JS Earnings Notes 2.11.2016 – Stericycle, MSCI, and Torchmark

Stericycle (SRCL) COO Brent Arnold said they are seeing growth in their pharmaceutical waste hauling compliance business

We continue to see strong growth in our pharmaceutical waste compliance program. Both our SQ and LQ adoption rates continue to increase, as customers look for a compliance solution for this waste stream. This program not only helps our customers manage their pharmaceutical waste, but it often paves the way for Stericycle to manage all of their hazardous waste.”

And they’re attempting to cross-sell their paper shredding services

The Cintas Shred-it synergies are on track, focusing on routing efficiencies and on-site to offsite conversion. The Stericycle Shred-it integration is gaining momentum and the team has kicked off a number of exciting cross-selling pilots. As a reminder, less than 20% of our existing Stericycle customers use Shred-it for secure information destruction. This represents a tremendous growth opportunity for Stericycle.”

With plans to grow the paper shredding business even further through acquisition

“Besides the Shred-it acquisition, we made four acquisitions of other secure information destruction companies. So we certainly – it’s part of our game plan. Shred-it obviously had a pipeline, and we were able to complete those deals in Q4.  From a geography line, certainly any country where we currently have operations, those have the best returns; and that’s where the focus will be. And then we’ll also look at countries that Stericycle is currently in on the waste side of the business and see if there are opportunities to enter into those secure information destruction markets as well.”

Stericycle (SRCL) CEO Charles Alutto said they did an acquisition last year to enter the automobile recall sector and this will likely be a growth area moving forward

We did that acquisition last year to get an entry into the auto recall space. There’s obviously a lot of heightened sensitivity to auto recalls. We can offer a turnkey solution to manufacturers. That helps them assist their customers with both notifications and increasing their response rate.”

Their sales pitch often involves going in and telling their clients about all their “compliance breaches”

And what they typically do is they go in and give them a compliance review, looking at how they manage all their secure information. Oftentimes when they do that audit, we can find compliance breaches. And it’s a great way for them to switch to an outsourced service. And, therefore, we’re selling multiple services.”

 

 

 

 

 

MSCI (MSCI) CEO Henry Fernandez said  they captured an increasing share of  the index investing market

ETFs based on our indexes, capture $88 billion of inflows in the year 2015, or 35% of the overall market, up from $49 billion a year earlier. Our development efforts have been focused on factor investing, where the estimated AUM linked to our factor indexes increased 17% to about $143 billion compared to $122 billion in 2014.”

And they are also benefiting from the trend of increased passive international index investing

“In 2016, we believe there are several growth levers in our Index products. The new product pipeline remains strong, and we continue our relentless effort on innovation to change the investment world. Factors and ESG continue to be incorporated into the mainstream investment process. The globalization and international investing trend is expanding.” 

MSCI (MSCI) CEO Henry Fernandez said the company, at its core, is a data and analytics company

I can tell you that at the core of our company, MSCI is a content company that leverages and shares content across the entire MSCI ecosystem to innovate new products and services. The generation of that content starts with understanding the investment problems of our client, designing a solution to them in the form of a model of some kind. We call them methodologies and Index and models in Analytics. And then that model can be then turned into either data or analytical calculators such as performance attribution calculators, repayment models, pricing libraries and so on and so forth.”

And their data is often at the core of their clients investment process

Our content sits at the very center of our client’s investment processes. It provides them with the insights and tools they need to build and manage their portfolios. A key part of my own job is to build senior-level relationship with our largest clients around the world. In my conversations with them, they tell me that the quality of our content is what sets MSCI apart. It is why they choose MSCI to help them with their biggest and most complex investment problems.”

Yet they seem to focus on the “quantity” of the product as opposed to the “quality”

As you all know, in your own businesses, outflows or inflows are the true measure of the health of an investment product, and therefore, we are pretty satisfied to see that we’re holding up very well there, despite the decline in valuations.

