Stericycle Inc (SRCL) 2017 Q4 法說會逐字稿

Good afternoon. My name is Jesse, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Stericycle's Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) Jennifer Koenig, Vice President of Corporate Communications and Investor Relations, you may begin your conference.

Thank you. Good afternoon, and thank you for joining Stericycle's Fourth Quarter 2017 Earnings Call. On the call today are Charlie Alutto, Chief Executive Officer; Dan Ginnetti, Chief Financial Officer; and Brent Arnold, Chief Operating Officer.

The discussion during today's call includes forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Other 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 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 as a reliable indicator of future performance -- should not use historical trends to anticipate future results or trends. To the extent permitted under applicable laws, 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 footnotes and schedules on our earnings press release, which can be found on Stericycle's Investor Relations website.

Finally, today's script will correspond with a presentation which is available on our Investor Relations website. So please refer to those slides.

With that, Charlie Alutto will begin our discussion.

Thank you, Jennifer. Welcome, everyone, to our fourth quarter and full year 2017 earnings conference call. I'd like to reiterate that we are providing additional details for this call in the presentation available on our IR website. Also, as a result of feedback from our shareholders and in an effort to increase transparency, you will see and hear additional disclosures on our financial and operational performance, both this afternoon and going forward.

Now turning to today's discussion on Slide 3. I thought it was important to review our leadership position, our vision and our long-term opportunities. Today, Stericycle is a leader in multiple large and fragmented markets. The markets we serve continue to grow, driven by increasing regulations, the focus on sustainable waste solutions, the aging population and our customers' desire to outsource services to focus on their core businesses. We also have long-term customer relationships on multiyear agreements and continue to identify cross-selling opportunities. The strength of our service lines and markets, combined with the actions we are taking to strengthen our organization, will accelerate our penetration in a growing $38 billion global market and position the company for long-term growth and improved financial performance.

So with that as a backdrop, let's review our agenda for today's call. We'll first discuss our strategy and the Business Transformation; Brent will highlight our performance by service line; and Dan will review our Q4 and full year results; and finally, Dan and I will review our 2018 outlook.

Now let's start with Slide 6 and the Business Transformation. As I introduced on the last earnings call, we are undertaking a comprehensive, company-wide Business Transformation to strengthen our business and position Stericycle for continued success for many years to come.

We recognize there is a clear need for change. Nearly 500 acquisitions over 25 years has resulted in more than 450 business applications and over 65 financial systems. There are certainly opportunities to drive synergies, improve processes and reduce redundancies. In addition, competitive pressure, including pricing, remains a challenge. We know that the performance of our noncore assets has been inconsistent and we must enhance our control and compliance efforts.

Since our last call, we've also identified additional strategies and investments for the long-term health of the business which will have an unfavorable impact on our 2018 guidance. In all, we've determined our operating model needs to be reconfigured to more effectively manage the business and enhance the return to shareholders in the future.

The Business Transformation is focused on a clear vision to build best-in-class performance management model, as outlined on Slide 7. We expect this will enable us to deliver an enhanced customer experience and greater value for shareholders through predictable growth -- profit growth, stable compounded revenue growth of 3% to 5% and adjusted EPS growth of 6% to 10% over the next 5 years. To carry out this transformation, we conducted comprehensive research and due diligence and hired leading consultants to help us with the diagnostic assessment of the business. Through this process, we identified a number of strategic improvement opportunities.

To execute against these, we've established dedicated project teams and upgraded an internal talent to help with oversight and ensure success. And to drive accountability, we developed detailed work plans and metrics to track our progress.

Slide 8 provides an overview of the key initiatives of this Business Transformation to help you understand the full scope and magnitude of the effort. We will be implementing a global enterprise performance management operating model. This new operating model is expected to standardize global end-to-end processes, align the company around key performance indicators and improve data management and decision-making. A global enterprise resource planning system is the central component of our Business Transformation and will become the backbone of our performance management model. With an ERP, we will integrate all of our service lines and geographies onto one operating system.

The 5 key initiatives of the Business Transformation include: portfolio rationalization; operational optimization; organizational excellence and efficiency; commercial excellence; and strategic sourcing.

First, we are evaluating our portfolio to rationalize noncore assets. Second, we are improving our operations by standardizing our route logistics, modernizing field operations and driving network efficiency across facilities. Third, to achieve operational excellence and efficiency, we are optimizing our organizational structure which began in November. Furthermore, we'll be aligning our structure around a global shared business services model. Fourth, to achieve commercial excellence, we are aligning our sales and service functions around the customer. We are standardizing our customer relationship management processes and expanding customer self-service options. And finally, we are implementing global procure-to-pay processes and improving demand management. We expect these initiatives will drive efficiency and enable Stericycle to better capitalize our growth opportunities with improved financial performance.

In addition to the significant operational benefits, we are focused on ensuring that the Business Transformation delivers an appropriate return to shareholders. As you've seen on Slide 9, we expect the Business Transformation will deliver an IRR of greater than 85% against our projected onetime program investments of $275 million to $300 million. As a result of near-term initiatives, in 2018, we expect initial adjusted EBITDA benefits in the range of $60 million to $65 million, which will partially offset our current business challenges. We expect cumulative adjusted EBITDA benefits of $850 million to $1 billion between 2018 and 2022.

