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Edited Transcript of SRCL earnings conference call or presentation 2-May-19 9:00pm GMT

Q1 2019 Stericycle Inc Earnings Call

LAKE FOREST May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Stericycle Inc earnings conference call or presentation Thursday, May 2, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cindy J. Miller

Stericycle, Inc. - President, CEO & Director

* Daniel V. Ginnetti

Stericycle, Inc. - Executive VP & CFO

* Jennifer Koenig

Stericycle, Inc. - VP of Corporate Communications & IR

* William J. Seward

Stericycle, Inc. - Executive VP & Chief Commercial Officer

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Conference Call Participants

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* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gary Elizabeth Bisbee

BofA Merrill Lynch, Research Division - Analyst

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Ryan Scott Daniels

William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Sean Wilfred Dodge

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, my name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Q1 Earnings Conference Call. (Operator Instructions) Please note that today's conference is being recorded. Ms. Jennifer Koenig, VP of Investor Relations. You may begin your conference.

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Jennifer Koenig, Stericycle, Inc. - VP of Corporate Communications & IR [2]

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Thank you and good afternoon, everyone, for joining us on Stericycle's First Quarter 2019 Earnings Call. On the call for the first time is Stericycle's Chief Executive Officer, Cindy Miller, as well as Dan Ginnetti, Chief Financial Officer; and Bill Seward, Chief Commercial Officer.

The discussion today includes forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause the actual results to differ are discussed in the safe harbor statement in our earnings press release and in greater detail within the Risk Factors in Stericycle's filings with the U.S. Securities and Exchange Commission.

Past performance should not be considered a reliable indicator of future performance and investors should not use historical results to anticipate future results or trends. To the extent permitted under applicable law, we make no commitment to disclose any subsequent revision to forward-looking statements.

On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable GAAP measures, please refer to the schedule in our earnings press release, which can be found on Stericycle's Investor Relations website. Please note that we provide guidance on an adjusted non-GAAP basis because it's not possible to predict or provide without unreasonable effort a reconciliation reflecting the impact of future acquisitions, divestitures, certain litigation, settlements and regulatory compliance matters, business transformation, intangible amortization, operational optimizations or certain other items and unanticipated events, which could be included in GAAP reporting results and could be material.

Finally, the prepared comments for today's call correspond to our first quarter earnings presentation, which is also available on our Investor Relations website. Throughout the call, we will be referencing specific slides from the presentation. I'll now turn the call over to Cindy Miller.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [3]

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Thank you, Jennifer, and welcome to our first quarter 2019 earnings conference call.

Let me begin by saying, it is an honor and a privilege to lead this great company and our 22,500 global team members during this historic change and transformation.

As we continue this journey, I get more excited about the future opportunities for Stericycle to enhance our customer relationships, become an employer of choice, and drive greater shareholder value.

I'm very pleased to announce that we've appointed a new financial -- a new Chief Financial Officer, Janet Zelenka who will join us on June 1. Janet brings deep financial, IT, transformational and operational experience to Stericycle, following 15 years with Essendant and 16 years at SBC/Ameritech. At Essendant, she served as both CFO and CIO and successfully led the company through its own transformation.

She also brings a breadth of corporate finance and internal audit experience. Given our own Business Transformation and ERP journey, Janet will be a valuable addition to our leadership team, and we look forward to working with her.

Turning to the quarter, our business performed well compared to our internal targets, which took into consideration our historical performance by quarter.

We maintain confidence in the business and reaffirm our full year guidance.

Before I turn the call over to Bill and Dan to review the quarter in more detail, I'd like to share with you some of my perspectives on Stericycle's future.

As I mentioned on our call in February, our primary focus for 2019 is to build, test and train phases of the ERP implementation. I'm pleased to report that we will complete the build stage this month.

This week, we began the testing phase, which will include 3 complete rounds of end-to-end testing of our 7 mega processes, with the final test incorporating actual Stericycle data.

To support adoption of the ERP across the front lines, the leadership team and I hosted 8 internal roadshows in the U.S. and Canada and met with close to 1,300 managers, representing 80% of the leaders responsible for deploying the ERP.

They're excited about the future and willing to embrace the changes to come.

As I said to many of our shareholders while on the road recently, my assessment of the biggest risk to Stericycle is continuing to operate in our current state and not implementing this ERP.

I'm impressed that the leadership position at Stericycle is established with outdated systems and the lack of visibility to performance data.

Not only will the ERP drive -- begin driving efficiencies and savings as early as next year, but immediately upon implementation, we will be empowered with data to enable real time performance reporting.

This will improve daily decision-making; simplify and enhance forecast accuracy; provide transparency for greater accountability; and aid in the development of strategic planning.

But most importantly, this transformation will make it easier for our customers to do business with us.

I've also spoken about the current focus on quality of revenue.

As the market leader across many of our service lines, Stericycle is well positioned to leverage our vast infrastructure and expertise to command a differentiated and premium brand value.

Recently, we realigned the U.S. sales organization and have begun to rollout new sales commission plan and new contract oversight, both structured to drive revenue quality.

These efforts will continue across the globe. We're also developing strategies and tactics to quantify and leverage the value of our brand to organically grow our customer base and provide differentiated service offerings.

Finally, I've been asked by shareholders if it is possible to drive efficiencies in route and treatment operations even before the ERP is implemented. The simple answer is, yes. Leveraging the experience of our new operational leadership, we are developing standard operating plans across our network, developing work measurement capabilities, and enhancing skill levels through additional training and hands-on management oversight.

Additionally, in the absence of new technology, we are focused on finding creative ways to improve and monitor our operational performance. While these efforts are manually intensive, we know they will improve results this year and better position us for the ERP implementation.

