Stericycle Inc (SRCL) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and would to your Stericycle Second Quarter Earnings conference call. (Caller instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Ms. Liz Brandel, VP of Finance. Ms. Brandel, you may begin your conference.

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. Factors described in the Companies 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.

With that, I’d now like to pass the call to Mark Miller.

Thank you, Liz. Good afternoon and welcome to our second quarter conference call. With me today, as usual, is Frank ten Brink, CFO, Rich Kogler, COO, and you heard from Liz, our VP of Finance.

Once again we’re pleased with the record results achieved by our team in the second quarter. Compared to last year, our net income grew by 21.6% to $18.9m. Stericycle finished their second quarter with an EPS of $0.41, up 20.1%. This included a $0.02 per share write-off of human-related fixed assets and loan amendment fees. Without these items, the EPS would have been $0.43.

We completed the acquisition in June of White Rose Environmental in the UK and this acquisition was effective June 1st of ’04. Once again, for 32 consecutive quarters, since our IPO in 1996, we’ve either met or exceeded expectations for our Company’s performance.

With that brief overview, I’ll turn the call over to Frank.

Thanks, Mark.

First of all, revenues grew $10.7m in the quarter to $123.8m, up 9.4% from $113.1m in the second quarter of last year. Of the $10.7m in growth, small quantity, our most profitable sector, was up $5.6m or approximately 9%. Large quantity revenues were down $3.1m or approximately 7%.

International equipment sales were up by approximately $2.5m in the quarter versus last year and acquisitions less than 12 months old contributed approximately $5.7m to the growth in the quarter. Customer revenue mix was approximately 63% in small and 37% in large customers and as in the past this makes this calculated exclusion international operations and 3CI.

Gross profit as a percent of revenue increased from 43.2% in the second quarter of 2003 to 44.7% in the second quarter of 2004, 150 BP improvement. The improvement resulted from continued success of our Steri-Safe program, improved margins in our large quantity business due to our progress on the large quantity margin improvement project, and productivity improvements offset by higher energy costs.

SG&A, excluding amortization, was 15.3% of revenues versus 15.1% in the prior year quarter due to higher investment spending related new programs such as BioSystems and Steri-Safe. Income from operations rose 10.7% to $34.6m in the quarter from $31.3m in the second quarter of 2003. Operating income was impacted by the write-off of $1.2m of incinerator treatment equipment in the second quarter and as a percentage of revenue the income from operations increased from 27.6% to 28%.

Net interest expense was lower in the second quarter of 2004 versus the prior year by approximately $0.8m, due to lower debt outstanding and modestly lower interest rates. At end of the second quarter, the balances of revolver were $52m, 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 from the second quarter rose 21.6% to $18.9m from $15.5m last year. As reported, EPS was $0.41 for the quarter, up 20.1% and this includes the previously mentioned write-off of the select U.S. incinerator equipment and loan amendment fees related to the increase in our senior secured credit facility, which was put in place in connection with the acquisition of White Rose. Which equaled about $0.02 per share. Without these charges, the EPS would have been $0.43 for the quarter.

Now the balance sheet. Our debt to book capitalization at the end of the quarter was 31%, down from 34.1% at the end of the second quarter in 2003. During the quarter we repurchased 30,000 shares of common stock in the open market in the amount of approximately $1.4m and in the quarter our CapEx was $9.6m due to the timing of projects.

We’re comfortable with our CapEx guidance for the year at 4.5% to 5% of revenues. The DSO in the quarter was slightly over 47 days versus 53 days a year ago.

Now some select balance sheet numbers. Cash and equivalents were $15.2m, accounts receivable $70.3m, current assets $112.9m, total assets $802.7m, short-term debt was $4.5m and long-term debt was $208.1m for a total debt of $212.7m. Net worth was $473m. We had depreciation in the quarter of $4.7m and amortization of $600,000.

Now a brief recap of the six-month numbers. For the six months ended June 30,2004, revenues increased to $241.3m, an increase of 7.1% from the same period a year ago. Gross profit as a percentage of revenue expanded to 45% for the six months ended June 30th versus 42.6% the prior year. As reported, EPS increased 24.3% to $0.82, from $0.66 per diluted share in the same period a year ago and cash provided from operations was $46.9m for the first six months of 2004.