The Business Transformation is expected to deliver strong bottom line growth. Over the next 5 years, we expect to deliver adjusted EBITDA on a compound annual growth rate of approximately 5% to 9% and an EPS compound annual growth rate of 6% to 10%. Over the same period, we anticipate generating substantial free cash equivalent to a compound annual growth rate of approximately 10% to 14%. This cash flow will provide additional levers to create value for shareholders.

Slide 10 reviews our anticipated milestones for the Business Transformation and the timing of the financial returns. To date, we've made good progress on the early phases of the transformation. In 2018, we will focus on executing near-term efficiency initiatives, making the necessary investments to ensure success and defining the blueprint that will deliver our target operating model.

In 2019, we intend to build and test the enterprise resource planning system and related enterprise performance management system. In 2020, we intend to roll out the ERP in the U.S., with deployment internationally beginning in 2021. We anticipate realizing the full value of the transformation in 2022 and beyond. Our investments in the transformation will weigh heavily in the first 2 years, primarily due to the upfront investments in the ERP system. We are executing on some near-term initiatives to drive adjusted EBITDA savings in 2018 and 2019, and we'll begin to realize the vast majority of the financial benefits in 2020 and beyond. This is truly a transformational effort to redefine how Stericycle operates.

Now on Slide 11. We are also conducting a thorough review of all of our service and geographies to determine their long-term fit within our organization and rationalize our portfolio. Our assessment includes screening for financial criteria such as long-term growth, return on invested capital and margin improvement. We will also look at strategic criteria, including alignment with our business model and core competencies, ability to leverage our infrastructure or customer base for growth, potential impact to current services and implications for the ERP implementation.

Over the past 18 months, we applied some of these criteria that make a number of portfolio decisions. This included the divestiture of the Manufacturing and Industrial asset in the U.K., the exit of our U.K. patient transport business and, most recently, the divestiture of our Secure Information Destruction business in South Africa. We will evaluate future potential divestitures to enable us to be more strategically focused and better positioned for continued growth and improved profitability.

Turning to Slide 12. The ERP system will enable us to further strengthen company-wide controls and complement ongoing compliance efforts. We have expanded our compliance, legal, financial and audit teams to strengthen our overall compliance program. We are also instituting new policies and procedures as well as increasing internal monitoring programs. The standardization of our information technology platforms that will come with the ERP implementation will further strengthen controls and support our compliance program. You will see the results of some of these efforts in our financial results today and in our periodic filings which include enhanced disclosures.

That concludes my overview of the Business Transformation. Brent will now discuss our Q4 revenues and performance by business line.

Thanks, Charlie. Turning to Slide 14. Total revenues for the fourth quarter were $887.8 million, down 2.1% from $906.4 million in Q4 2016. When adjusted for Manufacturing and Industrial, revenues decreased 1.6%. Acquisitions contributed $6.8 million to revenues and divestitures reduced revenues by $10.2 million. Growth was also unfavorably impacted in the quarter by a challenging comparison due to a record event in our Communication and Related Services business in Q4 2016.

Revenues from each of our service lines in the fourth quarter were as follows: Regulated Waste and Compliance Services, $497.7 million; Secure Information and Destruction Services, $202.2 million; Communication and Related Services, $97.2 million; and Manufacturing and Industrial Services, $90.7 million.

This quarter, we closed 6 tuck-in acquisitions, including 5 in the U.S. and 1 internationally. These acquisitions contributed revenues of approximately $1 million in the quarter, with projected annualized revenues of $9.7 million. In alignment with our portfolio optimization strategy, we divested a Secure Information Destruction business in South Africa. The divestiture reduced revenues in the quarter by $300,000 and was an annualized impact of $3.5 million.

As expected, Regulated Waste and Compliance Services revenue was down year-over-year. This was partially due to the previously announced patient transportation exit and divestiture. This result included strong growth in both retail hazardous waste and additional services to hospitals.

Secure Information Destruction Services continues to perform well. We had a record number of new installations among our national and regional accounts in the quarter. Organic revenue growth in the quarter was 5.5% and 6.1% net of paper.

Communication and Related Services also had a strong quarter with continued execution of recall events. However, it was down on a year-over-year basis given the comparison to our record quarter in the same period last year.

As expected, Manufacturing and Industrial Services was down when compared to the same period last year.

I will now hand it over to Dan, who will discuss our financial performance for the fourth quarter in greater detail.

Thanks, Brent. Turning to Slide 16 for our key financial performance. As Brent discussed, quarterly revenues were in line at $887.8 million. Adjusted EBITA was $151.5 million. Results fell short of our expectations due to the following factors: We incurred approximately $7 million in higher-than-expected costs. We recorded accounting adjustments of approximately $7 million. These adjustments are primarily related to our progress on internal control remediation efforts and are not expected to repeat; and we recorded a noncash depreciation and fixed assets expense of $18.5 million, the majority of which will not repeat. This resulted in an adjusted EPS of $1, including some international tax favorability.

GAAP EPS was $0.97. This includes the favorable impact of $1.52 from the federal tax reform, offset in part by noncash goodwill impairment charge in Latin America as part of our annual impairment testing in the fourth quarter and other adjusting items. Adjusted cash flow from operations was $165 million due in part to stronger collections and favorability related to timing of accruals.

