Stericycle Inc (SRCL) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. My name is Maria and I will be your conference operator today. At this time I would like to welcome everyone to the Stericycle third-quarter earnings conference call. (Operator Instructions).

I would now like to turn the call over to Mr. Frank ten Brink, CFO of Stericycle. You may begin your conference.

Welcome to Stericycle's quarterly conference call. On today's call will be Rich Kogler, COO, and Mark Miller, the CEO. 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.

Now the results. The results for the third quarter are as follows. Revenues grew $39.8 million to $277.1 million, up 16.8% from $237.3 million in Q3 '07. Internal growth for the Company was $22.9 million or 9.7%, which is adjusted for foreign exchange.

Domestic growth was 8% and international growth adjusted for exchange was 16%. Domestic growth consisted of SQ up 14%, LQ up 10%, and the returns management revenues [of] $16 million.

Gross profit was $123 million or 44.4% of revenues. And SG&A expense, including amortization, was $51.2 million or 18.5% of revenues.

Operating income was $71.5 million or 25.8% of revenues. And net interest expense was $8.4 million. Net income in the quarter was $39.2 million or $0.45 per share.

At the end of the quarter, our revolver borrowings were approximately $412 million. Currently, $225 million of our revolver is hedged at an average fixed 2.8% LIBOR rate, and normally we have 75 basis points in excess of that. The remaining $187 million is floating at LIBOR plus 75 basis points or the prime rate, whichever is lower.

The unused portion of the revolver debt at the end of the quarter was approximately $241 million. We repurchased 179,073 shares of common stock on the open market in an amount of approximately $9.1 million in the quarter. Cumulatively we have purchased approximately 11.1 million shares, and we still have authorization to purchase an additional 5.1 million shares.

Capital spending in the quarter was $12.8 million. And our DSO was 58 days. Cash from operations was $61.6 million in the quarter and $156.3 million year-to-date.

And with that, I will turn it over to Rich.

I want to begin by thanking each member of our worldwide team for their solid performance and continued commitment to our customers and our shareholders.

We enjoyed strong sales growth in all of our business segments in the quarter. The SQG growth was primarily driven by SteriSafe, with three out of four new SteriSafe customers choosing select and preferred. And SteriSafe contributed approximately 61% 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 Q3 with over 410,000 accounts, of which over 400,000 was small and the remainder large.

Now I will turn it over to Mark.

I would now like to provide insight in our current outlook for 2008 and provide a preliminary guidance for 2009. Please keep in mind that these are forward-looking statements.

During the third quarter we completed four acquisitions, three domestic and one international. The incremental revenue impact in the third quarter of this year was approximately $2.1 million. The annualized revenues of these acquisitions is approximately $15.5 million. Now please keep in mind that our guidance does not include future acquisitions or divestitures, and the settlement charge of $0.04 per share in the first quarter of this year.

We believe that analyst estimates will be in the range of $1.71 to $1.73, which we are comfortable with. We believe analyst revenue estimates for 2008 will be in the range of $1.08 billion to $1.09 billion, depending on assumptions for growth and foreign exchange.

We believe analysts will have estimates for net income between $151 million and $153 million, depending on assumptions for mix and interest expense.

We believe analyst have estimates for free cash flow of approximately $150 million, with CapEx anticipated between $45 million and $50 million.

Now I would like to provide preliminary outlook for 2009. Keep in mind that preliminary guidance does not include acquisitions or divestitures. We believe analyst EPS estimates will be in the range of $1.97 to $2.01, which we are comfortable with.

We believe analyst revenue estimates for 2009 will be in the range of $1.16 billion to $1.18 billion, depending on assumptions for growth and foreign exchange.

We believe analyst estimates for net income will be between $174 million and $177 million, depending on assumptions for margin improvement and interest expense.

We believe analyst will have estimates for free cash flow between $170 million and $175 million, with CapEx anticipated between $50 million and $60 million.

In closing, we are very excited about the tremendous growth opportunities in 2009 beyond. And we thank you for your time. And we will now go to Q&A session.

(Operator Instructions). Ryan Daniels, William Blair.

A couple of quick housekeeping ones I tend to ask every quarter. Can you just give us the LQG adds and Bio Systems adds during the period?

The Bio Systems new accounts were 72 in Q3, and we had 57 new MedWaste contracts.

And then on the SteriSafe, can you give us the total clients there and the percentage on premium of that business?

The total number of accounts now is just a little bit -- about 128,800 total accounts. And the percentage on select and premium is about 28%.

