Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2021-Q1

[Operator]

Good morning and welcome to the Stericycle, Inc. first quarter 2021 earnings call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Andrew Ellis, ‎Vice President of Investor Relations. Please go ahead.

[Andrew Ellis, ‎Vice President of Investor Relations]

Good morning and thank you for joining Stericycle's 2021 first 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 future events and are, therefore, subject to risks and uncertainties.

Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the Safe Harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U.S. Securities and Exchange Commission.

Our past financial performance should not be considered a reliable indicator of our future performance and 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 our 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 May 27, 2021. To access the replay of the call, dial 877-344-7529 and enter the replay access code 10153262. 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 April 29, 2021, may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without express written consent of Stericycle is prohibited.

I will now turn the call over to Cindy Miller.

[Cindy Miller, President, Chief Executive Officer]

Thank you Andrew. Good morning everyone. And thank you for joining us. I would like to recognize our team members and the essential role Stericycle plays in protecting what matters, the health and well being of our team members, customers and communities. Throughout the first quarter, we continued to innovate to match customer demand and strengthen customer relationships in a safe and sustainable way as they continue to fight the pandemic.

As a result of those efforts, in the first quarter, we delivered strong and continued organic revenue growth in regulated waste and compliance services and generated solid cash flow driven by operational performance. Secure information destruction revenues improved sequentially quarter-over-quarter despite continued disruption from the pandemic.

Stericycle plays a key role in managing the reverse logistics associated with COVID vaccination related waste, which contributed to our organic revenue growth this quarter. In the U.S., over 200 million doses have been administered and medical waste from many of those are coming to Stericycle for disposal through our mailback solution and from the mass vaccination centers we support, such as the United Center in Chicago and City Field in New York.

On today's call, I will start off by providing an update on our behavior-based safety culture transformation and then provide perspective on a few of our five key business priorities. As a reminder, they remain quality of revenue, operational efficiency, modernization and innovation, ERP implementation, debt reduction and debt leverage improvement and portfolio optimization. I will then turn the call over to Janet, who will discuss our first quarter financial results. Following our opening remarks, we will take your questions.

First, let's discuss our behavior-based safety culture transformation. Safety is fundamental to Stericycle as an organization. In the first quarter of 2021, we continued to build on a significant safety improvements we made in 2020 and further improved our vehicle incident rate 5% on a rolling 12-month basis. We completed the defensive driving program and training in North America and are well on our way to roll this out in the international market.

Turning to the quality of revenue. We delivered a strong first quarter in regulated waste and compliance services, with organic revenue growth of 6% driven by a combination of the net positive impact of our COVID-19 services and quality of revenue initiatives that I have shared on prior calls. The 6% organic revenue growth is comprised of 3.8% growth in North America and 16.4% growth in international.

Turning to operational efficiency, modernization and innovation. I have previously described the modernization of our facility to manufacture mailback kits which significantly increased our productivity and our capability to meet the demands of our customers providing COVID-19 vaccinations. As a result of this modernization, we increased our production capabilities by 400%. We are well-positioned to continue to provide strong support of this important global vaccination effort.

I am proud of how engineering and operations optimized the manufacturing processes and continued to stay in front of vaccine-related waste demand. And our mailback service represents only one of several ways we are supporting the reverse logistics of vaccine-related waste. When considering all of the services we offer to disposal of sharps, including mailback, we can handle well over 700 million needles in North America on a monthly basis with our existing capacity. This highlights our ability to handle the entire U.S. vaccine rollout, even if it was accelerated.

The transformation of our operations goes well beyond our mailback center. We have developed a systematic approach for optimizing and standardizing the design of our medical waste facility. In North America, we are implementing larger autoclaves in five of our facilities along with automated solutions that will improve safety, increase productivity, reduce operating costs and increase capacity. We are on track to complete these optimization upgrades in three more North American facilities in 2021. Internationally, we just completed two similar upgrades in key locations to support our U.K. business.

I will now turn to our North American ERP deployment. As previously communicated, we shifted the majority of our planned deployment of our North American ERP system into 2021. Our current expectation is that this summer, we will start deploying the North American finance and accounting, procurement and secure information destruction portions of the ERP system, subject to passing several though go/no-go gates that are standard leading up to deployment. The planned finance, accounting and procurement deployment includes our North American general ledger, the integration of our source to pay platform with the ERP and implementation of enhanced budgeting and forecasting functionality.

