Sean McMillan – Vice President of Corporate Finance Charles Alutto – President, Chief Executive Officer & Director Daniel Ginnetti – Chief Financial Officer & Executive Vice President Brent Arnold – Chief Operating Officer & Executive Vice President

Ryan Daniels – William Blair & Co. Al Kaschalk – Wedbush Securities, Inc. Sean Dodge – Jefferies Gary Bisbee – RBC Capital Markets Scott Schneeberger – Oppenheimer & Co. Brian Butler – Stifel, Nicolaus & Co. Joel Kaufman – Goldman Sachs & Co. David Manthey – Robert W. Baird & Co. Kevin Steinke – Barrington Research Associates, Inc. Scott Levine – Imperial Capital Jason Rodgers – Great Lakes Review Barbara Noverini – Morningstar, Inc.

Good afternoon. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. VP of Corporate Finance, Sean McMillan, you may begin your conference.

Welcome to Stericycle's first quarter 2016 conference call. I will now read the Safe Harbor statement. This conference call may contain forward-looking statements that involve risks and uncertainties, some of which are beyond our control, for example, general economic and market conditions. Our actual results could differ significantly from the results described in forward-looking statements. Factors that could cause such differences include changes in governmental regulations of the collection, transportation, treatment and disposal of regulated waste or the proper handling and protection of personal and confidential information; increases in transportation and other operating costs; the level of governmental enforcement of regulations governing regulated waste collection and treatment or the proper handling and protection of personal and confidential information; our obligations to service our substantial indebtedness and to comply with the covenants and the restrictions contained in our private placement notes, term loan credit facility and revolving credit facility; our ability to execute our acquisition strategy and to integrate acquired businesses; competition and demand for services in the regulated waste and secure information destruction industries; political, economic and currency risks related to our foreign operations; impairments of goodwill or other indefinite-lived intangibles; variability in the demand for services we provide on a project or non-recurring basis; exposure to environmental liabilities, fluctuations in the price we receive for the sale of paper, disruptions in or attacks on our information technology systems; 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, 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. I will now turn it over to Charlie Alutto, CEO.

Thank you for joining us on today's call. In the first quarter, we experienced strong revenue growth, strong cash flow and solid sequential growth for the Shred-It acquisition. Results in the quarter were unfavorably impacted by the timing of the Shred-It synergies and lower industrial hazardous waste revenues. Despite the challenges in the quarter, we remain confident about our business. Joining me on today's call will be Dan Ginnetti, CFO; and Brent Arnold, COO. I will now turn it over to Dan.

Thank you, Charlie. The results for the first quarter are as follows: revenues were $874.2 million, up 31.8% from $663.3 million in Q1 2015. And internal growth, excluding returns and recalls revenues, was up 5.6%. Domestic revenues were $649.7 million, of which $624.9 million was domestic regulated waste and compliance services; and $24.8 million was recalls and returns. First quarter domestic internal growth, excluding recalls and returns revenues was up 5%, consisting of SQ up 6% and LQ up 4%. As anticipated, growth rates were impacted by lower fuel surcharges and lower hazardous waste volumes from our industrial customers. International revenues were $224.5 million. And internal growth, adjusted for unfavorable foreign exchange impact of $23.8 million was up 7%. This growth rate was also impacted by lower hazardous waste volume. Acquisitions contributed $194.5 million to growth in the quarter. Gross profit was $369.2 million or 42.2% of revenues. SG&A expense, including amortization, was $207.3 million or 23.7% of revenues. Net interest expense was $24 million. Net income attributable to Stericycle was $66.7 million or $0.78 per share on an as reported basis and $1.11 when adjusted for acquisition-related expenses and other adjustments. Our covenant, debt-to-EBITDA ratio was 3.41 at the end of the quarter. The unused portion of the revolver at the end of the quarter was approximately $584 million. In the quarter, we repurchased 327,952 shares of common stock on the open market in an amount of $37.693 million. At the end of the quarter, we have authorization to purchase 3.4 million shares. Our CapEx was $34.2 million, or 3.9% of revenues. Our DSO was 63 days. Year-to-date, cash from operations was $156.9 million. When adjusted for recall reimbursement and other items, cash from operations was $163.6 million. I will now turn it over to Brent.

