Q3 2019 Earnings Call
Good day and welcome to the Steris cycle third quarter 2019 earnings conference call Im webcast.
All participants will be in listen only mode.
I'll just today's presentation, there will be an opportunity to ask questions.
Yes. Good question Anyway Press Star then one on the Touchtone phone.
<unk> question. Please press Star then to.
Please note this event is being recorded.
Actual results could differ significantly from those described in such forward looking statement.
Factors that could cause actual results to differ are discussed in the safe Harbor statement <unk> earnings press release and in greater detail within the risk factors.
Filings with the U.S. Securities and Exchange Commission.
Our past financial performance should not be considered reliable indicator of our future performance and investors should not use historical results do you anticipate future results were trends, we disclaim any obligation to update or revise any forward looking statements other than in accordance with legal.
Regulatory obligations.
Please note that we provide guidance on an adjusted non-GAAP basis, and it is not possible to predict or provide without unreasonable effort, a reconciliation, reflecting the impact of future acquisitions and divestitures certain litigation settlement and regulatory compliance matters Didnt.
Its transformation intangible amortization.
Operationally optimization, we're certain other items and unanticipated events, which would be included in the reported GAAP results and could be material.
Finally, the prepared comments for today's call corresponds to our third quarter earnings presentation.
Which is also available on our Investor relations website throughout the call. We made reference specific slide from the presentation.
I'll now turn the call over to Cindy Miller.
Thank you Jennifer and I like welcome everyone to today's call. Following just a few months with a new leadership team I'm pleased to report that the organization is beginning to see some of the benefit of the execution on the key priorities I introduced in February and their underlying initiatives.
Each passing week, we progressed in our overall business transformation as important milestones are achieved our transformation in a multiyear journey, but I'm encouraged by the investments, we're making the momentum we're building.
Summarizing the financial results for the third quarter, our actions to improve revenue quality enabled us to deliver another quarter of organic revenue growth in our core regulated medical waste and secure information destruction businesses.
These gains were offset primarily by macroeconomic factors, including lower sorted office paper pricing and foreign exchange rates and lower recall volumes in communication and related services.
From an adjusted EBITDA perspective, we performed in the range of our annualized Guy.
Demonstrated sequential improvement over the prior quarter importantly, we generated strong free cash flow $77.2 million in the quarter as a result of our actions to improve operations and working capital. This enabled us to decreased net debt by approximately 83 million.
Our largest quarterly net debt reduction since the third quarter of 2017.
Before Janet reviews, the financial performance in more detail I'd like to highlight a recent announcement and provide an update on our five key priorities.
First I'd like to congratulate Corey white on the expansion of his role to Chief commercial officer for Steris cycle. After joining in April Cory quickly made an impact on the communication and related services business by identifying improvement realigning operations and executing on portfolio rationalization.
I'm confident that we will benefit from Coreys 20 years of commercial experience in health care and then these transformations as we continue to drive change across the organization.
Our former Chief commercial officer build Seward departed stare cycle to rejoin his previous employer in a senior executive role that allows bill and his family to remain in Atlanta.
Good thing on portfolio rationalization, we closed on three divestitures this month.
And our communication and related services, we divested the north American telephone answering services business and a small retail pharmaceutical returns business.
In international we closed on the sale of substantially all of our operations in Mexico.
Gross proceeds from these three transactions of 38.1 million will be applied to debt reduction in the fourth quarter modestly improving our debt leverage I'm encouraged by our portfolio rationalization progress and our efforts here will continue.
As a result of these divestitures, we're adjusting our guidance for full year 2019 to reflect the impact of removing these businesses, which Janet will cover shortly.
As mentioned earlier, we're making progress on our second priority.
Auction and leverage improvement, we applied our free cash flow towards a net debt reduction of approximately $83 million in the quarter.
Cash flow generation is a key component of our debt reduction in leverage improvement initiative and we remain steadfast in our focus.
Shifting to our third priority quality of revenue, we continue to see the benefits of our sales organization realignment redesigned Commission plans and the deal review Committee all of which we continue to expand across our sales organization.
