Stericycle Inc (SRCL) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stericycle third quarter 2004 conference call. At this time, all participants are in a listen-only mode.

Later we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then 0 on your touch-tone telephone. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Ms. Brandel, President of Finance. Ms. Brandel, you may begin.

Thank you. I'll be reading the Safe Harbor Statement.

Statements by Stericycle in this conference call, which are not particularly 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's, as well as it's other filings with the S.E.C. 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 this 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 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 would like to pass the call over to Mark Miller.

Thanks, Liz. Good afternoon and welcome to our third quarter conference call. With me today are Frank Ten Brink, our Chief Financial Officer; Rich Kogler, our Chief Operating Officer; and you heard from Liz, Vice President of Finance.

Once again, we're pleased with the record results achieved by our team in the third quarter. Compared to last year, our net income in the third quarter grew by 23% to 21.1 million.

We finished the third quarter of 2004, with with an earnings per share of 46 cents per share, up 23.3%. And for 33 consecutive quarters, since our IPO in 1996, we have either met or exceeded expectations for our company's performance. With that brief overview, I'll turn the call over to Frank.

Thanks. First of all, revenues grew 22.8 million in the quarter to 136 million. Up 20.1% from 113.2 million in the third quarter of 2003.

Of the 22.8 million growth small quantity, our most profitable sector, was up $5.7 million, or approximately 9%. Large quantity revenues, were down 1.7 million, or down approximately 3.9%.

International equipment sales were up by approximately 1.9 million in the quarter. And acquisitions, including White Rose, less than 12 months old, contributed approximately 17 million to the growth in the quarter. Customer revenue mix was approximately 63% in small, and 37% in large customers. As in the past, this mix is calculated excluding international operations, 3CI , and acquisitions.

Gross profit as a percent of revenue, was 43.5% in the quarter, versus 43.7% in 2003. Predominately driven by the full quarter effect of our recent international acquisitions. Sequentially, the third quarter of 2004, versus the second quarter, the domestic gross margins improved by 30 basis points. In spite of significant operating cost headwinds, which negatively impacted the quarter more than 40 basis points. This was off-set by the full quarter impact of our White Rose acquisition in the UK. And a new acquisition in Mexico, which lowered our gross margin by 149 basis points as a result of mix.

SG&A, excluding amortization, was 14.7% of revenues, versus 15.3% in the prior year quarter. And income from operations in the quarter was 38.2 million, up approximately 21% versus last year. And as a percent of revenue, income from operations increased from 27.9 % to 28.1%.

Net interest expense was higher in the third quarter of 2004 versus the third quarter of '03 by approximately half a million, due to higher debt outstanding and modestly higher interest rates. Net income for the third quarter was 21.1 million, up 23%. And EPS was 46 cents for the quarter, up 23.3%.

Now the balance sheet. Our debt to book capitalization at the end of the quarter was 28.6%, down from 30.1% at the end of the third quarter in 2003. At the end of the third quarter the balances of the revolver were 52 million, our Term A loan was 62.4 million.

Now during the quarter, we repaid the entire 27.3 million of our Term B loan. The total outstandings for our senior subordinated bonds at the end of the quarter was 50.9 million. And we announced on October 18th, that we plan to redeem the entire balance of our senior subordinated debt in the fourth quarter of this year.

During the quarter, we repurchased 100,000 shares of common stock on the open market in the amount of approximately 4.5 million. And in the quarter our CapEx was 8.3 million, due to the timing of projects, such as the Baltimore Plant and Bio Systems. The DSO in the quarter was 52 days versus 51 days a year ago. And the DSO in the quarter increased by approximately five days versus the second quarter in '04 due to a billing delay caused by the transition to a new and improved invoice format.

And now some balance sheet numbers. Cash and equivalents, 10.6 million; accounts receivable, 77 million; current assets, 119.7 million; total assets, 827.8 million; short-term debt was 8 million; and long-term debt was 189.7 million; the net worth was 493.4 million; depreciation in the quarter was 5.7, and amortization was .6 million.

