Stericycle Inc (SRCL) 2009 Q1 法說會逐字稿

Good afternoon. will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle first quarter earnings call. (Operator Instructions). At this time, I would like to turn the call over to Mr. Frank ten Brink, Chief Financial Officer. Please go ahead, sir.

Thank you. Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Rich Kogler, COO, and Mark Miller, CEO. I will 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.

With that now the results. The results for the first quarter are as follows. Revenues grew $22.3 million to $274.1 million, up 8.8% from $254.8 million in the first quarter of '08. Revenues grew 15.1% when adjusted for the unfavorable foreign exchange impact of $16.1 million. Domestic internal growth excluding Returns Management was up 8.4% and international international growth adjusted for exchange was 9.8%. Domestic internal growth consisted of small quantity of 10% and large quantity up 6%. The Returns Management revenues were 19.7 million in the quarter.

Gross profit was $127.8 million or 46.1% of revenues and SG&A expense, including amortization, was $52.9 million or 19.1% of revenues. Net interest expense was $7.9 million, and net income was $40.7 million or $0.47 per share. At the end of the quarter the revolver borrowings were approximately $420 million. $225 million of our revolver is hedged at an average fixed of 2.81% LIBOR rate plus 75 basis points. The remaining $195 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 $222 million. We repurchased 536,346 shares of common stock on the open market at an amount of approximately $25.5 million in the quarter. Cumulatively we've now purchased approximately 12.2 million shares, and we still have authorization to purchase an additional 4 million shares. The CapEx in the quarter was $8.4 million, and our DSO was 53 days. The cash provided from operations was $76 million for the quarter 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. In the quarter we enjoyed strong sales growth in all of our business segments. The SQG growth was primarily driven by SteriSafe with three out of four of new SteriSafe customers choosing select and preferred. SteriSafe contributed over 64% of total small customer revenues. LQ sales growth was driven by the continued adoption of our biosystems offering and new LQG MedWaste contracts. In summary we ended Q4 with over 420,000 accounts of which over 410,000 were small and the remainder large. Now I will turn it over to Mark.

Thanks, Rich. I would now like to provide insight on our current outlook for 2009. Please keep in mind that these are forward-looking statements. At the end of the first quarter we completed three domestic acquisitions, in addition we closed on the U.K. Cliniserve acquisition in April. The annualized revenues of these four acquisitions is approximately $17 million. Keep in mind our guidance does not include future acquisitions or divestitures and related costs which will be expenses as a result of the new FASB 141 R. We believe that analysts EPS estimates will be in the range of $2.01 to $2.06 which we're comfortable with. We believe analysts revenue estimates will be in the range of $1.16 to $1.18 billion depending on assumptions for growth in foreign exchange, and we believe analysts will have estimates for net income between $175 and $179 million depending on assumptions and margin improvement and interest expense. We believe analysts will have estimates for free cash flow of between $180 and $187 million with CapEx anticipated between $50 and $55 million. In closing, we are very excited about the tremendous growth opportunities in 2009 and beyond. We thank you for your time and will now open it up to question and answer.

(Operator Instructions). Your first question is from Ryan Daniels of William Blair.

Good afternoon. A quick follow-up on the Cliniserve deal. I understand that that didn't close until the second quarter, but it sounds like that is part of the $17 million annual acquired revenue and therefore in your guidance. Is that fair?

That is correct.

Okay. Perfect. Then maybe a couple of bigger picture ones. I know recently you discussed adding a bit more resources on the M&A front. You had a few active quarters, and I am curious if you could provide a little more color there? Is it more opportunities, new market potential, new offerings you're targeting, any color there around the M&A outlook would be great.

The pipeline remains very robust. We have definitely over $50 million in the pipeline despite having done those deals. And good domestic and that's again a number for the North American market, but internationally it is active, so over all we're very energized and the team is doing a great job.

Okay. Great. Maybe now that we're sitting four months into the year, just curious if you guys could comment on any reluctancy you're seeing with the customer base about switching to SteriSafe or converting up service levels, anything like that with the macro issues, certainly doesn't look to be the case in the numbers, but any color there?

