Stericycle Inc (SRCL) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stericycle first quarter 2003 earnings conference call. 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, Ms. Liz Brandel, VP of finance.

Thank you.

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. Factors described in the company's form 10-K, 10-Q, 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 to forward-looking statements or any facts, events or circumstances after this date that may bear upon forward-looking statements.

During the conference call, we may refer to our total debt-to-capitalization percentage. This is calculated by using the total debt as numerator and the total debt plus preferred stock plus shareholder equity in the denominator. We consider this ratio to be a good indicator of the strength of the company's balance sheet. It is not a measure in accordance with GAAP accounting principles and is not a measure of net income, cash flow or liquidity.

We may also talk about EBITDA. EBITDA is calculated for any period as the sum of net income plus interest expense, income tax expense, depreciation expense and amortization expense. We consider EBITDA to be a widely accepted financial indicator of a company's ability to service debt from capital expenditures, pay income taxes and expand its business. EBITDA may be calculated differently by different companies and is not a measure in accordance with GAAP accounting principles. EBITDA funds may not be available for management's discretionary use due to legal or functional limitations, debt service, et cetera.

With that, I'd like to pass the call over to Mark Miller.

Thanks, Liz. Good afternoon. Welcome to Stericycle's first quarter 2003 conference call.

With me today are Frank TenBrink our chief financial officer, Rich Kogler chief operating officer, and you heard from Liz Brandel vice president of finance.

Once again wee very pleased with record results achieved by the team in the first quarter. On a comparative basis, net income in the quarter grew by more than 38.1% and EBITDA reached $34 million. Stericycle finished the first quarter of this year with an EPS earnings per share of 32 cents on an as-reported basis of 33.4% over the 24 cents we achieved in the prior year. For 27 consecutive quarters since our IPO in 1996, we have either met or exceeded expectations through our company's performance.

With that brief overview, I'll turn the call over to Frank, who will walk you through the financials.

We had an outstanding quarter as revenues grew 15.2 million in the quarter, 112.3 million, up 15.7% from 97.1 million in Q1 2002. Excluding international machinery revenues up .7 million in the quarter, revenues were up 18.2%.

Excluding acquisitions, small customer revenues grew approximately 11%, and large customer revenues grew approximately 4%. The customer mix was 59% in small and 41% in large customers. Acquisitions less than 12 months old contributed 11 million to the revenue growth in the quarter.

Gross profit as a percent of revenues increased from 41 to 42% in the first quarter of 2003. The improvement resulted from better margins on our LQG business, continued success on the rollout of Sterisafe, lower variable costs partially offset by higher fuel, energy, insurance, and employee benefit costs.

We benefited in the quarter from higher revenues and gross margin by approximately 800,000, due to favorable resolution of contracts related to royalties and one Medway (ph) services contract this had a favorable impact on our gross margin percent in the quarter by approximately 40 basis points.

SG&A excluding amortization was 14.6% of revenues versus 14.6 in the prior year. The absolute dollar spend was up primarily from higher revenues, from internal growth in acquisitions and higher fringe costs.

Operating income rose 26.3% to 30.4 million in the quarter from 24 million in the first quarter of 2002. As a percent of revenue, operating income increased from 24.8% to 27%.

Net interest expense was lower in the first quarter of 2003 versus the first quarter of 2002 by approximately 1.9 million due to lower interest rates and lower debt outstanding. In addition, we had 1.4 million premium interest payment related to the repurchase of 9.1 million of our senior subordinated debt, and a .2 million non-cash write-off of deferred financing fees related to the amount.

Under our bank line and reduced interest rates in the future, the balance of our term loan are now 117.6 million and 47 million for the term B loan. As you remember, in January 2003, we amended our credit agreement and revised the maturity dates of the revolver, term and term loan B loans by one year, improved the flexibility, and we now have our bank lines expiring in 2007 and 2008.

As a result of margin improvement and de-leveraging, the net income -- the following. Net income from the quarter rose 38.1% to 14.7 million from 10.6 million last year. The quarter included approximately 1.6 million of charges related to the repurchase of our bonds, and that on an after-tax basis was about 2 cents per fully diluted share. EBITDA increased 26.2% to 34 million versus 26.9 million in the prior year. Our debt to EBITDA ratio on a consolidated basis was 1.79.

