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Edited Transcript of SRCL earnings conference call or presentation 27-Feb-20 2:00pm GMT

Q4 2019 Stericycle Inc Earnings Call

LAKE FOREST Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Stericycle Inc earnings conference call or presentation Thursday, February 27, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cindy J. Miller

Stericycle, Inc. - President, CEO & Director

* Janet H. Zelenka

Stericycle, Inc. - Executive VP & CFO

* Jennifer Koenig

Stericycle, Inc. - VP of Corporate Communications & IR

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Conference Call Participants

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* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* John Henry Hanna

BofA Merrill Lynch, Research Division - Associate in Equity Research

* John Peter Bonner Mazzoni

Jefferies LLC, Research Division - Equity Associate

* Lawrence Soren Keusch

Raymond James & Associates, Inc., Research Division - MD

* Michael Edward Hoffman

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

* Scott Andrew Schneeberger

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

* Sean Wilfred Dodge

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Stericycle Fourth Quarter 2019 Earnings Conference call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Ms. Jennifer Koenig, Vice President of Corporate Communications and Investor Relations. Please go ahead.

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

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Hello, and thank you for joining Stericycle's Fourth Quarter 2019 Earnings Call. On the call today will be Cindy Miller, Chief Executive Officer; and Janet Zelenka, Chief Financial 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 our 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 our filings with the U.S. Securities and Exchange Commission.

Our past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statement other than in accordance with legal and regulatory obligations.

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 schedules 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 is 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, intangible amortization, noncash impairments, uncertain U.S. cash tax matters or certain other items and unanticipated events, which would be included in reported GAAP results and could be material.

Finally, the prepared comments for today's call correspond to our fourth quarter earnings presentation, which is also available on our Investor Relations website. Throughout the call, we may refer to a specific slide 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, everyone, to today's call. I am pleased to share with you our financial results for the fourth quarter, which reflect improvements in the business since the first half of the year. Our new leadership team has been in place since June. And we are beginning to see some positive change as our team focuses on key priority execution.

As a quick summary of the fourth quarter results, our actions to improve revenue quality enabled us to deliver the third consecutive quarter of organic revenue growth in our core regulated medical waste business and the highest growth rate we've seen in over 3 years.

From an adjusted EBITDA perspective, we generated sequential improvement over the prior quarter and delivered results in the range of our annualized guidance. We also delivered free cash flow results above our guidance. Overall, we believe our 2019 results demonstrate that we continue to move in the right direction to drive growth, improve profitability and deliver long-term shareholder value.

Before I turn the call over to Janet for a more detailed financial review, I'd like to provide an update on the progress we have made against our 5 key priorities. As a reminder, these priorities are: portfolio rationalization, debt reduction and leverage improvement, quality of revenue, operational cost efficiencies and the ERP implementation.

Starting with the portfolio rationalization. On February 7, we announced a definitive agreement to sell our Domestic Environmental Solutions business, excluding the health care hazardous waste services and unused consumer pharmaceutical take-back services to Harsco Corporation for $462.5 million in cash, subject to customary adjustments. This announcement demonstrates important progress in our transformation as we improve margins, reduce debt to enhance our balance sheet flexibility and drive long-term shareholder value. Stericycle will continue to provide hazardous waste services to our health care customers, while Harsco will provide us transportation and disposal services under a long-term service agreement. We will also retain our portfolio of solutions for unused consumer pharmaceutical take-back services, which we believe will continue to grow for many years into the future.

The health care hazardous waste and consumer pharmaceutical take-back services that will remain with Stericycle, represent approximately $100 million in annual revenue. As we noted in our release announcing the transaction, we expect it to close in the first quarter of 2020, subject to regulatory approval.

The sale of the Domestic Environmental Solutions business is a continuation of a very busy year in terms of portfolio rationalization. In December, we completed the sale of our operations in Chile to an affiliate of Veolia for approximately $30.7 million in cash. Gross proceeds were applied to net debt reduction in the fourth quarter, modestly improving our debt leverage. This transaction marks the fifth divestiture executed by Stericycle during 2019, with combined gross proceeds of approximately $83.7 million.

As a reminder, Stericycle also sold a texting business based in the U.K., a telephone answering service business in North America, a pharmaceutical returns business and substantially all of our operations in Mexico. We believe our divestiture activity over the last year demonstrates our commitment to reduce debt and to focus on service lines that are growing and profitable, are vertically integrated in collection and treatment, and are strategic to our regulated waste and secure information destruction categories. We will continue to focus on evaluating and optimizing our portfolio as appropriate.

Turning to our progress on strengthening our balance sheet. We generated $13.8 million of free cash flow in the quarter, enabling us to continue to reduce debt and improve our leverage. We applied our free cash flow and divestiture proceeds towards a net debt reduction of approximately $71.4 million in the quarter. Our fourth quarter results exclude any leverage benefit expected to be realized from the pending divestiture of the Domestic Environmental Solutions business. We estimate net proceeds to be approximately $430 million, which factor in customary adjustments. We intend to use the net proceeds to pay down outstanding debt.

Cash flow generation remains a key component of our debt reduction and leverage improvement initiative, and we will continue our focus on driving free cash flow in 2020. In addition to the progress we have made in reducing our debt levels, we also announced an amendment to our credit facility, which will provide us additional balance sheet flexibility, as Janet will describe in more detail.

