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Stericycle Incorporated (SRCL) Q1 2020 Earnings Call Transcript

By Motley Fool Transcribers - May 7, 2020 at 8:30PM

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SRCL earnings call for the period ending March 31, 2020.

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Stericycle Incorporated (SRCL 2.17%)
Q1 2020 Earnings Call
May 7, 2020, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. And welcome to the Stericycle First Quarter 2020 Earnings Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Jennifer Koenig, Vice President of Investor Relations. Please go ahead.

Jennifer Koenig -- Vice President of Corporate, Communications and Investor Relations

Hello, and thank you for joining Stericycle's First Quarter 2020 Earnings Call. On the call today will be Cindy Miller, Chief Executive Officer; and Janet Zelenka, Chief Financial Officer. The discussion today includes forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the safe harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U.S. Securities and Exchange Commission.

Our past financial performance should not be considered a reliable indicator of our future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statement other than in accordance with legal and regulatory obligations. On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable U.S. GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle's Investor Relations website.

Please note that we provide guidance on an adjusted non-GAAP basis because it is not possible to predict or provide without unreasonable effort a reconciliation reflecting the impact of future acquisitions; divestitures; certain litigation, settlement and regulatory compliance matters; intangible amortization; noncash impairments; uncertain U.S. cash tax matters or other items and unanticipated events, which would be included in GAAP results and could be material. The prepared comments for today's call correspond to an earnings presentation, which is also available on our Investor Relations website. Throughout the call, we may reference specific slides from the presentation.

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

Cindy J. Miller -- President and Chief Executive Officer

Thank you, Jennifer, and welcome, everyone, to today's call. It has been just 10 weeks since our last earnings call on February 28, but obviously, much has changed in the world in that short period of time. As mentioned on the last call, the Stericycle team was proactively engaged in supporting our customers with proper medical waste management resulting from COVID-19, but our focus quickly expanded in March to include protecting our team members, delivering continuity of service from a shelter-in-place environment and driving new operational efficiencies.

On today's call, we will review our results for the first quarter as well as our response to COVID-19 including the many ways in which we are providing essential services to our healthcare partners, actions we have taken to protect the health and safety of our team members operating in the field and deliberate steps we have taken to reduce costs and preserve cash flow. As governments, communities and healthcare providers have rallied together against COVID-19, I want to express our deep appreciation to all the healthcare professionals and essential workers for their extraordinary efforts and sacrifices.

Essential has taken on new meaning to include not only doctors and nurses, who care for patients, but also the many workers who help keep the rest of us healthy, fed and as productive as possible in a shelter-in-place world. I am honored and proud that Stericycle stands among the group of essential workers fighting this pandemic. During these past few months, our company has lived up to its mission. We protect what matters. As the pandemic just started to unfold domestically in February, our team worked closely with the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, the Department of Transportation and other international regulatory agencies to determine and implement best practices for the proper packaging, transportation and treatment of COVID-19-generated medical waste.

We also worked with a disciplined sense of urgency to update policies and procedures to protect our team members. Our medical waste facilities have remained open to provide hospitals, quarantine facilities and temporary testing sites with safe, compliant disposal of medical waste. These are challenging and intense times for all our global customers and team members. I am proud of our frontline team members as well as those sheltering in place around the world who are dedicated to serving our customers, supporting our business and protecting our communities.

As a quick summary of the first quarter financial results, we delivered another consecutive quarter of organic revenue growth in our core regulated medical waste and secure information destruction services, and free cash flow for the quarter exceeded our expectations. We were ahead of our internal plan and financial expectations through January and February. However, we started to see the economic impact of COVID-19 in March, primarily in our secure information destruction services. Our team quickly responded to the changing environment and adjusted our operating model to serve our customers, reduce our costs and continue our focus on cash flow, which Janet and I will discuss in more detail later. In response to the magnitude and duration of the economic uncertainty created by COVID-19, we have withdrawn our guidance for the year.

I'd like to focus for a moment on safety, an area that has always been very important to me, but now more than ever. During these past few months, our environmental health and safety team has been a critical part of our daily operations and continuity planning and has continued to work proactively with the CDC, OSHA, DOT and regulatory agencies around the world to ensure readiness for proper medical waste management and to protect our staff. We have updated and implemented numerous protocols and formed a PPE task force to manage requirements and inventory. We've staggered shift times to ensure social distancing and dedicated trucks to specific drivers to reduce exposure.

We've implemented more rigorous cleaning protocols for our facilities. And we have more than 7,000 team members around the globe working from home, who help maintain our business continuity and seamlessly serve our customers while helping to control the spread of the virus. In the midst of the turmoil and changes caused by COVID-19, we have remained focused on reducing accidents and injuries overall. I'm pleased to report that our efforts have resulted in significant year-over-year improvements.

During Q1, our total recordable injury rate in North America was down 22% compared to Q1 of 2019, and our lost work injury rate was down 31%. This is just one more reason for us to be proud of our team. While our immediate priority remains safely maintaining the continuity of our operations in the current environment, we have not lost sight of our five key priorities. In many ways, our progress to date on these priorities, as noted on slide four, has strengthened our ability to navigate the COVID-19 pandemic, and our commitment to them continues.

