Stericycle Inc (SRCL) 2016 Q1 法說會逐字稿

Good afternoon, my name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the Stericycle earnings conference call. (Operator Instructions)

VP of Corporate Finance, Sean McMillan, you may begin your conference.

Welcome to Stericycle's first-quarter 2016 conference call. I will now read the Safe Harbor statement.

This conference call may contain forward-looking statements that involve risks and uncertainties, some of which are beyond our control. For example, general economic and market conditions. Our actual results could differ significantly from the results described in the forward-looking statements. Factors that could cause such differences include changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste for the proper handling and protection of personal and confidential information. Increases in transportation and other operating costs, the level of governmental enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information. Our obligations to service our substantial indebtedness and to comply with the covenants and restrictions contained in our private placement notes, term loan credit facility, and revolving credit facility. Our ability to execute our acquisition strategy and to integrate acquired businesses, competition and demand for services in the regulated waste and secure information destruction industries. Political, economic and currency risks related to our foreign operations. Impairments of goodwill or other investment [live] intangibles. Variability in the demand for services we provide on the project [are] nonrecurring basis. Exposure to environmental liabilities, fluctuations in the price we receive for the sale of paper, disruptions in or tax on our information technology system, compliance with existing and future legal and regulatory requirements, as well as other factors described in our filings with the US Securities and Exchange Commission including our most recently filed annual report on Form 10-K. As a result, past financial performance should not be considered a reliable indicator of future performance. Investors should not use historical trends to anticipate future results or trends. We make no commitment to disclose any subsequent revisions to forward-looking statements.

I will now turn it over to Charlie Alutto, CEO.

Thank you for joining us on today's call. In the first quarter, we experienced strong revenue growth, strong cash flow, and solid sequential growth for the Shred-it acquisition. Results in the quarter were unfavorably impacted by the timing of the Shred-it synergies and lower industrial hazardous waste revenues.

Despite the challenges in the quarter, we remain confident about our business.

Joining me on today's call will be Dan Ginnetti, CFO, and Brent Arnold, COO. I will now turn it over to Dan.

Thank you, Charlie. The results for the first quarter as follows. Revenues were $874.2 million, up 31.8% from $663.3 million in Q1 2015, and internal growth excluding returns and recalls revenues, was up 5.6%. Domestic revenues were $649.7 million, of which $624.9 million was domestic regulated waste in compliance services, and $24.8 million was recalls and returns.

First-quarter domestic internal growth excluding recalls and returns revenues was up 5% consisting of SQ up 6% and LQ up 4%. As anticipated, growth rates were impacted by lower fuel surcharges and lower hazardous waste volumes from our industrial customers.

International revenues were $224.5 million and internal growth adjusted for unfavorable foreign exchange impact of $23.8 million was up 7%. This growth rate was also impacted by lower hazardous waste volume.

Acquisitions contributed $194.5 million to growth in the quarter. Gross profit was $369.2 million or 42.2% of revenue. SG&A expense, including amortization, was $207.3 million or 23.7% of revenues. Net interest expense was $24 million. Net income attributable to Stericycle was $66.7 million or $0.78 per share on an as reported basis and $1.11 when adjusted for acquisition-related expenses and other adjustments.

Our covenant debt to EBITDA ratio was 3.41 at the end of the quarter. The unused portion of the revolver at the end of the quarter was approximately $584 million.

In the quarter, we repurchased 327,952 shares of common stock on the open market in an amount of $37,693,000. At the end of the quarter we have authorization to purchase 3.4 million shares.

Our CapEx was $34.2 million or 3.9% of revenues. Our DSO was 63 days. Year-to-date cash from operations was $156.9 million; when adjusted for recall reimbursement and other items, cash from operations was $163.6 million.

I will now turn it over to Brent.

Thanks, Dan. Worldwide continued to use our strong free cash flow to drive our growth through acquisition. In the quarter, we closed seven acquisitions, five domestic and two international. The international acquisitions were one in Spain and one in Romania. Revenue from the seven acquisitions were approximately $1 million in the quarter and, annualized, are approximately $12.4 million. Our worldwide acquisition pool remains robust with well over $100 million in annualized revenues and multiple geographies and lines of business.

In the quarter, the Shred-it sales team delivered strong new sales growth. As a reminder, Shred-it has over 350 sales professionals across North America focused on converting customers that either do not shred, or shred themselves.

This unvended market represents a $2.5 billion growth opportunity for Stericycle. We also are encouraged by the progress the combined sales teams are having in selling Shred-it solutions. This quarter, the team closed eight health systems and multiple national accounts. Today, less than 20% of our current Stericycle healthcare customers use Shred-it as a secure information destruction provider, representing a nice growth opportunity for Stericycle. Our Shred-it integration efforts remain a priority across the organization. We are confident in our ability to achieve the full $73 million in (technical difficulty) Shred-it synergies, and our team has either completed or made solid progress on many of the integration projects.