Next, the balance sheet. During the quarter, we continued to make significant progress on improving our balance sheet. Our debt to book cap at the end of the quarter was 38.7%, down from 39.1% at the end of the fourth quarter of 2002, and 47.2% at the end of the first quarter of 2002.

In the first quarter, our total debt increased by 7.5 million due to the share acquisition offset by repayments of debt during the quarter. Also during the quarter, our capital spending was 3.4% of revenues, and the DSO was 55 days versus 60 days a year ago quarter.

And now some selected balance sheet numbers. Cash and equivalents was 10.3 million. Accounts receivable, 68.5 million. Current assets 97.6 million. Total assets 697.9 million. Our short-term debt 25.2 million, long-term debt was 210.5 million with a total debt of 235.6 million. The net worth was 344.8 million. D and A during the quarter was 3.9 million for depreciation and .3 million for amortization.

That concludes the financial part, and now I will turn it over to Rich.

Thanks, Frank.

The operating team's consistent focus on the basics of our business enabled us to achieve record results this past quarter. Once again they delivered additional productivity improvements and controlled operating expenses, resulting in continued margin expansion. Faced with the additional challenges posed by unusually harsh weather in some geographies, sharply increasing energy costs, and the complex integration of a number of significant acquisitions, the entire field operating team pulled together to deliver another strong performance.

As we look ahead to the remainder of the year, operating team will be lending their assistance to the upcoming bio-systems rollout. They will be involved in the permitting, installation and the day to day management of the operating infrastructure which supports the bio-systems service offerings.

Our hard working sales team also contributed to the record results in the quarter. We're very pleased with the steady growth of the Sterisafe compliance program. Building on a strong first quarter, the team will keep focusing on new Sterisafe sales, customer conversions, as well as continuing the movement of existing customers into higher level program offerings.

Our major account reps also focused on new business opportunities while steadily improving the margins of the existing customer base. In the quarter, they secured 48 new large quantity contracts, all at margins well above our current blended average. The rest also continue to work hard on the LQG margin improvement project. This company-wide program involves every one of our major account reps.

As we described in our last call, we require the reps to identify their lowest margin accounts and then develop and implement a specific action plan to improve these accounts. In most cases, the accounts can be brought to our target margins through adjusting price, service requirements, or both in some instances. The process has shown itself to be very effective and the results to date have been very encouraging.

That does not mean that every targeted account can be improved. Each quarter as we work through the program, we encounter a few low margin or negative margin customers that are unwilling to accept any changes in pricing or service. After exploring all available options, our reps will make the decision to discontinue service at a customer. For example, we recently decided to stop servicing certain LQG customers, representing total annualized revenues of over $2 million. These were accounts that all had unacceptably low or in some cases even negative gross margins. Always a difficult decision to end the customer relationship. We remain committed to returning the LQG business to an economically viable level.

Now we'd like to update you on bio-systems. The integration of the existing business into Stericycle has progressed well and is ahead of schedule. We are also preparing for our national rollout of this new service offering. We've targeted a number of geographies for the first wave of the national rollout effort. Permits required to support bio-systems operations have been applied for and we anticipate receiving approvals later this year. Standardized engineering plans for container handling, dumping and washing equipment have been final finalized. Orders for equipment to support the first wave of the rollout have been placed and machines are being built.

We're also pleased with some recent sales successes we've seen in the geographies where bio-systems and Stericycle currently overlap. Several new Bio-systems contract opportunities have resulted from cross-selling Bio-systems into existing Stericycle medical waste customers.

Summarizing the quarter, we now have approximately 55,000 small accounts on the Sterisafe program. Equal to 22% of our eligible SQG base. At the end of the quarter, we have signed up over 3800 new small customer agreements, and thanks to the continuing hard work and efforts of our sales team, we currently have more than 295,000 accounts with over 290,000 small customers and the remainder large.

I'll turn it back over to Mark.

Thanks, Rich.

