Stericycle Inc (SRCL) 2012 Q1 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Q1 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)

Laura Murphy, Vice President of Finance, you may begin your conference call.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink, CFO; Rich Kogler, COO; Charlie Alutto, CEO elect; 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 first quarter are as follows. Revenues were $460.1 million, up 15.6% from $398.1 million. In Q1 '11, our internal growth excluding returns and recall revenues was up 8%. Domestic revenues were $329.2 million of which $293.4 million was domestic regulated waste and compliance services revenues, and $35.8 million was returns and recalls.

Domestic internal growth excluding returns and recall revenues was up 9% consisting of SQ up 10% and LQ up 8%. International revenues were at $130.9 million, and internal growth adjusted for unfavorable exchange impact of $3.3 million was up 5%. Acquisitions contributed $41 million to the growth in the quarter. Gross profit was $205.3 million or 44.6% of revenues, and SG&A expense was $84.9 million or 18.5% of revenues. Net interest expense was $12.7 million. Net income attributable to Stericycle was $64.9 million or $0.75 per share on an as-reported basis and $0.78 adjusted for acquisition and nonrecurring expenses.

Balance sheet. At the end of the quarter, the revolver borrowings were approximately $477 million. The unused portion of the revolver debt at the end of the quarter was approximately $382 million. In the quarter, we repurchased over 38,000 shares of common stock in the open market in an amount of $2.9 million, and we have authorization to purchase an additional 4.3 million shares. Our capital spending was $17 million, and our DSO was 60 days. In Q1 year-to-date, the cash provided from operations was $99.6 million, and I will now turn it over to Rich.

Thanks, Frank. Worldwide, we continue to use our strong free cash flow to drive our growth through acquisitions. In the quarter, we closed 11 transactions, 6 domestic and 5 international. Our worldwide acquisition pool remains robust with over $100 million in annualized revenues in multiple geographies and lines of business. At the end of the quarter, we had approximately 528,000 accounts of which over 512,000 were small and the remainder were large. Our customers continue to be excited about our expanding portfolio of services.

For our SQ customers, these services include SteriSafe and Clinical Compliance offerings. For our LQ customers, the growth drivers are Sharps Management, Pharma Waste and Integrated Waste Services. The strong growth we experienced in the quarter was fueled by the continued adoption of these additional service offerings. 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, and as customers adopt our multiple services, this can more than double or triple their revenues. For 2012, we anticipate internal growth rates for small quantity to be at 8% to 10%, large quantity 5% to 8%, international 5% to 8%, and recall and returns revenues between $110 million and $120 million. We want to thank each member of our worldwide team for their strong performance and continued commitment to our customers and our shareholders. And I'll turn it over to Charlie.

Thanks, Rich. I would 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 $0.7 million and annualized are approximately $20 million. Keep in mind our guidance does not include future acquisitions, divestitures, and acquisition expenses.

For 2012, we believe analyst EPS estimates will be in the range of $3.24 to $3.28, which we are comfortable with. We believe analyst revenue estimates for 2012 will be in the range of $1.85 billion to $1.9 billion depending on assumptions for growth and foreign exchange rates. We believe analysts will have estimates for free cash flow between $320 million to $325 million, with CapEx anticipated between $60 million to $65 million. In closing, we're very pleased with our Q1 results and excited about the multiple growth opportunities for 2012 and beyond. Thank you for your time today. We will now answer any questions. Mike, you can open the Q&A line.

(Operator Instructions). Ryan Daniels, William Blair.

Let me ask a couple of housekeeping related up front. First on the returns and recall business, I know that you took up guidance for the year and I'm curious if that relates to an acquisition done during the first quarter, or is that just given the strong performance in Q1, you're more comfortable with the annual outlook?

It is the strong performance in the Q1 and then a good outlook for the rest of the year.

Okay. And then Frank, while I've got you, can you talk a little bit about gross margin performance? I know it's always helpful when you break that out organically versus some of the puts and takes that can pressure that year-over-year.

So the gross margin always should be looked at as compared to the prior quarter. So we were at 45.1% in Q4 of '11. The recall -- the larger recalls we had and also some large contracts impacted it negatively just by mix by 40 basis points. Fuel impacted the margin by about 20 basis points, and the general business including a very small favorable foreign exchange was about 10 basis points. These again were all versus the prior quarter.

Okay, and then sequentially, still comfortable with that 10% to 20% organic basis point improvement?

Yes. I think in Q2, you are looking at somewhere 44.8, 44.9, and then again, your 20 BIPs afterwards roughly increase quarter-over-quarter.

