Stericycle Inc (SRCL) 2010 Q1 法說會逐字稿

Good afternoon. My name is Mason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle first-quarter 2010 earnings call. (Operator Instructions). I would now like to turn the call over to Ms. Laura Murphy, Vice President of Corporate Finance for Stericycle. You may now begin.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink, CFO; 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 this Company's Form 10-Ks, 10-Qs, 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 for any facts, events or circumstances after this date that may bear upon forward-looking statements.

I will now turn it over to Frank.

Thanks, Laura. The results for the first quarter are as follows. Revenues grew $58.1 million to $335.2 million, up 21% from $277.1 million in the first quarter of '09. Revenues grew 19.1% when adjusted for the favorable foreign exchange impact of $5.2 million.

Domestic internal growth, excluding returns management, was up 7%. And international internal growth, adjusted for exchange, was up 7%. Domestic internal growth consisted of SQ up 8%, and LQ up 5%. Regulated recalls and returns management service returns -- revenues were $26.3 million.

Gross profit was $155.3 million or 46.3% of revenues. Excluding the regulated returns management services restructuring cost, the gross margin would have been 46.5%.

SG&A expense was $66 million or 19.7% of revenues. Net interest expense was $8.9 million. And the net income attributable to Stericycle was $48.1 million or $0.56 per share on an as-reported basis and $0.57 adjusted for after-tax transaction expenses related to acquisitions and restructuring costs.

At the end of the quarter, the revolver borrowings were approximately $405 million, which is floating at LIBOR plus 75 basis points. The unused portion of the revolver debt at the end of the quarter was approximately $251 million.

We repurchased 207,114 shares of common stock on the open market in an amount of $11.3 million, of which cash in the quarter to settle was $10.6 million. Cumulatively, we have repurchased approximately 13.4 million shares, and we have still have authorization to purchase an additional 2.8 million shares.

Our capital spending in the quarter was $12.8 million. The DSO in the quarter was 51 days. And the cash provided from operations was $81.1 million for the quarter.

And I will now turn it over to Rich.

Thanks, Frank. Our team delivered strong results worldwide, highlighted by the following areas. We continued to see growth of our small-quantity service offerings, and we increased adoption of our reusable sharps management and pharma waste services. We experienced a solid recall quarter, and all the countries delivered strong operating performances. We want to take this time to thank each member of our worldwide team for their solid performance and continued commitment to our customers and shareholders.

I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide insight on our current outlook for 2010. And please keep in mind that these are forward-looking statements.

At the end of the first quarter, we completed six acquisitions, two domestic and four international. The annualized revenue of these six acquisitions is over $37 million. Keep in mind our guidance does not include future acquisitions, divestitures and their related transaction expenses, but our guidance does include these items for the MedServe transaction we spoke about in the last call.

We believe analyst EPS estimates will be in the range of $2.38 per share to $2.44 per share, which we are comfortable with. And please note that this guidance includes approximately $0.04 per share negative impact from the acquisition integration expenses for MedServe.

We believe analyst revenue estimates for 2010 will be in the range of $1.35 billion to $1.38 billion, depending on assumptions for growth and foreign exchange. And we believe analysts will have estimates for net income between $206 million and $211 million, depending on assumptions for margin improvement and interest expense. We believe analysts will have estimates for free cash flow of between $245 million and $255 million, with CapEx anticipated between $45 million and $50 million.

In closing, we are very excited about the tremendous growth opportunities in 2010 and beyond. We thank you for listening to our prepared comments and will now answer your questions.

(Operator Instructions). Jonathan Ellis, Bank of America-Merrill Lynch.

A couple of housekeeping items first. Can you provide the total number of SQ and LQ accounts as of the end of the quarter?

Yes, the total number of SQ accounts -- or the total number of accounts is just slightly over 465,000, about 12,000 LQ and the remainder small.

12,000 LQ. Okay. And then, the total number of SteriSafe accounts and percentage on higher levels?

The number of accounts is over 143,000 currently, and the amount on higher levels is about 33.7%.

Okay, great. And do you have also an update on the portion of new accounts that signed up for one of the higher levels of SteriSafe?

We are looking at over 80%.

Okay. Great. And then, do you have -- typically I know you provide the number of new contracts for LQ and Bio Systems in the quarter.

Yes, the LQ contracts were 57 in the quarter, Bio Systems 73.

Okay, great. Just the international acquisitions, could you talk about where they were this quarter?

