Stericycle Inc (SRCL) 2018 Q2 法說會逐字稿

Good day. My name is Brandon, and I will be your conference operator today. At this time, I would like to welcome everyone to Stericycle's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Now at this time, I would like to turn the conference over to Ms. Jennifer Koenig, Vice President of Corporate Communications and Investor Relations. Ma'am, you may begin your conference.

Hello and thank you for joining Stericycle's Second Quarter 2018 Earnings Call. Joining on the call today are Charlie Alutto, Chief Executive Officer; Dan Ginnetti, Chief Financial Officer; and Brent Arnold, Chief Operating Officer.

The discussion today 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 within the risk factors 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. To the extent permitted under applicable law, we make no commitment to disclose any subsequent revisions to forward-looking statements.

On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable GAAP measures, please refer to the footnotes and schedules in our earnings press release, which can be found on Stericycle's Investor Relations website.

Finally, the prepared comments for today's call correspond to our second quarter earnings presentation, which is also available on our Investor Relations website. Throughout the call, we will be referencing specific slides from the presentation.

I'll now turn the call over to Charlie Alutto.

Thank you, Jennifer. Welcome, everyone, to our second quarter 2018 earnings conference call. Our second quarter results demonstrate the underlying strength of our core businesses and reflect the early benefits of our Business Transformation and its overall value to the company. Our core Regulated Waste and Compliance Services and Information Destruction businesses performed in line with expectations. We delivered within expected ranges for adjusted EBITDA and adjusted EPS despite weaker-than-anticipated revenue due to the impact of foreign exchange and softness in our Communication and Related Services. We also completed a number of operational improvements and strategic sourcing initiatives as part of our Business Transformation and achieved the milestones and objectives that we set for the quarter.

Before Brent and Dan review the results in more detail, I'd like to highlight a few accomplishments for the second quarter, starting with Business Transformation. As reflected on Slide 8, we delivered an additional $7.9 million in adjusted EBITDA benefits during the second quarter from the implementation of operational improvements, strategic sourcing initiatives and improved source-to-pay processes. In the first half of the year, we delivered $23.9 million in adjusted EBITDA benefits from transformation initiatives. Our progress year-to-date is expected to yield a benefit of $50 million toward our goal of $60 million to $65 million for 2018.

We also made significant progress on the detailed design of the ERP system, including mapping our end-to-end future-state workflows within our mega processes. Operational expenses for the Business Transformation were $21.8 million in the second quarter and totaled $43.9 million for the year. Capital expenditures for Business Transformation were $3.3 million in the quarter and $3.7 million for the year. We are within budget and on track to achieve our internal milestones for Business Transformation. We remain confident in our ability to deliver the $60 million to $65 million in adjusted EBITDA benefits expected for 2018.

One of the key elements of our Business Transformation is portfolio rationalization. As you can see on Slide 9, we continue to follow through on our commitment to simplify the portfolio to engage greater focus on our core businesses that provide long-term value for shareholders through predictable and profitable growth. During the quarter, we divested the remaining hazardous waste service line in the United Kingdom. We also signed an agreement to divest a non-core U.S.-based clean room service, and that transaction closed August 1st.

In addition, we announced today that we are pursuing strategic alternatives for Communication and Related Services, including a divestiture, demonstrating our commitment to rationalize the portfolio. We're conducting this process with the assistance of financial and legal advisers and are considering a range of potential alternatives for the business. Our focus will be on pursuing the outcome that will drive the most value for Stericycle shareholders. There can be no assurances as to the form or timing of any transaction or if a transaction will be consummated.

Before I turn it over to Brent, I'd like to highlight 2 more points. First, the SQ class action settlement went into effect. And as a result, we funded the settlement on July 6th.

Finally, as part of our continued board evolution, we appointed 2 new board members, Ronee Hagen and Kay Priestly. Ronee and Kay both bring Business Transformation experience and strong leadership in the management of multinational public companies. We look forward to their contributions to Stericycle.

I will now turn the call over to Brent to review our performance for the quarter.

