Stericycle Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

And thank you for standing by. Welcome to the Q3 2023 Stericycle Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr.

Operator

Andrew Ellis. Sir, please go ahead.

Speaker 1

Good morning, and thank you for joining Stericycle's 2023 Third Quarter Earnings Call. On the call today will be Cindy Miller, our Chief Executive Officer Janet Zelenka, our Chief Financial Officer and Chief Information Officer and Corey White, Our Chief Commercial Officer. The discussion today includes forward looking statements that involve risks and uncertainties. When we use words such as believes, expects, Anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward looking statements. Forward looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties.

Speaker 1

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.

Speaker 1

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 at investors.

Speaker 1

Stericycle.com. The prepared comments for today's call correspond to an earnings presentation, which is also available at Stericycle's Investor Relations website. Throughout the call, we will reference specific slides from the presentation. This call is being recorded and a replay will be available approximately 1 hour after the end of the conference call today until November 30, 2023. A replay of the webcast will be available on Stericycle's Investor Relations website.

Speaker 1

Time sensitive information provided during today's call, is occurring on November 2, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call Any form without the expressed written consent of Stericycle is prohibited. I'll now turn the call over to Cindy.

Speaker 2

Thank you, Andrew. Good morning, everyone, and welcome to today's call. I'm pleased to share that in the Q3, through the hard work and dedication of our team members and technology partners, We successfully deployed the ERP system to our U. S. Regulated waste and compliance services business.

Speaker 2

Today, Almost all of our U. S. Team members are leveraging the new technology. I'd like to take a few minutes to update you on the ERP deployment. I'm proud to say that we grew North America Regulated Waste and Compliance Services organic revenues by 3.9% in the 3rd quarter in the midst of a major ERP deployment.

Speaker 2

To give you greater insights into the deployment, I'll speak to the operations portion And then I'll turn the call over to Corey to provide an update from a customer experience perspective and how it has improved some of our commercial processes. We continued to prepare for this deployment throughout the quarter as we finalized data conversion, Training and facility upgrades. We launched the deployment in early September when we began servicing our customers through the new technology. From an operational perspective, we couldn't be more pleased with our team members' ability to continue to serve our customers since the system deployed. We experienced the typical start up learning curve that comes when processes change and are infused with new technology.

Speaker 2

For our frontline workers, this resulted in an anticipated and temporary reduction in productivity. As the team has become more familiar with the changes in processes and procedures, we are seeing continued improvements And we expect that this new technology will contribute significantly to our ability to achieve the margin expansion embedded in our long term outlook. I'll now turn the call over to Corey, who has been deeply engaged in helping our U. S. Regulated waste and compliance services customers Transition onto the new ERP.

Speaker 2

It will provide insights from our customers.

Speaker 3

Cindy, thank you for the opportunity on today's call to share our Customers experience throughout the ERP journey and highlight some of the exciting ways this new technology will help us improve commercial execution. Overall, the rollout of the ERP was a success. We have had no significant system issues. Orders are being created, Stops are being routed, containers are being tracked, waste is being picked up, treated and properly disposed and invoices are being created and processed for both regulated waste and compliance services and secure information destruction customers. Along this journey, we have been in frequent contact with our customers During the 1st couple of weeks of September, our customer satisfaction scores understandably dropped as some of our customers experienced short term disruption.

Speaker 3

Our scores have since improved and are already above pre go live levels. Following the deployment for the first time, We now have real time capability to see order completion in the system. We are pleased that an overwhelming majority of orders are serviced seamlessly. We have seen an expected increase in our customer call center volume. Importantly, The majority of this increase is from customers requesting assistance, understanding the new invoice format, enrolling in the customer portal, Setting up autopay or verifying new account numbers.

Speaker 3

We view these interactions as a favorable sign of our customers' engagement with and adoption of the new platform and how smoothly the ERP deployment has gone for the vast majority of our customers. I'd now like to highlight a few ways in which we have modernized and improved the customer experience through the ERP deployment. 1, We've added important digital enhancements, including redesigned portals that act as a one stop shop for customers to view Account information, receive consolidated billing for services and sites and pay for their services. 2, For our compliance services customers, we integrated the portal with our compliance training platform to create a single solution to meet their needs. 3, customers now receive automated advanced service notifications to help them better plan their days, a feature requested by our customers so they know when they will be serviced.

