Q4 2022 Stericycle Inc Earnings Call
Yeah.
Ladies and gentlemen, Hello, and welcome to the Q4 2020 to Stericycle earnings Conference call. My name is Maxine and I'll be coordinating the call today.
We would like to ask a question during the presentation you may do so by pressing star fleet by one.
I will now hand gives you aren't you Ellis Vice President of Investor Relations to begin and gene. Please go ahead when you're ready.
Good morning, and thank you for joining Stericycle 2022 fourth quarter earnings call on the call today will be Cindy Miller, our Chief Executive Officer, and Jan <unk>, Our Chief Financial Officer, a 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 other similar expressions, we are making forward looking statements.
Forward looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of 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 described in the safe.
Harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U S Securities and Exchange Commission.
Our past financial performance should not be considered a reliable indicator of our future performance and investors should not use historical results to anticipate future results or trends.
We disclaim any obligation to update or revise any forward looking statement other than in accordance with legal and regulatory obligations on the call. We will discuss non-GAAP financial measures for additional information and reconciliation to the most comparable U S. GAAP measures. Please refer to the schedules in our earnings press release, which can be found on spare cycles Investor relations website at investors.
Stericycle Dot com.
Repaired comments for today's call correspond to an investor 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 one hour. After the end of the conference call today until March 23 2023.
Replay information is available in the events section on <unk> Investor Relations Web site time sensitive information provided during today's call, which is occurring on February 23, 2023 may no longer be accurate at the time of a replay any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Stericycle is prohibited ill now turn the call over.
Cindy.
Thank you Andrew and welcome to our fourth quarter earnings call I'd like to start off today's discussion by thanking all of our team members and especially our frontline workers for supporting our customers and protecting what matters.
Pleased to share that our fourth quarter results were in line with our expectations. Our quarterly results included organic revenue growth of five 7% free cash flow generation of $139 million expanded margins reduced debt improved leverage and continued portfolio optimization as a company we can.
To focus on executing on our five key business priorities and I'll start with quality of revenue organic revenues increased five 7% led by secure information destruction, which grew 12, 2%.
<unk> waste and compliance services grew two 8% and in North America organic revenues grew seven 6% with secure information destruction, increasing 13, 2% in regulated waste and compliance services, increasing four 9%. These.
These results include the benefit from our service cost recovery fee and the enhanced recycling revenue surcharge that started in the first part of 2022.
These two pricing levers contributed approximately $10 million of revenue in the fourth quarter and $24 million of incremental revenue for the year. Since 2019, we have been working on transforming the commercial function to drive greater consistency and accountability throughout the sales process. The foundation of our commercial excellence.
Model includes the following.
One harmonizing over 120 Global sales Commission plans to a handful of sales Commission plan types that standardized performance expectations and incentivize revenue growth and margin expansion, while simplifying overall performance and plan administration to improving governance over <unk>.
Actual language to include competitive standard terms and conditions three redefining our value proposition to drive competitive differentiation and providing extensive training on value selling with a disciplined organic growth mindset for implementing a new deal review committee to ensure consistent disciplined Val.
<unk> based pricing contracting sales practices and governance.
<unk> launching a pipeline management process and tools to better forecast and manage opportunities in performance throughout the sales cycle, resulting in pipeline growth improved conversion rates and higher quality sales and six creating a data infrastructure as part of our ongoing ERP.
Deployment that allows us to draw greater insights into sales opportunities and service performance across the customer lifecycle.
With these foundational elements now in place we are advancing to the next phase of our commercial evolution to support our organic compounded annual revenue growth rate of 3% to 5%, which focuses on three key areas expanding service penetration improving customer implementation velocity.
And deepening customer partnerships by developing enhanced customer solutions. The first area is expanding service penetration draw.
Drawing from our newly created data infrastructure, we will leverage insights to win grow and retain customers through cross sell and up sell initiatives and targeted sales offerings, which we expect will increase the value we provide to our customers.
The second area is improving customer implementation velocity.
This is focused on accelerating speed to revenue by decreasing the amount of time. It takes from closing a deal to initially servicing customers.
The third area is deepening customer partnerships by developing enhanced customer solutions. We plan to continue to commercialize innovative solutions and products. We expect will drive additional revenue opportunities as we create safer and more sustainable working environment for our customers their employees.
And the communities in which we operate.
I'll now move on to our next key business priority operational efficiency modernization and innovation.
This has been a keen focus for our operations and engineering teams over the past four years as we opened four new Greenfield autoclave facilities and have made upgrades to existing auto claims incinerators shredders and facilities throughout our network and improved our fleet in 2023. These teams will concentrate.
Trade their efforts on three areas.
