Stericycle, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Feb 2022

[Operator:]

Good day and welcome to the Stericycle Fourth Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Andrew Ellis, Vice President of Investor Relations. Mr. Ellis, the floor is yours sir.

[Andrew Ellis:]

Good morning and thank you for joining Stericycle’s 2021 fourth quarter earnings call. On the call today will be Cindy Miller, our Chief Executive Officer; and Janet Zelenka, our Chief Financial Officer and Chief Information Officer. The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal, or similar expressions, we are making forward-looking statements. 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 the future events and are therefore, subject to risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the Safe Harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the US 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 US GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle’s Investor Relations website at investors.stericycle.com. The prepared comments for today’s call correspond to an earnings presentation, which is also available at Stericycle’s 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 24th, 2022. To access a replay of the call, dial 877-344-7529 and enter replay access code 3871221. A replay of the webcast will also be available on Stericycle’s Investor Relations website. Time-sensitive information provided during today’s call, which is occurring on February 24th, 2022, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Stericycle is prohibited. I'll now turn the call over to Cindy.

[Cindy Miller:]

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. In the fourth quarter, like many organizations, we were faced with the impact of COVID-related illnesses tied to the Omicron variant. As a result of the variant and associated quarantine protocols, we experienced unprecedented absences, exacerbating driver and worker shortages. However, through these extraordinary times, our team members came together to support our customers, helping to keep the health care network running. We had another positive quarter of organic growth, which increased 3.5% and was in line with the mid single-digit organic growth guidance, Janet shared on last quarter's earnings call. We since completed our 10th divestitures since 2019, closed on our first Regulated Waste and Compliance Services acquisition in over three years and generated strong free cash flow of $69.8 million. Expanding on our key business priorities, I'll start with the quality of revenue. As I previously mentioned, organic revenues increased 3.5%, primarily led by Secure Information Destruction, which grew 7.4%. We are pleased that North America Secure Information Destruction had organic revenue growth of 7.6% year-over-year in the quarter after the ERP implementation. Additionally, we continued to see organic revenue growth in the Regulated Waste and Compliance Services of 1.9%, primarily led by North America at 2.6%, which was mainly driven by the partial return of our cruise industry customers and encouraging trends in the higher average weight per container, which we believe was due to increased elective surgeries. We continue to demonstrate to our customers the value of the services we provide. However, in the fourth quarter, we continued to see inflationary pressures in our cost to serve. One of the strengths of our quality of revenue initiatives has been working to create a more flexible pricing model with the necessary levers to adjust to these inflationary cost challenges. We have the following pricing levers

[Janet Zelenka:]

Thank you, Cindy. I will start by summarizing our fourth quarter results. As noted on slide 5, revenues were $657.3 million compared to $655.9 million in the fourth quarter of 2020, excluding the impact of divestitures of $20.5 million and unfavorable foreign exchange rates of $0.9 million, organic revenues increased $22.8 million. Of the increase, Secure Information Destruction organic revenue growth was $13.9 million, and Regulated Waste and Compliance Services organic revenue growth was $8.9 million. As noted on slide 6, Regulated Waste and Compliance Services revenues were $455.7 million compared to $468.5 million in the fourth quarter of 2020. Excluding the impact of divestitures and foreign exchange rates, organic revenues for Regulated Waste and Compliance Services increased 1.9%. North America Regulated Waste and Compliance Services organic revenues grew 2.6%. Of this 2.6% growth, the majority was driven by an increase in maritime waste services revenues and an increase in the average weight per container, which we believe was due to increased elective surgery waste. International Regulated Waste and Compliance Services organic revenues declined 0.7% in the fourth quarter. This decline was due to lower pandemic waste volumes compared to the fourth quarter of 2020, which experienced an over classification of pandemic waste. As noted on slide 6, Secure Information Destruction Services delivered revenues of $201.6 million compared to $187.4 million in the fourth quarter of 2020. Excluding the impact of foreign exchange rates, organic revenues for Secure Information Destruction increased 7.4%, mainly due to increased service stops and higher recycled paper revenues, reflecting higher SOP pricing offset by lower SOP volumes. For the full year 2021, our global recycled paper volume was approximately 7% lower than 2020. In North America, Secure Information Destruction organic revenues increased $12.2 million or 7.6% compared to the fourth quarter of 2020. As Cindy mentioned, the ERP system start-up challenges and customer impacts that we experienced in the third quarter have improved as we've continued to tune the new technology and processes. For Secure Information Destruction, we generate revenues in two ways