Speaker 3

4, we also made enhancements to our In the near future, we expect that our portal will provide new and enhanced reporting features that will allow customers to easily access weight and volume metrics, benchmark and optimize waste streams and gain greater insights which can be used in pursuit of their sustainability goals. Over the past few months, I've met personally with well over 100 customers during face to face meetings as well as lunch and learn events to elicit their feedback, which has been overwhelmingly positive. They have been supportive of our move to new systems and are clearly excited about how our new capabilities will unlock opportunities Recently, one of our key customers told me how pleased they were with the deployment. They appreciated the proactive communication on changes we made to their account and liked the enhancements we made to the portal. They also said they did not get any negative feedback from their internal stakeholders.

Speaker 3

They saw this as a sign of a successful deployment, citing that Cylance is golden for managing these kinds of major changes. I'd like to take a moment now to talk about how our commercial organization is using the technology to become more nimble and efficient.

Speaker 2

All of our sales people in the U.

Speaker 3

S. Are now utilizing the new system for 5 key processes: lead development, pipeline management, Performance management, reporting and contracting. This is a major step forward on our quality of revenue journey and our ability to execute on key business priorities, which includes expanding service penetration, improving customer implementation velocity and deepening our customer partnerships by developing enhanced customer solutions. By operating on a common platform, we are improving our Efficiency and selling effectiveness for both the regulated waste and secure information destruction businesses, while driving greater consistency and accountability throughout the sales process. The platform also lays the foundation for future enhancements like digital and guided selling capabilities and additional call center automation.

Speaker 3

Finally, by unlocking data and related insights, we expect this will lead to more intelligent sales decisions, New product development and service enhancement opportunities as we continue to listen to the voice of our customers. I'll now turn the call back to you Cindy.

Speaker 2

Thank you for that update, Corey. Turning to our Q3 results. I'm pleased to report that in the Q3, regulated waste and compliance services Continued its organic growth trend, increasing 4.1% globally even during a period of ERP deployment. Growth this quarter has primarily come from our pricing levers. This has been partially offset by challenges in national accounts, which includes customers like retail pharmacies and nationwide healthcare service providers.

Speaker 2

These customers have remained very sticky despite the economic headwinds they are facing. As our customers reduce their footprint, our service stops in this channel have also contracted. We remain encouraged that the critical services we provide remain a priority for these customers. Secure Information Destruction Organic revenue declined 11.6 percent, mainly due to lower commodity indexed revenues, including lower RISI rates impacting sorted office paper and lower fuel and environmental surcharges. Although this revenue channel was down year over year, The Q3 of 2022 had significant organic revenue growth of 32.3% on the strength of commodity related pricing.

Speaker 2

When considering Secure Information Destruction's organic growth over a 2 year compound annual growth rate, it grew organic revenues 7.5% since 2021. Similar to regulated waste, our national secure information destruction customers are experiencing a reset in their post COVID pandemic office footprint. Across the Secure Information Destruction business, we believe we remain an essential service and are retaining these customer relationships, but have seen service stops decline year over year by about 4%, mainly driven by customer site closures and reduced service frequencies. In the long run, we believe secure information destruction We'll contribute to our long term growth trajectory by leveraging technology, deeper customer insights and new service offerings. Regarding our operational efficiency, modernization and innovation priority, most of our engineering team members were squarely focused on deploying the ERP and executing our facility modernization plan.

Speaker 2

During the deployment, our engineering team supported all aspects of field operations such as training, communication, site visits to ensure technology was working as designed and identifying and driving performance opportunities. Additionally, construction of our incinerator in McCarran, Nevada remains on track and we continue to expect the construction phase of the project to be completed in the first half of twenty twenty four. As mentioned during our Q2 earnings call, We completed 2 divestitures in the 3rd quarter with the sale of our dental recycling business in the Netherlands, which closed in July and the sale of our Secure Information Destruction joint venture in the United Arab Emirates, which closed in August. In early We also divested our regulated waste business in Romania, our 19th divestiture since 2019. In October, we substantially completed a targeted workforce reduction that we expect will generate annual savings $8,000,000 and resulted in an approximate $3,000,000 charge.

Speaker 2

As we look to drive long term margin expansion and shareholder value, We have a host of levers available. These levers are further enabled by our investments in our ERP technology and infrastructure and includes strategic initiatives, careful hiring, attrition and targeted workforce reductions to align our operating model with the performance of our business. I will now turn the call over to Janet to discuss our Q3 financial results in more detail. Thank you, Cindy. I will start by summarizing our Q3 financial results.

