Stericycle Inc (SRCL) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome this the third quarter earnings conference call for Stericycle. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Liz Brandel, vice president of finance for Stericycle. Miss Brandel, you may begin.

Thank you. I'll be reading the safe harbor statement. Statements by Stericycle in this conference call which are not strictly historical are forward looking. Forward-looking statements involve known and unknown risks and should be viewed with caution. To the 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 for forward-looking statements or any facts, events or circumstances after this date that will bear upon the forward-looking statements. I'll now turn the call over to Mark Miller.

Good afternoon, welcome to thur call. With me today are Frank Ten Brink, chief financial officer, rich koger, chief operating officer and Liz Brandel vVP of finance. We are pleased with the record results in the third quarter of 2002. After pro forma adjustment net income grew by more than 49.8% and EBITDA reached 30.3 million. Stericycle finished the third quarter of 2002 with an EPS of 27 cents, up over 40% compared to 19 cents in the prior year quarter. The quarter includes approximately 1.6 cents of one-time charges related to our repurchase of our bonds. For 25 consecutive quarters sips our IPO in 1996 we have either met or exceed expectations for our company's performance. That brief overview, I'll turn the call over to Frank who will walk you through the financials.

First let's start with revenue. We had an outstanding quarter as they grew 10.7 million in a quarter to 102 million up 11.7% from 91.3 million in the third quarter of 2001. Small customer revenue grew approximately 10% and large customer revenues grew over 4%. The customer revenue mix was approximately 58% in small and 42% in large customers. International machinery revenues including our recently announced project in Japan were 2.2 million. Gross profit as a percent of revenue increased from 40% in the third quarter of 2001 to 41.2% in the third quarter of 2002. The improvement resulted from better margins and our LQG business, lower variable costs, partially offset by higher benefit costs. SG&A excluding amortization was 14.6% of revenuesver 14.5% the prior year due to higher investment spending, R&D and fringe costs. The operating income after the pro forma adjustments to 2001 results for the adoption of FAS 142 rose 17.3% to 26.7 million in the quarter from 22.7 million in the third quarter of 2001. As a percent of revenue, operating income rose from -- from 24.9 to 26.1%.

Net interest expense was lower in the third quarter of 2002 versus the third quarter of 2001 by approximately 2.4 million. Due to the lower interest rates and lower debt outstanding forshally offset by 1.2 million in premium interest payments related to the repurchase of 8.9 million of our senior subordinated debt. Presently 125 million of our floating rate debt is hedged. At an average three-monthly IBOR rate of 5.2%. Based upon our text planning we currently anticipate a net effective tax rate for 2002 of approximately 39.5%.

Next net income. As a result of margin improvement and deleveraging, net income for the second quarter adjusted for fast 142 changes rose 49.7% to 12.1 million from 8.1 million. An apples to apples basis adjusted for FAS 142, it increased from 19 cents in Q3 to 27 cents per share. EBITDA after other expenses increased to 30.3 million versus the 25.9 million in the prior year. Our debt to EBITDA ratio on a consolidated basis was 1.92. The first time were below 2 to 1 ratio.

The balance sheet. During the quarter we continued to make progress and improving the balance sheet position. Our debt to book cap at the end of the quarter was 40.5%. Down from 44% at the end of the second quarter and 50% at the end of fiscal 2001. Year to date, through third quarter, we have repaid over 61.4 million of our debt. During the quarter, our Cap Ex was 3.9% of revenues, 3.9 million. The DSO in the quarter was 59 days, up two days versus Q2 but down 7 days from December 2001. Due to an improvement in the billing software which temporarily delayed billing in the periods. The slight delay in billing was plants and the updated software is working very well. Now some selected balance sheet numbers. Cash and cash equivalents 6.2 million. Accounts receivable, 63.3 million. Current assets, 86.4 million. Total assets, 615.4 million. Short-term debt, 1.3 million and long-term debt 217.5 for a total debt of 218.8. The net worth of the company was 321.6 million. Depreciation in the quarter was 3.4 million. Amortization was .5 million. And as mentioned before the debt to total cap was 40.5 million -- 40.5%.

A brief recap of the nine-moment results for the nine months ended, revenues increased to 298.3 million an increase of 12.3% for the same period a year ago. Gross profit as a percent of revenue expanded from 39.8% for the nine months ended September 30 '01 to 40.6% for the same period ended this year. Earnings per share after the pro forma adoption of fast 142 increased 42.7% to 76 cents from 5 cents per diluted share in the same period a year ago. Cash from operations for the nine months to date was 72.9 million versus 47 million in the prior periods. This concludes our financial picture and now I'll turn it over to rich.