For additional color on EPS, let me take you through a few details on Slide 17. Street consensus for EPS was $1.14. EPS from operations was equivalent to $1.09 or short of Street consensus by $0.05. This was primarily due to higher costs in Europe, including the last of some stranded costs from the patient transport business. In addition, our U.S. Regulated Waste and Compliance Services business saw increased costs related to the installation of a new large LQ contract, some higher fuel and energy and a shift in the expected mix of LQ and SQ growth. This was partially offset by a strong quarter in C&RS. In the quarter, there were some nonoperational expenses, including: $0.14 of catchup and acceleration of noncash-related depreciation; $0.04 from control remediation and policy harmonization, offset by $0.09 of favorability in the interest and tax not related to U.S. tax reform. Q4 adjusted EPS came in at $1.

Slide 18 covers our full year 2017 results.

Now for the balance sheet on Slide 19. Our covenant debt-to-EBITDA ratio was 3.66 at the end of the quarter. The unused portion of the revolver was approximately $597.5 million. In the quarter, we repurchased 65,000 shares of the mandatory preferred convertible for $3.4 million. At the end of the quarter we have authorization to purchase an additional 2.7 million shares. For the year, cash from operations was $508.6 million, and when adjusted for recall reimbursement and other items, cash from operations was $625.5 million. CapEx was shares was $143 million or 4% of revenues. And our DSO was 63 days. As I mentioned, our debt-to-EBITDA ratio is 3.66. The company's credit facilities contain a number of covenants, including financial covenants to which the company was in compliance at December 31, 2017. Based upon the company's expected 2018 Business Transformation investment plan, it is reasonably possible that the company could exceed a debt-to-EBITDA leverage threshold at some point in 2018. This risk can be mitigated through appropriate spending controls and/or seeking temporary relief from the leverage covenants from our lenders. We have a strong relationship with our lenders who have been supportive of the company in the past. We have approached our lead arrangers and believe there are fair options that will enable us to continue to invest in the future of Stericycle.

I will now hand it over to Charlie to go over our 2018 outlook.

Thanks, Dan. Now for our guidance for 2018 on Slide 21. Please keep in mind that these are forward-looking statements. Our guidance does not include future acquisitions or divestitures and is based on currently known items.

For the 2018 outlook, we'll be focusing on operational results and EBITDA. This metric is more commonly used, better aligns with our covenants and is a proxy for cash flow. Based on feedback from our shareholders, we will only be providing guidance for our cash from operations and free cash flow on an as-reported basis. Based on the current business environment, we believe annual revenue for 2018 will be in the range of $3.48 billion to $3.63 billion using current foreign exchange rates.

The worldwide revenue guidance for each of our service lines is: Regulated Waste and Compliance Services will be in the range of $1.92 billion to $1.97 billion; Secure Information Destruction Services will be in the range of $870 million to $910 million; Communication and Related Services will be in the range of $355 million to $385 million, depending on recall revenues; Manufacturing and Industrial Services will be in the range of $335 million to $365 million.

We believe adjusted EBITDA will be in the range of $760 million to $810 million. We expect adjusted EPS will be in the range of $4.45 to $4.85 using a share count of 90.5 million, reflective of the conversion of preferred shares and an effective tax rate of approximately 26% to 26.5%. We believe cash from operations will be in the range of $510 million to $560 million. We expect CapEx will be between $160 million to $180 million and free cash flow of $330 million to $400 million.

Slide 22 provides an overview of our assumptions for the 2018 guidance.

I'll now turn it back to Dan.

Thank you. The chart on Slide 23 provides a bridge from the directional guidance reviewed on the Q3 2017 call. We had anticipated that 2017 EBITDA results would be approximately $835 million and that 2018 would be generally flat.

Let me highlight what has changed since the last call. First, our Q4 results did not come in as anticipated, and approximately $5 million of that expense will continue in 2018. Next, we expect an impact of $25 million related to a revised long-term commercial strategy focused on strengthening our SQ relationships. We will make a $10 million investment in our IT infrastructure to stabilize our legacy IT environment and prepare for future ERP implementation. Lastly, with the completion of our 2018 detailed implementation plan for our Business Transformation, we have refined the timeline of recognized savings, which resulted in a shift of $10 million into future years.

As I highlighted on Slide 24, we expect a tax rate in the range of 26% to 26.5% as a result of the recent tax reform. We anticipate this will have an adjusted EPS benefit in the range of $0.55 to $0.65, which is already incorporated into our guidance, and will benefit cash from operations by $20 million to $25 million. We intend to utilize this cash in support of our ongoing capital allocation priorities.

Turning to Slide 25. We will continue to maintain a disciplined approach to our capital allocation strategy. Our approach allows for debt reduction and share repurchases as well as tuck-in acquisitions that expand our route density and operational throughput. Long term, we expect our continued strong free cash flow will provide additional levers to enhance shareholder value.

I will now turn it back to Charlie for final remarks before we open it up for Q&A.

Thanks, Dan. I want to reiterate that the entire Stericycle team is committed to our Business Transformation and improving our long-term financial performance. The transformation will enable Stericycle to enhance our customers' experience, drive operational efficiencies and improve shareholder returns. We look forward to providing updates on our progress on future earnings calls.

We'll now answer your questions. Jesse, please open the line for Q&A.

(Operator Instructions) Your first question comes from Ryan Daniels with William Blair.

Yes, let me start with one on the $25 million EBITDA hit to initial expectations for the long-term SQ strategy. Can you talk a little bit more about what that $25 million investment is? Is that kind of on the marketing front? Is it changing your pricing structure? Just any color there because that's a pretty big gap.

