Stericycle Inc (SRCL) 2010 Q4 法說會逐字稿

Good afternoon. My name is Jessica and I will be your conference operator today. At this time I would like to welcome everyone to the Stericycle fourth-quarter 2010 earnings conference call. (Operator Instructions). Laura Murphy, Vice President of Corporate Finance, you may 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, 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 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, Laura. The results for the fourth quarter are as follows. Revenues were $393.5 million, up 25.5% from $313.5 million in the fourth quarter of '09. Domestic revenues were $292.6 million. Domestic regulated waste and compliance services revenues were $250 million, and the returns and recall revenue were $42.6 million.

The international revenues were $100.9 million including an unfavorable exchange impact of $1 million. Domestic internal growth, excluding returns management, was up approximately 8%, consisting of small quantity up 9%, and large quantity up 6%.

International internal growth adjusted for exchange was up approximately 8%. Acquisitions, less than 12 months old, contributed $32.5 million to the growth in the quarter. Gross profit was $182.5 million or 46.4% of revenues, and SG&A expense was $75.7 million or 19.2% of revenues. Net interest expense was $10.7 million.

Net income attributable to Stericycle was $50 million or $0.50 per share on an as-reported basis, and $0.69 adjusted for after-tax transaction expenses related to various other adjustments.

At the end of the quarter our revolver borrowings were approximately $175 million, and is floating out LIBOR plus 75 basis points. The unused portion of the revolver debt at the end of the quarter was approximately $491 million.

As we mentioned before on October 15, 2010, we received a $400 million private placement, and those proceeds were used to prepay part of the term debt that we have and reduce the revolver.

We purchased 709,867 shares of common stock on the open market in the quarter in an amount of $50.7 million. Capital spending was $12.4 million. And our DSO at the end of the quarter was 51 days.

The cash provided from operations was $325.7 million for the year, which includes $23 million of cash received in the fourth quarter from our customers to be used for recall product reimbursements.

Those were my comments. I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter we had approximately 485,400 accounts, of which over 472,000 were small and the remainder were large. We continue to see strong growth worldwide driven by new account acquisition and 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. And today approximately one-third of our SQ customers utilize multiple services, leaving two-thirds of our customer base available for growth.

In closing, we want to thank each member of our worldwide team for their solid performance that led to a record year in 2010. And we especially want to recognize our recall team for successfully managing the large spike in volume we experienced on a few major recalls.

Now I will turn it over to Mark.

Thanks, Rich. I would now like to provide insight on our current outlook for 2011. Please keep in mind that these are forward-looking statements.

During the fourth quarter we completed 17 acquisitions, 6 domestic and 11 international. The incremental revenue impact in the fourth quarter of 2010 from these acquisitions was $8.8 million. The annualized revenue of these acquisitions is approximately $65 million.

Now keep in mind our guidance does not include future acquisitions, divestitures and transactional expenses related to acquisitions.

Now to provide you the outlook for 2011. We believe analysts' EPS estimates will be in the range of $2.76 to $2.80 per share, which we are comfortable with. We believe analysts' revenue estimates for 2011 will be in the range of $1.55 billion to $1.58 billion, depending on assumptions for growth in foreign exchange.

We believe analysts will have an adjusted estimate for free cash flow between $278 million and $283 million, and as-reported free cash flow of the $255 million to $260 million, after taking into account the $23 million cash outflow for the recall product reimbursement.

CapEx is anticipated between $45 million and $55 million.

In closing we are very excited about the tremendous growth opportunities in 2011 and beyond. We thank you for your time. And, operator, we will now go into the question and answer section.

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

The first question on the returns and recall business, can you give us some sense if any of that revenue from existing projects will have an impact -- a material impact in the first quarter of 2011?

And then can you also update us on your guidance for the returns management business in 2011? Is it still $75 million to $90 million of revenue?

Yes. So we had one acquisition in that space, so the guidance now for that is $80 million to $100 million. And any overage from Q4 is really not that material. It happens every quarter a little bit, but it remains a very uneven business, but our guidance for the year is $80 million to $100 million.

Can you talk a little bit about the acquisitions that you made, 6 domestic, 11 international? I guess I would ask can you breakdown that in terms of types of acquisitions, MedWaste versus other services, and then also geographic, which countries those acquisitions were in?

Sure. First, the geographies. Out of the 11 international there were five in the UK, two in Mexico, two in Brazil, one in Argentina and one in Romania.