Thanks, Charlie. As reflected on Slide 11, total revenues for the second quarter were $883.3 million, a decrease of 3.7% from Q2 2017. This was due to divestitures, the expected decline in the small quantity medical waste business combined with softness in CRS and was partially offset by growth in Secure Information Destruction and other core service offerings. When adjusted for Manufacturing and Industrial Services, revenues were $795.1 million, down 3.9%. As compared to the same quarter last year, acquisitions contributed $8.1 million to revenues and divestitures reduced revenues by $13.4 million. Revenues for each of the service lines in the second quarter were as follows: Regulated Waste and Compliance Services, $483.8 million; Secure Information Destruction Services, $230 million; Communication and Related Services, $81.3 million; and Manufacturing and Industrial Services, $88.2 million.

This quarter, we closed 6 tuck-in acquisitions. All 6 were U.S. Secure Information Destruction businesses. These acquisitions contributed revenues of approximately $0.8 million in the quarter, with projected annualized revenues of $7.2 million. We also completed the divestiture of a hazardous waste business in the United Kingdom. This divestiture reduced revenues in the quarter by $2.6 million, with a projected 2018 impact of $18 million.

Regulated Waste and Compliance Services revenues were in line and our small quantity business continued to perform as expected. We saw solid performance in our Hospital Sharps Management and Pharmaceutical Compliance Services. Our new medication disposal services for both hospitals and retail locations continue to show strong growth as our customers work to confront the U.S. opioid epidemic.

Secure Information Destruction Services also came in as expected. Organic revenue growth in the quarter was 4.8% or 3.2% when adjusted for recycled paper pricing. SOP prices remained above the 10-year average, driven by increased worldwide demand for high-quality recycled paper.

Communication and Related Services revenues declined due to smaller recall events and lower-than-expected call volumes in Communication Solutions.

Manufacturing and Industrial Services revenues were down 2.2% over the same quarter last year. Excluding divestitures in foreign exchange, M&I organic revenues were up 3.8%.

I will now hand it over to Dan, who will discuss our financial performance for the second quarter in greater detail.

Thank you, Brent. Looking at Slide 13. The results for the second quarter were as follows. Quarterly revenues were $883.3 million, down 3.7% compared to the second quarter 2017. Adjusted EBITDA was $190.9 million. Our core business performance and higher paper prices enabled us to deliver adjusted EBITDA in line with our expectations on lower-than-anticipated revenue in C&RS and due to unfavorable impacts of foreign exchange.

GAAP EPS was $0.31 due to certain nonrecurring adjusting items. Adjusted EPS was $1.17 versus the prior midpoint guidance of EPS of $1.13. As you will see on Slide 14, the difference was based on the following. The performance of our core business exceeded by $0.02. Strong SOP paper prices contributed $0.03. Lower depreciation expense, combined with lower interest and other, contributed $0.03. And accelerating the repurchase strategy of the mandatory preferred convertible contributed $0.03. These were only partially offset by $0.01 of foreign exchange and $0.06 in C&RS.

Cash flow from operations was $120.6 million in the quarter and reflects the benefit from the Business Transformation working capital initiative. Our debt to adjusted EBITDA ratio under the amended debt agreement was 3.27x at the end of the quarter. This does not reflect the $295 million SQ settlement payment made in Q3. The unused portion of the revolver was $663.8 million at the end of the quarter. In the quarter, we repurchased 150,000 shares of the mandatory preferred convertible for $7.4 million.

As a reminder, the mandatory preferred convertible stock will convert on September 14th. Upon conversion, there will be no impact to the reported adjusted EPS as we have been using the if-converted method. At the end of the quarter, we have authorization to purchase an additional 2.4 million shares. CapEx was $35.5 million or 4% of revenues. And our DSO was 65 days.

I will now turn the call back to Charlie, who will provide an update on Stericycle's 2018 full year guidance.

Thanks, Dan. Now for our updated guidance for 2018, which is included on Slide 17. Please keep in mind that these are forward-looking statements. Our guidance is based on currently known items and does not include future items such as acquisitions, divestitures or nonrecurring litigation matters.

