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 Kevin Steinke - Barrington Research Gary Bisbee - RBC Capital Markets Al Kaschalk - Wedbush Securities Michael Hoffman - Stifel Nicolaus Sean Dodge - Jefferies Scott Schneeberger - Oppenheimer David Manthey - Baird Barbara Noverini - Morningstar Hamzah Mazari - Macquarie Capital Joel Kaufman - Goldman Sachs Jason Rodgers - Great Lakes Review

Good afternoon. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Third Quarter Earnings 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 third 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 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 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.

Thank you, Sean. Good afternoon everybody. Thank you for joining us on today's call. We were able to maintain consistent margin performance in the quarter despite revenue headwinds from previously discussed pricing pressure and softness in the Manufacturing & Industrial market. Our EPS exceeded expectations, in part driven by the use of our record free cash flow to accelerate our stock repurchase of mandatory preferred convertible shares. Joining me on today's call to discuss our Q3 results and 2017 preliminary guidance will be Dan Ginnetti, CFO; and Brent Arnold, CRO. I'll now turn it over to Dan.

Thanks Charlie. The results for the third quarter are as follows. Global revenues were $890.1 million, up 23.9% from $718.6 million in Q3 2015. And internal growth excluding the impact of foreign exchange, acquisitions and Manufacturing & Industrial services was up 1.6%. Domestic revenues were $664.1 million. Excluding the impact of acquisitions and Manufacturing & Industrial revenues, internal growth was 1.6%. For consistency of your models, we're providing the following for the remainder of the year. Domestic revenues were $664.1 million, of which $637.1 million was regulated waste and compliance services revenue, and $26.9 million was recall and returns. Domestic internal growth excluding recalls and returns revenues, was up 1% consisting of SQ up 1% and LQ flat. As anticipated, growth rates were impacted by SQ pricing pressure, lower hazardous waste volume from our industrial customers and lower fuel surcharges. International revenues were $226.1 million or 3% internal growth when adjusted for foreign exchange impact. As anticipated, international growth rates were impacted by the exiting of certain patient transportation contracts. Acquisitions contributed $184.7 million to growth in the quarter. Gross profits were $381 million or 42.8% of revenues. SG&A expense, excluding amortization, was $189.3 million or 21.3% of revenues. Adjusted income from operations or EBITDA was $191.7 million or 21.5% of revenues. Net interest expense was $24.7 million. Net income attributable to Stericycle was $61.5 million, or $0.72 per share, on an as reported basis, and $1.24 when adjusted for acquisition-related expenses and other adjustments. Now for the balance sheet. Our debt to EBITDA ratio was 3.35 at the end of the quarter. The unused portion of the revolver at the end of the quarter was approximately $607 million. In the quarter, we repurchased 265,000 shares of the mandatory preferred convertible on the open market in the amount of $19.2 million. At the end of the quarter, we have authorization to purchase 3.1 million shares. Our CapEx was $33.8 million or 3.8% of revenues. Our DSO was 65 days. Year-to-date as-reported cash from operations was $417.8 million, and when adjusted for recall reimbursement and other items, cash from operations was $467.6 million. I'll now turn it over to Brent.

Thanks Dan. In the quarter, we closed five tuck-in acquisitions, all domestic. Revenues from the five acquisitions were approximately $0.4 million in the quarter and annualized for approximately $4 million. Our worldwide acquisition pool remains robust with well over $100 million annualized revenues in multiple geographies in lines of business. The SQ pricing pressure discussed previously continued in the quarter and will remain for the foreseeable future. To address these pressures, we are making incremental strategic investments and sales, marketing and data analytics. These investments will enable us to pinpoint and execute on opportunities to grow our business and improve our overall performance. Despite the SQ headwinds, we were able to maintain our operating margin profile as well as deliver positive revenue growth in other services. For example, in our hospital customer base, we successfully completed several large sharps management and pharmaceutical compliance installations. We saw strong growth in retail waste services driven by a high level of service and detail reporting capabilities. The combination of our customer relationships and our multiple compliance solutions provides a strong foundation for Q2 growth. In the secure information destruction service, we continued to see strong sales resulting from the conversion of unvended customers to ongoing service. In addition, the National Account team continues to make progress securing new large customers. Our synergies remain on track with recent progress in streamlining back-office processes and implementing new technology to optimize our inside sales and customer service. In closing, we would like to thank all of our worldwide team members for their continued commitment to our customers, our shareholders and our core values. I will now turn it over to Charlie.

