Q3 2023 Stericycle Inc Earnings Call
Good day and thank you for standing by welcome to the Q3 2000, I'm twenty-three Stericycle earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question joined that assertion you'll need to press star one on your phone you were down here an automated message advising your hand is raised to withdraw your question. Please I saw one one again, please provide that we got that.
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Today's conference is being recorded and I'd like to handle conflicts over to your speaker today Mister Andrew Ellis Sir. Please go ahead.
Good morning, and thank you for joining stericycle, 20th twenty-three third quarter earnings call on the call today will be Sydney Miller, our Chief Executive Officer.
Like a chief financial Officer, and Chief Information Officer, and Cory White are cheap commercial lobster.
Today includes forward looking statements that involve risks and uncertainties when we use words, such as beliefs expects anticipates.
Right.
Plan will go are similar expressions, we're 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 our management about future events and are therefore subject to risks and uncertainties are actual results.
Currently from those described as such forward looking statements factor.
Factors that could cause our actual results to differ are discussing the safe Harbor statement and our earnings press release.
Greater detail looking at risk factors and our filings with the U S Securities and Exchange Commission.
[noise] 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 <unk>.
Disclaim any obligation to update.
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. Got measures. Please refer to the schedules and our earnings press release, which can be found my fair cycled Investor Relations website at investors Pericycle Dot com.
The prepared comments for today's call a correspond to an earnings presentation, which is also available as fair cycled Investor Relations website throughout the call will reference pathetic 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 November 30th 2023.
He played the webcast will be available on Stericycle Investor Relations website.
Time sensitive information provided during today's call, which is occurring on November 2nd 2023 may no longer be accurate at the time of a replay.
Retransmission a rebroadcast of this call in any form without the express written consent upstairs cyclist prohibited I'll now turn the call over to Cindy.
Thank you Andrew Good morning, everyone and welcome to today's call I'm pleased to share that in the third quarter through the hard work and dedication of our team members in technology partners. We successfully deployed the ERP system to R. U S regulated wasting a compliant services business today, almost all of our U S team members.
Are leveraging the new technology I'd.
I'd like to take a few minutes to update you on the ERP deployment.
To say that we grew North America regulated wasting compliant services organic revenues by 3.9% in the third quarter in the midst of a major ERP deployment to give you a greater insights into the deployment I'll speak to the operations portion and then I'll turn the call over to Cory to provide an update from our customer.
Perspective, and how it has improved some of our commercial processes.
We continued to prepare for this deployment throughout the quarter as we finalized data conversion training and facility upgrades, we launched the deployment in early September when we began servicing our customers through the new technology.
From an operational perspective, we couldn't be more pleased with our team members ability to continue to serve our customers since the system deployed we experienced the typical startup learning curve that comes when processes change and are infused with new technology for our front line workers. This resulted in an anticipated anti.
For every reduction in productivity.
Team has become more familiar with the changes in processes and procedures. We are seeing continued improvement.
And we expect that this new technology will contribute significantly to our ability to achieve the margin expansion embedded in our long term outlook I'll now turn the call over to Corey who has been deeply engaged in helping our U S regulated wasting compliant services customers transition onto the new we are P. He will provide insight.
From our customers.
Thank you for the opportunity on today's call to share our customer's experience throughout the ERP journey and highlight some of the exciting ways. This new technology will help us improve commercial execution.
Overall, the rollout of the ERP was a success.
We have had no significant system issues orders are being created stops are being routed containers are being tracked waste is being picked up treated and properly disposed and invoices are being created and processed for both regulated wasting compliant services and secure information destruction customers.
Along this journey, we have been in frequent contact with our customers and they are not reporting any major disruptions, we track customer satisfaction trends weekly across our customer base.
During the first couple of weeks of September our customer satisfaction scores understandably dropped as some of our customers experienced short term disruption.
Scores have since improved and are already above pre go live levels.
Following the deployment for the first time, we now have real time capability to see order completion in the system.
We are pleased that an overwhelming majority of orders are serviced seamlessly.
We have seen an expected increase in our customer call Center volume.
Importantly, the majority of this increases from customers requesting assistance understanding the new invoice format enrolling in the customer portal setting up autopay or verifying your account numbers. We view these interactions as a favorable sign of our customers engagement with an adoption of the new platform.
And how smoothly the ERP deployment is gone for the vast majority of our customers.
I'd now like to highlight a few ways in which we have modernized and improve the customer experience through the ERP deployment.
One.
We've added important digital enhancements, including redesign portals that act as a one stop shop for customers to view account information receive consolidated billing for services and sites and pay for their services.
Two four.
For our compliance services customers, we integrated the portal with her compliance training platform to create a single solution to meet their needs.
Three.