Thanks, Frank. By continuing to focus on the basic operational blocking and tackling of our business our team delivered another strong quarter. Margins expanded sequentially quarter over quarter as they they treatment infrashuck sure to reduce operating costs. Additional momentum was achieved through the utilization rough our new noninsinration treatment capacity. We continued to evaluate opportunities to utilize more cost effective noninsinration technologies where customer preference, regulatory apcost structures allow us to move away from insinration. We are particularly pleased with the progress the team has made in this area since working with our customers to reduce waste insinration is an important part of the Stericycle mission. New byotrack rolling out across the country has proved to be helpful with the transportation managers. Our line managers can quickly analyze individual driver productivity on a daily basis and make rapid adjustments to improve route density and efficiency. The ability to monitor and continuously improve routing is an essential part of our strategy to leverage the entire operating infrashuck sure.

We experienced strong top line growth this quarter as the sales and marketing team worked hard on all fronts. We remain extremely encouraged by the progress we see with the domestic rollout of thestery stafe compliance program. The team achieved success in all aspects. New account growth, convergence of the existing transaction customers and service upgrades. Currently over 43,000 customers are on the subscription model which equates to approximately 17% of our targeted SQG account base. We are very comfortable in raising our previously announced goal of 18% of targeted customers on the subscription program to 19% now by year-end. In the quarter the team also focused on our LGQ -- LQG business both in terms of securing new customers and working with existing accounts to improve overall gross margins. The sales group secured 51 new hospital contracts and five new backup contracts. The team worked hard to improve the gross margins of existing accounts through improving pricing and adjusting service. In some cases where existing margins were extremely low or even nonexistent and could not be improved to or target levels we made the decision to let the work go. Though these are difficult decisions to make, we are fundamentally committed to raising the gross margins of this part of our business. At the close of the quarter we had signed up over 4750 new small customer service agreements, thanks to the hard work and dedication of our sales team we increased our customer base to over 283,000 customers, of which over 4800 are LQG and the remainder are small accounts.

Let's turn it back over to Mark.

Thanks, rich. Stericycle had another exceptional quarter with new record highs in revenues, gross margins, EBITDA and EPS. All contributing to exceptional value creation for our shareholders. We are excited about the multiple opportunities which lie ahead to expand the value of the company. I'd now like to provide some insight on our current outlook for the remainder of 2002 and provide our preliminary guidance for fiscal 2003. Please keep in mind these are forward-looking statements.

Before we get into the financial guidance, let me update you on the two potential acquisitions we announced earlier. Bridgeview and share. We are very pleased to announce that Bridgeview closed today. Our 2002 and 2003 guidance then will include Bridgeview's numbers, but will exclude share. As stated in our press release the share transaction remains subject to approval of share's stockholder just k customary closing conditions and regulatory reviews. We believe share will shortly submit its praubsy statement for the SEC review. After the SEC clearance, send it to its shareholders for the special meeting to approve the merger. On the regulatory front we are in dupgss with the various state agencies that regulate issues such as environmental permit transfers, transportation licenses and merger effects on market concentration. Yesterday we received approval of the acquisition from one of the state agencies, however at this stage in the process we brief it's prudent to not include the share transaction in the 2003 guidance projections. We believe it is appropriate to wait until a transaction has closed before doing so.

Now the financial guidance for 2002 and 2003. Current analysts' estimates for EPS for 2002 range from 1.02 to 1.0. We believe analysts after a detailed reof of their models will potentially raise their estimates to 1.05 to 1.05 which we are comfortable. This assumes an average share count of slightly over 445 million for 2002. Like to provide some fine tuning for the remaining outlook. Based upon the typing of the Japan project, new acquisitions, offset by reduced low margin LQG business. They may adjust 2002 revenue estimates two 399 and $400 million. We believe analysts will increase their estimates for net income to approximately 46 1/2 to 46.8 million, including the third quarter one-time charge of about .7 million in after-tax redemption premium on the bonds. 2002 analysts EBITDA estimates may be increased to approximately $115 million and that's why G&A expense of about 15 million.

