Stericycle Inc (SRCL) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Stericycle Fourth Quarter and Full Year 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. If anyone should require assistance during the conference, please press "*" then "0" on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Liz Brandel, Vice President of Finance. Ms. Brandel, you may begin.

Thank you. I will 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. 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 commitments 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 a company's balance sheet. It's not a measure in accordance with GAAP accounting principles and is not a measure of net income, cash flow, or liquidity. With that I would like to pass the call to Mark Miller.

Thanks, Liz. Good afternoon and welcome to Stericycle's fourth quarter and full year 2003 conference call. With me today are, Frank Ten Brink, our Chief Financial Officer and Richard Kogler, Chief Operating Officer, and you've heard from Liz, our Vice President of Finance. Once again, we are pleased with the record results achieved by our team in the fourth quarter. On a comparative basis, our net income in the fourth quarter grew by 61%. Stericycle finished the fourth quarter of 2003 with earnings per share of 40 cents, up 59% over the 25 cents in Q4 of 2002. For 30 consecutive quarters, since our IPO in 1996, we [have] either met or exceeded expectations for our company's performance. For a brief overview, I will hand over to -- the call to Frank.

Thanks, Mark. We had a strong quarter as revenues grew 11.3m in the quarter to 114.6m, up 11% from 103.2m in the fourth quarter of 2002. Of the 11.3m growth; small quantity, our most profitable sector was up $5m or 9%. Large quantity of revenues were down by $2.7m or down by 6.8%. International increased $0.5m primarily due to equipment sales in Japan offset by primarily unfavorable Mexican peso to dollar exchange rate on a Mexican business.

Acquisitions, less than 12-month old contributed over $8.5m in the quarter. The customer revenue mix was approximately 62% in small and 38% in large customers and as in the past this mix is calculated excluding international and acquisition revenue. The gross profit, as a percent of revenue, increased from 42% in the fourth quarter of 2002 to 44.6% in the fourth quarter of 2003. The improvement resulted from continued penetration of Steri-Safe in our higher margins SQ business dramatically improves margins in our LQ business due to our continued focus on the LQ margin improvement projects; productivity improvements partially offset by higher employee benefits costs. SG&A excluding amortization was 14.8% of revenues versus 14.6% in the prior year due to higher benefit costs and investment spending related to programs such as BioSystems and Steri-Safe.

Income from operations rose 33.5% to $33.2m in the quarter from 24.8m in the fourth quarter of 2002. As a percent of revenue the income from operations increased from 24.1% to 29%. Please note that the fourth quarter of 2002 included a fixed asset write-off of 2.9m. Net interest expense was lower in the fourth quarter of 2003 versus the fourth quarter of 2002 by approximately 2.1m due to lower interest rates and lower debt outstanding. At the end of the fourth quarter the balances of the revolver were 20m. Our Term loan A was 62.4m and 27.3m was outstanding under the Term loan B. The total outstanding for our senior subordinated bonds at the end of the quarter was 50.9m. Net income for the quarter rose 61% to 18.4m from 11.4m last year. Earnings per share were 40 cents for the quarter up 59% from a year ago quarter.

Now the balance sheet, during the quarter we continued to make significant progress in improving our balance sheet. Our debt to book cap at the end of the quarter was 28.1%, down from 39.1% at the end of 2002. In the fourth quarter our total debt decreased by $11.9m due to repayments of debt. During the quarter we repurchased 292,000 shares of common stock on the open market in an amount of $13.2m. During the quarter our CAPEX was 5.6% of revenues, approximately $6.4m. The DSO in the quarter was 49 days versus 55 days a year ago quarter and 2 days lower than the previous quarter. The net cash provided from operations was $32.8m in the fourth quarter of 2003. And now some selective balance sheet numbers.

Cash balances and cash equivalents were $7.9m. Accounts receivables was $59.7m. Current assets were $94.1m. Total assets $703.8m. Short-term debt $4.8m. Long-term debt $163m for a total debt of a $167.8m. Net worth was $428.8m. The deprecation in the quarter was $3.9m and amortization was $0.8m. The DSO in the quarter, as mentioned was 49 days.