The recycling recovery surcharge implemented in August contributed an approximate 3 million dollar benefit in revenue and margin in the quarter, which helped us to offset the continuing decline in FOP pricing.
With the foundational improvements made this year, our commercial organization is building solid momentum to support sustainable growth.
Turning to our fourth priority operational cost efficiencies I mentioned on the last call that we are challenging what we do and how we do it.
Long term our goals include transitioning the organization towards centralized decision, making on significant operational and financial matters.
Standardize operating model across the organization to optimize processes to drive efficiencies and improve both safety and service and measurable performance goals across all levels of the organization.
Early indications of traction include a year over year, 16% reduction in mid stops in our core businesses.
And a reduction of about 30% in our lost workdays.
Finally, let's discuss our fifth priority implementation of our ERP system.
I'll now turn the call over to Janet to review our financial results.
Thank you Sandy as Andy noted our results for the quarter reflect the impact of our actions to drive our key initiatives.
Total revenues were $833.1 million compared to 854.9 million in Q3 in 2018 continued organic growth and secure information destruction and regulated waste in compliance services was offset by the decline in S&P pricing the impact of foreign exchange.
Great and lower performance in our communication and related services business, primarily due to fewer recall that regulated waste and compliance services revenues were $474.9 billion compared to 476.6 million in Q3 2018, excluding foreign exchange.
Range impact organic growth was 1.6% slightly higher growth in last quarter, which reflect positive performance in medical waste and healthcare hazardous waste across the hospital portion of our business and internationally.
Secure information destruction services delivered revenues of $222.6 million compared to 227.6 million in Q3 2018.
Excluding the impact of foreign exchange rates and acquisition organic revenue growth was a negative 2% when backing out the impact of declining FOP crisis organic revenue growth with a healthy 6.1%.
Communication and related services revenues were $58.9 million compared to 71.6 million in Q3 2018. This largely reflects fewer recall events and lower revenue of about three and a half million dollars due to the Q1 2019 divestiture of the.
Manufacturing and industrial services revenues were $76.7 million compared to 79.1 million in Q3 2018. This reflects slight organic growth, 0.4% driven by international performance, which was offset by the impact of <unk>.
Okay great.
The decrease was driven by 20.5 million from S&P pricing and foreign exchange rate.
And 11 million in higher hazardous waste operating costs, partially offset by 8 million related to a favorable litigation settlement and lower incentive compensation.
GAAP diluted loss per share was 65 cents compared to diluted earnings per share of 20 cents in the third quarter of last year. The change was largely due to the operational items previously highlighted a lower effective tax rate on a lots from operation and the absence of gains on.
Payment cash flow from operations decreased 183.7 million due mostly to lower operating performance in 2019 as previously described and payments for annual incentive compensation in prepaid software.
Capital expenditures year to date were $161.2 million compared to 96.9 million last year 2019 included $70.8 million for the ERP implementation compared to 8.2 million last year.
Adjusted EBITDA was $150.5 million compared to 183.9 million in the third quarter last year. This variance was primarily driven by $20.5 billion due to FOP pricing and foreign exchange rate and 11 million in higher cost hazardous waste.
Operation.
A year on year variance in adjusted EPS was due to the following.
17 cents unfavorability from S&P and foreign exchange rate.
Three cents on favorability from the absence of gains on share repurchases this quarter compared to 2018 and seven cents favorability on tax partially offset by higher interest expense.
When normalized for the divestitures Dsos was 63 days compared to 66 days during the second quarter of 2019.
The improvement a three days, resulting from execution of collection initiatives.
Our ideas. So as reported in Q3 was 61 days, which included the effect of reclassifying receivables as assets held for sale.
We are pleased to report free cash flow of $77.2 million in the quarter, which reflects our actions to generate cash from operations and improved collection. This moved us your free cash flow generation of $40 million year to date.
Our debt to adjusted EBITDA ratio was 4.41 at the ended the quarter as defined under the amended debt agreement, which includes the add back a stock compensation expense, our third quarter cash flow and leverage ratio excludes any proceeds from the tree divestitures that closed in October .
I'd now like to spend a few minutes to review our portfolio rationalization efforts and provide an update on our investment in business transformation.
