Stericycle Inc (SRCL) 2011 Q3 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference operator today.

At this time I would like to welcome everyone to the Stericycle Incorporated third quarter 2011 earnings call. All lines have been place 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 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-Q, as well as its other filings with the SEC could affect the Company's actual results and could cause the Company's actual results to differ materially from expected results. The Company makes no commitment to disclose any revisions to forward-looking statements or any facts, events, or circumstances after this date that may bear upon forward-looking statements.

I will now turn it over to Frank.

Thanks, Laura. The results for the third quarter are as follows.

Revenues were $420.9 million up 16% from $363 million in Q3 of 2010. Domestic revenues were $303.9 million. Domestic regulated waste and compliance services revenues were $278.7 million.

International revenues were $117.1 million, including a favorable exchange impact of $4.1 million. Domestic internal growth excluding returns management was up 7% consisting of SQ up 8% and LQ up 6%. International internal growth adjusted for exchange was up 5%.

The returns and recall revenues were $25.1 million versus $31.9 million the prior year quarter. Acquisitions, less than 12-months old contributed $43.9 million to the growth in the quarter. Gross profit was $190.1 million or 45.2% of revenues, acquisition mix, unfavorably impacted gross margin percent by 50 basis points offsetting a sequential 20 basis point improvement. SG&A expense was $79.1 million or 18.8% of revenues.

Net interest expense was $11.8 million. And in late September, we closed on the renewal of the senior revolver facility for $1 billion at a spread of 137.5 basis points over LIBOR versus 75 basis points over LIBOR on our prior facility. Net income attributable to Stericycle was $59.2 million or $0.68 per share on an as reported basis and $0.71 adjusted for acquisition expenses and other non-recurring expenses.

Now the balance sheet. At the end of the quarter the revolver borrowings were approximately $528 million. The unused portion of the revolver debt at the end of the quarter was approximately $313 million. In the quarter, we repurchased over 962,000 shares of common stock on the open market in an amount of $76.9 million and we have authorization to purchase an additional 4.9 million shares.

Our CapEx was $13.3 million in the quarter. Our DSO was 58 days; however excluding the third quarter acquisitions, it was 53 days, with the full impact of these acquisitions in Q4, the DSO is anticipated to be in a range of 51 days to 61 days. Q3 year-to-date the cash provided from operations was $215.2 million.

And I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter, we had approximately 517,000 accounts of which over 501,600 were small and the remainder were large. We continue to see strong worldwide growth driven by the expanding portfolio of services that compliment our core regulated waste service. For our SQ customers, the growth drivers are SteriSafe and clinical service compliance programs. And for our LQ customers the growth drivers are Sharps Management and Pharma Waste Services.

Worldwide we continue to use our strong free cash flow to fuel our growth through acquisitions. In the quarter, we closed 17 transactions. 16 of these acquisitions enhanced our existing platforms, and the 17 was our first acquisition in Spain.

We also continued to invest in new service offerings such as patient communications and additional recall services. As we head into 2012, we anticipate internal growth rates for SQ at 8% to 10%, LQ at 5% to 8%, and international at 5% to 8%. We remain very excited about our future growth opportunity because 80% of our LQ and 70% of our SQ customers only used one of our current service offerings, as customers adopt our multiple services, this can more than double or triple their revenues.

We want to take time to thank each member of our worldwide team for their strong performance and continued commitment to our customers and shareholders. And I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide our insight on the current outlook for 2011 and 2012 preliminary guidance. Please keep in mind that these are forward-looking statements.

As Rich mentioned during the third quarter we completed 17 acquisitions, 6 domestic and 11 international. Revenues from these acquisitions were approximately $11 million in the quarter and annualized are approximately $103 million. Now keep in mind our guidance does not include future acquisitions, divestitures and acquisition expenses.