Now a brief recap of the full year numbers. For the year ended December 31, '03 revenues increased to $453.2m, an increase of 12.9% from the same period a year ago. Gross profit as a percent of revenue expanded to 43.4% for the year ended December 31 '03 versus 41% for the same period in '02. Earnings per share increased 41.3% to $1.43 from $1.01 per diluted share in the same period a year ago. Cash from operations was $121m, and capital spending was $21m or 4.6% of revenues. I will now turn it over to Rich.

Thanks Frank. We are extremely pleased that our gross margins improved by 240 basis points year-over-year. The operating team contributed to the success by their constant focus on productivity and lowering operating costs. The sales team also contributed to success we enjoy during 2003. Throughout the year we saw a steady increase in the penetration of Steri-Safe.

In 2004, the team will stay focus on the three key drivers of our SQG growth strategy; new customers, conversions, and up selling the higher program levels of Steri-Safe.

Having met or exceeded all of our Steri-Safe goals for 2003, I will now review our 2004 objectives. We expect to end 2004 with 85,000-90,000 customers on the Steri-Safe program equivalent to approximately a third of our eligible small accounts. In the quarter our major account reps devoted their energies to improving our LQG margins. They secured 49 new LQG contracts, and they also worked hard on the LQG margin improvement project. As you know from prior calls, the goal of the margin improvement project is to increase the absolute margin dollars of our LQ business and this is the process that occurs over time as we work with our customer to achieve this goal.

In Q4, we were able to our LQ gross margin dollars by over 20% even though revenues decreased. And as a result of price and service adjustments and calling of low margin accounts, our annualized revenue run rate for LQ decreased by approximately $2m. For the year we exceeded our internal goals for the margin improvement program versus the prior year gross margin dollars from our LQ business increased over 24%, even though revenues declined 2.3%.

Now, I would like to provide an update on the Biosystems roll out. We concentrated this quarter on equipment installation and validation. We are pleased to report that we now have the operating infrastructure in place to reach over 50% of our potential customer base. Specialists needed to market Biosystems have been hired, trained, and have begun initial sales activities. Customers who are aware of Biosystems are [inaudible] program. And even at this early stage in the roll out we have begun to take orders based on initial feedback from our sales force, customer prospects and our newest customers, we remain extremely excited about the growth potential of Biosystems. Although, it is still early in the roll out, we remain optimistic about our 2004 objective of signing between 100-200 new accounts in addition to the 300 existing Biosystem customers.

Summarizing the fourth quarter, we now have over 70,000 small accounts on the Steri-Safe compliance program equal to approximately 28% of our eligible base. At the end of the quarter we had signed up over 4000 new small customer service agreements. Thanks to the continuing hard work and efforts of the sales team, we currently have over 301,000 accounts with more than 295,500 small customers and remainder large. Now, I will just turn it back it to Mark.

Thanks Rich. Well, clearly Stericycle had another exceptional year, and I would now like to provide insight on our current outlook for 2004 and please keep in mind that these are forward-looking statements. The -- as a reminder, the guidance for our 2004 does not include non-routine items such as the assumption of additional repurchases of our bonds, should re-elect in Q4 of this year under the call provision, repurchase the remainder of the bonds, the pretax charge would be approximately 4.5m of which 1.3m is non-cash and 3.2m is a cash premium. The potential EPS impact of this repurchase charge in Q4 would be approximately 6 cents per share and would provide a benefit after 2004 of approximately 5 cents per share due to lower interest expense. In our last conference call, we provided preliminary 2004 EPS estimates of $1.67-1.72 per share. We believe that analysts after detailed review of their models will potentially raise their estimates to a range of $1.69-1.74, which we are comfortable with; this assumes an average share count of slightly over 46.5m shares for the year of 2004. I would like to provide some fine tuning for that outlook; we believe that analysts may adjust their 2004 revenue estimates to between 477-484m. These estimates include internal growth rates on small accounts ranked by analysts of between 8-10%, -3 to -2% on large account revenues, incremental BioSystems' revenues between $1.5-4m, and 4-7m in international equipment sales. We believe analysts will have estimates for net income between $78-81m depending on assumptions for improved margins, acquisitions, interest expense, and strategic spending. Depreciation and amortization expense for 2004 we believe will be approximately $18.5-19m.