Shifting to our business transformation I'd like to provide an update on our investments.
$99.7 million in capital expenditures since program inception in the third quarter 2017.
In my ongoing efforts to fully understand the initiative I have categorized the business transformation expenditures and two distinct efforts, one cost saving initiatives and business capability investments such as commercial pricing and project management expertise and to the ERP system and its implement.
Patient.
Since the program's inception, the company has invested approximately $80 million are about half of the reported business transformation operating expenditures to generate savings and build business capabilities about 20 million of this cost with severance related.
Any savings generated from the initiatives have been offset by challenges and business results.
We anticipate that investments in business capabilities and saving efforts will generally become part of our ongoing operations in 2020.
Regarding the ERP implementation since inception, we've invested approximately $170 million comprised of about 70 million in operating at a 100 million and capital expenditures primarily for the North American deployment.
We anticipate around another $30 million will be required in the fourth quarter of 2019 split evenly between operating and capital expenditures, we anticipate providing an update on 2020 ERP costs and over all program benefits factoring in the impact of portfolio rationalization.
None and other business drivers during our next earnings call.
Turning to guidance, we are updating our ranges for the full year 2019 to reflect the impact of removing recent divestitures, which will impact Q4 results.
Prior to the divestitures the company was performing within our guidance ranges.
In addition to the divestitures the revised guidance as shown on slide 11 reflects the impact of our estimate for FOP pricing for the fourth quarter and current foreign exchange rate.
We expect revenue for the full year 2019 to be in the range of $3.3 billion to $3.335 billion.
We expect adjusted EBITDA for the full year to be in the range of 575 million to $595 million.
We expect adjusted EPS for the full year to be in the range of $2.55 to $2.70.
We expect capital expenditures for the full year to be in the range of $180 million to $200 million due to the timing of payments.
Also today, we are providing you with a full year free cash flow estimate of 50 million, which reflects at least $10 million in the fourth quarter.
I will now turn the call back to Cindy.
Thank you Janet.
This quarter, we are beginning to see some impact of our key priorities on our results and as I mentioned earlier, our transformation is a journey and our focus is on the long term, but we're pleased with our progress thus far.
There are hundreds if not thousands of steris cycle team members, who supported our efforts around the globe and to all of them I extend the heartfelt. Thank you I'm very proud of your hard work in these times a constant change as we remain committed to delivering on our priorities. We will build on this momentum as we focus on providing superior service to our cost.
Summers, while driving long term value for our shareholders. We remain constructively dissatisfied so we'll break even in this moment, then exhale and get back to work with that operator. Please open the line for QNX.
Thank you ma'am, we will now begin the question answer session to asking questions. You May Press Star, then one or the Touchtone phone.
The first question will come from Scott Snowberger.
What's Oppenheimer. Please go ahead.
Thanks, very much and good morning.
So they could we start on on pricing and a in the our WCS business you had some success certainly in the first half and El Cubo. If you could give us a progress report or an update on how that's progressing and and then maybe transition into how you are adopting that overdue out to the small quantity.
Customers. Thanks.
Sure and thanks, Scott for the question so.
I'm very pleased with the results that were seeing commercially I'm just as a reminder, the pretty much the foundational work that I referenced whether it was a realigning the sales force some of the sales incentive plan reports and the deal review Committee most of that has been focused within the regulated waste a.
Just kind of a comparison.
It showed last time, we talked about for the first half of 18 comparison to 19 renewal deals we were giving away about 5% and total revenue.
We've we've seen even stronger improvement in and that double digit growth. So.
For us the story is this.
We've trained we have focus we have momentum on the initiatives in the hospital space and right now Cory White and his team are focused on taking that same type of effort in energy with a training investment and turning that towards the other portions of the other revenue streams within regulated waste. So I think early.
The days in that.
But certainly more to come now the deal review Committee piece has also been been kind of rolled out throughout some of the other business units or whether its secure information destruction and our environmental.
Solutions group and we're starting to see some traction there as well so to me early signs early days, but but it speaks positively in terms of our ability to have some organic growth and gets momentum. So thanks. Thanks for that Scott I Hope I answered. Your question Yeah. It takes it was certainly helpful. I appreciate that I guess the appropriate follow up there is.
