Stericycle Inc (SRCL) 2013 Q4 法說會逐字稿

Good afternoon. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle fourth-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). Thank you.

I will now turn the call over to Dan Ginnetti, VP of Finance. You may begin your conference.

Thank you Rachel. 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, President & 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 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.

I will now turn it over to Frank.

Thank you. The results for the fourth quarter are as follows. Revenues were $567.9 million, up 12.8% from $503.6 million in the fourth quarter of 2012, and internal growth, excluding returns and recall revenues, was up 7.1%. Domestic revenues were $394.6 million, of which $368.2 million was domestic regulated waste and compliance services, and $26.4 million was recalls and returns. Domestic internal growth, excluding recalls and return revenues, was up 7.8%, consisting of SQ up 9% and LQ up 7%.

International revenues were $173.3 million, and internal growth adjusted for unfavorable exchange impact of $5.4 million, was up approximately 6%.

Acquisitions contributed $32.4 million to the growth in the quarter.

Gross profit was $253.3 million, or 44.6% of revenues. Adjusted for litigation settlements, gross profit was 45% of revenues.

SG&A expense, including amortization, was $109.9 million, or 19.3% of revenues. Net interest expense was $15.3 million. Net income attributable to Stericycle was $78.2 million, or $0.90 per share, on an as-reported basis and $0.99 adjusted for acquisition and other nonrecurring expenses.

Now, the balance sheet. Our covenant debt-to-EBITDA ratio was 2.1 at the end of the quarter. The unused portion of the revolver debt at the end of the quarter was approximately $573 million.

In the quarter, we repurchased 424,729 shares of common stock on the open market in an amount of $49.2 million, and we have authorization to purchase an additional 2.3 million shares.

Our capital spend was $18.8 million and our DSO was 63 days. Q4 year-to-date as reported cash from operations was $403.5 million. When adjusted for recall reimbursements discussed last call and one-timers, cash from operations was $402.6 million.

And I will now turn it over to Rich.

Thanks Frank.

In the quarter, we closed eight transactions, one domestic and seven international. The international acquisitions were three in the United Kingdom, two in Romania, one in Canada, and one in Spain. Revenues from the eight acquisitions were approximately $0.7 million in Q4, and annualized are approximately $37.4 million.

We continue to use our strong free cash flow to drive our growth through acquisitions. Currently, our worldwide acquisition pool remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business.

Looking ahead, we remain excited about our expanding growth opportunities. Our global acquisition strategy increases our customer base, providing a long-term growth platform for selling multiple services such as compliance solutions, StrongPak, sharps management and pharma waste. As customers adopt our multiple services, they can more than triple their revenues.

At the end of the quarter, we had approximately 566,000 accounts, of which approximately 546,000 were small; the remainder were large.

In closing, we want to thank each member of our worldwide team for their strong performance and continued commitment to our customers, our shareholders, and our values. We especially want to recognize our US and Canadian team members who battled extraordinarily cold weather conditions over the past few weeks servicing our customers. We thank them for their hard work and their commitment to our customers.

I will now turn it over to Charlie.

Thank you, Rich. I would now like to provide insight on our current guidance for 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 nonrecurring expenses.

For 2014, we believe analyst EPS estimates will be in the range of $4.13 to $4.17. We believe analyst revenue estimates for 2014 will be in the range of $2.33 billion to $2.36 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 return to revenues between $100 million to $120 million. We believe analysts will have estimates for 2014 free cash flow between $402 million to $407 million. 2014 CapEx is anticipated to be between $70 million to $75 million.

In closing, we are very pleased with our 2013 results and remain excited about our multiple growth opportunities for 2014 and beyond. Thank you for your time today. We will now answer any questions. Rachel, you can open the Q&A line.

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

Good evening guys. Thanks for the questions. Let me start with one on StrongPak. We've seen some news lately about more retailers again facing fines out in California in early January. I'm curious if that's one driving more demand. Then number two, are you starting to see more states crack down on that? It appears to be California specific at this point.

Yes. Anytime there's awareness we think that's good, Ryan. Certainly California has been on the forefront when it comes to states. There have been other states in the US that are starting to and have been focusing on this. I would tell you that as retail expansions to new geographies and more into healthcare, I think that certainly helps us. Obviously, we can provide a service for both medical waste, healthcare waste and especially hazardous waste. And we have a healthy pipeline of orders from all the awareness and the enforcement of regulations that really have been on the books for many, many years.

Okay, helpful. Then switching gears to Communication Solutions, I know last quarter you talked about leveraging your LQ and SQ team relationships to foster organic growth there. Can you talk a little bit about how that's played out and what the reception has been among the current client base?

Yes. Actually, I just attended our national sales meeting last week where we began to cross-train our healthcare reps. We had both our healthcare SQ/LQ reps together with our Communication Solutions reps, so it is starting to take shape. We are excited about that cross-sell opportunity. I think it's something that will gain momentum as the year goes on.

