Stericycle Inc (SRCL) 2011 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'd like to welcome everyone to the fourth-quarter 2011 earnings release 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) Laura Murphy, Vice President 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-Ks, 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 fourth quarter are as follows. Revenues were $446.6 million, up 13.5% from $393.5 million in Q4 of '10. And internal growth excluding returns and recall revenues was up 7%. Domestic revenues were $316.9 million, of which $287.5 million was domestic regulated waste and compliance services revenue, and $29.4 million was returns and recalls. Domestic internal growth, excluding returns, recalls, revenue was up 8% consisting of small quantity up 9% and large quantity up 6%. International revenues were $129.6 million, and internal growth adjusted for unfavorable exchange impact of $2.5 million was up 5%.

Acquisitions less than 12 months old contributed $48.9 million to the growth in the quarter. Gross profit was $201.5 million, or 45.1% of revenues. SG&A expense was $84.3 million or 18.9% of revenues. Net interest expense was $12.7 million. We have the full quarter impact of 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 $64.3 million, or $0.74 per share on an as-reported basis and $0.76 adjusted for acquisition expenses and other nonrecurring 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 549,000 shares of common stock on the open market in an amount of $42.9 million, and we have authorization to purchase an additional 4.3 million shares. Capital spending was $16.3 million in the quarter. Our DSO was 59 days. Excluding the third-quarter acquisitions, the DSO was 53 days. Q4 year-to-date, the cash provided from operations was $306.1 million. I will now turn it over to Rich.

Thanks, Frank. At the end of the quarter, we had approximately 522,000 accounts, of which over 506,000 were small, and the remainder were large. We continue to see strong worldwide growth, driven by the expanding portfolio of services that complement our core regulated waste service. For our SQ customers, the growth drivers remain Steri-Safe 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 growth through acquisitions. In the quarter, we closed eight transactions, five of which were domestic and three international.

For 2012, we anticipate internal growth rates for SQ to be in a range of 8% to 10%, LQ 5% to 8%, international 5% to 8%, and recall and returns revenues between $95 million and $115 million. We remain very excited about our future growth opportunity, because 80% of our LQ and 70% of our SQ customers only use one of our current service offerings. As customers adopt our multiple services, this can more than double or triple their revenues. We want to close by thanking each member of our worldwide team for their strong performance and continued commitment to our customers and shareholders. And now I'll turn it over to Mark.

Thanks, Rich. I'd now like to provide insight on our current outlook for 2012. Please keep in mind that these are forward-looking statements. Revenues from acquisitions completed in the quarter were approximately $2.2 million and, annualized, are approximately $10 million. Keep in mind, our guidance does not include future acquisitions, divestitures, and acquisition expenses. For 2012, we believe analysts' EPS estimates will be in the range of $3.21 to $3.26, 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 their assumptions for growth and foreign exchange rates. 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 are very excited about the tremendous growth opportunities in 2012 and beyond. We thank you for your time. And operator, we will now switch over to Q&A.

(Operator instructions) Your first question comes from the line of Ryan Daniels with William Blair & Company. Your line is open.

Let me start with a question on the gross margins. I think, Frank, you had mentioned last quarter that those could be down 50 basis points from M&A, offset by maybe 10, 20 basis points of organic leverage. But it came in much better. It was almost flat sequentially. Any color there in what allowed that to outperform your expectations a few months ago?

Yes, so we ended last quarter with 45.15% in the gross margin. The acquisitions of the third quarter did negatively impact it by 46 basis points. Foreign exchange, which in the quarter was a negative to our guidance from a revenue point of view, in fact it was $5.9 million negative impact. That had about a 20 BP positive impact, and the business itself did better by 24 basis points. So that gets you to your 45.13%.

Perfect. Helpful color, and then given all the bevy of M&A activity, especially in the third quarter, can you just provide an update on how the integration activities are going, and maybe especially in some of the novel markets over in Europe, how that business has been relative to your expectations?

Yes, this is Rich. The most recent new platform is Spain, which we talked about in the last call. It's on track. There's not a lot of integration, there but we are pleased to announce that we completed our first follow-on acquisition of an SQG.

