Stericycle Inc (SRCL) 2009 Q3 法說會逐字稿

Good afternoon. My name is Nikisha, and I will be your conference operator. At this time I would like to welcome everyone to the third quarter 2009 conference earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions).

I will now turn the conference over to Mr. Frank ten Brink. Sir, you may begin.

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Rich Kogler, COO; and Mark Miller, CEO.

I will now read the Safe Harbor statement. Statements by Stericycle in this conference call that are not strictly historical are forward-looking. Forward-looking statements involve known and unknown risks and should be viewed with caution. Factors described in the company's Form 10-K, 10-Q, as well as its other filings with the SEC could affect the company's actual results and could cause the company's actual results to differ materially from expected results.

The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after this date that may bear upon forward-looking statements.

Now the results for the third quarter. Revenues grew $20.7 million to $297.8 million, up 7.5% from $277.1 million in the third quarter of '08. Revenues grew 11.1% when adjusted for the unfavorable foreign exchange impact of $10.1 million.

Domestic internal growth excluding returns management was up 6%, and international internal growth adjusted for exchange was over 6%. Domestic internal growth consisted of SQ up 8% and LQ up 3%.

Regulated returns management services revenues were $16 million.

Gross profit was $140.9 million or 47.3% of revenues.

SG&A expense excluding transactional expenses related to acquisitions were $57.6 million or 19.3% of revenues.

And net interest expense was $9.2 million.

Net income was $46.5 million or $0.54 per share on an as-reported basis, and $0.55 adjusted for transaction expenses related to acquisitions and the net release of prior-year tax reserves.

At the end of the quarter, the revolver borrowings were approximately $228 million. The unused portion of the revolver debt at the end of the quarter was approximately $400 million.

We repurchased 848,169 shares of common stock on the open market in an amount of approximately $41.2 million. Cumulatively we have purchased approximately 13.1 million shares, and we still have authorization to purchase approximately 3.1 million shares.

Our capital spending was $11.7 million, and our DSO was 52 days.

The cash provided from operations was $87.7 million for the quarter and $213.9 million year to date.

I will now turn it over to Rich.

We want to thank each member of our worldwide team for their solid performance and continued commitment to our customers and shareholders.

In the quarter we enjoyed strong sales growth in all of our business segments. The SQG growth was primarily driven by Steri-Safe with 80% of new Steri-Safe customers choosing select and preferred. In the quarter Steri-Safe contributed over 67% of total small customer revenues.

Large quantity sales growth was driven by the continued adoption of our Bio Systems offering and the new LQG med waste contracts.

In summary, we ended Q3 with over 440,000 accounts, of which over 429,000 were small, and the remainder large.

And I'll turn it over to Mark.

I would now like provide insight and our current outlook for 2009 and provide a primary guidance for 2010. Now, please keep in mind that these are forward-looking statements.

In the third quarter we completed five domestic and one international acquisition. The annualized revenues of these six acquisitions is over $16 million. Now, keep in mind that our guidance does not include future acquisitions which have not closed, divestitures, acquisition-related expenses, and the release of prior-year tax reserves.

So for 2009 we believe that analyst EPS estimates for the fourth quarter will be in the range of $0.54 to $0.55 per share, bringing our full-year range to $2.08 to $2.09, which we are comfortable with.

We believe analyst revenue estimates will be approximately $1.17 billion.

We believe analysts will have estimates for net income between $180 and $181 million, depending on assumptions on margin improvement and interest expense.

We believe analysts will have estimates for free cash flow of $210 million to $213 million with CapEx anticipated between $40 million and $42 million for the year.

Now I would like to provide preliminary outlook for 2010.

We believe analyst EPS estimates will be in the range of $2.31 to $2.37, which we are comfortable with.

We believe analyst revenue estimates for next year will be in the range of $1.27 billion to $1.30 billion, depending upon assumptions for growth in foreign exchange.