Thank you, Brent. I would now like to provide insight on our current guidance for 2016 and preliminary guidance for 2017. Please keep in mind that these are forward-looking statements and our guidance does not include future acquisitions, divestitures, integration and acquisition-related expenses and other adjusted items. As a reminder, our 2016 EPS guidance is adjusted for amortization expense. For 2016, we believe EPS will be in the range of $4.74 to $4.76. This includes the benefit of our ongoing strategy to repurchase the mandatory preferred convertible shares. We expect revenue for 2016 will be in the range of $3.56 billion to $3.58 billion depending on assumptions for growth and the impact of foreign exchange rates. Internal growth rates are expected to be: SQ, 3% to 5%; LQ, 2% to 3%; International, 4% to 5%; and recall and returns revenues between $95 million and $105 million. We have estimates for free cash flow in 2016 between $450 million and $470 million. 2016 CapEx is anticipated to be between $130 million to $135 million. We expect the 2016 full year as-reported tax rate to be approximately 36%. Now I'd like to provide preliminary guidance for 2017. For 2017, we believe EPS estimates will be in the range of $4.57 to $4.77 using a share count of approximately 91.1 million. This includes the unfavorable impact of approximately $0.19 from the normalization of performance compensation and additional SG&A investments to drive future growth and profitability. This is partially offset by approximately $0.17 of benefit from ongoing strategy to repurchase the mandatory preferred convertible shares. We believe revenues for 2017 will be in the range of $3.54 billion to $3.67 billion, depending on assumptions of foreign exchange and internal rates of flat to 3%. The worldwide revenue guidance for each of our service lines is as follows. Regulated waste and compliance services will be in the range of $2.03 billion to $2.09 billion. Secure information destruction services will be in the range of $780 million to $810 million. Communications and related services will be in the range of $340 million to $370 million depending on recall revenues. And Manufacturing & Industrial services will be in the range of $380 million to $400 million. We have estimates for free cash flow in 2017 between $450 million to $470 million. 2017 CapEx is anticipated to be between $125 million to $150 million. We expect the 2017 full-year as-reported tax rate to be approximately 36.5%. Stericycle continues to be the market leader in multiple services and geographies. We have a strong team and an unmatched infrastructure. We are confident in the long-term outlook of our business. As a reminder, Stericycle would be hosting its first Investor Day and webcast on the morning of Thursday, November 10 to share perspectives on Stericycle’s strategies, capabilities and plans to drive long-term shareholder value. More details are posted on the event page of our Investor Relations website. We encourage investors, analysts and the public to join the live webcast or watch the meeting replay. Thank you for your time today. We'll now answer any questions. Amanda, you can open the Q&A.

[Operator Instructions]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ryan Daniels from William Blair. Your line is now open.

Yes, good evening, and thank you for taking the question. Let me ask one on probably the hot button topic which is the SQ pricing. I'm curious if you can give us a little bit of color on how much you have incorporated into your 2017 guidance for that, and that's part A. And then part B, I'm assuming you have a pretty good view on that given your knowledge of contracts that are up for renewal, but can you confirm that’s kind of how you're looking at what the pressure will be?

Yes, Ryan, as for 2017, that is - it's a very similar number that what we gave on the last call. We are anticipating plus or minus about $40 million in pricing headwinds in 2017.

And Ryan, the second part of your question as far as to have a good view on that, we have long-term contracts that are spread out over three to five years. There is not any one year that we have larger contracts coming due. It is spread out pretty equally and that we are pretty confident in that range that Dan gave you.

Okay. And given that we’re now 11 months effectively through the year, I'm curious if you've seen any acceleration in that pricing pressure, or if that too has stabilized giving you better visibility as we look out over the next 12 months or so?

Yes. As you know, we first started seeing especially the hospital consolidation impact on our business earlier this year we spoke about on the last call. I will tell you that Q3 came in as expected, meaning that the pressure that we expected in Q3 came in line with our expectations.

Okay. And then a final question, I’ll hop off, also on pricing. Have you given any thought to maybe going back to your customers even prior to renewal? I would think that the renewal time, that's when they may be look at the market, look at websites, see who else is out there. So any thought about going back earlier and trying to re-extend contracts even if it brings some of that pricing pressure forward, or you're just going to let this play out over time? Thanks.

No. Absolutely, Ryan, I think part of the investment we're making in SG&A both in resources and in the data analytics that Brent mentioned in his opening, certainly is a strategy that we want to be proactive in the renewals and that is part of our ongoing strategy. It’s a little early to tell the impact but certainly that is part of the strategy. Thanks Ryan.

Thank you.

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

Good afternoon. So following up on that question about being proactive on renewals, I think you’ve also discussed, as part of your investment, looking to cross-sell more services to the SQ accounts that are seeing the pricing pressure and wondering if you're trying to make that more a part of your renewal discussions, and if you think that can have any offsetting impact on the pricing pressure you're experiencing?

