Stericycle Inc (SRCL) 2016 Q4 法說會逐字稿

Good afternoon. My name is Devon and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle fourth-quarter earnings call.

(Operator Instructions)

Thank you. Sean McMillan, Vice President of Corporate Finance, you may begin your conference.

Welcome to Stericycle's fourth-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 or level of enforcement of governmental regulation or the collection, transportation, treatment and disposal of regulated waste, or the proper handling and protection of personal and confidential information; compliance with existing and future legal and regulatory requirements; increases in transportation and other operating costs; 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 indefinite-lived intangibles; variability in the demand for services we provide on a project or non-recurring basis; exposure to environmental liabilities; fluctuations in the price received for the sale of paper; disruptions in or tax on our information technology systems; 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, and investors should not use historical trends to anticipate future results or trends. We make no commitments to disclose any subsequent revisions to forward-looking statements. I will now turn it over to Charlie Alutto, CEO.

Thank you, Sean. Hello, everybody. Thank you for joining us on today's call.

Overall, we were very pleased with our fourth-quarter operational performance. Additionally, our Recall team delivered a record-breaking quarter which enhanced our results. We continued to make great strides in the integration of the secure information destruction business and related acquisitions. Finally, we completed our initial evaluation of certain assets for potential divestiture. We have sold one hazardous waste asset in the UK, and we have designated our patient transport business and an additional hazardous waste business in the UK as assets held for sale.

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

Thank you, Charlie. Before I give the numbers, I would like to highlight a change to our reportable and operating segments. In our Q4 press release and going forward, our financial results for Canada will be included along with our domestic business.

Our new reportable segments are Domestic and Canada Regulated Waste and Compliance Services and International Regulated Waste and Compliance Services. Our new operating segments are Domestic and Canada Regulated Waste and Compliance Services, Domestic Communication and Related Services, and International Regulated Waste and Compliance Services. These changes will not impact the four service lines recorded on the revenue table in the press release, and going forward, we will continue to provide that revenue table.

As you are aware, on January 26, we issued an 8-K that included adjustments to both GAAP and non-GAAP earnings. When providing the Q4 2016 numbers, I will provide results both including and excluding the items from the 8-K that affected revenues and expenses.

The results for the fourth quarter are as follows. Global revenues were $906.4 million, up 2% from $888.3 million in Q4 2015; and internal growth, excluding the impact of foreign exchange, acquisitions, divestitures and manufacturing industrial services, was up 5.2%. Domestic and Canada revenues were $725.3 million and, excluding the impact of acquisitions and foreign exchange, internal growth was 4.4%.

For consistency of your 2016 models, we're providing the following information. Please note that for 2017 results, we will no longer provide this break out. Domestic-only revenues were $686.6 million, of which $633.6 million was Regulated Waste and Compliance Services revenue and $53 million was Recall. Domestic internal growth, excluding Recall revenues and adjusted for 8-K items, was SQ, up 1%, and LQ, up 1%. As anticipated, growth rates were impacted by SQ pricing pressure and lower hazardous waste volume from our industrial customers.

International revenues, including Canada, were $219.8 million, or 6% internal growth when adjusted for foreign exchange impact, acquisitions, divestitures and 8-K items; and as anticipated, international growth rates were impacted by the exiting of certain patient transportation contracts. Acquisitions contributed $5 million to growth in the quarter and divestitures unfavorably impacted revenues by $0.2 million.

Gross profit was $380.2 million, or 42% of revenues. When adjusted for 8-K items, gross profit was $388.8 million, or 42.6%. SG&A, excluding amortization, was $211.5 million, or 23.3% of revenues; and when adjusted for the 8-K items, SG&A was $188.5 million, or 20.7% of revenue.

Adjusted income from operations, or EBITDA, was $168.7 million, or 18.6% of revenues; and when adjusted for the 8-K items, EBITA was $200.3 million, or 22%. Net interest expense was $24.6 million. The as reported tax rate for the quarter was 56.1%. When adjusted for the 8-K and other adjusting items, the tax rate was 37%.