Yes, there were four international acquisitions -- one in Brazil, our entry into Brazil. There were two transactions in the United Kingdom and one in Chile.

And the $37 million of annualized revenue, can you give us some sense, is that more weighted to the international acquisitions this quarter versus the domestic?

Yes, the international was a bigger portion of that.

Great. And the six companies you acquired in total, are they all traditional medical waste companies, or are any of them providing other service lines?

Yes, the domestics were all tuck-in. Brazil was a med waste. And, yes, they were all tuck-in acquisitions.

Okay. Great. Just if you can provide an update on the MedServe integration, where does that stand in terms of facility consolidations and rerouting? Can you provide us a status report there?

The integration remains on track. As we said, we would take the early part of this year and through the summer to complete it. We are on track with our original plan. We still believe that there is $0.02 accretion once the integration is completed in the back half of the year.

Okay. And then just my final question is, when you look at, now that you've sort of had some chance to really delve into the books at MedServe and look at the account base, are you noticing any difference between the pricing for MedServe customers versus Stericycle customers that are receiving similar or equivalent services?

No, not really.

Okay. Great. Thanks, guys.

Scott Levine, JPMorgan.

It's actually Rodney Clayton. So first question, on the margins, just looking to get a little bit more color there, looks like margins may have eased a little bit versus the last couple of quarters. Can you give us some color on what's maybe driving that, if it's fuel or anything else in the quarter that may have impacted that?

So the most important factor, first of all, is the impact of the acquisitions that we did in the fourth quarter, specifically MedServe, and then the acquisitions we did ongoing also in the first quarter. Those reduced, kind of if you start from the fourth quarter, our gross margin by about 66 basis points just by mix. And obviously, we also had a very strong quarter with the recall and returns management group. The mix there, impact was about 22 basis points, and then the normal business was up roughly in the 20 basis points.

Okay, got it. That's helpful. On the Pharma Waste rollout, can you just give us a general update on how that's progressing? I think on the last call, you indicated you'd rolled it out in most of your geographies, but not all. Is that still the thought process there?

Yes, I think we are still in the first innings of that. We talked about it on the last couple calls. And while we offer it in most geographies, we are not quite in all yet. We're very excited. The customers are excited by it. It fulfills a regulatory requirement that they have. And we think our skill set, the kind of experience we have in dealing with large-quantity customers, positions us to do well in this market.

As I think we said perhaps on the last call, just the domestic market size for this is probably equivalent to Bio Systems, and of course, it has applications to international markets, too.

Okay, got it. On the MedServe deal, the divestiture that you're planning, is there any update there on maybe timing or what you're expecting?

We are expecting it to close in Q2.

In Q2. Okay, that's helpful. And then finally, can you give me a leverage calculation for your covenant?

The debt was 2.39 on a debt to EBITDA. That is down from 2.51 at the end of the fourth quarter last year.

Okay, great. Thanks a lot, guys.

Al Kaschalk, Wedbush Securities.

Frank, could you add how much in the quarter acquisitions contributed to the top line and if it was accretive or neutral?

Yes, there was $3 million. It was accretive. The revenue for the year, for '10, is going to be about $31 million, and then annualized basis, as Mark said, a little over $37 million.

Okay. And then on the returns business, I realize it's lumpy, very unpredictable, take it when you can get it. How would you characterize the start to the year for what you see for the balance of the year in terms of the revenue guidance in particular?

Yes, we are maintaining guidance, as we have said before, of about $70 million to $90 million. And the delta there really is the number recalls and the size of the recalls. We do believe our awareness campaign is working. We were pleasantly surprised to see that the number of recalls are up. And obviously, in Q1, we had a couple large ones.

A little bit drill down on the UK for a moment. Are you able to give us the split between SQ and LQ for that particular market?

Yes, it's still in the high 20s, approaching 30%.

30% is the --?

That's the SQ.

The SQ.

Thank you. Then finally, and I will hop back in queue, how should we read the acquisition in Brazil? I think, Frank, you had mentioned that it was an entry. But how, as you look out here, and maybe this is more for Mark, but as you look out at the international business, I think strategically you've talked about building sort of a franchise or a platform and then adding on. But is this an aggressive start to Brazil, or is this an entry point that will take further time to plan out? So if you could just maybe comment or update us on how this rollout into the international front is going.

