Stericycle Inc
NASDAQ:SRCL
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Stericycle Inc
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Good day, and my name is Ellen and I will be your conference operator. At this time, I would like to welcome everyone to the Stericycle Fourth Quarter 2018 Earnings Call. [Operator Instructions]
I would now like to turn the call over to Jennifer Koenig. Ms. Koenig is the Vice President of Corporate, Communications and Investor Relations. Ms. Koenig, Please go ahead.
Hello, and thank you for joining Stericycle’s Fourth Quarter 2018 Earnings Call. Joining on the call today are Charlie Alutto, Chief Executive Officer; Dan Ginnetti, Chief Financial Officer; and Cindy Miller, President and Chief Operating Officer.
The discussion today includes forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause the actual results to differ are discussed in the Safe Harbor statement in our earnings press release and in greater detail within the Risk Factors in Stericycle's filings with the U.S. Securities and Exchange Commission.
Past performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate future results or trends. To the extent permitted under applicable law, we make no commitment to disclose any subsequent revision to forward-looking statements.
On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable GAAP measures, please refer to the schedule in our press release, which can be found on Stericycle's Investor Relations website.
Please note that we provide guidance on an adjusted non-GAAP basis because it's not possible to predict or provide without unreasonable effort a reconciliation reflecting the impact of future acquisitions, divestitures, certain litigations, settlements and regulatory compliance matters, business transformation, intangible amortization, operational optimization or certain other items and unanticipated events, which could 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 will be referencing specific slides from the presentation.
With that, I'll turn the call over to Charlie Alutto.
Thank you, Jennifer. Welcome everyone to our fourth quarter 2018 Earnings Conference Call. Before we discuss our fourth quarter results, I want to take a moment to discuss our leadership transition that we announced today.
I'm pleased to share that Cindy Miller, our President and COO, will become the next President and CEO of Stericycle effective May 2. She has also been appointed to the Board of Directors effective today. Cindy's appointment follows my decision to retire after a wonderful 22-year career at Stericycle.
Given the strong foundation we've built, I'm confident that now is the right time to transition to the next generation of leadership. Cindy's appointment as CEO is the culmination of a thoughtful succession planning process undertaken by the Board, and the Board and I are delighted to have an executive of Cindy's caliber to take the range.
Since she joined Stericycle this past October, Cindy has been an instrumental voice and leader throughout the organization. Stericycle will be in great hands with Cindy at the helm, given her proven track record during her 30-year career at UPS; her substantial experience in Business Transformation and change management as well as her significant influence since joining the Company.
We also announced today that Dan Ginnetti, our CFO, will transition to become Executive Vice President of International following the appointment of a new CFO. Dan's in-depth understanding of Stericycle's core businesses and broad experience in the Company's operations position him well to take on this important role.
In addition to today's appointments, Stericycle has significantly strengthened the depth and experience of leadership team through several recent appointments, which Cindy will highlight shortly.
In addition to these important changes in our leadership team, we have announced that two of our directors, Mark Miller and Tom Brown, have made the decision after many years of distinguished service that they will be retiring from the Board at the Annual Shareholder Meeting in May.
Mark served as CEO from 1992 to 2013 and as Chairman from 2008 to 2018, and played an instrumental role in Stericycle's growth. Tom has served on the Board since 2008. The last two years as Chair of the Compensation Committee. On behalf of the Board, I'd like to thank both Mark and Tom for their many years of service and dedication to Stericycle.
An executive search is underway to identify potential new members for the Board with experience relevant to our business. As I transition out of the CEO role, I'm excited for Cindy, Dan and the leadership team and the entire organization for what is ahead.
When I joined the company in 1997, Stericycle was a multi-regional medical waste company, and I've seen, firsthand, the tremendous growth of our organization. 22 years later, Stericycle has a market-leading position in multiple waste and compliance service lines.
This success was due to the dedication of our team members who worked hard every day to deliver for our customers. I know what this great organization is capable of, and I'm committed to continue to work with Cindy, the team and the Board to support a smooth transition over the coming months.
With that, let's turn to the quarter. We are pleased to report that both our core businesses, Regulated Waste and Compliance Services and Secure Information Destruction met or exceeded our revenue expectations in the quarter.
Most notably, this was the strongest quarterly revenue growth for Secure Information Destruction since we acquired the business in 2015. This strong performance was offset by C&RS, which continued to experience smaller Recall events. Overall, our fourth quarter adjusted EBITDA and adjusted EPS were in line with our expectations.
Over the course of 2018, Stericycle delivered on our financial commitments for the global Business Transformation as summarized on Slide 9.
We continue to pursue strategic alternatives for C&RS, and today announced that we closed on the divestiture of the UK-based texting business, which was part of C&RS. We are also pursuing strategic alternatives for other non-core service lines and geographies, and we will continue to provide updates as appropriate. And now, I'll turn the call over to Cindy.
Thank you, Charlie. I appreciate the warm welcome I've received since joining Stericycle five months ago. I am honored to be taking on the role of Chief Executive Officer in early May, during the year, in which we celebrate our 30th anniversary.
Stericycle is an incredible company, given the breadth of our capabilities, our leadership position in core markets, our vast infrastructure, and the thousands of dedicated team members who work hard to serve our customers every day.
We have a remarkably strong foundation and, in turn, significant opportunity ahead. The key question is, how do we best capitalize on that foundation to realize Stericycle's fullest potential. Our Business Transformation plan, starting with the successful implementation of the ERP, does just that.
The ERP platform will replace our decentralized and disparate systems, standardize our business processes and eliminate resource redundancies.
But getting the ERP implementation right is key, and that's why 2019 is a critical year for us as we continue to build, test and train phases of our ERP in anticipation of implementation in the U.S. and Canada throughout 2020.
Successful implementation of the ERP system will deliver clear benefits that will drive long-term profitability and growth for Stericycle.
