Q2 2021 Stericycle Inc Earnings Call

Good morning, and welcome to the Stericycle, Inc. Second quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal of a conference specialist by pressing the star key followed by the route.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on your Touchtone phone.

Net draw from the question queue. Please press Star then 2 we ask that you limit yourself to 1 question and 1 follow up please.

Please note this event is being recorded.

Now I'd like to turn the conference over to Andrew Alex Vice President Investor Relations. Please go ahead.

Good morning, and thank you for joining Stericycle of 2021 second quarter 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 goal or similar expressions, we are making forward looking statements.

Looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are therefore subject to risks and uncertainties. Our actual results could differ significantly from those described in such forward looking statements factors that could cause our actual results to differ are discussed in.

The Safe Harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U S Securities and Exchange Commission.

Our past financial performance should not be considered a reliable indicator of our future performance and the 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 of applicable U S. GAAP measures. Please refer to the schedules in our earnings press release, which can be found on Stericycle Investor Relations website at investors that Stericycle Dot com.

The prepared comments for today's call of correspond to an earnings presentation, which is also available at Stericycle Investor Relations website throughout the call. We may reference specific slides from the presentation. This call is being recorded and a replay will be available approximately 1 hour. After the end of the conference call at the day until September 3rd 2021 the act.

A replay of the call dial 87734, 475 to 9 and enter the replay access code 67, 2 to 399, a replay of the webcast will also be available on the Stericycle Investor Relations website.

Time sensitive information provided during today's call, which is of Craig on August 6.2021 may no longer be accurate at the time of a replay any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of Stericycle is prohibited I'll now turn the call over to Cindy Miller.

Thank you Andrew Good morning, everyone and thank you for joining our second quarter earnings call.

Like to thank our team members for their continued dedication to protecting what matters because of our team members' efforts and their focus on serving our customers. We delivered strong and continued revenue growth in regulated waste and compliance services and secure information destruction.

We also delivered solid cash flow driven primarily by operational performance.

Also pleased to announce that we've achieved a significant milestone in our transformation journey at the beginning of August we launched of our North American ERP for financial and procurement processes and began the phase of deployment of the ERP for secure information destruction.

On today's call I will start by providing an update on a few of our 5 key business priority as a reminder, they remain quality of revenue of.

Operational efficiency modernization and innovation.

ERP implementation.

Debt reduction and debt leverage improvement and portfolio optimization.

I'll, then turn the call over to Janice, who will discuss our second quarter financial results. Following our remarks, we will take your questions. We.

We delivered a strong second quarter with total revenue growth of 12, 5%, which continues a trend of 4 consecutive quarters of total revenue growth.

In the quarter, we had organic revenue growth of 14, 4%.

Primarily driven by our quality of revenue initiatives and ongoing recovery from the pandemic.

Regulated waste and compliance services had organic revenue growth of 7.6% comprised of 6.4% growth in North America, and 12, 2% growth in international.

Secure information destruction had organic revenue growth of 34, 2% comprised of 31% growth in North America, and 72, 2% growth in international.

As a reminder, secure information destruction was significantly impacted by the pandemic in the second quarter of 2020 experiencing significant reduction in customer stocks. Since then this business has continued to recover as we increase customer stops.

Like many organizations, we too have been impacted by labor shortages, particularly driver and operational team members to date, we are addressing our internal needs through 3 main areas 1 recruitment.

2 market competitive compensation and benefits and 3 employee engagement and retention efforts.

In the first half of 2021, we expanded our internal recruiting organization to target attract and hire new team members over the past 2 years, we've been focused on ensuring that all of our team members are competitively compensated for the value they provide stericycle through ongoing market based wage.

Estimates.

I'll now turn to our North American ERP deployment at the beginning of August We went live in North America with ERP capabilities for financial and procurement processes and began our phased commercial and operational deployment for secure information destruction.

This ERP will combine our core businesses onto 1 the state of the art North American.

Platform.

That will provide us with powerful digital data and operational capabilities to fuel our continuing transformation.

With the launch in August we've established a streamline and modernize foundation for finance procurement and analytics capabilities, including implementation of enhanced budgeting and forecasting capabilities. We also began deploying commercial operational and order to cash technology for secure information.

Nation destruction that we will leverage to drive our quality of revenue and operational modernization and innovation key business priorities.

For our deployment, we have a customer first business continuity mindset, the commercial and operational components are being launched in the phased approach, which allows us to minimize customer impact while continually improving the systems to further minimize risk from customer of our system disruptions team members that normally.

Support operational efficiency modernization and innovation initiatives are now assisting with the ERP launch and we added a temporary hyper care team comprised of several hundreds of team members. We believe these measures support our customers' transition to the new Stericycle platform.