Customers now receive automated advanced service notifications to help them better plan their days.
Feature requested by our customers. So they know when they will be serviced.
Four we also made enhancements to our secure chain of custody and can now track waste at the container level through the entire service life cycle in real time.
Five.
In the near future, we expect that our portal will provide new and enhanced reporting features that will allow customers to easily excess weight and volume metrics benchmark and optimize waste streams and gain greater insights, which can be used in pursuit of their sustainability goals.
Over the past few months I've met personally with well over 100 customers during face to face meetings as well as lunch and learn events to elicit their feedback which has been overwhelmingly positive.
They had been supportive or move to new systems and are clearly excited about how our new capabilities will unlock opportunities to better service them.
Recently, one of our key customers told me how pleased they were with the deployment they.
They appreciated the proactive communication on changes we made to their account and liked the enhancements we made to the portal.
They also said they did not get any negative feedback from their internal stakeholders. They saw this as a sign of a successful deployment, citing that silence is golden for managing these kinds of major changes.
I'd like to take a moment now to talk about how our commercial organization is using the technology to become more nimble and efficient.
All of our salespeople in the U S are now utilizing the new system for five key processes.
[noise] development pipeline management performance management reporting and contracting.
This is a major step forward on our quality of revenue journey and our ability to execute on key business priorities, which includes expanding service penetration.
Improving customer implementation velocity and deepening our customer partnerships by developing enhanced customer solutions.
By operating on a common platform, we are improving our proficiency in selling the effectiveness for both the regulated waist and secure information destruction businesses, while driving greater consistency and accountability throughout the sales process.
The platform also lays the foundation for future enhancements like digital and guided selling capabilities and additional call Center automation.
Finally by Unblocking data and related insights. We expect this will lead to more intelligent sales decisions, new product development and service enhancement opportunities as we continue to listen to the voice of our customers.
I will now turn the call back to you Cindy.
Thank you for that update Corey turning to our third quarter results I'm pleased to report that in the third quarter regulated wasting compliant services continued it's organic growth trend, increasing 4.1% globally, even during a period of ear P deployment.
Growth this quarter is primarily come from our pricing levers. This has been partially offset by challenges in national accounts, which includes customers like retail pharmacy and nationwide health care service providers. These customers have remained very sticky despite the economic headwinds. They are facing is our customers reduce their.
Footprint our service stops in this channel have also contracted we remain encouraged that the critical services, we provide remain a priority for these customers.
Take your information destruction organic revenue declined 11.6%, mainly due to lower commodity indexed revenues, including lower really rates impacting sorted office paper and lower fuel and environmental surcharges. Although this revenue channel was down year over year, the third quarter of 2022.
You had significant organic revenue growth of 32.3 per cent on the strength of commodity related pricing.
When considering secure information destructions organic growth over a two year compound annual growth rate. It grill organic revenues 7.5 per cent since 2021.
Similar to regulated waste our national secure information destruction customers are experiencing a reset in their post COVID-19 pandemic office footprints.
Across the secure information destruction business. We believe we remain an essential service and are retaining these customer relationships, but I've seen service stops decline year over year by about 4%, mainly driven by customer site closures and reduced service frequencies in the long run we believe secure information destruction.
<unk> will contribute to our long term growth trajectory by leveraging technology deeper customer insight and new service offerings.
Regarding our operational efficiency modernization and innovation priority most of our engineering team members or squarely focused on deploying the ERP and executing our facility modernization plan.
During the deployment our engineering teams supported all aspects of field operations, such as training communication site visits to ensure technology was working as design and identifying a driving performance opportunities. Additionally.
Additionally, construction of our incinerator and Mccarron, Nevada remains on track and we continue to expect the construction phase of the project to be completed in the first half of 2024.
As mentioned during our second quarter earnings call. We completed two divestitures in the third quarter with the sale of our dental recycling business in the Netherlands, which closed in July and the sale of our secure information destruction joint venture in in the United Arab Emirates, which closed in August in early October we also do that.
That are regulated wastes business in Romania, our 19th divestiture since 2019.
In October we substantially completed a targeted workforce reductions that we expect will generate annual savings of approximately $8 million and resulted in an approximate 3 million dollar charge as we look to drive longterm margin expansion and shareholder value, we have a host of levers available.
These letters are further enabled by our investments and our ERP technology and infrastructure and include strategic initiatives careful hiring attrition and targeted workforce reductions to align our operating model with the performance of our business I will now turn the call over to Janet to discuss our third quarter financial results.
In more detail.
Cindy I will start by summarizing our third quarter financial results.
As noted on slide five revenues in the third quarter was $653.5 million compared to $690.3 million in the third quarter of 2022. The decrease was mainly due to divestitures of $32.4 million, which was partially offset by favorable foreign exchange rates of $6.1 million.
