Stericycle Inc (SRCL) 2010 Q2 法說會逐字稿

Good afternoon, my name is Christy and I will be your conference operator today. At this time I'd like to welcome everyone to the Stericycle second-quarter 2010 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)

Laura Murphy, VP of Corporate Finance, you may begin your conference.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink, CFO; Richard Kogler, COO; and Mark Miller, Chairman and 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 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. I will now turn it over to Frank.

Thank you. The results for the second quarter are as follows. Revenues grew $58.5 million to $347.7 million, up 20.2% from $289.3 million in the second quarter of 2009. Domestic internal growth excluding returns management was up 8.1% and international internal growth adjusted for exchange was up 9.4%. Domestic internal growth consists of SQ up 9% and large quantity up 6%.

Regulated recalls and returns management services revenues were $25.4 million. The gross profit was $161.5 million or 46.5% of revenues. Excluding the regulated returns management services restructuring cost, the gross margin would've been 46.7%.

SG&A expense was $67.3 million or 19.3% of revenues. Net interest expense was $8.8 million and net income attributable to Stericycle was $53.1 million or $0.61 per share on an as-reported basis and $0.62 adjusted for after-tax transaction expenses related to various non-operating items.

At the end of the quarter, the revolver borrowings were approximately $359 million which is floating of LIBOR plus 75 basis points. The unused portion of the revolver debt at the end of the quarter was approximately $297 million.

On July 16, 2010 we received informal commitments from 22 institutional investors to purchase $175 million of new 3.89% seven-year unsecured senior notes and $225 million of new 10-year 4.47% unsecured senior notes. We anticipate that the note purchase agreement will be signed in August of 2010 and that the new senior notes will be issued in October 2010. The proceeds of this new agreement will be used to repay the term debt and a portion of the revolver.

We repurchased 235,436 shares of common stock on the open market in the amount of $13 million in the quarter. Cumulative we have purchased approximately 13.6 million shares and we still have authorization to purchase an additional 2.6 million shares.

The capital spending in the quarter was $12.2 million, our DSO was 51 days and the cash provided up from operations was $129.3 million for the first six months of 2010. And I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter, we had over 471,000 accounts of which approximately 459,000 were small and 12,000 were large. We continue to see strong growth across all geographies fueled by new customers and the continued adoption of our value added services.

Let me put the worldwide growth opportunity into context for you. With our large quantity customers, we now have multiple service offerings which can potentially triple the value of each account.

Today, less than 20% of our LQ customers are using multiple services, leaving more than 80% of our LQ customer base available for growth by adding services such as Sharps Management and Rx Waste. Likewise, with our small quantity customers, we offer multiple services which can also triple the value of each account.

Today approximately one-third of our SQ customers utilize multiple services, leaving two-thirds of our customer base available for growth by adding services like SteriSafe, clinical services and Rx Waste. We're particularly excited about the recently launched Rx Waste program for our domestic large and small customers.

This program is now rolled out across the entire U.S. and is also available in a number of our international geographies. We're getting favorable feedback from customers about our unique in-service capability which helps them stay compliant.

In closing, we want to thank each member of our worldwide team for their solid performance and continued commitment to our customers and our shareholders. I will turn it over to Mark.

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

At the end of the second quarter, we completed four acquisitions, two domestic and two international. The annualized revenues of these four acquisitions is approximately $12 million.

Now keep in mind that our guidance does not include future acquisitions, divestitures of their related transaction expense but our guidance does include these items for the transactions already closed. We believe analyst EPS estimates will be in the range of $2.42 to $2.46 which we are comfortable with.

We believe analyst revenue estimates for 2010 will be in the range of $1.37 billion to $1.39 billion depending on assumptions for growth and foreign exchange. We believe analysts will have estimates for net income between $210 and $213 million depending on assumptions for margin improvement and interest expense.

And we believe analysts will have estimates for free cash flow of between $245 million and $255 million with capital expenditures anticipated between $45 million to $50 million. In closing, we're very excited about the tremendous growth opportunities in 2010 and beyond. We thank you for listening to our prepared comments and, operator, we will now turn it over to the Q&A session.

