Stericycle Inc (SRCL) 2012 Q4 法說會逐字稿

Good afternoon. My name is Kyle and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter 2012 Stericycle earnings 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)

I'd now like to turn the call over to Laura Murphy, Vice President of Finance.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink,CFO; Rich Kogler, COO; and Charlie Alutto, 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 Form10-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.

Thank you, Laura. The results for the fourth quarter are as follows. Revenues were $503.6 million, up 12.8% from $446.6 million in Q4 of '12. And internal growth, excluding returns and recall revenues, was up 8.4%. Domestic revenues were $355.6 million, of which $332.7 million was domestic regulated waste and compliance services, and $22.8 million was recalls and returns. Domestic internal growth, excluding recalls and returns revenue, was up 10%, consisting of SQ up 11% and LQ up 9%. International revenues were $148.1 million, and internal growth, adjusted for unfavorable exchange impact of $2.3 million, was up 5%. Acquisitions contributed $31.1 million to the growth in the quarter.

The gross profit was $227 million, or 45.1% of revenues. SG&A expense, including amortization, was $95.6 million, or 19% of revenues. Net interest expense was $13 million. Net income attributable to Stericycle was $70.1 million, or $0.80 per share on an as reported basis, and $0.88 adjusted for acquisitions and other non-recurring expenses.

On the balance sheet, our covenant debt to EBITDA ratio was 2.24 at the end of the quarter. The unused portion of the revolver debt at the end of the quarter was approximately $616 million. In the quarter, we repurchased 457,156 shares of common stock in the open market in an amount of $41.2 million, and we have authorization to purchase an additional 3.8 million shares. Our capital spend was $13.6 million and our DSO was 59 days. The full year cash provided from operations was $387.4 million.

And I will now turn it over to Rich.

Thanks, Frank. Worldwide, we continued to use our strong free cash flow to drive our growth through acquisitions. In the quarter, we closed 10 transactions; 5 domestic and 5 international. The international acquisitions consisted of two in Spain, two in the United Kingdom and one in Chile. Our worldwide acquisition pool remains robust, with over $100 million in annualized revenues in multiple geographies in lines of business.

At the end of the quarter we had approximately 541,000 accounts, of which approximately 525,000 were small and the remainder were large. The strong internal growth rates we experienced in this quarter resulted from more and more customers adopting our multiple services. One of our newer services contributing to growth is StrongPak. StrongPak is one of our regulated waste service offerings which helps retailers manage hazardous and pharmaceutical waste in a compliant manner. Increased regulatory scrutiny and fines for non-compliance have driven demand for StrongPak. We are excited about our future growth, because our customers continue to adopt additional services such as StrongPak. These additional services can more than double or triple existing customer revenues.

In closing, we want to thank our worldwide team for their strong performance in 2012. We are especially proud of our team members who were impacted by Hurricane Sandy. They continued to support our customers while their own lives were disrupted by the storm. Their actions demonstrate their strong commitment to our customers and their fellow team members.

Now I'll turn it over to Charlie.

Thanks, Rich. I would now like to provide insight on our current outlook for 2013. Please keep in mind that these are forward-looking statements. Revenues from the 10 acquisitions were approximately $8.4 million in Q4 and annualized were approximately $50.5 million. Keep in mind, our 2013 guidance does not include future acquisitions, divestitures, integration, and acquisition-related and other non-recurring expenses.

We believe analyst EPS estimates will be in the range of $3.65 to $3.69, including the impact of the private placement which was funded in Q4. We believe analyst revenue estimates for 2013 will be in the range of $2.11 billion to $2.14 billion, depending on assumptions for growth and foreign exchange rates. We anticipate 2013 internal growth rates to be -- SQ, 8% to 10%; LQ, 5% to 8%; international, 5% to 8%; and recall and returns revenues between $105 million and $120 million. We believe analysts will have estimates for free cash flow between $353 million to $357 million. CapEx is anticipated to be between $65 million to $70 million. In closing, we are very pleased with our Q4 and 2012 results and excited about the multiple growth opportunities for 2013 and beyond.