And if we think of the updated guidance, obviously one of the things that has happened pretty dramatically over the last three or four weeks is foreign exchange rates -- the dollar strengthened a lot. I know that is probably pressuring your revenue growth. Can you just give us a feel, one, for what you're using in your '08 guidance on FX, and number two, a feel for what kind of headwind that was in the guidance relative to if you may have delivered it just a couple of weeks ago?

I think if you look at the guidance from last and now, you will probably have anywhere from $30 million to $35 million lower in revenues because of the change in foreign exchange and the dollar getting, in this case, stronger. And that probably had about $0.05 impact on the EPS.

Annually, you mean?

That is annually for the '09 period.

So that is probably the exclusive reason for taking the $1.70 lower high-end down to $1.73 is just FX?

That is exactly right. I think if you look for '08 it is probably is about a $10 million to $11 million impact -- that is Q3 and Q4 combined -- with about $0.013 roughly.

Okay, perfect. I know you guys have talked about in the past if fuel prices came down, you may have an ability to keep some of the pricing you have passed through there. And I am curious, one, what are your thoughts on that? And, two, how much of a benefit was in the third quarter with a decline in fuel if much of that is still to be seen in the fourth quarter?

I think, first, we did not see any benefit in third quarter because, if you think about it, fuel prices stayed pretty high through the summer. They've only recently started to move.

I think the second thing is, we are primarily diesel driven, and gasoline has moved down much more quickly than diesel, so we are still paying diesel.

Also, we are looking at this period of time in a more normalized market where heating oil and winter tends to drive the price of diesel up. And then of course all eyes are on OPEC too. So I guess to kind of summarize, we didn't see any impact positive to our fuel and energy cost in Q3. And our guidance assumes that we will be sort of at this current stable rate through 2009.

That's helpful then. Final question and I will jump back in the queue. Can you just actually give us the energy cost in the quarter?

It was 7.6% of revenue.

Scott Schneeberger, Oppenheimer.

Just following up on that, could you guys break out of your organic growth what piece of that would be the fuel surcharges?

I think if you look, it is probably a little about 2% of the growth.

LQ and SQ combined?

Yes. It is fairly even.

The acquisitions in the quarter, the three U.S. and one international, could you guys take us a little deeper side on what they are in and where?

The three domestic are in the West and in the Midwest. And the one internationally is in Argentina. Again, the revenues annualized about $15.5 million. Total purchase price on a NPV basis there is notes, and I think cash is about $31 million. And the overall synergized EBITDA was about 5 to 6 times.

What are you seeing with multiples now overall? Is it that 5 to 6, is it coming down from there in this environment or are we pretty steady?

Again, our historic multiple is anywhere from 3.5 to maybe a synergized 6 or 7. I think it is probably coming down a little bit.

What is your appetite here? I believe you were looking to more of a focus on acquisitions, perhaps hiring in that space recently. Any thoughts on where and what from here?

The acquisition pipeline continues very robust, $50 million, in fact north of that. That team is very busy. Also our bank debt is well set up for it. We have ample room in our credit line. And so from from that point we have $241 million in our line available. We have not seen any hiccups in draws on that line.

We have a strong bank group. Both the B of A and JPMorgan are the leads in our bank group, which obviously right now are the stronger banks out there. So we feel very good about being in a position to take advantage of the market position.

Just one more from me. I think a concern lot of folks have right now is obviously in this environment would be a slow down of any sort. Could you take us through on the LQG side just your exposure there to a slowdown? How soon you think it would arrive? And what percent of revenue or magnitude do you think would come in that bucket specifically?

With large quantity generator space we do quite a bit of analysis by sector of the types of customers on volume. We have not seen any dampening of our volumes coming out of those accounts. That historically does not surprise us, but we had anticipated the question. And that is because of what drives the volume and demand.

Also the nature of our relationships with customers are such that even though there may be modest changes, it doesn't affect our data.

In terms of the large accounts sector, I think the second part of your question was what percent of our total business and --.

On the domestic side it is about 33% of our revenue.

And internationally it is roughly about roughly 70% to 80%?

Yes.

Specifically, how the contract set up though, where do you not have long-term contracts perhaps in LQG, or where it might be based on volume? Just where it might be a little more economically exposed versus short up?

There are three ways that we bill predominately to customers. It is weight driven or per container driven, which really what weight is in it is not as important.

Remember too that these are customers that are all on scheduled pickups, so the continuation is very stable there. And as we said, we have not seen an impact from a weight point of view or in the billing side. We do have some other customers that are on fixed-rate, so those obviously are not impacted at all.

Scott Levine, JPMorgan Chase.

Can you talk a little bit about the details -- in the '09 guidance specifically do you have an assumption for returns that you would be willing to share with us for that business for next year? And then also LQ and SQ assumptions kind of baked into the initial targets there?