Okay, good deal. And then I guess just one quick one on all the noise in Utah. There seems to be some debate about maybe moving the incinerator out there. IS that in your capital budget for 2014 or would that be something modestly incremental if you decide to do that?

It would be modestly incremental. We have a legal right to operate in North Salt Lake City, and our facility is totally in compliance right now, but we are always looking at all options, including relocation. Frankly, the relocation process involves many steps and a lot of decision points. And nothing has been finalized; it's very preliminary. The capital involved in it is not large, and more importantly, there would be no material impact to customers or to the company if we did decide to relocate.

Okay, perfect. Thanks for all the color guys.

Hamzah Mazari.

Good afternoon. Thank you. Just a question on the international business. Could you maybe talk about which countries you do see an SQ opportunity in similar to the UK market? And any regulations, positive or negative, on the horizon we should be aware of?

Yes, I think, Hamzah, on the international side, certainly we think, in almost every international market, we have an opportunity on the SQ side. When we look at comparing it to the US, we look at where are we right now with respect to our clinical service offering, which for those that don't know it's very similar to our Steri-Safe offering, bundling certain services, compliance solution services with our regulated waste program. And in some of the markets outside of the US, you mentioned the UK, certainly that's one of them, Canada, Portugal. Our latest entry where we are spending a good amount of time of rolling out clinical services is in Spain. We are getting some really good results early on. I think we are on track there. So we continue to expand that program in the international markets.

Great. And just a follow-up, you are in many more ancillary services than five, six, seven years ago. Could you give us a sense of how many of these ideas are coming from your customers relative to how many are you thinking about internally? And internally, do you have a formalized strategy team developed? How do we think about where you are in that process relative to history?

Yes, great question. I think the customer plays an important role. Even when we think internally about a service offering, whether it be Steri-Safe, clinical services, pharmaceutical waste, we have customer advisory councils not only in the US but in our international markets as well. And we continue to bounce ideas off those customer bases, one, to find out if we are on track for the service offering, but more importantly to find out what the pressure points are for those accounts and what can we do to address those pressure points. And sometimes it doesn't lead to a new program, but it might lead to an enhancement of an existing program like Steri-Safe.

Great. Thank you very much.

Al Kaschalk, Wedbush Securities.

Good afternoon guys. Just touch on the acquisition front, curious. Are all of these transactions medical waste related, or any other ancillary services specific?

There were seven in regulated waste and one in the Communication Solutions side.

Fair to say communication was domestic?

The communication was in Canada.

Okay. For some, that's domestic. Curious on Spain. Where was the largest acquisition made? Because this is something I think maybe some of us were looking for in terms of the next leg of expanding the platform you established in Spain a couple of years ago. But first maybe where was the largest acquisition made, and then talk about the one in Spain specifically, please.

Yes, we don't give details on individual acquisitions or the size by country. But if you really think about Spain over the last couple of quarters and really since we got in, there's pretty much acquisitions done every quarter. Some are smaller; some are larger. Again our focus has been to expand the small quantity generator size of their customers, and that's what they have really focused on and they've done a really good job.

Okay. Can we go to gross margin here for a second? I think, after the one-time litigation, it was 45%. I think that's a little maybe lighter than you were looking for. Can you talk about the niche there? And specifically is there one service that may be scaling faster that was a little bit of a drag on the overall performance? Still strong at 45%, but maybe a little lighter than we were looking for.

Yes, a good question. So the foreign exchange was about 8 basis points headwind. We had slightly better foreign-exchange rates on the European side versus our original guidance. The mix, which really it was driven by stronger sales in StrongPak, impacted it by about 24 basis points unfavorable, because the margin there is still lower than the company average. And then the general business improved by about 13 basis points.

Okay. And then if I may try to talk a little bit more about Utah. Just on a broader scale, why is it not a bigger concern, or should not be a bigger concern, if you decide to exit a market with a facility, and again not appreciating the volume or the dollar level that plant contributes, but why is this not -- why should we not be as concerned about it?

Yes, Al, it's really not a decision of exiting a market, even if we were to relocate the plant. It's not that we are getting out of that marketplace. Our contracts are not site-specific to where we treat the waste. We have a contract to collection, the transportation and the disposal of that medical waste, and that contract is not site-specific but it has to go to one plant or the other. We obviously use our whole network around the collection, and incinerators go down from time to time. We use other incinerators. When incinerators are down for maintenance, sometimes they are down for weeks or a month at a time. So that's why this is not a site-specific acing of a market type of discussion.

Okay. And what's the timeframe on maybe resolution in this particular matter?

As I said, right now, we are in compliance, and we are operating legally at the location that we are at. We are looking at other options, but there is no specific timeframe because there's many steps involved here. And besides that, we may not move in the relocation kind of direction. So, there is no timeframe I can give you here. We are simply looking at all options.

Sorry about this. What is the business issue here that's being raised as a flag?