Infrastructure and system modernization.
<unk> replacement and route and long haul network improvements and.
And save shield container rationalization and modernization.
The first area infrastructure and system modernization continues to progress in 2023, our operations and engineering teams will be focused on finalizing the construction of our new state of the art incineration facility in Nevada. We believe this facility will set the bar for high capacity medical way.
Just incineration facilities in North America through its sustainable water usage design and technology aimed at minimizing emissions in 2023, we also plan to upgrade over 20 facilities and leverage and deploy new system capabilities.
The second area is fleet replacement and route and long haul network improvements.
We are focused on replacing and modernizing our trucks and trailers with more efficient vehicles. While this was hampered in 2022 by supply chain disruptions. We are starting to see more equipment deliveries route and long haul network improvements began in 2022, we have reduced long haul routes through a combination of removing.
Routes from our network strategically locating new facilities near our customers consolidating facilities and internalizing. Some third party, calling these investments are expected to improve our operational service model, which we anticipate will contribute to margin expansion over time.
The final area is our safe shields container rationalization and modernization project. As a reminder, we are transitioning from over 150 container types to less than 20.
To date over 250000 safe showed containers have been deployed in North America, and we anticipate completing the rollout over the next four years.
These award winning containers are coated with an antimicrobial protective which reduces the potential spread of infection, while minimizing odor. They also feature an improved and more durable design in standard sizes that are <unk>, and stackable, allowing for more efficient transportation and storage.
Turning to our ERP deployment, we are now four months into our regulated waste and compliance services pilot in Puerto Rico I am excited to share that the ERP is running smoothly as we have been able to onboard service bill and collect cash from our customers based on this successful pilot we.
The plan, our ERP rollout to the U S regulated waste and compliance services commercial and operational functions in the second half of 2023.
Now turning to debt reduction as a result of strong free cash flow generation and divestiture proceeds we reduced debt by $175 4 million and finished 2022 with a debt leverage ratio of 328 times a year over year improvement of 33 points.
We anticipate getting close to or hitting our three times debt leverage ratio objective by the end of the first quarter of 2023.
Finishing with portfolio optimization.
In December we divested our communication solutions business in North America for $45 million and in January we divested our sandy Pic plastics joint venture in Spain for $2 2 million.
These are our 11th and 12th divestitures since 2019, and we applied the proceeds towards debt reduction as a result, it has afforded us the opportunity to focus on core businesses in our key business priorities like the ERP deployment and other investments in the company communication.
<unk> solutions is the fourth and final divestiture from our legacy communication and related services business 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 as noted on slide five revenues were $674 million compared to $657 3 million in the fourth quarter 2021, excluding the impact of unfavorable foreign exchange rates of 15.
<unk> 7 million divestitures of $10 8 million and an acquisition of $2 1 million organic revenues increased $37 5 million of the increase secure information destruction organic revenue growth was $24 5 million and regulated waste and compliance services.
<unk> revenue growth was $13 million.
As noted on slide six regulated waste and compliance services revenues were $449 3 million.
Compared to $455 7 million in the fourth quarter of 2021.
Excluding the impact of foreign exchange rates divestitures, and an acquisition organic revenues for regulated waste and compliance services increased two 8%.
North America regulated waste and compliance services organic revenues grew $17 9 million or.
Or four 9%, mainly driven by our three pricing leverage which include pricing in existing contracts, new customer pricing and surcharges and fees.
Overall volume was flat with new sites volume growth being offset by a decline in pounds per site collected from hospital to National accounts, which we believe was mainly due to hospital staffing challenges.
International regulated waste and compliance services organic revenues declined $4 9 million.
Or five 3% in the fourth quarter. This decline was due to lower waste volumes compared to the fourth quarter of 2021.
Secure information destruction delivered revenues of $221 1 million.
Compared to $201 6 million in the fourth quarter of 2021, excluding the impact of foreign exchange rates organic revenues were secure information destruction increased 12, 2%, mainly due to pricing, including fuel and environmental and other surcharges and higher.
Paper revenues driven by Sop pricing for the full year of 2022, our global recycled paper volumes were about flat year over year.
In North America secure information destruction organic revenues increased $22 8 million or 13, 2% compared to the fourth quarter of 2021.
<unk> 13, 2% growth service revenues contributed 10, 5% and.
And recycled paper revenues contributed two 7% the service revenue growth was mainly driven by surcharges, including the fuel and environmental and the recycling recovery surcharge is recycled paper contributed approximately $4 6 million more than in the fourth quarter 2021.
Reflecting higher Sop pricing.
And international secure information destruction organic revenues increased $1 7 million.