Now a brief recap of the nine months numbers. For the nine months ended September 30th '04, revenues increased to 377.3 million, an increase of 11.4% from the same period a year ago. Gross profit as a percent of revenue expanded to 44.4% for the nine months ended September 30th versus 43% for the same period ended September 30th '03. And earnings per share increased 24% to $1.28 from $1.03 per diluted share in the same period of a year ago. And cash provided from operations was 82.9 million for the first nine months of '04.

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

Thanks, Frank. First, I want to congratulate our operating team for their stellar performance in the quarter. While all operating locations dealt with the challenges of rapidly rising operating costs, we want to particularly recognize the efforts of our southeast area team. They successfully managed through the incredible challenges that were created by the hurricanes.

The sales team helped expand our business in this quarter by continuing to execute our proven growth strategy. They focused their efforts on the three key elements of our strategy - increasing Steri-Safe revenues, improving large customer margins, and the Bio Systems rollout.

Through the efforts of our small quantity sales team, we continue to expand the penetration of the Steri-Safe offering while putting increasing emphasis on upselling new accounts, and existing accounts into the higher select and preferred program levels. We have seen that customer acceptance of the higher level offerings is increasing.

The sales team will remain focused on delivering the higher program levels which offer higher margins and provide the best value for our customers. At the end of the quarter we had over 84,000 customers on the program and are clearly on track to hit our goal our goal of 85,000 to 90,000 customers by year-end. Significantly, approximately 20% of the accounts we captured in the quarter were in the higher program levels, with better than average revenues and margins.

Because of the hard work and dedication of our sales team, we're pleased to report that Steri-Safe now represents over 37% of our total small quantity revenues. In the quarter, our large account reps remained focus on improving margins in the lq business. While they secured 48 new large quantity contracts, all at or above our target margin level, they directed most of the their energy towards our large quantity margin improvement program.

Through their efforts, we continue to see progressive improvement in the blended gross margin of the large customer segment. While some work remains before we conclude our initial review of existing customers, we congratulate the sales team for having achieved significant improvement of this historically low margin business segment.

In the quarter, the annualized revenue impact from service adjustments and calling was $1.5 million and absolute gross margin dollars increased 11%, versus Q3 of 2003. As the rollout of the Bio Systems program continues, we remain very pleased with the sales team's performance. Customers options in new service is increasing in all the rollout geographies.

We are also pleased to report, that we have already achieved the lower end of our previously stated goal of signing 100 to 200 accounts in 2004. In the quarter we signed 42 new accounts, bringing our total new accounts to 103.

As we work through the 2005 planning process, we're excited about the opportunities, which lie ahead for 2005 and look forward to setting new goals for the Bio Systems sales team in the coming year. In summary, at the end of the quarter, we have signed up over 4,600 new small customer service agreements, thanks to the continuing hard work and efforts of our sales team, we currently have approximately 316,000 accounts; with over 308,000 small accounts and the remainder large. And I'll turn it back over to Mark.

Thanks, Rich. Well clearly we had another exceptional quarter and I'd now like to provide insight on our current outlook for the remainder of 2004 and as usual provide our preliminary guidance for fiscal 2005. Please keep in mind that these are forward-looking statements.

As Frank mentioned, in October we announced our intent to redeem all of the outstanding 12 and 3/8ths senior subnotes in the fourth quarter. This redemption will result in a one-time charge of $4.3 million in Q4. Now based upon the inclusion of this redemption, and the fine tuning which we are about to provide, we believe analysts will adjust their Q4 as reported earnings per share, to a range of 40 to 41 cents, which will bring their full year as reported earnings per share, to a range of $1.68 to $1.69 for 2004, which is in line with our prior guidance.

I'd like to provide some fine tuning for the remainder of the year. We believe that analysts may adjust their 2004 revenue estimates to between $511 and $512 million. This assumes continued Steri-Safe and Bio Systems penetration, no international machinery revenues in Q4, and continued calling of low margin business.

We believe that analysts will adjust their estimates for as-reported net income, to approximately 77.6 to 78.1 million. This includes the charges for the bond redemption in Q4, the incinerator write-offs that we did in Q2, and acquisition related charges, which some analysts have not included in their models.

