Stericycle Inc (SRCL) 2013 Q3 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle third-quarter 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 call over to Dan Ginnetti, Vice President of Finance. You may begin your conference.

Thank you, Mike. Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank ten Brink, CFO; Rich Kogler, COO; and Charlie Alutto, 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-Qs, 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 the expected results. The Company makes no commitment to disclose any revisions to forward-looking statements or any fact, events or circumstances after this date that may bear upon forward-looking statements.

I will now turn it over to Frank.

Thanks, Dan.

The results for the third quarter are as follows. Revenues were $534.6 million, up 11.3% from $480.5 million in Q3 of 2012, and internal growth, excluding returns and recalled revenues, was up 6.5%. Domestic revenues were $378.1 million, of which $353 million was domestic regulated waste and compliance services and $25.1 million was recalls and returns. Domestic internal growth, excluding recalls and returns revenues, was up 6.4%, consisting of SQ up 8% and LQ up 5%. International revenues were $156.5 million, and internal growth adjusted for unfavorable exchange impact of $5.3 million was up approximately 7%. Acquisitions contributed $34.1 million to the growth in the quarter.

Gross profit was $241.4 million or 45.2% of revenues. SG&A expense, including amortization, was $102.3 million or 19.1% of revenues. Net interest expense was $13.3 million, and net income attributable to Stericycle was $80.5 million or $0.92 per share on an as-reported basis and $0.96 adjusted for acquisition and other nonrecurring expenses.

Now on the balance sheet, our covenant debt to EBITDA ratio was 2.1 at the end of the quarter. The unused portion of our revolver debt at the end of the quarter was approximately $622 million. In the quarter, we repurchased 421,060 shares of common stock on the open market in an amount of $48.4 million, and we have authorization to purchase an additional 2.8 million shares. Our capital spend was $16.9 million, and our DSO at the end of the quarter was 62 days. Q3 year-to-date as reported cash from operations was $335.3 million. When adjusted for a $41 million customer deposit for recall reimbursement, year-to-date cash from operations was $294 million.

I will now turn it over to Rich.

Thanks, Frank. In the quarter, we closed 17 transactions, seven domestic and 10 international. The international acquisitions were three in Argentina, two in the United Kingdom, two in Romania, one in Mexico, one in Canada and one in Spain. Revenues from the 17 acquisitions were approximately $3.9 million in the quarter, and annualized are approximately $60 million. We continue to use our strong free cash flow to drive our growth through acquisitions. Currently our worldwide acquisition pulled remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business.

Looking ahead, we remain excited about our growth opportunities. The record number of acquisitions in this quarter expands our customer base and the geographical reach of our services. This increasing customer base provides a long-term growth platform for selling multiple services such as SteriSafe, StrongPak, Sharps Management and Pharma Waste that can more than triple the customers' revenues.

At the end of the quarter, we had approximately 561,000 accounts, of which approximately 542,000 were small; the remainder were large.

In closing, I want to thank each member of our worldwide team for their strong performance and continued commitment to our customers, our shareholders and our values.

I will now turn it over to Charlie.

Thank you, Rich. I would now like to provide insight on our current guidance for 2013 and 2014.

Please keep in mind that these are forward-looking statements and our guidance does not include future acquisitions, divestitures, integration, acquisition-related and other non-reoccurring expenses.

For 2013 we believe analyst EPS estimates will be in the range of $3.72 to $3.73. We believe analyst revenue estimates for 2013 will be in the range of $2.13 billion to $2.145 billion, depending on assumptions for growth and foreign exchange rates. We anticipate 2013 internal growth rates to be SQ 8% to 10%, LQ 5% to 8%, international 5% to 8% and recall and returns of revenues between $95 million to $100 million. We believe analysts will have estimates for 2013 free cash flow between $353 million to $357 million.