I'd like to provide a preliminary outlook for 2003. Current analyst EPS estimates for 2003 range from 1.22 per share to 1.27. We believe that analysts after detailed review of their models will potentially raise their estimates to a range of 1.27 to 1.29, which we are comfortable with. This assumes an average share count of approximately 46 million for the year 2003. We believe analysts estimates of revenues for 2003 will be then the range of 426 to 432 million with variations depending upon assumptions of international and acquisition revenues. These estimates will include internal growth rates on small accounts, between 8 and 9%, to about 4 to 5% on large accounts, approximately 4 to 6 million in international equipment sales. We believe analysts will increase their estimates for net income from approximately 57 million to approximately 58 1/2 to 59 1/2 million depending on adjustments for improved margins, acquisitions, offset by higher interest costs and strategic spending. 2002 analyst analysts EBITDA estimates may be increased to approximately 129 to 132 million with G&A expenses of about 16 to 17 million. In closing I would like to thank our customers first and foremost for their loyal support, our employees for their incredible efforts throughout the third quarter and finally our shareholders who collectively have provided confuse the resources to build a first-rate leading company. We'll now switch to question and answer.

Thank you, Mr. Miller. If you have a question at this time, please press the one key on your touch tone telephone. If your question has been answered or you witch to remove yourself from the queue, please press the pound key. If you have a question, press the one key. Our first question from Lorraine Mackus with Merrill Lynch.

Thank you. Could you just go through the driving factor in the very large pickup in gross margins sequentially in year over year.

.

In terms of the expansion in growth margins, we were successful in exiting some poor negative margin contracts. Our supply and energy costs were slightly favorable. And honestly due to the continued success of Steri-Safe that helps improve our mix as well.

Do you see the current levels as a good run rate going forward?

Yes. I think as you look at the modeling side, as we have talked about the guidance for the remaind main remainder of '02 and Q3. We continue to believe that will step up as we move through time. Guidance is without the share transaction layered in which will have a slightly dilutive pulldown on the percent numbers but is accretive to the earnings numbers.

Okay. And could you talk a little bit about the share transaction in terms of if you're planning a national rollout of this service?

Yeah. Our intent with the share biosystems business, it really puts us into a new service area and paradigm. One of the things that we think that we have as far as ability to get synergies out of the combination is because of the broad infrashuck sure we have in place. The ability to develop the programs and launch this type of service in other geographic areas across the country. It's still hard to get the exact quantityification but it's not too hard to look at this being an opportunity of several hundred million dollars if we were successful in reaching the same types of acceptance that they have and the areas they service.

One final question. Could you update us on the status of the Utah attorney general settlement and any other pending regulatory issues?

Utah is progressing nicely, within the reserves that we have already taken care of. We have not finalized all of the details, but believe that will be handled shortly. So as far as status, we have made great progress since we last updated and aside from the transaction issues interface that I mentioned on Bridgeview and share, there's been no other contacts from other state agencies or federal agencies on our base business.

Thank you.

The next question comes from Larry Taylor of CSSB.

This is actually Michelle Dragonetti for Larry Taylor. How would you define your own going acquisition strategy and can you talk a little bit about some of the opportunities that are out there?

In terms of acquisition pool still remains very robust. Even assuming successful close on share, we have an additional approximately 60-some-odd million worth of multiple companies that we are looking at. Still tremendous number of people and players in our base business and also continue to explore those related businesses which would easily leverage and integrate our core skill set. We are obviously very disciplined buyer. And we look to continue to augment our internal growth rates with those programs in the years to come.

And obviously you bought back some debt. What's your outlook for that going forward in terms of debt buyback and general deleveraging?

We will really look at all the opportunities to apply to cash. The buyback on the bonds was a very good opportunity for us and had a very good return. It was very accretive. We will continue to look for those opportunities in the future.

Just a question about the -- the net account pickup. Obviously you signed on a large number of the large accounts and a good number of the small accounts, but you spoke a little bit about calling the ngt base the less profitable accounts. Is that -- the accounts that were dropped, is it a fairly small number relative though the overall base, we are not talking about any impact in the net account pickup, are we?

Not only a huge number of accounts, but as we discussed in the prepared comments, these were accounts that were essentially zero gross margin or negative gross margin accounts. Although the revenue impact is not huge, what we really see is we see benefit on the gross margin side.

Any quantityification of the revenue impact?