Well, Brazil for us was a very good entry. It's a large and growing market. This was one of the bigger companies in Brazil. We took a 70% interest because the existing owners are still very active and engaged in helping us grow. We see really good growth opportunities in it. And it has the plants and infrastructure. So we see it as a very exciting opportunity and a very good market for us.

And if I may just add, sorry -- just an update. On acquisitions, and particularly ones like where the owners may stay involved, are the deals structured for potential earnouts, or is that not part of the program?

Typically, there's a variety of factors that are in play. But sometimes there's option agreements. There's ability for increased ownership triggers on our part. And that varies by transaction.

Ryan Daniels, William Blair & Company.

Frank, I guess a quick follow-up question for you just on the MedServe integration expenses. If I'm looking at it correctly, it looks like you had about $1.1 million in the quarter, or roughly $0.01 in EPS. And I know you said you're still considering it probably costing $0.04 overall to integrate. Should we think of the additional $0.03 primarily coming in Q2, or will that be spread out in Q2 and then maybe a little bit of a tail end in the third quarter as well?

It will be spread between Q2 and Q3 and then definitely lighter in Q4.

Okay, but it could continue into the fourth quarter just modestly?

Very small.

Okay, great. And then any update on the status of the recall facility consolidation? Was that actually completed? I know you had some small restructuring charges. But is that done, or will that also spill into the second quarter?

No. The restructuring is on track. There will be some costs still in Q2, and that will then also taper off.

Okay, great. And then, maybe a little bit broader comment, just an update on some of your OUS activities or growth initiatives, both in regards to maybe more actively cross-selling or I guess initially selling into the small-quantity business, and then second part of that would be cross-selling some of the clinical services, or thoughts on maybe rolling out Bio Systems in larger markets like the UK. Any color there would be great.

I think we continue to see opportunities to roll out, as you've heard us talk about in the last call. The clinical services offering in Canada continues to go very well as we've moved that in. But if you really think about the opportunity for SteriSafe, on a worldwide basis, we're still only about 30% of our customer base today on some type of program. And on the Bio Systems, we're about less than 20% that are on reusable sharps program. So we see those cross-selling opportunities is still a very big growth runway for us.

Okay, great. And then one final one, and I don't know if you're going to want to go into detail here, but I'm just curious if you've really kind of mapped out the revenue model on the pharmaceutical waste management. Obviously, talking about the market being similar, larger than Bio Systems, I assume the pricing has got to be pretty similar there as well.

So I guess the question is, are you seeing a variation on how customers use that, meaning some want a full in-service model where you are there categorizing the waste, taking it off-site, etc., where some want just consulting services? Or is there a big deviation there, or is it a pretty standard model?

What I've seen at this point is, similar to Bio Systems and similar to the majority of services we provide, customers want us to help them with nonhealthcare-related compliance issues. And so what we've seen is that we have that unique skill set. Because of Bio Systems, we are already inside of many of these hospitals. We know how to train because we've been training our customers since day one in how to comply with RMW and everything else.

So I think there's not huge variability in how the model is accepted or demanded by the customer. It's really one where they want this thing taken off of their back. And again, because we have the experience, we really can kind of tailor things to meet their needs. That's how we do it.

David Manthey, Robert W. Baird.

In the annual this year, you talked about your priorities being domestic and international growth. And I think that's pretty clear. And then you also talked about profit growth and service innovation. I'm wondering -- and I guess the service innovation you're touching on with some of these new -- the pharma returns and so forth.

But could you touch on profit growth? You mentioned streamlining operations. I'm just wondering if there are some initiatives there and what we should expect to see from those initiatives.

Yes, we have been working -- I think -- I have to actually complement my team. It's not "we," the people in this room, but the folks in the field have done a tremendous job over the years of continually refining our operations and driving efficiency. And you've seen us weather all kinds of headwinds because of their work.

What we have now throughout the whole organization, both domestically and international, is an ongoing continuous improvement program based on lean principles and then other guidelines like that that helps give us sort of a common language for driving those efficiencies. So that's -- when we reference that in the Annual Report, we are referring to the fact that in every part of the Company, in every location, people are focused on continuous improvement to drive operating efficiencies. And more importantly, they are focused on what we call Customer First. So, do the best that you can by the customer, and do it as efficiently as you can.

Okay, so nothing externally measurable right now?

I don't necessarily understand your question.

Well, I'm just saying in terms of -- is there a dollar amount that you're trying to wring out of the streamlining of operations, that sort of thing? Or is it just sort of continuous improvement?