Following the close of the second quarter, we believe annual revenue for 2018 will be in the range of $3.45 billion to $3.54 billion using foreign exchange rates at the end of the quarter. The majority of adjustments to revenue guidance are as follows: $40 million from unfavorable foreign exchange rates; $30 million from softness in CRS; and $23 million from the 2 divestitures that we announced today.

The worldwide revenue guidance for each of our service lines is: Regulated Waste and Compliance Services is expected to be in the range of $1.91 billion to $1.935 billion; Secure Information Destruction Services is expected to be in the range of $890 million to $915 million; Communication and Related Services is expected to be in the range of $330 million to $345 million, depending on recall revenues; Manufacturing and Industrial Services is expected to be in the range of $320 million to $345 million.

We believe adjusted EBITDA will be in the range of $750 million to $775 million. We expect adjusted EPS will be in the range of $4.35 to $4.55 using a share count of 90.5 million shares. This reflects an adjusted tax rate of approximately 25.5% to 26%.

As you can see from the adjusted EPS bridge on Slide 19, the strength of our core businesses, including paper pricing favorability plus tuck-in acquisitions, is driving an adjusted EPS increase of $0.06. This is offset by $0.02 from the newly completed divestitures of non-core businesses, $0.03 from the increase in interest expense related to the SQ settlement, $0.05 from foreign exchange headwind and $0.16 from softness in CRS.

We believe cash from operations will be in the range of $185 million to $225 million, which includes the payment for the SQ settlement. We expect CapEx to be between $155 million to $170 million. And free cash flow will be between $15 million to $70 million. We will continue to maintain a disciplined approach to our capital allocation strategy, as outlined on Slide 20.

This updated guidance reflects the recent funding of the SQ class action settlement. Our team remains focused on the commitments for 2018, including the successful execution of our Business Transformation. We have made significant progress on Business Transformation year-to-date, including the completion of several divestitures and the execution of our savings plan. We remain confident in the long-term success of Stericycle and believe that our leadership and growing markets for compliance services and the expected benefits from the Business Transformation will provide the potential for significant improvements in both operational and financial performance.

I want to thank each and every member of our worldwide team for their commitment to our customers, our core values and our Business Transformation. We'll now answer any questions. Brandon, can you please open the line for Q&A?

(Operator Instructions) And your first question is from Sean Dodge from Jefferies.

Maybe starting with regulated medical waste. There was a fairly sizable deterioration in organic growth there. Can you give us a little more insight into that? Is there a particular geography or client group that's struggling within SQ? Or has the pricing headwind ticked up a bit? Just a little spike because you guys are beginning to lap some easier comps, so we expected a little bit better result there.

Actually, I think what you're referring to is the Regulated Waste and Compliance revenues, Sean. I think compared to our guidance, if you remember correctly, we did have some PTS divestitures in that number. We had a contract exits. It actually came in line from what we were guiding. From a year-to-date perspective, it's down about 4.1%. If you look at our most recent guidance, it's $1.935 billion to $1.975 billion before we revised it for the foreign exchange impact. So it actually came in as expected for the quarter.

Okay. And then I guess for Brent, you're a couple of quarters into the transitions you've made within that sales force, the SQ sales force. Now you've ramped up your ad spending. You're more strongly promoting the Stericycle brand. Of course, you've made all the investments that we talked about in data and pricing analytics. Are we at a point now where you're starting to earn a return on those investments? Or is there still some -- going to be some fine tuning that needs to happen to kind of get all of that to really gel together and start to kind of make a difference, I guess?