The benefits include: Access to more robust and sophisticated realtime data, which will enable us to improve our daily decision-making; strategic planning and forecasting; improvements to our customers experience, which will make it easier to do business with us; and provide the foundation for future growth; and greater efficiencies from streamlined processes and the elimination of redundancies, driving substantial cost savings.
Central to the effective rollout of our ERP program is engaging with those Stericycle employees who will utilize it every day on the frontlines with our customers. To that end, the leadership team and I will be meeting with team members across the country over the coming weeks to provide an update on our Business Transformation, the benefits it will bring, and prepare them for the coming change.
To best position the company for success, we are evolving our leadership team to make sure we have fresh perspectives and strong expertise in place to successfully execute on our Business Transformation.
As Charlie referenced earlier, Dan Ginnetti will become effective Vice President of international. With over 10 years of successful North American operations experience and 6 years as CFO, Dan is uniquely qualified to lead our international efforts. His broad experience and deep familiarity with Stericycle's global businesses, combined with his financial acumen, will enable us to successfully grow our international business in key global markets.
We look forward to his continuing contributions to Stericycle when he takes on his new role. An executive search is currently underway for a new Chief Financial Officer, and Dan will remain in his role until the new CFO is appointed to ensure a seamless transition.
In addition, we've recently added three new executives on the team. Bill Seward joined the executive team as Chief Commercial Officer. A newly created position at Stericycle as we work to advance strategic planning and accelerate global growth.
Bill joins us with more than 28 years of commercial expertise, including experience growing multibillion-dollar service line. In his role, Bill will be focused on strategy, business development, brand management and sales execution.
Rich Moore joins Stericycle as Executive Vice President North America. Rich has a proven track record and 30 years experience, implementing strategic vision and productivity improvements as well as driving P&L results. He will be responsible for driving operational efficiencies across North America.
And also, Joe Reuter joined as Chief People Officer. Joe has nearly 30 years in the human resources field, including international assignments and management of global human resources support. He brings a comprehensive set of skills and experiences, including implementation of human capital processes and technology, and will play a critical role in advancing the company's human resource management and safety culture during the company's Business Transformation.
Like me, Joe, Rich and Bill have joined Stericycle at an important time. Together, with the rest of the leadership team, we are working to evolve and transform Stericycle for the future.
With the addition of these new executives and the continued dedication and hard work of our team members, we have a deep bench of talent to support Stericycle as we execute to our plan. I'll now turn the call over to Dan to discuss the financial results.
Thanks, Cindy, and Charlie, for the kind words. It is been an honor to serve as Chief Financial Officer of Stericycle, and I'm excited to take on this new international opportunity.
I'll now provide a breakdown of our financial results for the quarter. As reflected on Slide 12, total revenues for the fourth quarter were $852.7 million, a decrease of 4% from Q4 2017. Strength in Secure Information Destruction was offset by the expected lower revenues in both C&RS Recall and SQ Medical Waste. Compared to the same quarter last year, acquisitions contributed $6.8 million to revenues.
Divestitures reduced revenues by $10.4 million and foreign exchange reduced revenues by $21.4 million. Revenues for each of the service lines in the fourth quarter were as follows: Regulated Waste and Compliance Services, $474.8 million; Secure Information Destruction Services, $233.5 million; Communication and Related Services, $68.3 million; and Manufacturing and Industrial Services, $76.1 million.
This quarter, we closed 2 tuck-in acquisitions, both were Secure Information Destruction businesses in the United States. These acquisitions are expected to contribute annualized revenues of $2.2 million. Our capital allocation strategy continues to be primarily focused on debt reduction given our current leverage.
Regulated Waste and Compliance Services revenues were in line with our expectations. Although, headwinds continue within SQ, we believe the initiatives introduced in 2018, which focused on strengthening our brand and relationships with SQ customers are helping mitigate the impact, and we are encouraged by the trends we see. Secure Information Destruction Services exceeded our expectations. Organic revenue growth in the quarter was 13.8% or 7.1% when adjusted for recycled paper pricing.
This growth was driven by conversion of the unvended market in U.S. and in Europe. As mentioned, Communication and Related Services revenues declined due to the continuation of smaller Recall events. The federal government shut down also adversely impacted December results. Manufacturing and Industrial Service organic revenues when excluding the impact of foreign exchange and divestitures of the U.K. Hazardous Waste business, were down 1.5% compared to the same quarter last year.
Looking at Slide 14, GAAP loss per share was $3.51 due to noncash goodwill impairments related to C&RS and Latin America plus other adjusting items. Adjusted EPS was $1.03 versus our midpoint guidance of $0.94.
As you will see on Slide 15, the bridge between guidance and actual results includes the following: We had $0.07 of tax favorability in Q4, not expected to repeat in 2019; $0.03 from depreciation; $0.03 from operational improvements; and offset by $0.04 from lower Recall activity in C&RS.
As reported, cash flow from operations was $165.7 million in the year, which includes the third quarter payment of the SQ settlement. CapEx for the year was $130.8 million or 3.8% of revenues, which came in lower than anticipated due to the timing of CapEx spend as certain payments will carry into 2019.
Free cash flow was $34.9 million for the year, which, again, includes the third quarter payment of the SQ settlement.
In Q4, we repaid approximately $60 million in debt. Our debt to adjusted EBITDA ratio, under the amended debt agreement, was 3.64 at the end of the quarter. The unused portion of the revolver was $553.6 million at the end of the fourth quarter. Our DSO was 63 days. I will now turn the call back to Cindy who will provide 2019 full-year guidance for Stericycle.
Thanks, Dan. Recently, the Stericycle leadership team reevaluated its guidance practices, now the company will provide key performance indicators that can be more accurately predicted, enhancing the quality of our guidance estimates. We considered a variety of factors, including the company's long-term strategy; ongoing business transformation; portfolio rationalization efforts; planned ERP implementation and leadership changes. We believe the metrics selected most appropriately reflect our measurement of the company's financial performance.
