Q1 2023 Stericycle Inc. Earnings Call
Speaker 1: To the most comparable us GAAP measures. Please refer to the schedules in our earnings press release which can be found on stairoyclees Investor Relations website at investors do stair ycle com. The prepared comments for today's call correspond to an earnings presentation which is also available as stair yclees Investor Relations website.
Speaker 1: Throughout the call, we will 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 May 25, 2023. A replay of the webcast will be available on Sericycle's investor relations website.
Speaker 1: Time-sensitive information provided during today's call, which is occurring on April 27, 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 SpareCycle is prohibited. I'll now turn the call over to Cindy.
Speaker 2: Thank you, Andrew. Good morning, everyone, and welcome to today's call. Overall, I am pleased with our first quarter performance, which is in line with our expectations for the year. We saw solid performance and progress across our key business priorities.
Speaker 2: Turning to our first quarter results, our revenue performance benefited from the commercial actions started in 2022, which included leveraging our pricing actions.
Speaker 2: We delivered another quarter of overall organic revenue growth, growing 7.2% with secure information destruction increasing 11.8% and regulated waste and compliance services increasing 5%. We are showing good progress on our quality of revenue initiatives that I discussed last quarter.
Speaker 2: customer partnerships by developing enhanced customer solutions. In the quarter, gross profit margin expanded 130 basis points. Our actions on operational efficiencies, particularly in the areas of staffing and reduced overtime, have helped us offset increases in other cost areas such as fleet and facilities.
Speaker 2: We continue to be encouraged by what we see being reported in the market with hospital staffing levels shoring up, return of elective surgeries, and return to office trends.
Speaker 2: As a market leader in our core businesses offering solutions and compliance support, we are well positioned to take advantage of these trends as they evolve.
Speaker 2: Our infrastructure modernization efforts, including existing and additional future treatment capacity strategically placed in key geographic areas, positions us well to support growth in our customer base.
Speaker 2: Further, we are pleased with our cash flow generation and strengthened balance sheet.
Speaker 2: With regards to our operational modernization efforts, our new incinerator under construction in Nevada remains on schedule to go live in early 2024. We also have 20 additional projects underway, which include new autoclaves and conveyance systems.
Speaker 2: Regarding our fleet modernization initiative, although vehicle deliveries remain behind schedule, to date we have received almost 80% of our outstanding orders and anticipate receiving the remaining vehicles by mid to late summer. Looking ahead to the U.S. Regulated Waste and Compliance Services ERP deployment, the team is currently immersed in testing and readiness preparation.
Speaker 2: and we continue to anticipate deploying it in the second half of 2023.
Speaker 2: Now turning to debt reduction. We improved our debt leverage ratio to 3.05 times, a 23 point improvement since year end and we remain on track to achieve our three times debt leverage ratio in the first half of 2023. This is our lowest debt leverage ratio since 2015. Finishing with portfolio optimization.
Speaker 2: In April , we divested our operations in Brazil, which was our last remaining Latin America business for an investing cash outflow of approximately $28 million. This represents our 13th divestiture since 2019.
Speaker 2: I'll now turn the call over to Janet to review our financial results. Thank you, Cindy. I will start by summarizing our first quarter results. As noted on slide five, revenues in the first quarter were $684.3 million compared to $664.2 million in the first quarter of last year, excluding the net impact of divestitures of $16.6 million.
Speaker 2: As noted on slide six, regulated waste and compliance services revenues were $451.3 million compared to $452.6 million in the first quarter of 2022. Excluding the impact of divestitures and foreign exchange rates, organic revenues increased 5% in the first quarter.
Speaker 2: In North America, regulated waste and compliance services organic revenues increased $22.4 million, or 6.5%, mainly driven by our three pricing levers, which include pricing and existing contracts, new customer pricing, and surcharges and fees.
Speaker 2: International regulated waste and compliance services organic revenues declined 0.6 million dollars or 0.7% in the first quarter. This decline was due to lower waste volumes compared to the first quarter of 2022.
Speaker 2: Secure information destruction delivered revenues of $233 million compared to $211.6 million in the first quarter of 2022. Excluding the impact of foreign exchange rates, organic revenues for secure information destruction increased 11.8%, mainly due to pricing and higher recycled paper revenues.
Speaker 2: In North America, secure information destruction organic revenues increased $24.3 million or 13.4% compared to the first quarter of 2022. Of this 13.4% growth, service revenues contributed 10.8%
Speaker 2: and recycling paper revenues contributed 2.6%. The service revenue growth was mainly due to our three pricing levers, including fuel and environmental and recycling recovery surcharges.
Speaker 2: Recycled paper contributed approximately $4.8 million more than in the first quarter of 2022, reflecting mainly higher SOP pricing. In international, secure information destruction organic revenues increased $0.6 million, or 2.1 percent compared to the first quarter of 2022.
