Q2 2020 Stericycle Inc Earnings Call

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Good morning, and welcome to the Steris cycle second quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star Keith followed by zero.

After today's presentation, there will be an opportunity to ask a question.

Ask a question you May press Star then one on your Touchtone phone to withdraw your question. Please press Star then to please note. This event is being recorded.

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

Hello, and thank you for joining Steris cycle second quarter 2020 earnings call.

On the call today will be Cindy Miller, Chief Executive Officer, and Janet So we've got our Chief Financial Officer, and Chief Information 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 statements in our earnings press release, it 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 statements 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 schedule in our earnings press release, which can be found on Steris cycles Investor Relations website.

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.

Thank you Jennifer and welcome everyone to today's call during an unprecedented time that continued to be impacted by the closures and limited reopening of businesses because of the cobot 19 pandemic Steris cycle delivered a strong second quarter with meaningful year over year improvement.

Overall, our regulated waste and compliance services revenue remained steady compared to last year. The pandemic induced revenue decline initially scene and secure information destruction in April improved in May and June with the reopening of multiple geographies, while organic revenue was down due to cope with 19 compared to the prior year.

Sure, we improved operating leverage generated significant cash and lowered our debt leverage ratio.

This could be considered one of the most difficult quarters in modern times for any business around the world populations were faced with shelter in place orders that dramatically impacted their economies.

Companies had to quickly shift to work from home business models, there were global shortages of key supplies and we're now living through the attempts to reduce shelter in place orders and reopening of businesses, which have been met with mixed success in certain regions are faced with rising covert 19 cases.

In the face of continued uncertainty our team is focused on serving our customers, while ensuring the wellbeing of our workforce and tightly controlling costs across the organization.

Our regulated medical waste services are critical to healthcare organizations around the world and our industry leadership has led to national partnerships with key providers of expanding cobot 19 testing services.

On the secure information destruction side of the business, we continue to reactivate customers as countries in states altered their shelter in place orders and allowed certain businesses to reopen by quarters and.

We brought back about half of our furloughed employees over the quarter as business demands warranted. We are encouraged by trends, but with increases in daily Cobot 19 cases in certain geographies, we remain cautious.

Before Janet reviews, the financial result in more detail I'd like to review, our progress on safety and our key business priorities.

Collecting on our commitment to this important area our team continues to drive meaningful improvements in safety.

Over the first half of the year, we reduced our total recordable incident rate by 31% and our vehicle accidents by 34% compared to the same period in 2019.

This improvement is the result of a multi prong program that we have been implementing over the past 18 months that includes a centralized global focus on safety enhanced training programs and the shift to a behavior based safety culture.

This is great progress and I'd like to thank our global team members, who have committed to continuous improvement in this area.

I'll now shift where five key business priorities, starting with quality of revenue.

Despite the impact of the pandemic on elective surgeries and preventative care, we achieved relatively flat revenue for regulated waste and compliance services compared to second quarter last year.

The decline in our secure information destruction revenue was a direct result of the pandemic and shelter in place orders. However, as specific countries or states began implementing phase plans to reopen our secure information destruction business picked up reflecting the importance in the city of our service.

During this pandemic, we've identified new ways to support our customers evolving needs and launched three new services this quarter to support our customers as they face new business opportunities and challenges.

Starting with the medical waste business, we tailored and offering specific to cobot 19 testing centers as you've likely read in the media top retailers in the United States have announced plans to add and expanding the footprint of testing facilities.

Giving the breadth of our infrastructure the strength of our brand and our ability to quickly adapt to non traditional healthcare locations. Today, we are providing service to more than 1000, Covidien 19 testing site.

As antibody testing advances in the vaccine is developed we anticipate increased demand from these facilities.

Beyond the health care setting many businesses are now faced with managing soiled personal protection equipment or PE.

The disposal of co bid related pp in the non health care setting is not regulated businesses are seeking medical waste solutions for the gloves and masks worn by employees to ensure their safety and reduced the risk of spreading disease. Our offering includes both pickup and mailback options.

And third in secure information destruction, we've expanded our service offering for North American purge customers, who our customers requesting a onetime pickup we now offer and express service with a two day pickup guarantee a priority service with a five day guarantee and our normal select serve.

Service.

The new expression priority offerings demonstrate our ability to the agile in response to changing trends and innovative in meeting the needs of our customers.