And I couldnt be more proud of all of our team members' efforts in achieving this important milestone in our transformation journey.

We continue to execute on our fourth priority by reducing our debt and debt leverage ratio of.

By generating $149.8 million in operating cash flow through the first half of 2021 and further paying down debt.

We lowered our debt leverage ratio of the 3.06 times compared to 3.89 times at the end of the second quarter of 2020.

This significant improvement continues our progress towards achieving our long term debt leverage goal below 3 times.

This week, we signed an agreement to divest our operations in Japan for approximately $10 million, which will be reflected in our third quarter results.

Out of the progress the team continues to make in executing on our portfolio optimization initiatives as this marks our ninth divestiture since 2019.

Proceeds from this divestiture will be applied towards debt reduction.

I'll now turn the call over to Janet to review our financial results.

Thank you Cindy I will start by summarizing our second quarter results as noted on slide 4 revenues in the second quarter was $672.7 million compared to $598.2 million in the second quarter of last year of the $74.5 million dollar increase.

Secure information destruction of organic revenue growth was 52.2 million regulated waste and compliance of the services organic revenue growth was $33.7 million and the positive impact of foreign exchange rates was $15.8 million. These increases were partially offset by the impact of divestitures of 27.

$2 million.

As noted on slide 5 regulated waste and compliance services revenues were $463 million compared to $445.7 million in the second quarter of 2020, excluding the impact of divestitures and foreign exchange rates organic revenues grew 7.6% in the second quarter.

North American regulated waste and compliance services organic revenues grew 6.4 per cent of the 6.4% growth approximately 3 per ton was driven by quality of revenue initiatives approximately 2% from COVID-19 related revenues.

1.4 per cent from an increase in the average weight per container, which we believe is due to increased elective surgery waste and about 1 per cent from communication solutions. These were offset by about a 1% decrease in maritime waste services revenues.

International regulated waste and compliance services organic revenue growth was 12, 2% in the second quarter with the vast majority of the gains attributable to a higher pandemic waste volumes as we support our customers through the pandemic.

Secure information destruction services delivered revenues of $209.7 million compared to $152.5 million in the second quarter 2020, which reflects a 37.5 per cent increase.

Of the $57.2 million dollar of improvement organic revenues accounted for $52.2 million or a 34, 2% increase due to increased service stops as this business continues to recover from the impact of COVID-19.

In North America secure information destruction of revenues increased $43 million or 31.3 per cent compared to the second quarter 'twenty 'twenty for secure information destruction, we generate revenue in 2 ways servicing our customers 2 stops which comprised about 90 per cent of revenues in north.

Erica in the second quarter, and recycled paper, which comprised the remainder of North American revenues related to service stops increased $34.3 per cent compared to the second quarter 2020, as a reminder, in the second quarter of 'twenty 'twenty organic revenues significantly declined of secure information destruction was directly impacted.

<unk> by the pandemic and more restrictive shelter in place orders when evaluating the second quarter 2021 against pre pandemic results from the second quarter of 2019 service stops are down approximately 10 per cent.

Recycled paper revenues were up 2.6 per cent or about a half a million dollars compared to the second quarter 2020, the increase from recycled paper revenues reflected higher S. O P volumes offset by lower S. O P pricing this quarter compared to the second quarter 2020 of $3.6 million.

And international secure information destruction of organic revenues increased 72, 2 per cent compared to the second quarter 2020.

This increase was mainly due to increased service stops as this business continues to recover from the economic impact of COVID-19.

Income from operations was $55.6 million in the second quarter compared to income from operations of $24.9 million in the second quarter of last year. The $37 million increase was primarily due to 1 quality of revenue initiatives and operating leverage improvements along with the continued.

Ongoing economic recovery totaling $23.1 million to nominal divestiture and impairment charges in the second quarter of 2021 compared to the second quarter of 2020, which had charges of $15.2 million, partially offset by 3 higher labor costs of $8.7 million.

As a reminder, last year due to pandemic related business impacts we made a decision to defer our normal merit increases to the third quarter. This year, we returned to our normal cadence of providing merit increases in the second quarter. The merit of timing accounts for approximately $4.7 million of the difference with the room.

<unk> 4 million due to higher labor costs from the ongoing competitive wage environment to attract and retain team members.

In the second quarter 2021 we spent $26.7 million related to the ERP with about 65% in the operating expenditures and 35 per cent and capital expenditures on track with the overall annual estimated spend I previously shared.

S. GAAP net income was $29.3 million or 32 cents diluted earnings per share compared to a net loss of $4.5 million or 5 cents diluted loss per share in the second quarter of last year. The increase was mainly related to higher income from operations of 30.