Okay, that's helpful. And then a couple broader questions. First, just given everything that is going on over in Europe, I'm curious if -- with a financial crisis, number one -- you are seeing any impact on business, and two, if that it's opening up any more M&A opportunities perhaps at lower pricing.

The M&A remains very strong. We have over $100 million in our pipeline. It's both on the domestic front and international. And it continues, as we said in previous calls, that the European marketplace is very positive. We did three transactions in Spain this last quarter. Which again also gives us the opportunity to expand and tuck in those acquisitions. So as we said in previous quarters, that turmoil does create some opportunities for us.

And last one and I'll hop off, This is a little bit out in left field, but I'm curious with all the issues we've seen in market with counterfeit drugs as of late, is there anything you can do in your returns and recall business to help preserve the supply chain integrity, or is that too far field what you currently offer?

We think obviously with companies that have issues with branding that want protection with their brands, both our recall and returns business helps in that. And that could be in the form of a recall or just through our audit process and our variable labor force helping them really track what's on the shelves. So those again are services that we could help them with and that creates revenues for us.

Okay. Thanks again, guys.

Scott Levine, JPMorgan.

Question. The multi service penetration rates that you are giving remained the same. I was wondering if there was any color you could offer with regard to any observations on relative strength in -- or trends in any particular type of product, and maybe any update with regard to the patient notification program and thoughts on commercial potential there.

I think I will just give you maybe a small anecdote about one of our multiple services on the LQ front, which was the Pharma Waste program that we've talked about. I'm pleased to see that we had a record number of installations in sales in this first quarter. So handily beating what we were seeing last year.

I think the growth rates in LQ are reflective of the fact that the multiple services are getting more penetration, more adoption, and as we mentioned, we're seeing kind of broad adoption of sharps management, of the Pharma Waste, Integrated Waste services and everything we have in our portfolio.

So our feeling is, although I think we've talked about this before that those percentages of customers will not move a whole lot because we are continually replenishing, through acquisition, the pool. We are seeing the sales force really doing a much stronger job of getting our multiple services into the market.

Got it. And turning to -- I don't think this was mentioned on the call yet, but I think about a month, month and a half ago, there was a ruling from the UK Competition Commission regarding one of your acquisitions from last year. Hope you might be able to comment, provide an update with regard to how you see that process playing out.

It's a company called ECO Waste a very small transaction, less than $2 million of revenues that we did a little over a year ago. They also have a small plant in the southwest part of the UK. You know, it's not material in any way. We are currently challenging the decision, and we hope for a favorable outcome later this year.

Got it. One last one if I may. On energy costs, I was hoping you might be able to comment on how much that is percent of sales. And then as a follow-on to that, how much natural gas is of that portion, and maybe any plans you guys might have to invest in CNG trucks? We're getting a lot of questions in that variety.

Just from the numbers here, we're talking about 5.8%, so up about 20 basis points from prior quarter. And we do not really look at energy broken apart. We look at total energy because we also use electricity at some of our plants. As far as CNG trucks, we have considered them. One of the issues obviously is that we are operating in 46 states and 170 depots. So access to CNG refueling is a little bit prohibitive for us.

Understood. Thanks.

Al Kaschalk, Wedbush Securities.

I want to drill down further on the gross margin because it just seems like we are suggesting that the core business, ex some of the fuel, is more of a upper 44% range percentage. And I'm trying to triangulate here, because last quarter or two quarters before, we were pushing towards 45%, and now we look like we are back below.

I understand some of the puts and takes there on the acquisition front, but -- as well as mix, but recalls is quite a bit smaller on the percentage of revenue, and I would like to think that doesn't have as much impact on the margin. So the question out of all that mumble jumbo was -- is the core business -- should we set our expectations more to the 44.5% to 45% range, and then the strong leverage you get down at the bottom of it pushes it towards the EPS?

I think there are two factors. You will have every quarter with recalls, for instance, a little bit of a factor, and that business is strong and looks to be continued strong in Q2. The outlook for 3 and 4 is tough to predict still. The second part is that we are obviously seeing some good growth in the large quantity. And that obviously -- that could be the Integrated Waste solutions services, the multi-site national site services. They're larger contracts that have those lower margins embedded in them.

They're still very good because it also has a lower SG&A to revenue. As you have seen that in the last quarters, you've seen SG&A is a factor if revenue comes down a little bit. But that is because you get some growth in, yes, margins that maybe are a little bit below our average but still very good on an EBIT basis.