[Cindy Miller:]

Thank you, Janet. I'd like to close highlighting our efforts to protect the health and well-being of the environment in a safe, responsible and sustainable way, which is a key element of our mission and core values and something we focus on every day. With increasing focus on minimizing climate change impact, we formally disclosed our climate change data through CDP to enhance transparency with our many stakeholders. For our first submission, we are proud to have received a B minus score and look forward to advancing our ESG efforts. Another example of our sustainability commitment is our recently announced five-year partnership with the National Park Foundation. Over the course of the relationship, we are committed to supporting landscape and wildlife conservation with a focus on wetland restoration. The National Park Foundation's mission is to protect national parks and connect people to the wonder of nature. This aligns well with Stericycle's mission to protect health and well-being in a safe, responsible and sustainable way. Operator, please open the line for Q&A.

[Operator:]

Yes, ma’am. We will now begin the question-and-answer session. And the first question we have will come from Scott Schneeberger of Oppenheimer. Please go ahead, sir.

[Scott Schneeberger:]

Thank you very much. Good morning. Cindy and Janet, I guess this first question is for both of you. The first acquisition in a few years. And just curious the impetus behind that. And should we expect more of that to come? I understand the leverage ratio is a little distorted by the Foreign Corrupt Practices Act payout and is actually trending really nicely in the right direction with the debt paydown. So is this a turn? Are we going to see more? Cindy, that's your part. And then Janet, if you could kind of hit on maybe what type of multiple paid and contribution in current period in going forward? Thanks.

[Cindy Miller:]

Scott, great question. Thank you much. Appreciate it. Yes. So one of the things that we had -- we're still with the same five key business principles and initiatives that for the past several years since Janet and I have been together. And one of them, it started out as portfolio rationalization, because we realized that we needed to clean up the balance sheet. We needed to get focused on the core. We needed to make sure that we could take the resources and deploy them to where we had the opportunity to improve and grow Stericycle. So for us, just last year, we changed it to portfolio optimization. And I think for us, we're getting smarter. We're getting more strategic. And I think more importantly, we're getting more disciplined in order to understand the strengths of our markets, whether it's regionally here in North America or where we are globally. So for us, this strategic tuck-in made great sense for us in terms of it being, I think, a well-run company, a similar service offering, similar culture, a strong focus on independent customers. So I think that's going to afford us an opportunity to expand service offerings and really scale some of the operations in an area where we didn't have the strongest footprint. So I hope that helps. And I think in terms of what's the future, as always, we're going to take a look at all conditions, market conditions, our strengths and weaknesses, where we think that we could improve our footprint in order to grow. So I think as optimization states, all things are on the table. Go ahead, Janet.

[Janet Zelenka:]

Yes, thank you. Thank you for noting the debt leverage improvement. You're right, we do have a large payment or accrual that we put in there for the FCPA, and without that, we're trending quite nicely. In terms of what we viewed as acquisition, we -- as we stated, was accretive. It will generate revenue less than $10 million in the year, which we're pleased of. And I think we achieved a multiple that both parties were happy with.

[Scott Schneeberger:]

Great. Thanks. And for my follow-up, just curious that working capital headwind in 2021, sounds like the ERP in destruction was kind of a headwind. Janet, how quick can we see that repair? How is that factored into the free cash flow guidance for the upcoming year? And I guess, tying to that, on the Foreign Corrupt Practices Act settlement, do you have a sense of timing of payments in the coming years? Thank you.

[Janet Zelenka:]

Yes. So in terms of the free cash flow that we indicated, yes, you're right, the FCPA settlement will be this year. I'm not quite sure exactly when so we'll keep you posted as we know. In terms of the working capital opportunity, yes, we did make a conscious decision to delay some of the billings so we wouldn't have a lot of credit and rebills as we work to get very complicated customers on the platform for an accurate billing. So that is an opportunity. However, we also are not going to see the income tax benefits that we saw this year in terms of refunds or at least we're not anticipating it. So there is a working capital opportunity there. There's also a cash flow from operations opportunity built into that free cash flow. And yes, it would have been higher if we didn't have to pay the $80-some million for the FCPA.

