Stericycle Inc (SRCL) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.24.13 | About: Stericycle, Inc. (SRCL)

Stericycle (NASDAQ:SRCL)

Q2 2013 Earnings Call

July 24, 2013 5:00 pm ET

Executives

Laura A. Murphy - Vice President of Corporate Finance

Frank J. M. Ten Brink - Chief Financial Officer, Chief Administrative Officer, Chief Accounting officer and Executive Vice President of Finance

Richard T. Kogler - Chief Operating Officer and Executive Vice President

Charles A. Alutto - Chief Executive Officer, President and Director

Analysts

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Sean Dodge - Jefferies LLC, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

James Francescone - Morgan Stanley, Research Division

Barbara Noverini - Morningstar Inc., Research Division

Stewart Scharf - S&P Capital IQ Equity Research

Operator

Good afternoon. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Second Quarter Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Ms. Laura Murphy, Vice President of Finance, you may begin your conference.

Laura A. Murphy

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-Q, as well as its other filings with the SEC, could affect the company's actual results and could cause the company's actual results to differ materially from expected results. The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after this date that may vary upon forward-looking statements.

I will now turn it over to Frank.

Frank J. M. Ten Brink

Thanks, Laura. The results for the second quarter are as follows. Revenues were $526.5 million, up 12.3% from $468.9 million in the second quarter of 2012. And internal growth, excluding returns and recall revenues, was up 7.5%. Domestic revenues were at $370.2 million, of which, $346.5 million was domestic regulated waste and compliance services, and $23.7 million was recalls and returns. Domestic internal growth, excluding recalls and returns revenue, was up 7%, consisting of SQ of 8% and LQ of 6%.

International revenues were $156.3 million, and internal growth adjusted for unfavorable exchange impact of $4.1 million was up approximately 9%. Acquisitions contributed $34.1 million to the growth in the quarter.

The gross profit was $237.9 million or 45.2% of revenues. And SG&A expense, including amortization, was $100.6 million or 19.1% of revenues. Net interest expense was $12.9 million, and net income attributable to Stericycle was $78 million or $0.89 per share on an as-reported basis, and $0.93 adjusted for acquisition and other non-recurring 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 $644 million. In the quarter, we repurchased 540,390 shares of common stock on the open market in an amount of $59 million, and we have authorization to purchase an additional 3.2 million shares. Our capital spend was $20.9 million and our DSO was 63 days. Q2 year-to-date cash provided from operations was $176.5 million.

And I will now turn it over to Rich.

Richard T. Kogler

Thanks, Frank. Worldwide, we continue to use our strong free cash flow to drive our growth through acquisitions. In the quarter, we closed 12 transactions, 8 international and 4 domestic. International acquisitions consisted of 1 in Japan, 3 in the U.K., 1 in Romania, 1 in Portugal, and 2 in Brazil. Our worldwide acquisition pool remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business.

At the end of the quarter, we had approximately 550,000 accounts, of which, approximately 532,000 were small, the remainder were large. The strong domestic internal growth rates we experienced in this quarter resulted from more customers implementing our multiple services such as StrongPak, Steri-Safe, Pharma Waste and Sharps Management. International internal growth rates accelerated due to an increasing customer adoption of multiple services and expansion into new lines of business. Worldwide, we see increased regulatory requirements driving customer demand for our regulated waste and compliance offerings. And as we expand in new services such as communications solutions, we provide additional value to our customers. This strengthens our customer relationships, provides us with multiple new long-term growth opportunities. We remain excited about our future growth because when customers adopt multiple services, this can more than double or triple their revenues.

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

I'll now turn it over to Charlie

Charles A. Alutto

Thanks, Rich. I would now like to provide insight on our current outlook for 2013. Please keep in mind that these are forward-looking statements.