In closing we are very pleased with the results to-date, and particularly this year's launch of the BioSystems Sharps Management Program will provide us with a very unique platform for continued growth at higher margins. We are investing in this $200m opportunity because of the tremendous benefit it provides to our customers and to our shareholders. In addition, we continue to invest in new products and services focused on helping our customers with infection control and compliance management. We are very excited about the tremendous opportunities that lie ahead in 2004 and beyond, and would like to thank our customers, employees, and shareholders for their support in building the leading company, our industry. Thanks for your time, that's the end of our prepared comments, and operator we'll now switch over to answer any questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the "1" key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the "#" key. Our first question comes from Matt Litfin of William Blair & Co.

Congratulations on a very strong quarter. Let me ask you a couple of questions on BioSystems if I might, one is how many sales people do you have devoted to that at this point? And secondly, how many, you mentioned a few customer wins, which would -- how many customers do you have at this point since you began that rollout in earnest last month?

Yeah, Matt, first question you had was the number of sales folks, we have slightly over 20 right now, currently on board trained and beginning to market and in terms of the customers that we've acquired, we have about 8 new customers at this point, so we are still in the pre-marketing phase, but these are people who essentially have preordered their service and are looking for installation later in the quarter.

I think just to add to that, Matt, yes, we are pleasantly surprised, we don't want people to get too over anxious in terms of the selling cycle on these and we are pleased to actually getting some in the door at this [amount] but I don't think we can take it because of such a small sample size is being predictive of the sales cycles which as we mentioned; we anticipate 5-10 months typical account cycle.

Okay, two more quick ones if I might, one is have you made any acquisitions since the end of the fourth quarter and secondly have you -- or has your Board I guess discussed at all recently the possibility of any dividend activity that you could share with us?

Two questions, since 12/31 we haven't done any acquisitions and in terms of dividends that has not been the decision that the Board has taken, obviously from our standpoint the key priorities for use of the strong free cash flow, first and foremost to invest in the business and repay and include our cost to capital to paying down the expenses that as we mentioned in the bonds, and continue to look for acquisition opportunities, although acquisitions are not in our guidance. We do continue to explore and look at acquisitions that fit within our business model. Obviously use of cash for stock repurchase, so that's kind of the batting order right now.

Thank you and congratulations again.

Our next question comes from Raymond James of Lehman Brothers.

Good evening, [inaudible] charges housing keeping question, in terms of the shares repurchased can you repeat the number that was repurchased in the quarter?

The amount of shares that were repurchased were 200, and I'm looking for a second half -- one moment.

Sure.

292,830.

Great. Thank you. And I just wanted to get more color on the Biosystems roll out, in terms of the eight new customers as you talked about, you already secured in a pre-marketing phase, shall we incorporate expectations on sales coming in this quarter or you would die that to happen in the latter part of this year?

I think in terms of modeling the initial handful of accounts that we have signed up will begin installations and start to generate a small amount of revenue stream in Q2, but because it's so small it's not meaningful to the total numbers and a big ramp up in terms of incremental will really impact more of the latter half of the year than the first half of the year, so I think as you think about our prior guidance and continued guidance capturing a 100-200 some odd new accounts that will probably build within more in the last two quarters and obviously gives us a much more substantial run rate as we go into 2005. I know that if you run through your math, the guidance we have given last time and continue to give this time of incremental revenues of between $1.5-4m in this year would create an exit running rate of those accounts going into '05 between $5-10m annualized, which is roughly a 30-70% growth over the current installed base of business that exists on the Mid-Atlantic and New England area.

Great. And looking to the target number of sales people you want to get to by the end of the year and in terms of the eight customers you secured in terms of the scope of geographies, are they concentrating in one particular region or are they adopters of a specific market, but if you would at benefit or settling Stericycle in the market you already got the customers?