Organic revenues and regulated wasting compliance services grew $17.4 million well secure information destruction organic revenues declined 27.9 million secure information destruction with mainly impacted by lower commodity index revenues at $31 million, including.
Lower really rates impacting sorted office paper and lower fuel and environmental surcharges.
As noted on slide six regulated waste in compliance services revenues were $439.9 million compared to 447 8 million in the third quarter of 2022 <unk>.
Excluding the impact of divestitures and foreign exchange rates organic revenues increased 4.1% in the third quarter.
In North America regularly did waste in compliance services organic revenues increased $13 $9 million or 3.9% during the quarter of the ERP deployment, mainly driven by our pricing actions international regulated waste in compliance services organic revenues increased $3.4 million or $5 for.
Percent, mainly driven by our pricing levers, partially offset by lower waste volumes compared to the third quarter of 2022 international waste volumes continued to be impacted by healthcare staffing shortages and instrument and strikes.
Secure information destruction revenues were $213.6 million compared to $242.5 million in the third quarter of 2022, excluding the impact of foreign exchange rates organic revenues decreased 11.6%, mainly due to lower commodity index revenues, reflecting more.
More than a 100 dollar reduction and sorted office paper pricing per ton year over year.
In North America secure information destruction organic revenues declined $25.5 million or 11.9% compared to the third quarter of 2022 in the third quarter recycling paper revenues were down approximately 7.6% or $16.3 million due to lower really rates effects.
And sorted office paper pricing and lower tonnage in the quarter service revenue was down approximately 4.3% or $9.2 million, mainly driven by lower fuel and environmental surcharges and lower service stops is Sandy mentioned, excluding these surcharges service revenue was up $2 million.
Approximately one third of the lower sorted office paper recycling revenue was upset by her recycling recovery surcharge reflected in service revenue.
Under more normal really right circumstances, when sorted off this paper prices are below a $192. A time, we are able to offset approximately 60% of the reduction in paper prices given that the year over year decline in paper prices with over $100. A time, we were able to offset approximately one third of the lower.
S O P recycling revenue through our recycling recovery surcharge reflected in service revenue in the third quarter. This is due to the nature of the index for this surcharge and we expected to offset about 30% of the volatility when comparing to last year for the rest of 2023.
Or international secure information destruction organic revenues decreased $2.3 million or 9.2% compared to the third quarter of 2022, mainly due to lower recycling revenues and fuel and environmental surcharges.
Income from operations in the third quarter was $24.2 million compared to $56 million in the third quarter of 2022.
$26 4 million dollar decrease was mainly due to lower commodity index revenues and the corresponding margin flow through impact of $22.2 million. The decrease was also due to anticipated higher incentive stock based compensation of $7.2 million in a self insurance settlement of $2 2 million. These are partially.
Upset by cost savings of $8.6 million and lower bad that expense of $3.2 million.
Net income was $2 million or two cents diluted earnings per share compared to $28 million or 30 cents diluted earnings per share in the third quarter of 2022 $26 million decrease with mainly due to lower income from operations that are $26 $4 million as I just explained cash flow from operations for the night.
Months ended September 30th 2023 was $193.3 million compared to 43.1 million in the same period of 2022, the year over year increase of $150 $2 million was mainly driven by lower App CPA settlement payments of 72.8 million improved accounts receivable collect.
<unk> net of deferred revenues of $55 million and lower annual incentive compensation payments of $22.3 million.
Just at income from operations with $70.3 million or 10.8% as a percentage of revenues down from $92 million or 13.3% as a percentage of revenues in the third quarter of 2022.
To the income from operations decreased 250 basis points as a percentage of revenues due to the following lower sorted out this paper and fuel and environmental surcharges and their corresponding margin flow through impact of 340 basis points.
Higher incentive in stock based compensation of 110 basis points and a self insurance settlement of 30 basis points. These were partially offset by cost savings and margin flow through of 150 basis points and lower bad that expensive 50 basis points as noted on slide eight adjusted diluted earnings per share was 43.
Compared to 65 cents in the third quarter of 2022, excluding the impact from divestitures and foreign exchange rates of <unk>. The remaining 20 cent year over year decline was driven by lower commodity index revenues of 19 cents higher incentive in stock based compensation of six cents higher taxes and.
Dressed in other of <unk> and its self insurance settlement up too.
These were partially offset by cost savings and margin flow through of seven cents and lower bad that expensive <unk> cap.
Capital expenditures for the nine months ended September 30th 2023, where $102 $2 million compared to $106 million for the same period last year.
Free cash flow for the nine months ended September 30th 2023, with an inflow of $91.1 million compared to an outflow of 62.9 million in the same period of 2022 is noted on slide nine the year over year improvement of $154 million was mainly due to higher cash flow from operations of one.