We believe analyst estimates for net income will be between $199 million and $204 million, depending on assumptions for margin improvement and interest expense.

And we believe analysts will have estimates for free cash flow between $230 million and $240 million, with CapEx anticipated between $45 million to $50 million.

In closing, we are very excited about the tremendous growth opportunities in 2009 and beyond. We thank you for taking time out for the call. And now we will go to Q&A mode.

(Operator Instructions). Ryan Daniels.

Let me start with just a quick question on the LQ business. It looks like growth was up about 3% year-over-year. I think that's down from about 6% in the second quarter. Is there anything unusual there? Or just lower sales? Or can you comment on why that slowed down a bit?

It's really the year-over-year surcharges, and the timing on that is more on LQ. It comes up more and faster on the LQ. So in general again you're looking at a business 8% to 3%, and when you adjust for the 8% to 3%, 8% on SQ and 3% on LQ, you get to your 10% to 11% and your 5% to 6%.

So underlying trends are actually pretty similar?

Yes.

Got you. That makes sense. And then another housekeeping issue. Can -- something I always ask for, the LQ adds in the quarter? and Bio Systems adds? And then the Steri-Safe customers? And the percent on select and premium?

So starting with the LQ adds, we had 56 new contracts on the med waste side, 70 Bio Systems. Total number of Steri-Safe accounts is now over 139,000. And the percent on select and preferred -- or you want the total?

The percentage, yes of the total that are on select.

The percentage is 32.4%.

Okay, great. And then, do you guys have any color commentary on the pharma waste disposal service? I know you kind of took that out of the controlled launch, and I'm curious if you're ready to share client numbers or average contract size or any more detail on that segment at this point.

Yes, I can kind of talk to -- as we indicated the last time, we moved out of pilot stage, we're doing a staged rollout, quite similar to how we did Bio Systems a few years back. We have lots of customer demand. It's a program that's being driven by the regulations as well as by customers' interest in doing the right thing for the environment. And we are seeing good success.

Great. And then maybe just last question and I'll hop back in the queue -- any update on MedServe? I know you guys have been going through the HSR review, and I am curious if you've got any feedback from them or kind of what you're hearing about the potential product timing around that transaction.

Yes. The last time we talked we were still in the process along with MedServe of supplying information, and that process has been completed, so DOJ has information from both parties. We are now in the review process. We expect that this will finalize itself in Q4.

Great. Thanks guys.

David Manthey.

Could you just remind us what the fuel surcharge was last year? I believe I had 2%. Is that correct?

That's about right. From a total point of view, the effect of it.

And would there have been a greater or less impact on LQ at that time?

There would have been in this case from it coming off, is bigger on the LQ, it's a little faster than on the SQ. And say you get from that point a bigger of an effect on the LQ than the SQ.

And you haven't given back more than 100% of that, have you?

No, we have not.

And then any changes you're seeing in pricing or the competitive landscape? Any changes in renewal rates for either med waste services or ancillary services?

No. And I think we talk about this periodically, but volumes have been steady. Renewal rates are still good. We haven't seen anything really different. It's always been a very competitive business, and there's plenty of new competitors that are always entering. But frankly we are holding our own, and I think that's because of the nature of the services we offer.

Okay. And then finally on international opportunities, could you talk about acquisition opportunities there? And just in general, other opportunities you might have to redeploy capital and drive returns? -- that maybe we don't know about or maybe are still embryonic today.

Yes. Again, use of our cash is first of all to invest in the business, then the acquisitions, and then obviously repo's. On the international side, acquisitions remain very robust. One obviously in the quarter. And it was a nice sized one, and it was in Chile, an expansion. The overall focus again in South America, in northern Europe are areas that we have indicated that we are very busy.

Thank you.

Michael Hoffman.

If we could talk a little bit about the unit growth in the quarter? Just the numbers came out so fast I'm not sure I wrote them down correctly. Did you say 440 point something thousand for a total? I didn't get that number.

