Stericycle Inc (SRCL) 2011 Q1 法說會逐字稿

Good afternoon. My name is Adrian, and I will be your conference operator today. At this time I would like to welcome everyone to the Stericycle first-quarter earnings 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, Vice President 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; 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.

Thanks, Laura. The results for the first quarter are as follows. Revenues were $398.1 million, up 18.8% from $335.2 million in the first quarter of 2010. Domestic revenues were $290.6 million. Domestic regulated waste and compliance services revenues were $254.8 million. The returns and recall revenues in the quarter were $35.8 million, and international revenues were $107.5 million, including a favorable exchange impact of $2.3 million.

The domestic internal growth excluding returns management was up approximately 7%, consisting of Small Quantity up 8% and Large Quantity up 5%. International internal growth adjusted for exchange was up over 8%. Acquisitions less than 12 months old contributed $30.6 million to the growth in the quarter. The gross profit was $182.4 million or 45.8% of revenues, and SG&A expense of $75.3 million or 18.9% of revenues, and that interest expense was $11.2 million.

Net income attributable to Stericycle was $55.7 million or $0.64 per share on an as-reported basis and $0.68 adjusted for acquisition expenses and restructuring costs. At the end of the quarter the revolver borrowings were approximately $97 million and is floating at LIBOR plus 75 basis points. The unused portion of the revolver debt at the end of the quarter was approximately $579 million.

Our capital spending was $11.7 million and the DSO at the end of the quarter was 51 days. Cash provided from operations was $65.6 million for the quarter, and this includes a $17 million decrease in the balance of cash used for recall product reimbursements. So adjusted for this, the cash provided for operations was $82.6 million. I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter we had approximately 489,000 accounts, of which over 475,500 were small and the remainder were large. We continue to see strong growth worldwide, driven by new account acquisitions 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 a third of our SQ customers utilize our multiple services, which leaves two thirds of our customer base available for growth. We want to thank each member of our worldwide team, especially our team members in Japan, for their solid performance and continued commitment to our customers and shareholders. I will turn it over to Mark.

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

During the first quarter this year we completed nine acquisitions, three domestic and six international. The incremental revenue impact in the first quarter of 2011 was $1.8 million. On April 18 we announced the completion of HWS acquisition and the annualized revenues of all of these acquisitions is approximately $57 million. Keep in mind that our guidance does not include future acquisitions, divestitures, acquisition-related expenses and integration expenses. And please note we have not yet finalized the integration expense estimate for HWS. We believe analysts' EPS estimates will be in the range of $2.79 to $2.82, which we are comfortable with. We believe analysts' revenue estimates when the range of $1.61 billion to $1.64 billion, depending upon assumptions for growth in foreign exchange. We believe analysts will have estimates for free cash flow between $284 million and $288 million and as-reported free cash flow of $261 million to $265 million.

CapEx is anticipated between $45 million and $55 million, and in closing we are very excited about the tremendous growth opportunities in 2011 and beyond. We thank you for your time, and we will now go to question and answer. Operator?

(Operator instructions) Jonathan Ellis, Bank of America.

First question I just wanted to ask about in terms of understanding the impact of fuel this quarter and any other factors -- Frank, can you walk through any of the paths or the sequential change in gross margins?

Yes. So the gross margins in the fourth quarter -- we were about 46.37. We had an impact from mix, foreign change and acquisitions which was a negative impact of 35 to 40 basis points. Fuel was about 15 to 20 basis points, and the base business was slightly up to even, getting us to the 45.84%.

I know in the past you've talked about sequential gross margin growth in the base business on the order, I think, 25 to 30 bps per quarter. Anything we should be sensitive to this quarter on sequential margins in the base business?

No. I think the outlook for the year is still definitely that we see year end over year end, as we said, the 40 to 60 basis points. Q1 had a slight impact from weather on the cost side, not as much on the revenue, but in the cost. But I think for the year we still look for that.

So to be clear, 40 to 60 for the balance of the year or for the full year in total?

Yes. What you, however, do have to do is, again, the impact of acquisitions really could have a dramatic impact at times, so you really need to look at it from the prior quarter. For example, now the inclusion of HWS will bring gross margins down because that as a mix impact will have a negative on the gross margin percent, not on the gross margin dollars. Those things will impact gross margins, and you need to take those into account.

Would you be willing to offer up what you think the estimated drag from acquisitions that have already been completed this year will be for the balance of the year?

I think if you look in Q2 and then you can kind of step it up because we don't assume any acquisitions in the guidance, HWS itself could be 50 basis points.

Second, just on HWS, just doing some math, and I know your guidance for next year is $0.04 of EPS accretion -- trying to then back into what implies in terms of an EBITDA margin using your revolver as a source of funding for that acquisition, I get to a 25% EBITDA margin, assuming $0.04 of EPS accretion. That seems low relative to corporate average EBITDA margins as well as you think about the synergies that could come from this kind of acquisition. Can you help us understand the reason why you may not get above corporate average margins post synergy for that deal?