Or six 1% compared to the fourth quarter of 2021. This change was mainly due to the surcharges.
Income from operations in the fourth quarter was $59 1 million compared.
Compared to $8 2 million in the fourth quarter of last year that $59 million increase was mainly due to the following.
Commercial pricing levers, resulting in revenue flow through of $32 million lower adjusted litigation settlements and regulatory compliance expenses of $17 8 million.
Lower bad debt expense of $6 8 million as we lowered the reserve in our allowance for doubtful accounts, mainly due to improved collections in the fourth quarter.
Lower annual incentive compensation expense of $5 million and lower self insurance expense of $3 4 million due to favorable trends in claims. These were partially offset by higher vehicle wage and utility related inflationary costs of approximately $18 $3 million in.
Additionally, in the quarter overtime cost savings, partially offset our higher head count costs as we focused on optimizing our staffing model and driving operational productivity throughout our organization.
Net income was $31 8 million.
Or <unk> 35 diluted earnings per share compared to a net loss of $17 2 million or 19 diluted loss per share in the fourth quarter of last year. The difference was mainly related to higher income from operations of $59 million.
Cash flow from operations for the year ended December 31, 2022 was $202 million.
Compared to $303 1 million for 2021, the year over year decline of $102 nine milling was mainly driven by the FCA settlement payments of 81 million timing of vendor payments of $32 3 million in higher interest payments of $15 6 million.
These were partially offset by improvements in DSO of two days, which has translated into approximately $16 million in operating and net working capital improvements of approximately $10 million.
Adjusted income from operations was $90 6 million or 13, 5% as a percentage of revenues compared to $64 2 million or nine 8% as a percentage of revenues in the fourth quarter of last year adjusted income from operations increased 370 basis.
<unk>, mainly driven by revenue flow through of 480 basis points lower bad debt expense of 100 basis points lower annual incentive compensation expense of 80 basis points and lower self insurance expense of 50 basis points.
These were partially offset by higher vehicle wage and utility related inflationary costs of approximately 270 basis points.
Adjusted diluted earnings per share was <unk> 60.
Compared to 38 cents in the fourth quarter 2021 as illustrated on the bridge on slide eight excluding the impact of foreign exchange rates divestitures, and an acquisition of a penny the remaining 23 year over year increase was driven by 26 from revenue flow.
Through nine from favorable SG&A expenses, mainly due to lower bad debt expense of <unk>, <unk> and lower annual incentive compensation of <unk> three.
<unk> <unk> from lower self insurance expense and three from taxes and other.
These were partially offset by 15.
Higher vehicle wage and utility related inflationary costs and <unk> <unk> from interest expense cap.
Capital expenditures for 2022 were $132 2 million compared to $116 9 million for 2021, which is in line with the guidance I previously shared of $125 million to $135 million.
Free cash flow for 2022 was $68 million compared to $186 2 million in 2021 as noted on slide nine the year over year decline of $118 2 million was mainly driven by the lower operating cash due to FX CPA settlement payments of 81 million.
And higher capital expenditures of $15 3 million, mainly attributable to the timing of cash payments and operational infrastructure investments.
As a reminder, in the third quarter I provided guidance and how we would achieve free cash flow expansion of $100 million to $120 million from the third to the fourth quarter.
Sequentially, our free cash flow improved approximately $105 million as follows.
$47 million from improved collections, which was within our expected range of $40 million to $50 million. This improvement was driven by substantially catching up on our North America secure information destruction billing and collection efforts from the ERP deployment in 2021.
$25 million from lower interest payments, which was in line with expectations $10 million of lower capital expenditures, which was within our stated range of spending 7 million to $17 million less in the quarter.
Approximately $20 million less in vendor payments, which was below our target of $30 million.
Our fourth quarter DSO as reported was 56 days compared to 58 days in the fourth quarter 2021.
Sequentially from the third quarter 2022 to the fourth quarter DSO improved seven days.
As shown on slide 10 at the end of the fourth quarter, our credit agreement defined debt leverage ratio was 328 times sequentially from the third quarter 2022 to the fourth quarter, our leverage ratio improved almost half a turn net debt was reduced by $175 4 million.
In the fourth quarter compared to the third quarter, reducing net debt for the year ended December 31, 2022 to approximately 146 billion.
Turning to the full year results on slide 12 revenues were $2 $7 billion compared to $2 $65 billion in 2021, excluding the impact of unfavorable foreign exchange rates of $53 4 million divestitures of $52 7 million and an act.
Position of $8 1 million organic revenues increased $155 8 million.
The increase secure information destruction organic revenue growth was $129 million and regulated waste and compliance services organic revenue growth was $26 8 million when 2022 and 2021 results are normalized to exclude the revenues from our most <unk>.