Starting with portfolio rationalization. On April 6, 2020, amid the challenging economic environment, we successfully completed the divestiture of the Domestic Environmental Solutions business to Harsco Corporation for $462.5 million in cash. As discussed on the last call, Stericycle will continue to offer unused consumer pharmaceutical take-back services and provide hazardous waste services to healthcare customers as an integrated services provider. We will partner with Harsco to perform hazardous waste services for healthcare customers, including collection, transportation and disposal. The sale of the Domestic Environmental Solutions business is our sixth divestiture over the last 15 months and demonstrates significant progress in our transformation as we focus on our core businesses, reduce debt, enhance our balance sheet flexibility and drive long-term shareholder value. We will continue to evaluate and optimize our portfolio as appropriate.

Our second priority is strengthening our balance sheet. The divestiture of the Domestic Environmental Solutions business generated approximately $430 million in proceeds, net of customary adjustments and transaction expenses, which we applied to pay down debt in the second quarter. Cash flow generation is another key component of our debt reduction and leverage improvement initiatives. During this challenging time, we are generating and preserving free cash flow by executing on operational improvements and cost-cutting measures, reducing or delaying capital expenditures, adjusting workforce levels and closely managing working capital.

Let me shift to our third priority, quality of revenue. In the last three months, it has become clear that the Stericycle brand is stronger than ever. As countries around the world reacted to the pandemic, the scale of our infrastructure, depth of our industry expertise, and breadth of our relationships position Stericycle at the forefront of COVID-19 medical waste response. As clear evidence, we were awarded medical waste contracts supporting critical temporary hospitals, like the USNS Comfort, the Javits Center in New York, Principality Stadium in Wales, large grocery stores turned into hospitals in Portugal and converted hotels in Spain and Argentina. We have also partnered with leading healthcare providers, pharmacy chains and university laboratories to provide medical waste services to numerous global testing centers.

We have provided leadership to federal regulatory authorities and the healthcare industry as hospitals, clinics and other independent practices sought information on how to safely and compliantly manage their medical waste. In the United States, we established a Coronavirus knowledge center for the healthcare community and hosted well-attended webinars on managing COVID-19 medical waste. Around the globe, our medical waste services are considered essential for fighting this pandemic, and our team is focused on upholding our commitment to serve our customers.

As a result of the strength of our brand and quality of revenue initiatives, we generated overall positive organic revenue growth in the first quarter, including organic revenue growth of 3.3% in Regulated Waste and Compliance Services and 1.4% in Secure Information Destruction when excluding the impact of SOP pricing, as shown on slide seven. January and February delivered strong revenue results, exceeding our internal expectations. However, we experienced declines during March due to the Coronavirus and shelter-in-place orders, which Janet will highlight in more detail. Within medical waste, a small decrease was due to the postponement of preventative care and elective surgeries and the temporary closure of smaller, independent healthcare practices, which was not offset by increases in demand for services to support hot spots of COVID-19 outbreaks.

Additionally, as new opportunities emerged to serve quarantine facilities, hospital ships, docked, cruise ships and temporary testing facilities, we developed an operating playbook with service agreements and operational parameters that matched the unique needs of those facilities. Our secure information destruction services has experienced a more significant revenue impact from COVID-19 due to the temporary closure of many office buildings, retailers and other businesses as shredding services are primarily billed after a collection stop is completed. This leads to the importance of our fourth priority, operational cost efficiencies. Our efforts over the last 12 months to build performance dashboards, centralized decision-making and standardized operations vastly improved our ability to understand the environment and to quickly implement changes to ensure continuity of service to our customers while tightly managing costs.

Starting in early March, we focused resources to monitor changes in operational performance. We held daily control calls to share learnings and identify our necessary actions. We coordinated sourcing and distribution for critical PPE for our frontline workers. We identified and pulled operational levers quickly. And we continue to set and communicate clear expectations for cost control measures as we move forward. Led by our engineering team, all departments have been aggressively pursuing cost reductions to align with reductions in revenue. First, we instituted central oversight and controls to quickly drive down costs, including reduced travel, lower routine operational purchasing, lower spending on consultants, fleet reductions and the renegotiation of key sourcing contracts and leases.

Second, we have and continue to defer capital expenditures while supporting critical maintenance for our facilities. Finally, we managed our staff expense using multiple levers, including a freeze on hiring, merit increased deferrals, reduction in overtime and by furloughing approximately 2,300 team members, a large percentage of which were within Secure Information Destruction. Importantly, our prior technology investments for a centralized purchase order system and global human capital management system have provided critical tools to enable us to move quickly and control expense. These systems provide one source of truth regarding our spending and staffing, giving us real-time visibility to measure the impact of our efforts on a daily basis and the ability to drive executional accountability across the organization. There were many difficult decisions that had to be made, and we did not take the furloughing of our staff lightly.

