Stericycle Inc (SRCL) 2014 Q1 法說會逐字稿

Good afternoon. My name is Laurel and I will be your conference operator today. At this time I would like to welcome everyone to the Stericycle first-quarter 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 will now turn the call over to Dan Ginnetti, VP of Finance. Please go ahead, sir.

Thank you, Laurel. 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 Form 10K, 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. The results for the first quarter are as follows. Revenues were $570 million, up 10.9% from $513.8 million in Q1 2013. And internal growth excluding returns and recall revenues was up 6.3%. Domestic revenues were $392.1 million, of which $369 million was domestic regulated waste and compliance services and $23.1 million was recalls and returns. Domestic internal growth excluding recalls and returns revenue was up 6.4%, consisting of SQ up 8% and LQ up 5%. International revenues were $177.9 million, and internal growth adjusted for unfavorable exchange impact of $8.1 million was up 6%. Acquisitions contributed $32.9 million to the growth in the quarter.

Gross profit was $255.5 million or 44.8% of revenue. SG&A expense including amortization was $110.8 million or 19.4% of revenues. Net interest expense was $14.9 million and net income attributable to Stericycle was $79.1 million or $0.91 per share on an as reported basis and 104 adjusted for acquisitions and other nonrecurring expenses.

Now the balance sheet. Our covenant debt to EBITDA ratio was 2.0 at the end of the quarter. And the unused portion of our revolver debt at the end of the quarter was approximately $631 million. In the quarter we repurchased 685,990 shares of common stock on the open market in an amount of $78.3 million. The Board has authorized the purchase of an additional 4.1 million shares and now at the end of the quarter we have authorization to purchase 5.7 million shares.

Capital spend was $16.4 million in the quarter. The DSO was 62 days and Q1 as reported cash from operations was $144.5 million and when adjusted for recall reimbursement, discussed last call, and one-timers cash from operations was $156.9 million. Now I will turn it over to Rich.

Thanks, Frank. In the quarter we closed five transactions, two domestic and three international. The international acquisitions were in Portugal. Revenues from the five acquisitions were immaterial in the quarter and annualized are approximately $14.6 million. As announced on April 22, we completed the acquisition of the PSC Environmental Services division, which is expected to add approximately $165 million in revenue for the remainder of this year and annualized revenues are $240 million. The transaction is accretive to EPS this year. When combined with our existing business, we initially anticipate an unfavorable impact to our gross margin of 240 basis points to 245 basis points on a full quarter basis. As synergies are realized over the next 12 months our Company gross margin will improve.

We are very excited about this acquisition because it expands our operational infrastructure, increases our geographic reach, improves route and long haul efficiencies, and reduces disposal cost. This transaction enhances our existing platform and increases profitability and revenue growth in both our healthcare and StrongPak retail service offerings.

Following the completion of the PSC deal, our worldwide acquisition pool still remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business. Looking ahead, we remain excited about our expanding growth opportunities. Our global acquisition strategy increases our customer base, providing a long-term growth platform for selling multiple services such as Compliance Solutions, StrongPak, Sharps Management and Pharma Waste. And as customers adopt our multiple services it can more than triple their revenues.

At the end of the quarter we had approximately 569,000 accounts, of which approximately 549,000 were small, the remainder large. In closing, we want to welcome the over 1,100 PSC team members that are joining the Stericycle family and of course we want to thank each member of our worldwide team for their strong performance and continued commitment to our customers, our shareholders, and our values. Now I will turn it over to Charlie.

Thank you, Rich. I would now like to provide insight on our current guidance for 2014. Please keep in mind that these are forward-looking statements and our guidance does not include future acquisitions, divestitures, integration, acquisition-related and other non-recurring expenses. For 2014 we believe analyst EPS estimates will be in the range of $4.22 to $4.26. This includes approximately $.03 to $.04 contribution from PSC Environmental, mostly in the back half of the year.