Recently divested businesses communication solutions, and Fannie Pic plastics revenues were approximately $2 $64 billion in.
In 2022 compared to $2 five 2 billion in 2021.
Income from operations for the year ended December 31, 2022 was $153 7 million compared.
Compared to $72 3 million in 2021, the $81 4 million increase was mainly due to commercial pricing levers, resulting in revenue flow through of $116 7 million lower adjusted litigation settlements and regulatory compliance expenses of $63.
$1 million as we had accrued approximately $80 million for the CPA settlement expenses in 2021 versus approximately $10 million in 2022.
Lower North America, ERP implementation operating expenditures of $39 7 million.
Lower self insurance expense of $11 7 million and lower annual incentive compensation expense of $9 9 million.
These were partially offset by higher vehicle wage utility and facility related inflationary costs of approximately $65 5 million higher ongoing operating costs of $33 million associated with our August 2021, ERP deployment now reported and are ongoing.
Expenses higher head count Onboarding and overtime costs of $27 million and higher bad debt expense of $17 4 million.
Net income for 2022 was $56 million or <unk> 61 diluted earnings per share compared with a net loss of $27 8 million or <unk> <unk> diluted loss per share in 2021.
The difference was mainly related to higher income from operations of $81 4 million as previously discussed.
Adjusted EBITDA was $432 2 million in 2022 compared to $457 $8 million in 2021, the $25 6 million dollar decline was mainly due to higher ongoing operating costs of $33 million associated with our August .
2021, ERP deployment now reported on our ongoing expenses in 2022 communications solutions since Fannie Pic plastics divested operations generated approximately $13 million and adjusted EBITDA 102022 results are normalized to exclude results from these divested businesses.
2022, adjusted EBITDA would have been approximately $419 million adjusted.
Adjusted diluted earnings per share was $2 <unk> and 2022 compared to $2 19 in 2021.
As illustrated on the bridge on Slide 15, excluding the impact from foreign exchange rates divestitures, and an acquisition of <unk>. The remaining 90% year over year decrease was driven by 51 from higher vehicle wage and utility related inflationary costs 26 cents from higher.
Our ongoing operating costs associated with our August 2021, ERP deployment that reported in our ongoing expenses 21 from a higher head count Onboarding and overtime costs and three from interest expense. These were partially offset by 73 cents for revenue flow through 11.
The nonrecurring typical ERP startup challenges in the third quarter, 2021, and <unk> <unk> from lower taxes.
As anticipated and discussed in our earnings call for the fourth quarter 2021, our adjusted EPS of $1 25 in the second half of 2022 was better than our adjusted EPS in the first half of 2022 or <unk> 79.
The following 2023 guidance includes forward looking statements as contemplated in our safe Harbor provision as referenced at the opening of this call.
Our guidance for 2023, which considers the current macroeconomic headwinds and healthcare staffing shortfalls as shown on slide 16 and is as follows first we expect to grow organic revenue, 3% to 5% on a base of $2 64 billion, which has been normalized for divestiture.
<unk>.
Second 2022, adjusted EPS was $2 <unk>.
After normalizing 2022 results for our two recent divestitures the adjusted EPS baseline is $1 94.
In 2023, we expect to generate adjusted earnings per share in a range of $1 75 to $2 <unk>.
Anticipated underlying operating margin growth is expected to be tempered by higher incentive and stock based compensation costs of approximately 20% to 25.
And higher income taxes and interest of 10 to 15.
Third 2022 free cash flow was $68 million. After normalizing 2022 results for our two recent divestitures there free cash flow baseline is $55 million.
As a reminder, we paid $81 million of the CPA settlement in 2022.
In 2023, we expect to generate free cash flow in a range of $175 million to $205 million. This takes into consideration our expectation that in 2023, we will pay approximately $10 million for the remaining portion of the CPA settlement and $5 million to $10 million.
And adjusted F CPA monitor and related costs.
Fourth we expect cash paid for capital expenditures of $125 million to $145 million.
Fifth as Cindy mentioned, we anticipate getting close to or hitting our three times debt leverage ratio objective by the end of the first quarter of 2023.
We are also providing our updated long term outlook as shown on slide 17, which takes into consideration current anticipated macroeconomic trends and the impacts of recent divestitures and includes forward looking statements.
First we continue to expect to achieve a compounded annual organic revenue growth rate of 3% to 5%.
Going forward, we will be enhancing our guidance metrics by focusing on adjusted EBITDA growth and free cash flow conversion rate and transitioning away from an absolute free cash flow dollar targets. We believe these metrics will allow our investors to consistently measure the performance of our business.