Sean, probably best just to remind everybody of the investments we've made. As you recall, basically we rolled out 3 main initiatives. That was really focused on, first off, taking a strategic approach to our pricing where we, in some cases, would reduce or limit our annual price increases to reduce churn and future discounts. We would also expand a number of accounts covered by account managers. And then the third thing, you mentioned in your comments, was incremental investment in our marketing. I would say year-to-date, we're very pleased with these -- the progress of these initiatives. I believe that we have a strong correlation between our strategic pricing approach, the things we're learning in data analytics and the fact that we are on track year-to-date with discounting and our customer retention numbers. So we view that all as positive. Obviously, it takes a while for our account managers to build those relationships. But as they do build those relationships and become good working relations with our customers, we think that will also have a benefit with regards to retention. And the final thing is we're really trying to put a lot more out there in the media and communications around Stericycle's leadership, our compliance thought leadership in the market and the insight we can provide customers to really make sure that businesses stay compliant and stay ahead of the curve. Obviously, there are some changes coming out with e-Manifest and different things affecting our customers. And our goal is to make sure they recognize the benefit of being with a market leader and how that really protects their business in doing that. So overall, I will tell you we're really pleased with the investments. It's a long term -- we call it the SQ long-term strategy. It's a long-term play, but I think we are off to a really good start.

And your next question comes from Ryan Daniels from William Blair.

This is Nick [filling in] for Ryan Daniels. The first one I'm going to ask is if you could walk through a bridge on the EPS guidance for Q3.

Yes, certainly, I will try to do that. Thanks, Nick. In addition to the graph that you saw on there, keep in mind, I think what we shared is that there's about $0.02 of favorability that comes from the solid results and the outlook for the core businesses. You have $0.03 from interest. The $0.03 increase in the interest expense related to the SQ settlement. And then we have $0.05 from foreign exchange where again, we saw about $40 million of increase year-over-year for foreign exchanges in the back half of the year. And then lastly, $0.16 from C&RS. Because we really don't have line of sight to any large recall events, we're still doing the same number, in fact, increased number of recalled events. But we don't have a line of sight to those blockbuster events that really help you get to the top end of the range. So when you go down that, that should put you at about $4.35 to $4.55 range. I give you the midpoint on that. And then going into the Q3, there are certain benefits that we saw in Q1. Mandatory preferred is an example of that acceleration. We think the best spot to be is in the range of $0.95 to $1.05. And then you grow gradually for the Q4 from there.

Great. And how about for the free cash flow guidance change?

Well, the free cash flow guidance change is going to contemplate the payment that we did make on July 6 for the settlement of $295 million. There's also about a $3 million to $5 million increase that's going to come from additional interest now that we've actually made that payment. With the adjustment that we did, primarily in C&RS, will be less EBITDA than originally planned. That's in the range of anywhere from $12 million to $20 million, depending on the high and the low there. We reduced the amount of CapEx that we think that we would need to spend, and that's favorable $5 million to $10 million. And then lastly, we saw some increased legal fees on adjusting items. But as you know, we report an as reported free cash flow. So when you add that up, you get to about $15 million to $17 million range for free cash flow for the year.

And your next question comes from Michael Hoffman from Stifel Baltimore.

What I'm trying to reconcile is you've got at the midpoint of revenues, you're down $75 million. And in the midpoint of EBITDA, you were down $22.5 million. And if I've done this math right, most of that $22.5 million is CRS, like $19 million, offset by favorable, almost $5 million from document destruction. And that leaves a few million split between medical waste and M&I. Is that the right way to think about to hit the EBITDA that anybody who is fretting at, oh, my gosh, something is unwinding at medical, you're wrong?

Yes. No. You got it, Michael. I mean, the takedown from the midpoint is mostly driven by CRS. And I think we showed that on Slide 13, the midpoint guidance. I mean, foreign exchange certainly had an impact as well of about $0.05. But the majority is in C&RS. The rest of the business performed in line or did slightly better. I mean, paper actually helped.

Michael, I think that's a great point that you pointed. If you look at the graph on there and you really looked at the things that are within our core operations, the core businesses, SOP pricing and the acquisitions, we would have been raising the midpoint of the guidance. Unfortunately, foreign exchange, we had a very brief period where the dollar was weakening and now it's turned back and that's a pretty significant change. We did do the interest settlement, or the interest on the settlement. We didn't anticipate that or guided to that in the year. And then the real issue is within C&RS, which is episodic in nature. So all in all, I think the core business will have shown an increase.