[Scott Schneeberger:]

Got it. Thanks. I’ll turn it over.

[Operator:]

And next, we have Sean Dodge of RBC Capital Markets.

[Sean Dodge:]

Yes. Thanks. Good morning. On the revenue guidance for the year, the 3% to 5% growth you're targeting, can you talk a little bit about the visibility or maybe some of the underlying assumptions there? Is a lot of that expected to come from the cost pass-through levers, Cindy that you talked about? Is there an assumed contribution from things like ongoing revenue quality initiatives? And then, how much, I guess, incremental recovery or rebound do you need to see in Shred-it to get to that 3% to 5% range?

[Cindy Miller:]

Yes. Great question. Thanks, Sean. So for us, you're right. We talked on -- specifically, we wanted to share with everybody and get out there the fact that we are looking at price. We are looking at the levers that we can pull. We talked about those, whether it's with existing customers, brand-new customers or some of the surcharges. Our intent is to have that to offset some of just the onset of some unprecedented, whether it's inflation or some of the supply chain or labor shortages that we've seen. But your point is about -- here's what we're happy about and here's what I'm very pleased with in terms of our businesses. If we take a look, we've learned a lot of things since the pandemic. We've learned that the services that we provide within these businesses, our core businesses really have an opportunity to ebb and flow and yet still provide us a chance to grow. So if you think back to the pandemic, elective surgeries are down. But COVID, COVID waste, lighter, we had to get more creative but still, we saw growth and we saw growth as we came through it. Now as COVID is -- it's less and less, elective surgeries are starting to go back. At one point in time, maritime was completely shut down. It's starting to come back. So I think for us, it's a combination. It's a combination of the resilience of the service offerings that we have where they can ebb and flow. One can be more, one can be a little bit less and we're still in the growth focus for that 3% to 5%. And then on the Shred side, on the Shred side, we've seen good growth in Shred. If you take a look prior to the pandemic, we were -- we had an extremely strong January of 2020 and February of 2020 in Shred, a lot of momentum and then pandemic hits. Okay, we continue to focus. Saw good growth, incremental growth in recovery as the world started to dig out from underneath the pandemic. And then we saw growth in January through July last year, and then we roll out the ERP, and we have normal disruptions to a business. And now we're showing strong growth, we're showing solid growth in Q4 for Shred. So I think all indicators for us, as the world continues to rebound and again, your guess is as good as mine, I know there's some very unfortunate news today in terms of what's happening globally. And I think that tempers a lot of things everybody thinks about during a given day. And so for us, all things being as normal as they can be, we're very positive about all things contributing to that 3% to 5% growth opportunity.

[Janet Zelenka:]

And the only thing I would add is that as we look at that opportunity, yes, it's price as all the levers, as Cindy mentioned, it's also the volume based on the value proposition. We do note that the inflationary came on fast and you have to push pricing to your customers. So, as we mentioned in the prepared remarks, there is a timing between the first half and second half as we see that go into the market. But we're really impressed with the collaborative work that our sales team is doing with our customers. And I think a lot of our customers understand the pressures that everyone is seeing these days.

[Sean Dodge:]

Okay. And then you mentioned the impact that the Omicron surge had on drivers and having a large number of people not being able to come into work. It sounds like you had to pay some overtime to those drivers that could come in. Could you quantify maybe the impact of cost from that Omicron surge? And then I guess, were stops affected to this kind of revenue impact in the quarter, too? And then with this specific to the fourth quarter, is there some that's going into Q1?

[Cindy Miller:]