2013 CapEx is anticipated to be between $67 million to $70 million.

Now I would like to provide preliminary guidance for 2014. For 2014 we believe analyst EPS estimates will be in the range of $4.11 to $4.16 and a share count of $87.6 million, which we are comfortable with. We believe analyst revenue estimates for 2014 will be in the range of $2.32 billion to $2.35 billion, depending on assumptions for growth and foreign-exchange rates. We anticipate 2014 internal growth rates to be SQ 8% to 10%, LQ 5% to 8%, international 5% to 8%, and recall and returns revenues between $100 million to $120 million. We believe analysts will have estimates for free cash flow in 2014 between $392 million to $397 million. 2014 CapEx is anticipated to be between $70 million to $75 million.

In closing, we are very pleased with our Q3 results and excited about the multiple growth opportunities for the future. Thank you for your time, and Mike, I will ask you to open up the Q&A line.

(Operator Instructions). Ryan Daniels, William Blair & Company.

Frank, let me start with a few for you, housekeeping items. The tax rate was a little bit lower this quarter than we anticipated. So can you give us a little color on how that might shake out in Q4, and then what are your tax rate assumptions for the EPS projection you provided for the forward year?

For the year of 2013, it's about 35%, and then for next year, it's about 36%.

Okay. Thanks. And then in regards to the $41 million deposit you mentioned for returns and recalls, is that actually for you to go out and buy inventory?

And second question related to that, how quickly will that flow through the income statement? It sounds like that will be pushed out given that you really didn't change the guidance for this year on returns and recalls.

No, so this is what this is. A customer may, at times, put money with us that we used to reimburse for incoming product. This is not a revenue for us. This is just money that we are asked to use to reimburse for recalled products. So this is not an issue on an income statement for us. It is just a deposit with us that would then get outbound to their customers.

So in this case, we've had this in 2011, if people remember, kind of a larger deposit made. In this case, it also was a larger deposit on a recall that we are working on.

Okay. Perfect. And then maybe just a couple big picture questions, one on Patient Communications, if we could get an update there. I know you are through the integration of Beryl, and just want to get a feel for if you are focusing more on M&A there or what you are seeing on the organic growth front?

Yes, I think on the M&A front, there were two deals in the US that were Communications Solutions deals, so we certainly are focused on M&A. Sales efforts continue to evolve. The Communications Solutions team are starting to work very closely with our SQ and LQ sales teams, leveraging our relationships. The opportunity is out there right now in the marketplace, especially with consolidation that's going on in healthcare line, where folks want to deal with one vendor for like services, and Communication Solutions certainly falls within that. We are seeing evidence that there are more RFPs in this area, and we have won some nice contracts with some leading IDNs in the US.

So was that mostly replacement opportunities out of existing vendors, or are you seeing greenfield, too, where people don't utilize some of these communication services? Is there a heavier weighting towards one in the organic growth outlook?

It's a combination. It is taking some market share from other folks in the industry. It is also where folks are doing it in-house. So hospitals or doctors are doing some of these functions in-house, and they are now outsourcing it to outside providers.

Al Kaschalk, Wedbush Securities.

Charlie, just to follow up on the Patient Communication question, is this something where, I guess, that you are focused more on LQ at the moment or, given the platform with Beryl, that the marginal customer coming in right now is on the SQ side?

Yes, I think it's both right now. We don't have one focus or the other; we are looking at the bigger picture. Obviously, when we first got into this space with the NotifyMD acquisition, that was more SQ focused. Beryl gave us a nice platform to now add the LQ into the mix, and there is some crossover. There are some services like after-hour answering services that we sold on the SQ side, but now there's consolidation in the industry and large IDNs wanting to have one service provider to handle all their after-hour calls. So there is a lot of crossover of some SQ-like services that are now going into the LQ space. So it's really both that we are going after, both the LQ and the SQ.

What are the concerns or areas of touchpoints that your potential customer base may be expressing at this time for this service line?

I think if you look at it, that there are many different touchpoints. On the LQ side, like I said, if they are looking at all the locations they have, they might be looking for after-hour services, one vendor to provide a consistent after-hour service for all of their locations. Post-discharge calls are getting a lot of attention now because of the reimbursement rates changing. Doctors office needs have become more efficient, so products like appointment reminders certainly are a hot topic. So it's really across the board. We are seeing different touch points in different facilities that we are servicing.