Probably maybe $2 million or so on an annualized basis. Some of the accounts, the majority of them were holdovers from the BFI acquisition. As the contract came up and we attempted to get them to our targeted gross margin levels, when we were unable to do so, it made sense to move them along and get the margin pickup.

My last question, how is the outlook for the new large account sign-up, still a good pipeline of larger accounts to sign on and how is that going?

Well, as you saw, we did slightly over 50 this quarter. We have been doing consistently in that range. You know, we still see opportunities to get new accounts, but we are very disciplined because of that mindset that we want to move margins up. es we said before, new work is coming in over 20% gross margin and higher or we just don't take it.

Thanks so much.

The next question comes from Howard ca peck with UBS Warburg.

Howard ca peck. Just a few questions. Absent share, can you give us an update on where you are -- where you are, excuse me, in terms of capacity and then second, if you look at the launch group generator customers, what are they looking for from you in terms of service components, are there any add-aunts, service expansions similar to the share offering or anything like that that you can discuss?

Several questions there, Howard. First of all in terms of capacity, right now we are in the 70s, still plenty of room to absorb our business growth. As you know, we have added capacity. As we have moved through. That's included in our Cap Ex numbers. In terms of new business opportunities, we have a number of things that are under the works in test marketing. They are actually pretty exciting, probably inappropriate to discuss them right now before we have launched them. Things like the reasonable sharps program, biosystems and share and others where we can have incremental revenue expansion at higher margins than our base business and the large quantity generators. We are seeing there's just a number of functions and services and products that are part of the routine activities of that hospital environment, but they really aren't core to their day-to-day existence. When there's outsourcing opportunities that can help them in terms of focus, better compliance, better safety, and manage their costs more effective L, those are the kinds of things we really see that fit into our skill sets.

The next question comes from Kevin Munroe with Thomas Weisel partners.

Good afternoon. Couple of questions. First on the margin expansion, again, another pretty good quarter, where do you think you can go in terms of long term. I know you guys gave guidance for '03. What is the ultimate gross margin and operating margin goal?

I think in terms of a longer term goal, we are looking clearly at expansion as we go into next year, clearly looking at an overall rate, up 80 to 100 basis points, et cetera, excluding share. I think what we see in terms of the longer term outlook is the large quantity generator business clearly should be operating in the future 10 percentage points higher than it is today and we see in the small account sector the ability with Steri-Safe and continued growth of our business that that can expand another ten points. So I don't want anybody to go away saying, okay, I'm expecting gross margins to go from the low 40s to the low 50s in a short time period, that's going to take us time and process, but I don't think that's out of the realm of possibilities, still well within the cost effective service for our customers and still fair return on capital. This is the business that still has a lot of room for improvement in terms of return on investment capital and return on equities and we think that over time we will continue to strive to improve both of those.

Good. Also kind of a housekeeping question, what was organic growth in the quarter and what was acquired revenue?

If you look at the organic growth, like we said, on the LQG was around 10% -- SQG, LQG 4%, acquired revenue was 4.3 million.

Okay. And on the share acquisition, their margins have been coming down fairly consistently over the past few years. Can you guys mitigate that or potentially reverse that trend?

Some of their margins over the years were obviously impacted also by treatments of waste and obviously that's one of our strengths and we see opportunities there.

Okay. And also while we're on share, just a couple more questions, what are your plans for their consumer products business?

The consumer products business, actually, is a couple million dollars. It has very good flow-through and operating income, almost 50%. For those of you not familiar with the business it's a series of well-proven brands that are in the over the counter sector, that have a very strong hold. From our standpoint, those are unfamiliar with the background the management team in our past careers prior to Stericycle have been involved with OTC and consumer products like this, it's not unfamiliar territory. Clearly from us we'll look at ways we can grow and expand that, but it's generating good flow-through and cash and no rush to look at alternative solutions.

Okay. One more question on share, they had several equity investments that weren't quite successful. What is the status of those and I believe most of them have been written off, is that correct and what still kind of remains and what are your plans for that?

The value for those have been nearly written to zero. It's immaterial right now. In fact most of those businesses are not operational right now.

Okay, great, thank you.

Our next question comes from William Gibson of Banc of America.