Of the total quantity of 17, 16 were regulated waste and compliance services businesses and one was a returns management business, recall management.

The next question I want to ask about is just on the multiple service offerings for LQ and SQ, and I want to make sure I understand correctly the framework here, should we be working under the assumption that all LQ accounts represent the addressable market right now for multiple services, or is there some segment of LQ customers that are not eligible because they are based abroad or because of their profile?

I think you can assume that the multiple services that we offer are for the most part applicable to all geographies. It may not be applicable to every single customer in every geography. But for the most part what we have on the table now are things that benefit customers no matter what regulatory environment they are in.

Would that same principle apply to the SQ customer base, that we assume 100% of SQ customers for the most part are eligible for multiple services?

Yes.

Any update on some of the specifically SteriSafe and Bio Systems, I know you have talked about in the past. In terms of the rollout outside of the United States, I think you had been rolling out commercially in Canada, but any update on either Europe or potentially any progression in South America?

Yes, there is a continuation of the rollout in the UK, Canada and Ireland. And the next area that will get focus is Latin America.

I guess I want to just ask about the domestic business for a moment. If we look at some of your customers, I know specifically there have been some pilot projects ongoing with HCA related to different types of service offerings or contract structures. Can you provide us any update on where your relationship stands with HCA after the pilot projects have been completed now? Then also, any other major customers or hospital networks where these same types of projects are ongoing?

Normally it has not been our practice to comment specifically on individual customers. I think since HCA has been a topic, I think you have talked about it, Jonathan, we will go ahead and tell you that where it stands right now is that following the pilot project that we are involved in, HCA decided, because they are one of the larger health systems in the United States, to take their 15 divisions -- divisions are multiple hospitals in each division -- they decided to take them to market for a total waste stream management service.

We were very pleased with the outcome, because we obviously bid on the work. We were awarded over 70% of the work at the end. It basically doubled our revenues with HCA. So we are pleased with the outcome. And I think from our standpoint it validates that for this particular type of customer our multiple service offerings model works.

And are there any -- you don't obviously have to speak specifically at this point, but are there other hospitals -- major customers that are also looking at possible pilot projects along the same lines?

As I said, I really don't like to generally comment about what customers are doing for confidentiality reasons.

Great, thanks guys.

Ryan Daniels, William Blair & Co.

I was hoping just for a quick additional commentary, if you could, on the impact of the cash flows from the recall business, the $23 million. Is that a prepayment for services, number one, or is that cash that you'll use to actually go buy product off-the-shelf? Or any color there on what that is would be helpful.

Now we will at times get cash from a party that we do a recall for, but is used in essence to reimburse their customers for a product that has been returned to us. So we in essence do the service. This is a service we provide, but since it is not officially restricted cash in an accounting term it has to, unfortunately, be reported in our cash balance, and so it shows up as a positive cash inflow. That is why we highlighted it. But we in essence see that as not our cash. It is cash that we manage on behalf of our customer, and that goes straight to their customers when products are returned.

Okay, very helpful. Then, obviously, a great quarter on the M&A front, particularly internationally. If you look at 2011, have you guys maybe pulled forward some of the business, at least domestically, because of some of the tax law changes that were potentially, but did not take place, or do you still feel that the pipeline is going to be as strong as it was, even post such a good Q4?

I think there is no doubt that especially in the U.S., obviously, the tax law that was anticipated to change with respect to capital gains stimulated people to do deals and close them before year-end.

Now at the end it didn't change, so it didn't really make a difference for most of them. But I think it did stimulate some influx in that and it gave us a good platform. But it will continue. I mean, it is $100 million worldwide still in the pipeline, despite having done those deals, so we see activity in both domestically and internationally in multiple geographies. It continues to be good.

Okay, great. I know you guys are going to break out new client adds because that is not particularly relevant anymore, but I was hoping maybe for some color commentary just on the RS waste compliance. I know that is the newest incremental service offering you are adding, and I'm curious how that has been received as you have rolled that out over the last year or so across the U.S.

I think overall the traction is very good. We said early on we were not going to give detail on quantity or things like that, but it is at least a $200 million opportunity, and potentially is one that we can move into other geographies, and expect to do so. So we are very pleased with it. It has been a good service offering to add to our portfolio.

Then maybe two more quick ones and I will hop off. Just in regards to the end market, obviously hospitals facing a little bit more pressure, you know, this discussion of Medicaid rate cuts in some of the budgets. I am curious on the pricing front if you are seeing any more hesitation at all with those customers on pricing, or if they are being a little more cautious on some of the ancillary compliance offerings, or if that has not been very impactful for you guys thus far?