$152 million.
DSO is reported for September 30th 2023, with 63 days or 55 days and that a deferred revenues during the third quarter, we began to invoice certain regulated wasting compliant services subscription based customers in advance which contributed to the higher as reported DSO for September 30th.
2023 D. S. O is recorded for September 30th 2022 was 63 days 462 days netted deferred revenues.
That's September 32023, DSO net of deferred revenues with lower as compared to the same period in 2022, mainly driven by the improved timing of said customer billing and collections.
As shown on slide 10 at the end of the third quarter, we maintained our credit agreement to find that leverage ratio below three times, achieving a ratio of 2.84 times.
Cindy noted we recently completed three divestitures for a total of eight divestitures in 2023, and 2022, the Romania medical waste business and the Netherlands dental recycling business collectively contributed less than 1% of revenues and had approximately breakeven adjusted EBITDA on slide 11, we agree.
Move the divested revenues from our 2022 baseline.
Joint venture and the U a E was accounted for as an equity investment and included in Noncontrolling interest collectively these businesses were sold for a nominal amount of net proceeds as noted up quite 11, we are providing our updated 2023 guidance taken in consideration our expectations for the fourth quarter, we have law.
<unk>, our organic revenue growth rate range to 2% to 3% from 3% to 5% mainly due to the impact of commodity index revenues. We have narrowed are adjusted earnings per share of guidance range $2.80 to one dollar and 95 cents.
From one dollar and 75 cents to $2.05. This updated range reflects the impact of a self insurance settlement in the third quarter and potential commodity volatility that I mentioned earlier we.
We have narrowed our capital expenditure guidance to $135 million to $145 million from $125 million to $145 million. This reflects our expectation on the timing of cash outlay associated with the Mccarran Incinerated project.
We have modified our free cash flow range to 172 $190 million from 175 to two $105 million. This is mainly driven by our expectation that we will be at the high end of our capital expenditure guidance range, the self insurance settlement and severance associated with our targeted.
Workforce reduction mentioned by Cindy These three items could potentially result in an incremental cash outflow of approximately $10 million to $15 million in the fourth quarter higher than we previously planned excluded from our free cash flow guidance is adjusted litigation payments of which we paid approximately $30 million in the third quarter and <unk>.
Aspect to pay approximately 5% to $12 million in the fourth quarter I will now turn the call back to Cindy. Thank.
Thank you Janet.
[noise] upstairs cycles core values is that we embrace diversity and inclusion aligning with this core value I'm excited to share that earlier. This week, we were recognized for the third consecutive year by women and trucking is one of the top companies for women to work for this award highlights our focus on creating a rewarding and positive.
Work environment for all of our team members.
And as always I'd like to thank our customers team members. 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.
Thank you.
As a reminder to ask a question please but I saw one one on your phone I'll wait for your needs to be announced.
To withdraw your question. Please post all one one again.
Again, we ask that you please limit yourself to one question and one follow up.
But as the compiled it to you in a roster.
And one moment please for our first question.
Oh first question will come from Sean Dodge of RBC capital market. Your line is open.
Yep. Thanks, Good morning, and I'll get my offer my congratulations on the the successful Pete appointment and I left my bag next week I feel really nice.
That done now.
Thanks, John on.
The.
You'll see the update it.
It sounds like so far so good b now more than a full months.
He ended up having to use it.
Pretty much out of the woods now as far as figuring out if there are any glitches or or bugs lapsed or not.
At what point can we declare all through here and then.
Where do you think that the dangers or risks still lie going forward.
Mm show and thanks for that question and thanks for the congratulations I can tell you. The we are tremendously proud of.
The overall journey that the that our team members and and support folks have had you know it was quite a learning for us putting accompany with no technology really onto a platform a coupla years ago and the amount of lessons learned.
Leading up to putting this this business unit on which had far more complexities.
And for it to have gone as well as it as it has and continues to it.
We're really very very happy about it and I think I think the good news is as Cory had said in his.
And his remarks.
There isn't customer disruption most of most of everything has gone off pretty seamlessly and I think the testimony to that is do we still have our their major issues.
I I think I think we've put those the bed, we know where they are we're still fixing a few things, but I think for US we're now almost morphing from.
Worrying about where are the ghosts in the system to correcting the problems that we've identified and now even moving towards all right where are the next enhancements and anytime you do that in the system. The sooner you can get to your enhancements. The things you forgot the thing that would make what would make something a little bit more intuitive the suggestion.
Back from the field I think I think we've gotten to that point certainly much faster than any of us anticipated, which is really really good news. So janet any other insights I think since you said it very well we have actually also build in as a reminder, about 70% of the billing is a subscription based so we.