Clearly we had another exceptional quarter with new highs in gross margins, EBITDA and EPS all creating exceptional value for our share hold. I'm excited about the opportunities that lie ahead for the company. I'd like to provide an update into the current fiscal outlook for 2003, and please keep in mind that these are forward-looking statements. Our 2003 guidance includes the charges of the 1.6 million we incurred in the first quarter for the buyback of the senior subordinated bonds but does not include additional repurchases of bonds for the remainder of the year.

Current analyst EPS estimates for 2003 range from $1.32 to $1.36. We believe that analysts, after detailed review of their models, will potentially raise their estimates to a range of $1.37 to $1.40 for the year, which we are comfortable with. This assumes an average share count of slightly over 46.1 million for the year 2003.

Now I'd like to provide some fine-tuning for the outlook of 2003. We believe analyst estimates for revenues will be in the range of approximately 458 to 466 million with modest variations depending on assumptions of international and acquisition revenues.

We believe that the analysts will increase their estimates for net income to approximately 63 to $64.5 million, and that an analyst EBITDA estimates may be increased to approximately 137 to 140 million with the depreciation and amortization expense of about 17 to 18 million.

In closing, I'd like to thank our customers first and foremost for their loyal support, our employees for their incredible efforts, and finally our shareholders who collectively have provided us with the resources necessary to build a first-rate industry-leading company.

Thank you for your time. That's the end of our prepared comments. And operator, we'll now switch over to Q and A session.

Thank you. If you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, press the 1 key. One moment for questions.

Our first question is from Sheetal Mehta of Bear Stearns.

Good afternoon.

Can you talk a little bit about Sterisafe? You said it was about 22% of small quantity generators. Can you remind me what that was a quarter ago? For some reason I've got 24% in my notes, but --

The prior quarter was 20% account penetration, represented about 24% of the revenues of SQG.

You have the higher percent of revenues because there's higher revenues per account in the small Sterisafe account.

What was the comparable number in terms of percent of revenue?

Probably 25, 26% roughly.

Ok. And can you give us an update on -- I think last time you talked about what percentage of the Sterisafe customers are on the standard package versus the preferred level. Has there been any shift in that?

Actually, as we talked about in last call, we had about 5% picking the higher level programs in Q4, and we're now 7 to 8% now in Q1 picking higher level programs. So still in the early stages of the opportunity access, but we are seeing migration upward into the higher level programs.

Ok. Great. And could you give a percentage premium that you get from the preferred versus the standard?

Yeah, if you look at how we price the program, basic level program, for example, might be $150 a year. That same comparable practice on our preferred program might be 1700 to $2,000 per year.

Great. And then just one other question and then I'll get back in queue. Did you guys record or are you breaking out any of the consumer revenues from the shareholder health care acquisition?

No, we don't, but that's still a very immaterial number.

Then any revenues from 3CI in the quarter?

3CI's revenues in the quarter were about 3.4 million.

3.4 million? Ok. Thanks very much.

Our next question is from Lorraine Maikis from Merrill Lynch.

Thank you. Could you quantify the effects of fuel and weather in the quarter?

I think if you look at fuel in the quarter in total, it was about 1 penny a share roughly that was the impact on the increase, and that was comparative over the last year.

And then in terms of increased costs, you mentioned harsh weather. Did you break that out at all in terms of overtime or cost increases that you saw?

No, not in total. I mean, obviously there's a little bit of that, but it wasn't that significant at that significant in the total scheme of things. It was not something that we break out.

But from a macro standpoint on a top-line basis, it can affect us probably about a half a million depending on if you look across all the geographies, the snowstorms, the transactional-based business for small accounts, if a pickup is delayed, for example, if people are on a weekly service and that's pushed back, you essentially lose that revenue opportunity, and then with some of the severe storms they had in the Denver marketplace, not only were patients having trouble getting to hospitals, also doctors and nurses were as well, so you do get some volume effect, just ballpark about half a million.

Ok. And then the $800,000 of benefit from the royalty, can you expand on that a little bit?

We have in one of our licensees, we had a issue where we were trying to resolve how royalties would get paid through what form. That took a while to resolve those, finally have resolved, and we were successful in it, but it essentially gave us a catch-up from when they've been operating their system when they'd come on line through to the first quarter, so it was a bring-current adjustment. It's obviously not something where we'll have that kind of benefit on a quarter-by-quarter basis, but we were successful in capturing those back royalties and resolving how those would get paid to us.

