Stericycle Inc (SRCL) 2009 Q4 法說會逐字稿

Good afternoon. My name is Kim, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth 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 the CFO, Frank ten Brink.

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 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, as well 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 into the results. The results for the fourth quarter are as follows.

Revenues grew $39.5 million to $313.5 million, up 14.4% from $274 million in Q4 of '08. Revenues grew 13.5% when adjusted for the favorable foreign exchange impact of $2.6 million.

Domestic internal growth, excluding returns management, was up approximately 6%, and international internal growth adjusted for foreign exchange was up over 5%. Domestic internal growth consisted of SQ, up 8%, and LQ up 3%.

The regulated recalls and returns management services revenues were $16.1 million.

Gross profit was $147.1 million, or 46.9% of revenues. Excluding the restructuring costs, the gross margin would have been 47.2%.

SG&A expense was $61.8 million, or 19.7% of revenues.

Net interest expense was $8.8 million.

And net income attributable to Stericycle was $44.6 million or $0.52 per share on an as-reported basis, and $0.55, adjusted for transactional expenses related to acquisitions and restructuring costs.

At the end of the quarter, the revolver borrowings were approximately $382 million. Currently $100 million of our revolver is hedged at average fixed 2.83% LIBOR rate plus 75 basis points. The remaining $282 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 $244 million.

We repurchased 93,670 shares of common stock on the open market in an amount of $4.5 million in the quarter. Cumulatively we have purchased approximately 13.2 million shares. We still have authorization to purchase an additional 3 million shares.

Our CapEx was $10.3 million.

And our DSO at the end of the quarter was 52 days.

The cash provided from operations in the quarter was $63.3 million, and $277.2 million for the year.

And now I will turn it over to Rich.

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.

SQ growth was primarily driven by SteriSafe, with 80% of new SteriSafe customers choosing select or preferred programs.

LQ sales growth was driven by the continued adoption of our Bio Systems offering and new service agreements.

In summary, we ended Q4 with over 459,000 accounts, of which approximately 447,900 were small, and the remainder large.

Now I'll turn it over to Mark.

I would now like to provide insight on our current outlook for 2010. Please keep in mind that these are forward-looking statements.

During the fourth quarter we completed six acquisitions, two domestic and four international. The incremental revenue impact in the fourth quarter of this year was approximately $6.3 million. The annualized revenues of these acquisitions is approximately $59.9 million.

Now, please keep in mind that our guidance does not include future acquisitions, divestitures, and the related transactional expenses, but our guidance does include these items for the MedServe transaction completed at the end of Q4.

We believe analyst EPS estimates will be in the range of $2.34 to $2.40, which we are comfortable with. Please note that this guidance includes approximately $0.04 negative impact per share of acquisition integration expenses.

We believe analyst revenue estimates for 2010 will be in the range of $1.32 billion to $1.35 billion, depending on assumptions for growth and foreign exchange.

We believe analysts will have estimates for net income between $202 million and $208 million, depending upon assumptions from margin improvement in interest expense.

We believe analysts will have estimates for free cash flow of $245 million to $255 million, with CapEx anticipated between $45 million and $50 million.

In closing, we are very excited about the tremendous growth opportunities this year and beyond, and we thank you for your time. And operator, we'll now switch to the Q&A session.

(Operator Instructions). Ryan Daniels, William Blair & Company.

Maybe if I could just start on the M&A front, Mark, could you talk a little bit more about the deals you did. Obviously this was a great quarter, and I know a lot of the revenue there is MedServe, but maybe the other incremental deals and a focus on international, where those acquisitions were?

Yes. Let me take that. So we did six acquisitions. Four were international. There was one in Portugal, one in Romania, one in Canada, and one in Chile. There were two in the US, one of which was MedServe, and another was a transaction on the East Coast.

Were all those kind of traditional med waste acquisitions?

Yes they were.

Then maybe, Frank, another quick one for you. I know at the start of the year last year you guys were looking for free cash flow, kind of $175 million to $185 million . If I'm doing my math right, it looks like you had a closer to $240 million. Was there anything during the year that surprised you that drove that to become so strong and well above your initial

No, I think the team has done extremely well when it comes to the receivable collections. Obviously that contributed substantially to this year. The DSO was reduced from 57 to 52 days, so that obviously, even in this market environment, they did an excellent, excellent job. And that I think is a major.

The CapEx was maybe a little over than we started from a guidance point of view on the year, so that I would say is the second contributor, and the further increase in earnings during the year.

Sure. Could you provide a little bit more color on the restructuring? I think you're moving some of the facilities. Is it just related to that for the returns business?

Yes. In the returns business we had a site consolidation there during the process, it's in Conyers, Georgia and Boynton Beach, Florida that are getting consolidated into Indianapolis.

