Stericycle Inc (SRCL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stericycle first 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 on how to participate will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to introduce your host for the conference, Ms. Liz Brandel, VP of Finance.

Thank you. 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 now read the safe harbor statement. Statements by Stericycle on 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)s 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 to Frank.

Thanks, Liz. The results for the first quarter are as follows. Revenues grew $43.7 million to $254.8 million, up 20.7% from $211 million in first quarter of '07. Internal growth for the company was $23.9 million or 11.5%, which is adjusted for the divestiture of some assets of STG in the first quarter of '07, and foreign exchange.

Domestic growth was 11.4% and international growth, adjusted for exchange in divestiture, was 11.6%. Domestic growth consisted of SQ up over 13% and LQ up 9%.

Returns management revenues were $16.5 million in the quarter. Gross profit was $113.6 million or 44.6 percent of revenues, and SG&A expense including amortization was $48 million or 18.9 percent of revenues.

Operating income was $59.5 million or 23.3 percent of revenues, which included a charge of $5.4 million for the settlement of various business disputes with Daniels.

Net interest expense was $7.7 million versus $7.3 million in 2007, due to increased borrowings related to acquisitions and repurchases of shares. GAAP net income was $31.7 million or $0.35 per share, excluding the settlement charge, nonGAAP net income would have been 35 million or $0.39 per share.

Now to balance sheet. At the end of the quarter the revolver borrowings were approximately $495 million. On April 15, '08, we closed on a private placement of $100 million, and this note is a seven-year term, to expire in April of 2015, and has a fixed rate of 5.64%. The proceeds were used to repay revolver debt, increasing our unused portion to approximately $310 million.

We repurchased 1.482 million shares of common stock in the open market in an amount of approximately $79.4 million. Cumulatively we have repurchased approximately 10 million shares and we still have authorization to purchase an additional 3.3 million shares.

Our capital spending was $11.3 million, and our days sales outstanding was 59 days. The cash provided from operations in the quarter were $63.6 million, and 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 over two thirds of new SteriSafe customers choosing Select and Preferred. SteriSafe contributed approximately 57% of total small customer revenues.

LQ sales growth was driven by the continued adoption of our Bio Systems offering and new LQG Medwaste contracts.

In summary, we ended Q1 with approximately 397,200 accounts, of which approximately 387,400 were small, and the remainder large.

And I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide incite on our current outlook for 2008. Please keep in mind that these are forward-looking statements.

During the first quarter we completed two tuck-in acquisitions, one domestic and one international. The incremental revenue impact in the first quarter was approximately $1 million, and the annualized revenues of these two acquisitions is approximately $12 million.

Now keep in mind our guidance for the year does not include future acquisitions or divestitures, or the settlement charge in the first quarter of approximately $0.04 per share.

We believe that analyst EPS estimates will be in the range of $1.67 to $1.70, which we are comfortable with. We believe analyst estimates of revenues for 2008 will be in the range of approximately $1.05 billion to $1.07 billion, depending upon their assumptions of growth and foreign exchange rates. We believe analysts will have estimates for net income between $148 and $151 million, depending upon assumptions for mix and interest expense.

And also we believe they also have estimates for free cash flow between $140 and $145 million, with Capital Expenditures anticipated between $45 and $55 million.

In closing, we are very excited about the tremendous growth in the first quarter, and the rest of 2008 and beyond. We thank you for your time, and we'll now go to question and answer.

(OPERATOR INSTRUCTIONS). Our first question comes to us from Ryan Daniels of William Blair & Company.

Hi, good evening, guys. Just a couple of quick housekeeping questions up front that we track. Can you give me the number of large quantity adds and Bio System adds during the period?

Yes, the number of large quantity adds was -- 58 RMW and 70 Bio Systems.

Okay, great, and then, do you have the number of SteriSafe accounts?

Slightly, or the total number of SteriSafe right now is a little bit over 121,000.

Okay. Great. Then a couple broader ones.