Gotten those build out actually at the start of the month and continued to build that through if there's any if there's any thing. We're looking at is being very thoughtful of to transactional billing that's going down to make sure. It's accurate, but don't anticipate that to be a big issue and to send these point, we are moving into where can we enhance the system for rent rather than.
Where is it broken.
We do have a few incidents left as you would expect but lowered the volume than we expected to have at this point in time and I and I think Sean one last thing just to wrap that up right now everybody at least understands how to use it but everybody hasn't really develop their own you know, we all develop a routine and the the nuance of how we make it work faster or how we note.
To click through things I think we're developing that right now and so there's still there's still some learning there's still some change management tiguan not everybody has adopted it or has become proficient as as everybody else at the same time, but for the most part I think major major potential issues with customers with revenue recognition in those two.
The things I think I think those are those are well behind us.
And I think too you're right I mean, as you mentioned that we went live actually running attracts the beginning of September the quarter was spent and getting ready, but the truck started rolling the beginning of September. So we do have we do have a good month and more under our belt a month in the quarter and more than that as we talk today.
Okay, Great and then.
Janet boost the Ah the EPS and the free cash guidance for Q4 implied that a bit of a step up from Q3 can you just walk you through what to expect them to drive that Nathan you have about.
Visibility there is this kind of the benefits of the workforce reduction.
For your productivity anything else yeah. So we have some real key items that will help us drive there. One is we've had that incentive complex underneath that has stock comp acceleration that was due to retirement benefits I mentioned earlier that basically ended in the fourth quarter. So that's a few tenths of uplift.
Yeah that one time self insurance claim that won't repeat and that that will be an uplift if youre looking quarter to quarter, we see fuel, helping us a bit in the corner as you see that it it it's been a mitigating as the price and then we can see continued up late in bed that from quarter to quarter. So those are some of the key levels and I'm not even.
Talking about their continued to improve as we get more confident on the system and you know from the learning curve that Sandy mentioned, so we see a good line of sight to that EPS and then the cash flow similar.
Followed suit.
Okay, Great and then.
Yeah.
Thanks, John I appreciate it.
Thank you.
One moment please for our next question.
And next question will come from Scott Schneberger Oppenheimer Company. Your line is open.
Thanks, very much good morning, I'd like to share my congratulations I know how much your organization that's worked hard.
How hard in preparation for this so great that you you use our opponents flip the switch uhm I'm curious is there you've covered a lot of the update very well I believe you were running on a parallel on parallel systems throughout the process could you give us an update on how dependent you are still on.
Parallel systems, and and a follow up to this getting onward and upward is thinking about international and timeline, we should consider now that now that you're off and running in the U S. Thanks.
Yeah.
Scott what I'll do is I'll take that international portion of the question on two fronts and then in terms of the duplicative systems that we have the legacy and the new one I'll, let janet handle that.
In terms of international a couple of things. We've now had 19 divestitures since 2019.
And that's done a few things number one certainly from an overall portfolio our ability to manage things that has certainly helped us but the other thing. It's done as you can imagine is tying into the answer Jam. It's gonna give you is we've got 19 less countries and places and geographies and business units that we have to figure.
How to put on this new platform.
So this is afforded us an opportunity not just to improve balance sheet not just to improve oversight not just to manage the business better not just to use proceeds to pay down debt. This is also afforded us the opportunity to shrink the footprint of what's going to be required that's going to have to continue to go on to this new platform. So I think.
And then in terms of actual portfolio optimization, which is one of the key priorities.
We still leave that on there because I did talk about 19 divestitures, but we've also had an acquisition. So if it's got you've been on the journey with us since the beginning.
We originally started talking about portfolio divestitures.
Then we morphed into optimization figuring that at some point in time, we might get a stable enough balance sheet, where we would have options to not just be focused on divestiture, but also be devote beep you know become focused on potential tuck in acquisitions now that we understand more about the business where are our strengths where do we have a great footprint.
So I think we're leaving it on there for both things you know potentially divestiture, but then also from an acquisition perspective, So now I'll mark that back to Janet Janet with reference to the duplicative systems, how much more to go on and and what do you say, yes. So we put the U S on meaning we put the all the revenue on and we put all our.
Core waste processing, so all the way stations every everything that is.
Save it or incinerators running on it we have a few but he'll call edged cases of hybrid model, where they're actually partially using the system, but have some small unique areas that we need to still put on but that should be not a long putt to get there now we do have Canada, which is a much smaller part that is on our journey to move but I would.
Called the ERP in the U S. You know and what we're looking for in North America, largely done which is very exciting in terms of the legacy applications. They are still used right now in Canada as I mentioned, but also internationally. So that has been the next journey were on in the international team is very active working on the data clean up and starting to.