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

Let's get a couple of housekeeping questions out of the way first, if we could. Just total number of SteriSafe accounts as of the end of the quarter, percentage on higher levels and then SteriSafe as a percentage of SQ revenue, please?

Yes, as we said before, we're looking at about one-third are using multiple services. So we're probably in the neighborhood of 145,000 to 150,000 accounts.

And how many of those just to be clear though, how many of those are actually on the higher level.

About 11%.

Of the total.

11% of total, okay. And then total SteriSafe as a percentage of SQ revenue this quarter?

Total percent of domestic revenue was about 71%. That's domestic only.

And then just on the LQ side, can you provide us with the number of new LQ contracts and BioSystems accounts during the quarter?

58 new medical waste contracts, 75 BioSystems domestic.

Okay, great. Can we just talk a little bit about the returns business? There were a number of projects this quarter. Can you help us understand, are any of those projects going to continue into the third quarter? And any revision to the full year guidance for the returns business?

Well for our full-year guidance, we are expecting right now roughly $85 million to $90 million. What we're seeing as we go through this year is a number of fairly sizable events that extend over multiple months. We're also seeing a really good increase in the awareness of our capabilities and we think that will bode well for us.

And to be clear, any of the projects that are ongoing, would you expect them to continue into the third quarter or at this point, it's a matter of waiting on new projects to materialize?

Each project can often extend over multiple quarters. It depends on the scope of activities, what's requested. So it's not uncommon for even small projects to extend over multiple quarters.

And then just on the Rx business, you highlighted that as an opportunity and I know in the past you talked about how that program could take multiple forms. Based on your success thus far, can you give us some sense for how customers are tilting?

Are they using you to basically manage all the waste streams sort of holistically or are you just being contracted to dispose of pharmaceutical waste exclusively? Can you give us a sense of what the nature of most of the agreements are thus far?

Well the pharmaceutical waste program is to handle pharmaceutical products and we think that the opportunity right now could be a couple hundred million or higher depending on how the program is received.

It's compliance driven. We make it easy for the customer as I said in my remarks. And our unique in-service model means that we basically take over the hard work for the customer, make it easy for them to stay in compliance.

It has good gross margins in both the LQ and SQ space and right now, frankly we're seeing very good acceptance as we roll it out.

Okay, but I'm sorry, but just to be clear though, are most of the interest in Rx in conjunction with your universal waste solution as well or thus far most of the contracts you are signing are just exclusively for Rx?

I'm not really understanding your question. When you said universal waste solution, I didn't know exactly what you meant by that.

Where you're tasked by a hospital or a small quantity generator, but more so a hospital to manage all of their waste streams, including pharmaceutical.

You're talking about something called bundling.

Correct.

Bundling is really not a new market issue. It's something that's probably been out there for over 20 years. Some of the solid waste companies have tried it, hasn't worked out all that well.

Probably today, less than 0.5% of our LQ customers are interested in the service or receiving it. Where we are called in to make that kind of proposal, generally four out of five of the customers choose us over a competitor. But again, that is not really the Rx program that I was referring to.

I see, okay. And then just very quickly and then I'll get back in queue, the free cash flow guidance for the year, you didn't change that even though you raised the net income outlook. Just help us understand what the factors driving that are?

It's a little bit -- there's some expenses that will go up a little bit. I think it's really a range, the $245 -, $255. There may be a little bit of room in it. We were probably conservatives there but overall, we thought it was within the range still.

And then just my final question, the tax rate this quarter seemed to be fairly low. Any guidance on what the tax rate should be for the balance of the year?

Sure. Year to date is what you need to keep looking at because that kind of sets the rate and that is kind of in the mid to high 36%'s. We would say the forecast for the year is very similar, mid to high 36%'s.

Ryan Daniels, William Blair.

I just wanted to start with a quick follow-up on the Rx Waste Compliance program. Sounds like one, you've rolled that out across the U.S. and you're seeing good demand.

