Sean McMillan – Vice President-Corporate Finance Charlie Alutto – Chief Executive Officer Dan Ginnetti – Chief Financial Officer Brent Arnold – Chief Operating Officer

Ryan Daniels – William Blair Sean Dodge – Jefferies Gary Bisbee – RBC Capital Markets Michael Hoffman – Stifel Scott Schneeberger – Oppenheimer David Manthey – Robert W. Baird Barbara Noverini – MorningStar Joel Kaufman – Goldman Sachs Kevin Steinke – Barrington Research Larry Keusch – Raymond James Scott Levine – Imperial Capital Jason Rodgers – Great Lakes Review

Good afternoon. My name is Sara and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Second 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. Sean McMillan, Vice President of Corporate Finance, you may begin your conference.

Welcome to Stericycle's second 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 economics 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 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'll now turn it over to Charlie Alutto, CEO.

Thanks, Sean. Thank you for joining us on today's call. In the second quarter despite softer than anticipated revenues, the team was able to provide strong sequential increases of profitability, which allowed us to deliver a solid quarter. We are pleased with the results given the time and effort that our team members invested in both running our business and implementing our recently announced organizational redesign. Joining me on today's call will be Dan Ginnetti, CFO; and Brent Arnold, COO. I'll now turn it over to Dan.

Thanks, Charlie. Before I give the numbers, I'd like to highlight some of the changes that will enhance our reporting and disclosure to our internal and our external stakeholders. Our Q2 press release included a global revenue table and additional non-GAAP disclosures. In our second quarter 10-Q, we will have changes to our opening segments. Our new operating segments are as follows. We will have a direct – domestic regulated waste and compliance solutions segments. This includes our compliance and logistics related services. We will have a domestic communications and related services segment. This includes our communication solutions and recall businesses. International regulated waste and compliance solution is another segment and there's no change to this operating segment. Now for the numbers. The results for the second quarter are as follows. Global revenues were $891.6 million, up 24.6% from $715.7 million in Q2 2015. And internal growth, excluding the impact of foreign exchange, acquisitions and manufacturing and industrial services was up 3.3%. Domestic revenues were $651.1 million, excluding the impact of acquisitions and manufacturing and industrial's revenues, internal growth was 2.3%. For consistency of your models, we will continue to report the following for the remainder of the year. Domestic regulated waste and compliance service revenue was $486.1 million, up 1%, SQ revenue was up 2%, LQ was up 1%, growth rates were impacted by lower fuel surcharges and lower manufacturing and industrial waste revenues. Recalls and returns revenue's was $20.9 million. International revenues were $234.5 million, excluding the impact of foreign exchange, acquisitions, and manufacturing and industrial services internal growth was 5.8%. Acquisitions contributed $185.9 million to growth in the quarter. Gross profit was $381.6 million or 42.8% of revenues. SG&A expense excluding amortization was $189.5 million or 21.3% of revenues. Net interest expense was $24.4 million. Net income attributable to Stericycle was $37.3 million, or $0.43 per share on an as reported basis and $1.18 when adjusted for acquisition related expenses and other adjustments. Now for the balance sheet. Our covenant debt-to-EBIDTA ratio was 3.45 at the end of the quarter. The unused portion of the revolver at the end of the quarter was approximately $506 million. In the quarter, we repurchased 32,962 shares of common stock on the open market in the amount of $3.1 million. And we repurchased 65,000 shares of mandatory preferred convertible shares on the open market in the amount of $5 million. At the end of the quarter, we have authorization to purchase 3.3 million shares. Our CapEx was $32.9 million, or 3.7% of revenues. Our DSO was 64 days. Year-to-date as reported year-to-date cash from operations was $245.4 million. And when adjusted for recall reimbursement and other items, cash from operations was $282.9 million. Today, we filed a Form 8-K reporting our decision to amend Stericycle's timing of quarterly accruals from legal settlements in 2015. The amendments will have no effect on our 2015 year-end financial results. I’ll now turn it over to Brent.

Thanks, Dan. Worldwide, we continue to use our strong free cash flow to drive our growth through acquisition. In the quarter, we closed 10 acquisitions, 6 domestic and 4 international. The international acquisitions were one in Spain, one in Romania, one in South Korea, and one in the UK. Revenues from the 10 acquisitions were approximately $1.5 million in the quarter and annualized are approximately $10.6 million. Our worldwide acquisition pool remains robust with well over $100 million in annualized revenues and multiple geographies and lines of business. In the quarter, we saw strong performance from the secure information destruction business. The sales team set a record for new sales and closed several new major national accounts. In addition, we continue to make progress toward our synergy plan and we remain on track with previous guidance. Overall, we are pleased with the momentum we are building in this new service line. As you are all well aware, over the last six months, we've been working with the consulting firm to optimize our organizational structure in the U.S. and Canada. In Q2, we began implementing the new structure. First, our sales organization was realigned to focus on growing our healthcare customer base, expanding national account relationships, converting the unbent secure information destruction market and expanding our multiple services across new and existing customers. Next, we established one field operations management organization for our regulated waste, compliance services and secure information destruction businesses. By having these operations aligned under one leadership team, we will drive best practices across the organization and provide best-in-class service to our customers. This will also enable us to drive long-term efficiencies and margin improvement. In addition, we have combined our recall and Communication Solutions businesses under one operating segment. This is a large – since a large portion of our recall businesses is call center related, we have consolidated the operations, sales and marketing and client service functions under one leadership team. Finally, we're developing a long-term plan to expand our shared services model across all of our businesses. Some of these shared services include IT, financial support, human resources and continuous improvement. When fully implemented, this plan will enable us to better leverage best practices and SG&A. We are excited about this new organizational structure. We believe this will allow us to drive team member engagement, better serve our customers and provide long-term sustainable growth. In closing, we would like to thank all of those team members, who contributed their time, effort, and input to this important organizational redesign. I will now turn it over to Charlie.