Speaker 2

As noted on Slide 5, revenues in the Q3 were $653,500,000 compared to $690,300,000 in the Q3 of 2022. The decrease was mainly due to divestitures of $32,400,000 which was partially offset by favorable foreign exchange rates of $6,100,000 Organic revenues in regulated waste and compliance services grew $17,400,000 while Secure Information Destruction organic revenues declined 27,900,000 Secure information destruction was mainly impacted by lower commodity index revenues of $30,100,000 including lower RISI rates impacting sorted office paper and lower fuel and environmental surcharges. As noted on Slide 6, regulated waste and compliance services revenues were $439,900,000 compared to $447,800,000 in the Q3 of 2022. Excluding the impact of divestitures and foreign exchange rates, Organic revenues increased 4.1% in the 3rd quarter. In North America, regulated waste and Compliance Services organic revenues increased $13,900,000 or 3.9% during the quarter of the ERP deployment, mainly driven by our pricing actions.

Speaker 2

International regulated waste and compliance services organic revenues increased $3,400,000 or 5.4% mainly driven by our pricing levers, partially offset by lower waste volumes compared to the Q3 of 2022. International waste volumes continue to be impacted by healthcare staffing shortages and intermittent strikes. Secure Information Destruction revenues were $213,600,000 compared to $242,500,000 in the Q3 of 2022. Excluding the impact of foreign exchange rates, organic revenues decreased 11.6% mainly due to lower commodity index Revenues reflecting more than a $100 reduction in sorted office paper pricing per ton year over year. In North America, Secure Information Destruction organic revenues declined $25,500,000 or 11.9% compared to the Q3 of 2022.

Speaker 2

In the Q3, recycling paper revenues were down approximately 7.6% were $16,300,000 due to lower RISI rates affecting sorted office paper pricing and lower tonnage. In the quarter, service revenue was down approximately 4.3 percent or $9,200,000 mainly driven by lower Approximately 1 third of the lower sorted office paper recycling revenue was offset by our recycling recovery surcharge reflected in service revenue. Under more normal RISI rate circumstances, when sorted off as paper prices are below $192 a ton, We are able to offset approximately 60% of the reduction in paper prices. Given that the year over year decline in paper prices was over $100 a We were able to offset approximately 1 third of the lower SOP recycling revenue through our recycling recovery surcharge reflected in service revenue in the Q3. This is due to the nature of the index for this surcharge and we expect it to offset about 30% of the volatility when comparing to last year for the rest of 2023.

Speaker 2

Our international Secure Information Destruction organic revenues decreased and fuel and environmental surcharges. Income from operations in the Q3 was $24,200,000 compared to $50,600,000 in the Q3 of 2022. The $26,400,000 decrease was mainly due to lower commodity index revenues and the corresponding margin flow through impact of $22,200,000 The decrease was also due to anticipated higher incentive in Stock based compensation of $7,200,000 and a self insurance settlement of $2,200,000 These were partially offset by cost savings of $8,600,000 and lower bad debt expense of $3,200,000 Net income was $2,000,000 or $0.02 diluted earnings per share compared to $28,000,000 or $0.30 diluted earnings per share in the Q3 of 2022. The $26,000,000 decrease was mainly due to lower income from operations of $26,400,000 as I just explained. Cash flow from operations for the 9 months ended September 30, 2023 was $193,300,000 compared to $43,100,000 in the same period in 2022.

Speaker 2

The year over year increase of $150,200,000 was mainly driven by lower FCPA settlement payments of 72,800,000 Improved accounts receivable collections net of deferred revenues of $55,000,000 and lower annual incentive compensation payments of $22,300,000 Adjusted income from operations was $70,300,000 or 10.8 percent as a percentage of revenues, down from $92,000,000 or 13.3 percent as a percentage of revenues in the Q3 of 2022. Adjusted income from operations decreased Surcharges and their corresponding margin flow through impact of 3.40 basis points, higher incentive and stock based compensation of 110 basis points and a self insurance settlement of 30 basis points. These were partially offset by cost savings and margin flow through of 150 basis points and lower bad debt expense of 50 basis points. As noted on Slide 8, adjusted diluted earnings per share was $0.43 compared to $0.65 in the Q3 of 2022. Excluding the impact from divestitures and foreign exchange rates of $0.02 The remaining $0.20 year over year decline was driven by lower commodity index revenues of $0.19 Higher incentive and stock based compensation of $0.06 higher taxes, interest and other of $0.03 and a self insurance settlement of $0.02 These were partially offset by cost savings and margin flow through of $0.07 and lower bad debt expense of $0.03 Capital expenditures for the 9 months ended September 30, 2023 were $102,200,000 compared to $106,000,000 for the same period last year.