Well, the continuous improvement obviously shows if you, again, look at the downtick in the economy and everything, and how we have weathered that, if you look at some of the periods of time when we keep improving margins, even with severe headwinds. All those kind of factors show that our people are able to continuously improve and stay ahead of that curve.

Okay. And then final question on -- as you get MedServe in here and you're looking at it, speaking of these service innovations, are there any competencies or services at MedServe that you have discovered that you think you can broadly provide across the Stericycle organization?

MedServe had some unique offerings tailored to SQ market, which we are looking at evaluating and integrating. They also had hazardous-waste capability, which was something that was attractive to us as we move into the hazardous and pharma waste space across the country. Those are the areas that we're focused on right now.

Scott Schneeberger, Oppenheimer & Co.

I want to first jump off -- in Brazil, what part of Brazil are you in? How much of the country are you covering with this acquisition?

The acquisition covers many of the major marketplaces in North Recife as you go to the South area, Sao Paulo area, and other parts are still developmental markets, but predominantly the north-central.

Okay, thanks. And you mentioned it was one of the larger consolidated med waste companies. Can you give us a feel for how that market works, how many are larger than you, how many are in the same ballpark with this acquisition, and just a feel for the Brazil market overall? Thanks.

It's extremely fragmented, and this was one of the larger ones that had multiple facilities, multiple locations.

Okay, thanks. And just a sense of how much treatment it is. Is the treatment -- treatment facility, again, one of the larger ones there. How many treatment facilities do you have, and are the regulations quite similar to the US?

There's three facilities. Regulation is not too dissimilar, but emerging predominantly today more large-quantity, but emerging regs. But there really isn't good local data, but if you just look at the opportunity based on the healthcare delivery system and the market, we think it could be well in excess of $0.5 billion.

Great, thanks. And a real quick one. Chile earthquake, any impact to operations, any disruption, facilities damaged, anything notable there?

No. Actually, as those of you who followed Chile, we had the plant in Concepcion that was impacted. Luckily for us, not much damage to the plants to an extreme level. What I was really, really proud of is the operating team locally was able to scramble and get supplies and services to the plants and to their people. Some of our employees actually had severe damage to their homes. And, again, the team pulled together across the world. The Stericycle folks kicked in money to help rebuild their homes and help them get back on track. So, really a first-class effort by everybody in the local operations, and we were very impressed at how quickly they recovered from a very dramatic natural disaster.

Great, thanks. Acquisitions, just one more on that. Domestically and internationally, could you just give a sense of the LQ/SQ mix? Thanks.

You mean on the ones that we had just acquired?

Exactly, in the current quarter, yes.

So domestically, about a 50-50 split, and internationally, it was larger on the large-quantity generator.

Similar to other international mix?

Yes, so the international, we had more on LQ than we had on SQ.

Great. Generally, it's about 80%, or I think you said maybe 70% -- it's similar to that, Frank?

It's probably closer to the 70s.

Okay, thanks. And then one more, if I could. Well, two more, sorry. The RMS that you mentioned large in the quarter, a few large coming through the pipeline in the quarter, how much of that is going to persist in the second quarter?

Again, it will continue to be a very uneven business. It's very unpredictable even for the second quarter. You don't have much visibility to the end of that quarter. So, again, it will remain an uneven business, but we're very proud of them, of the volumes and the momentum overall with FDA and consumer protection is favorable. The environment for that part is getting tighter. People are getting more fines. And all that facilitates a better environment for us on the recall side.

Okay, thanks. And then finally, you hadn't mentioned it in the previous question about gross margin. Was energy impactful on the surcharges on the top or the gross margin line? Thanks.

It was really immaterial in the quarter. So, from that point, if you look at the fuel, we had higher fuel, but that was really offset by lower energy in the quarter. There is always a little bit of timing lag, but the year-over-year growth rates were not materially impacted.

[Jason Rodgers], Great Lakes Review.

My questions are basically answered. Just on the energy costs, what was the percent of sales in the quarter?

Percent was 5.3%

Okay, that was it. Thank you.

Michael Hoffman, Wunderlich Securities.

When should we expect the 10-Q to be filed?

The 10-Q will be filed probably around the 13th, 14th?

May 13, 14. Okay. And then on the customers, the 465 breaks down 453 SQ, 12 large Q. Can you break that US/international for us?

No, we don't break it international and domestic.