Since we now have a full year of ERP ongoing operating costs included in our adjusted EBITDA baseline, we expect to achieve an average annual adjusted EBITDA growth rate of 13% to 17% through 2027 with 2023 as the base year.
We expect to achieve our free cash flow conversion rate based on adjusted EBITDA of 50% to 60% beginning in 2024.
These metrics translate into a free cash flow range between $325 million to $375 million beats.
Between 2025 and 2026 this is lower than the previous outlook of at least $400 million of free cash flow in 2025, mainly due to expected short term macroeconomic trends impacting the business that are reflected in the 2023 guidance. The recent communication.
<unk> divestiture for which we had anticipated future free cash flow of 20% to $30 million higher anticipated income tax payments of $10 million to $15 million and higher anticipated interest payments of $5 million to $10 million based on the current interest rate environment.
In the future I will mainly discuss the long term outlook in the context of adjusted EBITDA growth and free cash flow conversion rates. This.
Outlook is based on currently known items and certain business assumptions, including current foreign exchange rates and estimates for <unk> and other commodity pricing. This outlook does not contemplate a prolonged recession inflationary environment are persistent healthcare staffing challenges impacting volume.
It also excludes any future acquisitions and divestitures I will now turn the call back to Cindy.
Thank you Janet as always I'd like to thank our customers team members 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.
Thanks, Keith if you would like to ask a question. Please press star followed by one on your telephone keypad now if you do change your mind please questions.
When asking a question. Please ensure your line is on mute please.
Limit yourself to two questions.
At the time and you are welcome too much just for another question and we will come back to this time.
Our first question today comes from Sean Dodge from RBC Capital markets. Please go ahead, Sean Your line is now open.
Yes, Thanks, Alright, good morning, and congratulations on the fourth quarter free cash flow performance.
Big lift to get to the targets there so well.
Well done.
Maybe just starting with the 2023 guidance.
Three years to 5% revenue growth off the base adjusted for the divestitures.
The underlying drivers of that the benefits you've been getting from pricing via the surcharges. Those work I think you said $10 million in the fourth quarter.
How should we think about the cadence of those over the course of 2023.
Yes, some levers left you can still pull on pricing or is that pretty much tapped out.
Yes.
I guess it would be my first question.
No Sean Thanks for that question and thanks for.
The recognition on the free cash flow that was a great job bye bye everybody involved but.
So just a quick reminder, we've got we've got three ways to get to get price we have renewals.
We've got new customers that we're going to win new sites that we haven't that we haven't started yet and we've got surcharges and fees. So if you look let's look at the surcharges.
<unk>.
Everybody, especially we felt the push of that capital I have inflation in Q1 of 2022.
And reacted as quickly as we could.
It wasn't we got some of the fees in let's say and really to the end of Q1 beginning of Q2.
And then a lot of the other fees and surcharges in contractual language you have got to give 30 days or 60 day kind of warning. If you will that some of these are coming so you may put them in to implement but it but it doesn't necessarily hit.
The day that inflation hits you so.
As we look at our opportunity to grow 3% to 5% over the court.
Over the long haul.
A lot of things are going to go into it we will at some point in time have an opportunity where we will lap certain customers that already have had the increased put in but we have an awful lot of renewal customers, whose contracts werent opened yet.
That those contracts will be opened this year and we will negotiate just as we did with the customer base last year.
And then we've got new prices new rate cards, new base tariffs built into all the new customers that we haven't hit yet so I think.
In conjunction we still have runway with reference to some surcharges and fees.
But I think we also have opportunity now I think a couple of things are a positive.
Businesses are coming back to work and right now what we are seeing on the hospital side visits are coming back people are visiting the hospital, they're going back to the Doctor elective surgeries is not hasnt shown itself to be a positive yet, but I think all of those other signs are encouraging.
That if the economy stays relatively stable, we don't have another hit of hi.
High inflation that nobody expected.
Think as things if you will maybe normalized I think we are well positioned to capture that that revenue growth and hit targets.
Okay.
And then the ERP. So you said you completed the Puerto Rico pilot in North America as that rollout should begin in the second half of the year.
Are there any updates you can share just regarding how long you expect the north American rollout to take.
And I guess at this 0.1 and when are the elements are transitioned.
You kind of worry most about.
Yeah, Hi, Sean this is Janet good morning.
So we are we are anticipating right now based on the success of Puerto Rico and what the team is working on in the second half of the year to rollout the U S and that would be U S.
<unk>, because we have enough confidence in what we learned from Puerto Rico, We think Canada would be a fast follower. That's a much smaller part of the revenue share. So really we would get the bulk in this year. So that that is the plan and that is with the team is targeting what we are most worried about this as the commercial and operational side of our WCS. The good news is we're in <unk>.