I think we're going to kind of summarize it here. What you really have is you have a situation where some nearby residents object to our incinerator, even though we've been operating there for 24 years and we have a legal right, we are fully compliant. So with that in mind, it makes sense for us to look at other options, including relocation to somewhere else in Utah.

But as Charlie said, the underlying issue here is not a big issue for us because we have seven other incinerators operating throughout the US with plenty of available capacity. We routinely move waste around because all these incinerators shut down throughout the year for maintenance, routine maintenance. And so there's no material impact here to the customers or to the company. It is simply a business issue that we are working through.

Got it. Thank you for the time on that.

Scott Schneeberger, Oppenheimer.

Thanks. Good evening guys. A couple of housekeeping on the acquisitions. I understand there's just one US, but could you give us a feel for the percentage of the annualized revenue, what is US, what's domestic?

Most of it was international.

Thanks. And LQ/SQ mix in the US and international overall?

It's about the same between the two. SQ was about 30% and large quantity about 70%.

Okay. Thanks. And then I guess RMS was a solid year, not a spectacular year. And the guidance is for a little bit better in 2014 and unchanged on this update. Could you give us a feel for what you are seeing on the macro horizon there? Any regulations or any activities that might slow or speed or just what is impacting that market and how you think about it?

I think we are always encouraged because, in 2013, we managed a record number of events compared to the prior year. So, a lot of this is awareness and activity in the market which is being driven by regulations and things like that. We also expanded our services during the year to Canada and Europe. So, all of these things sort of give us more reach.

We've always said it's an uneven business, and so our guidance for 2014 of $100 million to $120 million really says, on the higher end, we are assuming several larger blowout events. And I guess the lower end says we are sort of steady-state continuing to grow at still a good organic rate.

Fair enough. Thanks on that. Also, patient communication, saw the acquisition in Canada. Would you say you're still in an acquisitive phase? It feels like about one a quarter. But how is that going organically? Just an update between the mix of what's driving it and how you feel about pushing the rollout? Thanks.

Yes, we continue to make acquisitions in that space, and I think you will continue to see that in the future, of course although we don't guide to anything on acquisitions.

I think we are making significant progress on the operational infrastructure. That includes things, Scott, like upgrading our hardware and our backup systems. We continue to improve our telephony and application software. All of this allows us to better service our customers. More importantly, it makes us more efficient on the operational side, which will, in the end, help us to integrate future acquisitions better than we are today.

Thanks. And one more if I may, just on the healthcare act. Could you remind us on your view of how that will be impactful, and anecdotally anything you're seeing thus far? Thanks very much.

Yes, on the Affordable Care Act, really no change to our view. There's obviously a lot of noise and press around the number of folks that are accessing healthcare. In the end, we think that it will certainly increase the volume. We anticipate to see more insured, more people covered, which will increase volume. Probably a better opportunity on the SQ as services and folks now that don't have insurance go to LQ will migrate to SQ. We think that's favorable for us since we have a broad service offering and a really good broad service offering in the SQ space. So really I think that hasn't changed, so even though we are into 2014 now, our view of the Affordable Care Act has not changed at all.

Great. Thanks for taking my questions.

Shlomo Rosenbaum, Stifel Nicolaus.

Thank you very much. I just want to I guess just start with a housekeeping question, Frank. Did the free cash flow from the year of $330 million -- did I calculate that correctly -- like about $23 million lower than the range?

That is correct. So, in the quarter, if you look at the $403.5 million in cash from ops, that's where the shortfall was. So if you adjust that for the recall reimbursement and kind of one-time events, you would come to about $402.6 million, which is about $20 million lower than we had given guidance on. That really is driven by timing differences on our kind of two main, one, Accounts Payable and some accrued liabilities, and one day in the DSO. That's about $15 million to $20 million. And so that's where we will recover that, we feel, most of this in 2014. And as a result, we have taken the free cash flow up by $10 million because we think some of that will shift right into the new year.

Why isn't the guidance for free cash flow like $23 million?

$23 million you mean compared to the $20 million shortfall?

It looks like the 23 million shortfall whatever you want to put in (technical difficulty) if it's a timing issue.

So, we were $20 million short, and we think we're going to recoup at least $10 million. It depends on the DSO, which we are right now at the start of the year which we are conservative on.

Okay. Then Charlie, organic growth was -- ticked back up again, midpoint of the range 7.1% on regulated medical waste. Is there any real change in the business tempo from quarter to quarter, or are these just like such small vagaries that we are just kind of splitting hairs over here? How should we think of that?

Yes, I think, as we've said in previous calls, we're going to see growth rates. They are always going to vary quarter to quarter.

When you think about our latest quarter domestically, I would just characterize it that all of our growth engines performed really well in the quarter, especially StrongPak. And I think that's why you saw us come back on the higher end of the range for both the SQ and the LQ growth this quarter. We are always going to fluctuate. We've said that on the last several calls now. But certainly everything performed really, really well.