Start requirements next year with a goal to start moving off of that around the 2025 timeframe. Meanwhile, while we continued to take that 20 to 30 million out in the longer term. We are looking for ability to right size. The legacy platform, which may give us some opportunity on next year as we continue to look at it and I think I think one thing.
Two just as a point Scott.
Scott just a little bit more than 80% of all of our volume runs through the platform. Currently so I hope that put some things into perspective too in terms of size and just defer Kenneth sit is on the platform secure information instructions and I'm only talking about our WTS is the only piece left for Canada.
Yeah I got it. Thanks, that's very helpful very comprehensive I I. Another another two parter as my second question. The first part is.
What are you anticipating for sorted off his paper going forward just what are the trends that you're seeing what do you expect as you as you look ahead here, what's implicit in the in the fourth quarter.
And then I guess, that's mostly for you since you had mentioned.
That the though let me go back to the notes the a few sites a few customers. This information.
Information construction, a few site closures in this post pandemic periods and let her pick up frequency I just wanted out of what I'm trying to that for a second I I don't think I've heard that from you all before I just want to hear what you know how you feel about that trend.
Is that something new or.
Is that something you've seen consistent just just.
They just wanted to tell them a little bit more on that thank you both.
Gotcha, and Scott I can kind of help you with both of them first of all in terms of the <unk> right.
It <unk>, what what I think I said coming out of the pandemic, we were going to learn a lot and I and I think now a few years out here's what we've learned I think 2022 is the anomaly.
Here the average price of paper with people figuring out who's coming back to work who's who's going out to eat what's the demand on travel what's the demand on all these things it really put an immediate pressure on a lot of commodity specifically paper that's used in a lot of the essential things that we use and I think it.
Average the year somewhere around 235 that in and of itself as as an as an anomaly, but Q3 last year versus Q3. This year. It's a difference from we're looking at $254 in September of last year down to 140 in October of this year, but the trend that we're seeing in here.
I think the good news the good news is prior to 20 twenty-two being now just a complete outlier prior to that the 15 year average has been about $150 a ton and right now today, it's about 140 that seems pretty reasonable in terms of if you look if you take 2022 out of there.
Sure. It's now more normalized which I think is a good sign for society as a good sign that that we've gotten into a rhythm.
Of where where is demand. So so I think we need to level set that what are we seeing going into Q for right. Now. It's it's maintained around 140 over the last several months, which is a good stable number I think in terms of showing you know that.
It it it isn't showing the wild swings as much as it had over the last let's say six seven quarters. So I think that's really good news there and we know how to manage it that you know that that's more normal for the business and quite frankly once the risks right gets below $192 a ton.
Hour surcharge will help mitigate more like about 60% of whatever the volatility. So I think all that's good if I go to the second portion of the question about that National channel that National account channel base that we have we're seeing we're seeing similar things for the national accounts.
In both regulated as well as shred and what that nuance is we've seen it over the course of the last couple of quarters.
And what it's been is on the on the regulated side those national accounts those large retail pharmacies, you read headlines I read headlines. There is an awful lot of store closures. There is there is potential bankruptcies. There's a lot of things that are going on in that space and quite frankly that space not only uses us for regulated but.
They also use us for strength and when you have a footprint, which is thousands of stores and you choose that closed down a thousand of them that that is definitively means we they still use us. They just don't have a facility in in a particular town that requires that service anymore, So and we're seeing that.
We're seeing that unregulated and then on the shreds side when we take a look at at Shred. We're looking at that customer base that is now figuring out hey, most of our people are now back at work. This is going to be our new rhythm for right now as they continue to figure out how to cut their cost how does how does.
Had a right.
Reset their future.
So that they can position themselves to grow so they may have closed down some sites. They may have reduced some frequencies still requiring our service, but getting used to whatever their new normal is so I don't see any of those themes as anything that's lingering anything that's going to continue to a great degree.
I think we've seen the I think we've seen this shift in this change through our larger national account channel base and I see now an opportunity for that to stabilize and now I can tell you Corey and his team are just positioned to grow so that's where we sit and that's the.
A trend that we see.
Great. Thanks, so much.
Thank you.
And one moment please while next question.
Next question will come from Dave.
90 of Beard Your line is open.
It's a messy.
If your lines on mute please I need your line.
If you're using a headset please put on your headset.
Oh, sorry are you able to hear us.
The today Matti.
Because it is all right I'll move to the next person.
One moment please.
Next question.
We'll be up in a moment.
Next question will come from Michael E Hoffman Stifel. Your line is open.
Hey, Cindy Janet I was never in doubt so well done.
