Q4 2020 Stericycle Inc Earnings Call
Good morning, and welcome to the Stericycle fourth quarter 2020 earnings call and webcast.
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I would now like to turn the call over to Andrew Ellis VP of Investor Relations. Please go ahead.
Hello, and thank you for joining Stericycle fourth quarter 'twenty 'twenty earnings call on the call today will be Cindy Miller, our Chief Executive Officer, and Janet Zelenka, Chief Financial Officer, and Chief Information 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 coal or similar expressions. We are making forward looking statements forward looking statements of our perspective in nature.
Not based on historical facts, but rather on current expectations and projections of management about future events and are therefore share victory of risks and uncertainties.
Our actual results could differ significantly from those described in such forward looking statements factors that could cause our actual results to differ are discussed in the safe Harbor statement in our earnings press release and in greater detail, what's in the risk factors in our filings with the U S Securities and Exchange Commission.
Our past financial performance should not be considered of reliable indicator of our future performance and investors should not use historical results to anticipate future results or trends, we disclaim any obligation to update or revise any forward looking statement other than in accordance with legal and regulatory obligations on.
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 Investor Relations website. The.
Repaired comments for today's call of correspond to an earnings presentation, which is also available on our Investor Relations website.
The call we may reference specific slides from the presentation I'll now turn the call over to Cindy Miller.
Thank you Andrew and welcome everyone I'd like to start today's call by saying, how proud I am of our team members and the essential role Stericycle plays in protecting the health and wellbeing of our customers and communities as we continue to lead through the COVID-19 pandemic 'twenty.
2020 presented unique challenges for our business and our team demonstrated resilience and dedication.
Despite these challenges during the quarter, we delivered continued organic growth in regulated waste and compliance services maintained secure information destruction revenues in the fourth quarter in line with the third quarter. Despite continued disruption from the pandemic and we completed our eighth divestiture.
Since 2019 further we improved debt leverage driven by another strong quarter of free cash flow.
Of special note I'm pleased with the progress of our team members made establishing an effective internal control environment by fully remediated, our material weaknesses as of year end. This achievement represents an important governance and execution milestone as we continue our transformational journey.
Per cent compared to 2019, we are particularly encouraged by our team members adoption of a behavior based safety culture, the cornerstones of which our defensive driving training cameras in our North American fleet and transparent reporting an incident escalation processes.
Let us now transition to reviewing progress on our five key business priorities, which we introduced almost two years ago, when I became CEO.
Starting with the quality of revenue regulated waste and compliance services revenues grew one seven per cent for the full year and 3.2 per cent for the fourth quarter when compared to 2019.
When excluding the impact from the pandemic on maritime waste services organic revenues increased 2.4 per cent for the full year and $4 nine per cent for the fourth quarter.
As Janet will highlight later on this call. This growth is being driven by both our quality of revenue initiatives and net positive impacts from COVID-19 related waste services building on the momentum of our previously outlined quality of revenue initiatives, including the global sales pipeline and RFP management process.
I shared with you last quarter, we continue to transform our commercial organization.
Moving on the operational efficiency, we continued to deliver on our efforts to optimize modernize and innovate our operations as I've shared on previous calls our engineering and operations teams are partnering to implement improvements which have contributed to our gross margin expansion this quarter and for the full year in <unk>.
Thousand 20, we are focused on right sizing and balancing our fleet and the equipment, improving efficiencies and route and long haul planning and execution and developing a playbook to proactively manage our business through unprecedented times.
In the fourth quarter, we successfully completed our eighth divestiture in the past two years, the sale of our product recall business for approximately $78 million.
I am proud of the progress the team has made executing on our portfolio rationalization initiative and the benefits of that progress are clear.
Our ability to focus more deeply on our core businesses has led to elevated performance, we lowered debt and improved leverage we generated higher cash flow and improved margins in our streamline businesses.
In 'twenty 'twenty, one and beyond we will continue to evaluate opportunities to further optimize our portfolio of businesses.
Now turning to debt reduction our strong cash flow generation supported by divestitures and improved operating margins helped reduce net debt by $207 $2 million in the fourth quarter and $900 million for the year. We finished the year with the debt leverage ratio of 3.54 time.
A greater than 90 basis point improvement since the end of the 20th 19.
I will now turn to our North American ERP deployment.
As previously communicated we have shifted the majority of our planned deployment of our North American ERP system into 2021.
Over the past several months, we rolled out certain technologies associated with our North American ERP system, including our new employee travel and expense system and of global tax management system.
This follows the successful deployment of our human capital management system in January of 2020.
While we temporarily paused our deployment of the major ERP capabilities because of the pandemic. Our teams of remained engaged in preparation of our phased launch, which we anticipate will commence around the middle of this year.
We will continue to monitor the evolving pandemic dynamics that could impact our business customers and the safety of our team members and we will factor them into our deployment timing decisions.