First off, obviously, the economic environment continues to be a big topic for a lot of companies, and you continue to chuck through it. But I guess one of the questions I had is, how much in particular of the small quantity generator business if any is based on tonnage or volume, i.e., if the vet offices and dentist offices are seeing lower demand, does that impact your revenue growth, or do you contractually have it set throughout the year so that's not a risk?

The small quantity customer base is typically priced on a service based on frequency, and particularly in SteriSafe where there's a monthly or quarterly fee. There really isn't a tendency. Also the volume dynamic doesn't affect the revenues into our cost structures that much.

Okay, so volatility there really isn't going to impact your outlook.

No, and also you don't typically see much volatility (inaudible - technical difficulty). Healthcare continues to have demand through all those economic cycles.

Sure, and then two more quick ones, I know I ask this probably every other quarter, but on the water treatment side, maybe a bit of a paradigm event in that CMS actually came out last week and said, you know Legionnaire disease is now going to be treated as a never event. And I know your water treatment technology can really help hospitals control that very effectively. Is that something that might be that water shed event that really takes that product or that service offering to the next level, and could be a new growth avenue that we hear more about you from you guys in the future.

Yes, I think on the, the whole focus on better outcome of healthcare and affecting reimbursement levels based upon the actual results achieved, all of that focus and trend is good for us.

And I think as more and more institutions report and they are focused on how do they get the maximum reimbursement for activities, all areas that we operate I think are benefited, whether it be reasonable sharps programs or medwaste programs, other innovative programs that we have under R&D and pilot program, so I think it's a fundamental trend. I think the CMS dynamics are still, are going to take time to evolve, in terms of setting what will be the reimbursement, and for people to understand the base lines and comparative. But that fundamental trend I think goes in our favor.

Okay. Great. One final question, I noticed in your guidance, looks like everything has gone up a little bit, maybe with the exception of net income on the high-end coming down, is that just more interest expense because you've taken on more debt and repurchased some more stock?

Yes, obviously with the repurchase of the shares of about $79 million, that's close obviously, that will increase the interest expense but you have to lower share count. So really with holding the number about the same as before and the lower share count gets you the benefit.

Got you. Okay, great. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Alina Cellura from Citi.

Hi, good evening. Just a quick question on fuel. I know previously you mentioned that fuel is pretty much recovered, but with the spike recently, are you seeing any particular head wind at all from the fuel spike?

Well, obviously fuel is a challenge for us, but our contracts do allow us to pass it through. We mentioned before that there is some lag effect between when you actually put the surcharge in and when you recover it, and when fuel is moving as rapidly as it is now, that can pose a challenge, but I think we've managed through it pretty effectively. The one thing we always like to remind people is because it is a pass through, it can have a distorting effect and impact on both comparables for revenue growth and sequential margins.

And also, can you just tell us where those two tuck-in acquisitions were, domestically and internationally?

Yes, the one was in the Pacific Northwest and the other one was in Canada.

Okay. And were they just both Medwaste?

Yes, related, yes.

Okay, great. Thank you.

Our next question comes from Scott Levine from JP Morgan.

Hi, this is Rodney Clayton. Just, first of all, on the acquisition front, can you just talk a little bit about the pipeline, what you are seeing there, how strong it may or may not be at this point, and maybe you could talk about any particular regions you might be interested in from a new market standpoint?

Well, the pipeline remains robust, it's north of $50 million for the North American markets. So despite us doing deals, we keep being able to replenish it well.

It's really, we look at it opportunistically. (inaudible - technical difficulty) region that we maybe get more or less attention in that North American marketplace, and we look for (inaudible - technical difficulty) and tuck-ins, so there is not a specific one from that point of view.

Okay. Thanks.

And secondly, on the fuel, just kind of following up on that, what impact, can you quantify the impact it may have had on your margins in the first quarter, and or what it might do in the second quarter?

I think if you look in the first quarter, from a percentage of gross margin, it was just north of 20 basis points impact, so whereas before maybe if we did 44.6% without the fuel that clearly would have been closer to 44.8% and a little bit up from there.

Got you. Okay. Thanks a lot.

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

Hi, good afternoon. On the last question, Frank, did you say it was 20 basis points?

