Stericycle's (SRCL) CEO Cindy Miller on Q1 2019 Results - Earnings Call Transcript

About: Stericycle, Inc. (SRCL)
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Earning Call Audio

Stericycle, Inc. (NASDAQ:SRCL) Q1 2019 Earnings Conference Call May 2, 2019 5:00 PM ET

Company Participants

Jennifer Koenig - VP, IR

Cindy Miller - CEO

Dan Ginnetti - EVP & CFO

Bill Seward - CCO

Conference Call Participants

Sean Dodge - Jefferies

Ryan Daniels - William Blair

Gary Bisbee - Bank of America Merrill Lynch

Michael Hoffman - Stifel

David Manthey - Baird

Scott Schneeberger - Oppenheimer

Jeff Silber - BMO Capital Markets


Good afternoon. My name is Catherine and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please be mindful of time and participants and limit your questions to two. Please note that today's conference call is being recorded.

Thank you. Ms. Jennifer Koenig, VP of Investor Relations, you may begin your conference.

Jennifer Koenig

Thank you. And good afternoon everyone for joining us on Stericycle's first quarter 2019 earnings call.

On the call for the first time is Stericycle's Chief Executive Officer, Cindy Miller; as well as Dan Ginnetti, Chief Financial Officer; and Bill Seward, Chief Commercial Officer.

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

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

On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable GAAP measures, please refer to the schedule in our earnings press release, which can be found on Stericycle's Investor Relations website.

Please note that we provide guidance on an adjusted non-GAAP basis because it is 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 first quarter earnings presentation, which is also available on our Investor Relations website. Throughout the call, we will be referencing specific slides from the presentation.

I'll now turn the call over to Cindy Miller.

Cindy Miller

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

Let me begin by saying it is an honor and a privilege to lead this great company and our 22,500 global team members during this historic change and transformation. As we continue this journey, I get more excited about the future opportunities for Stericycle to enhance our customer relationships, become an employer of choice, and drive greater shareholder value.

I'm very pleased to announce that we've appointed a new Chief Financial Officer, Janet Zelenka, who will join us on June 1st. Janet brings deep financial, IT, transformational and operational experience to Stericycle, following 15 years with Essendant and 16 years at SBC/Ameritech. At Essendant, she served as both CFO and CIO and successfully led the company through its own transformation. She also brings a breadth of corporate finance and internal audit experience. Given our own business transformation and ERP journey, Janet, will be a valuable addition to our leadership team and we look forward to working with her.

Turning to the quarter, our business performed well compared to our internal targets which took into consideration our historical performance by quarter. We maintained confidence in the business and reaffirm our full-year guidance.

Before I turn the call over to Bill and Dan to review the quarter in more detail, I'd like to share with you some of my perspectives on Stericycle's future. As I mentioned on our call in February, our primary focus for 2019 is to build, test, and train phases of the ERP implementation. I'm pleased to report that we will complete the build phase this month. This week we began the testing phase which will include three complete rounds of end-to-end testing of our seven mega processes with the final test incorporating actual Stericycle data. To support adoption of the ERP across the front lines, the leadership team and I hosted eight internal Roadshows in the U.S. and Canada and met with close to 1,300 Managers representing 80% of the leaders responsible for deploying the ERP. They are excited about the future and willing to embrace the changes to come.

As I said to many of our shareholders while on the road recently, my assessment of the biggest risk at Stericycle is continuing to operate in our current state and not implementing this ERP. I'm impressed with the leadership position that Stericycle has established with outdated systems and a lack of visibility to performance data. Not only will the ERP drive begin driving efficiencies and savings as early as next year but immediately upon implementation, we will be empowered with data to enable real time performance reporting.

This will improve daily decision making, simplify and enhance forecast accuracy, provide transparency for greater accountability, and aid in the development of strategic planning. But most importantly, this transformation will make it easier for our customers to do business with us.

I've also spoken about the current focus on quality of revenue. As the market leader across many of our service lines, Stericycle is well-positioned to leverage our vast infrastructure and expertise to command a differentiated and premium brand value.

Recently, we realigned U.S. sales organization and have begun to rollout new sales commission plans and new contract oversight both structured to drive revenue quality. These efforts will continue across the globe.

We're also developing strategies and tactics to quantify and leverage the value of our brand, to organically grow our customer base, and provide differentiated service offerings.

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

While these efforts are manually intensive, we know they will improve results this year and better position us for the ERP implementation.