Yes. That's what I thought. Then maybe a couple more that I ask every quarter for our model. Do you actually have the number of new LQ clients and Bio System clients? And then the second part would be SteriSafe total customers and percent on premium and select?

Yes. The new LQ adds were 58, Bio Systems were 72. Total SteriSafe accounts now are in excess or over 141,000. And the percent that are on the higher premium programs is 32.8%.

Then I guess a last question and I'll hop off. I think in your prepared comments you also said that of the new SteriSafe you're seeing 80% gravitate toward the premium and select offerings. I think that's a lot higher than what we've seen in the past. I'm curious if you've changed the sales incentives or kind of the marketing approach, or is just the market gravitating more and more towards that? Or does that have to deal with international? Any color of why that was so strong?

Yes. What we said over time is that, one, the sales team would get better at selling this product offering, explaining the value. I think number two is that the market is realizing that there is good value here, and so the product is one that sort of sells itself. And then these are people who are calling in, they are listening to the whole menu, and they are sort of saying that we want this select or preferred program because, frankly, it helps us reduce our overall costs. It's a good value for our customers.

Great, thanks again guys.

Jonathan Ellis, Bank of America.

Maybe we could just start with the MedServe transaction. First off, I know previously you had guided to $0.02 of earnings accretion. Is that still what is baked into your guidance for 2010? Or has that increased based on what you've been able to accomplish over the last month or so?

No, that still includes. So the $0.02 is still coming for MedServe, and then in fact the -- from the last guidance we're up about 3, the other 1% -- $0.01 is other acquisitions, really offset with foreign exchange, which is a little bit dropping revenues down slightly.

But again, as Mark indicated, in the guidance of $2.34 to $2.40 is the integration expense, which is about $0.04 per share.

Right. The $0.02 EPS accretion for MedServe, was that including integration costs, or is that excluded?

That did include the integration cost, correct. So without the integration costs, it would have been $0.06.

$0.06. Okay, great. All right. That's helpful.

In terms of the consolidation of the recall facilities, what is the estimated annualized cost savings from that?

Again, we are not going into full detail, but obviously we're doing it to gain the efficiencies. We have gotten everyone onto a common system, and again, it's also -- it will have some more slight expenses in the year of '10, about $1 million in one-time expenses. And obviously that investment that we're making has a great IRR.

Okay. In terms of the revenue outlook, I know previously the guidance, returns management had been $70 million to $90 million for 2010. Any update to that?

That's the same.

And then in terms of the free cash flow outlook for the year vis-a-vis the net income increase, and even accounting for the $0.04 of charges that I know are baked into your guidance, it seems like there's much more of a pickup in the free cash relative to the increase in your net income outlook. Can you just talk through what factors are driving the free cash benefit?

Again, obviously from the last guidance, the flow-through that we are getting from the acquisitions -- and then again, when we give guidance the first time, we are normally a little bit more conservative. We are trying to see what our tax advantages are during the year. Same thing with receivables, although we're kind of holding that fairly flat. So it's multiple factors, but we feel comfortable with the guidance we are giving here.

Great. And then just in terms of the acquisitions you made abroad and the one specifically in Europe, I guess how do you think about it in terms of being able to expand within continental Europe? Do you need to have asset bases within each country? Or can you use some of these initial acquisitions you've made as a platform to serve other countries but perhaps not have as much of an asset-heavy model in each country within continental Europe?

I think -- take an example. Obviously we entered Europe now and indirectly a little bit in Romania. Portugal is the true first continental Europe. It's a leader that we bought there. A great team came with that, very solid platform, has three plants in-country, that obviously now is a strong beachhead to look for other opportunities. We continue to work on growth initiatives in Europe, and we will take it a country by country, and we will see. If waste may move across borders, that is not as easy, but it I think is helping over the time to have that infrastructure throughout Europe.

Great. And then just final questions related to energy. What was that as a percentage of revenue this quarter?

It was 5.1%.

And did you -- was there any benefit from incremental fuel surcharges either in SQ or LQ this quarter?

No. I think revenues obviously, like last quarter, were impacted slightly on the downside year-over-year comparisons, and so it's really in line with what it was in Q3, the 8 to 3% for SQ and LQ.

Thanks guys.

Al Kaschalk, [Wedbush Securities].

Frank, I was wondering, can you remind us what the split of revenue on MedServe is between international and domestic?

It's roughly -- it's in essence still a little bit too early since the integration is ongoing. But it's slightly more on the SQ than it is on the LQ as we see right now. It's not specific yet, but that's a rough.

And then just a little bit broader picture, maybe directed towards Mark. With the perception that there was more regulation involvement in this transaction, have you learned anything or taken into consideration information there that may evolve your M&A acquisition strategy? And this is more sort of from a positive side standpoint than a negative comment, please.