Thank you for your time today. Kyle, you can now open the Q&A line.

(Operator Instructions)

Ryan Daniels from William Blair.

Maybe, Frank, I will start with a quick housekeeping for you. Does the extension or re-extension of the workers opportunity tax credit have much of an impact on your thoughts for the effective tax rate for 2013?

No. For '13, our guidance is to remain in about the 36% as a tax rate.

Okay. Great. And then you mentioned specifically the StrongPak initiative being novel and driving growth, and you talked about that a little bit on the prior calls. Can you give us a little bit more color? I am curious if that is all route-based pickup or do you have any mailbag solutions there, given that the retailers are probably producing less medical waste?

It's actually a route-based pickup for retail. And just to give you a flavor for it, we purchased the company some years ago. But we are now past the pilot phase and we are offering the service nationwide, which is why it's becoming a strong growth driver. To give you some idea, there is about 750,000 retail locations that we can access of customers in the US. We estimate the market opportunity here could be slightly over $1 billion.

Is that mostly waste-related to more delivery of health care in a retail location, so things like flu vaccinations that the pharmacies are doing more, or mini clinic type services, or is it a lot broader than that, outside of medical waste and into other waste areas?

It's further than that, Ryan. It would be items that maybe were mislabeled or returned, items that could have batteries as part of their offering. It could be a chemical, if you go into a lot of retail outlets. Obviously, they sell a lot of cleaning chemicals. Some of those are hazardous upon disposal. Aerosols, things of those nature. More of a lab packing and hazardous waste service. Obviously, we are leveraging that medical waste. We're already picking up from some of these locations, and some of the pharmaceutical waste we also get from those retail clinics that have pharmacies on site.

Got you. Thanks for the call. I'll hop back in the queue.

Al Kaschalk from Wedbush Securities.

I just want to focus on one area in particular. The multiple growth that you made, you commented about '13 and '14. And on previous calls, you set us up for expectations on patient communication, in particular. So maybe I'll throw it back to you as to what you want to elaborate on. But obviously, that's an area of interest on our side.

And then also the StrongPak, which you just talked about, which are things that you've talked about in the past. But what's helping the transition to services to get the multiple services? Are there any in particular you want to call out? And then, secondly, update us on the patient communication activity.

Yes. Let me talk about 2013 growth drivers for us. From a regulatory front, obviously on the LQ side, pharmaceutical waste continues to do well. Compliance continues to drive sales in the hospital market in the US. As Rich mentioned in his commentary around StrongPak, we certainly have benefited from regulatory action and fines that have been levied against some retailers in some of the states in the US. That's certainly two areas where we've seen growth, not only now at the end of 2012, but we anticipate continued growth in 2013.

I think on the question you had on patient communications, Al, we obviously did a lot of studying in 2012. We are very excited about the opportunity. We are moving forward with this service for both our SQ and LQ customers. In 2013, we'll continue to make investments in this business. And long term, we see opportunity for both growth through acquisitions and internal growth.

And obviously, the main growth drivers continue. SQ being SteriSafe. Clinical services on the international front. And the sharps management service on the LQ side of the business.

All right. Charlie, in terms of the acquisition internal growth on patient communication, are you at a point right now, and based on the studies and your history of the way you guys have invested in markets and services, do you have enough platform today to then start the niche acquisitions or smaller acquisitions, or is this something that could be forthcoming in a more larger size than, say, a $3 million- to $4 million-type transaction?

Yes. From a capability standpoint, we've done acquisitions, obviously, in 2011 and now in 2012 that have given us a really good platform, both on the SQ and the hospital, the LQ side of the business. So obviously, as we look at 2013, we'll look at this acquisition as a tuck-in strategy for the business going forward. From a platform standpoint, we feel really good about the capabilities that we have built on the platforms we've acquired to this point. And now moving forward, we'll look to see if we can take some advantage of some of the synergies in deals going forward.

Okay. Finally, if I may, could you talk about, on the acquisition front in the quarter, the composition of those not by geography, but by service mix?