Ok. And then finally, could you just update us on the pending lawsuits out in Arizona?

Sure. I mean, I think as we've previously disclosed, there are several lawsuits that have within been filed by various parties against ourselves in allied and the lawsuits are similar in that they're all attempts to bring a class action involving the former customers of BFI and Stericycle in Utah, Arizona and Colorado. Each suit that we've seen -- all of which we previously denied. These are also copycat suits in that it's important to understand that we don't get exposed to any more liability by having one or more suits because they're really all involving the same plaintiff group. We reviewed these lawsuits with our outside counsel, and based on their review and analysis of the facts, we believe the suits are without merit, and they're not material.

Thank you.

Thank you. Our next question is from Steve Grabel (ph) (inaudible)

Hi. It looks like maybe with the $11 million from acquisition in the quarter, that organic growth is around 2%, and I was wondering, since it looks like you've been culling some unprofitable accounts, that price is up. Was the number of accounts down organically?

The one adjustment you didn't make in that is the international last year was about 2.7 million, so there's a variety of factors here, and this year international, the machinery side was .7 million, so if you take those kind of factors into account also, you come to a different percentage.

Ok. And then lastly, what kind of organic growth rate do you have for your outlook in 2003 that you get to the 458 to 466 million?

I think if you look overall in the small as the, it's about 9 to 10% over the prior year, and large, about 3 to 4%. And then on international, that can range anywhere for the year between 3 to 7 million.

Thank you. Our next question is from Kevin Monroe of Thomas Weisel Partners.

Good afternoon. I was wondering if you could talk more about the Bio-systems service offering. I know you kind of said you have the permits filed. What's the timing of when you're going to start rolling this out and sort of your new markets and could you guys talk about or quantify what you think the potential revenue opportunity is from this business?

Several questions. First of all, just for everybody's clarity, our guidance that we gave on revenues and earnings does not assume any new geographic rollouts in 2003. Rich had mentioned in his comments, we have seen in the current geographic areas where we have some early successes in cross-selling. In terms of the timing for the permits as we've mentioned in the past, it's something we can't control, but we anticipate over the next couple of quarters that we'll start to have some of those approval processes flow through, and then we'll begin installing the washing systems which are on order, so we're really right now ramping to have the infrastructure in place before the end of this year to start our launch in 2004. If something happens earlier, we'd be able to move sooner.

From a color standpoint as to what we have seen and what we anticipate in terms of the new opportunity where we might have a large account today for a base service that might be, let's say, 25 or $35,000 of revenue opportunity, that same hospital would be at 40, $45,000 opportunity on the Bio-systems offering, so it gives us a potential to more than double the revenue opportunity per account, and obviously at superior margins than we've historically enjoyed in our large quantity generator business. So mathematically, if we could achieve similar penetration across our large customer base, several hundred million long-term opportunity. Obviously we've got a lot of work to do to get that and achieve that penetration.

When you said 40 to 50,000 with Bio-systems, is that 40 to 50,000 incremental or combined with your current service?

Incremental revenue.

So for example, if we were at 30,000 per annum account and the service requirements that they had for the Bio-systems offering were 40, that account would be 70,000 per annum potential.

Ok. And I know the gross margins in this business are, what, around 35%?

Yeah, they run -- they've historically run in the high 20s to mid 30's, and clearly with operating on a shared platform of plants, transfer station, transportation, we think we can enjoy superior margins for our integration and overlap synergies, so we anticipate in trying to look at targeting accounts in the mid 30's on the gross margin side.

Ok. Now you guys have a union contract coming up in June, is that correct? And what's the status of that?

We actually have a couple contracts this year that are coming up. The status obviously is that we'll enter into negotiations. I think it's important to remember that, you know, we're primarily a non-union company with less than 10% of our work force being unionized, and this contract does not involve anything near the 10% of the work force. It's only one location.

Ok. Thank you.

Thank you. Our next question is from Tom Ford of Lehman Brothers.

Thank you. Rich, you mentioned the dirty dozen and the 2 million. Is that a new 2 million or is that the 2 million that you referenced, I think, a quarter or two ago?

These are accounts that have been worked through since the last time that we talked.