These new service offerings strengthen our brand and differentiate our offerings and enable additional opportunities to pursue organic growth.

We also continue to leverage the commercial advancements I've discussed on prior calls.

Including our deal review process updated commission plans and pricing initiatives, all of which drive a more disciplined commercial approach and greater accountability.

Switching to operational efficiencies, we actively controlled variable and discretionary costs to align with revenue declines.

Our engineering and operations teams continue to partner to centralize field oversight improve planning processes and implement standard metrics. As a result, we've made meaningful progress on sustainable operational efficiencies, including Rightsizing, the fleet and productivity improvements.

As for portfolio rationalization and debt reduction I'd like to remind you that on April six 2020 amid the challenging economic environment. We successfully completed the divestiture of the domestic environmental solutions business for $462.5 million in cash.

With net proceeds from the divestiture of $427.7 million, we paid down over 500 million in net debt in the second quarter.

And most recently this week, we divested of our operations in Argentina for approximately $3.9 million, which will be reflected in our third quarter results.

This marks our seventh divestiture in the last 18 months.

Proceeds from these divestitures have and will continue to be applied toward debt reduction.

Before shifting to our fifth priority, our ERP system I'd like to thank and congratulate Janet Lincoln for taking on the additional role of Chief Information Officer.

This organizational change reflects our continued effort to streamline the company and manage costs.

The timing was appropriate considering the simplification of our business following multiple divestitures and a deferral of deployment of the ERP system to 2021 due to the pandemic.

We made this decision to shift to schedule given the need for predictable travel and safe face to face teamwork during the deployment.

We will continue to maintain and fine tune the plan to ERP system and data throughout 2020 with more focused preparations and employee training for next year's deployment.

Ill now turn the call over to Janet to further review our financial results.

Thank you Sandy I will start by summarizing our second quarter results.

Total revenues were $598.2 million compared to 845.8 million in the second quarter of 2019.

Of the 247.6 million dollar change the impact of divestitures and foreign exchange rates reduced revenues by 149.6 million and 9.9 million respectively.

As noted on slide five regulated waste and compliance services revenues were $418.1 million compared to 553.2 million in the second quarter of 2019.

Regulated waste and compliance services continues to include healthcare hazardous waste services. It now also includes a small portion of international manufacturing and industrial revenue that remains following the divestiture of the domestic environmental solutions business.

Excluding the impact of divestitures and foreign exchange rate organic revenues in the service lines declined 0.3% as result of pandemic impacts, including a drop in our maritime business, which emerged in the middle of the second quarter, the lower cruise ship demand within maritime was worth approximately a 1% revenue decline.

In North America.

Secure information destruction services delivered revenues of $152.5 million compared to 229.4 million in the second quarter of 29 team.

Excluding the impact of S. LP pricing organic revenue declined 33.6%, which reflects the pandemic and do shelter in place orders that closed customer locations in our North American in international markets.

In North America secure information destruction revenue was down 30%, reflecting a decrease in stops of 28% in the quarter.

Revenue and stops were down as much as 40% at the start of the quarter in April and improve to an 18% decline in June when 28 state of the 42 that it closed we're open for business for at least part of June.

The net effect of SLP pricing with minimal and resulted in a $1.3 million benefit compared to the second quarter 2019.

Communication and related services revenues were $27.6 million compared to 63.2 million in the second quarter 2019.

The impact of divestitures and foreign exchange rates accounted for approximately $24.8 million of the decline.

Organic revenue declined 17.1% due to lower demand for hospital scheduling services due to the deferral of elective surgeries and preventative care and lower we call volume compared to last year.

Income from operations in the quarter was $24.9 million compared to income from operations of 25.3 million in the second quarter of last year.

The impact of divestitures of $8.4 million offset by a benefit from foreign exchange rates of 1.5 million reduced income from operations by $6.9 million.

In the quarter, we effectively reduced variable and discretionary cost to maintain operating leverage.

Additionally, our current assessment is that we made sustainable operational improvements of approximately $3 million to $5 million in the quarter from transportation and productivity gains.

You S. GAAP net loss was $4.5 million or five cents diluted loss per share compared to a net loss of 30.5 million or 33 cents diluted loss per share in the second quarter of last year.

