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Edited Transcript of SRCL earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Stericycle Inc Earnings Call

LAKE FOREST Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Stericycle Inc earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm 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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* David John Manthey

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

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* John Henry Hanna

BofA Merrill Lynch, Research Division - Associate in Equity Research

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Michael Edward Hoffman

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

* Nicholas Charles Spiekhout

William Blair & Company L.L.C., Research Division - Associate

* Scott Andrew Schneeberger

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

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Presentation

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Operator [1]

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Good day, and welcome to the Stericycle Third Quarter 2019 Earnings Conference Call and Webcast. (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. Ms. Koenig, the floor is yours, ma'am.

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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 Third Quarter 2019 Conference 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 our 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 its 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, and it is not possible to predict or provide without unreasonable efforts a reconciliation reflecting the impact of future acquisitions and divestitures, certain litigation, settlements and regulatory compliance matters, business transformation, intangible amortization, operational optimization or certain other items and unanticipated events, which would be included in the reported GAAP results and could be material.

Finally, the prepared comments for today's call corresponds to our third quarter earnings presentation, which is also available on our Investor Relations website. Throughout the call, we may reference 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 I'd like to welcome everyone to today's call. Following just a few months with a new leadership team, I am pleased to report that the organization is beginning to see some of the benefits of the execution on the key priorities I introduced in February and our underlying initiatives. With each passing week, we progress in our overall business transformation, and important milestones are achieved. Our transformation is a multiyear journey, but I am encouraged by the advancements we are making and the momentum we are building.

Summarizing the financial results for the third quarter. Our actions to improve revenue quality enabled us to deliver another quarter of organic revenue growth in our core regulated medical waste and Secure Information destruction businesses. These gains were offset primarily by macroeconomic factors, including lower sorted office paper pricing and foreign exchange rates, and lower recall volumes in Communication and Related Services. From an adjusted EBITDA perspective, we performed in the range of our annualized guidance and demonstrated sequential improvement over the prior quarter. Importantly, we generated strong free cash flow of $77.2 million in the quarter as a result of our actions to improve operations and working capital. This enabled us to decrease net debt by approximately $83 million, our largest quarterly net debt reduction since the third quarter of 2017. Of note, the third quarter results exclude gross proceeds from the 3 divestitures that closed during October. These are all good signs that we are moving the company in the right direction to drive growth, improve profitability and deliver long-term shareholder value. We remain constructively dissatisfied and focus on continually improving.

Before Janet reviews the financial performance in more detail, I'd like to highlight a recent announcement and provide an update on our 5 key priorities. First, I'd like to congratulate Cory White on the expansion of his role to Chief Commercial Officer for Stericycle. After joining in April, Cory quickly made an impact on the communication and related services business by identifying improvements, realigning operations and executing on portfolio rationalization. I'm confident that we will benefit from Cory's 20 years of commercial experience in healthcare and business transformations, as we continue to drive change across the organization. Our former Chief Commercial Officer, Bill Seward, departed Stericycle to rejoin his previous employer in a senior executive role that allows Bill and his family to remain in Atlanta.

As we continue our transformational journey, executing on our 5 key priorities is critical. As a reminder, these priorities are: portfolio rationalization, debt reduction and leverage improvements, quality of revenue, operational cost efficiencies and the ERP implementation.

Focusing on portfolio rationalization, we closed on 3 divestitures this month. Within our Communication and Related Services, we divested the North American Telephone Answering Services business and a small retail pharmaceutical returns business.

In international, we closed on the sale of substantially all of our operations in Mexico. Gross proceeds from these 3 transactions of $38.1 million will be applied to debt reduction in the fourth quarter, modestly improving our debt leverage. I'm encouraged by our portfolio rationalization progress and our efforts here will continue.

As a result of these divestitures, we are adjusting our guidance for full year 2019 to reflect the impact of removing these businesses, which Janet will cover shortly.

As mentioned earlier, we are making progress on our second priority: debt reduction and leverage improvement. We applied our free cash flow towards a net debt reduction of approximately $83 million in the quarter. Cash flow generation is a key component of our debt reduction and leverage improvement initiative, and we remain steadfast in our focus.