Ok. So this is new then, right?

Yes. And it's annualized revenue that I was referring to.

Right. ok. Great. And Mark, you had referenced half a million of an impact in terms of what you thought at the revenue line. Do you think that that's mostly on the large quantity side?

No, actually you get more on the small quantity generator side because if you think about a transactional base account if somebody's on a weekly service and there's a snowstorm in that area and they say, well, our office is going to be closed, pick us up next week, we just get the incremental container charges, and then in select markets like Denver where they had just a massive snowstorm and had blocked traffic out for a couple of days, there was a modest effect on hospital volumes.

Ok. And I know that the health care facilities have seen some difference or some incremental weakness this in their volumes, and I wanted to get a accepts from you as to what your thoughts are related to your business.

I think we have obviously heard of several hospital companies having effect from volume due to low morbidity or light cold and flu season and some other effects. When we look at our top accounts that we've had for years, we see very consistent volume patterns where people are up low single digit percentages. In some select markets where maybe they're having tougher competition from surgery centers, they may be flat or down slightly, but we see that volume pick up in our small quantity generator base, even though a procedure might move from a large account sector to a large account sector, we obviously win even though the unit growth may be zero, we win because we enjoy higher margins in the smaller account sector. And just overall, if we just haven't seen that dramatic of an impact, because if you think about the medical waste dynamic that occurs if somebody has a flu or cold, there's not a lot of medical waste generated.

Ok, great. And then just one more question which was with respect to the Scherer (ph) business where you said you recognized benefits or opportunities, was that from Scherer accounts signing on for the base Stericycle business or was that actually from cross-selling Scherer, the Bio-systems business to existing Stericycle hospital accounts?

It was in geographies where we currently have overlap of the business and it was cross-selling bio-system into existing Stericycle medical waste customers.

Ok. Just one quick one, sorry, Rich. For Biomed and -- or MicroMed (ph) and -- for the tuck-ins, Bridgeview (ph) , where are you in that process in

As far as the integration?

Yeah.

It's primarily done.

Ok. Great. Thank you very much.

Thank you. Our next question is from Mark Akaliante (ph) from Alliance Capital.

Good afternoon. Sorry if I missed this. Did you give the DSO's in the quarter?

DSO were 55 days. And we had 55 in last quarter. We had 60 the last year.

Ok. Everything else was answered. Thanks very much.

Thank you. Our next question is from Howard Capek of UBS Warburg.

Good afternoon. One housekeeping question first. Mark, in the revenue guidance for the year, is that assuming the ongoing sort of 2% per quarter sequential increase in account penetration on Sterisafe?

Yeah, our overall objective remains the same as we had before, to try to get a point and a half to two points on Sterisafe.

Bigger picture, more of a think question, in each account segment, small and large, what is sort of the tone of doctors or at the hospital level, wherever you're dealing with, to spend?

The tone to spend in terms of Sterisafe?

Sterisafe or just small group generator business in general, you know, physicians facing malpractice insurance increases, potential customer reimbursement rates depending on who their payors are, general tone. At the hospital level, more so from a propensity to maintain service and accept a price increase or, in the case of a bio-system, take on some added spending.

I think -- several questions -- our perception of the small account base is tremendous pressure on malpractice insurance, particularly in certain sectors, OB-GYN and others are just getting clobbered on increases in insurance. I think the overall sense that we have is sometimes that opens up new opportunities for us on Sterisafe because as people may have had more of a routine focus to their business and they're discussing with their insurance providers what can I do to help minimize it if the topic comes up, well, maybe you can look at improving your safety -- maybe having a lower overall work man's comp component, but that's a much smaller expenditure than the malpractice side.

In the hospital space for Bio-systems, you know, the key point that everybody needs to understand is that it really isn't about the hospital spending more money to do bio-systems. It's about saving money. About saving what they spend today in total when you look at the ago aggregate of sink single use containers, the cost to them of following up on needle sticks so if you can help reduce or prevent needle sticks, inventory management and the like. So we think we have opportunities even though hospitals are under and always have been under a fair amount of financial pressure.

And then just to follow, in the hospital accounts where you've had cross-selling success, who's doing the decision-making process? Is it higher up in the administrative side or is it a station by station sort of nurse managers?

