Stericycle Inc (SRCL) 2012 Q2 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 second-quarter 2012 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. 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 this Company's Form 10-K, 10-Q's, 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 second quarter are as follows. Revenues were $468.9 million, up 14.3% from $410.4 million. In Q2 of 2011 an internal growth, excluding returns and recall revenues, was up 8%. Domestic revenues were $337.9 million, of which $308.9 million was domestic regulated waste and compliance services revenues, and $29 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 $131.1 million and internal growth, adjusted for unfavorable exchange impact of $8.1 million, was up 5%.

Acquisitions contributed $36.6 million to the growth in the quarter, of which $2.7 million related to the recalls and returns business. Gross profit was $209.5 million, or 44.7% of revenues. SG&A expense was $88 million, or 18.8% of revenues. Net interest expense was $12.7 million and net income attributable to Stericycle was $67.6 million, or $0.78 per share on an as-reported basis and $0.81 adjusted for acquisition and other non-recurring expenses.

Now the balance sheet. At the end of the quarter, the revolver borrowings were approximately $516 million. The unused portion of the revolver debt at the end of the quarter was approximately $328 million. Our capital spend in the quarter was $16.8 million, and our DSO was 58 days. Q2 year to date, the cash provided from operations was $188.8 million, which includes $9 million of cash received in the second quarter from a customer to be used for recall product reimbursement.

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 eight transactions; three domestic and five 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 535,000 accounts, of which over 519,000 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 Steri-Safe and clinical compliance offerings. And 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. As customers adopt our multiple services, this can more than double or triple their revenues. For 2012, we anticipate internal growth rates for SQ to be at 8% to 10%, LQ 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 shareholders. A special thanks to our Spanish team for their great cash collections efforts in the quarter.

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 $3 million, and annualized are approximately $41 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 $3.26 to $3.29, which we are comfortable with. We believe analyst revenue estimates for 2012 will be in the range of $1.86 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 $322 million to $330 million, with CapEx anticipated between $63 million to $65 million. In closing, we are very pleased with our Q2 results and excited about the multiple growth opportunities for 2012 and beyond.

Thank you for your time today, we'll now answer any questions. Mike, you can open up the Q&A queue.

(Operator Instructions) Your first question comes from the line of Ryan Daniels from William Blair. Your line is open.

Let me get a couple of quick housekeeping out of the way. Frank, can you walk us through the gross margin performance during the quarter, going through some of the various puts and takes that moved that up and down with FX and makeshift in acquisitions?

Yes. We ended the last quarter at 44.6%. The large retail and healthcare contracts that we also talked about last had about a 0.2% negative impact, foreign exchange was about at an 8 basis point positive and then growth in the business and other factors added about 0.2% and that gets you to your 44.7%.

Okay, perfect. And then any more color on the M&A activity? It sounds like not a lot of contribution this quarter but a pretty good acquired run rate, I'm curious if you can go through internationally maybe where those are located and then in the U.S., the three, are those medical waste, patient communications, any color there?

Yes. So there's eight acquisitions; there were three domestic, five international. The international ones, there were three in Spain, one in the UK, one in Argentina, and then of the $41.6 million in total for annualized revenue, in total there were six regulated waste and two PC patient communication deals.

Okay, perfect. And then you mentioned the strong collection efforts in Spain, I'm curious. Outside of the FX headwinds you saw, are you having any issues with the macro storm over there, be it collections or slowing organic growth, just what's the outlook for the international operations at Stericycle?

We had a very good collection quarter in Spain, which resulted in our DSO coming down two days. Spain is performing totally on track. They've completed, as I mentioned, three additional acquisitions in Q2. On the overall European marketplace, we do think that the assets potentially are available, that's positive in a turbulent market that may become for sale and it gives us an opportunity, and I think Spain is a good example of that. We see opportunities into new services. Overall the volumes are fairly steady and our multiple services strategy is helping us reduce cost for our customers.