For 2011, we believe analyst's EPS estimates will be in the range of $2.81 to $2.82 which we're comfortable with. We believe analysts revenue estimates will be in the range of $1.65 billion to $1.68 billion depending on assumptions for growth and foreign exchange rates. We believe analysts will have estimates for free cash flow between $285 million and $290 million. And an as reported cash flow of $262 million to $267 million. And capital expenditures is anticipated between $50 million and $55 million a share.

Now I'd like to provide preliminary outlook for 2012. We believe analyst EPS estimates will be in the range of $3.19 to $3.25 which we are comfortable with. We believe analysts revenue estimates for 2012 will be in the range of $1.8 billion to $1.9 billion depending on assumptions for growth and foreign exchange rates. And we believe analysts will have estimates for free cash flow between $320 million and $325 million with CapEx anticipated between $60 million and $65 million.

In closing we're very excited about the tremendous growth opportunities this year and beyond. We thank you for taking the time to listen to our prepared statements and we'll now open it up to Q&A.

(Operator Instructions) Ryan Daniels, William Blair & Company.

Frank, let me start with one for you on the gross margins. I noted they're off about 110 basis points year-over-year. You said in your prepared comments about 50 basis points was related to the M&A mix. Is that on a sequential basis or is that 50 basis points year-over-year?

That is on a sequential, so if you looked at last quarter at 45.5%, there was a 50 basis point impact as a result of the acquisitions and then an improvement sequentially from the prior quarter of 20 basis points for the rest.

Okay, that's a helpful clarification and then given the big bolus of M&A activity during the quarter what should we be thinking about on the gross margin front if we look into the fourth quarter of fiscal 2011?

It's a very good question. The impact for the third quarter was, as I said, 50 points down. For a full quarter, the Q4 impact that is an additional 50 basis points down and it's all mix related.

Okay, and then just on the M&A, can you give a little bit more profile on the domestic deals or are those all related to the core business and then the international maybe breaking out just what market those are in outside of the novel market of course?

Yes, so we had 17 deals, 6 were domestic, 11 for international. They were all in the kind of overall in the countries let's first of all Brazil was 3, 1 in Canada, 2 in Romania, 1 in Portugal, 2 in Japan, 1 in Spain, and then 1 in the UK.

In the UK deal, is that the one that's still in the competition committee review or is that an additional one?

No, that was one that was announced prior quarters.

Okay, so that one is not included in the numbers that you go with?

No.

And then last question, just you highlighted the patient notification platform and maybe additional recall capabilities as some novel growth opportunities. Can you talk a little bit more about maybe those 2 in specifics, what is the additional recall capabilities you would consider and then with a patient notification maybe how the integration is going. And are you using that to sell to your existing customers or to sell into that customer base your services? Thanks, guys.

Yes, I think in terms of the recall market dynamics we've always talked about the importance of awareness. We've also talked about the importance of having a big portfolio of capabilities. One of the acquisitions that I referred to is one that would help us enhance the quality audit services that we already provide and the retrieval services you've seen us more and more move into that space. So that was the one that I referred to.

In terms of patient communications as we've mentioned we've done a platform acquisition. We've put a couple other acquisitions to that. This is an intriguing space to us because it leverages off existing infrastructure that we already have in the recall space and the return space and it also frankly services both SQ and LQ and could be a market opportunity of upwards to $1 billion dollars over time depending on how we execute it. Right now we're just testing it, we're figuring out the synergies. But the reason I included it in my remarks is I just wanted to point out that our strong free cash flow lets us not only do tuck in acquisitions or buy new platforms like Spain but we can also invest in new services that kind of build off of our platforms.

David Lewis, Morgan Stanley.

This is actually James in for David. First I had a question on SG&A cost trend sustainability. If you back out or if you exclude rather amortization and integration expense and just look at pure SG&A, it certainly looks like the business is running a little bit leaner than it has in the past. Could you give us any color on how much of that is just G&A leverage related to acquisitions or how much of that is a deliberate reaction to slightly lower GMs and in particular how sustainable that trend is going to be going forward?