Yeah. Actually I've got some share questions as well what I want to understand is this service. Why couldn't you just knock this off as opposed buying the company. In the other if the acquisition goes through and it's about 19 million of medical waste or recycling of the sharps container business, would that be incremental revenue or are we losing something at the margin because you're already taking -- let me answer the backup. This is incremental business, if you took a hospital, for example, that today would be a 25 or $30,000 per year account for us, biosystems could well be in that same account doing 30,000 or $40,000 per year, it's really a different service. There's some minor part of the waste stream which is the contents of those sharps containers that would be a small subset of ours, but it's not the primary part of the revenue driver. Now in terms of the -- in terms of the knockoff, we have done some of our own work and development, have tested different models of different sharps containers and systems, it's really not about just the magic of the container, there's a whole series of elements for this process of the container, infrack shuck sure, washing, infection systems, routine routing management within the in-service side of the business, particular nuances of how do you learn the process to properly price and model these new proposals. Looking at the service logistics of organizing and prepg the businesses. So even though I think on the surface people may say this seems pretty simple, well, if you said well, the pharmaceutical business is just about making a pill and selling it, what's so hard about that? There's a lot of nuances of what it takes to get a product through F.D.A. cycles, get it into the market, successfully market it and manage it. We view the biosystem opportunity as a way for us to have an immediate add-on business, to create additional synergies by adding it into the geographic base. Secondly to take that no-how and framework and molds and roll that out across our infrastructure.

That sounds pretty good. Couple other just little questions. On the equipment sales in the arrest, was that just Japan or another country in there as well.

The majority of that was Japan.

It looks like you repurchased little treasury stock in the quarter?

We did repurchase, it was 50,000 shares with the price between 28 and 29.

Okay. And just one last thing, I know you guided us towards lower tax rate, that was the third quarter an adjustment just going for what you expect it to be for the year?

In the third quarter there was a small adjustment in there for the year to date, that's correct.

Thanks, Frank, thank, mark.

The next question comes from bill Brady with Presidio management.

Hello. Couple of questions. Of your 4750 new small quantity generators, how much of those tookstery stafe?

Over 95%.

Really? Okay. -- 95% taking Steri-Safe, it looks like 19% by the end of the year would be pretty easy to do. Do you have any goals for next year as far as Steri-Safe?

I think in terms of our outlook for next year, we seem to be on a clip right now that's adding a point and a half to 2 percentage points penetration per period. We were at 15%, as you know, at the end of the second quarter, 17 this quarter and so we will continue -- if you model on that kind of a basis, that's well within the band width of the pace we're running. We are looking at ways to accelerate that penetration. For a macro model right now, I would seem to 2 points per quarter.

Then most of it is coming from the new customers and not converting that many existing customers?

We are capturing existing as well. The total blend now at the end of Q3 we over 43,000 accounts cumulatively on this program so we are obviously capturing from both.

Okay, thanks.

The next question is from Tom Ford of Lehman Brothers?

Thanks. Just a few questions for you in terms of the Biotrack that you had mentioned, rich, where are you in that process and can you give us any kind of sense as to what types of productivity or take the productivity commentary and turn it into numbers of sorts.

The new Biotrack has just started to roll out and obviously there is a shakedown familiarization process. I think what we are looking longer term is as the managers get familiarity and they start doing sort of daily or even -- at a minimum weekly sort of route updates and route efficiency changes, we are probably looking at 5 to 10% productivity improvements further out. It is a process where we are trying to get everybody at the transportation management level, even down to the route supervisor themselves, in a mode of looking and managing and making changes daily, now that they have the software to do so.

Okay. When you say productivity improvements, are we talking sort of same cost structure doing X amount more?

It can be coming from two areas. Obviously the productivity and the labor can do more, so with the tuck-in on top of it, you get improvements or you have an existing environment where you have additional customers coming in through the sales force, you can handle more as well as if something would be kind of stable with no new customers, an eventual reduction and more a step approach and maybe less drivers.

I think some of the things we are still in the early stages of really unleashing the power of this. We have seen with benchmarking again in world class companies in the transportation industries, through really tight systems management and processes they can obtain those kinds of productivity improvements. It can be things as simple as route analysis of looking at the math mathmatics to say we have customer X that's on this route that based upon our cost structure, transportation time and distance, isn't economically viable, so we either need to build on the route or find a way to exit that relationship or lay in with another route. That can also help you not just in the direct labor the labor efficiency, but in key decisions of how we are managing the day-to-day sales and marketing equation and capital structure and the like.

Okay. Shifting gears a little bit, given the fact that it is sort of a new concept or service for you to a degree, I know you had said you had test marketing similar-type services in the past. There are any concerns or issues at all in terms of that, new service offering. Is there something notably different here in terms of customer requirement or interaction with the facility. Is there anything there that proposes or poses an issue for you?