Industrial engineering and technology will be a much bigger focus for Stericycle moving forward. Beyond the ERP, we can pursue additional competitive advantages and cost improvements across our fleet and plant operations.

To lead this effort, Dominic Culotta has joined Stericycle in the newly created role of Executive Vice President and Chief Engineer. Dominic has 35 years' experience in operational and engineering roles. He has a proven track record of improving service levels, achieving cost efficiencies to the implementation of process standardization, work measurement, asset optimization and technology.

I'm excited to welcome Dominic to the team and look forward to the many advancements he will oversee as we position Stericycle to leverage best-in-class engineering capabilities.

We are also pleased to welcome Cory White to Stericycle as Executive Vice President of Communication and Related Services. Cory comes to Stericycle with 20 years of executive management experience in the area of outsourced business processes, including the transformation of companies for future growth.

He has expertise in both healthcare and technology-enabled services. We're thrilled to have a leader of Cory's caliber join Stericycle to refocus the C&RS business on growth and improve profitability to better enable the pursuit of strategic alternatives for the C&RS business.

With Janet, Dominic and Cory on board, Stericycle's new leadership team is complete.

I am confident in the team we have assembled and our ability to successfully execute the transformation plan and position the company for long-term shareholder returns.

Now let's turn to the performance of our service lines. I'm very pleased to welcome Bill Seward, Stericycle's Chief Commercial Officer, for the first time to our quarterly earnings call.

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William J. Seward, Stericycle, Inc. - Executive VP & Chief Commercial Officer [4]

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Thanks, Cindy. I'm excited to join the call today and to be part of the leadership team here at Stericycle.

Having started here on February 4, I knowingly joined the company in the midst of a multiyear transformation. And looking at Stericycle solid foundation and strong market position, I saw the tremendous potential for a turnaround here, and I'm excited to bring my commercial and business experience to help the company deliver on our plans. Since arriving, I've been impressed by the strength of our team members and feedback from our customers.

On visiting our operating facilities and meeting managers during internal roadshows, I've also been impressed with the feedback from our frontline employees and supervisors. They speak favorably of their work environment, and of our company culture. I found the talent on our team is strong and open to change.

Additionally, my early experience with customers, either directly or reviewing customer experience data, indicates they value Stericycle and what we bring to their businesses.

Our customers see clear differentiation when comparing our brand to the competition. These are important confirmations that I've joined a company whose strong foundation provides significant value to the customers and communities we serve.

That, combined with the company's well conceived business transformation roadmap, provides a clear path to a successful future. I'm extremely excited about the opportunities ahead.

Now I'd like to shift focus and turn to the financial results for the first quarter.

As reflected on Slide 9, total revenues for the first quarter were $830.1 million compared to $895 million from Q1 2018.

Primary drivers of the revenue declines include C&RS comparables, the effect of foreign exchange rates, and divestitures. Revenues and resulting profits were impacted by 1 less operating day in the quarter and extreme weather conditions. During February's extreme cold, we experienced closures of key facilities across parts of the U.S., including our largest outbound sales center, limiting new sales efforts and our ability to service customers. As noted on the last earnings call, we closed the divestiture of the U.K.-based texting business, which reduced revenues by approximately $2 million in the quarter, and is expected to reduce revenues by $15.8 million for the year.

We remain committed to portfolio rationalization and continue to pursue alternatives for noncore assets.

Regulated Waste and Compliance Services revenues of $469.2 million were in line with our expectations. Strength in our international market was driven by organic growth in volumes, and implementation of new revenue strategies across EMEA.

In the U.S., we continue to see encouraging trends in medical waste, including lower discounting and increasing new sales. Our hazardous waste business within RWCS was down slightly given higher comparable results in 2018 driven by hurricane-related project work.

Next. Secure Information Destruction Services delivered revenues of $232 million, continuing a steady growth trend. Organic revenue growth in the quarter was 4.3% or 2% when adjusted for recycled paper pricing.

Continued strong growth in European markets was offset by 1 less operating day and weather impact in the U.S. Also, while paper prices have declined since a recent high in October, we did see favorability in the quarter compared to the same quarter last year.

We are monitoring paper pricing given the recent declines in SOP prices.

Communication and Related Services revenues were $61.2 million, down $30.7 million from Q1 2018.

This reflects significantly smaller Recall events as well as fewer mandated Recalls as a result of the federal government shutdown.

We did see a slight increase in new Recall events during the month of March.

Manufacturing and Industrial Services revenues were $67.7 million, including the impact of foreign exchange and divestiture of the U.K. hazardous waste business. Organic revenues compared to last year were impacted by the benefit of project work from California fires in Q1 of 2018.

Now turning to financial performance for the quarter as presented on Slide 12. Loss from operations for the quarter was $4.2 million compared to income from operations of $54.1 million in the first quarter of 2018.

Our adjusted EBITDA was $136.8 million compared to $189.3 million in the first quarter of last year. As a percentage of revenues, adjusted EBITDA was 16.5% compared to 21.2% in the first quarter of last year.

We anticipated lower margin compared to last year given C&RS comparables and ongoing pricing impacts in RWCS. Results came in a little softer than we expected given the severe weather, the federal government shutdown impact on C&RS, and higher-than-expected operating costs in the first quarter 2019 that are not expected to repeat in future periods.

As Cindy highlighted earlier in the call, our operations teams across the company are currently focused on implementing plant and fleet changes to improve our cost structure. Additionally, the C&RS leadership team is evaluating strategies to align its infrastructure with current revenues, provide more operational flexibility and improve profitability. While these changes are not instantaneous, we're confident that our operations are moving in the right direction with a focus on both improved service and lower costs. I'll now turn the call over to Dan to discuss the EPS and cash flow results.

