Stericycle Inc (SRCL) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Stericycle fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer and session, and instructions will follow at that time. If anyone should require further assistance please press star then 0 on your touch-tone telephone. And as a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Liz Brandel, VP of Finance for Stericycle. And 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 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-Qs, as well as this 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 the 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 to Mark Miller.

Thank you. Good afternoon. And welcome to our fourth quarter 2004 conference call. With me today are Frank ten Brink, our Chief Financial Officer; Richard Kogler, our Chief Operating Officer; and you heard from Liz Brandel, our Vice President of Finance.

Once again we are pleased with the results achieved by our Team in the fourth quarter. During the quarter we completed the redemption of our 12 3/8 percent senior subordinated bonds. The charges associated with the redemption totalled approximately 2.6 million on an after-tax basis or approximately $0.06 per diluted share. Including these charges net income in the fourth quarter was 19.1 million and EPS was $0.42. For 34 connective 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. Revenues grew 24.3 million in the quarter to 138.9 million, up 21.2 percent from 114.6 million in Q4 of 2003. Up to 24.3 million growth, small quantity, our most profitable sector was up 6.3 million over 9.5 percent. Large quantity revenues were up 0.8 million or 2 percent. International equipment sales were down by approximately 1.3 million in the quarter versus the prior-year. And acquisitions less than 12 month old contributed approximately 18 million to the growth in the quarter. The customer revenue mix was approximately 63 percent in small and 37 percent in large customers. As in the past, this makes this calculated excluding international operations, 3CI in acquisitions.

Gross profit as a percent of revenue was 43.6 percent in the fourth quarter versus 44.6 percent last year due to the mix effect of our White Rose acquisition in the second quarter of 2004. Gross margins improved by 10 basis points sequentially. Domestic gross margins improved by more than 40 basis points in spite of significant operating costs headwinds, which negatively impacted the quarter more than 30 basis points. This was offset by 30 basis points mixed impact from international revenues.

SG&A excluding amortization was 15.5 percent of revenues or 21.6 million in the quarter. And income from operations in the quarter was 38.1 million, up approximately 15 percent versus last year. And as a percent of revenue income from operations decreased from 29 percent to 27.5 percent. Interest expense in the fourth quarter was 2.8 million versus 2.7 million in 2003. Including the bond redemption charges, net income for the fourth quarter was 19.1 million and EPS was $0.42 for the fourth quarter.

Now to balance sheet. Our debt-to-book capitalization at the end of the quarter was 29.1 percent. And at the end of fourth quarter the revolver was 109 million and our Term Loan A was 62.4 million. In the quarter we redeemed the entire balance of our senior subordinated debt as previously announced in October 2004. Our revolver loan capacity also was increased in the quarter to 205 million from 187 million before. During the quarter, we repurchased 558,000 shares of common stock in the open market in an amount of approximately 24.7 million. In the quarter, our CapEx was 9.9 million due to the acceleration of the investment into buyer systems rollout, and the Baltimore plant conversion. The DSO in the quarter was 48 days versus 49 days a year ago. And 4 days lower than the end of the third quarter.

Now some other balance sheet numbers. Cash and equivalence 7.9 million. Accounts receivable, 74.9 million. Current assets, 112.1 million. Total assets, 834.1 million. Short-term debt, 13.2 million. Long-term debt, 190.4 million bringing the total debt to 203.6 million. The net worth of the Company was 495.4 million. Depreciation in the quarter was 5.6 million and amortization was 0.6 million. Now a brief recap of the full year. For the year ended December 31, 2004, revenues increased to 516.2 million, an increase of 13.9 percent from the year ended December 31, '03. Gross profit as a percent of revenue expanded to 44.2 percent from the year ended December 31, '04, versus 43.4 percent for the year ended December 31, '03. EPS increased to 18.3 percent to $1.69 from $1.43 per diluted share in the prior year. And cash provided from operations was 114.6 million for the full-year of '04. That concludes the financial picture. And now I will pass it to Rich.