I think I can address that. I think the sales team is performing well and as you said it shows in the numbers. The offerings I think are still very attractive in terms of giving value to the customers, and that's terms of giving value to the customers, and that's why we still have a very high customer conversion to the premium and select levels as well as many of the new customers are going right into those levels as I indicated in my prepared remarks.

Sure. And then a few things for our model. Can you actually give us the SteriSafe clients and the percent on premium and then just the LQG business, the adds for biosystems and waste management?

Right now the total number of SteriSafe customer sincerely over 135,000, and the percent on the premium level is 30.4%. The LQ adds for the quarter were 58 LQG contracts and 74 biosystems contracts.

Great. And then maybe one last quick one just on FX, if we think about the forward-looking guidance, are you guys assuming a specific, I am sure you are, dollar to pound or are you modeling $1.40 if you will to get a feel for how revenue could fluctuate based on where the dollar goes?

I think if you look right now, the forecast would not for us assume any major change versus the last guidance and the exchange rates we used at that time.

Okay. Pretty similar. Great. Thanks a lot, guys.

Your next question comes from the line of David Manthey of Robert W. Baird.

Hi, guys, good afternoon. Could you tell us is $.5 million dollars about what we should expect for acquisition related expenses going forward?

I think that truly will depend on the quarter to quarter. We don't include it in guidance, and in comparison to prior periods and prior years we kind of from a point of view exclude it in comparing our sales because previously, as we all know, it was capitalized into the transaction, but again it will vary from quarter to quarter and it is difficult to predict.

Okay. In terms of that variability, Frank, we're talking from $.5 million to $2 million or are we talking from $.5 million to $600,000 or $700,000?

Again, depends on deal volume, and it really depends. It is tough for me to put a number to that. It won't be $10 million, I can tell you that, but it will certainly be commensurate with the transaction sizes that we're doing.

Okay. Second, is there any impact from a more aggressive EPA either positive or negative on your business?

I think the EPA effect is positive as we continue to see more focus on trying to look at the segregation of materials that's helping our returns and pharma services pilots we're doing and I think the longer term effect of the change in EPA regs and incineration which will be several years out will have a favorable effect, so I think those will be longer term activities.

Great. Thank you.

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Thanks. Good afternoon. I guess if we could start out back on the acquisitions, could you guys break out magnitude of clinic serve or just kind of degree of magnitude within the four there?

I think if you look on the annualized $17 million, you're probably somewhere between the $15 and $16, somewhere in that range depending on exchange rate for clinic serve.

Okay. That makes the other three fairly small. Can you give us a little more detail on those geographical and size?

They're with NDOS, predominantly, let's see, one was West, two pretty much East, but they were small deals no doubt. The larger one was clinic serve.

So those other three were all SQGs, then?

Predominantly SQG oriented - at least more than half of their SQG revenues, yes.

Can you speak to just the environment for waste volumes at your hospital customers? Your numbers are holding up well, but just what you're seeing there?

What we're seeing right now, is that the volumes are holding pretty well. I think it is also important to remember that over 80% of our business is really not volume driven, so we haven't seen any material effect. We do see some minor effects. I mean, a small dentist's office may be closing or something like that, but it really isn't material, and so that's why I am pretty comfortable in saying our business has not been significantly affected. Of course the international side, we're dealing with a lot of national health organizations where it's really not an issue at all.

Thanks. In the RMS business, any change to what you anticipate for the year, is that fourth quarter sizable acquisition progressing as expected and I guess just kind of big picture given the economic downturn, would you anticipate fewer or more recalls in such an environment? Thanks.

I think first of all our guidance is still the same. Our goal is to be 90 to 100 in that space. Peculiarly it's hard to predict the size of activities, but I think we're seeing the trends of more and more awareness of capabilities. We're capturing more and more recalls. Also in the environment the current political and legal environment is also very conducive to more attention and focus on recalls, but for us all we really need it one or two big ones, and we would make our numbers pretty easily.

Thanks. Shifting gears again. Pharmaceutical waste disposal at hospitals seems like a large opportunity and from what I am hearing the pilot is progressing into something somewhat larger. I guess could you speak to potential opportunity there and pricing strategy to the extent that you can? Thanks.