Shifting to our third priority, quality of revenue. We continue to see the benefits of our sales organization realignment, redesigned commission plans and the deal review committee, all of which we continue to expand across our sales organization. These efforts resulted in another quarter of organic growth in Regulated Waste and Compliance Services primarily driven by hospital sales performance in the U.S. and internationally. We saw strong organic growth within Secure Information Destruction. The recycling recovery surcharge implemented in August contributed an approximate $3 million benefit in revenue and margin in the quarter, which helped us to offset the continuing decline in SOP pricing.

With the foundational improvements made this year, our commercial organization is building solid momentum to support sustainable growth.

Turning to our fourth priority: operational cost efficiencies. I mentioned on the last call that we are challenging what we do and how we do it. Long term, our goals include transitioning the organization towards centralized decision-making on significant operational and financial matters. A standardized operating model across the organization to optimize processes to drive efficiencies and improve both safety and service and measurable performance goals across all levels of the organization. Early indications of traction include a year-over-year 16% reduction in missed stops in our core businesses, and a reduction of about 30% in our lost workdays.

Finally, let's discuss our fifth priority: the implementation of our ERP system. We remain focused on testing, training and the business readiness efforts. We are quickly approaching the deployment of our global human resources module in the first quarter of next year. Janet will be providing an update on the ERP investment later in this call.

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. As Cindy noted, our results for the quarter reflect the impact of our actions to drive our key initiatives. Total revenues were $833.1 million compared to $854.9 million in Q3 of 2018. Continued organic growth in Secure Information Destruction and Regulated Waste and Compliance Services was offset by the decline in SOP pricing, the impact of foreign exchange rates and lower performance in our communication and related services business, primarily due to fewer recall events. Regulated Waste and Compliance Services revenues were $474.9 million compared to $476.6 million in Q3 2018. Excluding foreign exchange impact, organic growth was 1.6%, slightly higher growth than last quarter, which reflects positive performance in medical waste and healthcare hazardous waste across the hospital portion of our business and internationally.

Secure Information Destruction Services delivered revenues of $222.6 million compared to $227.6 million in Q3 2018. Excluding the impact of foreign exchange rates and acquisitions, organic revenue growth was a negative 2%. When backing out the impact of declining SOP prices, organic revenue growth was a healthy 6.1%. Communication and Related Services revenues were $58.9 million compared to $71.6 million in Q3 2018. This largely reflects fewer recall events and lower revenue of about $3.5 million due to the Q1 2019 divestiture of the U.K. testing business. Manufacturing and Industrial Services revenues were $76.7 million compared to $79.1 million in Q3 2018. This reflects slight organic growth of 0.4%, driven by international performance, which was offset by the impact of foreign exchange rates. GAAP loss from operations in the quarter was $34.5 million compared to income from operations of $68.3 million in the third quarter of last year. Excluding noncash impairment charges of $82.4 million related to the 3 recent divestitures, income from operations was $47.9 million, a decrease of $20.4 million from 2018. The decrease was driven by $20.5 million from SOP pricing and foreign exchange rates and $11 million in higher hazardous waste operating costs, partially offset by $8 million related to a favorable litigation settlement and lower incentive compensation.

GAAP diluted loss per share was $0.65 compared to a diluted earnings per share of $0.20 in the third quarter of last year. The change was largely due to the operational items previously highlighted, a lower effective tax rate on a loss from operations and the absence of gains on share repurchases this quarter as compared to the third quarter of 2018.

GAAP cash flow from operations year-to-date was $201.2 million compared to $89.9 million during the comparable period last year. The prior year included a $295 million small quantity customer class action settlement payment. Excluding the 2018 settlement payment, cash flow from operations decreased $183.7 million due mostly to lower operating performance in 2019 as previously described, and payments for annual incentive compensation in prepaid software.

Capital expenditures year-to-date were $161.2 million compared to $96.9 million last year. 2019 included $70.8 million for the ERP implementation compared to $8.2 million last year. Adjusted EBITDA was $150.5 million compared to $183.9 million in the third quarter of last year. This variance was primarily driven by $20.5 million due to SOP pricing and foreign exchange rates, and $11 million in higher cost in hazardous waste operations. Adjusted EPS was $0.80 compared to $1.03 in the third quarter of 2018.

As illustrated on the bridge on Slide 9. The year-on-year variance in adjusted EPS was due to the following: $0.17 unfavorability from SOP and foreign exchange rates; $0.10 unfavorability from operating costs; $0.03 unfavorability from the absence of gains on share repurchases this quarter compared to 2018; and $0.07 favorability on tax, partially offset by higher interest expense. When normalized for the divestitures, DSO was 63 days compared to 66 days during the second quarter of 2019. The improvement of 3 days resulted from execution of collection initiatives. Our DSO, as reported in Q3 was 61 days, which included the effect of reclassifying receivables as assets held for sale.