I think the composition in this quarter was 20% SQ, 80% LQ. We did 10 deals. Five were domestic, five were international. There was one in the patient communication field and nine in the regulated waste.

Thanks a lot, everybody.

Scott Schneeberger from Oppenheimer.

Jumping to StrongPak, I believe it was just mentioned that there are 750,000 retail locations, and that's the target market. I think you guys had said, not too long ago, you had at least 2,000. Are you open to giving us an update on how penetrated you are thus far?

We don't get detail specific to the SQ and quantities by sector.

Okay. And is that -- Frank, could you correct me? It's mostly done by chain, right? You nationally contract with a chain? Or is this more of a mom and pop situation on how you work with retailers?

Right now, Scott, it's been the larger retailers. And we work by chain, not necessarily nationally. Some of these contracts are regionally based, depending on the retailer and how they want to comply with the regulations. Obviously, some states are more stricter than other states, from an enforcement standpoint. But don't necessarily think that because we have a chain, we have it nationally. It varies by customer.

Okay. Thanks. Switching up a little bit. For recall, a relatively soft quarter versus your run rate. And I notice you kept the guidance intact. Any comments on how that's trending into January and just things that are going to be driving that in 2013, good or bad, please?

I think if you followed recall, and I know you have with us for several years, you recognize that it is a lumpy business. And we look at it on an annual basis. That's how we give our guidance and that's really how we look at that business. What we have noticed is that this year, for example, and towards the end of last year, the number of recalls, just sheer number of customers we are dealing with, keeps increasing. In some quarters, the size or dollar amount of each recall could vary.

But we think overall it's a very positive trend that long term, the more customers that we bring into the family, the more opportunity we are going to have. And right now our guidance is between $105 million and $120 million for the year.

Thanks. And then lastly, on LQ growth, quite robust in the quarter. You maintained the guidance for 2013, but you also alluded to it being strong as you enter 2013. And you mentioned compliance-driven and touched upon it a bit. Could you take us a level deeper as to really what's behind it? What's behind this elevated growth and how long you believe it can persist? Thanks.

I think, as Charlie alluded to, it's the, call it, the original growth drivers. The fact that biosystems or sharps management continues to be very well accepted. And then things like pharmaceutical waste, which has been hot all last year, continues. And then we are moving into other directions, too. I think those who follow us, and I know you do, we're conservative people. But we are very pleased with the growth we are seeing in SQ and LQ.

Okay. Thanks. I'll turn it over. Thanks, guys.

Shlomo Rosenbaum from Stifel Nicolaus.

Maybe you could comment a little bit about the margins. The EBITDA margins started to come back up last quarter. They are up again sequentially by, it looks like, 20 basis points this quarter. Could you talk about what changed? You were on a downward trajectory for about a year, year and a half. Last quarter, one of the comments you made was that patient communications had started to be added in. Can you give us some more color, on a sequential basis, what's contributing to the margin expansion?

In the quarter, the sequential was really the gross margin improvement. From a gross margin point of view, we had about overall a 23 basis points uptake just in the operational side of the business. Acquisitions and foreign exchange were at 3 point BPS drags, almost nothing. I think that a lot of the lift in the quarter was to continue gross margin improvement in the business, operational, and then selling the services with the higher margins at higher rates. That continues to contribute. In the past, the slight drag in some of the quarters is really acquisition driven and a mix of bringing those acquisitions on top of our business.

You have done a significant amount of acquisitions during this quarter, as well. Is it less of a drag because they are regulated medical waste so there is less -- that's additive right away when you bring it into your business?

The average margins for the businesses that we bought this quarter were close to the company average.

Okay. And then, what was the litigation settlement for?

The litigation settlement was, first of all, for the New York that was announced. And there were two others relating to prior acquisitions on the litigation on those that we settled with people.

Okay. And just to follow up a little bit more on the patient communications question. Is patient communications continuing to be additive to the gross margin, or where does that stand in terms of a proven out business model?

As we've said in the past, the patient communication is improving nicely in gross margins in total. It is about at a company average, but coming up.

Okay. Thank you very much.

Jason Rodgers from Great Lakes Review.