Thanks, Frank. We want to congratulate the Operating Team for their outstanding performance in the quarter. All the operating locations dealt with the challenges of cost headwinds and once again through their hard work and effort we were able to deliver solid results.

As you recall, we began the conversion of the Baltimore Plant from Incineration to Autoclave Technology earlier in 2004. Throughout the year, we've been incurring the additional costs of outsourcing the treatment of the waste while this plant was under construction. Recognizing the significant operating costs savings that could result from the internalization of our volume back into the plant, the Operating Team worked day and night to finish the construction ahead of schedule. In January we began the process of staffing the plant as the first step towards full internalization over the coming months. As a result, we expect to incur initial start-up costs, which will be offset by reduced operating costs later in the year.

Our business expanded in all areas during the quarter, and we thank our entire Sales Team for their performance. In the quarter, they focused their efforts on the key growth drivers of our business strategy. Increasing Steri-Safe revenues, increasing large customer margins, and increasing BioSystems penetration. Through the efforts of our SQG Sales Team, we have focused our attention on upselling a greater percentage of new accounts and existing accounts into the higher select and preferred program levels. In the quarter, over 38 percent of SQ revenues came from Steri-Safe. We see that earlier customer adoption of the higher-level offerings is increasing. And we will continue to focus marketing and sales efforts towards the select and preferred programs. From the third to the fourth quarter, we increased the the percent of our customers on the premium program from 8 percent to now over 9.5 percent.

We successfully met our 2004 Steri-Safe goal by ending the quarter with approximately 87,000 Steri-Safe customers. In 2005 we are increasing the investment and focus of our sales and marketing efforts to achieve our goal now of 42 to 43 percent of our small quantity revenues coming from this higher margin Steri-Safe program by year-end. This will involve, among other things, extensive training of our sales force on upselling the premium programs.

In the quarter, our large account reps remained focused on improving margins in our LQG business. They secured 50 new Med Waste contracts all at or above our target margin level. And additionally, they continued to work on our margin improvement program. The blended gross margin for our large quantity accounts was approximately 28 percent in the quarter and absolute gross margin dollars increased 11 percent versus Q4 of 2003.

We're extremely proud of the Sales Team success in rolling out the BioSystems Service program to the large quantity customers. We're pleased to report that the Sales Team met their goal of signing between 100 and 200 accounts in 2004. And in the fourth quarter, we signed 51 new accounts bringing our new account total for last year to 154. We remain comfortable with our goal of adding between 200 and 300 new BioSystems accounts by the end of 2005. In summary, at the end of the quarter, we had signed up over 3800 new small customer service agreements. Thanks to the continuing hard work and efforts of our Sales Team, we ended 2004 with over 317,000 accounts, with approximately 310,000 small customers and the remainder large. I'll turn it back to Mark.

Thanks, Rich. Well, clearly Stericycle had another exceptional quarter. And I'd now like to provide fine tuning on our 2005 guidance. Please keep in mind that these are forward-looking statements. There are 3 items that I would like to mention first.

Number one, as you know our practice is to not include future acquisitions or stock repurchases in our guidance. Number two, as we discussed in our last conference call, we have challenged our Team to bring forward programs that could accelerate our key strategic initiatives. After finalizing our 2005 plan, we have decided to increase our strategic spending by approximately $2 million in 2005. And third, forecasted higher interest rates for 2005 will result in an increase interest expense of over $0.5 million over our previous guidance.

Now, keeping these items in mind, we believe that analysts may revise their estimates for EPS from or previous guidance range of 202 to 209 to a range of 203 to 207. And this assumes an average share count of approximately 46 to 46.5 million shares for the year 2005. We believe analysts may raise their revenue estimates for 2005 to a range of approximately 565 to $570 million, with modest variations depending upon assumptions on growth rates and foreign exchange rates. These estimates would include growth rates on our small account base, between 8 and 10 percent. And 4 to 6 percent on our large account base, which includes the additional 2- to 300 new BioSystems accounts. And between 0 and 1 million in international equipment revenues.