We are pleased to report free cash flow of $77.2 million in the quarter, which reflects our actions to generate cash from operations and improved collections. This moved us to free cash flow generation of $40 million year-to-date. Our debt to adjusted EBITDA ratio was 4.41x at the end of the quarter, as defined under the amended debt agreement, which includes the add-back of stock compensation expense. Our third quarter cash flow and leverage ratio excludes any proceeds from the 3 divestitures that closed in October.

I'd now like to spend a few minutes to review our portfolio rationalization efforts and provide an update on our investment in business transformation. As Cindy mentioned earlier, Stericycle closed on 3 divestitures in October. As a result of our intention in the third quarter to divest of these assets, we classified these businesses as assets held for sale, and reported noncash impairment charges of $82.4 million.

Shifting to our business transformation, I'd like to provide an update on our investments. As reflected in our business transformation schedule in our 10-Q, the company has invested $153 million in operating expenditures and $99.7 million in capital expenditures since program inception in the third quarter of 2017. This totals $252.7 million for the program to date, close to the $275 million to $300 million estimate for the total initiative provided by prior leadership in February 2018, early in the program's life. In my ongoing efforts to fully understand the initiative, I have categorized the business transformation expenditures into 2 distinct efforts: one, cost-saving initiatives and business capability investments, such as commercial pricing and project management expertise; and two, the ERP system and its implementation. Since the program's inception, the company has invested approximately $80 million or about half of the reported business transformation operating expenditures to generate savings and build business capabilities. About $20 million of this cost was severance related. This spend was almost all in 2017 and 2018. Any savings generated from the initiatives have been offset by challenges in business results. We anticipate that investments in business capabilities and saving efforts will generally become part of our ongoing operations in 2020.

Regarding the ERP implementation, since inception, we've invested approximately $170 million, comprised of about $70 million in operating and $100 million in capital expenditures, primarily for the North American deployment. We anticipate around another $30 million will be required in the fourth quarter of 2019, split evenly between operating and capital expenditures. We anticipate providing an update on 2020 ERP costs and overall program benefits, factoring in the impact of portfolio rationalization and other business drivers during our next earnings call.

Turning to guidance. We are updating our ranges for the full year 2019 to reflect the impact of removing recent divestitures, which will impact Q4 results. Prior to the divestitures, the company was performing within our guidance ranges. In addition to the divestitures, the revised guidance, as shown on Slide 11, reflects the impact of our estimate for SOP pricing for the fourth quarter and current foreign exchange rates. We expect revenue for the full year 2019 to be in the range of $3.3 billion to $3.335 billion. We expect adjusted EBITDA for the full year to be in the range of $575 million to $595 million. We expect adjusted EPS for the full year to be in the range of $2.55 to $2.70. We expect capital expenditures for the full year to be in the range of $180 million to $200 million due to the timing of payments. Also, today, we are providing you with a full year free cash flow estimate of $50 million, which reflects at least $10 million in the fourth quarter.

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. This quarter, we are beginning to see some impact of our key priorities on our results. And as I mentioned earlier, our transformation is a journey, and our focus is on the long-term, but we are pleased with our progress thus far. There are hundreds, if not thousands of Stericycle team members who supported our efforts around the globe. And to all of them, I send a heartfelt thank you. I'm very proud of your hard work in these times of constant change, as we remain committed to delivering on our priorities. We will build on this momentum as we focus on providing superior service to our customers, while driving long-term value for our shareholders.

We remain constructively dissatisfied, so we'll breathe in this moment, then exhale and get back to work.

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) The first question will come from Scott Schneeberger with Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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I guess, Cindy, could we start on pricing in the RWCS business? You had some success, certainly, in the first half in LQ. If you could give us a progress report or an update on how that's progressing? And then maybe transition to how you're adopting that over to the small quantity customers?