Okay, good. And then Frank, what should we think of for the tax rate? The tax rate has been moving down were you can finish the year I think at like 34.5%. It's down about 80 basis points. What should we think about for 2014?

The guidance right now, I would say it's in the mid-35s% as a good starting point. And so you're right. We ended the year at 34.5% for the year to date.

So is it the growth in international that's moving the tax rate down?

I think that is a little bit. Every year, you also have some factors, mostly in the third quarter, where you saw us have a lower rate, where you have some statute of limitation items that come off, so that can vary between year to year. So we are comfortable right now to kind of start the year with the mid-35s%.

Okay. Thank you very much.

Erin Wilson, Bank of America Merrill Lynch.

Can you speak to some of the ancillary services that you've implemented overseas? Have they gained meaningful traction? And I guess are there any specific services that you've come across maybe in Spain or in the UK that could be transferable to your US customer base?

Sure. And I think, when you think about ancillary services overseas, we look at our Sharps Management service, that something that we've now taken out into the Canada, UK, and Ireland market. Ireland has done a really good job. We've got some thought leaders in Dublin on the program, a great showcase for us to expand that not only within Ireland but a great showcase for other parts in Europe as well.

Clinical service continues, as I mentioned before. Clinical Service is certainly an offering that we have tested the latest market of Spain, getting really good results on expanding our relationship with the SQ customers.

ComSol is one that, you know, we talked about a recall and returns business that we acquired in the UK in Q2 of 2013. That had a call center element to it, so we have been able to expand some of the call center services that we have in the US, really early stages there, but I think that is something that could have an opportunity in other international markets.

And then your question around are there other things that we are finding in certain markets that we can bring back to the US? There certainly, in Spain, we found a few SQ companies that kind of bundled instead of with a client service offering and a bundling with dosimetry, that's a radiation detection service for those that might be exposed to radiation in providing x-rays, I don't know necessarily if that's one where we could take that and bring it to the US, but certainly it's got a great opportunity in some of our other international markets.

And then we are seeing some of the things that the UK recall and returns business did locally in the UK that are starting to share some of those ideas. And those ideas could come back to the US. So a lot going on in ancillary services. We're finding new offerings overseas, does not necessarily mean we have to leverage all of them in the US but they could be applicable in other international markets.

That's great. And I guess I've seen a few articles out there, but do your communications efforts at all address the business aspect or compliance or HIPAA related protocol as it relates to social media and that practice? As far as medical practice websites or other types of social media that may be out there. Do you intend to kind of address that area in any way?

Yes. Certainly, I've gone to some customer visits. I know social media and HIPAA is a big deal for some of the healthcare organizations. We actually do, on behalf of some large healthcare companies, we actually do some monitoring of social media sites for them for a variety of reasons, and we act as a back office for some of those calls related to that. We do have a have a HIPAA compliant part of our communication solution, and we think that's what differentiates our offering versus a lot of the small competitors in the marketplace that maybe aren't HIPAA compliant in their communications.

And when we talk about HIPAA compliance, we think more around our Steri-Safe offering where we've added a HIPAA compliance component where we now do training, both live and in person and WebEx training for our employees. So HIPAA certainly is getting a lot of attention and we are trying to meet that not only on the Communication Solutions side but on our compliance solution side as well.

And broadly speaking on that front, just with the increased regulations, are you seeing greater traction there either for Steri-Safe or communications?

I think the service offering certainly on Steri-Safe is more robust now because of the HIPAA compliance program, and we are starting to slowly see some additional traction on that side of the business. I think it's too early on the Communication Solutions side to say that we've seen anything material there.

Okay, great. Thanks so much.

Gary Bisbee, RBC Capital Markets.

Hi. Yes, good afternoon. You've done a really nice job the last five or eight years adding in or layering in additional services. Can you give us some sense just how successful it's been, either what the percentage of revenue is in all of these services relative to just the core medical waste, or any other way to give us a sense maybe how much their contributing to growth? Just trying to grade the performance and broadening out the base that you've done over the last however many years.

Yes, so if you look at the small quantity generated 8% to 10% kind of guidance we give, roughly 40% to 50% of that growth comes from kind of price and volume in the market, and the remainder is really the additional services. So, this is the compliance, this is Steri-Safe, StrongPak, some ComSol, Communication Solutions feed. So that gives you kind of a flavor of the SQ side.

For the large quantity, the 5% to 8%, 10% to 20% of that is about price and volume and the remaining, again, is the additional services. So this is the Sharps Management, the pharmaceutical waste. Again, StrongPak contributes to that. And right now it's a little bit of Communication Solutions is starting to feed into that.

So does that mean there's no more growth in the core medical waste? It's all -- because you just said pricing and then ancillary -- or is there a component that is selling more of the (multiple speakers)

The 10% to 20% and the 40% to 50% includes a component of volume in there. So we are getting --

Oh, okay.

-- we are getting obviously some newer customers, and those customers we grow with the additional services.