To support our team, Stericycle is covering the employee portion of medical contributions for furloughed team members, and we've made telemedicine services available free of charge to U.S. team members covered under Stericycle's medical plan. We've increased communications and employee fundraising activities for SteriCares program, our emergency assistance fund that provides financial grants to active and furloughed employees experiencing a financial hardship due to illness, injury and unforeseen financial burdens. Additionally, we are hosting voluntary weekly calls with furloughed team members across the globe with informational updates and messages from leadership to help keep these team members engaged.

Finally, let's shift to our fifth priority, the implementation of our ERP system. As noted on the fourth quarter call, we marked a significant ERP milestone in January as we successfully launched our new global human capital management system. We had a detailed schedule for the staged implementation of the commercial, operational and financial systems in the U.S. and Canada this year. However, guided by our commitment to protect what matters, we concluded that the health and travel risks associated with a field deployment in this COVID-19 environment were substantial. And given our priority on serving our customers and keeping our team members safe, we made the decision to defer the ERP deployment. We have flexibility, and we'll reassess the deployment timing as conditions improve.

I'll now turn the call over to Janet to further review our financial results and current position.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Thank you, Cindy. I will start with summarizing our first quarter results and then shift to our insights regarding the potential financial impacts of the pandemic. Total revenues were $785 million compared to $830.1 million in the first quarter of 2019. The decline was due to divestitures, which reduced revenues by $38.4 million and macroeconomic factors of SOP pricing and foreign exchange rates, which reduced revenues by $16.4 million and $10.5 million, respectively. The company delivered overall organic revenue growth of 0.5%, including the impact of SOP pricing or 2.5% excluding the impact of SOP pricing. This is the first quarter since 2017 that we delivered overall organic growth, and it was driven by performance across Regulated Waste and Compliance Services, Secure Information Destruction and Manufacturing and Industrial service lines.

As Cindy mentioned, our revenue was tracking to our internal plan in January and February prior to the economic changes that followed in March from COVID-19. As noted on slide seven, Regulated Waste and Compliance Services revenues were $467.3 million compared to $469.2 million in the first quarter of 2019. Excluding divestiture and foreign exchange impact, organic growth in Regulated Waste and Compliance Services was 3.3%, with the majority of growth in January and February as a result of revenue quality initiatives and continued stabilization of our independent customer channel. While our organic growth in the quarter was strong, we did see emerging impacts at the end of the quarter related to the COVID-19 pandemic.

Secure Information Destruction services delivered revenues of $218.1 million compared to $232 million in the first quarter of 2019. Excluding the impact of SOP pricing, organic revenue growth was 1.4%. This organic growth rate reflects the early impact of COVID-19. For the month of March, North American Secure Information Destruction average stops per day were down 11%, and reflecting the reduced operations or closure of customer locations across the country given shelter-in-place orders. Communication and Related Services revenues were $33.6 million compared to $61.2 million in the first quarter of 2019. Excluding the impact of divestitures and foreign exchange, which accounted for approximately $27.3 million in lower revenues, organic revenue declined only 0.5% due to lower demand during March for hospital scheduling services of procedures due to the focus on COVID-19 patients.

Manufacturing and Industrial services revenues were $66 million compared to $67.7 million in the first quarter of 2019. Excluding the impact of foreign exchange and divestitures, organic revenue within Manufacturing and Industrial services was up 2.2% and in line with our expectations. As a reminder, we received HSR approval for the Domestic Environmental Solutions divestiture on April three and officially closed that transaction on April 6. Loss from operations in the quarter was $30.4 million compared to a loss from operations of $4.2 million in the first quarter of last year. Excluding the impact of divestitures and goodwill impairments, income from operations was $27.9 million compared to $11.3 million last year, an increase of $16.6 million.

This improvement was the result of lower SG&A expenses of $27.1 million, primarily related to reducing consulting and professional fees for litigation, compliance and internal control remediation plus margin improvement of $4.2 million, which was partially offset by the SOP pricing impact of $16.4 million. U.S. GAAP diluted loss per share was $0.22 compared to diluted loss per share of $0.42 in the first quarter of last year. This reflects the previously highlighted significant charges in operational items as well as a tax benefit related to the U.S. CARES Act of $39.4 million, which relates to our ability to now carry back net operating losses to prior years that had higher tax rates. We also incurred lower interest expense of $2.6 million due to lower debt balances and interest rates.

U.S. GAAP cash flow from operations for the first quarter was $82.1 million compared to $36.2 million for the comparable period last year. The current quarter primarily reflects lower payments for annual incentive compensation of $19 million, accounts payable timing of $10.5 million and lower prepaid software of $8 million compared to the prior year. Capital expenditures in the first quarter of 2020 were $39.6 million compared to $66.1 million in the first quarter of 2019, primarily driven by the timing of investments in the ERP implementation and lower capital expenditures due to our disciplined capital management.

Adjusted income from operations was $93.8 million compared to $105 million in the first quarter of 2019. The decrease was driven by the first quarter 2020 SOP pricing impact of $16.4 million, which was partially offset by margin improvement of $4.2 million. Adjusted diluted earnings per share was $0.52 compared to $0.57 in the first quarter of 2019. As illustrated on the bridge on slide 11, the year-on-year variance in adjusted EPS was due to the following: $0.12 on favorability from SOP pricing, offset by $0.03 margin improvement; $0.03 from the benefit of a lower effective tax rate and related tax expense; and $0.01 from lower interest and other expense.