2009 we are looking at a range of about $78 million to $88 million on the returns business. And across the board on our growth rates we are looking at high single digit internal growth rates across all of our businesses. That is assuming there that is a constant level of energy from where we are at right now.

Do you have any thoughts regarding the potential cyclicality, if any, you would anticipate on the returns side?

It is hard to call on the cyclicality. The fundamental issues we see is the continued awareness of capabilities continues to grow. I think we're making good headway there.

There is also the recent impact of the new law which went into effect, HR 4040, which impacts the consumer products marketplace with higher penalties and higher and broader scope of responsibility, so that may drive opportunities. But the recalls really aren't as cyclical as an event-driven activity.

Then one last one on acquisitions. Could you share with us your thoughts in terms of how the activity, prices paid, deal flow, anticipations into a downturn there as well what your anticipations are?

Again, there is clearly a very robust environment for us. It is better there -- there is less competition going for deals. The financial buyers out there pretty much are shutout of that market right now. And historically internationally they have sometimes big competitors.

The leverage that they can throw at deals have changed from maybe 80 debt 20 equity now to, at best for them, 50-50. So all of these deals are severely impacted. And so that makes it better for us in that landscape. And overall we see that clearly have a positive impact.

One last one, if I can sneak it in as well. Any impact of business pressure maybe on the SQ side of the business with bad debt and/or pressure on that side that can you see?

We have not seen any deterioration in payments. And so, we have good collections. Our DSO is holding right in the mid to high 50s. We normally have a little bit lower DSO in Q2 because of higher prepaids. So we are right in line equal to a little bit better even than last year at the same time. So we have not seen a deterioration at this point.

Jonathan Ellis, Merrill Lynch.

Good evening guys. I wanted to just ask you very quickly on the acquisitions, you did mention where they were, but were they all medical waste companies or where they within different business lines?

Yes, they predominately were medical waste companies.

And could you possibly break down the $15 million in annualized revenues, how much of that was for the Argentinean company versus the domestic companies?

We don't break it out.

Any new joint ventures or licensing agreements you engaged in this quarter?

No.

Just on the recall business it does like revenues came down somewhat meaningfully from the prior quarter. And I know you don't give specifics around revenue from recalls and returns, but maybe if you can talk directionally about which part of that business was responsible for the quarter-to-quarter deceleration?

Sequentially it was the recall activity. The underlying routine business continues to grow -- and stronger. I think more importantly, as we invested in this space, the fall through margins continue to improve. The team is doing a great job in driving it. I think we are well positioned to take advantage of the opportunity.

Just along similar lines, in that recall and returns business, I was wondering if you could talk briefly about the international side of that? As I think about the opportunities to potentially expand abroad, I am wondering, do you think it would be easier to provide international recalls for companies based in the United States as just kind of an extension of your existing relationship, or to actually start targeting international companies that are going to be conducting local recalls? How do you think about the best way to possibly expand the recall business abroad?

The recall business abroad I think will vary by the type of company we interface with. Some companies that are global in nature, that have very centralized control over management, regulatory affairs and risk management, we think we will have an advantage because we will serve that enterprise in the U.S. marketplace. So that may help us in our expansion.

You have other global companies that are very decentralized in it may end up being country by country. We are looking at that opportunity in expansion but that is not in our '09 guidance at this point.

And just, since you're talking about the international side of the business, I know there was an arbitration settlement in the UK with a joint venture partner related to Bio Systems containers. I'm trying to get a feel, as part of that arbitration settlement what type of grace period or quiet period, if you will, has been put into effect such that you're not allowed to launch Bio Systems in specific parts of the UK until that is lifted? Can you give us a sense of what time period is?

I can't go because of confidentiality in that agreement into detail. There are some limitations. There are time limits on it. It is not that long. And so there is an opportunity long-term for us in that market. It is small from a geographic point of view. And I think that is all we can say about it.

And then just on fuel very quickly, given what has happened to diesel prices recently, at what point would you possibly consider a hedge or a forward purchase arrangement, if at all, for 2009?

I think we have looked at hedges over time. And for us, really because of the strength of our contracts and relationship we have built into it to adjust for these sort of events, we don't look at hedges, we just do pass-throughs.

Just my final question. In terms of the guidance for 2009. You mentioned high single digit growth across your businesses. I'm just trying to reconcile that with what you used in prior years as your basis for forecasting growth.

I know SQ has been 8% to 10%, and LQ was lower, 5% to 7%, and international was high single digits. I'm just trying to understand. Is implicit in your guidance that LQ may grow a little bit faster next year than it has historically, and that SQ grows a little bit slower? I am just trying to -- help us understand that.