We believe that analysts will have estimates for net income between 93.5 and $96 million depending on their assumptions for improved margins, interest expenses and strategic spending. We confirm our prior free cash flow guidance of 104 to $112 million, depending on assumptions for working capital, CapEx and tax rates. These estimates include the impact of the additional spending, which will incur due to the Baltimore Plant coming online in early 2005, our increased investment spending, and higher interest expense.

In closing, we're very excited about the tremendous opportunities ahead in 2005 and beyond. In 2004, and as we start this year, we have proven our ability to grow on multiple fronts; Steri-Safe, BioSystems, and our International Business. In 2005, we'll continue to invest and expand these 3 growth engines. And collectively, they will increase, revenues, margins, and cash flow creating significant shareholder value. We thank you for your time today. We're completed with the prepared statements. And the Operator will now open it up for question-and-answer.

[OPERATOR INSTRUCTIONS]. Our first question comes from Lorraine Maikis from Merrill Lynch.

Thank you. Just one quick question on the guidance and then we'll move on to some of the operating statistics that you gave. Looking at the high end of the range of 96 million in net income. If we take that divided by the share count of 46. That gets you above the high end of the range. I guess my main question, is what are your priorities for cash flow going forward? And should we expect that your share count will stay flat or go down from share repurchase? I know it's not in your guidance. But I just wanted to know how you plan on using your cash?

Our plans for use of cash are, obviously, first and foremost investments in the business. For example, when we made our decisions on adding another 2 million of strategics then, our paybacks on that investment we believe are very rapid. A couple of years or less, so very good IRRs. Second priority is acquisitions. And that's always been a disconnect of our guidance where we are constantly looking at acquisitions, and yet we don't include them in the guidance until we do them. And then the third priority would be share repurchase.

So I think as you think through your modeling, obviously it doesn't make sense to assume that we just build cash and cash reserves because that doesn't make sense. So we would be applying that cash to either debt reduction or, obviously, investments in the business or acquisitions.

Thanks. And then moving on to some of the higher levels of spending. Could you talk about the 2 million that you had discussed. What types of programs and initiatives you'll be spending on?

The additional spending will go to strengthen our BioSystems rollout. We now have the ability to reach all of the major metro areas in the United States. So we can cover the majority of the population. So we're investing in that growth. Steri-Safe on the upper-level programs, as Rich mentioned, as we're starting to see traction and so we want to continue to investment in moving and upgrading on Steri-Safe. And third as we mentioned in the last call, is investment into the Pharma Returns business, which we began in Q4.

And the kinds of things involved in investments, and training, and people, and marketing activities, and on the operation side. We're upgrading some of our scanning systems, PDT systems, and so we'll get efficiencies [audio difficulty] operations.

And then final question. Could you just talk about the impact that higher fuel prices had on your margins in the quarter?

Fuel prices in the quarter went up about a little over 30 basis points in the quarter over the prior quarter. So that was one of the headwinds we were referring to when we compared the picture.

Thank you.

Our next question comes from Brent Griffin from Berean Capital.

Good afternoon, guys. Congratulations on a good fourth quarter and a full fiscal year 2004. My question is -- actually I had 2 questions. One of them was answered. The other one is if you've got -- if I missed something you said regarding share repurchasing, can you give me an idea on plans -- what you've got plans to repurchase this year if you've announced it already?

The share repurchase several years ago we had approved and announced a total of 3 million shares in terms of repurchase. That is at the discretion as we move through time. So there isn't a specific target. And the guidance that we just gave assumes no additional share repurchases beyond the little over 0.5 million we bought in Q4. And in terms of approval that's already left and in the public domain is 1.86 million shares of additional repurchase capacity.

That's 1.8 million shares that you've got approved left to repurchase, correct?

Yes.

Okay. Thanks.

Our next question comes from Rob Willoughby from Banc of America.

It's Bob. Can you talk a little bit about the uptake of the Pharma Returns business? And, secondly, if you could repeat what the CapEx number in 4Q was? I would appreciate it. Thanks.

