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By: Jesal Jobalia Patrick Ripley. Recommendation: BUY 200 SHARES @ MKT. March 27, 2001. STERICYCLE, INC. Stericycle's Mission: To be the leading company dedicated to the environmentally responsible management of medical waste for the health care community. Who is Stericycle?.
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By: Jesal Jobalia Patrick Ripley Recommendation: BUY 200 SHARES @ MKT March 27, 2001
STERICYCLE, INC. Stericycle's Mission: To be the leading company dedicated to the environmentally responsible management of medical waste for the health care community
Who is Stericycle? • Founded in 1989, Stericycle, Inc. has its HQ in Lake Forest, IL • Largest provider of regulated medical waste management services in North America, serving over 251,400 customers throughout the United States, Canada, and Puerto Rico • Network includes 33 treatment/collection centers and 87 additional transfer and collection sites • Services and Operations are comprised of collection, transportation, treatment, disposal and recycling of medical waste • Also integrated with related training and education programs, consulting services, and product sales • Stericycle trades on the Nasdaq, ticker SRCL, and is listed in the waste management services industry
What is Medical Waste? • Generally defined as any waste that can cause an infectious disease or that reasonably can be suspected of harboring human pathogenic organisms • Needles, syringes, gloves, and laboratory, surgical, emergency room and other supplies which have been in contact with infectious agents
Eye Poppers! • Fortune ranks Stericycle No. 10 among America’s fastest-growing companies (8/21/00) • Only fully integrated medical waste management network • Only company offering medical waste services nationally • Provide theindustry's broadest service offering • Stericycle is 20x larger than its nearest competitor • Strong presence in the global market place • Since IPO in 1996, 18 CONSECUTIVE QUARTERS!, have met or exceeded Wall Street’s expectations for company’s performance
How Has Stericycle Performed? • Since year end 1996 investors have experienced an average return of 34.83%over the past 4 years
Stericycle Makes a Big Move! • Stericycle has grown primarily through acquisitions– “Roll Up” • Mission statement: • To be the leading company dedicated to the environmentally responsible management of medical waste for the health care community • In November 1999, Stericycle completed the acquisition from Allied waste Industries, Inc. (“Allied”) of the medical waste business of Browning-Ferris Industries, Inc. (“BFI”) in the United States, Canada, and Puerto Rico. • Prior to acquisition BFI had been the largest provider of regulated medical waste management services in the US
Business Description Stericycle divides itself into 4 major lines of business: Collection and Transportation- Collects containers of medical waste and transports to transfer stations or directly to treatment facilities Treatment and Disposal – Waste is treated using one of various treatment technologies then transported for resource recovery, recycling, or disposal Consulting Services- Attempt to “build in” efficiencies that will yield logistical advantages, i.e.) reduce volume of medical waste Documentation – Provide complete documentation to customers for all medical waste collected – Steri-Safe!
Treatment Technologies • Autoclaving – • Treats medical waste with steam at high temperature and pressure to kill pathogens • 65%-70% of medical waste was treated by autoclaving in1999 • Incineration – • Burns medical waste at elevated temperatures and reduces it to ash • 15% - 20% of medical waste was treated by incineration in 1999
Treatment Technologies • ETD Treatment Process – • Electro-thermal deactivation system for grinding medical waste • Uses oscillating fields of low-frequency radio waves to heat medical waste to temperatures that destroy pathogens • Advantages vs. Other conventional treatment technologies • Easier to get permits b/c does not produce fluid or air pollution • More cost effective to construct • Reduces volume of waste • ETD-treated waste may be used for fuel in “waste-to-energy” electrical plants • 10% of medical waste was treated by ETD in 1999
Overview of Medical Waste Management Industry • Industry arose with the Medical Waste Tracking Act of 1988 • Large and fragmented • In 1999 estimated size of regulated medical waste market in US approx. $1.5 billion • Worldwide market approx. $3 billion • In excess of $10 billion when services such as training, education, product sales, and consulting taken into account • Less susceptible than most industries to effects of a general economic downturn
Industry Growth Factors • Pressure to Reduce Hospital Costs Leads to Outsourcing – Health care industry is under pressure to reduce costs and improve efficiency, to accomplish using outside contractors to perform medical waste management • Outsourcing saves up to 50% on average for medium hospitals!! • Aging of Population – “Baby Boomers” 30% of US population, falling mortality, living longer, require more medical attention, more tests and procedures, all leads inc. generation of medical waste
Industry Growth Factors • Environmental and Safety Regulation – - Industry is subject to extensive regulation beyond MWTA - Clean Air Act 1997 EPA estimates competitor closings by 2002: Small waste incinerators – 83-90% Medium waste incinerators – 60-95% Large waste incinerators -- 35% - Occupational Safety and Health Administration “OSHA” • Steri-Safe • Likely to expand beyond traditional health care: ie.) restaurants, casinos, hotels, etc., anywhere employees come in contact with blood borne pathogens
Stericycle’s Competitive Strengths • Market Leader – largest and only national provider of medical waste management services in US • Vertically Integrated Services - offer broad range of services which allow customers to manage medical waste from point of generation through treatment and disposal • Established National Network – 33 treatment/collection centers and 251,400 customers in 48 states • Low Cost Operator – As a result of vertically-integrated network and broad geographic presence