Reduction so im not worried about moving the.
This system or production I'm not worried about the shared services and general ledger or the payables for invoicing our vendors because that is in for both businesses. So we're really focused on the in field operations and the commercial side of this the good news is we have 5000 people, who know how to use us there already explained.
<unk> to the <unk> WCS side from the shredded side, how this works that happened in Puerto Rico and that was a good success. So the key areas data I don't think it's as much functionality as it is getting all the data ready for years of multiple different ways of data was captured in our WCS to the acquisitions to standardize.
It clean it certify it and convert it and move it into the platform.
Okay, great. Thanks again.
Thanks, Sean.
Thank you. Our next question comes from David Manthey from Brian . Please go ahead. Your line is now open.
Thank you good morning, everyone.
My first question. If you look at Slide 15 provides a very clear bridge from 2021 to 2020 to EPS.
Could you maybe provide us the major segments of the bridge from the what you've called the base 2020 to EPS of $1 94 to the mid point of your 2023 guidance at $1 90.
Yes. Thank you you too so thanks for capturing that we do have a new with the comps all adjusted out we go from a base of $2 four which are oriented to the 194, so really our key our key drivers of our revenue flow through and margin expansion are one of the key drivers. We do we also get some benefit in there.
Free cash flow side from a lower incentive compensation payout, but if youre looking at EPS, it's primarily or primarily due to core growth.
And we also get some upside on bad debt as we look year over years, we've captured it receivables. So we really see a clearer pathway by the different measures to get to that get to that growth.
Okay and then.
On the longer term outlook, 3% to 5% organic revenue growth seems very reasonable, but what gives you confidence in this 13% to 17% EBITDA growth over the next four years I think if you stretch this out for 2027 level would be something like 23% EBITDA.
And so here too if you can just talk about what are the key drivers behind the improvement from where we are too to that level.
So a great question, Dave and it's really a convergence of all the things we've been working in the business over the last three years. So it is the quality of revenue and the pricing into the contracts in the next phase of what we call quality revenue in these areas of commercial excellence will drive continue to drive price and volume in the market on the <unk>.
New platform. It is operational efficiencies that are driven by the modernization.
Our new incinerator going live audio new autoclave modernized autoclave is everything that Cindy mentioned route optimization and leveraging the systems that are not still fully until we get to this year with the our WCS and then you get the system reduction eventually of $20 million to $30 million when we get the.
Anil off the platform. So you get an uplift there and then from the new system and having everything in North America, One platform you get back office efficiencies.
As we continue to reduce debt, you'll get lower interest expense coming through that will be offset survived some cash taxes that we see will be a higher cash tax payer. So that is the bridge that gives us confidence to put out that adjusted EPS growth rate in that free cash flow conversion rate and Dave I think I think the bigger story, that's a great question.
<unk> and its one unfortunately in this journey, we would've never picked to have all of those things in essence hit in in relatively one one year.
Think about this journey, we without a pandemic, we would've had the ERP already in we would've been chugging along with that we would have been fine tuning things facilities would have been a much.
Maybe a more linear pace in terms of that type of growth, but unfortunately.
We are.
We're the little engine that could we adapt to whatever we see that that's out there in the marketplace and as a result, Janet mentioned those things just are there going to converge maybe.
Maybe a little bit more close together than we than we would've liked but it still doesn't it these are still goals and targets that we're well focused on hitting and when they all converge.
We will handle that as we go through but those are the expectations and that's how we see line of sight to things. So I. Appreciate the question, but this journey. This transformation has really not been.
Linear we had good intentions in terms of of laid out plans, but.
Sometimes the pandemics.
Didn't show up when they should've or or some high inflation or.
Some some potential recession, but but I think I think everybody within inside the organization is very focused on making sure that we maximize these opportunities that we've created as they hit.
I appreciate the commentary thank you.
Thanks, Dave appreciate it.
Thank you our next question comes from.
And then from Stifel. Please go ahead. Your line is now open.
Yeah.
Somebody in China. Thank you.
Yeah.
I'm not sure, which one to start with.
Yeah.
Given that you're setting a baseline compounding prior EBITDA can you tell us what the expectation is for.
Your 23 EBITDA.
And in the.
And it's not because we're not disclosing that is there anything weird between.
The earnings per share at the midpoint.
The EBITDA line that I have to think about to be able to back into it.
So I understand what youre asking Michael So when we gave we gave adjusted EPS guidance, but I would say that we are assuming increasing interest rates with an expected unfavorable impact of about five. So this is on the slide that we have in the deck and we're expecting an unfavorable impact.