Revenues from the 12 acquisitions were approximately $1.6 million in Q2 and annualized are approximately $38 million. Keep in mind, our 2013 guidance does not include future acquisitions, divestitures, integration, acquisition-related and other non-recurring expenses. We believe analysts' EPS estimates will be in the range of $3.69 to $3.71. We believe analysts' revenue estimates for 2013 will be in the range of $2.12 billion to $2.15 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 revenues between $95 million to $105 million. We believe analysts will have estimates for free cash flow between $353 million to $357 million. CapEx is anticipated to be between $67 million to $70 million.

In closing, we are very pleased with our Q2 results and excited about the multiple growth opportunities for 2013 and beyond. Thank you for your time today, and we'll now answer any questions. Tracy, please open the Q&A line.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Ryan Daniels with William Blair.

Unknown Analyst

This is Nick in for Ryan. I was just wondering, do you feel that you have a fairly complete platform built out for patient communications now, or do you think you'll be doing any more decent-sized deals in that space during the second half or is the focus now going to be more on go-to-market and driving organic growth?

Charles A. Alutto

I think, from a platform perspective and the services that we offer, we have a fairly complete service offering. We'll continue to make investments in infrastructure and platform in 2013. Long-term, we see a great opportunity to grow this business and we're encouraged because we are seeing hospitals outsourcing some of their communications services.

Unknown Analyst

Okay. Great. And it looks like you're branding some of the communications assets now as a Stericycle communications solutions company. I'm just curious if you could discuss your go-to-market strategy in that space and if you found that leveraging the Stericycle brand in tandem with the existing operator brand is driving more market awareness of services or helping drive a higher win rate?

Charles A. Alutto

That's a good question. I think, from a go-to-market strategy, we still are using the Beryl name, but we are introducing the Stericycle name under the communications solutions umbrella. We're receiving really good feedback from our customers. They've been very positive about Stericycle becoming a leader in this space.

Unknown Analyst

And just one quick housekeeping question. On the acquisitions this quarter, could you give any breakout between SQ and LQ or what business lines those were in?

Frank J. M. Ten Brink

Yes, so it was 35% SQ and 65% LQ revenues, and 11 of the acquisitions were in regulated waste, and 1 was in the kind of recalls and returns area.

Operator

Your next question is from Bill (sic) [Al] Kaschalk with Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I guess they changed my name from Al to Bill. Just on the acquisition there on the recall, returns, Frank, is that geared geography-wise or another service opportunity or another type of recall?

Frank J. M. Ten Brink

No, that was a geographic expansion. It was an international one and is expanding our capabilities internationally into recalls and returns.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And that's one of the -- in terms of international though, is this your initial acquisition internationally on the returns, recalls business or?

Charles A. Alutto

Yes. We've had some recalls in the past where we've done some international capabilities where we've subcontracted some of that work. This acquisition created an opportunity for us to build infrastructure, specifically in the European marketplace.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And that would, I think, suggest that there's some opportunities to, a, grab some share and there's some growth in that type of business?

Charles A. Alutto

Absolutely.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. And then, just one other item I wanted to try and address here, Charlie. On the margins, looks like you're getting some good pull-through on some of the developments of some of the new initiatives. I was wondering if you could just maybe give us an update on how you feel where you're at? I know there's a lot of work to be done, but just in terms of the overall contribution to gross margin as you move out and where you're at in the expansion of this service?

Charles A. Alutto

Yes, I'll let Frank bridge a little bit on the quarter-to-quarter margin. But I think, the opportunity for margin expansion hasn't changed. We continue to look, long-term, to increasing our gross margins in the international markets. That will come by focusing on the SQ business, adding additional services like Clinical Services and Sharps Management. And in the U.S. side of the business where we did see relatively nice uptick in margins in Q2, again, the focus is on those additional services that do have higher incremental gross margins than our base business. Frank can maybe walk you through the puts and takes for the quarter with respect to the margin Q1 versus Q2.

