Laura A. Murphy - Vice President of Corporate Finance Frank J.

M. ten Brink - Chief Financial Officer, Chief Accounting officer and Executive Vice President of Finance Richard T.

Kogler - Chief Operating Officer and Executive Vice President Charles A. Alutto - President of Stericycle USA Unknown Executive -

Ryan Daniels - William Blair & Company L.L.C., Research Division Scott J. Levine - JP Morgan Chase & Co, Research Division Albert Leo Kaschalk - Wedbush Securities Inc., Research Division David R.

Lewis - Morgan Stanley, Research Division Richard C. Close - Avondale Partners, LLC, Research Division Scott A.

Schneeberger - Oppenheimer & Co. Inc., Research Division Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division David J.

Manthey - Robert W. Baird & Co.

Incorporated, Research Division Jason Rogers

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink, CFO; Rich Kogler, COO; Charlie Alluto, CEO-elect; and Mark Miller, Chairman and CEO.

I will now read the Safe Harbor statement. Statements by Stericycle in this conference call that are not strictly historical are forward-looking.

Forward-looking statements involve known and unknown risks and should be viewed with caution. Factors described in the company's Form 10-Ks, 10-Qs, as well as its other filings with the SEC, could affect the company's actual results and could cause the company's actual results to differ materially from expected results.

The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after this date that may bear upon forward-looking statements. I will now turn it over to Frank.

Thanks, Laura. The results for the first quarter are as follows: revenues were $460.1 million, up 15.6% from $398.1 million.

In Q1 '11, our internal growth, excluding returns and recall revenues, was up 8%; domestic revenues were at $329.2 million, of which $293.4 million was domestic regulated waste and compliance services revenues, and $35.8 million was returns and recalls; domestic internal growth, excluding returns and recall revenues was up 9%, consisting of SQ, up 10%, and LQ, up 8%; international revenues were at $130.9 million and internal growth, adjusted for unfavorable exchange impact of $3.3 million, was up 5%. Acquisitions contributed $41 million to the growth in the quarter.

Gross profit was $205.3 million, or 44.6% of revenues, and SG&A expense was $84.9 million, or 18.5% of revenues. Net interest expense was $12.7 million.

Net income attributable to Stericycle was $64.9 million, or $0.75 per share on an as-reported basis, and $0.78, adjusted for acquisition and non-recurring expenses. Balance sheet.

At the end of the quarter, the revolver borrowings were approximately $477 million. The unused portion of the revolver debt at the end of the quarter was approximately $382 million.

In the quarter, we repurchased over 38,000 shares of common stock in the open market in an amount of $2.9 million, and we have authorization to purchase an additional 4.3 million shares. Our capital spending was $17 million, and our DSO was 60 days.

In Q1 year-to-date, the cash provided from operations was $99.6 million. And I will now turn it over to Rich.

Thanks, Frank. Worldwide, we continue to use our strong free cash flow to drive our growth through acquisitions.

In the quarter, we closed 11 transactions, 6 domestic and 5 international. Our worldwide acquisition pool remains robust, with over $100 million in annualized revenues in multiple geographies and lines of business.

At the end of the quarter, we had approximately 528,000 accounts, of which over 512,000 were Small and the remainder were Large. Our customers continue to be excited about our expanding portfolio of services.

For our SQ customers, these services include Steri-Safe and clinical compliance offerings. For our LQ customers, the growth drivers are Sharps Management, pharma waste and Integrated Waste Services.

The strong growth we experienced in the quarter was fueled by the continued adoption of these additional service offerings. We remain very excited about our future growth opportunity because 80% of our LQ and 70% of our SQ customers only use one of our current service offerings, and as customers adopt our multiple services, this can more than double or triple their revenues.

For 2012, we anticipate internal growth rates for Small Quantity to be at 8% to 10%; Large Quantity, 5% to 8%; international, 5% to 8%; and recall and returns revenues between $110 million and $120 million. We want to thank each member of our worldwide team for their strong performance and continued commitment to our customers and our shareholders.

And I'll turn it over to Charlie.

Thanks, Rich. I would now like to provide insight on our current outlook for 2012.

Please keep in mind that these are forward-looking statements. Revenues from acquisitions completed in the quarter were approximately $0.7 million and annualized are approximately $20 million.