Thanks, Dan. Worldwide, we continue to use our strong free cash flow to drive our growth through acquisitions. In the quarter, we closed seven acquisitions, five domestic and two international. The international acquisitions were one in Spain and one in Romania. Revenues from the seven acquisitions were approximately $1 million in the quarter and annualized are approximately $12.4 million. Our worldwide acquisition pool remains robust with well over $100 million in annualized revenues in multiple geographies and lines of business. In the quarter, the Shred-It sales team delivered strong new sales growth. As a reminder, Shred-It has over 350 sales professionals across North America focused on converting customers that either do not shred or shred themselves. This unvented market represents a $2.5 billion growth opportunity for Stericycle. We also are encouraged by the progress the combined sales teams are having in selling Shred-It SOLUTIONS. This quarter, the team closed eight health systems and multiple national accounts. Today, less than 20% of our current Stericycle healthcare customers use Shred-It as a secure information destruction provider, representing a nice growth opportunity for Stericycle. Our Shred-It integration efforts remain a priority across the organization. We are confident in our ability to achieve the full $73 million in Cintas-Shred-It synergies and our team has either completed or made solid progress on many of the integration projects. However, we have reassessed the original timeline associated with the reroutes and onsite-to-offsite conversions. While several regions have successfully made this conversion, the time to convert each region is taking longer than previously anticipated. In order to ensure high service levels and support ongoing new customer growth, we have decided to extend the rollout schedule going forward. The new timeline enables the reroute teams to provide the necessary support and assistance without negatively impacting our customers. Based on these changes, approximately $20 million of the anticipated reroute and onsite-to-offsite synergies will be extended into 2017 with a full impact in 2018. In our retail and healthcare hazardous waste compliance program, we continue to experience strong growth. The growth is fueled by increased enforcement of existing regulations and by Stericycle's strong customer relationships in both retail and the healthcare industry. Looking ahead, we continue to see expanding growth opportunities as Stericycle provides multiple services to help our customers improve their operations and achieve their goals. As we execute on this strategy, we can more than triple our customers' revenues. We would like to congratulate Stericycle's Parkersburg, West Virginia facility for receiving Congressional recognition as a Star Status site in OSHA's Voluntary Protection Program. This is the first medical waste facility to earn the VPP award, and it demonstrates the team's dedication to our corporate values. In closing, I want to thank each member of our worldwide team for their continued commitment to our customers, our shareholders, and our core values. I will now turn it over to Charlie.

Thanks, Brent. I would now like to provide insight on our current guidance for 2016. Please keep in mind that these are forward-looking statements, and our guidance does not include future acquisitions, divestitures, integration and acquisition-related expenses, and other adjusted items. As a reminder, our 2016 EPS guidance is adjusted for amortization expense. For 2016, we believe analysts' EPS estimates will be in the range of $4.90 to $5.05, reflecting the unfavorable impact of the timing of the Shred-It synergies, softer industrial hazardous waste volume, and higher costs associated with our international operations. We believe analysts' revenue estimates for 2016 will be in the range of $3.6 billion to $3.66 billion, depending on assumptions for growth and the impact of foreign exchange rates. We anticipate 2016 internal growth rates to be SQ, 7% to 9%; LQ, 4% to 7%; international, 6% to 9%; and recall and returns revenues between $95 million and $115 million. We believe analysts will have estimates for free cash flow in 2016 between $435 million and $455 million. 2016 CapEx is anticipated to be between $125 million to $135 million. We expect the 2016 full year as reported tax rate to be approximately 35.5%. In closing, although disappointed with our results in Q1, we are confident about the long-term fundamentals in our business and remain excited about the growth opportunities in 2016 and beyond. Thank you for your time today. We'll now answer any questions. Steve, you can open the queue.

Thank you. [Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair. Your line is open.

Yeah. Good evening, guys. Thanks for taking the question. Dan, maybe one for you. Looks like about a 5% cut to EPS, and I'm hoping you could bridge that for us from the prior guidance and break down kind of the three impacts you outlined and how each of those is impacting the bottom line.

Yeah, Ryan. I'd be happy to do that. So the prior guidance was $5.26 to $5.33. We had a $0.05 miss in the quarter, so that's obviously going to roll into the next guidance. There was some strength in paper prices and slightly lower interest rates, and we had some acquisition contribution and that was offset by some higher depreciation expense. That nets to about $0.01 to $0.02 of favorable expense – favorable EPS. The delay, as Brent mentioned in his dialogue, in recognition of Shred-It synergies, is anywhere between $0.07 to $0.12 unfavorable. International cost pressures in Latin America and the UK is between $0.07 to $0.10 unfavorable. And we had some softness in the industrial markets, and a mix of customers in ESAW business, that will be anywhere from $0.10 to $0.11 on the year unfavorable. So the new guidance from there will bridge you to $4.90 to $5.05. And I think when you're looking at Q2, I think it's best to pick a range between $1.16 and $1.20 and I think you'd be in a good position for the quarter.