I think we're finishing up the pilot as you indicated. We've had pretty good acceptance by the customers. We think that it is a very solid offering, and it is an offering that kind of dovetails with the other package of services that we bring to the LQG market, so we'll continue to move ahead with it, and I think it is really too early to start talking about average size revenue, things like that, but it is very well accepted and as you indicated we're moving out of pilot.

One final one. Any thoughts on swine flu and if this could have an impact, be sizable in Mexico and just any potential thoughts? I know it is initial.

I think first of all at this point we don't see any material impact. I think it is on the global scale it is hard to tell at this point what will be the ramifications and rollout. I think our initial read is that the CDC and WHO are on top of it, they're following up with people, trying to look at the right things. What would likely happen, you can have impact where the more people go for testing or go to see their doctor or hospital, on any minor thing, it's probably not going to drive a lot of volume in a meaningful way because it would be maybe throat swabs and cultures and gloves and masks and that type of thing, but it is not a huge number, and I wouldn't bake anything in at this point.

Okay. Thanks very much.

Your next question comes from the line of Jonathan Ellis of Merrill Lynch.

Thanks. Good evening, guys. First off, if we could just talk about the three domestic acquisitions. You mentioned the geographic breakdown, but I am wondering are those all three traditional medical waste companies?

Yes, they were.

Okay. And in clinic serve, I know in the past there has been discussion that clinic serve has a higher mix of small quantity versus large quantity customers, but would you be able to quantify or give us directional sense how much of the revenue is small quantity versus large quantity for clinic serve?

Over half of their revenues would be SQ related. We're still fine tuning that obviously. When you get the customer list and you're really defining that, but that's the initial picture.

I see. In light of the clinic serve can you give us an update where your total mix of SQ versus LQ is in the U.K. and perhaps maybe pro forma for the clinic serve transaction?

I think with Cliniserve, probably in the mid20s as a percent of their total revenue.

Okay. Great. And I know recently you established subsidiaries in Brazil and Japan. Can you talk about, within your acquisition pipeline I know you don't quantify what the size is abroad, but are there any potential acquisitions in Brazil and Japan or are those longer term opportunities at this point?

Again, on acquisitions, we will do transactions when we're ready, and obviously to be ready in countries you need to have the infrastructure, you need to build the relationships, and that's really what's going on. We have been a little longer as you know already in Japan, so that's been around with the joint ventures we have there, and really the licensing, but Brazil is an opportunity for us, and we're learning more about that country and that gives us a chance to then do a transaction and be ready to do it by having that subsidiary in place.

Okay. Great. And then just on the account base this quarter, and you provided the overall numbers, but I am wondering, for instance, on the LQ contract ads at 58, does that include acquisitions that have been made this quarter or is that organic wins?

That total number is bulk acquisitions in there as well as the growth.

Okay. And would you be able to break down what the contribution was from acquisitions versus organic?

We normally don't totally break it, but Rich had already given you 58 news on the LQ side.

Okay. The 58 news you're saying was all organic?

Those were organic, yes.

Just to clarify again, 58 medical waste contracts are all new organic growth. 74 new biosystems contracts. What Frank was referring was the total customer count, LQ, which is probably around 10,000 total LQ customers.

Okay. I see. Great. Just on the small quantity side, I know would you be able to give smous sense, I realize you haven't given this in the past, but maybe even directionally did more of the growth in the account base come from acquisitions versus organic this quarter or vice versa?

More came from organic this quarter.

Okay. Great. And then just finally, if we could talk a little bit, I know that there was a division recently launched specialty waste solutions division, and I am wondering maybe if you could talk a little bit about what the strategy is there, and I realize it is probably embryonic stage, but my understanding is it has to do with offering document shredding and spill management and those type of services to customers. Can you talk about are you focusing on large quantity versus small quantity, is it something you do with internal personnel or use subcontractors, maybe a little bit of color around this division?

The group is really established because once in awhile we have acquisitions that may also do some document shredding or E-waste. It is very immaterial, not a main focus, and as part of that service coming with those acquisitions we obviously continue to service those with those customers and that's where that service is really residing. There is no specific focus from that point on that to really in that sense make it a lot bigger, but it is more that it came in through acquisitions.