I'm curious if that demand is pervasive across all the states you're in. Are you seeing more initial demand in those markets where the compliance and regulations are a little bit tighter? Any color there?

Certainly, it's regulatory driven. If for example a particular EPA region is pushing heavy enforcement, we will see a lot more customers coming to us.

But I would say that we're seeing interest in all geographies. That's why we rolled it out across the country as quickly as we could. And a lot of customers are looking at it as a green initiative. These wastes shouldn't be put down the drain.

They are also saying well, if you can do it as an in-service model like Bio Systems where really the labor component is done by Stericycle, that's a benefit to them. So I think we are seeing more interest in it besides just oh, I've got to do this to comply.

Okay, perfect. And then a little bit of a change of topic. But on the MedServe transaction, I know you thought you might be done with most of the integrations July/August timeframe. I'm curious one, if we could get an update there on how that's progressing; and number two, just relative to your prior financial forecast, what the current view is.

Yes, I mean the integration is on track according to our original projections. The two pennies are included in the guidance and those two pennies have been kind of our consistent view of what will happen when it's fully integrated.

I think most of you are aware that we sold the business in the Heartlands area and that was closed and done. And we closed one redundant location and right now, we're pretty much on track to finish up that integration.

Okay, great. Doesn't appear that at least it's hit the quarter at all. But I'm curious with all the austerity measures overseas especially throughout Europe if you guys are seeing any pressure or headwinds in that business or if you're sailing through that pretty much unscathed.

We have not experienced any effects of the austerity measures. Historically the healthcare budgets are not getting impacted.

I think there's -- we're seeing the effect on acquisition opportunities where in some cases there's a little bit less competition on deals where pricing is favorable. And there's some discussion in the UK that's been put forward about modifying the health system but that's going to go through a lot more public debate and [reversions] before we see that.

Then I guess final question just looking at your organic growth rate Rx recall, I think domestically it's gone from 6% in Q4 to 7% and now 8% international from 5% to 7% to 9.4%. Is there anything in particular there that's driving the nice re-acceleration in growth over the last few quarters or is it just some new product launches or just stable continuing demand? Any color there would be helpful.

I think it's multiple things. One is the adding of the multiple services we have, the rolling out and expansion of SQ internationally is part of that. Really have focus on fuel surcharge is not as much of a factor anymore.

So the year-over-year kind of factors that impact debt are not there anymore. So you're seeing more of the truth effect of what these multiple services are doing.

Great. Thanks a lot for the color, guys.

Scott Levine, JPMorgan.

Question, drilling down on the organic growth, if we look at your domestic SQ and LQ, your SQs kind of remained stable at an 8% rate or thereabouts I think an uptick this quarter. But your LQ has gone from the 3% range in the second half of last year to 5 and now 6%.

Is that -- is there anything with regard to the Rx or any other variables really driving that? Are you seeing increased penetration on hospitals or pricing? Can you elaborate a little further on the accelerating trend there?

Yes, I think as Frank just alluded to, we have multiple service offerings now. We have the Bio Systems which has continued to have strong acceptance. I mean it's a program we've had out there for some time, although it's still plenty of runway left there.

The Rx is coming on strong. Obviously there's a green mentality that I think is permeating the country in the last 12 to 18 months which is helping us. There's focus on trying to utilize labor in the hospitals more efficiently. That's helping us.

And I think his point about this being a period of time where we don't really have something involving the fuel distorting the growth rates. You're looking at really sort of a true growth rate now and you're seeing things in LQ reflecting these new services being rolled out.

Got it. And then does your guidance contemplate the note issue and the increased borrowing costs beginning I guess beginning in Q4? Is that factored into the guidance?

Yes, that is factored in. So in Q4, you will have about $0.01 to $0.02 diluted impact because of the higher interest rates.

If you assume that LIBOR remains the same as to what it is right now for next year, that would probably be between $0.05 to $0.06 impact. We're really taking advantage here of the low fixed rates and the diversification of our capital structure and obviously a good funding for us for growth.