Okay. Great. And then Frank, just in the financials, it looked like when you got your adjusted EPS, you actually hit the GAAP EPS by $0.01 for acquisition expenses. Is that just a change in fair value consideration, contingent payments that's in there netted against some transactions cost for FAS 141?

Yes, that's exactly what it is. It was contingent that in this case someone did not make their specific markers.

Great. And then last question I'll ask, and I'll jump back off. I'm curious if the leap year will have any negative impact on you just having an extra day of operations. I assume that doesn't really impact revenue positively, but will that pressure margins at all in the first quarter, or anything to think about a gross margin front as we head into Q1 of 2012?

That historically has not happened. We've been all here more than 15 years. I've seen a couple of those, and it has not.

Your next question comes from the line of Scott Levine with JPMorgan. Your line is open.

Scott Levine. With regard to the acquisition pipeline, it sounds like a slight tilt towards the U.S., but a relatively small annualized revenue number. Any noteworthy changes in terms of the mix of acquisitions? And how much of the U.S. deals were tuck-ins maybe versus other types?

In Q4, of those that we did, we did 8 in total, 5 domestic, 3 international. Of the 3 international, 1 was in Romania, 1 was in Spain, and 1 in Japan. And in total, the pipeline that we still have is over $100 million worldwide, and then so there's really no dramatic changes there.

And do you have the leverage calculation debt-to-EBITDA?

Debt to EBITDA was 2.52% at the end of the fourth quarter.

Got it. And then, maybe a little bit of color on the add-in services. I was wondering if you could provide an update, just even qualitatively if you don't want to give numbers in terms of the uptake of the advanced service offerings within the SQ base. Do those continue at the same pace, accelerating, decelerating, maybe a little bit of subjective color there?

Yes, as we said before, I think the main drivers in SQ remain Steri-Safe and clinical services. And we are receiving good uptake on that. It's reflecting the growth numbers. On the LQ side, the sharps management service and the Pharma waste have been particularly pleasing. We had one of our strongest quarters in Q4 for both of those services. So I think the growth drivers are all hitting on eight cylinders.

Got it. And the premium services within Steri-Safe, that's still continuing on pace, I suppose?

Absolutely, on track.

Okay, and then one last one, any update with regard to patient notification, that program and your plans there or any qualitative color would be helpful?

I think as we have talked about it, we are still in the trial stage. We are obviously very excited about it because it's a very large market. And there's been some pieces written on the business, which I think show you that it has good synergy with what we do and leverages off of our current talents within the organization. We are going to build the platform this year. I think it will have some impact in 2013, and we will discuss that with next year's guidance.

When do you think the trial phase ends?

Well, I think the trial phase is not something that is like a 60- or 90-day thing. You have seen us be fairly discriminatory when we move in a new area, but I think what we are really saying here is that, it won't have a meaningful impact on revenues this year. 2013 and beyond is something different.

Your next question comes from the line of David Lewis with Morgan Stanley. Your line is open.

This is John Demchick in for David. On acquisition competition, can you give us any color on what you're seeing on the deal landscape these days in terms of competition and valuation? And is there any indication that your solid waste competitors have been more active in trying to branch out into medical waste? And in general, how has deal competition impacted valuation over the past several quarters? Thanks.

It really varies from country to country. There's obviously always financial buyers looking at transactions in our space, and depending on country, you could obviously have many times have other companies. I wouldn't say there's a dramatic change from the past. They have been there, and they continue to be there as competitors for transactions.

Okay, very helpful. And also one on hospital and physician consolidation. Healthcare providers remain very fragmented, but we have been seeing an acceleration and consolidation of healthcare practices, to some extent among hospitals, but more importantly among physician offices, or physicians that switch from independent practice to hospital employment. Given the higher margin you have in smaller customers, is this something that we should be thinking about as potential price or margin pressure going forward? Thanks.

I don't think so, because first off, consolidation is not a new trend. People are talking about it right now, but the fact is there's always been consolidation health care. When hospitals get involved, for example, with small practices, it actually benefits us because there's more focus on compliance, and as everybody knows, our higher level services focus on compliance. We also have an opportunity to sell more of our services, so at this point, we haven't seen any negative impact.

Your next question comes from the line of Al Kaschalk with Wedbush Securities. Your line is open.