Shifting to our third priority, quality of revenue. We continue to see the benefits of many commercial initiatives implemented through 2019. These efforts enabled us to generate organic revenue growth of 2% in Regulated Waste and Compliance Services, as shown on Slide 5, the highest growth rate in over 3 years. Organic revenue growth within Secure Information Destruction was 1.8%. With the foundational improvements made this year, our commercial organization is building solid momentum to support sustainable growth.

As we look to the future, we are evolving our commercial and operational thinking. Going forward, we will focus on 3 distinct customer groups, hospitals and hospital networks, national accounts and independent businesses. These customer groups span both medical waste and secure information destruction. This new focus will enable us to improve the differentiation of our service offering, expand our flexibility and better meet our customer needs as we advance our commercial strategy to more aggressively pursue organic growth and greater revenue quality.

Our focus on revenue quality includes supporting our customers with a differentiated brand and value proposition. With the global focus on the coronavirus over the last few months, Stericycle has demonstrated its leadership, expertise and competitive advantage in the best interest of our health care customers in the communities we serve. Our teams around the globe have been working with regulatory agencies at federal and local levels as well as with many of the world's leading health care institutions to ensure readiness for the proper packaging, collection and treatment of coronavirus-related waste to reduce risk of further contamination. Once again, as the world faces a global health crisis, Stericycle is in a unique position to demonstrate the strength of our brand, the expertise of our people and the depth of our relationships.

Turning to our fourth priority, operational cost efficiencies. We continue to make progress towards the centralization of decision-making, standardization of our operations to drive efficiencies and improvements in safety and service. Focusing briefly on safety, we finished 2019 with a 22% reduction in lost time days and a 13% reduction in automobile accident claims. These reductions not only reflect improvements in our operating efficiency but are clear signs that we are driving a culture of accountability deep into the business. In addition to these safety improvements, we've also begun the process of implementing master operating plans to drive standardization across our collection and treatment facilities. These detailed plans have been developed collaboratively between industrial engineering and field operations. We are in the early stages of implementing these MOPs, but preliminary results are encouraging.

In the first 14 facilities, the team has been able to make staffing adjustments that reduce headcount on average by 27% as well as fleet reductions by approximately 8%. Over the next 2 to 3 years, we will implement new MLPs across our approximately 300 facilities in North America. As we become more efficient and productive in our operations, we expect this to improve our cost profile.

And finally, for our fifth priority, the implementation of our ERP system. We marked a significant milestone in January, as we successfully launched our new global human capital management system. This system now serves as our master record for employee data for more than 19,500 team members around the globe, enabling disciplined fiscal responsibility in our workforce planning. Additionally, we now have automated paperless workflows for employee data maintenance, including hiring and terminations, recruiting, team member onboarding, annual performance management and merit planning as well as streamlined interfaces to other applications, such as system-user access and payroll.

In summary, this initial launch of our ERP is a critical step in our journey to become a more disciplined, goal-driven organization with clearly defined performance measures. We are on track for the remaining and staged ERP implementation of the commercial, operational and financial systems in the U.S. and Canada over the course of 2020.

The bottom line is that we have made considerable progress on our key initiatives outlined less than a year ago, and we are confident that we are on the right track to drive continued improvement in value going forward.

I'll now turn the call over to Janet to review our financial results.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [4]

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Thank you, Cindy. Before I review our fourth quarter financial results, I'm pleased to share that we ended 2019 in line with our revised full year guidance across all metrics, as illustrated on Slide 12. As Cindy has mentioned in the past, we are focused on driving accountability across the organization, and our performance, aligning with guidance is an indication that we are making progress towards setting and achieving financial goals.

Now to the fourth quarter results. Total revenues were $799.9 million compared to $852.7 million in the fourth quarter of 2018. The decline was due to divestitures, which reduced revenues by $36.2 million and macroeconomic factors of SOP pricing and foreign exchange rates, which reduced revenues by $19.3 million and $9 million, respectively.

Organic revenues in Regulated Waste and Compliance Services and Secure Information Destruction continued to show favorable growth trends, which were offset by declines in Manufacturing and Industrial and Communication and Related Services.

As noted on Slide 5, Regulated Waste and Compliance Services revenues were $473.7 million compared to $474.8 million in the fourth quarter of 2018. Excluding foreign exchange impact and divestitures, organic growth in Regulated Waste and Compliance Services was 2% and reflects the continued positive performance in medical waste, driven by growth in the hospital portion of our business. Additionally, we are encouraged by the stabilization of customer loss discounting trends among small health care practices.

Secure Information Destruction Services delivered revenues of $217.9 million compared to $233.5 million in the fourth quarter of 2018. Excluding the impact of SOP pricing, foreign exchange impact and acquisitions, organic revenue growth was 1.8%.

Communication and Related Services revenues were $35.9 million compared to $68.3 million in the fourth quarter of 2018. Excluding the impact of divestitures, which accounted for approximately $31.1 million in lower revenues and foreign exchange impact, organic revenue declined 2%. As a reminder, we divested the texting business based in the U.K. during the first quarter and the telephone answering services business and the pharmaceutical returns business in the fourth quarter. We continue to operate the expert solutions recall business and communication services, focused on hospital outreach to patients.

Manufacturing and Industrial Services revenues were $72.4 million compared to $76.1 million in the fourth quarter of 2018. Excluding foreign exchange impact and divestitures, organic revenue declined 0.9%.