The $7 million as explained earlier.

Cash flow from operations for the first half of 2021 was $149.8 million compared to $207.3 million in the first half of 2020.

As illustrated on slide 7 the year over year of decrease of 57.5 million was mainly driven by an annual incentive compensation payout of $38.6 million in 2020, 1 versus the nominal payout in 2020, and net higher income tax payments and other working capital changes in 'twenty.

21 of $6.5 million. Additionally, twenty-twenty experienced favorable cash flow from nonrecurring items, including an advanced received on the service agreement related to the divestiture of the domestic environment solutions business in 2020 of $19.2 million and government related.

Payment deferrals in 'twenty 'twenty of $15.7 million associated with pandemic related relief. These were partially offset by lower interest payments of $22.5 million, mainly as a result of lower debt balances.

Adjusted income from operations was $105.7 million or $15.7 per cent as a percentage of revenues up from $85.3 million or 14, 3% as a percentage of revenues in the second quarter of last year adjusted income from operations improved 140 basis.

Points due to quality of revenue initiatives operating leverage improvements and the continued ongoing economic recovery, which contribute approximately 210 basis points and divestitures of lower margin businesses, which contributed approximately 60 basis points and these improvements were partially offset by <unk>.

Higher labor costs of approximately of 130 basis points.

Adjusted diluted earnings per share was <unk> 67 cents compared to 46 cents in the second quarter 2020 as illustrated on the bridge on slide 8 the 'twenty 1 cent improvement was due to the following.

13 cents favorability from higher adjusted income from operations 5 cents favorability from a lower effective tax rate, primarily due to a higher income with comparative levels of non deductible expenses year over year Tucson favorability from interest expense, which was mainly result of lower debt balances and 1 sense favorability.

For foreign exchange rates, our second quarter DSO as reported was 56 days compared to a DSO of 46 days in the second quarter 2020, when excluding divestitures as of June 30th 2021 from the trailing 12 months' DSO calculation DSO was 56 days in the second quarter 2021 compared to <unk>.

<unk> 51 days in the second quarter 2020 short term movements in revenues of receivables related to the impacts of the pandemic are impacting DSO year over year.

Capital expenditures in the first half of 2021 were $59.7 million compared to $74.6 million in the first half of 2020. The difference was mainly driven by lower ERP capital expenditures in 2021 compared to the first half of 2020.

For full year 2021 we now anticipate spending of $140 million to $160 million in capital expenditures. This represents the change from our previously shared range of 160 to 180 million, mainly driven by expanded timelines do the supply chain delays.

Free cash flow for the first half of 2021 was $90.1 million compared to $132.7 million in the first half of 2020.

The $42.6 million decrease was due to lower cash flow from operations, partially offset by lower capital expenditures as explained earlier.

As shown on slide 9 at the end of the second quarter, our credit agreement to find debt leverage ratio was 3 point O 6 times, an improvement from $3.8 9 times as of June 30 of 2020 and below our maximum allowable ratio of 475 times net debt was reduced by $97 million.

In the first half of 2021 to approximately 1.65 billion.

Although we still operate with uncertainty due to the evolving recovery from the pandemic I would like to provide some insights into what we see emerging related to third quarter revenues as well as anticipated European related expenditures for the rest of the year.

Looking forward to the third quarter 2021 it's important to remember that the pandemic continue to impact portions of our business in the third quarter 2020, but less so than during the second quarter 2020. After normalizing for the impact of divestitures on revenues in the third quarter 2020, which were approximately $19.7.

From the expert solutions in Argentina businesses, and excluding the impact of of foreign exchange rates, which had been favorable for the past couple of quarters on revenues, we anticipate generating consolidated organic growth in the mid single digits in the third quarter 'twenty 'twenty 1.

Regarding the ERP as Cindy mentioned, we have launched the North American finance and procurement portion of our ERP and began our phased deployment for secure information destruction. As noted on slide 10, we are on track to spend approximately $75 million to $85 million on the ERP implementation in 2021.

Which is in line with the ERP spending range I previously shared beginning in the third quarter 2 of the remainder of 2021, we also estimate having an additional $30 million to $35 million of ongoing <unk> operating expenses the.

Getting in 'twenty 'twenty, 2 we estimate the total annualized ongoing operating expenses for running the new system to be $50 million to $60 million. These 2021 and 'twenty 'twenty 2 ongoing I T. Operating expenditure of ranges are in line with the estimates I previously provided.

Following the phase of deployment of secure information destruction, we plan to implement the North American ERP for regulated waste and compliance services and 2022.

