Sean McMillan - VP, Corporate Finance Charlie Alutto - President, CEO & Director Dan Ginnetti - EVP & CFO Brent Arnold - EVP & COO

Ryan Daniels - William Blair & Company Michael Hoffman - Stifel Nicolaus David Manthey - Robert W. Baird Gary Bisbee - RBC Capital Markets Scott Schneeberger - Oppenheimer Al Kaschalk - Wedbush Securities Erin Wilson - Bank of America Merrill Lynch Scott Levine - Imperial Capital Isaac Ro - Goldman Sachs Adam Baumgarten - Macquarie Research

Good afternoon. My name is Dan 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 will now turn the call over to VP of Corporate Finance, Sean McMillan. Please go ahead.

Welcome to Stericycle's third quarter 2015 conference call. I will now read the Safe Harbor statement. This conference call may contain forward-looking statements that involve risks and uncertainties, some of which are beyond our control -- for example, general economic and market conditions. Our actual results could differ significantly from the results described in the forward-looking statements. Factors that could cause such differences include changes in governmental regulation of the collection, transportation, treatment and disposal of regulated waste; increases in transportation and other operating costs, the level of governmental enforcement of regulations governing recommended waste, collection and treatment; our ability to execute our acquisition strategy and to integrate acquired businesses; competition and demand for services in the regulated waste industry; political, economic and currency risks related to our foreign operations; impairments of goodwill or other indefinite-lived intangibles; exposure to environmental liabilities; compliance with existing and future legal and regulatory requirements; as well as other factors described in our filings with the U.S. Securities and Exchange Commission, including our most recently filed Annual Report on Form 10-K. As a result, past financial performance should not be considered a reliable indicator of future performance. Investors should not use historical trends to anticipate future results or trends. We make no commitment to disclose any subsequent revisions to forward-looking statements. I will now turn it over to Charlie Alutto, CEO.

Thank you for joining us on today's call. In the third quarter, our results were unfavorably impacted by the following key factors, the strengthening of the U.S. dollar, lower hazardous-waste volume from our industrial customers and some higher-than-anticipated expenses in certain lines of business. Although we're disappointed with the results and the third quarter, the long-term fundamentals of the Company remain strong. We're encouraged by our continued success in selling additional services to our existing customer base and are growing the recall solutions business. Furthermore, we're very excited about the future growth provided by the recent Shred-It acquisition. Joining me on today's call to review our third quarter results will be Dan Ginnetti, CFO; and Brent Arnold, COO. I will now turn it over to Dan.

Thank you, Charlie. The results for the third quarter are as follows. Revenues were $718.6 million, up 7.6% from $667.9 million in Q3 2014; and internal growth, excluding returns and recall revenues, was up 6.3%. Domestic revenues were $523.5 million, of which $493.2 million was domestic regulated waste in compliance services and $30.3 million was recalls and returns. Domestic internal growth, excluding recalls and returns revenues, was up 6%, consisting of SQ up 7% and LQ up 4%. Growth rates were unfavorably impacted by lower fuel surcharges and lower hazardous-waste volumes from our industrial customers. International revenues were $195.1 million. And internal growth, adjusted for unfavorable foreign exchange impact of $33 million, was up 8%. This growth rate was also unfavorably impacted by lower hazardous-waste volume. Acquisitions contributed $33.3 million to growth in the quarter. Gross profit was $299.7 million or 41.7% of revenues. SG&A expense including amortization was $138 million or 19.2% of revenues. Net interest expense was $17.4 million. Net income attributable to Stericycle was $41.8 million or $0.47 per share on an as-reported basis and $1.08 when adjusted for acquisition-related expenses and other adjustments, including the recent legal settlement. Now for the balance sheet. Our covenant debt to EBITDA ratio was 1.17 at the end of the quarter which includes the equity from the recent mandatory convertible preferred issuance. The unused portion of the revolver at the end of the quarter was approximately $875 million. In the quarter we repurchased 88,376 shares of common stock on the open market in an amount of $11.9 million. At the end of the quarter, we have authorization to purchase 4 million shares. Our CapEx was $25.8 million. Our DSO was 67 days. Year-to-date reported cash from operations was $293 million. When adjusted for recall reimbursement and other items, cash from operations was $353 million. I will now turn it over to Brent.