Speaker 2

Free cash flow for the 9 months ended September 30, 2023 was Inflow of $91,100,000 compared to an outflow of $62,900,000 in the same period of 2022. As noted on Slide 9, The year over year improvement of $154,000,000 was mainly due to higher cash flow from operations of 150,200,000 DSO was reported for September 30, 2023 with 63 days or 55 days net of deferred revenues. During the Q3, we began to invoice certain regulated waste and compliance services subscription based customers in advance, which contributed to the higher as reported DSO for September 30, 2023. DSO as recorded for September 30, 2022 was 63 days or 62 days net of deferred revenues. The September 30, 2023 DSO Net of deferred revenues was lower as compared to the same period in 2022, mainly driven by the improved timing of for a total of 8 divestitures in 2023.

Speaker 2

In 2022, the Romanian Medical Waste Business And the Netherlands Dental Recycling business collectively contributed less than 1% of revenues and had approximately breakeven adjusted EBITDA. On Slide 11, we have removed the divested revenues from our 2022 baseline. The joint venture in the UAE was As noted on Slide 11, we are providing our updated 2023 guidance, taking in consideration our expectations for the Q4. We have lowered our organic revenue growth rate range to 2% to 3% from 3% to 5%, mainly due to the impact of commodity index revenues. We have narrowed our adjusted earnings per share guidance range to $1.80 to $1.95 from $1.75 to $2.05 This updated range reflects the impact of a self insurance settlement in the 3rd quarter and potential commodity volatility that I mentioned earlier.

Speaker 2

We have narrowed our capital expenditure guidance to $135,000,000 From $125,000,000 to $145,000,000 this reflects our expectation on the timing of cash outlays associated with the McCarran incinerator project. We have modified our free cash flow range to $170,000,000 to $190,000,000 from $175,000,000 to $205,000,000 This is mainly driven by our $10,000,000 to $15,000,000 in the 4th quarter, higher than we previously planned. Excluded from our free cash flow guidance is adjusted litigation payments, of which we paid approximately $13,000,000 in the 3rd quarter and expect to pay approximately $5,000,000 to $12,000,000 in the 4th quarter. I will now turn the call back to Cindy. Thank you, Janet.

Speaker 2

1 of Stericycle's core values is that we embrace diversity and inclusion. Aligning with this core value, I'm excited to share that earlier this week, we were recognized for the 3rd consecutive year by Women in Trucking as one of the top companies for women to work for. This award highlights our focus on creating a rewarding and positive work environment for all of our team members. And as always, I'd like to thank our customers, team members, the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q and A.

Operator

Thank you. Standby as we compile the Q and A roster. And one moment please for our first question. Our first question will come from Sean Dodge of RBC Capital Markets.

Speaker 4

And I'll start by offering my congratulations on the successful ERP deployment, I know that's been a big lift, so it's going to feel really nice to have that done now.

Speaker 2

Thanks, Sean.

Speaker 4

On the so you all shared the update, Darren. It sounds like so far so good. Being now more than a full month Into that, having used it, are we pretty much out of the woods now as far as figuring out if there are any glitches or bugs Left or not? And I guess at what point can we declare all clear here? And then where do you think the dangers or risks still lie going forward?

Speaker 2

Yes. Sean, thanks for that question and thanks for the congratulations. I can tell you the we are tremendously proud Of the overall journey that our team members and the support folks have had, it was quite a learning For us, putting a company with no technology really onto a platform a couple of years ago and the amount of lessons learned, leading up to putting This business unit on which had far more complexities, and for it to have gone as well as it has And continues to. We're really very, very happy about it. And I think the good news As Corey had said in his remarks, there isn't customer disruption.

Speaker 2

Most of everything has gone off pretty seamlessly. And I think the testimony to that is, do we still have are there major issues? I think we've put those to bed. We know where they are. We're still fixing a few things.

Speaker 2

But I think for us, We're now almost morphing from worrying about where are the ghosts in the system to Correcting the problems that we've identified and now even moving towards, all right, where are the next enhancements? And anytime you do that in the system, the sooner you can get enhancements, the things you forgot, the thing that would make something a little bit more intuitive, the suggestions back from the field. I think we've gotten to that point certainly much faster than any of us anticipated, which is really, really good news. So Janet, any other insights? I think Cindy you said it very well.

Speaker 2

We have actually also billed and as a reminder about 70% of the billing is subscription based. So we have gotten those bills out actually at the start of the month and continue to build that through. If there is Anything we're looking at is being very thoughtful. It's a transactional billing that's going down to make sure it's accurate, but don't anticipate that to be a big issue. And to Cindy's point, we are moving into where can we enhance the system for rather than where is it broken.

Speaker 2

We do have a few incidents left As you would expect, the lower the volume than we expected to have at this point in time. And I think Sean one last thing just to wrap that up. Right now everybody at least understands how to use it, But everybody hasn't really developed their own we all develop the routine and the nuance of how we make it work faster or how we know To click through things, I think we're developing that right now. And so there's still some learning. There's still some change management to go on.