Speaker 2: This change was mainly due to pricing levers offsetting reduced volume.
Speaker 2: Income from operations in the first quarter was $40 million compared to $5.9 million in the first quarter of 2022. The $34.1 million increase was mainly due to growth profit improvement of $16.5 million, primarily driven by revenue flow-through and lower selling.
Speaker 2: general and administrative expenses of $22.6 million, mainly due to lower adjusted items and bad debt expense.
Speaker 2: These were partially upset by a divestiture loss of 5 million.
Speaker 2: US GAAP net income was $11.2 million, or 12 cents diluted earnings per share, compared to a net loss of $14.2 million, or 15 cents diluted loss per share, in the first quarter of 2022. The $25.4 million increase was mainly due to higher income from operations of $34.2 to dec Collbie 2020 $ twisted lost earnings ticket for cal http subject that.
Speaker 2: of $49.5 million compared to an outflow of $38.8 million in the same period of 2022. The year-over-year increase of $88.3 million was mainly driven by accounts receivable of $32.9 million due to an improvement in days sales outstanding.
Speaker 2: Higher operating income of $30.8 million, lower annual incentive compensation payments of $22.3 million and other networking capital improvements of $2.3 million.
Speaker 2: Adjusted income from operations was $84.7 million, or 12.4% as a percentage of revenues, up from $59 million, or 8.9% as a percentage of revenues in the first quarter of last year. Adjusted income from operations increased 350 basis points as a percentage of revenues due to the following.
Speaker 2: 1. Gross profit flow-through of approximately 130 basis points, mainly due to pricing, and 2. Lower selling, general, and administrative expenses of approximately 210 basis points, mainly due to improved operating leverage against higher revenues and lower bad debt expense. This was rules and rules summerss face-to-faceela for three reasons.
Speaker 2: As noted on slide eight, adjusted diluted earnings per share was 49 cents compared to 32 cents in the first quarter of 2022. Excluding the impact from divestitures and foreign exchange rates of two cents, the remaining 19 cent year over year increase was driven by 20 cents from gross profit flow through.
Speaker 2: 1 cent from lower selling, general, and administrative expenses, and 1 cent from lower income tax expense than other. These were partially offset by 3 cents from higher interest expense. Capital expenditures for the three months ended March 31, 2023, were $36.4 million compared to $37.5 million for the same period last year.
Speaker 2: Free cash flow for the three months ended March 31, 2023 was an inflow of $13.1 million compared to an outflow of $76.3 million in the same period of 2022. As noted on slide nine, the year over year improvement of $89.4 million was mainly due to higher cash flow.
Speaker 2: secure information destruction customer billing and collections.
Speaker 2: As shown on slide 10, at the end of the first quarter, our credit agreement defined debt leverage ratio was 3.05 times and our net debt was approximately $1.45 billion.
Speaker 2: As Cindy noted, we divested operations in Brazil in April for cash consideration paid of approximately $28 million. The cash consideration included coverage of debt-like related long-term liabilities, which will be removed from our balance sheet in the second quarter. The transaction is expected to result in a second quarter divestiture pre-tax loss of half an inch.
Speaker 2: In 2022, the business in Brazil was unprofitable, unfavorably impacting adjusted EBITDA margin by approximately 20 basis points on a consolidated basis. Also in April , we made substantially all of the remaining FCPA settlement payments available
Speaker 2: which totaled about $8 million. Our first-quarter results were aligned with our full-year 2023 guidance as shown on slide 11, and our guidance ranges remain the same. I will now turn the call back to Cindy. Thank you, Janet. Earlier this month, we had an opportunity to host a Senior Leadership Summit, which was attended by over 300 leaders across our organization.
Speaker 2: This was an amazing opportunity to celebrate the progress we've made in transforming this business over the past few years and engage and energize the team on advancing the next aspects of our journey. As always, I'd like to thank our customers, team members, the communities we serve, and our shareholders.
Speaker 3: for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two.
Speaker 3: When preparing to ask your question, please ensure your device is unmuted locally and today we ask you limit yourself to two questions and one follow-up.
Speaker 3: Our first question today comes from Sean Dodge from RBC capsule markets. Your line is open. Yep, thanks. Good morning and congrats again on the great progress in the quarter. Cindy, maybe just starting, if we could start with an update on the inflation or the cost backdrop. I think diesel has been in a pretty steady decline for six months now.
Speaker 4: work done around dumb.
Speaker 2: maybe incrementing some of those out. Yeah, Sean, thanks for that. That's a great question. Actually, what we are seeing is, you know, inflation, we still see it in, and it's not equal across everything, but I'll give you an example. While we are starting to see some of our vehicles that we had ordered come in, so a little bit of supply chain ease.
Speaker 2: The one thing as we are seeing continued inflation is when we look at maintenance costs and we look at rental costs, they still are pretty elevated. For us, that's something that really hasn't changed and it behooves us, we're going to be in much better stead once we get that full.
