Presentation for RCMP 11/06/08

1
Presentation for RCMP 11/06/08

• Brad Johnson
• Lucian Tira
• Evangelos Kalogiropoulos
• Gani Beket

2
Company History

• Founded in 1989 after Medical Waste Tracking Act
• First acquisition of outside provider in 1993
• Launched IPO in 1996
• First International operation in 1998

3
Company Overview

• Offers collection, transportation, treatment,
  disposal, and recycling of medical waste
• Full service for nearly 400,000 customers
• Small customers include doctors offices and
  pharmacies
• Large customers include pharmaceutical companies,
  hospitals and blood banks
• Foreign customers nearly 23 of revenues

4
Products and Services

• Regulated Medical Waste Services
• Handle possibly infected waste and prevent
  contamination and infection
• Provided for both large and small customers
• Service expanding greatly in International market

5
Products and Services

• Steri-Safe OSHA Safety Compliance Program
• Training for smaller customers to comply with
  regulations
• Manual, website support, consulting and supplies
• Very high margins

6
Products and Services

• Bio Systems Integrated Sharps Safety Solution
• Provides containers for used needles
• Collection and destruction of needles to prevent
  sticks
• Pick them up along with other medical waste

7
Products and Services

• Returns Management Services
• Removal of expired or unsafe products from
  customers
• For manufacturers, hospitals, pharmacies and
  distributors
• Handle the notification, processing, tracking and
  compliance reporting
• Also handle medical recalls

8
Macroeconomic Factors

• Population is getting older and needing more
  healthcare
• New presidents healthcare plan
• Changing Government regulations
• Tightening credit markets may affect growth

9
Transaction History

• Purchased 200 shares in May 2001 _at_ 19.47
• Stock split 21 in June 2002
• Sold 200 shares in March 2006
• Stock split 21 May 2007
• Currently hold 400 shares at 56.20 (11/5) with
  an effective cost basis of 9.73

10
Industry overview

• Estimated market size
• Global 10.0 Domestic 3.0-3.2B
• Frost Sullivan Industry Study and Management
  Estimates (including ancillary services
  products)
• Regulated medical waste any medical waste that
  can cause an infectious disease such as needles,
  syringes, gloves etc
• Five federal agencies supervise regulated waste
  under a variety of statues
• U.S. Environmental Protection Agency (EPA)
• U.S. Department of Transportation (DOT)
• Occupational Safety and Health Administration
  (OSHA)
• U.S. Drug Enforcement Administration (DEA)
• U.S. Postal Service (USPS)
• Different regulations in each state

11
Industry overview

• Growth factors
• Aging of population
• Pressure to reduce Healthcare costs
• Environmental and Safety Regulation
• Requirements of the Occupational Safety and
  Health Administration (OSHA)
• Shift to Off-Site Treatment
• Control of Drug Diversion
• The U.S. Drug Enforcement Administration
  (DEA) has recently emphasized on proper
  handling of expired or recalled pharmaceuticals.

12
Company review

• Market share global 10, domestic 22
• Operate in the U.S., Canada, Mexico, the U.K.,
  Ireland and Argentina
• No direct domestic competitors
• Insulated from economic cycles
• Revenue retention rate 95
• No large customer exceeds 2 of revenues
• Over 95 of revenues under long term contracts
  with automatic renewal

13
Risk Factors Competitive Strengths

• Risk Factors
• Governmental Regulation
• Low barriers to entry
• Technology and patents
• Potential environmental liabilities
• Foreign exchange

• Strengths
• Broad range of services
• Established National Network
• Diverse Customer Base and Revenue Stability
• Ability to integrate Acquisitions
• Strong sales Network and Proprietary Database
• Experienced Senior Management Team

14
Business Model

• 
  
  

Supply specially designed reusable leak-and
puncture-resistant plastic containers to large
and small-quantity customers Collect them at
intervals specified mainly by contract
Collection of regulated waste
Temporarily hold small loads of waste until they
could be consolidated into truckloads and
transported to a processing facility.
Transfer stations
Disposal in a third party landfill. Complete
documentation to customers for all regulated
waste collected
Processing Facility
Recycling or permanent disposal
First they scanned for unacceptable substances
and then proceed to various treatments such as
Autoclaving, ETD, chemical, Incineration
15
Current Strategies

• Expand Range of Services and Products
• Regulated waste services to pharmaceutical
  companies and other large-quantity generators
• Improve Margins
• Increase the base of small-quantity customers
• More efficient service strategies for
  large-quantity customers
• Seek Complementary Acquisitions
• Acquire businesses that expand its national and
  international networks
• Completed 135 acquisitions from 1993-2007,
  100 domestic and 35 international

16
SRCL vs. SP 500
17
Revenue breakdown

• LQGs constitute around 37 of total revenues and
  account for 2.46
• of total number of customers
• Continued penetration of BioSystems led to
  increase of revenue per LQG
• Average gross margin in this segment is 21

18
Revenue breakdown

• SQGs constitute around 63 of total revenues and
  account for
• 97.54 of total number of customers
• Increased adoption of SteriSafe program
  (including higher priced select and premium
  versions)
• Average gross margin in this segment is 44.3

19
Past sources of growth
Acquisitions have been fueling growth for years!
20
Acquisitions pipeline
Acquisition deal structures increasingly favor
debt
21
Pro-forma PL
  2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Medical Waste (dom-ic) 495,469 557,927 637,731 727,013 799,715 879,686 958,858 1,045,155 1,139,219
yoy growth 10.5 12.6 14.3 14.0 10.0 10.0 9.0 9.0 9.0