However, we have reassessed the original timeline associated with the reroute in on-site to off-site conversions. While several regions have successfully made this conversion, the time to convert each region is taking longer than previously anticipated.

In order to ensure high service levels, and support ongoing new customer growth, we have decided to extend the rollout schedule going forward. The new timeline enables the reroute teams to provide the necessary support and assistance without negatively impacting our customers. Based on these changes, approximately $20 million of the dollars of the anticipated reroute and on-site to off-site synergies will be extended into 2017 with a full impact in 2018.

In our retail and healthcare hazardous waste compliance programs, we continue to experience strong growth. The growth is fueled by increased enforcement of existing regulations and by Stericycle strong customer relationships in both retail and the healthcare industry.

Looking ahead, we continue to see expanding growth opportunity as Stericycle provides multiple services to help our customers improve their operations and achieve their goals. As we execute on this strategy, we can more than triple our customers' revenues.

We would like to congratulate Stericycle's Parkersburg, West Virginia facility for receiving Congressional recognition as a star status site in OSHA's voluntary protection program. This is the first medical waste facility to earn the VPP award and it demonstrates the team's dedication to our corporate values.

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

I will now turn it over to Charlie.

Thanks, Brent. I would now like to provide insight on our current guidance for 2016. Please keep in mind that these are forward-looking statements and our guidance does not include future acquisitions, divestitures, integration and acquisition-related expenses, and other adjusted items.

As a reminder, our 2016 EPS guidance is adjusted for amortization expense.

For 2016, we believe analysts' EPS estimates will be in the range of $4.90 up to $5.05, reflecting the unfavorable impact of the timing of the Shred-it synergies, softer industrial hazardous waste volume, and higher costs associated with our international operations. We believe analyst revenue estimates for 2016 will be in the range of $3.6 billion to $3.66 billion, depending on assumptions for growth and the impact of foreign exchange rates.

We anticipate 2016 internal growth rates to be SQ 7% to 9%, LQ 4% to 7%, international 6% to 9%, and recall and returns revenues between $95 million and $115 million. We believe analysts will have estimates for free cash flow in 2016 between $435 million and $455 million.

2016 CapEx is anticipated to be between $125 million up to $135 million. We expect the 2016 full year as reported tax rate to be approximately 35.5%.

In closing, although disappointed with our results in Q1, we are confident about the long-term fundamentals in our business, and remain excited about the growth opportunity in 2016 and beyond.

Thank you for your time today. We will now answer any questions.

Steve, you can open the queue.

(Operator Instructions) Ryan Daniels, William Blair.

Dan, maybe one for you. It looks like about a 5% cut to EPS, and I'm hoping you could bridge that for us from the prior guidance and breakdown kind of the three impacts you outlined and how each of those is impacting the bottom line.

Yes, be happy to do that. So the prior guidance was $5.26 to $5.33. We had a $0.05 miss in the quarter, so that's obviously going to roll into the next guidance.

There was some strength in paper prices, and slightly lower interest rates, and we had some acquisition contribution, and that was offset by some higher depreciation expense. And that nets to about $0.01 to $0.02 of favorable EPS.

The delay, as Brent mentioned in his dialogue, in recognition of Shred-it synergies, is anywhere from between $0.07 to $0.12 unfavorable. International cost pressures in Latin America and the UK is between $0.07 to $0.10 unfavorable. We had some softness in the industrial markets, and a mix of customers in the ESol business that will be anywhere from $0.10 to $0.11 on the year unfavorable. So the new guidance from there will bridge you to $4.90 to $5.05, and I think when you are looking at Q2, I think it is best to take a range between $1.16 and $1.20, and I think you get a good position for the quarter.

Okay, and then as my follow-up, can you go into a little bit more detail on the elongation of the Shred-it synergies? Do you think that is just going through two separate mergers as kind of distracting that workforce? Or is it as you have pushed some of the changes to route density improvement and moving to off-site, it has impacted customer churn or anything of that nature, such that you are trying to slow it down and kind of elongate that? Just any color there would be helpful.

This is Brent, absolutely. This is not about if we can get the on-site to off-site and reroute synergies, but rather when we will get these. All of us here want to get these synergies as soon as possible. We just need to make sure we do it in a timeframe that does not negatively impact our customers.

It probably makes sense to give a little bit of description of what we are talking about. What really goes into an on-site to off-site conversion?

First, with all of the conversions of this type, you have to have clean data. You need to know things like service locations, number of consoles, hours of operation, key contact information. Let me remind you that the team recently went through a merger of operating systems when Cintas joined Shred-it, and while that went well, there definitely are some items that still need to be cleaned up as part of that data cleanup.

