Stericycle Inc (SRCL) 2011 Q2 法說會逐字稿

Good afternoon. My name is Kyle and I will be your conference operator today. At this time, I'd like to welcome everyone to the second quarter 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. Ms. Murphy, you may now 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 involved 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 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 second quarter are as follows. Revenues were $410.4 million, up 18% from $347.7 million in the Q2 of 2010. Domestic revenues were $300.7 million. Domestic regulated waste and compliance services revenue were $273.8 million. Returns and recall revenues were $26.9 million in the quarter.

International revenues were $109.7 million, including a favorable exchange impact of $7.4 million. Domestic internal growth, excluding returns management, was up 8%, consisting of small quantity of 9% and large quantity customers up 6%. International internal growth adjusted for exchange was up 4%. Acquisitions less than 12 months old contributed $34.9 million to the growth in the quarter. And gross profit was $186.7 million or 45.5% of revenues.

SG&A expense was $78 million or 19% of revenues, and net interest expense was $12.9 million. And just a comment. In May, we repaid the remaining balance of the $76.9 million of our 2009 three-year term loan and accelerated the non-cash unamortized term loan fees of $1.2 million. Net income attributable to Stericycle was $55.5 million or $0.63 per share on an as reported basis and $0.69 adjusted for acquisition expenses and the term loan fees.

Now the balance sheet. At the end of the quarter, the revolver borrowings were approximately $387 million, and the unused portion of the revolver debt at the end of the quarter was approximately $297 million. We purchased 50,675 shares of common stock in the open market in an amount of $4.3 million in the quarter. Cumulatively, we have purchased approximately 14.7 million shares and still have authorization to purchase an additional 5.8 million shares. The CapEx in the quarter was $12 million and our DSO was 53 days. The cash provided from operations year-to-date was $119.7 million. And I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter, we had approximately 508,000 accounts, of which over 493,600 were small and the remainder were large. We continue to see strong worldwide growth driven by new account acquisition, the adoption of our expanding portfolio service offerings. Today only 20% of our LQ and 30% of our SQ customers are using more than one of our multiple services. The remaining pool of customers provides a long runway for future growth.

We remain very excited about this opportunity because adoption of multiple services has the potential to more than double or triple the revenues per customer. We want to thank each member of our worldwide team for their solid performance and their continued commitment to our customers and shareholders. I'll turn it over to Mark.

Thanks, Rich. I would now like to provide insight on our current outlook for 2011. And please keep in mind that these are forward-looking statements. During our second quarter, we completed 11 acquisitions, seven domestic and four international. This includes the Healthcare Waste Solutions, or HWS, acquisition which we discussed in our last call.

Revenues from acquisitions not previously announced were $1.2 million in the quarter, and annualized are approximately $9.8 million. Now keep in mind that our guidance does not include future acquisitions, divestitures and acquisition-related expenses. We believe analysts' EPS estimates, after adjusting for the Healthcare Waste Solutions integration expenses, will be in the range of $2.78 per share to $2.80 per share, which we are comfortable with.

We believe analysts' revenue estimates will be in the range of $1.62 billion to $1.65 billion, depending on assumptions for growth and foreign exchange. We believe analysts will have estimates for free cash flow between $284 million and $288 million and an as reported free cash flow of $261 million to $265 million. CapEx is anticipated between $45 million and $55 million. In closing, very excited about the tremendous growth opportunities in 2011 and beyond. We thank you for your time, and, operator, we'll now go to the Q&A session.

(Operator Instructions) Your first question comes from the line of a participant who did not leave their information. Your line is now open. Please state your first and last name.

Okay, sorry. It is Ryan Daniels from William Blair. I did state it, I'm not sure why it didn't go through. Let me ask, quickly, on the guidance. I know you were previously at $2.79 to $2.82 but we were pretty clear that that did not include the HWS integration expenses. Can you give us a feel for what that impact is so we can kind of make an apples-to-apples comparison to guidance?

Yes, the acquisitions that we did and the integration expenses were roughly about $0.02 and so on the bottom end it only came down $0.01 from $2.79 to $2.78 and on the top end $2.82 to $2.80.

Okay, so effectively the same or a little higher on the bottom line. That is helpful. And then, Frank, can you give us a little more color on the gross margins? I know we anticipated they were going to be down given the Healthcare Waste Solutions coming into the revenue stream. But I think in the past, you've helped us with our models, talking about the fuel, the FX, the mix shift and acquisitions and then what the core business was?