Thank you, 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. Our guidance is adjusted for the impact of foreign exchange and the following factors. Currently, the overall hazardous waste market remains challenging. This has led to increased competition for available volume. These market conditions have further reduced the revenue and profitability of our manufacturing and industrial waste business. We are also seeing increased pricing pressure on our SQ customer base. This is a result of the consolidation of physician practices by hospitals and the overall healthcare cost pressures resulting from managed-care. To counter the SQ pricing pressure, we will be making incremental SG&A investments to drive new customer growth. With respect to our international business, we have negotiated a plan for SQ patient transfer contracts in the UK later this year. We will still incur costs while we transition out of these contracts. As a reminder, our 2016 EPS guidance is adjusted for amortization expense. For 2016, we believe the analyst EPS estimates will be in the range of $4.68 to $4.75. We believe that analyst revenue estimates for 2016 will be in the range of $3.56 billion to $3.6 billion, depending on assumptions for growth and the impact of foreign exchange rates. We anticipate 2016 internal growth rates to be SQ, 3% to 6%, LQ, 2% to 4%, international 3% to 5% and recall and returns revenue between $90 million and $100 million. We believe analysts will have estimates for free cash flow in 2016 between $435 million to $450 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%. We continue to be the market leader in multiple services and geographies with a strong team and an unmatched infrastructure. We recognize the challenges that our business faces and we continue to take steps to address these challenges. We remain confident in the long-term outlook of our business. With that in mind Stericycle will be hosting its first Investor Day and webcast on the morning of Thursday, November 10th to share perspectives on Stericycle's strategies, capabilities, and plans to drive long-term shareholder value. More details are posted on the events page of our Investor Relations website. We encourage investors, analysts, and the public to join in the live webcast or watch the meeting replay. Thank you for your time today. We will now answer any questions. Sara, you can open the Q&A queue.

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

Thanks for taking the question. Dan, maybe I will start with one for you. It's been helpful in the past if you could provide EPS bridge. I know Charlie talked about SQ pressure, haz-waste and the U.K. contracts. Can you maybe break down a little bit how each of those are impacting the guidance versus prior expectations?

Sure, Ryan. As you know our prior guidance was $4.90 to $5.05. Acquisitions will contribute about a half a penny to a penny of EPS. Increased paper prices will add anywhere from $0.025 cents to $0.03 to EPS. Lower guidance on our recalls for the year will be unfavorable of about $0.02 to $0.04. FX, largely due to the Brexit will be a headwind of about $0.02. International, mostly due to the exit of the patient transportation contracts will be anywhere from $0.02 to $0.04 unfavorable. M&I, Manufacturing and Industrial, lower revenues, customer mix, and an Argentinian facility closure issue will be anywhere from $0.09 to $0.11 for the rest of the year and our regulated waste and compliance services will be about $0.10 to $0.13. That will bring you to $4.68 to $4.75 for the year. I think it would be best for your models in Q3 to have a range of about $1.17 to $1.21

Okay. Great. Thanks for all that color. And then if we think about the McKenzie study and, Brent, some of the stuff that you outlined with shared services and operational redesign and consolidation. How much of the benefit to the cost structure if any did you see in the second quarter and then what type of margin improvements do you think that can drive either through accelerated sales or just better cost controls going forward. What's the corporate goal there?

Yes, Ryan. This is a good question. Overall, when we implemented the savings we saw about a $5 million savings associated with the changes that we've made in the second quarter. That was already in our previous guidance and were also looking to reinvest some of that as you heard with some of the additional resources we're going to put into the back half. We do think though that organizational redesign sets us up to continue to achieve the $31 million that we're on track to achieve in 2016 as well as a follow-on $28 million in the next year. So, again, we do think that the reorg is going to set us up for long-term growth and the ability to drive the necessary synergy letting cost improvements in the operation.

Yes, Ryan, this is Charlie just to add a little bit to that. There was very little to your question around was there any savings in Q2 related to the study and implementation. I would tell you that very little was in Q2. The $5 million that Brent has alluded to was already in our guidance, on our previous guidance that we're going to invest now on the healthcare compliance business. And at the end of the day, the McKenzie study is going to help us hopefully exceed the $20 million to $30 million in the Stericycle and Shred-It synergies that we discussed when we did the Shred-It deal.

Okay. Thanks for the color.

Great.

Your next question comes from the line of Sean Dodge from Jefferies. Your line is open.

Good afternoon, thanks. Dan and Charlie maybe if we look at the guide down as it relates to regulated medical waste the $0.10 to $0.13, can we drill down into that a little bit more. Is that all pricing pressure related to consolidation and with a quick follow on consolidation has been happening in this space for a long time now why we all seeing it or why are we seeing all of a sudden now?

Hey, Sean, this is Brent. I'll go ahead and take that one. This is not a new trend, right? We've been tracking this for quite some time. Really, managed care is having an impact in two areas with us. And as we've been following closely at first we did not anticipate or see it having a major impact initially but the challenge is, is now that these doctors practices that had been acquired by hospitals are starting to get integrated into their networks. We are starting to see continued pressures, those contracts come up and they put those out for large RFP’s, we're starting to see increased pricing pressure associated with that. That's now having a material impact on our business. Secondly, we're seeing to a lesser extent we're also seeing the same trends now in our SQ business. As we go to renew those contracts we're also seeing pricing pressure and the need to do discounts to get new renewals.