The secure information destruction deployment will be conducted in several phases and includes commercial, operational and order to cash functionality. The new commercial tools and functionality will automate existing processes and enhance our quality of revenue initiatives. The new operational functionality will include routing software that integrates with our ERP platform and will provide enhanced container management and tracking which supports our operational efficiency, modernization and innovation priority. We anticipate completing the phased deployment to all North American secure information destruction facility by the end of the fourth quarter.

Following this deployment, we plan to implement the North American ERP for regulated waste and compliance services in early 2022. We will continue to monitor deployment readiness and timing along with the evolving pandemic dynamics that could impact our business, customers, internal control environment and the safety of our team members and will factor them into our deployment timing decisions.

Lastly, I want to provide a quick update on our credit defined debt leverage ratio. By generating $62.6 million in operating cash flow in the quarter, we were able to further pay down debt and we lowered our leverage ratio to 3.28 times, compared to 4.5 times at the end of the first quarter of 2020. This improvement continues our progress towards achieving our long term debt leverage outlook.

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

[Janet Zelenka]

Thank you Cindy. I will start by summarizing our first quarter results. As noted on slide four, revenues in the first quarter were $668 million, compared to $785 million in the first quarter of last year. Of the $117 million decline, the impact of divestitures was $135 million and secure information destruction revenues accounted for $26.8 million, reflecting pandemic-related business disruption. These declines were offset by regulated waste and compliance services organic revenue growth of $34.1 million and the positive impact of foreign exchange rates of $10.7 million.

As noted on slide five, regulated waste and compliance services revenues, which now include the remaining part of communication solutions, were $473.6 million, compared to $566.9 million in the first quarter of 2020. Excluding the impact of divestitures and foreign exchange rates, organic revenues grew 6% in the first quarter. North American regulated waste and compliance services organic revenues grew 3.8%. Of this 3.8% growth, communication solutions contributed 1.3% as the healthcare industry turned to Stericycle to support vaccination and test related communications and scheduling services. We estimate that the remaining 2.5% organic growth was primarily driven by quality of revenue initiatives.

Positive and negative pandemic-related revenue dynamics netted to a minimal impact on overall growth, as gains achieved from our COVID-19 related waste and mailback volumes, temporary testing centers and non-healthcare PPE services offset declines in waste from elective surgeries and cruise ship related maritime services. International regulated waste and compliance services organic revenue growth was 16.4% in the first quarter with the vast majority of the gains attributable to higher pandemic waste volumes as we support our customers through the pandemic.

Secure information destruction services delivered revenues of $194.4 million, compared to $218.1 million in the first quarter of 2020, which reflects a 10.9% decline. Of the $23.7 million decline, organic revenues accounted for $26.8 million or 12.3% decline, reflecting pandemic-related business disruption. In North America, secure information destruction revenues declined $19.1 million or 10.3% compared to the first quarter of 2020. For secure information destruction, we generate revenue in two ways, servicing our customers through stops, which comprised over 90% of revenues in North America in the first quarter and recycling paper, which comprised the remainder.

In the first quarter, the revenues related to service stops declined 9.8% as many customers still have staff working from home. North American recycled paper revenues were down 19.4% or about $3.4 million compared to the first quarter of 2020. This decline is inclusive of positive trends in SOP pricing of $0.6 million compared to the first quarter of last year. As a reminder, we have been working to add SOP surcharges to customer service contracts. As we continue to renew contracts and win new business, these surcharges are now included in approximately 40% of North American customer contacts and offset approximately 60% of paper pricing volatility. On a sequential quarter basis, North American secure information destruction revenues increased 5.6% when normalized for working days.

In international, secure information destruction organic revenues declined 21.2% compared to the first quarter of 2020 and included a modest $0.1 million benefit from SOP pricing. The decline in organic revenues was primarily due to the duration and severity of international lockdowns, many of which continue today. On a sequential quarter basis, international secure information destruction revenues increased about 1% when normalized for working days and foreign exchange rates.