Thanks, Dan. The quarter we closed 10 acquisitions, three domestic and seven international. The international acquisitions were three in South Korea, two in Spain and two in Romania. Revenues from the 10 acquisitions were $2.2 million in the quarter and annualized are approximately $14.3 million. Our worldwide acquisition pool remains robust, with well over $100 million in annualized revenues in multiple geographies and lines of business. In the quarter we experienced a solid growth in selling additional services to our existing customer base. This growth came from retail hazardous waste, sharps management, pharmaceutical waste and communication solutions. For example, we're seeing increased adoption of our pharmaceutical waste service by physician practices. By utilizing our existing customer relationships along with our environmental solutions infrastructure, we're able to deliver a simple and cost-effective service that keeps our customers compliant and helps protect the environment. We also experienced solid growth in our recall and return business. The combination of our recall expertise and the relationships in the automotive sector are creating many opportunities. The team has done a terrific job of flexing up our call center capacity to meet the demands of several large engagements. This has resulted in our best recall and returns quarter in the past three years. On October 1 we closed the Shred-It acquisition. The acquisition team is off to a quick start, driving operational synergies and laying the groundwork for long-term growth. Today less than 20% of our existing Stericycle customers utilize Shred-It for secure information destruction services. This acquisition provides another value-added service for our customers and an exciting growth opportunity for Stericycle. We would like to take this opportunity to welcome the Shred-It team members to our Stericycle family. Additionally, we thank all of our worldwide team members for their continued commitment to our customers, our shareholders and our values. I will now turn it over to Charlie.

Thanks, Brent. I would now like to provide insight on our current guidance for 2015 and preliminary guidance for 2016. Please keep in mind these are forward-looking statements and our guidance does not include future acquisitions, divestitures, integration, acquisition-related and other adjusted items. The current 2015 and preliminary 2016 guidance also includes the recently closed Shred-It acquisition, the related increase in share count and the impact of the strengthening U.S. dollar. For 2015, we believe analyst EPS estimates will be in the range of $4.38 to $4.41. We believe that analyst revenue estimates for 2015 will be approaching $3 billion, depending on assumptions for growth and negative impact from foreign exchange rates. We anticipate 2015 internal growth rates to be, SQ, 7% to 9%; LQ 4% to 7%; international, 7% to 9%; and recall and return revenues between $100 million and $110 million. We believe analysts will have estimates for 2015 free cash flow between $417 million to $426 million. 2015 CapEx is anticipated to be between $104 million to $110 million. We expect the full-year as-reported tax rate to be approximately 33.5% to 34%. This assumes the tax rate for the remainder of the year to be approximately 36%. Now I would like to provide preliminary guidance for 2016. As a reminder, in 2016 we will be reporting on a cash EPS basis. For modeling purposes, our 2015 EPS guidance of $4.38 to $4.41 is equivalent to $4.69 to $4.72 on a cash EPS basis. For 2016 we believe that analyst cash EPS estimates will be in the range of $5.28 to $5.35, using a share count of approximately 92 million which we're comfortable with. For comparative purposes, when 2015 cash EPS is normalized for tax rates and foreign exchange impact, this represents a cash EPS growth rate of approximately 17%. We believe analyst revenue estimates for 2016 will be in the range of $3.65 billion to $3.72 billion, depending on assumptions for growth and negative impact from foreign exchange rates. We anticipate 2016 internal growth rates to be, SQ, 7% to 9%; LQ, 4% to 7%; international, 6% to 9%; and recall and returns revenues between $95 million to $120 million. We believe analysts will have estimates for free cash flow in 2016 between $470 million to $485 million. 2016 CapEx is anticipated to be between $125 million to $140 million. We expect the 2016 full-year as-reported tax rate to be approximately 36%. In closing, although disappointed with the results in Q3, we're confident about the long-term fundamentals of our business and remain excited about the growth opportunities in 2016 and beyond. Thank you for your time today. We will now answer any questions. As a reminder, please limit yourself to one question and one follow-up question, as necessary. Dan, you can now open the queue.