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

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Sure. So very pleased with the results that we're seeing commercially. Just as a reminder, the -- pretty much the foundational work that I referenced, whether it was realigning in the sales force, some of the sales incentive plan reforms in the deal review committee. Most of that has been focused within the regulated waste portion of the business and that revenue stream, and specifically, the training and a good bit of the efforts went into that hospital space first. So it comes to reason that, that would be the place we'd see some of the strongest results right away. Just as an update to what I had shared -- or I believe what was shared with the group, just kind of a comparison, it showed last time we talked about for the first half of '18 comparison to '19, renewal deals, we were giving away about 5% in total revenue. And last quarter, we reported strong double-digit growth this year versus last. And I can tell you, we're continuing to track that and through September. So January through September '18 to '19, still giving away a negative percent, 5% last year. And this year, we've seen even stronger improvement in that double-digit growth. So for us, the story is this: we've trained, we have focused, we have momentum on the initiatives in the hospital space, and right now, Cory White and his team are focused on taking that same type of effort and energy with the training investment and turning that towards the other portions and the other revenue streams within regulated waste. So I think early days in that, but certainly, more to come. Now the deal review committee piece has also been kind of rolled out throughout some of the other business units, whether it's Secure Information Destruction and our Environmental Solutions group, and we're starting to see some traction there as well. So to me, early signs, early days. But it speaks positively in terms of our ability to have some organic growth and get some momentum. So I hope I answered your question.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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It was certainly helpful. I appreciate that. I guess, the appropriate follow-up there is, historically, Stericycle had spoken to some price discounting and had some targets with regard to small quantity customers. Where would you say we are? This was -- this year would be the tail end of that versus the original plan. Just give us an update on how you're looking at that? And how you may consider that going forward?

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

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Sure. And that's a great follow-up, Scott. And here's what I can say. I think one of the things that we understand that's here to stay in terms of any business that's dealing commercially is this concept of discounting. I think historically, or at least in the last several years, discounting has taken on a different meaning within Stericycle based on some of the issues of the past. So I think today, we're starting to morph into -- I don't want to say, but the normalcy of commercial transactions and negotiations, which also includes discount. So what I think we have to say is to kind of to wrap a bow around some of the historical commentary and thoughts, I believe, and what we see is we've trended where we were expected to, and we still are, as such. I think I've gone on record a couple of times saying, there is no actual end date when you can say, okay, on October 9, this was the last day of a previous issue. What I can tell you is, we have positive signs in terms of our ability to change the trajectory of internal goals and the service that we're providing and the value that we're going to continue to give our customers. So, I think, short answer, you're asking, we are on track in terms of where it was and where it had been laid out, and I believe, moving forward, we're going to continue to talk about the discounting. We're going to continue to talk about negotiations with customers, but it is not unique to 1 particular revenue stream within the business. So I'm very encouraged and very pleased by that. And the last piece to that, though, is -- I'll go back to the first portion of my answer. Cory and his team, they are elbow deep, if not further, in terms of revamping our inside sales opportunities. That includes some of the national accounts, some of the small quantity accounts, those types of things. And I think it's early days. But I'm looking very much forward to what his group is going to be able to do with that.

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Operator [6]

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And next, we have Ryan Daniels with William Blair.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [7]

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This is Nick Spiekhout in for Ryan. I guess, just to start off, if you can talk a little bit more about the company exits. I'm assuming those were lower margin businesses? And I guess, what are your criteria for your exits? And are there any more kind of in the bank right now?

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

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Thanks, Nick. And so concerning the portfolio rationalization of the divestitures, here's what we can say. The 3 that we divested, 2 of them were in C&RS, as was mentioned, they all closed in October. The 1 was Mexico. So from an international or a geographical perspective. We've got to continue to make sure that we focus on core versus noncore. And the other key piece that I think that's a factor in terms of what we're looking at is we've made evaluations as where do we think we can strategically grow? Where do we have the greatest opportunities? So you're right. These businesses were not very -- well, it's $38.1 million total in revenues from all 3. So certainly, not big, but that's where we're focused. And we're going to continue to drive the portfolio rationalization as we move forward. And all of those things, I think, go into factors. So that's pretty much where we are.

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [9]

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This is Janet. They tended to be lower-margin businesses as well.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [10]

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Yes. And Nick, if I -- just to make sure that I clarify. The gross revenues on those were about $38.1 million. I want to make sure that, that wasn't thought that it was -- those are the proceeds.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [11]

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Got you. and then I guess, as a follow-up, with kind of like Q3 run rates, like how much of that has come at that $38.1 million is coming out the different business lines? Like have you broken that out at all? Or if I guess, if you provide a little bit more detail there so we can kind of more accurately model out the divestitures going into the future?

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

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So in terms of where they were coming out of the business service lines, it's primarily C&RS and New Mexico is in international, and that is -- is that the question you were asking me?