GAAP loss from operations in quarter was $198.5 million compared to loss from operations of $345.9 million in the fourth quarter of last year. This includes noncash impairment charges and divestiture losses of $251.8 million in 2019 and $392 million in 2018.

Normalized income from operations, excluding the impact of noncash impairment charges and divestiture losses, was $53.3 million in the fourth quarter of 2019 and $46.1 million in the comparable 2018 period, an increase of $7.2 million. This improvement was a result of lower SG&A expenses, primarily related to reduced consulting and professional fees for litigation, compliance and material weakness remediation of $36.1 million. This was partially offset by the SOP pricing impact of $19.3 million and higher costs related to hazardous waste operations of $9.8 million. The aggregate impact of all divestitures in 2019, excluding losses and gains on sales of divestitures had a minimal effect on loss from operations.

GAAP diluted loss per share was $2.41 compared to diluted loss per share of $3.51 in the fourth quarter of last year. The change reflects the noncash impairment charges, divestiture losses and the operational items previously highlighted as well as a lower effective tax rate of 3.9% on loss from operations compared to the 15.1% rate in the fourth quarter of 2018.

GAAP cash flow from operations for the full year was $248 million compared to $165.7 million for 2018. In 2018, cash flow from operations was reduced by the small quantity customer class action settlement payment of $295 million. Excluding the settlement payment, cash flow from operations in 2019 decreased primarily due to lower operating performance as previously highlighted and timing of payments for certain litigation matters, incentive compensation and ERP-related prepaid software.

Capital expenditures in 2019 were $194.2 million compared to $130.8 million in 2018, primarily driven by planned ERP implementation investment. Adjusted EBITDA was $152.8 million compared to $180.5 million in the fourth quarter 2018. The decrease was largely driven by SOP pricing and higher costs related to hazardous waste operations, as mentioned earlier.

Adjusted diluted earnings per share was $0.72 compared to $1.03 in the fourth quarter of 2018. As illustrated on the bridge on Slide 9, the year-on-year variance in adjusted EPS was due to the following: $0.16 unfavorability from SOP pricing, $0.08 unfavorability from cost increases in hazardous waste operations and $0.07 unfavorability from a higher effective tax rate, partially offset by lower interest expense.

Our fourth quarter DSO was reported with 60 days. When excluding the divestiture revenues from the DSO calculation, DSO was 62 days compared to 63 days during the third quarter of 2019. We generated free cash flow of $13.8 million in the fourth quarter, exceeding our quarterly guidance. This reflects our actions to generate cash from operations and improved collections, which resulted in free cash flow of $53.8 million for the year.

At the end of the fourth quarter, under our credit agreement, our adjusted debt-to-EBITDA leverage ratio was 4.45. We filed an 8-K today announcing an amendment to our credit facility. Under the terms of this new secured credit facility amendment, Stericycle's adjusted debt-to-EBITDA leverage ratio maximum has been increased to 5.0 effective December 31, 2019, with a step down to 4.5 in the first quarter of 2022. The completion of the Domestic Environmental Solutions divestiture will trigger a step down of the leverage ratio maximum to 4.75 at close and to 4.25 in the first quarter of 2022. Additionally, our existing ability to add back a maximum of $200 million of defined expenses to EBITDA for the applicable 12-month period will continue through December 31, 2020, reducing to $100 million through December 31, 2021, after which there will be no further addbacks.

We proactively sought this amendment to minimize any potential distraction regarding the leverage covenant during a year of significant transformation for our company. However, we remain committed to reducing debt and improving our debt leverage. We paid down approximately $100 million in debt during 2019.

Turning to our internal control environment, we have made significant progress over the year, but there is more work to be done. We observed through testing results that our core business process controls, excluding the Domestic Environmental Solutions business, are designed appropriately. And notwithstanding our IT-related control deficiencies, we anticipate that we would have achieved operating effectiveness. For IT, we made strides in improving our IT-related controls, but we were hindered by the disparate nature of our legacy technology environment. We expect to benefit from the implementation of our future state ERP in North America and the global HR system that we launched in January, which are important parts of the IT remediation effort in 2020.

Before we move on to guidance for 2020, I'd like to take a moment to review the financial profile of our ERP system. There are 3 components to our IT financials. The first is the cost-to-finish development, testing and deployment of the new ERP. From inception through the end of 2019, Stericycle has invested $199 million in the development of the ERP, which is in line with the estimate provided in our earnings call last quarter. This included about $109 million in capital expenditures and about $90 million adjusted out of ongoing operating expenses.

2020, we anticipate spending approximately $85 million to $115 million to complete the ERP development, testing and deployment for North America, which will roughly be split equally between cash paid for capital expenditures and operating costs that will be adjusted out of ongoing operating expenses.

The second component is the incremental cost to run our IT system. We anticipate spending more in operational IT costs in 2020 over 2019 due to 2 factors: first, we will continue to incur the ongoing cost to run our North American legacy systems for all of 2020, since we are staging the deployment of the new ERP throughout the year; and second, we will also incur the cost of running the new platform, which we estimate to be $35 million to $45 million in 2020, as we go live in staggered deployments. Our current projections indicate that the annualized incremental cost to run our new ERP platform beyond 2020 will range between $50 million to $60 million.