I think you will see SQ being the faster grower, talking in the context of internal growth for total company we would anticipate being high single digit. And what you have is a blending affect when you have the faster growing SQ versus the slower growing LQ, you have ended up with a blended high single digit number.

Would you be willing though to give specific ranges for SQ, LQ and international like you have in the past?

I think if you -- directionally similar to what we have been doing where, if you take out the noise, SQ has typically been in the 8% to 10% and sometimes low double-digit. LQ has been 5% to 8% in the past, so a total domestic business in the 8% to 10%. And international, if you take out the noise factor, typically it is 7% to 9%.

David Manthey, Robert W. Baird.

I was wondering if you could help me understand if there has been any change in customer behavior. For example, has there been any measurable change in your renewal rates or demand for mail back, for example?

As we have mentioned previously, we have seen no real change in volume at all.

And do customers -- SQ customers -- once they start a SteriSafe program, do they ever cancel those, or do you have nearly 100% renewal rate?

I think we are at 95% plus retention rate with our contracts. And most customers see the benefit and continue on or upgrade to a higher level.

And with the issue too, you might have a doctor that closes an office because they retire. So there will always be some customers that, in fact, don't necessarily cancel but drop-off. And there are some customers that don't pay their bills, at which point we stop service.

Okay. That brings me to the next question. Is there any change in your willingness to do business with less stable customers, maybe elective surgery centers, or like you said, customers that may have been a little shaky on paying their bills?

Obviously, we keep close track to those that pay their bills slow or not. We look at sectors that are a little bit higher risk and take appropriate measures from a collection and focus point of view.

But also think about it. This is a very small amount people spend for a kind of office, and it is normally not the one, because it is a regulatory issue for them that they necessarily are being short on.

Just a color commentary on that as well is that even in the situations that we've had historically, whether it might be a hospital, for example, that goes bankrupt, we have often been deemed by the bankruptcy court to be a necessary utility, and we continue to get paid for our services as they work their way through. So it is not something like an inventory or a product sale where customer is not paying and they get cut off that they can work off the inventory or switch to another vendor. This is something where if they get cut off on service they have medical waste building up, and nobody really wants to bill inventory of medical waste.

Just two quick once on SteriSafe. What number did you say -- the percent of customers now are choosing the select or premium?

Of our total accounts right now we have almost 28% on select or premium. Three out of four accounts are going to the higher level if they are new accounts coming on board.

And to what do you attribute that? Is it just better sales efforts or is it a different customer? Why would it be so much higher?

I think the program provides good value, and our salesforce is getting more experienced. We been doing this for a number of years now.

And then finally could you talk about the average invoice for a select or premium versus a base, what in terms of percentage higher?

I think in the broad picture if you have a customer that is MedWaste you're looking at a party that is maybe doing anywhere $750 to $850, $900. If they select the premium level, that could be anywhere, $700 to $1,200 more per year, depending on again a lot of factors, the size of office, the number of people. There a lot of factors that play in there.

Greg Halter, Great Lakes Review.

What is the percentage of your revenues now coming from international sources?

It is about 23%, roughly 24%. And that was in Q3.

And I know you mentioned that fuel is about 7.6% of revenues. Did that detract from your gross margin? And if so, how much in the quarter?

In the quarter it was kind of a neutral point for us, if you compare it to the prior quarter. I assume you are comparing to the prior quarter right now to see what impact it had.

Right. Well, that or on a year-over-year basis.

Year-over-year it definitely had an impact, and that is probably north of at least 100 basis points.

And looking at your tax rate, I think it was like 37.2% or so, which is lower than it has normally been or historically been. Any comment there on the third quarter's rate, as well as the outlook going forward in the rest of '08 and into '09?

The third quarter was kind of an adjust to an overall year-to-date rate of 37.8%. And that is kind of a good rate to use for '08. We think in the guidance it is roughly about 38%.

For '09?

For '09.

It is small, but you have deferred revenue of about $14 million on the balance sheet. Does that relate to the prepaid contracts you have?

It is related to two major things. One is SteriSafe, where you have customers that sometimes pay annual in advance or quarterly in advance. And then we have some larger customers in the UK that do some prepaids within the national health system.

And I noticed some insider buys, I don't know, like eight of them over the last three or four months for about 400 some thousand shares, which frankly we don't see much insider buying of any of our companies that we cover. So we applaud you on that. I just wanted to inquire whether or not any of that is on margin though?

Not to my knowledge. I think it is all cash purchases to our knowledge.

There are no further questions holding in queue at this time.

We thank everybody for your time and your contribution. And we look forward to knocking the cover off the ball for you in the future. Have a great weekend.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.