Stericycle Inc (SRCL) 2014 Q2 法說會逐字稿

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle second-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. Please limit your questions to one question and one follow-up question. (Operator Instructions). Thank you. Frank ten Brink, CFO, you may begin your conference.

Thank you. Welcome to the Stericycle's quarterly conference call. Joining me on today's call will be Rich Kogler, COO; Dan Ginnetti, CFO elect; 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 10-K and 10-Q, as well 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 the forward-looking statements.

I will now turn it over to Dan.

Thank you, Frank. The results for the second quarter are as follows. Revenues were $640.8 million, up 21.7% from $526.5 million in Q2 2013. And internal growth, excluding returns and recall revenues, was up 7.2%. Domestic revenues were $454.5 million, of which $429.8 million was domestic regulated waste and compliance services, and $24.7 million was recalls and returns. Domestic internal growth, excluding recalls and returns revenues, was up 8.3%, consisting of SQ up 9% and LQ up 7%. International revenues were $186.3 million, and internal growth adjusted for unfavorable exchange impact of $4.4 million was up 5%. Acquisitions contributed $81.7 million to the growth in the quarter.

Gross profit was $275.3 million, or 43% of revenues. SG&A expense, including amortization, was $121.7 million, or 19% of revenues. Net interest expense was $16.4 million. Net income attributable to Stericycle was $81.9 million, or $0.95 per share on an as-reported basis, and $1.03 adjusted for acquisitions and other nonrecurring expenses.

Now for the balance sheet. Our covenant debt to EBITDA ratio was 2.38 at the end of the quarter. In the quarter, we increased our revolver line of credit from $1 billion to $1.2 billion. The new revolver will mature on June of 2019. The unused portion of the new revolver at the end of the quarter was approximately $512 million. In the quarter, we repurchased 527,243 shares of common stock on the open market in the amount of $58.8 million. At the end of the quarter, we have authorization to purchase 5.2 million shares. Our CapEx was $227.2 million, slightly higher in this quarter due to the timing of plant upgrades. Our DSO was 62 days. Year-to-date, as-reported cash from operations was $238.3 million. When adjusted for recall reimbursement, one-timers from cash from operations was $262.1 million.

I will now turn it over to Rich.

Thank you, Dan. In the quarter, we closed 13 transactions: 3 domestic and 10 international. This excludes the previously announced PSC transaction. The international acquisitions were 2 in Romania, 2 in Chile, 1 in Portugal, 1 in Brazil, 1 in Spain, 1 in Canada, 1 in the UK, and 1 in South Korea which represents a new market for us. Revenues from the 13 acquisitions were $5.3 million in the quarter and annualized at approximately $39 million.

Our worldwide acquisition pool remains robust, with well over $100 million in annualized revenues in multiple geographies and lines of business. I am pleased to report that our previously announced acquisition of PSC Environmental Services Division is performing well, and our integration plan is on track. As expected in Q2, the PSC acquisition unfavorably impacted gross margins by approximately 200 basis points. Per our previous guidance, gross margins in Q3, which is our first full quarter of this acquisition, will be impacted by an additional 40 to 45 basis points. Thereafter, gross margins will improve as synergies are realized.

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. As customers adopt our multiple services, they can more than triple their revenues. At the end of the quarter, we had approximately 594,300 accounts, of which approximately 573,600 were small; the remainder were large.

In closing, we want to welcome our new team members in South Korea, and 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.

I'll now turn it over to Charlie.

Thanks, 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 nonrecurring expenses. For 2014, we believe analyst EPS estimates will be in a range of $4.24 to $4.27. We believe analyst revenue estimates for 2014 will be in the range of $2.54 billion to $2.57 billion, depending on assumptions for growth and foreign exchange rates. 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 $110 million. We believe analysts will have estimates for 2014 free cash flow between $410 million to $417 million. 2014 CapEx is anticipated to be between $80 million to $84 million. We expect the full year as-reported tax rate to be 34.5%. This assumes the tax rate for the remainder of the year to be approximately 35%.

In closing, we are very pleased with our second-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. Ian, you can now open the queue.

Ryan Daniels, William Blair.

I guess I want to hit on the PSC integration efforts. Maybe you can talk a little bit more deeply about the team that's involved there and what their key goals are near term, what the early feedback has been from your and their clients. And it sounds like the synergies are on plan, so talk a little bit about that. Thanks.

