Stericycle Inc (SRCL) 2017 Q3 法說會逐字稿

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Third Quarter Earnings Call. (Operator Instructions).

I would now like to introduce your host for today, Ms. Jennifer Koenig, Vice President of Corporate Communications and Investor Relations. Ms. Koenig, the line is yours.

Thank you. Good afternoon, and thank you for joining Stericycle's call today. The discussion during today's call includes forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause the actual results to differ are discussed in the safe harbor statement in our earnings press release and in greater detail in Stericycle's filings with the U.S. Securities and Exchange Commission. Past 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 commitment to disclose any subsequent revisions to forward-looking statements.

On the call today, we will discuss non-GAAP financial measures. Please refer to the footnote and schedules on our earnings press release, which can be found at www.stericycle.com, for additional information and reconciliation to the most comparable GAAP measures.

Joining today's call will be Charlie Alutto, Chief Executive Officer; Daniel V. Ginnetti, Chief Financial Officer; and Brent Arnold, Chief Operating Officer.

I will now turn the call over to Charlie Alutto.

Thanks, Jennifer, and thank you, everyone, for joining us today. In the quarter, our Secure Information Destruction, hospital regulated waste and retail and health care hazardous waste services all had strong performance. Our small quantity health care and Communication and Related Services performed consistent with our expectations.

Also in the quarter, Manufacturing and Industrial came in lower than anticipated, we experienced cost pressures in Latin America and we were impacted by several hurricanes across the Gulf Coast, Florida and Puerto Rico.

Prior to our detailed review of the quarterly results, I'd like to introduce a comprehensive Business Transformation initiative that we are undertaking to improve our long-term operational and financial performance. Since our inception, the company has grown through 490 acquisitions resulting in many different systems, business processes and resource redundancies across the organization. Although Stericycle has traditionally been a lean company, we see substantial opportunities to improve our operations. The transformation will impact all of Stericycle's service lines and geographies. While the initiative is expected to take 3 to 5 years to complete, we anticipate positive contributions to the business starting as early as 2018.

The Business Transformation includes the following key initiatives: the implementation of an enterprise resource planning, or ERP, technology platform to consolidate the company's multiple systems; the restructuring of our organization and consolidation of select operations; the improvement of business processes across the organization, including route planning and logistics; and the reduction of spend through improved procurement processes.

This Business Transformation will improve the long-term financial and operational performance of Stericycle. We'll provide a more detailed review of the initiatives, the costs and expected savings during our Q4 earnings call in February.

I'll now turn the call over to Dan.

Thanks, Charlie. The results for the third quarter are as follows. Global revenues were $882.8 million, a decrease of 0.8% from $890.1 million in Q3 2016. Organic revenue, when adjusted for the impact of foreign exchange, acquisitions, divestitures and Manufacturing and Industrial Services, increased 0.2%. Domestic and Canada revenues were $708.2 million. Organic revenue, when adjusted for the impact of foreign exchange and acquisitions, decreased 0.2%. Organic revenue was adversely impacted by Manufacturing and Industrial Services. International revenues were $174.6 million. Organic revenue, when adjusted for foreign exchange, acquisitions and divestitures, decreased 2.2%. Organic revenue was adversely impacted by the exiting of certain patient transportation contracts in Manufacturing and Industrial Services.

Acquisitions contributed $6.8 million of revenue in the quarter, and divestitures reduced revenues by $9.9 million. Gross profit was $368 million or 41.7% of revenues. Adjusted SG&A, excluding amortization, was $192.2 million or 21.8% of revenues. Adjusted income from operations, or EBITA, was $175.9 million or 19.9% of revenues. Net interest expense was $24.5 million. The as-reported tax rate for the quarter was 41.6% versus an adjusted tax rate of 36.9%. Net income attributable to Stericycle was $35.4 million or $0.41 on an as-reported basis and $1.10 when adjusted for acquisition-related expenses and other adjustments.

Now for the balance sheet. Our covenant debt-to-EBITDA ratio was 3.48 at the end of the quarter. The unused portion of the revolver was approximately $712 million. In the quarter, we repurchased 145,000 shares of mandatory preferred convertible for $8.7 million. At the end of the quarter, we have authorization to purchase 2.7 million shares. Year-to-date, as-reported cash from operations was $392 million. When adjusted for recall reimbursement and other items, adjusted cash from operations was $462.1 million. Year-to-date CapEx was $91.7 million or 3.4% of revenues. Our DSO was 64 days.

Finally, I'd like to highlight that the company is in the process of renewing and extending its existing senior credit facility and term loan. We are capitalizing on current favorable debt markets and economic conditions. We appreciate the continued support from our banking partners, and we'll provide further details when the financing is complete.

I will now turn it over to Brent.