You expressed the words there's a lot of work to do in this area, and that is both an opportunistic phrase, as well as challenges. Are there any conversion issues that you are coming across now that you can share or anything of that nature?

I think it's the same that we said before. I mean we are still working on building a common platform internally, which will help us better service our customers, and that's really the main play right now is platform software so we can do a better job consolidating some of the business that we've acquired.

And just a clarification -- 17 transactions, it sounded like two on Communication Solutions. What were the balance of the M&A service line?

The other 15 were all in regulated waste and the compliance services.

Okay. And then finally, I mean I hate to sound like I've been asleep a while here, but obviously the Affordable Care Act has had some impact on the business. Maybe it hasn't, but could you share your thoughts on what this is doing or perhaps not doing to the end market? And maybe, constructively, what the opportunity is, say, in 2014 and 2015?

I don't think our view has changed on the Affordable Care Act. It has been in a lot in the news right now. We think as it all plays out that, there will be more people that are covered by insurance. That creates more volume, more volume potentially at SQ sites, which we think is a good thing for Stericycle. I think we are seeing some evidence with this consolidation that larger IDNs who want to consolidate and go with one service provider, so certainly we have seen some evidence of that. I think it is creating some uncertainty in the healthcare market, so it could potentially slow up the sales cycle and make the sales cycle longer on some of these. But I think those are the views that we have had for the last couple of quarters, and that really hasn't changed at all. And I think that goes forward into how we feel 2014 will play out.

David Manthey, Robert Baird.

First off, on the tax rate, Frank, could you talk about why it was lower this quarter specifically? I think your guidance had said it would be in the high 35%s. I think it came in at 32%. Could you talk about that?

Yes. Q3 is obviously a timing where there potentially could be some release of all the reserves with respect to the statute of limitation, and that's what benefited the rate in the quarter.

Okay, and second, throughout all of 2012, both domestic LQ and SQ growth was at the high-end of your targeted internal ranges. And I'm wondering, was there anything specific in terms of what moved the needle there? Did you ramp some major projects or something? And more broadly, I know you were talking a lot more about StrongPak and some of the retail opportunities you had there. Could you talk about how you charge for the StrongPak service, and is there sort of a channel fill situation there or not?

I think, just to address StrongPak, as we have talked before, it's a service that we are now offering nationwide. And the way that we charge it basically is it's on a per-stop basis in some cases. In some cases, it's a flat rate. So it's tailored to the customers' needs.

So we still look at 750,000 retail locations in the US and a market opportunity of $1 billion of revenue.

The good thing is we know route businesses, know how to service customers who need compliance and waste disposal services. So we still think StrongPak is a very critical part of our growth.

Okay, but there was nothing specific, no specific major programs or anything that ramped up during 2012 that moved the needle higher than normal?

I think the thing to keep in mind, and we have said this, I think, in prior conference calls, growth rates vary quarter to quarter. That's why we give you a range of growth rates for LQ, SQ and the like. And I think that StrongPak did contribute in 2012, and it will continue to contribute, but the StrongPak customers do come in in large amounts. It's a major contract with a major chain. So you will see some impact on growth rate comparability.

Okay, and then finally, along the same lines if you could address Patient Communications, is that an activity-based or subscription-based type service? Just help us understand how you are billing for that.

Yes, it is a good question, David. It is a recurring revenue, so it behaves a lot like our core Med Waste business in StrongPak. These are longer-term contracts with predictable revenue that comes along with them.

Okay. So it sounds like it's subscription-based, then, not based on number of calls taken or anything like that.

It's a combination, depending on the service line.

Scott Schneeberger, Oppenheimer.

Hi, guys. This is Dan Hultbert filling in for Scott. Going back to StrongPak, can you give us an update how that contributed in the quarter and also how you are thinking about the contribution when it comes to 2014 guidance?

Yes, we don't break StrongPak out specifically. You will see it, obviously, contribute to the growth rates in SQ and LQ, but we don't break it out specifically.