Stericycle’s Competitive Strengths • Diverse Customer Base and Revenue Stability– Top 10 customers account for less than 2.5% of revenues, and no single customer accounts for more than 1% of revenues • Long-Term Customer Relationships – Long-term customer contracts of 1-5 years with substantially all customers • Revenue Predictability – Over 95% of revenues are under long term contracts with automatic renewal (3-5 yrs) • Strong Sales Network and Proprietary Database – Largest most well-established sales force in the medical waste industry, with over 220 sales and marketing personnel
Stericycle’s Competitive Strengths • ETD Treatment Process – Electro-thermal deactivation (“ETD”) system for grinding medical waste • Experienced Management Team– Four most senior executives and the Chairman of the Board of Directors collectively have over 45 years of management experience in health care and waste management industries
The Management Team • Jack W. Schuler -- Chairman of the Board of Directors • Served in current position since January 1990 • From January 1987 to August 1989, he served as President and Chief Operating Officer of Abbott Laboratories, he joined in 1972 and where he held a number of management and marketing positions and served as a director from April 1985 to August 1989 • He also served as a director of Chiron Corporation, Medtronic, Inc., Somatogen, Inc. and Ventana Medical Systems, Inc., and several privately held companies • He is the co-founder of Crabtree Partners, a private investment partnership in Lake Forest, Illinois, which was formed in June 1995 • Mark C. Miller – President, CEO, and a Director • Served in current positions since joining in May 1992 • Vice President for Pacific, Asia, and Africa in the International Division of Abbott Laboratories from 1976-May 1989 • Director of AmericasDoctor.com, and Internet health care company • Director of Lake Forest Hospital
The Management Team • Frank J.M. ten Brink -- Executive Vice President, Finance and Chief Financial Officer and Chief Administrative Officer • Present role since joining the Company in June 1997 • He has over 16 years of finance experience in high growth environments, mergers and acquisitions • Prior to joining Stericycle, he was Senior Vice President and Chief Financial Officer with Telular Corporation • Between 1991 and 1995, he was Vice President and Chief Financial Officer of Hexacomb Corporation • Richard T. Kogler -- Executive Vice President, Chief Operating Officer • Present role since December 1998 • From 1995 until he joined the Company, Mr. Kogler served as Chief Operating Officer for American Disposal • Prior to his position at American Disposal, he spent 11 years with Waste Management where he held a number of management positions prior to being promoted to Vice President of Operations
The Management Team • Anthony J. Tomasello -- Executive Vice President and Chief Technical Officer • Present role since March 1999 • Joined Stericycle in August 1990 as Vice President, Operations, • Five years prior to joining Stericycle, was President and Chief Operating Officer of Pi Enterprises and Orbital Systems, companies providing process and automation services • From 1980 to 1985, he served as Vice President of Operations for Spang and Company, an operating service firm specializing in resource recovery and recycling for manufacturing and process industries
Weaknesses, Opportunities, and Threats • WEAKNESSES • Low margin large generator business • Low internal revenue growth • Heavily regulated industry • OPPORTUNITIES • Well positioned within industry with incredible growth opportunities • 20x Larger than nearest competitor • Owns only 20% of an estimated $1.5 billion domestic market • Big Fish in a Big Pond! • Superior waste treatment and disposal technology (ETD Technology) • Growth into global markets likely to continue through licensing of proprietary intellectual property (ETD Technology) • Business mix shift to small waste generator business leading to long-term margin expansion • EPA regulations should result in large hospitals and other smaller medical waste generators seeking less expensive methods of medical waste disposal rather than incur costs to comply to regulations • Favorable acquisition environment
Weaknesses, Opportunities, and Threats • THREATS • Highly competitive industry • Large number of regional and local companies • On-site treatment of medical waste by hospitals • Businesses who commercialize alternate treatment technologies • Governmental Regulation • Federal Regulation: EPA, OSHA, DOT, MWTA, CERCLA • State and Local Regulation • Foreign and Territorial Regulation\ • Patent Expiration • Currently hold 9 US patents relating to the ETD treatment process and other aspects of processing medical waste • Potential Liability and Insurance • Significant risks of statutory, contractual, tort, and common law liability claims: clean up costs, personal injury, damage to environment, etc.
Stericycle’s Customer Base • Small Account Customers – • Small groups of doctors, dentists, offsite & alternative health care providers • Existing account base of approximately 247,000 small account customers • Growth Area • Offer higher profit potential vs. other potential customers
Stericycle’s Customer Base • Small Account Customers – • Very concerned with compliance issues surrounding proper pick up and disposal of medical waste • “Cradle to Grave” Industry • Doctors are ultimately responsible if medical waste is not handled in accordance with state and federal regulations • “What are we in the business of doing?” – basis for significantly higher gross margins vs. large account customers • Do not produce sufficient volume of regulated medical waste to justify capital expenditures on their own medical waste • More service sensitive, rely on fully integrated service providers (waste removal, staff training, record keeping, OSHA compliance consulting—Steri-Safe)
Stericycle’s Customer Base • Large Account Customers – • Hospitals, blood banks, pharmaceutical manufactures • Existing account base of approximately 4,400 large account customers • Have been successful in serving and plan to continue to serve as long as satisfactory levels of profitability maintained • Provide consulting services to health care customers • Implementation of more stringent Clean Air Act and other federal regulations should significantly increase existing account base– “What are we in the business of doing?