Looking at your other income, there was a slight amount of other income in the quarter versus an expense last year. I just wondered what was comprised of that?

As a result of the capital gains change rates, we had some notes with respect to sellers that sellers wanted to accelerate at discounts, and we took advantage of discounting those notes and that gave us about a $700,000 impact positive on that line.

Okay. And then looking at StrongPak, is there any potential there for a compliance type of program, or is it just strictly medical -- or I'm sorry, any other kind of waste pickup?

We continue to look at it. Obviously, we have done a good job of selling compliance services on the SQ business. We are now selling compliance in a lot of our international markets. I think at this point, retailers just want to make sure they comply with their consent orders. So their first preference is for us to handle their waste and get it out.

But we certainly think between our services, Jason, and retail for StrongPak, obviously, when retail is pulling and retrieving items on the recall side, that down the road, there could be a service offering tied more to a compliance-type SteriSafe-type offering. But right now, the focus, rightly so for retail, is just complying with these regulations.

Thank you.

Kevin Steinke from Barrington Research.

I just wanted to follow up again on StrongPak here. Just wondering now that it's out of pilot stage, is there much more significant investment that needs to be made to continue to roll out that offering? And how much are you leveraging your existing infrastructure in terms of trucks and disposal facilities with that offering?

I think the answer to your first question, there is always investment that we make in all of our businesses, particularly the high -growth ones. But we do have a good platform. It's not capital intensive. It's a route business. So as the business grows, you add trucks and labor and that sort of thing.

Okay. And I noticed in the quarter that SG&A, including amortization, as a percentage of revenue just ticked up a little bit sequentially, to 19%. Just wondering if, given the top line coming in strong in the quarter, if you decided to perhaps accelerate some investments, and also how you might see SG&A as a percent of revenue trending in 2013?

Yes. For the fourth quarter, the acquisitions we closed on and the related amortization on some of those added about 30 BPS to that. So from 18.8%, 30 BPS up. And then the remaining part of the business, excluding the acquisitions-related amortization, was about 10 BPS down. So that gets you to roughly 19%. For 2013, I think the overall should be maybe modeled at approximately 19%. And that again includes amortization.

I think, Kevin, if you look at it, we think there is a great opportunity. We'll reallocate those resources and make the investments we need to make to take advantage of the market. We are always looking at that.

Okay. Great. And I don't know if you -- how much more detail you would want to get into, but I don't know if you can provide any more color on the size and the nature of the patient communications acquisition that you made in the quarter? Did you add any new services or anything notable with that?

Yes. We did make an acquisition, as Frank said, in the patient communication space. This was a market leader in the hospital patient communication business. It enhances our capabilities in patient communications. To give you a little feel for it, we are now able to offer physician referrals, scheduling and post-discharge calls. So it really rounds out our service offering in the patient communications phase. We had some hospital contracts through some other acquisitions that we made, but this clearly is the market leader in this space.

And this acquisition is a focus on the hospital market.

Okay. Thanks for all the detail.

Erin Wilson from Merrill Lynch.

Hi. Robert Willoughby, sitting in Erin Wilson. Frank and company, can you possibly give us any updates on developments overseas? What's worked well for you over the past couple of quarters, and what kind of changes or what should we focus on for 2013, as it relates to specific geographies or businesses gaining traction?

Yes. We continue to look at the geographies to build route density, Robert. So that's acquisitions in the SQ space. Clinical services, which is the SteriSafe offering, we continue to penetrate that in markets like the UK and Canada and Portugal, and we're looking to expand that into the Spanish market.

And then I think because we've got a large chunk of business on the LQ side, we continue to look at improving gross margins in the international space as well, looking at service paradigms, how often do we pick up waste at those hospitals. But I think it's going to be overall looking at acquisitions for route density and looking to expand some of the additional services like sharps management, like clinical services into both the European and Latin America regions.

And any specific countries in mind? I know you are obviously big in the UK. But where else is -- top three or four markets?