We've always said that a majority of our SG&A is building that relationship with the existing customer to add on services, so a majority of our time selling is to our existing customers.

Right, okay. All right. And then just one cleanup one. Would you be willing to give us the split of the $32.4 million by the three segments? That's the -- what M&A contributed to the revenue growth in the quarter?

Say that again? The amount that --

The $32.4 million year-over-year contribution of M&A, can you give us that from US ex-returns and recall, US returns and recall, and international?

Yes, so about $10 million of that was in the United States, and the rest was international.

Okay, great. And then just one last question. I know it's not a huge miss, but this is the second year in the last three when you've not achieved that 15% long-term EPS growth target and the initial 2014 guidance, while probably conservative, falls a few points below that. Should we question the ability to achieve this target over the long-term? Is there anything in particular you would point out? If the M&A pipeline is indeed as big as it sounds like, is there a reason you are not being more active? Just any thoughts on the next few years in that long-term growth rate? Thank you very much.

No, the goal is still the same. Our goal is 15%, and that's what we are shooting for. Sometimes you make it; sometimes you maybe don't. But that doesn't mean that the goal is going away. And we feel we have a very good and robust pipeline for, as Rich said, well north of $100 million in annualized revenues, both -- and that's domestic and international. So we feel very good about our growth opportunities.

Okay, thank you.

Michael Hoffman, Wunderlich Securities.

Thank you for taking my questions. Frank, can we come back to the free cash flow issue in the working capital? Can you help me understand what was moving around and why you're confident you'll get it back on the working capital side?

Yes, so the cut off for this year was kind of interesting because you had New Year on a Wednesday, and many of our tax runs are done on Thursdays. And so much of that cash was already funded right before the year-end, and as a result, the funding went out for that to supply on those cash and those TAC runs. So, that's what impacted it from a timing point of view, and we feel clearly that will come right back into this year because you kind of funded something that could've slopped right. We could held onto it but we keep our processes going. And so it was really a cut off and a timing and the same was the case with some accrued liabilities. On the payroll, for instance, the cut off was right there on that point. So we'll get that back. That's why we are confident and why we took our free cash flow up.

Okay. And so I -- back to the original -- or question that was asked earlier, you are not assuming you get all of it back? (Multiple speakers)

No, we are cautious. We kind of, on the DSO side, we said there was two components to it. The DSO side, we kind of are saying, okay, that one we don't know if we are or are not. We're going to work on that and we'll get more updates on that over the year. Yes, we are going to try to shoot for it but it's early in the year and you know us with guidance. We are not going to right away have everything come out --

Okay.

-- so that's really a conservatism we hope.

Fair enough. And can you share with us -- one day on a DSO tends to equal what in working capital typically?

I think, if you look at it, it's about $7 million to $8 million.

Okay. All right, very good on that side. Thank you. And then up through the nine months, you've been splitting out acquisition costs versus integration expense, and you bundled them back together in the fourth quarter. How does the $0.07 break up?

I don't have it right in front of me. I can follow up with you. It's really in the same category for us between the two as we see it. So from a press release point of view, we brought it out and brought it together.

Okay. I wouldn't mind it broken out, just because we --

We'll take that into -- the next press release, we can do that.

Fair enough.

Yes. And the thinking behind it is acquisitions are period costs and integration is cost of doing business.

Yes. Acquisition on a pretax was about $4 million.

Okay. That helps. And then any of the three of you, Charlie or Rich or Frank, within the SQ 9% or the LQ 7% domestically, how would you proportion in this quarter how you did on price volume versus the ancillary as a mix of that? How do you think that broke up in this quarter?

I don't think it's materially different than when Frank answered the other question though in breaking out what is coming from the ancillary services except that we had a stronger StrongPak this quarter as compared to last quarter. And that's when Frank gave you the bridge on gross margin where there was a little pressure on the gross margins side. So a little bit better on StrongPak quarter-to-quarter.

And if I'm remembering correctly, StrongPak is in the SQ.

Mostly in the SQ, but also it impacts LQ as well.

More SQ than LQ.

Right. So that helps to account for the bump up to the upper end of the range versus where we have been trending.

Correct. That is correct.

All right. And so I wanted just a little bit of more detail on that. Typically, if I remember correctly, there is that dip in margin, and then the return is pretty much within the next quarter. You have that set up and expense related to that first round of it, and then it settles in, so there is a bump in revenues and then the pay settles. So like I will have a tougher comp next year because of it.

Yes. You get -- the revenue, obviously if you get a bump, then a year later it becomes part of the base. From a margin point of view, that's where the team has the opportunity to further improve density, to improve those routes, and to get more efficient. So obviously they are having a continuous improvement program in place to continuously get that margin to improve. And they've done a nice job there.

All right. And then last question, coming out of the EPA office of Resource Conservation, they are talking about issuing a notice of federal record around retail. It sounds like they are coming out with much stronger rules and regs. Can you share any insight on that?