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

Hey, Ryan. This is Brent. Absolutely. This is not about if we can get the on-site to off-site and reroute synergies, but rather when we will get these. All of us here want to get these synergies as soon as possible. We just need to make sure we do it in a timeframe that does not negatively impact our customers. It probably makes sense to give a little bit of description of what we're talking about and what really goes into an on-site to off-site conversion. First, with all of the conversions of this type, you have to have clean data. You need to know things like service location, number of consoles, hours of operation, key contact information. Let me remind you that the team recently went through a merger of operating systems when Cintas joined Shred-It. And while that went well, there definitely is some items that still need to be cleaned up as part of that data clean-up. Then you notify the customers. So, you're notifying all the customers that are currently on-site, and you're letting them know that we're going to be switching their service from on-site shredding with a truck that has a shredder on it to taking that back to our facility and shredding back at our facility. So, you have to make sure you have all the right supplies, right, because we're switching trucks. So, you have to have that right number of box trucks, lift gates, consoles to transport the materials. So, all of those things need to be in place. Ultimately though, and this is really where we're noticing the biggest challenge is when you make the change, our team members now are going to new sites. So, imagine, Ryan, if a CSR is coming to your facility. The number of consoles you have across William Blair, and they've not serviced it before, you now are – while we have a description and location on the handheld, you still need to find those. And you need to find the best way to kind of wrap through your office to find all those consoles. So, there's a learning curve that our CSRs or drivers need to go through when we make these changes. Believe it or not, the first probably several weeks after re-route were actually less efficient than we were before the re-route. But as they go through that learning curve and that settles down, we start to get efficiency, and we ultimately will do a final kind of polishing re-route to really put as many stops on those routes as possible. So, again, our focus here is about how do we do this without impacting the customer, recognizing the synergies, and ultimately, doing it in a way that allows us to continue to close new business. The reason we're confident that we're going to get that $73 million, we've done this many times before. Our pilot market in Toronto, in Cleveland, in Charlotte, in Boston, in Detroit. There's a number of markets where we have successfully done this, but what we've decided to do is, you know what, this needs to be more of a 16-week process than an 8-week process and the timeline was just too aggressive. So in assessing that, we decided to extend it out ultimately because we do not want to disrupt service with our customers.

Okay. Very helpful color. I'll hop back in the queue.

Thank you. Our next question comes from the line Al Kaschalk with Wedbush Securities. Your line is open.

Good afternoon, everybody.

Hey, Al.

I appreciate the bridge on the EPS, but I guess I want to look at – take maybe a different angle at the mix of revenue that you have and maybe the profitability of that. And maybe there's some color you can provide us in terms of the percentage of industrial revenue that's international versus domestic and if there's any margin impact there. It appears to me just, again, on the surface that the business you've added isn't as profitable as you think it was or thought it was, or really the piece that's coming off on the industrial side is really pretty significant. So is there any color you can provide on that? And then second, I guess the follow-up to that would be, was there are further lag down in the first quarter on the industrial piece, specifically from when you exited 2015?

Yeah. This is Charlie. I'll take that. I think when you think about how this situation with Stericycle, roughly 80% of it is domestic, 20% is international. But if we dig down to the Q1 impact on what we call our environmental solutions business, hazardous waste volumes – that is excluding retail haz waste and healthcare haz waste. We're anticipating – we were anticipating that to grow at a seasonally – at seasonally adjusted rate of about 3%. It actually came in at a negative 4% for the quarter, so roughly speaking about $5.5 million soft on our industrial or our hazardous waste volumes. In addition, the mix of the waste that we did actually pick up in our projects resulted in a higher anticipated disposal expense of roughly about $1.5 million, and that has to do with some of the larger projects we did were direct disposal, and we have direct disposal as opposed to going through our facilities. We do incur a higher disposal expense for those accounts, and that's what Dan was referring to when he was talking about mix in the environmental solutions business or our hazardous waste business. So certainly we did see a lower hazardous waste volume. The good news, I think, though, and Brent talked about it in his opening, is where we are focused. That's the healthcare hazardous waste. That's the retail hazardous waste. That's the SQ hazardous waste. We had really strong growth there, but unfortunately we have a mix issue when it comes to the facilities that we've acquired to support this growth, and that is – has a very high fixed cost to it, and that's where you see it hurting us, not only on the revenue line but also on the profit line.