Yes.

Okay. Thank you.

Could you talk about the number of telesales, direct sales and drivers that you currently have, and what the growth rates you're seeing in those categories?

We don't break it during the year out. You do get the details in the K, so go back to the K, and that detail as much as we are willing to give is right in there.

Okay. Thank you.

And then on ETD, could you talk about the advantage of using that method versus incineration or other methods of treating medical waste? Is there a margin advantage there? And then could you talk about your capacity right now?

Okay. First on the treatment modalities, ETD versus incineration, ETD gives you the way to get in and be able to permit facilities and capacity, because you're not going into a community with a proposition that says there's air emissions or water emissions. It's never easy to permit new capacity, but it does have some advantages of being able to pull forward. It also has the grind and compaction dynamics. So there's unrecognizability and reduction in volume. But it's not a meaningful dynamic in the overall cost structure.

The cost of servicing customers is, our number one cost is transportation and logistics.

On the second part, on overall capacity, we are probably running a little over 70% capacity utilization right now.

Okay. And then final question, in terms of potential new business, I've been reading a little about reuse of medical devices. Is there any possibility you look at that as a new avenue going forward? Or is that not something you're interested in?

It's something we are aware of and keeping an eye on but it's not something in our current list of to do's.

Very good. Thank you.

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer.

Thanks, good afternoon. Just a quick clarification. On the gross margins, Frank, you mentioned about, it sounded like 20 basis points on fuel. And as you've talked in the past, you guide 20 to 40 basis points quarterly, sequential improvement absent things like fuel, acquisition impact, maybe 4 X. Could you give us a bit more of the break out on the sequential move in those pieces? Thanks.

I think, again, if you look in Q1 there's kind of two factors that impacted the margins. One is the, as I said the 20 basis points on the pass through, and the other one, which is a little smaller, it's kind of, rounding now but five basis points, probably acquisition related. And those are really the two main impact factors in the quarter itself.

If you look going forward, the kind of steady state, you are looking at a 20 to 40 basis points. And the thing that can throw that off, again, like it has in the past a little bit is, obviously acquisitions, any international mix factors, and then obviously if there is additional pass through, that would have an impact. But on the steady state you are looking at 20 to 40 basis points from what it was this quarter.

Thanks. SG&A, a little bit better than what I had modeled. I think 18.4%. Are we -- on that line, did you cut costs in the quarter to a new level? Basically, are you spending at a new level and this is going to be the run rate, kind of slowing down on certain things, picking up on certain things? I guess could you talk a little bit about the mix? Is it Bio Systems, SteriSafe, returns, recalls, where you are pushing down on the pedal or easing off? Thanks.

I think overall it is, there is no specific things that are being cut. We keep feeding the hot hands, obviously SteriSafe, Bio Systems, some new R&D, there might be some projects in quarters. Like we said, if we run ahead in our earnings, we do invest in projects, some of those might be one time R&D kind of things we are maybe doing, I wouldn't read too much into that. You are talking a little bit here in rounding overall. You also have some acquisitions.

And it depends, amortization, I don't know if you include that in it or not, but that could also swing the number a little bit. We normally include the transition expenses in SG&A. So if you have that in there, that was a little bit higher because of the larger deals we did in the fourth quarter. So those could be factors that could make it up and down a little bit but not materially.

Okay. Thanks.

Along those lines, SteriSafe, there's been talk of you getting more involved with an Internet offering there. Is that going to be much up-front cost? I imagine that would be attractive margins going forward. Could you just take us through your initiative there a little bit please?

We have a SteriSafe Internet initiative that's already in place. There really is not a big move on the cost side. It's something as time goes on, we have some accounts that are migrating to that. It's really based on the infrastructure that's in place in the practice office. So we have the full gamut of service offering but that's just one of the overall strategy.

Thanks. And then finally, coming up against a tough returns, recalls comp in the second quarter, I think it was in the ballpark of $25 million last year, again, anything to think about going forward as far as how those are going to ebb and flow?