Well, again, we are going through ourselves right now in determining the mix between SQ and LQ, and their mix is not as favorable as we have as a corporate average. That's one aspect. I don't know what you or other analysts obviously are using with respect to the LIBOR rate assumptions and borrowing rates assumptions. So that can make a difference between any of the analysts. And obviously, the integration is going to take about 12 months. That's very similar to the MedServe kind of transaction, so you'll really see it come at the end of the starting month 9, 10, 11 it's going to maybe starts come a little bit to it, but that's really into next year then.

Okay, got it, that's helpful. Just last question -- if you could provide the percentage of revenue from energy and then also help us understand was there an impact from surcharges on reported growth for SQ and LQ this quarter? And should we expect that contribution in Q2 from surcharges more so than in Q1?

Yes. So the total energy was about 5.7% revenue for the companywide.

I think that really we don't find it quite is challenging this time compared to, say, 2008. For one thing, we are stepping up in the range of like 50 basis points quarter over quarter -- you remember in 2008 total energy for the Company was 7.6% of revenue. So from our standpoint, because we have been able to see some offset from declining energy costs and the fact that we have some efficiencies because, obviously, two, three years later the Company's that much more route density and other operating efficiencies in place. We haven't found fuel to be as big of a challenge. So we really haven't seen that much need for surcharges. And we will continue to look at them, we will continue to monitor the price of oil. But at this point hasn't been as big a challenge as it was two years ago.

Okay, to be clear, then, in terms of the reported revenue this quarter for SQ and LQ, surcharges were not a material contributor?

Correct, they were not a material one.

Ryan Daniels, William Blair.

Mark, could you go back to the acquisitions that you did? It sounds like a very strong international acquisition quarter, maybe give us a little bit more color on the geographies of those and then just what the business mix is in the acquisition.

I'll take that one; this is Frank. There were two in the UK, two in Romania, one in Ireland and one in Chile for a total of six. All of the transactions that we did were in the regulated medical waste and compliance services business.

And that's both U.S. and abroad?

That is correct.

Okay, and then on the guidance I just want to make sure I understand the EPS guidance. Did you say that does or does not include the integration expenses that you're still working through?

It does not include the HWS integration expenses.

And then on the RX compliance, I know you guys have been excited about that being a novel growth opportunity. I know the FDA was supposed to have some commentary out about potentially moving that into the universal waste stream. I'm curious if that has slowed down, that business at all relative to expectations, or if the desire to properly dispose of it and state regs have continued to push that forward.

No; we still believe that's an opportunity of $200 million plus. We are seeing good traction in all the markets that we are operating in. We are seeing interest from IDMs and some of the larger hospital groups. If anything, the awareness is growing.

And then maybe one more quick when -- you mentioned your Japanese operations earlier. I know you ended that towards the end of last year. Was there actually any issues there or any slowdown in that business, or were they far enough away to continue as normal?

They're located on the north island. And no, there was no damage or impact from that direct area that has been of concern. We did have operational challenges because of rolling blackouts for power and things, but the team did a beautiful job and managed through it; customers were not affected.

Okay, great, thanks a lot, guys.

Scott Levine, JPMorgan.

With regard to returns business, I don't know if you mentioned the guidance for the year there, but at nearly $36 million in revenues, if I have that right, it sounds like you are running ahead. Is there any update to the view there on RMS for the year?

Yes, the guidance now is $95 million to $105 million.

Okay, and I'm assuming the strength in the quarter largely recall driven?

That is correct.

And then were you thinking about SG&A running in that 18% to 19% band? It looks like it's still there. Any change in view or application of strategic spend to individual products or any color around future expectations?

No, the trend has improved. We would say the guidance for 2011 is going to be in the low 19s, and again includes SG&A, the stock option expensing and the amortization cost.

Okay, following up on the last comment, on acquisitions, it does look in the last couple of quarters, obviously very active for acquisitions in general, but particularly international. Is it just a function of opportunity, timing of closing? Maybe you can comment on the U.S. market specifically. I'm guessing it's just a timing issue and you are focused on both markets, and I'm just curious whether there's any change in the pipeline or multiple or any color there.

No, pipeline, even though we did HWS, remains over $100 million. It keeps getting replenished both on the domestic and international front. It's very active, remains very active, and the multiples are remaining in line with what we've done in the past.

And then one last one -- can you give the leverage calculation at quarter end?

It was 1.98; that was the debt to EBITDA. That's our covenant calc.

And pro forma for HWS?

If you would have included HWS, and that's a conservative one that we make the calc, you come to about 2.4 to 2.5.

Got it, thanks Frank.

Al Kaschalk, Wedbush Securities.

Rich, could you comment on what you are seeing in terms of the multiservice approach both on LQ and SQ? I know there's a lot of headroom and opportunity there, but are you sensing that there is a little bit more of an acceleration on adoption of multiservice? Or, given the economic challenges, that people are content at the moment to stay put with the service level?