Thanks, Dan. This quarter, we closed 5 tuck-in acquisitions, including 4 in the U.S. and one internationally. These acquisitions contributed revenues of approximately $0.3 million in the quarter, with projected annualized revenues of $3.1 million. Our worldwide acquisition pool remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business.

As Charlie mentioned earlier in the call, our Secure Information Destruction, hospital regulated waste and retail and health care hazardous waste services all had strong performance in the quarter. Small quantity health care and Communication and Related Services performed in line with our expectations. Results in the quarter were adversely impacted by the weakness in the global manufacturing and industrial market, cost pressures in Latin America and several hurricanes.

Starting with our Regulated Waste Services. Small quantity health care pricing pressures came in as expected. Our hospital sales team delivered another strong quarter, driven by sales of Sharps Management, pharmaceutical waste and our new solution for controlled substance disposal.

Our Secure Information Destruction Service continued its organic revenue momentum, delivering 6.4% growth in the quarter. Our national accounts team signed 4 new accounts, all recognized leaders in their industries. Our integration of Shred-it and follow-on tuck-in acquisitions remains on track.

Our performance in the quarter was negatively impacted by the recent hurricanes in the Gulf Coast and Southeast regions. These storms temporarily closed many of our facilities and our customers' locations. Hurricane Maria shut down our operations in Puerto Rico for several weeks, and we are still working to return to normal operations. We also saw a decrease in revenues across our global Manufacturing and Industrial portfolio resulting from weakness in the market and unexpected delays of project work. In addition, Latin American cost savings initiatives that were anticipated to be completed in Q3 are now extending into 2018.

In closing, we would like to thank all of our team members who supported the recovery efforts related to the natural disasters. Our team members did a remarkable job preparing and protecting our sites and worked tirelessly to reroute and service our customers. And finally, we would like to thank everyone in the Stericycle family who donated time, money or gifts to support their fellow team members impacted by the hurricane.

I will now turn it over to Charlie.

Thanks, Brent. I'd like to announce that we've revised our financial guidance policy. Consistent with industry peers and best practices, we'll provide our full year 2018 financial guidance when we announce our fourth quarter results. This change will improve our visibility into the upcoming year prior to issuing initial guidance. The fundamentals of our markets remain strong. We are confident that we'll continue to maintain and grow our business into the future. Although we are not giving detailed guidance for 2018, we anticipate that our 2018 results will be in line with our expected 2017 results.

Now for our current guidance for the remainder of 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 will be in the range of $4.46 to $4.52 using a share count of approximately 91 million. This includes the impact from current foreign exchange rates, acquisitions and divestitures. We believe annual revenues for 2017 will be in the range of $3.54 million to $3.6 billion using current foreign exchange rates.

The worldwide revenue guidance for each of our service lines is: Regulated Waste and Compliance Services will be in the range of $2.01 billion to $2.03 billion, which includes the impact of the divested patient transport business; Secure Information Destruction Services will be in the range of $820 million to $830 million; Communication and Related Services will be in the range of $370 million to $385 million, depending on recall revenues; Manufacturing and Industrial Services will be in the range of $340 million to $360 million. We believe adjusted free cash flow in 2017 will be in the range of $450 million to $465 million. The 2017 CapEx is anticipated to be between $125 million to $145 million. We expect the 2017 full year adjusted tax rate to be at or slightly below 36.5%.

Thank you for your time today. We'll now answer your questions. (Operator Instructions) Sarah, you can now open the Q&A line.

(Operator Instructions) Your first question comes from Ryan Daniels with William Blair.

I know you want to reserve a lot of the conversation about the Business Transformation initiative till February. But I'm curious if you can talk maybe specifically about the ERP. I know that's something that's been a topic on a lot of investor minds for a while. And I guess there, specifically, regarding the costs and timing and how you account for it and then what you think the potential SG&A savings over time to look like from that specific initiative.

Yes, Ryan, let me take that. I think on the ERP decision, first, and then we can talk about costs. But on the ERP decision, we went through a competitive selection process. We actually included a second opinion validation, obviously, we've been going through this for a while, and we identified a top-tier software platform. We are now in the ERP process for the system integrator. So when we think about costs, we're pleased with what we believe will be the anticipated cost savings from the Business Transformation. But I think until the terms of the system integrator, and as I said, that's currently going through an ERP, are finalized, we will not go into detail on costs yet. We, again, will talk about costs and savings on the February call. However, when you think about costs associated with the Business Transformation, including the ERP implementation, we are going to capture these as an adjusted item. This is consistent, I think, with best practices for handling such investments, and it will provide transparency to our shareholders and hold the management team accountable to the numbers that we give out in February.

Okay, that's helpful. And then, Dan, can you just give us an EPS bridge between the prior and current guidance? I know there's some moving parts with the revenue, with FX, with the tax rate this quarter. Just the bridge is always helpful for us.

Yes. And I think, Ryan, specifically you're asking about the revised guidance? Or are you looking just specifically for the Q4 results?