Ryan, this is Brent. I'll take that one. Really, the long-term SQ strategy is really based on the work that we've done with our data analytics team and multiple pilots that we've completed over the last, I would say, 4 to 5 quarters. With that, we've had some key learnings in the business, and we'll be rolling out 3 initiatives focused on strengthening our customer relationships as well as improving our long-term performance. Of the 3 initiatives, the first being we're going to reduce or limit our annual price increase with specific customer segments in an effort to reduce our churn and long-term discounting. We're also going to be expanding the number of customers with a dedicated account manager. And really, those account managers will serve as the single point of contact for those customers for Stericycle. And then finally, we're going to be making some additional marketing investments to promote our brand in the marketplace. While all these investments or initiatives come with an impact to near-term results, we are confident they will help strengthen our relationships and improve the long-term performance of our business.

Okay. Thanks for that. And then as my follow-up, just looking at the anticipated $60 million to $65 million in adjusted EBITDA benefits in '18, it's a pretty good chunk of the overall EBITDA, about 8%. How visible at this point in the year are those benefits based on what you've already done? And how much is kind of still out there, where we're going to have to continue to monitor that going forward to ensure that you can achieve those results?

Yes. Thanks, Ryan. We do have line of sight on the entire $60 million to $65 million. We have dedicated teams and work streams associated with all that. Some of that has been accomplished through the organizational excellence and restructuring that we did in November. We will give updates as we go through the earnings calls on the progress of not only the $60 million to $65 million in 2018 but where we're tracking for the entire savings under the Business Transformation initiative.

Your next question comes from Gary Bisbee with RBC Capital.

Where to start? There's a lot there. It's going to be tough to keep it at 2, but I guess I'll try my best. The -- so the long-term growth targets that you're, I guess, updating from the ones you gave 15 months ago at the Investor Day, when do you expect to start to grow? Obviously, you're calling for declines in 2018. And are those CAGRs calculated based off of what, I guess, I would suppose as a bottom in '18 and then growing from there? I mean, I'm just trying to get a sense for visibility into the ability to deliver this given the continued challenges you face.

Yes, obviously, the CAGR is over the entire business over the 5-year period. Certain parts of our business are growing well, C&RS and the Secure Information Destruction Services. We do anticipate -- as you can see from the revenue tables on the guidance we gave for 2018, we still see a decline in RWCS next year. That's obviously continued pressure on the discounting in SQ, and it has some impact as well, Gary, on the divestiture of the assets. We feel that, when we leave '18, we will start to grow the business from '19 and forward. But certainly, we have short-term challenges. When we look at the CAGR, the CAGR is over the entire portfolio.

And Gary, as you saw on the graph, you see the savings in 2018 with the modest savings in '19. And then it really does ramp up in 2020 as we begin to implement the European EPM system, you begin to see those savings over our entire shared services as well as some of the -- that have carried forward from the earlier year.

And so just to be clear, I guess, the follow-up would be around the adjusted results. Is there any change in how you're thinking about what you adjust out to get to those adjusted versus the past? The fourth quarter seemed like there were a couple of things that maybe historically you might have adjusted out but you didn't. And then I want to be clear as part of that, you are including the savings from the transformation initiatives but you're adjusting out the cost that you're facing to deliver those savings. Is that correct?

Yes, a 2-part question there. I'll go at the back one first. That is correct that the cost, the $275 million to $300 million will be captured within that. And we'll begin realizing the savings, again, the majority of which, as we discussed, in the frequency and the cadence that we just answered the question to. The second question has to do really with some of the things that we adjusted from a theme approach. One of the things I hope you saw in the spirit of not just in this Business Transformation over 5 years but in all aspects of our business, we took a holistic approach and really looked to improve the press release financials. I think you'll see a -- more disclosures in our 10-K as well. And so we -- will be changed on the adjusting items. They're taking more a thematic approach with more footnotes. We would give you more transparency in there in exactly what we're backing out. And so you should be able to follow along with us each quarter and each year on what items we're putting in there. I think you've seen some good progress on some of these numbers coming down, but certainly with Business Transformation and capturing it there. You'll see that number and be able to track along with us along with the saving.

The improvement in the release is definitely noted, and we appreciate it quite a bit. Thank you.

Thanks, Gary.

Your next question comes from Scott Schneeberger with Oppenheimer.

Thanks a lot. And kind of following up on Gary's questions, obviously, that you're doubling the EBITDA in the next 5 years with the Business Transformation. So I just want to understand what the revenue -- I get the CAGR of the revenue provided as well, but what I'm getting to is, is this before divestitures occur? Because clearly, that's going to happen. And then, if you could please elaborate on the sense of urgency with the divestitures.

Yes. So first, this does not contemplate any divestitures beyond what we've already discussed, most recently being the divestiture on our Secure Information Destruction business in South Africa. Certainly, there is a sense of urgency to look at all aspects of the Business Transformation and the 4 pillars that we've discussed. And so we will be working diligently. We want to make sure that whatever -- in 2 years, whatever service lines or geographies are with us we are committed to, to make sure that we implement our ERP system and the time and energy it takes to be able to do that over that. And I think, Scott, sorry, there was a second part to that question.

Yes. Well, yes, just on that end, just really on, obviously, you're going to be working towards getting ERP implemented, and you want to have these divestitures done before that. I think you just answered that.