Yeah. Thanks, Micheal well you tested the bejesus out of it. So I knew you had pushed it and pulled it and tugged on it a lot but to that end.
Forget it we're right in the beginning of billing.
And billing was a challenge opposite you fixed it you tested that really hard in Puerto Rico, what are you seeing relative to that sort of.
Baseline of knowledge, what are you seeing at the moment.
We're we're seeing a much more astute understanding and we have reporting in place to track billing and pricing and contracts and everything that impact billing you know from day, one and I think that's the big difference that received because we knew what to look for there's a lot of complexity in our WCS in terms of its contracts and pricing so but.
There is also when you get to the transactional piece, but there's also the service revenue side that is a subscription base. It is actually easier and as you heard me mention we actually did add that we move that to be a month ahead of time for most of our customers. So that that was the switch we did so that needs to be that's a little customer.
Change management that we're watching but so far so good that has the potential in the long term to be a cash flow benefit for us and then we have been very thoughtful and been auditing all the transactional revenue that we're sending out to billing end up putting what they call pair blocks or other blocks on to make sure. It's right before it goes out so it's been a lot of thought on the team.
So so far so good we may have some of the transaction will be a little later will have a prescription be a little earlier and I think we'll watch out very well.
Alright, cool and then.
The end of the year you revise some of the parameters around your outlook.
Reaffirm those in this document today 13 into 17% EBITDA 50 per cent free cash.
When do we start seeing that happen now that 80% of the volume is on one platform and.
A lot of people can be held accountable in a good way when do I start seeing the benefit of that 13 to 17 and that 50% cash conversion.
Yeah, I think what we've talked about is taking yearend 2023, and then build from there and more of that is based off of the timing of this this ERP. The focus that we can then put into maturing that process as well as several other so a couple of things, we we talk about as being levers that we have.
Now that the ERP as in and as we mature with this and that.
Folks getting back getting getting better get smoother.
We put in a few enhancements to help really facilitate things working and going to flowing through our plans announcer customers a little easier. There is an opportunity then for us we've been leaning into attrition and we talk about removing the manual this I've I've often said at some point.
Time, when you get a technology.
System that can that can move data for you as opposed to you're needing to move it paper or needing to move statistics are needing to to swivel chair things from one system to the next that there should be a removal of a lot of that manual intervention. So for US I think we've got a continued.
Or maybe an additional targeted workforce reduction as we continue to to develop these things and like I said, we will still lean into attrition.
With controlled hiring I I think as as we get better with our infrastructure with any of the operational improvements. The ERP improvements that we can continue to fine tune for efficiency for productivity for scheduling for engagement with customers I I think all of those things in combination.
Are things that we will enact in 2024 moving forward and then then we continued Michael as you know then at some point in time Mccarron comes on it.
At some point in time, we retire the legacy system. Those are some some pretty big levers that I think are that are at our disposal in order to to make that adjusted EBITDA margin hit the long range targets that we've put out there.
Yeah, and just okay.
That bill of 2023, as the base year for that 13% to 17% annual adjusted EBITDA growth rate that we expect to see so you'll see it in 2024.
And we you know the 3% to 5% is a kangaroo growth rate that so 2024 is when you should start seeing it directly Michael to that question in Q1, if you look at the commodity headwinds on paper you will see some of that continuing Q1, but we have the system now we have a great variable cost model. So we are.
We are we are looking for that to to begin in 2024.
Okay. That's what I was looking for the this is it.
Every year not all back ended on a multiyear correct perfect you lay racks correct correct right right. Okay. I think it was a big part of it since the market is going to see evidence that all of this effort is beginning to pay off the 24 and and it's Cindy mentioned we already.
Have put in a targeted workforce reduction that we executed and they're continuing to fourth quarter that alternate $8 million next year. So those are some of the layers that we have is we drive efficiency. She also mentioned.
Careful hiring attrition, we have strategic initiatives that drive efficiencies and improvements and then our modernization efforts in our facilities are starting to take hold you combine that with the systems. You you just sort of get a compounding effect on efficiency being able to be driven.
Alright, thank you.
Thank you.
And again to ask a question. Please press one one on your phone and wait for your needs to be announced to withdraw your questions. Please post all one one again.
Please for our next question.
And again, we have Dave Nancy appeared.
Your line is open.
Oh date.
It's a messy.
Again, if you on mute please.
Line.
Yeah.
It's Matthew can you hear me now.
[laughter].
Wow I'm Gonna talk it up the user error [laughter].
[laughter] alright, well congrats on the ERP My question I'm going to.
Talk about the paper and soon do you talked earlier about the long range paper pricing being in the 150 range.
What's magical about 192, and 60 per cent I would've thought that over time as you cycling new contracts and design additional customers and lose some that that number would move around like you'd be able to move the 192 set points lower and get a lower percentage of absorption can you talk about.