Quarter-to-quarter, we will continue to provide actual revenue results for our four service lines, as well as qualitative insights on how various scenarios may impact future earnings so that stakeholders have appropriate information with which to measure our progress.
With that, our 2019 guidance is shown on Slide 20. We expect revenue for the full-year 2019 to be in the range of $3.41 to $3.53 billion, using current foreign exchange rates. Adjusted EBITDA margin is expected to be in the range of 19.4% to 20.1%. We expect adjusted earnings per share will be in the range of $3.32 to $3.72 using a share count of 90.7 million shares.
This reflects an adjusted tax rate of approximately 25.5% to 26.5%. We expect CapEx to be between $180 million and $200 million. This includes our investments in the business transformation for 2019, as well as the timing of CapEx spend and related payments carried over from 2018.
Now let me add a little bit more color on the guidance, and I'll start with the nonoperational drivers impacting 2019. In 2018, we recorded $0.19 from share repurchases and had favorability from a onetime depreciation entry. Neither of these items will repeat in 2019. We have a higher interest expense in 2019 due to the December amendment to our debt covenants, plus anticipated fed rate increases. Next, our adjusted tax rate will be in the range of 25.5% to 26.5%, which is higher than our ending 2018 adjusted tax rate.
And lastly, the impact from foreign exchange will serve as a headwind as we use current foreign exchange rates. Now let's turn to the operational components in our outlook. Our C&RS business in the first half of 2019 included some larger recall events, while the second half of the year included only smaller events, which continues to be the trend going into 2019.
As previously discussed, we expect the continuation of SQ pricing pressure in 2019, which has a significant impact on EBITDA margin, partially offset by transformation savings in 2018.
Finally, in secure information destruction, we expect paper prices to be lower in 2019. In closing, 2019 is an important year for Stericycle as we move ahead with our global business transformation and enhance our focus on our core businesses. As I mentioned before, this year will be filled with change, starting with our recent leadership appointments and our transformation plans. Our team remains committed to our customers, our core values and our business transformation.
We are steadfast in our focus on driving growth, improving profitability and as always, enhancing shareholder value. We are now happy to take your questions. Ellen, please open the line for Q&A.
Yes, ma'am. [Operator instructions] First question comes from the line of Sean Dodge [Jefferies]. Your line is open.
Good afternoon. This is – certainly a lot going on, maybe starting with the leadership transition. Charlie, congratulations on the retirement and Cindy, on the new appointment. Cindy, it sounds like all of the elements and time lines you had previously laid out as part of the Business Transformation plan remain in place.
I guess as we think about Stericycle, following the leadership transition, should we expect to see any big directional changes or deviations elsewhere in the business? May be around things like business lines or strategy you think our necessary or is the focus just going to be, this is the right plan, we just need to execute on it?
Yes, I think – Sean, thank you, and thanks for that question. Our focus – there's a lot that we've got to focus on with reference to delivering a successful ERP implementation, and it begins with the business this year with reference to the build, test and train phase that we're going through in 2019.
I'm very excited about the change that's happening. I'm very excited to lead that change, and I think we've got the right team in place in order to continue to drive positive results. I anticipate a very successful rollout of the ERP in 2020. And I think, truly, we are laying the groundwork right now, to unlock and really unleash the company's fullest potential.
And I'm also very, very optimistic about the impact our new leadership team will have on our results going forward. And certainly, we're continuing to look and evaluate our strategic positions, but overall, I feel very comfortable and very confident that we will be driving some shareholder value as we move forward.
Okay. And then on the 2019 guidance, you mentioned a different approach to the process. Is there anything about the way you've established those ranges that's changed from years past? Are you making any changes to what you exclude from the adjusted numbers? Or is there been a bit more cushion that's been built in to help insulate against some of the unknowns that inevitably pop up from time to time?
Another great question, Sean, but here's a – of course, we realize the things need to improve. And I think it's very obvious that we need to change. And that's really what we're trying to do. But I think, core is – the primary drivers continue to be – the SQ discounting and the instability of the C&RS business that we've seen continue throughout 2018. However, I also want to say that we're also not where we want to be in terms of total revenue from across the business. So we're going to continue to look at that.
And I'm also very excited that that's exactly why we run on a Chief Commercial Officer to help really drive profitable growth as we go moving forward. So I feel comfortable. I feel quite confident in the annual guidance that we've given. And I believe in this year of change, in this time of reset, that we are all focused on delivering positive results in this build, test and train phase and really focused on delivering our general guidance that we've – we put forth.
And Sean just to add to that. I think you also had a question whether or not there's consistency in what we are including a not including in the numbers. And as far as our adjusted EPS, the methodology that we're using is exact as we have in the past.
Okay, that’s helpful. Thank you.
Thanks Sean.
Next question comes from the line of Ryan Daniels [William Blair]. Your line is open.
This is Nick Spiekhout in for Ryan. Kind of going on a bit of that revenue growth driving. Just wondering if you got any update on marketing initiatives that you have been using to drive sales/retention in the small quantity market?
Nick, that's a great question. And our guidance does reflect the continued pressure from SQ. However, as we look at it, SQ is just one particular component of our revenue, and we've got to continue on improving the performance across all business and our customer segments. But I think that to your point, yes, all of our efforts are continuing to drive the appropriate results, and I think we're continuing to move forward with that. But I will tell you that we've got to make sure that we are focused on overall growth. And again, it lends itself to really supporting our addition of a Chief Commercial Officer just recently.
Okay, that's helpful. And then for the 2019 guidance, do you have any nuances in sales or kind of EPS cadence for the year?
Yes, no, no, no, the only nuances in sales that I would share. You should expect foreign exchange headwinds to continue for the organization and primarily that would be heavily impacted at the beginning of the year. As far as cadence, we're giving annual guidance. You should have – when looking at the numbers know that there are comparable issues. Recall had a better quarter in Q1 last year.
As I said, foreign exchange will be a bigger impact at the beginning of the year, and there has historically been some seasonality that does occur in the beginning of the year. From there, you'll have to use your numbers and then adjust accordingly for full year.