[Operator Instructions]. Your first question comes from the line of Ryan Daniels. Your line is now open.

Maybe the first one I can ask you to provide a bridge from the $1.18 you were thinking about for earnings per share in Q3 to what you reported, maybe highlighting the haz waste impact and then higher expenses? And perhaps a little color on what those both were?

Sure, let me help you with that. So the estimates out there were $1.19, anywhere from $1.18 to $1.19. Our guidance was $1.18. There's about $0.01 difference between that. We saw a $0.025 headwind from the additional equity and the continued FX impact from the strengthening U.S. dollar. The slower-than-anticipated worldwide project work, along with the shift in customer mix in the recall business, created about a $0.05 headwind. SG&A investments and growth drivers, some higher professional fees and some higher-than-anticipated cost of revenues contributed to about $0.025 of that miss. And that is how you would get to $1.08.

Okay. And then I guess my follow-up would be just looking at the cash EPS guidance for 2016. If we're assuming $0.10 accretion for Shred-It, so $0.47 cash EPS on the $470 million midpoint this year, it looks like the core business EPS growth is going to be pretty muted next year. So can you talk a little bit about that? Maybe I am doing some of the math wrong, but any color there?

Let me help you a little bit with the math and then I think Charlie can add a little bit of color to the future growth. When you look at the equivalent cash EPS that Charlie provided you from all-in purposes, that was the $4.69 to the $4.72 -- again, this year on from a cash perspective, we had two large legal settlements which significantly lowered our tax rate. We also had some great entity consolidation that we did earlier in the year which provided a much lower tax rate. So when you normalize for that tax going to the 36%, because we don't expect those are going to replicate, that is about a $0.12 difference. Also, the continued foreign expense or foreign exchange escalation throughout the year is about another $0.04. So when you normalize for that, you would look at about a $4.53 to a $4.56 -- on average, $4.55. And what that provides you is about a 16 to 17.5, probably 17 at the middle, year-over-year growth.

Yes, I think another way to look at it, Ryan and obviously, we're being conservative with our guidance and that is related to the strengthening dollar, the reduction in the industrial waste volumes and further investments in the long-term growth engines. This guidance will allow the Stericycle management team to focus on those areas that provide predictable revenues and outcomes. And these areas include environmental solutions, Shred-It, communication solutions, as well as our medical waste and compliance services. If the industrial waste volumes rebound, that will be an addition to our strong growth that we're experiencing in the overall business.

Your next question comes from the line of Michael Hoffman. Your line is now open.

Well, I guess I am flummoxed which doesn't happen very often. The forecast seems about $100 million to $150 million light to me on the revenues, when you think about you're ending this year at about $3 billion and there is -- $725 million is the number that was in the presentation for Shred-It. And you have got to grow the $3 billion and $725 million has got to grow. So help me gap that difference.

Well, I think when you look at it, we think that -- Michael, first of all, we think some of the industrial waste weakness that we've seen in Q3 is going to continue on and probably accelerate a little bit more in Q4. So we're being very conservative on the industrial waste. If you think about our industrial waste part of the business, we've got about $125 million to $200 million of our regulated waste services that we feel is directly related to project or industrial waste business. So we think that slowdown which we saw accelerate in Q3, is going to actually get worse in Q4 and then level off in 2016. Then we had the additional effect of the foreign exchange. Dan can walk you some of those bridges, but we certainly have the additional foreign exchange headwind that not only affected us this quarter, but if we were to use this rate going forward which we do, it has an impact going into 2016 as well.

So just to be clear, out of your roughly $520 million of hazardous waste, $125 million to $200 million is project-based and you see that number becoming what?