Several question, in terms of sales force. Rich, we have plans to continue to expand our coverage as we expand geographic reach. As Richard mentioned we can now reach over 50% of the population base, and we will continue to roll out in time terms, and where we would add representatives accordingly as we expand. In terms of the color on the first accounts captured, of those about half are what I will call contiguous geographies to the existing Biosystems infrastructure platform, i.e. where we have nearby states where we have referenceable accounts and people can drive over and see, and the other half is in brand new geography. So I don't think we have anything indicative at this point that would say that there is some magical move between Metro areas given the small sample size. I think from anecdotal standpoint, I can tell you that the sales force is getting very, very strong interest in reception and you know some of the comments we have gotten back from people is, you know, the -- particularly people that have sold products and services into a critical setting over a decade or more of a experienced are saying, you know, when I use to introduce new products and services very often as the some percent of the people I called upon that rebuff me and said, you know, I don't want to talk to you and that I am not interested in and I don't have any time They were already satisfied with a current level of offering, and I think where some of the reps are finding that they are getting great receptivity from people, but they do this as a new and innovative program, finding unique solutions. Well, time will tell what it takes to convert those into orders, but so far so good.

Great, thank you. And my last question before going back to the queue, in terms of the Steri-Safe roll out in New York and Washington, any updates for us?

Yeah we -- for those of who aren't familiar with this we had due to just regulatory processes the way were controlled, for example, in State of Washington has a regulated utility. We have to go through a process to add it to our service offering and those -- both those geographies now are in launch and continue to penetrate, and we did have some small uptake on our capture rate during Q4, but again not meaningful enough to move the numbers in Q4 on our total revenue and earnings. But a great opportunity across the nation to continue penetrating the existing base. We continue to see that rate of 3000-5000 a quarter and also the upgrade process, we are making some headway on.

All right. Thank you very much.

Our next question comes from Amanda Tepper of J.P. Morgan.

Hi, it's actually Barbara Farrell for Amanda Tepper. My question has to do with your optimal capital structure, and specifically what kind of leverage ratio that capital would you be aiming for as a target?

I think, obviously right now we had a very strong level. I would say that the sweet spot, maybe, is between 20-30% debt to cap. Obviously, we have a variety of opportunities that we maybe see, but at the same time the repurchase program can feed into that, so there's all kinds of tools in our toolbox that we can use to stay within that bandwidth and optimize the return to our shareholders.

Okay, and just in terms of margins looking out further, it seems like you had about 44.6% gross margin on the fourth quarter. How much more margin expansion do you see yourself getting overtime?

Well, I think, as we look into our 2004 guidance, I think, we would anticipate 2004 to be in the mid 45s-46s, obviously that big variance is depending on the rate of adoption on Steri-Safe and penetration, but if you look back historically, we have had several hundred basis points per annum increase by following this -- following our business strategy and I think as we -- as you look at the [gating] and modeling depending on what you are layering in and by quarter obviously in the early part of the year as we are ramping up with BioSystems, the first few accounts that we had in the geography will have -- carry a higher revenue rate and won't have as much gross margin, but we believe overtime we can move that business over extended period into the 40s and then obviously large quantity generators will continue our program and have strong double digit gross margin growth in that sector as well.

Okay, and can I just ask you to comment on your SG&A run rate for 2004?

Yeah, SG&A run rate still sticking to the same modeling that we had talked about in our last conference call. Where you will see us in the high 15s or low 16s as far as ratios in this early part of the year, because we have added the additional resource and then as revenues emerge from that investment we will start to taper back down, but I think most of the models that we've looked at are in the high 15 to low 16 level.

Great thank you.

Our next question comes from Lorraine Maikis of Merrill Lynch.

Thank you. Could you comment on the -- first, drop in large quantity generate a revenue of about 6%, that's higher than it had been for the year, just wondering that there was a specific customer loss or if you just ramped up your 30 dozen program or what led to that performance?