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [13]

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Yes, yes. So it was like basically like the large majority of that is going to be C&RS?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [14]

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Right. Because 2 of the divestitures were C&RS. One was the Telephone Answering Services businesses that we announced earlier in a discrete 8-K. So that was the largest part if you add up the total of the gross proceeds that we announced.

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

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Yes. And, Nick, a little bit of clarity, too. I think this might be a little bit helpful, just to give you an idea

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We still have in C&RS' expert recall. We talk about that often. And then we've got a patient engagement platform. That's where it's scheduling, it's appointment scheduling, and then it's also kind of post-discharge care, follow-up, those types of things. So about 60% of revenue in C&RS remains, and I'm going to give you directionally, probably about 1/3 of the employees remain. I think about 1,900 full-time equivalents would have gone with the divestitures, so we've got about 1/3 of the FTE still remaining in the business. So I hope that helps in terms of your ability to do any type of modeling.

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [16]

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Great. I appreciate it. And I guess, really quick. I know a couple of quarters ago, you had mentioned recontracting paper prices on your clients. I was just wondering how that's going? Are they pretty receptive to that?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [17]

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So you're asking about the surcharge? And I just want to make sure that I'm hitting it right?

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Nicholas Charles Spiekhout, William Blair & Company L.L.C., Research Division - Associate [18]

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Yes, exactly. Yes, sort of passing a bit of that risk back off to the clients?

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

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Sure. So in terms of the recycling recovery surcharge, let's just frame it. We had a really strong take rate in terms of eligible contracts, and I can tell you, on the eligible contracts, for ones that weren't eligible based on contractual language as those contracts get renewed, that language is automatically being put in there. So for on contracts that were eligible, we had a very strong take rate, in the high-90s, mid-90% from a take rate. So that was terrific. And in terms of what it did for us, our original expectation was that it should bring in -- should recover anywhere from 20% to 25% of the decline. But remember, and for those taking a look at it, it is on our website. It's an index. So it isn't a fixed rate, and it's based off of the risk tables. So we feel pretty strongly with it. I mentioned that we got $3 million in the third quarter that we can pretty much attribute directly to this surcharge. But I think of note, that $3 million was just for August and September, not the full quarter. So as we move forward in the fourth quarter, it's going to give us pretty much a better barometer of a full quarter in terms of the revenue. So I'm hoping that answered your question in terms of being able to see how it went. But it's -- headline is, it's tracking pretty much to plan as we had anticipated and how it was laid out.

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Operator [20]

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And next, we have Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [21]

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Cindy, Janet, can I ask a clarification question? I'm not sure I understood the last answer about what got sold in revenues and EBITDA. Could we be specific about that?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [22]

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Sorry. Yes. No, that was me, and I apologize for that. Total proceeds that we received for the 3 was $38.1 million as it was lined out. That's not total revenues sold nor is it total EBITDA. So I just want to make sure that we've got $38.1 million in the bank that for fourth quarter, we will be applying directly towards our debt reduction. So I hope that clarifies the $38.1 million to a better degree.

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

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And as we also mentioned, we sold about what's remaining in the business, about 60% of C&RS remains, we sold about 40% of C&RS.

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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. So you sold 40%, that's the part I got confused.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [25]

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Yes. Oh, yes. Yes. 60% remains.

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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. So just to frame it, this is a business that's doing about $240 million of revenue, so basically, 40% of $240 million is what's gone?

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

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That's about right.

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

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If I were you, that would probably be how I'd look at it.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [29]

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Okay. I just wanted to make sure I understood that. All right. Back to my questions. Janet, great move on SG&A, both in -- on a GAAP basis and adjusted basis, how does that trend forward?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [30]

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Well, we're encouraged by the cost savings initiatives we're seeing on the SG&A side. One of the bright spots is the alignment of the comp commissions for our sales team and in line with the sales motion that we're trying to do, as you've heard in the last call, and we're seeing some traction on that in SG&A. And then we also have some -- we did have, on a GAAP basis, just so you know, we had a litigation settlement that we mentioned, that was a few million that was a one-timer. But for the most part, it's just gaining tractions across numerous areas where we're trying to save money.

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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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So $240 million is the right number to use quarterly? That's the net number. That's net of depreciation?

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

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So I mean, there's puts and takes going forward. I mean, I built that into the range of the EBITDA, where I think it's going, but SG&A as a continued bright spot is what we're seeing going forward, and we're continuing to manage costs.