While the first few days of our ERP deployment are going well as with any major system implementation of our ERP has the potential to cause disruption, resulting in a potential customer impacts and additional costs.

Cindy mentioned this week, we entered into definitive sales agreement to divest our business in Japan for approximately $10 million revenues and EBITDA of Japans operations, which are recorded in international regulated waste and compliance services were approximately 1% of our consolidated total for the second quarter 2021 the diverse.

Stitcher will result in a third quarter non cash pretax loss of approximately $15 million. Finally, we remain committed to our long term outlook as summarized on slide 11.

I will now turn the call back to Cindy.

Janet.

Out of all of our team members for their continued execution against our 5 business priorities the.

Steady improvements in maturing this organization throughout the second quarter have led to double digit organic growth achieving a significant transformation milestone by beginning the deployment of our North American ERP system.

The progress in improving our debt leverage ratio and continued portfolio optimization.

Before we open it up for questions I'd like to thank our team members and our customers and the communities, we serve and our shareholders for their continued trust and having stericycle protect what matters operator. Please open the line for Q&A.

We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone zone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then 2 we ask that you limit yourself to 1 question and 1 follow up so the first question is from Sean Dodge.

Of RBC capital markets. Please go ahead.

Okay.

Hey, Good morning. This is Thomas Miller on for Sean Thanks for taking the questions.

So the as we kind of think about the longer term revenue growth guidance.

Maybe could you talk about a little bit about the trends you're seeing across the core medical waste business I know you've mentioned before some changes being made about how you approach sales of new account add sort of starting to see a lift from that and I guess on an account basis do you have more customers now than you had 5 or 6 quarters ago.

You know I think that takes.

How much of that question I think a couple of things that we are seeing is we're getting to a point where in order for us. The continue to grow and we are looking towards that L. R. P of of the 3% to 5% revenue growth. We've got to continue to hit on our quality of revenue initiatives.

So for US we are seeing a little bit we are seeing a return to some of the elective surgery levels, we've seen before in regulated waste. However, we're still not.

Seeing maritime business back yet and so you know kind of 1 is is.

Where we're seeing good things on 1 side and then you know still of lagging portion of the business or a portion of revenue on the other but I think if we look for the long term right.

Right now I couldn't be any more excited about the launch of the ERP, where we can really continue to drive more of our quality of revenue initiatives, but quite frankly of the ERP is really going to help us on all of them on all of the of the business priorities that we're looking at whether it's you know modernization and some of the innovation things. So I think.

I think a lot more to come as we get through the ERP successfully and then be able to kind of hone our skills of a little bit more and in our ability to to harness data.

And then you know make it bring some good things to us.

Okay. That's helpful. Thanks, and then maybe on the margins.

We're making good progress there and I know, you're not providing guidance, but can you could you give us a sense of how you expect EBITDA margins to trend over the remainder of the year.

Have you got the benefits of the operational initiatives you've been working on and then yes.

The <unk> restarted the ERP of notes associated costs. So on on the non-GAAP measures do you think of you, mostly offset that with the cost savings you've been able to generate or should we be expecting margins to come back in a little bit yeah. So first I'm going to start with the long term look of what we see with this business and then go to what's happening. This year. So first of all you know what.

We're driving to expand free cash flow, which is primarily going to be driven by margin expansion, which it gets us to that at least $400 million by 2025 in the year, what we're going to see is a flip of costs that have generally been running below the line moved to above the line. So as we continue to take cost adjusted.

Out and move them into normal operations of <unk>.

Justin income will have a shift and that's at $30 million to $35 million that I mentioned in my prepared remarks. So we're gonna have to start looking at GAAP. Excluding just a few discrete items is what our margin expansion number is because if you look at adjusted Youre going to see that movement. So that's that's the most ex Nick significant thing.

I see happening through the rest of the year.

Okay, that's very helpful well from me.

The next question is from David Manthey of Baird. Please go ahead.

Thank you and good morning.

Janet should we assume that you keep.

The legacy systems running parallel to the ERP through most of 2022.

Should we think about the the.

The SG&A step down I know, that's a ways off but when we get into 2022 is that when we see it or is it straight through the year. Yeah. We thank you sort of the question on the legacy application. So when you do of transition like we're doing in North America, you do need to keep the legacy going and as I've mentioned before the legacy applications all support our.

International operations or a good portion of our international operations. So we're going to have to keep them going until we move the our international operations to a modern platform as well so I would say, it's a it's a good projection to save through most of the 20, if not all of the 'twenty 'twenty..2 you will see that legacy cost day, that's why we indicate that the $50 million to $60 million an increase.