It's Al. Just a follow-up on the prior question, does the team prefer consolidation in the end market customer base, or is it a nonevent? Everyone seems to be concerned about what's happening in terms of increased service opportunities or visits to practitioners' offices versus the number of visits out there. But perhaps it's an opportunity just to clear up for everybody what you guys feel is a preference in terms of your own market.

I think our service offering is such that we can benefit with whether the market stays in its current state or whether there's an evolution of more patient access or whether there's consolidation. And that was part of our idea as we started building out the breadth of services. As you consolidate small practices or as they combine, often there's an office manager or someone put in charge that gives us a new contact point who focuses on compliance in the office, allows us to upsell and upgrade. And the other pressure we are seeing is that, as hospitals struggle to continue to be productive, our ability to have people inside their institution in-servicing them and helping them reduce their labor component and nursing and staffing is very important. And that's also on the patient communications. I think we will see opportunities for us to make our customers more productive in their practice and be able to increase their volume and throughput.

Helpful. On the guidance, just a couple of things that stood out. First on CapEx, that looks like it was increased, and if I carry forward the prior commentary at the end of Q3, I think you extended the upper end of your returns business to about $115 million from $105 million. So any incremental color there on what -- particularly the CapEx, which I think was extended about $10 million.

No. I think the CapEx was $60 million to $65 million. It was in the guidance for 2011 was $50 million to $55 million, so maybe that was misinterpreted. There were two numbers given last call, one for 2011 and one for 2012. But the number for 2012 did not change. And I think for the RMS it's really on the upend, we continue to see good opportunities. The quantity of recalls is increasing, so again we feel on the upper end to bring it up $5 million.

Would you be willing to share, and I guess yes is a way of saying you would share, but are there things outside of healthcare market directly that you've had the benefit of the RMS business?

I think the RMS business for us, when we started it was one where we wanted to understand customer needs and build awareness and expand our services. And over the past three years, we have expanded services, better understood our customer, gotten the awareness, and we have moved into the consumer space. So I think what you've seen us do at RMS is in some ways outside of the healthcare space, but even so, with that particular growth engine, we still are accessing less than 10% of the domestic opportunity for recalls and for these other services.

Then finally, on a couple of unique or interesting services seem to be appearing up on your website, which are nontraditional on the industrial side, but tied I guess maybe towards a little bit more towards the chemical component. Are you willing to talk a little bit about some of these additional opportunities you're developing?

I can describe one, which is a service we call Strong Pak. And it's a service offering for retail waste at the small commercial level. Sometimes this is prescription waste, RX waste, sometimes it's haz waste. But Strong Pak is a unique service offering that helps the retail side dispose of RX and haz waste. And these are typically like SQG customers, so that's one for example that we are in. And we do have haz-waste capability because it supports our pharma-waste program.

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

I'll start with a follow-up on RMS. You mentioned that enough confidence to increase the guidance on healthy volumes. Can you just talk a little bit to the environment, the regulatory environment, what might be driving, where you're seeing that, and give us a little more help with the enhanced confidence?

Yes, the regulatory environment has been getting stiffer and stiffer over last couple of years, which is helping us. And as customers react to that, they are turning to us, I think, more and more for all the menu of services that we have.

Thanks. And the way you provide the guidance, is there a base level you're certain of, and then maybe a few to come through? Like this incremental move, was it just the environment, and you said, hey we felt good going into the year? Or are there things you can see and feel and touch right now that allow that to happen?

As we said in the past, the low end of it is what we feel is a base, and the top end will depend on larger recalls.

Thanks. With regard to the acquisitions starting domestically, generally what was the mix of small versus large for those five?

It was about one-third small in those that we did, and it's not just domestic. That's for the total of the RMW that we did.

U.S. and international?

Yes.

Okay. And then just curious about Spain. Could you tell us where you stand there? Was that a large or small acquisition? I think historically, you've been involved in JVs. What's going on with your business in that country?

As Rich said, it's obviously on track. We closed it last quarter. Team is doing very well. We completed one follow-on acquisition in the country. The Company we bought was predominantly almost north of 95% large-quantity generator revenue. It's a mix of public and private in that marketplace, and we think that market as a whole is several hundred million opportunity for us.