Those are the customer accounts (multiple speakers) in total, north of 440,000. And so the large quantity of that is a little over 11,000.

A little over 11. So it's 429 for the small quantity generator.

And then within that, the question with regards to Steri-Safe, 139,000, it sounded like there was two things were co-mingled together versus the prior times. Before you've talked about total number of premium customers --

So that would be the 32.4% that Rich mentioned.

And then in prior -- last quarter you had a 67% number, which --

That's the percent of SQ revenue that's Steri-Safe, and that was over 65% last quarter. It's now over 67%.

67. And then when you look at the total adjustable markets, what penetration of that total addressable market do you have now with your Steri-Safe product?

The penetration is now over 43%.

43%. Okay. Penetration.

And then with regards to share repurchase, any thoughts? As robust as the cash flow is, are there any thoughts about accelerating the pace of that? You're generating more cash than you can spend through acquisitions at the moment, so --

Well, I think it's been a good balance for us to again invest in the business, to do the acquisitions. Obviously repo's we have done opportunistically, but we feel it's a good balance that we have done in the past, and we will continue to use that strategy in the future.

Thoughts about a dividend?

Nope. Not yet.

Okay. All right. Great. Thanks.

Al Kaschalk.

Could you just comment on the tone on the acquisition pipeline in terms of maybe pricing or the environment you're seeing, particularly on the international front?

I think that there really is no major shift in the pricing, again, overall. What we have indicated before is that on a pre-synergized basis you may get acquisitions on average somewhere in the -- anywhere ranging from the five to maybe eight, nine. And synergized ranging then between five and six, seven.

Internationally, obviously if you are in very high-risk countries, that multiple could be a little lower, obviously adjusted for the factors in those countries. In most Western European countries and some other ones in the world, that would not be very dissimilar from the United States.

And within the core business or the sort of internal business, how would you characterize the volume of waste from your customers? Have you seen it moderate? Or are you seeing sort of the expected growth in volumes with the economy?

We really have not seen any impact negatively to volumes. And because health care keeps expanding and we keep expanding with more customers, volumes keep increasing.

But even when you strip out the acquisition effect, your core, your base business you would characterize as a sort of low GDP type growth on a volume perspective?

No. I think the industry as a whole, from a point of view, is probably somewhere in three to four. It could be a little bit faster growth in overall if you look year-over-years. Baby-boom drives that. Households continue to outsource drives that. Waste moving from hospitals to the small generators drives growth in our industry from a total revenue point of view. So those are all contributors to that. And that driving off the baby-boom as well as households losing still business to the small generators continues.

Then if I may, just flip back to MedServe, and to the extent you can comment -- or clarify is probably the better word -- would be great. Should we have expectations that things continue to proceed at the pace you believe they are going for mid to Q4 close?

And then secondly, could you just talk or refresh us on what your expectations are for accretion or the impact for 2010, and whether that's included in the guidance that was provided.

So as Rich said, we expect to finalize in Q4, and the accretion, as we said, after a period of integration, which was probably going to be somewhere around the six months, would then be about $0.02 for the year.

Is that in the $2.31? That's probably -- no.

No, that is not, because we do not include acquisitions that haven't closed yet.

Thanks for clarifying.

Scott Schneeberger.

Just following up on that last question, so the -- after six months of close on MedServe, then in the subsequent 12 months would be $0.02 of accretion? Or would it be in the 12 months from the close just you would see the $0.02 in the back half?

I think it's in the 12 months. That's I think fair. It will be obviously a little bit more in the back end, second half of that 12-month period.

I guess a little housekeeping first. On the acquisitions, it was -- I think it was five and one. Can you just take us a little deeper on -- I heard one in Chile was the big one, but if you could take us through some detail on each of those.

So it's six acquisitions, five domestic, one in Chile. Revenues annualized, about $16.5 million, approximately -- $16 million, $16.5 million. The overall price was about $58 million. Multiple synergized, about six to seven.

Chile was the big one. What did that constitute of the $16.5 million annualized?