Keep in mind our guidance does not include future acquisitions, divestitures and acquisition expenses. For 2012, we believe analyst EPS estimates will be in the range of $3.24 to $3.28, which we are comfortable with.

We believe analyst revenue estimates for 2012 will be in the range of $1.85 billion to $1.9 billion, depending on assumptions for growth and foreign exchange rates. We believe analysts will have estimates for free cash flow between $320 million to $325 million, with CapEx anticipated between $60 million to $65 million.

In closing, we are very pleased with our Q1 results and excited about the multiple growth opportunities for 2012 and beyond. Thank you for your time today.

We will now answer any questions. Mike, you can open the Q&A line.

Let me ask a couple of housekeeping-related upfront. First, on the returns and recall business.

I noted you took up guidance for the year and I'm curious if that relates to an acquisition done during the first quarter or is that just, given the strong performance in Q1, you're more comfortable with the annual outlook?

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

Okay. And then, Frank, while I've got you, can you talk a little bit about gross margin performance?

I know it's always helpful when you break that out, kind of organically versus some of the puts and takes that can pressure that year-over-year?

Yes. So the gross margin always should be looked at as compared to the prior quarter.

So we were at 45.1% in Q4 of '11. The recall, the larger recalls we had and also some large contracts impacted it negatively just by mix by 40 basis points.

Fuel impacted the margin by about 20 basis points, and the general business, including a very small favorable foreign exchange, was about 10 basis points. And these, again, were all versus the prior quarter.

Okay. And then sequentially, still kind of comfortable with that 10% to 20% organic basis point improvement?

Yes. I think in Q2 you're looking at somewhere of 44.8, 44.9, and then again, you have 20 bps afterwards roughly increase quarter-over-quarter.

Okay, that's helpful. And then a couple broader questions.

First, just given everything that's going on over in Europe, I'm curious if with the financial crisis, number one, you're seeing any impact on business? And two, if it's opening up any more M&A opportunities, perhaps, at lower pricing?

The M&A remains very strong. We have over $100 million in our pipeline.

It's both on the domestic front and international. And it continues, as we said in previous calls, that the European marketplace is very positive.

We did 3 transactions in Spain this last quarter, which again, also, had -- gives us the opportunity to expand and tuck in those acquisitions. So as we said in previous quarters, that turmoil does create some opportunities for us.

Okay. And last one, then I'll hop off.

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

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

Question. So the multiservice penetration rates that you're giving remain the same.

I was wondering if there's any color you could offer with regard to any observations on relative strength in -- or trends in any particular type of product and maybe any update with regard to the Patient Notification program and thoughts on commercial potential there.

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

I think the growth rates in LQ are kind of reflective of the fact that the multiple services are getting more penetration, more adoption, and as we mentioned, we're seeing kind of broad adoption of Sharps Management, of the Pharma Waste, Integrated Waste Services and everything we have in our portfolio. So our feeling is although -- I think we've talked about this before that those percentages of customers will not move a whole lot because we're continually replenishing through acquisition the pool, we are seeing the sales force really doing a much, much stronger job of getting our multiple services into the market.

Got it. And turning to -- I don't think this was mentioned in the call yet, but I think about 1 month, 1.5 months ago, there was a ruling from the U.K.

Competition Commission regarding one of your acquisitions from last year. I was hoping you might be able to comment, to provide an update with regard to how you see that process playing out?

Yes. It's a company called Ecowaste, very small transaction, less than $2 million of revenues, that we did a little over one year ago.

They also have a small plant in the southwest part of the U.K. It's not material in any way.

We are currently challenging the decision and we hope for a favorable outcome later this year.

Got it. One last one, if I may.

On energy cost, I assume you are able to comment on how much that as a percent of sales. And as a follow-on to that, how much natural gas is of that portion and maybe any plans you guys might have to invest in CNG trucks, we are getting a lot of questions in that variety.

Yes, I mean, just from the numbers here we're talking about 5.8%, so up about 20 basis points from the prior quarter. And we do not really look at energy broken apart, we kind of look at total energy because we also use electricity at some of our plants.

As far as CNG trucks, we have considered them. One of the issues, obviously, is that we're operating 46 states and 170 depots, so access to CNG refueling is a little bit prohibitive for us.

I want to drill down further on the gross margin today. It just seems like we're suggesting that the core business, X some of the fuel, is more of a upper 44-range percentage.