Yes. I think, if you looked at the criteria we put in there, one of them is the implications toward ERP, Scott. So one of the nonfinancial views we'll use in evaluating a service line or geography is, if we hold on to that asset, how hard is it to implement into the new ERP platform? And certainly, that'll be one of the criteria that we look at when we make a decision on the rationalization of the portfolio.

All right. Thanks, guys. And as my follow-up, I'm just curious on the cadence, quarterly cadence of this 2018 guidance overall. And then also, if you could slip in at the end how you think about compliance with the covenants and when you might be at the danger areas on that or actually breach on that?

Sure. As far cadence, I think the most important number would be to remember that Q1 typically has seasonality built into it, and then you see a bit of a recovery into Q2. You have the EPS guidance for the year of $4.45 to $4.85. I think the way I would start that is in Q1 to be in a range of $1 to $1.10. And then you take it up ratably thereafter, probably a little bit more than a rational step-up in Q2, and then more static going from Q2 to Q3 to Q4 in the growth. We'll provide Q2 and further guidance on the next call. Coming out of Q1, I'd stick with $1 to $1.10.

Thanks, Dan. And just -- and touching on the covenants, if I could...

On the covenant, yes. So it's very difficult to tell on that , because obviously, the expenses that we have contemplated, including the Business Transformation, some legal fees, these things are very difficult to predict. And so we have modeled this out through the year, and we believe that there are points in time if they come in, in certain chunks, that we could -- we stand -- it's [reasonably] possible that we could exceed that. What I would share with you is that, as I mentioned, we have a very strong relationship with our lenders, and we have reached out to the lead arrangers. As you're evaluating this, I would share that it would be appropriate -- inappropriate for me to discuss kind of a plan, but our company generated very strong free cash flow. We paid nearly $500 million in debt over the last 2 years, and we have the ability to service our debt obligations. So we've reached out to them. I think we can come up with a plan that is fair, that will allow us to continue to invest in the business. More to come on that as we get along -- a little further along with our lenders.

And I think, Scott, just to add to that, the other thing is the uncertainty of the $295 million of action, when that'll be paid. There's really no update on that it there're steps that have to be taken, but we just don't know when the $295 million of the legal settlement will actually be paid out.

Your next question comes from David Manthey with Baird.

Guys, maybe you could help me understand Slide 10 in a little more detail. When you say that the gray line is incremental benefits, does that imply that 2019, even though the curve comes down, it'll be greater than $65 million? And then just if I look at that overall number, it's $170 million to $200 million annually, I guess, if you average it. When would you anticipate hitting that average level? And I guess, when we hit 2022, you're going to have to be significantly above that. Am I thinking about it correctly?

I think how I would read that graph is the gray bar is the in-year anticipated savings. And as we shared with you, with the business -- early steps of the Business Transformation, we expect $60 million to $65 million in 2018, some of which will carry into 2019. But we have some incremental savings opportunities that we will have there. The green bar is the cumulative effect, and that's why you see that never bending down. It will continue to go up as we enjoy that cumulative benefit, which will be anywhere in the range of $850 million to $1 billion over the 5-year period of time.

And then, David, a significant part of the savings comes with the implementation of the ERP, and that's why it's back-end-loaded. Because that's when we see and unleash the efficiency of the back office functions, our operational optimization. We'll get some initiatives and savings before that, but the vast majority comes in after they're implemented in 2020.

But if that green line in 2022 is that $850 million to $1 billion and the gray line in 2018 is $65 million -- $60 million to $65 million, it just doesn't look like the magnitude is anywhere close. I'm just trying to figure out, what does -- so in 2020 you're anticipating what, a couple hundred million? I just don't understand how to read this graph.

Yes. I think if you look at it you'd see, in 2022, there's $250 million of EBITDA as well. The green line is a cumulative representation of the savings. But I think that's what it's supposed to represent, accumulative.

So David, you would save $65 million in the first year, you would save that same $65 million in every year thereafter. And then as you save incrementally more in '19, you'd add to that and incrementally more until it creates that compounded effect. That gray bar is not meant to indicate at any point are we getting back any of the savings that we anticipate saving.

Correct.

All right. That helps. Thank you. And then as a follow-up, it looks like you're allocating $40 million to $80 million in capital allocation for acquisitions in 2018. That -- it seems a little bit like changing tires at a moving car here. Why not just stop the M&A program while you fix the organization and pick it up later? I'm just wondering why you would allocate that, especially given your capital challenges you talked about.

Yes. I'll take that, David. I mean, certainly, our focus is only on small tuck-in acquisitions that still have a very good return. You're right, we're not going to be going after any acquisitions that add complexity to the ERP or on any part of the Business Transformation initiatives or delay them or risk to the timeline. But certainly, the team can still take in really small tuck-in deals, especially in the U.S. in shredding or medical waste or in some of our more mature international markets. But that's a much lower amount than we've had historically, so I think you could see that we have pared down on acquisitions, with respect -- especially with the size side of the acquisitions, and any of the complexity of new service lines.

David, remember also, not only everything that Charlie said on that, but remember that an acquisition comes with EBITDA as well. So if that $80 million, is that -- the dollar amount we end up on, that's not strictly dilutive to EBITDA, as it does come with the trailing 12 months of EBITDA and the opportunity for us to execute on that and generate a return that can actually help us delever.

Your next question comes from Michael Hoffman with Stifel.