We believe analyst revenue estimates for 2014 will be in the range of $2.51 billion to $2.53 billion, depending on assumptions for growth and foreign-exchange rates. This includes $165 million contribution from PSC Environmental.

We anticipate 2014 internal growth rates to be SQ, 8% to 10%; LQ, 5% to 8%; international, 5% to 8%; and recall and returns revenues between $100 million and $115 million. With the addition of PSC Environmental, we expect our gross margin to be unfavorably impacted by 240 basis points to 245 basis points on a full quarter basis. The impact in Q2 will be approximately 200 basis points due to the timing of the closing. Q3 impact will be 240 basis points to 245 basis points and then improving sequentially thereafter as synergies are realized.

We believe analysts will have estimates for 2014 free cash flow between $410 million to $417 million. 2014 CapEx is anticipated to be between $76 million to $80 million. Due to the impact of the one-time tax adjustment in Q1 we expect the full year as reported tax rate to be 34.5%. This assumes the tax rate in each of the remaining quarters to be approximately 35.5%.

In closing, we are very pleased with our first-quarter 2014 results and remain excited about our multiple growth opportunities for 2014 and beyond. Thank you for your time today. We will now answer any questions. As a reminder, please limit yourself to one question and one follow-up question as necessary. Laurel, you can now open the Q&A queue.

(Operator Instructions) Ryan Daniels of William Blair.

This is Nick Hiller in for Ryan Daniels. Thanks for taking my question. So can you just walk us through the logic on the PSC Environmental deal a bit, meaning why now and what are some of the cost savings and logistics advantages you get with the assets, and who are the main clients, et cetera?

Sure. On the why now question, Nick, with our growth in StrongPak and other healthcare haz waste, PSC was a very good fit right now -- perfect match, given their geographical reach and operational infrastructure. Obviously, on the synergies side, it's in areas that we have really good experience in. That would be in our long-haul efficiencies, our route density, and our disposal costs. And in the end, the compliance team has great depth of experience in all aspects of the hazardous waste business. So, I think the timing was perfect for us, and we really feel that PSC was the perfect match for Stericycle.

Okay, and on PSC I think about 80% of the business is recurring in nature. What about the other 20%? I realize overall it will be a small percent of corporate revenues, but what would cause ebbs and flows there?

Those are more contracts or project based. But they have had a very good revenue coming from reoccurring customers that come back to them, so even though they are not under reoccurring long-term contracts, they have a very good repeat business from customers.

All right. Great, thank you.

Gary Bisbee of RBC Capital Markets.

Congratulations on the quarter and the acquisition. I'll ask about the acquisition as well. You had obviously significantly lower margins in the core business, and I guess can you talk through if this is really just a lack of revenue scale over the infrastructure? Are there different operating costs, competitive dynamic, or pricing or other things about this market opportunity that would lead it to a longer-term be structurally lower margin than the core medical waste business?

Yes. Today this is a lower margin business for Stericycle. But the combination will improve these margins through synergies. And with the growth in margins we will improve significantly over time when these synergies are realized. And also part of that, as you said, is the utilization of the capacity that they have in their infrastructure. And we don't focus solely on the margin percentages. As we said, the criteria to do this deal was a very good strategic fit. It was a very good longer-term ROIC and IRR in the transaction and gives us great growth opportunities and supporting the growth in StrongPak.

Okay. And then just following up on that, is the $240 million of revenue, is that largely in the hazardous waste area? And I guess, I don't know what StrongPak is doing, but let's say $50 million to $100 million. All of a sudden that would seem to indicate 30% to 35% market share of that opportunity. Is that right? Or if not, what other elements should I think about?

You are partially right. The $240 million is in SQ hazardous waste. But it's not solely in retail hazardous waste. So if you think about their business, they have small quantities of hazardous waste. They augmented an on-site services compliance program, sustainability offering. And you think about the different industries they go beyond the retail space. They are in things like life sciences, education, manufacturing. And even within the retail space there are some segments of that that we didn't previously service like home improvement centers. And I think the other thing to think about, when we were talking about the StrongPak opportunity of $1 billion, we were looking specifically at the retail hazardous space. I think conservatively if we think now with these new service areas and focusing we could certainly double that market. But again we are focused on the SQ hazardous waste market.