Net income attributable to Stericycle was $12.3 million, or $0.14 per share on an as reported basis, and $1 when adjusted for acquisitions-related expenses and other adjustments. When taking into account the impact of the 8-K of $0.23, the adjusted EPS would have been $1.23 for the quarter.

Now to the balance sheet. Our covenant debt to EBITA ratio was 3.42 at the end of the quarter. The unused portion of the revolver at the end of the quarter was approximately $655 million. In the quarter, we repurchased 105,000 shares of mandatory preferred convertible on the open market in the amount of $6.6 million. At the end of the quarter, we have authorization to purchase 3.1 million shares.

Our CapEx was $35.2 million, or 3.9% of revenues. Our DSO was 64 days. Year-to-date, as reported cash from operations was $547.4 million; and when adjusted for recall reimbursement and other items, cash from operations was $612.4 million. I will now turn it over to Brent.

Thanks, Dan. This quarter, we closed nine tuck-in acquisitions. The nine acquisitions were five domestic and four international, with total revenues in the quarter of approximately $1.1 million and annualized of approximately $12.4 million. Our worldwide acquisition pool remains robust, with well over $100 million in annualized revenues in multiple geographies and lines of business.

This quarter, we also divested a UK-based hazardous waste asset that unfavorably impacted revenues in the quarter by approximately $0.2 million and has an annualized impact of $3 million. In the quarter, we saw strong performance from our Recall team, progress on our Shred-it integration, and continued implementation of our SQ strategic investments.

Focusing on the Recall team, the combination of our call center expertise, reverse logistics capabilities, and the dedication of our team produced a record-breaking performance in the fourth quarter. While some of the success was driven by the team's ability to quickly scale up to handle multiple consumer electronic events, we also saw continued success in the automotive and medical verticals. This commitment to our customers demonstrates why we are the market leader and why global brands trust Stericycle for executing a product recall.

Our Shred-it synergies remain on track, with a number of key projects making significant strides over the past several months. This quarter, we completed the integration of our inside sales and customer service teams. By investing in call center automation and intelligent work distribution systems, inbound calls and service requests can now be handled consistently across all our US branches.

On the field operations side, the team has established standard best practices and we plan to have these rolled out by the end of Q1. By leveraging standard procedures, our team members consistently meet the needs of the customer, while enabling ongoing incremental improvements to the process. And finally, our cross-selling efforts produced several sizeable wins in both our national and hospital account space.

In our SQ business, we continue to see competitive pricing pressure. While in the quarter, the team made good progress implementing the strategic initiatives discussed at our Investor Day, these initiatives will take time and we will continue to provide updates to these on future calls.

In closing, I would like to thank all of our worldwide team members 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 2017. 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.

For 2017, we believe EPS estimates will be in the range of $4.54 to $4.74, using a share count of approximately 91 million. This includes an unfavorable impact from foreign exchange, partially offset by acquisitions completed in the quarter. We believe revenues for 2017 will be in the range of $3.51 billion to $3.64 billion, depending on assumptions of foreign exchange and internal growth rates.

The worldwide revenue guidance for each of our service lines is as follows. Regulated Waste and Compliance Services will be in a range of $2.01 billion to $2.06 billion. Secure Information Destruction Services will be in a range of $785 million to $815 million. Communication and Related Services will be in a range of $340 million to $370 million, depending on recall revenues. Manufacturing and Industrial Services will be in a range of $375 million to $395 million. This includes the full-year impact of the UK divested M&I asset.

We have estimates for free cash flow in 2017 between $450 million to $470 million. 2017 CapEx is anticipated to be between $125 million to $150 million. We expect the 2017 full-year as reported tax rate to be approximately 36.5%.

We are very pleased with our results in the fourth quarter and we are confident in the long-term outlook for our business. Thank you for your time today. We'll now answer any questions. Devon, you can open the queue.

(Operator Instructions)

Your first question comes from the line of a participant whose information was unable to be gathered.

(Operator Instructions)

Hey, guys. Can you hear me?

We can hear you. Is this Ryan?