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

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

Good luck, guys. Thank you.

Thanks, Al.

Thank you. And our next question comes from the line of Sean Dodge with Jefferies. Your line is open.

Hi. Good afternoon. Thanks. So you guys talked about the extended timeline on the synergies related to the Cintas acquisition. Is there any – do you have any updated thoughts on the $20 million to $30 million of incremental synergies Stericycle thinks they can get? I think you initially said those would be an opportunity beginning in 2017. Is that – are those still on track?

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

Okay. And then is there any update you can give on the business optimization exercise or process you guys have undertaken?

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

Were there any costs associated with that in the first quarter that wouldn't necessarily be recurring but you haven't backed out?

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

Understood. Thanks again.

Thank you. Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Your line is open.

Hey, guys. Good afternoon.

Hey, Gary.

Hey, Gary.

Hi. I guess I wanted to ask about the international business. Just looking at the 10-K, and in the Ks and Qs obviously you give more detail and that the margins there relative to the U.S business are like less than a third the amount. I know that got hurt last year by haz, like the U.S. did, but I guess the question is this, if what – is there a credible plan and strategy to narrow that gap in the next two to three years? And for years, you've talked about if you can move the mix more to SQ that will take care of it, but it doesn't seem to me that you've had much success with that, at least overall, because those margins are down several years in a row. And at that level of profitability, can you justify continuing to do M&A in the international waste business? It just seems like there's no way you're getting good returns if you can't really improve the profitability?

Yeah. I think I'm going to take that as two steps, one, I want to walk you through what are some of the pressures that we're facing currently, Gary, in that market. And then I'll take a stab at your question around long term, what do I think we can do there. So the pressure points and what we feel will be the pressure points for the rest of the year are in two distinct lines. It's first of all, it has to do with our patient transport business in the UK and obviously that's been one of our biggest contributors to our international cost pressures because it has rapidly grown over the last several years. We continue to experience an increase in the cost to operate certain contracts and as a result, that has had a pressure on the overall international margins. Just to educate everybody, most of that work was previously performed by the hospital, and as a result, it was difficult to get historical data prior to bidding. And what are we doing about that, how are we going to try to work on that? Well, the team is working diligently. They're working on these cost overrides, they're working on a contract-by-contract basis to see if these costs, some of them could be passed through our customers, and we may look at exiting some of those agreements. So that certainly is something that's been – it's a headwind in Q1. We think it will be a headwind for the rest of the year. The other issue we're facing is in Latin America. Obviously, the economic pressures in Latin America, especially Brazil, are impacting our business. The economic pressures are mostly in the form of now pricing pressure on government accounts. Just in Brazil alone, 58% of our medical waste volumes are tied to government contracts. When you think about Latin America, kind of a perfect storm for us. We have increased costs. We've talked about that last year. Usually, in Latin America, we can pass those costs along, but now we're experiencing some headwinds with respect to government accounts and being able to pass along those prices. So we'll continue to work on that certainly. The team is working on all fronts to improve margins over a longer period of time. Acquisitions, yeah, we'll look at certain markets and we will take a cautious stand on acquisitions. If it's a good tuck-in acquisition that has a good return in our core business, certainly, we'll look to complete that. We're not looking to add any new services, though, at this point until we can get the base business stabilized in some of the international countries.

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

Yeah. Let me take you through that, because I could see how you can get to that number. Remember, as a mandatory convertible, there's a range on this. So, anything below $136 – or let's put it this way. $136.25 is the maximum dilution of this, and that translates into 5.6 million shares. No matter where the price is below that, you will not see a greater converted share count. Anything above $136 up into $170 will then begin to become less dilutive and can actually go to as low as 4.5 million shares and never less diluted than that. So, Gary, at the level we're at right now, you will see no greater dilution than what it's at, and 91.8 million shares for the year is a good estimate to use.

Okay. Great. Thank you.

Thanks, Gary.

Thank you. Our next question comes from the line of Scott Schneeberger with Oppenheimer. Your line is open.

Thanks. Good afternoon. Kind of segueing the discussion on international and acquisition, you made two in Europe. Is this just predominantly a Latin American issue where we wouldn't see acquisitions in that region for a while but you're still active in, I guess, ex-UK, the continent of Europe? Just some thoughts. And if you could talk about what those acquisitions were U.S. and international in the quarter. Thank you.