Historically stericycle it spoken to to it.
It with regard to small quantity customers.
Aware, where would you say we are this was with this year would be the tail end of bad versus the original plan is give us an update on how you're looking at that and how you may consider that going forward.
Sure and on that's that's a great follow up Scott and here's what I can say I'd I'd.
I think one of the things that we understand that is here to stay in terms of any business. It's dealing commercially is this concept of discounting I think historically or at least in the last several years you know discounting is taking on a different meaning within stare cycle based on on some of the issues of the past so I think.
Today, we're starting to morph into I don't want to say, but but the normalcy of commercial transactions and negotiations with salt, which also includes discount. So what would I think we have to say is two to kinda to wrap of ball around.
You know some of the historical commentary and thought I believe in what we see as we've trended.
Where we were expected to and we still are as such I think I've gone on record a couple of times, saying there is no actual end date. When you can say okay. You know on on October nine. This was the last day of of a previous issue what I can't tell you is we have positive signs in terms of up our ability to change the trajectory of.
Bob internal goals and the service that we're providing and the value that we're going to continue to to give our customers. So I think.
Short answer you're asking we are on track in terms of where where it was and where it had been laid out and I believe moving forward. We're going to continue to talk about the discounting we're going to continue to talk about negotiations with customers, but it is not unique to one one particular revenue stream within the business. So I'm I'm very into.
Courage and very pleased by that and the last piece to that though is I'll go back to the first portion of my answer Korea and his team. They are elbow deep if not further in terms of revamping our inside sales opportunities that includes some of the national accounts some of the smallpox.
One of the accounts those types of things and I think it's early days, but but I'm I'm looking very much forward to what his group is going to be able to do that.
Great, Thanks, and nice job at the steps forward and backward.
Thanks Scott.
And that's we have Ryan Daniels with William Blair.
Hey, guys. This is mix speak out incur Ryan. Thanks for taking my question I guess just to start off with you can talk a little bit more.
About the company that I'm, assuming those were lower margin businesses and I guess what are your criteria for your exits and are there any more color the bank.
Yeah, Thanks, Nick and so you know concerning the portfolio rationalization of the divestitures, here's what we can say the three that we divested of two of them. We're in Crs as was mentioned they all closed in October . The one was was Mexico, so from an international or geographies.
Oh perspective.
We've got to continue to make sure that we focus on core versus noncore and the other the other key piece and I think that's a factor in terms of what we're looking at is is we've made evaluations as where do we think we can strategically grow where do we have the greatest opportunities.
So you're right. These businesses were not very well, it's 38.1 million total in revenues from all three so certainly not big but but you know that's where that's where we're focused and we're going to continue to drive the portfolio rationalization.
As we move forward and.
All of those things I think when the factors. So that's a that's pretty much where we are.
Oh.
Hi, This is Dan at high they tended to be lower margin business, well, yeah and and.
If I just to make sure that I clarify the gross revenues on those were about 38.1 million I want to make sure that that wasn't wasn't thought that it was a those are the proceeds that it was better but yet.
Got you.
Then I guess as a follow up.
With kind of what Q3 run rates, what how much of that his comment that 38.1 is coming out of the different business lines like have you broken that out at all or.
That's a nice provide a little bit more detail there. So you kind of more accurately.
Model out that Doug hi passengers going in future.
So in terms of where they were coming out of the business service lines is primarily Cnrs into Mexico is an international and that is is that that would the question you were asking me.
Yeah, Yeah. So it was like basically like the large majority of that is going to be Crs.
Right because two to the divestitures were Cnrs, one with the telephone answering services businesses that we announced earlier and discrete 8-K. So that was the largest part if you add up the total at the gross proceeds that we announced yeah and I've got dig a little bit a little little bit of clarity to I think this might be a little bit helpful. Just to go.
If you like.
We still haven't Crs is expert recall.
We talk about that often and then we've got a patient engagement platform.
That's where it's scheduling its appointment scheduling and then it's also kind of post discharge care follow up those types of things. So about 60% of revenue in Crs remained and and I'm I'm I'm going to give you directionally probably about a third of the employees remain I think about 1900 full time equivalents.