The international portion of it was about $7.5 million of that annualized number.

In modeling, each of these should be equal across the quarters? Nothing dramatic seasonality-wise?

Should not be, no.

And then the five U.S., can you speak to LQG, SQG, any other details?

I think the overall SQ/LQ mix for the total is about 50/50.

And RMS, $16 million in the quarter. Just can you take us through what you are seeing in that market? Hasn't been tremendously robust for a couple of quarters. We know it's lumpy, but how is that looking now? Are you comfortable with the guidance for the full year?

For RMS we saw a continued impact of picking up new accounts. We feel good about what's happening there. We have not had in the quarter any big recalls. As you know, it's not something you can predict based upon units or activity. It's really driven by what are the issues surrounding that particular product and what needs to happen.

We had estimated in our last call about 80 for the year. In the numbers we gave just now, we are targeting about 70 for the year, so we are taking it down on the assumption that there would not be a big recall occurring in Q4. Now, that may happen. That may turn out to be conservative. But at least for the modeling that we did for guidance, we took it linear.

That's helpful. Is the economy playing a role in this? Or is this entirely a business unique in the economy? I'm just curious what might be driving a little bit of back-to-back softness in quarters?

Well, you have one issue, which is how do you determine what's the size and scope of the recall. So you can have two products, and if one is deemed to be a labeling issue and it may mean it needs notification and some follow-up, but it's not as life threatening or the like, there may be activities that we'd do that we'd bill out and do that service on an outsource. But it's really the ones that are more severe that would deem more activity and more services provided.

I think from general shifts in the economy and the environment, we see more and more efforts on enforcement and safety and regulation and follow-through. I think the administration is behind it to drive that process. I think there's a higher -- heightened awareness.

But it's a little bit of just the nature of the lumpy business. You don't really know when the big one or the real serious one is going to happen. But we think fundamentals are long-term in our favor that people will like to outsource this as opposed to build in-house capabilities.

Sure. Thanks. So just kind of taking that to 2010 -- A, what type of outlook for revenues do you have from RMS in 2010? And then -- and taking it back to the core business, SQG and LQG, what type of growth breakout do you expect in those in the 2010 revenue.

In the guidance that we gave for 2010 on RMS, I'd put a range of like 70 to 90 in those two bandwidths. And then on SQ and LQ -- SQ, about 8% to 10%, assuming no comparable issues of the spikes in energy or the like, but on a normalized basis 8% to 10%, and LQ, about 5% to 8%, and international, about 5% to 8%.

And then finally if I can sneak one more in, SG&A -- it was a little above my number, but I think it was well within what you guys had been talking about as far as forward outlook. Are you planning on spending more or less through the end of the year into next year? And what on that line item?

We definitely are investing in the growth engines and continue to do so. We also have a little bit of higher cost with respect to stock options as we have a lower forfeiture rate within the program. But new programs and expanding existing ones are definitely getting funding and to us are exciting.

Okay. Thank you.

Jonathan Ellis.

Just wanted to ask a question about the acquisitions this quarter. Were they all medical waste companies that were acquired domestically?

They were predominantly medical waste. There were some angles in it with respect to hazardous, for instance, for health care, but predominantly were medical waste.

Great. And just on the international revenue growth that you just offered up for next year of 5% to 8%, did that assume that FX remains where it is today?

Pretty much. We looked forward a little bit, but there's not much different where roughly it is right now and the expectations.

Okay, great. And then just hopping around a little bit here, but energy costs? What were they this quarter as a percentage of revenues?

Total energy was about 5% of revenue.

Great. And then just -- if we could just circle back as it relates to LQ revenue growth, and you talked about the surcharge is coming off. Can you help us understand, are your surcharges with LQ accounts primarily indexed so they scale up and down with diesel prices? Or are they more of a negotiated rate?

Many are indexed, some are negotiated. But they do move up and down pretty rapidly, which is why you see more effect to your year-over-year comparable.