Before turning the call over to Janet I'd like to thank and congratulate dominant colada for being named Chief Transformational Officer.
Dominic began his career at Stericycle, leading our engineering team working tirelessly to centralize standardize and optimize processes to improve our performance.
And then as we look to the future the need to keep transforming is of critical element of our operations and culture.
This year, we began an effort to redefine our cultural values to align the beliefs and behaviors necessary to strengthen our business.
Our future focus will be the implementation of the ERP and leveraging that technology to advance all of our operations Dominic's long term outlook commitment to sustainability and experience leveraging technology position him well for this role.
I'll now turn the call over to Janet to review our financial results.
Thank you Cindy I will start by summarizing our fourth quarter results.
Total revenues were $655 $9 million compared to $799 9 million in the fourth quarter of 2019 of the $144 million decline the impact of divestitures accounted for $133 $7 million and secure information destruction revenues accounted for.
For $31 8 million, reflecting pandemic related business disruption.
This was partially offset by organic growth in regulated waste and compliance services of $17 3 million and the favorable foreign exchange rate impact of $4 8 million.
As noted on slide five.
Related waste and compliance services revenues were $439.8 million compared to $546 1 million in the fourth quarter of 2019, excluding the impact of divestitures and foreign exchange rates organic revenues for regulated waste and compliance services.
Increased three 2%.
When excluding the impact from the pandemic on maritime waste services, which largely support the cruise industry organic revenues increased four 9%.
Almost all of the Maritime waste services revenues are included in the North America segment. So when excluding their impact North America regulated waste and compliance services organic revenue growth was two 9%.
Of this two 9% increase about half of the growth was driven by quality of revenue initiatives and the remainder of by a net positive impact from increased COVID-19 related waste mail back volume temporary testing centers and non health care P. P E services, which was partially offset by.
Continuing elective surgery deferrals in the fourth quarter international regulated waste and compliance services organic revenue growth was $13 four per cent. The majority of the international revenue growth was attributable to supporting our customers through the pandemic despite the deferred.
Our all in elective surgeries.
Secure information destruction services delivered revenues of 187 $4 million compared to $217 9 million in the fourth quarter 2019, excluding a negative point 9 million dollar impact from S. O P pricing organic revenues declined 14, 2%.
Reflecting pandemic related business disruption.
In North America secure information destruction organic revenues declined 12, 9%, excluding the impact of S. O P pricing compared to the fourth quarter of 2019 reflective of a decrease in service stops and international secure information destruction organic revenues declined 21.3.
Per <unk>, excluding the impact of ESOP pricing compare to the fourth quarter of 2019.
Communication and related services revenues were $28 $7 million compared to $35 9 million in the fourth quarter of 2019, the impact of divestitures and foreign exchange rates accounted for approximately $6 $5 million of the decline organic revenues declined <unk> 6 million.
Income from operations in the quarter was $93 $2 million compared to a loss from operations of $198 5 million in the fourth quarter of last year. The change was primarily due to one no goodwill impairment in 2020 compared to a goodwill impairment of $207 4 million in 2009.
<unk> to an improvement in net divestiture gains and losses of $67 5 million and three a reduction in adjusting charges of $30 8 million noted on slide 21 also I'd like to highlight that in the fourth quarter, we spent $17 $1 million related to.
On the ERP with about 75 per cent and operating expenditures and 25% and capital expenditures in combination with our third quarter ERP spend of $13 $6 million. This puts us at the lower end of our previously shared range of $30 million to $40 million for the second half of 'twenty.
'twenty.
U S. GAAP net income was $48 $5 million.
Or 53 cents diluted earnings per share compared to a net loss of $219 3 million or $2.41 diluted loss per share in the fourth quarter of last year. The difference was related to higher income from operations of $291 $7 million mostly.
Related to no goodwill impairment in 2020 versus 2019, the impact of net divestiture gains and losses I already mentioned and lower interest expense of $7 3 million as a result of lower interest rates and debt balances.
The improvements were partially offset by higher income tax expense of $31 $9 million, mainly due to net income in the fourth quarter of 2020 compared to a net loss in the fourth quarter of 2019.
Cash flow from operations for the year ended December 31, 2020 was $532 million compared to $248 million for 2019 of the year over year improvement of $282 2 million.
Approximately of $160 million as COVID-19 government relief of divestiture cash benefits that are not expected to repeat which include one U S. Cares Act net operating loss carry back refunds received in the third and fourth quarters of 2020 for a total of $110 million.
Two government tax relief related payment deferrals of $30 2 million roughly split two thirds of U S and one third non U S and three advances received on executed service agreements of $19 2 million related to the domestic environmental solutions divestiture in the second quarter.
The other year over year of changes in cash from operations were one lower payments for legal and professional fees annual incentive compensation and prepaid software of $55 $5 billion to lower interest payments of $26 million and three lower operating expenditures for ERP.
<unk> and related matters of approximately $20 million compared to 2019.