Would have gone with the divestitures as we've got about a third of the Oh, the FTC still remaining in the business. So I hope I hope that helps in terms of your ability to do any type of modeling.
Great. Thank you I appreciate it and I guess, what really quick I know a.
Couple of quarters ago, you had mentioned re contracting paper prices on your clients I was just wondering how that's going out there pretty receptive to that.
So you're asking about the surcharge and just want to make sure that I'm I'm hitting it right that yeah, you're exactly.
Passing a bit of that risk that's also the clients.
Sure. So in terms of the of the recycling recovery surcharge.
Let's just frame it we add up we had a really strong take rate in terms of eligible contracts and I can tell you want the eligible contract for one that weren't eligible based on contractual language as those contracts get renewed.
That language is automatically being put in there. So so far on on contracts were eligible we had a very strong take rate in the high high Ninetys mid 90% from a take rates. So that's terrific and.
And in terms of of what it did for US our original expectation was added should bring in should recover anywhere from 20% to 25% of the decline, but but remember and for those taking a look at it is on our website. It's an index. So you know it isn't a fixed rate.
And it's based off the receipt tables so we've.
We feel pretty strongly with it I mentioned that we got $3 million in the third quarter that we can pretty much attribute directly to that to the surcharge, but I think up no.
That 3 million was just for August and September not the full quarter. So as we move forward in the fourth quarter, it's going to give US you know pretty much of a better barometer of a full quarter in terms of the the revenue. So I'm, hoping that that answered your question in terms of being able to to see how it went but we're just it's.
Headline news, it's tracking pretty much to plan as we had anticipated and how it was laid out.
Awesome. Thanks very helpful guys I. Once again appreciate you taking my questions I'll hop off of it thanks Nick.
Next we have Michael Hoffman with Stifel.
Hi, Sunny Janet Thanks for taking my questions.
Can I ask for clarification question I'm not sure I understood. The last answer about what got sold in revenues and EBITDA could we be specific about sorry, yeah. I don't know that makes me and I and I apologize for that total proceeds that we received for the three was 38.1 million as it was lined out that's not.
That's not total revenues sold it nor is it total EBITDA. So so I just want to make sure that we've got $38.1 million in the bank that for fourth quarter, we will be applying directly towards our a debt reduction so I hope that I hope that clarifies the 38.1 million onto a a better degrees.
And then Okay. You also mentioned you would tell you sold about what's remaining in the business about 60% of CRM, Yes remains we thought about 40% of Cnrs. So okay. So you sold 40, that's the part I got it can be say, though.
At 60% remain.
So just to frame at this the business that's doing about 240 million of revenue. So basically 40% of 240 is whats gone.
That's now if I were you that would probably be how I look at okay. I just wanted to make sure I understood all right back to my questions Jana Great move on as Shannay, both and on the GAAP basis, an adjusted basis, how does that trend forward.
Well, we're encouraged by the cost savings initiatives were seen on the SGN a side one of that one of the the bright spots in the alignment of the comp commissions for our sales team.
Aligned with the sales motion that we're trying to do as you've heard in the last call. We're seeing some traction on that and SGN a and on that we also have some.
We did have a on a GAAP basis. Just so you know we had a litigation settlement that we mentioned that was a few million that was at one timer, but for the most part it's just gaining tractions across numerous areas, where we're trying to save money.
So so 240 million for right number to use quarterly.
That's.
That's net of depreciation.
So so I mean, there's puts and takes going forward I mean, I built that into the range of the EBITDA, where I think it's going but SGN a it as a continued rights part is what we're seeing you know going forward and we're continuing to manage costs.
Okay.
Okay.
On a follow up on a regulated medical waste in North America, If you strip out the healthcare hazardous waste business or has this way services.
Is there are clear evidence that the price compression in Sq is nearing an end plus the quality of revenue benefits in Q3.
You will report that in a table in the Q1, we got it but can you talk about it now.
Yeah, I think I think you know.
I think from a clarity perspective to point would be are we looking for continued.
Are we to a point, we can say that we believe we are going to see.