Yes, Kevin. This is Brent. As we talked about on our last call, we were making a number of investments both marketing and sales to try to offset some of those headwinds that we are seeing. Part of it - you remembered correctly, right. We've got more sales reps that have been hired and we’re working to have them have a bigger impact with regard to influencing that renewal, emphasizing the value of our Steri-Safe services and overall trying to approach that situation proactively. Obviously it's too early to see any returns on that but that is definitely one of our strategies as well as trying to grow new sites in SQ is another strategy to - while it won't offset that headwind, it will drive new growth that in turn will help us offset that in the long-term. So you're correct. Those are some of the things that we are doing. It’s just a little too early right now to see if that's having an effect.

Okay. And I think you also talked about on your last call about maybe digging more into the Manufacturing & Industrial business and analyzing it over the next several quarters about long-term fit, at least for parts of that business. So I'm just wondering if you’ve started on that analysis and any initial thoughts on that work you're doing there.

Sure, Kevin. We continue to evaluate multiple businesses, not just the M&I business for their long-term strategic fit in our portfolio of services. We have not made any definitive decision yet on M&I or any assets within Stericycle.

Okay. Thanks for taking questions.

Thanks Kevin.

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

Hi guys. Good afternoon. I guess the first question I'd ask is on Shred-it and just diving into the guidance and how we think about profitability. Can you give us a sense what you're expecting for synergies and profit growth at Shred-it? Are we getting back to how you thought about the initial margin ramp at time of acquisition? I know that was pushed out, or should we think that that continues to be somewhat lower. And I guess I'm trying to understand is that a big factor that offsets pricing that you’ve talked about in SQ, or how do we think about Shred-it? Thank you.

Yes. Thanks Gary. I'll touch on a little bit of what we have as far as synergies built in and it will be what we shared all along. The $20 million in synergies that we deferred from 2016, we fully anticipate that we’re going to be able to capture throughout 2017, which will certainly contribute to the profitability growth. And we've already begun enjoying from the in the last years since we've owned Shred-it. And so I think Brent could probably talk to you about the some of the steps that we are taking to achieve the numbers that we have in the guidance.

And these are - hi Gary, this is Brent. No new would activities here but just continue to focus on integration activities associated with the reroutes switching from onsite to offside, continuing to look at back-office processes. The team actually has had a really busy quarter this quarter as we look to automate and integrate all of our customer service. So we put them all on a national platform. We are in the process of doing that this quarter. We are doing the same thing with inside sales. We also have kicked off automation for several of our back-office processes around collections, cash applications, as well less AP. So a lot of those things will contribute to continue to drive cost out of the business to help us hit those synergies.

And then I guess just a follow-up on your international business where the profitability has really struggled, can you give us an update on what's going on there and what the strategy is to improve it? I guess, are you exiting more U.K. contracts, any update on the cost situation of Brazil, whatever you think is a relevant update. Thank you.

Sure, Gary. On the international, I mean, we've discussed this previously I think. What's driving some negative impact to the international margin certainly is the LatAm pricing pressures in our patient transports business. So let me address those separately. On the patient transport business, we continue to exit certain contracts. Once we do that, we’ll evaluate the strategic value of this business. We anticipate exiting or contract ending in 2017, so the 2017 revenue for patient transport will be roughly $50 million to $60 million. And then on the LatAm, certainly we are facing inflation and pricing pressure on our large government contracts and we are looking at this on a contract-by-contract basis. If you just take our sequential to Q2 to Q3, we saw a modest increase on the EBITDA line. So we've made little progress but there is more work to be done. Right now the focus is on Latin America in the patient transport business.

And then just one last one for me quotes both Charlie and Dan. I think you both highlighted the strong cash flow of the business. Can you give us a sense how you're thinking about reinvesting that cash flow going forward and is it different from how we’ve thought about the last few years? I mean, if that's really the key asset and you're not forecasting much growth, how are you going to reinvesting in 27 to bring back growth longer term? Thank you.

Yes, we’ve - definitely we’re pleased with the record collection in the quarter and record free cash flow for the quarter. Gary, capital allocation strategy remains similar that it has in the past while we will shift buckets from quarter-to-quarter depending on the cash flow and the opportunity that exists. And that would remain to be acquisitions are a top priority of ours, certainly following our largest acquisition in company history and the debt level that we are going to be proactive as reducing debt when appropriate and certainly will remain opportunistic taking advantage of maybe a quarter where we are - we have maybe less acquisitions, we'll be opportunistic in purchasing the mandatory preferred convertible. And appropriate balance is necessary at this point in time while we both utilize the cash to grow the business as well as be able to pay down debt.