2019 comparable quarter included a loss on early extinguishment of debt of $23.1 million due to our debt refinancing.

Second quarter 2020 included lower interest expense of $14.3 million due to lower interest rates and our efforts to reduce debt, which was partially offset by an increase in tax expense of 11.7 million, primarily due to higher discreet items.

Yes, GAAP cash flow from operations for the first half a 2020 was $207.3 million compared to 71 million for the comparable period last year.

The year over year improvement of $136.3 million, primarily includes one lower payments for legal and professional fees annual incentive compensation prepaid software and interest totaling $54.8 million.

To lower accounts receivable of $56.5 million driven by collections exceeding revenues due to the pandemic and from collection process improvements.

Three lower accounts payable of $25 million, primarily driven by reduced costs.

For government relief tax related payment deferrals of $15.7 million roughly split between us and international and.

Five advances received on recently executed service agreements of 19.2 million related to the domestic environmental solutions divestiture.

Capital expenditures for the first half of 2020 were $74.6 million as compared to 108.2 million in the first half of 2019.

The change was primarily driven by timing of 2019 investments in the ERP and 2020 disciplined capital management.

Adjusted income from operations was $85.3 million compared to 105.6 million in the second quarter of last year, excluding the impact of divestitures and foreign exchange rates of $14.7 million adjusted income from operations declined only 5.3 million. Despite the 89.4 million dollar reduction in.

Revenue.

Adjusted diluted earnings per share was 46 cents compared to 56 cents in the second quarter of 2019.

As illustrated on the bridge on slide eight the year over year variants and adjusted EPS was due to the following.

11 cents reduction from the impact of divestitures.

Four cents on favorability from lower revenue flow through three cents on favorability from higher adjusted tax rate and an eight cents benefit from lower interest expense.

Our second quarter DBSO as reported was 46 days compared to 47 days in the first quarter of 2020.

When excluding the revenues from divested businesses from the trailing 12 month DSL calculation.

Yes, So was 52 days compared to 61 days for the first quarter 2020, we estimate the sequential quarter over quarter improvement is based on five days from the domestic environmental solutions divestiture.

Three days from collections exceeding revenues due to the pandemic and an additional day from collection process improvements.

Free cash flow for the first half a 2020 was $132.7 million compared to an outflow of 37.2 million in the first half of 2019.

The year over year improvement of $169.9 million was due to better cash flow from operations and lower capital expenditures as previously described.

At the end of the second quarter, our adjusted debt to EBITDA leverage ratios to find in our credit agreement was 3.89 times, which was below our maximum ratio for the quarter of 4.75 times during the second quarter, we paid down over $500 million in net debt since the beginning of the year.

We paid down net debt of over $550 million. We currently have approximately $500 million available at our revolving line of credit to support the business in the near term.

Ill now review the financial implications are shifting our ERP deployment to 2021.

Year to date, we have invested $71.3 million and our ERP with 44.1 million for capital expenditures and $27.2 million for operating expenses adjusted out of ongoing operations for development testing and appointment and for the human capital management system launched in January given the shift.

The deployment of the ERP until 2021, we anticipate incurring $30 million to $40 million for the remainder of 2020 split roughly between capital expenditures and operating expenses for licensing maintenance and continued enhancements of the development environment, which we adjusted out of ongoing.

Operations, we anticipate this costs will be offset by the 35 to 40 million dollar incremental IP ongoing costs, we will avoid by not having to run both the new system and legacy systems in 2020.

Looking to the North American implementation in 2021, we anticipate incurring deployment costs, which will be adjusted out of ongoing operations. We are currently assessing the amount of these costs. We had previously estimated that these costs would be $20 million to $30 million during 2020.

Depending upon the deployment date in 2021, we will incur the pro rated portion of the incremental ITD ongoing cost for running both in new system and legacy systems, which are currently estimated at an annual run rate of $50 million to $60 million.

I'll now turn to the third quarter and provide a few insights into preliminary July revenue performance.

Within regulated waste and compliance services July revenues in North America were down approximately 1% when compared to July of 2019.

The change in revenue continues to be impacted by the pandemic, including the lower cruise ship demand within our maritime business. Excluding the maritime business. We would have shown revenue growth in North America up about 1% in July.