Yes. EPA, the notice data availability, EPA is soliciting input on how to manage retail haz waste. There has been already delays in that solicitation several times, one of them because of the government shutdown.

We view this as that it potentially could increase awareness in the marketplace, especially among those medium and small retailers. We will see about the date.

Just to remind you, Michael, as you know, the pharmaceutical waste, there is supposed guidance coming out on pharmaceutical waste going to universal waste, and I think that's been delayed three or four years now. So we will see if they meet this latest time horizon they set for the release of the solicitation. But at the end, we think the awareness will be a positive impact and bring some clarity to retailers on the disposal of hazardous waste.

Terrific. Thank you very much.

Isaac Ro, Goldman Sachs.

Good afternoon, guys. Thanks for taking my question. Can you drill down into pricing a little bit more? You gave some color on your assumptions for pricing that's embedded for 2014 guidance. I was wondering if you could help us with the baseline and give us a sense of how pricing shaped up in 2013? Was it better or worse than what you're guiding to for this year?

2013 and 2014, again, for us, very similar. Our business is very stable. And so what I just mentioned as to the contribution from price and volume, we have no different assumptions there.

Got it. That's helpful. Just to follow-up on the acquisitions, maybe give us a little bit of color on what you expect them to do in terms of impact to the margins this year. In the past, there have obviously been near-term drags, given the size and scale. And so if we just dissect your guidance a little bit, it looks like, in spite of the deal flow here, you are expecting a little bit of margin improvement. And I haven't had a chance to dissect all the numbers, but just eyeballing the guidance, it does look like you are assuming margins improve a bit. So I'm just wondering if you could comment a little bit about how that dovetails with your deals. Thanks.

Yes. So in the first quarter, because we are coming off a quarter of, again, more acquisitions, the margin probably is going to be a little bit more flat and then coming out for year-to-year. If you look at it in a total, you then are going to see that 20 BPS improvement quarter-over-quarter. The team obviously is synergizing deals. That helps. And then the general trend that we've always had, that 10 to 15 BPS improvement, kicks overall on an average in. But definitely Q1 is normally a little bit for us softer in the improvement and it comes more into Q2, Q3 and Q4.

Got it. Thank so much, guys.

David Manthey, Robert W. Baird.

Could you discuss puts and takes from foreign exchange in your 2014 guidance relative to the updated guidance? And then if you could give us a share count range you are assuming.

Yes, David, a very good question. Obviously, we are having our revenues and things in Latin America and Canada's exchange rate also has done a little bit less favorable. It's about a $21 million headwind to us, and so the acquisitions of $37 million that got added have a counter to that of about $21 million as a result of foreign exchange. Again, mostly Latin America and Canada are the contributors to that. And the share count that we are assuming for this coming year is $87.3 million.

$87.3 million?

Yes.

Okay. Thank you. And then second, on this Utah thing, you said that you are in compliance and up and running and so forth and in compliance with your permits. But I was under the assumption there was some kind of an assertion, I don't know who it was from, that there was some sort of wrongdoing going on there. Is there anything -- are there any pending investigations you can tell us about or anything that is lingering there, or is it just there was this assertion and none of it is true, you're operating under your permits and everything is fine?

The state of Utah issued a single NOV, what we call notice of violation, which was related to a December 2011 emissions test. We are contesting that NOV and that involves a legal review process which we are currently engaged in, and the process continues because these things take time. There's really nothing else to report at this point.

Okay. And is it safe to say that these sorts of things happen frequently to you?

I wouldn't characterize it as frequently. This is the first time that we've had an NOV in Salt Lake City in 24 years. That's why we are taking it very seriously and we are taking it through the whole process.

I see. Okay. And then the final question is on incentives. Could you give us an idea of how your people are compensated to sell all of these ancillary services in their -- I would assume there is some sort of variable comp or incentive to do so. Could you talk about that?

Yes, sure, David. It depends on segments. So, when you're dealing with our SQ team, let's say they are selling Steri-Safe, they are compensated obviously with a base salary, but the variable comp would be in relationship to the upsell opportunity, the selling of the Steri-Safe contract.

It gets a little bit more complex when you're dealing with our LQ accounts. We have reps that manage the relationship with the hospital. Their job is to manage that renewal process of all of our existing services in that hospital, but at the same time we want them to introduce new services into that hospital. So their compensation is not only based upon renewals of contracts, but growing that relationship with additional services. In some of those additional services, we have Sales Solutions Executives that no those products, and obviously they're compensated on getting the sale. So they'd have a base salary and their variable comp would be associated with the new sale, let's say Sharps Management or Pharmaceutical Waste. So it really depends whether you're talking about an SQ or LQ, but there are many different components. But yes, certainly they are compensated. A big part of that compensation is the additional services to the existing customer base.

Great, thank you very much.

Barbara Noverini, Morningstar.