Speaker 2: that came up for renewal during times when inflation was exceptionally high. If you want to say even Q1 of last year when it broke a 40-year record high. So we still have leases that are going to continue with some of those pricing in there because you obviously signed them for you know.
Speaker 2: really drive some good things. However, that stability has come at a higher wage rate, kind of a run rate than we've seen. I don't see that getting, we're not saying that's getting any worse. We're very pleased with where we are. But obviously those continue to be in the run rate of the business.
Speaker 2: So overall, I think there are still some pockets where we're seeing some pretty strong inflationary pressure, but we'll see how that continues throughout the rest of the year.
Speaker 3: Okay, and then just clarifying on the contribution from the two surcharges, Janet, I think you said 130 basis point lifted gross margins in the quarter. My math would put that at about $9 million. That would be down just a little bit from the $10 million in the fourth quarter. Is that just because there were some?
Speaker 3: kind of surcharges those contribute incrementally in Q2 and maybe over the remainder of the year.
Speaker 2: So as you think about Q1 and our ability, we put surcharges in in RWCS later in the year than we didn't have any in the first quarter of last year to speak of an RWCS other than some existing legacy.
Speaker 2: And then we continue to modify the floors that are existing on the SID surcharge for paper and just continue to tune all our pricing levers that we had, which are three through last year. So what you're seeing is the benefit of all those levers hitting Q1 very solidly where we didn't have as many in place or, you know, and some were not even existing in Q1 of last year.
Speaker 2: market in particularly in the second half of the year. So that's why the first quarter's looking, you know, that strong in that search range. Okay, great. Thanks again.
Speaker 5: Thanks, Sean. Our next question comes from David Manthi from Baird. Welcome to Virtual travelled,
Speaker 6: Oh, hi, good morning. Along the same lines here, when you think about approximate contract pricing, so the other two levers beyond surcharges, when we think about the 5% organic growth in RWCS, how much do you think is related to those...
Speaker 6: New contracts that are that are priced higher and when you think about that those those two levers of pricing I assume some of that carries through the year you probably have additional actions through the year does that remain? Constant or move up or down you
Speaker 2: Yes, so if you look, I'll just start with the, you know, if you look at our 3 to 5 percent growth rate for the year, we are reiterating that, and that's because you're going to stop some of the pricing actions. However, we continue to leverage both of those pricing levers, which is renewals, and also in the beginning of the year, the CPI that we put in contracts, renewals, the higher pricing.
Speaker 2: and continue to turn surcharges according to what we see in inflation. I'll turn it over to Cindy if she has any other thoughts. Yeah, I think too on the RWCS side, Dave, it's important to note, as we had said, Q1 of 22 was a very difficult quarter for us. If we take a look, I mentioned the inflation. We had tremendous...
Speaker 2: staffing issues, there were just major supply chain disruption, and really we were still kind of getting our sea legs from the ERP deployment in SHRED. So that's, well that's on the SHRED side. On the RWCS, I think as we move throughout the year, a positive note I think is...
Speaker 2: the return of elective surgeries as we move through. So this won't be purely, our plan is not to have it purely be a price story, which this year's Q over Q turns out to be as such, simply because we didn't have those pricing levers in Q1 of last year. But we see and we're very encouraged.
Speaker 2: by the return of elective surgeries. Now, all hospitals don't rebound at the exact same time. However, we built into this year's plan the thought that surgeries would come back. So for us, it was a positive sign that we're seeing that, and I think, you know, RWCS is well positioned to continue to hit the plan for end of year.
Speaker 6: then we can back into EBITDA margins of low to mid 20s. Does that map still hold for the the changes that have happened to business as well as the adjusted free cash flow targets that you looped last quarter just trying to get a read on ultimately where we're headed.
Speaker 2: Our long-term outlook stays the same as that I issued in February . Does that answer your question? Yes.
Speaker 2: So it is, it is, yeah, 13 to 17% adjusted even a growth rate, which drives those higher margin rates and the free cash flow conversion rate of 50 to 60% with the following then and through 2027 and then an annual taker of three to 5% in revenue growth. So those are all.
Speaker 7: open.
Speaker 6: Thank you. Good morning. First question, I guess I want to focus on regulated waste organic growth acceleration look good. How did that compare to your internal expectations? What were some of the some of the drivers and then kind of kind of separately as an add-on on that theme.
Speaker 6: What are you expecting out of used paper prices going forward? What are you seeing on that trend? Janet, maybe now a commentary on what percent the surcharges cover on that. Thank you.
Speaker 2: Yeah, Scott, this is Cindy. I'll take the first part of your question. So I think we're pleased with RWCS. We are on track with our internal expectations. But again, I wanna say, you know, if we look at Q1 of this year versus Q1 of 2022.