This concludes our financial picture and I now turn it over to Rich Kogler.

Thanks, Frank.

The team delivered another record quarter by continuing to execute in these important areas: Steri-Safe program penetration, large customer margin improvement, the BioSystems rollout and operating costs and productivity improvements to offset higher energy costs.

Through the efforts of our small customer sales team, we continue to expand the reach of the Steri-Safe service offering. At the end of the quarter, we had approximately 80,000 customers on the program. Steri-Safe currently represents over 35% of our small customer revenues.

In the quarter, our large account reps focused on improving the margins of the LQG business. They secured 47 new LQG contracts and continued working the LQG margin improvement program. Through their efforts we saw a steady improvement in the blended gross margin of the large customer segment. In the quarter, the annualized revenue impact from service adjustments and calling was $1.8m. Although LQG revenues decreased, absolute gross margin dollars increased 8.3% versus Q2 of ’03.

As full-scale marketing of the BioSystems program continues in our initial rollout areas, we’re seeing strong customer acceptance. In the quarter we signed 35 new accounts, bringing our total new accounts to 61. Based upon our results to date, we are on track to meet our previously stated goal of capturing 100 to 200 new BioSystems accounts.

In summary, at the end of the quarter, we had signed up over 4100 new small customer service agreements. Thanks to the continuing hard work and efforts of our sales team we currently have over 312,000 accounts with approximately 305,000 small and the remainder large.

Now I’ll turn it back over to Mark.

Thanks, Rich.

I’d like to provide some minor fine-tuning on our current outlook for 2004 and please, keep in mind that these are forward-looking statements. Obviously for those of you who were in on our conference call last month on White Rose, not a tremendous amount has changed in the last month or so, but I’ll fine-tune anyway.

Guidance for 2004 does not include the assumption of the additional repurchase of bonds. Should we elect to do so in the fourth quarter of this year, to repurchase the remainder of those, the pretax charge would be approximately $4.5m, of which $1.3m is non-cash and $3.2m is the cash premium. Potential EPS impact of this repurchase in Q4 would be approximately $0.06 per share, but would provide a benefit after 2004 of approximately $0.05 per share due to lower interest expense.

In our June 11th conference call, we raised our 2004 EPS guidance from a range of $1.70 to $1.75 upward to $1.72 to $1.77 range. We believe that the analysts, after detailed review of their models, they potentially adjust our estimates upward to a range of $1.73 to $1.77, which we’re comfortable with and this assumes an average share count of approximately $46.3m.

As some additional background information for tuning models that people may have, we believe that analysts may adjust their ’04 revenue estimates to between $508m and $511m. And this would include the same growth rates and information that we’ve provided on the past several calls of small account growth rates between 8% and 10%. Total year for large, between minus (-) 2% and (-) 4%, incremental BioSystems revenue between 1.5% and 4% and international equipment sales between 5% and 7%.

We believe the analysts will have estimates for net income between approximately $80m and $81.8m, depending on their assumptions for improved margins, interest expense, strategic spend, and the like. D&A expense for 2004 we believe will be approximately $22m.

And in closing, as usual, we’re very pleased with our results to date. I’d like to thank our customers, employees, and shareholders for their support in building the leading company in our industry and we’re really excited about some of the future opportunities that lie ahead.

That’s the end of our prepared comments and Operator, we’re ready to now go into the question and answer session.

Thank you. (Caller Instructions.) Our first question comes from Matt Litfin of William Blair.

Hi, good afternoon. Rich, just housekeeping, I missed -- you had said 312,000 total customers and then you made a split out there of the two pieces. Could you give that again?

Sure. We have approximately 305,000 small accounts and so the remainder would be large.

Okay and then one other housekeeping question there. You’d mentioned 80,000 Steri-Safe accounts. What’s the percent penetration of eligible?

Currently, right now, we’re at over 30%

Okay, great, one for Frank. Could you maybe talk about energy costs in the quarter and I think you mentioned it. Can you just give us any quantification there and then Mark, if you could just walk us through how the integration of White Rose is going in the past month?