Okay, perfect. And then last one and I'll hop off into the queue. Healthcare Waste Solutions I know we're anniversarying that in the second quarter with a year since its being closed and I think you've had somewhat of an approach to be more hands off on cross-selling and upselling within the first year. So I'm curious. Now that you've anniversary that, is it helping drive growth in the LQ to where you're selling more into that customer base? Thanks.

So Healthcare Waste Solutions on track, did perform as to the synergies that we got out of that transaction. Cross-selling started there probably a little bit sooner but they already had a strong cross-sell with their own resource management tool that we have now blended with ours. So it's a little bit less of a timing thing there.

Okay, thanks again, guys.

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

Good afternoon, guys.

Good afternoon.

Just a fairly softball question, actually. In the first quarter's queue, you disclosed a deposit for pending acquisition. Was that utilized in the quarter, or applied in the quarter, or what does that relate to?

No, we had a small escrow here, it's associated with a future acquisition, has not yet closed at this time, it's not that material.

Right, understand. And then just to clarify, the acquisition revenue in the quarter was what?

$3 million. So the deals we closed in the quarter contributed $3 million to the revenues.

Okay. And then on the press release, though -- oh, that was last year, the $36 million, is that right?

That was year over year, yes.

There you go, I'll hop out. Thanks a lot.

You're welcome.

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

Hi, it's Scott Levine. My question with regard to the margins, which trended up sequentially on a gross basis, I'm not sure if you had mentioned this in response to an earlier question, but do you have the fuel as a of percent of revenue or maybe an indication as to how much of a beneficial impact that was?

I think fuel as a total maybe contributed about 0.1% favorably to the overall gross margin. If you look at it on a pure measurement on those parts of the business that are energy and fuel dependent, we went from 5.8% to that revenue to 5.6% but that is not all of the revenues within the Company.

Okay. And did you give the leverage calculation of debt to EBITDA?

No. Debt to EBITDA was at 2.33 and there again, we have our average cost of borrowing right now at about 3.4%. Again, with long-term fixed rates continuing to get lower, we really also continue to evaluate to term some of the debt out maybe in the future.

Got it. Can you give us the size of all the acquisitions that you've done recently in Spain? How large is the revenue base there roughly at this point?

We don't break out individual countries. It is part of our segment called Europe as a whole.

Got it. Anything new with respect to the Eco Waste divestiture?

Yes. On the Eco Waste divestiture, based on the EU ruling we are in the process of divesting that asset. We expect to complete that by the end of the third quarter.

Rough idea about how much revenue is associated with that?

If you think on the revenues associated with that it was immaterial. It was GBP1.8 million on the revenue side.

Got it, great. Thanks.

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

Thanks, good afternoon. I think you said two acquisitions in the quarter in patient communication, Charlie, could you give us an update? I get the sense that this year is going to be a feel out for integration and how well and how quickly you could ramp that up. Could you just give us a progress report there? Thanks.

We continue in 2012, as you know, to build out that platform, add some service capabilities and continue to look at how we can sell this to our current customer base and at the same time how do we integrate these acquisitions that we acquired over time. Still early and we remain excited about the opportunity, though.

Okay, great, thanks. Should we anticipate a greater mix of acquisitions in the near term, or is that something a little bit farther out?

I would stay put on that, you'll see.

Okay. Comment on recall in the quarter, it was above what we were expecting. Could you just give us a feel for what the environment is right now and are there any big projects that may trickle into the coming quarter? Thanks.

No, our guidance is $110 million to $120 million so the same -- so the expectations are still the same as the last quarter. It's a business where you don't totally know yet what next quarter is but we feel that the business keeps running as expected according to that guidance.

Great, thanks. And then lastly, this Alameda County vote and the implications of a potential ordinance to tell pharmaceutical companies that they'd have to pay to get rid of pharmaceuticals, could you just give us your thoughts on -- I think that was unprecedented and if this becomes a norm, if this is something that gets pursued, what are your views on how it might affect your business?

Yes, Scott, as you know, first of all in the pharmaceutical waste opportunity we focused on the hospital market, a little bit on the SQ market. We monitor the household pharmaceutical. The ordinance that you're referring to in California that's not unique. There's been some talk around the country and in some states and also some municipalities to implement that and hold the pharmaceuticals accountable to pay for that proper disposal. I think it's too early to tell if that will become a trend or not. Obviously, the more regulations that come around household pharmaceuticals it could become an opportunity for us in the future but right now our focus has been on our core business, which is the LQ and the SQ side.

