Stericycle Inc (SRCL) 2010 Q3 法說會逐字稿

Good afternoon. My name is Danny and I will be your conference operator today. At this time I would like to welcome everyone to the third 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). Thank you. Vice President of Corporate Finance, Laura Murphy, you may begin your conference.

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, Chairman and 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-Qs as well as its other filings with the SEC could affect the Company's actual results and could have cause for the Company's actual results to materially differ 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.

Thanks, Laura. The results for the third quarter are as follows. Revenues grew $65.2 million to $363 million, up 21.9% from $297.8 million in the third quarter of 2009. Revenues grew 22.4% when adjusted for the unfavorable foreign exchange impact of $1.6 million. Domestic internal growth, excluding returns management, was up 8.4% and international internal growth adjusted for exchange was up approximately 6%. Domestic internal growth consisted of the SQ up 10% and large quantity up 6%.

Regulated recalls and returns management services revenues were $31.9 million. Gross profit was $168.1 million, or 46.3% of revenues. Excluding the regulated returns management services restructuring costs, the gross margins would have been 46.4%. SG&A expense was $69.4 million, or 19.1% of revenues, and net interest expense was $8.4 million. Net income attributable to Stericycle was $56.7 million, or $0.65 per share on an as-reported and adjusted basis.

At the end of the quarter, the revolver borrowings were approximately $375 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 $290 million.

On October 15, we received a $400 million private placement. The proceeds were used to repay $100 million of the term debt and $300 million of the revolver. We repurchased 308,588 shares of common stock in the open market at an amount of $19.3 million in the quarter. Capital spending was $10.9 million, and our DSO in the quarter was 53 days.

Finally, the cash provided from operations was $205.4 million for the first nine months of 2010. And I will now turn it over to Rich.

At the end of the quarter we had approximately 476,000 accounts, of which approximately 463,500 were small and the remainder were large. We continue to see strong growth worldwide, driven by new account acquisition of the adoption of our expanding portfolio of service offerings.

With our large quantity customers, we have multiple service offerings which add to the value of each account, and today less than 20% of our LQ customers are using our multiple services, leaving more than 80% of our LQ customer base available for growth. Likewise, with our small quantity customers, we offer multiple services that increase the value of an account. Today approximately a third of our SQ customers utilize our multiple services, leaving two thirds of our customer base available for growth.

We do remain excited about the recent new launch RxWaste program for our domestic large and small customers, and we continue to receive favorable feedback from our 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 and preliminary outlook for 2011. Please keep in mind that these are forward-looking statements.

At the end of the third quarter we completed six acquisitions, three domestic and three international. The annualized revenue of these six acquisitions is approximately $18 million. Keep in mind our guidance does not include future acquisitions, divestitures and related transaction expenses, but our guidance does include those items for transactions that are closed. For 2010 we believe analysts' EPS estimates will be in the range of $2.45 to $2.46, based on as-reported GAAP EPS for the first three quarters of the year, and we are comfortable with this range. We believe analysts' revenue estimates for 2010 will be in the range of $1.4 billion to $1.41 billion, depending on assumptions for growth rate and foreign exchange. And we believe analysts will have estimates for free cash flow of $241 million to $243 million with capital expenditures anticipated between $46 million and $47 million for the year.

Now I would like to provide a preliminary outlook for 2011. We believe analysts' EPS estimates will be in the range of $2.71 to $2.76, which we are comfortable with. We believe analysts' revenue estimates for 2011 will be in the range of $1.49 billion to $1.52 billion, depending upon assumptions for growth and foreign exchange. And we believe analysts will have estimates for free cash flow between $270 million and $275 million with capital expenditure expenses between $45 million and $55 million.

In closing, we are very excited about the tremendous growth we have achieved and opportunities in 2010 and beyond, and we thank you for your time on the prepared comments. Operator, we will now go to the Q&A mode.

(Operator instructions) Ryan Daniels, William Blair.

Just a quick question on the 2010 guidance. I want to make sure I have it correctly. What you're providing is a range of $2.45 to $2.46 is on the GAAP basis, which I believe is running about $0.02 lower than your pro forma numbers. Is that right?

That's correct. It's, in fact, $0.01 roughly, year-to-date, is the difference between the two.