Well, clearly there's some differences. I think one of the key elements is that the share management team of bios systems is signed up to come with the package and the program. We are real excited about the people, their skill sets and expertise. Many of them have a decade or more of experience in this. In terms of the nuances from a capital spend standpoint, there's small amounts of incremental capital, that would require for us to put in our own washing systems as we look at where we are going to launch this and roll this out. But as far as the how to move materials from point A to point B, get to a hospital, interface with billing processes with the hospital, treat the material, watch containers and the like, those are very common every day practices that we do, so we don't see this as a major risk challenge in terms of our learning skills.

Great. Just one last question for you, is -- Rich, can you run down for us the backup situation and I'm just curious, is there anything you saw there, given that we hit the deadline or is it more along the lines that we were obviously I guess well along the way before we hit the deadline and so there was no real notable change in terms of backup-type situation?

Currently we have 145 backup contracts in place. As far as what we saw as the deadline loomed, the conversions basically got completed for the people who were moving to outsourcing and shutting down incinerators. Right now there's probably less than 300 medical waste incinerators still on site and operating. Going forward we still see the same strategy, at a rate we have kind of experienced here, two one or two or three a quarter. A backup contract will convert to a fullon-site or someone will just make the decision down the road they can't really operate their insin raet -- incinerator and move to outsourcing at that point.

Great. Thanks very much, guys.

Thank you.

The next question is from Rick wise with Bear Stearns.

A lot of our questions have been answered already. Couple still just small housekeeping stuff. Can you give us the 3CI revenue number for the quarter?

It was 3.8 million for us, little bit of intercompanies, what they report might be slightly different.

And just remind me what's in the other income expense on I think it was 300,000 positive and how that's likely to trend over the next year or so?

What is in there is things like franchise taxes, minority interests and the like. The trending on that for the next year is probably a little bit up with the continued growth internationally. So from an expectation we have in the past said on an annual basis somewhere between 1.5, 1.6 million.

And I think she has a question as well.

Just a question on pricing and contracts. I think we heard a lot kind of in the -- you know, just around about some pricing pressures and where some of are -- where some of your customers felt pressure, we heard a lot to negate that. But can you talk about contracts and whether or not you're able to pull through pricing increases or how prices are along with the contracts right now?

We continue to be successful in implementing price increases that are in the contracts. Relationships. I think we are -- it becomes a little bit of a challenge. We occasionally will have one or two where, for example, the famed one that was in the newspaper was negative 188% gross margins. So when you're trying to take something that is so far underwater and losing mope and move it to at least a break-even or modestly profitable, then it's a pretty dramatic swing. In those situations, we will move and do what we need to do and sometimes exit or like what Rich had spoken about, we had a contract carry-over from a large account that was actually in a waste stream that was not medical waste. They -- what's called AFIS waste where a cruise ship comes in and the coffee grounds or other materials, it's more classical solid waste type volumes and handling that was a carry-over that really was not profitable for us, didn't meet our standards. We were glad to be able to exit that one. For the most part, I think people realize in the health care community that costs do go up from time to time and that we give fair value for service and we wouldn't have the revenue retention rates that we did if we didn't have fair value for service.

Great, thank you.

Again if you have a question, please press the one key on your telephone. If your question has been answered, please press the pound key. Next question from David Schwenk of duress capital.

Just a quick question. Looks like over the past six months your accrued liabilities on the balance sheet have increased by 20 million or so. Why has that happened?

A component in there which was deferred tax related. Insurance overtime increased slightly, you also have -- you can have time with respect to interest on the long-term bonds. Depending on the quarter and this was a quarter in which you get into the longer period between may and now. So that builds up during the year also.

Thank you.

The next question from Robert wloil bee with first Boston.

Mark, the Cap Ex number for the year of 20 million seems a bit higher. Item applies a $10 million spend in the fourth quarter. What are we looking at there?

The Cap Ex for the quarter was about 3.9 million, and in that sense we are at about 3.9% of revenue.

I guess for the fourth quarter, though, if we're meeting a $20 million target for the year. Is there a beg spend in the fourth quarter?

No.

Our Cap Ex run rate will be 4, 4 1/2% max for the year.

Okay. Thank you.

Next question is from mark aDal lampblgy with alliance capital.