A mental on top of that legacy I T cost.

Okay, and then to be clear on the Capex statement that you made of you.

Seeing some supply chain delays, maybe you can clarify that but.

The the capital expenditure of changes that you're talking about here.

None of those are related to ERP, but maybe you could outline of what they are related to and why you have to be happy too. So what we're seeing is that most of the delays or in the debt.

The dozens and dozens of maintenance projects, we're doing not the core growth projects, we're working on or the ERP. So when you add up of dozens of work we're doing to refresh our operation can do the what I call. The normal ongoing we're seeing some delays, which are sort of adding up to that change in cash, but our core growth initiatives and the E. R.

P or are on track.

Thank you very much.

Yeah.

The next question is from Michael Hoffman of Stifel. Please go ahead.

So this is where you get creative and tried out of 7 questions of 2 how're you doing Cindy.

Thank you Michael.

Michael you're you're getting pretty good at debt, though yeah. So.

Just to help us on the 30 to 35 million, which turns into the 50 to 60 next year.

Where do we put that but and SG&A and D&A of how much splits between the 2 and do we step up.

Take <unk>, and then add that to it because of.

Good basis to sort of how to think about it.

Well, so and and I'll I'll direct you. If you go to 1 of the slides in our decade of slide 10 that 30 to 35 will be in the second half of the year and $8 million to $10 million will be depreciation expense of that and the rest will be basically SG&A and then the $50 million to $60 million has the similar run rate for an annualized share.

On depreciation for the next year and then that is that is essentially normal operating SG&A expenses.

And use of <unk> as the baseline to attitude of Theres not from something going on sequentially.

Some of them millions of items cost yes.

Yeah, just if I started with really cute on the total.

Total yeah, we had the legacy systems running and then we're adding this on top of the right right. Okay. And then the second question I appreciate the year over year direction on on sales of there's so much noise in the year over year, what's the trend sequentially from <unk> into <unk>.

I think it's probably in the same range as what we're seeing we have so many dynamics going on Michael its interesting to watch. So it really is dependent on maritime you know the cruise has started the sale, but now we're watching you know with the Varian impact will be so so we kind of took a middle of the road. If you will on that range of what we see given all of the.

The dynamics that seem to be emerging in the business. So it'll be kind of in the same range, but the these key drivers of things open up we have an opportunity to exceed it if businesses started to shut down again and you know we go to shelter in place orders, which we don't think all of that happened. The you know that would be an impact on it. So it is a hard business.

To predict right now because both of our core business are acutely impacted by Titanic trends and in multiple ways.

And Michael just 1 more thing to think about I think from a sequential perspective. If you were to talk to US a couple of months ago, we were definitely anticipating and we saw everybody's, saying Hey returned to work at September <unk> returned to work of August 1st returned to work.

You know of October 1.

And plans were coming true there was anticipation of schools opening and then just recently if you look at most recent headlines in the last 2 weeks.

You know that almost as flip flopped. So I think so I think for us.

We monitor the situation as closely as we can and then the 1 thing I think that we did at least developed some muscle memory 4 is being able to adapt to whatever those circumstances are so I think I think that just highlights the little bit about what we're looking at and what what the Janet had mentioned.

Terrific. Thanks.

The next question is from Scott Schneeberger with Oppenheimer. Please go ahead.

Thank you good morning.

Cindy I think I'll start out I'm just curious.

That was just discussed there's a lot of noise from the year over year comparison, and what's going on but on pricing.

You alluded to some of them some some labor inflation pressures.

Are you able to cover that and that's that's kind of in the direct question and the higher level question is how are you trending overall in the.

The revenue quality on specific pricing initiatives for your large and small customers. Thanks.

No a great question, Scott and a couple of things on pricing I think I think we're getting more and more astute in the marketplace with our marketing team, our commercial team and our operators in understanding.

The dynamics of the different markets across the U S. In both of the businesses and then understanding.

Standing what is that what is the fair value of what's the market value for the services and the values of the what we bring to our customers I think as we as we continue to see this ebb and flow as.

As we improve our quality of revenue and that includes improving contractual language, where we're where we're kind of centralizing it standardizing it getting more process behind it in comparison to how we had been a few years ago.

Certainly we build into their opportunities for out to for our customers to grow with Stericycle, but then also for us to be covered for different things. So I think we're getting we're maturing better from a commercial organization to be able to to stand up those the contractual relationships whereby we.

Can we can cover ourselves to a greater degree than maybe we had been before so I think in terms of price and where are we I would say that we learned a lot from we went from what we win but on any of the contracts, where we don't we learned an awful lot from that too and I think that helps us keep in tune with what is going on in the March.

