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 - Executive Vice President and President of Stericycle Usa

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 Scott A.

Schneeberger - Oppenheimer & Co. Inc., Research Division Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division Erin E.

Wilson - BofA Merrill Lynch, Research Division David J. Manthey - Robert W.

Baird & Co. Incorporated, Research Division Stewart Scharf - S&P Equity Research Barbara Noverini - Morningstar Inc., Research Division Richard C.

Close - Avondale Partners, LLC, Research Division

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

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

Forward-looking statements involve known and unknown risks and should be viewed with caution. Factors described in the company's Form 10-K, 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 third quarter are as follows: Revenues were $480.5 million, up 14.2% from $420.9 million in Q3 '11.

And internal growth, excluding returns and recall revenues, was up 8.5%. Domestic revenues were $348.2 million, of which $319.5 million was domestic regulated waste and compliance services and $28.7 million was returns and recalls.

Domestic internal growth, excluding returns and recalls revenues, was up over 10% consisting of SQ up 11%, and LQ up 9%. International revenues were $132.3 million and internal growth, adjusted for unfavorable exchange impact of $8 million, was up 4%.

Acquisitions contributed $31.5 million to the growth in the quarter, of which $0.6 million related to the recalls and returns business. Gross profit was $215.6 million or 44.9% of revenues.

And SG&A expense was $90.2 million, or 18.8% of revenues. Net interest expense was $12.9 million and the net income attributable to Stericycle was $65.5 million or $0.75 per share on a reported basis and $0.84 adjusted for acquisitions and other nonrecurring expenses.

Now the balance sheet. Our covenant debt-to-EBITDA ratio was 2.22 at the end of the quarter.

The unused portion of the revolver debt at the end of the quarter was approximately $610 million. On October 22, we signed 2 private placements for a total of $250 million.

This includes a $125-million, 7-year note at a rate of 2.68% and a $125-million 10-year note at a rate of 3.26%. The proceeds will be used to reduce existing borrowings.

In the quarter, we repurchased 43,500 shares of common stock in the open market in an amount of $3.9 million, and we have authorization to purchase an additional 4.2 million shares. Our capital spending was $17.8 million, our DSO was 60 days and Q3 year-to-date cash provided from operations was $277 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 12 transactions, 3 domestic and 9 international. Our worldwide acquisition pool room 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 537,000 accounts, of which over 521,000 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 expanding portfolio of offerings.

For our SQ customers, these include Steri-Safe and other compliance services; and for our LQ customers, the growth drivers are Sharps Management, Pharma Waste and Integrated Waste Solutions. We remain very excited about our future growth because today, 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. We want to take this opportunity to thank each member of our worldwide team for their strong performance and continued commitment to our customers and our shareholders.

I'll now turn it over to Charlie.

Thanks, Rich. I would now like to provide insight on our current outlook for 2012 and 2013.

Please keep in mind that these are forward-looking statements. Revenues from acquisitions completed in the quarter were approximately $3.8 million, and annualized, are approximately $33.7 million.

Keep in mind, our 2012 guidance does not include future acquisitions, divestitures, acquisition-related and other nonrecurring expenses. For 2012, we believe analysts' EPS estimates will be in the range of $3.27 to $3.29, which we are comfortable with.

We believe analysts' revenue estimates for 2012 will be in the range of $1.87 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 $319 million to $327 million, with CapEx anticipated between $65 million to $68 million.

Now I'd like to provide a preliminary outlook for 2013. Keep in mind our 2013 guidance does not include future acquisitions, divestitures, integration, acquisition-related and other nonrecurring expenses.

We believe analysts' EPS estimates will be in the range of $3.62 to $3.67, including the impact of the private placement and a share count of 87.5 million, which we are comfortable with. We believe analysts' revenue estimates for 2013 will be in the range of $2.06 billion to $2.09 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 $350 million to $355 million.

CapEx is anticipated to be between $65 million to $70 million. In closing, we are very pleased with our Q3 results and excited about the multiple growth opportunities for 2012 and beyond.

Thank you for your time. We'll now open it up to Q&A.

Mike, you can open up the Q&A line.

Question, in regards to the accelerating organic growth you're seeing, I know you pointed out it's stemming from a lot of the cross-selling opportunities into the existing client base, but is there anything novel you're doing on the sales front or bundling those? I mean, we've always had those opportunities, but growth seems to keep ticking up throughout the year, so I'm curious if it's macro trends or anything internally you are doing different?