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [5]

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Thanks, Bill. Looking at Slide 12, GAAP loss per share was $0.42. Adjusted EPS was $0.57 compared to $1.21 in the first quarter 2018.

The year-on-year variance in adjusted EPS is due to the following: $0.21 from share repurchase comparable, temporary higher tax, higher interest, and the foreign exchange impact; $0.12 from expected lower revenue from C&RS; $0.23 from much of which was expected from RWCS pricing and 1 less operating day as well as extreme weather and temporary closure of 2 key facilities; and $0.08 from higher non-reoccurring costs in the quarter as we advanced our material weakness remediation process.

As reported cash flow from operations for the quarter was $36.2 million compared to $110.4 million last year. This was primarily a result of the current operational performance, cash and cash payments for annual performance incentives, and prepaid software.

Our DSO was 64 days. CapEx was $66.1 million and in line with our expectations and inclusive of planned Business Transformation investments and expected payment of accrued CapEx from 2018. Free cash flow, inclusive of capital expenditures, was negative $29.9 million, reflecting the operating performance and the timing of the investments. Our debt-to-adjusted EBITDA ratio under the amended debt agreement was 3.96 at the end of the quarter.

This level of leverage is higher than anticipated but within our covenant. To address this level of leverage, we're implementing spending controls and are evaluating a number of options, including divestitures, restructuring of our debt, and seeking temporary relief from leverage covenants. The unused portion of the revolver was $516 million at the end of the quarter. We have adequate cash flow and borrowing capacity to manage our ongoing business. I will now turn the call back to Cindy.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [6]

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Thanks, Dan. So in summary, we remain confident in our business and reaffirm our 2019 guidance as issued in February. The team is fully focused on our transformation and delivering on our 2019 commitments to our customers and our shareholders. So Catherine, please open up the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sean Dodge with Jefferies.

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Sean Wilfred Dodge, Jefferies LLC, Research Division - Equity Analyst [2]

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Cindy, I think you said at the beginning of the call, the quarter had met your own internal expectations. If we just annualize what you did in the first quarter, the $0.57 of EPS that puts you short of your annual target. I guess what do you see changing over the course of the year that will drive the ramp you need to see in EPS to achieve the full year ranges you reaffirmed?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [3]

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Sean, thanks for the question. And one of the things that we wanted to try to make sure we all understand is that at no point in time did we believe every quarter was going to be the same.

So within our own internal guidance, we realized that as we brought more and more executives onboard and got more focused with some of our both revenue and cost of revenue efforts, that, that a lot of the quarters at -- the net effect of that was going to be more of a ramped effect from Q1 through Q4. So let me just highlight a couple of things as to why I remain confident in our guidance.

So I'll talk first in terms of revenue. So right now, we're seeing the revenue trending to our internal targets. So I think that's strong.

In addition to that, our Chief Commercial Officer is ahead of plan in terms of the reorganization, and some of the changes that we're making to our internal sales incentive plans.

He completed phase I well before we thought we're going to be able to. And then he's been implementing some strong revenue management controls, really putting more focus and more strict adherence to some commercial strategy. For example, he's got a deal review community where we make sure that we have taken some of that control from a decentralized perspective to a more centralized control.

He is evaluating in that commercial strategy some surcharges to make sure that we're covering some costs that are in line with what we see in the market, but certainly, to address some of the things that we see in gaps in our revenue. So I feel very comfortable from that perspective.

Then also, Sean, I've got a -- I also feel comfortable -- because I have to really look at what was planned and what we knew we were going to see in terms of the foreign exchange in Q1 to Q1, the divestitures. Certainly, weather wasn't necessarily planned, but I see -- if we take a look all things equal for those, compared to our internal targets, we are pretty close to where we thought we would be for Q1.

And also, it's unfortunate, but when you have a couple of nonrecurring items, they're behind us. And I see Q2 through Q4 with an opportunity to gain some ground on some of those deficits.

And that's just on the revenue side. Sean, if I may, on the op side, it's also a ramping effect. And I see our Executive Vice President North America, Rich Moore, is really pushing in terms of accelerating our efforts in terms of cost control. I'll give you an example. We're accelerating some of the mobile collection vehicles that we have to put on the street, and let me just tell you briefly what that would be. For example, they bring 35% improvement in our efficiency. So for every 100 that I put on the street and replace current Shred-it vehicles, I'm going to take 135 of those vehicles off the street. I'm also going to get 25% fuel savings as a result of that. And here's the big thing for us, we're going to see, just in that alone, for those drivers, will have about 7 stops per day per driver of improved productivity. Those are going to be very big for us that aren't in -- and we knew they wouldn't be in our first quarter numbers. And those are just a couple of the things. He's got a metrics dashboard that we're pushing out that we're accelerating, albeit, it's manual, but I think that's meant to drive some labor savings. So I think -- and then the last thing is, we have some key facilities that drove some of our transportation and network costs beyond what we thought and what we had planned in the first quarter.

Those facilities are up and running right now. So we believe our -- those long haul costs are back in line. And it's based on all of those things that we all remain very comfortable and very confident in being able to attain year-end guidance. So thanks for the question.

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Sean Wilfred Dodge, Jefferies LLC, Research Division - Equity Analyst [4]

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Yes. That's very helpful. And then on the SQ pricing headwind, it's been the expectation for a while now, we begin to see that tapered sometime during the back half of this year.