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

To lead this effort, Dominic Culotta, has joined Stericycle in a newly created role of Executive Vice President and Chief Engineer. Dominic has 35 years experience in operational and engineering roles. He has a proven track record of improving service levels, achieving cost efficiencies to the implementation of process standardization, work measurements, asset optimization, and technology. I'm excited to welcome Dominic to the team and look forward to the many advancements he will oversee as we position Stericycle to leverage best-in-class engineering capabilities.

We are also pleased to welcome Cory White to Stericycle as Executive Vice President of Communication and Related Services. Cory comes to Stericycle with 20 years of Executive Management experience in the area of outsourced business processes including the transformation of companies for future growth. He has expertise in both healthcare and technology enabled services. We're thrilled to have a leader of Cory's caliber join Stericycle to refocus the C&R business on growth and improved profitability to better enable the pursuit of strategic alternatives for the C&RS business.

With Janet, Dominic, and Cory, on board, Stericycle's new leadership team is complete. I'm confident in the team we have assembled and our ability to successfully execute the transformation plan and position the company for long-term shareholder returns.

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

Bill Seward

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

Having started here on February 4, I knowingly joined the company in the midst of a multi-year transformation. In looking at Stericycle's solid foundation and strong market position, I saw the tremendous potential for a turnaround here and I'm excited to bring my commercial and business experience to help the company deliver on our plans.

Since arriving, I've been impressed by the strength of our team members and feedback from our customers. In visiting our operating facilities and meeting managers during internal Roadshows, I've also been impressed with the feedback from our frontline employees and supervisors. They speak favorably of their work environment and of our company culture.

I found the talent on our team is strong and open to change. Additionally, my early experience with customers either directly or reviewing customer experience data indicates they value Stericycle in what we bring to their businesses. Our customers see clear differentiation when comparing our brand to the competition. These are important confirmations that I've joined the company whose strong foundation provides significant value to the customers and communities we serve. That combined with the company's well conceived business transformation roadmap provides a clear path to a successful future. I'm extremely excited about the opportunities ahead.

Now I'd like to shift focus and turn to the financial results for the first quarter. As reflected on Slide 9, total revenues for the first quarter were $830.1 million compared to $895 million from Q1 2018. Primary drivers of the revenue declines include C&RS comparables, the effect of foreign exchange rates, and divestitures.

Revenues and resulting profits were impacted by one less operating day in the quarter and extreme weather conditions. During February's extreme cold, we experienced closure to key facilities across parts of the U.S. including our largest outbound sales center, limiting new sales efforts, and our ability to service customers.

As noted on the last earnings call, we closed the divestiture of the UK based texting business which reduced revenues by approximately $2 million in the quarter and is expected to reduce revenues by $15.8 million for the year.

We remain committed to portfolio rationalization and continue to pursue alternatives for non-core assets.

Regulated Waste and Compliance Services revenues of $459.2 million were in line with our expectations. Strength in our International market was driven by organic growth in volumes and implementation of new revenue strategies across EMEA.

In the U.S., we continue to see encouraging trends in medical waste including lower discounting and increasing new sales.

Our Hazardous Waste business within RWCS was down slightly given higher comparable results in 2018 driven by Hurricane-related project work.

Next Secure Information Destruction Services delivered revenues of $232 million continuing its steady growth trend. Organic revenue growth in the quarter was 4.3% or 2% when adjusted for recycled paper pricing. Continued strong growth in European markets was offset by one less operating day and weather impact in the U.S. Also while paper prices have declined since a recent high in October, we did see favorability in the quarter compared to the same quarter last year. We're monitoring paper pricing given the recent declines in SOP prices.

Communication and Related Services revenues were $61.2 million down $30.7 million from Q1 2018. This reflects significantly smaller recall events as well as fewer mandated recalls as a result of the Federal Government shutdown. We did see a slight increase in new recall events during the month of March.

Manufacturing and Industrial Services revenues were $67.7 million including the impact of foreign exchange and divestiture of the UK Hazardous Waste business.

Organic revenues compared to last year were impacted by the benefit of project work from California Fires in Q1 of 2018.

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

Our adjusted EBITDA was $136.8 million compared to $189.3 million in the first quarter of last year. As a percentage of revenues, adjusted EBITDA was 16.5% compared to 21.2% in the first quarter of last year. We anticipated lower margin compared to last year given C&RS comparables and ongoing pricing impacts in RWCS.