I'd now like to provided our preliminary outlook for 2005. We believe that analyst EPS estimates will be in the range of $2.02 to $2.09 per share, which we are comfortable with. And this assumes an average share count of approximately 46.5 to 47 million shares during the year of 2005. We believe that best estimates for revenues for 2005 will be in the range of approximately 555 to 565 million with modest variations depending on assumptions, on growth rates, international machinery revenue, and foreign exchange rates.

These estimates would include growth rates on small accounts, in the range of 8 to 10%, rates of 0 to plus 2% on large account, adding 200 to 300 new Bio System accounts in 2005 and between 0 and 1 million in international equipment revenues, consistent with our past practices this guidance does not include any new acquisitions that have not closed. We believe analysts will have estimates for net income between 94.5 and 98 million depending on assumptions for improved margins, acquisitions, interest expense and strategic spending.

We believe analysts will have estimates for free cash flow between 104 and 112 million, an increase of more than 20% versus 2004, depending on assumptions for working capital, CapEx, and tax.

In closing, we're very pleased with our results to date. We are very excited about the tremendous opportunities ahead in 2005 and beyond. I think a key point in 2004 that we have proven our ability to grow on multiple fronts with our Steri-Safe program, our Bio Systems launch and international.

In 2005, we will focus our investment and activity on expanding these three growth engines. Collectively, they'll increase our revenues, expand our margins and cash flow, creating significant shareholder value. We thank you for your time, that's the end of our prepared comments. And operator we'd now like to switch over to question and answer session.

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

Our first question is from Amanda Tepper from JP Morgan.

Good afternoon.

Hi.

I'm going to start with a nit-pick question and then have a bigger picture one. I just want to make sure the charges in the fourth quarter, basically after tax is 5 cents? Is what we should expect? And that's what you've built into your guidance for the year?

For the bond?

Yes.

Yeah, bond will be 5 to 6 cents, depending on what you've assumed on timing and interest rates.

Okay. And are there any other charges that I missed, or that's it?

Well, the things that we had talked about obviously, as we've moved forward with new acquisitions, as you saw in our Q3 numbers. And we anticipate in Q4 some additional minor acquisition-related charges, which were not anticipated, I don't think, in anybody's model, and then a little bit of carry-over on operating headwinds. So, in summary of those three elements, roughly about a 6 to 8 cents, if you're trying to bridge on a pro forma basis.

Okay, thank you. That's very helpful. And then the operating headwinds. What are these, and aren't you passing most of them through?

Yeah, the operating headwinds clearly energy as we've had the past. We've been very successful at being able to capture most of those. Sometimes you have a timing delay impact.

The two others, which are a little bit tough for us to control is, as we've talked about in prior calls, since we are converting our Baltimore incinerator facility to an autoclave plant we're incurring the additional expense as that plant switches over this year, and that will come on-line in the first part of next year, and so we incur longer transportation long haul, and paying to third parties, and then obviously in the tail end of this quarter, and a little bit of carry over into Q4 is just the machinations with the hurricane effect in the southeast of moving material and plant closures and bringing plants on-line and the like.

Okay, and then could you could you give a quick update on where you are on your new pharm overturns business?

On the pharm returns business, we have begun to make the investments in test marketing now. And our Q4 numbers we're going to be doing some more test marketing. And the preliminary guidance that we've given you for 2005 we haven't included much for that other than some investments spent because we haven't finalized our plan rate. But if your doing a macro modeling for '05, I wouldn't put more than maybe a million to 2 million in revenues in '05, but we'll fine tune that when we go through our next call and give our final guidance on '05.

But are the early signs encouraging?

Yeah, I think the fundamentals still are very encouraging to us, because you have clearly a need on the part of the marketplace to have a better solution. The preliminary discussions with people that we've approached on our program, I think see a lot of power in the value proposition that we offer. And we'll see how, you know, they capture rate. The reason we're being probably conservative on the build, is the decision makers in this process would be going to hospital pharmacies, and we know from experience that hospitals are kind of slow in their decision process.