Well, I'll respond and then Rich may want to add color. This was a process we've gone through now a couple of times. It's very deliberate and analytical. The outcome didn't surprise us as we went through the process, and we've gone through this in other countries. So I don't think there's anything that is a huge change of how we would proceed forward on transactions.

The process, I think some of you may be familiar with it, you may not, but we've been through it, as he said, multiple times. The Department of Justice does a very in-depth review of the entire market, all the participants -- very, very detailed. That's why it actually took a number of months to get through this. And so by looking at the whole market, they kind of in the end form a conclusion about it, and their conclusion sort of matched up with what we thought, and so I think in the end we don't really see much change and we don't see anything dramatically different that resulted from the outcome, and obviously we're moving forward.

Then just as a follow-up question on some of this premium select, is there room for pricing power, given some of the receptivity you're getting from your customer base? Maybe you don't want to comment on that on the call here.

No. I think it's a little different. You need to understand that a customer that takes select or preferred is still many times comparing it to costs that they have right now. So if someone is doing the training, if they have material safety data sheets, if they are complying with OSHA, most likely the alternative, which is having people come to their offices, have different vendors, is going to be more costly than our select and preferred services. So that part has really, under the pressure in the economy, continued to give us a good opportunity to sell to customers because it is a cost savings.

Thank you, I'll hop back in queue.

Scott Levine, JPMorgan.

With regard -- did you give your leverage calculation for your covenant?

No, we did not. It was 2.51 is debt to EBITDA.

Got it. And so it sounds like you're well within your comfort zone there. If you could comment with regard to -- it sounded like on the last call you'd suggested that the accretion from MedServe was kind of more backend loaded. Does the integration process or anything else really kind of cause you to take your foot off the gas when it comes to acquisitions? Or kind of business as usual here?

No, I think it's business as usual. And it is correct, the $0.02 is definitely backend loaded into the last two quarters.

And if you could comment -- I think you recently completed a pilot phase on your pharmaceutical waste program. Could you comment regarding the commercial potential for that perhaps? Or is it still too early to quantify?

Well, we actually are starting a phased rollout, which I think we talked about on the last call. The nice thing about this program is, again, it meets the customer need, it's driven by the focus that the EPA and the state regulators have on pharmaceuticals in the environment. It's too early I think to sort of predict where this will go, but the receptivity from the customer has been good, in every market we see interest, the sales force is very excited about it, and we think it has applications here and globally because this is the sort of issue that really touches all countries.

Understood. One last one then maybe on the -- or actually two quickly. Did you give the SQ/LQ breakout specifically in the UK market?

It is in the high 20s is the SQ in the UK as a percent -- the percentage of revenues for SQ.

Got it. Okay. Then one last one on the returns business. I know you don't break out the recall side from the return side, but is it right to think that there just really hasn't been a lot of large project activity on the recall side? And maybe if you could characterize your growth expectations for the business on a longer-term basis, consistent with what you guys were expecting one or two years ago?

Yes. So the awareness campaign continues to work. We continued to see strong customer growth in quantity of customers that we service. The outsourcing is more efficient for them, and so at the end it remains a hard to predict kind of sector for us, the recalls. But the scope of recalls can really vary along with the revenues for each event, depending on what we do for those customers.

Great, thank you.

Scott Schneeberger, Oppenheimer.

Just kind of following up on that last one and tying it back to SG&A, Frank, mentioned spending, and recall returns one of the areas where that's happening. Any change to the SG&A outlook as we look out to 2010?

No. I think if you look at the Q4 '09, obviously acquisitions raised the percentage to revenue to the high 19's. In '10 we expect to kind of incur in that, depending how you model it, maybe to 5.4 on integration, some of you don't. But the trend will be down during the year as integration progresses, and so for the full year we should be kind of in the mid 19's, slight [tick] about that, but the mid 19's.

Okay, thanks. And then with regard to acquisitions in the quarter -- this was asked earlier, may primarily on MedServe so I assume it rings true across each of the acquisitions as a whole since that's the big piece when it was entered, more SQ than LQ, but just kind of for those who -- those of us who model the acquisition, is that a 60/40? 70/30? Any further color? And not specific asking on MedServe but all the six in the quarter?

I think if you have MedServe, rough, starting at a 50/50, the others are really far more on the international side, it's really more in LQ than SQ. So they are not far off versus the rest of the world, so that definitely is more SQ -- or LQ than SQ.

Thanks, that's helpful. And then finally with the hospital/pharma waste, can you give us -- I'm going to ask a few questions that hopefully you'll answer it to some extent. But what do you see as the market potential there? How far have you rolled it out with regard to geography or -- I don't know -- any other metric you would care to give? Just to give us a little bit of help of how far along it is right now?