Okay. So I guess the sequential step down then in the organic growth rates from the first to the second quarter and then for the rest of the year is purely your inability to get price that you assumed you were going to be able to get from those renewals?

Is two factors, Sean, the price that Brent just spoke about, but remember we're also taking down we talked about the softness in the M&I business. So it's an impact of both the M&I and the future of the M&I for the rest of the year and the items that Brent just discussed.

Okay. Understood. Thanks.

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

Hi, guys. Good afternoon. I just wanted to first clarify or confirm the new revenue reporting with which we obviously appreciate. Can you just go through and tell us exactly what's in the four new lines and then confirm what is going to be in your financial filings? So regulated waste and compliance, is that just med-waste or does that include the good part of has and then any color on this.

Yes, the regulated waste would include and compliance services includes our regulated waste. It includes the additional services that we have been selling to our healthcare community and it also includes our hazardous waste. We did break out for you the M&I. We thought that was important for the shareholders it's gotten a lot of focus. It seems to be the one that's experiencing the headwinds and the volatility due to project work in the industrials. Our secure information distraction obviously with the new acquisition we look at that very closely. We thought it would be important also for our analysts and shareholders to be able to see the growth of that business and how it's contributing to the overall growth of Stericycle. And then communication solutions and recall coming together, has really been a natural over the last year or so as we've seen more and more recall that we're doing, the really call-center type work and we've been able to leverage our call center agents and we thought it was really important to make that one group.

Okay. Great. And in the filings you said you're just going to add one segment which is the comp segment. Did I catch that right?

Yes. The operating segment will be a combination of the Recall business and the Communication business, which will then change the regulated waste and compliance services segment a little bit in its nature.

Okay. Great. Are you going to provide us a time series of this new revenue break down historically or we're going to wait four quarters to get the historical?

Yes. I think as we're reporting right now, you are getting a one-year look back and on Q4 you would get two additional years. So at the end of the year you would get 2016, 2015 and 2014. What could give you the look at that Gary? This is a brand-new report out there and so, as we're out there we'll provide feedback when we can, but as of right now at the year over year and at the end of the year you get a three-year.

Great. And thanks for that and one other – by the way we appreciate the extra color looking to that revenue. And then just one operational one, I guess, Charlie, at what point do you decide that some of these businesses you’ve ventured into just are not up to the historical Stericycle quality around profitability potential or stability of revenue and look to maybe consider other exits than those British contracts. Is that on the table? Have you thought about it? Is the board considering these things or do you feel like in a reasonable timeline you can start to fix some of the damaged businesses and not just grow your way out of it by growing Shred-It? Thank you.

No, obviously we continue, we've always looked at the businesses and whether or not they fit the long-term strategy. I mean certainly in this quarter you saw that we started taking steps at least in the patient transport business in the UK although we're still in that business we were able to exit two contracts. We'll continue to look at that on a contract by contract basis. And then we'll review whether or not that business fits in the long-term strategy. And I think really the focus has been on the manufacturing and industrial business and whether or not do we expand that business. I want to maybe take a step back before I answer that one. I mean we got into that business because we needed to build the infrastructure as we said before to support our core strategy around retail, healthcare, SQ hazardous waste and those services continue to grow and they do fit the Stericycle model. They are predictable and stable. We’ve made the PSC acquisition and a few of our acquisitions overseas, we did – the hazardous waste dynamic at that time, were good. They were growing. M&I was strong. However, since the market conditions obviously have deteriorated, we are currently evaluating all options there. And that's an option around do we need the infrastructure we currently have to support the predictable and stable parts of that business? Are there parts of that business that don't belong in the portfolio? And we'll look at that over the next two quarters. Certainly we'll look at that.

Great. Thank you.

Thanks, Gary.

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

Thank you, Charlie, Dan and Brent for taking my questions. Just to work through the model, Dan, you gave an SG&A number, which I'm assuming is net of amortization and adjustments. So that's what I'd call a core SG&A. That was about 180 million, is that 0.9, is that the way to think about it, it's going to be 180 a quarter for a while? And then I have another one.

You might well have been seen that we've been getting to – really at the beginning of the year look at things from an EBITDA perspective. It's appropriate for us to look at SG&A absent amortization. I'm sure in middle of the quarter when you looked at it, you did see a spike up in amortization expense. I think it probably appropriate to address that since you've asked that question. As we finalize the purchase accounting for the Shred-It deal. There was a recommendation by the third-party we utilized to do the purchase accounting to increase the value of our customer relations and at the same time reduce the period, over which we amortize that. And that's what you saw a one-time spike in amortization. But even prior to that, we began looking at the business absent that. And so I do think it's appropriate when looking at it to continue to do that. And I think you've seen a little bit of improvement in the SG&A number. And I think you should show what you're looking at is pretty stable. But as Brent mentioned we are going to make investments in SG&A to be able to ramp up the growth in the areas that Brent discussed.

Okay. So digging into that you had 18.3 million in amortization the first quarter, but a 51 number in the second. What's the sustainable number?

It will be about $29 million per quarter.

Okay. And the integration expense running at 22, 23, is that the path for the rest of this year?

I think that's a reasonable number for the rest of the year, integration is ongoing. We're in the very early stages, having just really announced this restructure in May, which is largely due in integrating two very impressive companies. And so I think for – at least for the year I would expect those levels to stay relatively consistent.