And then last one kind of going on the Communications sale – business sale. Any update there on timing or key milestones to look at as you divest from that business?
Yes, Nick. This is Charlie, I'll take that one. We continue to pursue the strategic alternatives for C&RS. Obviously, that process has been impacted by declines in the business over the last couple of quarters. Our focus is on really stabilizing on that business and positioning it for growth, setting it up for the strategic alternatives. But in the meantime, we'll look at parts of that business, or strategic alternatives. And we announced in the opening comments that we did enter into an agreement to divest the U.K.-based texting business, which is part of C&RS.
Got it. So timing more just kind of as they come up?
As they come up, we'll update, correct.
Got you, thank you. All right, good. I’ll get back in the queue. Appreciate it.
Thanks Nick.
Next question comes from the line of Gary Bisbee [Bank of America Merrill Lynch]. Your line is open.
Hi good afternoon. I guess the first question, are you – can you give any more color on just what the major factors are that you're expecting to depress the profitability, adjusted EBITDA margins in 2019? I know you called out Cindy at the end of your comments on guidance of guidance a few things. I guess our expectation was the SQ pricing drag moderates as we get into mid-year. A number of the things you called out actually weren't EBITDA related like the convert gains impacting EPS and whatnot. Is there step-up in investment? Or what really are the key factors?
Gary, thanks. I think a couple of things from a primary driver perspective. We obviously – we continue to talk about SQ discounting. We continue to talk about the instability of the C&RS business. We understand that we've got to improve all of the revenue. But then there is a question about the cost to revenue side. And we're just not driving the productivity gains that we should in order to offset these declines.
And hence, the reason for us to really need to change, which is where I think the positive story begins, and that's what excites me. 2019 is the year of change. It's the year of reset, and it's going to begin with us delivering a successful build, test and train phase of the ERP, followed by successful rollout in 2020. So I think those are the things that we're really focused on moving forward, and we've got to get these things right to really unlock and unleash our fullest potential.
And the only other thing that I think Cindy didn't cover with you, is that we do expect after four consecutive months of paper declining that we would anticipate that trend to continue and again, foreign exchange will be a headwind as well.
Yes, okay. And then a follow-up question from me, just – with the guidance you're giving for adjusted EBITDA, it looks like the leverage ratio could – probably goes up not down in the near term. And I guess, you already bumping up against the reset covenants as I understand it. So is this a potential issue? Are you going to have to amend those again? And I guess is there anything you can do in the near term to try to handle that situation?
Gary, thank you. We have continued very strong free cash flow in this year, where we won't be making at $295 million settlement. A good portion of our cash flow is going to go to debt reduction. Our expectation is that we're going to remain in guidance – remain in compliance with our covenants. In fact, our anticipation is that we would be doing some delevering in this year and that's factored into the guidance that we gave.
Okay, thank you.
Next question comes from the line of Michael Hoffman [Stifel]. Your line is open.
Hi, thanks for taking the questions. Charlie, good luck and thanks for your support.
Thanks Mike. Appreciate it.
And welcome on board to the new role, Cindy. We'll see you in Canada in a couple of weeks.
Thanks, Michael.
The midpoint of the guidance on giving the margin is $685 million of EBITDA versus the $745 million, so I'm trying to figure out where the $60 million goes? And unless I'm mistaken, we have a guide of $130 million out there was the long-term hit on paper – on SQ.
So if I take what I think it's been the run rate up to now, I've got another $25 million of that offsetting that is Business Transformation at $25 million. The comm segment is not a very profitable business, it is a middle, may be low double-digit. So if you're down $60 million or $70 million of revenues, I'm only talking about maybe a $10 million hit. So that means paper and ForEx are pretty big. Is that the right conclusion?
Paper and ForEx are certainly impacting the year. Michael, I also want to point out that the expectation of ongoing SQ pricing, plus you have to carry over that was discounted in the prior year. You have the impact of lower Recall that will impact the number. And then finally, one of the things I think the team and Cindy mentioned is we've got to get better operational.
One of the things that we've seen in these numbers if that we continue to have an increase number of stocks, and increased number of containers and pounds that we process with the discounting – the revenue has come down, and we have to work very hard as an organization to be able to put off those headwinds. Also as Cindy talked about, we are going to be focusing on build test and train for our ERP system in 2019, which means the benefit that you anticipate from BT will be largely carry overs from 2018 with the focus of this year really setting the table to drive incredible efficiencies that we are very confident that we'll come from our ERP implementations throughout 2020.
Yes, and Mike, the only thing I'll add to your comments. I think you acted on the C&RS. But the flow through on those large blockbuster Recall events are very large. So when you have a quarter – like we did at the beginning of the year, we had a year like we did in 2017 where we leveraged our Recall platform. It flows through very high margins. We don't have that. So certainly it is a lower-margin business, but the flow through on those blockbuster events is a benefit that's when we have them.
Okay. So I'm a little bit confused. Why not be more transparent about what makes up that $60 million? I mean, you've given us the midpoint of the number, to take the midpoint of the two numbers, I've got a year up. Why not be more specific about that? I know – I'm a little confused.
Yes, Michael, that certainly is a fair question. And – but one of the things I can say is the executive leadership team and I, we've had a chance to evaluate the practices and take a look at everything that’s going on right now in such a time of change. When we talk about portfolio rationalization, we talk about the Business Transformation. We talk about a lot of things.
We wanted to make sure that we gave measures that we can accurately predict during such a time of extreme change. And those ended up being the focus of total revenue to make sure that we’re focused on quality growth. We get into EBITDA margin, that’s really our effort to make sure that we’re focused on the profitability and that we’re trying to drive some of the operational efficiencies.