The third component is our international system portfolio. As mentioned earlier, we did deploy the HR system globally in January. We are now building our implementation plan for the commercial, operational and financial systems for our international businesses, which will leverage the same ERP we are using in North America. Please note we anticipate that we will continue to incur annual costs of about $25 million to $35 million to maintain the legacy suite of applications also used by our international businesses until their system portfolio is replaced. I will provide an update on our analysis and planning for international once finalized. Also of note, for 2020, we are focused on maintaining our targets for the year, which will trigger incentive compensation. This results in an incremental $30 million in expenses year-over-year.

Turning to expectations for 2020. We anticipate several moving parts between our adjusted and unadjusted items due to the transitional year that we faced with the implementation of the ERP. Therefore, we are using revenue and free cash flow as the cornerstones of our full year guidance, which is provided on Slide 13.

Our guidance is based on currently known foreign exchange rates and estimates for SOP pricing, which we have held at a stable level in our guidance modeling for 2020. We have based our outlook on the full business and only factored in the impact of divestitures that have already closed. We expect organic revenue for the full year 2020 to be in the range of $3.22 billion to $3.3 billion. This reflects an organic revenue growth of approximately 1% to 3.5%. We expect free cash flow for the full year 2020 to be in the range of $150 million to $200 million. Our free cash flow guidance includes an estimated: one, $40 million to $60 million in ERP operating expenditures; and two, about $20 million to $30 million of anticipated divestiture and control environment improvement costs, both of which are adjusted out of ongoing expenses on a non-GAAP basis on the P&L. We estimate capital expenditures for the full year to be in the range of $175 million to $195 million, which includes $45 million to $55 million of cash for the ERP capital expenditures.

Of note, our current modeling indicates that our free cash flow and GAAP operating income will be directionally aligned, excluding any unforeseen impacts.

Our outlook includes the Environmental Solutions business on a full year basis, as the transaction has not yet closed. Of note, the 2019 revenues associated with the Domestic Environmental Solutions business included in the transaction with Harsco represent all of the $238.3 million of U.S. Manufacturing and Industrial Services revenue and all but about $100 million of the $321.3 million of U.S. Hazardous Waste Services revenue under Regulated Waste and Compliance services.

Remodeled SOP paper prices is stable. Year-over-year impact is approximately a $30 million reduction to both revenue and margin. The foreign exchange impact year-over-year, based on the most current rates, is modeled to be minimal. We also anticipate improving the gross margin rate. However, this improvement is expected to be offset by the increased SG&A expenses mentioned earlier. We expect depreciation and amortization in total to be relatively flat to prior year.

Finally, as I indicated on the last call, I would like to provide some perspective on the long-range outlook for our business. We have been modeling our long-term plan, considering all our transformation initiatives including our ERP implementation. While the business continues to evaluate the full benefits that the ERP will unlock, based on what we have modeled so far, we are encouraged as we look forward over the next 5 years. We expect organic revenues to grow at a compounded annual rate of 3% to 5%. We expect free cash flow generation to increase to at least $400 million annually, primarily driven by margin expansion. We expect to continue to pay down our debt and improve our leverage and anticipate a leverage ratio below 3x within the next 2 to 3 years. It is important to note that this 5-year modeling is based on the business we have today and does not consider the impact of the divestiture of the Domestic Environmental Solutions business or any other potential divestitures or acquisitions. It also assumes a stable SOP pricing environment.

Before I turn back over to Cindy, I also want to take a moment to highlight the fact that Board of Directors has recently approved changes to Stericycle's 2020 executive compensation plans, as we have outlined on Slide 14 in our presentation deck. These changes follow discussions with our shareholders and are designed to reflect best practices as we align compensation with performance. With that in mind, the new incentive plans are designed to reward executives for progress against the key initiatives we have outlined in the near term as well as profitability and share price performance over the longer term.

I will now turn the call back to Cindy.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [5]

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Thank you, Janet. Earlier this month, we gathered more than 200 of our top leaders to set expectations for the year in the paint division for this critical time of transformation. As I shared with the team, 2020 will be filled with changes and challenges, but it will also be a year of tremendous opportunities. With a disciplined and steadfast focus on our key priorities, I am confident we are positioned for success. I believe Stericycle is an amazing organization with an unmatched infrastructure, a strong differentiated brand and a team of industry experts ready to unlock our potential.

With that, operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Hamzah Mazari of Jefferies.

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John Peter Bonner Mazzoni, Jefferies LLC, Research Division - Equity Associate [2]

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This is John Mazzoni filling in for Hamzah. Could you comment more on the noncore asset sales? And how we should be thinking about the further balance sheet deleveraging?

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

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So on the noncore asset sales have been factored in the ones we've done so far, obviously, into our thinking of guidance. And going forward, except for the ESOL business, which we announced, we have not factored that into our guidance. We have given you some indication of the revenue components on a historical basis that I think will help you get a perspective of where we're going there.

And then in terms of deleveraging, you can see that we're applying proceeds from the Environmental Solutions business of about net proceeds of $430 million. So when it closes, it will be applied to reduce debt. And we've also taken the ones that we've done in 2019 and applied them to reduce debt as well.