I think because we have multiple service offerings and they help the hospital basically save money, become more efficient, outsource labor and stay compliant in all of that, we have not seen any pushback. In fact, I think our growth rates reflect the hospitals continue to look at our services as something that makes economic and overall sense for them.

Thank you. And the final one, you mentioned the ACA contract that is going to double your revenue. Was that reflected in the quarter? Did you see those new contract awards come into play or is that going to be in 2011 where we will see the uptick there?

2011.

Okay, thanks a lot, guys.

David Manthey, Robert W. Baird.

I was wondering in terms of the guidance that you're offering here, I assume it excludes any kind of restructuring expenses, but could you tell us if it includes or excludes the transactional acquisition expenses? And then the acquisition integration expenses, could you address both of those separately?

It does include the integration expenses, but does not include the transactional expenses that are listed separately on our press release.

Okay, and the way that has been running here in the past year somewhere between $0.5 million and $1 million seems to be the range?

It really depends very heavily on deal flow. We obviously had some expenses still on pending transactions that are continuing. So it will continue because we are acquisitive and the pipeline is robust.

Okay, great. Then as you look out here, I am just wondering about the growth rate longer-term, what do you see as the most important growth drivers over the next 3 to 5 years? Could you talk about growth initiatives that you're focused on now that are both big enough and growthy enough to move the needle for Stericycle going forward? Which are the ones that you're looking at and saying, these are the very promising ones?

Well, I think just kind of trying to address that, I think that for us it is the multiple services. Remember, we are looking at this year 8% to 10% in SQ and 5% to 8% growth in LQ. Good, strong organic growth blended for both international and domestic.

But as I said in my prepared comments, what we are really looking at is an expanding portfolio of services. And, for example, we mentioned RX Waste, which domestically is a $200 million plus opportunity for us that has really just begin to really touch our customer base.

And as I mentioned in my comments, it is somewhere between 20% or only one-third of our customers, depending LQ, SQ, have even adopted more than one of our service offerings. So I think that is going to be a large part of the growth driver.

And then we will continue to do our acquisitions because, as Frank said, we are an acquisitive company. So the combination of the two should really funnel the growth -- or fuel the growth going forward.

Then, finally, in terms of international contribution to your growth, could you talk about the markets that you're in now as you look at those which of those of the most promising? It looks like you're making some moves here in Brazil and South America. Could you talk about the markets that you see as the brightest?

I think of the international markets, the markets that we are in, we continue to focus our strategy of continuing to build leadership position in each of those.

So as you noticed, the ones we were doing where expansion geography within the country or tuck-ins within the country. So we will continue to do those plays.

There is other countries that we are looking at that we won't make an entry until we see the right combination. But I think the key is get the right kind of platform, look at the consolidation opportunities, stabilize and integrate that business, and then post that bring the know-how and systems to expand services into those countries.

And also vice versa, we pick up ideas and learn from their organizations as well of things we can bring back to the domestic market.

Okay, thank you very much.

Scott Levine, JPMorgan.

Can you give us the debt leverage calculation based on your covenant for the quarter, and remind us what you project that to be upon closing of the HWS acquisition?

The debt at the end was $2.15 billion. That compared to $2.16 billion at the end of the third quarter and $2.51 billion at the end of fourth quarter of last year.

It is at the low end of our range. Our range that we are very comfortable with is between $2 billion and $3 billion. I think if the consumption is done of the transaction with the HWS that could go in between $2.5 billion to $3 billion, depending on other acquisitions and activities.

Got it. Then on the returns business, obviously a huge few quarters here, and it seems like most, or all of the upside is really from recalls. But if we look at your guidance for '11 relative to what your initial guidance was for '10, it doesn't really project much underlying growth, I guess, in returns, if you accept the recall.

So I guess I would ask you to focus on the returns side of that business, are you seeing growth, are you seeing increasing adoption rates or penetration rates? And what thoughts should we have regarding the secular growth potential of the returns business over a 3- to 5-year horizon?

I think the returns business overall is obviously a slower growth than it has been like the recalls for us. The recalls remain very uneven, but when it does come with larger recalls it does fall very nicely to the bottom line. So that gives us obviously a great cash inflow into the business that we can then use in that business and elsewhere.