Kit.

And yes, I just like to add in of the 6.4% grocery saw in North America regulated waste and compliance services about 3% of that was driven by the quality of revenue initiatives and then of about 2% from the Covid related revenues and about 1.4% from an increase in the average weight the container, which we think.

It's due to elective surgery increase so those quality of revenue issues of dropping to the bottom line and they include get gaining new business as well as pricing for value.

Got it thanks.

And then in.

Yeah, just and Cindy back New I guess, it's been a year now since you had those 3 newly introduced services 2 of them were very COVID-19 related the other was a the express from priority engine.

The information I'd rather of a.

Kind of a progress report on existing and thoughts on what may be coming because I know that's been a personal net.

You've had in that focus area for the company.

Yeah, I think a great question and thanks for bringing that up you're referencing our non health care PPE customers. So the non traditional warehouses those are non traditional health care customers running warehouses and distribution.

The facilities.

No you're asking their people to to use PPE equipment, and then you're talking about the the Covid first it started as testing sites that were popping up all over the place and now it's more of the vaccination.

Distribution sites, you know they continue to weaken.

We continue to to do very well if those are in terms of those adding to our quality of revenue and to the organic growth agenda had referenced.

I think.

And then there's also the you know we as the vaccines continue to roll out and move across the the U S really across the World. You know we are well positioned for the ebbs and flows of those dynamics as well will there be more vaccines. We don't know it depends on I guess, what headline you read so I like where we're positioned with those.

And then I think as we move through right now we're very focused on the ERP. Most importantly, minimal customer interruption is really the focus right now.

But but we're always thinking about what are what will our new datasets give us in terms of the ability to continue to innovate.

So we're we'll be very ready to announce any of the types of changes and new services that we have but but I think it's suffice it to say, we're putting in the ERP to make sure that we can become more nimble.

And really get ahead of our customers and what they might need.

Got it sounds good thanks.

The next question is from Gary Bisbee of Bank of America Securities. Please go ahead.

Hi, good morning.

The first question just on the balance sheet Cindy you talk about your priorities and you can see continue.

Can you say debt reduction of its it's a pretty amazing job you've done getting the basically right to that 3% you targeted in the.

2 years ago that seemed like like Oh.

Just a lot to do when you're there. So when do you change that from debt reduction to <unk>.

More broadly about capital allocation and I know the target is still getting below 3 times next year the you're after.

How are you thinking about sort of updating that or what what are the longer dated target from here would be do you ramp up M&A do you repurchase stock did you want the leverage to go well below 3 I guess, just how are you.

All of that evolving thank you.

No great question, Gary and 1 that we do talk about you know when when I'm when I got here and took over and as well as then with Janet the rest of the executive leadership team and the board I'm getting the balance sheet stronger to be in a position to have to have choice and to be opportunistic.

And the market was a priority and I am very proud of the work that the team has done.

It's just being you know steadfast focus on that improvement in and quite frankly, you know you don't you don't just improve and that our balance sheet as everybody knows it's because every every other process. Every other business unit is really focused on doing the right things. So very proud of that but I also would would bring.

I think Gary of everybody's attention, we continue to invest in the company, which which it isn't it isn't just about about every dollar of debt reduction.

And I think if you look at the ERP investment if you look at our continued rollout and.

And if you as to what Janet had talked about on some of our capital expenditure projects. We are looking to modernize we are looking to upgrade to automate to do a tremendous amount of things internally, while paying down debt. So so I think more to come in and I think there'll be an opportunity with the stronger balance sheet for us.

To be of a bit opportunistic as we look to the future and as we make those changes will be more than happy to 2 share of that info with everyone. But certainly we are focused on a lot of different things right now.

And then Gary this is Janet regarding the AR the debt leverage ratio of we're real pleased from where it is and you pointed to our guidance of about 2022.2023 to get below 3 and we are focused on that and we got there close to their faster I would want to point out with the movement of the I T costs above the line there.

No longer an add back of the ERP development. So that is a factor for the debt leverage calculation.

Okay, Yeah fair enough and then just on the higher labor costs I understand the big chunk of that was the timing of your merit increases, but how are you thinking about you know labor shortages and wage rates I'm sort of looking forward over the next few quarters.

Is this an issue is that 4 million of good run rate to use FERC for higher wages or is the risk of more of that and how how material is the shortage of drivers and other people that you. You commented you could this get worse as the essentially the question. Thank you yeah.

Gary I think I think that's of Great question and 1 of the things that I think stands out to me. There's 2 things first 1 is stericycle is not immune to what's happening in the marketplace by any stretch of the imagination and you know it is as as.