Yes, it's Ryan Daniels from William Blair. I apologize for that. I did put my info in. Thanks for the color thus far. I wanted to ask one on the guidance for 2017. I appreciate that it excludes the hazardous waste asset that you already sold. But does your current revenue and cash EPS guidance include the assets held for sale? And then if it does, if those are sold, can you talk about the potential impact to sales and EPS when that occurs?

Yes, Ryan. The guidance for both revenue and EPS excludes the asset that was sold. The revenue and the EPS associated with the assets held for sale are still in the numbers. Should those ultimately come to sale at some point during the year, we would make an adjustment at that point. When we do, you should expect that it's more of a revenue adjustment and would have minimal, if any, impact to EPS for the year.

Okay. Thank you for that. And then Charlie, you mentioned, it sounds like you completed the initial analysis on some of the non-core operations. I don't know if that's just internationally, which led to these decisions, but I'm curious if you've completed it domestically, as well, and decided to maintain the full M&I assets, et cetera, in the domestic operations.

Sure, Ryan. As I said in the opening statements, we did make a determination on what assets were sold and what are determined and held for sale in the UK. We did, however, also make a decision on the US business. We have decided to keep our M&I haz waste assets in the US, at this point.

Okay. And then final one and I'll get out of the queue. Just any more color on the pricing pressure? I'm curious if it's accelerated, decelerated, stayed the same, just any color there would be helpful. Thanks.

We continue to experience pricing pressure, obviously for local and regional competitors. Basically, Q4 came in as expected. So there's no change to the assumptions that we made on SQ pricing, as we discussed on our Investor Day.

Okay. Perfect. Thank you.

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

Yes, thanks. Brent, I think you said the sales force reorganization has now been completed. It doesn't seem like much of a stretch to imagine that that process weighed on sales productivity during the course of it. Do you think that's the case, that organic growth was negatively impacted by the reorganization the last couple of quarters? And if so, could you put some book ends around how big you think the impact might have been?

Well, overall, Sean, we've got a number of sales forces. And so I don't know if overall the results were affected. We've had actually quite a bit of success with cross-selling. We've been successful at selling, cross selling at both hospitals, large retailers, pharma. As a matter of fact, just this quarter we have a really large retailer that was using our hazardous waste service who now is going to use us for secure information destruction. So I would say from that perspective, things have gone well. But with the customer service, as well as the inside sales integrations that were happening in Q4, we did notice a little bit of lost purge volume. But the good news is is we're back on track and we're seeing that where expected now.

Okay. Thanks. And then Charlie, the decision to keep the US M&I business, can you give us a little bit more maybe background on what went into that decision? Are you seeing something changing in the market that makes you a little bit more encouraged now than perhaps you would have been before?

Sure, Sean. We looked at it, a few things that played, a few factors that played into our decision. Certainly, we didn't feel we'd get maximum value for the sale of this business at this time. The business has stabilized. And I think you see that in the table on the M&I line. So we feel that that business has stabilized. And there are improvements that we think with can make to the business and we think, we feel that the US industrial market does have a potential for a rebound, especially in the United States. Also, when we look at these operational assets, they fit really well and support our growing retail, our healthcare haz and our Rx waste services. So in the end, we believe that this is a great, this business has great potential for Stericycle, so we've decided not to sell the asset.

Got it. Thanks again and congratulations on the quarter.

Thanks, Sean.

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

Good afternoon. So you talked about some success in cross selling Secure Information Destruction and actually bumped up your revenue guidance for that business line by, I think, $5 million for 2017. So can you just talk about what's going well there? I think you talked a couple quarters ago about you were still working on some sales pilots there. Have you gotten to the point where you've actually are starting to roll out some of those sales pilots more aggressively or what's contributed to that performance and the outlook for 2017 in Secure Information Destruction?

Kevin, this is Brent. I'll take that one. Well, we've already mentioned cross selling is going very well. We've had a number of pilots also go into full implementation, both on the SQ side, or tele sales side, and also in our hospital sales groups. We now have a dedicated team of specialists selling it into our hospital customers. And as you know, we've had a lot of success selling additional services to our hospital customers.