Income from operations was $59.1 million in the first quarter compared to a loss from operations of $30.4 million in the first quarter of last year. Of the $89.5 million increase, the change was primarily due to, one, the first quarter of 2021 having known net divestiture losses compared to net divestiture losses of $58.3 million in the first quarter of 2022, two, selling, general and administrative expenses of $27.3 million after excluding a reduction in SG&A associated with divestitures of $29.1 million and three, operational efficiency improvements of approximately $5 million. These were offset by one, higher third-party disposable cost in international regulated waste and compliance services of approximately $6 million, two the combined revenue flow through and cost impact of severe weather in North America of approximately $4 million and three, lower operating income due to divestitures of $2.1 million.

in the first quarter, we spent $20.3 million related to the ERP, in line with the overall spend I shared on the last call, with about 90% in operating expenditures and 10% in capital expenditures. U.S. GAAP net income was $26.1 million or $0.28 diluted earnings per share, compared to a net loss of $20.1 million or $0.22 diluted loss per share in the first quarter of last year. The difference was related to higher income from operations of $89.5 million, as explained earlier and lower interest expense of $6.6 million, mainly driven by a lower debt balances. These were partially offset by an increase in income tax expense of $52.2 million compared to the first quarter of 2020, primarily as a result of a non-recurring tax benefit from the CARES Act of $39.4 million in the first quarter of 2020 and a higher taxable income generated in the first quarter of 2021.

Cash flow from operations for the first quarter was $62.6 million, compared to $82.1 million in the first quarter of 2020. The year-over-year decrease of $19.5 million was primarily driven by a higher annual incentive compensation payout of $38.6 million and higher accounts receivable of $9.2 million driven by increased revenues. These were partially offset by lower interest payments of $15.6 million, primarily as a result of lower debt balances and improved operating and working capital performance of $12.7 million.

Adjusted income from operations was $110 million or 16.5% as a percentage of revenues, compared to $93.8 million or 11.9% as a percentage of revenues in the first quarter of last year. Lower SG&A contributed approximately 280 basis points of the improvement. Quality of revenue and operational efficiency initiatives contributed approximately 200 basis points. And divestitures of lower margin businesses added approximately 120 basis points. These improvements were partially offset by higher third-party disposable cost in international regulated waste and compliance services of approximately 90 basis points and severe weather impact in North America of approximately 60 basis points.

Adjusted diluted earnings per share was $0.71, compared to $0.52 in the first quarter of 2020. As illustrated on the bridge on slide seven, the $0.19 improvement was due to the following, $0.18 favorability from higher adjusted income from operations, $0.06 favorability from interest and other expenses which was mainly a result of lower debt balances, $0.01 favorability from a net positive benefit of foreign exchange rates offset by $0.06 unfavorability from the impact of divestitures.

Our first quarter DSO as reported was 55 days compared to DSO of 47 days in the first quarter of 2020. When excluding divestitures as of March 31, 2021 from the trailing 12-months DSO calculation, DSO was 57 days in the first quarter of 2021, compared to 55 days in the first quarter of 2020.

Capital expenditures in the first quarter were $24.7 million, compared to $39.6 million the first quarter of 2020. The difference was mainly driven by $22 million less in ERP capital expenditures in 2021, compared to the first quarter of 2020 and the timing of planned 2021 capital expenditures. As a reminder, for the full year 2021, we anticipate spending $160 million to $180 million in capital expenditures.

Free cash flow in the first quarter was $37.9 million, compared to $42.5 million in the first quarter of 2020. The $4.6 million decrease was due to lower cash flow from operations, partially offset by lower capital expenditures.

As shown on slide eight, at the end of the first quarter, our credit agreement defined debt leverage ratio was 3.28 times, an improvement from 4.50 times as of March 31, 2020 and well below our maximum allowable ratio of 4.75 times. Net debt was reduced by $38.3 million in the first quarter and total net debt is approximately $1.70 billion. As of March 31, 2021, we had $970.8 million available in our revolving line of credit.

Although we still operate with disruption and uncertainty due to the pandemic, I would like to provide some insights into what we see emerging related to second quarter revenues as well as anticipated ERP-related expenditures. As a reminder, the pandemic significantly impacts portions of our business in the second quarter of 2020. Shredding service stops declined as workers were sent home to shelter in place, cruise ships stopped sailing and many elective surgeries were deferred. Because of those prior year dynamics, we expect that portions of our business may benefit from favorable revenue comparisons if the trends from the first quarter of this year continue into the second quarter.

After normalizing for the impact of divestitures on revenues in the second quarter of 2020, which was approximately $27 million from the divested environmental solutions, expert solutions in Argentina businesses, we may generate organic growth in the low teens in the second quarter of 2021. We do not anticipate this level of organic revenue growth to continue through the second half of 2021, as we began to lap the impact of the pandemic.