The CapEx number in the last quarter was 9.9 million. And you want to talk about the pharma market?

The Pharma Returns business in our 2005 guidance assume 1 to 2 million of revenue in that sector. I think what we've been pleased by is the continued interest in it. We've started to sign up customers. And as a matter of fact in the fourth quarter, we did back-up work for one of our customers that's using our program. Which helped us and gave us 200,000 in revenue. Now, obviously, a low margin because we were doing this work to learn and operate our returns center.

But what we're seeing is that the tool has a great deal of benefit to our customers and helping them manage this process. And we believe can be a very interesting business for us. And part of the reason we're being relatively conservative on our forecasting of it is that we're new into it. And the customer process it goes through quite a bit to get people signed up and go through our fees. So we'll keep you posted as we go through each quarter. But we're excited about the opportunity.

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

Good evening. Quick question on the revenue from acquisitions you said you had about 18 million in revenue from acquisitions in the quarter?

That's correct.

How much is from foreign currency?

The international side of that is approximately -- hang on -- 16.3.

That's the -- that's White Rose revenue or that's the --?

That's White Rose, Mexico and yes. White Rose, Mexico at their exchange rate, yes.

Okay. So that includes -- so how much of that 16.3 -- like if you kept it in -- because White Rose did 50 million in --?

There's about 1 million in foreign exchange in there, that benefited in the quarter.

Okay. In terms of the growth opportunity at White Rose, what are you guys doing -- can you give us any updates -- what your progress in terms of penetrating the small customer market over there?

White Rose, first of all, I think clearly from a revised guidance for next year we had given in the last call was 50 to 55. That revised right now would probably be about 55 to 60. And it's really the exchange rate. The dollar has weakened, obviously, which has reversed a little bit. The trend that we saw in October of last year. And the traction they are definitely on track, with respect to our expectations. And are doing well.

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Amanda Tepper from J.P. Morgan.

Hi. Good afternoon. First question is on the LQG that was a nice turn around in the quarter. Finally in positive territory after a while. Is the calling pretty much done? I know you guided for positive net growth. But I'm wondering underneath is there still culling going on or are we pretty much through that?

The culling continues. We're nearing the end of the original group of customers. But we still will probably continue the process through the first half of the year. And keep in mind that this process kind of resets itself because we move acquired customers in and we start working their margins up. And then we also continue to raise the bar for our sales force because we want to drive the gross margin of that business back to levels of sanity. The business should be in the 30s or higher in terms of gross margin. As you heard we're at 28 percent now, which very nice pick up. But we have a little bit more work to do.

Do you think you can get in the 30s this year?

We're going to keep working at it.

Okay. On acquisitions, did you do any small tuck-ins in the quarter? And can you comment on the pipeline both domestically, internationally on solid waste and if you're looking at acquisitions in any other related services?

There were no really acquisitions specifically in the quarter. The pipeline remains good at about 40 million plus. And on the international side, that's more the North American domestic business. International side we don't give specific numbers. But there are opportunities there too.

Okay. And then I know you guys have been looking at infection control, which is different from pharma control as another business. Is that part of the 2 million investment? Can you comment on kind of what that market might look like for you over time?

The infection control area is a very broad sector that we want to continue to grow in our participation. The guidance that we gave of 1 to 2 million on the revenues is predominantly driven by pharma return, with some modest amount of infection control traction. The pharma return will be our primary focus. Some of you may have seen in the "Wall Street Journal" a few weeks ago, the front cover story about nosocomial infections. This is -- the data that was in that is all data. But it is an issue that hospitals are wrestling with. And how do they track and how do we benchmark. And it's one where the tool that we have to offer them on Infection Control Tracking Software, we think has a lot of power to help them gather that data.