And then earnings per share, certainly, to focus on the shareholder value. But post ERP, obviously, we’ll be able to look at other things when we have access to real-time data, all of that will be readily available. And we’ll get to that point, but right now, this is what we feel our focus should be at the moment
Michael, you talked about transparency as well. And I want to reassure you that while all this is our guidance going forward on an annual basis, that in addition, quarter-to-quarter, we will provide revenue results by service line and give you visibility, both qualitatively and quantitatively into the trends of the business. So you will go along on a journey with us. You will get full transparency with each quarter that we report on.
Yes, okay. Free cash flow. What’s the target for free cash flow in 2019?
Michael, as far as – as you saw on the guidance, we are not providing a free cash flow guidance. The reason for that is, obviously, we historically had given a GAAP number. And due to the unknown nature of some of the numbers that are in there, we couldn’t reasonably give that guidance. However, what we are giving you is revenue in EBITDA percent and we gave you CapEx as well. And so I think you have all the tools you need to calculate the implied cash flow of our ongoing business.
And one of the things I’m very proud of is the cash flow in this year. In year, where we did pay our resettlement, self-funded. The ongoing ERP in the business incurred some legal expenses, our net debt only went up $30 million. So we are pleased with the cash flow, and I think you have all the necessary tools to be able to calculate it.
Just let me ask one last question and then I’ll stop. So three – you did about $35 million, if I heard correctly, on the free cash flow you are calculating, I add back $295 million that puts me basically at $330 million. It’s – when I do my math and give – okay, I’ll do all this math, is it going to be less than the $330 million? Are you expecting this to be less?
Yes, Michael, if you were to take our EBITDA and you factor in the higher CapEx, and the EBITDA that we gave you, I think, you would expect it probably in the range of that, if you just do the math. I think it will be less than that, but it’s still very strong cash flow. We’re very encouraged by continuing ability to generate cash.
Okay.
Thanks, Mike.
Yes.
Next question comes from the line of David Manthey [Robert W. Baird]. Your line is open.
Thank you. Are the EBITDA and EPS growth CAGRs from one year ago still intact from the 2017 reported levels? Or will new leadership be taking a fresh look at those?
I think – thanks, Dave, that’s a good question. And one of the things that we are taking a look at is, in this transformation of the business, we have the opportunity to maximize our growth, and the goal is to improve profitability. But certainly, a few things have changed since those numbers were given back in the early 2018. First is an example of the results were much less than expected. So naturally, our run rate has changed. But then also, we will experience some changes in those numbers as we execute things like our portfolio rationalization plan. So those things will change, but one thing won’t.
The one thing that remains constant is that we will be a far better company once we are transformed and we have a successful ERP fermentation. That’s when we’ll have real-time data, we’ll become a metrics driven company focused on delivering long term shareholder value. And I think that certainly, we’re in a process with new leadership, getting engaged and really getting out there with the workforce in order to drive change. But I think we are all focused on making sure that the company has a successful ERP, so that we can unleash our overall potential.
Okay, thank you. It seems like most of the people that are new to the leadership team come from UPS. I’m sure they’re very good at data analytics and using ERP. Has anyone implemented one?
That’s a really good question. I think what we’re really focusing on – successful ERP limitations really – it boils down to three things. The successful ones have a great communication plan, they have strong frontline buying, and they have a robust and I mean, a very robust build, test and train sales. One of the things that I can tell you is we do have is CIO that was brought on with many successful ERP implementations and he has brought a team with him who have also have that. We’re partnering with one of the leaders in terms of consultants dealing with successful ERP implementation, and I have no doubt that we’ll continue down that path.
The other thing that I can say is with reference to the UPS experience is, we do understand metrics-driven data analytics and driving an accountability culture that’s going to continue to improve profitability and drive growth. But getting back to the actual experience, all of us have had opportunity to drive change in our particular areas of responsibility prior to coming here. And one of the things I’m really proud about, we all understand the need for communication and frontline buying.
The executive leadership team and I will be on a 11-city communications tour. And what’s most impressive is we’re going to get a chance to talk to and shake hands with 85% of our frontline management folks where we can explain the whys and the hows of Business Transformation, and really give them a good view of what good looks like. So overall, I think we are very well prepared to lead a successful ERP.
Okay, thank you. And Cindy, last question is for you specifically. Based on the new guidance, the stock is trading something high single digit multiple of EBITDA, does that at all impact your thinking on divestitures? Are you willing to take a hit to right size or streamline the business?
I don’t think it impacts divestitures at all. At this point in time, we got – our primary focus for the capital allocation certainly is debt reduction. We need to continue with that. But I think we are focused on certainly overall growth and that – our fullest potential will be unleashed and unlocked once we get a successful ERP.
So that’s really in short term what we’re focused on, but I think we’ve aligned everybody really putting key people in place with great skills in order to be able to really come out on the other end, driving the appropriate growth that’s necessary.
I appreciate the time. Thank you.
Thanks, Dave.
Thank you very much.
The next question comes from the line of Hamzah Mazari [Macquarie Group]. Your line is open.
Good evening. Thank you. Congratulations, Charlie on your retirement. I look forward to keeping in touch, and congrats Cindy on the new role. I think my first question is sort of along the same lines of questioning. But sort of, if you exclude the ERP implementation, could you may be talk about some of the stuff that your management team or Cindy, you’ve done at UPS, Europe or running global freight there when you managed whatever – a $3 billion P&L.
Is that sort of similar here? I know there are outpaced businesses but is there any restructuring here? You talked about product gains a little bit in your prepared remarks. Anything that similar that you’ve done transformation wise, ex-ERP that is relevant to this business?
Hamzah, thank you for that, and thank you for that question. Here’s a couple of thing I can say. In my previous experience, as you mentioned, I was put in charge of a large international region and I was put there after an unsuccessful acquisition bid. So really, it was my job to pivot from a plan of inorganic growth to one of organic growth. And during that time, we achieved record results, and it was really a time of change for us.
And then as you mentioned, I returned to the U.S. and took over really a global and multimillion dollar business unit, but it had been suffering from disappointing results quarter-after-quarter and had a chance to drive them to record profits before leaving. But I needed to transform several things.