Medical Waste (foreign) 100,147 172,653 210,857 267,788 321,346 369,548 424,980 488,727 562,036
yoy growth 70.9 72.4 22.1 27.0 20.0 15.0 15.0 15.0 15.0

Returns mng-nt (dom-tic) 12,778 58,509 83,677 115,474 155,890 202,657 253,322 303,986 349,584
yoy growth 1157.7 357.9 43.0 38.0 35.0 30.0 25.0 20.0 15.0

Domestic gross margin 46.3 47.7 48.7 49.7 50.0 51.0 51.0 51.0 51.0
Foreign gross margin 32.1 32.4 31.4 32.0 32.0 32.0 32.0 32.0 32.0
EBT 18.4 21.9 20.5 23.2 23.9 25.3 25.9 25.4 24.5
Source 10Ks, team estimates
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DuPont Analysis
               
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Net Income (NI) 105,271 118,379 157,112 186,362 224,130 258,864 284,872 307,046
Shareholders Equity 625,081 714,075 871,187 1,057,549 1,281,679 1,540,543 1,540,543 1,572,207

ROE 16.84 16.58 18.03 17.62 17.49 16.80 18.49 19.53

Profit margin 13.33 12.69 14.15 14.59 15.44 15.81 15.50 14.97
Net profit/Sales 20.99 -4.80 11.50 3.14 5.77 2.43 -1.97 -3.41

Asset turnover 66.48 63.54 65.61 66.80 65.19 62.38 62.90 66.11
Sales/Avg. Assets 2.63 -4.42 3.27 1.81 -2.40 -4.32 0.83 5.10

Equity multiplier 2.12 2.25 2.04 1.94 1.88 1.84 1.95 2.04
Assets/Equity 5.77 6.01 -9.48 -5.05 -2.99 -1.76 5.61 4.55
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Leverage
               
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E
Current portion LTD 22,681 22,003 21,410 19,067 26,374 13,547 13,547 13,547

Senior credit facility 387,265 465,434 488,521 510,780 580,757 654,864 735,147 820,336

Notes payable 77,914 168,641 111,028 127,695 145,189 196,459 220,544 246,101

Total debt 487,860 656,078 620,959 657,542 752,320 864,870 969,239 1,079,983

Total assets 1,327,906 1,608,159 1,776,062 2,047,186 2,406,895 2,842,085 3,001,648 3,202,624

Debt/total assets 36.74 40.80 34.96 32.12 31.26 30.43 32.29 33.72
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Leverage revised
               
2006 2007 2008E 2009E 2010E 2011E 2012E 2013E

Total debt 487,860 656,078 620,959 657,542 752,320 864,870 969,239 1,079,983

Total assets 1,327,906 1,608,159 1,776,062 2,047,186 2,406,895 2,842,085 3,001,648 3,202,624

Intangibles 929,852 1,186,022 1,265,101 1,341,153 1,457,946 1,668,476 1,920,970 2,202,503

Assets less intangibles 398,054 422,137 510,961 706,033 948,949 1,173,608 1,080,678 1,000,121

Debt/Assets less intangibles Debt/Assets less intangibles 122.6 155.4 121.5 93.1 79.3 73.7 89.7 108.0
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DCF inputs
Description of an input Value Source/Other comments
Weight of Debt 13.0 Based on market MV of equity BV of debt
Weight of Equity 87.0 Based on market MV of equity BV of debt
Cost Debt 6.00 Bloomberg. Yields on companys LT debt.
Cost Equity 10.27
ß 0.78 Bloomberg, finance.yahoo.com.
R f 4.00 Yields on 10-yr US treasuries
Return on the market 12.00 Team assumptions
Tax rate 39.00 Effective income tax rate of the company
WACC 9.41
Sustainable growth rate 4.00 LT growth rate of the US GDP
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DCF model
2007 2008 2009 2010 2011 2012 2013 TV
Net Income 118,379 157,112 186,362 224,130 258,864 284,872 307,046
Depreciation 27,480 32,097 36,659 41,882 47,800 54,466 61,939
Amortization 3,657 5,329 6,129 6,969 7,858 8,822 9,844
-CAPEX (40,031) (47,089) (54,292) (61,771) (69,736) (78,402) (87,654)
-?NWC 18,337 (27,661) (16,044) (7,073) (28,056) (16,498) (17,506)
FCF 127,821 119,789 158,816 204,137 216,730 253,260 273,668 5,262,078
PV - - 145,158 170,536 165,487 176,749 174,568 3,356,572
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DCF results
Description Value
PV of FCF 4,189,070
Less LT debt 635,784
PlusCash and ST inv 18,364
Equity value 3,571,650
of Shares 85,406
Price per share 41.82
10 range 37.6-46
Market price as at 6-Nov-08 is 58 Current stock
price implies growth rate of revenues over 20 in
the following 5 years!!!
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Sensitivity analysis
TV growth rate TV growth rate TV growth rate TV growth rate TV growth rate TV growth rate
WACC 3 3.50 4 4.50 5
WACC 7.0 62.04 70.77 82.42 98.71 123.16
WACC 8.0 47.84 53.08 59.62 68.03 79.24
WACC 9.41 35.36 38.31 41.81 46.02 51.18
WACC 10.0 31.63 34.04 36.85 40.16 44.14
WACC 10.5 28.94 30.98 33.35 36.10 39.36
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1 yr stock performance
Flight to quality since October as investors
dump other stocks?
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Recommendation

• SELL 200 shares of Stericycle (SRCL) at the
  market price of 55.00
• Tight credit markets hinder growth at previous
  rates
• Flight to quality baked into the current price
• High profit margins and low barriers to entry
  may lure in competition