Okay, fair enough. Also, as far as guidance goes, what kind of gross margin expectations should we think about?

I think, again, if you look at the gross margin for next year, again, you take Q3, you probably have your normal 10 to 15 basis point improvement. There will be a slight lift from the mix impact on the acquisitions, but that's a little bit offset by also higher SG&A expense. And then for next year, again our normal trends, about 10 to 15 basis points quarter over quarter is what we would guide for.

Great, one final for me, please. As far as your international growth in the quarter, can you take us a little deeper on the contributors here in terms of RMS, Sharps Management and Clinical Services, please?

On the breakdown for international growth, we did talk about a larger recall project that we had in Q2 that was about a 1% to 1.5% increase. We did not see that again in Q3. We did have a 7% growth, so a good quarter in Q3 on international growth. We see the European escalators slowly improving. We are starting to get traction on clinical services, certainly, and now with Sharps Management. And then now we are offering more of a recall type business in Europe. We might see the growth rates fluctuate quarter to quarter, depending on how large a recall that we handle on that particular quarter.

Shlomo Rosenbaum, Stifel Nicolaus.

I just want to go back to a question that was just asked before, just in terms of the mix of organic growth rates, and I appreciate your comments that the organic growth rates can move around quarter to quarter. But did you guys sense that there was any change in the momentum of your business in the underlying basis at all, or does it just seem to me like exactly that, that there's an anomaly -- I would even say an anomaly, but just sometimes it's higher, sometimes lower. I guess the question is, should we think about the growth rates going forward being towards the lower end of the range because of tougher comps versus what we saw over the last year?

No. I think, to answer your question directly, there's really no change in the underlying business, and we see all eight cylinders still hitting. And like we said, we are within our guidance. We have given indications of where we are going to be next year. The growth rates do vary, and the comparability can be a number of factors influx with larger contracts or StrongPak or, as Charlie alluded to, other things that may be going on. But, frankly, we see pretty much steady-state going forward.

Okay. And then just on the domestic front, can you give, at least qualitatively, more detail in terms of the growth coming from areas like Sharps, Pharma, SteriSafe, StrongPak? Is there one area that was doing particularly better or doing particularly worse in the quarter?

You know, actually I think they are all doing pretty much online. I can give you an anecdote. This quarter we signed our largest pharma customer ever, a dramatically large customer. The team did a great job. They have been working that for six months. So those are indications to me that that multiple service, as well as the others are gaining traction. StrongPak has been a good contributor. So I don't really see any change in what we have discussed in prior quarters.

Okay, and then, Frank, tax rate for 4Q specifically, can you just tell us what to expect?

Say that again? Tax rate for which year? For 4Q?

4Q this year -- no, 2013, next quarter.

Oh, for the year? So it will be roughly 35% for the year. That's the rate I would use for the year.

So I should use the roughly 33% this quarter and average them out for --

Yes, and then average out so you get roughly to a 35%.

Okay, and then in terms of the organic growth in international leases, Charlie, I've talked to you for a while about that, eventually accelerating the 7% growth we saw this quarter. Is that something that we should think about over time, over the next, say, year or two, that we should expect better organic growth out of international?

Yes, I think it's safe. We gave guidance; it's going to be 5% to 8%. Obviously, we are coming off two very good quarters, but obviously there's a lot of different markets that we are in. Things change on the pricing front. But we are very confident we will be in the guidance range next year 5% to 8%.

Okay, and I guess my last one and I'm going to jump off -- can you just go over the geographic breakdown of those acquisitions again? I missed a bunch of that.

There were two in the UK, two in Romania, one in Mexico, three in Argentina, one in Spain and one in Canada. That's a total of 10 international and there were seven domestic.

Kevin Steinke, Barrington Research Associates.

I was just wondering if you could speak to the mix of SQ versus LQ business on the regulated waste acquisitions that were made both domestically and internationally, please.

Yes, the mix was about 30% SQ, 70% LQ.

Was there any big variance, international versus domestic, or do you care not to break --

International had a slightly higher tend toward LQ, but not a lot.