Frank J. M. Ten Brink

Acquisitions were just a slight drag, only 4 basis points. Foreign exchange kind of offset that. Because international grew a little bit faster than historically, that, because of margins in general being a little bit less there, brought margins, in effect, down, but the general business has a nice uptick, somewhere between 11 and 15 basis points quarter-over-quarter.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And then, just back to the more broader question. If hospitals are outsourcing a little more, should we think through that as eventually getting more scale on your operating leverage for that segment or is that going to be sort of consistent with your historical trends on performance there?

Charles A. Alutto

I think, we'll be consistent, I mean, our operating leverage on the communications solutions business will come from building out our infrastructure, getting on a common platform and being more productive with respect to the centers that we're running today, Al. Anytime you can add more activity to the center, obviously, you'll get some lift as well.

Operator

Your next question comes from the line of Sean Dodge with Jefferies.

Sean Dodge - Jefferies LLC, Research Division

So you guys have talked in the past that Japan is about the second-largest med waste generator in the world. And I'm curious, so the weakness we've seen in the yen over the last few quarters, how big of a role is that playing in your acquisition strategy there, and does this maybe help you guys accelerate your move down to the central and southern parts of that country?

Frank J. M. Ten Brink

Most acquisitions aren't as much driven by foreign exchange. And so the timing of them isn't driven by the dollar or the yen or any other currencies getting stronger. And obviously, if the yen goes a little weaker, the deals may get a little cheaper in dollar terms, but then obviously, it also has a relative slightly less consolidated result [ph] on to our total returns. No, I don't think so. Japan continues to be a market where we see opportunity as a gradual increase, it's always a little tougher to do M&A in Japan, as we've said before. But there's good opportunity there and the group will continue to look for opportunities to buy businesses.

Sean Dodge - Jefferies LLC, Research Division

Okay. That's helpful. And then, outside of Japan, you guys really haven't done much in the other parts of Asia. Is there something structurally about those markets that are keeping you out of there or is it you just have your plate full with Europe and South America, and the other geographies that you just haven't had time for it yet?

Charles A. Alutto

No, Sean, we continue to look at markets around the world, Asia being one of them. Again, looking for -- there's a lot of factors that go into selecting the next geography, we certainly have some targets in Asia, but we're very patient and we want to make sure we do the right deal and the right terms and find the right management team. So we continue to look in Asia, and I think, over time, you will see an expansion into other markets in the Asian region.

Operator

Your next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Guys, could you clarify, did the high end of RMS guidance go down by $5 million? And if so, why? Because you had a good quarter and you mentioned this acquisition.

Frank J. M. Ten Brink

We did bring the top end down a little bit. The quarter itself was okay within our own guidance. We're starting to see some international revenues on that one, but overall, we're cautious for the second half. We haven't really had any major larger recalls. Again, the team did a fabulous job in that they managed a record quantity again this quarter in a number of events, and that's good, but we haven't had any blockbuster large recalls.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Got it. A little bit more housekeeping on the acquisitions. With regard to those international, could you give us a feel for SQ, LQ recall mix, please, Frank?

Frank J. M. Ten Brink

Yes, I think, total, the mix was 35%, 65%, and then it kind of crosses over. That's for the total that we normally give the information on for all the deals combined.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. And so international is representative of the total as well?

Frank J. M. Ten Brink

Yes, it's probably similar, yes.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. And then, no patient communication acquisitions in the quarter. I think, someone asked earlier on this, but it was my understanding that you guys would start to become aggressive with acquisitions once you had the infrastructure set up the way you like it, and felt that you can integrate well going forward. Is that still on pace? I know we touched on this a little earlier, but I was just curious to see in absence in the quarter?