Okay. Thank you.

Thanks Gary.

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

Good afternoon guys.

Hey Al.

I want to press a little bit on the SQ pricing in the context of you’ve given us, I think two components, $30 million, $40 million and $16 million and it sounds like that's an approximate amount of headwind you’re expecting in ‘17. But I think the struggle that a lot of us are having is trying to appreciate where you're at in that renewal process or new pricing market environment? Said differently, if you look at the SQ business, are you at a spot where the resets that you would expect on an new competitive environment were 40% or 50% of the way through, or do we have you a few more years to go through that?

Yes, I'm going to have Dan answer your first, Al, because you're off onto ‘16 headwinds. It's not $30 million or $40 million in ‘16 and that's not we feel. So some of Dan level set that for you. I'll make a comment on where we are on the renewal process on that.

Al, on the last call, we expected $10 million to $15 million of pricing headwinds in the second half of the year. We are certainly within that range. I would anticipate maybe on the higher end of that range with expectation that you would see plus or minus $40 million in 2017.

And as far as the contract renewals, obviously this is something that’s come up this year, so this is something new facing us. So I think it certainly is something that will be with us through ‘17 and then we are making investments to be proactive - to the question we answered earlier, it's just too early to tell what kind of impact that will have. Obviously we don't want us to be something that will last three to five years which is our normal contract renewals of all of our agreements. So we are making those investments to shorten that time period and that time horizons. It’s just a little bit too early to tell you at this point when we think this headwind goes away. Thanks Al.

Okay, thanks.

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

Thanks, Charlie, Dan, Brent. So I'm going to come back to this SQ issue. So if I understand correctly, it's about $750 million is what’s defined as SQ. Have you gotten a sense in your own mind how much of that $750 million before you offset with the new sales force cross-selling and then things of those initiatives, how big you think that total price compression is going to be?

Yes, I don't think it's changed from what we talked about on the last call. We said that about - of that $700 million to $750 million of SQ revenue, about 18% to 20% of that is SQ that is hospital affiliated. So it's owned by hospital, affiliated with hospital. We are saying obviously more pricing pressure there up to 30%, 35% as they bid out multiple locations. So we are aggressive and trying to - we will not renew that. We want to keep that route density. And then we are seeing general price that we have national account as we’ve talked about, Michael, on that $700 million to $750 million about roughly 25%, 30% are national accounts. There has been no change in that business. Obviously there is preferential pricing in there with contract Ts and Cs, so that really is not impacting. In fact, we’re having a great renewal year on our national accounts. And then the remainder would be all of the SQs that are not affiliated with any large group or a hospital or a national account and we are seeing general pricing pressure we talked about at 10% to 15% on that business. So I think we've bucketed it really well, Michael. I think we understand that. And listen, that’s why we are trying to get away from SQ, LQ, right, because we've got 20% of our SQ customers that are owned by LQ. So they are not truly SQ, because they are not independently making decisions. But I think we have a good handle on the SQ business and the different buckets. And then as to Brent’s point, we'll use data analytics that help us get through how we should look at pricing. Maybe we don't have to discount as much as we’re proactive. Maybe we throw in additional services and we can work through that but obviously we are going to make some investments to make smart decisions on that SQ business for us.

Yes. I just want to make sure I heard the numbers correct. So out of $750 million, approximately 20% is owned by LQ, 25% is national, all the rest is the rest of SQ that has some pricing pressures. So the 20% that’s LQ has got 30%, 35%, national none, and all the rest is 10% to 15%?

That’s correct.

Okay. So that's about $110 million. Is that the right - $110 million, $120 million, that’s sort of what we're looking at?

You’re talking about from a discounting perspective?

Just if - okay. And at this juncture, this 10 to 15 second half, do I annualize that and that's 20 to 30 for this year, 40 next year. So let's take the 30, I've got 70 done, so I got 50 left.

Yes, Mike, I think we anticipate a bit of an acceleration which is why our guidance is really plus or minus 40. I think you're going to hit the inflection point where you're going to begin to see it wind down as you ramp up. That's really what we are looking at as to see the signals as to when we are seeing this and reduced amounts, in other words beyond majority of it. But I think it's safe to say that we expect a full impact in 2017 that's why we put approximately plus or minus 40.

Okay. Thanks for that statement, Dan. But my question was, one, do I annualize the second half and you had 30 was the full-year ‘16 effect? 40 is approximately ‘17, so that’s 70. If I'm dealing with $110 million to $120 million, I've got to 40 to 50 left.

That is correct. You could look at it that way, so we could tell you that we got another year at ‘17 if we are not successful in mitigating the pricing impact.