So thinking about StrongPak, I understand that, as a newer business, margins remain below corporate average, which explains the gross margin drag in the quarter. However, as the business matures, what is your expectation for the margin profile? Was it skewing towards SQ? Can the segment achieve similar margins to SQ domestic regulated waste?

Yes, I think certainly the operational efficiencies are on track. We are building that route density, but it's not just about our route density. It's making sure that we have the capability of our transportation network, where the waste is flowing to. Those will all add into growing margins.

But your question around can we get to SQ margins, I think it's too early to make that assumption. We certainly -- we are already higher than our LQ margins, and we will see if there's additional services that we can add to that StrongPak service more like compliance solutions that it is possible to get it to SQ like margins. Right now though, I think it's too early to say that we will get whether -- we can get or not get to SQ margins.

Yes, that's helpful. Also, was there anything atypical about StrongPak's growth in the quarter, maybe a large project, or is it more a function of just an expanding recurring customer base there?

It's expanding and obviously they are also signing up some new ones.

Okay. And just lastly, when you have a tough winter like we have experienced in the current quarter, what sorts of disruptions do you see in your operations? Is it likely that we're going to see some margin pressure next quarter as a result, or was it largely immaterial?

We didn't have an impact in Q4. Historically, we've managed it, and it's been immaterial. If it's anything, it's a slightly higher cost. It's not really impacting revenues as much, but it could be if there's a little more over time for people getting back to the shop, etc.

Okay, thanks.

Sean Dodge, Jefferies.

Good afternoon. Thanks for the questions. Development work on the patient communication platform nears completion. How should we expect that to impact the income statement? Is it going to drive more of an inflection in sales as you are able to make a more concerted push marketing a complete platform to clients, or is going to be more of a benefit to margin because you're able to pull back on some of the development spending, or kind of all of the above?

I think all of the above. First of all, I think it will be a continuous process. We are always on the look to upgrade our systems. Obviously, we are starting from Ground Zero right now as we are buying a lot of small mom-and-pops.

As I mentioned before, we are making significant progress on the operational infrastructure. We continue, as we acquire places, to upgrade the hardware and the backup systems. But I think, Sean, we can do that. So what does that mean? It means more reliability and a better service for our customers that would help us on the retention end. It certainly helps us on the growth of the business. And from a margin perspective, when you're providing service where you can do backups, it certainly helps you on the overall gross margin of the business, especially if you are able to integrate future acquisitions in a more timely basis.

Okay. And then we covered the buildup of your internal growth guidance for the domestic segment. I'm curious how that looks for the international. So, the 5% to 8% you're guiding for internal growth in the international business, how much of that is price volume versus the ancillary services?

I think it's probably not much different from the LQ. It's about 10% to 20% on price, maybe a little bit more in volume, a little bit more on the volume side, and then the rest is, again, the newer services.

All right. That's all I got. Thanks.

Jason Rodgers, Great Lakes Review.

Looking at 2013, would you provide a figure for the recall business for the year?

No, we don't break it out. I mean there's --

You're talking about revenue?

Yes, revenue.

Revenue for RMS for the year came in at $97.8 million.

All right. And looking at 2013 again full-year, could you provide an internal growth figure for the company as well as domestic and international?

The internal growth figure for the year? Yes. So for SQ, it was north of 8%. LQ was north of 6% for the year. And then international was almost 7%. Total for the company was 7.3% excluding RMS.

Okay. And then looking at accounts receivables up year-over-year, was that due mainly to the acquisitions?

There was a big contributor there. The acquisitions was about $19.9 million of the increase. You had a little bit of currency translation in it, and then the DSO itself was a contributor to it also.

And then finally, would you be willing to provide an estimate for interest expense for 2014?

For 2014, you're going to be somewhere in the probably $53.5 million to $54.5 million.

All right. Thank you very much.

David Lewis, Morgan Stanley.

This is actually James in for David. First, one follow-up on the situation at North Salt Lake. Between the original emissions test that caused the NOV to be issued and your subsequent response to the regulators following retesting, did you make any process changes or remediation to the facility? That is did you identify any issues that you then proceeded to fix, or was it simply that a new test came up with different results than the first test?

As I said, we are in the middle of a process here, so I am probably not comfortable getting into all kinds of details and what have you. I can tell you that we are upgrading that facility like we are upgrading all the other plants because of the new regulations that the federal government has put in place this year.

Yes, we continued all of our incinerators to do upgrades throughout the year, and we've been doing that for several years. And that's not related to North Salt Lake. It's just in general what the new regulations are for the Clean Air Act.

All right, got it. And then any color on SG&A expectations for the full year? Obviously, 2013 ended up 30 to 40 BPS higher than 2012. Should we expect that level of reinvestment into 2014 as well?

Yes, so we ended the fourth quarter at about 19.35%. The guidance is about 19.3% for the year of 2014. It will start out a little bit higher and then sloping down slightly during the quarters and the year.