Okay. Would you say the average lag is probably no more than a month or two between the spot price of diesel and the actual surcharge?

No. It varies because we have different tables and different things. But I think Frank's overall comment I would agree with, which is that they adjust quicker both up and down at this point than the SQ.

And then just the only other question related to surcharges. I know some of the solid waste companies have had success in trying to recoup some of that surcharge that's coming off in the form of core pricing or sustained pricing. Have you pursued that strategy at all?

Well, you have the factor overall that you want to recoup what the cost increase is. Remember right now too diesel is coming up again, we are going into the winter months. So it's one that you got to anticipate a little bit, and it has come up. We all are -- we're looking, at least in the Chicagoland market, at rates at the pump in the $1.60s. Now it's back up to the $2.80s. So fuel is getting up again.

Okay. And just a final question for me. As we look into 2010, can you help us understand to what extent -- I know you've talked about how LQ pricing tends to track slightly below CPI, SQ slightly above. But to what extent are your contracts, particularly I'd imagine on the LQ side, indexed actually to inflation where CPI measures actually would have implications for pricing next year?

I think our contracts typically have an escalator that is built into them. When we say that we get CPI or a little less than CPI, we are sort of comparing it to something that most people can relate to. But our contracts don't index. Some of it may occasionally have that, but I mean the truth is, we have contracts that we negotiate with customers that have varying terms, and so it's kind of hard to generalize. I don't know if other industries use forms, but we don't.

Actually my final question, and I sneak one more in. You just provided a penetration rate for Steri-Safe. Could you offer up a similar penetration rate for Bio Systems?

Well, I think right now we have -- the total number of Bio Systems accounts probably 1800.

1804.

Yes. Probably about 1800. And obviously with the --

We gave a total number of accounts. That still is, as we said, there's definitely a lot of opportunity still left. A couple of thou still. Definitely opportunity.

I would say just based on LQ count we are probably 20%, 30% penetrated, at best.

No, it's just I ask only because I know that LQ count includes both domestic and international, so that's what I was trying to understand, what and how.

That's more a domestic number from that point. International -- it's in the early phases still and a lot of opportunity.

Thanks guys. That's helpful.

Just for clarification on the Steri-Safe penetration, so that you have -- not have apples and oranges, that's the percent of penetration of the accounts that are eligible. So that's a smaller universe versus the total number.

Scott Levine.

This is Scott Levine, JPMorgan. Regarding the leverage, could you give the leverage calculation for your covenant and remind us of what your comfort zone is there in terms of how high you're comfortable going in levering up for deals and/or buybacks?

Sure. We hadat the end of the quarter the leverage debt to EBITDA was 2.3. And so lots of room. Our covenant max is 3.75. Just a delta, we wouldn't get any EBITDA for it, but that is at least north of $500 million additional borrowing capability to not yet hit the leverage hurdle.

And where would the leverage go once you close MedServe?

I think we're still definitely below three, and there is room left. Our comfort level, as we said, and a very easy comfort level, is between two and three from a debt to EBITDA, but we are not afraid to go at times over it. And then it comes down fast. If for instance we don't do repo's or it's a little too low on acquisitions, it comes down very fast. And obviously there's also EBITDA that comes with an acquisition, and that obviously helps also.

Okay. And turning to the guidance of a little bit, could you tell us what tax rate is implicit in your preliminary 2010 and your Q4?

I think if you look overall, you're talking somewhere -- a lower -- in the low to mid 37, so 37.2, 37.5.

Okay. And then the margin trends and the SG&A spend in 2010, any material changes versus what we see in '09 and in recent years?

I think right now SG&A, again, and continuing, it's arcing low to mid 19s, and on the margin improvements at year-end over year-end of definitely about 80 basis points. And that SG&A will probably come a little bit heavier in the beginning of the year, and then with our growth we will grow into that.

Maybe one last one. Any trends we should keep an eye out for on the regulatory front, to watch healthcare legislative debates or anything else that you expect to be noteworthy as far as your business is concerned?