Then you notify the customer. So you're notifying all the customers that are currently on-site and you are letting them know that we are going to be switching their service from on-site shredding with a truck that has a shredder on it, to taking that back to our facility and shredding it back at our facility.

So you have to make sure you have all the right supplies, right, because we're switching trucks. So you have to have the right number of box trucks, liftgates, consoles to transport the material. So, all those things need to be in place.

Ultimately though, and this is really where we are noticing the biggest challenge, is when you make the change, our team members now are going to new sites.

So imagine, Ryan, if CSR's coming into your facility, the number of consoles you have across William Blair, and they have not serviced it before, you now are -- while we have a description of the location in the handheld, you still need to find those and you need to find the best way to wrap through your office to find all those consoles. So, there is a learning curve that our CSRs or drivers need to go through when we make these changes.

Believe it or not, the first probably several weeks after reroute, we're actually less efficient than we were before the reroute. But as they go through the learning curve, and that settles down, we start to get efficiencies, and we ultimately will do a final polishing reroute to really put as many stops on those routes as possible.

So again, our focus here is about how do we do this without impacting customers, recognizing the synergies and ultimately doing it in a way that allows us to continue to close new business.

The reason we are confident that we are going to get that $73 million, we have done this many times before. Our pilot market in Toronto, in Cleveland, in Charlotte, in Boston, in Detroit, there's a number of markets where we have successfully done this. But what we have decided to do is, you know what, this needs to be more of a 16-week process than an eight-week process, and the timeline was just too aggressive.

So, when assessing that, we decided to spin it out ultimately because we do not want to disrupt the service with our customers.

Okay, very helpful color. I will hop back in the queue.

Al Kaschalk, Wedbush Securities.

I appreciate the bridge on the EPS. But I guess I want to look at -- take a maybe a different angle in the mix of revenue that you have and maybe the profitability of that. And maybe there is some color you can provide us in terms of the percentage of industrial revenue that is international versus domestic, and if there is any margin impact there.

It appears to me, just again on the surface, that the business you added is not as profitable as you think it was or thought it was, or they really -- the piece that is coming off on the industrial side is really pretty significant.

So, is there any color you can provide on that? And then second, I guess the follow-up to that would be -- was there a further lag down in the first quarter on the industrial piece and specifically from when you exited 2015?

This is Charlie. I will take that.

I think when you think about how the situation with Stericycle, roughly 80% of that is domestic, 20% is international. But if we dig down to the Q1 impact on what we call our environmental solutions business, hazardous-waste volumes that is excluding retail haz waste and healthcare haz waste, we are anticipating that to grow at a seasonably adjusted rate of about 3%. It actually came in at a negative 4% for the quarter. So, roughly speaking, about $5.5 million soft on our industrial or hazardous waste volumes.

In addition, the mix of the waste that we did actually pick up in our projects resulted in a higher anticipated disposal expense of roughly about $1.5 million. And that has to do with some of the larger projects we did were direct disposal, and we have direct disposal as opposed to going through our facilities we do incur a higher disposal expense for those accounts, and that is what Dan was referring to when he was talking about mix in the environmental solutions business, or our hazardous-waste business.

So, certainly we did see a lower hazardous-waste volume. The good news I think, though, and Brent talked about it in his opening, is where we are focused. That is the healthcare hazardous waste. That is the retail hazardous waste. That is the SQ hazardous waste. We had really strong growth there.

But, unfortunately, we have a mix issue when it comes to the facilities that we have acquired to support this growth and that is -- has a very high fixed cost to it, and that is where you see it hurting us, not only on the revenue line, but also on the profit line.

Does that continue for -- I know your annual guidance incorporates how that water falls off, but do we have another quarter? Do we have two quarters to go in terms of sort of normalizing it from a operations standpoint?

We look at it as a conservative saying that that softness in hazardous waste will continue. We don't know. Again, the project work is unpredictable. But from a guidance perspective, for the year it was around $0.10 or $0.11 spread now over the first quarter and then continuing into the rest of the quarter, so about $0.02 or $0.03 a quarter.

Good luck, guys. Thank you.

Sean Dodge, Jefferies.

You guys talked about the extended timeline on the synergies related to the Cintas acquisition. Do you have any updated thoughts on the $20 million to $30 million of incremental synergies Stericycle think they can get? I think you initially said those would be an opportunity beginning in 2017. Is that -- are those still on track?

Yes, you are thinking about that exactly right. We have got groups working on those now. We really feel like we will start to see impacts with those in the back half of 2016 and throughout 2017 with the full-year impact in 2018.

Okay, and is there any update you can give on the business optimization exercise or process you guys have undertaken?

Yes, as we talked about on the last call, we are working with an outside consultant and it really -- the focus has been how do we set up our business. Coming out with the Shred-it acquisition and off the heels of the PSC acquisition, how do we set up our business for growth long term? We are looking across all of our businesses in North America. Our goal was to have this completed by mid-2016, which we are on track and we are excited to be able to share more of that with you at the Q2 call.