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John Peter Bonner Mazzoni, Jefferies LLC, Research Division - Equity Associate [4]

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Great. I have one more question, and then I'll turn it over. Could you just talk about the execution risk in terms of a successful ERP implementation going forward?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [5]

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Sure. So we have built -- the execution risk ranges in terms of any unforeseen development costs or anything as we continue to finalize it, built into the ranges that we gave. The execution risk is the normal execution risk when you take an ERP and apply it to your business model, we have been very thoughtful about a hypercare model that we need to do that, and we've been very thoughtful about staggering the deployment of the ERP, starting with 1 region, assessing and then moving to the next region as we start thinking about it with the Shred-it business, which is actually on an older SAP environment that has closer to the new SAP environment. So we have taken a lot of efforts to de-risk this. But again, when you're taking every manual process that you have, which are significant and moving them into a new system, you, of course, have the opportunity for some disruption, and we are looking at all those customer touch points and making sure we have them covered.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [6]

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Yes. I think, John, great question. The one thing I will say when you're -- that's why we believe we've got to keep a steadfast focused on revenue, and we've got to keep a cost profile focus from a free cash flow. So no matter through the operational, the commercial and the financial systems' changes and the overhauls that we're making, we can't afford any disruption to customers, certainly any that's going to interrupt any revenue streams, and we've got to stay really buckled down to the budgets and the things that we have. So we're hopeful and certainly planning from a revenue and a free cash flow perspective that at least in this particular year of transition, focusing on those will help us make sure that we're still keeping our eye on the things that are important, yet affording ourselves the opportunity to really get knee-deep into a successful implementation.

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Operator [7]

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Our next question comes from Larry Keusch of Raymond James.

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Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [8]

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Wanted to -- as you gave some of the long-range plan guidance, I wanted to just touch on the organic growth of 3% to 5% on a compounded basis. Could you speak a little bit, Cindy, to how you take the business and drive it up to that 3% to 5%? And as you think about that long-range plan, what business units are in there that gets you to that range of growth?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [9]

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Yes, I think -- thanks for the question, Larry. I think one of the most exciting parts about the business going forward is really the development and the growth and the morphing. We are changing from a company that really farmed its acquired revenue to a company that is now going to go out and hunt new revenue and really expand individual sales territories and that type of thing. We've taken many initiatives in order to be able to kind of position the company for that, if you will, everything from -- I think right now, we're about 3/4 of the way through changing our compensation plans, so that everybody is aligned in the field, and we are driving and promoting growth. The DRC expansion, DRC being our deal review committee, started that early on. I know we talked about it, got built early momentum from that in really the hospital space. We're now expanding that over the hospital and hospital networks. We're putting it in the nationals, and we're putting it in the independent practices and businesses. So for us, really using that -- as well as internationally, we're seeing uplift there across all the core business -- both core businesses. And then I think Cory and his team are really focused on better aligning resources, as opposed to such an internal look of where we classified customers based on volume that they gave us. That was really an insular internal view, and it really didn't match where we want to go in terms of growth. Because for us right now, we've got to make sure that we are engaged more with customers so that we can be more collaborative, take on more of a partnership perspective, be more flexible, be more responsible. So I think as we morph the company to growth, organic growth as opposed to just kind of cross-selling or upselling, I think those are the things across both segments of the business where we believe we should see that type of organic growth. And early signs and early days, kind of, lead us to that direction. And I think that's probably the most exciting thing for us as we look forward to this longer-range view.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [10]

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I just want to add that, that forward-looking organic growth is assuming a stable paper pricing. And I think that's an important part to call out. I did mention that in my remarks. And specifically on the modeling, it's on the business we have today -- it's all the businesses we have today. But as you'll look at the core businesses being most of what we have today, those are the key drivers of this growth going forward.

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Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [11]

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Okay, perfect. And then just quickly one question on the sorted office paper pricing. Can you help us think about sort of how important China is in terms of those recycling revenues that accrue to you guys? And how do we think about pricing here with coronavirus? Could that actually push pricing down here, down for a period of time?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [12]

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Larry, that's a great question. I will tell you, it almost got to the point where even tweets in Twitter accounts, we're putting pressure on SOP pricing. When you take a look at the decline from 2018 to 2019, I believe 2019, we -- it ended the year somewhere around $90, and it was quite a difference. I think the average throughout 2018 was somewhere around $190 a ton. And I think -- that was 2018. 2019 was around $132, all-in. So higher at the beginning of the year, much, much worse at the end of the year. What we've done is -- January was at $88, February is around $93 right now. We've taken a stable number around somewhere in that range. We have modeled it going forward.

And in terms of the pressures on China, what was interesting to us is, we use third-party kind of wholesalers and resellers that we trade with and a small portion of our specific paper goes to China. However, anything hurting that commodity affects the whole market. So it isn't necessarily what commodities do we exchange? It's -- we exchange with third-party vendors who then also trade with China, and that's where, whether we do 2 slices of paper or we do all of it, that's the effect that we have.

Coronavirus, I think, as you can see right now, coronavirus in the market just even in the last couple of days has had a great effect on every business. So I think that's still -- it's certainly not -- that's for smarter people than me to predict. But I think, right now, we're just looking at it continuing to be a stable value, and we'll give more updates as anything as the dynamics change, if you will.