Now that we're a bit closer to it. I guess other than we have pretty much gone through a full contract cycle and hopefully that's flushed most of it out. Is there anything else you're seeing or signs you can point to that really give you confidence, the bulk of the headwind will be behind us, as we look ahead to 2020?

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William J. Seward, Stericycle, Inc. - Executive VP & Chief Commercial Officer [5]

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Sean, it's Bill Seward. Thanks for the question. A couple of things. First of all, one of the things that Cindy talked about in the last call, and we want to emphasize again today is that, there is multibillion-dollar service lines outside of that pricing SQ space that we are focused -- hyper focused on growing. So we've got a lot of emphasis there. Cindy alluded to some of those things in her comments a moment ago. Regarding the SQ specifically, we are seeing that we're on track to previously communicated plans.

Our churn or lost customers, our discounting as well as our new sales, onboarding of new customers are all in line with those previously communicated plans, and we are confident that we will be able to pursue revenue strategies across the rest of the enterprise that will drive the confidence that Cindy just spoke to for the rest of the year results.

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Operator [6]

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Your next question comes from the line of Ryan Daniels with William Blair.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [7]

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Mine relates to the strategic alternatives for the CRS business. I noticed in your other press release discussing the executives that you mentioned in particular that one of the emphases for Mr. White will be working on improving the profitability that enable the pursuit of strategic alternatives. So is that happening a little bit slower than you thought due to lack of interest? Or is the company internally taking a pause there to try to improve predictability and profitability in order to drive a stronger valuation as you sell it?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [8]

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Ryan, this is Cindy. That's a great question. And let me share this with you, there is no pause in terms of the whole portfolio rationalization and our ability to transact in some of the divestitures. But I will say this, we realized very quickly, and all you have to do is take a look at our first quarter numbers in terms of C&RS in comparison this quarter to first quarter of last year, we have a business unit that whether something is divested tomorrow or it's divested sometime in the future, we still need a business unit that's held accountable to hit marks whether they're stretch goals or they're marks that we should be hitting, they contribute to the overall revenue and the overall guidance numbers. So for us, we're very thrilled that Cory, somebody of his skill and ability and his experience in this, and not just in running one of these facilities, but also, in preparing it and improving it in order to make sure that it is up value in terms of any type of divestiture portfolio rationalization plan.

So for us, it's twofold. If there's an opportunity tomorrow, certainly, we would take the opportunity tomorrow. But in the meantime, we still need to make sure that C&RS holds up its end of the bargain in terms of the total corporate goals.

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Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [9]

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Okay. That's very helpful color. And then the other thing, you have hit this a little bit, but I noticed in the slide deck, talked especially on Regulated Waste and Compliance is about new strategies for revenue growth across emerging markets. Can you -- is that the new data point? Highlight a little bit more about what you're doing in those markets to try to reaccelerate organic growth?

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William J. Seward, Stericycle, Inc. - Executive VP & Chief Commercial Officer [10]

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Ryan, this is Bill Seward. So thanks again for the question. Listen, I'll talk about a couple of things there. First of all, we feel really good about the team. I would say, I love the team that I've met over the last couple of months.

I've had a chance to connect with obviously the senior leaderships on the commercial side, but also, as a result of the roadshow, I have met many of our frontline and middle management teams as well. And a high level of expertise that they show was impressive and is exciting. And I think part of the reason why customers value us so much. The other thing is that we found that the team has been receptive to change. While obviously, there is certain resistance to change naturally, I've been impressed with the fact with most of our leaders in our sales team and our marketing teams are very receptive to some of the new ideas and the things we've talked about.

And I'll give you just a couple of comments on some of the things that give us the confidence we've got going forward. Number 1, we've instituted which Cindy alluded to, this idea of contract governance. We've got it instituted in part of our U.S. business, part of our international business, and throughout the rest of year, we'll be taking that contract governance process, a deal review committee to all of our business units. And we've seen early signs of life. It's a really good returns as we've hit the street in first quarter with some bottom line impact, we think there will be more to come there. We've also taken a look at changing our commercial structure overall. We've got the opportunity, and we're going be rolling this out in the second quarter, to reallocate some of the talent we have got in areas like marketing and in training and in sales operations. So we're excited about taking that leveraging our spend, which is right now sometimes in the past been diffused across businesses, combining our spend leveraging it to get more optimal outcomes.

We're also looking at things like the potential of surcharges where appropriate to cover our costs. We are certainly looking at that pricing lever, where appropriate. We've also done some things with our sales leadership. There have been some instances where our sales leadership in the past had been focused on administrative responsibilities like sales ops reporting into the sales leadership, or like sales compensation or sales planning reporting into the sales leadership, we've moved that off of our sales leaders, so that the sales team is focused on growth and growth only. So those are the couple of things, and thanks for the question.

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Operator [11]

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Your next question comes from the line of Gary Bisbee with Bank of America Merrill Lynch.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [12]

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I guess, Cindy, the first question is for you. You've obviously expressed support for the ERP transformation, and we understand how important that is long term for the business. But I don't believe you've commented specifically on the target set by the prior team in terms of both the level of savings and the time line to achieve those savings. Are those -- should we think that those targets are under review and you may fine-tune those yourself at some point in future or are you willing to commit to the prior targets that your predecessors put in play?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [13]

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Yes. No, Gary -- and to be quite honest, I consider those targets from my predecessor's mind, simply because I was -- I'm here as of October 1, not today. And so I'm of the -- I've been trained where all numbers are my numbers.

So -- but I think your question is fair, and I'd like to share how I look at it.

So right now, the business -- these plans were made several years ago and certainly, well before maybe any of the thoughts about divestitures or any portfolio rationalization.