The go-to-market strategy where the focus had to be on small and medium customers. I had to change the way be looked at the business, and we also were in the middle of – I had an opportunity to get support from the Board on investment into that particular business for some couple of hundred million dollars worth of change in technology and that was in the business unit that just prior to that was not doing very well.
So one of the things I can say is that I’m very familiar with going into places and helping to turn things around and drive change. And really here at Stericycle, I see a very clear path to success, and its built off of the foundation of a successful ERP. But it’s also important to note, I think, that the fundamentals of the business are still very strong here. We generate strong free cash flow. We continue to hold market leadership positions in many of our business units. And I think that a successful ERP is just going to enable us to improve these fundamentals going forward.
In one other note, Hamzah, it’s great that you can mention my experience or any of the other executives that have come on Board, but trust me, there is a great base of talent and a lot of deep expertise at all levels here at Stericycle. And I’m confident that we’ve got the right combination of new, combined with the experience that’s currently here for us to really reach our potential. So it’s exciting times right now for us at Stericycle.
Great, that’s good to hear. And then just on the divestitures. Could you may be talk about – is there a sense of urgency to divest assets to delever? Or is it just – it seems like the divestitures we’ve been talking about them for a little while. I know there’s been management change. You have the ERP. You have the restructuring. I’m just curious whether there’s just a lack of interest in some of these disparate assets? Or whether you’ve had too much on your plate. So this is kind of taking a backseat in terms of sense of urgency of divestitures?
Hamzah, you bring up a couple of different points that. And yes, we are very focused for us to follow on debt reduction, and it remains core at what we’re thinking about. However, focusing on that should not prompt us for make us rush into anything. We want to make sure that we – in our portfolio rationalization that we’re going to do this with awful lot of thought and engagement.
But I think one thing we can say is our evaluation has been completed, and I think we are exploring some strategic alternatives. Of course, I can’t give any detail at this point in time simply because we must run the business, but you can count on updates when they are – when appropriate. But we’re excited about that part and to your point, we’ve got to manage the whole business, Hamzah. And have to make sure that we look at everything that’s going to improve Stericycle for the future. So we can’t take our eye off the ball of really anything that’s going on at the moment.
Okay. Great. Thank you.
Thanks, Hamzah.
The next question comes from the line of Jeff Silber [BMO Capital Markets]. Your line is open.
Hey, good evening or good afternoon. It’s Henry Chien calling in for Jeff. Congrats also to Charlie and Cindy. Just Cindy, I just had a question. And I know there’s a lot of moving parts here and again, congrats on coming into the seat. But I’m just curious what would you consider the core operations at Stericycle to focus on to improve growth?
I think we’ve been very clear. The core businesses that we have is the regulated waste management and our Secure Information Destruction Services here in the U.S. And we are focused but unfortunately, we don’t want to be focused just on SQ. Certainly that’s an important part of the business, but it isn’t the only part of the business.
So when I say that we really need to focus on core, we’ve got other revenues streams whether it’s in our SQ national and regional customers, whether it’s in LQ, and when we take a look at all of our different service lines in our Secure Information Destruction. And we’ve got to evaluate that, which is exactly why, I think, our Chief Commercial Officer is the right person at the right time to make sure that we take a look holistically at core businesses to make sure that we’re driving and maximizing our value.
Got it, okay. Great. And just on the small quantity headwind. Is there any – I understand there’s estimates on the amount of headwind. Is there any estimate of when this headwind will actually pass?
Great point. Our guidance does reflect continued pressure, as we mentioned, from SQ. And I’ve also said it’s just one portion of the business, and we have to really focus on improving the performance across all the business segments, so I have mentioned that. We are encouraged by the trends. We are evaluating what churn should be. We’re evaluating the balance, and how we’re going to balance the quality of revenue moving forward.
So I think the one thing that us positivists we’ve got to trend of seeing increasing new sites in comparison to lost sites. But again, take – all of that is taken into consideration in our annual guidance. And I think we’ll give color, certainly, and give some qualitative insights quarter-to-quarter to let you know how those things are going.
Jeff, we’ve been tracking that number for a while. And yes, some of that number that we’ve been consistent on. And so I think we’ve got a good handle on what has happened historically, it has shown that we’re – we’ve modeled it correctly, and it’s coming as anticipated, if not slightly better. So I think going forward, I think what we’ve shared in the past is staying consistent to what we believe.
Okay, great. Thanks so much.
Thanks, Henry.
The next question comes from the line of Scott Schneeberger [Oppenheimer]. Your line is open.
Yes, thanks very much. Congratulations to everyone in your new roles, a lot of change. The – Cindy, when your – the only mandate, I think, you did not have was involvement in CRS when you joined Stericycle. And now, with Charlie moving on and you taking over the CEO role, it’s all done to you. And obviously, you have an ERP implementation, it is something you’re looking to disposition. Is the sense of urgency increased? And also, you could just a few components of the texting business in UK how large was that? And what exactly occurred there?
Yes, Scott, I’ll take some of that. I mean when we made the announcement for Cindy, yes, we did point out that C&RS will report to me. During my transition time, I’ll continue to see that through to a new leader or currently we are very active in looking forward a new leader for that business. As I’ve said earlier, we’re looking to stabilize and grow that business, which would put us in a better position for a strategic alternative. Certainly, Cindy will become more involved as we get through the next couple of weeks, and in 2 months. But we are looking for – actively looking for a leader where that business, and I'll continue to work with Cindy on that transition. As far as the stats for the texting business Dan will take that.
Yes, the portion of the business that we sold that was in C&RS. It was about $70 million in annualized revenues and about little over $2 million in EBITDA.
All right. Thanks for that, Dan. Another thing – just shifting gears a little bit, obviously, it's a pretty wide guidance range for 2019 and obviously, a lot of questions about bridging that.
One of the initiatives you had in 2018 was brand development, customer relationship investments with some reduced pricing increases and just – and some focus there for going some certain business. I think that was a $30 million revenue headwind to $25 million EBITDA headwind anticipation for 2018.