Were there any costs associated with that in the first quarter, that would not necessarily be recurring but you have not backed out?

No, the costs that we've incurred on that, they are early on. Some of these costs are being captured in our integration expense because it really is about bringing these acquired organizations together with ours.

Understood, thanks again.

Gary Bisbee, RBC Capital Markets.

I guess I wanted to ask about the international business. Just looking at the 10-K, you indicated [in the Q] obviously you would give more detail and the margins there, relative to the US business, are less than a third the amount. I know that got hurt last year by haz like the US did, but I guess the question is this.

Is there a credible plan and strategy to narrow that gap in the next two to three years? And for years, you have talked about, if you can move the mix more to SQ, that will take care of it. But it doesn't seem to me that you have had much success with that, at least overall, because those margins are down several years in a row, and at that level of profitability, can you justify continuing to do M&A in the international waste business? It just seems like there is no way you're getting good returns if you can't really improve the profitability.

I think I am going to take that in two steps. One, I want to walk you through what are some of the pressures that we're facing currently in that market, and I will take a stab at your question around long term what do I think we can do there.

The pressure points and what we feel will be the pressure points for the rest of the year are in two distinct lines. It's -- first of all, it has to do with our patient transport business in the UK, and obviously that has been one of our biggest contributors to our international cost pressures, because it has rapidly grown over the last several years. We continue to experience an increase in the cost to operate certain contracts, and as a result, that has had a pressure on the overall international margins.

Just to educate everybody, most of that work was previously performed by the hospital. And as a result, it was difficult to get historical data prior to bidding. And what are we doing about that? How are we going to try to work on that?

Well, the team is working diligently. They are working on these costs override. They are working on a contract by contract basis to see if these costs -- some of them we passed through to our customers and we may look at [exiting] some of those agreements. So, that certainly is something that has been -- it is a headwind in Q1. We think it will be a headwind for the rest of the year.

The other issue we are facing is in Latin America. Obviously, the economic pressures in Latin America, especially in Brazil, are impacting our business. The economic pressures are mostly in the form of now pricing pressure on government accounts. Just in Brazil alone, 58% of our medical waste volumes are tied to government contracts.

When you think about Latin America, kind of a perfect storm for us. We had increased costs. We talked about that last year.

Usually in Latin America we can pass those costs along. But now, we are experiencing some headwinds with respect to government accounts and being able to pass along those prices.

So we will continue to work on that, certainly. The team is working on all fronts to improve margins over a long period of time.

Acquisitions, yes, we will look at certain markets, and we will take a cautious stand on acquisitions. It was a good tuck-in acquisition that has a good return in our core business; certainly, we will look to complete that. To add, we are not looking to add any new services, though, at this point, until we can get the base business stabilized in some of the international countries.

Okay, thank you. And can I ask one quick follow-up? Just on the mathematical calculation for the share count on the convert, as I recall last quarter, you said that the beginning of period share price determined the formula, and I just don't get this 91.5 million shares based on the January 1 share price. I think that the formula would say it would be more like 93 million. Is (multiple speakers)

Yes, let me take you through that because I can see how you can get to that number. Remember, as a mandatory convertible, there is a range on this. So, the -- anything below $136 or, let's put it this way: $136.25 is the maximum dilution of this.

That translates into 5.6 million shares. No matter where the price is below that, you will not see a greater converted share count. Anything above $136, up into $170, will then begin to become less dilutive and can actually go to as low as 4.5 million shares and never less dilutive than that. So Gary, at the level we are at right now, you will see no greater dilution than where it's at, and 91.8 million shares for the year is a good estimate to use.

Okay, great, thank you.

Scott Schneeberger, Oppenheimer.

Kind of segueing the discussion on international and acquisition, you made two in Europe. Is this just predominantly a Latin American issue where we would not see acquisitions in that region for a while but you are still active in ex-UK, the continent of Europe? Just some thoughts. And if you could talk about with those acquisitions were US and international in the quarter, thank you.

Yes, Scott, the two acquisitions in Spain and Romania, I would not read anything into that with respect to Europe versus Latin America. They were two small tuck-in acquisitions around regulated market medical waste. We will look at acquisitions like we always have, on a country by country basis, and if we feel that we need to do more integration work and improve margins before we do deals, and certainly that will come into our decisions. I would not look at it acquisitions Latin America versus Europe.

For the quarter, we had seven acquisitions. They were five domestic, two international. Brent gave you the Spain, Romania. Of the five domestic, one was regulated medical waste, four were secure information destruction, and as I said before, the two international were regulated medical waste tuck-in acquisitions in Spain and Romania.