Well, I mean, I think the two things we have seen are the new incineration reg's, which really are not that much of an issue for us. A couple of hospitals I know are closing down their incinerators, but we are not having any problems with that.

The pharma reg's, and the push on that of course is what's driving the pharma waste program like we talked about earlier, that we think is providing an opportunity for us and -- to help the customers out.

Thank you.

Greg Halter.

I think in the past you've talked about possibly getting up to operating margin numbers into the mid 30s, I believe. Is that something you still envision over the coming years?

Yes, definitely. If you think again, the growth opportunities in Steri-Safe, the growth opportunities in Bio Systems and further density there, those are all opportunities for us to obviously improve margins on. We still see opportunities operationally in transportation for instance to improve our efficiencies. So those are definitely goals that we still have.

Okay. And on the Steri-Safe side, I believe last quarter you talked about entering Canada. Can you provide any commentary on how that effort is proceeding so far?

Yes. We've actually had very good response in Canada in the initial rollout. And we are looking at other markets as well. But again, we see this whole platform, as we keep building our business and follow our business model to establish a good customer base and then provide additional added -- higher value services to that customer base. And we are pleased with what we see in the uptake.

Any kind of update on the water, the water pathogen side of things? Is that still in a trial phase?

No. The water pathogen is one that's on hold for now. We are putting more emphasis -- we really like what we see of the RX pilot coming off and going into rollout, the opportunities with helping the healthcare facilities with their select haz materials, particularly as it ties to their pharmacy and lab work. And then also our ability to keep driving the Steri-Safe or Steri-Safe-like programs domestically and ramping international.

And Frank, can you provide where the current all-in rate on your debt is?

We have -- right now we are paying on our overall debt, LIBOR plus 75 on the incremental borrowings on our revolver. On our term loan it's equivalent to about LIBOR plus probably 325 with the amortization of fees and everything. Our fixed rate debt, obviously the private placement is 564. Most of the foreign seller debt is somewhere in the range -- on average probably around 5 to 6. And then any of the other foreign bank debt, that ranges quite a bit because now we are in countries like Argentina, Mexico and the like, so those rates can anywhere range from low teens to high teens.

And I missed your commentary on the share repurchase, how many shares were purchased? I think you say a $41.2 million cost, but I didn't get the shares.

It was about 848,000 shares.

Were those done mostly late in the quarter?

They were done at the latter end, yes. Not totally, but more spread to the back end, yes.

All right. And the acquisitions you spoke of, the five domestic and one international. Any idea or estimate on number of employees that you may be bringing on? Or is this more just assets?

Well, you have obviously infrastructure to come with it in those, but you do have some synergies, and -- but overall I don't right off the top of my head know the number of employees. I apologize.

Not a problem. The reason I ask is Waste Management in great timing today said they are buying a company in Salt Lake City. It seems awfully small. But just wondered if you had any kind of knowledge or input relative to that.

We were aware of that company. We had looked at it. We decided not to pursue it. We do know the company covers Utah and California and I think Idaho. And they have some hospital work in all three of those states.

Okay. The state numbers I'm coming up with show one to four employees, which doesn't sound very large to me.

It was not a very large company. Like I said, I think they had a few hospitals. They were operating in a three-state area. My exact recollection of the number of employees, I can't tell you. But it was small. We knew about it. It was not one that we decided to pursue.

So that deal probably will not be vaulting them past you anytime soon.

I don't know. I guess (multiple speakers) it's a small deal.

I'm being facetious. Thanks a lot guys.

Richard Skidmore.

Good afternoon. Just want to touch on two topics. First, on the gross margin where gross margins on a year-over-year basis are up pretty significantly. Can you talk about how you feel about the sustainability of those gross margins and how you feel that gross margin number moves going forward?