Speaker 2

Not everybody has adopted it or has I'm as proficient as everybody else at the same time. But for the most part, I think major potential issues with customers, With revenue recognition and those types of things, I think those are well behind us. Okay. And I think to your point, as you mentioned that we went live actually Running the trucks at the beginning of September. The quarter was spent in getting ready, but the trucks started rolling at the beginning of September.

Speaker 2

So

Speaker 4

Okay, great. And then Janet on both the EPS and the free cash guidance for Q4 implies A bit of a step up from Q3. Can you just walk us through what's expected to drive that? Anything you have about visibility there? Is this kind of The benefits of the workforce reduction, kind of improving productivity, anything else?

Speaker 2

Yes. So we have some real Key items that will help us drive there. One is we've had that incentive comp, which underneath that is a stock comp acceleration That was due to retirement benefits I mentioned earlier. That basically ends in the Q4. So that's a few cents of uplift.

Speaker 2

We had that one time self insurance claim that won't repeat and that will be an uplift if you're looking quarter to quarter. We see fuel Helping us a bit in the quarter as you see that it has been mitigating as a price and then we can see continued up late in bad debt So those are some of the key levels and I'm not even talking about the continued improve as we get more confident on the system and from the learning curve that Cindy mentioned. So we see a good line of sight to that EPS and then the cash flow similar sort of similar follow suit.

Speaker 4

Okay. Great. And then congratulations again. Thanks.

Speaker 2

Thanks, Sean. Appreciate it.

Operator

Thank you. One moment please for our next question. And our next question will come from Scott Schneeberger of Oppenheimer and Company. Your line is open.

Speaker 5

Thanks very much. Good morning. I'd like to share my congratulations. I know how much your whole organization has worked How hard in preparation for this. So great that you've finally flipped the switch.

Speaker 5

I'm curious, is there you covered a lot of the updates very well. I believe you were running on parallel systems throughout the process. Could you give us an update on how dependent you are Bill on Parallel Systems and a follow-up to this getting onward and upward is just thinking about international and Timeline we should consider now that you're off and running in the U. S? Thanks.

Speaker 2

Yes. Scott, what I'll do is I'll take that international portion of the question on two fronts. And then in terms of the duplicative Systems that we have the legacy and the new one, I'll let Janet handle that. In terms of international, a couple of things. We've now had 19 divestitures since 2019.

Speaker 2

And that's done a few things. Number 1, certainly from an overall portfolio, our ability to manage things That has certainly helped us. But the other thing it's done as you can imagine is tying into the answer Janet is going to give you is We've got 19 less countries and places and geographies and business units that we have to figure out how to put on this new platform. So, this has afforded us an opportunity not just to improve balance sheet, not just to improve oversight, not just to go on to this new platform. So, I think and then in terms of actual portfolio optimization, which is one of the key priorities.

Speaker 2

We still leave that on there, because I did talk about 2019 divestitures, but we've also had an acquisition. So if and Scott, you've been on the journey with us since the beginning. We originally talked about portfolio divestitures, Then we morphed it to optimization figuring that at some point in time, we might get a stable enough balance sheet where we would have options To not just be focused on divestiture, but also be become focused on potential tuck in acquisitions. Now that we understand more about the business, where are our strengths, where do we have a great footprint. So I think we're leaving it on there For both things, potentially divestiture, but then also from an acquisition perspective.

Speaker 2

So now I'll morph it back to Janet. Janet, with reference to the duplicative systems, how much more to go on and what do you see? Yes. So we put the U. S.

Speaker 2

On, meaning we put All the revenue on and we put all our core waste processing, so all the waste stations, everything that is an autoclave and our incinerator is running on it. We have a few, What I'll call edge cases of hybrid model where they're actually partially using the system, but have some small unique areas that we need to still put on. But that should be not a long putt to get there. Then we do have Canada, which is a much smaller part that is on our journey to move. But I would call the ERP in the U.

Speaker 2

S. And what we're looking for in North America largely done, which is very exciting. In terms of the legacy applications, they are still used right now in Canada, as I mentioned, but also internationally. So that has been the next journey we're on and the international team is very active working on the data cleanup and starting to start requirements next year with a goal to start moving off of that around the 2025 time Meanwhile, while we continue to take that $20,000,000 to $30,000,000 out in the longer term, we are looking for ability to right size the legacy platform, which may give us some opportunity Next year as we continue to look at it. And I think one thing too just as a point, Scott, Just a little bit more than 80% of all of our volume runs through the platform currently.