I have no idea how I'm going to do this in 2 unless I ask a multilayered question. So let me start with Slide 10. Can you tell us the absolute numbers for the blue bars and what your expectations are at the moment?

Yes, the blue bar is the cost of the initiative, which is the $275 million to $300 million.

Yes, yes, yes. But what are you -- so what's it in '17? What's it in '18? What's it in '19? And what's it in '20? Tell us by year.

Yes, I think, if you look at the guidance that we gave you on the press release, it even has an outlook section, and you can see that, in 2018, we're anticipating about $100 million in spend directly related to the Business Transformation. In 2017, it was about 1/4 of that. And really, this is meant to be directional. Certainly, it's going to be delivered based on how we can move on to the next step effectively, making sure that we capture everything and that we are as detailed as possible to make sure the implementation happens according to plan.

Yes, and I think, if you go back to my prepared remarks, we even said it obviously is front-loaded. So a majority of it is in '17, '18 and '19 as we prepare for the implementation of the ERP system.

So $25 million, $100 million, 75 and then the remaining $75 million to $100 million spread over the last 3 years?

Yes, we'll get back to you with the exact breakout. But yes, and nothing -- and really, that spend is done by 2021; we'll fully realize the initiative in 2022.

Okay. There's a $78 million, $79 million rounding delta between how you finished in Regulated Medical Waste versus the midpoint of guidance. I'm assuming $45 million of that $79 million is SQ price. What's the remaining $33 million or $34 million?

Yes, the $45 million is SQ price and the majority of the other delta is from the divestiture of the patient transport business in the U.K. and the contracts of the patient transport exits that we had during 2017.

Your next question comes from Sean...

And the other thing just -- I'm sorry, the other thing on that, Michael, was there is a delta on foreign exchange. It adds something like a $12 million headwind in 2018.

Your next question comes from Sean Dodge from Jefferies.

So maybe going back to the portfolio optimization. Charlie, can you give us a sense of what, at this point, you'd consider to be nonstrategic or maybe an idea of how significant or expensive the rationalization could be? I guess, does it -- would you consider the entirety of M&I to be included there and are you potentially looking at exiting things like ComSol or curtailing a big portion of your international footprint?

Yes, I think -- Sean, I think, at this point, it'd be prudent not to talk about specific businesses that we're in, in alliance what would be core and noncore. I mean, certainly -- let me take you through maybe South Africa to give you a little flavor for the decision with respect to the South African divestiture. So you can kind of -- as we looked it through, I gave an update on what the financial and the strategic criteria will be. But if you look at South Africa, it was a limited opportunity to roll out additional services above and beyond Secure Information Destruction. Included is that the business, as they continue to grow, we did have good growth in South Africa, but continued growth would have required us to have a local equity partner, as required by the government regulations. And given those factors, and also given the fact that there was solely going to be Secure Information Destruction, we decided to divest this business. I think, as you think about the patient transport business, certainly, that would be an easy one to say, "Hey, that was noncore to the business," or M&I in the U.K., where we weren't really creating a link between our operations and functions. So we will continue to look at that. We are also going to look at it through the lens, as we said earlier, of the implications of the ERP. Certainly, if we think it could delay or create risk in the Business Transformation, we wouldn't want to -- we want to make that decision before we implemented the ERP system.

Sure, okay. And then on the 6% to 10% EPS, the long-term growth target there, maybe a quick one on the underlying assumption. Is that range inclusive of any benefits you'd get from deploying the cash you expect to generate over that timeframe? I know the EPS guide doesn't include any M&A, but does that include debt repayment or any buybacks or any balance sheet kind of driven growth?

No. Yes, I think when you look at the long-range EPS plan, it doesn't include anything with respect to acquisitions, debt reduction or share repurchases. However, if you look at our guidance for 2018, as we continue to take advantage of the repurchase of the mandatory preferred shares, there is $0.17 built in to the 2018 guidance. So above and beyond using free cash, accelerated free cash for other levers, it's not included in that compound annual growth rate.

Your next question comes from Hamzah Mazari with Macquarie Capital.

This is Kayvon Rahbar filling in for Hamzah. Can you give us an update on how medical waste pricing is trending relative to your prior guidance of about $130 million headwind?

Yes, let me do that, Kayvon. For 2017, remember, we guided that we'd be at about a $45 million SQ discounting amount in -- for the year. We actually came in slightly better than that for the year. We still anticipate the impact to be about $130 million, which would imply that we still have in our guidance about $45 million in SQ discounting in 2018 and an additional $20 million in 2019.

Okay, thanks for that. And then the other -- the follow-up question I have is, you've mentioned earlier about the highly regulated nature of the business you're in. Can you give us a sense for how that's changing some of the competitive landscape, specifically, in the compliance work that you guys do?

Yes, I think -- I don't think there's been a significant change. Obviously, we work in markets that are highly regulated, both for ourselves and our customers, and that's the service we sell, which is around compliance and making it easier for our customers to comply. I don't necessarily see the competitive landscaping changing. Obviously, we've always been a premium price in the marketplace. We've always said that. And that is related to some of the discounting that we're taking now in our SQ business. I think that has added a lot factors there. And so our price in the marketplace, it is pressured in health care, a consolidation in the health care market. So I think that has changed. And I don't know necessarily if the competitive market has changed. I think, when you think about our hazardous waste or M&I business, I think that has gotten more competitive. I think when we think about M&I, when we see it, especially in the project and large customer volume accounts. And I think that has to do with some extra capacity that's in the marketplace now. I think, for us, long-term M&I means a shift or a pivot to more smaller and medium customers, where, I think, our service provides greater value and convenience. So I do see that has been more competitive, but I think that has been a change in the market. But I think that's what we're seeing in the M&I business.