Anything unique about the Communication Solutions acquisitions that you made this quarter?

No, just the ones that we had done before and, over time, really good synergize to be in our business.

Okay, then lastly, what sort of expectations do you have baked into 2014 for SG&A as a percent of revenue?

Yes, I think if you look for the year with the acquisitions that now came in for the year, you are looking roughly at 19.3%, roughly. That's an approximation of a percent of revenue. Again, that's SG&A, including amortization at stock option expense.

Michael Hoffman, Wunderlich Securities.

Charlie, on the international growth, historically there has been an uptick in the fourth quarter that -- there's a seasonal aspect to that. Should we be expecting that trend, or has the mix changed enough that maybe that doesn't happen?

And you are referring to internal growth, Michael?

Yes, yes. Just when you look at it sequentially, you have a much stronger fourth quarter sequentially than you do through the course of the year, and it's just a pattern of that going back several years.

Q3 tends to be a little slower in some markets like Europe from an overall business standpoint. So you can say that internal growth has an impact. But when we are giving our internal growth number, it's prior-year guidance. It's prior-year compared to this year. So that's really in the comparable for internal growth. In general, though, I will tell you that international business Q3 in Europe is slower.

Okay. And then on the SQ domestic organic growth, when we look -- and I think I got the number written down, it was coming quickly -- I think 8%? Is that right?

That's correct.

So how would you break it up between the price and volume component of that 8% versus the ancillary services part?

It's a little bit over the CPI on the price side, and then volume in the industry is obviously a little better on the SQ than the LQ. So that's a couple percentage points, and then the rest is the additional services.

Okay, so if I work that math, CPI is running around 2%. So on SQ it splits pretty evenly between price and volume and ancillary services?

Yes, that's a good approximation.

For the quarter, okay. And if I think about that 4%, how what I divvy that up just proportionally between Steri-Safe upselling or StrongPak or Patient Comms? Who is making the contribution in the quarter?

It's even very difficult for us to split that out because here is a customer that went from transactional maybe to SteriSafe, but we don't really equate volume necessarily after it. So it's very difficult for us to measure that ourselves. So we do it as a combo in total.

Okay, but one of the theses in the story is there's this great opportunity to continue to upsell. So you have to have some data point that says, well, we went from X number that didn't -- that was at the base level that now they are in the middle level or they are in the upper level versus we have so many StrongPak customers or we don't. Right? Isn't there -- even at that level, you should be able to figure out --

Yes. So what happens is the revenue per account, for instance, for three-doc practice may be somewhere in the 1200 -- 1000, 1200 per year for medical waste, and then we can more than double that if they sign up for the whole suite of SteriSafe. So that gives you a flavor of what the opportunity is.

But again, we don't break it out afterwards how much was volume afterwards because that's not what is being tracked.

So then, I guess, from a management standpoint, how do you know whether you are being successful at improving in the upsell, just looking at the total dollar per customer?

Yes, again, like I said, you have a customer that you have roughly a revenue on. And then in total, you see that that revenue per customer is going up because they are signing up for those additional services.

Right. And I get that. But at what point, when do you realize that I should stop pressing so hard on SteriSafe and focus more on the other ones if you are not actually tracking the individual contribution?

Again, they all contribute, Michael. And so it is part at the end you need to look at the growth rates. So an 8% includes that. So that is a very important part in the picture. That will tell you that things are on track.

Erin Wilson, Bank of America.

Thanks for taking my questions. On Patient Communications, how penetrated are you in your addressable market in that arena now, and where do you think that can go over the near-term and longer-term? Do you hit some sort of meaningful inflection point at some point? And are there any potentially new regulatory issues in that particular arena that you could offer a service for as well?

Yes, I think we probably got a long way to go on the addressable market. When you think of the market opportunity as greater than $2 billion, obviously we are new into this space. We don't break it out, but it's one where we've got -- we are in the early innings from a rollout.

So from an opportunity, Erin, this has got a long run ahead of us. I think your other question is, are there other services that we could add based on changes and regulations? Certainly, we are looking at that. We feel very comfortable where we are on the services we currently have. But over time we will probably add additional services to that suite of menus that we give out on the whole Communication Solutions business.