That business I think will evolve through time as hospitals and insurers try to measure and balance, what is the way to benchmark and trend. Because it isn't an apples and apples comparison. But it's a very important part of the healthcare system long-term and we think that we have a lot of knowledge in that space. And it's a segment that's a natural evolution for us. But I think for '05 I wouldn't assume any major wave effect from that. But it will be something that we continue to work on.

Okay. And then if we could circle back to the share repurchase that you ended up doing in the quarter. I know you don't have a particular program. We had not been looking for that share repurchase. Is this something -- how did you come to that decision to pull the trigger at that time? Do you just look at your cash flow kind of at the end of the year? Is it relative to the stock price? How does the Board look at that?

Obviously, first of all, you want to have a good internal rate of return on the transaction. Besides that, obviously, and the price obviously plays in on that. So we're at times opportunistic. We look, obviously, at pipelines of acquisitions. It's just cash use instead of debt repayment. We look for acquisitions. But again, we're not going to do things just for the sake of. That's why we don't include them in our guidance.

And I think in fairness to everyone on the call, it's in the best interest of all of our shareholders that we not disclose the exact methodology about how and when we come to the purchase price. Because it's our best interest to buy it at what we believe to be good pricing.

It's just good to know that there is a methodology. Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. Our next question comes from Tom Ford from Lehman Brothers.

Thanks very much. Good evening.

Hi, Tom.

Just a couple of questions. Rich, you talked about Baltimore. Could you guys -- what was the cost headwind impact from Baltimore in 4Q?

Baltimore probably impacted us about 20 basis points.

Okay. And is 1Q then going to be sort of the high watermark in terms of the impact because you have a little of the startup cost?

I think in Q1 we kind of should see a similar kind of gross margin probably still to Q4 because of the pass-through timing on some of the increases in fuel. Baltimore will definitely still have its affect because the plant is coming onstream. We obviously had some weather in the beginning of the months here in January. But I think overall, if you look for the year that the step-up in margin is definitely on track for Q2 through Q4. Still, I mean we've been running historically somewhere around 180 basis points per year. That's kind of the positioning. And historically, that has been 180 to 240 basis points per year. And in Q1 that will be a little bit slower. Kind of even with Q4 and then step up after that.

Okay. Great. Thanks very much, Frank. Maybe just a clarification, maybe a stupid question. But when you guys talked about, Mark, you talked about a 2 million step-up I think in strategic spending? Is that CapEx? Is that G&A? Is that a combination?

It would be predominantly G&A and then some operating costs. But it would be things that would be flowing through the income statement.

Okay. Hence the reason --?

And on the flip side the reason we're comfortable in confirming our free cash flow range of 104 to 112. Is we think based upon the efficiencies that we had -- if you recall in Q3 our DSO was a little bit higher because we've switched to the new invoice format, and timing on working capital is improving, and then obviously, the margin flow through. As steady as she goes in terms of the free cash flow side.

Okay. And then where was the -- you had the back office consolidation in 4Q?

That is correct.

Where was that in terms of the expense numbers?

Well, the expense of that would predominantly be in the SG&A side. So that is a component of SG&A expenses. But it is really from a point of view in the quarter. It's not as material. We had some modest CapEx related to it on building out into centralized location. But from an income statement that was not that material.

Okay. Then just lastly, Frank, ending with you. You talked about CapEx. You guys really had a -- I thought a spike-up in the CapEx number, if I'm right, from Q4?

In Q4 we did do a continuation, obviously, and then pulled up some bio rollout. That was having good traction and we didn't want to fall behind there. Baltimore we did pull that up. We saw the benefits. We continued to look at the benefits of the PDTs, which again is tied in with our billing. And as you know we did our new invoice there and that assisted. So we pulled some of that up. And then like I said in the back office, there was some CapEx relating to that.

Okay. You guys reaffirmed the free cash flow outlook at 104 to 112?

Correct.

Does the CapEx number implied in that, this quarter guidance versus last, has that changed?

The CapEx, in fact, as a range was last time about 26 to 28. And it's probably right now right around, the 28 million.

Okay. For '05 that's --?

For '05, correct.

Okay. Thanks very much.