Your next question comes from Kevin Steinke with Barrington Research.

So of that $275 million to $300 million of total investment in the Business Transformation, are you able to share how much of that is specifically for the ERP system implementation? And then I don't know if you could share the system you chose and who the integrator is going to be.

Yes. In fact, thank you for asking that, because it allowed me to hop back on a number of questions that were out there. So first of all, of the $300 million that we put out there, the $275 million to $300 million, I wanted to share that about 1/3 of that is for capital expenditures. And so that's directly in response to Dave's question about what goes to the adjusting items on that and the theme that we have for Business Transformation. The capital will never show up there. The capital will just go into CapEx. Once it begins to be depreciated, that means the asset is being utilized, and that will never show up in the adjusting, that will just be in our results. The spend that we have on there will be, and this is really to Michael, the first year of 2017, we had about $42 million. You saw about $30 million of that was consultive-type work and about $11 million of that was CapEx. You should expect about $115 million or so in '18; about $90 million to $100 million, say, in '19; and then moving down beyond that. And Kevin, to answer your question, about $175 million to about $200 million of that is directly related to the ERP. We did select to go with SAP, the latest S/4HANA platform which is cloud-based. As far as system integrator, we are in the final, final, final stages of negotiation. And so I probably could share that to you in about a week or 2, but unfortunately not today.

Okay, no problem. That's very helpful. And on the -- following up on the $25 million of added SQ investments in 2018. I was curious about the one component, which is the dedicated account managers, and wondering if you see the potential there to maybe alleviate some pricing pressure by strengthening those relationships and just simply better educating customers about all the offerings that they currently have with Stericycle and making sure they use them appropriately. So maybe that helps alleviate pricing pressure. And then maybe also, does it help you on your cross-selling to the SQ customer base?

Kevin, it sounds like you were in the meeting. You're exactly right. As you are very familiar with, we've got account managers in our hospital sales group, our regional and national accounts groups, our Shred-it groups. That model works very effectively across a lot of pieces of our business. And just like you said, the goal of that account manager is to serve as the trusted adviser and that one single point of contact for the customer. And really, by doing that, it allows us to build relationships with the customer, better understand their needs, which enables us to match their needs with our compliant services. So traditionally, we've -- our upsell and cross-sell has been more of a transactional model, and so we're making this shift, in -- not in all areas, but in more areas with an SQ. And again, our pilots showed that it helped reduce churn, it helped reduce discounting, and it really created a platform for upsell. The challenge is it takes time, right? It takes time to build those relationships. And in that interim period, you have higher expense as well as less upsell to that subset of customers. So again, we're very excited about the long-term potential. I think you're right on with the benefits. We see it the same way. It's just a matter of it'll take time for us to get there.

Your next question comes from Isaac Ro with Goldman Sachs.

I want to start briefly with a question around the current business environment. I think the prior question has touched a little bit on what's going on in Regulated Waste. And I'm curious, as the settlement notices have gone out, has there been anything surprising that would indicate kind of how you think customers will behave with regards to future contracting over the course of the year? And I'm kind of curious what's baked into your outlook for 2018 guidance on that specific topic.

Yes. So the -- as you alluded to, the notifications went out. They went out over November and December. That period actually is past. And now the time period has passed for class members to opt out and object to the settlement. So we did not see anything noticeable in call volume or discounting. As I said before, we actually did slightly better than we had forecasted on the $45 million of discounting in 2017. As far as what do we do with that information as we go forward into 2018, we still think we'll have discounting, and that hasn't changed; our view of $130 million has not changed. And we have, obviously, in our guidance $45 million in discounting in the plan. With respect to the next steps, the next thing would be that when the checks go out, we could get an increase in calls. I mean, you've seen the guidance range. Obviously, included in the guidance range is both upsides and downsides to SQ performance. I think it's really important to note, however, with the settlement, with the notifications going out, even with the checks going out, that our contracts remain in effect. But so far, as far as the -- your direct question on notifications, we didn't see any major impact there.

That's helpful. And then just a clarification on the guidance you've provided on the slides. That 3% to 5% revenue CAGR over 5 years, is that meant to be an organic number or does it include some M&A? If so, how much? And I think you guys said on the slide that the FX that you were guiding to was respective of current rates. But then, I think in the slides, it also said maybe effective December 31. So if you could just clarify what exchange rate you're using for that guidance.

Yes. So the CAGR on growth does not include any acquisitions. It's organic growth. And we're using current rates as of today with respect to foreign exchange.

The next question comes from Michael Hoffman with Stifel.

Okay. So -- and I asked this question the last quarter. If you take out SQ year-over-year and the fourth quarter, what was the underlying growth of the rest of Medical Waste?

Yes, we didn't -- let me give you this number, Michael. It was -- it's difficult because of all the puts and takes on the SQ business. When we exclude the patient transfer divestiture, the RWCS grew at a negative 0.5%. We'd have to get back to you with the SQ out of the business.

Okay. So that's -- okay, so...