Regarding the ERP. As Cindy mentioned, we will continue to monitor deployment readiness, along with the evolving pandemic dynamics and we will factor those into our ERP deployment timing. As noted on slide nine, we are on track to spend approximately $75 million to $85 million on the ERP implementation in 2021, which is in line with the ERP spending range I shared last quarter. Beginning in the third quarter through the remainder of 2021, we also estimate having approximately $30 million to $35 million of ongoing IT operating expenses. Beginning in 2022, we estimate the total annualized ongoing operating expenses for running the new system will be $50 million to $60 million. The 2021 and 2022 ongoing IT operating expenditure ranges are in line with the estimates I provided last quarter.

Finally, we remain committed to our long term outlook, as summarized on slide 10.

I will now turn the call back to Cindy.

[Cindy Miller, President, Chief Executive Officer]

Thank you Janet. This is an exciting time to be part of Stericycle. Every day, our team members show up, do the work and continue to transform Stericycle. We remain confident our five key priorities are the right ones to unlock long term shareholder value and we remain focused on successful execution.

And before we open it up for questions, I would like to thank our team members, our customers, the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters.

Operator, please open the line for Q&A?

[Operator]

[Operator Instructions]. Our first question comes from Sean Dodge with RBC Capital Markets. Please go ahead.

[Sean Dodge, RBC Capital Markets]

Thanks. Good morning and congratulations on the great performance this past quarter. Maybe on the revenue quality initiatives. Cindy, you mentioned that being a meaningful contributor to the organic growth in the quarter. Can you give us a sense of where you are in working through that opportunity? Have you been able to reprice most of the larger customer contacts? Or do you think you are still in earlier or mid-innings there?

[Cindy Miller, President, Chief Executive Officer]

Yes. Sean, thanks for that question. A couple of things. That was a key component when we were early days in quality of revenue movements. It was kind of like the one that we can get our hands wrapped around first. We started the deal review committee where many of those large deals were brought into a central location where we took autonomy away from the field to a degree so that we could help, get more standardized in terms of the service and the value that we were going to put forth.

Since that time, we have done many other things. We have evolved Cory White, our Chief Commercial Officer and his team. We have realigned the sales incentive plan. We put in a centralized RFP process, which we never had before. That's yielding great dividends for us. And we are still early days, couple of months, into pipeline management, which was one of the latest technology engagements that we have put out for quality of revenue. And I can tell you, all of those collectively are helping to contribute to the growth that we are seeing this last quarter.

We are estimating about 2.5% of the growth came from quality of revenue, the other 1.3% from ComSol which was another great story for us. But I think we are past just making sure that we are pricing for value on contract renewals. Right now, I think we are selling value. We are negotiating to value. And quite frankly, I think we are becoming a better partner to our customers as we learn more about all the capabilities that we are doing for them and being able to tailor to the forward-look of the customer demands. So very excited about the efforts and certainly excited about the results for Q1.

[Sean Dodge, RBC Capital Markets]

Okay. Great. And then on the secure information destruction business, good sequential progress there. I think first quarters tend to be big purge quarters. Maybe could you comment on how much of that purge were contributing to the quarter? And then maybe on the compared year-on-year? I am curious, was there a big decline in purge related demand versus the pre-pandemic first quarter of 2020?

[Cindy Miller, President, Chief Executive Officer]

Sean, that's a great question. And one of the things that we find is, it is some purge, naturally from a sequential perspective is first quarter. But it also kind of rolled in the second quarter post income tax day, if you will. But I think we have got the automatics, the customers that we come to regularly and then purge. I think we are positive in terms of us seeing sequential quarter-over-quarter improvement, as you had mentioned. That's key to us right now and it's telling us that as businesses come back and they are open, they still see our service as an essential part of that opening. So that's good news for us. So I don't have the breakdown in terms of purge versus purge. But I can tell you, we are very positive about continuing to see steady increases and steady improvement in that business since its precipitous decline in Q2 of last year.

[Sean Dodge, RBC Capital Markets]

Okay. Thanks and congrats again.

[Cindy Miller, President, Chief Executive Officer]

Thanks Sean.

[Operator]

Our next question comes from David Manthey with Baird. Please go ahead.

[David Manthey, Baird]

Thank you. Good morning. Janet, I appreciate the confirmation of the OpEx dynamics on slide nine. And as we look at second quarter SG&A and think about how that tracks relative to the first quarter, should we assume some moderate upside there? It looks like you are guiding to sequentially revenues being a little bit higher? And then from there, we would probably add in $15 million to $17 million or $18 million per quarter for that $60 million to $70 million run rate step-up. So I am looking at your total SG&A somewhere in the ballpark of $200 million. Are we on the right track there?