Currency hedged investment index products could be a large growth driver

We were also the Index leader for full-year 2015 in terms of net cash inflows to ETF based on currency-hedged indexes. Net cash flows in ETF linked to factor indexes, which increased almost three times compared to 2014 levels, and also our leadership position as number one in ETF.”

MSCI (MSCI) CEO Henry Fernandez said the company has tailwinds from the switch from active to passive investing

In an environment of significant volatility, it’s actually sometimes a positive environment for us, even though our clients are not feeling well because there’s a lot of focus on risk, there is a lot of focus on understanding the performance of portfolios, there is a meaningful amount of money that flows into passive investments from active that we benefit and the like. And obviously, on the other side, budget gets a little more tight, approvals get longer and the like, but on balance, it has not affected us.”

MSCI helps financial services clients reduce their costs

“A lot of our clients are under cost pressures and profit pressures and, therefore, they’re trying to reduce costs. So, a lot of what we do it creates transparency, efficiencies and therefore reduction of costs. So, many of our clients are tackling the issue of how do they deal with risk and how do they report risk and how do they manage risk.”

 

 

 

 

 

Torchmark (TMK) Co-CEO Gary Coleman said expenses were up

“Administrative expenses were $48 million for the quarter, up 9% from a year ago and in line with our expectations. As a percentage of premium from continuing operations, administrative expenses were 6.3% compared to 6.1% a year ago. The primary reasons for the increase in administrative expenses are higher information technology and pension costs.”

Torchmark (TMK) Co-CEO Gary Coleman said their investment portfolio saw losses in their energy bonds

To complete the investment portfolio discussion, I’d like to address our $1.6 billion of fixed maturities in the energy sector. As a result of spreads widening in the fourth quarter, the net unrealized loss of our energy portfolio increased by $142 million to a total of $165 million at December 31. However, we believe the risk of realizing any losses in the foreseeable future is minimal for the following reasons. $1.5 billion or 94% of our energy holdings are investment grade. Only a $143 million or 9% of our energy holdings are in the oil field service and drilling sector. Approximately 70% of these bonds are investment grade.”

Yet  they aren’t expecting any defaults

Also based on the consensus of expert views, our investment department believes that oil is more likely to increase to $45 a barrel or $50 a barrel during the next 12 to 24 months then to remain at current levels.  We believe the companies in our portfolio can continue to operate for a very long time with oil prices at $45 a barrel to $50 a barrel. Even if oil remains around $30 a barrel for the next 12 to 24 months, we would not expect to have any defaults during that period.”

They are hoping for higher interest rates

We continue to hope for higher interest rates. As discussed on previous analyst calls, rising new money rates will have a positive impact on operating income by driving up excess investment income. We’re not concerned about potential unrealized losses that are interest rate driven reflected on the balance sheet since we do not expect to convert them to realized losses.”

Torchmark (TMK) CFO Frank Svoboda said they are exiting their Medicare Part D business due to increased competition driving down profitability

This business has been changing rapidly over the past few years and the earnings had become much more volatile. Increased competition, industry consolidation, and preferred networks have reduced overall margins and made it more difficult for smaller players to compete in this market.  While we are still generating profits from the Part D operations, those profits have been shrinking in recent years due to higher drug cost and increased administrative and compliance cost. We believe this trend will likely continue and perhaps could even turn into significant losses in the future as drug costs, especially those on specialty drugs continue to escalate.  Overall, the risks and the administrative and compliance costs associated with the business are much greater than they once were and the business now demands an increasingly disproportionate amount of time and focus given its level of earnings.”

Torchmark (TMK) Co-CEO Gary Coleman said they don’t expect to sell any of their energy bonds

We feel confident in the bonds that we have and we expect them to be money good. So we don’t expect to sell any of those. In the last few years we have, I think done a good job of spreading the risk of we were a little overweight on financials a few years ago with.”