Okay, thanks. And I think before, previously you said you are about 10% penetrated for the Pharma Waste. Could you give an update on that metric?

Yes. I don't think we've actually broken it out like that, but as we've said before, we continue to have good success, which is reflected in the LQ growth rates. And obviously, it's a $200 million plus market opportunity that we have really just entered in the last couple of years.

David Lewis.

Just one question, Charlie, I know the tone of the call is that metrics or trends really haven't changed in the results. The one area, though, that stands out to us is the LQ business across the last four quarters. If you look at the 2012 period, it certainly stepped up from an organic growth period versus the 2010-2011 period. So there was a material step-up a year ago, and that trend continued.

But in the last four quarters, we have seen LQ organic growth go from upper single digits or 9% down to around 5%. That's a four-quarter trend down. Can you just maybe talk to us through some of the factors that may be explaining why that has gone down four quarters in a row and why that is not a trend?

Yes, I think when you look at LQ, you are talking about larger contracts. They are going to vary from quarter to quarter depending on the timing of those contracts. Whether or not we get a whole IDN that, let's say, takes our pharmaceutical waste services on, that's going to be a large influx of Rx waste. StrongPak plays into LQ growth as well. So when you have StrongPak and Rx waste over LQ and it all comes in at one time, you can't have that going on to the upper end of our range of 9% in a particular quarter. So I think that really is the biggest impact on LQ, David.

Okay, and Charlie, sorry, one more quick question based on something you said earlier. One of the interesting things about HCA may actually be that virtually every hospital CFO we talk to is preparing for actually declining utilization in an inpatient basis and expanding utilization in outpatient or ambulatory care. That dynamic alone should be a positive mix driver for Stericycle. Have you in any way begun to -- first off, have you seen it in your business this year or last year? Do you have any way of quantifying what that could mean to your business on a multiyear basis?

We agree that the trend is heading in that direction. I think it aids both of our medical waste and compliance business, as well as our Communication Solutions business. I don't know if we have seen it meaningful enough yet to quantify it, but we have seen some contracts, like I said, especially on the Communication Solutions side that as they are growing their base of off-site services to meet Obamacare and these ACOs are being created as well, they are looking at one service provider for a suite of services. And I think that certainly fits in well for both our compliance services, as I said before, and really now on a Communication Solutions side of the business. So we are seeing it in some RFPs and some wins, nothing meaningful at this point, but certainly the trend is heading in that direction.

Isaac Ro, Goldman Sachs.

The first one I had was on the international business, the second one on ACA. On the international business, just wondering if you could maybe summarize the year-to-date margin improvement you think you've seen, if you had a quantitative way to measure that. And the reason I ask is just trying to figure out what you think that trajectory looks like over the next 6 to 12 months as you factor in the most recent range of deals on the international market expansion piece of the story; it's obviously an important one.

I think the international, like the US -- their goal, too, is -- and then that's obviously what they are trying to achieve is continuously adding that 10 to 15 basis points quarter over quarter through internal improvements.

What you, however, do have happen in that sector is the larger size of acquisitions relative coming in, and that can many times fluctuate the mix for them. So you may have, as a result of that, see it not necessarily all the way come through the EBIT.

Q3 normally for them is a fairly flat quarter to sometimes even slightly down because of the volumes in Europe, as Charlie talked about, and then it picks up again in Q4 a little bit.

Okay, and then on the ACAPs, I'm just wondering Charlie alluded to the increasing cadence of conversations regarding consolidation of services such as yours. And I'm wondering if you could talk a little bit about the complexion you deal with when you speak with these IDNs? Is it typically a CFO? Is there a Chief Procurement Officer that gets involved? I'm just trying to figure out where you have had the most success in penetrating senior management levels within these networks so that we get a sense of how quickly that sort of dynamic could take hold as ACA becomes a little bit more transparent of a process.