And finally, if you look at it from a total cash flow point of view, these services have a lower CapEx to revenue. The Pharma Waste for instance, the multi-site national services that we have, the Integrated Waste solutions. They don't have the CapEx that goes with the rest of the business. So overall, the cash flow is good. The return we get on those. Yes, it does have that impact on the gross margin. And overall total, it goes up and down a little bit with that, and then you get, like you said, the impact in the prior quarters because of the acquisitions.

On the large contract in the quarter, is that just a change or is it a new contract? Or -- what was part of the recall of 40 basis point decline that you highlighted.

We have larger contracts that at times kick in. We can't again comment on any individual customers. So if you look at it from the 40 BIPs, it is probably half-and-half recall and half related to the larger contracts.

Okay. And finally, a little bit pressing on some of the other regulatory related. There was a large retail pharma chain that had to settle for some handling of pharma medication, etc. And I'm just wondering how that plays into your thought process on where you can help. Is that a recall opportunity, or can you provide more training regulated services? How does that create an opportunity?

Well, you remember that on that type of customer, we do pick up regulated medical waste and over the years, we've expanded our capability in providing hazardous waste, Pharmaceutical Waste, recall and audits to those types of customers. So we think the regulatory compliance gets a lot of focus in this area, and obviously, that could be a good opportunity for us on a go-forward basis.

Are you willing -- I appreciate that color. Are you willing to say whether it's a multi chain type of customer or a bigger box, how the penetration is on that --?

We don't comment on individual customers.

Thank you.

David Lewis, Morgan Stanley.

Frank, sorry to come back to margins here, but I will at least do you the favor of shifting from gross margins to operating margins or EBITDA. I appreciate the RMS recall could have pressured GMs in this particular quarter, and you called that out. But if you think about EBITDA margins, that trend has also been flat to down over certain multi-quarter period.

I guess what I'm trying to -- it's really a two-fold question. First, even though we are seeing some GM pressure, there should be a reasonable contribution to the bottom line. I guess why are we not seeing that? And as we start seeing incremental service offerings across your existing infrastructure, when can we start seeing that EBITDA margin beginning to take a more positive trajectory?

I think the impact on EBITDA is probably -- each quarter has its nuances. Take an example, third quarter of last year impacting fourth quarter a little bit was the Spanish acquisition. Which we mentioned had in the quarter of Q3 probably on a gross margin and similarly down -- because it is a fairly high percentage, almost north of 90% plus LQ-oriented -- had a declining impact on the overall blended gross and EBITDA margin.

And then the gross we said at that time in the quarter was about 40 BIP, 50 BIP, and then an additional 40 BIPs, 50 BIPs in the quarter thereafter, so in total cumulative 80 BIP impact on that acquisition. We do these acquisitions not just based on their contribution positive or negative to gross margin. We do them based on they're good IRR deals.

So at the end, it's really a cash flow orientation. So each quarter does have its impact. You can't just generalize and say -- hey, if I look back a couple of quarters, because that was the quarter in which we bought $100 million plus in revenues, and yes, that will change the mix in our business. So I think you have to continue to look at each quarter individually and see what is happening and then break it down.

Okay. That's helpful. And maybe just a second question, and maybe to the broader group. The last couple quarters, you've seen a growth contribution from acquisitions be closer to 400 basis points or so or 4%, which deviates from some of the recent historical norms of upper singles to double digits. Is this a two-quarter artifact, or is this a two-quarter trend in terms of how we should think about the growth impact from acquisitions over the next couple of years?

I think in general in the broad picture, our long-term goals again are growing the business in earnings and cash flow at a 15% rate. And so historically, what has that been? It has been about half through acquisitions, half through internal growth. And so I think we are well on track on that. And it continues to get stimulated by doing acquisitions. And those will be different again quarter to quarter. You get some larger quarters, some smaller ones. We'll work on the deals and we will do them when they are right.

Okay, maybe just one last one and I'll jump back in queue. In terms of future growth expansion plans. If you make a decision to get more aggressive in call center consolidation, is there any reason to believe that from a capital or access to free cash perspective, you will not be able to execute on a call center consolidation strategy simultaneously with the existing waste management or organic consolidation?

No, I think as we have shown through the years now that it has been at play in medical waste and the recalls/returns business and our pharmaceutical waste and some of the small amount of a little bit of haz, patient communication. We feel we can do it all.

Okay. Thanks very much.

Richard Close, Avondale Partners.

Yes, thank you, congratulations. Talk a little bit about the Integrated Waste services. You highlighted that. In terms of some of the gross achieved there in the quarter, if you could maybe go down a little deeper on that.