Maybe lastly, we are now following the debate regarding the healthcare legislation. Have you seen any impact in your business, or do you anticipate any impact in your business associated with the way the legislative process plays out, or is this really a nonevent in your opinion?

I think overall, as we have said before, the healthcare reform should increase volume with our small customers. We do see it overall as a positive to our business. It moves volumes potentially a little bit from hospitals to the small quantity generators, so we don't think it will be a negative.

Okay, then lastly, the tax rate came in a little bit higher, Frank, than we were projecting. Is this quarter's rate it a good go forward rate for 2011?

No, the thing is when you have larger transactional expenses many of those could relate to a stock deal in an acquisition. Those are not tax-deductible. On an operational level, without those transactional expenses, the tax rate was about 37%.

Very good, thank you.

(Operator Instructions). Scott Schneeberger, Oppenheimer.

I have a couple housekeeping upfront. I am sorry, I came on a little late. I missed RMS contribution.

The RMS revenues?

Yes.

Revenues were $42.6 million in the quarter.

Then on the acquisitions did you give the -- you gave annualized what the contribution will be, but did you give that split U.S. versus international?

We did not give the split U.S./international. I need to look that up. I don't have it right at my fingertips here.

Okay, do you know is it lumpy to one side or the other?

No, it is fairly even between the two, maybe slightly more on the domestic. It is fairly even.

Thanks. I will catch up with you later on that. It looks like as far as your organizational structure with how you manage international operations kind of shifted at the year-end. Can you take us through that a little bit more on how you are looking at your global operations, how you are operating them and how you are approaching M&A? Thanks.

The international business, each country has a country management team. And then we also have built up area management teams for managing the Latin America, for managing Europe. And the thought process is really to have as much of the resource close to the customers and the markets as possible. And those regional managers than report into Rich Kogler, who is the Chief Operating Officer.

Thanks. One after this. But just off RMS, I am now hearing a large number, I heard someone ask a question earlier, how much of that will trickle into the next quarter. I think I asked last quarter, is there a weekly or monthly trickle, and the answer was multi-quarters. I think I heard this time, no, it doesn't trickle. Can you just clarify that for us please?

The question was more was there a large recall that it would have a major influence on the other. Obviously recalls span through the year. That is part of a base of business that we have in that. And that is part of the base guidance that we would have for the $80 million to $100 million.

Then just on margins, I see some fuel drivers picking up. Could we just talk about what were some of the gives and takes in the quarter with regard to the cost lines?

If you look really at the impact of mix on the business for higher returns management with large recalls, that maybe had a 30 bip headwind. And then the base business as a whole, including the other parts of the RMS and the base RMS business, was about 36 basis points better versus -- and this is all versus the prior quarter.

Okay, thanks. And those are the big drivers. How is energy overall as a percentage of revenue right now?

As a percent of revenue it is 5.2%.

Okay, thanks. Just any update on -- are hedges going into place on fuel? Is that necessary at this point?

We don't hedge fuel, and have never done so.

Okay.

Again, we have the ability to pass through, and have done so when that is necessary.

Are you implementing those at this point?

Again, if it is required, we will. And so, again, it is an ongoing process for us. If you keep looking at -- you obviously look at both the fuel and the energy side, we have had some efficiencies on the energy side, so that has offset some of that increase.

Okay, thanks. I will turn it over.

Daniel Owczarski, Avondale Partners.

I would like to -- sorry for beating up this recall issue, but can you talk maybe a little bit about the overall market, what has happened in the last year or so?

I know we have seen the FDA be more active, but are these overall recalls larger in size where companies don't have the in-house resources and you're helping them out, or is the FDA going after smaller companies that don't have any experience? What is the overall trends that you're able to take advantage of here?

I think the overall trend is that the FDA definitely has tightened up. And even now the latest step with Food Modernization Act, it kind of expands the powers of the FDA and gives them the right to recall certain products.

So the FDA definitely has more powers now than it did before, and it is enforcing more. It will remain an uneven business for us. It has been a great year. There have been larger recalls. The quantity of recalls, again, and the awareness campaign continues to work in that we do more recalls and also in more industries.

That is continuously -- also with the acquisition that we did, it expands the capabilities. So we are allocating resources there, and foresee that comes. But at the same time in giving guidance we really don't know what the amount of recalls are going to be in a year.

And we have had that happen to us in '09, where we were probably getting ahead of us a little bit in the guidance, and then there were no large recalls in that year. If there are, great, then everyone will see the positive. But if there aren't, then we haven't over-extended ourselves in the guidance.