So Dan, could you share how that finished up for the year? And how much perpetuation of that strategy quantification, if you can share it, is occurring in 2019? Thanks.
Scott, this is Cindy. I'll address maybe a portion of it, and then if Dan wants to give more color, he certainly can. But we have taken a good bit of our guidance – has taken into consideration the pressure on SQ. But remember, it's just the 1 component of the total revenue that we have and we know we need to focus on improving all of our revenue across the business segments. And exactly what you had mentioned earlier, with reference to how are we doing with our brand engagement?
How are we doing with our customer relationships? How are all those other pieces going? That speaks directly to why we needed to bring on a Chief Commercial Officer so that we could have someone who's focused on strategy, brand management, really focused on sales and focused on our complete marketing efforts to make sure that we're maximizing. But again not just in SQ, but maximizing all of our revenue streams. So that's just one thing I wanted to share. Dan any other color?
Yes, Scott, again, those initiatives would really improve the brand and the relationships with customers, and we're encouraged by the trends with that. We are very specific about the amount that we're going to invest in that to be able to monitor. If you look at our Regulated Waste and Compliance Services revenues in performance, it was really close to right in line. So it happened exactly as we incurred. We're very pleased to have Bill on with us as our Chief Commercial Officer who can now dive into those and really determine whether the ongoing effect in those is a trend that we are going to continue to invest in.
All right. If I can sneak one last one in, please, C&RS and Latin America impairments in the quarter, additional color there? And then also indication of, will there be more to come?
Yes, I'll talk to – the impairments. So we discussed on the Q3 10-Q. Where we believed that there were the risk of impairment related to our Latin America and our C&RS business as well as some others. And as part of our annual interim Q4 impairments assessment, we did recognize, as you noted – as you notated, a noncash goodwill charge for communication-related service in Latin America, and the total amount of that was $358 million. The primary reason for that Scott is due to the decrease long-range free cash flow due to the ongoing performance of the business as well as we had to rationalize that with the stock price performance to come to a final number. Just a reminder that those are noncash answers.
Thanks.
The next question comes from the line of Kevin Steinke. [Barrington Research]. Your line is open.
Good afternoon, everyone. Dan, in your prepared comments, I believe, you talked about some of the investments made in the Medical Waste business such as account managers are actually helping to offset the discounting headwinds. So if you could provide a little more color on that. And are those investments the reason that you've called out the last couple of quarters that may be the discounting is actually coming in a little less than you've anticipated?
Kevin, I'll jump in just for a portion of that. But one of the things – you bring up some great points with reference to some of the initiatives that we put in place to really address the SQ pressure, the pricing pressure. And again, that's one of the main reasons why we brought on and we felt we needed more focus on more effort and energy put into our overall commercial strategy, which is really why we brought on Bill Seward. And I think it's early days in terms of Bill's engagement.
However, he is already making a difference in terms of looking at where we're focused and what we're doing. You brought up marketing and brand management, all of those things we have to continue to dive into and evaluate and figure out how we can continue to do them better to make sure that not just for SQ, but that we are actually reaching and making a difference for the customer experience, that all of our customers will have with UPS – I'm sorry, here with Stericycle. So it's very important for us to make sure that we stay focused on that.
Okay, got it. With Dan taking over international, what's the vision for that business going forward? What you still need to accomplish there to get to international portfolio as you would like to have it going forward?
If you don't mind, I'll start with that one. I've had an opportunity to live abroad for many years as have quite a few of the new executives that we have brought on to executive leadership team here at Stericycle. And one of the things we see is, we do have a presence, and we do have a presence in some of the key markets around the globe. And what we really are very excited about with Dan, and I think he is uniquely positioned in order to be able to look and evaluate, are we in the right markets? Are we in that key places where we need to be? Is there other opportunity that's out there? All of those things are early day stages. And once Dan gets in the roles are going to take a look at evaluating all of that with reference to the core businesses that we currently do.
Yes, I think I'll add something as well. I think Dan obviously knows the business really well. And as we roll out ERP in the U.S. and in the Canada in 2020, we're going to have to prepare the rest of the world for the rollout of our ERP. Dan has been now through with here – early stages in the U.S. So he's well prepared. He knows those processes. He helped build some of those mega processes. Folks in his team have been involved. So certainly he's going to add value there and then I think, Cindy touched on a little bit, obviously we finished our portfolio rationalization evaluation, and we are pursuing strategic alternatives for some of those – for some geographies, Dan will also play a role there as well.
Yes, I'm very excited about the opportunity. I've had great tenure here as the CFO. But when I look back at my operational areas and one of the things really focused on the standardization and driving efficiencies, and I'm passionate about that. And I see tremendous opportunity with a great team over there to begin standardize, as we said prepare for the ERP, drive profitability and growth in the business. So I'm very excited.
Okay. One last question from me. I understand the headwind that you're baking in to 2019 in terms of smaller Recall events to continuing. The commentary last quarter you made was despite smaller events, that the underlying trend were still good in terms of the number of recalls growing. Is that still the case? I mean, you've made some reference to having to stabilize the business in terms of the C&RS and recall? Have those fundamentals changed at all since the last quarter when at least the event number was growing?
Yes, I'll take that Kevin. The events we still the trend of more Recall events when we look at this quarter prior to the prior year quarter. So that trend continues. We had slightly more recalls in Q4 2018 than we did in Q4 2017. I did – we did in the opening comments talk about the government shutdown. That certainly impacted the results at the end of December, and certainly impact in Q1 as well. Obviously, the FDA, Consumer Product Safety Commission were all affected by that shutdown and there were virtually no Recalls mandated from those departments. We'll think they will catch up on that in 2019 but that will have an impact certainly in Q1.
Okay. Thank you everyone.
The next question comes from the line of Isaac Ro. [Goldman Sachs]. Your line is open.