Great, thanks for taking all the questions.

Your next question comes from the line of Erin Wilson from Bank of America. Your line is open.

Hi, a quick question on patient communications. Do you ever plan on breaking that contribution out on a quarterly basis when it comes to some critical level?

It's not material yet for us to break it out. Again, there's pretty straightforward SEC rules when something is material and then it will be.

Okay. And I noticed that Sharps Compliance launched a web based OSHA compliance and blood-born pathogens training program, is there any -- do you have any concern about that, or are you seeing others out there that are bolstering up their ancillary services offerings?

Yes, there's been a lot. Over the years many companies have offered a compliance program so we don't see the market changing all that much. We saw that as well but that's been ongoing from different competitors around the marketplace. We continue to look at our program, make enhancements to it. Our program looks a lot different every year by adding additional services and capabilities to our own program.

Okay, great. Thank you so much.

Your next question comes from the line of James Francescone from Morgan Stanley. Your line is open.

Thanks for taking the question. This is actually James in for David. First just a question on operating margin and how you're expecting those to trend through the rest of the year. For the first half of 2012, it looks like EBIT margins are down around 70 BIPs year over year. I haven't quite had the time to run the calculations of what your guidance for the back half implies, but it does sound like you're expecting some improvements, what would be the big drivers there?

I think obviously our continued drivers are selling services that have higher margins, making the improvements on acquisitions that we've made from a synergistic point of view. The guidance on a gross margin level is sequentially about 10 to 20 basis points improvement quarter over quarter and Q3 there's not a lot of change with respect to that because the acquisitions that we did in the prior quarter don't really have a changing effect on that trend. If you look at overall the SG&A levels, they probably are going to stay fairly close to the level we're at right now, coming down slightly between now and the end of the year.

Okay, that's helpful, and then a question on tax. Could you break out what the non-GAAP or adjusted tax rate was in the quarter? Looks like that might have been a little bit lower than it usually has and I'm wondering if there were any one-time impacts in there?

No. The as reported for the year to date is about 35.9% and that's what we anticipate the rate for the year to be at about that 36%.

Okay. Okay, great. And then on currency, could you, one, from a high-level perspective what's your approach to managing currency risk, either considering natural or synthetic hedges, and could you give us some sense of what the FX outlook is like for the rest of the year at current rates?

So if you think about our business it's really a services business so we are naturally hedged in each country. We don't make products in one country and send it to another, so our risk is really consolidation, which you don't hedge for. The outlook for the year it's everyone's crystal ball. We really look at where rates are right now, trying to not get too fancy in the future. We do think, if you think about the rest of the year, there was about $23 million added from a point of view of acquisitions. Definitely in the second half we'll have a little bit of an impact because the euro has certainly dropped a little bit. So in the guidance setting it probably was about to $13.5 million impact versus our previous guidance.

Great, very helpful. I'll jump back in queue.

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

All right, thank you. Good afternoon. First off, could you talk about your hit rate selling some of these ancillary services to med waste customers that you've had for awhile, maybe two or three years, and if you can compare that to your hit rate of acquired customers? Let's say that you've gotten through acquisitions over the past year.

I think, like we've said for quite a few years, once a customer becomes a Stericycle customer after an acquisition, then we bring them into the fold, introduce them to our services, our sales people begin to contact them, but I can give you an antidote. Year to date right now -- I think we talked about this on some prior calls -- one of our multiple services, the pharma waste service, our installations in hospitals were up 20% this year versus last year. I guess just another antidote is that our sales team as a whole is running above their internal plan and you see this reflected in the growth rates for the Company SQ and LQ, which are at the higher end of our range.

Okay, thank you. And second, I was wondering if you could discuss the pace of the mix shift you see from large-quantity to small-quantity customers within your international markets and if you could compare and contrast that with the historical pace of U.S. conversion?