Okay, so pretty similar. Secondly, do you guys have any update on the Healthcare Waste deal, maybe anticipated closing date on that? And I'm curious if the fact that you went through the MedServe Hart-Scott-Rodino review gives you more confidence that can close a little bit quicker, potentially.

Well, where we stand right now is that both companies have filed their HSR notification with the DOJ, and that just took place a couple weeks ago. DOJ, as you know, has 30 days to review the information, and they may request additional information. Closing, of course, depends on the DOJ information request.

As far as the second part of your question, we do think that the benefits that the DOJ is up to speed on the industry, but beyond that really the timetable is in their hands.

Any more color on the M&A front, kind of the pipeline? I'm curious if at least domestically you guys are seeing more activity as sellers rush to try to complete deals ahead of what could be a change in capital gains taxes at the end of 2010.

Yes, so the pipeline is over $100 million in revenues worldwide and multiple geographies. It's very robust. We do see a little bit of a pickup as a result of people wanting to maybe close before year end, but I would say that people coming to the table, mom-and-pops, aren't necessarily driven for that to be the starter. But, once in the game, then they maybe want to speed it up.

Last question and I'll hop off, just a little more colors on the deals that were done. I think you said three international. Can you give us the markets there and then maybe talk a little bit about anything unique or what the business mix is?

Yes. So the three in the U.S. market were in regulated waste, and the three international -- one was in Portugal and two were in Japan.

Jonathan Ellis, Banc of America.

Maybe just go through some of the laundry list questions first. SteriSafe as a percentage of its key revenue?

Is over 71%.

And then total number of SteriSafe accounts and percentage of higher levels?

We're over 147,000 total, and the percent on the higher levels worldwide is over 11% now.

Just as an aside, too, if I can, because I guess I wanted to say this to folks like yourself who have been following the Company for awhile but also people who are new to the Company. I think you all know we continue to invest so we can add and expand service offerings for LQ and SQ customers. Our current menu, as I mentioned, gives us the potential to triple customer revenues. And we've seen similar behavior over the years from customers who go to the menu and they customize what meets their needs. And as we moved into international geographies and also as we got multiple service offerings and we continue to expand on that, we've found that these legacy metrics related to, say, one service offering like SteriSafe or acquisition of med waste accounts or something really become less relevant for us. So we don't really focus on them internally. We look at growth in our business sectors, and so I guess I just wanted to make that point for people who are trying to model us that we think and we tell our team that the important thing is to look at the growth in the space and not necessarily get tied up in number of accounts here or there.

I guess until you give us an alternative metric to look at, though, this is the best we have for now.

I just want to make it clear that it may not be the best way to model the Company. So for someone who's just starting to follow us, they probably need to focus on growth rates because that is the metric that we use.

Understood, appreciate that. Just one clarifying point on the counts on higher SteriSafe levels. If my numbers are correct, over the past few quarters it has been running about a third. And I think I heard -- if I heard you correctly, you said more than 11% now?

You asked for the total percentage of accounts who are on SteriSafe? You said that you wanted the percentage of the accounts --

No, no. On higher levels -- I'm sorry -- at higher levels.

The number on a domestic basis is about 35.1%. But, again, what we are saying is that the people that worldwide are on higher levels as 11%.

So that's in the new denominator. Understood.

That's correct. So that's why, again, you need to look at it more worldwide with clinical services now having been introduced in the UK, Ireland and getting spread.

Okay, got you, good. And then the new accounts signed up for higher levels of SteriSafe -- is that still over 80%?

It's running about 75% to 80%, in that range. It hasn't changed.

And then just finally, total number of new LQ contracts and Bio Systems accounts?

Sure. 56, and 74 Bio Systems.

Okay, great. Just on the returns management business, based on the third quarter, do you have updated guidance for this year and any guidance for next year for that business?

So the guidance for this year is between 104 to 110, and for next year it's 75 to 90. That's million dollars per year.

Okay, great. And then just on the energy costs, do you have that number for the quarter, fuel and energy as a percent of revenue?

It was 5.2% for energy as a percent of revenue.

So, Frank, can you help us understand, because I think that's pretty comparable to last quarter, and the gross margin decelerated about 30 basis points. Help us understand what some of the moving factors were that may have influenced gross margins this quarter versus last quarter.