Results came in a little softer than we expected given the severe weather, the Federal Government shutdown impact on C&RS, and higher than expected operating costs in the first quarter of 2019 that are not expected to repeat in future periods.

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

I'll now turn the call over to Dan to discuss the EPS and cash flow results.

Dan Ginnetti

Thanks, Bill.

Looking at Slide 12, GAAP loss per share was $0.42. Adjusted EPS was $0.57 compared to $1.21 in the first quarter 2018. The year-on-year variance in adjusted EPS is due to the following: $0.21 from share repurchase comparable, temporary higher tax, higher interest, and the foreign exchange impact; $0.12 from expected lower revenue from C&RS; $0.23 from much of which was expected from RWCS pricing and one less operating day as well as extreme weather and temporary closure of two key facilities; and $0.08 from higher non-recurring costs in the quarter as we advanced our material weakness remediation process.

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

Our DSO was 64 days.

CapEx was $66.1 million and in line with our expectations and inclusive of planned business transformation investments and expected payment of accrued CapEx from 2018.

Free cash flow, inclusive of capital expenditures, was negative $29.9 million reflecting the operating performance and the timing of investments.

Our debt-to-adjusted EBITDA ratio under the amended debt agreement was 3.96 at the end of the quarter. This level of leverage is higher than anticipated but within our covenants. To address this level of leverage, we're implementing spending controls and are evaluating a number of options including divestitures, restructuring of our debt, and seeking temporary relief from leverage covenants. The unused portion of the revolver was $516 million at the end of the quarter. We have adequate cash flow and borrowing capacity to manage our ongoing business.

I will now turn the call back to Cindy.

Cindy Miller

Thanks, Dan.

So in summary, we remain confident in our business and reaffirm our 2019 guidance as issued in February. The team is fully focused on our transformation and delivering on our 2019 commitments to our customers and our shareholders.

So Catherine, please open up the line for Q&A.

Question-and-Answer Session


Thank you. [Operator Instructions].

Your first question comes from the line of Sean Dodge with Jefferies.

Sean Dodge

Good afternoon. Thanks for taking my questions. Cindy, I think you said at the beginning of the call, in the quarter made your own internal expectations. If we just annualize what you did in the first quarter the $0.57 of EPS it puts you short of your annual target. I guess what do you see changing over the course of the year that will drive the ramp you need to see an EPS achieve the full-year ranges you reaffirmed?

Cindy Miller

So Sean thanks for the question. And one of the things that we wanted to try to make sure we all understand is that no point in time that we believe every quarter was going to be the same. So within our own internal guidance, we realized that as we brought more and more executives on board and got more focused with some of our both revenue and cost of revenue efforts that that a lot of the quarters had the net effect of that was going to be more a ramp effect from Q1 through Q4.

So let me just highlight a couple of things as to why I remain confident in our guidance. So I'll talk first in terms of revenue. So right now, we're seeing the revenue trending to our internal targets. So I think that's strong. In addition to that, our Chief Commercial Officer is ahead of plan in terms of the reorganization and some of the changes that we're making to our internal sales incentive plans. He completed Phase 1 well before we thought we're going to be able to. And then we have -- he has been implementing some strong revenue management controls really putting more focus and more strict adherence to some commercial strategy. For example, he's got a Deal Review Committee where we make sure that we've taken some of that control from a decentralized perspective to a more centralized control. He's evaluating in that commercial strategy, some surcharges to make sure that we're covering some costs that are in line with what we see in the market. But certainly to address some of the things that we see in gaps in our revenue. So I feel very comfortable from that perspective.

Then also, Sean, I've got -- I also feel comfortable because I have to really look at what was planned and what we knew we were going to see in terms of the foreign exchange in Q1 to Q1, the divestitures certainly weather wasn't necessarily planned. But I see if we take a look all things equal for those compared to our internal targets, we are pretty close to where we thought we would be for Q1. And also it's unfortunate but when you have a couple of non-recurring items they're behind us and I see Qs 2 through 4 with an opportunity to gain some ground on some of those deficits, and that's just on the revenue side.

Sean, if I may on the upside, we're -- it's also a ramping effect and I see our Executive Vice President, North America, Rich Moore is really pushing in terms of accelerating on our efforts in terms of cost controls. I'll give you an example. We're accelerating some of the mobile collection vehicles that we have to put on the Street. And let me just tell you briefly what that would be. For example they bring a 35% improvement in our efficiency. So for every 100 that I put on the Street and replace current shredded vehicles, I'm going to take 135 of those vehicles off the Street. I'm also going to get 25% fuel savings as a result of that.