A good example of that is the UK where right now the SQ is in the low 30s as a percent of revenues to the total revenue for SQ. When we purchased that business it was nearly only 2% and that was in the 2005, 2006 timeframe. So that kind that gives you a period of time through which the business has fairly dramatically already shifted. Spain is a good -- second example. A little too early but we've done some acquisitions in the SQ sphere and that has started to build density up and they are definitely ahead of their numbers and on track. So it's working and we'll continue to work the system to make the SQ a larger part of the businesses overseas.

Thank you very much.

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

Thank you, good afternoon. Relative to the operating -- the FX impact, I should say, $8.1 million on sales, what kind of impact does that have on operating income?

If you think about our international business it's predominantly LQ in larger percent so the impact is far less. Probably about at the end, somewhere in the area of a penny to two pennies if you think about it from an entire year point of view in the guidance. So what we had as $3.24 to $3.28 before a penny to two pennies is the impact on a full-year basis.

Which is a negative impact, correct?

That is correct.

Okay. And just wondered if you could provide any insights into what you're seeing on a competitive nature, either domestically -- or I should say and domestically, as well as internationally?

Well, I think as you've heard us say many times it's a very competitive business with a lot of competitors large and small. That being said, we continue to manage our way through and our sales team does a good job and, again, I think you see it in our growth rates. But this is a business where people will always be looking to try to enter and that's the American way.

All right, thank you.

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

Hi, guys, thank you for taking my questions. Just to follow up on a question that was just asked. The currency headwinds are affecting your guidance negatively by $0.01 to $0.02 for the year, is that correct?

That is correct.

And am I understanding this right that the tax rate guidance went from $0.37 to $0.36, which is a positive impact of like $0.04 to $0.05?

No. If you looked -- we last time said in the guidance that the tax rate was somewhere in the mid $0.36's and now it's about $0.36 for the year. You may and did get a penny out of that in Q2. A little bit just on a year-to-date basis there probably is $0.005 to $0.01 in the second half and then you have your acquisitions that are adding a $0.01 to $0.01 and that kind of offsets the $0.01 to $0.02 headwinds on the foreign exchange.

If I'm looking -- instead of it being $0.37 being $0.365 so that's about $0.02, $0.025 so you assume that that's a little bit more than what we're getting -- or roughly the same as what we're getting from offsetting the FX, is that right?

I don't think the math is right that you're doing because of the first quarter we were a little bit below the $0.37 and at that point the guidance that we had set was saying use the mid $0.36.

Okay, I will go back to that. And then can you just give us some of the dynamics on what's going on in SG&A? The gross margin's obviously moving up and you're seeing the EBIT margin moving down. I was wondering, is there timing of acquisitions? You did a lot more acquisitions this quarter than last quarter. Are we seeing some of the timing impact the SG&A that's moving the margin down?

Yes, we did have the investment in our large retail and healthcare contracts that are starting up. The acquisition makes -- impacted that slightly from a percentage. Then we did, because we were ahead of the game, did some strategic investment spend in growth initiatives.

Could you just give us an example of what strategic investment spend might be?

Well, those are investments in our programs like Steri-Safe and factors of how we can make improvements in our business. There's always a list of activities that we have that we would like to do but we want to be sure that they're not totally negatively impacting what we're doing trend wise.

Okay. And in terms of the acquisition revenue contribution -- I think someone might have alluded to this earlier -- we're seeing just last three quarters a decline, is that -- on a sequential basis. Is the right way to look at that that things are just bumpy and you don't close acquisitions on a straight line basis, or is it really just the pipeline of acquisitions is changing, or the ones you're going after are smaller?

No, I think you need to look at two different numbers. In the quarter the contributions to growth were $436.6 million. That's the difference between how much the revenues were on acquisitions that have not been yet in the business for 12 months between last year and this year. In the quarter itself we had $46.5 million in revenues in acquisitions but in the prior year there was $9.9 million. A lot of that was attributable to the HWS transaction. So the contribution to growth is $36.6 million, but in the quarter itself was $46.5 million.

Okay, I think I'm going to delve into this little more off line. Thank you very much.