The revised guidance.

Okay.

Or both, if you want to offer it. I'll take both. I'm sure others would as well.

Sure. Let me take you through that. It'll probably be easier if I first take you through the bridge to the current quarter, because that will have impact, obviously, in the Q4. So when you think about Q4, The Street consensus was at $1.14, and our guidance was $1.13 to $1.19. The Q3 adjusted EPS came in at $1.10. EPS from operations fell short of Street expectations by about $0.05, primarily due to the lower M&I volume, some higher costs in Latin America and the multiple hurricanes in the quarter. We had about a $0.01 tax headwind that was more than offset by $0.02 of favorability of the repo and our mandatory preferred convertibles. So that gets you to the current quarter. When you think about going forward, if you take the Q3 EBITDA miss, that was about $0.04 on the low end and $0.10 on the high end. So that gets factored into the go-forward rate. We will add to that the repo, the $0.02 of repo that we got in Q3. The rest of these are impacts that we see carrying forward into Q4. For M&I and the continuation of the weakness in the market, we see about $0.05 on the low end and $0.07 on the high end. If you saw the bridges Charlie gave for the revenue, you saw that we tightened our Regulated Waste and Compliant Services revenue, really taking the top end down. So that's really no change on the bottom end and about $0.02 off on the high end. We anticipate that the hurricane, both in Puerto Rico as well as the impacts in the Gulf Coast region, to be a potentially another $0.01 headwind going into Q4. Our International business, with some revenue impacts in EMEA as well as those cost pressures we discussed in Latin America, to be about $0.05 on the low end, $0.07 on the high end. As you've seen, paper prices have come down, and so what we're simply doing is trimming a couple of pennies off the top end of the range as a result of the direction paper's going. So that's no change in the bottom end and $0.02 on the top. To offset this, we have anywhere from $0.03 to $0.08 of favorability. And that will come as a result of some improved benefit costs we're experiencing as well as rationalizing our bonus program to account for the change in our guidance. And then finally, we have about $0.01 to $0.02 favorability due to lower interest rates. So what you're seeing is the ultimate change is about $0.09 on the bottom end and $0.17 on the top, for a midpoint of $0.13.

And just to add to that, so as you go into Q4, you would expect in the range of $1.12 to $1.18.

Your next question comes from Sean Dodge with Jefferies.

Charlie, maybe just going back to your comment on the initial outlook for '18. You made the comment that you expect the '18 results to be similar to 2017. Without getting too far in the lead there, did you mean that the growth trends that you're seeing in '17 you expect to carry into '18? Or do you literally mean that you expect '18 ranges to be similar to the numbers you produced in '17?

Yes, I think if you think about what's -- we're faced with a probably a $40 million headwind on SQ -- that's our best estimate; that hasn't changed -- for 2018. So if you think about that headwind that we're facing, that was known that we were going to face, what I'm saying is that we'll be flat from an EPS perspective. I don't think there'll be major changes. Obviously, some of the C&RS business has some lumpiness in it with projects, and obviously, M&I has some projects in it as well, but I'm talking more about an EPS guidance flat '18 versus '17. Again, we have a headwind to make up on the pricing for our SQ business, which remains about $40 million and it remains about $120 million to $130 million over this next 2.5 year period.

Okay. And then going back to the bridge for the quarter, Dan, could you just strip out for us the impact of the hurricanes alone? I'm sure it affected med waste, but it -- I would imagine it also had some impact on M&I as well. So just the impact from the hurricanes, maybe both revenue and EPS, if you could?

Hey, Sean. This is Brent. I'll go ahead and take that one. In the quarter, we had about a $0.02 impact with regard to the hurricanes. And that's a very conservative impact. As you can understand, there are certain things that are easier for us to quantify, stops we went to where we weren't able to do that, and what's the normal revenue of those stops. Facilities that were closed and what's the normal revenue or costs associated with those facilities on a daily basis. Those are a lot more straightforward and simpler to get. The things that are more difficult are things like the time the team members spent preparing for the storms. Team members that actually went to different districts to help out with the storms. So for instance, our Northern Texas team all went to southern Texas during Hurricane Harvey. And really, that was driven by the fact that most of our team members, or many, were impacted personally. So we needed to bring people in. So there's just a lot of moving parts, not impossible to quantify, but difficult. So again, $0.02 in the quarter. We think that's a conservative number. And also I would just mention that we do feel, and you heard that in Dan's bridge, we do feel another $0.01 will also be an impact as we go into Q4.

I think one of the things that also that makes it very difficult to quantify is as we are experiencing the flooding and having to reroute our typical routes around different routes to be able to get to those stops as well as changing our routes for stores that are open and stores that aren't, added challenges that are hard to capture that exact dollar amount. But it did make routing very difficult in both of those areas.