Our first quarter DSO, as reported, was 47 days, compared to the DSO of 60 days in the fourth quarter of 2019, reflecting the shift of accounts receivable from the Domestic Environmental Solutions business into a held-for-sale classification. When excluding the divestiture revenues from the DSO calculation, DSO was 61 days compared to 62 days for the fourth quarter of 2019. On a normalized basis going forward, we expect to see at least a three-day improvement in DSO resulting from the divestiture of the Domestic Environmental Solutions business. Free cash flow was $42.5 million in the first quarter, compared to an outflow of $29.9 million in the first quarter of last year, an increase of $72.4 million resulting from improved cash flow from operations and lower capital expenditures.

At the end of the first quarter, our adjusted debt-to-EBITDA leverage ratio as defined by our credit agreement was 4.5 times, which was below our maximum ratio for the quarter of 5.0. During the first quarter, we paid down approximately $43 million in net debt, and we have paid down approximately $115 million over Q1 2020 and Q4 2019. As a reminder, the net proceeds from the divestiture of the Domestic Environment Solutions business of about $430 million were applied to the repayment of debt in April. Given the uncertain economic outlook in light of the COVID-19 pandemic, we are withdrawing our financial guidance for the full year 2020. However, I would like to share some insights regarding the divestiture of the Domestic Environmental Solutions business, the expected impact of COVID-19 on our business going forward and our liquidity position.

Let's start with the impact of the Domestic Environmental Solutions business. The divestiture included the retail and manufacturing and industrial hazardous waste service lines. The 2019 revenue for these businesses was approximately $460 million. The EBITDA margin percentage was below the company's average and in the mid single-digit range. Stericycle will continue to offer unused consumer pharmaceutical take-back services and provide hazardous waste services to healthcare customers as an integrated services provider. 2019 revenues for these retained service lines was approximately $100 million or approximately 30% of the hazardous waste services as reported in the disaggregated revenue table in our 2019 Form 10-K. We will continue to report this revenue as part of Regulated Waste and Compliance Services going forward.

I would like to provide some insights into April revenue trends for our North American core businesses. Within Regulated Waste and Compliance Services, April revenues in North America are down approximately 2% when compared to April of 2019. This relatively modest decline in revenue reflects a 12% decline in RMW weight, which we believe is due to the postponement of preventative care and elective surgeries and the temporary closure of smaller, independent healthcare practices. In general, about 25% to 30% of revenue within North American Regulated Waste and Compliance Services business is transactionally priced by weight or by container. Transactional pricing is primarily within the hospital and national customer channels, which account for approximately 60% of RWCS revenue with about 35% to 40% priced by weight or by container. As preventative and elective care and surgeries increase and independent practices reopen, we anticipate seeing improving revenue trends.

Looking at the Secure Information Destruction business, our April 2020 North American revenues were down approximately 40% compared to April of 2019. This reflects a 40% decline in the numbers of service stops as a direct result of over 40 state shelter-in-place orders and temporary closure of nonessential businesses. If the trend toward states allowing businesses to open continues, we anticipate seeing revenues improve. In response to the declines in revenue, we have aggressively pursued cost reductions, as Cindy described, and we will continue to manage the business with disciplined cost control. The shift in the ERP implementation time line will result in additional savings in 2020. As I discussed on our last call, we anticipated spending $85 million to $115 million during 2020 to complete the ERP development, testing and deployment. This spending would have roughly been split equally between cash paid for operating and capital expenditures that will be adjusted out of ongoing operations.

In the first quarter, we spent about $42 million toward this effort with the details presented in the Form 10-Q. We expect to spend an additional $30 million to $40 million, primarily capital, in the second quarter to complete the development and most testing. The remaining $20 million to $30 million is operating expenditures directly tied to the timing of deployment. During the fourth quarter call, we also indicated that our 2020 IT operating costs would increase by $35 million to $45 million reflecting the incremental cost of running the new system. These costs will be reduced proportionally, depending on the timing and the shift of our go live.

We are also taking advantage of the deferral of certain tax-related payments and other relief opportunities. As a result of the CARES Act, we expect two benefits: First, we anticipate cash inflows of approximately $100 million in 2020 from cash tax refunds for 2018 and 2019 net operating loss carrybacks. We expect to receive both refunds by the end of the year, although there is some timing risk given current IRS volume and government shelter-in-place requirements.

Second, as provided under the U.S. CARES Act, we are deferring cash payments associated with employer-related payroll taxes of approximately $20 million in 2020, starting in the second quarter through the rest of the year with payments in late 2021 and 2022. Internationally, the company is actively pursuing payment deferrals under various programs for social and indirect tax matters. I'd like to take a moment to acknowledge the U.S. and international governments for the relief and stimulus efforts that have been introduced to help our customers, small and medium-sized independent businesses and impacted hospitals to get back on their feet.