And here's the big thing for us. We're going to see just in that alone for those drivers, we'll have about seven stops per day per driver of improved productivity. Those are going to be very big for us that aren't in and we knew they wouldn't be in our first quarter numbers. And those are just a couple of the things he's got a metric dashboard that we're pushing out that we're accelerating albeit it's manual. But I think that's meant to drive some labor savings.

So I think -- and then the last thing is we have some key facilities that drove some of our transportation and network costs beyond what we thought and what we have planned in the first quarter. Those facilities are up and running right now. So we believe our -- those long haul costs are back in line. And it's based on all of those things that that we all remain very comfortable and very confident in being able to attain year-end guidance. So thanks for the question.

Sean Dodge

Yes, thank you. That's very helpful. And then on the SQ pricing headwind, it's been the expectation for a while now we begin to see that that tapered sometime during the back half of this year? Now that we're a bit closer to it, I guess other than we've pretty much gone through a full contract cycle and hopefully that's flushed most of it out. Is there anything else you're seeing or signs you can point to that really give you confidence that the bulk of the headwind will be behind as we look at the 2020?

Bill Seward

Hey Sean, it's Bill Seward. Thanks for the question. A couple of things. First of all, one of the things that Cindy talked about in the last call and we want to also emphasize again today is that, there's multibillion dollar service lines outside of that pricing SQ space that we are focused, hyper-focused on growing. So we've got a lot of emphasis there. Cindy alluded to some of those things in her comments a moment ago. Regarding the SQ specifically, we are seeing that we're on track to previously communicated plans, our churn or lost customers, our discounting as well as our new sales onboarding of new customers are all in line with those previously communicated plans. And we are confident that we will be able to pursue revenue strategies across the rest of the enterprise that will drive the confidence that Cindy just spoke to for the rest of the year results.


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

Ryan Daniels

Yes, thanks for taking my questions. Mine relates to the strategic alternatives for the CRS business. I noticed in your other press release discussing the Executives that you mentioned in particular that one of the emphasis was for Mr. White will be growing and improving the profitability to enable the pursuit of strategic alternatives. So is that happening a little bit slower than you thought due to lack of interest or is the company internally taking a pause there to try to prove predictability and profitability in order to drive a stronger valuation as you sell it?

Cindy Miller

Ryan, this is Cindy. That's a great question. And let me share this with you. There is no pause in terms of the whole portfolio rationalization and our ability to transact in some of the divestitures. But I will say this. We realized very quickly and all you have to do is take a look at our first quarter numbers in terms of C&RS in comparison this quarter to first quarter of last year. We have a business unit that whether something is divested tomorrow or is divested sometime in the future, we still need a business unit that's held accountable to hit marks whether they're stretched goals or they're marks that we should be hitting. They contribute to the overall revenue and the overall guidance numbers.

So for us, we're very thrilled that Cory, somebody of his skill and ability and his experience in this and not just in running one of these facilities but also in preparing it and improving it in order to make sure that that it is of value in terms of any type of divestiture portfolio rationalization plan. So for us it's twofold. If there's an opportunity tomorrow certainly we would take the opportunity tomorrow but in the meantime, we still need to make sure that C&RS holds up its end of the bargain in terms of the total corporate goals.

Ryan Daniels

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

Bill Seward

Hey Ryan, this is Bill Seward. So thanks again for the question. First I'll talk about a couple of things there.

First of all we feel really good about the team. I would say I love the team that I've met over the last couple of months. I've had a chance to connect with obviously the senior leaderships on the commercial side but also as a result of the Roadshow, I've met many of our frontline and middle management teams as well and a high-level of expertise that they show was impressive and it's exciting. I think part of the reason why customers value us so much.

The other thing is that we found that the team has been receptive to change. Well, obviously there's certain resistance to change naturally. I've been impressed with the fact that most of our leaders and our sales team and our marketing teams are very receptive to some of the new ideas and the things we've talked about.

And I'll give you just a couple of comments on some of the things that give us the confidence, we've got going forward. Number one, we've instituted as Cindy alluded to this idea of contract governance. We've got it, instituted it part of our U.S. business, part of our international business and throughout the rest of the year, we'll be taking that contract governance process, a peer review committee to all of our business units. And we've seen early signs of life and some really good returns as we've hit the Street in the first quarter with some bottom-line impact. We think there'll be more to come there.