Yeah. Scott, the two acquisitions in Spain and Romania, I wouldn't read anything into that with respect to Europe or Latin America. They were two small tuck-in acquisitions around regulated medical waste. We'll look at acquisitions like we always have on a country-by-country basis, and if we feel that we need to do more integration work and improve margins before we do deals, then certainly that will come into our decision. So, I wouldn't look at it, acquisitions LATAM versus Europe. For the quarter, we had seven acquisitions. There were five domestic, two international. Brent gave you the Spain, Romania. Of the five domestic, one was regulated medical waste; four were secure information destruction. And as I've said before, the two international were regulated medical waste tuck-in acquisitions in Spain and Romania.

Okay. And if I could ask kind of a two part follow-up or...

Sure.

...it's probably two separates. Could you speak to RMS in the quarter? It looks like nothing too dramatic there versus trend. I saw you took down the high end of the guidance range for the year by $5 million, just what trends you're seeing. And then I'll ask my third question now with it. Just with – what should we expect to hear on the second quarter call, when you talk about working with the consultants and what you're assessing, what type of outputs are we going to hear? I mean, I know you're not going to quantify today, but what are the changes that are coming? Just if you could give us a taste. Thank you for answering both of those.

Sure, Scott. On the – your recall and returns question, we had solid growth this quarter versus the prior year's quarter, greater than 20% year-over-year. So the 24.8% compared to our 20% in Q1 of last year, so the team had a very good quarter. Obviously, it continues to an uneven business, difficult for us to even forecast. The only reason, to your question of why we brought the top end of the range down, which is after one quarter we still haven't seen that one blockbuster of really large recall. We would need a couple of those to get to the high end of the range, so we thought it was prudent just to shave the top end of the range down a little bit. But the team delivered solid quarter on all the industries: auto, food and beverage, pharma, med devices, consumer products. The team continues to do a really good job for us there, and we're excited about the opportunities in the quarters ahead. With respect to the consultant and what we'll talk about on Q2, I mean, obviously, we're looking at how best to organize the North America business. And it's all the businesses. It's ComSol and Expert. It's our Environmental Solutions. And more importantly, it's how do we take Shred-It and integrate that into all of our businesses and leverage the infrastructure that we have and really set us up for long-term growth. So I think when the Q2 call comes along, we'll talk about what the final outcome was. How did we structure ourselves? How are we going to have a better go-to-market strategy to utilize a better way to cross-sell our businesses? And at the same time, Dan and the finance team will look at, well, how are we measuring success in the new organizational structures internally and then how externally when we talk to our shareholders and our analysts about the different matrix on our business. So that's our anticipation talk track for the – I think we're set up well to talk about that on the July call, and those will be some of the topics we touch upon on our next earnings call.

Great. Thanks.

Thank you. Our next question comes from the line of Brian Butler with Stifel. Your line is open.

Thank you for taking my questions.

Hey, Brian.

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

Yeah. Brian. Let me kind of work with you on the synergy numbers. Our previous guidance was $51 million of synergies would be in 2016, with us pushing out these onsite-to-offsite conversions and reducing that by $20 million. We're now at $31 million we'll hit 2016. Those conversions will go throughout probably mid-2017. So we'll recognize the full $73 million in 2018.

And, yes, those numbers are in the guidance.

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

Although you're going to start – so really, they're all 2017. You're not going to realize any of that in 2016?

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

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

Yeah. Brian, I'll address that. And this really follows the conversation that Charlie just had below. I can give you certain averaging color. But remember, I think you should look for maybe some enhanced reporting once we go through the consultant review and how we run the business. We will report based on a true reflection of how we run the business. I think what you've asked for and that we have given historically is businesses like ComSol. From a gross margin standpoint, it's running at about company average with an EBIT in the low-teens, which is lower. It's more SG&A intensive, as you could imagine. Environmental Solutions has got gross margins in about mid-20s, and again, due to some of the costs that Charlie talked about, that's in the kind of the, probably just below double digits. And then Shred-It, where we've given you some historical on that and it's got EBIT margins in the – we tend to look at that, though, on an EBITDA, which is $16.5 million. I don't have the EBIT numbers for you but we've always talked to you historically from an EBITDA perspective and that's a low mid-$20 million business that we think over time from an EBITDA perspective, we can improve very well. So, I don't know if there's any more that you need on that, but I think that covers most of what we can give, really.

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

Yeah. Keep in mind, Brian, the SQ growth and the LQ growth rate are not just medical waste. Over 50% of our SQ growth and 70% of our LQ growth comes from additional services, like ComSol, compliance services, Rx waste disposal, so that's not just medical waste. We actually did well on our growth rates. Although the SQ growth rates were 6% and 4%, if you adjust those growth rates for the impact of the fuel surcharge and the lower haz waste volume, it would have been more like a 9% and a 6% in the quarter.