And I'm trying to triangulate here because last quarter or the 2 quarters before, we were pushing towards 45. And now it looked like we're back below, and I understand some of the puts and takes there on the acquisition front, but -- as well is mix, but recall is quite a bit smaller on the percentage of revenue and I would like to think that, that doesn't have as much impact on the margin.

So the question out of all that mumbo jumbo was, is the core business -- should we set our expectations more to the 44.5% to 45% range and then the strong leverage you get down at the bottom of it pushes it towards the EPS?

I think there's 2 factors: You will have every quarter with recalls, for instance, a little bit of a factor and that business is strong and looks to be continued strong in Q2. The outlook for our 3 and 4 is tough to predict still.

The second part is that we are obviously seeing some good growth in the Large Quantity and that obviously, that could be the Integrated Waste Solution Services, the multi-site national site services. They're larger contracts that have those lower margins embedded in them, and they're still very good because it also has a lower SG&A to revenue.

As you've seen -- that in the last quarters, you've seen that SG&A as a factor of revenue come down a little bit, that is because you get some growth and, yes, margins that maybe are a little bit below our average, but still very good on an EBIT basis. And finally, if you look at it from a total cash flow point of view, these services have a lower CapEx to revenue.

The Pharma Waste, for instance, the multi-site national kind of services that we have, the Integrated Waste Solutions, they don't have the kind of CapEx that goes with the rest of the business. So overall, the cash flow is good that the return we get on those.

Yes, it does have that impact on the gross margin, and overall total, it goes up and down a little bit with that and then you get, like you said, the impact in the prior quarters because of the acquisitions.

And then on the -- the large contract in the quarter, is that just a -- is that a change or is it a new contract [ph] or what was the -- it was part of the recall of 40 basis point decline that you highlighted.

No, we have larger contracts that at times kick in. We can't, again, comment on any individual customers.

So if you look at it from that 40 bps, it's probably half and half recall and half related to the larger contracts.

Okay. And then finally, a little bit pressing on some of the other regulatory related.

There was a large retail pharma chain that had to settle for some handling of pharma medication, et cetera. And I'm just wondering how that plays into your thought process on where you can help them.

Is that a recall opportunity or can you provide more training, regulated services -- how does that create an opportunity?

Well, you remember that on that type of customer, we do pick up regulated medical waste. And over the years, we've expanded our capability in providing hazardous waste, pharmaceutical waste, recall and audits to those types of customers.

So we think the regulatory compliance gets a lot of focus in this area, and obviously, could be a good opportunity for us on a go-forward basis.

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

Again, we don't comment on individual customers.

Frank, sorry to come back to margins here, but I'll at least do you the favor of shifting from gross margins to operating margins or EBITDA. I appreciate the RMS recall could have pressured GMs in this particular quarter and you called that out.

If you think about EBITDA margins, that trend has also been sort of flat-to-down over sort of a multi-quarter period. I guess, what I'm trying to -- it's really a twofold question: first, even though we're seeing some GM pressure, there should be a reasonable contribution to the bottom line and I guess, why are we not seeing that?

And as we start seeing incremental service offering is across your existing infrastructure, when can we start seeing sort of that EBITDA margin begin to take a more positive trajectory?

I think the impact on EBITDA is probably -- each quarter has its nuances, take an example, last quarter -- third quarter of last year, impacting fourth quarter a little bit was the Spanish acquisition, which we mentioned had, in the quarter of Q3, probably on a gross margin and similarly down because it is a fairly high percentage, almost north of 90% plus LQ oriented, had a declining impact on the overall blended gross and EBITDA margin. And on the gross we said, at that time in the quarter, was about a 40, 50 bp and then an additional 40, 50 bps in the quarter thereafter.

So in total, a cumulative 80-bp impact on that acquisition. We do these acquisitions not just based on their contribution, positive or negative, to gross margin, we do them based that they’re good IRR deals, so at the end, it's really a cash flow orientation.

So each quarter does have its impact. You can't just generalize and say, hey, if I look back a couple of quarters, because that was a quarter in which we bought $100 million-plus in revenues, and yes, that will change the mix in our business.

So I think you have to continue to look at each quarter individually and see what is happening and then break it down.

Okay, that's helpful. Maybe just a second question of -- maybe for the broader group.