No, Ryan. It's the same concept on our sales strategy for both SQ and LQ.

Obviously, we've got a good value proposition for our SQ and LQ customers. And the accelerated growth you see is the same formula we've followed for many, many years.

That strategy has not changed except we're getting a higher acceptance rate on those offerings.

Okay, that's helpful. And then, Frank, maybe one for you in regards to the debt placement.

We clearly didn't have that in the model. I'm curious what the trade-off on that debt is versus the debt you paid down and what that does on a forward EPS basis, if you can give us a feel for that.

On a forward EPS, I would say for '13, the comparison between either borrowing under the revolver, which would we otherwise would have done, or now with the private placement, it's the equivalent of about $0.025 diluted. So a higher interest expense by about $3.5 million pretax.

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

In regards to the patient communications business, we tend to ask this every quarter, but can you give us a little bit more color there on how that's progressing? I know this was going to be a year of making sure you could integrate it well and drive organic growth.

Are we ready to see that accelerate from an M&A or organic growth standpoint if we think about your 2013 expectations?

Sure, Ryan. I think if you look back, what we've always said about 2012 for patient communication, it's a year that we'll spend looking at integrating those acquisitions that we've already completed to date, adding service capabilities to the platform of services and then piling certain sales activities with respect to our existing sales team and leveraging that relationship for our customers.

Obviously, we're 10 months through the year. We're on track.

We look at this as the assumptions we made going into this business. We validated those assumptions throughout the year.

We remain very excited about the opportunity. And I think if you look at how do you take that for next year, I think we'll look at M&A continuing in that space at this point.

Question, I guess, on the general spending environment on the LQ side in particular, but SQ as well. Are you seeing any impact in terms of spending levels or appetite for your services?

It sounds like you saw some acceleration on the add-on side. Your guidance seems to imply your typical growth rate.

So I'm just wondering whether there is any general change in the business environment or customer receptivity to services?

The overall guidance we've given, I mean, it's really -- it may prove to be conservative, but I think, overall, that the trends are normal. We don't see any major changes.

Good growth in the quarter, nice acceleration during this year, quarter-to-quarter a little bit, so we're on track we feel.

Got it. And maybe a little bit more color, then, on which add-on services or multiservice offerings, just maybe seeing a little bit more penetration with and additional detail perhaps with regard to the Patient Notification rollout.

And I'm guessing you won't provide quantified guidance for what that might mean for '13, but maybe a little bit more color regarding individual service offerings and uptake there.

This is Rich. I think Rx Waste, Pharma Waste as we call it, has been a very, very strong performer this year.

We're already well ahead of the sales closes and the installations and therefore the revenue inbound, compared to where we were in 2011.

And I think on patient communications, Scott, you'll see that 2013 will be more M&A adding service capabilities to that platform. And then we'll see more internal growth efforts in the 2014 time frame, when we talk about patient communications.

In terms of the patient communication, just a clarification. So if it's service-oriented, does that imply it's -- there's not necessarily a lot of technology that you're looking at, but more it's a customer base?

No, it's both. I mean, obviously there's technology in both, in the relationship and the communication tools that we use, the call center technology that's in place.

That is being expanded over the call centers. We have the integration of those call centers.

It's going to be obviously important that we're learning a lot there and doing things on that front. So it's both the technology component that's improving over time that creates efficiencies, that creates integration and also more capabilities to service our customers.

I think in the quarter, you said that acquisitions less than 12 months came through at like $31 million.

$31.5 million, correct.

If we took some of the prior disclosures, that one seems to be a little bit lighter than -- maybe if you divided...

Let me explain that out. So the way that -- that $31.5 million is the contribution to growth.

So in the quarter itself, there were $42.6 million in revenues from those acquisitions, but in the year 2011 in the same quarter, there was $11 million in it. So you have the revenues in both years and the delta between those 2, the contribution to growth, it's $31.5 million.

Right. Okay.

All right. I think I had another question, but -- oh, the final one I had was on -- it looks like you sold some business.

I was wondering if you could talk through that, maybe not just the dollars and cents, but more the structure, the reason for maybe exiting.

Sure, Al. It's related to the divestiture of Ecowaste in the U.K.