So there are -- there is some of that built in that I think it's fair, Gary, if any changes happen from now until the second quarter or through the rest of the year, obviously, something like that would trigger us to have to take another look at what those total numbers were.

But I will tell you, you brought up the ERP, I remain confident in the numbers. I remain confident in our ability to successfully implement this, and more importantly, I remain confident in our capabilities of once we implement it to actually draw value, real value, meaningful value.

So for me, Gary, what I think we need is, if our portfolio changes or at any given point in time, if we believe that we can find more, we can do more. Then I think we owe it to certainly everybody on this call, we owe it to our shareholders to maybe have a discussion about that. So we can talk a little bit more specific to targets. But good question. Right now, I stand by them and -- but again, if we have any big changes to will then obviously, we will share that information and whatever those changes might be.

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Gary Elizabeth Bisbee, BofA Merrill Lynch, Research Division - Analyst [14]

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Great. And then just a quick follow-up. I may have missed this if you're provided it, but can you give us any sense of how big you think the weather impact was to revenue in the quarter?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [15]

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Yes. I'll speak first, and then in case Bill has any other comments for it. So weather happens every day, and I'd be the first one to not want to talk about weather. It's -- I don't come from an industry and my history is always -- you do what you need to do and on a year-on-year comparison, weather happens everyday. However, the only thing that makes it a little different in our circumstance is this, there is -- there are portions of our business that are reliant on daily transactional telesales, every day. And there's a portion of the business that relies on that and I -- we had here in Chicago, it was record polar vortex, I think, we saw it in headlines for some of the weather that was here in February, and unfortunately, that's where over 500, the largest bulk of our telesales group sits, and we had to shut down those facilities, not run them with just fewer people, but we actually closed them for a few days when we were facing the negative 55-degree temperatures. So that did have an effect. Can I -- Gary, can I turn around and give you the exact number. I think internally, we've got some estimates. We're not as sophisticated enough internally to be able to give you exact. But from our internal numbers, it was significant enough that it was something that we noticed. So Bill, do you have any other color?

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William J. Seward, Stericycle, Inc. - Executive VP & Chief Commercial Officer [16]

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Yes, Gary, this is Bill. I would just add 1 comment. Cindy hit it pretty well about the impact on our sales side of the business and our growth side, but it also impacted our ability to run the operation, to be able to get out and service our customers. And because we were missing some of those services due to the weather pockets around the country, obviously, there was a chance that we are not recovering the billing and the revenues there. So thanks for the question.

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Operator [17]

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

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [18]

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All the new players, congratulations, and congratulations Cindy on your first day.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [19]

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Thank you Michael, thank you very much.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [20]

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So if you look at the guidance and you take the midpoint, and you take the first quarter, and you do this analyst thing that we do, and start looking at what this cadence would be, it says, you got to do -- if you did it evenly $880 million of revenue a quarter or 183 of EBITDA. And you haven't been in the high 800s in revenues in a while. I mean, you had 1 quarter of it in the first half of last year.

So can you talk about the cadence and help us understand how we should think about it? If we think about the midpoint of these ranges and where the ebbs and flows across those 3 data points that make up your guidance through the rest of the year?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [21]

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Michael, this is Dan. I'm going to start this, and I'm going to pass it to Bill to specifically talk about the revenue. We anticipated -- one of the things that I think I would share with you, as you look back historically, we have seen seasonality in our business occur in Q1. But sometimes it gets overshadowed. And that historically leads, at least for a last couple of years, we got really strong C&RS, but hasn't shared with you kind of the seasonality that we see inside in some of our business, like Secure Information Destruction, and Environmental Solutions, even a little bit in our Medical Waste business.

And so we also anticipated that the foreign exchange impact was going to be heaviest at the beginning of the year as well as we saw some benefit from our Environmental Solutions business as some cleanup work.

So our plan had anticipated, and we are largely in line with our plan, say a ramp-up, going from Q1 to Q2 and then ratably up thereafter, however, you choose to do it at that point in time. So from that profitability standpoint, the only thing that didn't happen really as expected within the quarter was there were some acute disruptions in some plants that did cause some higher costs, and then we did have some certain accounting entries that we did that I have mentioned at the beginning. Outside of that, the revenues were along with our plans. And the profitability, had it not been for those things, would've been actually slightly ahead of plan. While I pass it over to Bill to kind of talk about what he sees as far as opportunity to be able to ramp-up to the revenue that you were discussing.

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William J. Seward, Stericycle, Inc. - Executive VP & Chief Commercial Officer [22]

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Yes, so thanks, Dan, and Michael, I appreciate the question. I think Dan hit it pretty good about the adjustments for weather and FX being a little bit higher than we anticipated. But I also think I talked earlier with one of the previous questions about some of the things we've done with our reorg. But there are 2 other comments I would add to those comments, so I don't reiterate what I have said previously.

One is, had to do with emphasis we're placing on quality revenue and pricing. We have not yet rolled out what we will soon be rolling out in Q2, a reorganized commercial structure. One of the things I didn't talk about there was that we will be allocating or reallocating talent to this pricing and revenue management discipline.

And we see, based on some testing we did in February and March, some really good impacts happening rather quickly, and we're going to be building that functionality throughout the rest of the year. We think that's a great opportunity for us to take price. In addition to doing an evaluation on not just price, but revenue management, where should we be charging appropriately for the value of the service we provide. That's one thing, we think, is there for us. And the other thing we've got going on is our sales comp plans.