Well I think Integrated Waste services is where we work with larger hospital groups, IDN , chains, multiple locations to do a total waste stream solution for them. And after we did the HWS acquisition last year, we also had their resource management technologies that we can bring to bear. So I think what you are really seeing is now that HWS is fully integrated. We have their solution integrated into our solution. We are taking that out to market, and it is attractive to certain types of LQ customers, primarily very large IDNs or

And now that -- HWS and your solution is integrated, are you seeing any major -- I guess an acceleration of RFPs coming out on the Integrated Waste, or is it pretty much steady state? Any trends that you can call out there?

I'd say it's a steady state.

Okay. With respect to the acquisitions that you announced in the quarter, just want to be clear on that. That you said the revenue in first quarter '12 -- or from the acquisitions that you completed it was $0.7 million in '12?

That is correct. In Q1 was $0.7 million. And for the annualized revenue -- not in the year itself, it is for an annualized number -- it's about $20 million.

Okay. And then any additional clarity on the acquisitions themselves and the various buckets, large quantity, small quantity -- I'm not sure if you gave that.

The broad mix is about 60% SQ, 40% LQ. They're never as precise because we have to obviously look at that after acquired. There were three in Spain, one in Japan, one in Romania. Those were the five international ones.

Okay. And then on the patient communications, I guess we are about a year into that. How would you characterize the past year and where you -- where you are and maybe the opportunity on that side.

I think for where we're at in the progress of building out the platform, we're tracking nicely. We've had some good additions to the team and not only in terms of capabilities of the organizations, but the talent pool involved. And we are still very excited about it. It's early stages of the game, but still a big opportunity for us.

And just one final question here would be on the Pharmaceutical Waste. It sounds as though that is really ramping up nicely. Any quantification would be helpful. And then, are you seeing any type of heightened level of regulation or enforcement at your customer level that is driving that?

We have not seen any more push by the regulators, but there has been a steady push over the last few years which has been the impetus for adoption by customers. As I mentioned, we had a really nice quarter of sales. We've got a healthy pipeline of orders that we continue to work. And then go ahead and get the installs in. It remains for us a $200 million plus opportunity.

Okay great. Thank you.

Scott Schneeberger, Oppenheimer.

Thanks guys. Just want to pick up on the prior question with regard to some incremental clarity on the acquisitions. I know it's five international. Could you remind us how many domestic? And I know you said 60/40 on SQ/LQ. Was that overall or was that domestic? And then specifically, did you do any patient communication acquisitions in the quarter?

There were a total of 11 acquisitions, 6 were domestic and 5 were international. As I said, three in Spain, one in Japan, one in Romania. Those were all regulated waste transactions. On the domestic front, there were four patient communication deals.

Thanks. Should we be looking for a lot of those now? Are you at a comfort level where you're ready to really ramp on that front? Hearing four sounds aggressive.

I think they were smaller. I wouldn't read anything into that. The team is working on all fronts, both on a regulated waste, on the patient communication, on the pharma. There's multiple areas that they're working on, both domestic and international.

Thanks. Couple more for me. One, Frank, you alluded to obviously a strong recall quarter and you said you saw strength into 2Q as well; less visibility out beyond. Could you just take as an incremental level deeper or two on what you are seeing in this quarter that makes you feel comfortable about it?

Obviously we are in the quarter Q2 right now and recall obviously does not have that long forward-looking stable part as we have in med waste through our contractual relationships and through the relationship with our customers. But no, I think the recall looks good for Q2, and that's the signal that we wanted to give, which is also why our guidance of the bottom end came up nicely.

Fair enough. And then you talked a bit about gross margins and EBITDA margins. I want to hone in specifically on SG&A. That was a little better than we expected in the quarter. Obviously it's not what we expected in gross margin. That's been discussed at length. But could you speak on this call to SG& A and how you would look at it over the remaining quarter of the year? Thanks.

I think if you look for the year to be in the mid 18%s as a percent of revenue -- and again, that percentage is SG&A, stock option expense and amortization.

Thanks.

Shlomo Rosenbaum, Stifel Nicolaus.

Most of my questions have been answered. I have a couple of housekeeping ones. Can you go over the EBITDA breakdown for the U.S. and then international?

We -- again, you've got to wait till the 10-K comes for that final. So you will see that in the 10-K.

Okay.

Or 10-Q, sorry.

And then in terms of the growth internationally, was I right in catching that it was like 3.5%?

It was 5% on international, so it was 10% for SQ, 8% percent for LQ, and 5% for the international -- there was internal growth.