I think really we look at this in all the markets we are in. But if you look at size and opportunity, Spain, UK, and Brazil are some of the larger markets that we're looking at right now. And then, we are always looking to expand in those geographies where we think there is a good opportunity. Our focus continues to be in northern Europe and in Latin America.

Great. Thank you.

Gary Bisbee from Barclays.

First, the SQ and LQ both have been growing above the high end of the guidance for several quarters. And I understand you tend to be conservative. But is there anything in particular you would point to that you expect to lead to deceleration, other than tougher comps when you come up against these?

No, nothing specific. I think it's just a range that we feel comfortable with. No. There is nothing really specific that would drive that in any direction.

And then on the cross-selling success you've referenced throughout 2012. How do the economics compare of a customer that uses multiple services versus only a single one, or if it's easier to talk about just amongst the different ones? Are there some that are better than the core regulated waste, some that are worse? How do we think about that? Thanks.

If you look at a small customer, a base customer without SteriSafe may have margins in the mid- to high 50s. With SteriSafe, that may double the revenue and the entire margin may go mid- to high 60s. So that incremental revenue really improves the margins even further. With the large customer, a base MedWaste customer, margins may be in the mid- to low 20s. And then the incremental services, like sharps management and the pharmaceutical waste all increase that margin profile. And it can triple the revenue with that customer then.

Okay. And then there is probably some rounding involved, but I noticed the LQ customer count didn't grow at all throughout 2012, despite some M&A. Have you been losing more -- and that's grown pretty nicely pretty much every year I can see, going back 10 years. Have you been culling some customers, losing some, or is it more something you point out rounding as being the reason for it?

No, I think your math must be wrong. Maybe I will look at that with you after the call. But we went from about 15,600 to about 16,500.

Okay. All right. And just one last one. You referenced the New York Attorney General overcharging settlement, or at least that's what the release we saw said. Can you give us any color on this in terms of how much of the Company is government, and if there are contracts elsewhere where you don't specifically have pricing in the contract, and thus, could have some exposure to something like this? Thanks a lot.

Sure. This was an investigation that targeted really a small number of our government customers in New York, about 650. The New York attorney general, obviously, alleged that we didn't follow our contract terms. We disagreed with him. But we made the business decision that to avoid legal expense, we would settle. And it is all now settled and behind us. We don't really see anything else to it.

Okay. Thank you.

Stewart Scharf from S&P Capital IQ.

Can you talk a little about the multiples for your acquisitions? And where were the acquisitions domestically?

Domestically, they were -- I don't have the specifics, but they were -- I don't -- I have to follow up with you there where they geographically were. Internationally, two in Spain, two in the UK, and one in Chile. Domestically, I know one was in Texas, but the other ones I can't remember.

The multiple is anywhere from 4 to about a little over 9, on an MPV basis. We are a little bit at a higher end of the range on maybe one of those, due to the strategic side of that acquisition, which really enhanced our capabilities. And the rest of those deals were really in the range of anywhere 4 to 6. And those again were multiples of EBITDA.

Okay. And that's pretty much within the range --

Yes. I think if you look for the year, we were totally in the range 4 to 8 multiples, which is pretty historically been the same. So I think not really a change in how we do deals.

Okay. And what's the pricing environment looking at like right now? Do you see it improving or competitive? And based on specific areas and markets.

I think on the deals, we really don't see a change in the pricing of the market overall, Europe and the US, on multiples. I mean, the competition remains the same. But historically again, in that 5 to 8 multiple is very normal for us on the deals.

And general pricing in the industry?

No real change.

Pretty much the same?

Yes.

Okay. Thanks a lot.

David Lewis from Morgan Stanley.

Frank, I just want to come back to EBITDA margins again, heading into '13. Thinking about your SG&A comments, it does sound like in the back half of '12, specifically in the fourth quarter, gross margin was a positive tailwind and it dropped through to EBITDA. As you think about '13, should we be thinking about EBITDA margins that are flattish with 2012 trends, or would you expect gross margin mix to be beneficial in '13?