We've also taken a look at changing our commercial structure overall. We've got the opportunity and we're going to be rolling this out in the second quarter to reallocate some of the talent we've got in areas like marketing and in training and in sales operations. So we're excited about thinking that leveraging our spend which is right now sometimes in the past been diffused across businesses combining our spend leveraging it to get more optimal outcomes.

We're also looking at things like the potential of surcharges. Where appropriate to cover our costs, we are certainly looking at that pricing lever where appropriate.

We've also done some things with our sales leadership. There's been some instances where our sales leadership in the past had been focused on administrative responsibilities like sales office reporting into the sales leadership or like sales compensation or sales planning reporting into the sales leadership. We've moved that off of our sales leaders so that the sales team is focused on growth and growth only. So those are a couple of things and thanks for the question.


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

Gary Bisbee

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

Cindy Miller

Yes, no Gary. And to be quite honest, I consider those targets from my predecessors mind simply because I was -- I'm here as of October 1st, not today. And so I'm of the -- I've been trained where all numbers are my numbers. So but I think your question is fair and I'd like to share how I look at it.

So right now, the business -- these plans were made several years ago and certainly well before maybe any of the thoughts about divestitures or any portfolio rationalization. So there are -- there is some of that built in that that I think it's fair, Gary, if any changes happens from now until the second quarter or through the rest of the year obviously something like that would trigger us to have to take another look at what those total numbers were. But I will tell you, you brought up the ERP. I remain confident in the numbers. I remain confident in our ability to successfully implement this. And more importantly, I remain confident in our capabilities once we implemented to actually draw value, real value, meaningful value.

So for me, Gary, what I think we need is if portfolio changes or at any given point in time, if we believe that that we can find more or we can do more then I think we owe it to certainly everybody on this call, we owe it to our shareholders to maybe have a discussion about that. We can talk a little bit more specific to targets. But good question.

Right now, I stand by them. And but again if we have any big changes to it then obviously we will share that information and whatever those changes might be.

Gary Bisbee

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

Cindy Miller

Yes. I'll speak first and then in case Bill has any other comments for it. So weather happens every day and I'd be the first one to not want to talk about weather, it's -- I don't come from an industry and my history is always you do it, you need to do and on a year-on-year comparison weather happens every day. However the only thing that makes it a little different in our circumstances is this. There are portions of our business that are reliant on daily transactional telesales every day and there's a portion of the business that that relies on it.

And we had here in Chicago, it was record Polar Vortex I think we saw as headlines for some of the weather that was here in February and unfortunately that's where over 500, the largest bulk of our telesales group sits and we had to shut down those facilities not, not run them with just fewer people. But we actually closed them for a few days when we were facing the negative 55 degree temperatures. So that did have an effect.

Can I -- Gary can I turnaround and give you the exact numbers. I think internally we've got some estimates, we're not as sophisticated enough internally to be able to give you exact but from our internal numbers, it was significant enough that it was something that that we noticed. So Bill do you have any other color?

Bill Seward

Yes. Hi Gary, it's Bill. I would just add one comment; Cindy hit it pretty, pretty well about the impact on our sales side of the business and our growth side. But it also impacted our ability to run the operation to be able to get out and service our customers and because we were missing some of those services due to the weather in pockets around the country. Obviously, there's chance that we were not recovering the billing and the revenues there. So thanks for the question.


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

Michael Hoffman

Hi, thank you for taking the questions and all the new players congratulations and congratulations Cindy on your first day.

Cindy Miller

Thank you, Michael. Thank you very much.

Michael Hoffman

So if you look at the guidance and you take the mid-point and you take the first quarter and you do this analysts thing that we do and start looking at what this cadence would be. It says you got to do, if you did it evenly $880 million revenues a quarter or $183 million of EBITDA and you haven't been in the high 800s in revenues in a while, I mean you had one quarter of it in the first half of last year. So can you talk about the cadence and help us understand how we should think about it, if we think about the mid-point of these ranges and where are the ebbs and flows across those three data points that make up your guidance through the rest of the year?

Dan Ginnetti

Hey Michael, this is Dan. I'm going to start this and then I will pass to Bill to specifically talk about the revenue.