I would tell you the biggest success, though, really has come from the team's ability to convert the unvend market. We've often mentioned the unvend market is as big as $2.5 billion in opportunity. And the sales executives associated with Shred-it have had a great deal of success closing that business. And as we continue to improve our service and grow that business, again we feel optimistic about the growth potentials for our Secure Information business.

Okay. Great. And then I think at the Investor Day, you talked about within your Communication Solutions looking to roll out, I think the live answer platform in 2017 and then becoming more aggressive on customer acquisition in that space. So just wondering where you stand in that process and how you feel about the outlook for the Communication Solutions as we go throughout the remainder of the year.

Yes, Kevin, I'll take that one. As you know, Ruth did a great job of presenting communication-related services and our live answer platform. An update there is the development of that enterprise-wide platform continues in the live answer cloud-based architecture. Again, that's what Ruth had talked about, the initiative was in Q4 and Q1. We are actively onboarding customers to the new platform, and the focus remains integrating our live voice capabilities with our automated products, which is a differentiated product in the offering. And if you remember, our automated products are a live answer, they are online scheduling, and automated appointment reminders. Certainly, it provides us a differentiated service offering in the marketplace.

All right. Perfect. Well, thanks for taking my questions.

Thanks, Kevin.

And your next question comes from the line of Hamzah Mazari with Macquarie Capital.

Good afternoon. Thank you. Just had a question around just the SG&A run rate. Could you give us a sense, both short-term what you're thinking in terms of trying to chase more volume and what the SG&A will do short term, and then longer term, do you guys have a plan to integrate your IT systems so that SG&A can get to a more normalized run rate longer term? Just any thoughts around that.

Yes, Hamzah, I think, as you saw in the quarter, one of the numbers we shared is after the 8-K adjustments, we came in at about 20.7%. Thinking about that going forward into 2017, and as we talked about on the Investor Day, you should expect that number to come up first. And part of that is making investments into systems that will enable us in the longer term to be able to get the leverage and the scale that you're suggesting. So I think it's a sequence of events. You first have to make investments in the business. That will manifest itself in a little bit of an increase in SG&A. That's built into the guidance numbers that we gave. And I think over the long term, you'll be able to see us be able to put that system to work for us, both in supporting SG&A, as well as growth drivers in the business.

Yes, Hamzah, I think longer term, obviously we want to leverage SG&A. When you say normalize SG&A, I think it's always been difficult to find a peer to Stericycle. If you look at us against, I don't think a traditional solid waste company is a good peer. We obviously have a higher SG&A run rate than they do. But then if you look at us vis-a-vis some business service organizations and companies, we actually have a more favorable SG&A as a percentage of revenue. But obviously, the long-term plan is to leverage all of our assets, get the right systems in place to bring SG&A down over time.

Okay. And then just on the Shred-it business, what mix are you running right now in terms of off-site versus on-site shredding? And is that going according to plan or are you seeing pushback from customers in conversion? I know last year, you guys had said that the timing was too aggressive to convert some customers. I'm just curious what the update there is.

Yes, as you'll recall, when we first acquired Shred-it, the mix was about 60% on-site and 40% off-site, with the goal of flipping that and getting to the point where we had 60% off-site and 40% on-site. So far, the team continues to make really good progress. I would say we're about halfway home there. And that's one of the many things contributing to the fact that we are able to hit our synergy targets through the end of the year.

Great. Just last question and I'll turn it over. So your guidance looks like it's coming down by $0.03 on a net basis, both sides, low and high end. And I know you mentioned this, Brent, is there any change to the underlying operating guidance? Is this just the divestiture coming out and FX being a little more negative and then maybe being offset by better SOP pricing, or just underlying operationally, is anything changing?

No, nothing operationally is changing from the guidance that we gave. And the divestitures did not have an impact to EPS. The change is really for two things. Foreign exchange, we've continued to see the dollar strengthen. And with the Trump administration, we've also heard that we expect that to continue. That's about $0.04 to $0.05 of impact next year. That's partially offset with the acquisitions that we completed, and that will contribute about $0.01 or $0.02. Those are the only adjustments we have. So what that does is it nets to a guidance going forward of $4.54 to $4.74. I also think it's really important on how we pace ourselves for the year on that. You know that Q1 over the last couple of years has historic seasonality into it, in it for our Environmental Solutions business. So I think you're best to start the year in the range of about $1.02 and $1.08, and then you'll ratchet it up from the last three quarters of the year.