Looking at the preliminary results for our secure information destruction business. Our July 2020, North American revenues were down approximately 14% compared to July of 2019. This is consistent with about a 15% decline in service stops in July we remain encouraged by the service reactivation of our customer.

Yes.

Where they're cautious as to how certain states may react to increasing numbers of positive coated 19 test results.

Outside North America, <unk> regulated waste and compliance services remain relatively flat in July compared to last year.

We anticipate that the reactivation of customers in revenues for secure information destruction services in international markets will lag North America.

And thinking about our cost drivers our actions to date have included temporary measures to manage through the impacts of the pandemic, we anticipate resuming investment in the business roughly in alignment with revenue recovery.

For example, we're bringing back some furlough team members and improving travel as demand more in the executive team is committed to balancing the need for short term cost savings with requirements for the long term health of the business.

Specific to the third quarter I'd like to make a note regarding the divestiture of our business in Argentina, which closed earlier this week revenues and EBITDA of Argentina operations were approximately 1% of our consolidated total.

The divestiture will result in a third quarter noncash pretax loss of approximately a $115 million.

Primarily associated with the reclassification of accumulated currency translation adjustments to earnings due to hyper inflationary impacts.

I'd like to provide an update on the $100 million related to cash tax refunds for 2018, and 2019 that we expected to receive from the U.S. Cares Act in July the company received approximately half of the expected refunds. We also deferred approximately $7 million in the second quarter of the until.

To pay to 20 million full year benefit associated with U.S. employer related payroll taxes that I mentioned on our last call.

Outside of the U.S., we have benefited from additional indirect tax deferrals of approximately 8 million during the second quarter 2020 to be paid in early 2021.

On the last call, we provided our expectations for the long range outlook. We have commenced our normal annual process of updating our long range plan, which will factor in the evolving economic impacts of the pandemic.

I will now turn the call back to Cindy.

Thank you Jim.

Although the uncertainty of the pandemic remains reality our team continues to make steady progress against our key priorities and build a stronger foundation for stairs cycles future.

As demonstrated this quarter, we can be innovative and nimble in response to our customers needs and significant business challenges and we continue to drive meaningful progress towards revenue quality long term operational efficiencies cash generation and debt reduction I.

I'm extremely proud of our team and the progress we've made over the past year I remain excited about the many opportunities that lie ahead for us it's their cycle and the transformational journey. We continue to pursue every day operator. Please open the line for acuity.

We will now begin the question and answer session to ask a question when the press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset before pressing the key kill withdraw. Your question. Please press Star then too we do ask that you limit yourself to one question.

And one follow up.

Our first question will come from Sean Dodge with RBC capital markets.

Thanks, Good morning.

Jana.

The free cash generation 130 233 million.

You generated over the course, the first few quarters is certainly impressive.

You mentioned.

Chairs and items.

You got in your pocket now in July.

Beyond that I I guess, how should we be thinking about the free cash cadence into the back after the year. There any other notable items are things we should be aware I believe we're planning for.

So thank you. Thank you Sean so just to be clear that amount. We got in July was not part of the second quarter cash generation.

Which had a variety of factors going so let me on packwood, where it was a I think a generating sustainable cash generation and what was just because of some of the peculiarities that come with a pandemic and reduce revenues. So if you look we had a lower accounts receivable of $56.5 million driven by the collections exceeding the lower revenues and that.

That is a factor of revenues being reduced.

That is about where three days a video so if revenues continue to climb and improve you will see a use of cash of that three days of deals so which is worth about $20 million to $30 million, we did generate a sustainable improvement in cash collections of about a day that we hope to retain we do we do plan to sustain.

During the lower payments for legal professional fees, but we the one time of the annual incentive compensation that we did not pay in the second quarter that was because we did not achieve our financial results last year. So we didn't impaired sensing kaput full rate that that is more of a onetime benefit the prepaid software is due to lower soft.

Our payments, we're having right now as we put the the ERP on deferrals for you I gave you sort of her trajectory of what we expect to spend on that going forward. The interest reduction Israel and should be continuing because we have lowered our debt and we're seeing lower interest rates as well the lower accounts payable is due to lower cost that were.

Incurring right now we do see some sustainable reduction in some costs, which I can go to if you want but they'll also increases cost increase in wanting to support the business with revenues and then the government relief tax related payments referrals are onetime deferrals and those were around 16 million and we will see that through the rest of the York's we only incurred part of it.