In the quarter, Q1, we ended at 45.8%. As we discussed in the first quarter, at our conference call, the Healthcare Waste Solutions impacted us by 50 basis points down. The foreign exchange and kind of the higher, slightly higher revenues in RMS kind of mix was about 9 to 10 basis points and then the remainder of the business did about 29 to 30 BPS up on the business.

So if you now look forward, we anticipate that there is not a lot of impact in Q3 versus Q2 from acquisitions. So we anticipate kind of a 20- to 30-basis-point improvement, kind of excluding new acquisitions in foreign exchange in the quarters to come.

Okay, great. And then last question and I'll hop off. In regard to international, I know it was a bit weaker than the run rate coming in at 4%. Part of that is probably a really tough comp. I think you were at 9.4% in the year ago period. Is there anything else there besides the tough comp? Are you seeing any weakness over in Europe or maybe in Japan post- the disaster there? Thanks.

Yes, Ryan, this is Rich. I'll address that. Actually, it is really the impact just comes in the UK from two areas. One is we lost a regional LQG contract that was primarily an incineration contract. When it came up for bid, we bid it to improve the margins and we were not able to keep it.

So you'll see some effect from that in the next couple of quarters. And then the other thing about the UK is we lost effectively two collection dates because of the additional holidays they had recently. Otherwise, the remainder of the business is doing very well, no problems in the other areas. In our guidance for the year we will stay at a 5% to 7% growth.

Okay. Do you know the impact of the two-collection-day loss. The kind of anomaly there?

It's probably about, somewhere around $1 million.

Okay, perfect. And was the big LQ contract even profitable for you guys?

Well, it was incinerate only and in that market incineration capacity is very tight. We are obviously looking at our SQG business expanding. We're looking at other more profitable contracts. So for us it was a decision about either getting the right margin or moving away from it. Like the U.S., you'll see that we'll have a disciplined approach in the UK, and other international markets to LQG. We need to get to the right margin level or we need to move on.

Okay, perfect. Thanks, guys.

Your next question comes from Richard Close from Avondale.

Yes, it's Richard Close, Avondale Partners here. I was curious if you could talk a little bit about your acquisition pipelines? I guess you made an acquisition with a natural-based company here, NotifyMD, back in the spring. Can you talk about any other service areas that might make sense for you guys to expand into?

Yes. The acquisition pool, even though we did obviously the HWS transaction in the quarter, which was about $45 million in revenues is still over $100 million worldwide. These are companies that we actively talked to, it is not a wish list. Your other part on the patient communication, Notify was a platform acquisition for us. It is kind of a new area for existing customers.

It is a service that services both our small and large customers and, again, what we like in that business, the relationship is very long-term and contractual. So very similar to what we have elsewhere. So it is kind of a start for us to add additional services with our customers.

Okay. And then when we think about the international opportunity, I believe you talked a little bit about expanding into other countries? For some reason I want to say Brazil was near the top of your list. If you could talk a little bit about other geographic areas that could prove fruitful for you guys in the short term?

Yes. The countries and the areas that we are excited about obviously are first of all, all the countries we are in. We did an acquisition this quarter in Romania, one in Canada, one in Argentina, and one in Brazil. So nicely spread and that continues to build density in those geographies and in those areas. If you look at new geographies, Brazil we did enter last year. But newer ones could be northern Europe, could be southern Europe, Spain, for instance, are areas. And then if you skip over to South America, I mean, obviously, we are in all the major countries. We'll continue to look in Japan where we just have entered to continue to look for acquisitions, those are kind of our main focus geographies.

Okay, thank you very much.

Your next question comes from Akil Marsh with Atlantic Equities. Your line is open.

Hi, could you touch on how you are seeing the uptick rates on some of your premium offerings? In particular pharma waste? Thanks.

Sure. I will be glad to kind of speak to it as you know we don't get specific detail about quantities. But I can tell you that the program continues to have wide acceptance with our large customers. The acceptance we are kind of seeing right now is similar to what we saw with BioSystems which is once we get into the all the markets then our sales people become more adept at the sales, the customers become more aware of it from referrals.

And I can say we have had a couple of our strongest months here recently. We still believe that it is about a $200 million opportunity for us, and we have obviously a healthy pipeline of orders right now.

Thanks, very helpful. And just one follow-up. On the communications/NotifyMD platform, I realize it is early days. But could you give us a sense of how large of an opportunity that could potentially be?