Got it. Thank you.

Thank you.

Your next question comes from the line of Barbara Noverini.

Hi. Good afternoon, everybody.

Hi, Barb.

So of the nine tuck-in acquisitions in the quarter, what lines of business were they in?

You know, Barbara, I'll take that. We did nine, five of them domestically. Four of them were Secure Information Destruction, one Regulated Waste, and the four that we did internationally were all in Secure Information Destruction.

Okay. Great. Thanks. And then if you were to pull the recalls out of the business, what would be the underlying growth rate of Communication Solutions year-over-year?

I think from a Communication Solutions standpoint, Barb, I don't have the number directly in front of me, I think it generally runs around 3%. So I think if you pulled out recalls and returns, recalls of $53 million, it's around 3% growth.

Around 3%, okay. And then just one more. Last quarter, you guys talked about having some good success on the LQ side of things and in Sharps management selling. Did that continue into the quarter? Are you still seeing good success there or is that something unique to last quarter, in terms of some of the business that you'd been pursuing?

No, Barb. We continue to see ongoing adoption of both our Sharps management program and our Rx waste program. So continue steady as she goes.

Okay. All right. Great. Thanks, guys.

Thank you, Barb.

Your next question comes from the line of Michael Hoffman from Stifel.

Thank you very much. Charlie, Dan, Brent, how you doing?

Hi, Michael.

So the $450 million to $470 million in free cash that's guided for 2017, what's that compared to in 2016?

Michael, you're garbled up a little bit, Michael. Can you repeat the question? I'm sorry.

The $450 million to $470 million of free cash in 2017, what's that compare to 2016?

Yes, the adjusted free cash flow that we ended for 2016 came in at $476 million. So that first look at it with the adjustments that we have of FX, I think is right in line with where we are, the EPS is relatively flat. We did bring it a little bit down, just from the things we talked about, FX and acquisitions. So generally in line with last year.

Okay. So that's a different display than when we saw at the Analyst Day, because at the Analyst Day you were showing us a guidance of about $400 million compared to the $450 million for 2017 on the bottom end, so --

From what I can see, Michael, I believe our cash flow guidance, free cash flow of $450 million to $470 million is unchanged.

I think the confusion on the Investor Day, wasn't that a year-to-date number and not a full year number? I thought that was it. But the guidance has not changed on free cash flow. It was $450 million to $470 million at the Investor Day.

Yes, I get that. But at the Investor Day -- I just want to be clear -- at the Investor Day, we all walked out of there, you were going to grow free cash in 2017 on a like-to-like basis to what the 2017 number was versus how you'd ended 2016. Now what I'm hearing is that free cash is actually down on a like-to-like basis.

You know what, Michael, I think the challenge there is that I believe in the Investor Day, you may have seen the as reported number.

And just so you're clear, our as reported free cash flow for 2016 is $411 million That translates to an adjusted of $476 million. The guidance that we gave from an adjusted is $450 million to $470 million. So I think maybe that will help from an apples-to-apples.

Okay. So what's the assumption of adjustments in the $450 million to $470 million?

We'd expect, we're going to run the adjusted items, and again, those will get taxed different, usually, I think, and I have that, I would assume that going forward, the adjusted EPS is going to be in the range of about $0.40 to $0.45 per quarter of adjustments. That's an EPS. The dollar associated with it, I don't have the exact break out, but you can probably back into the number on that.

Okay. So 42.5 times 91 times 4, is what you're telling me?

Yes, that's about the average, right around, between $0.40 and $0.45 per quarter of adjusting items.

Okay. And then you've given, in the last two quarters, it's been a look forward more than just the EPS, so a little bit of thought around your free cash and as well as even an EBITDA, an adjusted EBITDA number. What's your thoughts about 1Q in the context of the ability to look forward 90 days and say, this is what we think our business can do?