We think a number for next year will be -- well, for next quarter it could be down anywhere between $14 million to $20 million -- $18 million to $20 million. And we were impacted roughly by about $8 million to $10 million in this quarter. So if you take that weakness that we were showing and Q4 and you take that out into 2016, that right there is anywhere between $60 million to $70 million.

Your next question comes from the line of David Manthey. Your line is now open.

I guess here, too, I am wondering on the gross margin -- maybe you could break that apart a little bit. Some of the items that you mentioned here in terms of SG&A, investment and professional fees -- clearly those are more SG&A related. And on the GP, we've never really seen a drop like this. Is it that the profitability of this industrial waste is much higher than average? Or it's just a lack of absorption? What the underlying cause of that -- of the gross margin weakness?

Sure, David. I'll tell you what, why don't I start with the bridge and I will add a little bit of color to that. So Q2 gross margins were 42.66%. We did have some acquisitions, but the impact of that was offset directly with foreign exchange. We did have 40 basis points of unfavorable impact that came from the lower-than-expected project work. And we had some higher-than-anticipated cost revenues about 51 basis points of unfavorability. What those were, David, since you asked about them, those were redirection of waste flows required from two facility fires; payroll adjustment required by unions due to inflation in two Latin American countries; we've experienced some higher operational costs from running our newly compliant Title V incinerators. Regarding the project work, yes, that does come out at higher. We have a certain amount of -- a significant amount of fixed costs that are tied to the industry and when revenue comes in, we're able to leverage those resources and go at them. We do have a plan going forward that Charlie will talk about on how to maybe flex that a little bit. But when that revenue comes off, we have to maintain the integrity of our fixed costs in our fleet to be able to continue to service that reoccurring business.

Yes, I think as Dan said, David, the current fixed cost structure in environmental solutions, coupled with that unexpected lower revenues, unfavorably impacted revenues. I think the biggest question is, what are we going to do to mitigate that in the future? Well, we're certainly going to implement plans to reduce those fixed costs within the business. If you think back, this is very similar to our approach and success we had in our recall business, where they solely have a business based on project work. So we do need to mitigate that in the future by lowering those fixed costs on our environmental solutions side of the business.

Okay. And then on the SQ, LQ and international, unless I missed something, it seems like you adjusted those ranges. Is that correct or did I miss something here?

No, you are correct on that. The growth engines performed well when we looked at it from an additional services perspective. But certainly we had headwinds related to fuel surcharges and those hazardous waste volumes. So we have adjusted the domestic LQ and SQ growth rates for 2015 and 2016, based on our assumption that the headwinds which we've outlined, will remain -- will be in effect for 2015 and remain for 2016 as well.

Your next question comes from the line of Gary Bisbee. Your line is now open.

Let me add to that. The industrial waste and project work, can you give us a little more color, exactly what that is? I assume that came through PSC and was not something you built organically. But it begs the question, is that really something we should be in, given what seems like pretty -- essentially volatile? In two out of three quarters, this was a factor that led to a miss.

So our Q3 industrial waste volumes worldwide were less than we anticipated. And, Gary, that includes project work and lower volumes from the industrial waste customers. Obviously, we feel the shortfall on the projects and these volumes are directly related to the drop in energy and commodity prices. And I think you kind of said it, that we've acquired assets over the last several years that included industrial waste customers. And these customers and volumes are now included in our base business. So certainly from a guidance perspective, since we thought that this pressure would not only continue but get slightly worse for the remainder of 2015, level out in 2016, that is why we took it out of our guidance in 2015 and for 2016. But it's -- certainly the acquisitions we made were a portion of the business inside there. You're absolutely right about that should not be our focus. All along we have talked about building an SQ reoccurring revenue model. We're certainly going to do that. We will look at that with a little more gusto now that we have seen that project work fluctuate more than we would like. We saw it fluctuate in Q1. It came back in Q2. We thought we were going to be right there in Q3 and Q4. So this told us obviously it builds during the quarter. But the focus will be over time. It's a transition -- it's project and industrial waste work which is not our core focus, to a more SQ reoccurring revenue model -- for instance, like Steri-Safe for hazardous waste customers.