Your next question comes from Scott Schneeberger with Oppenheimer.

I'm going to take it outside the country for a moment. Could you elaborate on just the dynamic in Latin America? It sounds like some M&I projects pushed but also just cost pressures. Could you elaborate on each? And then I'm going to have a follow up on patient transportation.

Yes, I'll let Brent jump in on the M&I, because the M&I number, Scott, is a global number. So we are seeing weakness in the M&I sector, not just in the U.S., but also in Latin America. The Latin America cost issues, though, are related to saving plans that were primarily related to our Brazil operations and are delayed due to permit issues. We had a plan that we were going to close several disposal plants but convert them to transfer stations in Q3. Those would require permanent modifications, and they are just taking longer than anticipated. Of course, these plant conversions also had related restructuring savings that didn't come to fruition because of the delay in obtaining the permits. And we'll take this initiative, like all other initiatives, and push it into the Business Transformation, which also have some savings initiatives well above and beyond just the ERP implementation, and those will move into our 2018 plan. On the M&I, I'll let Brent kind of talk a little bit about the M&I volume reductions.

Hey, Scott. It's Brent. You know what, I'll also just talk about M&I just globally, if you don't mind. I'm sure it's on a lot of people's minds. As we mentioned earlier, it came in below expectations. Again, really driven by many factors. Charlie has already hit on the fact that this is a global number. And so you will have effects for industrial weakness outside of the U.S., especially in the markets where we participate. It was also driven by lower project volume overall and just lower project work and volume levels were down. Also disruptions from the hurricane. We've talked a lot about that, but many of our facilities on the ESOL side were closed. As a matter fact, our Houston TSD was closed almost 10 days. So a significant impact on our business there. And it is a competitive market, so we continue to face different pressures in the market. So those are some of the key drivers that account for the M&I coming in below expectations. I think I would be remiss, though, if I didn't take an opportunity to step back and just reiterate that our M&I business is a component of our overall Environmental Solutions business. So while we break M&I out to give that transparency and that visibility to the variability that the M&I business sort of revenue has, it's really part of -- it's one piece of a much larger business. And that infrastructure associated with M&I, really, is what helps us enable the growth of our retail waste, which is actually growing in high single digits; our hospital hazardous waste, which is growing in low teens; some of our pharmaceutical waste program, which is another big growth initiative for us; some of our opioid or take back programs also rely on some of that infrastructure. So I think it's just important to keep in mind that while we're disappointed that M&I is below our expectations, there are some good external reasons for that. But the component and that infrastructure really enables a lot of our growth strategies and are key to an overall success of Stericycle.

All right. Great. And I got certainly at least a 2 for one out of that one. But if I could follow up with one more, just on patient transportation. I saw the divestiture impact in the quarter. Could you just kind of give us the rehash on -- and I understand it's in guidance and I think we're done this year. But just a rehash on it. Anything uncommon? Or is that flowing as planned?

No, it came in as expected. There's 2 components to it, if you remember, Scott. One was we divested certain assets. And that had, as we talked about on the last call, that had an $18 million impact to the second half of '17. It was a $36 million annualized business that was divested. So that $18 million, obviously, from a comparison standpoint, $18 million second half of this year, $18 million first half of next year. Nothing new there. But we still are managing a couple of agreements that were not sold. And if you remember, we also exited some contracts. So I think when you look at the international growth number, it's really important. It came in at a negative 2.2%. But if you exclude the patient transport exits of certain contracts and our M&I business, where it obviously had some fluctuations in it, that actually had an organic growth of about 1.5%. But as far as your question was there anything out of the ordinary in the quarter with PTS, or patient transport services, no, it came in as expected. And obviously, we announced the divestiture on the last call.

Your next question comes from Michael Hoffman with Stifel.

So you have been on the road on many occasions, I've been with you on some of them, where you've talked about $150 million as sort of way to think about this ERP. Is there any change in that view?

Obviously, I don't want to answer the cost question, Michael, because we're going through this ERP process. And as you know, the system integrator piece is the biggest piece to that puzzle. We want to get the best company in there that has experience in the implementation. So I want to not give a comment on that. The only thing I would say is that this going to be a part of a broader Business Transformation initiative. As we talked about, process improvements, restructuring, that will happen, other projects above and beyond ERP. So again, I don't want to get ahead of myself on giving a number at this point.

Okay. So if you're going to go through a big business transformation, are we finally going to finally take up any businesses that are using up 80% of your time but are contributing 0 to negative, and so divest of things that are not working for you? And then save some money on the ERP in there?

Absolutely, Michael. I think you bring up a very good point. If we're going to go through this ERP implementation, which is a multiyear process, and full implementation of the ERP really is 3 to 5 years. And the first 2 years really are just focusing on design and blueprinting a lot of the back-office functions that are common between all the businesses, certainly before we implement it into a business or a country, we want to make sure that that's going to be a long-term fit to the overall strategy of Stericycle. So absolutely, part of it is to continue to look at the portfolio of services and countries that we're in. And we do need to make those decisions before we go through the expense of implementing that ERP in that service line or that business. Absolutely, we'll be looking at that.