I think from an EBITDA percentage, I think from a Q1, 21.5 is where we feel we'll be at the start of the year, Michael, from an EBITA perspective.

That's going to ramp up. From an EBITA, Michael, I think Q1, you're looking at about a 19%, and then you should go up to about a 21% for the full year.

Okay. So fiscal 17 is 21, but 1Q is 19?

19. And again, that factors into the seasonality, as well as in the front half of the year, you have additional fringe that comes in the beginning of the year. And then you'll be able to ramp up from that. It also takes into consideration the investments that we've talked about.

Okay. And so on an apples-to-apples basis, what's that percentage in 4Q?

Why don't I bridge you Q4 going to Q1 on how they would shape out? You can expect a normalization of the expert business; and to the midpoint, that's about $20 million. In addition, you've got the normal [Esol] seasonality. That will bring it down some. And then you have higher fringe, higher corporate. So you're going to really take the adjusted Q4 EBITDA at about 22, and then we'll come down to about 19 and then begin to ramp up from there. If you look at it, it's the same effect that you've seen on the EPS in prior years, too. It definitely steps down due to those same factors.

Okay. And then do we have a little steeper year-over-year comparative on M&I, because you still declined into 2Q from 1Q in 2016. So is this maybe even a little deeper cut because that M&I comparison --

No, when you look at our guidance we just gave, Michael, compared to the guidance we gave last quarter, it's roughly down $5 million. But that really has more to do with the divested asset and foreign exchange.

Okay. And then on M& I, I get selling a business at the bottom of the cycle doesn't make a lot of sense, and so I'm not hearing this is taken off the table entirely, but you're not going to sit here and put yourself in a position of trying to negotiate out of a position of weakness. So at some future date, this could be revisited.

We revisit all of our assets and we look at it by country, by service line. But right now, we don't anticipate selling this asset any time in the future. We think it has potential and a long-term fit with Stericycle. Thank you.

Your next question comes from the line of Jason Rodgers with Great Lakes Review.

Yes, a question on the success you've had with the Shred-it cross selling, the services there. Are you bundling that with the waste management, and if so, are you giving discounts on the waste management side for those contracts?

Yes, I would tell you, Jason, that most of the cross sell success has been built off of relationships. So we've got a strong relationship with a national customer or a system or a hospital, and with that credibility we bring in our counterpart, and it just puts them in a good light with regard to credibility that we deliver on what we say we're going to do. So most of the success so far has been around those relationships.

And then looking at the amount of synergies from Shred-it, how much was realized in 2016 and is $20 million still the target for 2017?

Yes, I'm happy to report that in 2016, we were able to achieve the $31 million that we discussed previously. And our goal is to obviously hit the $20 million in 2017 that we talked about.

And just a question on the income statement in the fourth quarter. That $7.1 million in other expense, what is that and was that excluded from the adjusted results?

There was a small part of the 8-K that did affect other income and expense, as well as there was an entry due to the settlement of a note between the UK, about $2.5 million of that was due to the 8-K, and the rest was a settlement of a note, and about $1.5 million of that was FX.

But the dollar that you reported, does that include the $7.1 million?

It does. It does.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Al Kaschalk from Wedbush Securities.

Good afternoon, guys.

Hi, Al.

I wanted to focus on two areas, most of the questions have been fired at. On the international front, the organic growth of 4.5%, could you talk about the components there of what drove what seems to be a fairly healthy number?

Yes, we did. We had a good result from the international. It also had some headwinds from the patient transport exits that we've talked about previously. Really, what drove international were international recall revenue. So we reported $53 million. Obviously, that's US recall. But some of those events were global events, so that really drove that 4.5, rounded 5, with the recall. I think if you take that out, Al, it had probably a 2% impact. So we would have came in around 3% growth, if you extract the international recall revenues.

Okay. And then just the follow-on. Is that business, the international recall, or let me ask it differently, was the profitability better on the organic business or was it influenced by the recall business, which has, I think, a good cash flow business, but I'm not sure about the margin profile?