Organic growth in the in the core business of regulated waste and to me. Your question. Then says we're going to continue that with hospitals and are we are we seeing the end of Sq, which I think Scott wanting to get after on an earlier question as well I think I think what we're saying is we have the ability to grow.
We're continue to be focused on it a lot more training and a lot a lot of other things we've got a rollout as as you can imagine the hospital side of of sales in negotiation is different.
What we do on small quantity or some of the the more transactional accounts.
But that is all under being revised right now and I think.
I'm very encouraged very excited about our opportunities moving forward to see continued organic growth.
The next question Web will come from Gary Bisbee with Bank of America Maryland's.
Good morning. This is this is Jay Hanna on the call for Gary This morning.
Just sort of going back to get the 11 million you pointed out on higher haz waste costs country. We assume that this is related to the issues, that's sort of cropped up last quarter for that business.
Yeah, I think I you know fair question and it's something that we're taking a look at it if you take a look at the the earnings per share bridge, we're looking at a 10 cents in terms of.
The effect on on that earnings per share, which is down from previous quarters, certainly not an apples to apples comparison, there being compared to prior years.
What we are focused on it let me let me just give you a little color in that area in terms of a couple of things. We're doing so I think on a positive note and I'm really pleased about this if you take a look at it included in that is safety and service improvements and I think it but to me. It all starts with safety, we've got to get a stable workforce.
It's out on the road everyday 30% reduction in lost workdays helps us towards that goal. So early days there as it was a direct result of that we've we've missed if you will we've got a 16% improvement in terms of Miss pickups, that's all positive and I think more to calm as an example, I mentioned in given some color towards.
A concept of insight am or inside time before drivers punch on the clock and then there in a facility before they are there a wheels kind of cross the threshold out to driving towards their first stop you know right now we're running at about anywhere from 40 to 42 minutes. Some insight am time, and we're looking to cut that in half a we're making.
Some traction towards it, but obviously not enough yet, but I think the bigger buckets.
That we had highlighted were some third party costs, especially in some business lines, where we don't we don't control our full destiny, if you will and in those business lines, Here's what we've done we probably have about our in that business line, we probably have about seven I want to say, maybe seven or eight that are large third party vendors with whom we engage in.
In big contracts.
And what we've seen is during the third quarter, we've had an opportunity to I said, we were going to renegotiate many of those contracts. We've got three of them done in sign on so when you when you're working an awful lot back and forth and you get them sign we will see future benefit of that I'm pleased to say on those contracts. The three out of the seven or eight that we've renegotiated.
We should see anywhere from let's say of 7% to 10% improvement in terms of our costs, but again, that's not the total but we are we are systematically.
Driving down costs in buckets, where we can't it's a very big bucket for us and I can tell you being an operator at heart. We are not pleased with where we are in them and continuing to drive those savings and we've got out we've got to get much much better in that category.
Okay. Thank you for that color and then my follow up is certainly him and I business looks like there was some pretty nice.
Sequential improvement from last quarter can you just give us an update on what how volumes are trending there and your expectations from here.
Yes, I think I think up to in a good bit of that and I business.
There's a couple of things at play here volumes not really been the problem, but as we had mentioned not having a handle on costs as much as we should specifically in that particular business unit, where we don't control our own destiny to the greatest degree.
We've had to get that in line and so that to me as more not necessarily.
Volume up or a volume down type story, it's more of we're getting where we've gotten a little better handle in terms of the costs and our focus. So that's got to continue because that's not near where we needed to be so I think.
That's pretty much more the story I would say as we've not really seen a volume problem.
Okay. Thank you.
Thanks Jay.
The next question will come from David Manthey of Baird.
Hi, good morning, everyone.
In your model logs, Cindy you mentioned.
Redesigned Commission plan I was wondering if you could help us understand when that went in and then.
Janet mentioning this 30 million in Opex for the ERP in the fourth quarter.
I'm just sort of what all is in the context, the big reduction sequentially that <expletive> AOCI came down by about 20 million and I'm just trying to understand here too.
Is that a normal run rate going forward was there anything unusual in Threeq Q is there something that's going to step up in Fourq. You just just trying to put some context around the SGN a in the third quarter.