The last couple of quarters, you've seen a growth contribution from acquisitions being closer to 400 or so basis points or 4%, which deviates from some of the recent historical norm of upper singles to double digits. I mean, is this a 2-quarter artifact or is this a 2-quarter trend in terms of how we should think about the growth impact from acquisitions over the next couple of years?

I think in general, in the broad picture, our long-term goals, again, are growing the business in earnings and cash flow at a 15% rate. And so -- and historically, what has that been, it has been about half through acquisitions, half through internal growth.

And so I think we're well on track on that and it continues to get stimulated by doing acquisitions. And those will be different again quarter-to-quarter.

You get some larger quarters, some smaller ones, and we'll work on the deals and we'll do them when they're right.

Okay. Maybe just one last one, and I'll jump back in queue.

Just in terms of future growth expansion plans, if you'd make a decision to get more aggressive in call center consolidation, is there any reason to believe that from a capital or access to free cash perspective, you will not be able to execute on a call center consolidation strategy simultaneously with the existing waste management organic consolidation?

No, I think as we have shown through the years now that it has been a play in medical waste and the recalls/returns business, in our Pharmaceutical Waste, in some of the small amount of a little bit of haz, not [ph] a patient communication, we feel we can do it all.

Talk a little bit about the Integrated Waste Services, you highlighted that in terms of some of the growths achieved there in the quarter. If you can maybe go down a little deeper on that?

Well, I think Integrated Waste Services is where we work with larger hospital groups, IDNs, chains, multiple locations to kind of do a total waste stream solution for them. And after we did the HWS acquisition last year, we also had their resource management technology that we could bring to bear.

So I think what you're really seeing is now that HWS is fully integrated. We have their solution integrated into our solution.

We're taking that out to market and it's attractive to certain types of LQ customers, primarily very large IDNs or chains.

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

I'd say it's a steady-state, Richard.

Okay. And then with respect to the acquisitions that you announced in the quarter, I just want to be clear on that.

The -- you said the revenue in the first quarter '12 -- or from the acquisitions that you completed, it was $0.7 million in '12 or in the first quarter?

That is correct. So in Q1, it was $0.7 million, and for the kind of annualized revenue, not in the year itself, but just for an annualized number, it's about $20 million.

Okay. And then any additional clarity on the acquisitions themselves on the various buckets, Large Quantity, Small Quantity?

I'm not sure if you gave that.

Yes, the broad mix is about 60% SQ, 40% LQ. That's never as precise because we have to obviously look at that after we acquire.

There were 3 in Spain, 1 in Japan, 1 in Romania. Those were the 5 international ones.

Okay. And then on the patient communications, I guess we're about one year into that.

How would you characterize the past year and where you are, and I guess, maybe the opportunity on that side?

I think for where we're at in the progress of building out the platform, we're tracking nicely. We've had some good additions to the team not only in terms of capabilities of the organizations, but the talent pool involved and we're still very excited about it.

It's early stages of the game, but still a big, big opportunity for us.

And just one final question here would be on the Pharmaceutical Waste. It sounds as though that is really ramping up nicely.

Any quantification would be helpful. And then are you seeing any type of heightened level of, I guess, regulation or enforcement at your customer level that's driving that?

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

It remains for us a $200 million-plus opportunity.

I just want to pick up on the prior question with regard to some incremental clarity on the acquisitions. I know it was 5 international.

Could you remind us how many domestic? And I know you said 60-40 on SQ-LQ.

Was that overall? Was that domestic?

And then specifically, did you do any patient communication acquisitions in the quarter?

So there were a total of 11 acquisitions, 6 were domestic and 5 were international. As I said, 3 in Spain, 1 in Japan, 1 in Romania.

Those were all regulated waste transactions. On the domestic front, there were 4 patient communication deals.

Should we be looking for a lot of those now, are you at a comfort level where you're ready to really ramp on that front? I mean, hearing 4 sounds aggressive.

No, I think there were smaller. I wouldn't read anything into that.

The team is working on all fronts, both on the regulated waste, on the patient communication, on the pharma. There's multiple areas that they're working on, both domestic and international.

A couple of more from me. One, Frank, you alluded to, obviously, a strong recall quarter and you said you saw strength into 2Q as well, less visibility out beyond.

Could you just take us an incremental level, or deeper or 2 on what you're seeing in this quarter that makes you feel comfortable about it?