Yeah. On energy costs, if you compare it for instance to the year-end kind of costs in Q4 of last year, we had about a 20% increase in energy costs versus this quarter on the fuel side and so that is what we’ve absorbed and still reached our numbers.

And the outlook for the year is still what we had given in previous guidance, that versus Q1 we still think that that’s going to be roughly a 7-10% increase versus the first quarter of where were at that point.

And Matt, on your question on White Rose, I mean, obviously we’re still early into it, but I’m very pleased with what I see. The team went over and spent time with the team and met some of the key customers, looked at some of the facilities and ops and talked with them about their plans as they look into the future. And their first month came in as we had expected, so we’re one month into a trend, but based on our modeling exercise that we had done in the purchase decision everything is on track and in line and we’re feeling very good about their opportunities going forward.

Okay, great. Thanks very much.

Thank you. Our next question comes from Lorraine Maikis of Merrill Lynch.

Thank you. Did you guys mention what the large quantity generator gross margins were in the quarter?

Large quantity growth for the quarter was a negative (-) 7%.

No, gross margins.

Gross margin.

Oh, gross margin, I’m sorry. Gross margin was around 27%, up from Q1.

Great and then the status of the calling program?

Well, we continue to work through it and we’ve been touching about 5% of the bucket of accounts that we started with. We probably have about 10-12% of the accounts still work through and so we’ll continue to move it through the rest of the year.

And then, in the first quarter of ’05, should we expect a positive growth rate again for the LQ accounts?

Yes, I think so. Although keeping in mind that the process continues and as we do acquisitions, for example, we bring those accounts into the fold and move the margins up and of course internally we’re always setting the guidelines higher and higher. So the bar moves up, but I think, in general, your assumption is correct.

Okay and then moving on to the BioSystems program, 35 new accounts. What types of anecdotal evidence are you hearing from the sales force in terms of the pipeline of possibilities for the second half?

I think in general I would characterize or the thought process is we’re much more comfortable with our forecasting and modeling. If you go back going into late ’04 when we hadn’t launched yet and were coming up with our goal and objective, which we communicated of 100 to 200 new accounts, we really didn’t have a whole lot of data to premise that on.

And then, when we did our February conference call on year-end, we had all a whopping 8 new accounts and so we really didn’t have that pulse or feel that were we getting our people properly trained, were they being managed through, what was the trend in activity.

As we saw in Q1 where we’ve gotten up to 26 and then expanded, we’re now starting to see where our close rates, the acceptance by the customer base, the knowledge base, the learning curve that’s happening with our sales force gives us much more visibility and comfort in our original projection on the premise of the close cycle and the value proposition and what’s likely to happen.

So, long-winded answer to say we really feel comfortable that we’re on track to be in our goal range of the 100 to 200 and it’s a great value proposition. But it just takes time to go through, sell through the committee process, get people signed up, and get them started.

Thank you.

Thank you. Our next question comes from Amanda Tepper of JP Morgan.

Good afternoon.

Hi Amanda.

Hi. I’m trying to tease out what your gross margins were ex-White Rose, which I believe is dilutive to the whole Company. Because it’s a change in trend to see your sequential gross margin down and I’m coming up with roughly the same gross margins as Q1 of about 45.2. Does that sound about right or are they still trending up ex-White Rose?

It’s actually sequential. If you were to carve out White Rose sequentially, up about roughly 25-30 BP, quarter to quarter.

Okay.

And so, if you look at the effect, one of the things, because we’re taking, as we mentioned in the prior calls, with our gross margins in the 26-27% range, when you take the full quarter effect and blend that in, it will impact, on a BP basis, roughly 180 BP blending effect in terms of change in the gross margin, on a per quarter basis.

That’s this quarter. As we go forward, how --?

No, no. The 180 BP would be on a full quarter.

Oh, if it had been a full quarter, which it wasn’t.

Yeah.

Yes.

Okay, so you’re saying --

We just had one month’s worth in Q2.

Right. Okay.