And then the follow-up question, just on Shred-It, can you -- within that guidance, I realize you may not break it down in a detailed fashion going forward, but can you give us a sense what is implied for Shred-It, whether that is on the revenue line or the EBITDA line? Or just give us -- help us get to this new guidance. Frame what's in there for Shred-It.

Sure, Gary. I think when you are modeling for 2016, about $716 million is an appropriate range. Looking at their EBIT and I would urge you to look at us from an EBIT perspective as well -- as we transition Shred-It which was a Canadian-owned Company, over to U.S. GAAP, IFRS to GAAP requires some changes. So you will see potentially some movement within gross margin and SG&A. But EBIT should be consistent. So I would model it about 16.7% for their EBIT. The depreciation in their model and amortization is about $56 million depreciation and $30 million amortization. And then figure about $35 million to $45 million in interest.

Your next question comes from the line of Scott Schneeberger. Your line is now open.

You just mentioned on the last question that the hidden industrial waste came on quickly; it caught you a little off guard. Could you take us a little bit more in depth into what exactly happened? What exactly is it? And you are speaking to stabilization in 2016. Could you elaborate a little bit on -- you know, it is going to get worse in fourth quarter from third? Stable in fourth quarter? Please kind of speak to what happened and what gives you the outlook of stabilization next year?

Yes, so I think just so I paint the picture clear, we had obviously an impact in Q3. We think that impact boded slightly worse in Q4. And then it will stay at that level into 2016. So it will stay at that low level. That's at least from a guidance perspective. And we might prove out to be too conservative on that, but we think it's prudent to have that view of the business at this point. To give you an example, Scott, on what do we mean by that type of work -- I will give you kind of two examples. And I think if you think through, as I said before, although we don't directly work with energy or mining companies, many of our customers do work for these industries. So the rate of decline, when we look at these customers, was much faster than we anticipated. And it declined rapidly in the quarter. So two examples I think we look at, we have been some servicing a customer for several years that provides generators to the oil and gas industry. This customer provided very steady volumes over the last several years. Their business was down by over 70% when we look at that specific example Q3 year-over-year. Another example, we had a contract with a customer that provides equipment cleaning services for the energy in the mining industry. In Q3 we experienced an 80% decline, again related to the energy and commodity prices. So those are just two examples. Obviously, we have been negatively impacted from this. And I think as we stated, we just really want to be very conservative on the guidance. That's why we're taking guidance down for the rest of the year and having that continue for the business in 2016. If it comes back, it will just be additive to our growing core business.

And Charlie mentioned, worldwide, could you give us a little bit of help on what is domestic and what is outside the U.S.? And in the U.S. geographically, are we -- in the oil patch is where this is mostly occurring? And the commodity is the international? Just a better feel for -- and you gave some splits before on what impacted third quarter, what you think will impact fourth quarter. Just if you could give some splits around that, please, it would be helpful.

Yes, I think if you think back, Stericycle has built an environmental solutions business not in the U.S., but in other parts of the Americas as well. So when we think about the business for us, it's the U.S., it's Canada, it's Latin America. And when you look at where we're seeing this impact, we're seeing it -- we're seeing it evenly across. The business is bigger domestically, obviously. So when you look at the split, is about an 80%/20% split, 80% affecting the U.S., 20% affecting international. And that is just because of the scale of the business, Scott.

Your next question comes from the line of Al Kaschalk. Your line is now open.

Sorry, I think that's Al, right? On the expense items that were elevated, I'm not sure if I understood what those were, if there was just lower utilization. Just maybe a little bit more color on helping to explain the $0.03, $0.04 there that I think you, Dan, articulated.

Absolutely. We had a couple of fires in plants, both internationally -- and that does require, when you have that, to temporarily redirect waste for a period of time. And that will carry forward into Q4 and that does come at a cost to be able to move those waste flows. Also, you have seen large inflation pressures in certain Latin American countries in which there are large unions that cover our workforce down there. And we're required by regulation and within our union contracts due to the inflation to do a large, kind of unexpected payroll increase. Again, obviously, that is going to continue through. The other thing that we've learned is as we've upgraded the compliance of all of our domestic incinerators that meet Title V requirements, that does come in operating at a higher cost. And I think Brent could probably touch on a little bit of color to help you better understand why that happens.