So what gives you confidence you’ve bucketed that right?

Well, certainly we have data that we know - the only thing I would tell you, Michael - and first of all we know what the national accounts are and we've had a long track record and history there, so we are confident on the national account. And the reason we bucket the hospital on 18% to 20% is that not every SQ that's acquired is of notice that they are now owned by a hospital system. So could that be 20% to 22%? We are pretty confident in the number. Could it go up a little bit over the next year or two? Certainly it can, but I think we have done a good job of identifying the customers in our database. We track hospital affiliates ever science the early 2000s. We've never seen it behave differently but we track it. So I'm confident that we've bucketed it correctly.

Okay. Fair enough. In your - I’m going to take the midpoint of your 2017, so that's $467 million. In your $467 million, what's your assumption for tons of paper sold at what price?

The tons of paper is really…

700,000 to 800,000 tons at the current rate, which is $157 per ton.

That's correct.

Okay. And I mean you're not concerned that in December of last year we were at $125?

Well, Michael I think we are always going to be concerned about that and that's why you're noticing that in the range that we gave, you have a much broader range than we had given historically. Last year we gave guidance it was $0.07 EPS range. This year we gave $0.10 to the downside, $0.10 to the upside, realize those moving parts in the business. One of those could be paper and so the downside of that would assume that we aren’t able to hold at that level the entire year. The upside would be, if you would, read the index sometime it moves and stays above the 10-year average for a short period of time and so we have marketed or ranged our guidance in order to be able to account for those things.

Okay. And then when we look at the synergies that you paid for when you bought Shred-it, there was approximately $52 million left out of the original ones at Shred-it and Cintas had identified. That's the number that's been moving around. How much of that $52 million have you captured in - will capture in ‘16 at this point and then what's left?

Yes, I think we have $31 million we’ve capture exiting the 2016. There are about $20 million more that we would achieve in 2017, and then we are still considering and working on synergies that would be between Shred-it and Stericycle.

Right, but those weren’t the ones that you paid for and...

That’s correct.

Right, so those are the - you got trucks in a market, can I go to one truck, that type thing.

Right, that’s the $20 million remaining in 2017.

Okay. And then can you share with us - you talked about this before and my recollection to the first half of the year, is you actually in a good way had a pleasant surprise about the organic growth going on at document destruction. The sales force did a good job of converting unvended. So can you frame what that organic growth looked like in the third quarter combination of that price plus how much did they get converted?

Yes, Brent will take that one.

Yes, I would say Michael that's close to 4%. We continue to see great results with regard to converting the end-to-end market. We’re also having a lot of success with our national accounts and winning new business, but overall 4% is what we projected.

That was in the third quarter?

Correct.

Right. And is that all volume or was there price in that, or is it that’s all conversion of unvended?

The majority of that is - I would say the majority of that is conversion and a little bit of it being price.

Thanks Michael.

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

Yes, thanks. Good afternoon. Going back to gross margins for a moment. Third quarter was flat sequentially despite the pricing pressures. I know Brent said it was still early as far as the benefits from some of the new sales investments. Can you talk about what did help you offset those drags in the quarter?

Yes, absolutely. I will just take you through the quarter-to-quarter gross margin bridge. Q2 was 42.8. We had the anticipated pricing pressures in the SQ business as well as a temporary impact from exit of a patient transportation contract. Those combined were about 54 basis points of headwinds. However we were favorably and directly offset by improvements in gross margins from foreign exchange, increased paper prices and we saw higher recall revenues, those combined were about 35 basis points. And by improvements in all other lines of revenues, it provided an additional 19 basis points of gross margins. So the puts and takes directly offset each other in the quarter.

Got it. Okay. Thank you. And then the acquisitions during the quarter were really light. I know you guys said you're taking some time to integrate and kind of retrench internationally. How long does this pause last, and is this kind of the level of small tuck-in M&A we should expect for the next few quarters or more or less?

Well, we did five deals Sean this last month. This last quarter we did 10. I wouldn't read anything into the number of deals or the annual revenue from this quarter. It's simply timing of deals. We've got a significant pipeline, especially in the secure information pipeline. And as you know, Cintas and Shred-it were both doing acquisitions, but after they joined forces, they slowed down. So we think there is a great pipeline there. This is just a timing in Q3. I wouldn't read anything into the five deals. I think a normal quarter for us is more like what's happened in Q2.

Got it. All right, thank you.

Thanks Sean.

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

Thanks. Good evening.

Hi Scott.