Speaker 2

So I hope that puts some things into perspective too in terms of size. Yes. And just for Canada, Sid is on the platform, secure information instructions. So I'm only talking about RWCS as the only piece left for Canada.

Speaker 5

Yes, got it. Thanks. That's very helpful, very comprehensive. Another 2 parter as my second question. The first part is, what are you anticipating for Sorted Office Paper going forward, just what are the trends that you're seeing?

Speaker 5

What do you expect as you look ahead here? What's implicit in the 4th quarter? Jen, I guess that's mostly for you. Cindy, you had mentioned that the let me go back to the notes, A few sites a few customers, this is on information destruction, a few site closures in this post pandemic period and lesser pickup frequency. I just wanted to latch on to that for a second.

Speaker 5

I don't think I've heard that from you all I just want to hear how you feel about that trend. Is that something new or is that something you've seen consistent? Just want to delve in a little bit more on that. Thank you both.

Speaker 2

Got you. And Scott, I can Kind of, I'll help you with both of them. First of all, in terms of the RISI rate, what I think I said coming out of the pandemic, we were going to learn a lot. And I think now a few years out, here's what we've learned. I think 2022 is the anomaly.

Speaker 2

That year, the average price of Paper with people figuring out who's coming back to work, who's going out to eat, what's the demand on travel, what's the demand on all these things. It really put an immediate pressure on a lot of commodities, specifically paper that's used in a lot of the essential things that we use. And I think It averaged the year somewhere around 235. That in and of itself is an anomaly. But Q3 last year versus Q3 this year, it's a difference from we're looking at $2.54 in September last year Down to 140 in October of this year.

Speaker 2

But the trend that we're seeing and here's I think the good news. The good news is prior to 2022 being now just A complete outlier, prior to that, the 15 year average has been about $150 a ton. And right now today it's about $140,000,000 That seems pretty reasonable in terms of if you look if you take 2022 out of there, It's now more normalized, which I think is a good sign for society. It's a good sign that we've gotten into a rhythm of where is demand. So I think we need to level set that.

Speaker 2

What are we seeing going into Q4? Right now, it's maintained around 140 over the last several months, which is a good stable number, I think, in terms of showing That it isn't showing the wild swings as much as it had over the last, let's say, 6, 7 quarters. So I think that's really good news there. And we know how to manage at that. That's more normal for the business.

Speaker 2

And quite frankly, Once the RISI rate gets below $192 a ton, our surcharge We'll help mitigate more like about 60% of whatever the volatility is. So I think all that's good. If I go to the second portion of the question about That national channel, that national account channel base that we have, we're seeing similar things for the national accounts In both regulated as well as shred. And what that nuance is, we've seen it over the course of the last couple of quarters. And what it's been is on the regulated side, those national accounts, those large retail pharmacies, you read headlines, I read headlines.

Speaker 2

There's an awful lot of store closures. There's potential bankruptcies. There's a lot of things that are going on in that space. And quite frankly, that space not only uses us for regulated, But they also use us for Strand. And when you have a footprint which is thousands of stores and you choose to close down A thousand of them that definitively means they still use us.

Speaker 2

They just don't have a facility in a particular town that requires that service anymore. So and we're seeing that on regulated. And then on the, shred side, when we take a look at shred, We're looking at that customer base that is now figuring out, hey, most of our people are now back at work. This is going to be our new rhythm for right now as they continue to figure out how to cut their costs, how to write To reset their future, so that they can position themselves to grow. So they may have closed down some sites.

Speaker 2

They may have reduced some frequencies, still requiring our service, but getting used to whatever their new normal is. So I don't see any of those themes as anything that's lingering, anything that's going to continue to a great degree. I think we've seen the I think we've seen this shift and this change through our larger national account channel base. And I see now an opportunity for that to stabilize. And now, I can tell you, Corey and his team are just positioned to grow.

Speaker 2

So, that's where we sit and that's the trend that we see.

Speaker 6

Great. Thanks so much.

Operator

Thank you. And one moment please for our next question. Our next question will come from Dave Manthey of Baird. Your line is open. Our next question will come from Michael E.

Operator

Hoffman of Stifel. Your line is open.

Speaker 7

Hey, Cindy, Janet, I was never in doubt. So well done.

Speaker 2

Thank you. Thanks, Michael.

Speaker 7

Well, you tested the bejesus out of it. So I knew you had pushed it and pulled it and tugged on it a lot. But to that end, I get it. We're right in the beginning of billing, and billing was a challenge, obviously, you fixed it. You tested that really hard in Puerto Rico.

Speaker 7

What are you seeing relative to that sort of baseline of knowledge? What are you seeing at the moment?