I think it's really a combination. I mean obviously, we are definitely as a house focused on lean thinking but the acquisitions certainly play into that. I mean if you look in and go forward to fourth quarter there definitely is a little bit of a drop in that because of again the acquisitions that came in, in the quarter and so it's also leveraging our infrastructure once we acquire. It's really a lot of factors. It's tough to kind of break it out but they all do contribute. I think the SG&A for the year, if you look at 2012 is probably going to be somewhere in the mid 18's, and that includes again stock option and amortization.

Okay, perfect, and then have you seen anything changing with respect to utilization trends or underlying volume at your hospital customers. And certainly just judging from organic growth in LQ, everything seems to be on track there but we have heard a lot of noise around weak volumes at hospitals. So I'd be interested in your thoughts on that topic.

Really, we've not seen much of that. I think like you characterized it, it's more noise. Obviously our growth rates kind of reflect the fact that the volumes are doing well.

Okay, and then just one more on NotifyMD. As you've had a little more time to get to know that business, have your views gelled at all in terms of potential market size or timing of revenue and when do you think we're going to get -- when can we see a more material growth impact from that piece of the business?

As I mentioned, I think we're excited about it. We're still experimenting with it. Those who have followed us for a while know that we're fairly cautious as we move into a new space. And so I think that you'll see us continue to learn more about this space in 2012. I don't think it will be a material in 2012 but then thereafter, we tend to launch and launch quickly.

Al Kaschalk, Wedbush Securities.

Could you give us the fuel costs for the quarter or the margin impact on fuel cost?

Total energy for the quarter was 5.8% of revenues up slightly from Q2.

Okay. As you look at the returns business in the quarter, I noticed you didn't provide any commentary in terms of composition of that for the quarter or for 2012 but it was up a little bit better than we had modeled. Can you comment on the nature of the recall business in the quarter?

I think the recall was not bad. It didn't have any large substantial large recalls in it, so it was a fairly average quarter for 2011, the guidance that we're giving is $108 million to $113 million at this point. Again, if you look at this also versus prior year, it's important in both Q3 and Q4 of this year, had the revenues been the same as last year, we would have probably had $0.02 more in EPS this year and in Q4, we noted we had a fabulous quarter with very large recalls last year. Again if you look at our guidance, that's probably a $0.03 to $0.04 year-over-year impact compared to last year.

I want to drill back on this gross margin because it appears that the mix and whether that's acquisitions or just the organic business that the trend is that this should be closer to the sub 45% margin and I'm wondering if you can talk to that given the trend in margins. And then secondly, to the point of a question made earlier about utilization trends, etc. Are not the billings less than on volume more towards frequency and service that maybe that doesn't really matter in terms of the billing rate?

I think on the last one, that's true and I think that's what Rich was saying is we don't see it really as much because the billing paradigms we have are not truly on just weight driven. It's far more on the combination of frequency and fixed. Now with respect to the margin impact from these new acquisitions, it's really the ones, all the acquisitions, the 17 were predominantly LQ oriented. Only about 7% to 10% was SQ revenue. This also gives us a great opportunity in some of those geographies where we bought these because obviously our focus as everyone knows is then subsequently really try to grow to SQ business. But the margins of what's acquired was definitely lower than our Company average which brings the true mix, the average down.

Michael Hoffman, Wunderlich Securities.

Can you give us your SteriSafe penetration and the percent that's at the premium pricing?

Yes, Michael, we don't give that detail anymore. We focus really on the growth rates, as we've said a couple of times in our calls.

Any reason for not giving it? Its been a good data point for years.

No, I think it has improved but it's not a really good indicator of what we're doing with additional services and like. It's not the only service anymore. There's more focus on really the worldwide opportunity on multiple services and Bio Systems and Sharps Management. Not everything is now anymore quantity of customer driven. It's really the total quantity of customers that's important and that's a number that we give.

Okay, so when you think about the organic growth, how are we supposed to think about what is really driving that? Is it all the ancillary services or is it new customers? How do you want us to think about the mix of that?