[Janet Zelenka]

Yes. I think that we are pleased with the performance on SG&A. We are in dynamic times with puts and takes that are going through the year. I think the key thing here to know is the ERP expenditures, which will hit SG&A will be, they are adjusted out for the year on the GAAP basis. But then also when we turn the switch, you are going to see a flip of about $30 million to $35 million a share into SG&A for the new system going live.

So that's a key dynamic in the second half of the year for SG&A. Certainly, we hope that there is revenue flow through, but note the international dynamic that with the pandemic-related waste, we also have some higher costs going on internationally. So that will be, we actually should see improved margins in international if we have left COVID waste than the other way around. That's the way to think about that dynamic.

[David Manthey, Baird]

Okay. So it sounds like there is nothing unusual that we should anticipate other than that $30 million to $35 million in the second half of the year that you have outlined.

[Janet Zelenka]

Right. There's that plus the ongoing cost of implementing ERP through the year plus there is the uncertainty that comes with putting in an ERP. But yes, those are the key dynamics.

[David Manthey, Baird]

Okay. But as far as the first piece there, the implementation that you are spending today ongoing, that's not stepping up, the $30 million to $35 million, that represents the amount that's stepping up in the back half, right?

[Janet Zelenka]

That is correct.

[David Manthey, Baird]

Okay. All right. That's helpful. And then just quickly to close the loop on that. Janet, could you tell us how you are preparing the people side of ERP implementation? Updates on the training that you are doing for data capture and analytics? And are you expecting any short term inefficiencies before you start seeing benefits from the system next year?

[Janet Zelenka]

It's a great question. Thank you for it. So business readiness and change management is a key part of any ERP. And it's an area we are to be focused on. We have a whole team focused on change management and business readiness. It is actually when we talk about go/no-go gates, business readiness is one of them as well as your technical IT go/no-go gates like production, et cetera, we are deeply engaged in that. We have thought power users. We are building deep knowledge of the system to the testing we are doing. And also have a training program.

There will be natural inefficiencies as you train a workforce such as drivers out on the field and take them offline to understand how they use the handheld differently than they use today or what new capabilities they don't have today. So that is built in how we are thinking about the second half. You also may have extended call times initially with call centers helping customers get through some changes that they will see. Even though they may be upgrades, they are different. So we have factored that into our thinking and it's a really important part of the planning for the ERP.

[David Manthey, Baird]

Thank you very much.

[Operator]

Our next question comes from Brian Butler with Stifel. Please go ahead.

[Brian Butler, Stifel]

Good morning. Thanks for taking my questions.

[Cindy Miller, President, Chief Executive Officer]

Good morning Cindy.

[Brian Butler, Stifel]

Can you guys hear me?

[Cindy Miller, President, Chief Executive Officer]

Yes. Good morning.

[Brian Butler, Stifel]

Okay. I wanted to make sure.

[Cindy Miller, President, Chief Executive Officer]

Yes. We have you, Brian.

[Brian Butler, Stifel]

Just the first one. When you think about the divestitures, what remains out there? It looks like communication was rolled into the regulated medical waste and compliance services. So is that still for sale? Just a little color on, I guess, what is still for sale? And maybe some thought on timing of that?

[Cindy Miller, President, Chief Executive Officer]

Yes. I think that's always a great question. We have left portfolio optimization as one of our five key priorities for a reason. I think we are focused on making sure that we take really a disciplined approach to capital, a disciplined approach to the core businesses and really managing that way. I think the divestitures we have had up to this point in time have certainly helped. They have helped the balance sheet and certainly helped to reduce debt.

I think what we are looking at is, we have always said we have core businesses and then we have always said that we wanted to be in markets where we felt we had a strong commercial opportunity to grow quality of revenue. So, for us, we continue to look at that to see and make sure that we are in markets where, if you will, the juice worth the squeeze. So for us, I think we are taking a disciplined approach to looking at all things and evaluating.

Certainly, with us having had our largest company divestiture last year, I think it was in Q2 of last year. So we have developed the muscle memory in order to be able to be flexible and I think we are leveraging that to make sure that we are capturing what we might think would be the best deals out there. So for us right now, we are sitting back and being pretty opportunistic.

[Janet Zelenka]

I just wanted to add up to that that we put ComSol into the RWCS business service line for a reason is that it has a high overlap in hospital customers with what we have today and it's been a real gem of a performer as you can see in the first quarter contributing to the overall growth as the hospitals and other major medical providers see the value.