Sure. So if you adjust already for the restructuring, it's that 30 basis points, mix predominantly driven by the returns management side impacted it negatively by 32 basis points. The acquisitions in the quarter was about 18 basis points, and then predominantly foreign exchange, a little bit of fuel but mostly foreign exchange was 5. So those were all headwinds of about 55 basis points, and the rest did about 25 basis points.

Okay, good, the cash on the balance sheet built up somewhat this quarter. Any explanation there or color?

No, it can fluctuate. Obviously, we at times do have cash related to our returns business, so that can fluctuate based on the business. But predominantly we try to use cash to reduce debt as fast as we can.

And the pickup in receivables -- is that also tied to recall or returns projects?

Yes. It's really the timing of revenue and acquisitions in the quarter that make DSO go up a little bit.

Okay, I see. And then just, if I may, on the acquisition in Japan, my understanding is that's a market that's more separated out, collection and treatment are done by different companies. Can you help us understand the types of companies that you acquired in that market?

Yes. We bought two companies that combine both the transportation and treatment, and you're correct in that the marketplace is very, very granular. Most of the companies are either dedicated in treatment or transportation, and we saw an opportunity to begin the learning process of integrating and providing a totally integrated service direct to customer for that marketplace. So excited about the new entry and a big opportunity over the long haul.

To be clear, these are integrated companies, but most of that integrated candidates in Japan are still very much fragmented or carved out based on treatment versus transportation?

Yes.

Al Kaschalk, Wedbush Securities.

Just to clarify or follow up on the acquisition, I realized it's small, so please appreciate what this is originating from. But is that in any way a change or just an opportunity that you are taking advantage of? Because I thought historically you talked about more looking at platforms in the international markets and then building around those versus this sounded maybe a little bit more niche-y oriented.

The Japan entry -- we've been watching and looking at Japan since the early '90s. The marketplace was never one that had a single leading player, and over that time hasn't evolved that way. There's literally close to 1000 entities that service this space. What we were looking for is entities that had customers, good leadership teams, infrastructure to combine and provide the combined growth platform and provide an integrated service to the customers so that we can begin to see how the impact of that on the market dynamics are and whether there's ability to continue that model throughout Japan in the future.

And then on the six acquisitions, I think it was $18 million of revenue. Was any one of them a greater contributor to that number?

Both in Japan were a larger part of that, the combination of the two.

Finally, if I just may add, could you add a little bit of color on the dynamics on the 10% growth in SQ and 6% growth in LQ, which I think are at opposite ends of the range of growth? And are these the particular growth rates that we -- are you suggesting that we look at as we try to calibrate the new business or the Company with our financial models?

Yes. If you look at the growth rates overall that we give and have given for this year and for next year, it's very similar. SQ for this year and next year 8% to 10%, LQ 5% to 8%. As I mentioned already, the returns management, $75 million to $90 million and then the international market 5% to 8%. So this was a good quarter, and we are excited about it. But overall, these are the ranges that we feel are the right ranges to use.

Not to split hairs, Frank, but was there just higher conversion on the SQ this quarter? Or what --

No, I think overall all engines worked. Again, you're talking about customers with additional services. So the multi-service picture that we have is really continuously what we have built on, and that facilitates the growth.

Scott Levine, JP Morgan.

It's Scott Levine from JP Morgan. A question regarding the RxWaste -- for 2011 I'm guessing you are not qualifying a target there, it's kind of embedded within your growth targets. But can you talk maybe quantitatively or qualitatively, if that's true, in terms of what your expectations are? Are you in full commercial rollout? Are there regulatory catalysts that we should look for to drive that business? Any thoughts to guide expectations regarding RxWaste in 2011?

We are in full rollout mode for LQ and SQ. You're correct that we don't provide metrics and that sort of thing. That growth is embedded in the overall LQ growth, and that's how our people look at it and measure it. We are less concerned about whether they sell one account or three accounts, two accounts. But we are seeing very strong adoption in all markets.

And in terms of the importance of national regulation versus -- I think there have been some developments at the state level, are there important catalysts to think about or look to on that front, or is that really not terribly important, in your view?

In our view it's doing fine right now. I think we see two drivers. One is the regulatory driver. The other really is just do the right thing driver. Everybody is sensitive these days to doing things, so our model, which basically makes it easy for the hospitals, because we do in-service, we take the labor and that component out of their hands, and the fact that we can put them in compliance and we can do it efficiently and relatively economically -- they end up doing the right thing. But the real driver is the total model, the in-service piece.

