Stericycle Inc (SRCL) 2008 Q4 法說會逐字稿

Good afternoon, my name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I'd now like to hand the call over to Mr. Frank ten Brink, Chief Financial Officer. Please go ahead, sir.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Rich Kogler, COO, and Mark Miller, 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 day that may bear upon forward-looking statements.

Now to the results. The results for the fourth quarter are as follows -- revenues grew $22.5 million to $274 million, up 8.9% from $251.6 million in the fourth quarter of '07. Internal growth for the Company was $21.7 million or 8.7%, after adjusting for negative foreign exchange impact of $13.4 million.

Domestic growth was 7.2%, and international growth, adjusted for exchange, was 13.6%. Domestic growth consisted of SQ up internally over 13%, LQ up over 9%, and a Returns Management revenues of $15.3 million.

Gross profit was $125.3 million or 45.7% of revenues, and SG&A expense, including amortization, was $52.2 million or 19% of revenues. Net interest expense was $8 million, and net income was $39.1 million or $0.45 per share.

Now the balance sheet. At the end of the quarter, the revolver borrowings were approximately $440 million. Currently, $225 million of our revolver is hedged at an average fixed rate of 2.81% at LIBOR plus 75 basis points. The remaining $215 million is floating at LIBOR plus 75 points or the prime rate, whichever is lower. The unused portion of the revolver debt at the end of this quarter was approximately $198 million.

We purchased 534,768 shares of common stock on the open market in an amount of approximately $27 million in the quarter. Cumulatively, we've purchased approximately $11.7 million shares, and we still have authorization to purchase an additional $4.61 million shares.

The CapEx in the quarter was $11.8 million and our DSO was 57 days. The cash provided from operations was $54.3 million for the quarter and $210.6 million year-to-date.

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 during the quarter.

The SQG growth was primarily driven by SteriSafe, with three out of four new SteriSafe customers choosing select and preferred. SteriSafe contributed approximately 63% of total small customer revenues. LQ sales growth was driven by the continued adoption of our Bio Systems' offerings and new LQG MedWaste contracts.

In summary, we ended Q4 with over 418,000 accounts, of which over 407,000 were small and the remainder large.

Now I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide insight on our current outlook for 2009. Please keep in mind that these are forward-looking statements.

During the fourth quarter, we completed 13 acquisitions -- eight domestic and five international. The incremental revenue impact in the fourth quarter was approximately $1.3 million. The annualized revenue of these acquisitions is approximately $40 million.

Now, keep in mind our guidance does not include future acquisitions or divestures and related costs which would be expensed as a result of the new FASB 141R.

We believe that the analysts' EPS estimates will be in the range of $2.00 to $2.04, which we are comfortable with. We believe that analysts' revenue estimates will be in the range of $1.16 billion to $1.18 billion, depending on assumptions for growth in foreign exchange. And we believe analysts will have estimates for net income between $175 million and $179 million, depending upon assumptions for margin improvement and interest expenses. We believe analysts will have estimates for free cash flow of $175 million to $185 million, with capital expenditures or CapEx anticipated between $50 million and $55 million.

In closing, we're very excited about the tremendous growth for opportunities in 2009 and beyond. We thank you for your time, and Operator, we'll now open the call up to Q&A.

(Operator Instructions). Ryan Daniels.

If I could just ask a couple quick housekeeping upfront. Could you give us the total SteriSafe accounts and then percent on premium? And then the additions for bio and LQG during the quarter?

Total SteriSafe is a little bit more than $132,000. And the percent on select and premium is just a little bit over 29%. And then LQG adds were 56 and Bio Systems were 71 new accounts.

Okay, great. And then, Frank, I think you mentioned upfront that if we adjust for FX, the organic revenue growth was fairly close to 9%. I assume there's a little bit of headwind in there for fuel too, given the drop in energy prices we've seen. Have you guys tried to determine what organic growth would look like, if we kind of take out that impact on a year-over-year basis?

Year-over-year, it's probably about a couple percentage points.

It would be a little bit over 10%?

Yes.

Okay, great. And then can you discuss -- do you have any hedging programs in place? I know most of your costs obviously are incurred over in the foreign operations, but did you hedge your FX at all? Or is that pressuring the bottom line, given the precipitous drop we've seen, particularly in the pound over the last few months?