Charles A. Alutto

Yes, very much on track. Just to reeducate everybody again, we did a rather large acquisition of the Beryl Health business in Q4. We're integrating their team with our team, so I would tell you that everything is on track there, but again, the Beryl acquisition integration is one that we wanted to make sure that we were comfortable with before we move forward but everything is on track and we definitely will continue to look at this space. I wouldn't read anything into the fact that there were no patient communication deals this quarter.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. And I don't want to ask too many but just on CapEx, free cash flow and CapEx outlook, pretty consistent with what you had said last time, but a big jump in the second quarter this year versus last year. Is that just a timing issue, I guess it is based on the guidance, but anything special going on there?

Richard T. Kogler

No, it's really just the timing of investment in plants in the U.S., in Latin America and Europe kind of simultaneously. All these projects had a good return for us. We're still going to manage to a CapEx number of about $67 million to $70 million for the year.

Operator

Your next question is from Michael Hoffman with investors group.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Wunderlich Securities. Can you help us a little bit about your thoughts on the trend as a percent of sales for the remainder of the year on your G&A and your D&A?

Frank J. M. Ten Brink

Yes, so in general, you've seen a slight uptick in the SG&A this quarter versus the prior. Some of that was kind of acquisition-related. A little bit of investment spend continuing on things like comm sol and the like, that obviously -- if you then include amortization where you've seen over the years more of an uptick coming in, so the 10 basis points is really a function of the acquisitions a little bit and then the overall for the year, we think the guidance is about 9.1%.

Charles A. Alutto

19.1%.

Frank J. M. Ten Brink

19.1%, sorry.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

19.1% for the whole year?

Frank J. M. Ten Brink

For the year.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Well then, that calls for a really steep increase in the second half then.

Frank J. M. Ten Brink

No. So that's SG&A, stock options and it includes the amortization. That includes it.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. Yes, I didn't have the amortization in it. Okay. And then, on your D&A?

Frank J. M. Ten Brink

D&A, fairly stable. I mean, no major things there. It's really -- no, I don't see major swings there. Again, the A is where you'll see the move a little bit. Depreciation, very stable, 2.9%. It's in the amortization that it may be the 1.2%, 1.3% on a rounding.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then, pretty big working capital swing in this quarter. How much of that is just timing, and you've already got it back but it was a pretty negative working capital swing?

Frank J. M. Ten Brink

Yes, most of it was receivables. And so on the receivables side, we have a lot of acquisitions that closed at the end of the quarter, so the receivables show on the books and that kind of changes the DSO paradigm a little bit because you don't have the revenues in the quarter. We had an increase a little bit in the U.K., the NHS has gone through a kind of restructuring on their payment systems and that delayed payments out of the NHS a little bit that are impacted. So the receivables is more a timing issue in the quarter. Both Q1 and Q2 were unfavorable cutoffs, they were Sundays, so that never helps on your collections. But we think, for the year, we'll get that back and that will become more in line.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And have we already seen some of that back in the third quarter?

Frank J. M. Ten Brink

Yes.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then, can you talk a little bit about sort of the nature of the activity in Steri-Safe, I remember, Charlie, when we met in New Orleans, you talked about what I call upselling going from a low-tier pricing to mid-tier to high-tier, can you just frame or characterize that in the second quarter and sort of the trend as it goes through the year? That and StrongPak?

Charles A. Alutto

I don't think there's -- and I'm sorry, Michael, what's the follow-up on that?

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Well, I mean, StrongPak is sort of a similar conversation about sort of how do you feel about where that rate of growth is, is it still trending up or has it hit a level and it's holding with -- how does that sort of?

Charles A. Alutto

Yes, I think, Steri-Safe continues. It's a long opportunity for us. There hasn't been any material change in the percentage of growth attributed to Steri-Safe quarter-to-quarter. On the StrongPak, if you remember, when we sell it, it was a recurring revenue, but the contracts are it's a large contract that we implemented for both LQ and SQ. So the timing of those opportunities do fluctuate quarter to quarter, Michael.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And so how was the second quarter impacted by StrongPak?