We have revived our sales compensation plans in Q1 as we go forward. So Q1 was static, but Q2 where certain divisions have had their plans change, and we will be looking at other plans throughout the year. The idea there is not to pay our people less, the ideas there is to reward our people for the most optimal outcomes for the company, and we found that there was some room for improvement that. We've made some of those adjustments. They've been well received by the teams where we've made the adjustments, and we think that will also help us lead to better outcomes in the immediate future. Thanks for the question.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [23]

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Okay, so if I take all of that, and then try and repeat it back, what I'm hearing is that based on what you just added as far as improving quality of revenues, what Dan shared with some of the unusual incrementals in 1Q, every single quarter for each of these line items improves, it's not all weighted at the very end of the year?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [24]

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Yes. That's correct, Michael. And it can't be -- Now one of the things that I did say is, it's a -- this is a great team that with the announcement of Janet and Dominic and Cory today, we believe the team is complete. And part of the things we realized is, we knew this year was going to be a ramp. Ramp-up means there is expectation that every quarter we get something not just a hockey stick that it happens all at the end of the year. So I really believe that with some of the advancements that Bill has made in a shorter period of time that we had anticipated, and then you combine that because obviously your question was about revenue. If you combine that on the cost of revenue side then we turn around and we take a look at some of the things that Rich Moore is doing internally from a cost of revenue and operations, and then back to Bill again, some of the things that he is doing to help on the SG&A line. I think all of those things in conjunction certainly don't mean that everything is weighted till fourth quarter, but we are encouraged -- and Michael, remember, we're -- I'm not happy over the fact that we had a couple of things happen from nonrecurring items that put us a little bit below internal targets. But by no means, based on the momentum that I'm seeing, based on the leaders that we have in the team, I absolutely believe that we should be able to certainly recover that and move forward.

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Operator [25]

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

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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First off, Cindy, maybe could you give us an idea of what you're thinking about for the second quarter? I don't know, revenues, EBITDA, EPS, just so we have something to think about? And then maybe you could discuss the bridge that gets you there? I mean, not qualitatively, but in dollars and cents?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [27]

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I'll turn it over to Dan. Dave -- David, thanks for the question and thanks for joining us today. I think overall, it's -- you're getting back to kind of like the guidance question, and it's very difficult. This is the first quarter earnings call that we have where it really is more of a year-on-year comparison as opposed to traditionally where it's always been compared to quarterly guidance. And I guess that the cadence and the rhythm needs to be a little bit different.

And we went through all the evaluations in terms of guidance and with all of the changes in terms of transformation, in terms of executive leaders. We realize that while it's different and it's going to take a different rhythm for everybody. This new practice we are focused on, what are the most meaningful metrics that we think we can get, and that's why we're looking maybe a little bit longer term in terms of our strategy and looking at year-end. We think it's important to be able to give some insights quarterly, and give some color as far some trends. So I don't know, Dan, if you have anything else to comment, but as far as specific numbers, I -- we won't be providing that at this time.

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [28]

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Yes, Dave, I can appreciate it historically we've given to you. I think the best thing that you can do Dave, at least is to look back to our trends from last year you had as kind of an indicator, and maybe take out some of the noise of things like foreign exchange, and C&RS that had some volatility in it, and then what you'll see from there is typically a little bit of seasonality in Q1, stepping up in Q2 and then moving from there. I think that's probably the best way asset that's kind of breaking our own code of trying to give quarterly guidance, and that's the best way to capture the cadence.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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All right. Well, yes, I wasn't really asking for specific guidance, that's not what I was asking, but eventually, based on your annual guidance you're going to have to get back to a quarterly earnings level of say $1 of EPS at some point. Let's talk theoretically here. Can you just bridge us from $0.57 to $1, what are the factors that can get you there?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [30]

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I'll start and I think we are going to be repeating ourselves a little bit. I think Bill talked to it a little bit about some of the sales opportunities. If you just look at the current results, it was probably about 110 basis points of items that were not reoccurring. Those are the items that I said that were accrual driven that goes away, that's not expected to repeat. And then within kind of the operations where we saw some year-over-year comparables, we also had some impact of some plant facilities that were closed, causing us to redirect waste.

So from a cost standpoint, we think that we will incur the third-party and the disposal rates that we we're having to incur in some of the hauling. We also experienced some rental issues due to rainy weather down in Latin America, and that will give behind us. And those are some of the things, from a margin standpoint, that you will not see repeating in Q1 that will get you a step-up more even into the range where we had anticipated. Like I said we were about where we expected for Q1, absent those kind of unexpected items.

And then I think Bill did a good job of kind of highlighting the focus of revenue. Also remember that we talked about seasonality that paper tends to -- there are more Recall -- more purge type events that tend to happen in Q2 and beyond than you typically would see in Q1, and very similar also in the project work related to our hazardous business.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [31]

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David, you asked a great question. And there is one thing I think that needs to be mentioned. We might be taking it for granted in this room, but obviously, internally, what we've got to make sure that we are putting in some spending controls to make sure that we are monitoring.

So I spoke earlier about revenue. We spoke about improving the cost of revenue in terms of some operational things. But then, just straight up, we've got to make sure and we have plans in place to tackle and make some big changes in terms of our staffing and labor spend. We're looking at our outside consultant spend. We've got to rein that back. We're looking at everything -- including travel and discretionary expenses, we're looking at long haul and disposal costs, overtime and operations. The list goes on and I can tell you that everything is on the table right now for us to make sure that we rein in some of the spending. So that hand in hand -- and again, that's part of the plan, but hand-in-hand, that along with everything else is going on in terms of quality of revenue, in terms of any of the growth, and then some of the fleet changes and those types of things. I think all of those things hand in hand, provide us the opportunity to bridge that earnings per share gap.