You're welcome.

Our next question comes from Matt Litfin from William Blair Company.

Good afternoon.

Hi, Matt.

Did you say that your guidance on LQG for 2005 up 4 to 6 percent revenue wise, does, indeed, include the BioSystems rollout?

Yes, it does.

And also the LQG revenue in the quarter up 2 percent internally, does that also include that?

Yes, it does.

Okay. I guess my question is, have we been including that all along here and I've just sort of missed that?

No, the bio -- yes, the bio growth -- although if you remember in the beginning of this year has always been very still slow because it didn't have that much traction yet. That was included in the LQ numbers. Correct. So the negative 7 and 7 in Q1 and 2, and then in Q3 it's starting reduce. And now in Q4 it became positive.

Okay. And then maybe just as you turn toward -- still staying on the LQG subject. But as you turn toward looking at revenue growth there. Can you outline for us or just refresh us as to what the opportunity is either in dollar amounts or in number of hospitals, et cetera within that LQG segment for growth in the core Medical Waste Services, and excluding bio?

Yes, I think what we're looking at is a business that's probably going to grow very minimally. It's, somewhere in the range of --.

Matt, if you look at typically like in this quarter, we picked up 50 new Med Waste only accounts, which net of about -- losses or upgrades would have put us net up about 20 for the quarter. And I think that pace will continue.

But I think the -- that overall sector, again our key focus on the Med Waste side is not so much adding hundreds and hundreds of accounts per year. But trying to bring the gross margin ratios up in a meaningful way. So if you were try to think or kind of parse through the Q4 and look at it and say, okay, what's going on with the Med Waste business, excluding BioSystems. Of the 2 percent combined LQ growth, we would have had, excluding Bio Systems, we probably would have been roughly what, Frank, about minus 1?

Minus 1 percent.

One percent. And the gross margins in that space were up, as Rich mentioned in his comments, up over 13 percent. So we're still focused on the same basic strategy, which is improving the margins of that sector. Trying to move things towards operational efficiencies. And, I think, the kind of the big wave of accounts that we were working through, through the BFI acquisition helps make our comparables a little bit better.

But the fundamentals are -- expand the margins from the high 20s to the 30s. And launch the BioSystem's program, which can more than double our revenue in the account. And then launch other services like Pharma Returns and Infection Control Software, et cetera into that space.

Okay, so not to beat this to death. But of the, call it 5 percent revenue growth guidance on the LQG side for '05, you might say a point or two would come from core Medical Waste. And the other 3 or 4 points would come from the bio rollout?

Yes. So I think if you compare and contrast, if were to think about the modeling as two separate items, you would say the LQ Med Waste is probably in '05 a 0 to 1, 0 to 2 percent kind of number because of the comparables year-to-year. The 4 to 6 is really predominantly driven by the BioSystems effect.

Got it. Thanks. And congratulations.

Thank you.

Our next question comes from Mark from Alliance Capital.

Hi, Mark.

Good afternoon. Can we talk about in a little more detail on BioSystems and the Returns business. What are you looking for in '05 in terms of new account signs? And we'll look at the Returns in a second, I guess.

On BioSystems, confirming our preliminary guidance of 200 to 300 new accounts in '05. If you think about where we've been in '04, we moved from the early part of the year closing 10, 20 at a time. In Q4 we, for the first time, passed over the 50 closes in the quarter. I would say from a pipeline process and from the sales force organization, marketing efforts, we feel very comfortable at the low end of our range of the 200 accounts.

Obviously, we need to step up as we go through '05 to hit the high end of the range. But that's the bandwidth that we're in on BioSystems. And I think also the fact that we've made these additional investments. And we can cover all the major metro areas. Again, we want to keep growing that piece. It's small relative to our a $570 million revenue stream. But it's a very fast grower. And we think strategically it's important to build our platform.

On the Pharma Returns business, our revenue guidance for '05 is 1 to 2 million. And that will evolve as we go through more so in the latter half of the year. Because as we go to customers whether they be hospital or retail pharmacy or the pharmaceutical and biotech customers we have, they often have a formal RFP processes where we've prepared proposals and go through a formalized bidding process.