Yes, I think the good news is when we first started in the business, our point of contacts were more just in procurement and maybe environmental services because what we were selling were just waste services. I think the sales team has done a great job of building relationships higher up in the organization, and certainly building those relationships and at the same time building the Stericycle brand has led us to an opportunity to start dealing with -- depending on the service, though, Isaac, I mean if it's Communication Solutions, it's going to be more marketing or support services. If it's pharmaceutical waste, it could be Chief Procurement Officers and pharmacy directors. It really depends on the service that we are selling in there. But in the end, we are having better luck as we have higher relationships within the IDNs, within the hospitals.

If I could ask one last clarifying question on that item, if I look specifically at the classic SQ/LQ parts of the business and then try to assess where you guys have had the most success, could you characterize if you at this point have spoken with maybe the majority of the major IDNs, or is it still in the minority when it comes to the classic businesses and having conversations at a pretty senior-level?

On looking at a whole suite of services, it's a minority at this point. So we think it's a great opportunity as we move forward to talk to more and more, and some IDNs are just not at this stage. They are more acquiring right now and not thinking about building platforms, so it really depends on where they are at.

Sean Dodge, Jefferies.

Going back to pharmaceutical waste, when you look across the hospital landscape, where do you think compliance rates stand currently when it comes to properly disposing of that stuff? And secondly there, how big of an inflection in demand for that service did you see after pharma waste became part of the JCAHO on it?

I think compliance rates are still relatively low, and the reason for that is it's a lot more state-driven from a regulatory standpoint. Having JCAHO now look at the program and start to ask the hospitals about compliance certainly helps. We've seen some evidence that that has helped us in some of the sales in the last 12 to 18 months. But this is still more of a state driven. We have some states that are definitely focused on this, and we see compliance rates a lot higher. In other states, they are lower.

Okay. And how long ago was pharma waste added to the JCAHO audits? How long have they been auditing for that now?

A little bit over about 18 months.

Richard Close, Avondale Partners.

A question here on, I guess, the internal growth rates, and as we think about 2014 -- and I just want to touch on the large quantity being at the low end, at 5% to 8% but most recently 5%. If you think about next year at the 5% to 8%, what gets you, I guess, from the low end to the upper end in terms of 2014 on the large quantity, maybe the puts and takes on that line item, please?

I think if you look at the contributors to growth, it's Sharps Management, Rx waste and StrongPak. So if all three hit at a very good pace, then it gets to the higher end of the range. It's not like we are adding new services to get to the higher end of the range; we are comfortable with the services that we have. Depending on timing of contracts and larger contracts, it will depend on what we do in the quarter. And obviously it's going to vary quarter to quarter. But those are the three contributors to growth that certainly impact it. So if all three hit on a high rate, we are going to be at the higher end, but we are very comfortable with the range.

So when we look at the internal growth rates for all the divisions for next year, are you assuming any additional product lines coming into the business like Patient Communications or StrongPak, anything like that, that helps assist growth going forward, or is it just what's in your bag right now?

Well, I'll answer it two ways. Certainly it's what's in the bag right now, but we are always enhancing the program offerings, which sometimes helps escalate the sales process. We are comfortable with what we have right now, but we are always looking to make improvements to those offerings.

Okay. Have we seen in any of the acquisitions any additional service lines or offerings that maybe are not in a prime time, ready for prime time mode right now, similar to StrongPak, I think, a couple years ago that you got through an acquisition?

No, not in this last quarter.

And maybe the quarter previous? Any time this year, anything that you can talk about that you are incubating?

In the previous quarter, we did the RMS deal in the UK, which added to our platform in Europe.

Okay. Final question from me would be, as you look at the divisions, the domestic, SQ and LQ and then you think about international, international seems to be on an uptick over the last couple quarters. Maybe LQ trending down, as was noted earlier. Where do you see the most opportunity in 2014? What do you think is going to be the area that shows the most strength?

I think the benefit of Stericycle is we've got multiple opportunities within each of the markets. So we feel really good about SQ with SteriSafe and StrongPak and LQ with pharma waste, Sharps and StrongPak hitting the LQ line as well. And the international market with the expansion of RMS now and Recalls and Returns and Clinical Services and Sharps Management, certainly we feel good about all three of our main lines of businesses in those three areas.