Charles A. Alutto

Yes, I think, if you look at growth rates from quarter-to-quarter, you'd see that it was a little lower in SQ in Q2, so we didn't have that large influx of a large StrongPak contract that was implemented in Q2. Nothing to read into that, we feel really -- we remain excited about the opportunity in StrongPak, we still think the market opportunity is over $1 billion. Again, we are leveraging our core competencies in transportation, compliance and routes.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then, on the patient comms, one of the initiatives is to rationalize some of the call centers. Where are we in that?

Frank J. M. Ten Brink

Continued nice margin expansion in that sector. And so from that point, the team has done a very good job in the integration. If you look year-over-year, I mean, definitely percentage points of improvements and we see continued opportunity for improvement there.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

So what inning are we in, this initial rationalization of cost structure?

Frank J. M. Ten Brink

Second inning.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Second inning. Okay. And then, last. I just -- so I'm clear, maybe I misunderstood this, the international business tends to be more LQ. So would the acquisitions tend to be skewed differently than normal? I mean, usually, you're mostly LQ and a little bit of SQ?

Frank J. M. Ten Brink

Yes, I think, it's definitely...

Charles A. Alutto

It was 35% SQ and 65% LQ.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. Great. So that was -- because your overall pool was -- didn't you say the overall pool was 65%?

Charles A. Alutto

No, 35% SQ. 65% LQ.

Operator

Your next question comes from the line of Erin Wilson with Bank of America Merrill Lynch.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Can you talk a little bit about the potential opportunity associated with waste management's overall sort of deemphasis of the med waste business? And did that contribute anything meaningful in the quarter?

Richard T. Kogler

Well, I think, we've all seen the same media reports that they're reevaluating their health care business but what we see is they continue to compete with us in multiple geographies.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. So could you speak, I guess, then, to the current pricing environment in the U.S.?

Frank J. M. Ten Brink

There's really no change, I mean, in the market.

Richard T. Kogler

It's been -- this business has always been competitive as long as I've been in it, and I've been in it for over a decade. So it really doesn't change. And as I said, waste management continues to compete vigorously out there.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And then, you touched a little on this, but what were the key drivers for the international internal growth rate? Was there any particular ancillary service that received greater adoption or any other key drivers that you'd like to point out?

Charles A. Alutto

I think, some good color on the international growth there would be we do see the European escalators slowly improving. There has been an adoption of our rollout of additional service like Sharps Management and Clinical Services, and we did see some of the -- an increase in some of our international recall revenues in the quarter. And those all contributed to the really nice growth that we had in Q2 for international.

Operator

Your next question comes from the line of Shlomo Rosenbaum with Stifel, Nicolaus.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Just looking at the revenue guidance, the revenue guidance is up $10 million on each side. You added about $20 million, which should be additive through acquisitions. Is the difference $5 million because of recalls and then some kind of rounding or something, because I would have expected that the revenue guidance should be a little bit higher?

Frank J. M. Ten Brink

Yes. In fact, foreign exchange is the main contributor. So the previous guidance was $2.11 billion to $2.14 billion, and foreign exchange continues to be a little bit of a headwind, probably in the $7 million to $7.5 million over the second half. And then, the acquisitions in the remainder of the year are about $19 million. And so that gets you to your $2.12 billion to $2.15 billion.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And what kind of tax rate should we use? Tax rate has been wide [ph] for the last couple of quarters, what should we expect for the rest of the year?

Frank J. M. Ten Brink

It's a little bit better in the overall outlook, so right now, it's in the high 35s.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, on the StrongPak business, can you talk about a little bit on any interesting developments that might have happened over the quarter, or competitively, where you guys think that you stack up vis-à-vis some of the larger players in that part of the industry?