Okay. And then just I’m sort of unclear on what’s happening in the healthcare business domestically. If you stripped away the ancillary services and hazardous waste, retail and healthcare hazardous waste. What I’m hearing is that you had a net decline in the domestic business?

No, I think if you – there’s a few things, Michael, I think you got to think about when you’re looking at the recent quarter. One, when you compare Q2 of this year to Q2 of last year, there is a comparable issue because of the weather related events even in our med waste business in Q1 of 2015. And then I think if you adjust for the lower fuel surcharges, I don’t think it’s accurate to say we had a net decline. It wasn’t like historical numbers, but there was a positive increase in that business.

Michael, you remember there was a $51 million in incremental revenue from Q1 to Q2. I think when you’re looking at the growth rates, looking at the first half of the year is a better more realistic perspective of what’s going on than just looking at Q2.

Okay, fair enough. But even if I come to all that groups, you’re in a zero to 1% on the traditional go collect and burn it or autoclaving in medical waste business?

No. I think when you look at the regulated waste group together, I think if you add back 0.5% to 1% on fuel charges, I think your rate – you’re between 1% and 2%, Michael?

Okay.

And that doesn’t include the obviously the additional services where we’ve spent most of our time trying to grow over the last quarters [ph].

Right. I got that. So how much of what’s been going on has distracted the cross-selling of let’s push more sharps, push more pharma, upsell the Steri-Safe? Was retail and healthcare hazardous waste double-digit like it was in 1Q? I mean, what’s happening in those items?

I would say we continue to have strong growth in all three of the hazardous waste segments we focus on, right. Retail, pharmaceutical waste and hospitals, as well as SQ haz-waste. So all three of those continue to do well. I would bring it back to the market dynamic that we’re facing and M&I is really one of the major contributor’s, as well as then...

Brent, I don’t mean to interrupt, but I got the M&I part. I’m trying to understand inside $517 million of revenues is a hazardous waste business, did that hazardous waste business show the double-digit growth rate that it had?

No. It was higher single-digits. It came down a little bit and I think some of that had to do with quarter-to-quarter comparable as well.

Okay.

And you’re looking at us, yes, that’s correct.

Okay. And was there any impact in the cross-selling efforts because of all of the things that have been going on? And you can regain momentum or have we hit a new normalized point of year-over-year change in cross-selling, the Steri-Safe, sharps, pharma?

I think Michael it’s tough to tell whether that had an impact on cross-selling. But it probably has an impact which we believe is – we didn’t move aggressively on the pilots on adding secure information destruction during the redesign as we were bringing those two teams together. But I wouldn’t say that there was a distraction on the field sales team on selling additional services. I mean that does fluctuate quarter-to-quarter, but I wouldn’t say – I wouldn’t want to pin the redesign on any issues with our cross-selling activities.

Okay. And in the redesign you went from 13 districts in the old Stericycle, 55 in Shred-It, what are we looking and Shred-It had sales marketing and operations, Stericycle just had operations. What does that look like now total number of districts where sales and marketing sitting and how do we think how that all works?

Yes, from the reorg perspective again, we put all of operations under one leadership, so we’ve got eight different regions that now run all of the operations associated with our combined business. And then sales and marketing is at the compliance, at the overall business unit level so to speak. The sales organizations are set up like we talked about. We focused them on key customer groups and so we’re really looking at things like retail and national accounts, hospitals, non-healthcare, all of those really focusing how can we drive our business both new accounts and additional services in those different channels.

Okay. And just so I’m clear on the eight regions, so that has M&I, operations, communications and related services operations, document destruction, regulated medical waste or this is regulated medical waste document destruction operations only?

Right now it’s medical waste and document destruction. The plan would be to eventually, potentially put all the different businesses which would be our hazardous-waste business, no Michael, this does not include communication and recall were combined. It’s not in the operational business that Brent just described.

All right, and if it goes eight regions there, obviously there’s another level below that or is eight regions that’s used under the eight the regions and that’s it?

No, it’s the eight regions and then within each region there’s either a Shred-It district and/or HCS district.

Okay. All right. Great. Thank you.

Thank you, Mike.

Thank you.

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

Hi, thanks. I guess, could we talk international, the trend is decelerating in the second half and year-over-year comps. You’ve addressed it kind of broadly. Could you address – kind of, international? And then a little bit more color on patient transportation. And then the third part of this question would be, in Latin America you said its something in Argentina, I missed. And then kind of an update on how you’re doing with your Latin American government related customers and what’s occurring with them, if that was a headwind noted last call. Thanks.

Sure, Scott, jump in if I missed anything, because you had a couple of parts to that question. So international growth rates for the quarter were approximately 6% and that was driven higher in the quarter by a good communication solution and recall activity overseas. We did bring down the full-year guidance there and that is directly related to the exit of the patient transport contracts in the second half of the year. A little more color on the patient transport business and what that meant with respect to the quarter, our guidance is, we have negotiated an exit on two contracts later this year. We are going to still incur cost while we transition out of these contracts. And if you think about what is the headwind for that particular one, I think Dan addressed early on the bridge there about $0.02 to $0.04 to EPS for the rest of the year. As far as – you had your question about Argentina. We do have a facility that was shut down, will be shut down for most of the rest of the year. It had to do with heavy rains in the Buenos Aires areas earlier on that facility shut down, I think, around April. So it did had some impact a little bit for us in Q2. And your last question related to government contracts in Brazil, and we talked about that that we are having issues taking some of the increases we have on wages and passing that through. There’s nothing new there. That hasn’t worsened. We didn’t think it was going to get better that’s why we guided down a little bit on that on the last call. But there’s really no update there. It’s still a tough situation with respect to Latin America. We continue to try to work the best we can contract by contract in getting increases passed through. I believe I caught all of your questions.