Adjusted income from operations was $108 $6 million or 16, 6% as a percentage of revenues compared to $122 6 million or 15, 3% as the percentage of revenues in the fourth quarter of last year, excluding the impact of divestitures and foreign exchange.
Ange rates of $5 $9 million adjusted income from operations declined $8 1 million adjusted income from operations as a percent of revenues improved 130 basis points. The majority of this improvement was driven by divestitures of lower margin businesses, which contributed approximately 200 basis points.
And quality of revenue and operating efficiency initiatives, which contributed almost 80 basis points.
These were partially offset by an increase in annual incentive compensation of approximately of 170 basis points.
Adjusted diluted earnings per share was 15 nine cents compared to 72 cents in the fourth quarter 2019 as illustrated on the bridge on slide eight the variance in adjusted earnings per share was due to the following an eighth unfavorably from a higher tax rate impact a sixth sense unfavorable.
<unk> from lower adjusted income from operations.
Five cents on favorability from the impact of divestitures and foreign exchange rates and a six cents favorability from lower interest expense.
Our fourth quarter DSO as reported was 52 days compared to 50 days in the third quarter 2020, and 60 days in the fourth quarter of 2019.
When excluding the revenues from divested businesses from the trailing 12 month DSO calculation DSO was 56 days compared to 55 days in the third quarter of 2020, and 55 days in the fourth quarter of 2019.
Capital expenditures for 2020 were $119 $5 million as compared to $194 2 million for 2019. The difference was primarily driven by the timing of 2019 investments in the ERP and 'twenty 'twenty disciplined capital management.
Free cash flow for 2020 was $410 $7 million compared to $53 8 million for 2019, the significant year over year improvement of $356 9 million was due to higher cash flow from operations and lower capital expenditures.
At the end of the fourth quarter, our credit agreement defined debt leverage ratio was 354 times, which was well below our maximum allowable ratio of 475 times for the quarter during the fourth quarter, we paid down $207 $2 million of net debt decreasing total net debt.
Net to $1 74 billion.
Since the end of 2019, we reduced our credit agreement defined debt leverage ratio of by 91 points and paid down net debt of $900 million as of December 31, 2020, we had $947 $2 million available in our revolving line of credit to support the business in the.
The fourth quarter, we closed a 500 million dollar senior note offering and used the proceeds to pay down existing term and revolver debt, allowing us to extend our overall debt maturity profile at historically low long term interest rates.
As Cindy mentioned, we successfully completed our eighth divestiture in the past two years, having divested of our global product recall business for $7 million to $8 million in December in 2020. This recall business had revenues of approximately $57 million principally.
The reported in the North America segment as part of communication and related services, what remains with the Stericycle is communication solutions, our patient engagement services business, which represents approximately $60 million in annual revenue in 2020.
Turning to the full year results, which begin on slide 10, total revenues were $2 six $8 billion compared to three <unk> three 1 billion in 2019 of the $633 $4 million of decline the impact of divestitures accounted for $483 7 million secure information destruction.
Revenues, excluding the impact of the Sop pricing accounted for $142.4 million and the Sop pricing impact accounted for $14 7 million.
In 2020 divested businesses generated approximately of $195 million in total revenues. When 2020 results are normalized to exclude the revenues from divested entities 2020 total revenues were approximately $2.48 billion.
Income from operations for the year ended December 31, 2020 was $31 $9 million compared to a loss from operations of $211 $9 million in 2019. The change was primarily due to no goodwill impairment in 2020, compared the goodwill impairment of $228 3 million in 'twenty.
19, offset by divestiture of losses of $123 6 million in 2020 compared to divestiture of losses of $103 million in 2019 for a net negative divestiture difference of $20 6 million also I'd like to highlight that in 2020, we spent $102 $1 million related to the ERP.
With about half an operating expenditures and half in capital expenditures.
Net loss for 2020 was $57 $3 million or <unk> 63 diluted loss per share compared with $346 8 million or $3.81 diluted loss per share in 2019. The difference was related to previously mentioned higher income from operations of two.
<unk> hundred $43 8 million lower interest expense of $36 4 million and no loss on early extinguishment of debt in 2020 versus $23 1 million in 2019, which were partially offset by a lower income tax benefit of $16 7 million.
Adjusted EBITDA was $495 $2 million in 2020 compared to $577 $8 million from 2019, and 2020 divested entities generated approximately $25 million and adjusted EBITDA. When 2020 results of our normalized to exclude the results from divested on.
Entities 2020, adjusted EBITDA was approximately $470 million.
Adjusted diluted earnings per share was $2.25 from 2020 compared to $2 65 in 2019 as illustrated on the bridge on Slide 15, the variance in adjusted earnings per share was due to the following.
29 cents on favorability from the impact of divestitures and foreign exchange rates 15 cents on favorability from a higher tax rate impact 12 cents on favorability from the impact of our Sop pricing.