So I mean, I'm going to adjust $10 million to, whatever it is, $70 million -- $15 million to $70 million for the $295 million. So that really is -- the original was $330 million to $400 million. Now we're $310 million to $365 million. That's the number I'm surprised is down as much. I would have thought you would have been able to minimize the proportional decline there.

Are you talking about the free cash flow?

Yes. I mean, you're not -- I mean, $295 million (inaudible) events. So you're really running the company at $310 million to $365 million as the new guidance on operations, which at the midpoint is $337.5 million versus the old midpoint was $365 million.

Actually, I think it's $210 million. You're saying $310 million. It would be $510 million minus $295 million.

$210 million, $210 million, sorry. $210 million, yes.

The one thing you're not picking up in there is the cash tax benefit that we will also see as a result of not funding the settlement that we will now have some cash tax benefit as a result of that in the back half of the year.

Yes, it's just -- it's a really healthy -- listen, $80 million swing in the midpoint to midpoint. You're $365 million and now you're going to $280 million something. It seems like a really big swing in the free cash flow at the midpoint.

Again, I think if we go down it, Michael, everything on there that we've shared are things that we have seen. The Business Transformation is on plan. There's been no change for that. The legal expenses are higher, about a $15 million adjustment there, and then the change in EBITDA along with the settlement and the interest associated with it. So I think if you bridge from the $330 million to $400 million, that will actually go down to the $15 million to $70 million. And again, contemplated in that, there are things that we had the ability to do as far as improving our DSO from 65 where we are at today. We think there's benefits that we, outside that we can do there, continue to work on our working capital initiative, which is aligning our -- reaching out to our vendors and aligning payment turns to more coincide with our DSO. So I do think there's opportunity within that. And then from there, you just have to contemplate what other investments we have made on continued acquisitions.

Okay, I guess I'll have to follow up. It just seems too big of a, just for the, I know I'm repeating myself. But if you adjust for the $295 million, you add the $295 million to both the $15 million to $70 million, that's $310 million to $365 million, midpoint $337 million. The old midpoint was $365 million. That's $30 million. That seems too big relative to $22 million of EBITDA. I just thought that's the part I'm struggling with. Why is there a bigger hit to the free cash than there is to the EBITDA?

Michael, I think the reason for that is remember, we're doing an as reported. And so we are seeing some increased expenses on our adjusting items such as legal that were not yet picked up in the EBITDA adjustments, adjusted EBITDA adjustments that we're giving you.

Okay, I think there will be some value in helping to bridge that then because...

Certainly.

Yes, the power of the story was how good this cash has been despite all of the other issues, and now your cash looks like it weakened more than the rest of the revised guidance.

Yes, I think let's just take it from a cash from operations. It was $510 million to $560 million. You have $295 million in the settlement. You have $3 million to $5 million on the high and the low on the interest. You have an adjustment to EBITDA, which we made. That's the one thing that, you know, the outside of the settlement of $12 million to $20 million. And then you've got the $15 million, which gets you to the $185 million to $225 million. Because you keep saying $310 million. I think it's more like $210 million plus the $15 million for legal.

Because $15 million plus $295 million, is $310 million. And $15 million plus 3 -- $70 million is $365 million. I mean, all else being equal, that $295 million is not an operating issue. The operation should be doing $310 million to $365 million, right?

Yes, Michael, we will bridge that for you. But the adjustment to that, we need to take them one by one and add it down. And then again, it goes up slightly with the adjustments to CapEx.

And your next question comes from Scott Schneeberger from Oppenheimer.

Can we just touch in a moment, following up on that line of conversation, on legal, what is in there? What's that associated with? How is that going to look going forward? The multiple quarters, if you can address it because that sounds like that's -- that was a change there. And then a follow-up, if I could.