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Operator [13]

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Our next question comes from Michael Hoffman of Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [14]

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If I could just comment on SOP to remind everybody, the vast majority of it is used to make tissue paper. And if we're having a really bad cold and flu season, that's going to be good for SOP?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [15]

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Good point, Michael.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [16]

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So I have a question that has a free cash flow and the comp plan tied together. If I take your free cash flow guidance, which I have to admit this sort of dumb country boy is not sure I'm looking at this right. Is the $150 million to $200 million an adjusted number? Or is it -- or it's a clean run rate number, and then I get to add back all those things that are in the footnote?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [17]

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So it includes everything in the footnote. So it includes -- unlike how we've used an adjusted number in the past, where we've excluded the business transformation costs, we've excluded the cost for remediate material weaknesses, for example, and excluded cost of any divestiture. We have included that in our free cash flow. The only thing we did not predict was legal costs, which you have seen have come down significantly on a year-over-year basis. So I view that as a very inclusive free cash flow number. So as such...

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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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Which means I get to say the run rate is higher than that once all those things go away?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [19]

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Yes.

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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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Okay. All right.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [21]

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Well. And yes. So if you're saying things that used to be the cash-related items that used to hit in the adjusted EBITDA table below the line are all included, except for prediction of legal cost essentially in that free cash flow number.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [22]

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Okay. So just to repeat, make sure I understand the answer correctly, $150 million to $200 million isn't a run rate number. It's the actual that's going to reflect all the cash in and out of the business. And when although those onetime things are related to doing this ERP go away, that all gets be back -- added back for run rate?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [23]

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Yes. That's correct.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [24]

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Okay. Right. So the other cool thing is, you gave us your CapEx number, which is slightly down at the midpoint $10 million, but you're up on cash flow from ops. If I go to CapEx by 16%, so what's the driver of that? That's really cool.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [25]

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Yes. So if you look at overall cash flow from us, we have reduced a lot of SG&A expenses from a cash basis that used to hit below the line. Those are a significant part of it. We also did not hit, for the most part, our targeted annual incentive plan numbers. So you do see a modest cash benefit in this year because we reward for performance. So those are the key drivers. But we've really taken -- we're improving margin expansion. We're getting generation from all those SG&A costs that are coming down significantly.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [26]

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Okay. And then my follow-up is on growth. In medical waste, if you pull out the hazardous waste business, what was the growth? And document destruction, it's been running at 4% to 6% organic ex paper prices for a long time. So what happened in the fourth quarter?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [27]

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So why don't you take, Cindy, the Shred-it, as you look at it overall because I think we're very bullish on that, and I don't know anything really happened in the fourth quarter.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [28]

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Yes, I think -- couple of things, I think, here, Michael, are coming in play. We consistently say that we don't have seasonality and those types of things, which we don't. However, when holidays fall in particular days of the week, especially in a holiday-rich time like the fourth quarter, when you do an awful lot of transactional business, like we do in Secure Information Destruction, of course, there's a potential for businesses to be closed and it's not to be front of mind. And for us, we're not that good at forecasting and planning to have gotten down to those nuances, which is just one more thing that I think I'm extremely excited about when we start talking about this ERP implementation and really getting commercial data. I think we'll get that much better in terms of what is that actually happening from a data analytical perspective, we'll be able to study customer buying habits better. So I think we'll get better from a predictor there. But I'm still very positive about Secure Information Destruction, especially with -- we are early days. And by early days, I want to say, maybe within the last month or 2, in terms of Cory, really revamping this whole growth of patch of land, realigning resources and a good bit of that is also in the Secure Information Destruction group with the Shred-it sales, and I think more to come there in terms of some goodness. So I'm still very positive about it.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [29]

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And I'm not sure I understood your ESOL question, Michael. Could you...

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [30]

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Oh, yes, the first point in my note.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [31]

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Well, so regulated medical waste includes hazardous waste solutions. If I pull hazardous waste solutions out, that $321 million on an annualized basis, what's the underlying growth rate of medical waste, excluding the benefit of hazardous waste solutions?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [32]

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Yes. So I don't have that number off the top of my head, but I think in our disaggregated revenue table that we'll have, we'll be able to piece that together for you in the 10-K. So we'll be able to get that number for you.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [33]

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When is the K coming?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [34]

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The K is coming tomorrow.

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Operator [35]

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Our next question comes from Sean Dodge of RBC Capital Markets.

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Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [36]

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Maybe turning back to the portfolio rationalization. Cindy, you talked about the significant progress you've made so far on that. So congratulations are certainly in order there. Can you give us a sense of where you stand now with those efforts? Have you sold the majority of what you were looking to? And then can you give us any idea of what's left in terms of revenue or EBITDA? And any thoughts on time lines for any additional divestitures?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [37]

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Sean, great question. And thanks, I can remember being on calls where we hadn't really gotten any traction on this and then to have closed -- come on strong and closed 5 deals in 2019 and then to at least have announced a signed purchase agreement with Harsco, certainly not closed yet; we're working towards that. That's all very exciting for us. But a couple of things I think we need to highlight. So I've always said core versus noncore, and I've always included geographies. Even where we do core, maybe we shouldn't be in some of those regions, and maybe there are some countries where we would have a profitable opportunity. So just think about this, though, those 5 that we divested of last year, we're still divesting of them, and we're still in some of those businesses under transitional service agreements. So we've got a team that's working on making sure that's successful. Once the Harsco deal closes, that is another. We've got to make sure that kind of all hands are on deck in this very large opportunity for us. And we're working very closely with our partners at Harsco, very pleased with how that's -- how we're working together early days. So we're going to be really focused on a big shift and lift in terms of a transition with that deal. But I will tell you this, we are -- we will still pursue anywhere we see an opportunity to optimize our portfolio where we see appropriate. I don't have an idea at this moment exactly how much that would be. But I certainly can tell you, as we've mentioned before, in some of the business units that we have that we haven't completely divested of. We are still very focused and looking for the best opportunities that we can. So all I can say is more to come.