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Operator [32]

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Your next question comes from the line of Scott Schneeberger with Oppenheimer & Co.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [33]

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Want to jump back on these nonrecurring items because I think $0.08 is sizable, but our take away from commentary is that those absolutely won't repeat. And you've seen a month of second quarter, and I would infer that that's been smooth, but I think there's some unease that, that other unforeseen things could arise. So I guess, the way I want to ask the question is, Dan, you touched on a little bit more some long-haul that was related to facility shutdown. Could you give us some more color on that and confidence that, that won't recur? And then you mentioned rain in Latin America, I mean, it sounds unique, but how comfortable are you that some of these unforeseen are truly unforeseen?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [34]

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Scott, great question. And Maybe we should've mentioned a little bit earlier, it might've helped. When we talked about some key facilities being closed. To give you an example, we have a facility on the West Coast Tacoma that had been closed because of fire. And as a result, for that whole Northwest corner and everything that we bring in and out, we've now had to take on quite a bit of long-haul costs and additional transportation expense that we didn't anticipate that really -- it hurt us more than we would've thought. We're now back up and on and running. So that's an example of that's not going to repeat.

When we take a look at another facility that was on the West Coast that we had closed down and incurred some additional costs, that's coming back online. So we had some 2 key facilities in a very stronghold position for us in terms of running our operations. And our desire to make sure it's our responsibility to take care of our customers and maintain the compliance and the high levels of standard that we have within the business. And we did the right thing, and how we maneuvered our -- how we maneuvered the waste, but it did add cost. And so those are 2 examples that put quite a bit into those nonrecurring that right now we don't see. Dan, any color on any the other issues?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [35]

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Yes, Scott, really this year, I think, there were some that were listed in EPS that were part of our revenue and our cost within the quarter and then there was also specifically EHS and these are things that we feel very confident that wouldn't repeat. We did have some operating costs of about $6 million in the quarter that were related to insufficient accrual estimates at the end of the year. And we did have an over accrual of revenue that again got reversed out that was about $4 million and that has been corrected in Q1.

The combination of that is about $0.08. What I want to point out in that is that this is part of our remediation of material weakness efforts.

And then in 2018, towards the end, we implemented a new purchase order system, which is -- will be integrated as part of our future state ERP system.

This system provided substantial benefits in streamlining and automating our payment process while at the same time, it did highlight opportunities to improve our estimation process. And so we're working on addressing those. So I think, we are pleased to have advanced one of our systems. We're pleased at the precision that it gives us, but it did highlight things that we needed to do to get in line and we made those entries, and those are not expected to repeat.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [36]

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Great. I appreciate that incremental color. But just one more from me. In C&RS, the government shutdown, you indicated that probably had an impact and that's quite logical.

Is the overall -- did you see any improvement in the overall trend and that was what held the quarter back? And it was significant or it's just the trend is still somewhat weak? And are there any -- it was asked earlier, but looks like there's a little bit of cleanup in that before or while you're trying to pursue strategic alternatives. So is there -- are there any execution, morale or otherwise issues there that are worth citing?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [37]

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Yes. Let me touch on the revenue component of it. As we shared with you, it was early in Q2 last year that we began to see an impact, both in our export business, but also we had a decline in minutes that we had come communicated in the Communication Business as well. We're pleased that what we've seen in the Communication Business is that over the last couple of quarters, it has stabilized, if not slightly improved.

The Recall business, certainly, we saw the beginnings of that at the end of last year when the federal government shutdown. And what had been a trend of much more significantly smaller events, we then also were during the government shutdown, saw virtually no news of that's being launched at that point in time. So that caused obviously more of an impact than we -- that based off the trend. As we shared with you, we we're encouraged to see a slight return of volume coming in March. As far as the cleanup, anytime you get new leadership, and especially proven leadership that comes from this industry, they're going to bring a tremendous amount of value, and I don't view it as cleanup as though we had plans for sweep up, but I think it's a new leadership that brings new ideas and innovation and ability to drive efficiencies in the organization. Cory demonstrated that in the past, and I feel very confident that he's going to be able to do that. So this isn't part of a, hey, we need to kind of pretty this thing up, this is, we're going to run the business, and drive the most out of it, and take advantage of the great leadership that joined the company.

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Operator [38]

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Your next question comes from the line of Jeff Silber with BMO Capital Markets.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [39]

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If I were to try to summarize the tone of a lot of the questions here. It seems that there is some questioning from our side whether you can hit the guidance for this year. And I know there's been a lot of numbers thrown around, and maybe we can go back to that slide on Page 13, so we can all set the bar up for everybody.

If we're looking at that slide, you highlighted 1 item that's nonrecurring on that slide. But of the other 3 items that you segmented out there, what should we be kind of adding back to that 1Q '19 base to sort of normalize a run rate going forward?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [40]

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Yes, I'll start on it. So remember, just for our own internal expectations, we're talking -- this is a year-over-year bridge. In the -- we talked about in the $0.08. In the $0.23, that is inclusive of the pricing that we've been discussing with you for a year, that's inclusive of the year-over-year impact that came from some of the benefits that we saw from California fires. It also adversely had the impact of some adverse weather and a day fewer in the quarter. So and then finally, Cindy talked about the operational items that are in there. I only talked about for ones that were specific to us improving our systems and giving us precision. The ones Cindy talked about which were the disruptions and the redirection, that would be in those numbers as well that we wouldn't anticipate being able to repeat and then you saw a tax impact in the quarter year-over-year of about $0.06. Our adjusted tax rate was about $0.33, that's not in line with our guidance and we expect the tax rate to normalize over the course of the year that had to do with valuation allowances that we took in the first quarter. So I don't know if I answered the question Jeff, exactly what you we're looking at but inside that, there is a significant amount of items that were not going to be reoccurring in nature whether it's the tax, nonrecurring items as well as some of the disruptions that we saw due to a few facility closures.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [41]