Yes, absolutely. So let me take the legal expenses. The legal fees are predominately related to the previously announced FCPA investigation. Obviously, these investigations by nature are expensive because they require collection of a large volume of data with multiple interviews with employees and in multiple languages. And as we've said all along, we're fully cooperating with the authorities in conducting a very thorough investigation. We did have significant legal expenses in Q1 and Q2, but we don't think those legal expenses in the second half of the year are going to be as high as they were in the first half of the year.

And I know you don't want to provide '19 guidance, but is it something that ends in -- or for the most part ends in '18? Will there be a trickle beyond?

I think it's hard to tell. These investigations do take time. So I would anticipate that this will not be completed by '19. But I think it's too early to tell. And obviously, we're not going to give any guidance for '19 today.

And then it sounds like you said no great line of sight for recalls. That was a stickler in the quarter and for the forward guidance. But I'm guessing there's a little bit more in CRS as well. Could you just talk about what some of the difficulties are there? And in the strategic alternatives, would it be recall alone, the whole segment as a package? Or is that a TBD?

Yes, thanks. You have 2 questions there. Let me, I will take both of them. First of all, on the recall, you're right on that. We actually -- I think Dan had spoken to it earlier. If you look at Q2 '17 versus Q2 '18, we actually did more events in '18. But these events were significantly less revenue compared to '17. Or said in another way, we didn't really have any large or blockbuster recalls in the latest quarter. And in our visibility of the business, we really -- and we know it's an unpredictable business. The visibility of those we have right now is we don't see any more -- we don't have visibility in the large recalls for the remainder of the year. But I'm cautioning everybody. It does change. We've said in certain quarters where it's looking slow, and all of a sudden, you get a very large recall. I want to remind everybody, we got a 98% retention rate with that business, meaning that recurring where if somebody does business with us on a recall, if they have another recall, they come back to us. Again, we can't predict how big that recall will be when they come back to us. Right now, we're trending towards the lower recall. So we know it's unpredictable, but it's a great business. And we certainly have great relationships with really blue-chip companies around the globe in that. You're right though, there is another factor with respect to our communications business. And really what we saw in the communications side, we did see our live voice call volumes, especially in the SMB business, decrease. So as a resulted in fewer calls and reduced revenues, we have growth in our enterprise and our automated solutions but it only partially made up that difference. So that's really what's going on in the CRS business. You had another question resell -- recall with outcome. So I mean, we're looking at several strategic alternatives. Our main focus will be on maximizing our shareholder value in any alternative strategic transaction we make.

And your next question comes from Hamzah Mazari from Macquarie Capital.

Just had a question on CRS as well. Do you -- was there any distraction in that business? Because you're selling that business. You're seeking strategic alternatives. Just curious on that. And then I thought you -- do you guide recalls? Or do you not guide recalls? I know that policy had changed over the years. And so I'm just curious on the $0.16 headwind in terms of the annual bridge of EPS. How much of that is just the distraction within that segment? And then I thought you did not forecast recalls.

Yes. So let me take that one first because we've always forecasted recalls. Ever since we acquired that business over 10 years ago, it's been in our guidance. We don't forecast blockbuster recalls. We also don't forecast when we think things are going to be slower. We try to be right down in the middle with respect to our guidance and figure out where we think we will end up on an average quarter. So it's always been in our guidance, Hamzah. You've seen us exceed that guidance in many quarters, and then for those that are following the company for a long period of time, every quarters where like this quarter, we have an absence of any large recall. So it's always been in the guidance, and it's had an impact unusually on results. As far as your question around distraction, I think that's a really good question. I mean, we've talked about it internally here as well. Obviously, we're in an ongoing process. So that means the process has started. That leadership team obviously is on the front lines and looking at the strategic alternatives and talking to our legal advisers and our financial advisers. So I think it will be foolish to say that the results weren't -- there wasn't an implication of a distraction in the business. I think it's really hard for us to quantify what that would be or what it was. But we do have a really solid and great leadership team there. We'll focus on the business to make sure that we continue to run the business while we seek strategic alternatives. But I think it's fair to say that there was certainly a lot going on in that business in the last quarter.