For the modeling you need to take and fold that in on the gross margin and then the flow through. Now the EBIT margins, as we had talked about in the past, ran about 12%.

Uh-huh.

And their D&A a little bit higher than ours, but EBITDA margins of right around 19-20%.

Do you expect that gross margins at White Rose will start to move up this year, so that over the third and the fourth quarter it would have a little bit less of a dilutive effect or should we not assume that?

I would, for ’04 -- in our guidance we had not assumed any major shifts, because they are predominantly -- 90% of their revenue is large account contracts over multiyear. So we, in our guidance that we gave earlier in the call, had not assumed any major shifts in it.

When do you think you’d be attempting more to export more of the various accessible cross-sell efforts you’ve done in the U.S. into White Rose?

I think to look at their margin would be part of our ’05 planning process. So we’ll give some primarily color on that in our next conference call of what our thoughts are in ’05 and beyond. But I think for modeling ’04 guidance I wouldn’t put major swings in it because just even the translation and [inaudible] the local regs and you have to move the needle in a few months.

Okay and then you mentioned an energy cost hit in the quarter. If you could just comment on - I’m assuming that’s mostly diesel fuel - where you are on either hedging it or passing it through and whether you think that’s going to continue to be any kind of head wind for you?

First of all, on the numbers side, the fuel cost, as I said, 20% up versus the fourth quarter and from a pass through point of view, yes we are passing that on to our customers. So, from that aspect, its really that part passed on. We don’t hedge. We don’t have an ability to store fuel and the like, which is the predominant way of hedging, but we do not hedge.

I think the important thing is that we’ve seen this before in our history, over the past few years. And through the ability to pass through in our contracts and also the ability to ring more operating improvements and efficiencies and productivity improvements out of the infrastructure, we can manage through it. So we’ve anticipated a slight rise by the end of the year over what we’re currently seeing. We built that into our guidance and we’re currently tracking to the guidance assumptions.

Okay. Thank you very much.

Thank you. Our next question comes from Robert Willoughby, Banc of America. Please state your question.

Hey. This is actually Matt Jackson for Willoughby. I was wondering, do you have any sort of update on the status of the 3 new ancillary services that are set to launch this year and is the pharma returns business still expected to be the most lucrative?

Yeah. Of the 3 programs, pharma returns is the one that we probably are furthest along in the learning curve, because there was people and talents and intellectual property there. We will be launching that later this year, but no real color info.

But at least on the preliminary discussions we’ve had with potential clients and talked through the business idea and concept, there clearly is a need in the marketplace for this type of solution. The other programs we’ll be test marketing later in this year. So in our 2004 guidance numbers, we haven’t included any major impact from those programs. They’re really for ’05 and beyond.

Okay and what about any sort of CapEx assumptions for the remainder of the year?

CapEx for the year is still 4.5% to 5% of our total revenue.

Okay. Thank you very much.

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

Thanks. Hey Frank, I just wanted to go back to the gross margins. If I look sequentially over the past few quarters, you guys have generally seen a trend stronger than what Mark had indicated on the core business of up 25-30% and I’m just wondering, is that energy? Was there anything else that kind of jumped out at you in terms of the numbers below, underneath the overall op expense line?

Yeah. I think energy plays into that a little bit, from our point of view. Overall, insurance cost is a little bit on the pressure side, in general, as everyone sees and that’s for benefits in the aspect, a little bit too. But we’ve been able to really weather that through the pass through capabilities that we said before and those things normally go through cycles a little bit. So I think that is a part.

And I think also, in the future, what we look at is we’re going through right now some changes, as you know, and our Baltimore facility was shut down. It’s being transitioned over. That increased the cost a little bit on a temporary basis, because we’re going through a third party with some of that waste, the transportation that’s related to that, and that should really come out by the end of the year when that is done. So, we see it really as a temporary thing and that the trend, from that point of view, is still strong for us.

Okay. Do you have a number there in terms of the impact or you’re not interested in providing?

No, not specific. I think it really is a couple of things, like I said. I gave you a little bit of color on the fuel and things from that point of view, Baltimore.