Also in terms of, our approach and discussions with either the pharmaceutical or Biotech industry, or the retail sector you have a customer type that is more typical to request for proposal, and review multiple proposals, so it's a drawn out process, as well. So, we're not trying to get people too far in front of us, til we get out and see kind of the timeline and the capture rate. But I think there's a lot of the positive response to it.

Okay. Great. Thank you.

Our next is from Jason Rogers from Great Lakes Review.

Hello.

Hi, Jason.

I wondered about as far as your -- was there any currency gains for you, in in the quarter?

No, the currency gains were not that high. In this case in total, and that's included in the other was a couple of hundred.

So the organic growth rate is just taking out that 17 million in acquisitions, is that right?

Well, the currency from a point of view is really more with respect to inter-company loans that we have. From a point of view as the exchange rates in the quarter versus the prior quarters, have been in fact, slightly down, i.e. that was not favorable from a consolidation of their results into ours. That in total was not as big of an impact because in the last quarter we only had one month of White Rose it in this was three months, so the impact wasn't really visible as much in the total picture.

Okay. And as far as fuel costs, if you could just comment on what you've seen as far as increase in costs this year as well as what type of expectations you have for the year? Or for the fourth quarter.

Yeah, what we've seen sort of quarter over quarter, was about 20 basis points of impact. And what we're looking at for next year, frankly, is -- it's difficult to forecast. And we do try to pass some of this on to our customers, because we -- you know, the small accounts have contracts that allow us to do this.

What we have done in the preliminary guidance to our field is suggest a 10 to 15% increase spread over next year. With the understanding that should it rise, and continue to rise dramatically as it has, we would pass that back and the only issue there, which I think Mark kind of alluded to, is that there is a timing lag, particularly with the larger customers, in terms of how quickly you can recover it. So that's kind of where we've guided our field at this point.

I think that -- to got a little bit deeper on the Deltas that we've seen, and those of you who follow the energy side of it, from where we were in Q4 of last year, diesel costs have gone up dramatically like 46%, 47%. Year-over-year it's like 50 some odd%, 54 or 55%, depending on geography. And originally when we had done our planning for this year, we had assumed 15 to 20%.

So, you know on a macro basis, even if you just run the math, even if 100% is captured at exactly the time that it happens you still have a downward pressure on gross margin ratios of roughly about 30 basis points. So, we feel good about the way the group has responded. They've been able to continue to take on these challenges and still expand margins.

So as we looked at how the group did in Q3 versus Q2, had things been constant, they would have gone quarter- to-quarter almost 70 basis points quarter-to-quarter expansion on the domestic business. Net they ended up about 30, so, you know, the margin expansion plans and execution continue to show that they work.

And finally, the capital expenditures for the year, are you still expecting 4.5 to 5% of revenues, and any early estimate for '05?

Yeah, for the year we expect it to be closer to the 5, but we feel that we can definitely stay a little bit around the 5 to below that, yes. And for 2005, again, 4.5 to 5% is a good range to use.

Okay. Thanks a lot.

Our next question is from Tom Ford from Lehman Brothers.

Great. Thanks. A couple of questions. In terms of the guidance for '05, Mark, you had indicated on the LQG side something like 0 to 2%?

Yes.

And I was just wondering, how should we expect that to trend during the year? Is it steady throughout the year? Or is it something where you see more of a negative element in the first part, and then you start to see something more notable in the second half?

Well, I think consistent with what we talked about in the past, we're able to touch each quarter roughly about 5%, which we did this period. We should complete that process towards the end of Q1, so, you know, as we've seen this year we're on a year-to-year basis you have minus 7, minus 7, minus 3.9. That will start moving upward into crossover in the first part of the next year.

I think the one point Tom which I know you're tuned into cause you've been following us for awhile but some people on the line that may not have done the math, the really important dynamic is what's going on with the gross margin side. And we take, for example, in the quarter where Rich mentioned, that we were up 11% in gross margin and just to put it in the context, if all variables were held constant, if our large quantity business revenues grew one percentage point, it would generate roughly about .2% -- or about .2 cents of earnings.

Um, Hum.