Non sense on favorability from lower adjusted income from operations and 26 cents favorability from lower interest expense on other.
Although we still operate with economic disruption and uncertainty as a result of COVID-19, I would like to provide some insights into what we see emerging in 2021 related to the preliminary January revenue anticipated the ERP spend some cash flow dynamics and our long term outlook.
Preliminary January organic revenue growth for our regulated waste and compliance services and secure information destruction services.
Was generally consistent with the trends experienced in the fourth quarter.
Regarding the ERP as Cindy mentioned, we will continue to monitor the ongoing and evolving pandemic dynamics and we will factor those into our ERP deployment timing.
With that I'll now provide an update on our ERP system initiative, assuming of deployment beginning in the middle of the year.
In addition to our current ongoing spend which we anticipate will continue at historical run rates in 2021, we estimate incurring in ERP spend of approximately $105 million to $120 million in 2021, the spend is anticipated to be split into the following categories. One approximately.
The $60 million to $65 million of operating expenses that we anticipate will be adjusted out of non-GAAP earnings. These operating expenses will relate to testing training data conversion deployment and the cost of maintaining the development of environment until we go lives. This compares to ERP operating expenses of $50 8 million.
In 2020.
<unk>, approximately $15 million to $20 million and anticipated capital expenditures compared to capital expenditures of $51 $3 million in 2020, and three approximately $30 million to $35 million of expected ongoing operating expenses for running the system after deployment.
Of which we anticipate approximately $8 million to $10 million of system. Depreciation. This is anticipated to be a new incremental ongoing operating expense compared to 2020.
After the ERP is fully deployed in North America. The total annualized ongoing operating expenses for running the new system are expected to be $50 million to $60 million of which we anticipate approximately $17 million to $20 million of system depreciation.
Let's take a moment to look at some anticipated changes in free cash flow for 2021.
We had $160 million of COVID-19 government relief and divestiture of cash benefits in 2020 that I mentioned earlier and are not expected to repeat.
Second I'd like to highlight for anticipated incremental cash outflows in 'twenty and 'twenty. One as follows first we anticipate spending of $160 million to $180 million on capital expenditures compared to $119 $5 million in 2020.
Second we anticipate paying our annual 2020 of incentive compensation payout of approximately $40 million in the first quarter of 2021 of which almost all of this incremental to last year.
Third as I mentioned earlier, we anticipate spending approximately $130 million to $35 million in incremental ERP ongoing operating expenditures as part of our new ERP ongoing operating expense structure and to an incremental $10 million to $15 million and adjusted ERP operating expenditures that are adjusted out.
Non-GAAP earnings compared to 2020.
Lastly, we anticipate paying approximately half of the $30 2 million government tax relief related payments deferred in 2020 with approximately half repaid in the first quarter and the remainder of repaid in the third quarter. We anticipate these payments will be offset on a full year basis by various tax related refunds.
The following long term outlook includes forward looking statements as contemplated in our safe Harbor provision at the opening of this call.
We are reaffirming our five year outlook as follows one we expect organic revenues to grow at a compounded annual rate of 3% to 5% with 2020 as the base year, two we expect to generate at least $400 million in annual free cash flow between 2024 and 2025.
Primarily driven by operating margin expansion and three we expect to achieve of credit agreement defined debt leverage ratio of below three times between 2022 and 2023.
This outlook is based on currently known items and certain business assumptions, including current foreign exchange rates and estimates for Sop pricing. This outlook also excludes future acquisitions and divestitures.
So with that I will now turn the call back to Cindy.
Thank you Janet as we close the books on 2020 I have never been more excited about the future of Stericycle as I said early on in 2020, we found that the urgent necessity to adapt and change communicate and collaborate caused by the pandemic accelerated our team members of acceptance of cultural change.
And buy in to the principle of constructive dissatisfaction.
It also accelerated our drive to standardize centralize and modernize our operations innovate in our go to market strategy and leverage data and metrics to make better decisions. We continue to transform virtually every aspect of the company and that was clearly evident as our team members rose to the challenge time and again in 2000.
20.
The fruits of this transformation can be found in our double digit percentage of improvements in safety organic growth in regulated waste. The complaint services operating margin expansion, despite headwinds to our maritime waste services and secure information destruction businesses. The completion of three divestitures, including our largest the best.
Stitcher ever and the repayment of over $900 million in net debt our team members' ability to come together to deliver these results has given us the confidence in energy to drive further transformation in 2021, including the implementation of our North American ERP system.
I'm proud of our accomplishments in 2020, and how we lived up to our commitment to protect what matters for our team members our customers and the communities we serve and most of all I'm excited about the organizational resiliency and transformational culture. Our team members are creating every day.
Operator, please open the line for Q&A.
Thank you we will now begin the question and answer session.
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We please ask that you limit yourself to one question and one follow up.
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At this time, we will pause momentarily to assemble our roster.
Okay on the first question will come from David Manthey with Baird. Please go ahead.