I mean, you clearly are talking there probably in a cost increase, probably a couple of hundred thousand, $150-200,0000, somewhere in that range of increased cost. And it’s sometimes tough to parse out exactly the long haul costs from it, because they do some dropping hooks and going to different directions, so it’s not an exact number.

Uh-huh, okay, great. Hey Mark, I got a question for you on BioSystems. I know when you guys first gave the guidance you had said at least that you kind of thought it was a six to ten-month selling cycle and it seems like we’re incrementally improving here, as we go forward, in terms of the sign ups. And I’m just curious as to what you think, really about that selling cycle now.

Yeah. I think the selling cycle, I guess our comfort level with the six to ten-month is a typical cycle, because we’re seeing people that we approached early in the year change. I was not as comfortable when we only had a few data points.

You know you get 8 or 10 accounts signed up and you don’t really know. Is it just the 8 or 10 people in the universe that try everything new? Is it 8 or 10 people that just say we love Stericycle so much we’re going to try anything new they offer? And so the early adopters, you just don’t have a sense of is that really representative of the process in the cycle.

I think what we’re seeing now is, as we’re coming towards the six-month, seven-month training cycle, the learning curve of our sales force of how to go through the process with the account and people percolating out the other end. We’re seeing those presentations, those evaluations turning into real live orders and people getting started.

Now, again, it’s a sample of 61, but that certainly gives me a lot more comfort on our learning curve than 8 or 10.

Okay. Rich, did I hear your numbers right that new accounts went to total 312?

Correct. That includes also the acquisition of White Rose.

Oh it does. Okay.

Yes. I mean, those numbers include the acquisition of White Rose and as we said in the previous conference calls, those were a couple of thousand from an add on both large and small.

Okay. All right. So maybe, LQG core, up a couple hundred?

LQG core, no. I mean, as Rich said, in the quarter the large quantity we signed up 47 new accounts and so that’s the number that, from our point of view, is more the domestic number and that’s fairly consistent with the prior quarters.

Okay, great. One last question for you is on international equipment sales. You’re sort of keeping the full year number?

Uh-huh.

Any thoughts on like Q3? I mean, is it kind of a step down or --?

Yeah. We have the -- as you know, we’re working on our third facility in Japan, which is what’s been flowing through in these past couple of quarters. We still have the reminder, which will occur throughout the rest of the year. So, from a rate, it’ll step down from where we have been running, because we just have the residual left to go.

Okay, great. Thanks very much.

Thank you. Our next question is from Elena Salura [ph] of Smith Barney.

Hi. It’s Sa-lu-ra. Anyway, I just had a question, actually, about the acquisition. I’m just curious sort of what your priorities are. Obviously you want to integrate and I kind of want to get an idea of the timeline and sort of after it’s integrated. Are you going to then focus on acquisitions next out in England or are you going try to focus on just increasing the small customers? Sort of what’s the timeline and what are the priorities there?

The priorities of this, first we have met with the management team and clearly, for them, they see opportunities to expand their customer base and their current geographic area. They see opportunities to expand into new geographic areas. The small quantity generator model we spent a lot of time with them taking them through some of the ideas and programs, which they’ll try to look at which pieces adapt to their business and as always, we look at acquisitions as well.

So the answer is we’re going to be looking at all of those components. The when acquisitions, like the same with our base business around the world, occur when the timing is right. I think the continued penetration of the existing base is ongoing and geographic expansion, may be they’re through acquisition as a toehold or looking at contiguous geography. So that’ll be something we’ll work through as we go through the 2005 planning process.

Okay. Do you expect integration of White Rose to be done by year-end or I mean, is that--?

Well, the fundamental integration for us will be done by year-end. There are not major efforts that are needed there in terms of process. We’ve got a great management team. We’ve got infrastructure that the synergies are fairly straightforward and occur early in the sequence. So there’s not a lot of what I’ll call “integration risk”, so to speak, in terms of degree of difficulty.

Okay and also, just curious what your acquisition pipeline is now and if you can kind of break out what percentage of that is in the U.S. versus international?

Acquisition pools over $40m of combined revenues.

Okay.