Okay. And if you do the math -- just off the press release, it looks like the internal growth was 6.1%. Given the weighting off of the other items that are there, I would've thought that you would be the mix would have come out a little bit differently. I'm sorry, I'm going to take that one off-line. I'm going to go to the next one. Just in terms of what was the change in fair value or other that was being excluded from expenses in the numbers?

We had a party that exceeded their respective expectations. There was an earnout on it, and they achieved their earnout. And when you do these transactions, you have to estimate those earnouts early on. You may sometimes be a little bit lower on those earnouts and as a result, you get that kind of a picture. In this case, that now goes to the income statement instead of to the balance sheet.

Okay. And then just one more question on the notifier communications aspect of the business. When you are building it out, are you looking for geographic density, or how does that work exactly in terms of where you are making acquisitions and how you're thinking of that?

I think it's both. We look obviously at geographic expansion. As well as tuck in acquisitions. And then we also over the years have increased capabilities. Good example in our recalls returns business, the capabilities got enhanced by acquisitions. Our audit functions, for instance, were acquired, and then we expand on those.

So with your acquisitions, are you -- right now, are you expanding geographically with that, or is there capabilities that you're adding with each of the acquisitions?

It's all of the above.

All right. Thanks a lot.

David Manthey, Robert W. Baird.

First of all, in terms of your pipeline, this may be one of those questions we ask every quarter and you say you don't disclose it, but do you talk about the percentage that is international versus domestic?

No, we don't break it out.

Okay. That's what I thought. And second, Forex, as you look at where the exchange rates are today, is it safe to assume that the impact will be even more negative next quarter than it was this quarter?

I don't know if it's going to be more. Both sterling and euro drive that. They've been fairly stable, and who knows what's going to happen in our guidance. We've kept it fairly stable, so the impact we saw in Q1 versus our previous guidance is carrying a little bit through the rest of the year.

Okay. All right. If you look at the percentage of LQ and SQ that are multi-service remaining somewhat constant -- I guess that implies that you are not net outgaining your acquisition pace. Is that disappointing to you? What is the impediment from moving the needle faster? It would seem like that would be easier to do than just keeping up with the same pace of acquisitions.

Again, it shows again in the growth rate -- both SQ, LQ strong -- and those are driven really by those multiple services. So I think you need to keep looking at the growth rates. If we stay in that 8% to 10%, 5% to 8%, then we're clearly on track with respect to the growth in the multiple services.

All right. Are you implying that the size of customers that are taking on the services or the revenue contribution is greater than the percentage of the number of customers?

I think it certainly contributes. I think the number of customers isn't the only factor. You also need to look at -- it's both quantity but also what kind of services are getting added. Yes.

Exactly. You might have a customer that starts out just with the medical waste services and adds later on sharps management service and later on Pharma Waste services, and then maybe later on adds Integrated Waste services. Well, as far as looking at just customer count or percent of customers, that would still be -- think of that as one. But the revenue stream might have quadrupled over that time period.

That makes sense. The pace of mix shift from LQ to SQ in your international markets. Is it been your experience that that mix shift pace has been about the same internationally than you've seen domestically or is it different, and what do you expect going forward?

It's growing. And it's on track. I think they are doing a nice job internationally to look at the small quantity opportunities. Every country is at a different phase.

Okay. And then finally, noncontrolling interests, is that -- I'm assuming these are consolidated JVs that you own more than 50% or something. Maybe I'm wrong on that, but could you talk about what's subject to the noncontrolling interest?

We have some partners in Brazil; that's really the largest one. And so that is a kind of -- you could say a JV environment style where you do have that noncontrolling interest be then on the balance sheet. Yes.

And that's the primary one or the only one that's out there?

That the primary one.

Very good. Thank you.

Jason Rogers, Great Lakes Review.

Hi guys. Looking at 2012, I think you said last quarter you expect your DSOs to be at 58 to 61. Is that still the case?

Yes.

Okay. And what was the debt leverage ratio for the quarter?

It was 2.4. And that's a debt to EBITDA. That's our covenant calc.

Okay. And with HWS now fully integrated, what level of EPS accretion are you baking into your guidance for 2012 there?

That's included in our guidance. And it was as expected.

Okay. Thank you.

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

Well thank you. In closing, I'd like to take a moment to personally thank Rhonda and all of the administrative professionals that work so hard every day here to help build Stericycle. We all thank you for your hard work and effort in keeping us on track as we continue to build value for our shareholders. Thank you everyone. Talk to you next call.

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