No, the profitability was about consistent on all the other underlying businesses. Obviously, with a recall event like that, it flowed through a little bit better than company average and a little bit better than international average. So the recall would have been personally responsible for the uptick of that. The rest of the business operated relatively consistent from what we've seen.

Okay. And then domestically, have we seen any change on the pricing environment on the international front? I know the 8-K addressed part of that, but I'm surprised that the growth rates maybe implied by the guidance, we wouldn't have had some impact on the revenue side there.

No, when we talk about SQ pricing, which is the first part of your question, that doesn't have anything to do with the international. We continue to grow our international businesses. Obviously, different countries are at different stages. Some drive growth through new med way services, some drive growth through additional services. So I think those came in as we expected and guided for on the last call. Again, the uptake in international had to do with the international recall revenues.

Okay. And then just a clarification. The pricing that you're assuming in the Security Information business, particularly sorted office papers, had a fairly good run or maybe tonnage that you're assuming in 2017.

Yes, the pricing has gone up. It's slightly above the range that we had when we gave you guidance. Our range was anywhere to $147.00 to $167.00 a ton, with $157.00 being the midpoint. What was the other half of your question, Al?

The assumption.

The assumption, Al, midpoint of the guidance is $157.00, and there's been no changes to the volume in that.

And the volume, as we shared at the Investor Day, is anywhere worldwide between 700,000 and 800,000 tons.

Okay. All right. I'll follow-up. Thank you.

Thanks, Al.

Your next question comes from the line of Joel Kaufman with Goldman Sachs.

Hi, guys. Thanks for taking the questions. Just any update on what the incremental margin profile of the recalls business actually looks like today. Just trying to understand what the normalized EBIT margin would have been this quarter ex the recalls beat, ex the write down.

Yes, the incremental contribution to EBITDA, if you looked at our guidance, we gave guidance of about 21.5%. It came in on an as reported of 18.6%. We were unfavorably impacted by the 8-K. That was about 340 basis points. The remainder is about 50 basis points of improvement that came from a combination of things. That would be recall, the higher recall, foreign exchange, that actually helps EBITDA a little bit, because you have lower margin business coming out, and then the higher paper prices contributed, as well. So the combination of all of those, when normalized for the 8-K, was about 50 basis points of improvement.

Great. And then just to clarify on the paper shredding business, to what extent did price on the recycled paper side contribute to any of the organic growth this quarter?

It's about $2 million, it contributed about $2 million to growth. And that's spread over both domestic and international.

Great. And the last one for me, just on capital allocation. Looking back to the comments you guys made at the time of the Shred-it acquisition, you guys discussed rapidly delevering to pre transaction levels by 2017. Obviously, not pacing towards that. And in light of the headwinds that you guys have seen over the past year and a half, just trying to understand two things, one, if deleveraging is still a priority, and two, any framework to think about leverage targets over the next several years.

Yes, I think unfortunately, sometimes good success gets lost in the numbers. We did come in at 3.42. Part of the reason that we went back on that is the adjustment to EBITA due to the 8-K. And the unfortunate thing is that offset really over $200 million that we have paid down in debt. So when you've adjusted the EBITDA on the calculation, it's taking it away. We did start a pretty good progress of delevering. But our allocation strategy hasn't changed and it's unchanged from what we gave you at 2017, or at the Investor Day for 2017, and that's really the majority of our cash is going to go to debt reduction. We will contribute anywhere in the range of about $110 million to $130 million towards acquisitions, but I would say that our strategy hasn't changed. I think you'll see strong delevering. We've got an incredible cash flow, as we just shared on Michael's question, that from a free cash flow standpoint, with a 2016 range of $450 million to $470 million, we were above that. So if we continue to be able to put that cash to work for us, we'll make progress on our delevering.

Great. Thanks, guys.

There are no further questions at this time. Pardon me, your next question comes from the line of Michael Hoffman with Stifel.

Just one quick follow-up, if I may.

Sure.

At the Analyst Day, you had $0.19 for investing back into the business offset by a positive $0.17 for repurchasing the convertible. Is that still in the model?