We anticipated one of the things that I think I would share with you is you've looked back historically is we have seen seasonality in our business occur in Q1. But sometimes it gets overshadowed and that historically we've at least for the last couple of years, we've got really strong C&RS that hasn't shared with you kind of the seasonality that we see inside in some of our business like Secure Information Destruction and Environmental Solutions and even a little bit in our Medical Waste Business.

And so, all right. We also anticipated that the foreign exchange impact was going to be heaviest at the beginning of the year as well as we saw some benefit from our Environmental Solutions business as we cleanup work. So our plan had anticipated and we are largely in line with our plan that a ramp-up going from Q1 to Q2 and then ratably up thereafter. However you choose to do it at that point in time.

So from that profitability standpoint, the only thing that didn't happen really as expected within the quarter was there were some few disruptions in some plants that did not cause some higher costs. And then we did have some -- some certain accounting entries that we did that I've mentioned at the beginning. Outside of that the revenues along with our plan and the profitability had it not been for those things would have been actually slightly ahead of plan.

I want to pass it over to Bill to kind of talk about what he sees as far as opportunity to be able to ramp up to the revenue that you were discussing.

Bill Seward

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

One is it has to do with the emphasis we're placing on quality, revenue, and pricing. We have not yet rolled out but we will soon be rolling out in Q2, a reorganized commercial structure. One of the things I didn't talk about there was that we will be allocating or reallocating talent to this pricing and revenue management discipline. And we see based on some testing we did in February and March, some really good impacts happening rather quickly and we're going to be building that functionality throughout the rest of the year, we think that's a great opportunity for us to take price in addition to do an evaluation on not just price but revenue management where should we be charging appropriately for the value of the service we provide. That's one thing, we think is there for us.

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

Michael Hoffman

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

Cindy Miller

That's correct, Michael, and it can be now. One of the things that I did say is it's a -- this is a great team that with the announcement of Janet and Dominic and Cory today, we believe the team is complete. And part of the thing we realized is we knew this year was going to be a ramp, ramp-up means there's expectation that every quarter we get something not just the hockey stick that it -- that it happens all at the end of the year. So I really believe that with some of the advancements that Bill has made in a shorter period of time than we had anticipated. And then you combine that because obviously your question was about revenue. But if you combine that on the cost of revenue side and we turnaround and we take a look at some of the things that Rich Moore is doing internally from a cost of revenue and operations. And then back to Bill again, if some of the things that he's doing to help on the SG&A line. I think all of those things in conjunction certainly don't mean that that everything's weighted to a fourth quarter.

But we're encouraged and Michael remember, we were -- I'm not happy over the fact that that we had a couple of things happen from non-recurring items that that put us a little bit below internal targets but by no means based on the momentum that I'm seeing based on the leaders that we have in the team, I absolutely believe that we should be able to certainly recover, recover that, and move forward.


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

David Manthey

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

Cindy Miller

And I will turn it over to Dan. David, thanks for the questions and thanks for joining us today. I think overall you're getting back to kind of like the guidance question and it's very difficult. This is the first quarter earnings call that we have where it really is more of a year-on-year comparison as opposed to traditionally where it's always been compared to quarterly guidance. And I guess that the cadence and the rhythm needs to be a little bit different and we went through all the evaluations in terms of guidance and with all of the changes, in terms of transformation, in terms of executive leaders, we realize that while it's different and it's going to take a different rhythm for everybody, this new practice, we're focused on what are the most meaningful metrics that we think we can get.

And that's why we're looking maybe a little bit longer-term in terms of our strategy and looking at year-end. We think it's important to be able to give some insight quarterly and give some color as far as some trends. So I don't know, Dan, if you have anything else to comment. But as far as specific numbers, we won't be providing that at this time.

Dan Ginnetti

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

David Manthey

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

Dan Ginnetti

Yes. When I start and I think we're going to be repeating ourselves a little bit. I think Bill talked a little bit about some of the sales opportunities. If you just looked at the current results there was probably about 110 basis points of items that were not reoccurring. Those are the items that I said that that were accrual driven that go the way that's not expected to repeat.

And then within kind of the operations where we saw some year-over-year comparables, we also had some impact of some plant facilities that were closed, causing us to redirect waste. So from a cost standpoint, we think that we will not incur the third-party in the disposal rates that we were having to incur in some of the hauling. We also experienced some landfill issues due to the rainy weather down in Latin America and that will get behind us. And those are some of the things.