Yeah, I think there's a lot in there. And one of the things that, we are looking at is we don't specifically have anything tied to X amount of drivers or absent for whether it's Omicron or some of the other things. I think we've had a run rate of a certain percentage of shortage just based off of the labor shortage, specifically the, I think the American Truckers Association still talks about the fact that, there's 80,000 short drivers in North America. So that is still there. But Omicron, as we had said, exacerbated it. It's on top of your – whatever companies have adapted to in terms of being short drivers. But for us, I think a couple of positive things that we did have – we did talk about having overtime and those things. I think it's a testimony to the team for how hard everybody worked to make sure that we took care of customers as best we could. And we're really focused on the continuation of our efforts to attract talent and to retain it. You mentioned some local market adjustments that we had put in. I think the culture that we're developing here at Stericycle is becoming something that's helping us retain our employees with our mission and our purpose and our values. And then, I think there's a lot to be said for the fact that people are enjoying the fact that at least a portion of the business, we're getting new technology. We're now not at a disadvantage in comparison to the working – a normal work environment that potential candidates would have at another company versus ours. So I think all of those things are shaping up to be more of a positive for us. But when it will end, when it will stop, when we'll see more employees going into the marketplace, your guess is as good as mine. I'm just really pleased that right now, the Omicron variant, we are seeing folks coming out of protocol and certainly returning to work and servicing our customers.

[Janet Zelenka:]

Yeah. And in terms of the quantification, the labor costs that we saw that were above and beyond were around $7 million, and that was a combination of the shortages, the absences, which caused the overtime, right? And then you have – we had just – we were bringing on, we are being successful in recruiting new people in, which you have a learning curve with the new people. So as we assessed all of those, which are very connected, that was worth about $7 million in the fourth quarter.

[Sean Dodge:]

Okay. Great. Thanks, again.

[Cindy Miller:]

Thanks, Sean.

[Operator:]

The next question we have comes from David Manthey of Baird.

[David Manthey:]

Yeah. Thank you. Good morning. Janet, the $7 million you were just referring to, I was unclear, is that in the quarter or for the year?

[Janet Zelenka:]

That was in the quarter.

[David Manthey:]

The quarter, okay. So that's – okay.

[Janet Zelenka:]

Thanks.

[David Manthey:]

And then...

[Janet Zelenka:]

Yeah, which was due to the cash onset with several people, almost everyone saw that happen in the quarter, yes.

[David Manthey:]

Yes. Okay. And then more accounting here. On the acquisition and divestiture, you gave us $10 million in revs for the acquisition, and you gave us $5 million in EBITDA for the divestiture. But could you fill in the gaps there? What was the -- what approximately EBITDA for the acquisition and then revenues related to the divestiture?

[Janet Zelenka:]

Yes. So I haven't -- we haven't -- I didn't release the EBITDA with the divestiture, but it's accretive. So meaning that it will be at least at the rate or above what we normally see.

[David Manthey:]

Okay.

[Janet Zelenka:]

And there's a lot of bridges and information in my remarks and in the deck and even in the K to help you get to what the divestiture's impact was versus others to set the end of the year framework for you.

[David Manthey:]

Right. We'll have to sort that out. Thank you.

[Janet Zelenka:]

You’re welcome.

[David Manthey:]

And then the 3% to 5% organic revenue growth, I know you said that maybe it will take some time to get some of this pricing in. But could you talk broadly about how you think that breaks down volume versus price? I mean, in an environment where inflation is running as hot as it is, that seems pretty low either way. And I was just wondering, would it start out the year at the beginning -- at the low end of that and end the year at the high end, or how are you thinking about that 3% to 5%? It just seems low in this inflationary environment.

[Janet Zelenka:]

Yes. So it -- we are putting the pricing in place using the levers that Cindy said. And as we mentioned, we will have a timing. The first half EPS will be lower than the second half compared to the prior year due to two factors, the timing of that plus the -- we didn't have the IT costs that we had -- now we have in our normal adjusted run rate cost as it reflects into adjusted EBITDA compared to the first half of last year. And in terms of pricing, yes, there will be -- there is significant pricing going into the market that will drop to the bottom-line, but it will also be covering the increased costs that we're seeing, and you're going to see a timing on that between the first half and the second half.

[David Manthey:]

Okay. Thank you very much.

[Janet Zelenka:]

Thanks, David.

[Operator:]

At this time, there appear to be no further questions. This will conclude today's question-and-answer session. I would now like to turn the conference call back over to Ms. Cindy Miller, President and Chief Executive Officer for any closing remarks. Ma'am?

[Cindy Miller:]

Thank you, Mike. I appreciate it. So to everyone listening on this call, we greatly appreciate your interest in Stericycle and your shared excitement in our future. So thank you much. Appreciate it.

[Operator:]

All right. And we thank you, ma'am and to the rest of the management team for your time also today. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care and have a wonderful rest of the day. Thank you.