Moving to liquidity. You may recall that we entered a debt amendment in February, which increased our maximum debt leverage ratio to five times for the fourth quarter last year and first quarter in 2020. Following the Domestic Environmental Solutions divestiture in the second quarter, our leverage ratio moves to 4.75 times through 2021 and then drops to 4.25 times for the first quarter 2022 by which time, we anticipate renewing the credit agreement given its maturity in November 2022. As referenced earlier, we applied approximately $430 million in net proceeds from the divestiture to the repayment of debt, which we expect will reduce our leverage ratio in prospective quarters by about 50 basis points off our trailing 12-month leverage ratio.

With the divestiture proceeds and our continued focus on managing cash, we anticipate we will maintain a debt leverage ratio below our debt covenant of 4.75 times. We currently have approximately $450 million available in our revolving line of credit to support the business in the near term and as a reminder, our credit agreement matures in 2022. While economic conditions are challenging to predict, we remain focused on ensuring our cash position is sound.

While we have withdrawn guidance for 2020, we remain confident in the long-term outlook of the business, barring a COVID-19-induced prolonged recession, we believe we can deliver the long-term outlook for growth, cash flow and debt leverage we presented during our last call. To reiterate, over the next five years, we expect organic revenues to grow at a compounded annual rate of 3% to 5%. We expect free cash flow generation to increase to at least $400 million annually, primarily driven by margin expansion. We expect to continue to pay down our debt and improve our leverage ratio below three times within the next two to three years.

This five-year projection excludes the Domestic Environmental Solutions business, but includes all the businesses we have today and assumes a stable SOP pricing and foreign exchange environment at rates which we started 2020. We will continue to monitor longer-term economic forecasts, and we may update this outlook in the future as we gain a better line of sight on any potential long-term economic impacts of the COVID-19 pandemic. Finally, I'd like to stress that we continue our commitment to maintain a strong internal control environment as times like these only reinforce the need to ensure that internal controls are in place and operating effectively.

I will now turn the call back to Cindy.

Cindy J. Miller -- President and Chief Executive Officer

Thank you, Janet. Although we remain in the midst of the impact of COVID-19, we are already looking to the future. Our engineering and operations teams are developing plans to efficiently and effectively scale our field operations to support our customers as they return to work. Safety remains a priority, and we have a task force focused on understanding evolving regulatory guidelines and new precautions to prevent the spread of the virus when our offices and those of our customers reopen. We are committed to disciplined decision-making processes as we look to the future. We see this as an opportunity to think differently about how we operate, and we'll be evaluating longer-term improvements based on key learnings from our scaled-back operations.

I am proud to work with the executive leadership team we have assembled here at Stericycle as we lead through these unprecedented times. And I am pleased to announce that Kurt Rogers has returned to Stericycle as Executive Vice President and General Counsel, effective March 31, 2020. We welcome Kurt back to the team and look forward to his additional contributions. And while this is not the 2020, we envisioned, Stericycle remains in a uniquely strong position. Our core medical waste service is highly valued by our customers. We have sufficient cash available to support our liquidity, and our commitment to protect what matters guides our focus. Our efforts over the last year to become more efficient operationally with centralized and standardized processes, have positioned us well to respond quickly to the current economic challenges. We continue to support our customers, protect our team and the communities that we serve, and drive value for our shareholders.

And as a final comment, I'd like to give special recognition to our frontline staff, the drivers, plant workers and technicians in the hospitals, many of whom work shoulder-to-shoulder with healthcare providers. These team members are truly our heroes as they provide an essential support service that allows doctors and nurses across the country and around the world to care for those who are ill. For more than 30 years, Stericycle has served as a critical partner to support the modern healthcare system from which we all benefit, and we couldn't do it without our men and women in the field. I deeply appreciate your efforts to protect what matters.

Operator, please open the line for Q&A.

Questions and Answers:


Thank you. [Operator Instructions] Our first question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Scott Schneeberger -- Oppenheimer -- Analyst

Sure. Good morning everyone and Cindy thanks for taking my question. I guess starting off, organic growth rate in regulated waste was impressive again in the first quarter and, obviously, a little bit of disruption at the end of the quarter, unfortunately. But could you you cited revenue quality initiatives. Could you just talk a little bit about the progress you were seeing and then how you're going to continue to drive that or attempt to in the current environment?

Cindy J. Miller -- President and Chief Executive Officer

Yes. Thanks, Scott. Great question. We're very proud of the quality of revenue initiatives that we started last year as one of the key priorities, and I think it positioned us very, very well as we are so proud of the organic growth that we're seeing now across the organization, across the core businesses. Specifically in the regulated waste, what we're seeing is there is strength and stability in our independent channel. It's been a main focus of ours. And I think that Cory and the commercial team, that group is really doing a terrific job there. And quite frankly, just prior to March and the pandemic, if you will, or it being so front and center, the team has a tremendous amount of momentum going there.

And I think that they are all focused on organic growth. I can also take a look at our ability to continue with the deal review committee that we have. I think that we're readdressing some very old contracts as many of these things are still coming, new and some of the older contracts that we have. And I think all of those things, including and combined with some strong service that our operators are providing, any time you have that type of a recipe, I think it's a great recipe for organic growth. And I can tell you, it is a very bright spot for us. And even during this time, we are seeing additional inbound calls from some adjacent spaces that we haven't been as strong in.