You did. Yes, great. You covered them all. A follow-up on the patient transportation in the UK, exiting two contracts what is left and what I assume everything will be exited ultimately. What’s the timeframe?

We haven’t necessarily made a decision on the ultimate exit of that business. Yes, we did exit two agreements. We’re left with about $65 million to $75 million in annualized revenue after the exit. That number though has also come down with the exchange rate headwind in the UK. If you remember the last call I talked about that business being $85 million to $95 million. So about half of the reduction that I just spoke to came from foreign exchange, the other half came from the exit of those contracts. There are about 30 contracts in total. Again, we’re looking at this on a contract by contract basis. Certainly we’re looking at some contracts that are unprofitable that we’re looking to exit. And then we’ll make a decision on the long-term strategic fit of that business.

Okay, thanks. And just one final quick follow-up. Is the restructure over now? Or the redesign or whatever you guys – the McKinsey study in the diagnostics. What should we anticipate looking ahead? I assume you’re still going to guide the out year on the third-quarter call. So just kind of curious what additional changes we’ll see in reporting going forward? And just operational fundamental is all the consulting is gone and the new processes in place? Thanks.

Yeah. As far as the major changes, we tried, Scott, to bucket those together. Obviously, from an organizational perspective, you don’t want to just have change after change happening. So we tried to bucket as many of those together. But at Stericycle, one of our core values is continuous improvement. So we’ll always be looking to make the necessary changes to continue to improve and drive our business. With regard to upcoming changes that you’ll start to see, I referenced the consolidation or virtualization of our inside sales team, that’s something we’re working on. We’re currently working on also using all the expertise we have in customer service to bring all that together, use our technology around call quality, call routing, intelligent work distribution, all of those things. So these are things that we’re just a few years ahead in our journey than Shred-it was. And I think we have a lot of opportunities to continue to make margin improvements, as we take the expertise we’ve had and having all the logistics-based business that used to be decentralized and really pulling all of this and using that same expertise and best practice and taking that to Shred-it. But the final thing I’ll add is we are continuing a couple engagements with the consultants. Some around sourcing and some around customer data and information and we’re excited about those projects.

Okay, thanks. And just quickly speaking, any thoughts on segment reporting or changes in the third quarter, I guess, Dan, for you on the guide that we should think about now? And thanks for taking all these questions. I appreciate it.

Yes I think we showed you what we’re prepared to do and what we think fits. Obviously, it’s a representation of how we’re running the business. As far as the revenue table, it’s not only how we run the business, but it’s also providing information we thought would be meaningful for you too. I think everything that we have at least in the near term is laid out to where we planned for it to be.

Thank you Scott

All right. Thanks.

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

Thank you. Hi, guys. When you look at the declines in the SQ, LQ, international growth rates, is that all volume and fuel surcharges or is there a component of price declines also? Yeah. So I’ll take that, David. So, again, I think, when you’re looking at growth rates, you should look at the full year because I think that takes out the comparable issues. So I’ll answer it with that view in mind. So we obviously had a big influx of revenue in Q2 of last year. So the main contributors are lower M&I and lower fuel surcharges. Certainly, we’ve seen some of this SQ pricing start to build now. So there is a component of that in Q2. When you adjust though for all of those impacts, the impacts around M&I and the lower fuel surcharges, we would have been at a comparison of about 6 SQ and 4 LQ. And then, I think, it begs the question around, well, what does that mean going forward into 2017? So, when we – obviously, we're going to provide our exact guidance on the 2017 on the October call. However, some of the headwinds we've discussed here today around M&I and around our regulated compliance solutions business will continue into next year. So we anticipate the 2017 growth rates will be lower than the historical averages.

Okay. And then you talked about M&I and potentially thinking about getting out of that business or somehow stripping out those revenues and not being in the business anymore. If that were to happen though, wouldn't it stand to reason that what was left of PSC would be underutilized? You may have to close facilities, shift further to get there? I'm just trying to understand how that would happen because at a conference back in June, Dan had talked about the volumes sort of indicated that you would take those volumes day of the week because if they were helping you maximize the utilization of your facilities.

Yes, David, so, a good question. First of all, no assumptions right now. We have not made any decisions to sell any part of our hazardous waste business. That includes obviously our retail, healthcare in SQ or M&I, our manufacturing and industrial. One of the reasons to call it out on the table is that obviously has a lot of unpredictability to it, so from an analyst and a shareholder perspective, we wanted to call that out. If we made a decision to sell or to move away from a business, we certainly would look at what's left from an operational infrastructure and make the proper adjustments to make sure that we can run a very predictable, stable and profitable business. We wouldn't just leave and then try to figure out what the infrastructure would look like afterwards. That would all be part of the overall decision.

Okay. And then somewhat related as it relates to the structures of these businesses, you talked about the difficulty in converting on-site shredding customers to off-site and if there's a handful of holdouts customers that back of hold up the entire process of gaining synergies, given the structure of your trucks and things like that, is it wrong to think that that would extend beyond the initial integration for example to acquire a document destruction target a year from now, two years from now, wouldn't you have the same difficulty integrating that route into an existing route if there's a number of customers that want their paper to be shredded on-site?