But that that is a one time as well.

I hope that helps you unpack what is you know more unique to the quarter and the dynamics versus what is sustainable into the rest of the year.

Yes, that's great very very helpful. Thank you and then.

Hi, Cindy on your operational initiatives.

Despite the delayed at the ERP and disruption from the pandemic you mentioned.

When you progress on those can you give us a sensitive.

Are you referring to the new operating plans you have developed for your facilities, primarily there I think you had rolled those assets where team facility leaves you or how many of you you introduce those into now and what kind of pace or or cadence can you maintain going forward.

Thanks, Sean I think a couple of things our frontline folks first one of the things that we're all most proud of for Q2 and in it and sometimes it gets forgotten, but we've we'd like to thank our.

Global frontline team members, who really were shoulder to shoulder as essential services with health care professionals around the world really helping to keep up all healthcare networks up and running a so we're very proud of those folks and then you add on top of all that they were doing.

Our operators in our engineers.

Continued to just look at every way to use the pandemic as a transformational catalyst and I mean, a big kick start.

To really changed the way we look at dispatching the way we look at equipment that we haven't or facilities. The way we look at containers. The way we look at processing everything that we do and as a result of just to an awful lot of folks being an operations and taking a different look with with guidance from a.

Our engineering team to change the way, we do business, we've right sized as an example, I think we returned over 300 different power and non powered type equipments, whether its tractors or its chassis storage its trailers.

We found 300 extra now where some of those because of some reductions in paper or were collections were stops sure, but a good bit of it was we just found that we carry too much of the bench, because we really werent dispatching with discipline, we were more controlled.

By a day's events rather than planning you know a couple of weeks ahead as to what we would need so we've gotten much better with that those will be those are things that roll into that $3 million to $5 million. It costs that we believe we're going to be able to continue to hold onto a we've improved as an example.

Some of our stops prepaid.

For total paid hour, we improve that from February to July somewhere around 13% improvement we've seen pounds per hour improve about 15%, we've seen containers process per hour improve about 10%. When you start talking about all facilities not just the ones I think what you were referencing Sean is our continuing effort to put in master.

Our operating plans and our facilities and we've we've slowly gotten back to putting some of them in again and we're seeing great work there, but this was really work that we pushed all across the organization and and quite frankly the way the team has responded.

I just couldn't be prouder of what everybody's done so thanks for asking that question.

Thanks, and congratulations on the live events from the quarter.

Thank you very much.

Our next question comes from Brian Butler with Stifel.

Hi, good morning, Thanks for taking my questions.

Good morning, Brian.

Oh, just on the first one when you think about the ERP and just the color. You gave was very helpful. But I just wanted to look into 2021 and the the spend you have for the back half that 30 or 40, how much additional spend occurs in 2021 I apologize if I missed it in your Oh, yeah. So what's the timing look like.

Sure. So we're planning to deploy in the first half on the ERP and what we what we will need to do is turned on the new systems on an annualized rate those costs about $50 million to $60 million. So there will be pro rated based on when we turn them on.

Like this year, we thought it was going to be 35 to 45 million based on our deployment so somewhere in that range for proration those will be ongoing operating expenses that we will add more normal runway and maintain the legacy costs that we have as well so that will be additional and then we have deployment costs that we deferred into next year.

We had estimated them on the prior call about 20 to 30 million I'm looking at those right now to them to change that a little bit, but that's that's roughly.

We estimate we have right now and that should push the system out and all the work you need to do that.

And.

Follow whats the offset on the savings again, just kind of the highlight what what's your expectations are on the on the annual savings once it's up and running.

So so our business case for the ERP since it's so foundry is our long range planning assumptions in the savings were generating as we go through the business.

It is we at where we have a lot of technical that in this business in terms of just our foundational ability to run the business on our and so so it is the the foundational for for the future growth the future cash flow generation of the company.

And after kind of this quarter and how you guys for performance due to call that Youve. How do you feel about the 400 million dollar free cash flow target is that something you could reach faster than expected. It's I'm really encouraged by the cash flow generation that we've been able to demonstrate over the past few quarters I really think it speaks to our ability to do that and now.

It is still are long term plan right now is two to 400 million at the end of the five year trajectory as I mentioned, we're going through a long range planning process right now and we will get all the dynamics in the economy and the government tax and everything and maybe update that but but I'm very very positive about the cash flow generation.