Yes, Mike. Nothing has changed from that strategy. So you didn't see, we did not make any changes operationally, whether it be for mandatory or for the investments that we're going to make. The underlying business remains the same. It did contribute to the Q1 jump off point of $1.02 to $1.08, and that's really where you begin to see that $0.19 kick in.

Okay. And then lastly, what was the per share impact of the repurchase in 4Q? Because we can't, we got to figure out what that premium versus the savings dollars --

Yes, do the math on that, Michael, is it comes to $0.04 of EPS.

$0.04. Okay. Great.

Thanks, Michael.

Thanks.

You're welcome.

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

Hi, guys. It's Dale in for Scott. Can you please elaborate a little bit on what you're seeing in the M&I segment and how you would categorize your visibility now heading into 2017 and what you saw in the fourth quarter?

Yes, I would say it's consistent over the last couple of quarters. We still have every single quarter about $15 million to $20 million of project work. We've got a good pipeline. And I think as I said earlier a couple of times in my comments, that business has stabilized. I think we have good visibility to it. There's still, obviously every quarter, project work that we have to fill, but that project work is down significantly from where it was 12 months to 18 months ago.

Okay. Thanks. And lastly, can you help us think about the gross margin progression as we go through 2017?

Yes, when thinking about gross margin going forward, I would start your year at around 42%, slightly down from the 42.6%. That has to do with the normalization of the recall that we had, as well as the seasonality. From that 42%, I think you have a full year of about a 43.5% gross margin.

Okay. Thank you.

Your next question comes from the line of Larry Kirsch with Raymond James.

Thanks. Good afternoon, guys. Charlie, I'm wondering if you could just spend a moment and provide some thoughts around the acquisition strategy for secure document destruction overseas. Obviously, you did a bunch this quarter, so if you could talk about geographically where you're going or what markets you're going after, and maybe also talk a little bit about the margin profile of these acquisitions that you're going after.

Sure. I think if you think about our international footprint, there are some markets where we have secure information only businesses today, and there's some markets where we're in that we don't have any secure information, but we have certainly operational platforms there for medical waste. So one of the acquisitions we did internationally actually was in Spain. So we were able to acquire a leading secure information destruction business in Spain and then take our operational assets and help that business from a leverage standpoint, where we park our charts, using it now to sell secure information for the healthcare customers we have in that market, very similar to the United States and the Shred-it acquisition.

Certainly, in markets where we currently have Shred-it assets, we add on acquisitions where we think we can get either tuck-in, so we'll do tuck-in acquisitions to leverage the existing secure information businesses that we have in those markets, or it might be an expansion of the geography where we're not currently in. So that's really how we're looking at secure information. Margins vary by geography. For the most part, if you look at Shred-it margins globally versus Shred-it margins in the US and Canada, they're very similar.

Okay. Perfect. And then one other question. Just wanted to get your updated thoughts around the data analysis model that you were working on relative to assessing your SQ customers in the US and trying to predict those that would require some revisions on pricing versus those that may not and how you're thinking about, again, potentially accelerating contract renewals, where applicable.

Larry, I'll take that one. This is Brent. Just to reiterate for one, when the purpose of that investment was really to enable us to use big data and those powerful analytical tools to pinpoint specific areas of opportunity. A lot of work has been done in the quarter. The team put together the data, the tools are now in place. It is early in the process and we continue to run a number of pilots to learn what works best. Early indications are showing positive signs. Some examples would be we take data around people who attend webinars, people that sign into our website and create safety plans or respond to certain promotional e-mails. What we do is we use that data then to target customers for additional incremental sales. And the goal, and what we're showing, is it improves our overall close rates so we can be more productive as a sales organization. And that's one of many, many different ways that we're using this data to help make us more effective as an organization.

Okay. Terrific. Thanks, guys.

Thank you.

There are no more questions at this time. I'll turn the call back over to the presenters.

Thank you, Devon. Well, thank you, again for joining. We look forward to seeing some of you at various conferences and road shows in the coming months ahead. Have a great evening. Thanks so much.

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