No; we are actually seeing strong adoption, and the reason for that, I think, is that our multiple services in many cases relieve headaches and save money for the customers. And in this period of time when healthcare is looking to try to outsource more things that are non-healthcare functions, those multiple services play right into that. The other thing that folks are looking at, obviously, is sustainability initiatives and things like our reusable sharps program play right into that.

Are there theoretical targets where that makes sense to raise either LQ and SQ to a certain level, or, again, not on a given quarter, but over the next couple of years, how we should think about that?

Well, we give you how much of the customers, in this case a third that are using multiple services worldwide for SQ and less than 20% for LQ. Since we keep replenishing the customer base through acquisitions and internally, that number may, at times, quarter to quarter even go down a little bit so that the opportunity becomes bigger for us. So I think, with our keep replenishing mode, it may go up, but it may also remain fairly flat, and that's a good opportunity for us because it keeps the pipeline open.

Okay, I certainly appreciate that, but I was just trying to drive at maybe some theoretical targets, what's in-house, so to speak, today. On the Rx, I'll just follow up on that. What do you mean when you talk about the awareness growing, and when do you think this gets a little bit closer to trending towards the multi-year target of the $200 million opportunity for you?

I think it keeps feeding. So similar -- let me just take you back to the Bio Systems, where it really became a very nice and gradual growth of customers each quarter. This is not going to be dissimilar, could be a little bit accelerated. But I think, in total, it's one that's a gradual program. It's being fed by, obviously, the leads that people have and the sales force that addresses that market. But it's a gradual, continuous growth that comes from that.

Finally, just to tighten up on Japan, I know it was asked earlier. But are there greater market opportunities there now as a result of some of this event-driven -- events that have happened over the past couple of months? Could you just talk about maybe what markets internationally you are seeing increased opportunities?

Our markets that we see opportunities remain northern Europe, Central Europe, Spain and then, obviously, all of Latin America shows great opportunity still for us. Japan has opportunities. I wouldn't say that it has accelerated or decelerated as result; it's going to be a slower process either before or after what happened in Japan. That really is not impacted by it. We keep building relationships with people, which is very important in Japan as well as in other parts of the world, and that's what keeps feeding our current pipeline, which is over $100 million.

Thank you.

Vance Edelson, Morgan Stanley.

Just following up on the last one, given the most recent international acquisitions, could you provide an update in terms of where you are in the broader scheme of things on the emphasis for expanding into northern and central Europe? Is there still a long runway for additional deals there, or are you getting to the point where your focus might at some point in the near future shift to elsewhere in the world for M&A?

No, there's a lot of activity that goes on in both the countries we are in as well as into the territories that we just mentioned. There's enough work for us with the team that's doing that right now that will keep us busy.

Okay, great. And on the domestic front, are there any changes that you sense in the regulatory environment for M&A? Some of the other companies we follow are saying they are having more of a difficult time and that the environment has gotten noticeably worse for getting any deals done. Have you sensed any shifts taking place?

No, not at all. In fact, in our case I would say that there's been less competition a little bit, not from the point of -- there's others in the industry, but we had a lot of competition in the old days from financial buyers, and they have had a rougher time finding financing. The competition may come from others in the industry, and so that's key and that will continue. But, overall, no; it's very similar.

Okay, very helpful, thanks.

(Operator instructions) David Manthey, Robert W. Baird.

I was wondering if you could give us an example of one of your markets where you have very high density and if you can discuss what kind of market share you think you have there and the kind of growth in EBIT margin you have been experiencing lately.

No, I don't think we provide that kind of color and traditionally we haven't. So I think what I was referring to earlier on one of the other questions is, as we continue to do tuck-ins, which densify our routes, our routes become more efficient, which help us weather things like this fuel increase.

And a related question -- are you seeing incremental costs of operating your incinerators or autoclaves as well, and are you able to recapture those costs? And then a follow-on to what we just talked about -- are you able to take disproportionate share in a high energy cost environment because, your smaller comps, it's a larger percentage of their costs?

I don't think I quite understand the question; I'm sorry.

I'm thinking because of your route density you're able to better leverage fuel costs and all other energy costs, whereas if your smaller competitors do more windshield time, theoretically that would mean energy is a larger percentage of their cost structure, and if it goes up they would be less competitive relative to you.

We've always been focused on expanding margins and driving efficiency in the business, and I like to think that we are always trying to be the low-cost provider.

And then just the other question, in terms of -- are you seeing higher energy costs relative to operating incinerators and autoclaves? And are you passing that through?

Actually, we've seen some benefit in the total scheme of energy for what powers our plants -- electricity and natural gas. That has been offsetting the increase in fuel.

Okay, thank you.

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

Well, we thank everybody for their attention on the call today. But before we sign off, this is very special day. We wanted to thank all of the Stericycle administrative professionals whose hard work and dedication are a key to our success. And in particular, we want to recognize Rhonda Toth for all she contributed to the continued success of Stericycle. So, everybody have a great day, and again thank you so much. We will talk to you next quarter.

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