Stericycle Inc (SRCL) 2009 Q2 法說會逐字稿

Good afternoon. My name is Abigail, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2009 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).

I would now like to turn the call over to Mr. Frank ten Brink, Chief Financial Officer. Sir, please go ahead.

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 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 for the results of the second quarter.

Revenues grew $11.5 million to $289.3 million, up 4.1% from $277.8 million in the second quarter of '08. Revenues grew 9.3% when adjusted for the unfavorable foreign exchange impact of $14.3 million. Domestic internal growth, excluding returns management, was up 7.7%, and international internal growth, adjusted for exchange, was 6.4%. Domestic internal growth consisted of SQ up 9%, and LQ,up 6%.

Returns management revenues were $18.3 million in the quarter. Gross profit was $136.5 million or 47.2% of revenues, and SG&A expense, excluding transactional expenses related to acquisitions, were $55.7 million or 19.2% of revenues. Net interest expense was $8.2 million, and net income was $43.9 million or $0.51 per share on an as-reported basis, and $0.52 adjusted for transaction expenses related to acquisitions.

At the end of the quarter, the revolver borrowings were approximately $370 million. On June 24, '09, we entered into a three-year term loan and initially borrowed $50 million. Since then, we increased the borrowings by $145 million and we also have signed commitments for an additional $20 million. The proceeds of this new $215 million term loan will be used to repay the revolver facility. The interest rate on a new term loan ranges from 2.75% to 3.5% over LIBOR base on a Company -- and it's based on the Company's leverage.

We anticipate that our after-tax interest cost for the remainder of '09 will increase by approximately $1.8 million as a result of this new facility. The unused portion of the revolver debt at the end of the quarter was approximately $250 million, and adjusted for the new term loan, would have been $465 million.

We repurchased 40,162 shares of common stock on the open markets in an amount of 1.9 million in the quarter. Cumulative, we have purchased approximately 12.2 million shares and we still have authorization to purchase approximately 4 million shares.

Our capital spending was $9.5 million in the quarter. Our DSO was 53 days, and our cash provided from operations was $49.9 million for the quarter and $126.2 million year-to-date.

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. During the quarter, we enjoyed strong sales growth in all of our business segments.

The SQG growth was primarily driven by SteriSafe, with over 80% of new SteriSafe customers choosing Select and Preferred. SteriSafe contributed approximately 67% 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 Q2 with over 430,000 accounts, of which 419,000 were small and the remainder large.

I'll turn it over to Mark.

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

In the second quarter, we completed five domestic and one additional international acquisition. The annualized revenue of these six acquisitions is over $14 million, but keep in mind our guidance does not include future acquisitions or divestiture and acquisition costs, which are now expensed for the new accounting rules.

We believe that analysts' EPS estimates will be in the range of $2.03 to $2.06 per share, which we are comfortable with. We believe analysts' revenue estimates will be in the range of $1.16 billion to $1.18 billion, depending on assumptions for growth in foreign exchange.

We believe analysts will have estimates for net income between $176 million and $179 million, depending on their assumptions on margin improvement and interest expense. And we believe analysts will have estimates for free cash flow of between $185 million and $195 million with CapEx anticipated between $45 million and $50 million.

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

(Operator Instructions). Ryan Daniels, William Blair.

Thanks, and good evening, guys. I had a quick question just to follow up on your guidance. I know you -- it looks like you've narrowed the range upward a little bit. And that $2.03 to $2.06, does that guidance include any FAS 141R? -- meaning that you guys have had roughly $2 million year-to-date. Should we be backing that out to get to your $2.03 to $2.06?

It just includes the year-to-date but not any future.

Okay. So that $2.03 to $2.06 is based on the GAAP numbers that have been reported year-to-date?

Yes. So, for the first two quarters, you should adjust for it. So this is adjusted already for the first two quarters, so you should take it out.

Okay. So we're using the $0.52 in Q2 to get to this guidance?

Yes. Right.

Okay, perfect. And then a couple of quick housekeeping questions too, on top of that. Can you just give me the number of SteriSafe customers in overall on Premium? And then the total LQ in Bio Systems adds for the quarter?

Yes. You're asking first for the total number of SteriSafe customers?

Yes, sure. And then the percent on Premium?

Yes. Total number is over 137,000, and the percent on Premium is -- or actually the total number on Premium right now is over 43,000. So, the LQ adds -- 57,MedWaste contracts; and 71,Bio Systems.

Okay, so pretty consistent. Okay, great. And then if we -- a couple of broader ones. I know you launched the equivalent of SteriSafe in Canada, I think, the clinical services offering. I'm curious if you could talk a little bit about how that's been received. And then maybe what we might see with expanding on the other geographic fronts, maybe the UK later in the year. Any thoughts there?

I think we've continued to see good progress in the international markets of adding on to our small quantity offering. It's still fairly early in those rollout of services, but early adoption has been good in Canada, and we'll continue to look at programs in other markets as well, as we move forward.

Okay. And then, I guess, the last two questions are just on the M&A front. Frank, you've shared with us the pipeline size in the past and I'm curious now that, if we remove MedServe from the pipeline, given that you've announced that deal, how it looks today?