Then for the Rx Waste program now that it is fully rolled out, are those kind of the first adopters? Do we think that -- is that mostly targeted towards medical offices, or do you target the pharmaceutical manufacturers as well? And what do those pharma manufacturers do right now for their waste?

So the key here is the hospitals. We do look in the future at manufacturers and retail, because they have to dispose of that too. So we are addressing each market sector all the time, but hospitals has been the first focus.

Thank you.

Greg Halter, Soleil Group.

Frank, I know you touched on the tax rate. Is 37% a good figure to use on a go forward basis?

Yes.

Regarding the M&A activities, are you seeing more or less competition for deals? And are the prices you are paying higher or lower than they have been?

I think our trend in general has been that our price is in-line with what it has been in the past. I would say that in most of the markets in the past the most overheated market probably was the UK and Ireland, which after the '08 crash kind of came back to normal. But in most of the markets things have been rational and logical, and have really meant that our multiple has been fairly stable.

Okay. On the fuel site again, are you doing anything in regard to new vehicles that might be out there you can use?

Well, we are starting to bring hybrid trucks into our fleet, not only for the environmental benefit but also to address fuel. So far although we have a limited number of those running, we are seeing good results.

I noticed there was a caption on the income statement of plant closure costs. What is that related to?

At times when we obviously acquire businesses we consolidate. This was the case also with respect to the business in RMS. It could happen in any -- in the medical waste side, where we don't need certain locations because we have infrastructure in place, so that is what that relates to.

Okay, and one last one. What are your plans on the salesforce in terms of additions either in the field or focus in call centers and so forth?

The way we have looked at SG&A, and you have seen our guidance, is that we will continue to use the SG&A to feed the hot hand. So I think we look at the growth engines that we have and the customer base that we are trying to address and then we staff accordingly.

As we have seen, we are doing a pretty good job of balancing SG&A spend with the growth. I think we are getting the growth rates that we want.

Great, always good to have those pocket aces. Thanks.

[Kevin Lee], Wedbush Securities.

Most of my questions have been answered, but just a quick clarification follow-up. The guidance for 2011, does that include any contribution from HWS? I think you guys have mentioned briefly, but I didn't catch it earlier. I apologize.

No, no it does not, because that transaction has not been closed yet. We would only include acquisitions that have been closed.

Okay, got it. So I take it, it still targeted I think for Q2, probably back half of this year close?

That's not unreasonable.

Okay, that is fair. I appreciate it.

(Operator Instructions). Rick Skidmore, Goldman Sachs.

Just take a quick question. If I look at your acquisition revenue that you reported in your returns revenue, it looks like your organic revenue only grew about $5 million in the quarter, about 1.5% or so. That seems to be a slowdown versus the prior quarter. Can you just talk about what you're seeing organically in the business in the fourth quarter that may have caused that?

Are we talking the recall business or which part, because that calc is not correct.

Well, I am just taking your numbers that you report in the press release and your returns number of $32 million of acquisitions and $42 million of RMS, which is $75 million. And your revenue year-over-year is up only $80 million. So $5 million comes from what I assume would be the base business.

No, obviously, the absolute number -- you are mixing up two things. You are mixing growth with absolute in a quarter. Obviously, there was returns and recall business in '09. So I can take you through those numbers separately, but that is not the correct calc.

Okay, and then --

So internal growth, if you look at it excluding all the factors for just, as we said in our scripted part for the business, for the SQ, LQ domestic business was about 8% internal growth. And then the international internal growth was about 8%.

And then you have -- we normally don't do the recalls and returns business in a growth number because it is so swinging. In fact, that one was 161% growth factor if you look at it from a percentage point of view. But we think it is not totally the right way to project that. So in absolute terms that was a business that did $42.6 million in revenues, and in the prior year that was $16.1 million.

Okay, maybe you can just take it off-line a little bit later. Second question would be your M&A. With new acquisitions does that -- what kind of margin models do those come in at? Are they higher or lower -- the international businesses that you're acquiring are they higher or lower than your overall margins?

The businesses that we acquired have margin levels not dissimilar from what we are running in the overall business. And the SG&A, however, is higher. So the SG&A factors for them was higher than what we are running in the total business.

Okay, thank you.

There are no further questions at this time.

Well, we thank everybody for your time and attention. We look forward to our next call. And everybody have a great year. Take care.

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