Charles A. Alutto

Shlomo, we haven't seen any kind of changes on the competitive landscape. There are some larger privately owned companies that are national and they're offering this another player that actually is a publicly traded company that also participates but there really hasn't been a change in the competitive nature of the business. So the other question was related to regulatory. I think, the other thing is you have seen some media reports about some funds that were settled by retailers. I will tell you that those were finally [ph] settled, those companies already made a buying decision so it didn't impact in the quarter. But anytime we see those kind of reports, we like that, it validates what we're doing, it demonstrates to all the retailers that they do need to comply with these regulations. So I think those are some of the things that you saw in the quarters. For our business, we're on track with our plans. We still think there are over 750,000 retail locations in the U.S. that would require this type of service. And that equates to about $1 billion market opportunity.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, the last thing, the receivables trickling up, that is primarily what you talked about the U.K. NHS, and the acquisitions got nothing to do with anything like in Spain?

Frank J. M. Ten Brink

No, Spain, in fact, is still nicely ahead of when we acquired it. As you know, we had an influx last year. It's gone up slightly but not as much and that's not -- has been a big influence on it.

Operator

Your next question comes from the line of Kevin Steinke with Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

I was just wondering if you could offer any commentary on the pharmaceutical waste offering and how that is playing out in the market for you currently?

Richard T. Kogler

Sure. I mean, it actually is being well-received, it has been for some time. It seems on plan with their goals. We still see a healthy pipeline of contract orders and installs. And as we said before, this as a $200-plus-million opportunity for us in just the domestic LQ space, so we have a lot of runway still to go.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Do you see opportunity to roll that out internationally as well in the future?

Richard T. Kogler

I think, in certain markets, it may be applicable but one of the things about international is you have to look at the regulations and the health care regime in each country. So I think, right now, we're very busy in the United States and we will be for some time.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And Frank, what was energy as a percentage of revenue in the quarter?

Frank J. M. Ten Brink

Energy and fuel was 5.5%, but always remember that account now is based on the services impacted by energy fuel only, not on total revenues.

Operator

Your next question is from the line of Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just a follow-up on the international rebound there. Is that something we should expect to continue over the foreseeable future here or upcoming quarters at or above the high end of your targeted range and internal growth?

Charles A. Alutto

No, I think, I mean, we left guidance unchanged there, Richard, so we're assuming 5% to 8%. Obviously, we feel a lot better about it, that's why we left the guidance unchanged from the year before even though obviously we are in the 4% and 5% 2012 in the first part of this year. We're always conservative with our guidance, but we feel real comfortable with that 5% to 8% range, but certainly feel real -- the teams did a really good job in the international markets in the last quarter.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. And continuation on the international, just to be clear, on the returns management acquisition there, that's going to show up on the returns line and not in the international line?

Frank J. M. Ten Brink

No, I think, the segment reporting will require us to continue to book that under the international numbers and when it becomes material there, then we will break it out.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. I just want to talk a little bit about maybe what's in store in the next couple of years. Obviously, you have these higher margin or higher growth areas, the Sharps, the Steri-Safe and I guess pharmaceutical returns, things along those lines and patient communications, how do you guys go about determining areas to -- add-on, service areas to add-on, what do you think the opportunity is there? Obviously, I don't expect you to go into specifics to show your hand there, but how many additional areas you think could be growth opportunities for you guys?

Charles A. Alutto

Richard, I wouldn't want to put a number on the growth opportunities. I think, what we do, we do have a business development team, we're always looking at how we can leverage our core competencies. And what are some of our core competencies? Transportation, the technicians that we have in the field for our Sharps Management services, the consultants that we have in the field doing Steri-Safe, compliance services, so we do try to stick within that. Obviously, communications solutions was an offshoot of the very large call center we're running in Indianapolis for our recall and returns services. So we certainly want to look at those existing services that we have and how can we leverage that with those core competencies. That's how we look at it. We don't set a number that we have to have so many new services and we're very conservative before we start talking about them. And you know that from our past. We definitely play out the market, do a lot of analysis and research, do pilots and then launch. So it's worked for us in the past, we continue to use the same recipe for looking at new service lines.