The overall decision tends to be more committee. You have obviously input from environmental services, nursing, purchasing, risk management, because there's several functionalities (ph)within the hospital that make that decision, and I think that's where Bio-systems is a great opportunity for them to outsource, because you're essentially saying overall, we can save you money, we can reduce your risk, you can free up valuable nursing time to spend time taking care of patients, you can free up environmental services time, you can reduce inventory, reduce purchasing, material management time. It's just an overall win across all of those functions, but they're all involved in touching that decision.

Has there been any one outstanding sort of Champion in terms of hospital functions?

I think you usually end up between nursing, risk management and then obviously environmental services is affected by it. In the early successes, we're seeing our relationship with the hospital and why somebody picks Stericycle to begin with is it's the safe decision. I mean, they're trying to manage their liability and risk instead of just dealing with a broker, they want to deal with a vertically -- provider, so they've already thought through some of the risk management and cost-effective outsourcing decisions, and then as you interface with nursing and risk management where they say, oh , maybe -- that's an important call.

Following -- sorry, last question, I promise. Any change or added incentives for the sales force to sell? Bio-systems?

Well, the sales force right now is not -- they're kind of frustrated a little bit because we haven't cut them loose yet on being able to sell Bio-systems, so they're excited about the opportunity. I think one of the challenges that we have as a management team is to kind of hold back the reins because we're saying sell what's available today with our current offerings and when we open up knew geographies we'll open up the floodgates with the launch team. So right now the only -- we're actually pleasantly surprised that there's been some early successes because we haven't really thought about that too hard and really we're focused more on get the integration done and get prepared to launch the knew geographies.

Great. Thanks. Sorry for so many questions.

Thank you. Our next question is from Amanda Tepper (ph) of J.P. Morgan.

Hi. Good afternoon. I want to follow up on that last topic first before getting to a couple other questions, which is you're launching -- your launching of the new Bio-systems in new geographies -- what is driving the timing and roughly what's the plan over the next 12, 18 months?

What paces the timing is the receipt of permits within each new geography that we launch. We have to submit a drawing of our new wash line that we'll add to the treatment plan. And this is similar to whether you're -- it's your home or office or building, you have to submit for building permit to modify, so it's not a real complicated process, but it's just a time-driven process. We have already submitted in a number of markets our plans and submissions. Usually those cycles take from one to two quarters, depending on the process, and then once we receive approval, we will then install the wash lines and then begin marketing in those geographies. So the reason we hadn't included any guidance in our 2003 numbers for new geographies is we just don't have a pulse as to, you know, when that timing will occur, and, you know, in future calls, we'll update on the success and progress of the receipt of those permits and anticipation of launch as we go into 2004.

Is there much cost involved in getting the permits?

No, the cost to get the permits is not complicated. It's essentially taking drawing submissions, most off our drawings are CAD-CAM driven so we can update where the wash line would go in and what's involved, and obviously it's a fairly uniform submission across each of the plants.

Ok. Great. And then on Sterisafe, I'm wondering, on up-selling, which I know is part of the long-term plan, how is that coming along? What kind of progress are you making? And how exactly do you approach up-selling customers, especially in the current environment where I think -- I can understand -- it seems more intuitive getting someone in at the first level, but trying to then take them up from there?

In terms of the progress, earlier we had mentioned where historically, we were 98, 99% in the lowest level entry program up through the third quarter of last year. In Q4, we'd seen about 5% going into the higher-level programs. In the first quarter of this year, we've seen 7 to 8%. So, you know, kind of slow but steady progress. What makes people move into the next levels, they may go to use the blood-borne pathogens training CD, realize that they don't have the CD-ROMs for material safety data sheets or for quarterly safety meetings or other items, and call the 800 number to request that, of which we'll say, fine, would you like to become a select or a preferred customer, and that's this amount of incremental. And sometimes it comes through just word of mouth activities. Obviously we continue to do waves of invoice stuffers, mailings, telemarketing, outbound calls, and have gone through a complete training of our sales and customer service personnel as well. So we're really trying to hit it from a variety of fronts, but obviously we've got a lot of work to do and a lot of opportunity.