Speaker 2

We're seeing a much More astute understanding and we have reporting in place to track billing and pricing and contracts and everything that impact billing From day 1, and I think that's the big difference that we see because we knew what to look for. There's a lot of complexity in RWCS in terms of its contracts Pricing, so but there's also, when you get to the transactional piece, but there's also the service revenue side that is a subscription base that is actually easier. And as you heard me mention, we actually did that we moved that to be a month ahead of time, for most of our customers. So that was the switch we did. So that needs to that's a little customer change management that we're watching, but so far so good.

Speaker 2

That has the potential in the long term to be a cash flow benefit for us. And then we've been very thoughtful and been auditing all the transactional revenue that we're sending out through billing and I'm putting what they call payer blocks or other blocks on to make sure it's right before it goes out. So there's been a lot of thought on the team. So, so far so good. We may have some of the transaction be a little later.

Speaker 2

We'll have subscription be a little earlier, and I think we'll wash out very well.

Speaker 7

All right. Cool. And then Beginning of the year, you revised some of the parameters around your outlook and you reaffirm those in this document today, 13% to 17% EBITDA, 50 When do we start seeing that happen now that 80% of the volume is on one platform and a lot of people can be held accountable In a good way. When do I start seeing the benefit of that 13% to 17% in that 50% cash conversion?

Speaker 2

Yes. I think what we've talked about is Taking year end 2023 and then build from there. And more of that is based off of the timing of this ERP, The focus that we can then put into maturing that process as well as several others. So a couple of things we talk about as being levers that we have. Right now That the ERP is in and as we mature with this and that folks get better, Get smoother.

Speaker 2

We put in a few enhancements to help really facilitate things working and going flowing through our plants And out the customers a little easier. There's an opportunity then for us. We've been leaning into attrition And we talk about removing the manualness. I've often said, at some point in time, when you get a technology a system that can move data for you as opposed to you needing to move it paper or needing to move statistics or needing To swivel chair things from one system to the next that there should be a removal of a lot of that manual intervention. So for us, I think we've got a continued or maybe an additional targeted workforce reduction as we continue to develop these things.

Speaker 2

Like I said, we will still lean into attrition with controlled hiring. I think As we get better with our infrastructure, with any of the operational improvements, the ERP improvements that we can continue to fine tune For efficiency, for productivity, for scheduling, for engagement with customers, I think all of those things in combination are things that we will enact in 2024 moving forward and then we continue, Michael as you know, Then at some point in time, McCarran comes on. At some point in time, we retire the legacy system. Those are some pretty big levers that I think are at our disposal in order to make that adjusted EBITDA margin Hit the long range targets that we've put out there. Okay.

Speaker 2

Just to add to that, yes, 2023 is the base year for that 13% to 17% Annual adjusted EBITDA growth rate that we expect to see, so you'll see it in 2024. And the 3% to 5% is a CAGR growth rate that So 2024 is when you should start seeing it directly, Michael, to that question. In Q1, if you look at the commodity headwinds on paper, you will see some of that We have the system now. We have a great variable cost model. So we are looking for that to begin in

Speaker 7

Okay. That's what I was looking for. This is iterative every year, not all back ended on the Multi year compound

Speaker 4

that you laid out?

Speaker 2

Correct. Correct.

Speaker 7

Right. Okay. I think that's a big part of this is the market is going to see evidence that all of this effort It's beginning to pay off in 2024.

Speaker 2

And as Cindy mentioned, we already have put in a targeted workforce reduction We executed and continue in the 4th quarter that will generate $8,000,000 next year. So those are some of the layers that we have as we drive efficiency. She also mentioned Careful hiring, attrition, we have strategic initiatives that drive efficiencies and improvements and then our modernization efforts And our facilities are starting to take hold. You combine that with the systems, you just sort of get a compounding effect on efficiency being able to be driven. Great.

Speaker 4

Thank you.

Operator

Thank And again, we have Dave Manthey of Beard. Your line is open. Mr. Mancy?

Speaker 6

All right. Well, congrats on the ERP. My question, I'm going to Talk about the paper and Cindy you talked earlier about the long range paper pricing being in the 150 range. What's magical about 192% 60%? I would have thought that over time as you Cycle in new contracts and sign additional customers and lose some that that number would move around like you'd be able to move the 192 That point lower and get a lower percentage of absorption.

Speaker 6

Can you talk about that formula and why that number hasn't changed in a while?