That's helpful. And then finally, you mentioned in your prepared remarks that obviously there has been some adverse weather in the first quarter. Any implications to the P&L as we look into 1Q 2014?

No. We had no impact in Q4.

On Q1, sorry.

Again, we don't -- it's in part of our guidance. It's all in there for the year. So it's too early to say.

Perfect.

But again, historically, we've managed it, as I said, and it's been immaterial.

Okay. Thank you.

Richard Close, Avondale Partners.

Thanks for taking the question. With respect to the add-backs, Frank, can you give us a little bit of help in terms of how we should think about the add-backs in 2014?

Define for me add-backs.

The difference between where you have GAAP earnings and the non-GAAP adjusted, just as we think about adjustments going throughout the year.

Yes, I think the two main lines that obviously continue always for us is the acquisition expense and integration expense. And then depending on what is being integrated, for instance, you may have a plant closure. So in Q4, there were some charges for plant closures because, for integration, we didn't need a facility anymore. It gets closed and there are some non-cash write-offs that may go with that. In a business where you do a lot of integration, that will happen. But that could happen, at this point not planned, but it could happen depending, again, on acquisitions. But the two lines that will be consistent will be acquisition expense and integration expense.

Okay. And then as we are looking at the fourth quarter, just looking at the dollar amounts you have there for acquisition integration, the change in fair value, restructuring, plant closure, etc., what tax rate are you applying to those to get back to your $0.07 and $0.03, etc.?

The overall tax rate is slightly lower. Some things are not tax-deductible maybe in those items, but it's not far removed, maybe slightly lower as to its tax deductibility but it's not that material.

Okay. And then just thinking about you had $0.01 on the litigation settlement, but you are not showing any dollar amount on the P&L.

No, it is part of the -- I just mentioned on the P&L. There was about $2.1 million that was in the line of cost.

Okay, yes. I see it there. Thank you.

With respect to the Utah -- I don't want to ask too many more questions on this because we seem to have focused a lot on it here on the call. But do you have any ability if, let's say you do shift volume to other incinerators, if they are far away from I guess the existing incinerator, are you able to adjust price accordingly, or how does that work?

As I mentioned before, we routinely do this as a matter of operational course. So I think you've looked at our historical trends, and obviously our contracts allow us to move waste around and customers are fine with that. And it really doesn't have any material impact on the company's financials when we do it because, again, we do it as a matter of course every quarter.

Okay, but let's say I am a physician or a hospital that's located close to Salt Lake City. All of a sudden, that plant is not open. You are not able to go back and charge them more money when their contract maybe comes up?

Yes, I think you have to put this in perspective. First of all, a physician's practice wouldn't normally have waste that has to be incinerable. Let's remind everybody of what types of waste has to be incinerated. It's those types of -- it's medical waste. It's not limited to this, but it includes pathological waste, trace chemotherapeutic waste, and nonhazardous pharmaceutical waste. These are required to be incinerated in some states.

So on the example on a physician, that waste really doesn't -- can be sent to an alternative treatment facility. Even in the case of a hospital, only a small portion of their waste, less than 10% of their volume, has to be incinerated. So right there when you're looking at what kind of additional costs you have, it's over a small part of the overall waste stream. And it really depends on the contract that we have in place with that customer with respect to what kind of pass-through opportunities we have.

Okay, thank you.

Kevin Steinke, Barrington Research.

Good afternoon. Kevin Steinke with Barrington. Just wondering. In the international business, you talked about continuing to roll out clinical services. I was wondering if you are making progress or looking at rolling out some of the other ancillary services internationally as well.

Yes, as I spoken about before, we are making really good progress. I think the progress is on track. Just to reeducate everybody on clinical services, which is the Steri-Safe equivalent in the international markets, we are currently in Canada, Ireland, the UK, and Portugal. The latest country that we started to pilot and is starting to have good traction is in Spain.

With other additional services, when we look at our Sharps Management service, that is in Canada, Ireland, and we recently rolled out in the UK.

And then when you look at our recall strategy, obviously the acquisition in Europe in the second quarter of 2013 gave us an opportunity to start rolling out those recall type services into the European market. We are always looking at adding additional services. There's a lot of work going on in country. In summary again, we talked about some services that are country-specific, but we feel really good. I think we are on track with the additional services on the international front.

Okay. And how are price escalators on the contracts in Europe trending?

I think overall obviously with some of the very large contracts that we have, like the national health systems, there's a little bit more linkage at times with consumer price indexes and the like. But we are very pleased with the 2013 growth rate that we've had internationally. It's been the highest now in the past three years, so I think the team is doing a good job.

All right. Great. Thanks for taking my questions.

And that does bring us to the end of today's Q&A session. I will turn the call back over to our presenters.

Thanks Rachel. We appreciate everyone taking time to participate on today's call. On a snowy and cold day in Chicago, I will leave you with one warm thought. Pitchers and catchers start reporting to spring training tomorrow, which means that spring is not that far away. Stay warm my friends, and have a great night.

Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.