Very good, thank you.

Hamzah Mazari with Credit Suisse.

This is a Flavio Campos. I'm standing in for Hamzah Mazari today. Just a quick question, none directly on PSC, but when you were looking at this asset, did you also look at other assets on the market such as the EQ, Environmental Quality company that Ecology just bought? And what made you decide to go for PSC over other assets like that one?

Yes, I think if you at thise certainly we looked at our options, we had a build versus buy option in the marketplace. But when we looked at other assets we really looked at the geographical reach and operational infrastructure of PSC and that's why we thought it was a perfect fit for us. If you think about the fact that they have 12 TSDF facilities where we had one, they have 22 10-day locations to our 18, it really was a good fit for our service offering in healthcare haz and the StrongPak business.

Perfect. That's helpful. And just looking into the base business of you guys, posted some pretty good growth this quarter. You have historically said about 50% of your growth comes from price and volume and the rest from ancillary services. Which of the ancillary services are the ones that are growing faster right now and that you guys expect to grow faster in the future?

Yes, I think when we talk about where the breakdown is, if you remember SQ is about 8% to 10% internal organic growth. About 40% to 50% of that is price and volume. The additional comes from additional services, so the reminder comes from additional services. In SQ that's historically SteriSafe and StrongPak services. On LQ the growth rate is 5% to 8%, only about 10% to 20% comes from price and volume. The remainder comes from additional services like RX Waste, Sharps Management, and some StrongPak in there as well.

Perfect, perfect. that's very helpful. And just as a final question on the margin profile. You guys have touched on this a lot of the acquisition side already. But some of ancillary services also have a little -- additional services also have a lower margin profile. I think that like with acquisitions such as PSC and the growth in the services side -- does that put like long-term margins, some pressure on long-term margin profile, or you guys are confident that through synergies you can keep current margins?

So in the next quarter we will see a drop because of the inclusion now of PSC, as Charlie said. And in Q3 it is going to be a full quarter, but then you'll see the improvements with the synergies really kicking in. So Charlie said what those rates were.

Al Kaschalk with Wedbush Securities.

Maybe we can talk about 90% of the business that you own. Can you give us a little bit of an update on how that performed in the quarter, and in particular maybe address a little bit of the margin? I guess the gross margin may have been impacted by transaction cost, but can you just help me through that?

Yes. So the gross margin, if you look at last quarter, which had the one-time settlement in it, if you adjusted for that you were at about a 45% margin. So this quarter if you look at it Q4 to Q1, the Q4 acquisitions had about a 10 bps negative impact, weather probably about 20 bps, foreign-exchange was about four bps improvement, and then the general business decides those factors improved by about 11 bps to about 44.8% for this quarter.

Help us understand maybe to what extent there's customer overlap or already existing businesses. Is there any attrition here or business you will need to give up? I know it's gotten through the regulatory clearance, et cetera. But just help a little bit understand is all of this, I'll say new growth but new customer base, et cetera?

Yes, it's all new customer base for the most part. I think when you think about their service and our service we complement each other very well. Both of us obviously are in the retail haz waste space. They had a little bit in healthcare hazardous waste, Al, but not much. But then they had a lot of different small quantity customers. Again, I touched on the manufacturing, life sciences, education. I think at the end of the day was really there infrastructure was such a great match that gave us the geographical reach we want, gave us the TSDFs and the 10-days. So from a service standpoint not a lot of overlap there. Customers not really any. So that really was more operational, a good fit for our business and gives us a really good platform to grow the business for many years to come.

Have you said how many customers they have?

We did not yet give that information. That's what we are working on. There's obviously thousands of locations that they service, but next quarter you will see that included in our customer account.

Scott Schneeberger with Oppenheimer.