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Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [38]

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Okay. That's helpful. And then maybe one on guidance. Janet, with this being the first set of annual targets that you're involved with developing, can you walk us through, maybe just high level, your philosophy or how you approached setting these numbers? And then to the extent you can't -- how this year in the development of those this year differs than the way those targets that you communicate externally were developed in the past?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [39]

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Sure. I would be happy to share. So I believe that cash flow is the primary driver of value in a business like this, so I'd start there. I tell my entire team, the cash flow statement is my favorite financial statement. So we modeled that rigorously. And that is a difference from what has happened in the past where the focus of the business was on adjusted EBITDA modeling. I also believe that a business is driven all the way down to the bottom line and operating income, including D&A because once upon a time they were cash. And I think the business needed more discipline in managing the cash input that went into the DNA because you should be generating a return on the D&A. And you can see that in the incentive compensation design where we're moving to EBIT from EBITDA. So those are some of the philosophies. So we ended up with much more robust and detailed modeling at a lower level, down into the -- getting to the bottom of the P&L. And we also initiated a very collaborative process not only on the annual plan, with the long-range planning exercise, with all the functions who got engaged because this is a team effort to understand how we can drive this business forward.

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Operator [40]

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Our next question comes from Scott Schneeberger of Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [41]

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I guess, first question, just on the -- on what's being sold to Harsco. Could you just talk about why, which pieces you sold and which you didn't? And why I know it has something to do with Harsco, but what was the Stericycle philosophy of -- was it consideration for strong packs, was it consideration for the pharmaceutical take-back services? Just a little background there?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [42]

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So I'll just map it for you from a financial basis, and I'll hand it over to Cindy for the strategic reasons of what we kept and what we sold. So first of all, if you think about the business as we reported, we sold all the U.S. Manufacturing and Industrial businesses as we report that as a service line revenue category, and we sold all but about $100 million of what is reported under Regulated Waste and Compliance Services as hazardous waste services. So most of the business is being sold. What we kept is related to health care, and I'll turn it over to Cindy on our thoughts of why we kept that.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [43]

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Yes.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [44]

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With our partnership, we're going to have with Harsco, too.

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

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No. Thanks, Scott. We wanted to partner with the company. We believe, as we've seen that we're not as vertically integrated in the -- on the hazardous waste side as we needed to be, hence, the decision for the divestiture. But I think moving forward, we wanted to partner with a company that the health care piece, that's really our bailiwick. We are in the hospital space. We are with the procurement c-suite, and we are helping them make the appropriate decisions to make the back of the hospital as efficient as they're trying to make the front of the hospital. And that partnership and that engagement is very important to us. We wanted to make sure that we partnered with a company that had that same type of commercial focus on customers, and we believe that we found that match in our partners at Harsco which we're very happy about. So holding on to that, we'll still sit. We will still offer bundled solutions. We will still be collaborative with that hospital network. And then the engagement that we're going to have with the same level of collaboration and partnership with Harsco in terms of the actual pickup, the transportation, the hauling, the disposal. And we believe they are well positioned and eager to partner and be in that space. So that was important in terms of us continuing to be able to grow that revenue stream and to sell those services. So that was the one piece there.

And then the pieces that we're keeping, whether it's kiosk or it's any of the consumer pharmaceutical kind of seal and sand products and mailback that we're getting, we see tremendous opportunity with that, as we continue to see health care really be focused more on consumer actions and consumer decisions. So I think early days in that in terms of the commercial strategy around it. Cory and his team have that as one of their projects as we, along with the many others right now, as we shift our whole commercial group with this ERP, but I think we're going to see some bright spots there. Too early to actually define, but there's just something in terms of the expertise that we have that we think we're going to be able to continue to grow years into the future. So that's pretty much, I think, the mentality of where we were.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [46]

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Great. Appreciate that. And then for my follow-up, it's somewhat of a 2-parter. It is -- with regard to the free cash flow guidance, specifically for 2020. What are, in your mind, kind of the key swing factors that you can discern at this time for high end and low end? And then the second part of the question is, Janet, could you please address the cadence of that free cash flow over the course of the year?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [47]

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Well, so the swing factors are the ranges that I gave you regarding the ERP, whether it be the development of it and the final training and testing, which I gave a range on, that is an underlying range under the free cash flow guidance. And also the capital range that I gave you under the ERP that is also feeding into the range on the free cash flow guidance. And I would say the -- those ranges manifest themselves more as the year goes on, and we are moving in to finish and get to the final stages of deployment and then move on to operating the system. So I gave you subranges under free cash flow that I think can give you some indication of where the changes could be.

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Operator [48]

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Our next question comes from Jeff Silber of BMO Capital Markets.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [49]

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Just wanted to focus on the ERP implementation. Forgive me, the -- you had mentioned you rolled out the global human capital management module. And it's going to be, I guess, a staged modular rollout of the other commercial, operational, financial. Was it always planned to be that way? Or were the other modules expected to be rolling out earlier this year?