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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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Okay. Okay. I want to follow-up on the regulated medical waste in North America, if you strip out the Healthcare Hazardous Waste business or hazardous waste services, is there a clear evidence that the price compression in SQ is nearing an end plus the quality of revenue benefits in LQ? You report that in the table in the Q when we get it, but can you talk about it now?

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

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Yes, I think from a clarity perspective, the point would be, are we looking for continued -- are we to a point where we can say that we believe we are going to see organic growth in the core business of regulated waste? And to me, your question then says, we're going to continue that with hospitals, and are we seeing the end of SQ, which I think Scott wanted to get after on an earlier question as well. I think what we're saying is we have the ability to grow. We're continuing to be focused on it. A lot more training and a lot of other things that we've got to roll out. As you can imagine, the hospital side of sales and negotiation is different than what we do in small quantity or some of the more transactional accounts, but that is all under -- being revised right now. And I think I'm very encouraged and very excited about our opportunities moving forward to see continued organic growth.

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Operator [35]

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And the next question we have will come from Gary Bisbee with Bank of America Merrill Lynch.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [36]

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This is Jay Hanna on the call for Gary this morning. Just sort of going back to the $11 million you pointed out on higher hazardous waste costs, should we assume that this is related to the issues that sort of cropped up last quarter for that business?

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

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Yes, I think -- a fair question, and it's something that we're taking a look at. And if you take a look at the earnings per share bridge, we're looking at $0.10 in terms of the effect on earnings per share, which is down from previous quarters, certainly not an apples-to-apples comparison as they're being compared to prior years. But we are focused on it. Let me just give you a little color in that area in terms of a couple of things that we're doing. So I think on a positive note, and I'm really pleased about this, if you take a look at -- included in that is safety and service improvements, and I think to me, it all starts with safety. We've got to get a stable workforce that's out on the road everyday. 30% reduction in lost work days helps us towards that goal, so early days there. As a direct result of that, we've missed, if you will. We've had a 16% improvement in terms of missed pickups, that's all positive. And I think more to come, as an example, I've mentioned and given some color towards a concept of Inside AM or inside time before drivers punch on the clock, and then they're in a facility before their wheels kind of cross the threshold out to driving towards their first stop. Right now, we're running at about anywhere from 40 to 42 minutes of inside AM time, and we're looking to cut that in half. We're making some traction towards it, but obviously not enough yet. But I think the bigger buckets that we had highlighted were some third-party costs, especially in some business lines where we don't control our full destiny, if you will. And in those business lines, here's what we've done. We probably have about -- or in that business line, we probably have about 7 -- I want to say, maybe 7 or 8 that are large third-party vendors with whom we engage in big contracts. And what we've seen is, during the third quarter, we've had an opportunity to -- I said, we were going to renegotiate many of those contracts. We've gotten 3 of them done and signed. So when you're working an awful lot back and forth, and you get them signed, we will see future benefit of that. I'm pleased to say, on those contracts, the 3 out of the 7 or 8 that we've renegotiated, we should see anywhere from, let's say, a 7% to 10% improvement in terms of our costs. But again, that's not the total. But we are systematically driving down costs in buckets where we can. It's a very big bucket for us. And I can tell you, being an operator at heart. We are not pleased with where we are and continuing to drive those savings. And we've got to get much, much better in that category.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [38]

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Okay. And then my follow-up is just on the M&I business. Looks like there was some pretty nice sequential improvement from last quarter. Could you just give us an update on how volumes are trending there? And your expectations from here?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [39]

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Yes. I think up to -- in a good bit of that M&I business, there's a couple of things at play here. Volume's not really been the problem. But as we have mentioned, not having a handle on costs as much as we should, specifically in that particular business unit where we don't control our own destiny to the greatest degree, we've had to get that in line. And so that, to me, is more -- not necessarily a volume up or a volume down-type story. It's more of we're getting -- we've gotten a little better handle in terms of the costs and our focus. So that's got to continue, because that's not near where we need it to be. So I think that's pretty much more of the story, I would say, as we've not really seen a volume problem.