Richard C. Close - Avondale Partners, LLC, Research Division

And then, I guess, final question for me is on the organic growth, the small quantity ratcheted down a little bit. Was there anything specific on that front that we should note or anything onetime or anything along those lines?

Charles A. Alutto

No, as we said last time on our last call, growth rates vary quarter-to-quarter, depending on the influx of both LQ and SQ customer contracts. We're within our guidance range and we've reiterated that guidance for the remainder of the year.

Operator

Your next question comes from the line of James Francescone with Morgan Stanley.

James Francescone - Morgan Stanley, Research Division

First, just one more on international. I know you touched on this, I mean, several times before but it still seems pretty impressive and that's a business that had been putting up 4% to 5% quarters for the past 8 quarters, and suddenly puts up a 9% quarter. Is there anything that was not sustainable or onetime that's worth calling out there? I mean, is that simply you had a really good quarter in recall this quarter or does it really feel like something more important has changed either in the environment or in your execution?

Charles A. Alutto

No. I think, we're hitting on some cylinders now with clinical services where we've moved out of the pilot stage in Spain, so we're starting to gain entry on the clinical service offering in Spain, as we've now built that SQ business through to 10 acquisitions that we've completed in Spain. Sharps is getting some leverage in markets like Ireland. We'll soon roll it out in the U.K. And recall obviously did impact it. I mean, it wasn't material but it had a little effect and brought it up in Q2, certainly.

James Francescone - Morgan Stanley, Research Division

Any way you could help us with a little more granularity on what the recall impact was?

Frank J. M. Ten Brink

I think, it was maybe 1%.

James Francescone - Morgan Stanley, Research Division

Okay. That's very helpful. And then, secondly, on margins, particularly on SG&A, obviously, you've done a better job leveraging the gross margin line over the past year or so. But SG&A has actually been going probably in the wrong direction. Even putting aside the amortization, is that -- is leveraging that line a priority of yours? I mean, how should we think about that going forward, particularly in relationship to any investment needs in some of your growth drivers?

Charles A. Alutto

Yes, I think, you just hit it. I mean, obviously, it's an investment spend. We're now in certainly new lines of businesses like communication solutions, like StrongPak, these have really great growth -- long-term growth opportunities for us. So we will certainly make those investment spends. I think, we're very -- still very conservative when we come to spending. We look at resource allocation from different buckets that we have on the different lines of business. But certainly, it's attributable to the investment spend that we're making into this business for the long-term growth. And it also has something to do with acquisitions. Obviously, as we've made our way into the communications solution business, we haven't rationalized that SG&A yet, which we will over time.

Operator

Your next question comes from the line of Barbara Noverini with Morningstar.

Barbara Noverini - Morningstar Inc., Research Division

As you guys grow the StrongPak business domestically and extend your reach, are you finding that you need to partner with third parties for final disposal or incineration of this material that you collect or are you internalizing most of this additional volume?

Richard T. Kogler

We use third parties for disposal or incineration. We have a pretty good platform in place that we built out over time to sort of allow ourselves to manage the waste, transfer the waste, bulk waste, things like that.

Operator

Your last question is from the line of Stewart Scharf with S&P Capital.

Stewart Scharf - S&P Capital IQ Equity Research

Could you just talk a little bit about price in the market and the mix based on your different markets and regions? Are you seeing any kind of improvement or worsening in price in any areas?

Richard T. Kogler

It's pretty much the same. I mean, as I said, I think, on an earlier question related to a competitor, very competitive business. So obviously, everybody is price-sensitive and we have to react to that, but otherwise, no changes.

Operator

At this time, there are no further questions in queue. I'll turn the call back over to the presenters.

Charles A. Alutto

Thanks, Tracy. We appreciate everyone taking time to participate on today's call. Enjoy the rest of your summer and we'll see you on the road later this quarter. Have a great evening. Thank you.

Operator

Ladies and gentlemen, thank you for joining. This concludes today's conference call. You may now disconnect.

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