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

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Great question, Jeff. It has always been planned that way. One of the things that we wanted to do, as you can imagine, the HR implementation for us -- for any time you want to become a performance measured and focused culture and you want to drive accountability, you've got to get a system where you can have paperless flow, you're not on Excel spreadsheets, where folks can really understand here are my goals and here's how I've tracked against it quarter after quarter. So we were very excited over the fact that this was a global rollout, and we actually turned it on January 6, and we did not have a hitch. So that also put a little wind in our sales in terms of -- obviously, the more complex operational, commercial and financial implementations that we're doing from a stage perspective.

Janet talked about in the prior question about what are the key swings from a free cash flow perspective and those are the risks in the business, which is why we are staging it throughout the year, starting in certain regions, going to make our few mistakes that everybody has with an ERP and then being able to come back and make those corrections so that we don't repeat them as we move forward, our biggest focus this year. And it's all -- we do tactical stuff. But I think we need to make sure that we constantly keep our customers in mind, that we make sure that any of these changes are as seamless as possible to them and what we can continue to monitor and grow the revenue and keep our eyes on it as we should. Certainly, the financial systems for getting invoices in and out and doing the things we need to do, so I think that's our focus in what we wanted to do and kind of tackle this year, which is why we didn't do a 'one switch, flip it all on' because we felt that there would be way too much of risk.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [51]

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Yes, I wanted to note on the HR system, the ability to do workforce planning has been, honestly, to track everybody we had in this company was on spreadsheets and they have that in a system. Think about the power that is -- it's hard for companies to believe that switch, but that's where we are this year and having true visibility in a cascading system of everyone who works here, where they work down to a detailed level, which is feeding into some of those productivity improvements that Cindy has been referring to.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [52]

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Okay. That's helpful. If I could -- and my follow-up, focus on the RWCS business. It was great to see the 2% organic growth. Is it possible to break that out between volume and pricing? And what do you think we should be expecting for those 2 components in 2020?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [53]

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Thanks. I think I'll take first stab, and if Janet has any color that she'd like to add. I think as we take a look from a volume perspective, we are -- anytime you're growing organically, you're increasing your volume. And as we realign our resources, and we really try to expand, if you will, a patch of land of responsibility for a sales resource, we are going to see and we should see some volume increases. But I think what you bring -- the second part of the question from a pricing perspective, that's where the deal review committee, that's where the change in comp incentive plans and the focus that we have on rewarding quality of revenue growth, I think that comes with not always just an assumption that it's a price discussion. As we get more engaged with customers from a collaborative and a partnership perspective, we end up having more discussion about the value that we bring. And I think as we look forward to that, that's where I think we're going to continue to see some steady and strong of what we think are solid growth levels as we look out from a long-range perspective. And again, I couldn't be any more bullish on our commercial group and how well they're doing. And as long as I'm giving a plug, I can tell you, I'm very, very bullish on our ERP opportunities. I think that Janet's leadership team and from a finance perspective, I think we're really doing great things there. Cory is doing a terrific job, just overhauling the commercial group. And I've got to give a shout out to Rich Moore and to Dominic Culotta with engineering and operations. I hope it is -- one of the most exciting things I've talked about was the 27% reduction in headcount in just putting in master operating plans in 14 of the facilities, a reduction in 8% of the fleet. And remember, these weren't our biggest facilities. So for me, just more to come there in terms of all of the things that the foundation of the ERP is going to afford us the opportunity to get that much better.

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Operator [54]

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Our next question comes from Gary Bisbee of Bank of America.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [55]

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This is actually Jay Hanna on for Gary today. I just wanted to go back to the ERP very quickly. Just given the rollout, how it's -- everything is going according to plan. Are those longer-term cost savings? The range you gave us previously, is that -- that's still very much in play?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [56]

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So are you referring to, I think, guidance that was given out in early 2018. Is that what you're referring to, just to be clear?

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [57]

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That's correct. Yes.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [58]

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Yes. So if you think about what our opportunity is for the investment we're doing in the business on the ERP and the other transformation, it is the long-range plan in totality. It is such a profound impact on the business because that is what we're looking for. And I will tell you, we're building that plan at a detailed level. So as we identify opportunities, we are in a continuous mold to layer in into our future projections of the business. So more to come on that. But that is how we're thinking about the business case, if you will, for everything we're doing in this business. And as I mentioned in my remarks, I don't think the business is a full understanding of all the capabilities that we are generating through the system. But as we identify it and envision forward and come up with a good financial estimate of what they are, we have layered those into our future long-range planning exercise and we will continue to do that as we mature our thinking and understand what we are unlocking here.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [59]

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And I think, Jay, just one more point, as you look at that. The business -- that plan was laid out and probably devised somewhere between -- during 2017. And just right now, at the fourth quarter of 2019, we were 5 divestitures out of that plan and now another major potential divestiture and in closing of a big portion of a business that was also built into that particular model from whenever I think it was released, maybe February of 2018, somewhere around in there. So those -- so what Janet has said is we've taken what we believe is the opportunity and some of the gains we're going to make. So we've kind of put those to this point in our long-range plan, but Janet will tell you that she and I are 2 folks that -- as we unlock additional opportunity, we'll be the first ones to make sure that we drive that into the plan and bring those things forward as we unnerve them.

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Operator [60]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Cindy Miller for any closing remarks.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [61]

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Thank you, Andrea. So for everyone that was listening to this call, I would just like to say that we really appreciate your time. We appreciate your interest in Stericycle, and we also appreciate your shared excitement in our future. So thank you very much.

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Operator [62]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.