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Operator [40]

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The next question we'll have will come from David Manthey of Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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In your monologue, Cindy, you mentioned this redesigned commission plan. I was wondering if you could help us understand when that went in? And then Janet mentioned this $30 million in OpEx for the ERP in the fourth quarter. I'm just trying to put all this in the context of the big reduction sequentially in SG&A, it looks like it came down by about $20 million. And I'm just trying to understand here too, is that a normal run rate going forward? Was there anything unusual in 3Q? Is there something that's going to step-up in 4Q? Just trying to put some context around the SG&A in the third quarter?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [42]

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Yes. No, great questions, David. I'll tell you what, I'll take the first portion with reference to the sales incentive plan redesign, and then Janet and I can both kind of tag team that -- the $30 million OpEx question that you had for fourth quarter. So on the redesign, we -- our previous Chief Commercial Officer, Bill Seward, who was on this call many times, talking about redesigning sales commission. It was pretty much in -- he started, I think we mentioned that we had over 60 different sales incentive plans and comp plans. That's pretty complex, and there's a lot to untangle there. So we started to focus on 1 bite of that elephant, and that focus, I think, we made -- most of those changes would have gone into effect sometime around in March, and that was mostly in the group of sales folks that handled our hospital portion, some of the bigger customers that we have in the regulated waste. So we're on a full-blown overhaul of all of the sales incentive plans. And making some progress on more and more of them. Believe that by end of year, going into first quarter of next year, we should have probably close to 50% to 60% of them changed and more realigned where it benefits both the field sales folks, inside sales people as well as the top line growth for Stericycle. So we really want -- the focus has been to incent better behaviors. And I believe that early days are showing some strong traction for us in terms of where we've rolled it out. And one other piece with that is, it isn't just changing the comp plans, another key component of that has been a good focus on training. So we're retraining and focusing people on value, value selling and more negotiation skills and that, I think, has to go hand-in-hand with any type of revision that we're making. So that's a little bit of color on redesigning those plans, and we have more to roll out as we move forward. And I think I'll be able to give a little bit more color to that as we roll them out, get the training done, and we can talk about it with some anecdotes. So Janet, any comments or anything you'd like to add on the $30 million OpEx expense for ERP or the SG&A, $20 million?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [43]

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Yes. So let me clarify that $30 million. So that was in the context of the business transformation, which is the table in the 10-Q which is adjusted out of earnings. But I get a lot of questions on it. So this would not be hitting above the line in adjusted EBITDA, first. Secondly, it's split evenly between capital and operating expense. So it's only about $15 million of operating expenditures that would be below the line, and that is not -- that is consistent, I should say, with our normal run rate for putting the ERP in. So I was just providing some clarity as we aggregate numbers for the ERP, where we're heading for the end of the year. Did that answer your question?

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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Yes, to some extent. The second part here, just quickly on the divestitures just so we know how to model this thing. Can you break down and give us the sales and EBITDA for the international and U.S. pieces?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [45]

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So we haven't really released those externally. I would say the vast majority of it was the C&RS. And we sold about 40% of the C&RS revenue line and retained about 60%. And Mexico was a small part of our international operations. And they were low-margin businesses.

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Operator [46]

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And next, we have Kevin Steinke of Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [47]

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Just wanted to make sure on the change in revenue guidance and the other guidance items. Is that all related to the divestitures? Or is there also -- are you also factoring in something for changes in the exchange rates and sort of -- sorted office paper pricing as well?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [48]

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Yes. So about half of the revenue change is due to the divestitures, and a good chunk is due to FX. When I look at the range, I also hedge the range based on the lumpiness that we tend to see in the recall business, and we continue to see. But predominantly, it's FX and divestiture, and divestiture is about half of that. When I look at -- on an EBITDA basis, the divestitures, about 1/3 of that, again, reflecting that these are lower-margin businesses.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [49]

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Okay, great. That's helpful. And then Janet, with your discussion of what has been spent so far on the business transformation and that target of $275 million to $300 million that was given under the prior leadership team, is the implication that that prior target is too low?

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Janet H. Zelenka, Stericycle, Inc. - Executive VP & CFO [50]

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Yes. So the target was split into 2 parts: and the first part was on the cost saving and business capability, and that's mostly prior investment. There are some that were in 2017, mostly severance-related expenses of future utility investments. And that was roughly on track. And I was trying to parse that out, because I get a lot of confused question, is the $275 million to $300 million all ERP? And the answer is no. So the ERP number is actually a subset of that. And then when you look at that number, as part of it, and you add the other, we are coming to the $300 million mark. And so I wanted to give some clarification on the split between the 2 parts of that $275 million to $300 million prior estimate, and give an indication that we are trending towards that number. And we are looking deeply into 2020 to see will that -- will the additional costs will be in 2020. Recognize that 2020 is a deployment year. The vast majority, if not all of the development is behind us. We are in testing, and we are getting in readiness training. So any development, if you will, is really just fixes on any defects -- remaining defects we have and we are deep in the final data cleansing to get the system up and running. So all those costs are behind us. So now we're really focusing mostly on development costs. And then we may have some additional requirements as we look internationally and beyond, because the primary deployment for next year is North America.