A one percentage point movement in overall average gross margin generates 2 pennies.

Right.

So, that's really the name of the game. And in kind of a strange way the pressures we've all seen on fuel also help us in the stimulation on some of these large accounts to help them change behavior.

So instead, of having to approach those renewals that came up in, and say we have to raise your price, because of what's going on in energy we can say on your renewal, instead of us having to go X times per week, we'll visit fewer teams so we can take costs out of our system. So we try again to position it as a win win for us and for the customer.

Okay. And you guys referenced it, did you have a hurricane impact in the -- in the quarter?

Yes. I mean, we operate extensively in the southeast, particularly in Florida. And so, some of the impact that we saw, for example, were plants having to be shut down temporarily, then brought back into line, temporary power, as well as, you know, just the disruption of the transportation infrastructure as waste was being moved, and just generally trying get our trucks around down there in the middle of all that havoc.

Yeah, I think the other dynamic, which again shows this power of the infrastructure is that for most companies, they do not have -- you know, their own operating infrastructure. If they do, they may have one. Our ability, like on -- we're feeling it, for example, on Baltimore where we're having to go from internalized to externalized, and it's costing us a lot of money to do that. Now, we know that that's a temporary dynamic, but it's not menial.

But also in the context of being able to respond to an event like the hurricane, so that we were able as we went through the period to protect our infrastructure, move materials to other plants that we have so it kind of causes a wave effect in our infrastructure. But then to be able, as we went towards the end of September and in through October, be able to migrate that back. So, you know, that, I think, is a very powerful component of the footprint that we have.

Right. I mean, do you know if it was something notable in terms -- it sounds like it was a net negative. But, I guess maybe it's also it's probably hard to -- it's probably hard to measure.

Yeah, I think in total the impact may be in the quarter at the end, was probably a couple of hundred, a little bit around that, and then, you know, there's a little bit of the slop over in the fourth quarter, because of getting back and getting a long haul and those things. Some of those things that are still being cleaned up.

In total, there is in essence six plants that some way or fashion were impacted all the way from Puerto Rico to Reserve, Louisiana and stuff. So it's quite a geography that all of these hurricanes spanned over.

Right, okay. And then Mark, in terms of the '05 guidance, you have the Bio Systems stepping up to 200 to 300?

Yes.

Can you just talk a little bit more in detail there? Is that a reflection of improved sales understanding and ability? Is that expanded geography?

Our preliminary range, we haven't finalized our planning process, but just kind of the color is I think we're seeing as we move through time steady improvement in the selling process and knowledge base. As we've gone, you know, quarter to quarter.

I think also as we look at our preliminary plans for '05, we're going to start to expand some of our infrastructure so we can reach more parts of the universe. So this is initial analysis and for our Bio Systems team that may listen to this call now or in the future don't get locked in to 200 to 300 as all we have to do, we may be stretching a little bit part farther as we finish our plan review. But, as always what we make in terms of commitment to the external universe, we want to meet or exceed.

Okay. So just picking up on one of your comments there about seeing steady improvement. One of the things you guys had said when you first started to talk about Bio Systems was it was a, I don't know 5 to whatever 8, 9-month selling cycle. And this is really kind of the first quarter that we've hit, that is sort of encapsulating that cycle. But I guess, from your comments, we should take away that this is by no means the adds, this quarter we're up from last, but we should not by any means take away that sort of a normalized run rate?

Yeah, I don't think any of these closes on the Bio Systems are linear predictability. If you recall, we started our rollout in January, some territories hit the ground in January, some in February, some in March. So Q3 was really kind of the front end of that wave. We did see people picking up. And I do thing there is still a fundamental component which is hard to predict, but historically a pattern within the healthcare space is that as we start servicing on a routine basis multiple players within a metro area, will our rate of penetration accelerate? And fundamentally, our hypothesis is that it will. And at what rate and how does it effect, as we look into the future we think we have more opportunity to expand that space.

Okay. One last question. There's been a lot of mention in the press about, you know calls by the governor of Illinois to shut down on-site incinerators?

Yes.