Yes, as we meet these new emissions standards, what we're finding is we're experiencing higher operating costs, particularly associated with the ongoing maintenance of this new, more stringent equipment to reach these levels. Examples would be our higher supply costs; increased maintenance costs; and then, when we have downtime, just the cost of moving it from one waste processing facility to the other is where we're experiencing that higher cost.

So does that allow -- are these costs that you are going to absorb and not be able to pass along? Or, say, in 2016, 2017, over time you will be prudent on getting the higher operating costs in your business out to your customers?

I think this is something that over time we can pass on to the customers, especially those customers that utilize incineration, although we will have to look contract by contract. And certainly a lot of this increases go when we have the contract come up for renewal. So certainly, it is something that we feel that we'll get, but we think there will be a lag in when we will be able to get some of these costs back.

Your next question comes from the line of Erin Wilson. Your line is now open.

Can you just -- not to belabor the topic, but can you just speak to the visibility on that industrial waste business and how concentrated is that? You mentioned several projects, the vast majority of it concentrated and is it really an inherently lumpy business? Does it ever make sense to break it out similar to what you do in the returns business, given the volatility there?

Yes, I think, Erin, if we think about visibility for it, it came in Q3. And historically in Q3, even in our medical waste service, July and August tend to be slower months for us. We see a bit of a revenue decline even on the healthcare side as people take vacations. And we have an increased cost of a lot of overtime that takes place in July and August. So as we were looking at the business, we saw the normal slowdown. Usually in the medical waste business, it bounces back like it did. On the industrial side, it didn't. The project work is very lumpy. When you start making these take-ups and you see the volumes significantly lower, that is when you see that you are not getting that industrial waste volume that you would like to see. And I think the fact of where it happened in Q3, we were looking at our normal July and August. We just did not see the bounce-back, especially in the United States in that September time period.

Erin, just to add on, I really don't think it does make sense to break that out. We're utilizing the same sales force, the same transportation fleet, same facilities. It is a percentage of the overall business that we service. And it would be very difficult to break that out.

And then on the recalls business, kind of going forward, I guess it's kind of your standard guidance there for 2016. Is there -- how much of it was automotive in the most recent quarter? And how should we think about that component of the business going forward? Could that offer upside, I guess?

No, thanks, Erin. Certainly we continue to see a rebound in the recall business. If you recall, we started the year at about $20 million. And as Brent said in his prepared remarks, we had the highest amount in the quarter in three years of $30 million. We continue to see uneven business, but the auto sector continues to create opportunities. And Brent even talked about it in his opening comments. A lot of that is coming around the call center work. That does have some related lower margins. But we feel really good about where we're in that business, certainly for 2015 and for Q4 and for our 2015 results. When you think about the auto recalls -- why we're excited about that? Obviously there is a heightened sensitivity to auto recalls in general. And if you think about Stericycle, we offer a turnkey solution to these manufacturers to help them assist their customers. So what do we do? We help them in notifying and we help to get their response rate up. And that is where they are getting a lot of pressure. So we think it further adds to the solutions in the recall space. We don't break out, certainly, where we're getting these recalls from. But auto recall helped us get to that high level of a little over $30 million in the quarter.

Your next question comes from the line of Scott Levine. Your line is now open.

I don't recall if you gave the gross margin bridge that you typically gave. If you did, I apologize. If you didn't, if you could offer that up? I'm just trying to get a better sense of the gross margins implicit in your guidance. If you back out some of the fees, the fires, etc., costs that were kind of nonrecurring in the quarter -- just trying to get a better sense of what the jumping off point is and whether we should continue to expect that underlying 10 to 20 basis points of sequential gross margin going forward? Or maybe a little bit more color around what Shred-It does for the margin outlook there?