None of that is in our guidance and the acquisition, like the White Rose for example, that was not in our acquisition pool in the past. So that’s kind of a special case scenario. So the $40m is really targeted at our North America core business.

North America. Okay. All right. Thank you.

Thank you. Our next question comes from Mark Adalente [ph] of Alliance Capital.

Thank you. Good afternoon. One or two of the analysts asked most of the questions I was going to. Just wanted to know, I guess, on BioSystems, are the accounts that you signed as profitable as you thought they would be?

Yeah, Mark. On the profitability, we have targeted to eventually be in the 40% plus gross margin range with that business. Clearly, when we start new accounts in the geography where we don’t have density or penetration we’ll be more typically in the high 20’s to mid 30’s. But its really just density and we’re seeing that our price value proposition fits in that category and so we’re comfortable with that.

So initially your pricing may be a little bit more generous than you will in six months to a year?

No. It’s really not a pricing issue. It’s more, if I take an example, if I go into a major metro area and I start up one hospital, I’ve got a certain cost structure of servicing that account that I have to sort that overhead.

If I add the second, the third, the fourth hospital, my incremental cost to service those additional accounts is there. But we’re pricing it not giving lower pricing at the front end. We’re pricing it as to where we think the service should be. So, what will expand margins is expanded penetration and density within the major metro areas.

Are the 61 accounts all current waste customers?

No. Actually, no, we have both existing customers, we have people that some are on-site, we have some people that are with other service providers and we’re seeing that the service clearly has a niche and a need. We have, from our standpoint, we think, it’s great news if we can get people that are on site or provided service from other players, if we can get them on to our program. Because we can show what we can do service-wise and the value proposition and perhaps gain additional business from them.

Do you plan on rolling this out in the White Rose business?

Actually, the White Rose business is launching a reusable and a sharps program as well. So it’s one where a similar paradigm and thought process to be able to have an offering in that marketplace. They had gone in the early phases of launch and we’re excited about that opportunity as well.

And lastly, on the calling, I think you said there was 10-12% of accounts to go?

Yes.

And you’re targeting 5% a quarter, is it?

Yeah.

And have any called accounts come back to the Company as customers again?

Yeah. It’s one where it’s not a straight-line predictability and it’s one they probably have addressed in maybe one or two prior calls.

What we tend to see happen is, in the case of us walking away from an account, that we can’t find a way to make the economics work, if they don’t work for us they probably don’t work for the other party who takes the service agreement. And sometimes it takes two years, sometimes it takes three years into the agreement, sometimes it takes six months, but we do see a chance to get the work back.

And Mark, as you know, the calling process, we still keep about 80-85% of those accounts, so it’s more just the adapting and measuring the service level to a profitability range that makes sense for us. So, if we can make it a win-win by having revenues go down but absolute gross margin dollars go up on an accounts.

What percent would come back? Can you quantify that and say over a two and a half, three-year period?

I don’t think we have enough history to give it a specifically meaningful range.

Okay.

Because it seems to vary by geography. Rich?

I mean, I can give you an anecdote. We had one come back in six months, simply because they thought they would move to on-site and the on-site machine turned out to be a disaster and we came back to do backup at a much higher rate and now have signed a long-term agreement. I don’t expect everything to kind of move like that, but I think it kind of shows that sometimes the assumptions that customers make about other alternatives are not always the correct assumptions.

We’ve also had some times where several customers in a geography will go with a new vendor and the vendor hangs on for two years or three years and then goes bankrupt because they’re not pricing at a level that generates cash flow in excess of their cost to capital. So its more just how much money they’re willing to pour into it before they realize that it’s lost money.

Thank you very much.

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

Good afternoon, gentlemen.

Hi Greg.

And congratulations on getting good results. Mark, I wondered about your guidance, the $1.73 to $1.77, does that exclude the $0.02 charge in this quarter?

No. That includes.

Okay.

Because it’s an actual number right now.

Yeah. So the $1.73 $1.77 would be the results as reported plus our forecast for the reminder of the year. Now obviously it does not include if we elect to do the bond repurchase in Q4.

Okay and can you comment on the international equipment sales, in particular any geographic region where those may have been better than anywhere else?