Okay. And just a follow-up question. You mentioned in your deck board evolution. Maybe if you could talk about how was this board looking at the business differently. Is there more pressure to execute? Just any sense of how is the board evolution impacting your execution and the business? And so any color there, we'd appreciate.

Sure. It's Charlie. I guess I'll take that one as well. I mean, I think evolution is good. Getting new board members with fresh perspectives, I think, is always helpful. I think the pressure to execute has always been there. So to say that the former board members didn't want us to execute or weren't as on us for execution wouldn't be accurate. I think certainly, the new members bring a vast experience, especially in Business Transformation. So I think that will help us. And certainly, when we looked at adding both Ronee and Kay, that was certainly one thing we were looking for, folks that have been in public companies that have gone through transformation. So I think we've got a good mix now of some longer-tenured board members with new members, new leadership in Bob Murley, who has was been fantastic. So I think the pressure is there. To go back to your original question, I think the pressure has always been there. But certainly, we're looking at the business with a fresh set of eyes and new perspectives with the new members. Some have joined us just in the last year, but if you think about it, over the last 3 or 4 years, about 70% or 60% of the board is new. So I think we've made some really good progress there.

And your next question comes from Kevin Steinke from Barrington Research.

Just wanted to go through a few of the other pieces of the guidance here. In terms of Secure Information Destruction, that came up on the low end by $15 million. Is that from paper pricing?

Yes. Dan, you want to take it?

Yes. I think that's exactly what it is. The fundamentals of the business for the quarter, the business operating as we expect. We're seeing the benefit of paper prices. We took the opportunity to look at kind of the historical trends, and we've seen its index go up and down. We certainly believe it's going to stay above our guidance range for the year. We also are cautious about expecting it can stay at the level that it's at today. So the revised range that we're operating under right now, we think paper prices will be in the range of $175 to $185. And so with that, the bottom end of the range did come up as well.

Yes. I think 2 other points there. I think it's important to note that obviously, we did acquisitions. That's going to bring up the guidance. But at the same time, this is an international business for us, Kevin. So foreign exchange will have a negative impact. That's why you probably didn't see the top end come up as much.

Yes, there was about a $6 million of the $40 million FX impact in Secure Information Destruction.

Okay. And then on Regulated Waste and Compliance Services, the change in guidance there, that's currency plus the divestitures?

Yes, there's a number of things in that number. The foreign exchange will impact Regulated Waste and Compliance Services $27 million of that $40 million. We did have about $5 million in divestitures that we announced today that will impact. And then we took the opportunity to really trim the bottom half and the top end of guidance just by about $6 million on the bottom, about $9 million on the top. So most of the change is FX and in divestitures.

Okay. And then I guess lastly, the Manufacturing and Industrial came down again. I guess what are the factors driving that?

The majority of that adjustment is, in fact, divestitures, $18 million of the divestitures that we did in the U.K. with the hazardous waste company. It was about $7 million impact in that. And largely, that has to do with the portion of M&I that we have in Latin America. And then we took the opportunity in revising those guidance, and in fact, we came up on both the bottom and the top end because we are continuing to hit our numbers.

Yes. And I think another point on the M&I, just for everybody's reference. Year-to-date organic growth for M&I is actually 3%. So it's trending towards the top end of the range from the most recent guidance. So if you strip out the foreign exchange impact, if you strip out what Dan had talked about in divestiture, we have growth in M&I.

(Operator Instructions) And your next question comes from Isaac Ro from Goldman Sachs.

First question for me was on just SQ pricing. I know that you guys are working through the process here to settle here. And I think in the last couple of quarters, it didn't sound like there was much movement in terms of the pricing conversation. But I just want to check in just to see if that was still the case.

Yes, SQ pricing came in at Q2 as expected. So we're on track with the $120 million to $130 million that we talked about at the second half of '16.

Okay, got it. And then just on the ERP plan. I know you guys said that it's on track and within budget. Maybe if you could update us on kind of next key steps between now and the end of the year as you start to prepare for that to go live. It will be helpful to kind of understand your process and put that in context with some of the things you're talking about on portfolio rationalization and just the general -- how you're putting all that together.