Your next question comes from the line of Kevin Steinke from Barrington Research. Your line is open.

Good afternoon. Just wanted to follow up on energy a little bit and with fuel prices coming down recently, does that have any impact on your outlook for fuel surcharges in the second half of the year, or is it not material enough a move to make a difference there?

Energy was down just slightly from 5.8% to 5.6% of revenue for the revenues that were affected by transportation for the quarter. We have surcharges that are tied to our contract language and of course, as fuels a decline then the surcharges would tend to roll off. I guess it's anybody's guess though what fuel's going to do so if it moves up our contracts also give us the flexibility to deal with that.

Okay. And then internationally, are you still in the process of renegotiating or discontinuing LQ contracts that are lower margin and how far along are you in that process, or is that an ongoing process?

It's actually an ongoing process because you're dealing with large customers and there's contract terms. As we worked through the process a while back here in the States, it's something that takes place over time and then as you acquire new contracts you continue to work through those. So I guess I would I guess I would characterize it as ongoing.

Okay, but there's not necessarily a large chunk right now that you'd like to work through and then that eventually tapers off and it's just more of a one offers?

It's a continual program. And as I said, as new contracts come into the fold through acquisitions we'll work them too.

Great, okay, one last one. I'm wondering if you have any breakout on LQ versus SQ for the regulated waste acquisitions that were done during the quarter?

It was about 58%, 60% SQ and 42% LQ.

Great, thanks. That's all I had.

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

Okay, thank you. Congratulations. Just really a quick couple of questions here. On the pharmaceutical waste, if you can just update us again on the market size there and where you think in terms of revenues how far you're penetrated?

Well, I think the market, as we said before, is equivalent or larger than the Bio Systems market, which means it's probably $200 million-plus. We continue to have good success and see high demand. This is also probative and may have affability in other international markets. So I think from a penetration standpoint we still have a lot of runway.

And just to be clear, when you said -- I think you mentioned the hospital market, you're up 20% or so year to date in the large quantity pharmaceutical waste, are you doing anything with local government? I know you talked a little bit about this earlier. Are you doing any type of contracting with local governments?

Yes, Richard, we do a little bit on the SQ side of the house where we have some doctors that have some pharmaceutical waste. We do have a program for that that's included in the SQ growth. Some municipalities on some of the hazardous waste collection days we're contracted to take away some of those pharmaceuticals. It's not a big part of the business. We also handle pharmaceutical waste coming out of pharmacies and retail chain customers so there's other opportunities. The big one right now is in the hospital space. We think it's one of the bigger markets and that's why we spent a lot of time focusing on that part of the business.

Okay. And then with that being up 20% year to date I'm curious, as contracts -- large quantity contracts or hospital contracts come up for bid, what percentage -- when you renew a contract or re-win one, what percentage are you selling multiple services here domestically?

Well, our multiple services -- yes, our multiple service domestically, those services are available for all of our hospitals so it's not when a renewal comes up. With respect to when a renewal comes up, these are normally separate contracts so we have a separate contract for regulated medical waste, a separate contract for pharmaceutical waste, for our sharps service, so it's not really where we're waiting for the renewal for an opportunity to sell the additional services to that customer.

Okay. I guess I'm trying to get a feel of how much the market is going to a fully bundled service offering and how that is developing in terms of the full bundled services?

I don't think it's a bundled service in the classic sense of that term. As Charlie just said, these are multiple services that customers could opt to take individually or they can take all three or all five or whatever we're offering. We're not bundling and I don't really see the market going to a bundled mode. That's just -- that's how we're seeing things right now.

Okay, and one final question, I know we've had a lot here. But with the acquisition revenue that you guys called out, you mentioned something with respect to recalls. Was there an acquisition on the returns management recalls business?

No. The one that we mentioned is sometimes needed to calculate the internal growth [matters] so that's why I gave the number, but this was an acquisition that was done in prior quarters.

Okay, great. Thank you very much.

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

Great, thanks, Mike. I want to thank everybody participating on today's call. Enjoy the rest of the summer and we'll speak to everybody again in October. Have a great night.

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