Yeah, good question. I think actually what we see as, lot of it impact of the cumulative effects, so I think as you look at this year and first, excuse me, 2003 and look at the first three quarters of next year, we have some funny comparables, because as you look back overtime we have adjusted about 2m in Q4 of '02 and then 2m in Q1 of this year, about 4m in Q2, roughly a 1.5m last quarter in Q3, and about 2m this quarter. So as you run through the map, a lot of that percentage delta is driven by the [cum] impact of those actions, but from our standpoint as you move to time, we are able to attack of about 5% per quarter as what we have been running, so we still have about 20%, that we will be calculating and the net effect of that gives us a double digit gross margin dollar gain and that will still take a several quarters to get through.

Then [what's] your gross margin run rate for the LQG during the quarter?

In terms of a percent to revenue in Q4 was about 25% and fully blended.

And then could you just comment on the margin performance as BioSystems, the existing business that you purchased? Have you been able to fully integrate that into your operations and what kind of gross margin expansion have you been able to achieve because of that?

Well the integration has been completed and we have picked up several points on that. That plays into part of our margin expansion as you have seen quarter-by-quarter this year that overall, where they have historically run from a high 20s, we are now running in the low 30s. And I think as we look at rolling this in the new geographies as well as leveraging infrastructure, we think the potential is to move that as much as 10, 12 percentage points of revenue.

Thank you.

Our next question comes from Barry Mendel (ph.) of Mendel Money Management.

Yeah, I noticed that Waste Management today announced their approval to collect -- they have shortest program for the residential sector and just wondering if you would ever have any interest in that or you have not underplayed already?

Yeah, did see the announcement of program that they have had in place for several years. At least my understanding of it is that as materials go from recycling in the home environment and hit recycling centers it creates a hazard and risk of needle sticks for the employees and union employees that work in those recycling centers or as material moves to landfill, part of that issue has been historically the home marketplace at the State level is not regulated under the medical waste regulations. There isn't a specific mandate to enforce or tract or provide penalties, should people not handle it properly. So, an example, if somebody is diabetic and is giving insulin injections in the home, they are often coached to take those diabetic syringes and put them into a heavy sturdy plastic container such as a coax bottle or to put them into a coffee can -- the metal coffee can and take that up. Unfortunately, if they don't separate that and if they put that into recycling, I just take the risk. So several years ago waste management had began offering a mail-back program to try to help offset some of that, and we offer those mail-back programs as well, but they have not been significant in terms of update because the consumer at this point views it as a fairly high expense rather a regulatory and past practices, they don't have to spend that money today. But should that ever change, we are obviously in a strong position to participate in a regulatory shift there.

Okay. Thanks.

Our next question comes from Kevin Monroe of Thomas Weisel Partners.

Good afternoon. Couple of questions, the -- what's pricing like in the large customer business, I know you said you got 49 new contracts in the quarter, are those coming in at, you know, 25 plus gross margins, how's the pricing in that business?

The new contracts that we are taking on are all coming in at or above our blended rate.

Okay. Now on the small customer side, it looks like internal growth might be slowing a bit there, is there anything in particular going on there or?

No, actually growth rates, we've been got a 9-10%, and obliviously what effects that is period wise; when we are doing marketing activities, when people are doing sign outs and so. I don' think there is anything I'd read too much in the trends of plus or minus, you know, 0.4 or 0.5 percentage points in period-to-period.

Yeah.

We got that kind of bounce around in the last couple of years as well.

Right. Last question. 3CI, I think there is a dispute over preferred dividend. What you take on that? What's potential impact you come get it or?

The impact really isn't in our financials on a consolidated basis, so there is really no impact for that matter on a financial basis.

Yeah. Okay. Thank you.

Our next question comes from John Bozler (ph.) of Oppenheimer Fund.

Yes. What was the -- what acquisitions were done in the fourth quarter?

The acquisitions in the fourth quarter really related to investments in companies, in new programs, and services that are really focused on the infection controlling compliance side, and we also did a couple of Med Waste acquisitions in the quarter.

Can you comment about the acquisition stream because after the large acquisition of share, which closed in January of '03, it seems to, you know, has just kind of really dried up as far as impact. Can you comment what you see out there on the horizon for acquisitions?