Business.

Our next question comes from David Manthey with Baird.

Hi, good morning, Thank you.

On slide four where you talk about operational cost efficiencies some of those items centralized field oversight improved processes implemented metrics productivity fleet rationalization all of those sound like things would be much easier to get that was better information systems or that you alluded to.

This in the prior question.

Maybe for January again did you discuss a couple of the wins you've been able to get here in the near term and then how that operational improvement process might accelerate once you get an ERP system in and 2021. That's great question. Thank you for that so we have done this with really a lot of talent.

And spreadsheets cooling systems from a assistance or want to give you the data, but getting it out of the data and continue to elaborate on a daily and weekly basis to get insights to drive the performance of the business. So it will be a lot easier and we can take that talent to more a high level insights to drive even than another.

Step function change in the business going forward I will also say that we have leverage juices. Since we did put in we did put in the HR Successfactors system, which was our human capital management system that has been really amazingly helpful. In this time, because we didn't even know where everybody was we had we were managing our age or.

Human capital or people on spreadsheets and now we have a system across the globe and where that was very helpful. Who this at this time, we also put in a purchase.

Order system in the end of 2018, which was extremely helpful. Because we built the processes through 2019 decentralize the purchasing controls around that system and we were able to leverage that centralized management of procurement. During this time to really provide disciplined cost management and that system was key so we are taking advantage of ever.

The system, we have and any modernization, we've done plus the talent in the organization to extract data for analytics.

That's great color, Thank you and.

Random question on your thoughts regarding hedging the risk from sorted office paper prices.

Any.

In the past you talked about potentially some changes in the contract language of the structure.

Just could you update us on your thoughts there is obviously.

A major factor in the in the results up and down and they just I'd be interested in hearing how you're thinking about potentially hedging that risk going forward.

Yeah, Dave This is Indian and thanks for joining thanks for the questions. You know I think what are the things and I'm extremely proud of it in unsecured formation destruction is in several things number one even during the the pandemic probably one of the most difficult quarters that I think any business has ever had to face.

Since probably 1929.

We look at the fact.

We still came out with a new service whether its express is priority or select service in terms of the timing and the guarantee for us to be able to come out take care customers. What what we are seeing is maybe within the organic growth that we're looking at.

As as stops continue to come back in line and as customers reopened.

We're certainly there to renew our service with them and we have and our engagement with customers I think everybody's just looking to get back to normal, but so stops are there and remember we don't get paid per piece of paper, we get paid for this for the service and for the value for the consultation of engagement that.

We bring for the certifications that we bring to the table. When we are actually not collecting paper. We are we're securing sensitive information and our customers and our engagement. That's that's really what it's built off of just that printers.

So as we move forward with with folks sheltering and working from home I think what's interesting to say is I've. Just recently looked at a study and about 77% to of companies today prior to the pandemic had some type of work from home process.

And I think that we you know, we'll we'll figure out whatever the new normal lives.

But I think the key to us is continuing to be there for customers as they return number two we also understand realistically Dave not not every business will have survived Q2.

So it's our responsibility to to provide this necessary service to whatever businesses potentially take their place in the world economies and in the marketplace.

And I think we're very well prepared to do that in our shift to organic revenue growth more of a hunter mentality or some I'm still very excited about opportunities and and I'm also I don't want to be premature, but when when we rolled out three new services. During this difficult time I can tell you.

That our commercial team is actively involved in continuing to become even that much more innovative for future challenges in future opportunities in markets as they continue to open.

Okay. Thank you.

Our next question comes from Scott Schneeberger with Oppenheimer.

Thanks, very much good morning, everyone.

I I.

Thank you me I guess, I guess I'd like to start off asking your arm with regard to be.

Database segment, I'm, just kind of touched upon its but I'm curious what you see trend wise, it's a nice stability in both segments. What do you see with large customers in small customers in good and bad kind of component contrasting as as we move through the pandemic and what's.

You I know you're not going to provide guidance for the second half, but the trends that you're seeing churns impacting and then just until lupines. Any these two new offerings that you just highlighted are they going to be meaningful in the near term can anyhow. They contribution second half. Thanks.