The rates obviously when we did them, we were the lowest rate at that point issued in the year even including investment grade higher than we were. We were the lowest rate and obviously seven and 10-year money was clearly very good and well oversubscribed by about six times.

Got it, that makes sense. One follow-up on acquisitions. Can you tell us which geography the internationals were in and maybe an update on the pipeline and multiples paid in the market.

Yes, so there were two domestic, two international. One was in Mexico and one was in the UK. They were tuck-in acquisitions as Mark said, annual revenues about $12 million, revenues in the quarter itself were about $1.5 million.

The multiple, very similar to what we paid before, between six and seven, but 70% of the revs were with large quantity. From a pipeline point of view, it's north of $100 million and increasing, it's both domestic and international.

Scott Schneeberger, Oppenheimer & Co.

Frank, could you just repeat what percent was for LQG, SQG and new acquisitions?

It was 70% LQ.

I guess while we're on that theme, could you give us an update? You were very acquisitive last quarter, how those are progressing and any impact on the margin in this quarter?

The acquisitions we concluded last quarter are all on track. The larger one there as everyone remembers was Brazil. Great team, they clearly are on track. We see lots of growth and deal opportunity in Brazil. So we're very excited about the adding of that country into the total. But all the other ones are working the way they should.

Okay, thanks. The gross margin is down year over year. I assume that was primarily MedServe. Please correct if I'm wrong. How much was it on the RMS contribution? What were other components that would move it up or down year over year?

If you look at the year-over-year quarter, you are down about 50 basis points. If you look at an adjusted excluding the restructuring for the RMS, so it went from 47.2 to 46.7, about 100 basis points of that is acquisition related. The biggest one of that was MedServe related.

Energy and fuel was a negative, about 50 basis points, and then all the other factors, the improvements in the business and growing the higher-margin sectors faster was an add of about 100 basis points. So it netted out a negative 50 still but because of mostly acquisitions in energy.

Are you guys at a point now where you're national with Rx Waste that you can give us an idea of what type of revenue magnitude that is?

Well like I said, we have rolled it out in all geographies and we believe the opportunity is a couple hundred million or it could be higher. We're pretty excited about it right now.

Sure, obviously not big enough to disclose. At what point would it be big enough to disclose?

It will stay included into the SQ/LQ. So if both sectors are being [impacted to serve, this is also performed] by overlapping parts of the infrastructure. So some of it will be difficult to separate. Most likely, you'll continue to see it as part of SQ/LQ in their growth rates.

Okay, thanks. Now with -- are they -- you mentioned in the prepared remarks, a good quarter for recall at RMS and good awareness out there. Could you speak to your spend I assume predominantly in SG&A with regard to that? Are you going to put the pedal to the metal or pull back now you feel you have hit a level where you have enough awareness?

So if you look at our SG&A over the last couple of quarters and if you exclude for instance stock options, amortization and any of the restructuring, you have seen Q4 at about 18%, Q1 at about 18% and then a slight drop in Q2, 17.6%. We would say including all those factors, you're still looking at a mid to low 19s.

But we are clearly, as we said also with the integration of MedServe, we're starting to see a little bit of that benefit now and those are the kind of things that should lower it a little bit. And for the year again, mid to low 19s, including the factors like stock options and amortization.

David Manthey, Robert W. Baird.

There were several seemingly large recalls announced somewhat late in the quarter, McDonald's and Maytag and Kellogg's and a whole bunch of things. I'm just wondering when you look at the first half, it seemed like as far as I can tell was your highest returns half ever and I'm just wondering, the 85 to 90 seems a little light. Is there a lack of visibility on what you're working on now? It sounded like things are going well. I'm just wondering why. Are you just being conservative there?

It remains an uneven market in that it is one where we probably were overestimating when we started last year from that point of view. But it remains uneven and unknown. We don't know yet what's going to come out in the months to come.

And so we have to be on that part, not necessarily conservative but just where we think is realistic? And remember too, even though recall is done, it really depends what we do for it.