Yeah, I think first of all in terms of acquisitions, right, we -- there isn't a steady quarter-by-quarter trending as to when this go, they tend to come as the seller and us come to agreement on the Meeting of the Minds and if you watch our past they tend to be very spiky in nature. The pool in infectious waste sector, domestically, is about 40m people -- combined revenues of people whether in various stages of discussion, negotiation, due diligence. We don't include those in on our guidance because we do them on our own our terms and conditions, very disciplined borrowing and we find that by being patient and making sure we will do a right. A) We if have had great success with the acquisitions and their impact, and B) they have been around when they are in the future, once that we have looked at years ago are still around and were the most likely and most favorable exit side. And I think the -- with the items that Frank mentioned in our Q4 investment, and we will be covering in future conference calls, too early to describe details of the marketing activities and programs that these investments will be targeting in infection control and compliance services, that we will cover those in detail in the future conference call, so we continue to look at ways to not only do the standard tuck-in and geographic expansion whether be domestic or internationally, but also in terms of leveraging the infrastructure that we have in place.

How many large quantity and small quantity accounts were acquired in the quarter?

In the quarter on number of accounts, immaterial.

Okay. And how many new customers were there on Steri-Safe again for the quarter?

Steri-Safe, 5000 new accounts in the quarter. We were at 65 in the last quarter and we are now at 70,000 accounts.

Great, thanks so much.

Thank you.

Our next question comes from Greg Halter of LJR Great Lakes.

Good afternoon guys.

Hi Greg.

Noticed you accrued liability is up about $10m year-over-year, anything in particular of note there?

The accrued liabilities and the total that is up, mostly things like accrued compensation, our insurance was self-insured, so that accrual keeps growing, tax is built into, that does combined make up the 10.

Okay, and finally on your repurchase program, do you have a set dollar amount or share amount that's authorized by the Board?

Yes, in the historic press release we had authorized up to 3m shares and that was put out a while ago and obviously we got a lot of real estate dealings.

Okay, thank you.

Our next question comes from Alina Cellura of Smith Barney

Hi, good afternoon. I was just wondering if you provide a little guidance on cash flow from op for '04?

Cash from operations for '04, if you use the same assumptions as to the tax deductibility and the benefits we get from option exercising and like the range is probably somewhere between $150-120m from a cash from ops depends a little bit on the tax deductibility on that.

Okay. And also just curious, I know for the Biosystems, you can reach about 50% of the potential customer base, now if -- in order to expand that for the 100% of the customer base, I mean is it just adding new sales force or would you have to go through permanent applications again and equipment upgrades?

Actually, all of the above, we have in process permit applications and expansion, some permits, which we have in hand, but it's really the further geographic expansion, is driven by the permitting our own kind of ROI calculations because as we now have the platform, we can reach very broad geographies to our infrastructure and so also, you know, future build out, it's kind of make versus buy, i.e. what is a process to move the longer distance and what's the trade off to put in additional plant capacity and then sales force expense, we would match, but within our CAPEX range of guidance that we gave last time in the low of $20 -- $122m range, that's well within the capacity to continue that expansion.

Okay. And also, can you just breakout as a percentage of revenues, what the small customer accounts and large customer accounts were as a percentage of rev?

62% were small and the remainder was large.

Okay.

And again those are accounts related -- based on excluding acquisitions and international.

Okay. And then I'm not sure if this is also mentioned or not, but I'm just curious -- I think last quarter you mentioned that about 25% of the large quantity generators or the large customers, still you guys needed to sit through to just see which one unprofitable or maybe you could raise prices, you know, what percentage is left?

About 20%, we were able to tackle about 5% this past quarter, and going forward we look to do about 5% a quarter on in 2004.

Okay. All right. Thank you.

Once again, if you have a question, please press the "1" key on your touchtone telephone. Our next question comes from Mark Adoliance (ph.) of Alliance Capital.

Hi, good afternoon.

Hi Mark.

Hi. At peak revenue, might be on the numbers right, do you expect to have 5000 or so around 5000 fire systems customers?

Yeah since we -- the 200m penetration would be about approximately 5000 accounts.