The pipeline is over $50 million and that excludes MedServe.

Okay. And then any -- last question would be any update on timing there? Is that likely to be a third quarter, fourth quarter close?

You know, I think the HSR review process takes some time, and right now, both ourselves and MedServe are in the process of providing information to the DOJ. Through that process, of course, DOJ is getting up to speed on an industry that they really haven't looked at for a number of years, probably not in depth since we did the transaction with BFI in 1999.

So, once all this information is submitted, it typically takes DOJ about 30 or 60 days to review and respond. And once the review is completed, we can close, obviously, in a matter of days or weeks because we have the dollars with our new revolver borrowings.

Yes. Okay, great. That's helpful color. Thanks, guys.

Scott Levine, JPMorgan.

On the SteriSafe, on the percentage of Select Preferred, if I'm looking at accurate history, it looks like there was a step up in the percentage of new adopters taking the Premium offerings. How is that coming in relative to your expectations? And do you see yourselves running into any issues? In the current economic environment there, it doesn't seem like you're seeing any issues there.

No, I think you've kind of hit it right on. We're seeing a steady trend upward. The sales force is getting, obviously, more adept at presenting the value to the customers. And I think the results kind of speak for themselves. Even in today's environment, it's a good value proposition and we're doing well.

And then turning to uses of cash flow, it sounds like the acquisition pipeline is still robust and the activity is still high. Could you help us think about how you guys plan -- will there be any change, assuming activity levels remain high, with regard to how you guys plan to use the buyback going forward, and how would the closing of MedServe potentially affect that?

Well, again, both domestic and internationally, there are always many new companies entering in the business. And so, opportunities on acquisitions remains the number one investment opportunity for us.

We obviously first would like to conclude the MedServe transaction, and acquisitions, both international and domestic, are robust. We, again, don't include the international number outside of North America in the $50 million.

So, Repo will continue to do opportunistic. We do that based on, again, IRR calculations. And historically, obviously, have now bought back in the range of the 47 to low 50's in the past.

Okay. One last one. On cash, it looked like there was a negative working capital swing, if I'm calculating correctly, in the quarter. Do you expect that to reverse down in the coming quarters? And is there anything noteworthy there?

No, the second quarter is always a quarter that's negative because it includes the tax payments for both Q1 and Q2 that you do not make in Q1, but it ends up to be made in April and in June. So, second quarter will always, for us, be -- and for many companies, be a lower cash from ops quarter.

Got it. Thanks.

Scott Schneeberger, Oppenheimer.

A couple of questions on different topics. With regard to the new revolver, you used the proceeds of that to pay down existing revolver, correct?

Yes. The new one is, in fact, a term loan. It's a three-year term loan. It's not a revolver. It's fully drawn. And those proceeds are used to pay down the revolver, so it, in essence, reloads the revolver for us.

Okay. All right. Any other anticipated changes to how you have the financial structure of the Company going forward? Prior -- just considering the upcoming MedServe -- the pending acquisition.

No, at this point, obviously, we have -- after the term loan is fully done, it's $465 million in available. And that's obviously at this point, plus our free cash flow that we generate in the normal course of business. That should be sufficient right now to keep us busy.

Okay, thanks. RMS had a very tough comp year-over-year in the second quarter. What are you looking for out of that for the full year with regard to revenue?

Our guidance that I gave you is a little conservative. We assumed about $80 million. If you'll recall in prior calls, we have talked about higher numbers if we get one or two big recalls. And we still could exceed that. But we did not have any big recall happen in Q2, so we were a little bit more cautious on how we built the guidance.

I think the fundamentals we see are very strong. The regulatory framework, the penalties are now being issued, are increasing, so the awareness by companies of handling recalls properly is definitely up. And we continue to expand the awareness of our business.

We see our ability to capture new companies as customers expanding; our growth in that area has been good. And we think, just given the current administrative environment and the area that we're in, that should create great opportunities. But it's a fundamental lumpy business and we've tried to be conservatives on our forecasting for the remainder of the year for that business.

Okay. Thanks for -- yes, on that last sentence, you mentioned there that really one or two big ones coming in at the back half of the year could pop you up to the high end of the guidance, but at this point, we've moved half the year, and so --

Yes.

Got it. Also, you mentioned five U.S. tuck-ins and one international for $14 million annualized. Does that -- Cliniserve, you closed, I believe, in April. Does that exclude -- because you'd mentioned that on the first quarter call. Is that in there or out of there?

Cliniserve is not included in there. We did announce that one in last conference call.

Okay, thanks. And could, I guess, you just speak a little bit more in depth to the five U.S. and the one international? Is there one big one in there? Or is it fairly even in an SQ, LQ -- just whatever color you can add, please.

It's fairly spread out. And the one new one internationally is in Europe, in Romania. And the five domestically are fairly spread out and even.

Okay. SQ or LQ in the domestic?

I mean, it's fairly split.

That's nice, okay. Thanks. And then Romania geographically has been different from where you've been in the past. What's the strategy there? Are you going to build out around there?