Stericycle’s Business Model • Target Higher Margin, Small Account Customers – • Actively target and increase base of higher margin, small account customers • Capitalize on Outsourcing due to newly enacted Clean Air Regulations – • Clean Air Act 1997 expected increase capital costs required to bring existing incinerators into compliance • Increased EPA regulations • Anticipated movement by hospitals to outsource medical waste treatment presents significant growth opportunities
Stericycle’s Business Model • Expand Range of Services and Products – • Inclusion of collection and treatment of materials like photographic chemicals, lead foils, and amalgam • Expand operations Globally through joint ventures and licensing of Proprietary ETD Treatment Technology • Offer broad range of OSHA compliance and consulting to dental and other types of customers • Steri-Safe • Continue the Evaluation and Integration of Acquisitions – • Have completed 43 acquisitions • BFI • Projected approximately 24 in 2001
Stericycle’s Successful Growth Through Its Business Model • The overall business mix stands at 57% small-quantity generator revenue and 43% large quantity generator revenue • Base internal growth excluding acquisitions and international revenue was up 7% in Q4 2000 vs. Q4 1999 • Sequential 10.3% growth of small account customers in Q3 2000 brought the total number of small account customers to 247,000 • This number of small account customers remained level in Q4 2000, reflecting a 9% revenue growth in small accounts vs. Q4 1999
Stericycle’s Successful Growth Through Its Business Model • There were 4,300 new small account service agreements signed in Q3 2000 • Gross margins for small account customers are high, ranging from 15%-55% • Growth in large account customers revenue was up 5% in Q4 2000 vs. Q4 1999 • Gross margins for large account customers range from 12%-13% • Management feels with EPA Regulations pending gross margins for large account customers should reach 20% • Base internal growth stronger at 7% vs. historical levels of 5% • Implies management cutting unprofitable contracts, and strengthening pricing
Stericycle’s Successful Growth Through Its Business Model • International Environment • International Revenue grew substantially up $2.1 million sequentially to $2.7 million in Q3 2000 • Stericycle has also established a strong presence in the global marketplace • Management is excited at its ability to leverage intellectual property of patents (ETD Treatment Tech.) to create value for shareholders without having to put major stake holds in various geographic areas • Stericycle has entered into joint ventures and licensing agreements in Argentina, Brazil, South Africa, Canada, Japan, and Mexico • Plan to open first facility in Kyushu area of Japan by yr end 2001
Stericycle’s Successful Growth Through Its Business Model • Acquisition Opportunities • Consummated 3 small tuck-in acquisitions, with annual revenue $0.2 million in Q3 2000 • Management has estimated up to $7.5 million in tuck-in acquisitions in 2001, “…north of 2 dozen…” • 2,000 companies with revenues of $65-70 million that represent pipeline for Stericycle • Tight on acquisition criteria, favorable pricing of 3-4 times EBITDA • Completed successful integration of BFI on schedule at yr end 2000
Stericycle’s Successful Growth Through Its Business Model • STERI-SAFE • Dental offices and other customers must address a complex and often baffling array of OSHA safety issues - especially regarding medical and hazardous wastes. The Stericycle Steri-Safe™ Program offers comprehensive compliance services for dental offices (and other types of customers) and is designed to keep your office in total compliance - guaranteed. • Steri-Safe™ Components • Blood borne Pathogens Training CD-ROM • OSHA Compliance Manual • Complete Material Safety Data Sheets on CD-ROM • Quarterly Audio Safety Meetings on CD-ROM • OSHA Hazard Identification & Communication Poster • OSHA Hazard Communication Labels • Annual OSHA Training with Continuing Education Units • Mock OSHA Inspection • Hazardous* and Medical Waste** Containment and Collection • “Cradle to Grave” Process!!
Stericycle’s Successful Growth Through Its Business Model • STERI-SAFE • Management is planning aggressive nation-wide roll out of Steri-Safe program in 2001 • Potential to re-shape fundamental business • Has seen very strong acceptance from existing customers • Vehicle for additional revenues • Changes billing paradigm to payment in advance vs. payment in arrears • Currently only 2% penetration into current customer base • Profitability– 55%-60% Gross Margins Range • Management sees these margins only increasing as program gains critical mass with national customer base!!
Going to Excel • Ratio Comparison • Discounted Cash Flow Model
Recommendation • Buy 250 shares at the market • Given yesterday’s closing price of $38.25, this will be a total outflow of ~ $10,000 • This will give us the flexibility to take an “additional bite” in the future if we deem necessary