From a margin standpoint that you will not see repeating in Q1, that will give you a step-up more even into the range where we had anticipated. Like I said, we were about where we expected for Q1 absent those kind of unexpected items. And then I think Bill did a good job of kind of highlighting the focus of revenue. Also remember that as we've talked about in seasonality that paper tends to -- there are more recall -- are more purge type events that tend to happen Q2 and beyond than you typically would see in Q1 and very similar also in the project work related to our hazardous business.

Cindy Miller

And David, yes, a great question. And there's one thing, I think that needs to be mentioned. We might be taking it for granted in this room but obviously internally, we've got to make sure that we're putting in some spending controls to make sure that we're monitoring. So I spoke earlier about revenue. We spoke about improving the cost of revenue in terms of some operational things but then just straight up, we've got to make sure, we have plans in place to tackle and make some big changes in terms of our staffing and labor spend. We're looking at our outside consultant spend. We've got to rain that back. We're looking at everything including travel and discretionary expenses. We're looking at long haul and disposal costs over time and operations. The list goes on and I can tell you that everything is on the table right now for us to make sure that we rain in some of the spending, so that hand-in-hand and again that's part of the plan.

But hand-in-hand that along with everything else is going on in terms of quality of revenue, in terms of any of the growth, and then some of the fleet changes and those types of things. I think all of those things hand-in-hand provide us the opportunity to bridge that earnings per share gap.


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

Scott Schneeberger

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

Cindy Miller

No, no, Scott, great question. And maybe we should have mentioned a little bit earlier, it might have helped. When we talked about some key facilities being closed to give you an example, we have a facility in the West Coast Tacoma that had been closed because of fire. And as a result for that whole Northwest corner and everything that we bring in and out, we've now had to take on quite a bit of long haul cost and additional transportation expense that we didn't anticipate that that really, it hurt us more than we would have thought. We're now back up and on and running. So that's an example of that's not going to repeat.

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

Dan Ginnetti

Thanks, Scott. Really there's two other things. There were some that were listed in the EPS that were part of our revenue and our costs within the quarter and then there was also specifically key things [ph] and these are things that we feel very confident they wouldn't repeat. We did have some operating costs of about $6 million in the quarter that were related to insufficient accrual estimates at the end of the year. And we did have an overhaul of revenue that again got reversed out that was about $4 million and that has been corrected in Q1. The combination of that is about $0.08.

What I want to point out in that is that -- this is part of our remediation of material weakness efforts. And then in 2018 towards the end, we implemented a new purchase order system which is -- will be integrated as part of our future state ERP system. This system provided substantial benefits in streamlining and automating our payment process while at the same time, it did highlight opportunities to improve our estimation process. And so while we're working on addressing those. So I think we're pleased to had advanced one of our systems. We're pleased that the precision that it gives us but it did highlight things that we needed to do to get in line and we made those entries and those are not expected to repeat.

Scott Schneeberger

Great. Thanks, I appreciate that incremental color. Just one more from me. In CRS, the government shutdown, you indicated that probably had an impact and that's quite logical. Is the overall, did you see any improvement in the overall trend and that was what held the quarterback. And it was significant or is just the trend still somewhat weak. And are there any it was asked earlier but looks like there's a little bit of cleanup in that before or while you're trying to pursue strategic alternative. So is there -- are there any execution morale or otherwise issues there that are worth citing? Thanks.

Dan Ginnetti

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

The Recall business certainly we saw the beginnings of that at the end of last year, when the Federal government shutdown and what had been a trend of much or significantly smaller events we then also were -- as during the government shutdown saw virtually no new events being launched at that point in time. So that caused obviously more of an impact that we had based off the trend as we shared with you, that we were encouraged to see a slight return of volume coming in March.

As far as the cleanup, anytime you get new leadership and especially proven leadership has come from this industry, they're going to bring a tremendous amount of value. And I don't view it as cleanup as though we have glass to sweep up and I think it's the new leadership that brings new ideas and innovation and ability to drive efficiencies in the organization. Cory demonstrated that in the past and I feel very confident that he's going to be able to do that. So this isn't part of hey we need to kind of pretty this thing up. This is we're going to run the business and drive the most out of it and take advantage of the great leadership that have joined the company.


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

Jeff Silber

Thanks so much. If I would to try to summarize the tone of a lot of the questions here. I think that there is some questioning from our side whether you can hit the guidance for this year. And I know there's been a lot of numbers thrown around and maybe if we can go back to that Slide on page 13, so we can all set the bar for everybody. If we're looking at that slide, you highlighted one item that's non-recurring that's fine. But on the other three items that you segmented out there, what should we be kind of adding back to that 1Q 2019 base to sort of normalize a run rate going forward?