Okay, and if I could ask kind of a two-part follow-up, (multiple speakers) separate. Could you speak to RMS in the quarter? It looked like nothing too dramatic there versus trend. I saw you took down the high end of the guidance range for the year by $5 million. Just what trends you are seeing, and then I will ask my third question now with it.

Just with what -- what shall we expect to hear on the second-quarter call when you talk about working with a consultant and what you are assessing? What type of outputs are we going to hear? And I know you're not going to quantify today, but what are the changes that are coming? Just if you could give us a taste. Thank you for answering both of those.

On the recall and returns question, we had solid growth this quarter versus the prior year's quarter greater than 20% year over year, so the 24.8% compared to a 20% in Q1 of last year, so the team had a very good quarter obviously. It continues to be an uneven business, difficult for us to your forecast.

The only reason, to your question of why we brought the top end of the range down, we just, after one quarter, still have not seen that one blockbuster really large recall. We would need a couple of those to get to the high end of the range, so we thought it was prudent to shave the top end of the range down a little bit.

But, the team delivered solid quarter on all the industries: auto, food and beverage, pharma, med devices, consumer products. The team continues to do a really good job for us there, and we are excited about the opportunities in the quarters ahead.

With respect to the consultant and what we will talk about our Q2, obviously we're looking at how best to organize the North America business. And it is all the businesses, it is ComSol and [expert], it's environment solutions, -- it is our environmental solutions. And more importantly, it is how do we take Shred-it and integrate that into all of our businesses and leverage the infrastructure that we have that really set us up for long-term growth.

So I think when the Q2 call comes along, we will talk about what the final outcome was, how do we structure ourselves, how are we going to have a better go-to-market strategy to utilize a better way to cross sell our businesses. And at the same time, Dan and the finance team will look at how are we measuring success in the new organizational structures internally, and then now externally when we talk to our shareholders and our analysts about the different matrix on a business.

So, that is our anticipation talk track for -- I think we are set up well to talk about that on the July call and those will be some of the topics we touch upon on and ask earnings call.

Great, thanks.

Brian Butler, Stifel.

First one just on the synergies, you are looking at now $53 million in synergies in 2016. How does that play out over the quarters and what is baked into the 2016 guidance from the perspective of the Stericycle synergies that you had talked about in the back half?

Let me work with you on the synergy numbers. Our previous guidance was $51 million of synergies would be in 2016. With us pushing out these on-site to off-site conversions, and reducing that by 20, we are now at $31 million will hit 2016. Those conversions will go throughout probably mid-2017, so we will recognize the full $73 million in 2018.

And yes, those numbers are in the guidance.

And as far as the Stericycle synergies that you asked, the $20 million to $30 million, we have always said those will start in 2017, but will be realized in 2018.

So although you're going to start so really they are all 2017. You're not going to realize any of that in 2016.

Correct, and that is no change from the previous time we spoke about that.

Okay. And is it possible to provide some kind of business line detail on either revenue and profitability kind of going through the stuff outside of the regulated medical waste such as the hazards waste, document destruction, patient communications?

Brian, I will address that. And it's really follows the conversation that Charlie just had below. I can give you certain averaging color, but remember I think you should look for maybe some enhanced reporting once we go through the consultant review and how we run the business. We will report based on a true reflection of how to run the business.

I think what you have asked for that we have given historically in businesses like ComSol, from a gross margin standpoint it is running at about Company average with an EBIT in the low teens, which is lower. It is more SG&A-intensive as you can imagine. Environmental solutions, this got gross margins in about the mid-20s and then again due to some of the costs, that Charlie talked about, that is in kind of the probably just low double digits.

And then Shred-it, where we have given you some historical on that and it has got EBITDA margins in the -- we tend to look at that, though on a [EBIT A] which is 16.5. I don't have the even numbers for you, but we have always talked historically from an EBITDA perspective. And that is the low to mid-20s that we think over time from an EBITDA perspective we can improve very well. So I think -- I don't know if there's any more that you need on that, but I think that covers most of what we can give on it.

Okay, and if I could just maybe tie one last one in there, on the regulated medical waste on the domestic at 5% growth organic, was there something -- is that price or volume? And does that just -- do you see that recovery just gradually through the rest of the year? And kind of get to your targets? Or is there something else that was missed there?

Yes, keep in mind, right, that the SQ growth and the LQ growth rate are not just medical waste. Over 50% of our SQ growth and 70% of our LQ growth comes from additional services like ComSol, compliance services, RX waste disposal, so that is not just medical waste. We actually did well on our growth rates, although the SQ growth rates were 6 and 4. If you adjust those growth rates for the impact of the fuel surcharge and the lower haz-waste volume, it would have been more like a 9 and a 6 in the quarter.

Okay, thank you.

Isaac Ro, Goldman Sachs.