I'll give you an example. We, for some reason or another, when you're really focused on farming, you don't necessarily look left or right in adjacent spots in order to grow. But right now, we're seeing growth potentially in some of our some of the aging care facilities and nursing homes around the U.S. We've gotten a good bit of interest from some veterinary clinics. And so I think the team is really focused on just going out to capture a patch of land, and I'm very excited about what that's going to bring once the world returns from this COVID pandemic. Thanks for the question, Scott.

Scott Schneeberger -- Oppenheimer -- Analyst

And just one more, if I could ask a second. The obviously, Secure Information Destruction, some disruption from the current environment. Could you speak to the contract structures there, the amount that's transactional versus maybe some that's contractual? And then maybe discuss trends in purge after, hopefully, we come out of this current environment. Just how should we think about that going forward and magnitude of how it could be impacted?

Cindy J. Miller -- President and Chief Executive Officer

Yes. And I think what we'll do here is I'll give you just some overviews, and then if Janet has any other color in terms of some of the specifics on some contract language. Let's just talk in general. What we're very excited about in Secure Information Destruction is for quite some time, the last several quarters, we've been talking about organic growth. And let's take a look at 2019. Just as a reminder, paper price started really high at the beginning of 2019, and then the recycling rate dropped to $85 by the end of the year. We were seeing organic growth during that time period, and we had talked about the fact that many of the smaller and potentially regional players weren't extracting value from their service, but were really living off of the margin on the recycling fees. So we think we gained momentum there because of gaining patches of land.

And then we saw that continuing into Q1. Now if we take a look at that same scenario, many of these many of some of the competitors might not make it through this pandemic which affords us an opportunity and Cory's team to get very wide eyed, if you will, in terms of pursuing additional opportunity. So I'm very excited about what we're going to see as many of these shelter-in-place states start to open up and businesses get back to usual, if you will. So I'm excited about that.

And I think as we had said, we make money mostly in Secure Information Destruction off of completing the transaction. You make the stop and you record it and, obviously, it's a bit more transactional. So we're we see it as businesses open up and we're afforded the opportunity to make those stops, that revenue should come back in line. And Janet, I don't know if you have anything else that you'd like to share with reference to contracts or specific to purge.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

I would just say that as we think about purge versus auto revenue, meaning it's a service based on the stops, most of our revenue is the service based in Secure Information Destruction. We have seen a reduction in both, but we actually are as states open up, we anticipate both of those revenue streams will open up as well.

Scott Schneeberger -- Oppenheimer -- Analyst

Thanks very much, I'll turn it over.


Our next question comes from David Manthey with Baird.. Please go ahead.

David Manthey -- Baird -- Analyst

Hi, good morning. Thank you. Following up on the first question, Janet, you referenced it. But can you quantify the year-to-year SOP tonnage collected in April?

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

I don't have that data for you. We're actually gathering that. It's a very intense process. I will tell you that the tonnage in April in generally is down because the stops are down, so we're collecting less waste. We are gathering that information as part of our close efforts as we speak.

David Manthey -- Baird -- Analyst

Okay. And I suppose it's another layer of complexity to think about the sort of tonnage divided by the customers that you are able to access. But so by customer, do you think the volumes are also down? Or is that too granular at this point?

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Well, I'm not sure that's true. I think the key driver of what we're seeing in Secure Information Destruction right now in terms of the service revenue is the stops, which are aligning very tightly with the revenue decline. When you're talking about what we can get in terms of paper, in terms of recycling, that's a different equation. But if you're looking for that, it's the stops, and the stops have declined and the revenue declined in accordance with that. And that is the primary activity driver that we're seeing.

Cindy J. Miller -- President and Chief Executive Officer

Yes. And Dave, one of the things that's a great question. I think we've always been a company that talked about end of year being about 750,000 tons of paper, and it's been it's actually held pretty steady for what I from what I can see about the last decade or so. I think what we're seeing is we're not seeing I think the decline in paper for April is probably going to come in commensurate with roughly the decline in stops. I think there's not quite a specific one-to-one relationship. So I think last year, we probably did over 60,000 tons potentially in the month of April. And I would imagine that we'd see a correlation in terms of the decline, but again, too early.

But I am very, very positive about the number of inbound calls and the engagement that our inside sales team is having right now with customers. As states have been announcing, hey, the states are opening up, business owners are making the decisions they're going back in, and we've had a tremendous amount of inbound call for people saying, "Hey, we're going to need your services. This is when we anticipate being back." So we're very encouraged by that. And I think, obviously, Q2 will tell us more. But that's a very positive sign, and that's how we're taking it internally.


Our next question comes from Michael Hoffman with Stifel. Please go ahead.