Dan Ginnetti

Yes, I'll start on it. So remember just from our own internal expectations, we're talking -- this is a year-over-year bridge. In the $0.23 -- we talked about the $0.08. In the $0.23 that is inclusive of the pricing that we've been discussing with you for over a year. That's inclusive of the year-over-year impact; that came from some of the benefit that we saw from California fires. It also adversely had the impact of some adverse weather and a day fewer in the quarter, so.

And then, finally, Cindy, talked about the operational items that are in there. I only talked about the ones that were specific to us, improving our systems, and giving us precision. The one Cindy talked about which were the disruptions and the redirection that would be in those numbers as well that we wouldn't anticipate being able to repeat.

And then you saw a tax impact in the quarter, year-over-year of about $0.06. Our adjusted tax rate was at about $0.33. That's not in line with our guidance and we expect the tax rate to normalize over the course of the year. That had to do with valuation analysis -- valuation allowances that we took in the first quarter.

So I don't know if I answered the question Jeff exactly, what you were looking at but inside that there's a significant amount of items that we're not going to be reoccurring in nature, whether it's the tax, the non-recurring items as well as some of the disruptions that we saw due to a few facility closures.

Jeff Silber

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

Dan Ginnetti

Yes, absolutely, Jeff. We're confirming our guidance and 66 was definitely handy. If you remember at the end of the call last year I talked about some CapEx that was in 2018 [ph]. That was probably about $15 million of what came over into the quarter. We also had a business transformation expenses as we're ramping up our ever efforts to prepare for that. And so we anticipated a heavy first quarter due to those things that we talked about and as well as the spending but we still feel confident that the $180 million to $200 million CapEx target for the year is in line with our expectations.


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

Michael Hoffman

The two new people Cory, where she come from and two when does Janet start?

Cindy Miller

Great questions. Janet starts June 1st and we're very excited. If I can just take a minute just to share a little bit about that the CFO search and about getting Janet. We were very impressed with the amount of candidates and the applicants that we had for the position, it was very impressive and it was actually -- I was so impressed going through and dealing with the interviews. But what Janet brings that we're very excited about that you've probably noticed is she was the one that had both CFO and traditional CFO Internal Audit, all of the financial audits and practices. She also was the CIO and she had an opportunity to really lead her company their transformation. And when you take a look, I know Michael you're very familiar with the 65 different financial systems that we have that we're trying to get down to a manageable amount.

Having known that, she's gone through it as a CIO, she is just going to compliment all the efforts that we're actually tackling right now with our own current CIO in terms of our ERP and some of the things that we need to tackle right away. And to be honest that the whole financial piece, the plan to perform the accounts report, all of those types of things are extremely important. So she is going to be instrumental.

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

Michael Hoffman

Okay. The second question going back to if I take the Slide 13 strategy again and we have to average basically $0.08 a quarter to get to the mid-point of the guidance. How much of that bridge that $0.41, am I looking at on Page 13 and how much is coming from things like Bill talked about quality of revenues and Cory fixing cost issues?

Dan Ginnetti

And Mike, I'll just add to that, some of that is seasonality as well, so.

Michael Hoffman

Okay. And seasonality --

Dan Ginnetti

And nothing happened on this page. We would expect it grow into that and I'm not going to give you that kind of the quarter-to-quarter cadence for all the reasons that we've discussed before. But Q1 is atypical or traditionally lower quarter that ramps up into Q2, really in areas like we typically see a higher level of purge volume in our Secure Information Destruction business, we typically see a return in the Environmental Solution Business especially for any kind of remediation work that's outdoors.

And then we typically see -- begin to see other parts of our business kind of driving along. Q2 is typically one of the better quarters. So you have a significant amount there that's just didn't grow. And then as we shared with you, you have $0.08 somewhere and I don't want to go exact, probably somewhere in the $0.10, $0.15 of expenses that we incurred that are absolutely not going to repeat themselves next quarter because they were one-time in nature. So it's a combination of both and then tax was a headwind in the quarter and we don't expect to be operating the full-year anywhere near the 33.2 adjusted tax rate and so that's part of it.

Cindy Miller

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


And there are no further questions at this time.

Cindy Miller

All right. So thank you, Catherine.

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

And with that, we hope everyone has a good night. Catherine, this ends the call.


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