Have you guys have had any time to look at that, think about it, you know is that an oppor -- I assume it's an opportunity, probably not something that you factored in, but is that something order of magnitude that's pretty -- pretty notable?

Well, I think first of all there has been commentary, if you follow the press on the state of Illinois, from a macro standpoint. Most of the on-site incinerators in the state of Illinois closed like the rest of the country, through the impact of the EPA law.

We have seen the remainder starting to consider outsourcing or alternatives. You know, in terms of orders of magnitude, I wouldn't, at this point, put it in a mega swing on our numbers, because you know, even if we captured 100% of those remaining, we capture more than that in terms of new hospital accounts in a given quarter today. So that's not something that, you know, I would say is a tidal wave effect that would blow up. I think it's underlies the fundamental premise, which is even though you had hospitals, which, you know, followed the rules, followed the new regulations, put in a lot of money in investment to upgrade their systems. There's still pressure to rethink what they do, and we think that some of the those when they do will decide to outsource as opposed to spend more capital to try to do it on-site. Because we think for most of them that is a more economically sound business decision, than what they've done to date.

Okay. Great. Thanks very much.

Our next question is from Kevin Monroe from Thomas Weisel Partners.

Good afternoon.

Hi, Kevin.

I was wondering if you could talk about in terms of your '05 guidance what you're expecting in terms of contribution from White Rose?

I think if you look at White Rose for '05, you're probably looking at a revenue somewhere in the range of 50 to 55 million. Their margins in overall are probably going to be somewhere in the 27, 26-27 range right now. They're at about a 26.5. That could increase a little bit if we get some traction and further on the small quantity, but that's kind of too early in the cycle for us planning-wise but there's some opportunities there. But the revenues 50 to 55 million. And the exchange rate is a little bit, too.

Okay, so you really haven't factored in any significant share gain in the small customer side over there?

No, not yet. I think we definitely see good opportunities and they're making good headway. But it's -- we're in the middle of that planning review side and we'll give more guidance on that in the first quarter when we have our conference call then.

Okay. In terms of, also on the guidance in '05, look at -- the margins kind of implied in the guidance, it doesn't seem like you're expecting a whole lot of margin expansion, which is kind of a change from your kind of historical performance. Any particular reasonable for that? Is it White Rose or something else?

In margin expansion, I think that depends on what you use as your jump off point in your modeling. We think that on our domestic business it will continue at the pace of 30 to 60 upticks, quarterly basis. And so it really depends on blend effect, what you have in terms of your gross margin assumptions.

There's the mathematical year-over-year, that since White Rose was really not into the first and second quarter, those were higher percentage quarters,

Right.

and so if you adjust for that full year you definitely will see a continued nice pick up, and even from a point of view of Q4 and where we were Q3, there's definitely, as Mark indicated from our point of view, an anticipated uptick in the margin side.

Yeah. Thank you.

Our next question is from Leone Young from Smith Barney.

Yeah. Good evening. We were pleasantly surprised by the SG&A levels, and I was hoping you could tell us a little bit about the absolute level or the trends that you see in SG&A?

Yeah, I think the SG&A in the quarter was percentage-wise a little bit lower, and you had some businesses that were getting included in that. We do, and will continue t invest in the future in activities, as Mark had indicated, too we'll look to again next year to continue to do that, so I would not drop that a lot yet. We see some good opportunities on that front for new kind of adventures and the like, and we want to continue to do that for growth in the future.

Okay. Great. Thank you.

Our next question is from John Boizier from Dominic and Dominic.

Yes, hi gentlemen. Can you tell us what the growth was in the small and large quantity generators sequentially, please?

Yeah, I think if you look at the small quantity growth, we had -- you mean from quarter to quarter?

Yes, sequentially.

I think if you look at from that point we were in the first quarter 9%, in the second quarter about 9, and this quarter about 9%. In the first quarter on large we were negative 7, in the second quarter we were negative 7, and now about negative 3.9. Those were all percentages.

And is that in terms of revenue or number of customers?

No, that's in respect to revenues.

And is -- in terms of number of customers, then, on the large quantity generators, are they growing in actual numbers?