Good afternoon, guys. Thank you. Cindy, few questions for you, one on the ERP and one on your growth outlook. On the ERP, can you just confirm for us – I know you guys have sort of done this sort of in the call in piecemeal, but just in the aggregate that you guys expect to go live in the U.S. in 2020, and that the aggregate spend through 2022 should be somewhere around $300 million. So just want to confirm that those numbers for the ERP program are still accurate?
Yes, I think they are. And Isaac, we're very focused. Remember in order for us to even reap the benefits we've got to make sure that we really do an awful a lot of hard work on the front-end, which is on the build, test and train phase, which is 2019. I'd like to say we've got a brawn and a brains side to the ERP. Brawn, we have a lot of heavy lifting. A lot of very hard work that is going to have to get done 2019 into 2020.
And then the brains side of it is okay, now that we have the capability we have data analytics. We've got opportunity to improve our efficiencies, and we're going to be able to improve our customer experience and drive a long-term shareholder growth. That's going to require a little bit more of the brains portion of it. And remember we've got a – we will be implementing ERP, the full implementation will be on a rolling schedule throughout 2020.
It's not as if we wake up on January 1 and flip the switch and it's done. But we know that this is the heavy lifting part of it and again, that success is determined by our ability to have success in the build, test and train phase this year. So we really are all hands on deck, very focused on it.
And Isaac, if you referenced Slide 9 of our investor deck, you see the annual spend for the year came in as we expected, and the project remains on track, both from a cost and a time line perspective.
Got it. And Cindy, just to follow up on your growth outlook. Clearly, there's been a lot of change in the industry and in the company on the top line in the last couple of years. And this is specifically with regards to core regulated medical waste business. As you look past this period of transition, could you maybe articulate for us at a very high-level, if you think to a long-term economic cycle what you think a normalized growth rate for that business should be and within that, any comment you would make about what your assumption is for price?
It seems to me that you should be able to enter a period of stable pricing record with a little bit of account growth that together should roll up to a decent underlying growth trend for that business, but I want to maybe ask you for your philosophy on that. Understanding that you still haven't fully taken over, but want to make sure that as we think about long-term growth of business, what you think is reasonable?
That's a great question. And I think the underlying answer to it is the fact that we are focused on long term growth. We are focused on making sure that all of our four business lines become more profitable that we focus on quality revenue. That we take a look at balancing what is appropriate churn and right now, we are in the early stages of making sure that we assess that. But as I've said before, and even in my opening comments, a successful ERP, one of the things that I think is going to really help us drive growth is a benefit that is going to come out of the ERP is the fact that we're going to be able to make improvements.
Certainly there will be operational improvements and network optimization, but one of the things I'm most excited about that should facilitate growth is the improvements that we're going to make to our overall customer experience. I think what we really need to do is make it easier for our customers to do business with us and when we see that, I think we'll get to a point where we are unlocking and unleashing's Stericycle's fullest potential. And right now, we're seeing low to – mid to low-single-digit growth, and I think at a minimum that's what we should expect,, but certainly I'm very bullish on our opportunities and what we're going to be able to do.
Thanks you, guys.
Next question comes from the line of Gary Bisbee. [Bank of America Merrill Lynch] Your line is open.
Hey, just one quick follow-on at the risk of asking something that's already been asked, but on the SQ pricing is it still the right expectation that the repricing largely lapsed by mid-year and either stabilizes or there is some potential for CPI type increases thereafter? Or would it be better to say Cindy that just given a leadership change and what your team will be doing that, that is sort of under review in terms of it, if that's the right way to think about it?
Gary, here is how we like to look at it. We like to allow the executive leadership team to take a look at that and do their evaluations. But I still feel – I feel comfortable that we're looking at it the right way. I feel very confident with the new chief commercial officer that we have and really, all the executives on the leadership team. That we are really focused on making sure that we deliver our annual guidance numbers. But as we mentioned earlier, Gary, to your point, I think it's important that we continue to give some qualitative color and insights, as we go quarter-to-quarter to keep everybody posted as to where we think we are.
All right. Thank you.
Next question comes from the line of Michael Hoffman. [Stifel, Nicolaus & Company]. Your line is open.
I think you kind of sort of answered this one. You all have a market place offer, $130 million is the current hit on SQ. When it was asked, one before this, Dan said, there was no change in that. Is that still right? That doesn't preclude what all other things you said about revenue quality and improving our overall growth. For the first round of, we think it is, it's still $120 million to $130 million.
We said, Michael, that's a number we've been tracking.
It's a yes, are no question. Yes or no?
It's on track.
So it's yes? Yes to $120 million $130 million.
Yes.
Okay. Capital spending $180 to $200, so midpoint $190 million, up $60 million, is this onetime or we resetting the rate of capital spending?
Michael, that number is inclusive of a number of things. One of the things you see, and why – part of the reason we over performed from our guidance on cash flow is there it was about $20 million – about $25 million of CapEx that is accrued and not yet spend, and we anticipate that carrying into 2019. That's why we were under from what we guided in CapEx this year.
That also includes the investments in our business transformation. So we anticipated and shared with you that we would have higher CapEx in the years that we were doing that. And then we have our normal run rate post investment in the Business Transformation. I think you'll see that number normalized. And we have historically run between 3.5% and 4% of revenue.
Okay. That's what I need to know. Thanks.
Thanks, Michael.
Presenters that will be the last question for today.
Thank you, Ellen. On a personal note, I have been in the waste and compliance industry for over 30 years. Over that time, I've met some wonderful people including team members, customers, vendors and stakeholders. Many of whom have had a lasting impact on my life. We've accomplished many great things at Stericycle.
I am most proud of the work we do for our customers and the positive impact it has on the environment and the safety of the many communities in which we live and work. I have been fortunate to lead Stericycle, shape its direction, and influence its culture. It's been an honor for me to serve this organization and I have incredible memories, and I'll take them with me to the next chapter in my life. I want to thank everybody. Have a great evening.
This does conclude Stericycle fourth quarter 2018 earnings call. Thank you for participating. You may now disconnect.