And when do we learn about that?

Well, I think we're a little premature now because we're going to be -- obviously, we don't start implementing -- some of our businesses -- obviously, we're going to look at our core businesses first, in 2019 or 2020. But as soon as we make decisions around that, and if we were to classify anything as assets held for sale, certainly we would disclose that, and we would share that with our shareholders.

Okay. If you pulled away the price compression that happened in the RMW business, could you share what the underlying domestic growth and the international growth -- organic growth was?

Let me take you through two segments, Michael. Good question. Let me take you through that. Obviously, the SQ pricing falls into the Regulated Waste and Compliance revenues on the revenue table. And if you look at that, you see a Q3 organic growth of a negative 1.9%. And remember, going into this year, we said that category was either going to be flat or down a little bit. So that came in as anticipated. But if you exclude the patient transport contract exits, which we talked about on a question earlier, and you put aside the SQ pricing issue, we actually grew that segment by 4.1%, which really reiterates what Brent and I have said before. We had really strong growth. So what has contributed to that? What contributed to that is certainly retail, haz waste is in that number. That's growing at high single digits. Health care hazardous waste growth growing in the low teens. The controlled substances and some of the opioid take backs contributed to that growth. So the underlying part of our business, unfortunately, it doesn't show up in that number because of the SQ issue. Again, it's grown by about 4.1% for the quarter. Also on the international, you asked the international. Let me reiterate that again because I think I answered it earlier, but I'll take you through that. The organic growth rate for the quarter was a negative 2.2%. But again, if you exclude the patient transport exiting of contracts and M&I, which we know fluctuates and had a disappointing quarter, we actually had an organic growth of around 1.5% or a total growth of around 2.7%.

Okay, on that one...

Is that helpful?

Yes, very helpful. And you've got a mixture of paper and medical in the remainder of that international. So did something not (inaudible)...

No, Michael, the paper actually would fall into the Secure Information Destruction services. Right, Dan, is that correct?

Yes.

No, I meant paper meaning your Secure Information -- sorry. So there's document, International document destruction. Is that part of that number, that 1.5%?

It would be in the overall international number that you're looking at. But that gets absorbed if you specifically looked at the Regulated Waste. And then the Secure Information Destruction worldwide number, the paper would be in that number. When you look at the international, that does include that in there.

All right. I've asked the question clumsily, and I apologize. The data you just gave me, the International 1.5% growth, is that all International or just RMW International?

All international. And then the different service lines include the global revenues for all those service lines. I'm sorry, I cut you off, Michael.

Yes, that's all right. So where I was going is, I think your RMW international business had been trending to the middle of the year at 3% or 4% on a constant currency basis. Are you still looking at that kind of number in the RMW part of that?

Yes. I don't have the break out. We'll have to look it up and by the end of the call, try to get back to you on that.

Okay. When recalls -- there's a big headwind in 4Q, right? We've got to remember that. That's something everybody should be paying attention to?

Absolutely. If you -- last year was a record year for C&RS, driven by one very large recall event in Q4. We're on track to match that this year without that one big event that had no carryover to 2018 -- into 2017. But you're right. We have a big comparison in Q4 of '17 versus Q4 of '16. That's correct.

Okay. And then what were the dollar sales of paper in 3Q?

If you look at paper. What are the dollar sales, you mean the gross revenue from paper?

Yes, it's in the total document destruction number? I'm trying to understand what the sequential decline is going to be?

Yes, Michael. I think -- in the organic growth rate of our Secure Information Destruction, it was about 1% of that 6.4% growth.

Okay. All right. Last question for me, and then I've run over the numbers. But if you -- the thing that impresses me more than anything, given all of the misses, is the free cash flow number. So you're telling me you're going to do $80 million to $95 million in free cash flow in the fourth quarter?

Yes, Michael. We are very pleased with our continued focus on cash flow and, more importantly, the flow-through of it. If you think about it, and I know even when you look at the income from operations year-over-year being down, the year-over-year cash flow is much better than that. And so what you see then is being able to convert, obviously, some less cash tax that you have to pay as a result of it. But really it improved flow-through. So we're pleased with our cash flow generation based off our results.

Your next question comes from Gary Bisbee with RBC.

The first question, Charlie, as you discussed the Business Transformation project, there were a lot of things you cited in addition to the ERP. And I guess I wanted to just ask about the genesis of this. Did this start with or come out of that consultant that you'd hired a year ago? Have you been working on this for a long time and just getting to the point where you're getting ready to start talking about it? Or is this more a reaction that more needs to be done? I'm just trying to understand what got you to this point of talking about this.