Okay. Thank you.

Thank you. Our next question comes from the line of Isaac Ro with Goldman Sachs. Your line is open.

Hey, guys. Thanks for taking the question. It's actually Joel in for Isaac.

Hey, Joel.

Just another one on the domestic medical waste business. Any update to your strategy with some of those large provider systems and IDNs, anything you guys may have learned from some of the deals you've struck thus far that you're using to negotiate any new contracts?

Yeah. I think you're referring to the Shred-It contract that we signed this quarter. I'll let Brent answer that, and I'll give you a little color on what we're seeing because I think you're also talking about IDNs, and I think we have some color there as well, but Brent can talk to you about what we're seeing early on, on the success in the secure information destruction for some of those LQ systems.

Yeah, Joel. Secure information destruction fits in really well with our LQ, our hospital sales force. As we've talked about in previous calls, we've got an account manager, a sales specialist model that has served extremely well for us to add on additional services with our customers, whether that be our Sharps Management Program, our pharmaceutical waste program or our hazardous waste program. This will feather in nicely with that as well. It's just one more solution we can bring our customers. We've had a lot of success adding on new services within healthcare and integrated networks. So, we're very bullish and confident we'll be able to do that very well.

And, Joel, just to give you a little color on just larger hospital systems in the U.S., we've always kept an eye on that. Obviously, you guys cover healthcare and you know the consolidation of SQ practices by hospital systems. We are starting to observe some longer sales cycles at these hospital-affiliated SQ customers. Remember, the decision-maker changes a little bit when the hospital acquires a doctor's practice. Where we've normally dealt with an office administrator or office manager, we're now dealing with more personnel from the hospital. So we believe we'll see some pricing pressure on hospital-affiliated SQ accounts as these contracts come up for renewal. But on the flipside, it does create an opportunity to sell a broader suite of more LQ-type services like pharmaceutical waste disposal, and our Sharps Management System. But – and to give you a little bit of color on that, we estimate that about 16% of our SQ accounts are now somewhat hospital-affiliated. Internally, Stericycle refers to that as a blend customer, and we certainly are keeping an eye on that consolidation and the decision-making process.

Great. Very helpful there. Thanks. And then maybe one just for Dan. I think the interest expense came in a little light this quarter. Any update on what the expectation is for the year on the interest?

Yeah. Interest was just a touch lower than guidance. And so I think if you were to look at the year, I think if you just brought it down about $1 million from what we shared last quarter from $106 million down to $105 million, I think that's a safe range to be in.

All right. Thank you very much.

Thank you. Our next question comes from the line of David Manthey with Robert W. Baird. Your line is open.

Hi. Thank you. Dan, maybe you could give us Shred-It revenue, gross profit and EBIT contribution this quarter.

Yeah. Let me take you through how they performed from a revenue standpoint. In the quarter, it was about $185 million, which is a good growth from last quarter. And remember, that number includes acquisitions, and so why I say good growth also, that's about up from $177 million, which was the acquired quarterly run rate. So pleased with the growth there. As we went through the bridge today, I did share with you that they had pulled some marketing costs forward. That affected the EBITA or EBITDA margins a little bit. And they saw some higher costs, but they're largely performing pretty well. I think from a guidance perspective in the rest of the year when you're looking at the model, they're running at an EBIT that when we delay the synergies now, I think it will be around 13.5% because we're moving those synergies out. We're going to pick those up next year. And then that accounts also for the changing paper prices. From an EBITDA perspective, just down by that about same amount, I think it was $200 million we gave you last time, about $184 million now.

Okay. Thank you. And then you mentioned Communications Solutions. Could you just give us an update there? I think STERICONNECT is fully implemented. When do you anticipate the growth inflection occurring in this service?

Yeah. Thanks, Dave. The new platform is live at STERICONNECT. Accounts, as we spoke about on the last call, are being transitioned on to the new system and this will continue throughout 2016. This is a very slow process, as we've said, to convert these customers onto the platform. Healthcare calls are very customized and they are customized on an account by account basis so it takes a long time to convert them into the new system. So far it's going well. At the same time, we'll be integrating our live voice infrastructure. That's the STERICONNECT system with our automated product portfolio, so things like automated appointment reminders, scheduling. So this will include a cloud-based automated scheduling and an automated appointment reminder service and this does put us in a very unique position vis-à-vis our competitors in the market. And actually, we had new growth for Q1 for ComSol and it was slightly ahead of our internal projections for the quarter. So they're off to a good start to the year.