Great great questions. So what we are seeing as as we've said without the maritime in if we take a look at just just the July snapshot you know we're up about a percent now not all I'm not all a independent facilities, whether it's you know the independent doctors.

And dentist's office and those type things not all of those are back yet.

But we are seeing improvement there certainly it with a lot of concern from those folks wanting to make sure that that's they stay compliant and engage with us to make sure that we're doing what we need to do with are regulated waste what would I will say I think from a trend perspective might be there.

Yes, I think there's still a portion of the population while elective surgeries and preventative care is coming back let's remember one thing.

The highest risk group for going outside and engaging and and not having the best success with the pandemic or is the older population. The over 75 over 80 over 85 and also quite frankly that happens to be a very large portion of the population that.

Spends.

Some time in doctors' offices.

So I think there's still a little bit of the pent up demand. If we wanted to take a look at it in terms of maybe from some age brackets, whereas I know several other folks who had their their knee surgeries or other elective surgeries in our backs with their preventative care I think there might still be some hesitancy in in that segment of the population.

In terms of fully returning to you know regularly scheduled visits and care and that type stuff. So going forward, though very very positive when we start talking about launching new services, which I'll talk about as you would ask.

Our ability to adapt you know, we're making pickups in parking lots on a regular basis with time sensitive.

Heating time requirements in some of our contracts where customers want US you know to make a morning pickup prior to eight o'clock and afternoon pick up in an evening pick up at certain times and with S. delays.

In accordance with the US meeting those commitments and we've been doing exceptionally well I couldn't be prouder of the operations as to how they've adapted.

To the requirements and wanting to partner with our customers and quite frankly, Scott long gone are the days, where we perform and try to do collect revenue just for the sake of revenue our new service offerings, our value accretive they'll continue to grow and we.

Make sure from the discipline, we have right now in terms of pricing and then the discipline, we have wrapped around our operations, making sure that everybody's involved at the table. When we talk about how are we going to price and what's the value of the service in the marketplace. The services that that we've put out recently, we're very excited about them in.

But but to your point, we don't have a crystal ball to know how long will people be wearing p. equipment in grocery stores or you know in some other a warehouse settings. So the service that that we've created for the non traditional health care type settings, I'm, not just where are the funds.

Cities, but you know in warehouse work, where people are wearing PPD equipment.

You know I don't have a crystal ball to say, how long will people be wary those things, but I do know right now that for the service, we're providing we're bringing value certainly to our customers, but also to the company in terms of our ability to do what we do as a premium that should be expected.

Great. Thanks, a real quick follow up in a and I guess your anymore. You can you gave a nice overview of joint or taking Ron CIO role Janet I think maybe it's not broadly known your background in IP. If you could you share kind of how you Ukraine your vision.

For integrating your CFO and CIO responsibilities for sure. So I. Thank you for that yes, I have been a CIO as well as the CFO actually was CIO before it became a CFO in my career journey.

And I think there's great ability to tap synergy between the two roles, especially as we rollout our ERP a lot of the capabilities are really foundational to the financial management of the business and so I'm, making sure that that happens, okay as well as all the other righty points and then the control environment they control environment and.

Green tea and finance are very linked and that is an area of keen focus for me as well. So those are those are a couple of the key areas and UBS my priorities and I think they linked very well between financing 90.

Thanks.

Our next question comes from Ryan Daniels with William Blair.

Hey, guys must be go in for Brian I know you talked about how listed contracts are in volume base. There just kind of almost like a barber shop, but I'm wondering like if you've experienced any push back.

On pricing, given the likely reduction or volume or the reduction softwood prices nullify only need garbage shortly comes to my house and once a month at all you don't want to be.

The same amount quarter I was wondering either stanphyl capital.

Yeah, that's that's a great question and I think.

As businesses have returned we work with all of our customers to help to help really supports them.

Whether they're getting through difficult times or to support them. When you know there at the height of their growth. So we've always been flexible we've always been adaptive I will say as we move forward.

The one thing that I think our customer base understands is as opposed to it being the collection of paper, we're collecting their sensitive information that they are interesting with with a top certified company with well trained drivers with well trained plant processing people, who understand exactly how you handle.

Somebody's sensitive information that needs to be handled securely. So so for us I think.

Yeah. All you have to do is take a look at at the average and the continuing rising costs of of data breaches.