Thanks. And then just one more for me. Anything, I think historically you said even though it's muddled by acquisitions, first quarter is typically a seasonably soft quarter. A, could you just address that, and, B, any one-time items we should be thinking about in the first quarter or in 2012 across any of your outlook?

Again, we give guidance for the total. What we indicated last quarter may be an update. Gross margin maybe starts in the high 44%s, 45%. SG&A for next year in the mid 18%s, are broad guidelines.

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

First off, given the 5% to 8% organic growth target for international markets being equivalent to the large quantity growth in the U.S., does that say anything about the uptick of ancillary services in international markets? And if not, should that number accelerate as we move forward and the shift goes from large quantity to small quantity internationally?

Yes, there's a lot of factors that go in it, obviously, adding Spain into that mix and Spain being 95% large. So you get a lot of mix factors in these growths, so that Spain should affect or pull that number maybe down a little bit, but the continued focus on SQ internationally is not stopping and is on track. So I think in each individual country, they are growing the small faster than the large, and that's also a market dynamic. The growth market is growing faster and has always continued to do that.

And approximately what is the mix today internationally of large quantity to small?

I think we have given it for the UK where they're north of 30%. We have not given details past that point.

North of 30%, small quantity?

In the UK, yes.

Okay. All right. And then last quarter I believe you gave us SG&A, ex acquisition, a core SG&A number. Can you give us that number again this quarter?

SG&A, excluding the acquisitions, well, I can maybe give it to you SG&A the raw numbers. If you look at that, it was about 16.88% and then you have to add to that the stock options and the amortization, and it gets you to about 18.99% or 19% to revenue in the quarter. What really increased in the quarter as a percent is the amortization. Us obviously doing a lot of deals adds to the amortization line, and that's why that has jumped a little bit up.

Okay. And then finally, on the patient notification, is that a service or is it a system, meaning is it something that you do for your customers, or is it something you install at their site and they do for themselves? The reason I ask, I'm wondering about the decision-maker on something like that. Is it -- does it become a telecom or IT decision, as opposed to a business manager or office manager type person?

It's purely a service, we have all of the IT. And basically the decision maker is somebody who says that, I'm either the office manager or the doctor, and I need to have this service, but we maintain all of the infrastructure ourselves.

Your next question comes from the line of Richard Close with Avondale Partners. Your line is open.

A question, I saw an article recently about I believe you guys doing some hiring, 100 full-time jobs, 100 part-time jobs in Pennsylvania. Can you talk a little bit about that, what exactly that is for, any particular service?

That really is for the patient communication side, and that is because we maybe moved centers, integrate centers, so you obviously maybe see a hiring. You don't necessarily maybe see the other side of it.

Okay. So did the patient communication already have a presence in that area or are you moving from --

No. We had a presence in that area already.

Okay. And overall, in the domestic market, could you talk a little bit about the pricing environment? We saw one article where one of the counties mentioned getting a reduction in pricing. And I just was curious whether that was something widespread or just specific to that particular client?

We haven't seen any changes, and we are not aware of the details about the particular county you're talking about, but, obviously you win a few and you lose some occasionally. But we haven't seen any change or any trend in either direction. It's been pretty steady.

Okay. And then I guess my final question here would be along the lines of the organic growth numbers. Is there any -- for the various buckets, SQ, LQ, and international. Is there anything specific that you can point to that maybe takes you from that bottom end of each of the ranges to the top end of the ranges, just anything that you can point to with respect to that?

Well, as we have said many times, Stericycle is a marathon; it's not a sprint, so you're not going to see dramatic changes. And in fact if you really do the numbers, a 1% change isn't that big a number. So I think in the quarter maybe have a slight influx of something more. As you maybe know or not, but we at times do cruise ship work or things, so that could maybe move it around a little bit. But overall it's very stable, and I would not read overall a lot into it, if it switches by 1%.

And then internationally, anything going on with the financial situations over there that is negatively impacting you guys at all or anything you can point to?

No. In fact, I think it could be an opportunity for us, as I think in Spain it was an opportunity for us. This was a business that was sold by an entity that really needed the cash, and maybe four or five years ago that would not have been the case. So I think it may create opportunities.

Your next question comes from the line of Shlomo Rosenbaum with Stifel, Nicolaus. Your line is open.