Following up on the margin in the quarter, you just mentioned weather was a negative 20 bps sequentially. Could you give a taste for how much of an impact that was year over year? It doesn't seem too meaningful, and I wouldn't think it would be very meaningful in your business but just some more positioning around that.

Historically, we've always had some weather impact. And we've managed it. It is been immaterial. This year was obviously more severe because how often does Atlanta get shut down for two days? But as Frank said, the impact was about 20 basis points in the quarter.

All right, thanks. I want to throw in on the tax rate -- thanks for the guidance for the remainder of the year. Could you speak a little bit about what was occurring in the first quarter and changes going forward?

Yes. We had a situation where we had the text deductibility of goodwill that was now achievable in Brazil on some acquisitions that we've done where we became 100% owner, and because of that it became deductible. And so that's a one-time entry. And this lowers our cash taxes, obviously in future years, which is a great cash contribution in the future.

Okay, thanks. That's my two, I'll come back later.

Shlomo Rosenbaum with Stifel.

I just want to get to the core business a little bit. If you look at what seems to be the regulated medical waste domestically, it looks like there was less than $1 million organic growth on a sequential basis. I have to go back about 10 years to see that small amount of sequential growth. Am I looking at something wrong, or were you guys preoccupied with the business and the acquisition or how should I think of that?

So, the overall growth rates were right in our range. So it was impacted a little bit by the weather, as we said, that carried through the gross margin. It can vary Q to Q, the comparative a little bit versus the prior period. But overall the growth rates were right in the picture.

Domestically, Shlomo, we are very similar to Q3 of 2013.

You see what I am pointing at there on the sequential basis, up like 800,000? I would have thought just on the natural growth of your business would have been a little bigger than that.

Yes, it's also a little bit maybe of timing. Acquisitions were not contributing in the quarter. They were closed in the quarter. So you have a little bit of that factor that can play in on the total number.

And can you just talk a little bit about the free cash flow potential of this business that you are buying when you get to the synergies kicking in more. You have raised the free cash flow guidance up like $7 million to $8 million? Given the size of this acquisition, I would think that there's a lot more to go when it is fully integrated. Can you give us some kind of outlook on that?

Yes. If you look at it on a similar basis, fully synergized with really no growth included yet, which obviously there will be, you are looking at a free cash flow of somewhere $17 million to $18 million, which we think is conservative. But as you know, we are conservative when we give these initial numbers. Capital spend in that business is not dissimilar from what we are running in our overall business, right around that 3.5% is what they have been running. And with that, I think, the combination we can get capital utilization there and capacity utilization out of that.

Isaac Ro with Goldman Sachs.

It's actually Joel Kaufman in for Isaac. Just on the base business, can you provide an update on the margin expansion initiative outside the US, how those are tracking, maybe focusing particularly on Spain and Japan?

Yes. When we talk about our international market expansion it depends on which country. Obviously some countries we have done a lot of acquisition and are still looking to build the SQ base and now it's about selling additional services. I think specifically to Spain, we followed up with several SQ acquisitions. We've talked about rolling out clinical services. So we're still in the pilot phase but rolling out that clinical services, which is the equivalent of SteriSafe in Spain. And I think everything is on track with respect to Spain. I think the other question you had was Japan. As you know, we are in the northern island of Hokkaido. They had some really great improvements with some integration work that done over the last 18 to 24 months. We feel real comfortable with that market and feel like we are on track in Japan as well.

And just another one on PSC. Can you touch on the revenue synergies that that acquisition provides? And then to what extent that those are factored into your returns math for the deal?

Yes. I think it's really, when you think about this infrastructure that came with the transaction and obviously a great team on the sales and the operations side that's now combined with ours is a really good platform to continue to support the growth in StrongPak. They obviously had things going that there were going after that looks good and is growing for them. It has been a business that has been growing over the years. So again, we look forward to good results from them going forward as a combo with us.

Thanks.

David Manthey with Robert W Baird & Co.