Hi. Could we start out on communications solutions related services? There is a big deceleration in organic year-to-date second quarter to third quarter, and I saw that your recall which is in that went higher presumably on one of those large smartphone makers. So if you could update on what the deceleration was, and if you are in fact seeing better in recall? And then the final part of this question is what is implicit in the recall guide for next year in comm solutions? Thanks.

Sure, I’ll take that. You have a couple of questions in there. You’re right we had a solid quarter for recalls. It was $26.9 million, but it actually declined year-over-year, Scott, by about 11.2%. That's just the U.S. number. So when you look at the communication and related services decline sequentially year-over-year, it's mostly to do with worldwide recalls were actually lower this Q3 than they were last Q3. As far as we did raise guidance though for 2016. We raised it to $95 million to $105 million, that simply because we saw a lot of activity towards the end of the quarter and it’s continued into Q4, so we thought it was best to raise guidance for 2016. Related to your question about guidance for 2017 in that communication-related service line of $340 million to $370 million, that has roughly $90 million to $120 million in recall and revenue by guidance in that number.

Thanks. And so the big driver of the slowdown of organic year-to-date was the year-over-year of recall, or was there something else?

No, the big driver was year-over-year decline in recall, that’s right.

Got it. Thanks. And then switching gears, in the 2017 guidance, you mentioned $0.19 of - and I didn't get it down well in my notes, but it seemed like some sort of investment spending which sounded bigger than what you would have told us last quarter offset by about $0.17 of purchasing the converted preferred. So could you elaborate on, one, what those investments were a little more specifically, and then just a little color around the repurchase maybe in the third quarter of the convert preferred and what the $0.17 represents next year? Thanks.

Yes, thank you. So just to be clear, we didn’t - none of this was found last quarter on the call. This is all new guidance for 2017. And what we did talk about on the $0.19, it’s all what we call corporate expenses and that's a made up of really two buckets. It's performance compensation which is roughly about half of that, and this is primarily related to cash flow and it’s just tied to specific performance goals. This performance compensation was only partially accrued for in 2016 results. And as our practice has been to accrue appropriate levels throughout the year based on real-time performance. As this is our initial guidance in 2017, we historically included a full performance compensation in our guidance to reflect our expectation of not only achieving but exceeding our goals. The other half of that spend is really in SG&A investments for growth. And these would be in things such as IT to enhance our operational and financial systems, as well as continued investments to support growth. Throughout the course of the year, we'll evaluate these projects and we'll adjust and release these funds where best appropriate. I think your other question, Scott, was really about the $0.17 of purchasing the mandatory preferred convertible. What we've looked at in why we are purchasing that over the common is really it’s the best use of cash. That only gives us the best ability to reduce dilution by being able to buy more shares but it also offsets 5.25% dividend rather than paying down 2% interest. We were very successful in doing that in Q3. Again you would see that we purchased about $0.07 of that. And so we really built that into our guidance going into next year and even into Q4, we’ll do a marginal amount. We've said conservative guidance for next years. Doesn’t really has to be a balance of how we are going to utilize all of our cash flow.

All right, thanks. And just add to clarify - sorry to start it [ph], it’s $0.07 year-to-date or $0.07 in the third quarter of this year?

It will be $0.08 year-to-date. We did purchase a penny of it in Q2. We did $0.07 in Q3 and our guidance really for next quarter would be anywhere from $0.02 to $0.03, and we could be opportunistic depending on again have the quarter shaped up from all avenues of our capital allocation strategy.

Thanks. And to clarify what I meant when I originally asked the question was that I thought that this - you would announce on the second quarter call some SG&A investments, and I don't recall what that amount is but it sounds like half of the $0.19, so let's it called $0.09 or $0.10 is next year?

This is SG&A investment over and above what we communicate to you in Q2. This would be additional investment for 2017.

Great. Thanks for the clarification.

Thanks Scott.

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

Thank you. Good afternoon. Historically you’ve indicated that more than half of your organic growth comes from cross-selling services. Could you outline your expectations for volume, price and cross-selling that gets you to that 0% to 3% next year?

Yes, I think if you look at, David, now given the pricing pressure that we face especially in our SQ business, looking out in the historical context of SQ, LQ, we would estimate that about 20% of our growth will come from price and volume and about 80% from additional services. And really we have seen no change on the LQ side of the business. So roughly 10% to 20% price and volume and the rest of the growth from additional services. So you see that it has changed a little bit on the SQ profile, given the pricing pressure.

So the delta between your historical overall organic growth is 7% to 8% and this 0% to 3% is entirely price?

No. I can take you through each service line but if you look at going forward into next year, if you look at it purely from a revenue standpoint, as Dan said, we are down about $40 million in price concessions and it doesn't offset the growth of the business. There is other things we are doing with synergies and other opportunities, but we basically - I think it's $40 million in price that goes right to the bottom line, about $100 million to $110 million in the revenue but that has to flow-through, so flow-through obviously I think - Dan, what is the EBITDA flow-through amounts in...