No, we are kind of naturally hedged as a service business since all our costs in-country are also generated. It's mostly payroll; we don't make anything in one country and ship it to another. So the intercompanies and the like -- if we have intercompany loans, those are not hedged either. Those that would be maybe some exposure. We had some in the fourth quarter, which is why we had higher other income and expense. And that was probably about $850,000, which was intercompany predominantly between the UK and Ireland. But that was more intercompany borrowings from each other.

Okay. That's very helpful. And then two more broad ones and I'll hop back off into the queue. Did you guys have any success during the period in trying to hold some of the energy surcharges or maybe lighten those a little bit? And in turn, did that drive any of the pretty substantial operating profit improvement we saw year-over-year during quarter?

Yes, you know, our goal with the fuel surcharges has always been to recover the impact of the increased fuel costs. And the way we do it, which we've discussed many times, is with the continuous process where we first analyze our cost and then we look at customer contracts and we attempt to match the two.

So, our goal really is to recover our costs. Of course, as we said before, it's a lagging process, and in some cases, you're not able to recover the costs right away. I think the thing that probably everybody needs just to keep in mind is when you're passing through surcharges or reducing surcharges, it can have a corresponding impact on your revenue and your gross margin percentage comparables -- you know, period over period.

Right. Okay, that's helpful. And then the last question I had, I know there's been some new noise out of the EPA about pharmaceutical waste and changing that to hazardous waste -- is that something that's a potential growth driver for you, depending on how that is finalized coming up here in February?

Yes, those regs are still being discussed, but we already are involved in pharma waste for our large quantity customers. And we've ourselves irrespective of those regs to continue to expand that business.

But would those, if they come out like they're currently written, be a growth driver? Or is that kind of neutral for you guys?

I think it could be an opportunity, since this will be a harder hit on some of the incinerators that are on-site at hospitals. And that could be an opportunity for us. It's a small market, what's remaining, but that could be one.

Okay, perfect. Thanks a lot, guys. Nice quarter.

David Manthey.

You mentioned that 60% of your SQ revenues are SteriSafe. Could you talk about the percent of total SQ growth in the fourth quarter that was driven by SteriSafe programs?

We don't break that out. We don't break out how much the growth is from different components of volume and alike.

Okay. Second, in terms of the currency impact, I don't know if you mentioned specifically what the impact was on top line and bottom line, but could you talk about how that was relative to your expectations, when you gave guidance back in October?

I think if you compare it, it was $13.4 million compared to the prior year. If you compare it to what really it was in the third quarter, we were probably about $10.8 million down compared to the third quarter. And when we gave guidance, the guidance that we gave, there probably is -- probably about a $3 million delta between our expectations at that time and what actually came in.

Okay. And then final question for you -- could you talk about what you would consider the most cyclical part of your business, if any?

There really -- there's very little cyclical nature to the business. The only kind of things you see that are really very minor and not material in variances as you might say in a pediatrician's office towards the late summer or early fall, as kids are getting ready to go for school and shots, there's some minor increase. But it's really not meaningful at all in how it affects our numbers.

Great. Okay, thanks, guys.

Scott Levine.

This is Scott Levine, JPMorgan; I'm guessing that's me. With regard to the acquisitions, obviously a pickup in activity. Were any of the deals notably larger than any of the others or were they all kind of roughly same size approximately, give or take? And can you remind us maybe or update us with regard to your thoughts on what the acquisition pipeline activity might look like into a slowing economy this year?

Yes. The acquisition pipeline is very strong. We're definitely north of $50 million in revenues. It's robust. There's definitely less competition out there for deals.

We did the 13 deals in Q4; that's a total of 22 in '08 in the last quarter. Eight were in the U.S., as Mark said; five were in five different countries, so nicely spread. The sizes -- no one really stands out; fairly much across, and so I think a very good quarter for us.

I mean, it was -- again, the team has been increased to take advantage of the market that we're in. And so, we clearly want to invest more and do more. We think that the benefits of synergies that we can give gets a better selling and price for our seller, and still a very good IRR for us. So we think it's a very good environment for us.

Any of the five internationals in any new markets or all in existing?

They're all in existing. I mean, it was in UK, Ireland, Chile, Mexico, and Canada.