Yes, David, maybe I didn't communicate this as well in the past but we will always have on-site customers and we are going to offer both services going forward. So for those customers who want their documents destroyed on-site, we'll always have those resources and assets. Our focus has been moving percentage of those to where more of them are on-site versus on-site. So, yes, we will always be going through this process – as leading customers know the two different ways that we can handle their documents and then helping guide them to the most appropriate one that meets their needs. So this will be an ongoing process. Clearly, it's more efficient for us to do it off-site but if they want it on-site, we will continue to do that as well. Just a little more color there, they remember to think off this business is both on-site and off-site. They had about 60% of their customers off-site but they offered on-site and they had 40%. All were saying now is the combined entity during the integration period will get the combined entity to 60% off-site and the remainder on-site. But I think it's a key point I've seen some articles out there about Stericycle is getting out of the on-site business. That is not accurate. That is not part of the plan.

Okay. And then final question, are the consultants still there or are they gone?

No, as a mentioned earlier, consultants now have moved on to a sourcing project as well as the data project. So we've moved on to two other smaller projects but once that we are very interested in.

Okay. All right. Thank you.

Thanks, David.

Your next question comes from the line of Barbara Noverini from MorningStar. Your line is open.

Hey, good afternoon, everybody.

Hey, Barbara.

So it's interesting to see organic revenue decline for the quarter in the new communications segment and I assume much of that is related to the recall business but given that recall is such a lumpy business including it in the segment sort of the masks underlying growth of console, which you have talked about in the past as a nice growth platform for you. So I understand it's a pretty steady recurring revenue stream kind of business. So if you were to exclude recall how did that console business perform and what could we expect for that going forward?

Yes, so the few things I'll point out. And then I think you brought up some good questions there, Barbara. First of all when we looked at combining the business, the first thing we looked at was that 60% of recalls revenues were call-center related. As you know recalls consistent on retrieval, disposal, notification and call-center but the lion share of the work there was call-center. So there was a lot of synergies and we've been working for more than a year trying to figure out how do we leverage our communications solutions team to take those recall works which is lumpy, in nature. So that was one of the thought process of bringing the two together. Secondly on your question around, what is the growth rate if we exclude some things? And recall, certainly was down this quarter, it was $20.9 million. It was down to 26% year-over-year. So let’s remove the noise there on the number. I think the team, the console team and the recall team did a good job of winning auto call-center contracts which we utilized the communications solutions team for. So they assist in vehicle buybacks and customer care related work. So when you strip out the noise and you exclude the U.S. recalls, the Europe recalls and acquisitions, year-to-date growth in console was actually about 11%. I caution you a little bit about moving forward there. We have some year-over-year comps in Q3 but we are, we think about it, how do we get that work in console in the auto space, it started with an acquisition that we made of a company that had a relationship with auto manufacturers. They were able to pass along where we got some small recall events in auto, but really then we able to work with communications solutions and we are now doing some large work for auto manufacturers like I said in the area of vehicle buybacks and customer care work. So, if you think about it it's worked very well with tuck-in acquisition we extended the services they can offer and it is paying off nicely for that part of the business.

Got it. Thanks for the additional detail.

Thanks, Barbara.

Your next question comes from line of Isaac Ro from Goldman Sachs. Your line is open.

Hi guys thanks, this is actually Joel in for Isaac.

Hey Joel.

So, any color on what you guys are seeing in terms of pricing within a document destruction side of the business? And then maybe any insights on your plans to integrate paper pricing surcharges into any of the newer contracts that you've been signing?

Hey, Joel, this is Brent. With regard to pricing – with regard to market pricing again, haven't noticed any major changes or differences in the trends when we got into business. One thing that we're really excited about though is, the size of the unwind market and the ability for our team to go out there and convert it. And can convince those customers that it is better to outsource that service as opposed to either be noncompliance or two Shred-it themselves. So obviously when we go out and convert that business we're able to kind of set the value with a customer and we do really well there. With regard to the paper pricing, we're happy to come back. And so hopefully will continue to see it come back to more of that 150 historical level, but so far it's on the right trend.

Yes, and right now, I mean it's about 146. So its not that far off of that 10 year, we talked about that five-year to 10 year average of 152, so we are pleased that it's come back and talked about, that's created a little bit of a tailwind process in that business.

And I think you're also asking about question of getting language into the contracts and as we mentioned that would be as the contracts cycle about four years, we would be migrating that in. So that will take time to implement over the whole contract base.

And the good news there is that the team has made strides to getting that language in the new agreements that were signed, so we're moving forward on that front.

Great. Thanks. And then maybe just to clarify, on the SG&A investments you guys discussed in the context, offsetting some of the pricing pressure in SQ, was that back half of 2016 phenomenon or was that something that you would be implementing over the longer term?

Correct. That's going to be over the – the initial investments will be in the back half of about 4 million to 5 million in the back half of 2016. And where we're going to put that is incremental sales and marketing. And we're going to really focus that on driving additional services and the SQs that have been acquired by hospitals. The reality is that they still need the services that we have, whether that be pharmaceutical waste or our compliance training services so – or sharps management service. We just feel like we need additional resources to help get out there and push that forward. And then the second part will be a new part for us, which is really exciting. As you think about it, most of our sales process in the past has been upselling existing customers to additional compliance services. We have a large market opportunity with regard to an incremental site in the SQ market and so we're excited about proactively approaching and gaining those sites with this sales investment.

Great. Thanks.

Thanks, Joel.

Your next question comes from the line of Kevin Steinke from Barrington Research. Your line is open.