As we listened in here, whether it's drivers or its plant workers or quite frankly, I don't know that I've walked into any place over the last couple of months, where I didn't walk in and there'll be of help wanted sign in the window. So so we're not immune to that but what I do like the point out on the labor shortage pieces.

Say, we've been focused on on our really taking a look at our competitive wages.

For the last probably 2 years are really getting more in touch with the with with the specific markets and and trying to make sure that we improve our our compensation in our benefits packages.

And then if you will just at the very beginning of this year, we brought our recruitment and hiring in house. So whether it's you know for recruitment.

We're continuing to look at comp and Ben and then also for our engagement and retention initiatives. So so I think it's something we've been focused on and I'm very proud of the efforts that we have that we've done and I'm and I'm really proud of our ability to continue to do our best for our customers right now under under some challenging condition.

Janet anything else you'd like to add.

So yeah. Thanks.

Thanks for pointing out that the 4.7 was due to the merit timing.

And as we look at compensation, there's a couple of drivers here..1 is the the key underlying competitive pressures with Cindy says, which we're addressing the other is that we we did we did ramp up and for the this quarter to the next to put the ERP and as you've as you've heard we of we've added support. So those are kind of 2 dynamics going on there but.

But we do have the ERP and we do have the team that's usually focus on productivity working on that so your best defense of that is modernized systems and productivity improvements that leverage them. So we're just you know we just put it in this week sort of at the beginnings of that but those are our opportunity areas and tools that we didn't have you know just a few day.

[noise] ago to help us with this challenge.

Okay. Thank you.

Thank you Sir.

The next question is from Jeff Silber of BMO capital markets. Please go ahead.

Thank you so much.

1 of the prior answer as he just mentioned quickly the delta of area and I was wondering if you could drill down a little bit how has that impacted the different business lines as an example of.

In the Sip business I'm, just curious if you had some customers that started up.

Creasing services and might be holding back now and they decide to open up their offices a little later.

Yeah, I think Jeff.

Jeff Great question, what we are really happy with in terms of shred. It is how it continues quarter over quarter due to improved with the customer stop and as businesses are coming back and they are calling and they and they do once they understand its an essential service and to keep their businesses compliance is so so we are good.

Of those calls so I'm very very pleased with that what I would say more with reference to Delta variant I think we we are eagerly anticipating when business is you know do bring employees back into offices when schools do open back up when universities do go back to more of a you know on cash.

In in classroom type of settings, because as you know you know that obviously isn't the indicators and would be of help in terms of in terms of stops and volume. So you know like I said, a couple of couple of months ago announcements of of the businesses going back big businesses starting to go back.

You know, let's use September purchases as an example in just in the last 2 weeks with the Delta variant discussion.

You know, there's there's some changes to that so I think I think we're very pleased with with how the business is recovering but when will it get to full recovery of when we hit normal I think I think that story hasn't been written yet.

Okay.

And if I could switch phase 2.

The ERP implementation I know, it's really early but in the past.

The management team had talked about the inability to get timely information has that improved at all of your getting reports quicker. So you can make decisions quicker.

So the this is janet the thanks for the question. So we will get reports quicker. It is the first week of I'll.

I'll give you. An example of like someone came in and said I'm seeing I'm seeing revenue come in like I had to wait to the end of the month et cetera, but there's a lot of tuning to do its just the first week. So theres nothing actionable now from it but the promise is there and the team is getting decided I'm excited with the army of the possibility.

Alright, that's great to hear thanks, so much.

The next question is from Kevin <unk> of Barrington Research. Please go ahead.

Good morning.

In relation to a relation to the ERP rollout I just wanted to ask about.

The change management initiatives around the which are always an important component in terms of.

The training and helping you get through that process.

Talk about your efforts on that.

From the investments that are being made in change management.

Sure I can start and then you know of Janet wants to chime in a little bit first with the ERP that training component of that change management 1 of the things that I said was a terrific change management catalyst for us.

I think the the very the the silver lining if there if anybody could have 1 out of the pandemic was you know how much we had to change the way we do business changed the way, we we interact with each other change the way businesses look at tomorrow, our business units.

That that happened starting last year. So I think I think we've developed a really good muscle memory in terms of hey, today is different than yesterday, and we need to be able to adapt our customers' needs are different today, we need to be able to adapt so I think I think we've had strong preparation for this.

I think the team has planned very well and very proud of our all of the folks that are associated with our internal rollout I think theres been Ben.

And I think unprecedented within the company kind of collaboration between departments to make sure that as as the systems rollout day by day that we continue to knock down of any of the potential.

Issues that have popped up so I'm very very pleased with with how internally, we're adapting to change I think I'm on a on 1 of our calls yesterday.