What's the margin on the business? How do you get paid? How big is that market? How do you reach critical mass?

In terms of the critical mass, I think for us we believe if we can get to our '05 goals, we will be generating money out of that business. We think that the business in terms of size, if you look at all aspects is -- 100 to $200 million space. That's when you include returns, recalls, activity from manufacturing, et cetera. Clearly we have a long way to go to make a meaningful mark in that space. We think as that scales up, it can be interesting margins. The same or higher than our current blended revenue gross margins. So, it's one where the critical mass or crossover point for us is not nearly as daunting as the in-service type business that you would have with our service center account. Because we're leveraging the infrastructure that we have in place.

How many people sell BioSystems right now?

We have over 20 specialists.

Is that going up?

Yes. We're increasing that.

Do you have a target?

Well, I think as we talked about here, we're moving into sort of all major, metro areas. Part of the investment spend that we've discussed is additional headcount. I think we'll be moving to the high 20s here to get coverage across all those metro areas.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. Our next question comes from Leone Young from Smith Barney.

Good evening. Just to revisit a little bit Tom Ford's question on the SG&A. If you could just help clarify for me a little bit. So the 2 million in extra spend you're talking about is mostly in SG&A over the course of the next year? Or perhaps, you could just give me a sense of SG&A trends, from this quarter's space?

Well, I think if you think about it from a sequential modeling, obviously, in Q4 we pulled the trigger on upping some of these investments. And with our SG&A, excluding amortization, we were at 21.6 million. As you look at 2005, we'll take and jump off of that point and rise slightly. But we're really trying to move as quick as we can. If you have in your modeling a SG&A ratio to sales, excluding amortization in the low 15s, -- 15.2 to 15.4 you'll be in the bandwidth.

And that was a percent of revenue.

Great. Thank you.

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

Good afternoon, guys. We got another new one. I'm keeping track of all these names. Looking at your debt, can you elaborate on the principle repayment schedule as we go through '05 and maybe a couple years? Anything significant coming up?

No. I think we are ahead of schedule on our debt if you look at the balance sheet. The current portion is about 13.2 million. Remember that most of our debt right now is really -- that has to get repaid from a payment scheduled point of view, is what remains under the Term B. And pretty much that one expires in 2007. So we have got a ways to go. But in total the B Loan is a little over 60 million. It's definitely not a daunting task. I'm sorry, that was the A Loan. I'm confusing the A and the B. The revolver is where most of our borrowings move into, which is kind of an evergreen.

And just to clarify again, the Term A has 62.4 million on it?

That's correct. And that has a repayment schedule to it. And then we have smaller loans relating to vendor, people that we did financing with on acquisitions.

And the Term B has 60 million?

No. The B is 0. Sorry, I confused you there. The A from a pure point of view -- but we're ahead of that schedule is 20 per year. But we are ahead of that schedule already.

Okay. And what is the definition -- you gave on the free cash flow 104 to 112 targeted for 2005. How do you define free cash flow?

That would be cash from ops, which is about 132 to 140. With roughly 28 million in CapEx and your free cash flow of 104 to 112. It's the cash flow from operations from the cash flow statement.

And this year's cash flow is down somewhat from the previous year. What would you attribute the major culprits, if you will?

The biggest part really is income tax. That was the biggest one. We had NOL's in years prior to that. And a delta year-over-year, you're probably talking somewhere in the neighborhood of 12 to 15 million more in income tax in cash.

Okay.

Thank you. I would like to know if you can comment on your growth expectations for the Latin American markets, including Mexico. How significant will these growth will be in terms of marginal contributions to earnings?

If you look at Mexico as an overall, they're focus right now is really on the integration of the acquisition that they just completed. The market as a whole is from a large generator. Again, about pretty much all of their revenues is with large generators. It's fairly stable. So from that point of view there is not a lot of market growth. But they also, after the integration, which is what their focus is in the first half, will start to concentrate on the small quantity generator sector. And then also trying to see if some of the products that we have in the United States could apply there also, like Steri-Safe.