Hi, good morning, everyone.
First of all of Janet just to clarify here on your guidance.
The.
For the ERP expenditures the.
30% to 35 million in the back of the.
The 2021.
Split roughly evenly third to fourth quarter and then the step up to 50 to 60 in 2022, that's consistent with what you told US before correct that is consistent with what I told you before yesterday.
Okay. Thank you.
And then just two quick ones here what are your thoughts generally on higher interest rates and inflationary pressures that we may see in the 2021 and then the second question is just on the current portfolio of how do you feel about it or are there any of the big pieces do you think you might look to divest year in 2021. Thanks.
Sure I'll take the interest rate and in the bid on the inflation question and hand, it over to Cindy on the divestitures.
So one thing we've done is restructured our debt to be less.
Dependent on flexible interest rates. We currently have about 625 million of variable debt at the end of the year and about one per cent change in interest rates is worth about $6 million. So it is not a significant impact to us and we think we can manage it.
The continued reduction of debt balances as we indicated on our long term guidance should also mitigate the impact of.
And then in terms of inflation. We are we are with our centralized of our procurement in our management systems. We are really getting very good at managing our third party spend you know with our vendors and we also are very good at managing our new contracts with our customers in terms of inflationary protections in them and with that I'll turn it.
Over to Cindy for the divestiture for the question.
Hey, thanks, Thanks, Janet and the thanks, Dave Yeah. So a couple of things with reference to the portfolio rationalization. We are we are looking you know we've done a lot we've been quite busy and we have had the largest is as everybody knows where the environmental solutions I think where we are right now is.
We're still focused we're still opportunistic we're still evaluating you know geographies and and a few other things, but I think where we're pleased with where debt levels are right now, but I, but I don't think we're done as you know we've taken the the divestitures the proceeds and put them down to that.
We've had some really good results. So for me I think we're still are we're still staying pretty disciplined we're still focused on optimizing the portfolio as we have it but I I would I would say I think with confidence we're not looking at anything large, but I still think that you know well, we'll take a look at opportunities as they.
As they pop up.
I appreciate the color. Thank you.
Thanks, Dave.
And the next question will be from Jeff Silber with BMO capital markets. Please go ahead.
Thanks, so much.
Your prepared comments, you talked a little bit about service stops declining and your security information destruction business I'm just wondering.
On a sequential basis have you seen any change in what are you expecting as kind of the reopening of the economy starts.
Yeah, Great question, Jeff you know the one thing that we have found a couple of things with reference to secure information destruction. We know that about 60 per cent of the cost is variable and the discipline the that and the learnings that we've had this past year is exactly how do we flex to demand.
How do we how do we gear up when businesses are opening and then and then how do we flex back in order to make sure of the productivity maintained and and we're driving them, we're driving the right things so for us what what the trends of showed US is as businesses come back we've seen.
We've seen a direct correlation to the stops improvements and as customers get back to work you know it is it is the they still are extremely concerned about making sure that they keep their information secure and we play of a significant role on that I like our position as you know the lead business you know really.
The strong brand in this particular space I appreciate the synergies that we have with our health care customers, but I think as people return to work and businesses reopened we saw demand for our services come back and if you'll notice we.
We saw sequential improvement Q2, Q3, and then what happened going into Q4 is a new strain of Covid and states that had opened you know pulled back a bit and kids weren't going back to school and some places where maybe schools were open by Thanksgiving. It was hey don't go visit your family and you know the.
Things continued through the fourth quarter and as a result, you know we saw kind of a.
Flat line from Q3 the Q4.
And if we look globally, we look at the U K, which is a which is the strong shred market for us and we look there. They went back on almost the complete locked down right. After the new year. So there's a lot of volatility are yet in terms of businesses open state by state, but certainly country by country. So we continue to watch it but.
But what we do see your original question, we do see of correlation businesses come back and open up we do see the the increase in stops and the improvement in revenue.
Okay. That's helpful and you alluded to just on your answer I wanted to drill down a little bit further on prior calls you guys had talked about potentially.
The providing.
The regulated waste services to your secure information destruction clients or other corporate clients as we see the return to work I'm. Just curious are you having any.
With that any conversations as we reopen up the economy.
Yeah, you know.
That is Oh I did talk about the synergies that we do see them with with the health care shred as well and Cory and his team have really put forth one of the other our organic growth strategies. They have is really driving cross selling of the services, where you where we can have.
You know a greater.
Service portfolio to customers specifically in the health care industry and we are seeing we are seeing success. There I think I think the whole focus on organic growth.
No matter, where it is and getting the the commercial team to act as one unit of I think has really been instrumental and that will play of continued role in our ability moving forward.
Okay, great. Thanks, so much.
And the next question will be from Michael Hoffman with Stifel. Please go ahead.
Good morning. This is the odd distrustful of filling in for Michael Hoffman, Thank for taking my questions.