Understood, and then turning to the returns business, I believe you don't break out, call it the recall business from the returns side. But when you look at the guidance you provided, say, for next year -- this year obviously is an active year for recall, so the $75 million to $90 million versus the traditional $75 million to $90 million -- is the mix between the two expected to be materially different than what it has been in the past, or is it kind of consistent going forward?

Well, $75 million to $90 million is what we feel is normal year for recalls, and obviously, $90, there are some larger recalls in the $75 that's really small. So within those parameters, the rest is regular mix.

Got it. One last one -- I believe you have a partnership with a major solid waste provider to provide bundled services to hostels, I believe. Can you talk about what level of activity you're seeing there, what expectations you might have? Is it particularly meaningful? Or any other color would be helpful.

We have an existing relationship with one of the large companies, Republic. And in the event that a customer wants to have solid waste or recycling services, then we can bring Republic in. We don't do bundling in the classic sense. Bundling is where you basically go into the lower level of the organization or you are into purchasing and you're trying to convince them you can do everything that they need to have done. And it's really sort of a cost saving play. It isn't really where we are at in our program.

Scott Schneeberger, Oppenheimer.

With regard to the existing consensus for 2011, earnings, you guys came out with a little bit of a lower range. Correct me if I'm wrong. That does not include the pending HWS? And if you could refresh me on what that contribution could be?

And then as a follow-up, just your thoughts on the growth rate and the potential for expansion on it next year?

So the numbers do not include the Health Waste solution business. It does include the impact of interest. We talked a little bit about that at our last call, and we indicated at that time that it was about $0.05 to $0.06 kind of headwinds with respect to the private placement that now has been funded. And in fact, as to how we use the private placement and not reducing all our term debt but part of the term debt and part of the revolver to keep the availability for the HWS and other acquisitions, that probably increased the interest costs by another $0.02 to $0.03, potentially, because of how we allocated those repayments. And so, in total, depending on if analysts have included that, that's about a $0.09 difference from prior times when people maybe looked at it. So I would urge all the analysts to look at their interest expense and to incorporate the proper allocation of that private placement and the costs related to it.

Thanks on that, Frank. With regard to the RMS, and I guess it's implied in your guidance what you're expecting for fourth quarter with regard to this elevated level of recall activity this year. Could you just refresh -- what is a tail on a typical job there as far as revenue coming through to you? Is this weeks, months? I know it varies, but if there's a rule of thumb we could follow?

It's actually over several quarters. It's very rare that there's activity we do that is contained within a short period. There may be notifications, calls, there may be a follow-up, testing of the market, a shelf sweep testing, there may be follow-up fulfillment, there may be further inquiries by regulatory agencies to the company that wants us to go back and check even further. So it can go on for several quarters, if not more than a year on some of them.

And you outlined how the operations flow. Is it similar to think about the revenue the same way?

It's not linear because it's dependent on the activity and what specifically we are requested to do. We had one recently where we went out and went over to 50,000 stores in face-to-face handsweep visits in the short period of time. So obviously something like that requires a bigger spike of activity, and there may be others were it's call center or other backup activities which are more normalized.

And just a couple more for me -- with, I believe you said in the prior question, the brunt of the acquisition, annualized acquisition contribution, was it Japan and Portugal?

Japan and Portugal were the larger ones of the $18 million annualized revenue, yes.

And could you update us on your activities in Brazil?

Brazil is really on track -- great team, and we see very good growth potential both internal as well as through acquisitions.

Rich Skidmore, Goldman Sachs.

Frank, just to be clear on the interest expense, you're talking about you're roughly in the $44 million to $45 million range for 2011?

I think that would be an appropriate number, not way off.

And then just on the regulated returns number, I think you mentioned it at the very beginning of the call, but I missed it. Can you just restate what that regulated returns number was or the year-over-year change in the third quarter?

Say that again?

Just the regulated returns management business revenue contribution in the quarter or the year-over-year change in that business.

Oh, the amount of revenues in the quarter were $31.9 million.

Okay, and then maybe just a step back, kind of broader question. As I look at EBITDA margins for Stericycle, it's been in that 31% over five of the last six, quarters, kind of stepped up from 2008 levels in the 28%-29% range. As you look forward, are you feeling good about that level of EBITDA margin? Are you seeing that there's opportunities to step that up? And how would you anticipate the acceleration in the margin going forward?