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

Fair enough. And then -- and you talked a bit about gross margins and EBITDA margins.

I want to hone in specifically on SG&A. That was a little better than we expected in the quarter, offsetting the softness that we were expecting in gross margin.

That's been discussed at length, but could you speak, I guess, on this call to SG&A and how you would look out over the remaining quarters of the year?

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

Most of my questions have been asked. I have a couple of housekeeping ones.

Can you go over the EBITDA breakdown for the U.S. and then international?

We -- again, you got to wait until the 10-K comes out for that –- [indiscernible] final. So you'll see that in the 10-K.

Okay. And then...

Oh, 10-Q. Sorry.

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

No, it was 5% on international, so it was 10% for SQ, 8% for LQ and 5% for the international. That was internal growth.

Okay. And if you do the math on -- just off the press release, it looks like the internal growth was 6.1%.

Given the weeding off of the other items that are there, I would've thought that you'd be -- that it would've come out -- the mix would've come out a little bit differently. I'm sorry, I'm going to take that one off-line, I'm going to go to the next one.

But just in terms of -- what was the change in fair value or other that was being excluded from expenses in the numbers?

We had a party that exceeded their respective expectations. There was an earnout on it and they achieved their earnout, and when you do these transactions you have to estimate those earnouts early on.

You may sometimes be a little bit lower on those earnouts, and as a result, you get that kind of a picture. Then you –- in this case, that now goes to the income statement instead of to the balance sheet.

Okay. And then just one more question on kind of the notifier communications aspect of the business.

When you are building it out, are you looking for geographic density or -- how does that work exactly in terms of where you're making acquisitions and how you're thinking of that?

Well, go ahead, Frank.

I think it's both. I mean, we look obviously at geographic expansion, as well as tuck-in acquisitions.

And then we, also, over the years, have increased capabilities. A good example in our recalls/returns business, the capabilities got enhanced by acquisitions.

Our audit functions, for instance, there were acquired and then we expand on those.

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

It's all of the above.

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

No, we don't break it out.

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

I don't know if it's going to be more, both sterling and euro drives that. They've been fairly stable and, yes, who knows what's going to happen.

In our guidance, we've kept it fairly stable. So the impact we saw in Q1 versus our previous guidance is carrying a little bit through the rest of the year.

Okay, all right. And if you look at the percentage of LQ and SQ that are multi-service remaining somewhat constant, I guess that implies that you're not net outgaining your acquisition pace.

Is that disappointing to you? I mean, what's the impediment from moving the needle faster?

It would seem like that would be easier to do than just keeping up with the same pace of acquisitions?

Again, it shows again in the growth rate. Both SQ, LQ is strong and those are driven really by those multiple services, so I think you need to keep looking at the growth rate.

If we stay in that 8 to 10, 5 to 8, then we're clearly on track with respect to the growth in the multiple services.

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

I think it certainly contributes. I think the number of customers isn't the only factor.

You also need to look at -- it's both quantity, but also what kind of services are getting added, yes.

Precisely [ph]. You might have a customer that starts out just with its medical waste services and adds later on Sharps Management Service, then adds later on Pharma Waste services, then maybe later on adds Integrated Waste Services.

Well, as far as looking at just customer count or percent of customers, that would still be –- you’d think of that as one, but the revenue stream might have quadrupled over that time period.

Yes, that make sense. The pace of mix shift from LQ to SQ in your international markets, is it been your experience that, that mix shift pace has been about the same internationally than you've seen domestically, or is it different?

And what do you expect going forward?

It's growing and it's on track. I think they're doing a nice job internationally to look at Small Quantity opportunities, every country is at a different phase.

Okay. And then finally, noncontrolling interest, is that -- I'm assuming is your consolidated JV that you own more than 50% or something, maybe I'm wrong on that, but could you talk about what subject to the noncontrolling interest?

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

Okay. That's a primary one or the only one that's out there?

That's the primary one.

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

Yes.

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

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

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

Again, that's included in our guidance and it was as expected.

Well, thank you. In closing, I'd like to take a moment to personally thank Rhonda and all of the administrative professionals who work so hard every day here to help build Stericycle.

We all thank you for your hard work and effort and keeping us on track as we continue to build value for our shareholders. Thank you, everyone.

Talk to you next call.