It's a tough one because obviously, because of the acquisitions and the like, our customers do increase. So I mean from a total customer point of view we were at about a little over 5,600 in the first quarter in large, second quarter, because of the acquisition of White Rose and some others that went to 7,200. Now 7 ,000 roughly 400. So it's tough to compare those because of the acquisitions.

Okay if you X-ed out the acquisitions. I apologize, I should have asked it.

If you X-ed out, the net is a plus.

Okay. Great. Thanks so much.

Our next question is from Robert Willoughby from Bank of America.

Thank you. Frank, what do the '05 forecasts assume for incremental debt reduction? And given some improved financial flexibility, lower capital costs here and in the stocks valuation, might we see more on the share repurchase front?

I think you'll see on all fronts you'll see, obviously, us continue to take advantage of opportunities on the repurchase. I think on a free cash flow, as Mark indicated, we're looking at that one as clearly year-over-year, as a 20% plus factor. which would get it into about 104 to 112 million. Now, we'll continue to also look for acquisitions. We have about 40 million in the North American pool. There's opportunities outside that market, too, so that's an exciting think still to go for.

So at the end, debt reduction is not the primary, maybe, as is not maybe share repurchase. We look for those other opportunities, and -- but we're very comfortable to be able to continue to buy back when the opportunity comes, and obviously our debt to cap has shown. Even if we do a transaction that a quarter later we're back to the same debt to cap rate as we were before.

That's great. Thank you.

Our next question is from Matthew Litfin from William Blair & Company.

Yeah, hi, it's Matt Litfin. Revenue , or actually revenue guidance for next year that you gave on international equipment sales, 0 to 1 million, that's you know, down from a higher number this year. Can you give us some color on your thinking there?

Yeah, one of the dynamics that we do on international equipment is little bit like our acquisitions on guidance. As you've seen in the past, like this year where we had guided to 5 to 7 million, and we completed that at the end of the third quarter and then some is based upon transactions that we already have signed that are tracking so that, you know, the things that pace the timing are more just shipment of equipment, or final permitting and the like. And so at this point in time, even though we're in a number of discussions, we don't have a firm, you know, for sure deal that we know is going to start shipping in Q1 or Q2, and so we just left it out of the guidance for right now. And it would be the same kind of thing with an acquisition. You know, we've got a number of people that we're talking to today that may or may not come to fruition, but we haven't built any of those into our '05 numbers.

Okay and one follow-up if I might, on -- also on the '05. Bio Systems guidance for customers. What are you assuming there in terms of your revenue per customer as you blend up the number of Bio System customers up into the total revenue guidance that you've given here?

Yeah, I think in the ranges we've talked in prior calls, Bio Systems revenues annually per account depending on size, range from 35 to 45,000 per annum. And so I think as you are go doing your modeling, if you pick a mid-point, or the low end on conservative side, you'll be looking at that as an incremental to to the medical waste revenue stream in the account. So another way of simply think about it is potential the double -- slightly more than double the revenue stream per account.

Okay. And just one more, if I might. The EPS guidance that you've given, I want to assume that does include the nickel per year interest benefit of paying off the senior subdebt next month?

Yeah.

Okay. Thanks so much.

Our next question is from Jason Rogers from Great Lakes Review.

Hello again. I notice that 3CI, the stock price has gone up pretty dramatically since your last call. Any thoughts on what's happening there?

No, we don't know why it's gone up. Nothing that we're aware of that's been put up by the company or anything that we've heard.

Okay.

Again, if you have a question, please press the 1 key on your touch-tone telephone. Our next question is from Lorriane Maikis from Merrill Lynch.

Thank you. Just one quick clarification on Matt's question. The 2 to 300 accounts for Bio Systems are not included in your LQG 0 to 2% growth rate?

That's correct.

Okay. Thanks. And then could you talk a little bit about what you bought in Mexico, and what type of -- what type of impact we'll see on revenues going forward from that?