This would have an impact.
Conversions, but just so you know two to three.
And depreciation expense and we expect a effective tax rate in the range of 26% to 29%, which we think is a 5% to 9% impact because it's more normalized income tax levels in 2023.
So those are some of the some of the key areas that will back you into.
An expectation of EBITDA.
And on and adjust if.
If youre looking at GAAP EBITDA, we also have the indications of the adjusted items, primarily in the CPA area of cost that we have estimated.
Right.
Uh huh.
Okay, and then to go back to the 3% to 5% sales growth. So for 'twenty three not the long term compounding.
Can you.
Unpack the mix between price unit growth in your <unk> assumption just so we understand.
What you're seeing in 23 versus the long term.
Yes, so do the headwinds we're seeing in the arguably it's yes volume right now on elective surgeries, we're hopeful there, but I would say our growth in both spread and our WCS, which I actually think is a good story as we forecast that range.
Is more indexed to price on the lower range and then if we have some tailwind on volume as things recover in the market, we could get to the higher range. So I think it indicates that we have pricing power thats sustainable through next year in terms of <unk>. We estimated what it ended at December for the Sop pricing through the rest of the year.
And those are our key assumptions in revenue.
And whats that number just so we all have it accurately.
I will have someone to 'twenty I believe yes.
220, okay.
Okay.
So many more questions.
Well the good news I hope Michael is we have a lot of information thrown out in the slides.
The K. So hopefully we will have everything we can.
There is a lot to digest and we do we do understand that.
Thank you.
Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Sir your line is now open.
Yeah.
Thank you and good morning, just following up on that real quick.
That's the end of December the $2 20 are you extrapolating that through 2023, where you said youre, making your.
Yes, so we don't predict Sop pricing I think it's proven to be hard to predict so we just as an assumption.
Assume that the end of year as a flat through our guidance expectations.
Thank you.
And then next question.
Yes.
Cadence through the year of 2023.
How should we think about that.
Maybe some thoughts on first quarter, how that may compare sequentially or year over year.
So we're out of the gate modeling appropriately.
Yes.
Do you expect more to come through in the back half how does how does this year look.
So actually when we looked at the quarterly cadence is fairly it's not the same that we had last year, where the first half was significantly different than the second half, we see sort of a reasonable steady cadence now the pricing levers will be the surcharges carry momentum into the first quarter, but then our other pricing levers start to carry momentum into the rest.
For the year as we continued to renew contracts and increase our rate cards and do other things so.
We see a relatively stable we will see what the macroeconomic headwinds do for us in terms of volume, but if we see the the volume as we expect gates on what we're seeing today.
I think we will not have that kind of impact on the cash side. However, Q1, and Q3 are heavy cash outlay areas due to entrust pain or any bonus payments et cetera. So you do see that in our seasonality on cash to Q2 and Q4 are higher cash.
Generating quarters, and Q1, and Q3 are higher cash outlay in quarters.
Thanks, and then I'm going to ask.
The bunch two questions into one for my for my final.
You did do a great job with.
Debt reduction and leverage reduction and youre guiding that by the end of the first quarter 'twenty three you'll get down to the three years from three.
What should we think about for your leverage going forward. It sounds like you all have outlined.
Further debt reduction will be use of capital.
Little.
How should we think about that what is your target thereafter, because you've kind of achieved this one and congrats for achieving it on time and then the second part of the question is.
It sounds like you have a lot of needs for capital spend.
For the.
Cindy you mentioned, it's not linear you guided capex for 'twenty three how should we think about capex in your longer term free cash flow.
Guidance.
One element is capex is that as a percent of revenue or otherwise in our view would qualify thank you alright.
Alright, so I'll hit the debt reduction first and what just to be clear yes.
We think we'll get to the three times in the first quarter or get close so it will be in the first quarter or second quarter, but we think we're going to get closer hit it in the first quarter just to be clear there in terms of how we will use our cash that we generate we do have a capital expenditure for this year. So our first priority after reducing debt is to invest in ourselves and you see.
And we're limited by the capacity of us to spend money as we've learned in prior years due to the major projects and the amount of people you need from engineers to it people to everything to to execute on that but as we look at our priorities for what we use with our cash debt.
If all goes well, we'll generate cash and we'll continue to apply to that but it does leave us opportunities in the future you should look at other capital allocation opportunities, but our first priorities will be this year debt and capital investment in the business and in terms of long term capital. It will range based on the major projects.
I think we will move from heavy modernization as we.
We complete some of those major projects like the incinerator et cetera to making sure we maintain the right maintenance expense going forward. The team is working on that plan I don't I think its in the range of what you've seen before but I don't have a precise targets for capital.