I just wanted to have a few small things here or there. I want to know how much you've added on in terms of acquisitions to the original notify acquisition? How many acquisitions have you done subsequent to that to bulk up in that space?

We haven't totally broken it, but it's somewhere in the four to five.

Okay. And are those -- what you're doing now, is that rationalizing call centers and stuff like that, or are you still figuring that out?

That's in fact what Rich was saying, we are building both the platform as well as the capabilities. And so 2012 will be a year when we are building a platform that we continue to do more acquisitions, but I think overall, it's building the platform and getting to know issues like integration and what it takes to do that.

And so when I'm seeing like a closure of a facility, is that -- is that something that popped up because of the notify acquisition in the quarter?

That could happen, yes.

Okay. Then a couple of other just housekeeping things. How should we expect the A/R DSO to decline as you move past acquisitions that bumped it up in the third quarter?

Well, the third quarter was impacted by the acquisitions we did, and Spain had an impact on that. As we said from a guidance point of view, we anticipate to be between $58 million and $61 million. Certain countries are definitely higher. Spain is one of those internationally. So when you acquire a business in your overall DSO will go up. So I think acquisitions may impact that in the future, but the business as a whole guidance, our guidance for this coming year is $58 million to $61 million as a range.

To what -- is there something that took you by surprise? It seems like the free cash flow was lighter than what the annual guidance was calling for.

No. It was a little bit of timing. As you know, we do have some businesses, like the RMS business, which can have an influx in revenue in the last month, which was the case. And so timing was a big impact there, and that can make your receivables go up in that specific time frame.

So it really was a timing thing? Because it seems like vis-a-vis the annual, there's maybe a $30 million difference versus expectations, and you're saying it's all in RMS?

No. So if you compare, you need to look at the guidance where we do have the adjust of the $23 million. So quickly for those that have not been on calls before, at the end of '10 we had a $23 million cash inbound, and this was for a recall reimbursement to their respective customers. It showed up as a cash from ops from us, and that cash moved out in the first half of '11. So if you really adjust for that, and if you look on an as-reported basis, we are really almost about $10 million that we were off compared to the guidance. And a lot of that was the timing in the AR with, specifically, RMS driving some of that.

That's very helpful. And then lastly, how should we think of the tax rate going forward?

I think overall the tax rate, if you take the adjustment of the 141-R out of there and the like, for next year, we would say it's probably about 37% for '12.

Your next question comes from the line of Greg Halter with Great Lakes Review. Your line is open.

It's Greg Halter. Just don't want to harp on the receivables, and I won't, so I'll look at the reserve, which was up to I think 6.1% of gross receivables versus 4.8% last year. Just wondering if you had any comment on that change.

Yes. You see that, that increase already occurred in the third quarter, which was primarily the result of the larger acquisitions we did in that quarter. So the acquisitions there did make that number jump up.

Okay. And what was your fuel expense to revenues in the quarter?

5.6%.

And any expectations on what that might be for 2012? Obviously, you're no experts in the oil markets, but --

I don't know anybody who can -- (laughter). I study a whole lot of pundits, and still we get surprised, but fortunately our contracts and our operating methodology allow us to buffer it.

Okay. And with the acquisition of health waste solutions coming up on nine months to almost a year now, just wondered if we could get your thoughts on how that has gone versus your initial expectations.

It integrated on schedule. The management team that stayed with us and the employees have been very helpful. They had certain processes that have helped our LQG space. All in all, it's performing as we thought, and we are very satisfied.

Okay. And I don't believe I heard the acquisitions, the 8 that were done in the quarter, what type those were, if they were traditional or other areas.

6 were in the regulated waste, and 2 were in the patient communication.

All right. And one last one. The returns business total for 2011 amounted to how much?

It was $117 million.

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

Well, we appreciate everybody taking time and a non-Stericycle, but related comment, for those of you who have not seen the Hallmark Hall of Fame movie called A Smile as Big as the Moon," it's going to be repeated on the Hallmark Channel on Saturday at 7.00 and 9.00 pm central time. And the reason it's of interest is Frank ten Brink's son, Peter, plays the role of Ben Schmidt, a child with Down syndrome. And Peter just does a great job in this very touching job, and hope you get a chance to watch it. Thank you, everyone.

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