Sure. So of that, say, 7 to 8% at the end of the last quarter, is almost all of that current Sterisafe customers who are trading up or are they new customers coming in at the higher level?

Both. You have that slice, you're probably about half and half.

Thank you very much.

Thank you. Our next question is from Matthew Litfin of William Blair.

Good afternoon. I have a follow-up on fuel costs for Frank. I'm interested in what have you baked into your guidance relative to what you saw in Q1 on fuel?

I think if you look at really the year-over-year as a whole has been about 15 to 20% year over year, so a lot of debt obviously is in the first part because we do see it tapering off a little bit. But that's roughly what we had built into it, and we're comfortable with that.

Ok. Another question, if I might, on capital structure. Can you give us your latest thinking on best uses of free cash flow that we're expecting to be generated through the balance of the year?

I think if you look at, again, what was said, kind of the despot of free cash flow was first going to be used for continued looking at the investment and the growth of the business. We have obviously opportunities there on the Bio-systems side. Looking for obviously a good acquisitions potentially. Then we're looking for reduction of debt first to high yield part, the 12-3/8ths, we'll continue to look for opportunities there to see if we can buy back bonds out of the market. And after that, we'll be continuously reducing our senior A-B debt from that point on.

Great. One last one, if I might. Have you guys made any acquisitions since Scherer?

We made one small one, really a fairly immaterial tuck-in, in the Texas market.

Great. Thanks very much.

Our next question is from Mark Ataliante of Alliance Capital.

Hi. In follow-up, 2003 guidance on cash flow after CAPEX, are you giving that out as well?

Yeah. As you look at the cash flow from operations and deduct CAPEX, first cash from operations ranged 90 to 100 million, and then if you deduct the cap CAPEX range of about 18 to 20 from it, that's what you would be looking at approximately.

Ok. Thank you very much.

Thank you. Again, if you have a question, press the 1 key on your touch-tone telephone. One moment for questions. We have a question from Steve Denelski (ph) of Copper Arch Capital.

It looks like looking back over the last couple years, you've gone from about -- at the end of fiscal 2000, to a current rate of 447, but over the same time, you actually decreased working capital over that time frame, and I realize DSO's have come down, which has helped a bit, but -- so my question is, I guess, what other dynamics are at play to help you generate cash flow from working capital and given the growth of the business, do you see that turning around where working capital is going to have to start increasing?

Working capital is obviously improved for self fundamentals. One fundamental issue is integrating on to a common system and platform, our tower basis tem, we get the ability to constantly track and improve our check shuns effort. Second, we also get the ability to improve through the impact of the working capital effect of Sterisafe movement, and then oh obviously --

We also had a very important one, and this goes on for a long time to come. We had 8 to 10 million per year in deferred tax, and that's because the goodwill is tax-deductible, and that gives us a big benefit on the cash from op side year over year of about will to 10 million, and that obviously buffers some of the increase you might get from an AR even into the future.

Is that going to increase -- it looks like your cash flow from operations estimate went up. Is that -- is that a big deferred tax?

No, it's a contributor to that. You have a little bit of a factor in cash from ops being up because you might get tax deductibility with respect to the option exercising that occurs. That gives us a tax deduction and it gives us some tax benefits that might be a contributor at times a little bit, but it's overall the trend in the business is not a heavy quote-unquote working capital user if you include that deferred tax in it. And in fact, that's a surplus side most likely it in a continued growth environment.

Ok. And one other question. Did you spend about 26 million on the Scherer acquisition in cash and then the difference on that 31 that shows up in the cash flow statement today? Is that that other small acquisition?

The other one was a small acquisition, a couple of small touch-ups with respect to MicroMed and Bridgeview on purchase accounting, some minor ones, so that's the bridging, and in total, the whole deal including all the expenses with respect to the acquisition was about two on the preferred with respect to taking those out on Scherer also, so that in total was 28.

Ok. Great. Thanks.

Thank you. I'm showing no further questions.

Well, Thank you, Operator, and thanks, everyone, for your time and attention. We had a very solid quarter, strong performance, in light of a number of scary head winds of what was going on in Iraq and oil prices and the like, but very, very pleased, and we look forward to many more pleasant calls throughout the year and the years to come. Talk to you soon. Bye-bye.

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