No, as Rich said a very important part of our growth comes from the additional services with our customers and then on top of that, when you acquire new customers, it's those customers also that then start feeding our pool that we can sell additional services, we constantly replenish and look at our customer base, and again the opportunity is good. 20% only of our large customers use us for multiple services, 70% of our small customers still can use multiple services and so there's a lot of runway for us to look at additional services with customers.

Okay, but as we think about what the addressable market is, like in your small generator group, I'm assuming a certain percentage of those are just really small operations, they're 1, 2, 3 doctor or practitioner and they may not add anything more than just the medical part of it, the red bag, just because of their size, right? It's too small for them to take on that cost?

Michael, I don't necessarily think so, this is Rich. I mean, the SteriSafe offering has applicability to anybody whose subject to bloodborne pathogens regs for example. I can't think of a doctor who isn't interested in things like patient communications and even something as simple as the basic level of Stericycle can double the revenues of the smallest 1 doctor operation. So I think what Frank was trying to say is we basically have a large pool of customers of all different sizes from a single doctor up to obviously some of the largest hospitals. We're operating worldwide. We have a core business and then we have the ability to add-on multiple services that can double or triple. I think that's kind of how we look at the growth.

Okay, on the balance sheet, can you give us a sense where you think cash from ops will finish for the year?

Well again, if you take us forward, it obviously depends but if you look at our guidance, the cash from ops on an as reported basis is about $312 million to $322 million and remember that this year, we had about a $23 million adjust in there because in Q4 of last year, we received $23 million in cash from a customer which is to be used for disbursement on a recall and that flowed through cash from ops and it kind of makes the comparability different. But an as reported $312 million to $322 million and an adjusted $335 million to $345 million.

And what do you think the trend then would be to 2012?

Well in 2012 as Mark said, free cash flow at $320 million to $325 million with a $60 million to $65 million CapEx would get you to $380 million to $390 million.

David Manthey, Robert W Baird.

First off, were the acquisitions pretty much all med waste or are there some other services in there?

No, again most of them were med waste, as we said there were some in the compliant services patient communication field. And one was in the returns business.

Okay, and as the pendulum has swung here to international acquisitions, do you see it staying there or do you see it swinging further? How do you think about the opportunity set in the U.S. that remains?

Well, it's not totally. If you look at this year there was some really good sized ones in the domestic market, Healthcare Waste Solutions and at the end of last year, NotifyMD, and the like so I mean it swings between. I would not read into this that there is one group more or less in the future a better opportunity than the other. I mean, it will continue on both fronts.

Okay, and then finally as it relates to service opportunities internationally, I know you gave us the numbers, the 70% and 80%. I guess that's an overall number of SQ and LQ, but could you talk about the international uptake of services and as you talk about that, could you explain which services are getting the best traction internationally?

Yes, I think internationally, it's a bigger opportunity because there are 2 parts to the international growth. 1 is to expand the SQ market for us, that's one very important part and we do that both internally but also through acquisitions. A good example has been the UK over the years where really when we started we were less than 5% in small quantity. Now we're north of 30% of our revenues coming from small quantity. The second part is the services that can go overseas is for instance, clinical services which is a similar kind of service as we have called SteriSafe in the U.S. has been introduced and is on track in the UK, Ireland and Canada and it's being introduced into Portugal. If you look at the Sharps Management, Pharma Waste, those are all applications that are worldwide opportunities for us. So those will also be going international in the future.

Scott Levine, JPMorgan.

Hi, this is Scott Levine of JPMorgan. Quick question, somebody asked earlier with regard to volumes and you indicated you hadn't seen much change in trend there. I was wondering if you were to experience a downturn in volumes, what impact that would see on -- you would see in your business both in the LQ and the SQ side? Is there expectation that have much impact on your business and what have you seen in the past in situations such as that?

As we said in the past, if you really look at the different markets and some markets are really not subject to the economy because there's national health in place. And if you take those things into consideration, we calculated that north of 80% of our revenues were not really impacted by volume. And again, that assumes that in markets that are national health systems where people really have that access any which way if they are employed or not employed which is a driver people feel, we're not impacted materially by it.