Yeah, no great questions. David I'll tell you went off I'll take the first portion with reference to the the sales incentive plan redesign and then Janet and I can both kinda tag team that's up the 30 million Opex question, they had upper for fourth quarter.
So on the redesign.
We.
Our previous Chief commercial Officer, Bill Seward I was on this call many times talking about the redesigning sales Commission. It was pretty much in you started I think we mentioned that we had over 60 different sales incentive plans and compliance that's pretty complex and there's a lot to untangle.
There.
So we we started to focus on one bite of that elephant and that focus I think we made most of those changes would have gone into effect.
Sometime around in March and that was mostly in the group of sales folks that handled our hospital portion some of the bigger customers that we have a in the regulated waste. So we are weak we're on a full blown overhaul of all of the sales incentive plans.
And I'm, making some progress on more and more of them believed that by end of year going into first quarter of next year, we should have probably close to 50% to 60% of them changed and more realigned where.
Where get benefits both.
The field sales folks inside salespeople as well as the topline growth for Sarah cycle. So we really want focus has been twin sense better behaviors and I believe that early days are showing some some strong traction for us in terms of in terms of where weve rolled it out and one other piece.
With that is it isn't just changing the comp plans.
Other key component of that has been a good focus on training so were retraining and focusing people on value value selling and more negotiation skills and that I think as to go hand in hand with any type of revisions that we're making so that's a little bit of color on on redesigning those plants and we have more to rollout.
As we move forward and I think I'll be able to give a little bit more color to that as we as we roll them out get the training done and we can talk about it with some up some anecdotes so janet any any comments or anything you'd like to add on the 30 million to opex expense for ERP or the SGN, a 20 million. So let me clarify that 30 million. So that was in the context as a business transformation.
One which is a table in the 10-Q, which is adjusted out of earnings, but I get a lot of questions on it. So this would not be hitting above the line and adjusted EBITDA first secondly, it's split evenly between capital and operating expense. So it's only about 15 million of operating expenditures that would be below the line and that is not inc.
That is consistent I should say with our normal run rate for putting the ERP and I was just providing some clarity as we aggregate numbers for the ERP, where we're heading for the ended the year does that answer your question.
Yes to some extent thank you.
The second part here just quickly on the divestitures just so we know how to model is thing can you break down and give us sales and EBITDA for the international in us pieces.
So we haven't really really so its return I would say the the vast majority of it was to see NRF and we told you about 40% of the Cnrs revenue line and retained about 60% and Mexico was a small part of our international operations and they were low margin.
Businesses.
Thank you.
Thanks, Dave.
And that's with Kevin Stein.
Barrington research.
Good morning.
Just wanted to make sure on the change in revenue guidance and the other guidance items is that all related to the divestitures or is there also are you also factoring in something for no changes in the exchange rates and so.
Sorted offer sorted office paper pricing as well.
Yes, so about half of the revenue changes due to the divestitures and a good chunk is due to FX when I look at the range I also.
Hedge the range based on the Lumpiness that we tend to see in the recall business and we continue to see but predominantly its FX and divestiture and divestitures about half of that when I look at on an EBITDA basis. The divestitures about a third of that again, reflecting that these are lower margin.
Okay, Great that's helpful and then.
Hi, Jane it with your discussion of.
What has been spent so far on the business transformation and that you know target of 275 to 300 million a that was given under the prior leadership team is the implication that that prior target is too low.
Yes, so the target was split into two parts and the first part with on the cost saving and business capability and that's a that's mostly prior investment there. Some that were in 2017, mostly severance related expenses of utility investments.
And and that was that was roughly on track and I was trying to parse that out because I get a lot of confused question is the to 75 to 300, all ERP and the answer is no for the ERP number is actually a subset of that and then when you look at that number as part of that and you add the other we're coming to the 300 million Mark and so I.
Wanted to give some clarification on the split between the two parts of that to $75 million to $300 million prior estimate and given indication that we are we're trending towards the that number and we are looking deeply into 2020 to see will that will the additional costs will be in 2020 recognize a 22.
20, as a deployment year.
Vast majority if not all of the development is behind US we were and testing and we are getting readiness training so any any.