No, I think if you look overall, our guidance was $70 to $85 million, and that still is, we feel comfortable with. Q1 last year was a little bit lower but I wouldn't read too much into it. I mean, you are looking at kind of an industry a little bit because of that bumpiness, has some variance. It is growing. There is certainly more awareness that we are creating, and there's more media attention as you read in the newspapers and the like. So I think all those positive factors are kind of good back winds for us for the long run.

Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS). Our next question is from Jonathan Ellis of Merrill Lynch.

Thanks. Good evening, guys. Just a quick question on SteriSafe. Could you provide the percentage of total accounts that are on the higher levels as of the end of the first quarter?

Yes, right now we're at about 25% of total accounts on the premium select.

Okay. Great. Thank you.

And the LQG and SQG growth for the quarter, would you be able to provide what portion of that in basis points was a function of fuel surcharges?

I think if you overall look, you are talking a couple of percentage points.

Both on SQG. and LQG.

Yes, it's not materially different.

We don't really break it out. It's very hard in the quarter to sit down and say, well exactly this much was fuel surcharge, whatever. In general we believe it's in a 1 to 2% range.

Okay. That's helpful. And just to be clear, my understanding is more of your SQ customers are surcharge eligible versus your LQ customers. Is that in fact the case?

I don't think that that's necessarily the case. Our contracts provide flexibility, because we've been able to manage through it now for several years that we've had higher fuel, I think that really one of the issues might be timing. The large quantity contracts sometimes have notification periods and whatever, but we have flexibility.

Okay. And just on fees in general, are there any other fees other than fuel surcharges that you try to implement in your contracts that can scale up over time that offset perhaps other inflationary pressures in your business.

Not direct, we obviously have specific charges relating to environmental or regulatory, yes, those would be able to be passed on. Sometimes there are taxes being added by states. Obviously those are straight pass ons, those are the kinds.

Okay. All right. Great. And just on the acquisition front, you mentioned that the pipeline in North America remains fairly consistent above $50 million. I'm curious, are you getting a sense that there may be potentially some privately owned companies that are becoming increasingly willing to come to the bargaining table, given the prospects of capital gains tax rules may change in the next administration, are you getting a sense that there is more interest in potentially doing deals?

I think in the discussions we've had with people doing deals over the last year or two, yes, that has always been part of the discussion for them, how to structure things. So I would say, yes, there is a sensitivity on the side of sellers to that issue, yes.

Great. And then just on the SG&A side, just to clarify one of your answers to a previous question, should the expectation still be that SG&A for the year is in the high 18% range, approaching 19%?

Correct.

Okay. And the extent that you can just characterize this maybe qualitatively, would you say that more of your spending this year is focused on existing, enhancing existing programs, or as you mentioned R&D or new programs, trying to get a relative sense of where most of the SG&A is being allocated.

I think overall, obviously in total dollar spend, we spent more on current. But I would say from an incremental, there is definitely a focus on R&D and looking for new opportunities, and if we do get ahead of ourselves, as we've said always, that's when we would look for additional invest and pulling projects up.

Okay. Great. And then just finally, on the resolution related to the arbitration proceedings in the U.K., does this make it easier in any way, either legally or structurally, to launch a Bio Systems program in the UK?

The settlement of the joint venture really wasn't working for either party, and both of us agreed to go on our own way. So it's kind of two elements of the cost of defense and distraction element. The venture was just in a subset of the geographic area of White Rose.

So our overall thinking and analysis on Bio Systems and international markets has (inaudible - technical difficulty) consistent with what we said in prior calls, it's really, think about it as a phase II (inaudible - technical difficulty) for most priority is focus on acquisitions, integration, building the small (inaudible - technical difficulty) platform and launching additional programs under that as we move through time. So there's no (inaudible - technical difficulty).

Okay, and just one last question I can squeeze in, the percentage of accounts in the UK that are now SQ versus LQ?

We were in the, SQ was in the low 20s right, for SQ, and that's a percent of total revenue.

Okay. Great. Thank you, guys.

Thank you. (OPERATOR INSTRUCTIONS). Our next question is from Greg Halter of Great Lakes Review.