Yes. We have moved it out of pilot phase, we've begun to offer it in most geographies, but not all. I think the market potential really is all LQ, and I say that because every hospital dispenses pharmaceuticals, every hospital is going to be subject to these regulations. And so in terms of potential, this is probably the same or larger than Bio Systems was, which is, again, is a product that every hospital can probably use.

I would say, I mean, I guess if you're trying to ballpark it, I would say it's $200,000 million, similar to Bio Systems.

With where you are now, and not making you put something out there we would hold you to, but you said you are in a lot of regions, not all -- and thank you for sizing what you think it can become -- what type of time frame? -- to the extent you care to answer it. Thanks.

Well, I think that it will -- the time frame to move it out will be similar to what you saw us do with Bio Systems. But as an example, I am kind of like stepping up to the plate, I am the first batter in the first inning at the top. That's where I'm at in terms of moving this thing along, so there's quite a bit of runway left. And we are in the early stages.

Great. Thanks very much.

Richard Skidmore, Goldman Sachs.

Just a couple of questions, first on the MedServe acquisition. I believe that there were some divestitures of some assets that were supposed to be done. Are those complete? And if not, are they in your guidance? And how much would you expect that would impact the free cash flow in 2010?

The transaction just closed the beginning of December. We are now in the process of working the divestiture, which as you recall, is one plant and some transfer stations and some LQG accounts. I really don't want to comment much more on the timing or anything because we have multiple buyers involved, and it's not appropriate obviously to discuss it in detail on this call.

The guidance that we've given includes the effect of these divestitures, both in terms of revenue and cash flow. So post-divestiture the guidance we've given you is the guidance for the year.

Okay. And then just separately on use of free cash flow as you think about the guidance that you provided with regards to free cash flow, how would you think that gets deployed in 2010 in terms of buckets with regards to M&A, share repurchase, etc.?

I think the two most important remain investment in the business, expanding the existing services, launching new programs, and then acquisitions -- two top ones -- and then repo, we continue to do opportunistically.

And then shifting just quickly to the small customers, in terms of the retention rate, can you quantify how the retention rate has been in the SQ business? And then on those customers that are on the standard model, what's the conversion rate of those customers to the premium and select?

From a revenue retention we remain strong at 95%. We don't go to -- into the details of how many converts. We do give obviously that the quantity of customers that have selected SteriSafe, of those in the quarter, 80% selected for the higher programs.

Thank you.

David Manthey, Robert W. Baird.

So the guidance you've given includes MedServe revenues and EPS accretion. Did you say it does or does not include MedServe acquisition-related expenses?

It does include $0.04 of those integration expenses. And net of those $0.04, it's accretive by $0.02.

So when you made the overall statement that the new guidance includes $0.04 of acquisition expenses, that's from MedServe, and your old guidance didn't include any of those expenses? Is that correct?

It is that. Pretty much 90% of it is related to MedServe.

Okay. And of the 19,000 new customers that you added, how many of those were from MedServe or other acquisitions, versus organic new customers?

Don't break it total out, but there's obviously -- we did through the acquisitions get additional customers from MedServe and from the international, so they both contributed. What we did say is that we had 58 new LQs and that we were able to put 72 customers on Bio, although some of those are existing customers.

And then I think in the past you've told us what percent SteriSafe represented of total SQ revenues. I'm not sure you gave it to us this time .

SteriSafe as a percent is 60 -- about 69%.

Okay. (multiple speakers)

And then in the domestic revenue.

Yes. Okay. And then on the P&L, the $905,000 for restructuring impairment costs, can you divide those between the two so we know where the restructuring costs?

You broke up on that question. Could you say that again?

Sure. I'm trying to figure out, of the $905,000 how much is restructuring versus how much is impairment costs?

It's really -- most of it is the restructuring. There is barely any impairment in it. It's really part of the restructuring, it's fixed assets and things like that, it's the cost of the restructuring, and really the impact of the impairment, as you can see from the table, is almost negligible.

All right. And then finally, what percentage of LQ revenues comes from Bio Systems today?

Right now Bio Systems, about -- hang on. I need to quickly look that up. About 23% to 24%.

Thanks much guys.

(Operator Instructions). Jason Rodgers, Great Lakes Review.

Looking at the returns program, the returns and recall, I wondered if you had a number for the quarter as far as revenues, what the total was for '09, and if you have a goal for 2010.

The total for '09 for the whole returns group was $70 million and for '10 the guidance is $70 million to $90 million.

And do you have a goal for new accounts for Bio Systems for 2010?

Over 200. Again, similar to last year's goal.

And then wondering on the progress on the SteriSafe offering in Canada. Thank you.

That program has just started out. We are seeing pretty good adoption. I would kind of compare it to the first or second year when we started SteriSafe here in the States. So we still have quite a bit more runway, and we need to get it moved across all the provinces.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to the presenters.

Well, we thank everyone for your time and attention, and we look forward to speaking to you on the next call. Thanks so much.