Good afternoon. Could you provide the bridge from prior revenue guidance to the updated revenue guidance as you did for EPS and also what's the full-year impact of currency incorporated into guidance now?

Yes, I'd be happy to do that. Revenue, as you know before, the prior guidance was 3.6 billion to 3.66 billion. The Q2 lower revenues will create unfavorable of about 10 million for the guidance going forward. The lower expert guidance will be 5 million to 15 million. The environmental solutions will be about 10 million in the back half of the year. SQ growth that we talked about is anywhere from 10 million to 15 million in the back half of the year. Exiting that patient – those two patient transportation contracts will be between 7 million and 12 million on the back half. And in the acquisitions that we did will contribute about 5 million. Foreign exchange, and I think I'm going to answer both questions with this one. The Brexit will create about 10 million in foreign exchange headwinds, most of it had to do with the Brexit. And then the improvement in paper prices is about 5 million. If you look at that it will bring it to about 3.56 billion to 3.60 billion in revenue for the year, guidance.

All right. Got it. Thank you very much. And I'm not sure if you touched on this earlier, but you mentioned that last quarter that you had some good success cross-selling document destruction services to some healthcare customers and you also cited some new wins this quarter. So, where do we stand on the cross-selling efforts of information destruction to healthcare and are you now setting up the team to sell those services more aggressively to the legacy Stericycle customer base?

Yes, Kevin, Charlie commented a little bit on this earlier, but I’ll just reiterate. The sales pileups are going well. We did have to keep them relatively smaller and scale just with the magnitude of things that we had going on with the organizational redesigns. But they had contributed to the success in new revenue or new sales that tried to had in Q2. And overall we’re very pleased with the progress that the organic growth is making anywhere from 3% to 5% which is high – probably higher than historical averages. We look to accelerate that the investments which regard to cross-selling. I think that’s the way the new sales organization we set it up to sell all services. It’s going to be a great plus there. So again, we’re still in the process of learning lessons and continuing to pilot the ones that where best we will fund and we will accelerate those in the back half of year and in to next year.

And just to add a little color, I’ll give you the example Kevin on the LQ, what part of the redesign on the organizational redesign is that, our hospital group, which is led by – that's one of the segments that Brent talked about, they will have embedded specialists that can sell secure information instruction to those customers. It's a similar model that we followed for Sharps Management, for our Med/Waste, that team is always delivering solid results. When we use the major account executives relationships and hospitals to bring in those specialists to get that cross-selling activity signed and brought into the company. So we're excited about that. That was part of focus. Certainly we had to get through the redesign and now we're gearing up that team to be within the hospital sales team for Stericycle.

All right, helpful. Thanks for taking the questions.

Thanks, Kevin.

Your next question comes from the line of Larry Keusch from Raymond James. Your line is open.

Thank you. Good afternoon, guys. I want to start on the patient transports and the $65 million to $75 million in revenue that you mentioned after you exit the two contracts. How do we think about sort of the economics of that remaining revenue? So, in other words, is there a portion of that business that makes sense, or should we really be thinking about you looking to exit these contracts over time because, again, just the overall economics just don't make sense, and they aren't going to change?

Larry, I would tell you that about – some four years ago when we were in – we started to get into the patient transport business in the UK. It came with a Med/Waste acquisition and for a couple of years and some of those smaller contracts that we were winning in the north of England and other parts of the UK, they were profitable. That profitability was very similar to our Med/Waste business. And as we discussed we went into this business thinking that the NHS was going to outsource this and the large trenches of contract. We were correct on that, but we've had difficulty setting up and delivering on a profitable basis in that marketplace. So, you're right, as we start to look at the unprofitable contracts there are some contracts, legacy contracts and contracts – smaller contracts that we’ve won over the last several years that are profitable. And that's why we'll take a step back at that point to figure out what we do next? Do we sell that business? Do we stay in that business? We really need to look at it on a – we always thought that this was a UK centric approach. It wasn't going to expand to other markets and we just have to make sure that it fits in the long-term strategy of that business given the fact that we remain small and probably won't grow.

Okay. Perfect. That's helpful. And then I just wanted to come back and just see if we can deconstruct a little bit the comment around the pressures being driven by managed care. So, I understand the dynamics of former SQ customers now being negotiated under LQ contracts. But where does specifically managed care hit the business?

Well, I think where managed care hits the business the most, right, is the trend of the physicians practice being acquired by hospitals. So early stages when that happened we didn't see a material impact, but naturally as you can imagine, right, renegotiating the Med/Waste contract was not the first thing on those hospital administrators listed up to-do as when they bought those 300 doctors practices. We're finding now they're getting around to that part of the integration and as those renewals come up, you can imagine, right, the purchasing power of IDNs as they put those out to bid can't be significant. So that's one aspect of it. The other is just with the local and regional competition and just the unaffiliated SQ looking to save more money as their reimbursements going down. We are noticing an increasing amount of discounting that we need to make to renew those agreements. So again, it's not like the business is declining. This is just cutting into our overall SQ growth.

Okay. Got you. Okay, I think the disconnect was it sounds like you're talking about the trend of hospitals acquiring physicians private practices and making them employees versus I thought there was some true managed care from a managed care provider angle which doesn't sound like that.

No. No, no. Good clarification. That's not the case. This is just a matter of hospital XYZ, over time it would acquire 100 doctor practices. As those agreements come up, they look to put them all out for RFP. We are usually well positioned because we have very good service and are fully integrated to Windows, but it's just a matter of it puts pricing pressure from their previous price to now the new negotiated price from the hospital system.