I see. You're just basically formalizing the assets you already have as opposed to launching a new platted form for significant growth going forward?

Correct. It is more division and not a division, more a legal entity issue than it is really separate division for that matter.

Great. Just one final question from a cash flow standpoint. Based on my math, DSOs are the lowest point they have been since the first quarter of 2005, and I am wondering is there any reason why we may see for of an acceleration than we typically do on a seasonal basis in 2Q and 3Q in terms of DSO science.

I think Q1 is a little better internationally, has some prepaids in there, if you look historically Q1 has been a stronger one, and I think still from an overall picture point of view we're looking at mid-50s to high 50s is what our trend has been, and that's a good number to hold to. I don't expect we're going to work hard to keep it down and to bring it down. Mark is sitting next to me and saying come on, let's go, but I think from a planning and forecasting honestly it is conservative to leave it in the mid-to high 50s.

Great. Thanks, guys.

Operator Instructions). Your next question comes from the line of Scott Levine of JPMorgan.

Good afternoon, guys. Looks like the free cash flow guidance coming up a little bit here. Is that purely the flow through on acquisitions or are there any other changes working capital management or otherwise that are driving that number higher?

No. I think overall we obviously had a strong first quarter. I think that the working capital I think is going well, the investment we're making there, and the focus is working, so that's part acquisitions contribute a little bit to that, so I think the two main ones are working cap and acquisitions, and then Q1 CapEx was a little lower, so it helps the free cash flow number just slightly, but we're talking $2 or $3 million from that part.

And no change to the CapEx outlook for the full year?

The full year we've still capped kind of as a $50 to $55 million from a range point of view.

Can you help us think about downside and to that number potentially or is that kind of a good maintenance steady figure?

That is maintenance and growth. We've always said that we're somewhere between the 4% to 5% of revenues, and so it is more timing that this quarter it was a little bit lower. That's why for the year we still feel that the $50 to $55 million is a good number, and that includes growth again.

Includes growth. Okay. Turning to fuel really quickly, can you rough out again the impact on the top line and potentially I don't know if it is possible to do so on the margin as well, how much the decline year-over-year roughly speaking I think you have been talking about 200 basis points or so hit or, yes, hit to the top line last quarter. Is it roughly the same this quarter?

I think overall there is a slight benefit in the quarter just from the overall picture in fuel being lower a little bit, and so it is a little bit that contributed obviously to the gross margin, and we'll see what still is going to happen for the rest of the year.

Got you. One last one very quickly. Can you remind us on the interest rates fixed versus floating, total mix of debt?

We're probably fairly similar to last quarter, which was about just north of 70% was fixed, and the rest was variable.

Okay. Great. Thank you.

The last question currently in queue is from the line of Greg Halter of Great Lakes Review.

Yes. Thank you. On the last question there do you have the percent that energy was as relation to revenue?

For the quarter it was 5.1% for total energy.

Total energy. Okay. And is international now around and I guess maybe this would include clinic serve but around 24%, 25% of your total business?

No. It is about in fact because of the foreign exchange we're almost 20%, 19.9%.

Okay.

Clinic serve wasn't in the quarter yet, so that is for the quarter Q1, not for the year.

Okay. And I noticed on your website that you're handling the pistachio recall, was any of that in the Q1 returns figure?

Very small amount, and typically with that type of a product it is more the communication notification, spot shelf checking, the like, because a consumer would throw that kind of product away, and it is really more just the infrastructure and capabilities activities.

Okay. That's a smaller type that you would handle in that instance?

Yes. Okay. Thank you very much.

(Operator Instructions). Your next question comes from the line of Chris Sussing of AMI Asset Management.

Thanks for taking my call, my question. Given that the clinic serve was kind of a tough one to get through, do you think this pretty much ends the acquisition activity in the U.K.?

No, not at all. I think the focus of the OFT was clearly on specifically treatment and incineration is still one of their main focus points, and there is many other opportunities, both within MedWaste and adjacent areas that we see opportunities within the U.K. for growth that have nothing to do with treatment at times, so there's clearly opportunities there.

Okay. Thanks.

Gentlemen, there are no other questions in queue at this time.

We thank you, everybody, and look forward to having a great year and seeing you again.