And then this year, the high end of your guidance is about 100 customers?

Would be adding a 100-200 and some odd customers, which would bring our total billing into '05 where starting point would be 400-500 in some odd customers.

Okay, and then secondly, on international any opportunities out there, becoming more interesting?

Yeah actually the Japan business we -- as we've talked in some of the prior calls we had gone back to get approval in some MUD on the permits, those have been achieved we have begun the shipping of our third plant to Japan. So -- from a market standpoint, a very interesting dynamics of, it's actually a little bit larger than the U.S. market, has much better margins than this market enjoys. It's a first one where we are taking and looking at the ability to -- of our equity position overtime, and our view is long-term, which is you know take us years to do but is to build a leading franchise in Japan; it is a marketplace that is phenomenally granular. There has not been restructuring of end market pricing, it has very similar characteristics of pressures on reduction of [in simulation] of trying to look at proper management and the likes. So we think we are well positioned there. Other international markets we continue to look at other entries and -- you know consistent with our philosophy is that if we are going to make investments into new markets in the form of ownership, we want to be sure that we have a good chance of being number one or number two in that market in a reasonable timeframe; and so our primary focus has been as you know in Mexico, and in Japan and that we are exploring the other markets around the world, but similar philosophical approach.

And the international equipment sales of 1.5m, what are you selling?

Well in that markets to Japan, we had concluded an agreement to provide treatment equipment under our patent technology called ETD, Electro-Thermal-Deactivation. We hold several patents in that field, and so the contract is for us to supply that treatment equipment, do the installation, training, validation, teach them about the business, and then help them build that business through time.

Is there any margin on that equipment?

Yeah, we make margin on it comparable to our overall blended margins as typically stated margins are also affected also by what royalty rate we extract. So, our negotiations with each individual contract varies depending on how much local work is done in the engineering side, in building alignment, building construction, supervisions, and some of the parts may be supplied locally, and then obviously offset by what we get from the royalty stream on the future net revenues after that business, so we adjust those accordingly.

And lastly is the beginning -- this 1.5m should we expect this number to grow each quarter or is this just a one-time equipment type of --?

Well its equipment has shipped in Q4, there is further shipments that will occur in 2004, and when we gave the guidance of 5-7m in 2004 that would include those types of shipments.

Alright. Thanks very much.

Thank you.

Our next question comes from Steve DeNelsky of Copper Arch Capital.

Hi, what was the internal growth rate in the quarter?

The internal growth rates were 9% for small quantity and a negative 6.8% in large, and that equated to approximately $5m growth in small and 2.7m in the large quantity reduction.

Okay. So, blended growth rate overall without acquisition.

2.4%.

2.4%. Okay. And then secondarily, you gave guidance of -- net income of about, up 20%, but the cash flow from operation; you just gave, [you did] in the high end of the range if I heard it right; it's actually down from the number you just put up. So, can you just walk us through the dynamics sir?

Yeah the main issues are there our tax and we are more conservative on the tax deductibility also of the option exercises and are like. The other thing is, we did up a good year on accounts receivables. We have done and continue to do that, but obviously we will work hard on that and Steri-Safe might be continued -- contributed to that obviously but we are cautious there.

Two more to our guidance going into '03 and into '02 or etcetera. We tend to be pretty conservative on our assumptions. So those people are doing modeling, and their goal is to meet [inaudible].

Great, Thanks.

Our final question comes from Greg Halter of LJR Great Lakes.

Actually it was just answered. Thank you.

I appreciate everybody's time and attention and joining us on the call, I think, there are some exciting things that are going on for our business right now and look forward throughout the year to update you not only on our continued progress, and large quantity, margin expansion, Steri-Safe, international, BioSystems, and some of the other new programs, which we will be introducing later in the year. They really give us a phenomenal platform to help our customers in terms of fraction control management, help them with compliance and really a tremendous value for our shareholders. So thanks everyone for your time and support and we look forward to talking to you soon in the future.

Ladies and gentlemen thank you for participating in today's conference. This concludes the program you may all disconnect. Everyone have a great day.