Good afternoon, guys. I notice that your receivable is up about 31% on a year over year basis. Just wondering why that is.

Well, it's heavily, heavily acquisition driven. Obviously with the acquisitions, and there's a lot of activity. DSO was at year end 58, this quarter 59. We were up just because of the one day and then the rest was really acquisitions. But the majority of this increase year over year is acquisition related.

Okay. And do you have the figure for what fuel cost as a percentage of your revenues in the quarter?

Total energy, which is fuel and energy, was 6.6 percent of revenue.

Which I think is up from 6.1 in the previous quarter?

That is correct.

Okay. And looking at your market share and the potential that you have there, and I know you've been talking about this $10 billion number as the total market, do you see any changes in your status position or competitors or size of the market, and I guess that would be a worldwide question?

I think one thing we are seeing is continued expansion of the market. We see, as people age and access to healthcare, there's just continuous steady demand. We saw that with nice growth in the first quarter, that was coming through in volume. So I think there's just a fundamental expansion of service.

Obviously the size of the market expands as we add new services to the program, and we keep enhancing our service offering. I think it's still a very, very competitive market but we believe longer term, because of the size and scale, and keep innovating and advancing, that we can continue to change, change the game and have a competitive advantage by just having breadth of service for our customers.

Okay, and given your large market shares, do you run into any trouble with FTC when you look at or make acquisitions?

I'm not sure how you define on the market shares but we don't think we are anywhere close to those levels. But from our standpoint, we roughly are about a 9% of the global opportunity, and so it hasn't been an issue from an FTC standpoint.

Okay. Excellent. And Frank, on a debt to EBITDA basis, where do you stand currently?

At the end of the quarter we were at two-point, a little over 2.2, which roughly was about the same. We were at 2.16 and we are at 2.22 at the end of this quarter.

Okay. And I think you said you can go up to as much as three times, I believe?

Yes, I think it's again, a range. We feel very comfortable between two and three. I think if we go to three it will be normally for a shorter period. But overall our loan allows us to go to 375. That is the covenant that we have in both the senior and out of private placement. So we have the room.

And again, if you look at history, if we don't do any repurchases or acquisition in the quarter, we come easily down 30 bips in a quarter. So it delevers very fast and it's from that point that gives us an opportunity.

I think you had mentioned, and I may have missed it, you now have $310 million available or unused on the revolver after you did the $100 million note.

That is correct, the note was used to reduce that and that is what is available right now.

Okay. And here where I sit in Cleveland, they are having a concern over pharmaceuticals being flushed down the toilet and so forth, contaminating the water, and the city will be enacting or having a drop off I guess you will, on May 7 for any unused or expired pharmaceuticals, pills, whatever. Is that an area that you're involved in now or could be involved in, or is this something that could happen throughout the country or is it just not an event?

No, I think it's something we are seeing across the country, and more and more focus on it, and it's not just the U.S., it's a global issue. We are finding trace elements in water systems of residual chemicals and, again, most water treatment systems weren't designed to take chemical entities out of the water, they are designed to disinfect to a reasonable level.

It does fit into our service offering, as you may or may not know, through our recalls and returns management offering, through our hospital in-service programs. We have a number of capabilities to help hospitals and pharmacies be able to segregate appropriately waste, and programs that we also do in connection with communities to help properly segregate that material, contain it and destroy it in an appropriate manner.

Some of the leading institutions that are really trying to focus on their impact on the environment, their safety and regulatory compliance, have found great value in our programs and I think this external awareness will just help move that further. So it will evolve through time but we are seeing much more increased awareness of this topic.

Okay. That's great to hear. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). I'm showing no other questions from the phone lines.

Well, we thank everybody for your time, and just in closing, as a reminder of everyone of administrative professionals recognition week, I hope all of you take the time to recognize those people that make it happen for you. And I would like to say, on behalf of the entire Stericycle team, we want to thank Rhonda Toth for all of the outstanding support that she does for us day in and day out to keep the company running and keep us on track. So thank you, Rhonda. Take care everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.