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Okay, appreciate that. I can follow up off-line. And then also just one other item on the guidance in terms of capital spending. You're still maintaining the $180 million to $200 million for this year, but you had a pretty sizeable number in the first quarter. Were there some items that were front-loaded in the first quarter, should we expect that to ramp down for the rest of the year?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [42]

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Yes. Absolutely, Jeff. We're confirming our guidance the 66 was definitely heavy. If you remember that the end of the call last year, I talked about some CapEx that was incurred AP that was probably about $15 million of what came over into the quarter. We also had Business Transformation expenses as we are ramping up our efforts to prepare for that. And so we anticipated a heavy first quarter due to those things that we talked about and as well as the spending. But we still feel confident that the $180 million to $200 million CapEx target for the year is in line with our expectations.

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Operator [43]

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We have a follow-up question from the line of Michael Hoffman with Stifel

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [44]

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The 2 new people, Cory, where does he come from, and 2 when does Janet start?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [45]

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Great question. Janet starts June 1 and we're very excited. If I can just take a minute just to share a little bit about the CFO search and about getting Janet. We were very impressed with the amount of candidates and the applicants that we had for the position, it was very impressive and it was actually -- I was so impressed going through and dealing with the interviews. But what Janet brings that we are very excited about that you've probably noticed is she was the one that had both CFO and traditional CFO, internal audit all of the financial audits and practices. She also was the CIO and she had an opportunity to really lead her company, their transformation. And when you take a look -- I know Michael, you're very familiar with the 65 different financial systems that we have, that we are trying to get down to a manageable amount. Having known that she is gone through it as a CIO, she's just going to compliment all the efforts that we are actually tackling right now with our own current CIO in terms of our ERP and some of the things that we need to tackle right away. And to be honest, that whole financial piece, the plan to perform, the account to report, all of those types of things are extremely important. So she's going to be instrumental.

And in terms of Cory, Cory just has a tremendous amount of experience, 20 years or more experience in the industry. He is -- he has experience in turning around some other businesses, and also positioning other businesses for divestiture. With his work at STARTEK, he has been at Convergys, and he was even in Xerox/ACS business. So I think he brings a tremendous amount of experience and to be quite honest, I think we've got to get to a point in time where we need our current cost structure in our C&RS business to get to a point where we are reflecting the amount of decline that we've seen in terms of revenue. And we believe that Cory brings the skill set in order to be able to do those type of things.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [46]

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Okay. The second question going back to, if I take the Slide 13 strategy again, and we have to average basically $0.98 a quarter to get to the midpoint of the guidance. How much of that bridge, that $0.41, am I looking at on Page 13? And how much is coming from things like, Bill talked about, quality of revenues and Cory fixing cost issues?

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [47]

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Michael, just to add to that, some of that is seasonality as well. So...

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [48]

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Okay, add seasonality...

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Daniel V. Ginnetti, Stericycle, Inc. - Executive VP & CFO [49]

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And nothing happens on this page. We would expect growth into that. And I'm not going to give you that quarter-to-quarter for all the reasons that we've discussed before. But Q1 is a typical or traditionally lower quarter that ramps up into Q2 in areas like we typically see a higher level of purge volume in our Secure Information Destruction business, we typically see a return in the Environmental Solutions business, especially for any kind of remediation work that is outdoors. And then we typically see -- begin to see other parts of our business kind of driving along. Q2 is typically one of the better quarters. So you have a significant amount there that's just in growth and that as we shared with you, you have $0.08 somewhere in the -- I don't want to go exact, but probably somewhere in $0.10, $0.15 of expenses that we incurred that are absolutely not going to repeat themselves next quarter because they were onetime in nature. So it's a combination of both, and tax with a headwind in the quarter and we don't expect to be operating the full year anywhere near a 33.2% adjusted tax rate. So that's part of it.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [50]

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And Michael, one other thing if I can say is this. I think your question was, in that $0.41 that you referenced, the question is, how do you get there? And I think what we've got to do is, make no mistake about it, we need to hit our plans, the revenue needs to pull through the expectations for our operational improvements on the cost of revenue, and the realignments of some things in SG&A have to hit. And we've got to get to a point that we have got -- we've got different things ramped in as we move from 1 quarter to the next in our internal targets, and we understand that. The executive leadership didn't get together today and all of a sudden we were able to just enact a lot of it, however, we still realize and the team understands, it is about executing to the plan. So to your question, I can't break out what percentage is what, but I can let you know that everything in conjunction needs to hit.

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Operator [51]

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And there are no further questions at this time.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [52]

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All right, so thank you Catherine. And one of the things before we end this call, I'd like to take a moment to recognize Charlie Alutto who is retiring from Stericycle today. As many of know, Charlie spent 30 years in the Medical Waste industry. Fresh out of college he went to work for an emerging Medical Waste company that was later acquired by Stericycle. He has become a recognized leader in the industry and he helped shape its direction, and he lead responses to critical events like the Ebola outbreak and the current Opioid crisis. It was his vision that brought Shred-it into the Stericycle portfolio, which has been a great addition and he's played a role in shaping that industry as well. Although, I have only known Charlie for a few months, I can honestly say, that it is quite obvious he has put so much of his heart and his soul into this organization. I'm honored that Charlie had a role in selecting me to be his successor. I'm very proud to call Charlie a mentor and a friend. So from the thousands of team members across Stericycle, we wish you much success for the next chapter of your life. Charlie, many thanks and all the best. And with that, we hope everyone has a good night. Catharine, this ends the call.

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Operator [53]

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Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.