If you look overall, I think normally Q1 from a gross margin as comparison to Q4 has been normally a little bit flat for us historically, and we anticipate the same again in '13. And then the remainder of the year, we're holding that SG&A up at 19%. You should see a year end over year end of that 40- to 60-basis-point improvement in the total business. And that presumes, again, no acquisitions and no changes in things like surcharges or foreign exchange rates.

Okay. Very helpful. And then, Frank, just given the small changes in the capital structure across the quarter. Any sense of where interest expense should come out, roughly, for '13?

Yes. I think you do need to adjust for the picture of the private placement. So I think your interest expense is probably for the year, some are going to be in the 54.5 to 55.

Perfect. Very helpful. One last strategic question for Charlie or Rich. If we think about the mix of acquisition backlog, OUS to US, can you give us any qualitative or quantitative color on how that mix has shifted or how you would expect that mix to shift in perhaps '13 or beyond?

Yes. David, I don't think it really has changed much. We still have a lot of opportunities left in the US. We remain active in the international markets that we are in today, and we continue to look at new geographies. So we really haven't seen any changes to that mix in what's available. Obviously, the pipeline remains well over $100 million in opportunity.

And do you still think the emerging markets specifically remain less important to the company than some of the European markets or more developed markets outside of the US, at least for the next couple of years?

I think for the next couple of years, our folks will be more in the markets like Europe and Latin America. But we continue to look at the emerging markets as an opportunity in the next three to five years. We are certainly watching it and we'll see how that develops.

Great. Thank you very much.

David Manthey from Robert Baird.

In the recall business, I know you can handle everything from food to RV parts. But is there any aspect of that business that requires additional technology or expertise or anything you can either develop internally or acquire, or are you pretty much set there from a growth standpoint?

We're set.

Okay. Thank you. And then second, on the patient communications business, how scalable is that business? I'm wondering, you mentioned the improved profitability there. Does the profitability in that segment move up and down as you grow and absorb capacity, and does that flex around? Or is it more automated or have a bigger fixed component, where once the profitability is set higher, it will remain higher over time?

I think you need to look at it incrementally. So you improve from where you are. There is definitely, with technology and efficiencies and the tools that people use, room for improvement. We already have shown that to ourselves in 2012 during the year, when we have started integrating some of the acquisitions. So this is where you continuously will look as an increase.

You may get some business that again, you acquire that start out lower and then you bring them up. So it presumes again on the same platform that you can grow and you can improve the profitability with acquisitions then being mixed changes.

Okay. From an organic investment standpoint, there is not big chunks of costs that need to go in and be absorbed? It's fairly scalable over time. So if you flex your costs up with your revenues going up, the profitability should continue to move up and to the right?

Yes. And it is a business that overall is really a lower capital-intensive business.

Right. Okay. All right, Frank. Thank you.

Al Kaschalk from Wedbush Securities.

First of all, StrongPak and lab pak, StrongPak is the brand name, a trade name? Or am I confusing the two here?

Yes. I think for the service offering, it's called StrongPak. It is like a lab pack type service. So when we go to these retail outlets, Al, they could be co-mingling different types of waste into more containers and they're holding it at their site. But as we're transporting it per DOT regulations, we will sort and separate those into different waste streams. And those familiar with the waste industry, sometimes that's called lab packing that material. We are using that term, but it's called StrongPak.

Got it.

Our service offering is called StrongPak.

Right. Okay. So help maybe appreciate -- and obviously, there is a component here that's customer-driven. But how far away from -- I'm just trying to understand strategically how big these types of businesses could be down the road, because obviously, we know that traditional market share that you have in the waste services, pharma, medical, et cetera, and then the LQ growth and SQ growth. But these ancillary and incremental services, is this geared towards more of the medical pharma side or more industrial, non-pharma, non-medical business?

The StrongPak is more towards the retail setting. But if you look at opportunity, we think that opportunity -- it's early on, but we believe it's an opportunity to incrementally of greater than $1 billion just in the US. And it's really non-medical waste type of opportunity.

Okay. All right. Great. Thanks.

There are no further questions at this time.

Thanks, Kyle. Well, thank you, everyone, for participating today. We look forward to speaking to everyone again in April. Take care and have a good night.

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