I think if you look for existing customer base, if they would add all the services, we can grow the relationship almost twofold. So 100% improvement in revenues with that relationship.

All right. Thank you.

Your next question comes from Al Kaschalk from Wedbush. Your line is open.

Good afternoon. On the waste, on the pharma waste side, $200 million under 10% penetrated on that or what is the, can you square up a little bit on your progress?

That is not a bad assumption.

Okay. Second, fuel costs in the quarter, and what type of headwinds are you looking at or not looking at?

The total energy for the quarter was 5.7% of revenues. So the same as prior quarter, it was 5.7% the prior quarter. There is no specific headwinds that we see. It keeps going up and down a little bit but it's been fairly stable.

And is there, I obviously cannot recall. But is there a hedging program there? Or how do you view that, Frank, going forward?

We do not hedge. What we do, obviously, is if we see these increases, we do have the ability to pass to our customers.

Okay. If I take a look at the FX and the returns business considered and I look at the growth rate, it looks sub- 6% in my math, what seems a little bit lower than you have done historically. And so, that is, I guess, a question at when you look at pricing for your customer base have you seen some recent push back or are you experiencing any type of headwind on being able to get price, given the economy, just given the market, et cetera?

Yes, I think it's starting to get impacted with the returns management, obviously, the growth rate. But we are right in line with our guidance that we said for small quantities, 8% to 10%, large. I think what you do see, obviously, this quarter, as we said, we are a little bit lower than the guidance we gave for international, which probably brought it and then you have very small growth rate. We did $25.4 million second quarter on the returns management, this year $26.9 million, which, again, gets very impacted with other large recalls in it or not. We obviously have two very strong quarters in Q4 and Q1.

Just a nice segue, in terms of the guidance, are you adjusting anything on the returns business given the $26.7 million you did in the quarter?

Yes. The guidance for the year is $100 million to $110 million for the returns and recall business.

All right. I'll hop back in queue. Thank you.

Thank you.

Your next question comes from Scott Schneeberger from Oppenheimer. Your line is open.

Thanks, good afternoon, guys. Just following up on that last one. I'm showing in my model guidance for RMS as of last quarter's call was $95 million to $105 million. Is that correct? We are going up $5 million on the low and the high end on RMS?

That is correct.

Thanks. If we could go just a little more detailed on acquisitions, the four international, I caught each country, but is that all core med waste, anything unique in those?

On the international, yes, it is all med waste. On the six transactions domestically, we had five in the regulated waste and one in patient communication.

Okay, thanks. And then with regard to NotifyMD you cited the size of the opportunity on a prior question, how quickly do you think that that can be expanded? When should we start to see impact from that initiative? Thanks.

Again, we are getting to know the marketplace. We are still testing things out, as you know. Stericycle is a marathon, but it's one that we try to learn what the business is about. I think that's going well. It helps the customers with inbound and outbound communication between a health care provider and their patients. It's too early but we'll give more guidance in 2012 and beyond.

Okay, great. Thanks very much, guys.

Your next question comes from the line of David Manthey from Baird. Your line is open.

Hi, good afternoon. First question, on the two fewer days you mentioned in the UK. Is that year-over-year there is two fewer days?

It is really because of the wedding activities in the UK that the country shut down and Easter and all those combined. Easter was, obviously, fell slightly different. But it's in total was about two days year-over-year and quarter-over-quarter.

Got it. Okay. And then second question, would you be willing to talk about the relative profitability or, say, more specifically the quantitative profitability of a one-service customer versus a customer that uses two or three of your services?

It depends a little bit what we are adding. So I think we have historically talked with everyone that if we add SteriSafe that can improve profitability with the customer. If we would add the Sharps Management that's at a level similar to what the average is, the pharmaceutical waste is a slightly better margin, and obviously improves because we also utilize services.

Patient communication is promising. And looks good. And then overall, internationally, where we have the clinical services, which is kind of similar package than our SteriSafe, domestically, that one has better margins than the average for that sector.

Okay, and you are speaking specifically about gross margin?

That is correct.

Okay. So I would imagine just having a customer relationship, the contribution to EBIT or EBITDA would be even higher right?

Yes. I mean, there is, obviously, investing that we do to stimulate these programs. So earlier on there is a little higher SG&A up front for things like clinical services or like the development of the pharmaceutical waste program. But, yes, we feel that gets recouped fairly fast.

Great. Thank you.

There are no further questions at this time.

Thanks, everyone, and we are looking forward to the next quarter.

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