Yes. I think from a forecasting and planning point of view, foreign-exchange -- and there are no acquisitions, but foreign-exchange holds fairly stable, so the ratio of domestic/international holds stable. Then you should see a margin improvement year-end over year-end, up about 80 basis points. So I think sequentially that's somewhere -- 15 to 20 basis points Q over Q is the rough math there. And so you always kind of need to take the last quarter into consideration when you look at forward projections.

When you look at the gross margin improvement that you've had, can you break down where that is coming from? Is that just the increased growth on the Steri-Safe within your small customers?

I think obviously year-over-year there's been a nice improvement as a result of the overall energy. But then on top of that you have obviously efficiencies from the acquisition, so the integration of those acquisitions. But energy is definitely one of the larger ones if you compare year-over-year. And then you get the growth from Steri-Safe, which incrementally has strong margins, the improvements in margins over time with the density in Bio Systems, and then other services that we are looking at that are at higher margins.

And then just shifting to Steri-Safe for just a moment, as you go out and have your salespeople pitch Steri-Safe as an offering to your customers, what's the success rate of those pitches?

So if you really look at the ability to get to the higher levels from a sales point of view, to preferred and select, again 80% of customers incrementally of the customers in the quarter came onto those programs. So again, we have been very successful signing people up for the higher programs, where in essence if they had to parse it out into individual kind of services from other people, the cost would most likely be higher, and this could mean a savings for them if they were doing it before.

But I guess the question I'm asking is, what's your batting average as you try to move those customers? And can you -- are you hitting -- are getting a 100% essentially success rate? Or are you hitting 50%? Or are you hitting 10%? And what kind of ability do you have to improve that average?

Well, I think the close rate is very good because of two reasons. One, the numbers of folks who basically call in to establish service and move right on to Steri-Safe, a very high percentage. And then the rest of the folks that we're marketing Steri-Safe to are existing customers who have had our medical waste service for a long period of time. When we give them the value proposition for Steri-Safe, it's a pretty compelling proposition, and we have a high close rate.

Thank you.

(Operator Instructions). Michael Hoffman.

Just a quick point of clarification. The 37.2 to 37.5 was for the fourth quarter and 2009? Or one or the other?

Which one were you referring to?

That's the tax rate question.

That is the tax rate for next year, 2010. That was the question -- what would the guidance be for '10?

What about your fourth quarter?

Fourth quarter is probably going to be a similar range.

Okay. And then it seemed like a big positive working capital move in -- the helping the free cash flow. Is that a timing issue?

No. I think there is a little bit of payables, but I think we've done a continued good job on bringing the DSO down. If you compare it to year end, it was about 57. Now we are at about 52. So that obviously is a nice improvement.

Where do you think it can go?

It depends. Overall we are very pleased with it. I think from a modeling point of view, if you keep it around that level, I think that would be conservative.

Okay. So using 50 days from 2010 would be reasonable?

That's up to your modeling.

Yep. Okay. And then the difference between second quarter and third quarter, 430 goes to 440. How much of that is new customers through your sales force versus you acquired it?

There were definitely acquired it. We don't totally break it out. As Rich indicated, there were 70 new Bio Systems, 56 new on the LQ side. But it's a combination between acquired and new some of it was the new customer growth on the small quantity and the large combined.

All right. And then in the guidance you gave for 2010, what underlying customer number are you assuming?

We don't. We don't give that. From a detail, again, modeling of customer quantity is not something we recommend.

And then on the fuel surcharge issue, clearly that had a negative revenue impact in the third quarter, because if you put a surcharge in last year, you'd be rolling it back this year. How much of your margin improvement was accounted for for the surcharge?

I think as you look year-over-year, you probably are looking at roughly -- let me look at my notes here. Give me one second. You are probably somewhere in the 120, 130 basis points.

And then in the 80 basis points, how much are you assuming is flushing out the surcharge?

There really isn't.

Thanks.

There are no further questions at this time.

Well, we thank everybody for your time, and we look forward to having a great fourth quarter call with you. Drive safe everyone.

This concludes today's conference. You may now disconnect.