Yes, I think the genesis was we brought in some talent. I think we talked about that around over a year ago to look at our systems. And we knew that we were operating far too many systems. And internally, we struggled with the fact that we've done a good job of integrating acquisitions into a service line, Gary, but not necessarily into the broader Stericycle. So we've known we've had challenges of integrating into and fully leverage our size and scale. And as we went through what is best-in-class, as we went through how can we transform the company, not only from a systems standpoint, you start looking at business processes, you start looking at organizational structure. So this has been a journey. This is something we've looked at for the last year. Obviously, you don't want to take this decision lightly. It is obviously a big initiative. I think we're up for the challenge. But as we looked at it, got a second opinion, that's really the genesis of how we came to the decision at this time, both on an ERP system and on the process improvements we think we can make, the restructuring that we think we can do and some other related procurement activities that we think that overall will drive a better operation at Stericycle and obviously improve our profitability.

And, Gary, just to add to that. One of the things that's so important is to take this time prior to the implementation of an ERP to really align our organizational structure and our processes. Not only does it create some opportunities to create efficiencies in advance of that, but it really highly increases the likelihood of having a very successful implementation by preparing the organization in advance, and that really led to a broader context of Business Transformation leading the work up to and then including the ERP implementation.

Okay, that makes a lot of sense. Do you guys feel like you have the right team at the company? Or are there areas where you're going to need more talent to deliver on what sounds like a significant amount of effort here?

Yes, I think it's a combination of both. I think we, certainly, over the course of the last year, we've supplemented our IT team with a group of professionals that have a proven track record of an ERP implementation. We've gone outside. We realized there are some things that we, maybe we're not as good at. As you know, as we're looking at a broad organization or process improvements, we've aligned with a top-tier consulting company to help us on that journey. And then, really, from the education I think we've all been through as an executive team, it comes down to the system integrator, right? There's a lot of different technologies you can put out there. They're all very good. There are some that are -- that you feel are a better fit for your organization. But the integration is the one where the road -- the rubber hits the road, and we haven't decided yet. We're in the middle of an ERP. Again, it's a bigger expense item. That's why we're going to wait on talking about costs until after we've negotiated that agreement. But we're going to align ourselves with a top-tier system integrator. We want to make sure that this is going to be successful. This is the future of Stericycle. I think we're going to be in really good shape 3 to 5 years from now, much more -- we've always been lean, but we're going to be more operationally efficient now. So it's a combination of inside talent and getting help from the outside as well.

Okay, great. And then just the last one from me. I hear all your comments on the M&I business. But we've seen U.S. and really global industrial activity pick up pretty strongly. I know there was a lag on the way down. But it strikes me that you should be seeing some lift from that. Is there anything specific to your business that would make that not come back as industrial activity improves in the U.S.? Or is it just something to do with the end markets?

I think it's a combination of both. I think when you look at our total ESOL business, overall, with M&I, we grew 2.2% year-to-date. And I think if you compare us to other companies out there, we might be a little bit below them. But certainly, it's not like the overall hazardous waste business is not doing well. And obviously, we're focused where we think we bring a lot of value to customers, right? Retail haz waste, health care haz waste. The other thing that gets lost in this is that we've actually improved profitability in this business. So we talked about it last year, remember. We were thinking about potentially divesting it, but we saw there was opportunities for profitability improvement. And that business, as a whole, ESOL, because we run, obviously we share a lot of those resources across all the different hazardous waste service lines, actually had an improvement of about 140 basis points year-over-year. Now the M&I -- yes, I think we're trailing the market a little bit. It is a very competitive marketplace. We're in a niche player in M&I when you compare us to others. We're trying to be disciplined on the work we go after. Our focus is, again, on retail and health care haz waste, and I think Brent talked about it. Really the reason we got into this business and we made these acquisitions and build the operational structure was not to go after the M&I business. We call it out now because it does fluctuate. Our focus is on retail and health care haz, and I think we've proven that we have done really well in those markets, and that's why when you look at it, RW, our Regulated Waste and Compliance revenues excluding setting aside the SQ and the PTS, we're growing by 0.1% because of that. So a long way to answer your question, but hopefully I answered it for you.

And Gary, just to add to that, if you recall, and I think Charlie did a great job of highlighting the differences is that back when the M&I kind of retraction in that market began, Stericycle lagged that for a couple of quarters. And so it's not a complete surprise to us that if there is significant rebound, because of our niche orientation, that we may lag on the way back up.

Your next question comes from Hamzah Mazari with Macquarie Capital.

The first question is just a clarification. Are you giving 2018 guidance? Or did you guys call 2018 as being flat? I recall you said you're not giving guidance. But then maybe you must -- you may have referenced something on 2018.