Just looking at the revenue bridge from 2020 on page 13 of the presentation the.
S. I D sales were down around $142 million.
Could you just provide some color on how much of this is permanent versus what can return on our reopening trade and what.
What incremental margins.
Yeah. So as Cindy mentioned this is Janet good morning, as Cindy mentioned, we we are seeing a correlation with the economics situation, we have unemployment and people returning to work and the shutdowns and the impact on secure information destruction.
One of the uncertainties that we have in the business right now on the predictability going into next year of when everything will reopen and it seems dependent on the the trajectory of vaccinations and the trajectory of employment and people returning to work. So we are anticipating recovery. We just are dependent on those external factors Cindy.
The thing you'd like to add.
Yeah, I think we really are that particular business. We're finding is quite tied to the economy into employment.
And as we see major sectors of her certainly the U S economy, whether it's the retailer academic professional services. Some of those you know not being fully open we are seeing that so our focus is to make sure that you know as as the if there ever is of normal.
That we all get back to pre Covid levels, but it is as Janet had mentioned, they're still they're still quite of bit of variables and volatility in there for us to price to predict.
Thank you just one follow up question, what what is the basis of organic growth of $36 5 million and the the.
The irregular route of regulated medical waste the Zip.
Price or is it new customer additions or is it upselling to existing customers or.
Some combination of all of that.
I think that that's a that's of great question E and I think it is a combination of all of it when we're very proud of them a lot of the the changes that we've made in the commercial organization I'm really focusing on organic growth, but getting down to fundamentals. When you talk about basics of changing sales incentive plans and leadership and then you get.
Into having deal review committees pipeline management revamping the art, but the RFP process of putting that in we're seeing growth. We're seeing growth. That's consistent it's not based on one particular segment of the the regulated waste side, whether it's not just hospitals, it's not just nationals, it's not just our independents.
It really is the collective response.
And I believe we certainly aren't.
We're not in it for some type of a price.
Focus, where we're actually selling value value that we bring in and and I think we're seeing that in terms of our WCS for specifically Q4, even with elective surgeries being down and certainly not having maritime revenue in there you know when you look at 3.2% growth in fourth quarter.
Year over year, and you look at without maritime it being 4.9 I.
I think as Janet had said, it's a it's a lot of the cost of it or the quality of revenue initiatives, we have as well as our ability to position ourselves to play a big role in the in the vaccine in not just the vaccine, but also in the testing portion of the of the pandemic.
Oh, thanks, so much for taking my call.
I look forward to meeting you all one of these days.
This is the whole too.
Thanks, so much.
And the next question will be from Gary Bisbee with Bank of America. Please go ahead.
Hey, this is Jay Hanna on for Gary This morning.
I'm kind of.
Going back to where you were speaking to with regard to regulated waste organic growth if we think about it.
Excluding the maritime impact so around 5%.
Did you say half of that was generally from.
I don't want to say, one time, but from an uptick in demand related to COVID-19. So like on a on a longer term run rate level, we'd be thinking more 2% to 3% maybe for the year or back half of the year when things normalize.
You know I think I think I'll I'll start with that and the agenda to few of any comments, but one of the things I do the way we do look at it is regulated waste as a complete bucket.
So a lot of things are in it whether it's you know unused pharmaceuticals red bag waste if it's sharps if it if it is things related to the pandemic. If it's if it's anything related to flu shots of shingles shots or any other vaccinations during their seasonality or elective surgeries. So what we're really pleased.
With is how we've got the flexibility in our within our within that service line that elective surgeries have been you know completely closed opened a little bit now back on the decline.
Maritime boats were out crossing the international waters now they're parked.
Now, they're they're docked if you will in harbors and yet we're still able to see growth and we do of we can where we're very confident of the fact that yes, we've gotten the uptick.
From the the Covid, whether it's the the testing and the and the vaccinations in and all of that but we also have have or are confident as we continue to win new hospitals, where we're growing our customer base. We're having success in the independent segment of our business, having enhanced many of the <unk>.
<unk> that we have so I believe.
Strong organic growth story.
That is is more than just.
You know related to the two of Covid or to the pandemic. So I'm I'm very I'm very excited about our ability to reach them.
Our long range targets, when we talk about three years to 5% you know.
That's the focus and I think we'll get there.
Okay, Great I'll just add on you were talking about the numbers that the two 9% is North America. When you take out the maritime and that is split between Covid related and core growth driven by quality of revenue and then maritime it's mostly North America. So you would add that on top of that when you look at Internet.
National we have a strong growth rate in international that's contributing to the overall global growth rate that is mostly driven by the COVID-19 impact of serving our customers even with the deferral of elective surgeries.
Okay. Okay. Thank you and then on free cash flow in 'twenty 'twenty, one just the use of that it seems like there'll be some more pressures this year given some of the government related topics.
The topics.
And maybe if we think about less divestiture proceeds to should we expect the debt pay down to be a bit lower than what we saw in 2020 and are you comfortable.