Yes, I think it would be the mid-to-high 20s.

So it's about $25 million to $30 million, plus that we are certainly getting revenue from that. And then you have the impact of M&I year-over-year being flat and then obviously exiting the PTS [ph] contracts which creates additional headwinds for the total business.

Okay. And then you had other income of about $3 million when that's normally an expense. Could you outline what that was?

Yes, that was settling of an inter-company loan dealing with two different exchange rates. This was between the Sterling and Netherlands, and obviously with the Brexit that's affected how that came out of the financial.

Okay. And then finally as you're looking at ways to target new customers and invest in getting renewals and things of that nature, are you willing to take new business or get renewals at a lower revenue and margin than you have historically to sort of recharge the growth from here forward?

David, this is Brent. I would say absolutely. Obviously we look at all new business carefully but given our infrastructure, our footprint, we often times can bring on new business lower than other people given we have the biggest infrastructure and route density everywhere. So yes, we are not walking away for any new opportunities, plus we have the ability to up-sell once we get it, which increases the profitability. So no, I would say we are very aggressive at going after new business and new sites.

Okay. Thank you.

Thanks.

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

That’s Barb Noverini. Good afternoon everybody.

Hello Barb.

So internal LQ growth came in flat year-over-year, which is also much lower than typical. Can you comment on what you've been seeing on the LQ side, and what gives you confidence that pricing pressure going to accelerate in that customer category as well?

Yes, so a good question on the LQ. I mean, the LQ really, Barb, has been driven on the M&I. A lot of the M&I work, remember again - take a step back. SQ and LQ is not just our medical waste services, it describes our total business in the U.S. So when you see the decline in M&I like we faced, most of that M&I work is flowing into the LQ bucket. So when you look at LQ where it was just less than 1% last quarter and flat to down a little bit this quarter, they are the ones taking the brunt of the M&I hit. As far as pricing pressure in the LQ side of the business, we are doing great on the LQ side of the business. To be honest with you, we just look at just our medical waste services. Brent touched on it early on and we had really large installations in both sharps and pharmaceutical waste installations, some really large healthcare centers. The team is doing a really good job there. We've hit the ground running with respect to secure information disposals. So certainly it's always been a category with respect to price, that's why the margin has always been lower than our SQ business. I don't see any changes there. I think it will always be price-sensitive, but we've done a really, really good job on our traditional hospital LQ business.

Got it. That's actually a helpful distinction. So if you were - I know you are trying to walk us away from that categorization but if you were to disaggregate that M&I impact, would you say that LQ hospital category performed as typical in that sort of low-to-mid single-digit organic growth range that you’ve had in the past?

It did. It was roughly 4% or 3% to 5%.

Okay.

And we usually get a benefit of other things coming in on LQ that always would make it 5% to 8% but certainly that wasn't there because the headwinds in M&I.

Got it. And then you mentioned that retail haz was doing quite well in the quarter. So if you were to sort of give us a ballpark estimate on what that growth rate is, what could we expect from that?

Yes, it's been in the high-single digits and that's where it’s year-to-date.

Okay, great. Thanks very much.

Thanks Barb.

Your next question comes from the line of Hamzah Mazari from Macquarie Capital. Your line is open.

Good afternoon. Thank you. Just had a question on trying to understand the 10% to 15% price declines in half of the SQ customer base. Is it just systematic that the hospital affiliated accounts understand price decline is there, but how is it spreading to the SQ - the rest of the SQ customer base? Is that just your estimate, is it a bottoms-up analysis, or is the business incrementally more competitive? Just trying to understand that piece.

Yes, I think, Hamzah, it's always been a competitive market, the SQ local markets. So I don't think there has been any change with that. I think the one thing that's changed and you see it in the press, you see it all over that healthcare is based with reimbursement costs, so they are getting less fees for their service and now for the first time I think they are looking at anywhere they can save even a little money, so for our contract I think fell below the radar. We were getting more attention there and that's why we are seeing discounting in that marketplace. I think it’s - the competition though I would tell you - from market-by-market I would tell you hasn't changed much in the last couple of years.

Got it. And then just a follow-up for Dan. The op margin - trying to understand the op margin guidance at the midpoint. Are you guiding flat op margins for ‘17 at the EPS midpoint? Is that the right way to think about sort of operating margins? Just trying to - the reason I asked is I'm trying to understand what the offsets on the margin side are to the $40 million pricing pressure you're going to see next year?