Development. If you was really just fixes on any defects remaining defects, we have and we're at deepen the final data cleansing you get the system up and running so all those costs are behind us. So now we're really focusing mostly on development cost and that we may have some additional requirements as we look internet.
Additionally, beyond because the primary deployment for next year as North America, Hey, and the Kevin If I give just a little color in terms of the where we are from the ERP. We're on our end to end mock training number four I'm just to put put things in perspective, all around the you know North America would probably about a thousand team members.
Engaged not all of them here in Chicago, but we were doing a lot of.
Frontline testing so we have about a 1000 team members that are theyre actively engaged I think in this market. We found about another nine I think the numbers are about 987 defect.
660, those closed the good news is when you get to kind of a mock for thinking you started Mach one we had zero critical defects.
Whereas I can remember in Mach one I'm, having critical defects was.
We had quite a few of those at the team worked through so in terms of how are we looking and how does the actual European system design look I think I think we're progressing pretty well and I'm I'm pleased with the efforts and and all the energy. This team has put in.
Okay, that's great to hear thanks for the update.
Thank you.
And that's where I'm just sober of BMO.
Thanks, So much I guess this question is somewhat related to the ERP system, but I know the issue in the past from the management reporting perspective or management information perspective was the lack of timely information.
Has that improved at all since you've taken over or do we still have to wait for the ERP implementation for that to happen, Yes, Jeff I think and let me just make let me ask it back to you to see if I'm unclear, but really what you're talking about as we develop any any real time like kind of data capabilities are that that kind.
And what you're asking.
Real time would be wonderful, but even closer to real time than where you have no.
Yes.
No you're right real time, we'd be wonderful.
I, what I will tell you. This is the first answer is no we have not gotten anything from a systems perspective, that's afforded US you know any greater advancement of visibility, but what I, here's what I can tell you.
The internal processes that has started with capital expenditures.
It's gone right down through procurement.
Anything else from a fiscal discipline perspective, while we may not have a timely or real time data or or easier capabilities to see what is in a pipeline. We we've improved our processes the old fashioned way, where we actually have to get up out of our chairs bring people together and put.
Excel spreadsheets together evaluate them and add them. So that we are developing our own way of getting some better timely visibility Ah. That's I think attributable to my take a look at the efforts of Janet if I look combined with Dominic lot, our our chief engineer Rich Moore and engine any leading.
In both North America, and international we have a lot more proactive discussion, albeit manual, but but still trying to put some discipline into areas, where we know technology will just enhance that.
Okay. That's great. So I guess beginning next year. We said we are used to be able to us have even greater improvements once the system is all up and running.
That is if.
That's the headline Jeff.
Okay.
Our responsibility right now its ERP deployment readiness, okay. That's great, but we are all chomping at the bit for us to say that we've got our our businesses I'm kind of lined up and turned on all defects done and we're moving forward I will say this.
Well, that's a goal we've got to make sure. The one group that I'm very concerned about through all of this is our customer base.
And sometimes when we start talking about numbers you know that voice gets missed and it's not missed on me or anybody else in this executive leadership team or on our team members.
Our goal is I can't wait till we get timely data. So we can improve cost efficiencies, but you've got to make sure that then everything that we're doing is keeping a seamless and making this is painless as possible on our on our loyal customers and I will say on the customers that we've yet to win their hearts, but but I know core he and his team are going to go after.
Her that organic growth as well.
So I just want to make sure that we all take a look at that it's not just about the numbers, it's about making sure that our customers are taking care of and and that we provide them with appropriate reports and data and things that can help them in their businesses. So thanks for that question, Jeff and and.
Appreciate it.
Yes.
Well the somewhere so no further questions, we'll Glenn conclude our question answer session, Illinois, the teleconference call back over to Miss in the Miller for closing remarks maam.
Sure and thank you might greatly appreciate that and just a thank you to folks who have tuned in today and for those who have continued interest in stare cycle.
And we look forward to our next time to chat. Thank you.
And we thank you ma'am and through the rest of the management team for your time also today. The conference call now concluded the suddenly may disconnect Hello, everyone.
Thank you again take care and have a great day.