Okay. And then turning to the Returns business, I think you said $15 million and change in revenue; a little bit lighter than your average quarter in '08. Would you guys update the Returns forecast? I was thinking you guys had $78 million to $88 million or so forecasted; in terms of your guidance for '09, is there any update to that?

Yes. Well, actually, we're taking our guidance up for that sector to a goal of $90 million to $100 million for 2009. One of the acquisitions we did was in that space and we'll continue to expand our footprint. And we continue to see an awful lot of focus on attention to recalls. It's just, as you know, it's one of those things that's tough to call the timing on.

Got you. There's no change to the organic growth outlook there.

One last one -- with regard to EPA regulations here, and the EPA crack down on incineration, are you seeing any opportunity for increased outsourcing potentially in your LQ segment there?

Yes, I think it's obvious, whenever the EPA tightens up the incinerator operating regs and it really falls disproportionately on the small incinerators, some of the hospital incinerators. And that will provide an opportunity for us to become the outsourced provider for them when they shut down.

Great. Thank you.

Jonathan Ellis.

Great, thanks, and good evening, guys. Wondering if you could just -- on the acquisition front, the company you mentioned in the Returns Management business, could you talk a little bit about which end markets within the Returns Management business that company serves?

Well, it would be for the same type of customers that we serve today, the universe of where you have products being pulled back from the marketplace or either return credit or to properly manage a recall, and they had service offering in that same capability.

Okay, but just to be clear, I know historically, your focus had been the pharmaceutical market. Did this company serves other markets as well?

Yes, they've served, as we do, the consumer-based products as well as pharma products.

Okay. And could you speak to the multiples you paid for these companies, both domestically and abroad?

If you look at it on an NPV, because it's about -- the price was a little bit to half, more than half in notes and the other half was cash upfront, it's a little bit less than a six times EBITDA multiple.

Okay. And the other companies you've acquired in the United States as well as those abroad, are they all traditional medical waste companies? Or are they other types of businesses?

Yes. They were in the regulated waste business, yes.

Okay, great. And just in terms of your SQ and LQ growth for the quarter, should we assume that the impact from fuel surcharges, which you mentioned -- I think it was a couple percentage points on the top line -- would that be fairly evenly distributed across both SQ and LQ?

Yes.

Okay. And then just finally, on your outlook for the coming year, any update to your growth targets for the domestic business and international business, in terms of -- I think you said 8% to 10% domestic, 7% to 9% international?

Yes, I think if you look right now, it's about 8% to 10% for the SQ market. And if you look at LQ international, 5% to 8%, yes.

Okay. And I'm sorry, you said the international market was --?

That's the same, 5% to 8%.

Okay. Thank you, guys.

(Operator Instructions). Jason Rodgers.

Looking at the field costs in the quarter -- I'm not sure if you gave this out -- but do you have what that is as a percent of revenue, what the fuel and energy costs were in the quarter?

6%.

It was 7.6% last quarter, 6.0% this quarter. And that's the energy charge, fuel and energy.

Okay. And how much did that detract from the gross margin looking versus last year?

I mean, if you, again, look year-over-year, you're talking overall, a couple of percentage points, as I said, as part of the surcharge.

Okay. And as it stands now with fuel costs, do you see that number continuing to decline?

Well, as I think I stated before, we have a process and methodology where we continue to look at it, and will analyze what the surcharge is, match it up with the customer contract and our costs. Right now, fuel seems to be stable, but it's stable for a week and then it continues to move around.

So, it's really an ongoing process. I don't think anybody can forecast. Plus, as you remember, we're really diesel and energy-based; we're not gasoline-based. So, we're in a little different market that what you see at the pump.

Okay. And looking at the Returns program, you mentioned $90 million to $100 million as the target for '09. Do you have what that figure was in total for 2008?

$74 million.

Okay. And do you have a target for Bio Systems for 2009?

In terms of number of accounts, we'll probably be sort of comparable where we were in '08, north of 200 new accounts.

Okay. And have you seen any changes, given some of the constraints in budgets at hospitals in the competitive landscape? Any competition trying to lower prices in the current environment?

No, we actually haven't seen it. We have a pretty broad menu of services, with Bio Systems, the RMW, the pharma waste, training. So, I mean, when we go in, we sort of put the whole pallet in front of the hospital, and I think it provides good value to them, and obviously, it gives us many different ways to service them and increase our revenue.

And no changes as far as hospital spending for your services?