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [51]

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And Kevin, if I -- I'll give just a little color in terms of where we are from the ERP. We're on now our end-to-end mock training #4. Just to put things in perspective, all around North America, we probably have about 1,000 team members engaged, not all of them here in Chicago. But we're doing a lot of frontline testing. So we have about 1,000 team members that are actively engaged. I think in this mock, we found about another 9 -- I think the numbers are about 987 defects, and about 660 of those closed. The good news is, when you get to kind of a mock 4, thinking you start at mock 1, we had 0 critical defects. Whereas I can remember in mock 1, having critical defects was -- we had quite a few of those as the team worked through. So in terms of how are we looking and how does the actual ERP and system design, look? I think we're progressing pretty well, and I'm pleased with the efforts and all the energy that the team has put in.

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Operator [52]

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And next, we have Jeff Silber of BMO.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [53]

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I guess this question is somewhat related to the ERP system. But I know the issue in the past from a management reporting perspective or a management information perspective was the lack of timely information. Has that improved at all since you've taken over? Or do we still have to wait for the ERP implementation for that to happen?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [54]

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Jeff, I think -- and let me just make -- let me ask it back to you to see if I'm clear. What -- really, what you're talking about is, have we developed any real-time like kind of data capabilities? Is that kind of what you're asking?

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [55]

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Real-time would be wonderful, but even closer to real-time than whaere you have then?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [56]

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Yes, you're right. Real-time would be wonderful. What I will tell you this, is that the first answer is no. We've not gotten anything from a system's perspective that's afforded us any greater advancement of visibility. But what I -- here's what I can tell you, the internal processes that have started with capital expenditures that's gone right down through procurement, anything else from a fiscal discipline perspective, while we may not have timely or real-time data or easier capabilities to see what's in a pipeline, we've improved our processes the old-fashioned way where we actually have to get up out of our chairs, bring people together and put Excel spreadsheets together, evaluate them and add them so that we are developing our own way of getting some better timely visibility. That's, I think, attributable to -- if I take a look at the efforts of Janet, if I look combined with Dominic Culotta, our Chief Engineer; Rich Moore and Dan Ginnetti, leading both North America and International, we have a lot more proactive discussion, albeit manual, but still trying to put some discipline to areas where we know technology will just enhance that.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [57]

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Okay, that's great. So I guess, beginning next year, we should be -- or you should be able to have even greater improvements once the system is all up and running?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [58]

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That is -- that's the headline, Jeff. And if -- our responsibility, right now, it's ERP deployment readiness, okay. That's great. But we are all chomping at the bit for us to say that we've got our businesses kind of lined up and turned on, all defects done, and we're moving forward. I will say this, while that's a goal, we've got to make sure -- the 1 group that I'm very concerned about through all of this is our customer base. And sometimes, when we start talking about the numbers, that voice gets missed, and it's not missed on me or anybody else in this executive leadership team or our team members. Our goal is, I can't wait until we get timely data, so we can improve cost efficiencies. But we've got to make sure that everything that we're doing is keeping a seamless and making this as painless as possible on our loyal customers. And I will say, on the customers, that we've yet to win their hearts. But I know Cory and his team are going to go after that organic growth as well. So I just want to make sure that we all take a look at that. It's not just about the numbers, it's about making sure that our customers are taken care of, and that we provide them with appropriate reports and data and things that can help them in their businesses.

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Operator [59]

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Well, at this time, we're showing no further questions. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Ms. Cindy Miller for any closing remarks. Ma'am?

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Cindy J. Miller, Stericycle, Inc. - President, CEO & Director [60]

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Sure. And thank you, Mike. Greatly appreciate that. And just a thank you to folks who have tuned in today and for those who have continued interest in Stericycle, and we look forward to our next time to chat. Thank you.

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Operator [61]

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And we thank you, ma'am, and to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may disconnect your lines, everyone. Thank you again. Take care, and have a great day.