If you remember, Ryan, let's go back. We talked about synergies in this deal were mainly in three areas; it was in long-haul, route density, and disposal costs. We also talked about the fact that leading up to the closing during the waiting for the approval, we did get the teams together, especially on the IT side, and looked at our waste profiles and how could we get that - those waste profiles into the PSC systems. The systems are compatible. The good news is we've started to divert waste into our new structure. As well as we have begun various integration efforts in things like sales, IT, finance, compliance, operations. So all in all, the integration is certainly on track, and we are tracking to those integration accretion numbers we talked about on the previous call.

Okay, perfect. And maybe one for Dan, given the noise with the PSC acquisition and just everything else. Can you give the gross margin bridge that you often provide to us so we can understand the core ins and outs there?

Thank you for that. So coming off of Q1, we were at a 44.82. As expected, PSC impacted our gross margins unfavorably by about 202 basis points. The other acquisitions within the quarter further impacted it about 13 basis points. We had a small impact from foreign exchange of about 4 basis points. And then our improvement from both the normal course of business and recovery from the weather impact to Q1 was about 33 basis points up, and that's how we posted the 42.96.

Perfect. Thanks, guys.

Al Kaschalk, Wedbush Securities.

Before I forget, Frank, it's been a pleasure. I know you're not going anywhere, but it's been a pleasure having you at the CFO role.

Thank you.

On the CapEx side, could elaborate on maybe the changes or the investments that you're making there?

Sure. I think as we talked about, it's really just the timing of projects. And the projects are primarily upgrading some of our autoclave plants, and the required Title V compliance work that we needed to do this year for our incinerator plant facilities. That needs to be done and completed by October, so we kind of moved everything up just to get it done ahead of time.

Are you running into any additional surprises or items of pleasant surprises as you're going through this analysis?

No. Actually, we're glad to see the plants are moving ahead. We're sticking to our full-year guidance of $80 million to $84 million, which was kind of in line with where we've seen the Company run in the low 3's - 3.1% to 3.3%. And even if you just take Q1 and Q2 and put them together, we're at an average of 3.6%, which is identical to Q2 half-year last year.

Is that - I know we a limit, one follow-up, but still on the same topic, how does PSC impact CapEx plans going forward? I realize you're targeting this 3%, 3.5%.

The PSC is in the same range, and it's included in the guidance we are giving you now for this year.

Okay. Thank you.

Gary Bisbee, RBC Capital Markets.

If we were to take a long view, like say five years from now, how should we think about the puts and takes around what the PSC StrongPak profitability can look like in the future relative to what you do in the core business? Is it safe to say that without the high-margin compliance part of the offering with medical waste that it's likely always going to be lower? And if so, any sense of how much or how do we think about that?

Yes, we think - first of all, we need to integrate the businesses because we're going to see improvements of margins as we integrate into their infrastructure. Again, the thought process behind the deal was we like where their facilities were located; it just strategically fit into our business. Obviously, longer-term we think margins will also improve significantly because, Gary, the facilities they had were underutilized. And even with our volume going into their plants, there is still a lot of capacity available at their facilities. Longer term, do we think this could be very similar to our SQ transactional and med waste business? There's a good possibility for that. It's too early to tell at this point, but there is right now a compliance component like Steri-Safe but that could change over time as well.

Okay. And then the follow-up, can we just get an update on how you are doing selling the SQ overseas? And what markets is that really working in, and what are - what are the gating factors to more quickly penetrating that? I guess along with that also the compliance offering that you've been selling overseas, I don't think we've got an update in a while on that.

I think on the SQ side, we've always been selling SQ types of services when we go into a market. Generally we enter a market traditionally by LQ-type businesses, then quickly follow-up with tuck-on acquisitions on the SQ side. So we've got SQ sales activity in virtually every market that we are in around the world. On the Clinical Services side, which I think was the second part of your question, if you take and you look at Spain, which is our latest market entry, we've seen a really good adoption as we've launched Clinical Services into that specific geography. So I would say on the international growth front, we are within our growth range, but we feel really good especially about the international growth rate on the second half of the year.

But is the SQ still like a tiny percentage of the mix overseas? I remember you saying it was like less than a quarter relative to two-thirds in the US. Is it still that range, or is that has that been improving or increasing in the last year or so?

It's been increasing. Of course, it varies country by country. The country that we have been longer, the UK in Canada, it's a bigger percentage than some of the newer market entries like Spain and now South Korea.

Okay. Thank you.