Can we talk about the non-health care related revenue? I know you've been working on large national contracts. How is that prog?

Hi, Mark. Actually we have picked up some new business in that area. We continue to be pretty selective as far as rolling it out because we do want to have it be 100% compliance. I think we are now probably on the order of magnitude of 8 to 10 total agreements in that arena. And we are continuing to find out what are the key hot buttons -- and continue to work the program. Still small part of our revenue stream today because the rest of our business continues to grow at a pretty good clip.

What kind of business is there seeking out your services?

Well, for example we have petsmart, laboratory services, airlines, car rental, automobile manufacturing plants, so there's a number of different settings where it's not a classical health care delivery, but where they really have a safety and compliance requirement, they may have a first aid station, may be doing randomon-site drug testing, may be doing other minor delivery and this is a pretty easy way for them to meet their compliance needs, particularly as we continue to learn and augment our Steri-Safe offering.

Is it as profitable as, say, working with a doctor or doctor's office or hospital?

The same or better.

And are you focused on that area of growth, or is it -- you said you're being selective. What's the impediment to diving into it?

I think it's setting the priorities of the organization. We have Steri-Safe rolling into our base customer base so the predominant amount of resource has been directed at that this year. We only have a handful of people right now focused on the national accounts and non-health care sector. So they feel a little underresourced right now, but it's clearly a great growth opportunity for us in the future.

Lastly, kind of more out of left field type of question, what would rising gas prices do to margins at the company? How dependent are you on gasoline?

On fuel and energy, we have built into our forecasts and models modest increases in those. So when we give our guidance for the remainder of '02 and '03, we are assuming modest increases. In terms of total energy, including natural gas, electricity, diesel, gasoline, et cetera, depending on geography runs about 3 1/2 to 4% of revenues. Some run a little bit favorable to that. Obviously if there was some catastrophic event where everything doubled or tripled overnight we would have a big scramble to catch up, but to put that in context in the year 2000, we had phenomenal rises in many markets, natural gas doubled or tripled, we had electricity that went up 3 or 4 fold in some markets. Huge increases in both gas fuel, supply such as boxes and plastics, and we were able to continue to expand our margins. Now we had to work hard to execute our pass-throughs in our contracts, get productivity improvements and the like, so it wasn't an easy process, but we made it happen.

Great, thank you very much.

Thanks, Mark.

The next question is from Matt lit Vin of William Blair and company.

Good afternoon. What are your short and long-term goals for your capital structure and how will you be --

I think on a broad base, our sweet spot remains between -- we would say 35 and 45% of debt to cap, which equates to about probably a 1/2 to 2 1/2 kind of debt to EBITDA. Where obviously this quarter slightly below the 2. The board has a special committee that really looks at this on a continuous basis. With both delevering. We obviously have acquisitions that are coming up which are going to mean the debt will go slightly up again with the delevering that's going to come down. The priorities are really centered around accretiveness, internal rate of return on a transaction, focused first on growing the business, then reducing the debt and looking at the senior subordinated bonds that we have outstanding. And equities probably last in line.

Again if you have a question at this time, please press the one key on your telephone. Gentlemen, at this time I show no further questions and I'll turn the program back over to you.

Thanks so much. I would like to comment on one element that -- to address, I had a couple of calls today in terms of the huge volume and some of the volatility of activity of trading. And the -- in calling around, the only unfounded rumor that we were able to pick up was apparently someone had put forward some kind of a rumor related to some activity or announcement that they said we were going to be making regarding Florida and some kind of illegal dumping issue. I can tell you without question there is no such announcement, there is no issue. We have also doubled through and checked with both the Florida state general counsel and enforcement as well as environmental area, we have also notified the appropriate regulatory authorities such as NASDAQ because, quite frankly, it's our belief that there may have been opportunistic activities taken. We intend to cooperate fully with the regulatory bodies to see if there were illegal activities to manipulate the stock and prosecute in the fullest. So we apologize to anybody that found that disruptive to activities and we will work with NASDAQ and whoever else to sort out and see what can be done to prevent any illegal manipulation, if that was the case. And lastly in closing, I just want to wish everybody a safe Halloween evening, I hope all of you are very careful driving back home in your own transportation and watch out for the kids and have a great evening. And we look forward to talking to you soon.

Ladies and gentlemen this concludes today's conference. Thank you for your participation, you may disconnect at this time and have a wonderful evening.