Yes, I think if were thinking about operating margins for 2017, I would be in the mid-21 range, so it is really flat to this year. Certainly there are a number of puts and takes, and I think Charlie, Brent and myself, we have seen some of them. Certainly you have the synergies that will be only partially offsetting the price concessions we’ll have next year. And then the growth it doesn't come through at the same percent that pricing goes out. So you're going to see a little bit of pricing there on profitability headwinds. We are also going to be experiencing some effects exiting a patient contract that can temporarily affect margins until you're fully out of that. And then we are going to make investments in the business, and that’s important that we do that with the things that Charlie, Brent talked about and in those investment we know will build return over the long-term. But initially at the beginning of the year, those investments will be really investments to set out the infrastructure in that stage to be able to grow the business, so that's going to be some of the headwinds.

Okay, great. Thank you.

Thanks, Hamzah.

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

Thanks. It’s actually Joel in for Isaac. Maybe back to the consolidations team from a slightly different angle. Can you talk about how you're thinking about the potential for increased efficiencies maybe on the route density side just given your consolidating customer base?

Yes, Joel. So I think certainly route density, as Brent mentioned it before, we want to be able to be the low cost provider, low expense provider in the marketplace. So we've utilized on our better technology over the last few years. The team continues to make strides in that area. The focus now really is on the secure information destruction side of the business to get that same level of service, a high level of service, with the best route density that you can get. And that's one of the reasons I think the strategy - and Brent answered before would be, would we be willing to renew customers at a lower rate? Yes, because we don't want to lose that competitive advantage that we have in the marketplace which is route density. So it does play into it certainly. hopefully that answered your question?

But Joel, this is Brent. Just one of things to think about, a lot of times when these SQs are being rolled up into an integrated delivery network, there is often times don't even change, right. There just the name or the sign on the building changes, so not all the time is that provide us kind of a more centralized spot to pick it up. We often times are still covering the same footprint things that we look for.

Great, thanks. And then maybe over to haz. Can you all parse out the margin profile of the energy, sort of project-based work versus the general M&I? Just trying to understand the impact of profitability if we happen to see a resurgence in demand in either of those markets.

Yes, we still haven't broken out M&I and its own kind of service line and profitability at this point, Joel. But if you think about environmental solutions in general, the general - the gross margins are in the mid-to-low 20s and the EBITDA margins are in the high single digits. Certainly that includes the whole portfolio, so that’s healthcare haz, retail haz and M&I. M&I does have a lower profitability - M&I and project is a lower probability than retail and healthcare haz would have.

Great. Thanks.

Thank you.

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

Just a question on the SQ contracts, the one subject to the 10% to 15% pricing pressure. As those come up for renewal, are you renewing those at a consistent rates as you have historically, or is the margin on some of that business so low that you had to walk away from it?

We take every contract when we look at discounting, Jason, on a case-by-case contract-by-contract basis. So it's hard to just generalize what we are doing on discounting. It's really done on a case-by-case contract-by-contract basis.

And the 10% to 15% is really just an average of the aggregate, right, so that’s something more than that or less something go up.

All right. And I'm sorry if I missed it, but the internal growth estimate for ‘17. Did you break that out between SQ, LQ and international?

We did not. We are not going to be giving SQ, LQ. We broke it out by service line. Regulated waste and compliance will be $2.04 billion to $2.09 billion. Communication and related services will be $340 million to $370 million. The M&I will be between $380 million to $400 million, and secure information and destruction will be between $780 million to $810 million. Total it's flat to up 3%. And then the mix of international domestic is similar to what it has been over the last year-to-date breakup.

And is there any savings from the McKinsey baked into your 2017 outlook?

Well, most of that was built into the results for this year and any remainder is built into this current guidance.

Then finally just speaking of Steri-Safe, rolling that out internationally the clinical services, wonder if you could talk about the status of that and any potential new growth areas?

Yes, we continue to look at it market-by-market. We've had success recently in Western Europe, Spain and Portugal as we've coupled it with a symmetry service. It really takes a different form in each country. In the U.K. we've coupled it with First Practice Management, which is an website for HR and compliance for small practices. I would say the focus over the next 12 to 18 months is as we look at Latin America and the opportunity to roll out in equivalence to Euromed [ph] in all Latin America markets.

Thank you.

Thank you.

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

Thanks Amanda. Thank you for taking time to listen to our call this evening. Since we are based in the Chicago, I’d be remiss if I didn’t mention the Cubs. This weekend will be the first World Series games in 71 years played at Wrigley Field. I say this with no disrespect to our team members in Cleveland, but go Cubs. We look forward to seeing everyone on the November 10 Investor Day in New York City. Have a great night everybody. Thank you.

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