You know I've had some of the operators are just talking about you know where we just continue to get better and you know it's interesting too we have an ERP update call several times a day and as you know we're phasing out the ERP, we're rolling it through the U S with with shred it and.

And we have so many of our of our operators on the calls that have yet to face. The phase you know they they didn't get the phase yet the phases coming to them and we're learning so much from every day that I'm very very pleased overall and I know, it's early days, but certainly an awful lot of good things going on within Stericycle.

Janet any other comments about the change management go to I'm really excited about that question because it's the big passion for me change management and I think there's 2 aspects to it it's the hard concrete from too. This is how you did it before this is how you do in the future and then there's the human aspects of change and we of address both of those head on with the.

The dedicated change management team that has been supporting each of the processes plus an external partner to help us with that so for example on the hard concrete from twos, we feel purity maps of the customers of suppliers in the different roles in the business. We have built the hundreds of standard operating procedures and training them and we've rolled out Trey.

Both virtual and in the facilities for examples of the drivers were in the facilities before go a lot of it and with interactive in person training, which was the benefit of shifting this to an area, where we could get people out to the field to help with the training and then the human aspect of going through that what I used to do before its not how we do it today and how to help people.

With that change journey and also changed leadership training for our leaders to help them with that too and that has resulted in a very positive collaborative attitude.

Protein that's changed.

Okay, great well it sounds like a lot of thought and effort has gone into the change management. So thats good to hear and I just wanted to secondly, you asked about.

The last quarter you talked about.

You had started up a systematic approach to optimizing and standard.

The design of your medical waste facilities of needed to started the.

Implement that at a few facilities is that kind of ongoing as it kind of too new to be rolled out across all of your facilities going forward and what sort of operational gains or cost savings or are you seeing out of the.

Yeah, I think yeah. It its debt definitely anytime a company that debt as we've said, it's just the a patchwork of of 400 different.

400 different acquisitions.

The equipment looks different the facilities look different the layout is different how we process waste is different the containers are different.

And it really is a very large effort for us internally to try to standardize and.

And modernized as much as we can so we did talk about facilities and we continue with that with that process.

To make sure that whether it's it's it's upgrading or putting in new systems and new equipment.

And then if we're going to go ahead and put in new equipment. We go ahead and we've developed what we believe would be some with the engineering team.

What how should the facility would be laid out what's how can we maximize their productivity in every facility. So that continues and it remains a very big part of it as it's listed as 1 of the 1 of the key priorities. So anytime we're gonna put anything in 2 of the facility are modernized we certainly do look to see how we could see.

Standardize things so that we can gain all of the operational efficiencies that we should be.

The next question is from Ryan Daniels of William Blair. Please go ahead.

Hey, guys. The next big on for Ryan.

Thanks for taking the question.

The solid trends past couple of quarters with.

I'm wondering how much of this is kind of being driven by new client wins versus kind of existing client just coming back online I think stops the route.

And then it kind of regarding that all of it.

I was kind of cross selling those.

Those services has been with the our WCS.

Got you know very insightful question, Nick and I appreciate it.

Any time youre going to grow your business and you're looking for an organic growth strategy, you've got to have a healthy mix of both you have to show the customers are coming back and they're saying Hey, let's let Sam I'd like My service you get restarted, but then you also have to add the net new customer. So I'm I'm very proud of the of of the commercial group.

And how we're looking to do that so I'm going to say, it's a it's a healthy mix of both AR and then in terms of cross selling our effort. That's another that's a quality of of revenue initiative, where we needed we realized we needed to get the the commercial side of the organization understanding you know the full suite of services because we do have the 8.

Strong mix of of customers you know that need both so I think when you look at any of the organic revenue growth that we're that we've had it's because we're starting to hit on all of those cylinders, including cross selling new clients.

Having other other customers come back and restart their services. So so it's a it's a it's a mix of everything.

Great. Thanks, and then I guess, just I'm kind of a quarter over quarter decline in our WCS is there any kind of dynamics of call out there or is it.

Just kind of I guess, a little bit of seasonality in the Divesture chip saye probe of dynamic.

Yeah. So basically it's the seasonality factor when you're looking quarter over quarter. Our WCS is doing well during these times and you can see that with the the continuing focus and results. We're seeing from the quality of revenue initiatives the underlying dynamics in there.

We're of course of the maritime continues to lag underneath that but there's also of seasonality component to that.

Got you got sort of assume thanks guys.

Thanks, so much Nick.

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

Thank you take so to everyone listening on the call. We greatly appreciate your interest in Stericycle and your shared excitement for our future. Thank you very much.

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

Yeah.