Yes, let me take that, Hamzah. First of all, as you know, historically, we have given guidance on this call. But we, obviously, want to be consistent with industry peers and best practice standards. So we are not going to give guidance, official initial guidance, until our Q4 results. Obviously, we'll get improved visibility into the upcoming year because we'll have Q4 and we'll have January results. We'll have greater visibility to our SQ pricing at that time and the Business Transformation savings and costs. So those will have an impact on 2018. So we're not giving official guidance. What you maybe jumped on the call and heard is that just directionally, we think our end markets are strong. We're going to maintain and grow the business in the long term. And we feel at this point at a very, very high level from an earnings perspective that -- anticipate that our '18 earnings will be flat versus '17. Again, we're going to give a lot more detailed guidance on the Q4 call in February.

Okay. And then any -- you talked about the M&I business. But one of -- one of your competitors had flagged just U.S. chemical industrial customers asking for bigger discounts. Are you seeing pricing pressure in the M&I business? Just curious, because I know the earlier question asked about disconnect with global industrial activity. And so any color there?

Yes, I think any time you want to characterize a market as competitive like we have, it certainly is a competitive market, and I think pricing comes into play when you're talking about these projects. I don't know if it's gotten any worse over the last 3 to 6 months, not really. I don't think so. But it is, it remains a very competitive marketplace.

Okay. And just last question, and I'll turn it over. Should investors be thinking about any positive, negative or net neutral impact from Amazon getting into drug distribution? I don't know how big your pharmacy business is. But is that a meaningful impact? Or should we just be ignoring that as it relates to Stericycle?

Yes, I think -- listen, no matter who distributes the pharmaceuticals, eventually, they have to get returned. Or where the distribution location takes place, they would have loss or damaged material that we would have to service. I don't think right now it would have any material impact whether they come into the drug space or not. Again, I don't want to comment on a particular -- on a potential customer. But I don't think it really has a material impact on our pharma waste business, Hamzah. Thank you.

Your next question comes from Kevin Steinke with Barrington Research.

So you did revise 2 of the service lines favorably, Secure Information Destruction, it looks like the bottom end of guidance came up by $25 million, at the top end by $5 million. And then Communication and Related Services, the bottom end, I believe, came up by $15 million in terms of the revenue outlook. So just could you talk about what's driving the changes in both of those 2 outlooks?

Sure. I think when you look at our C&RS business, the $15 million really was just a reflection of a strong year-to-date number. We've done really well, as we've talked about in recalls. Automotive continues to do well for us. So we felt comfortable -- as you know, Kevin, you've followed us for a long time, when we called out recall and returns, obviously, as you go to Q4, you just have more visibility. We have 3 quarters done already, so you can narrow the range and feel more comfortable about it. It's still an unpredictable business. But certainly, we feel good about it going into the last quarter. And on the Shred-it, on the Secure Information Destruction revenue line, again, a solid 3 quarters in a row. So we feel good about that business. Again, a newer service line for us. So we're trying to get comfortable with that business before we bring guidance up. But certainly, 3 strong quarters, more fine-tuning and that one going up both in the bottom end and the top end of the range.

And just add to that, just in the overall changes to our ranges. Remember, we saw some favorability in foreign exchange. So built into those numbers across all 4 of those revenue streams is about $8 million in foreign exchange and about $1 million due to the impact of acquisitions.

Okay. Did you make any Secure Information Destruction acquisitions in the quarter? Or what was the composition of those tuck-in deals you did?

Yes. I would classify all the deals in the quarter as tuck-ins, small tuck-in deals. We did 4 in the U.S., one International, and they were all in the Secure Information Destruction space.

Okay, perfect. Just one last one here for me. So October 17, you had the 8-K announcing you'd entered the settlement for the class action with the plaintiffs and their council and it looks like the next step is preliminary court approval of that settlement. So I don't know if you've gotten any more insight into the timing of the court schedule or if that's still kind of up in the air.

Yes, actually the court granted the preliminary approval of the settlement at the end of October, so right after the agreement was struck. Members of the settlement class will receive notification probably sometime, Kevin, late November through December. At that time, as you know, class members have an opportunity to opt out or object to the settlement. And a final fairness hearing has been scheduled for February 23. Just a little portion on that date. That time would be the best case scenario. It doesn't factor in a time for an appeal. And if there is an appeal, certainly, you can push out that final fairness hearing and the final approval for several months or even a year from that February 23 date.

Your next question comes from Barbara Noverini with MorningStar.

So another thing that kind of struck me about the quarter was that gross and EBITDA margins actually held up pretty well sequentially given the revenue challenges in the quarter. So is this primarily because M&I was so weak and that's really a low-margin business for you? Or were there some other business lines that performed a little bit better than you expected in the quarter?