That formula and why that number hasn't changed in a while yeah.
They have great questions. So so I think in terms of that well well anybody can set numbers and and set set ranges well, we actually tried to do was take market data and an understanding of what's going on in the market place and we took this whole recycling.
Revenue surcharge and put that onto a scale. Unlike anybody else in the marketplace on that side of the business Ah that was purely putting out a recycling surcharge fee you know, whether it's a flat 10% if it's 20% whatever it is we felt that this one.
The scale that we've designed we looked at at at at the market in general to see what what do we think where whereas the opportunities for us develop a scale, where we believe we can win we can still be competitive we can still get paid for the value of of the the service that we provide and pretty much through all of that is where.
That sliding scale came and as we do talk about 60% of the volatility being covered there is it that that's a that's a gym at a general number but you are correct as we continue to win new customers as we continue all new contracts go out with some type.
Acceptance or adoption of this surcharge, but but we also have a legacy customers out there that that continued to negotiate so I think I I think it's not just a combination of where do you want to be it's a combination of where do you want to be and how competitive do you want to be in in markets all across the U S.
And it depends on who the competitors are against him. We play. So I think I think if you take a look at the National account perspective, you know a national account has potentially a little bit of a lower adoption in terms of that versus some of the independents are some of the larger customers. So that that's I think I'm pretty much where that came from.
As opposed to just being here's where we think we could mitigate 100 per cent of the volatility.
Okay.
And then second Ugly E. R. P. I I I understand that you were not standing still before you flip the switch on on the system.
But what are the key changes the early wins that you can get out of the ERP system. So if we look to your one based on your experience with S. I D. What should we expect an order W C as in and related.
Is there any reason why we shouldn't see marshals just steadily pick higher from here I mean, it seems like with all this behind you you can start folding up some of those legacy systems and you've already done the risks maybe there's more behind that is there any reason, we shouldn't see sort of up into the right as it relates to margins from here.
Dave Great question, and I think what we focus on our unfortunately during this journey that we've had it stares cycle, it's been quite a turbulent five year time period at least for me in terms of things that have been maybe let's say a bit outside of our control, whether it's been pandemics and hyper inflation and.
We're.
In Ukraine, and Russia, and supply chain issues and now another breakout.
So I I think you are correct when I look at the things that we can control here's some things that the ERP system affords us an opportunity to do right away, we get better with scheduling we get better with routing we get better with over time, we'd get better with staffing we get better with plant.
Utilization, we get better with with engagement with customers, we get better and we get more nimble when a customer wants to put on a service or attic container or schedule, an additional pick up we get better at those things because we get faster and anytime we get faster on those things, it's affords us an opportunity to get the revenue quicker.
To match the effort and the energy that we're putting on the operation sides from a cost perspective, so I I, our expectation and what we do see and what we had seen.
For a moment.
And we will see that so Dave you're thinking about it correctly and again the caveat is for things that we can control I'm very proud of very confident in in the development of this culture and who we are and how we handle.
Things to get better every day, so I'm I'm excited about that Janet a couple of things and so and they just to reiterate we we said that 2023 was the base year of our long term outlook, which includes a significant margin expansion with adjusted EBITDA growth rate of 13% to 17%, which you expect to start seeing next year and.
Due to all the things and levers that Cindy is mentioned as well as the commercial lover too Cory is sitting right next to me mentioned on the call that they give us confidence in that number and then the legacy systems and international start to come up and out and twenty-five we see some opportunity for adjusting it cost as we go through this.
So we still need it.
I will point out there'll be some timing next year, a little bit in the first quarter there'll be that continued headwinds from the paper, but we have a great variable cost my as I mentioned and we can drive through that but you know from a top line perspective, you still may see some year over year Choppiness on everything right.
And the first court.
Janet brings that Dave you're I know, you're very in tune to the Richie right just kind of an average Q1, two Q next year would be comparisons to Q1 Q2, obviously this year when the average for both of those Q1 was probably about 225 Q2 was close let's say 180.
Six somewhere around in there 187, so there's still some some some stiff comps I would say for Q1 Q2, but then by the time you get to Q3. It. It obviously it comes down it's about 146 and I think that's where you finally get a decent year over year comparison from a commodity perspective at least with respect to raise.
And the top line yeah.
Okay. Thank you very much.
Thanks, Dave I appreciate it.
Thank you.
This will end Q&A session I would now like to turn the conference back to Cindy Miller, So closing remarks.
Thank you and and as always we'd like to thank the investors, we'd like to thank our employees or customers community that we serve for their continued interest in in Stericycle. So thank you all very much.
This concludes today's conference call. Thank you all for participating even though disconnect and have a pleasant day.
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