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

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

Great. Thank you.

Thank you. Our next question comes from the line of Kevin Steinke with Barrington Research. Your line is open.

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

Yeah, Kevin. I think this is a good time maybe to take a step back and think about that business and tell you – and to really, by taking a step back and telling you why we got into and what the strategy is for the long run. If you think about it, six years ago, we identified two significant growth opportunities: retail and healthcare hazardous waste. And why do we think they're a good fit for Stericycle? They were a route-based business. They were SQ-type volumes. They came with complex regulatory issues for the generator of the waste, or the customer, and we had established relationships in a lot of those markets. So when we looked at it, we said the retail haz waste business was approximately $1 billion, and we still think that today. And the healthcare SQ haz waste market, we identified as at least a $1 billion market. And we quickly became the market leader in these growing segments, but unfortunately, as we spoke about before, we needed to add that operational infrastructure to support our growth. So we went out. We acquired PSC. We acquired other acquisitions to give us that additional facility in order to meet the demand of that growing business. Unfortunately, these acquisitions came with other hazardous waste streams: haz industrial waste, other hazardous waste, project work. And obviously, we're frustrated that this base revenue is shrinking, and most of this is really outside of our control and it's more market-driven. But we also have to look at what can we do better on the cost escalations on that business to make it better. But we needed the infrastructure. It came with some things that we didn't want to focus on. Where we're focusing, we are seeing really great growth in healthcare haz and retail haz. So, we continue to look at that as a focused part of the business, and we think over time, that will become a bigger part, and that will minimize the impact of this industrial and project work. And I think about why do we still think it's a good business. I mean, that's I'm sure a question of, should you guys be focused on this or not. And you think about recent enforcement action. Recently, Comcast announced a $26 million settlement in the State of California. It was related to two things. It was related to the improper disposal of hazardous waste and the disposal of secure information. So obviously, enforcement continues to build awareness, and I think this is a great example of how we have the ability to cross-sell a wide variety of compliance-related services over the customer base that we have or over one customer. So, that's really our strategy. It continues to be our strategy to focus on retail, healthcare, and SQ hazardous waste.

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

Sure. In Q1, started off as paper pricing increased by about $7.50 a ton from our last call. So last call it was at $126 as an average – at the end price of the quarter. At the end price of Q1, it's at $133.50 and that's what we assume now in our guidance going forward. Obviously, in Q1, you don't get the entire $133.50 because that grew incrementally over the quarter, but that's what Dan has used in the model right now is $133.50 or approximately $4 million for the rest of the year because of that slight increase. We are starting to look at contracts and make changes on agreements. That's done on a contract-by-contract basis. We know that will take us several years to implement and more to come on that in the coming quarters.

Okay. Thanks for taking my questions.

Thanks, Kevin.

Thank you. [Operator Instructions] Your next question comes from the line of [ph] Hansa Mizari with Sterne Agee. Your line is open.

Hey. Good afternoon. Thank you. Just had one question. I know you guys are delaying some of the synergies to prevent disruption. But maybe if you could frame the upside, potential upside to synergies for investors longer term. Thank you.

Yeah. Let me take that, [ph] Hansa. I mean, when we think about, and one of the reasons we're going through the consultant study is that we think there will be an opportunity down the road when we're looking at markets that don't have density where we might be able to combine some routes. And have our drivers or the Shred-It drivers combine both medical waste and secure information on the same truck is by definition, those rural routes are not dense. They're not dense for secure information. They're not dense for regulated medical waste. So, one of the reasons we're taking up time on the study, one of those reasons we're taking time not to disrupt customers is because we know there will be opportunities over the next two, three, four years to improve both the operations of our Stericycle business and the Shred-It business. There will be things like we have a tech inside the hospital, collecting sharp containers. Our plan long term is to make sure if we have a hospital account to secure information destruction that that tech, while they're there, will collect all the secure information bins. So, we'll turn an account that used to take a secure information driver a long time to do, because they used to have to park their truck, walk throughout the hospital to collect all of these bins. We will have it waiting for that truck, and it'll be just another stop that they're picking up on their route. So, certainly, we're still excited about that. I think as we get closer to the Shred-It business, all the things we thought about, how closely it is related to Stericycle and what we do, we think there are things like that longer term that really set us up to improve the overall margin for Stericycle going forward.

Thank you.