And then.
One of the other opportunities we have with the debt is three times is probably not enough. If we want to get to investment grade. So it would probably have to be more in the two five times range. So that is something we may just naturally get to by the cash generation that we generate.
And I think I answered both of your questions.
Did I Miss anything.
Do you guys think.
I appreciate it I'll turn it over.
Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star.
Led by Ron Smith, Thank you Pat now.
Our next question comes from Kevin Steinke from back to Mr. <unk>. Please go ahead, Kevin Your line is now.
Good morning.
I just wanted to clarify.
Your comments around the 3% to 5% organic revenue growth guidance for 2023.
It sounds like you're maybe making some macro headwinds into that is that correct.
Just any more comments on.
The macro and how you see it impacting 2023.
So we're seeing that there's some durability and some of the headwinds and so I do we do think elective surgeries will recover if they recover faster that will help US then the current pace of recovery that there they are having.
That's one of the key drivers of what I'd say is that a headwind versus tailwind. So we did we did have some of that factored in and that's why you have a range of 3% to 5%. So so and then and then at the EPS level. There is persistence and some of the inflationary pressures that a lot of people are seeing in the market. So we were.
I would say appropriate given what we're seeing today and persistent inflation and some of those mitigate because it's not just about fuel. It's about containers that are based on petroleum based products. It's based on.
Current rent and other utility costs et cetera that has stayed high so we factored that kind of persisting into 2023, which is why.
That is in the base line, so headwinds are factored into that range.
<unk> could give us some opportunity and Kevin just a just a general reminder for.
And for everybody, how we look at volume I think it's important.
Every lots of companies look at volumes different ways.
Even hospitals.
But for us we.
Volume turns into we talk about volume in two different ways number one is we'll win a new site or new customer.
And if we've got a subscription fee as an example, with an independent Dr.
Doctors office and independent.
Customer we.
We will get a subscription fee that covers everything so.
And wait may not be the physical weight or the pounds that we may pull out of that place might not matter because it's a subscription fee. Then we will look at hospitals in national accounts and volume could take on a different volume has a different metric volume will be how many pounds are we pulling out based off of elective surgeries that are.
And Theres, a theres a price per pound component to that and in all of our in the hospital.
National accounts, Thats about 35% to 40% of revenue.
That weight the actual week than what we pull out generates so for us we.
We will see hospitals talking about visits are up.
And Thats, Great news people are out and about and Theyre going back to hospitals, and they're going back to doctors.
More importantly, we're encouraged and we're hopeful.
That staffing in these hospitals and in the health care network continues to show improvement and if that does there should be an assumption that elective surgeries at some point in time the knees hips.
And a lot of those types of orthopedic surgeries come back as they generate a good bit of waste and as that kind of returns to a normal.
That is opportunity for us because we are well positioned to handle that volume so for us when we say volume was flat in Q4 that meant we were winning more sites.
We were bringing in new customers on both sides of the business, but the the actual so volume on sites was was positive but volume in terms of weight.
So that kind of yielded a flat look for Q4.
In 'twenty, two but I think as Janet said hospitals get staffing more inline people are feeling more comfortable going back to hospitals and to the Doctor's office.
I think that that to follow will be elective surgeries and I think that's a good sign for us.
Okay, Great. That's very helpful color and just one other one.
Thank you.
Contemplated in the 2023 guidance any sort of.
Potential disruption to revenue from the.
ERP rollout in the U S I know.
You had a lot of learnings from the secure information destruction rollout the pilot in Puerto Rico is going well, but.
Just any comments on potential impact there any assumptions around that.
Yeah, Kevin Kevin you're kind of calling it learnings we did have learnings.
From on the shred side, but but I think Janet can give maybe more specific color on I'm very confident.
We came out of the gate in Puerto Rico, and certainly hit the usual snafus that you would hit but that's why we chose to do it in a pilot and I think we've had we've had quite a few months to work through any of those little <unk> or surprises so Janet.
You feel pretty comfortable with it if you look at the range that we have and you look at the disruption that we attributed that to EPS about <unk> 11.
For shred and that was putting it into production for the first time only a couple of hundred people knowing the.
Yes.
The system.
First time doing data conversion et cetera, I think our ranges cover any potential risks there.
We're working to not have that be a risk factor.
Okay. Thank you very much.
Thanks, Kevin.
Thank you that concludes our Q&A session. So I'll hand back over to Cindy <unk> closing remarks.
Thank you Maxime so to everyone listening to this call. We greatly appreciate your interest in their cycle and you shared excitement in our future. So thank you very much.
Thank you ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
[music].
Okay.