No. We really look at more of those changes, what we've seen and heard of, is more on the CapEx within hospitals but not in a day-to-day, like operational. And unlike us, we are a necessary service.

Okay. And those acquisitions you made during the quarter, did I hear you right, that you mentioned only one was in the Returns Management business? The rest was --?

That's correct. Out of the eight domestic, one was in the Returns Management.

Okay. All right, thank you.

(Operator Instructions). Scott Schneeberger.

Following up on the hospital spending, do you guys foresee if there's a sustained downturn in the economy throughout the year and pressure on hospital budgets, you know, and hospital volumes? What is your sensitivity to that, just a broad overview question?

Well, I think what we've seen in the past and what we've seen in these recent times, we haven't seen volume decrease caused by the economy. Also, as a reminder to everybody, about roughly 84% of our revenue stream comes from the relationship we're building, where it's a monthly service or it's priced on a container activity, not a unit like a pound or volume-driven.

And if you look at the type of volumes, even digging in different hospitals and different types of clinics, we just don't see that change of volume in terms of procedures. There may be people not doing certain tests or procedures, but it doesn't affect what's ending up in our waste stream or the service levels that we're providing.

Okay, thanks. And on the SQG side, have you ever seen during past economic downturns, perhaps consolidation? And might you see some of your customers leave the system in a sustained downturn?

I think you do see sometimes where either people may retire or combine offices or join groups. But often for us, that creates opportunity, because when there is a change of infrastructure, there's still a need for service of some kind, and it gives us an opportunity to talk about the SteriSafe programs and the higher level services. And they still generate waste.

So, even if you take a regulatory framework and the State may require 28 days or 32 days minimum storage time, they may be set up on a monthly service, and that's what really drives the billing modality, is the service. So whether that container that we pick up has 10% less or 10% more than average, it really doesn't affect our cost structures or our billing structures.

Okay, thanks. And so, just to reconfirm -- it sounds like the organic -- the domestic organic growth remains 8% to 10% SQG and 5% to 8% LQG. So, really the only change that we see in the updated guidance is from the acquisitions in the quarter?

Again, those rates do not include the acquisitions, so that's correct. I mean, if you look for the guidance change from last time, it's up about $0.03 because of the acquisitions. That is correct. You then have kind of your FX headwinds, the foreign exchange, i.e., the international units. And that's then offset with some favorable interest rates and productivity and mix.

Great. That's helpful. Thanks. On the acquisitions, both domestically -- excluding the one of RMS -- domestically and internationally, could you give a little color on mix of LQG/SQG there?

It's too early normally within these deals, but I would say overall, I think it's not bad to assume maybe a 50/50 mix.

Great. Thanks. That's helpful. Just a couple quick other ones. There's a $1.5 million expense in the other expense line. Could you take us a little deeper on what that is?

Say that again?

In the fourth quarter on the other expense line, $1.5 million charge?

The other was higher and that was predominantly -- we normally in a quarter would maybe have $400,000 to $500,000 in a quarter; now it was like a $1 million, $4 million, $5 million. That was predominately intercompany foreign exchange. There were payables due between the UK and Ireland, and that was predominately a shift for them between the pound and the euro. And that was about $850,000. So it's pretty much a one-time.

Thanks. And then finally, any change in what you're seeing in receivables that are -- you know, things that are past 90 days, perhaps? Any -- just trying to gauge customer health here.

Collections were strong; DSO was down a day in the quarter, and we've continued to see good collection sets.

Great. Thanks very much.

Barry Mendel.

Yes. Could you discuss the gross margin trends in both LQ and SQ?

I think if you look right now again, margins in SQ, mid to high-50s, and LQ in the mid-20s. Those have obviously come down a little bit in the overall trend in the last year, because you had that compression as a result of the fuel surcharge. Again, that's just surcharge, and then, as Rich already explained, revenue is up; but you kind of get a dollar revenue and a dollar cost.

Right. What's the average revenue for a Bio Systems customer these days?

It's still about $35,000, $40,000.

And what's going on with pricing --?

Nothing. I mean, it's fairly stable and really no different swings or whatever versus the past.

Thanks.

Thank you. There are no further questions at this time.

Well, we thank you, everybody, for your time and attention. And we look forward to bringing in another great year. And we'll talk to you in 90 days. All the best.

This concludes today's conference call. You may now disconnect.