Shlomo Rosenbaum, Stifel.

Charlie, can you talk about the communications business, what you're seeing in terms of underlying growth? And just when do you expect to have the growth of that business organically will start to be a contributing factor? Or to say it a different way, at what point in time will you need that to start contributing in order to be able to maintain that 6% to 8% organic growth rate that you guys are targeting?

I would say, first of all, it is contributing to growth right now. So we are seeing growth, and it's within the bandwidth of our overall Company average growth. I think the one thing that we talked about early in the year, Shlomo, was about how we wanted to leverage the Stericycle sales force. I want to maybe give you a good example of a recent win we had on a very large East Coast healthcare system where we had med waste relationship and servicing for med waste. We did a little physician referral services there, but we really leveraged the medical waste relationship. And we were recently awarded a contract that included after-hours answering services, appointment reminders, call overflow for approximately 26 clinics and over 100 physicians, and there's even more opportunity to grow that over time.

So I think, as we've always said, we really feel that we'll be able to leverage our relationship, and I'm glad to see very early on in the process as we have educated and trained our sales reps and we are starting to see some wins. So it certainly is in the growth rate; it is growing. We think long term, there's a great opportunity for us.

Okay. Then just this is kind of a housekeeping item. Can you go over the free cash flow normalized in over the puts and takes that were in the quarter?

Yes. Free cash flow, we came in as reported, 66.6 and 194.7 year to date. And keep in mind we do an adjusted free cash flow on that, so we adjust for the recall reimbursements, which is about 4 million that went out, so we add that back in. And of course some of the one-timers like $7.3 million in the quarter, so you would get to an adjusted of 77.8, and 218.5 for the year.

And Shlomo, remember Q2 is normally a lower free cash flow quarter because it's the quarter that we make two tax payments. The Q1 and Q2 tax payments are made into the Q2 timeframe.

Great. Thank you very much.

Scott Schneeberger, Oppenheimer.

One thing I wanted to hit on is recall. It looked like a solid quarter, yet I think you took the high end of the guidance range down by $5 million. And that category has been faired on the range value of revenue for many years. I'm just curious, is it just the environment? Is it you're spending less in marketing now and maybe allocating elsewhere? Just an update there, please.

I think we've always described this business as having a certain amount of base organic growth that grows quite well. And then we have sort of what we want to call the blockbuster events or bluebird events. And the only reason why we slightly tweaked guidance was because we didn't see any of those blockbuster events in the first two quarters. So we move it down, the guidance down slightly, and we anticipate hopefully one in the back half of the year. But the regulatory environment continues to intensify out there. We continue to manage more and more events, and now our events are very well diversified among the different customer types. So we feel good about the business.

Great, thanks. And then I'll bite on South Korea. It sounds like it's interesting. If you could please elaborate there, thanks.

Sure, just a little more information on South Korea. Obviously, the 14th largest economy in the world. It's got a very strong regulatory and enforcement around regulated medical waste. It is a fragmented industry. So if you think about - we talk about new countries that we want to go into, strong regulations, fragmented industry; certainly South Korea has both. And as well as a sophisticated in an expanding healthcare market. And just to give some color around the market opportunity, we estimate the market opportunity to be between $200 million and $250 million.

Great. Thanks very much.

Isaac Ro, Goldman Sachs.

I want to ask another one about healthcare, specifically just in general, specifically with regards to healthcare reform, the ACA. It didn't sound like you're seeing a whole bunch of impact here from medical waste lines tied to the new coverage, but I'm curious if you had any update on your plans to try and get some of that business as it shows up, and just your general views on how that will pace the back half of this year.

I think you saw some good grace growth rates in the domestic business. I don't essentially tie that to the Affordable Care Act. I think at this time we've seen no material effect. I think longer term, as we see more come into the ranks of insurance, we think that will grow, especially near the SQ space. We see it now in the retail clinics that are being built and run. We think there will be opportunities for more of our services.

I'd like to bring it back to the ComSol. When you see us sign, a large East Coast healthcare system, specifically their off-site clinics as hospitals consolidate and start to branch out outside of the traditional four walls of large hospitals, those services specifically within Communication Solutions play really well in that space, both after-hour answering appointment reminders, call overflow - those are traditionally services you would see in the SQ where we are getting traction for them from our LQ customers as the lines blur between SQ and LQ in the US healthcare market.