Thank you. Our next question comes from the line of Scott Levine with Imperial Capital. Your line is open.

Hey. Good afternoon, guys.

Hey, Scott.

Scott.

So, just to be clear, it sounds like the issues within the industrial haz waste are identical or very similar to the issues you experienced in 3Q of last year. I was hoping you might be able to confirm that, maybe elaborate on whether there's been any change whatsoever in either the types of customers that you're seeing the slowdown with or are there any differences between what you experienced here in 1Q versus what you experienced in 3Q of 2015?

Yeah. I think the big difference is what we experienced in Q3 was more fuel and energy related. And we saw that we were not going to pick up any part of that project or larger volumes in the foreseeable future. I think this is just we've seen a slowdown in the hazardous waste, excluding the retail on the healthcare haz, and we already knew that there would be some seasonality, and we adjusted for that. We just saw an actual decrease above and beyond seasonality. So I think that's the main difference. It's not as dramatic in this quarter. And then there's a mix issue where on the project works we did do, on the project works we did do in Q1, we did see a higher disposal expense related to that, just based on the type of project. And to be conservative, we wanted to make sure that we looked at Q1. And then we said, if that continues, what does that mean for guidance for the rest of year? Certainly, it's not as big as the drop-off in Q3, and I don't think it's related because I think Q1 was certainly related to fuel and energy, and this is just a softer hazardous waste market and manufacturing industry.

And – sorry. Go ahead.

Just to add to that, while we're facing all that, again, the focused areas that Charlie talked about, healthcare, hazardous and retail continue to have great growth.

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

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

Got it. Great. Thanks, Dan.

Thanks, Scott.

Thank you. And our next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is open.

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

Yeah. If you think about some of the broad buckets, Jason, on the hazardous waste and the larger industrial and project work is about $100 million to $120 million. We talked about that last time. We have about $210 million to $220 million in the retail, healthcare hazardous waste bucket. There is bucket of just general hazardous waste, which is the remaining part of that, which is both small quantity, large quantity. There is some project work in that. But I think the thing that you're getting to is the larger industrial project work is about $100 million to $120 million.

Thank you.

Thank you. And our next question comes from the line of Barbara Noverini with Morningstar. Your line is open.

Hey, everybody. Thanks.

Hey, Barb.

So this is something that I think about when I think about the growth in your hazardous waste lines of business. So obviously, the beauty about your medical waste business is that it's basically a closed loop. You can pick up the waste and dispose of it through your own facilities primarily so – whereas in industrial haz, you're reliant on third party disposal providers, which increases your cost. Are you able to leverage any of your facilities to dispose of the healthcare or retail hazardous waste, or are you also reliant on third party disposal in those lines of business as well?

Yeah. The reason we focus – that we want to focus on the retail and the healthcare hazardous waste, Barbara, is there is an opportunity where we're bringing our material back to our TSDF [treatment storage disposal facilities] facilities. We can do – we can break that waste apart. We try not to use incineration or even landfilling that material. Sometimes we can remediate that material; sometimes it's used as an alternative fuel. So that's why our focus is there because that part of the business is not as dependent on disposal as is project or the larger industrial waste. And over time, we'd like to grow that so that the industrial and hazardous waste part of the business is just a baseline business for us and it's a smaller part of the larger business. And in our Rx waste, all of the non-hazardous pharmaceutical waste, we actually can utilize our medical waste facilities for that material. So we do have a closed loop on some of that non-haz pharmaceutical waste when we sell that product to a hospital or to a doctor's office. Even some of the mailbacks that we have and the take back programs, we'll actually utilize some our own – our goal is to utilize some of our own medical waste facilities. So we certainly – that's something we considered when we got into this business, when we looked at why we want to grow those particular segments.

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

Totally right. And I think, Barbara, you've followed Stericycle for a long time. So if you go back to the early days of Stericycle when we were mostly an LQ business and not making much profit, we had obviously 70% – 65% to 70% of our business was LQ medical waste, and we focused for years on the SQ side of the business. We didn't get out of the LQ business because you need that as a base line for your facilities. But what did we do? Fast forward 15 years. 60% to 65% of our business now is SQ, and LQ, which still has a low profit to it, is a smaller part of the overall business. So this is going to take time; we realize that. But I think you've seen it before from Stericycle. We're focusing on those smaller markets that have better profitability where we can control our own destiny. We're not going to walk away from this hazardous waste from the larger industrial waste market, but we do want to make it a smaller part of that business over time.

All right. Makes sense. Thanks a lot.

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

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

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