It's actually Joel in for Isaac. Just another one on the domestic medical waste business. Any update to your strategy with some of those large providers systems and IDNs? Anything you guys may have learned from some of the deals you have struck thus far that you are using to negotiate any new contracts?

Yes, I think you are referring to the Shred-it contracts that we signed this quarter. I'm going to -- I will let Brent answer that, and I will give you a little color on what we are seeing, because I think you're also talking about IDNs, and I think we have some color there as well. But Brent can talk to you about what we are seeing early on, on the success in the secure information destruction for some of those LQ systems.

Yes, secure information [destruction] fits and really well with our LQ, our hospital salesforce. As we talked about in previous calls, we've got an account manager, a sales specialist model that has served extremely well for us to add on additional services with their customers, whether that be our Sharps Management program, our Pharmaceutical Waste program or our Hazardous Waste program.

This will feather in nicely with that as well. It's just one more solution we can bring our customers. We have had a lot of success adding on the services within healthcare and integrating networks. So we are very bullish and confident we will be able to do that very well.

And Joel, just to give you a little color on just the larger hospital systems in the US, we always kept an eye on that. Obviously you guys cover healthcare and you know that there is a consolidation of SQ practices by hospital systems. We are starting to observe some longer sales cycles at these hospital affiliated SQ customers. Remember the decision-maker changes a little bit when the hospital acquires a doctor's practice. Where we have normally dealt with an office administrator or office manager, we are now dealing with more personnel from the hospital. So, we believe we will see some pricing pressure on hospital-affiliated SQ accounts as these contracts come up for renewal.

But on the flipside, it does create an opportunity to sell our broader suite of more LQ type services like pharmaceutical waste disposal and our Sharps Management system.

But -- and to give you a little bit of color on that, we estimate that about percent of our SQ accounts are now somewhat hospital-affiliated. Internally, Stericycle refers to that has a blend customer, and we certainly are keeping an eye on that consolidation and decision-making process.

Okay, great, very helpful there, thanks. And then maybe just one just for Dan. I think the interest expense came in a little light this quarter. Any update on what the expectation is for the year on that on the interest?

Yes, interest was just a touch lower than guidance and so I think if you were to use -- look at the year, I think if you just brought it down about $1 million from what we shared last quarter from $106 million down to $105 million, I think that is a safe range to be in.

Thank you very much.

David Manthey, Robert W. Baird.

Dan, maybe if you could give us Shred-it revenue, gross profit in EBIT contribution this quarter?

Yes, let me take you through how they performed. From a revenue standpoint in the quarter, it was about $185 million, which is a good growth from last quarter. And remember that number includes acquisitions, and so I think its growth also, that is about -- up from $177 million, which is the acquired quarterly run rate. So, pleased with the growth there.

As we went through the bridge that I did share with you that they had pulled some marketing costs forward. That would have affected the EBITDA, our EBITDA margins a little bit, and they tossed some higher costs. But they are largely performing pretty well. I think from a guidance perspective in the rest of the year when you are looking at the model, they are running at an EBIT that when we delay the synergies now, I think it will be around 13.5, because we are moving those synergies out. We are going to pick those up next year. And then that accounts also for the change in paper prices.

From an EBITDA perspective, just down by that same amount, I think it was [200] we gave you last time, about [184] now.

Okay, thank you. And then you mentioned communications solutions. Could you give us an update there? I think Steri-Connect is fully implemented. When do you anticipate the growth inflection occurring in the service?

The new platform is alive at Steri-Connect. Accounts as we spoke about on the last call are being transitioned onto the new system and this will continue throughout 2016. This is a very slow process, as we've said, to convert these customers onto the platform.

Healthcare calls are very customized, and they are customized on an account-by-account basis. So it takes a long time to convert them into the new system. So far it's going well.

At the same time, we will be integrating our live (inaudible) infrastructure, that is the Steri-Connect system, with our automated product portfolio. So, things like automated appointment reminders, scheduling, so this will include a cloud-based automated scheduling and automated partner reminder service. And this does put us in a very unique position vis-a-vis our competitors in the market and actually we had new growth for Q1 for ComSol, and there was slightly ahead of our internal projections for the quarter.

So they are off to a good start for the year.

Okay, thank you. And just lastly, Charlie, when you talk about secure document destruction in the past, the kind of secular decline in paper overall, you mentioned that once you get out there, say 10 or 15 years from now, the Company will be providing additional data security services. I'm just wondering if you can give us a broad idea of what other non-paper-based data security services you might be able to provide?

David, this is Brent. Some additional services that are available now that we look to expand is they have got hard drive distraction services. So, while small, that is a new adjacent market that is a very large and profitable market we can go after. And we also hope to develop the same type of compliance programs that we are very successful at selling to our SQ customers and to roll that out kind of like a Steri-Safe for business, for business -- a business essentials package that we can take to those customers, and hopefully sell through the large salesforce that they have as well as our inside sales team.