Great. Maybe just a follow-up on that would be your point on SQ. You obviously have a trend in the major retail pharmacies where they are becoming more of these sort of mini-clinics, if you will. I have to imagine that will create an opportunity for you guys to get closer to that channel. I'd be curious when you think that will be significant. How are you trying to approach the opportunity? Thanks.

We still have it. We have some already today. I think that that gave us an opportunity to get some haz waste opportunities on StrongPak. We're starting to cross-sell the other way now, where StrongPak is starting to get us the opportunity in medical waste on the retail side and it's a little bit too early, but I think as the segment grows, and it is growing, we are really in a great position to address that market, Isaac.

Thanks, guys.

James Francescone, Morgan Stanley.

This is actually James in for David. Thanks for taking the question. You did a nice job earlier of walking through the impact of PSC on the gross margin line. I was wondering if you help us think through what the implications were for SG&A as well, which obviously had a nice tick-down from the first quarter to the second quarter. How much of that is organic improvement versus the impact of PSC, and how does PSC or any synergies you're expecting from their impact that line going forward?

That's a great question James. Thanks. In the quarter, PSC benefited our SG&A line by 25 basis points. And then internally we also improved about another 18 basis points. And then you saw a little bit of improvement from partial quarter of some of the other acquisitions, and that's how we came in at 18.9. Going forward, next quarter I think you'll see about another 15 basis points improvement. We still believe that for the year, 19% SG&A (technical difficulty).

Okay. And then for the tax rate, are you still thinking 34.5?

For the year, 34.5, yes, that's a good tax rate. So that should put you in the second half somewhere in the 35.0 to 35.2 range.

Okay, perfect. Thank you.

Sean Dodge, Jefferies.

It's actually Jefferies. Good afternoon, and congratulations on the good quarter. Charlie, we had talked previously about some changes you are testing to the Steri-Safe program here domestically where you're going to be expanding your compliance offerings beyond just OSHA. Just wondering if you could just flesh that out a bit. What else is there compliance-wise you guys can help physicians with?

Over the years we've always looked to enhance the Steri-Safe offering. And in recent years and really now, we have both a HIPPA compliance program and a Hazardous Drug Disposal Compliance both are ones that are regulatory compliance programs especially for the offices that just don't have the wherewithal and the expertise on their staff to comply with these requirements (technical difficulty) we have already launched and enhanced the Steri-Safe offering. So we look at Steri-Safe as no longer just OSHA compliance, it's really safety and total compliance program for our customer base.

Okay, I think I missed the last part. So this is something you already rolled out here? And is it something you can charge a higher fee for?

Started to rollout, and there are some additional fees associated depending on the program that they select, correct.

Very good. All right, thank you.

David Manthey, Robert W. Baird.

Question on the ComSols business. Could you give us an idea of a BerylHealth or a NotifyMD, what are the average monthly revenues per customer or per doc that they are experiencing right now?

Usually we look at it on a per-physician basis. And in general when you look at an after-hour answering service or an appointment reminder, in general anywhere between $90 to $100 per physician per month. But there are other charges in there depending on how many calls and how many minutes time that we use. So that's really from a NotifyMD. On a physician referral line or a post-discharge call for BerylHealth, it varies. It could be tens of thousands of dollars for hospital, but it really depends on which service offering they are taking. More of that is based on how many agents we're going to have on and how many minutes we might be on the phone. So that varies per hospital.

Okay, so not too far off from your targeted ranges. When you said it's contributing to the overall growth of the Company, and then you mentioned that it's growing in line with the overall growth rate of the Company, did I hear that right? It would seem that you'd be seeing better growth there off a smaller base, or is that not right?

No, if you think about that business, it's growing in the overall growth rate of domestic -- not SQ, but domestic internal growth rates. So it's in that mid-single-digit range of growth for that business. Remember, we really are still consolidating a lot of those sales teams and just now leveraging the Stericycle team.

Right. And when you offer that broadly, obviously, you'll expect that to grow much faster.

Correct, it should.

And then final question on StrongPak. If you get a new StrongPak customer -- retailer, for example, let's say 1,000 storefronts -- do you count that as one customer or 1,000 customers?

We cover that as 1,000. We do everything by locations that we service, sites.

Got it. Okay. Thanks a lot, guys.

There are no further questions. I return the conference to the presenters.

Thank you, Ian. We appreciate everyone taking time to participate on today's call. We will see some of you on the road later this quarter. Have a great evening, and enjoy the rest of your summer. Take care.

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