Okay. And I will slip one final one in. Just, Frank, just a clarification. On the SG&A expense as a percentage of revenue, the 19.3% number that you threw out there that includes the amortization and stock comp, was that for this year or for 2014?

In fact, it's equal this year to next year, which really would mean that Q4 will be a little bit higher. And that's, again, a result of the influx of acquisitions that were running at a higher rate. So the SG&A in Q4 is probably going to be somewhere around 19.6%, but the margin also got benefited there a little bit to gross margin. As I mentioned, the acquisition mix was favorable there.

Barbara Noverini, Morningstar.

With customers wishing to consolidate services into one contract, are you gaining better ability to craft longer contracts in exchange for being a one-stop shop? Perhaps you offer customers smaller price increases year over year if they accept a larger suite of services and stay with you for a longer period of time?

It hasn't really changed the length of the contract in the LQ space, 3 years to 5 years on the SQ space 5 years. So it really materially hasn't changed the length of the contract, Barbara.

Okay. Are those contract lengths similar internationally as well?

It could be a little bit longer. International has a greater variance internationally where they could be as little as a year but up to 10 years in certain geographies.

Jason Rodgers, Great Lakes Review.

Good afternoon. Looking at the other expense line, the $1.3 million, could you indicate what that was?

That can fluctuate based on things like currency. That's probably the biggest swing factor that can happen there. And the rest, it's a whole slew of things. It can fluctuate and has so between anywhere like a $0.6 million to $1.5 million. Currency is a big driver there.

Speaking of currency, what is your estimate for the currency impact on sales for the fourth quarter?

Again, that's too early. It will, overall -- still FX is a little bit of a headwind. We see that the currencies in Latin America are weakening a little bit, so we do anticipate that currency will have an impact, probably a couple of million dollars at least on the foreign exchange in Q4.

And when you indicated you signed up your largest pharma customer ever in the quarter, what business was that?

We don't disclose any customer information, but it was. Oh, I'm sorry. It was Rx waste -- pharma Waste, I'm sorry.

And then finally, Accounts Receivable up 18%, a little bit higher than the sales increase. Is that just due to the acquisitions?

Yes, that's acquisitions. If you did the -- as I mentioned, the DSO calc was a day down versus the prior quarter. There were obviously only $3.9 million in revenues in the quarter for those acquisitions. So if you did your average daily sales, you would be too low what the ongoing amounts are on the balance sheet representing that receivable.

Stewart Scharf.

Would you talk a little about the general market environment? I mean your growth rates, your guidance is generally consistent into 2014 and hasn't changed much watching that consistent growth. What would change any of those range, the range of 8% to 10% SQ international? Are there any specific markets that would impact those forecasts?

No. I think we give a pretty wide range. So I think there are material changes -- not material changes; let's say, European had a price slowdown in RPI pricing that has an effect on the business. But because of the ranges we gave, I think we feel real comfortable that if there is something in the marketplace that we'll still be within that range, it's a steady market for us on all the different fronts on our business lines. So we don't really anticipate anything that would have it fluctuate greatly from the guidance that we provided.

Okay. And regarding the recalls and returns, you are looking at $100 million to $120 million in 2014. How do you arrive at that range? Is it just based on historical recalls or --

Yes, I think the historical side -- obviously, the recall trend is they have had continuously more recalls in this year versus last year. We have a very good repeat side in that business, so that obviously feeds the funnel over time. And then the difference between the $100 million and the $120 million is really having or not having larger recalls in the year or not.

Okay, and as far as acquisition multiples, would you say it's still in the historical range, 4 to 8 times, or is it closer to the 8 times now?

No. It's definitely in the 4 to 8 times, and that was also true for the third quarter.

There are no further questions. I will turn the call back over to the presenters.

Thank you, Mike. We appreciate everyone taking time to participating on today's call. Enjoy the cooler temperatures and we will see everybody on the road later this quarter. Have a great evening.

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