Yeah, in Mexico we had an opportunity, which is very exciting. It was a nice-sized player in the market. It obviously enlarged our opportunity in that market both geographically, as well as some overlapping. It was a revenue stream from a point of view of 5 to 6 million in total, and that we can see some really good synergies also to come from that over the next year. It takes a little bit longer there. But also, we were having two plants that came with that in very good locations from an expansion geographically, and we'll elect still to see what we do. Definitely one of those will continue to run, but maybe both.

Thanks. And then looking over to White Rose, that's been completed since about June. Just -- or announced since June. Wondering what your strategy would there for the small quantity generators? Are you anticipating trying to do that organically, or do you expect to do some tuck-ins to establish your market presence on the small quantity side?

Yeah, I think as we've talked in prior calls, we're fortunate to be in the position where we can consider both. We're working through with the management team as they go through their '05 planning process, what investments they're proposing to make to expand to organic growth in terms of capture, and we're also obviously open and have the capacity to accelerate that through acquisitions, obviously if they're at the right price. But the guidance that we gave did not include the assumption of any acquisitions, so it would be purely just taking the base business and growing it at its historic base, and whatever we do to accelerate small quantity would be on top of that guidance.

So you effectively have zero growth for the White Rose business included in your '05 guidance?

It's a little bit from a total point is of view, but it's on a conservative side.

Also, it depends on what you assume on exchange rate.

Yeah. Exchange rates are anticipated in the overall forecasting from a variety of banks do show next year the dollar strengthening, and so you need to watch that, because exchange rate will have a swing factor potentially there of an easy 5 million.

Okay. And then finally, we've been reading a lot from Steri-Corp about some arbitration surrounding and ETD that you had sold them, and the write down of some debt or receivables. Could you commend comment on the status of that?

We have had discussions with them. We're still in discussions. They had put the system into place, and did subsequent acquisitions after that. I think the fundamental issue from our point of view is we've shown the system works not only there but around the globe, and that they've taken a a different business strategy, so I'm not sure it's appropriate for us to comment much beyond that, but, you know, that's what we've talked about in the past.

Thank you.

Our next question is from Matthew Litfin from William and Blair.

Yeah, one quick follow-up, if I might. The -- What is the implication for Steri-Safe in terms of quarterly net new accounts next year? Are you still looking for 4 or 5,000 net new per quarter from Steri-Safe?

Yeah, I think in Steri-Safe, we've looked at it historically kind of 3 to 5 per quarter. We've been running 4-plus. As we're going through the plan reviews with the guys, one of the things that is very, very intriguing to us is, although still early in the learning curve, we're excited about what we're seeing on gaining traction of selling the higher level programs. So you realize economic implications of, you know, a top-end program is worth several multiples of low-end. And we've seen that grow pretty meaningfully from where we started out a year ago. Not quite double, but more than double of where we were in Q2 of last year, in terms of percent.

So one of the challenges we've given to the team, is what are the ideas and programs they have on the sales marketing equation. We know it has very high fall-through margins, it has great EBIT dollar margins. So we've given them kind of a challenge of what could you do to accelerate that penetration in a meaningful way, and they're working through that. So that's one of the things we'll be looking that our investment spending decisions when we finalize '05.

Great. Thank you.

I'm showing no further questions at this time.

Well, we thank everybody for taking the time to join us on our call. We think we have a phenomenal future ahead of us. Clearly a lot of upsides and potentials as we go into '05. Strong free cash flow generated to the business gives us lots of degrees of freedom to be able to do acquisitions, make investments in new programs. And I think as I mentioned before, we are now at a very unique influxion point where we've proven now our capability on Steri-Safe to be able to start to sell the higher level programs. That was a hypothesis a few years ago, and I think we've now starting to see the hard data that shows it can happen and what the impacts are. Bio Systems, I think is one I think we have already shown that we can sell. And obviously international expanding our franchise there. And then we think the move that we're doing with the bond repurchase and restructuring, obviously we pick up on that, and there will be some rise in interest rates anticipating in our model. But overall, it lowers our weighted average cost to capital and gives us a great way to continue to drive our growth going forward. So, last but not least, if you have cars out over the next few days as we've reminded you in the past drive safe and watch for kids on the trick-or-treating side, and also exercise your right to vote next week. Take care everyone, bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Thank you.