We divested a treatment location and approximately USD $2.8 million in contracts. This was a CC ruling, but it allows us to bid on these contracts in the future and there are no restrictions to future deals in the U.K.

as part of this divestiture.

What was the -- I won't say the rationale, but why are you exiting? Maybe I've missed something in the past, but...

Yes, this was the ruling from the Competition Commission of the U.K.

Let's -- if we could, can we start out going through the acquisitions in the quarter, the 3 in the U.S. and the 9 international?

Could you guys please give us a feel for what categories those were done in?

Those were all in regulated waste. There was 1 in Romania, 1 in Portugal, 2 in the U.K., 1 in Brazil, 2 in Mexico, 2 in Chile on the international front.

On the U.S. front, in med waste, was it SQ, LQ?

Could you give us a feel for mix for both domestic and international, please, Frank?

We don't break it between domestic and international, but for all acquisitions in the quarter, 80% was SQ roughly and 20% was LQ, from a revenue point of view.

Okay. In all med waste, curious, and Charlie kind of covered it in the prior question, but just interesting nothing was done in patient communication in the quarter.

Is it -- are you still in the integration phase? Charlie just mentioned '13 would be the acquisitive phase, '14 would be organic growth.

Do I have that correct? And are we still 2 quarters from aggressive acquisitions in PC?

Yes, PC, obviously, is one where we said we would build the platform, but we are continuously looking for acquisitions. And it's one that we've done some this year and we will continue to look for those.

Okay. Two more, if I could sneak it in.

First one on recall. Could you give us a feel for how that's trending, anything sizable that may trickle into the next quarter?

The guidance for the coming year looks about as one would expect, but just any developments there that we should be aware of, please.

The trend, as you saw, very strong first quarter at about almost $36 million; second quarter, $29 million; and now about $29 million. Trend is, again, not much in this business, visibility longer term.

There's always a little bit of slop over into next quarter, but in general it's very stable there, very similar to prior quarters. Guidance again for this year, for 2012, between $112 million and $120 million, and then the guidance for next year, $105 million to $120 million.

And then lastly, you've had success with a few of your recent projects such as Pharma Waste and LQs and patient communication as far as emerging. Anything new on the horizon that's worth discussing, that's far enough along to bring up on this call?

No. Again, if there are, then we would tell you.

But I think, overall, each of them, Pharma Waste, the hazardous, the Sharps Management, the compliance side, the SQ international, they're all tracking and contributing to the growth that you've seen this quarter.

Just a couple of questions. Can you -- was the international growth 4%?

Did I catch that correctly?

That is correct.

And it's a little bit lower than what you guys normally expect. What -- is there anything in particular going on there?

Or was the divestiture impacting that?

That was part of it, but also in this quarter we had a couple of hospital contract escalators that were lower than expected and that also impacted it a little bit.

What does that mean exactly, that the escalators were lower than expected? What was going on there?

Well, I'll give you an example. In one geography, we have an escalator tied to something like a CPI or -- that's not the term they use, but it's tied to that.

So hard to predict those things until you get right down to the time when the contract turns.

Okay. Is that going to impact international growth going forward?

I mean, should we think of maybe the range is a little bit looser than we had expected or up until now?

No, I mean, we're providing guidance. I think Charlie mentioned 5 to 8, which is in our normal range going forward.

And is the DSO tick up sequentially Spain-related? After you got the money, it's kind of building back up again?

No, it wasn't. September was kind of a tricky month.

It ended on a weekend. It only had 19 days in it that were working days that you get money out of the banking system.

So it was just a tougher month to end the quarter with. And that added about 2 days to the DSO.

And so it wasn't particular to international?

No. I mean, it was general.

There were some in domestic because of the cutoff and some in the international. They kind of equally contributed to it.

Okay. And then what's going on with the tax rate exactly?

Because it's a couple of quarters in a row that it's a little bit lower than what we were expecting. I mean, what kind of tax rate are you expecting for the rest of this year?

And what about for next year?

The tax rate year-to-date is about 35.6%, a little bit lower than the 36% that we said we would be at. Guidance for next year, we would still say it's approximately 36% and so it's fairly close together.

A little bit of tweaking here and there, a little bit of benefits this year with some NOLs, but I think overall, the guidance for next year is 36%. We've continued to optimize our corporate structure to manage the tax rate.