So just so we're clear, we're not comparing -- I just want to make sure that you have the right number. If you look at the RWCS revs for the quarter, our Q4 organic growth rate was a negative 2.3%. But in that number, you had patient transport exits and divestitures. If you remove that, which is an easy account to do, it was negative 0.5% organic growth.

Right. So you gave us a 4% growth number in 3Q for that -- the same answer to this same question. So can you get back to us on that?

Yes, we'll get back to you on that.

Yes, we'll get back to you on that, Michael. I'm sorry, we did not calculate that one.

Okay. And then I got 2 more, Charlie. Don't let the...

No, that's fine, Michael. Yes.

So what is your assumption of FX, since you said it was $12 million in RMW, what's it for the whole revenue number for FX year-over-year for '18?

Yes. The impact in 2018 is $16 million of FX, total business.

And $12 million...

$12 million of which is in Regulated Waste and Compliance Services; $6 million in M&I, and then we have $2 million favorable that happens in our Secure Information Destruction.

Depending on where they are in the world, yes exactly.

Yes. Yes, okay. And then you have a slide that shows the waterfall of what we thought '18 was going to be based on it being flat, and then you did the progression. I'd like to go the other way, which is you thought '17 was going to be $835 million, it comes out at $812 million. So what makes up the $23 million miss? What are we dealing with there?

Yes, I'll take you through that, Michael, and that's kind of bridging to where we thought that we would be in EPS for Q4 compared to the Street -- our EBITDA, I think, is what you're asking for.

Yes.

So we initially thought, Michael, that Q4 adjusted EBITDA would be about 20.8%. We did already speak to you about the catch-up and acceleration of the noncash-related depreciation and also some controlled remediation work that we did. That in itself was a combined 285 basis points headwind. And remember, the vast majority of that, Michael, will not repeat. We saw some cost pressures in Europe, including the last of the stranded patient transportation. That was about 45 basis points of headwind. And we had 55 basis points for the CS business from cost to install a new large LQ contract, some higher fuel and energy and that mix of LQ to SQ. And then we saw 15 basis points of favorability from the, call it, the results of CNRS. That got you to a 17.1% EBITA. Remember, I'm going to talk to you regarding Q4 in EBITA. And then as I'm giving you guidance going forward to next year, we'll be speaking about EBITDA going forward.

Okay. And then lastly, in the current guidance of $760 million to $810 million, that assumes $65 million of benefit from all this work you're doing?

It does, Michael. And I know -- again, I want to share with you, remember, we had some headwinds in the business that a lot of that is going to get absorbed in. And that was contemplated in the -- kind of the directional guidance that we gave in Q3. One of which is, as you know, we underperformed in 2017 and we ended up not paying bonuses. So you do have the bonus -- the performance comp going back in. That $65 million then offset that. We've already let you know that we continue -- we expected 2019 to have a continuation of -- sorry, 2018, to have the continuation of the SQ pricing impact. And then on top of that, we now have a few of the other items that we broke out in that waterfall table.

(Operator Instructions) Your next question comes from the line of Gary Bisbee from RBC Capital.

Just I wanted to ask a follow-up. Can you give us any more detail on what -- where exactly does $60 million to $65 million of efficiencies this year comes from? What are the categories there? What are the key items that are driving those savings?

Yes, I think, if you look at the pillars that we talked about, if you go back to the pillars of the slide that we talked about, Gary, in the presentation, you've got operational optimization, commercial excellence, org excellence and sourcing. If I rank them in the order of the #1 place that we're getting efficiencies, so that $60 million to $65 million is operational optimization. Second will be organizational excellence, which we already executed on and was the restructuring that we did in November. And then we'll see some come through sourcing and commercial excellence. But the top 2 are operational optimization, obviously, getting efficiencies in our operations and the organizational restructuring that we concluded in November.

And then, Charlie, just you did mention, I think, compliance IT. You said a couple of places, there were some hiring to support doing what you're going after. But can you give us any more color there? Is there a need for a much deeper bench in a number of areas? Is there a need for -- I guess, relative to SAP, there's a need for extensive help on the integration front, but how does the ongoing sort of G&A or corporate headcount need to change to accomplish all of it?

Yes, I think you've seen it over the course of the last year. I mean, if you think about it, between the Chief Financial -- Chief Accounting Officer, the CIO that we brought in, the new General Counsel that we brought into the business, the investments we've made in Business Transformation and a dedicated team there, we've been building that bench frame. I mean, obviously, it's now in the full run rate of the business but we've been building that over the last 12 to 18 months. You're right about SAP, but I will tell you that our CIO has been through ERP implementations before. And we've already built a fairly significant internal team, augmented obviously, with outside resources that have not only SAP experience but SAP conversion experience. So it's been building. And I think you've seen it over the last 12 months. Obviously, though, now it's in the business.

And we've considered that in our 2018 guidance. And above and beyond what Charlie shared, we're taking a look at really bringing in talent today that can think about what a true global shared service end-to-end process looks like, and bringing that expertise that can help us, a blueprinting system that will free us up to have a lot of opportunities for savings down the road. And so those investments in people are contemplated in our 2018 plan. And so I don't anticipate seeing any surprises in SG&A investments in team members because like we've thoroughly considered that.

There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Thanks, Jesse. In closing, I'd like to thank everyone for joining us on today's call, and have a great evening. We'll see you on the road soon. Take care.

This concludes today's conference call. You may now disconnect.