On the SteriSafe, what percent of your addressable customer base have you penetrated at this point?

A little bit over 43%, 43.9%. But that is just a domestic number. If you look at worldwide, it's only 31%.

Okay. So back to the other question, it would be helpful to understand sort of what's the customer mix in those two markets on small generators?

No, I think there's a lot of opportunity left because, of the customers that are on the program, on the select and preferred, that's only 33.7% of those customers that we have on SteriSafe. So again, SteriSafe is a three-legged stool -- new customers coming in, signing them up for the higher levels, existing customers to get them into and they may start at the entry level and then upsell them.

And just for everyone's information, the upselling is very powerful. So a premium-level customer is almost six times more lucrative for us, because we get about $700 maybe to $1000 more in revenues from them, whereas an entry-level for just the standard entry-level for the training is maybe like $200 and $250 more.

So again, it's not just the people that are on the program, but then also the mix of people within the program. And there's opportunities on both sides to expand with customers that are not yet on domestic and international, as well as the upselling, which is a huge opportunity for us still.

Fair enough. In the quarter, the cash from ops was pretty big on the benefit of working capital. Should we see some of that smoothing the working capital shift, or how much of that is permanent?

Well, I'm very proud of the team on the collections side. Obviously, we had a very strong quarter also on the recall side. So that's where the receipt increase was. But the one day off again on DSO, they continuously have been able to reduce that, and we'll continue to work that, Michael. I don't think there is an end yet for that.

Okay. So if I understand that clearly, some of it is related to mix, but a piece of it is permanent.

No, because the permanent part, if you have a recall that is very large, Michael, that obviously if you have a slow one the next quarter, you're going to get that working capital to come back to you.

Okay. And then on the acquired revenues, the $31 million for the contribution in 2010, can you give us a little better feel for the split between domestic and international so we get the model right?

I think right now, we're at about 24% in this quarter. So everything depends a little bit on foreign exchange rates. And so, if we now get a full quarter of the internationals to come in, it will eke up a little bit, maybe like to the 25%. But then it will depend; again, the growth rates are not that dissimilar between the two, so it depends again on acquisitions, which we don't include in our guidance.

Right. And then on this continuous improvement program, is there a target G&A number you would like to be at?

If you look at the overall SG&A, I think it's one that at the end of the year, with the integration being completed, you really should look at kind of the mid-19% kind of range. And then it can come down a little bit from that, especially after the integration of MedServe is complete.

(Operator Instructions). Richard Skidmore, Goldman Sachs.

Just a couple of follow-ups. First, on the SteriSafe, can you talk to whether the pace of upselling and your success rates are accelerating or decelerating?

I would say that they are accelerating because -- two reasons. One is obviously the salesforce gains more experience every month that we continue to sell. And I think also the word is getting out that the program provides a very good value. And we kind of see this acceleration with the fact that over 80% of customers go right into the upper levels when they call in for new service.

And as a result of that, are you putting more labor towards that? Or how should we think about the opportunity to really accelerate that going forward?

Well, we tend to follow the strategy of feeding the hot hand, which is why you will see our SG&A move around a little bit in terms of tenths of percent. In this case, we're definitely making sure that we're fully staffed to take advantage of the experienced salesforce that we have and the customer demand.

And then, just if I might ask a couple of questions about acquisitions, just in terms of the pipeline that you see going forward, how would you categorize it? And then where do you -- if you break it down into more subcategories in terms of size, geography, end markets that you're focused on, just to help us understand a little bit better what you see out there on the acquisition front.

I think the pipeline is definitely north of $50 million for the North American markets and north of $100 million worldwide.

And is there a target for 2010 to come from acquisitions?

No. We don't have targets. We do them when the deals are right.

Okay. And then have you closed any acquisitions in April?

Again, we don't disclose until quarters are over.

Jason Rodgers, Great Lakes Review.

I was just wondering what your plans are for the MedServe OSHA compliance program, if you're planning on continuing that or getting rid of it or what?

We are looking at that. That was I think an earlier question about some of the valuated programs that came over. They had a program that emphasized the HIPAA compliance. Probably if I were looking out in my crystal ball, I would say that we would integrate the best of all the programs, because that's what's going to be most desirable and attractive to our customers.

There are no further questions at this time. I turn the call back over to you.

We thank everybody for your time and patience. And we look forward to having another great quarter when we talk to you in Q2. Take care, everyone.

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