Lastly, there is definitely still acquisitions opportunities in Mexico as well. So overall as a growth rate for them, it's a total market volume fairly flat. It will come at the end of the year with focus on small quantity. Not a major material point in the total scheme for [indiscernible].

Thank you very much.

Our next question comes from John Costler from Dominick & Dominick.

Yes, gentlemen. I've been kind of traveling today. Maybe you've already covered it. What are the -- what's the total customer-base on the small quantity generators now? What were the new conversions to the Steri-Safe program and then what was the new additions to the Steri-Safe acquisitions?

As I said in my spare comments, the total small quantity base is around 310,000, currently. And in terms of Steri-Safe, we're right now at over 87,000 customers on the program. And as I think I mentioned too, we're very pleased in the quarter that right now we have about 9.5 percent of the Steri-Safe customers are in the higher-level programs, which is a new watermark for us.

Great. What were the additions in the quarter for the Steri-Safe, net additions versus acquired?

It's about 3,000. We were about 84 last quarter. 87, a little over 87 this one. There is no acquisition impact there because this is really internally generated.

Great. Thanks so much, guys.

[OPERATOR INSTRUCTIONS]. We have a follow-up question from Lorraine Maikis from Merrill Lynch.

Thank you. Could you just talk about how your rolling out the pharmaceutical returns and also the nosocomial software? How you plan to price those and who within your customers are you planning to target in terms of your selling efforts?

The rollout of Pharma Returns is being done initially targeted through our large quantity sales organization to generate leads at hospital pharmacies. And then we have some specialists who are interfaced with the major retailers and the pharmaceutical industry. And in terms of pricing, it's really a customized pricing program. Because there are several components. There's a software license access for people. And then depending on whether they want to utilize that infrastructure on site in their infrastructure or they want to do a total turnkey, we can do that for them. And we price it based upon their specific needs that's tied by license, and item, and activities.

In terms of the Infection Control Software, again, that would be through the leads generated with our interface, within the Infection Control Specialists at the hospital. And that would be priced on a size package for licensing of that software to that account. So it depends on whether they want to run on a laptop or a centralized platform and how many users.

Thank you.

[OPERATOR INSTRUCTIONS]. I am showing no further questions. Actually we do have a question from Louise Sykes from Pennant Capital Management.

Hi. Good evening, guys. Thanks a lot for taking my question. I have a couple of questions. One on the tax rate it seems like it was a little lower this quarter. Can you tell me what tax rate you baked into your guidance for '05?

The tax rate for '05 is somewhere 39.3 to 39.4 percent.

Okay. And then second question on the -- just looking at the allowance for doubtful accounts, that's been trending down somewhere as a percentage of the total accounts receivables. Or it's been about flat where they are up 25 percent or so. What's been contributing to that? I would have expected I guess, the opposite given that your mix is shifting to smaller accounts.

The overall picture, obviously, with our DSO having come down over the periods in the years. That obviously has improved the whole picture. That makes the whole payment scheme better. We also have with the Steri-Safe program, that's a pre-paid system. That helps both the DSO, as well as the collection site and the need for reserves. And overall we've gotten better at that picture. Coming from a company that was 30 million to now more. We have more resources and better systems.

Okay. Okay. Thank you.

[OPERATOR INSTRUCTIONS]. I am showing no further questions.

Thank you, everyone for your time and attention. It's been a great 2004. And I'll tell you 2005 and beyond is really exciting for us. It's nice to have multiple areas that we can invest our resource in. And the Team is excited and energized. We think that's the ability to have the strong free cash flow and the ability to not only invest in our base, but do acquisition, and to really grow this business is an exciting time. We thank you so much. We look forward to talking to you on our next call.

Thank you, ladies and gentlemen. This concludes tonight's conference. You may now disconnect. Have a great day.