I think there are so many factors that play on that margin. It could be mix, it's foreign exchange, acquisitions can at times bring that down again. And so one has to watch that a little bit. But I think low 30s is probably with an upside. And I know your question, again, on interest -- I think it's going to be closer to the 40 than your 45.

And then, I think in the prior question, the questioner asked about potential operating metrics of the announced acquisition with Healthcare Waste. I'm not sure if you gave any numbers, but can you provide any operating metrics here -- top line, any numbers that you have been able to provide at this point?

Sure. The revenues are in the high 40s. We anticipate that after the close, pretty much similar to MedServe, at the end of that first year about $0.01 to $0.02, accretion, and then in the second year thereafter, about $0.04 to $0.05.

Richard Close, Jefferies & Co.

Thank you, it's Sean Dodge. Most of what I had has been answered. The last question I had, though, was the 6% internal growth rate in the international segment. You know when you look at the comps you're lapping from the previous year, it looks like it's a little bit of a deceleration. And with the rollout of the premium services to the international market in the last six to 12 months, I would have expected to see that move in the opposite direction. I was just wondering if you could provide any color as to the reason for the deceleration.

Part of it is just, as we continue to focus mix shift, we are more focused on the profitability in the small space and added new services and less focused on the LQ. So sometimes when you do that you may be walking or letting LQ accounts go that don't make economic sense or don't meet certain criteria on the space, which may affect those growth rates. But I don't think it's material to the numbers.

Jason Rogers, Great Lakes Review.

Just a question on HWS, which seems like a good opportunity to expand some of your other services. But from what I looked at or understood, what the company does, they do do a lot with bundling those services together for the customers. I just wanted to get your thoughts on how that plays out with the services that you offer.

Yes. As I said before, I think bundling is an approach that some of the solid waste companies have used or maybe continue to use. That's not what Health Waste is about, that's not what we are about. Their program, which they call Resource Management, is a consultative program that is really a totally transparent process. And it helps healthcare providers improve not only their cost and efficiency management but also safety, compliance and sustainability. It's a program that basically has a lot of appeal to the C suite and the higher levels of these larger hospitals and large healthcare providers. And that really is not bundling.

David Manthey, Robert W. Baird & Co.

Frank, could you please go over the puts and takes on the gross margin again? I'm having a hard time here understanding if you mean quarter to quarter or year-over-year, and how those add up.

So the one that he asked for was the 30 basis points quarter to quarter. So in this case there was -- on the sequential quarter, so the third quarter of 2010 versus the second quarter of 2010. And that was -- if you adjusted that for the restructuring, it came to 30 basis points. And so that's how I explained the 30 basis points.

Okay, that makes sense. I think we can back into it based on the information you've given us, but can you give us the range and average gross margins for the returns management segment?

Again, we don't have that detail from that point. We've always said that on the base business, it's not dissimilar from the total. But obviously, if you do very large recalls those margins are normally lower.

Can you tell us what percentage of your revenues today are in British pounds and what is in Canadian dollars also?

Again, if you look at the amount of revenue in the quarter for Europe, that's the segment reporting that we do, it was $49.3 million in the quarter.

And then finally, as it relates to the opportunity here of the resource management, this consulting model, I suppose the plan here is long-term not to get ahead of ourselves, but after you get this deal closed, this is the sort of service you would roll out to the remainder of your network, I would imagine. Can you size this opportunity? Do you have any thoughts on how big this is or how quickly you can roll this out?

We really don't, at this point, want to give any color to that. What I can tell you is that this resource management program on top of the menu of service offerings that we currently provide, I think, will be attractive to a number of our customers. I think, as Frank also said, we are looking at about a one-year integration of the whole company. So it's going to take us a little bit of time, and that's why I really don't want to give you too many forward projections here. Give us a little bit of time to put all these pieces together with our pieces.

Finally, I missed the number of shares you bought in the quarter. Could you tell us also what number of shares you have left authorized under the current authorization?

We have about 2.2 million left, 2.3, and we bought about 308,000 shares.

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

We thank you all for your time and attention today. Two quick reminders -- first of all, with Halloween, be safe because you're driving around and the kids are trick-or-treating. But most importantly, please get out and vote next week if you haven't already done so. Take care.

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