Yes. The Romanian opportunity was very interesting to us, as we looked at the characteristics of the market. They have increasing implementation of regulations, tightening of regulation; very, very fragmented market, and reminded us quite a bit of our own experience in the United States in the early days of medical waste services in this country. Also a good basis for expansion across the central Europe opportunity.

The company that we did a transaction with is a leader in their space of a little over $4 million revenue stream. And we'll continue to apply the same basics of helping them try to grow, expand their business and provide some of the opportunities to let them take advantage of this program and services that the other countries have.

Thanks. Sounds interesting. One more, if I could sneak it in, on another topic. Your pilot of the used pharma in hospitals -- could you give us an update on how that's progressing?

Yes, it's actually moved out of pilot phase and we're now rolling it out to the hospital space. It's actually being well-received. It fulfills a need. It's a fairly simple program. And we kind of look at it as another offering that's complementary to the RMW as a basic service and Bio Systems.

It's still small, so I think as you've seen us do before, we pilot for a period of time and then we begin a very small, kind of graduated rollout. So it's really not material to the numbers of the guidance right now, but we are seeing a lot of customer interest.

Excellent. Thanks.

Jonathan Ellis, Merrill Lynch.

Wanted to first ask with respect to the five acquisitions in the United States, were those all regulated medical waste companies? Or did some of them have other ancillary services?

Four were regulated medical waste; one had more of a haz tint to it.

Okay. Great. And then any new joint ventures or licensing agreements in new countries this quarter?

No.

Okay. Just in terms of the multiples paid for the acquisitions this quarter, can you give us an average range?

Very much in line, again, slightly around the sixth multiple of EBITDA that we'd again do on a net present value basis. There was both cash, as you saw in the cash flow statement, and notes issued.

Okay. Great. And then just turning our attention to MedServe, if I understood you correctly, you're still providing information to regulators. Does that mean that the clock has not started ticking yet on the 30 to 60-day period that they require to come back to you with an opinion?

Yes.

Okay. So we're still waiting on that clock to start ticking.

Could you maybe give us some sense or color why you elected to borrow additional funds against that term loan as the end of July -- why, at this point, as opposed to perhaps closer to when the MedServe transaction may close?

Well, again, it was a good opportunity for us. We're also looking for, again, differentiation in the balance sheet with different tools from a capital structure point of view. We continue to look both domestically and internationally for a robust acquisition environment. And it's all those that we felt the availability would be good to put in place.

Okay, great. And then -- just on Cliniserve, any update there in terms of the integration? I know usually you target at least a turn of EBITDA in the form of synergies. Can you give us any more specifics, though, in terms of what your expectations are for cost savings related to that particular transaction?

It's probably a little too early. I think when we get closer, I think that would be better. But obviously, there are synergies -- transportation, specifically.

Okay. And then just my final question -- energy costs during the quarter? What were those as a percentage of revenue?

They were 4.6%.

4.6% of revenue. Great. Thanks, guys.

Your final question comes from David Manthey with Robert W. Baird. Your line is open.

In terms of the gross margin, which came in much stronger than we thought, is the higher contribution margin sustainable based on the cross-sell and upsell activity? And if there's any other factors that went into the higher gross margin.

Yes, we had a one-time favorable pickup from benefits on the domestic, which was probably about 40 basis points. We did have favorable mix and operating efficiencies in the quarter, and those were partially offset by kind of lower gross margins that we had and that are normal with acquisitions.

But year-over-year, like in the last call, probably people had about 200 basis points year-over-year improvement in margins. Now that maybe is about 210 for the year.

Okay. And then back to the fuel, just so we're clear on the impact there. When you look year-to-year, was there a top line impact or margin impact due to fuel or transportation?

No, there always is. Obviously, with fuel, as we've said in the past, it's probably about 200 basis points impact on revenues, is what we've historically indicated.

Okay. And then finally, as it relates to the regulatory landscape -- Mark, I think you mentioned in relation to the returns management, there was more regulation going on there. But can you talk, just in broad strokes, about the EPA, any more aggressive enforcement, et cetera?

Yes, the EPA, obviously, is still looking at hazardous -- or pardon, not hazardous but medical waste and incinerator regulations. Those haven't been promulgated; they're still being reviewed. If those come about, they tend to fall disproportionately, I guess, on the smaller incinerators, the ones that are still remaining out there at hospitals, because they obviously have a harder time with the capital expenditures involved.

And then EPA has been obviously beating the drum for several years now on waste pharmaceuticals. And that is obviously spurring the pharmaceutical waste program that we're rolling out to our LQG customers.

Okay. And I'm sorry, I just had one more auto-related question. Can you discuss how much of the $800,000 acquisition-related costs were related to MedServe versus other acquisitions? And then could you talk about where that number might go in subsequent quarters? Thanks.

Again, we can't break it out. The question was also in the last call -- how much is that in the future? We do not include it in our guidance. It's difficult to forecast and don't really want to include it in our guidance right now.

Okay. Thank you.

There are no further questions in queue at this time.

Okay. We thank you, everybody, and we look forward to another great quarter in Q3 and beyond. All the best.

This concludes your conference call for today. You may now disconnect.