On this income tax adjustment in the first quarter, could you tell me what was that benefit in dollar terms? And second, you exclude a lot of things here to arrive at non-GAAP EPS, why wouldn't you exclude that?

You can exclude it. It was about $4.3 million or about $0.05 a share. So it's not -- it depends again on what the rates are that the different analysts have in their models as to a tax rate because that's what you really are comparing to. But it was about $4.3 million.

And then in terms of the four items that you did exclude that you typically do, can you give us what the net income dollar values are, just give us a little more precision on that? And if you want to just put them all in a bucket, that's fine, but I just want a net income dollar number that I can compare rather than EPS.

Yes. Let me follow-on up on that. I don't have a right in front of me but I will follow up with you on that.

Okay. Thanks, Frank.

Greg Halter with Great Lakes Review.

Thank you and good afternoon. On the five deals that were announced, can you discuss what type those were?

Yes, they were four regulated waste transactions and one communications solutions transaction.

And by location?

By location, there were three in Portugal. Those were the three international. And in the other ones were in the United States.

And in Portugal were all RMW's?

Yes, those were all RMW's.

On the fuel cost side I just wondered if you could comment about that and what you see with prices going up again.

Wasn't a dramatic change. It was about 5.6% of what we call total energy. That's fuel and energy. And remember, that's calculated only on the sectors where that applies to.

All right, thank you.

[James Francescone] with Morgan Stanley.

Do you expect that, having just done a relatively larger deal that your appetite or the pace of acquisitions going forward will change at all?

No, I don't think so. Our leverage on a pro forma basis is going to be at about 2.3, 2.4 compared to the 2, so we still have ample room. And obviously the free cash flow that gets generated in the business supports also our acquisitions. Our line has substantial usage still available underneath it. And again, as Rich said, we have well over $100 million still in annualized revenue of people who we have discussions with.

Looking at that from maybe a slightly different angle, do you have any constraints on your ability to integrate deals of this size?

It hasn't in the past. If you think about it, this one transaction makes it almost a little easier because we already had the team working very well together pre the deal was closed, to work on what were the synergies. When the deal closed everyone had their seat already assigned to them so they are well on the way to making it work. And so that team is very dedicated to it, but that team doesn't get as much involved necessarily in the subsequent deals. The synergies that we are getting out of the PSC deal are entirely related to long haul, route density, disposal cost, very much in the areas that we are very familiar with. So no, I don't think the team is going to hold back in doing more stuff. From a total Company point of view we are obviously doing them internationally and in the different areas of our business.

If I could sneak in just one more financial one, do you have a sense of what the incremental amortization expense, particularly from that deal, is going to be?

We are still looking at that but the estimate is roughly for the D&A to be about $15 million - $15.5 million, of which about $10 million is depreciation. But that is still being worked on because that is all the purchase price allocations and things.

Kevin Steinke with Barrington Research.

Good afternoon. Just wondering what we should expect for SG&A as a percent of revenue for the remainder of the year.

The PSC impact there is favorable, so we have given before for the year to be about 19.3%. Now it's closer to the 19%. So that is a good number for the year.

Okay, and I wanted to ask about Communication Solutions, what you are seeing on the organic sales front there. I think you talked about training your sales force last quarter on Communication Solutions.

Yes, Kevin. As we spoke in the last call, we have just finished our national sales meeting. We spent a lot of time at that meeting focused on Communication Solutions and training our existing sales team on the capabilities in that area. Obviously, the long-term goal is to start working with our SQ and LQ sales team and leverage that relationship. And out of that meeting we are currently building a very strong sales pipeline which we feel will support that business ongoing in the future. So I think we are on track there. The team has really hit the ground running from our national sales meeting, and the pipeline is strong.

Okay, great, thanks.

There are no further questions at this time. I'd like to turn the call back to Charlie Alutto.

Thanks, Laurel. We appreciate everyone taking time to participating today's call. We look forward to seeing some of you on the road in the next couple months. Have a great night. Take care.

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