Presentation for RCMP 11/06/08

Brad Johnson Lucian Tira Evangelos Kalogiropoulos Gani Beket

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

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

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

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

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

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

Macroeconomic Factors

Population is getting older and needing more healthcare

New president’s healthcare plan Changing Government regulations Tightening credit markets may

affect growth

Transaction History

Purchased 200 shares in May 2001 @ $19.47

Stock split 2:1 in June 2002 Sold 200 shares in March 2006 Stock split 2:1 May 2007 Currently hold 400 shares at $56.20

(11/5) with an effective cost basis of $9.73

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

1. U.S. Environmental Protection Agency (“EPA”)2. U.S. Department of Transportation (“DOT”)3. Occupational Safety and Health Administration (“OSHA”)4. U.S. Drug Enforcement Administration (“DEA”)5. U.S. Postal Service (“USPS”) Different regulations in each state

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.

Source:''www.stericycle.com''

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

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

Business Model

Collection of

regulated waste

Processing Facility

Transferstations

Recycling orpermanentdisposal

Supply specially designed reusable leak-and puncture-resistant plastic containers to large and small-quantity customersCollect them at intervals specified mainly by contract

Temporarily hold small loads of waste until they could be consolidated into truckloads and transported to a processing facility.

First they scanned for unacceptable substances and then proceed to various treatments such as Autoclaving, ETD, chemical, Incineration

Disposal in a third party landfill. Complete documentation to customers for all regulated waste collected

Current Strategies

Expand Range of Services and Products1. Regulated waste services to pharmaceutical companies

and other large-quantity generators Improve Margins1. Increase the base of small-quantity customers2. More efficient service strategies for large-quantity

customers Seek Complementary Acquisitions1. Acquire businesses that expand its national and

international networks Completed 135 acquisitions from 1993-2007, 100 domestic and

35 international

SRCL vs. S&P 500

Revenue breakdownLarge quantity generators (LQG)

-

5,000

10,000

15,000

20,000

25,00030,000

35,000

40,000

45,000

50,000

2004 2006 2008 2010 2012 2014

Period

# of

LQ

Gs

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

$ re

venu

e

Revenue perLQG

# of LQGs

• 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%

Revenue breakdownSmall quantity generators (SQG)

-

100,000

200,000

300,000

400,000

500,000

600,000

2004 2006 2008 2010 2012 2014

Period

# of

SQ

Gs

-

500

1,000

1,500

2,000

2,500

$ re

venu

e

# of SQGs

Revenue perSQG

• 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%

Past sources of growth

Organic growth vs growth due to acquistions

0%

5%

10%

15%

20%

25%

30%

35%

2002 2003 2004 2005 2006 2007

Year

% g

row

th

0

5

10

15

20

25

Num

ber

of a

cqui

stio

ns

% growth inrevenue

% growth dueto acquisitions

% growth dueto organicgrowthNumber ofacquisitions

Acquisitions have been fueling growth for years!

Acquisitions pipelineAcquisitions financing sources

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007

Year

% o

f tot

al a

cqui

sitio

n so

urce

s

Equity

Debt

Cash

Acquisitions value, mln $ 37.4 90.6 189.4 194.9 241

Acquisition deal structures increasingly favor debt…

Pro-forma P&L  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: 10K’s, team estimates

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%

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 1,608,1591,776,062 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%

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 122.6% 155.4% 121.5% 93.1% 79.3% 73.7% 89.7% 108.0%

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 company’s LT debt.

Cost Equity 10.27%

β 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

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

DCF results

Description Value

PV of FCF 4,189,070

Less: LT debt 635,784

Plus:Cash 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!!!

Sensitivity analysis

TV growth rate

WACC

3% 3.50% 4% 4.50% 5%

7.0% $ 62.04 $ 70.77 $ 82.42 $ 98.71 $ 123.16

8.0% $ 47.84 $ 53.08 $ 59.62 $ 68.03 $ 79.24

9.41% $ 35.36 $ 38.31 $ 41.81 $ 46.02 $ 51.18

10.0% $ 31.63 $ 34.04 $ 36.85 $ 40.16 $ 44.14

10.5% $ 28.94 $ 30.98 $ 33.35 $ 36.10 $ 39.36

1 yr stock performance

“Flight to quality” since October as investors dump other stocks?

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