Michael Hoffman -- Stifel -- Analyst

Hi, thank you for taking the questions. So if we could follow-up on document destruction, the 1.4% in the first quarter, you had a really easy compare. So I just want to make sure I understand that how to think about that number in the context of the compare because of what happened a year ago in the weather. And then following through that, how do you think about how many of the customers don't come back if we have a work at home becomes more commonplace than it was prior to this.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Yes. So Michael, this is Jan. I'll just give you some context. So January and February were quite strong. It was March that mitigated and ended up with that result. So I think we were in an appropriate place in the comps until we started to have, frankly, the states start to shut down, which correlated with stops shutting down. So I think that answers your comparative question. And what was your next question, just the follow-up?

Cindy J. Miller -- President and Chief Executive Officer

I've got Janet, I've got that one. Michael, great question. I think a couple of things. Any time we've been rethinking and trying to get as innovative as possible. We've been rethinking everything. We rethink how we're how we dispatch our drivers. We've been rethinking just how we handle ourselves from an operations perspective, in a non-ops perspective, looking to be leaner and tighter everywhere we can. And I but that also brings about opportunities for innovation.

So we are going to assess to see how businesses return and to see what is the dynamic and then rethink maybe some other opportunities for work-from-home-type secure information destruction service. So more to come there, but it is something that we are thinking about in order to be flexible and nimble, to adapt to what is the potential change for what does tomorrow look like.

So great question there. More to come. I think we're early in the experiment. But it certainly is challenging us in the manner in which it should. We should be changing and adapting, and I'm pleased with the thought process that we have right now that's going on.

Michael Hoffman -- Stifel -- Analyst

Okay, thank you.


Our next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Jeff Silber -- BMO Capital Markets -- Analyst

Thank you so much. I think you alluded to this a little bit, but I wanted to drill down a little bit more. You have operations in areas where we've started to see some opening up of whether it's outside the U.S. or in some of the states or, for instance, in New York and New Jersey, where the number of cases are going down and we're seeing some of the temporary hospitals close, etc. What's been the impact on your business in those locations, both from regulated medical waste and also Secured Information Destruction?

Cindy J. Miller -- President and Chief Executive Officer

So thanks, Jeff. Great question. So initially, early on, the Javits Center got set up. The USNS Comfort was in the New York Harbor. And immediately, whether it was local governments or healthcare agencies that were handling these, they called this right away and said, hey, can you partner with us just based on the expertise and the size of us in the industry. So certainly, we answered the bell. We set up the 2,000-bed temporary unit in the Javits Center, all complete with regulated waste materials and containers.

We were ready to go. What we had to do and what I'm really, really proud of the team having done, for Cory's commercial team and Janet's finance team and the operators, got together and figured out, OK, this is a new playbook. What do we do? How do we price this? This isn't set up to be long term. This isn't set up to be a long relationship engagement. So how do we make sure that we're covered initially for setup. And then we are commensurated with some type of remuneration based on what we've collected. So I think the team came up with a great quick-hit playbook, if you will, in order for us to be able to do those things.

Now the Javits Center, as everybody knows, never really got certainly didn't fill all 2,000 beds. And the Comfort, the USNS Comfort, left the New York Harbor. But we were right there and we stood at the ready, and we made sure that we were not left in the lurch in terms of holding the cost without necessarily recovering the benefit of it, if you will, as we looked for more upfront-type payments. So and then in those areas, certainly, we've had to adapt our scheduling. We've had to make some more pickups in certain hot spots to make sure that we keep these hospital networks flowing. Last thing anybody wants is any issues in any of their internal workings of the hospital. So I'm very proud of the team and the efforts that they've done as many of our folks were have been and continue today to be right in the mix in the hospitals with the healthcare professionals.

On the Secure Information Destruction side, there have been some states where we've had uninterrupted service. Not every state went to shelter-in-place, if you will. I believe there may have been at least eight that stayed open. And obviously, we ran full services there and continued to provide service to customers. And as many of these customers continue to come back online, we're prepared to engage on both portions of the core business enable to in order to service everybody that needs servicing. So we stand at the ready. We're fully engaged proactively with customers to find out what are their thoughts for coming back online so that we're prepared.

But then our focus is to make sure that as we scale up, after having put an awful lot of effort into scaling down, we want to make sure that we do that as wisely and as efficiently as possible. And that's where, I think, a lot of the great operations and engineering efforts that we have going forward will prove extremely valuable.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay. Great. And as my follow-up, it is probably is for Janet. Can you talk about the decremental margins in your two largest lines of business, regulated waste and Secure Information Destruction? I know the business has changed over the past few years, but if you can help us out in terms of trying to estimate that, that will be great.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

So I would say that what we've been doing in this these unprecedented time is keeping our variable costs in line with our revenues, and we continue to focus on our operating leverage. In the past, we've been improving it up to this point, and we are keeping in the line. Just to give you some indication, variable costs as a percent of our revenues run around 60%. And that is what we're keenly focused on in terms of aligning them with the revenue of the business and keeping them tight as revenue grows, but also taking them down as we've seen some revenue declines.


Our next question comes from Sean Dodge with RBC Capital Markets. Please go ahead.