Speaker 2

Yes. Dave, great question. So I think in terms of that, while anybody can set numbers and set ranges, What we actually tried to do was take market data and an understanding of what's going on in the marketplace. And We took this whole recycling revenue surcharge and put that onto a scale unlike anybody else in the market On that side of the business, that was purely putting out a recycling surcharge fee, whether it's a flat 10%, if it's 20%, whatever it is. We felt that this one, the scale that we've designed, we looked at the market in general to see what do we think where is the opportunities for us to develop a scale where we believe we can win, we can still be competitive, We can still get paid for the value of the service that we provide.

Speaker 2

And pretty much through all of that is where that sliding scale came. And as we do talk about 60% of the volatility being covered, there is that's A general number, but you are correct. As we continue to win new customers, as we continue, all new contracts go out with Some type of acceptance or adoption of this surcharge, but we also have legacy customers out there that continue to negotiate. So I think it's not just a combination of where do you want to be. It's a combination of where do you want to be and how competitive do you want to be In markets all across the U.

Speaker 2

S. And it depends on who the competitors are against whom we play. So I think if you take a look at the national account perspective, a national account has potentially a little bit of a lower adoption in terms of that versus some of the independents or some of the larger customers. So that's I think pretty much where that came from as opposed to just being Here's where we think we could mitigate 100% of the volatility.

Speaker 6

Okay. And then second on the ERP, I understand that you were not standing still before you flip the switch on the system. But what are the key changes, the early wins that you can get out of the ERP system? So if we look to year 1, Based on your experience with SID, what should we expect in RWCS? And related, is there any reason why we shouldn't see margins just Steadily pick higher from here.

Speaker 6

I mean, it seems like with all this behind you, you can start folding up some of those legacy systems and you've already done the risk, maybe there's more behind that. Is there any reason we shouldn't see sort of up into the right as it relates to margins from here?

Speaker 2

Dave, great question. And I think what we focus on are Unfortunately, during this journey that we've had at Stericycle, it's been quite a turbulent 5 year time period at least for me In terms of things that have been maybe let's say a bit outside of our control, whether it's been pandemics and hyperinflation and We're in Ukraine and Russia and supply chain issues and now another breakout. So I think You are correct. When I look at the things that we can control, here's some things that the ERP system affords us an opportunity to do right away. We get better with scheduling.

Speaker 2

We get better with routing. We get better with overtime. We get better with staffing. We get better with plant utilization. We get better With engagement with customers, we get better and we get more nimble when a customer wants to put on a service or add a container or schedule an additional pickup.

Speaker 2

We get better at those things because we get faster. And anytime we get faster on those things, it affords us an opportunity to get to revenue quicker to match the effort and the energy that we're putting on the operation side from a cost perspective. So our expectation And what we do see and what we had seen, we will see that. So Dave, you're thinking about it correctly. And again, the caveat is for things that we can control, I'm very proud and very confident in the development of this Culture and who we are and how we handle things to get better every day.

Speaker 2

So I'm excited about that. Janet, a couple of things? Yes. So and Dave, just to reiterate, we said that 2023 was the base year of our long term outlook, which includes a significant margin expansion with adjusted growth rate of 13% to 17%, which we expect to start seeing next year. And due to all the things and levers that Cindy has mentioned as well as the commercial levers, who Corey is sitting right Timmy mentioned, on the call that they give us confidence in that number.

Speaker 2

And then, the legacy systems and international start Come up out in 'twenty five. We see some opportunity for adjusting IT costs as we go through this. So we still need to get on. I will point out there'll be some timing next year, a little bit in the Q1, there'll be that continued headwinds from the paper, But we have a great variable cost model as I mentioned and we can drive through that. But from a top line perspective, you still may see some year over year choppiness on In the Q1.

Speaker 2

Yes. And I think, Janet brings up Dave, I know you're very in tune to the RISI rate just kind of on average Q1, 2Q next year would be comparisons to Q1, Q2 obviously this year when The average for both of those Q1 was probably about 225,000,000 Q2 was close, let's say, 186,000,000 somewhere around in there, 187,000,000. So still some stiff comps, I would say for Q1, Q2. But then by the time you get to Q3, Obviously, it comes down. It's about 146, and I think that's where you finally get a decent year over year comparison from a commodity perspective, at least With respect to RISI and the top line, yes.

Speaker 6

Yes. Okay. Thank you very much.

Speaker 2

Thanks, Dave. Appreciate it.

Operator

Thank you. This will end the Q and A session. I would now like to turn the conference back to Cindy Miller for closing remarks.

Speaker 2

Thank you. And as always, we'd like to thank the investors. We'd like to thank our employees, our customers, the community that we serve for their continued interest in Stericycle. So thank you all very much.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.

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Earnings Conference Call
Stericycle Q3 2023
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