Sure. I think the teams are very focused on the work streams around our -- what we call pave the way, and that's the $60 million to $65 million. And as you can see, great progress in the first half of the year. Feel very confident that we are going to hit the $60 million to $65 million deliverable that we have. I'll let Charlie talk about the portfolio rationalization. What I want to touch on is really early work being done now that will ultimately yield benefit in 2020, and that's really the work that they're doing on the ERP. Our team members are incredibly engaged right now. They're getting excited about seeing technology and how it can be able to work for them. They completed the blueprint design of our target operating model and are now down into what we call mega processes, most of those end-to-end processes, and things that really help you drive shared services, that account to report, that purchase to pay. All of those initiatives that they're working on are blueprint. There's about 7 or 8 of them, and we go through and call them. Spread team comes together, cross-functional group. They're working very collaboratively, and I'm really seeing enthusiasm build around it. They see the future of Stericycle under a single operating system with really world-class controls and capabilities. Charlie, you want to touch on...

I think we talked about portfolio rationalization. The only thing I'd add to Dan is certainly the design work will take us through the end of the year, and then 2019 is the year where we start to build the system. And then obviously, to remind everybody, the milestone that we have for go-live is to go live in the U.S. in all of our businesses in 2020 and to go live internationally in 2021.

And your next question comes from Michael Hoffman from Stifel Baltimore.

The document destruction, the $3.2 million net of paper seems a little lower than what your trend has been since you bought it. You've been actually enjoying more of a $4 million to $6 million. So if I think of the mix in $3.2 million of purge price and new customer, what was going on there?

Michael, it's Brent. I'll cover that one for you. The good news is we're right in the middle of our range year-to-date. So our range is, net of paper, organic growth targets of 3% to 5%. We're right in the middle at 4%. So year-to-date, we're doing well. Auto and recurring is doing well and is on track. So that's good news. The one area that we did have an impact in the quarter was purge revenue. In the quarter, we moved one of our regional inside sales offices into our centralized sales center, and we did have a challenge ramping up to the necessary headcount by the time line. And that was the impact in the quarter with regard to purge. The teams jumped on that situation. We're focused on bridging that gap. But that was the impact you probably saw on the numbers.

Okay. If I could circle back to -- at the midpoint of the change of revenue, $75 million, when I think about the mix, there is -- again, midpoint is $32.5 million from medical waste. You said $23 million of that is divestitures. What's the other $9 million? How much of that is ForEx versus how much of it is something going on?

We're talking in its entirety, Michael? Are you talking about one of the revenue streams?

I'm trying to reconcile what the sources of why the revs are coming down. So in medical waste, you're down at the midpoint, $32.5 million. But $23 million is for divesting businesses, right?

Yes. Let me just look at the high point and the revenue in totals. We came down $40 million due to foreign exchange. It's all the strength in virtually, again, every currency that we operate under. We came down $23 million due to the divestitures that we announced, the new divestitures. The old ones were already built in. Another $30 million in C&RS as we don't have line of sight to larger recall events, and Charlie talked about the transition from live work to automation, and we'll catch up to that. Acquisitions contributed $4 million. And then on top of that, we see a positive $15 million in revenue to the midpoint. And that has to do with -- in part due to paper as well as in part, as we mentioned, due to M&I and trimming some of the other ranges to tighten them up.

Okay. So that's the $19 million, okay, all right.

And we have no more questions in queue.

Thanks, Brandon. Before closing today's call, let me take a moment to recognize our former board member, John Patience. John served as a strong and influential voice on the Board of Directors for many years. Throughout, John played an important role in driving the growth and evolution of the company. His strategic thinking and business expertise had a significant impact. On behalf of the entire Stericycle family, I'd like to sincerely thank John for as many years of service and valuable contributions to the company. Thanks, everybody, for joining us on today's call and have a great evening. Take care.

And this does conclude today's conference call. You may now disconnect.