And Larry, part of the investment that Brent talked about is we have other additional services that we think play well in hospital affiliated accounts. Things they care about pharmaceutical waste disposal, reusable shards. Part of investment is to make sure that even though the decision might be delayed because now it's not made by an office manager it's made by hospital, that we want to make sure from a marketing and a sales perspective that we have an opportunity to drive the additional services to that hospital group.

Okay. That makes sense. And then last one for you, and I don't know how much you can help on this, but I think you mentioned in the past that perhaps that if you looked at the SQ group that was now, again, sort of being negotiated under LQ terms, it was around 16%. And I guess what I'm just trying to wrap my arms around a little bit is, it sounds like this may be – you will try to offset this and sell more services, but it sounds like this could be a headwind for certainly the foreseeable future.

Yes. I think it will be an ongoing headwind until we get through the renewal phase obviously, but I think the number was more like 18% to 20% and the reason it's a range Larry that sometimes the doctor gets acquired and we don't know. We continue to service the account under that contract. And when the renewal comes up for further down the line maybe a year after the hospital acquired it, it’s a breakpoint, they don't really – this is not something that's top on their list. Then we will get a notification. So one thing that we do have in our favor is the data that we have seen is that the consolidation seems to have peaked at this point. And I don't think this will be growing every year or becomes 25%, 50%, at least based on the data that we see today.

Yes, I would concur with that. Okay. Thanks very much.

Thank you.

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

Hey, good afternoon, guys.

Hey, Scott.

I just want to push on that last point a little bit more and make sure I understand this correctly, because it would seem like the kind of issue that would develop over time and it seems like it's all kind of hitting home pretty quickly and in one shot. Am I thinking about it correctly or is this a trend that has been developing for a period of time that's really coming to a head here in the second quarter? Maybe just a little bit more color on how this issue has evolved affecting the pricing in particular in the core business?

Yes. I think if you look at this – certainly has been something that we've looked at for many years. We actually have been within the company we call it blended account, hospital affiliated accounts. Certainly it's been a trend. We've seen over the years some pricing pressure not really material to the overall numbers. We did see it increasing in Q1 and that's why we kind of spoke about it on the last call. We saw that trend continue and more contracts get renegotiated in Q2. And we’re taking that data that we have now, Q1 and building Q2, and now were applying it in our guidance on a go forward, because we feel – Q1, we weren't sure, because we wanted to look a little bit more. We called it out as a potential issue and certainly we see a little bit of acceleration there in Q2 and if that acceleration continues then we're going to see that headwind. And the proactive SG&A is that we don't want to wait to react. We want to make sure that we get out in front of this with respect to investments and mitigate this on a go forward basis.

Got it. And then maybe just one follow-up sticking with that SQ business. I know you guys used to give metrics for additions in Steri-Safe and also by a system like, just maybe qualitatively are you all still seeing the same success in general with penetration rates in some of the more, these older, call it, complementary services within the SQ and LQ businesses or that’s slowing at all?

No, we continue to see nice adoption, whether it's our OSHA compliance program, we have really strong growth in our pharmaceutical waste program and SQ. On the LQ side, we continue to close our Sharps Management accounts as well Rx, our pharmaceutical waste compliance programs. So all of those we continue to see nice progress, so, no, I wouldn't say those are falling off.

Got it. Great. Thank you.

Thanks Scott.

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

The accounts being acquired by hospitals, the SQ accounts, do you consider them as SQ accounts or you know classifying them as LQ accounts?

Well, as Charlie mentioned, we call them blend accounts. So they are either SQ affiliated or blend accounts.

But, yes, I think Jason, they are the SQ numbers, they've always been in the SQ numbers. We've always tracked them because we have been monitoring this for many years. And I think you've raised a good point. One is the LQ, what is a LQ now and what is a SQ? And given the fact that we've now gone to a revenue table with different services, it's likely when we give guidance, we will continue, – I know you guys all have models SQ, LQ and recall, we'll continue to give our numbers for that through the end of the year. It's most likely where we give guidance next year. When we talk about the lines of business services, the growth rates will be bucketed by that, because what do you call a hospital on SQ? So go into that location, you're still getting a small amount of waste. It is historically been in our SQ numbers, but it will probably be the end of the SQ, LQ matrix that we give out going into 2017.

And as you cross-sell Shred-It, are you selling that as a bundled medical hazardous waste Shred-It contracts or are you keeping them separate?

I would say we're doing both, which depends on the customer and what they're looking for. So we can patch it together as an overall package of compliance services as well as removal of medical waste as well as their secure information destruction or we can sell them all parts.

And to clarify, the M&I segment, does that include only industrial hazardous waste because I thought that area was down to around 3% of revenue?

No. That again includes manufacturing and industrial. It is a worldwide number, the number that you're looking at. What it doesn't include is retail, healthcare and some SQ haz-waste.

Okay. Thank you.

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

Thank you, Sarah. I'd like to take a moment and share with listeners that Stericycle will celebrate its 20th anniversary of its initial public offering in August. 1996 was a record year for IPOs. More than 1,200 companies went public that year. 20 years later approximately 100 of those companies remain listed. Among all the 1996 IPOs, Stericycle is one of the top success stories. We are very proud of that accomplishment and we’ll continue to build on our strength which include the hard work and dedication of our team members, they are one team, one goal mentality. Our operational excellence and continuous improvement focus, builds the ability to close an integrate acquisition, and not being afraid to try new things. I want to thank all of those team members, past and present that have contributed to our success these last 20 years, and we look forward to all the opportunities the next 20 years will bring. Thank you all and have a great evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.