Great, thank you.

Kevin Steinke, Barrington Research.

I think in the past you have talked about working to reduce your exposure to project-based industrial waste work and maybe even trying to convert that to more of a recurring model. So is that something you are still thinking about or any progress on that front?

Yes, Kevin, I think this is a good time maybe to take a step back and think about that business and tell you -- and really, by taking a step back and telling you why we got into what the strategy is for the long run, if you think about it, six years ago, we identified two significant growth opportunities: retail and healthcare hazardous waste.

And why do we think they were a good fit for Stericycle? They were a route-based business. They were SQ type volumes. They came with complex regulatory issues for the generator of the waste or the customer. And we had established relationships in a lot of those markets.

So when we looked at it we said that the retail haz-waste business was approximately $1 billion and we still think that today. In the healthcare SQ haz-waste market we identified as at least a $1 billion market. And we quickly became the market leader in these growing segments, but unfortunately, as we spoke about before, we needed to add that operational infrastructure to support our growth.

So we went out, we acquired PSC. We acquired other acquisitions to give us that additional facility in order to meet the demand in that growing business. Unfortunately, these acquisitions came with other hazardous waste streams: haz industrial waste, other hazardous waste, project work, and obviously we are frustrated that this base revenue is shrinking and most of this is really outside of our control and it's more market-driven.

But, we also have to look at what can we do better on the cost escalations on that business to make it better but we needed the infrastructure. It came with some things that we did not want to focus on.

Where we are focusing, we are seeing really great growth in healthcare ads and retail ads. So we continue to look at as a focus part of the business and we think over time that will become a bigger part and that will minimize the impact of this industrial and project work. And I think about, why do we still think it's a good business. I mean that's -- I'm sure a question of should you guys be focused on this or not.

And you think about recent enforcement action, recently Comcast announced a $26 million settlement in the state of California. It was related to two things. It was related to the improper disposal of hazardous waste, and the disposal of secure information.

So obviously, enforcement continues to build awareness. And I think this is a great example of how we have the ability to cross sell a wide variety of compliance related services over the customer base that we have or over one customer.

So that's really our strategy and it continues to be our strategy, is to focus on retail, healthcare and SQ hazardous waste.

Okay, that's helpful. And have you made any changes in the assumptions within your guidance for paper prices and do you continue to work on negotiating surcharges and contracts? I know that's kind of a longer-term initiative, but any update there. And also on what you are assuming for the paper pricing.

Sure, in Q1, it started off as paper pricing, increased by about $7.50 a ton from our last call. So last call, it was at $126 as an average -- at the end price of the quarter. At the end price of Q1, it is at $133.50 and that is what we assume now in our guidance going forward. Obviously in Q1 you don't get the entire $133.50 because that grew incrementally over the quarter.

But, that is what Dan has used in the model right now. -- is $133.50 or approximately $4 million for the rest of the year because of that slight increase.

We are starting to look at contracts and make changes on agreements. That is done on a contract by contract basis. We know that will take us several years to implement. And more to come on that in the coming quarters.

Okay, thanks for taking my questions.

(Operator Instructions) Hamzah Mazari, Sterne, Agee.

I just had one question. I know you guys are delaying some of the synergies to prevent disruption, but maybe if you could frame the upside -- potential upside to synergies for investors longer term. Thank you.

When we think about it, and one of the reasons we are going through the consultant study is that we think there will be an opportunity down the road when we are looking at markets that don't have density, where we might be able to combine some routes and have our drivers or the Shred-it drivers combine both medical waste and secure information on the same truck, because by definition, those rural routes are not dense. They are not dense for secure information, they are not dense for regulated medical waste.

So one of the reasons we are taking our time on the study, one of the reasons we are taking time out to disrupt customers is that we know there will be opportunities over the next two, three, four years to improve both the operations of our Stericycle business and the Shred-it business. There will be things like we have a tech inside the hospital collecting Sharp containers.

Our plan long term is to make sure if we have a hospital account with secure information instructions that that tech while they are there will collect all the secure information bins. So we will turn an account that used to take a secure information driver a long time to do, because they used to have to park their truck, walk throughout the hospital and collect all of these bins, we will have it waiting for that driver and it was just be another stop that they are picking up on their route.

So certainly, we are still excited about that. I think as we get closer to the Shred-it business, we -- all the things we thought about how closely it is related to Stericycle and what we do, we think there are things like that longer term that really set us up to improve the overall margin for Stericycle going forward.

Thank you.

Scott Levine, Imperial Capital.

Just to be clear, it sounds like the issues within the industrial haz waste are identical or very similar to the issues you experienced in 3Q of last year. I was hoping you might be able to confirm that and maybe elaborate on whether there has been any change whatsoever in either the types of customers that you are seeing the slowdown with, or are there any differences between what you experienced here in Q1 versus what you experienced in 3Q of 2015?