What's your long term perspective on on what level, you're comfortable with leverage. So so we're trying to get to leverage of below three times between 22, and 23 and 2022 and 2023 and that's what we're comfortable with so we're still working to get it down you're right. We've done most of the large divestitures that contribute to that too.
On the cash flow generation of of the business will be the the probably the primary contributor going forward to driving the dead zone.
Okay. Thank you.
Thanks Jay.
The next question comes from Sean Dodge with RBC capital markets.
Thanks.
Good morning.
Genesis the numbers you gave for normalized revenue and EBITDA for 2020, so it sort of kind of normalizing for the divestiture of the 2.48 billion and of the $470 million should we think about those of I guess, it's being good jumping off point for 2021. So if we kind of take the $2 4 billion revenue number and we add in what we think.
Revenue growth kind of organic growth from med waste and then basic assumptions around like of reopening in paper prices in secure information destruction that kind of gets us to where we need to be and then <unk>.
EBITDA, maybe some more constitute can take out of it finished up these operational initiatives and then.
I guess, what would flow on incrementally from the.
The ERP beginning here midyear.
Is that kind of.
I guess at least Directionally in line.
Having the right range as Sean I think you of you. How you are heading in the right way end of those are good jumping off points and we thought with all of the noise in the year. It was important to give those to you and you did capture one of the spend elements at the end there, which is the ERP spend but everything else that you mentioned would be the kind of drivers that you would see happen in our business.
The uncertainties, our secure information destruction when maritime will come back up on the cruise ships will start failing and are in that are the the churn that we're seeing in terms of going back to normal regulated waste services, such as elective surgeries versus the Covid, which we think will be a positive.
Of course, as you see the core growth expanding but theres still of the pandemic going on.
Got it Okay and then on yes, Sean This is Cindy just one more thing on that where we're following very closely a lot of the surgical suppliers equipment are the hospital updates that we've been getting in and of elective surgeries and getting those back to normal is certainly a focus of theirs.
They're trying to figure that out and they're the best the we've seen where were they are thinking sometime end of Q3 potentially into Q4 for possibly being pre COVID-19 levels, but yet you know where the that's that's still yet to be seen so those of the things that we're looking at in order to try to help guide us, but again that is.
Still a you know that.
That's still of a big question.
Sure. Okay, and then on the long term free cash flow guidance. Janet you said that should primarily be driven by operating margin expansion.
Can you give us a sense of of how much expansion on or what levels do you expect to be at in order to generate the the $400 million and then.
As we think about the trajectory of margin is this gonna be a little bit of of <unk>.
Slower sort of at the beginning of a hockey stick up in 2024 or will the progression of would be a little bit more.
Linear well when you look at the EBITDA level as you can see we have to get through the ERP. This year. So that is the that isn't the outlay of expenditures that will have the have an impact on that trajectory and then you know we're looking for steady progress as we you know we get to that target.
Okay.
Okay.
Great. Thank you again.
Okay.
Thanks, Sean.
The next question the Walker from Scott Schneeberger with Oppenheimer. Please go ahead.
Thank you very much good morning.
The city of rugby start off on a kind of following up on some earlier questions on regulated waste segment the.
Before the the pandemic a lot of focus on on on hospital chains and on independents on improving pricing and you talked about of the revenue quality I'm just curious what you've seen though since COVID-19 disrupted how of the how are the conversations of the sales conversations going with the existing customers on renewals.
<unk>, just obviously a great quarter on on on growth and congratulations for that but specifically on pricing what are the trends that you're seeing and kind of what are you thinking for four over the interim 12 months, what type of what type of pricing dynamics should we expect contributing to the sort of the.
The growth from the segment. Thanks.
Yeah no. Thanks for the question Scott I think I think one of the things that has happened that had to happen is we are getting more engaged with customers, having far greater dynamic conversations about them about how we can help about unmet needs that we might be able to fill in.
Those those conversations are becoming more collaborative and more relationship as opposed to you know commodity here is the price and as you get into value selling and as as we really.
Put forth the value of all of the capabilities that we have the conversations with the hospitals continue to be very strong and let's make the let's be certain where we're not out here, making sure that anybody is set to make a short term price decision.
For short term gain.
Where we're looking to make sure that we engage with our customers, where we can support them. So that we have you know longer term relationships built on the future. So I think as I'm I'll give you. An example in independent on on an independent side, we've gone back to take a look and say hey, how do you know what greater value can we bring because of the pandemic certainly brings a lot of.
Regulation of lot of uncertainty to many of the those of those smaller independent Doctor and Dr. Facilities. So you know we've we've enhanced our consulting services. We've we've we've targeted.
Targeted at towards what's happening today, and what do people need to be aware of as opposed to just make a package deal of of just the basics of ocean HIPAA and several other things. So I think our customer base is appreciating how we're adapting to how we can get ahead of of what their concerns might be and as a result, I think the quality of.