No, I think, Barbara when you're looking at the EBITDA margins, certainly, as you described it, some of the shortfalls, remember, a big impact of that is the $14 million in revenue shortfall, and that kind of flows through. And as you indicated that some of those that flow through at less margins, and then we had the impact of the hurricane included. Partly to offset that, though, we did have some benefit from the C&RS business. They had about 21 basis points of better improvement, or better flow-through, in profitability of what they had. And then we saw some favorability in the benefits. But also based off the results, we did rationalize our bonus accruals to get in the range of based on the current performance of the company.

Got you. Okay. And then just quickly, you mentioned your success at cross-selling services to hospital customers, and that seems to be ongoing. Historically, this has been a pretty steady category for you, gross margin wise. So I'm just curious if your success in layering multiple services on to these hospital customers, these LQ customers, is actually translating into some margin expansion for that business?

Barbara, this is Brent, I'll take that one. Yes, I would definitely say that's the case. It's difficult at times to break it out, right? Because our operations support both our LQ and our SQ business. But I would tell you based off of what we're seeing with regard to expanding our services, each of the new services that we roll out, we tend to be able to improve the overall margin. Some of that is just because we already have resources in place. So if you have a sharps account, also now, that technician can be leveraged to use -- to collect the Rx waste. That same technician can be used to change out the CS/Rx or the controlled substance container. So a lot of that is just based off the fact that we're already going to those places and enables us to bring on additional services at better margin.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

It's Henry Chien calling for Jeff. Just a question on the Regulated Waste and Compliance Services side. I know you mentioned that organic growth, excluding the transport and the SQ pricing headwind, improved. And you called out some of the retail impact or the growth from that business. Just curious if you could provide more color on the core Regulated Medical business? And if you're seeing an improvement there, where that's coming from and what's driving that?

Yes. I think certainly on the core Regulated Waste, the core Regulated Medical Waste business, I think that's what you're referring to, Henry. Obviously, we've got challenges on the SQ side of the business. And that headwind of the $40 million is obviously impacting a negative 1.9%. But as Brent has alluded to and I think the question that Barb was right on is we've been really successful on the hospital side of the business. And we highlighted it on the call. We continue to sell Sharps Management, pharmaceutical waste, our controlled substance product is being really well received in the marketplace. That LQ business is growing by about 4% to 5%, which historically is a great number at Stericycle. When we used to report on LQ, SQ, that was certainly a good number for us. So I'm giving you the U.S. number on that Regulated Waste, but that obviously is 80% of our market. So we continue to do really well on the hospital side. Obviously, the SQ pricing impact came in as expected for the quarter. There was no big surprise there. We haven't seen an increase in calls or discounts. So we're pleased with that result as well.

Got it. Okay. Yes, that's helpful. And in that business, are you -- have you been consolidating any of your routes or divesting any of the businesses there?

In the medical waste side of the business? No...

Medical waste side. Yes. Okay.

No, absolutely not.

And your next question comes from Isaac Ro with Goldman Sachs.

There's been a lot of talk about various guidance assumptions. But I wasn't clear why did your guidance for Regulated Waste for the year come down? If you could just maybe simplify that specific logic point.

Yes, absolutely. So if you look at where we're trending for the year, and as we took the opportunity in the fourth quarter to really narrow our ranges, we had been operating to the mid to the low end of the range. So when you see the adjustments that we did by bringing up the bottom or bringing the top down 20, what you're really seeing is just an adjustment only to the top end of the range, but no change to the bottom end of the range. So as a result -- it's just a change -- it's just a result of tightening up ranges.

I understand that. But the midpoint is lower. And so I'm wondering, did something change in your pricing assumption? Or is there another dynamic here that's new in the fundamentals of the business?

Yes, I think that would be Latin America and Europe. Yes. And Isaac, this is Charlie. I think Dan kind of spoke about it when he gave the bridge with respect to Q4. There is some softness in the growth in international, specifically Latin America. So certainly, that has an impact on it because that falls into the RWCS, Regulated Waste and Compliance revenue table as well.

Okay, that's helpful. So if Latin America was tracking better, is it fair to say your guidance would've been unchanged otherwise?

I think it was because there was slight weakness in EMEA -- in our EMEA, which is our European and emerging markets, Asian market. But primarily, it was Latin America. I don't know if it would've been all mitigated by that, Isaac. A good portion of it, though, would have, yes.

And there are no further questions. Do you have any closing remarks?

I do, Sarah, thank you so much. In closing, I'd like to share that Stericycle has partnered with the National Safety Council on a public education campaign against prescription drug abuse. The campaign will feature a traveling memorial to the victims of the opioid crisis which will visit select cities over the next 6 months. The campaign memorial opens tomorrow in Chicago. We are pleased to be part of this important educational campaign. The campaign and the memorial will feature Stericycle's Seal & Send Medication Mailback Envelopes. Our support of this campaign reinforces our commitment to provide safe solutions for the disposal of unused pharmaceuticals.

Thanks for your time, everybody, and have a great night.

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