Sure, let me first give you the bridge. I did give it before, but certainly we would be happy to do that for you again. The Q2 gross margin was 42.66%. And when you add the 40 basis points of unfavorability that came from the lower-than-expected project worldwide, we did have those higher costs that I gave a lot of color on. And that was 51 basis points. So that is how you get to the 41.77%. If you want to look at the guidance going forward, I would urge you to -- for your modeling, let's focus on EBIT. As we work through mapping Shred-It expenses into Stericycle structure, from IFRS to GAAP, you're going to see changes in gross margin and SG&A. So with that, I think it's more important if you just look at it from an EBIT perspective. And I think the model going forward has about a 268 basis point impact when we bring in Shred-It right now. So if you look at our EBIT, it was Q3 23.6, about a 268 basis point impact when you include Shred-It into that number. You will see about 55 basis points of improvement. So, certainly, while we expect some of this to continue, you do see some nice expansion going in there as we work towards the plan Charlie talked about. And I think for your model purposes, about a 20.6 EBIT for Q4. And that would put you at about a full year of 22.3.

And as a follow-up, very quickly, I think last quarter you announced in your international business some new markets for clinical services in Latin America. Any noteworthy trends in your international business generally -- outperformers, just outliers and any additional traction within clinical services to be aware of?

Scott, this is Brent. Absolutely. We continue to see good growth of our sharps business in Latin America, where we have opened up some new facilities there. We talked a little bit more about that last quarter but continue to see real strong progress both in Brazil and Chile. And then from a clinical services, continue to be pleased by adoption rate and what the team is doing both in Spain and the other parts of Europe.

Your next question comes from the line of Isaac Ro. Your line is now open.

I wanted to start, maybe, Dan, with a question on CapEx and free cash flow. If we sort of look at the guidance you have given for 2016, it doesn't look a bit of a step-up here. I'm wondering the extent to which that might be a one-time increase or is it sort of a new run rate that we should think about for the long-term?

A step up in guidance for free cash flow? Are you talking for Q--?

Well, not in guidance, just on the absolute number year on year. It's a material increase year on year. I'm curious if that is the run rate or is it sort of a one-time thing as it relates to getting Shred-It integrated and all that?

Yes, I think a big chunk of that obviously is going to come from Shred-It. I think what you're looking at is the guidance year-over-year of about a 13% increase which is in line with the growth that we will give you. Remember, we helped you normalize for what the real performance was and is going to be over that tax and foreign exchange. Seeing about a 13% increase. I think that is in line. I think it is conservative, as we usually are coming out in 2016. And we will continue to work on things such as our DSO and to prove that out and continue to bring the cash that will help us continue to grow the business.

And then maybe just a general question on the overall operating environment. Specifically with regards to pricing, just curious what your assumptions are for 2016 versus 2015. Any change there? And maybe help us understand or remind us how the pricing environment in the Shred-It business may differ from the core. Thank you.

Yes, nothing overwhelming in the pricing where we feel going into 2016 as compared to 2015. And as we said before, one of the things we like about Shred-It and their service -- it is truly not volume-driven. So it really fits in well with our normal SQ business, where you go to a stop; you check certain bins. It's more about bin tips and collections than it is about volume. And if you think about it, that's very similar to some of our SQ offerings, like Steri-Safe; and even some of our communications solutions offerings which are not really volume-based. So Shred-It, as we said on our calls when we first did the acquisition, from a pricing and a service, it logically fits in to the Stericycle offering.

Your next question comes from the line of Adam Baumgarten. Your line is now open.

I believe, just to clarify, you gave guidance for 2016 including $750 million in revenue from Shred-It. Correct?

Yes, about $750 million.

And what does that represent growth-wise versus 2015 for just that business?

It is roughly about 4% to 5%.

Okay. And that assumes some FX headwinds, as well, I guess, into next year?

Yes, we did factor that in.

There are no further questions at this time. I will now turn the call back to the presenters.

Thank you, Dan. In closing, we're excited about our growth engines going forward. I want to thank everyone for taking time and joining today's call. We will see everybody on the road later this year. Have a great evening. Thanks, everybody.

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