Okay, but it's safe to assume that your guidance assumes no real change in trend there?

We have not seen it and I'm not assuming so.

Okay, I don't know if this has been asked yet but did you quantify the impact of fuel on either margins or surcharge revenues on your top line?

It was not an impact.

Not an impact. Okay, and then maybe a follow on question, obviously the bias toward international here with M&A. Is there any change or has there been any change or do you anticipate any change in terms of your emphasis and within your M&A program where there is by design maybe an emphasis on overseas versus domestic or any other changes that you would foresee or envision with regard to your M&A profile either over the past year or expect over the next year?

Yes, I mean, I think what you really see here is that we're an opportunistic buyer and right now, there's opportunities domestically. There always has been and there continues to be. But then there's opportunities overseas, some of which are coming because of some of this global uncertainty. We're seeing that assets that weren't for sale are coming for sale, purchase price multiples and purchase terms are more favorable. And sellers are just becoming more motivated, so wherever we see an opportunity geography irrespective we're going to take that free cash flow and put it to work.

Got it and maybe one last one. On Spain I know you guys typically don't discuss the size of individual transactions. Maybe some early thoughts regarding the market there and kind of what's unique about it and the circumstances around that deal in particular?

Yes, I mean, I can kind of tell you that we think long term and that long term means after we build it out, do the SQ play and bring in our multiple services, this is probably a several $100 million market for us. It's a good mix of public and private healthcare. Right now, predominantly LQ is what we have, got good infrastructure and probably the most important thing is that we've got a great Management team over there. These are experienced guys. They've got a lot of depth. They came on board, so we're very pleased with that.

Richard Close, Avondale Partners.

Just really quick, on the multiple services, the 20% and the I guess 30% for the Small Q, those numbers have been pretty much it seems like stuck right there. Can you comment a little bit about I guess the success you're able to or you're achieving in terms of the up-sell, because it just seems like we're sort of stuck on the 20%.

It's maybe the wrong number, because on the one side, it's an opportunity but what really what has happened with this number is because of the very strong acquisitions and the quantity of customers that, that has added. If you think about it, last year we had roughly 475,000 customers and now we're at 517,000, so obviously taking those percentages on that means the rest is growing and that's really what's happening. New customers come in through acquisitions and that kind of dilutes it down a little bit and then we obviously make the progress that drives our growth rates.

Okay, so it's just a function of adding all the customers that you're adding. With respect to the acquisition pipeline, you've talked about even though you've been successful on the acquisition front of it being around $100 million. Is that still the right number to be using right now on the pipeline?

Yes, even though we did a fair amount of volume this month or this quarter, the pipeline is over $100 million worldwide.

Okay, and then with respect to the UK, I just want to be clear on this. You mentioned SQ is north of 30% of UK revenue; is that correct?

That's correct.

Okay so that's up from if I go back through my notes about a year ago or so, it was at about 20% I think?

Yes, a little bit higher than that, but yes, I mean depending one year ago you were taking the notes.

Okay, then on the Rx waste, you mentioned going internationally. Are there any regulations that are currently in the works on the international front that is going to drive the Rx waste business for you guys that you can point out?

Well most the Markets that we operate in have similar regulations to the United States or they piggyback off. So what we've really seen is that in some geographies, there's some interest in tightening up the regs. In other geographies we're already doing the work. So I think it's just one of those things where as we move into other international markets, we're looking for markets that have tight regulations that are going to get tighter and that are going to kind of mimic what we see here so that our services will fit the need.

Scott Schneeberger, Oppenheimer.

Could I ask you please to repeat the countries in which the acquisitions were in?

Sure. 3 in Brazil, 1 in Canada, 2 in Romania, 1 in Portugal, 2 in Japan, 1 in Spain, and 1 in the UK.

Thanks, and Frank, that's a lot of activity you had in the quarter looking at the $100 million plus annualized. Where was the bulk of it? Could you kind of group for us maybe $10 million US, $90 million, something along those lines, maybe the feel for what the bigger countries were?