Yes, I think the big difference is what we experienced in Q3 was more fuel- and energy-related, and we saw that we were not going to pick up any part of the project or larger volumes in the foreseeable future. I think this is just -- we have seen a slowdown in the hazardous waste excluding the retail and the healthcare haz. And we already knew that there would be some seasonality and we adjusted for that. We just saw an actual decrease above and beyond seasonality.

So I think that's the main difference. It is not as dramatic in this quarter.

And then there is a mix issue where, on the project works we did do in Q1, we did see a higher disposal expense related to that, just based on the type of projects. And to be conservative, we wanted to make sure we look to Q1 and then we said if that continues, what does that mean for guidance for the rest of the year?

Certainly, it is not as big as the drop off in Q3, and I don't think is related, because I think one was certainly related to fuel and energy and this is just a softer hazardous waste market and manufacturing industry. (multiple speakers)

I would just add to that, while we are facing all that, again the focus areas that Charlie talked about, healthcare, hazardous, and retail continue to have great growth.

Understood. And is most of the pressure that you are assuming in the guidance change contained to Q1 or Q2 or are you kind of assuming this throughout the year?

Yes, and as we gave guidance for the year and I think Charlie already mentioned it, but it's about $0.10 to $0.11, and I would expect that to be spread evenly throughout the year.

Got it, great. Thanks, Dan.

Jason Rodgers, Great Lakes Review.

I just had a follow-up on the hazardous waste. How much revenue is left in industrial in project work, and what is the expectation by year-end?

Yes, if you think about some of the broad buckets, Jason, on the hazardous waste and the larger industrial in project work is about $100 million to $120 million. We talked about that last time. We have about $210 million to $220 million in the retail. Healthcare and hazardous waste bucket, there is a bucket of just general hazardous waste, which is the remaining part of that, which is both small quantity, larger quantity, there is some project work in that. But I think the thing that you are getting to their, the larger industrial project work is about $100 million to $120 million.

Thank you.

Barbara Noverini, Morningstar.

This is something that I think about when I think about the growth in your hazardous waste lines of business. So obviously the beauty about your medical waste business is that it is basically a closed loop. You can pick up the waste and dispose of it through your own facilities primarily. So, whereas in industrial haz, you are reliant on third-party disposal providers, which increases your cost.

Are you able to leverage any of your facilities to dispose of the healthcare or retail hazardous waste? Or are you also reliant on third-party disposal in those lines of business as well?

The reason we focus and we want to focus on the retail and healthcare hazardous waste is there is an opportunity where we are bringing that material back to our TSCF facilities. We can do -- we can break that waste apart.

We try not to use incineration or even landfilling in that material, and sometimes we can remediate the material. Sometimes it is used as an alternative fuel. So, that is why our focus is there, because that part of the business is not as dependent on disposal as this project in larger industrial waste.

And over time, we would like to grow that so that the industrial and hazardous waste part of the business is just a baseline business for us and it is a smaller part of the larger business. And in our RX waste, all of the nonhazardous pharmaceutical waste, we actually can utilize our medical waste facilities for that material.

So we do have a closed loop on some of that non-haz pharmaceutical waste when we sell that product to a hospital or to a doctor's office. Even some of mail docs that we have and the takeback programs, we will actually utilize some of our own medical waste facilities. So we certainly -- that is something we considered when we got into this business, when we look at why we want to grow those particular segments.

Great, great, that is good to hear. So, going forward, we could reasonably expect that there will be opportunities to, let's call it displace some of that industrial waste that is going through your systems at present. Maybe you will be able to allow some of those contracts to -- I don't know -- roll off, or something like that. But the goal would be to sort of use up that capacity with that other type of waste, because it seems to me that your advantages are just stronger there.

Totally right, and I think you have followed Stericycle a long time, so if you go back to the early days of Stericycle when we were mostly an LQ business, and not making much profit, we had obviously 70 -- 65% to 70% of our business was LQ medical waste. And we focused for years on the SQ side of the business. We did not get out of the LQ business, because you need that as a baseline for your facilities.

But what do we do? Fast forward 15 years. 60% to 65% of our business now is SQ, and LQ which still has a low profit to it, is a smaller part of the overall business.

So this is going to take time. We realize that. But I think you have seen it before from Stericycle. We are focusing on those smaller markets that have better profitability where we can control our own destiny. We are not going to walk away from this hazardous waste and the larger industrial waste market. But we do want to make it a smaller part of that business over time.

All right, makes sense. Thanks a lot.

There are no further questions at this time. Presenters, I turn the call back over to you.

Thanks, Steve. Thank you, everyone, again for joining us on the call this evening. We will see you all on the road during the quarter. Have a great night. Thanks, everybody.

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