To know as I think I think the average data breach right now and or or problem with secure information is somewhere tops $8 million just on average and when you take a look at that.

Folks understand the sensitivity and the importance of the service that we provide so I can appreciate where folks who might not have to deal with it often talk from a from a shred perspective about [noise] about you know it being paper, but as this is paid by stop.

It's paid from a service fee perspective, the value is in his into security the value was in the certifications. The value was in who we are in the relationship with the customer not not by piece. So have we have we worked with customers to help help everybody get through the pandemic just like we all been trying to.

Of course, we have but I don't see anything longer term at this point, that's making me feel you know any less positive in terms of our ability to continue to grow shred.

Great. Thanks, that's helpful color for sure.

And then you might you mentioned home July was tracking.

For the business volume wise at least for.

I'd.

I was that related to June was June also kind of trending up in was that.

Further trend on June or I apologize, if I missed that yes, no no. That's that's a great question. We have seen we've seen continual improvement now remember June is a bit June into July.

I think are still a little odd in the fact that you know states kind of <unk>. There was a there was a lot more that said hey, we're open as we got through May into June and then then there's been maybe some.

Some some attempts to two to go back to closing a little bit just because of the cases, so weve see we've seen steady improvement, but I think and we certainly have seen between June and July July June stops I think was down maybe close to 18% July I think Jim had mentioned around 15.

Present still in improvement, but I think we're still cautious simply because it's been open and close and then open again and close again and and I'm sure that's quite difficult for our customers to have to manage but we're right there with them in order to be able to a two to help them with servicing so we'll see how it continues through the through Q3.

But I'm pretty positive.

As we move through the month that that we're going to see you know continual improvement.

Great. Thanks, guys. Thanks for taking my questions, but we don't.

Our next question comes from Jeff Silber with BMO capital markets.

Thank you so much you've obviously been making a lot of changes to the business. During this pandemic I'm wondering can you give us an update by the major segments, what the incremental in decremental margins are now by each segment.

I think five five segment to the the margins for shred, our shredding secure information destruction and regular metrics are roughly comparable I think which might might be more helpful is to go through with the drivers of our operating leverage improvement because I think that might be what you're trying to assess.

So so there really split into three major categories. So the first is the divestitures. So we divested Bob low margin business, primarily the domestic environmental solutions business and the out to a lesser extent the a communication in terms of this size, but those were those account for about a third of the operating leverage improvement you're.

Looking at the adjusted EBITDA or even the adjusted EBIT level and then we mentioned about three to 5 million a sustainable savings those are those cross both of the the the main core segments that we have and that's about a third of the operating leverage improvement that's at $3 million to $5 million I mentioned in my script and the last week.

Discretionary costs that we also pulled the trigger on across all the core segments. That's about another third and those are things like travel and some other things project work that we could we could pull as we watched on what the economic conditions were so those discretionary costs will probably have feedback into the business, but we're committed to have them.

Aligned with the revenue improvement that we see going on we hope to see the sustainable cost go below that I'm, you know continue to drop to the bottom and the divestitures will just by function of them not being part of our business anymore.

Okay I bet is help I appreciate that.

I guess, along with the ERP improvements and I guess, we'll see more next year, but do you envision a time or what do you need to see in order due to reinstate guidance and even if it's not on an annual basis, maybe on a quarterly basis. You know estimates were all over the place. So I think providing a framework might be helpful. Yeah. So I think I think some stability in the economics.

Additions and since our or secure information destruction, so impacted by the pandemic into shelter in place orders and stability in what we're seeing with geographies and staying open or close and sustainability of their their economic environment would probably lead us to two Ah to think about reintroducing guidance and we will continue to try to provide.

What information we can as they did in this call of key pieces of it going forward as we see what happens in the business.

Okay. If I could just sneak one more in you you mentioned a few times on the call. Your long range planning when do you think you'll be in a position to share that with US. This is a long range plan as process goes through now into the fall last time, I think I I discussed it in the fourth quarter call. So you know that would be likely place that I'd put it which is you know in the the first quarter, but.

If I have insights before then I'd be happy to share them.

Okay looking forward to thanks, so much you're welcome.

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

Thank you I Lee and to everyone listening to the call I would just I'd like to say we appreciate your continued interest in their cycle and we appreciate your share to tighten in or future. So thanks much for today and I'm sure we'll be talking to you soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.