And can you kind of bridge us for the parts that we might need in the organic growth calculation? Like when I just take what you put out, I get to upper 7s, and you had talked about an 8.5%.

Were there certain things in recalls that happened last year that I should be paying attention to?

Sure. So the way the math works there is if you take our total revenue growth of $59.6 million, and what you've done is you obviously exclude the $31.5 million from it, and that is the delta again between $42.6 million this year in the quarter in acquisitions, minus last year in the same quarter, $11 million.

You then add back the $8 million on foreign exchange. The returns management internal growth was $3 million, positive, so you deduct that because we do this calculation excluding the recalls.

So that gets you to $32.9 million in kind of the growth year-over-year. And then you divide that by a number that you first look at your total revenues for '11.

You again deduct that $11 million on acquisitions from it and then the internal RMS number, which is $23.1 million, and that gets you to then $386.8 million. So $32.9 million, divided by the $386.8 million, gets you to the 8.5%.

Sorry, can you hear me?

Yes, we can hear you -- now we can't.

I was just wondering if you could give us, Frank, the after-tax amount of the charges for the acquisition expenses, restructuring, plant closure and the sale of business, just so we can reconcile? I know you gave us the EPS impact, but sometimes there's differences in taxability and so forth.

Let me look it up. The after-tax number, I'll get back to you on that.

That was for just the Ecowaste or which one? Or total?

Yes, I'm looking for the -- you give us the pretax amount of these charges and then you give us the EPS impact of the charges. Do they all come across at the same tax rate?

No. The tax rate was slightly lower.

The after-tax amount was about $7.5 million.

In aggregate?

In aggregate.

Okay. Maybe we can follow-up with the individual categories afterwards.

No problem.

How much was, I guess, customer mix a factor in the sequential gross margin trend?

If you look at the gross margin, the large contracts, again, the growth there was about a 9-bp lowering of the gross margin. In the quarter, foreign exchange and acquisitions were about 5 bps lowering the margin, and then the rest of the business, the overall mix and everything else, made it 33 basis points better in the quarter.

So that's quarter-over-quarter.

Okay. And then I was just curious what your thoughts were on the medical device reprocessing market.

I assume many of the relevant devices and materials end up in your treatment facilities that could ultimately be refurbished or reprocessed. Do you have an existing effort there or maybe have any interest in establishing, I guess, a more formalized relationship with the big players like J&J or Stryker?

Yes, Erin. We've looked at this -- we've never thought of it as a good fit to be in the medical device reprocessing business.

But you're right; a lot of those devices that can be reprocessed do wind up in the medical waste containers. Hospitals don't do to a very good job of segregating that material out.

We are piloting right now with some of the major players in that space on trying to recapture that material from the waste stream and get it to them. It helps health care.

There's a shortage of medical devices, from our understanding, that can be reprocessed. So early phases of piling right now.

We think it will be good for our customers, good for the environment to get that material into the hands of the reprocessors. So nothing material, but certainly, we are piloting those efforts right now.

Could you quantify, maybe, the overall market opportunity associated with that?

Too early to tell.

Stewart Scharf. Regarding the regions in Europe and the impact, especially like in Spain and the U.K., could you guys break that down a little bit?

We don't break by country. Overall, in the segment reporting itself, Europe in total was about $72.7 million in revenues and the other international locations were at $59.6 million in revenues.

Okay. And regarding the call centers, could you elaborate a little more on that as far as the number of people and how you're allocating patient communications and so forth?

The call centers that we have, obviously at this point have been acquired, which obviously, where there's lots of resource that we're now trying to optimize not only their efficiency but also the tools that they use, the infrastructure and technology that they use to do their business. And so all those efforts allow us to improve that business and to look for integration there and to also add additional services to that over time.

Okay. And also regarding the multiple services -- and you've said for a while that the SQ was basically 80% for the single serve and for the LQ around 70%.

And do you have a time frame or a goal for expanding that to multiple services and improving that percentage?

The percentage heavily depends on obviously how many customers we acquire. And because we keep acquiring customers on a worldwide basis, the opportunity remains really open to us and the percentage is very close every quarter-to-quarter.

The number isn't changing, which on the one side you would maybe say, "Well, what is it going to do? Where are you going to take it?"

Again, because of our continued acquisition, that number and that opportunity that we have remains very large for us.

Okay. And just one more quick one, regarding the elections.