No, the one transaction in Spain was a very nice transaction for us and was a nice part of that total of $103.5 million that Mark was mentioning.

Okay. When you guys speak of clinical services, you started to hash out a little bit more on it with regard to SQ, but could you just go a little deeper about what specifically the main drivers are there?

Well it's very similar to SteriSafe so this is a service like SteriSafe that really is now amended to the country and to the needs within that country and the regulations within that country, so that's really what we're doing. We've built a platform where that's pretty easy to do and where we can take those ideas and we can box them and we can move them around, we can amend them slightly, obviously language plays into play, all those kind of things, but it's set up to be able to be transferred into different countries in the future depending on their needs.

Okay, so that applies to the organic growth in international, not in domestic, correct?

That is correct.

Okay, and then with regard to domestic SQ, is the predominant piece of the organic growth SteriSafe, are you still having success growing SQs just kind of get a feel for a break out of pricing, volume of new additions, net new additions and then how much is SteriSafe and how much is other that I might not have captured there?

Well I think just to kind of make it simple, SteriSafe continues to be a strong growth driver in the United States. And we continue as these new customers come on board, we continue to move people into SteriSafe, existing customers move up through the levels, so SteriSafe has a lot of runway left and then like we talked about, other things like Rx waste and such are things that we're looking to move into the SQ space and we've started to do that.

Okay, and then finally, with regard to the 2012 guidance, is there anything special one-time in nature we should be aware of? Is it pretty clean guidance, any strange ForEx or energy assumptions that we should be thinking about?

No, I think the only important part -- a couple of things. One is obviously the RMS side returns and recall management, the guidance for that for next year is $95 million to $105 million. We're really on the top end there assuming some large recalls but on the bottom end we do not, we are trying to be cautious there, so that's a key. As we already talked from a gross margin point of view, it kind of starts at about 44.8percent-ish and then 10 to 20 basis points sequential quarterly increase. SG&A I talked already for the mid kind of 18% and that includes stock option amortization and DSO, I think I made a mistake in the script I said 51 days to kind of 61 days. It's kind of 58 days to 61 days with the inclusion of the acquisitions we just did.

Ryan Daniels, William Blair & Company.

Yes, Frank, you just hit on this a little bit but I want to make sure I understand the gross margin going into the fourth quarter, based on the response you gave me to my earlier question. You said that the acquisitions will hit gross margins by another 50 basis points sequentially. Will that be offset 10 to 20 basis points of the net decline in gross margin would be more like 30 basis points or are you saying including the organic improvement we should expect an overall gross margin pressure of about 50 bips?

The 50 bips is for the acquisitions alone. That's one.

Okay. Thank you for that.

So you got to then do your sequential depending on your modeling.

Yes, perfect.

I think one important part for next year, too, Scott maybe still relating to your part is exchange rates have changed over the last 3 to 4 weeks and so many of you obviously that have had models out now since the last call that were done late kind of July when exchange rates were more favorable, the difference between then and now is probably the equivalent of about $23 million roughly of revenues that you need to think about. Now that goes all the way through the income statement on international but it is something to take into account when you do your forecasting and think about exchange rates.

Jason Rogers, Great Lakes Review.

Most of them have been asked but I did want to ask about the leverage ratio, what that was for the quarter and if you have the year ago figure that would be helpful as well.

Sure, in the third quarter of last year, it was 2.16. We ended the year at $198 million. Q2 was $232 million and this third quarter now the end was $256 million. We're right in the middle of what we would call our comfort level. 2 to 3 is a very comfortable level for us in debt to EBITDA and again these are the covenant calculations.

And for the receivables the allowance for doubtful accounts it was up I think close to 100 basis points year-over-year as a percentage of receivables. Is that just a function of more international acquisitions?

That is correct.

We have no further questions at this time.

Well we thank everybody for taking the time to join us on the call. We look forward to talking to you again next call and have a great and safe weekend. Take care.

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