Well, the bulk of what you see this year in the international is the build out of our third facility in Japan, so it’s predominantly Japan focused.

Okay and Frank, do you have a figure on what acquisitions added to revenues in the quarter?

Yeah. Acquisitions in the quarter were $5.7m.

Okay.

And that’s again that add to the total.

And your organic growth rate then?

Organic growth rate comes to about 2.4% combined, which again is 9% on the small and negative (-) 7% on the large.

Okay and last question. You’re allowance is about 5.2% of gross receivables now versus 6.5% at the end of the year. Can you comment on that trend there?

Yeah. The adjustment came, really, in Q1 a little bit more. We did some cleanup and what that really means is that your receivables go down and you charge that off against the doubtful account itself. We’re going to and have started to introduce our new invoice and before we did that we wanted to do some clean out before we started to send that invoice out.

Okay and sorry, one last one. On the cash flow from operations, on a year-over-year basis, it’s off. Wondering if you could provide some color there, as well as your expectations for the full year ’04?

Yeah. The expectations for the full year, again we had given guidance before on kind of a free cash flow after CapEx, really, no change in that expectation. We had said before that it was about $87-91m on free cash flow. That’s, again, after CapEx and the CapEx expectation, the same thing as I said, 4.5-5% of revenue.

And in the quarter itself, we had a tax payment, which was both. You take your first and second quarter payment in the second quarter, that’s both on April 15th and on June 15th, so that from a cash point of view, it was a $15m outflow in the quarter itself. And then also for those that maybe are new to it, the second quarter and the fourth quarter are the two quarters that we make our bond interest payments, so there’s a little bit of a sliding that way.

Okay, great, thank you.

Thank you. Our next question is a follow-up from Tom Ford of Lehman Brothers.

Thank you. Frank, just sticking with that, is that -- there was what seemed like a fairly notable swing in the accrued liabilities line on the cash flow statement.

That relates to the tax payment, which was $15m in the quarter.

Okay, great and Mark, you had noted that there was a customer that went to try to go on-site. Do you remember or willing to say who the equipment provider was?

Actually it was me, Rich, who made the comment. I really wouldn’t think it’s appropriate to single out the equipment vendor.

Uh-huh.

Simply to say that the equipment was sold as doing something that it obviously didn’t do very quickly and the account was very disappointed and came back to us and we’re glad to have them back at a higher margin.

So, is that a fairly normal thing that you see, Rich or Mark, where you have people making an investment under one assumed scenario of economics and then reality turns out to be something different?

Yeah. I think, if I look at the 13-plus years that I’ve been in this, the accounts that when we first started, many of our first accounts were situations like that. Where people at some accounts had literally spent millions and millions of dollars on incineration equipment and bag houses and the like, had gone through a series of trials and tribulations and decided to shut down and go off-site. Many with other technologies as well, because I think what people don’t think through is what are all of the implications and costs implied in those services.

Now, I guarantee you there are several of them that have gone that way and gone year after year and continue because of either personal preference or the way that they look at their costing or they don’t look at their cost accounting. But it’s not an uncommon scenario to see people try something and then later on realize that the grass wasn’t quite as green on the other side.

Okay. Thanks very much.

Thank you. I’m not showing any further questions at this time. Please proceed with any further remarks.

Well, I appreciate everybody’s time and attention.

And one thing that we didn’t discussion, which I think is an early data point, which again it’s a data point of one, but as we’ve reported in our past periods, our percent of our Steri-Safe accounts that we’ve signed up in the quarter, on selective preferred, has continued to improve. If you’ll recall in Q1, we stepped up to about 14% and in Q2 that stepped up to about 17%.

So we continue to see our ability and our learning curve on how to go to market, how to position the higher premium programs and for those of you not familiar with it, that is very, very important to us. Because the higher level programs are significantly higher revenue and margin integration potential for us. So still in the early periods but starting to show some learning curve traction.

So, look forward to talking with everybody on the next call and have a safe week.

Ladies and gentlemen, thank you for your participation in this conference. This concludes the program. You may all disconnect. Everyone have a wonderful day. 13