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks, good morning. So maybe, Janet, just staying on the costs for a moment and maybe coming at it from a slightly different way. The actions that you've taken over the last 1.5 months, can you put some bookends around or give us a sense of the magnitude of those reductions you can generate in the short term? Are you talking tens of millions of dollars here on an annualized basis or furloughing 2,300 workers? It sounds like this could be in the hundreds of millions.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Yes. So it's a significant dollar amount. I like to think about, as I talked about the variable costs as a percent of revenue, we have worked hard to keep those in line and proportionate with the revenue trends that we are seeing. And we're also maintaining the flexibility to bring the cost back in line as the revenue goes up again. And so that has been how we've been managing this. We've also taken cost out of what I'd call the not the variable front line costs as well, which includes like some of the travel for staff, merit deferment, etc. So it is a significant amount. I haven't disclosed the exact, but it is closer to the larger number than the smaller number.

Sean Dodge -- RBC Capital Markets -- Analyst

Got it. Okay. And then you've outlined the pandemic impact on the transactionally priced medical waste business. If we think about the clients that are on monthly subscription, so I'd imagine much of the smaller-quantity business, even though those are on a subscription-based model, do you anticipate being able to invoice everyone for April? Or is there some expectation that there'll be pushback from those sites that were closed for the month?

Cindy J. Miller -- President and Chief Executive Officer


Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Go ahead, Cindy, if you want to take it.

Cindy J. Miller -- President and Chief Executive Officer

Yes. No, Sean, that's a great question. I think one of the things that we wanted to do is there's a lot of things you have to do to support your customers, and it's a lot more than just servicing and billing. Sometimes it's stopping, listening, calling, engaging and really trying to work with your customer base in order to make sure that you're working on longer-term relationships rather than just shorter-term initiatives. So for us, we have a mix. We've been engaged with customers and have said from us calling them and them calling us. And they've there's been a small percentage that said, "Hey, can we defer? Can we postpone for the moment? As soon as we come back, we'll let you know."

We have detailed plans by the customer as to engagements for those that have given us states to start back up. Those that have said, "Hey, not a problem, continue to bill me." We've even had some customers say I know we've had some customers that have said, "Hey, please continue to bill us in April. We appreciate the service that you guys are doing. And we know that the service fee is going to go to help. We see your men and women out there braving the streets every day, and please make sure that let them know that we care about them." Which just kind of shows you the softer and really the American spirit, I think, as to who human beings are in their want to make sure that everybody is OK.

So we've seen a mix. We've got about in the independent space, there's potentially 70%, 80% of folks that are on a subscription basis. We've got less than that that's involved with reference to a transaction. So we've been very much engaged with them, and I anticipate they'll turn right back on as soon as doors open back up. And I think what's going to be huge news for everybody is, as elective surgeries and procedures and preventative care opens back up, I think that's quite a tailwind that the healthcare industry will be able to take advantage of. And certainly, it will help us as well.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

And just to add on, we have seen very few customers say, we don't want to maintain your service on the service side. It is a really small part of the mix.


Our next question comes from Ryan Daniels with William Blair. Please go ahead.

Nick Spiekhout -- William Blair -- Analyst

Hey guys. This is Nick Spiekhout in for Ryan. I guess, just to start off, you talked about reducing capex for the year. I think you were originally targeting around $175 million on the low end. Where are you guys thinking you're going to end up for the rest of the year? And then if you can kind of describe some of the areas that you would cut back on and then some of the areas that you're planning on kind of maintaining.

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Yes. So the areas we're cutting back on are more discretionary, enhancing projects. And the ones we're keeping and maintaining are the mandatory in keeping our plants in good shape and maintenance. What we've also instituted is a capital budgeting and planning process, which we put in last year, which is really helping us. So some of this is just disciplined capital management that we are leveraging because we have now central management of all capital expenditures.

But we are making sure that we're keeping everything in good working order and just for right now, deferring the more discretionary projects until we see the businesses open up again just as good, prudent cash management. And I haven't indicated what the target will be because it's uncertain right now. If we see good return to business as normal, we could potentially stop start some of those discretionary projects again. If not, we will keep it tight until we see where the economy is going.

Nick Spiekhout -- William Blair -- Analyst

Is there like a percentage of how much of that is discretionary at all? Like do you know that?

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

It's I don't have the exact number. No, I don't have that off the top of my head.


This concludes our question-and-answer session. I would like to turn the conference back over to Cindy Miller for any closing remarks.

Cindy J. Miller -- President and Chief Executive Officer

Thank you, and thanks for everybody for your attention and your time today to share for listening for us to share our information with you. But what I do want to say is one more time is, we greatly appreciate your concern for the Stericycle employees that are out there in the field every day, working to keep the healthcare network flowing, and we're very proud of the work that they've done. So thank you all very much, and we'll look forward to hearing from you in the next call.


[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Jennifer Koenig -- Vice President of Corporate, Communications and Investor Relations

Cindy J. Miller -- President and Chief Executive Officer

Janet H. Zelenka -- Executive Vice President and Chief Financial Officer

Scott Schneeberger -- Oppenheimer -- Analyst

David Manthey -- Baird -- Analyst

Michael Hoffman -- Stifel -- Analyst

Jeff Silber -- BMO Capital Markets -- Analyst

Sean Dodge -- RBC Capital Markets -- Analyst

Nick Spiekhout -- William Blair -- Analyst

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