And I know that's not a major driver for what you're looking at. You're looking more at the baby-boom and the long term.

But assuming there was Obamacare and there was a shift from, say, emergency rooms to smaller clinics, is there any way to quantify that?

We haven't really quantified. We think the Affordable Care Act, or Obamacare, obviously, we anticipate more people being insured.

To your point, that probably does move volumes from the emergency room to SQ, which we think is good for us. It gives us the opportunity to sell more services.

That should be favorable. If we look at Massachusetts, and a lot of people point to Massachusetts, because they do have a similar type of health-care system, the studies that we've done internally, we have seen volumes increasing, especially in the SQ world, in that state.

So we look at that as a favorable outcome. So we'll see.

It's too early to tell, but that's one thing that we can point to as something that's been favorable for us.

Could you give us maybe some color, or an update on the competitive dynamics of the Pharma Waste space? Have you been seeing competition heat up, maybe some new entrants into the market given the relatively attractive opportunity going forward?

Yes. I think if you look at the competitive landscape for Pharma Waste -- and when we look at Pharma Waste, we're specifically looking at LQ, the hospital market.

You have a lot of regional companies, regional hazardous-waste companies that are in that space. And then on a national or semi-national platform, folks like waste management and clean harbors, I think the advantage that we have is the relationships that we have within health care.

So I think, quickly, we've taken a leadership position for that type of service offering and when we look at the opportunity we have, when a hospital does outsource that program, we do close a large percentage of those accounts. And I think that's because of the leadership position we have within health care.

Got it. And how would you say the rate of growth of Pharma Waste compares with the other services available to LQ customers?

It's at a higher growth rate, but it's also -- we're in an earlier inning there.

Just a follow-up on that. Did you say what your penetration rate was on Rx Waste with your customers?

Have you given that?

No, we did not.

We're in the early stages of that service offering.

Okay. And then when we think of patient communications -- and I know obviously a lot of talk there.

Just to be clear, there was not any acquisitions in the patient communications in the third quarter. That's correct.

That is correct.

Okay. And on a go-forward basis, can you give us a little bit of, I guess, update with respect to when do you expect -- or maybe you won't do this, but brand this as "Stericycle Patient Communications?"

Or are these acquisitions you've done still operating as the -- under the existing names?

Yes. I think it's a mix.

We have certainly the platform acquisition that we did, which was NotifyMD. We continue to use that name.

Some of the acquisitions that we have completed, we have branded them NotifyMD, but not all. I think it's too early to tell.

We're looking still from -- and that's as far as the piloting on the sales and marketing strategy on how do we brand that service offering.

Okay. And is there any opportunity for the patient communications to be leveraged into the LQ base?

I would assume you have some national accounts that this would be an attractive service for.

Oh, absolutely. I mean, in the acquisitions we've made, there've been both LQ and SQ customers.

I think the LQ one is interesting. From the Affordable Care Act and the way that hospitals are being reimbursed, there is certainly an opportunity that now that it's based on patient satisfaction and outcomes, that how a hospital communicates with the patients -- there's been a lot of white papers.

The better that they communicate with their patients, the better the outcome. So we think there could be some great opportunities on the LQ side.

But right now, the focus has been mostly on the SQ side.

Okay. And then any update with respect to the ability to, I guess, ramp up the SQ on the international front, how that is progressing?

That's on track. I mean, there is definitely focus.

As we've said in the past, the equivalent of Steri-Safe is expanded internationally and it's called to the compliance program there. So it definitely is on track and continues to grow there.

Okay. And then final question for me.

I would be interested in hearing your thoughts on the retail front. I think you guys have been doing some business with respect to national accounts on returns or waste disposal on large retail customers.

Any thoughts on that?

Yes. If we could remind everybody again on the StrongPak offering, it's a unique offering, assisting retail to dispose of both hazardous waste and Rx Waste.

We continue to build off our med waste offering. So we do have good coverage in accounts in the retail space.

We're picking up items like med waste and pharmaceutical waste. So we continue to see a lot of regulatory compliance, and retail is getting a lot of focus in this area.

And where there's opportunities, we're out in the marketplace trying to expand that service offering. We're excited about that offering.

We thank everybody for joining the call. Next week -- always drive safe, but please next week be very alert for trick-or-treaters.

And one last thing: please remember to get out and vote. Thank you, everyone.