Is it done all the way to the consumer level or not, one recall can as a result be $5 million and the other one can be $100,000. So again, quantity of recalls is not the guidance that would drive our revenues.

It's our interaction on the quantity of work that we do for a customer. But it will remain uneven and I wouldn't say if it's conservative or aggressive. It's just that we think right now we can look at and feel comfortable with telling.

As it relates to your increased awareness that would indicate to me that you're seeing more opportunities. Is your win rate within those opportunities also increasing?

I think definitely the awareness campaign is working. The government also is putting on more pressure and all those combined I think are a positive environment for us.

Lastly, can you just give me an idea right now where you stand in terms of the mix of small quantity versus large quantity, if you would break out U.S. and international separately?

I think numbers we've given in the past, it's roughly similar. You're talking 63% of U.S. is about small. Internationally what we've indicated and for instance the UK, we're now at approximately 30%. Those are some of the ratios that we have given and what it is right now.

(Operator Instructions) Richard Skidmore, Goldman Sachs.

Just one question specifically about SteriSafe. If I look back over the last few quarters, your percent of SQ customers on SteriSafe has stayed around one-third.

But I believe in the past couple of conference calls, you have talked about the salesforce being better adept at increasing the SteriSafe subscribers. Can you just talk about the progress and when you might see that percentage accelerate small quantity customers on SteriSafe? Or what might be keeping that from really growing?

I think, what you are seeing is actually that the customer base, the target base of customers who can be offered continues to increase. So it's not really a factor of the salespeople have plateaued.

The salespeople actually have gotten very adept over time at bringing people into SteriSafe and to the higher level programs. But what you do see is through acquisition, through new account capture of transactional business, we continue to add to the pool of customers. And that's why I said on kind of a worldwide basis, we still have two-thirds of our customer base, small quantity customer base available for growth.

And can you just reconcile that with I think a previous comment, maybe not this quarter but in prior quarters, where the new small quantity customers, roughly 80% were taking SteriSafe and maybe just reconcile that with your previous comment?

And that's still the same. In the quarter itself, we were still over 80% that sign up for the higher levels.

Richard Close, Jefferies & Co.

I want to start with just kind of touching on the internal growth rates what's possibly been driving them. Has there been any recent changes in the size or composition of your salesforce and/or marketing spend

No, there hasn't been. I mean, it's fairly stable. I mean, obviously we do invest into the areas of our business where we have great returns like SteriSafe now obviously and the Rx Waste market sector.

So there is emphasis on that investment, that's fair. But they have shown and continue to show very good results. Again, it's contributing to the growth in our revenues.

What percent approximately of your large quantity contracts are volume based or actually based on the way you collect? I guess given kind of the lower utilization of hospitals that we've heard a lot of these guys report lately, is that having any impact or do you anticipate that having an impact on your business?

This question has come up over the years obviously, especially in recessionary kind of environments on how does volume really impact us. It's very different from country to country because volume could impact it if you think about it because of down economy, but then in countries where there is national healthcare and the like, that's not really an impact.

So if you look overall through all the recessions now that I have been here at, we've not seen an impact on our volumes and as we've indicated before. So this again is an industry that's insulated it seems from the economic up and downs.

There's probably slightly less volume growth in large quantity because they keep losing it to the outpatient centers and the like. So there's more volume growth in the outpatient than the small customers.

What's driving industry growth is the baby boom. What's driving it is more regulatory frameworks, like pharma is also being driven by a regulatory framework. Those are very positive for us. And overall, the percent of business that really gets billed based on volume is not that high.

SteriSafe is a fixed monthly fee with overages. The remainder of the customers that are small are billed by the container. And so the weight in a container is really not a driver of the amount of revenues.

If you look at large customers, they may be volume driven both on the container or a per pound basis, but also the programs such as the Rx Waste and even Bio System charts are fixed monthly fees. So again, all those combined make the percentage of business that's volume driven not that high.

There are no further questions in queue at this time.

Well we thank everybody for their time and attention today and we look forward to speaking to you again in the next quarter with another set of great results. Have a great day.

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