The revenue initiatives on price.
You know I think had been had been reasonable and consistent and the other thing too Scott, but I think it was a big fundamental we had the change was we had so many existing contracts were.
We're just contract language was all over the board depending on some of the acquisitions that had come into the fold that we've gotten to the point, where we've where we're standardizing those and in those standardization comes many safeguards for both kind of for both the customer and Stericycle in terms of annual agreed upon.
Percentage increases and a lot of the basics that really were missing from our contract structure. So I think those things will help certainly position our ability to continue to grow as we move into the future.
Sounds good thanks and for my follow up on the second quarter call. You introduced three new three new services. So I was just kind of curious if you could provide a bit of a progress report about what you've seen.
112, where we're primarily COVID-19 related and then the the third being in secure information destruction kind of kind of a hearing the offering.
But also.
Second part of the question is there more is there a pipeline being generated off of new business offerings, you've kind of just mentioned it in regulated waste, but our view are there is there the potential for you over the coming year use of introducing hey, we'd come up with this or that and it's big enough that as mentioned before on one of these calls thanks.
You know and Scott I swear that that the Cory white and the and the commercial team probably are jumping up and down and thrilled that you asked that question that I might think that they ask they might of paid you to ask that one we are thrilled with with the the the adoption of as an example in secure information.
Struction the the express from priority kind of tiered tiered pick up services that we rolled out we're seeing them you know 8% to 10% right now is a pretty much of running average of of the requests when someone calls in for a purge service that they are taking either express or.
The priority and and and we've been doing providing great service to those folks for for that request and I think that that's continuing to grow on the our WCS side. It was the the non health care customers with PPE that remains consistent continues to grow we continue to have opportunities that are out there with with.
Folks that wanted to do the right thing in terms of the of handling what what or providing I think of a greater safety measure for their employees. So that's gone well.
And then the Covid sites, whether whether we started testing in having to make pickups in parking lots and and be adapted from that perspective same is true for for a lot of the the vaccination sites now so that that is continuing nicely.
But I'll give you. Another example, you asked about the pipeline, yes, we've got the we've got an internal committee I think any company that wants to make sure that they remain relevant tomorrow has to figure out what what do we need to innovate and how do we need the change in order to be ready for tomorrow.
And that was that was one thing that we really that was one of the few things of that we certainly didn't have going here within stericycle that we do now in terms of new product New service development and and that the that group is certainly active and I'll give you. An example, while it's not headline news.
Just adapting and enhancing the consulting capabilities that we're providing our independent customers you know its extremely appreciated by them and it's something that they were looking for.
So it's it's it's an enhancement that was necessary, but that came because we realized we do have to change in order to meet their unmet needs. So thanks for the question.
Great. Thanks.
And the next question will come from Alexander Leach Ehrenburg capital markets. Please go ahead.
Hi, guys. Thanks for taking my question.
My questions go answer the net in the Q&A already but maybe.
Maybe if we just shift a bigger picture question.
How are you guys thinking about the potential transition to significantly more remote working off some of the pause.
On the American and.
Potentially the impact of it could have on on the volume school secure information destruction.
Yeah, I think that's that's of Great question, Alexander and thanks. Thanks for.
Thanks for asking it I think I think what we're talking about are a couple of things. So first we know that about 77 per cent of all companies out there currently well before the pandemic had some type of of capability for their employees to work from home. So it's not a new concept. The concept is is you know certainly we all under.
The stand at one point in time, we all were forced to be at home, but so the thought is does work from home you know how does that translate into office from home and we are engaged with many customers who.
Who are very concerned about the the potential information that if some of them was in an office on the third floor of the building would walk down the end of the hall and.
Make sure that their paper was was put into of Ben so that it can be handled appropriately.
There is of concern for folks generating paper at home. So we're in where it's part of that pipeline. If you will that that Scott had the just asked about we realize that we're going to need to come up with with the better solutions for our customers in order to be able to control that right now we have many companies where employees stop by the on.
They shouldn't bring the paper in and we continue to make the pickups. There. So we're getting adapted to it but but they're obviously, we need to continue to focus on that and as you had said effect on tonnage.
Anytime that people earn at work generating paper anytime that there's there's those type of the AR of circumstances, obviously it will affect our tonnage we were a company that on average did about 700 of 750000 tons of the of paper per year S. O P paper and you know right now.
I think I think we finished 2020 somewhere around I want to say 560000 tons. So there was the decline.
And as a result of that.
That's a direct result of the fact that the that people aren't work of generating paper.
Sure sure. Thanks, so interested to get your thoughts on the that's it from me. Thanks.
Ladies and gentlemen.
These are of question and answer session.
I would now like to turn the conference back over to Cindy Miller for any closing remarks.
Yes. Thank you Chad so to everyone listening to this call. We greatly appreciate your interest in Stericycle and your shared excitement for our future. So thank you very much.
And thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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