[Cindy Miller, President, Chief Executive Officer]

Yes. And Brian, if I just may, with reference to ComSol since you brought it up, I just think it's important for us to talk about one of things we know him from that divestiture question you had, we did divest. We divested of the telephone answering service in the expert recall business from underneath that C&RS umbrella. We had an opportunity to restructure that organization in ComSol communication solutions. I think the team, under Cory White's direction, has done a great job in better aligning costs.

We have enhanced and upgraded some of the service offerings. We have got live voice. We have natural language processing. We have got multi-language support. And I think what we are seeing in ComSol is, it provide intelligent scheduling capabilities in various channels, whether it's on live, live voicemail, live voice email, chat. It's great for referral management which has really been key to our customers right now. Communication reminders with reference to appointments and other engagements with hospital patients or doctor office patients. And we have got post-discharge services, patient hotlines.

So for us, as Janet was mentioning, it's a great synergy where it's affording us an opportunity to stay connected with our strong customer base where we are kind of on the back half of the logistics, provide us an opportunity to get up front and get engaged with customers and the interesting thing that we are really seeing right now is we have seamless integration with our customer networks. We have got a comprehensive platform.

And lastly, we are finding we have about 300,000 daily patient engagements and experiences a day on behalf of that large customer base that we have. And I think we are learning more about it as a result of the divestiture and I think with it contributing the 1.3% of the growth that we had, the organic growth in North America, out of the 3.8%, we are excited about where that's going.

[Brian Butler, Stifel]

Okay. So it would be fair to say that beyond normal business through the non-core assets that you find, there is really no large chunks remaining to be divested?

[Cindy Miller, President, Chief Executive Officer]

I stand by what I said. We continue to know the core and evaluate our options. So I think we will see where that shakes out.

[Brian Butler, Stifel]

Okay. Second question, just on the ERP. You have provided great detail on kind of the expense. Can we review maybe the expected benefits as the rollout go out? And how to think about maybe modeling that and what the potential is in the remainder of either 2021 or as we head into 2022?

[Cindy Miller, President, Chief Executive Officer]

Sure. It's a great question. I will start off. If Janet has anything else that she would like to add, that would be great.

But I think I think we tried to take a look at putting in an ERP, there has been an awful lot of technical debt, I think, in terms of all the disparate systems that we had up to this point in time. So we realized that a good bit of us everything. For us, being able to make our long-term guidance plan, we have got to have this ERP implemented and successful. A good bit of whether we are talking about $400 million in free cash flow, if we are talking about the continued debt leverage, if we are talking about being able to grow, all of those requires the infusion of the technology capabilities that ERP is going to provide for us. So while we are doing our best to continue to work efficiently and optimize what we are doing in standardized processes and we are doing our best to make sure that we are continuing to drive the quality of revenue. But the capabilities of the ERP will bring, that's what's going to take us into the numbers that we put out there.

Janet, anything that I have missed?

[Janet Zelenka]

No. I think you covered it. Basically that the business cases, the hole list of long term guidance that we have given because it's so foundational to the business.

[Brian Butler, Stifel]

Okay. Great. Thank you.

[Cindy Miller, President, Chief Executive Officer]

Thanks Brian.

[Operator]

Our next question comes from Alexander Leach from Berenberg Capital Markets. Please go ahead.

[Alexander Leach, Berenberg Capital Markets]

Good morning and congrats on the quarter. My first question is around the vaccine work that you guys mentioned. How much of a benefit are you seeing from that exactly? And do you expect that to roll of in H2? And on the flip side, there is still conversation that we may have to get annual boosters for the vaccine going forward. So is that an opportunity and some upside to revenue for you guys?

[Cindy Miller, President, Chief Executive Officer]

That really is a great question. Here is what we are very pleased with. We have a large portion or portion -- we have a portion of our regulated waste, whether it's the decline in elective surgeries, people staying away from hospitals and doctors offices. And a complete shutdown of another portion of the business in maritime. When we talk about those pieces being down and yet what we have seen is our ability to be nimble enough to capture this opportunity called COVID or this opportunity called the pandemic.

So for us, we see COVID really coming in, whether it was the nimbleness we showed when it was all about testing and all about non-healthcare PPE disposal and now we are looking at it just being added to with reference to vaccine logistics. So we think that portion of the business is really helping to offset what we are seeing in declines in another key portions of the business with elective surgeries and maritime.

And then on top of that, our growth we are seeing certainly is based off of our quality of revenue initiative. So, for us, here is what I know. I think we are prepared. We have got strengthen our quality of revenue right now. We are seeing growth. We are positioned if some of this pandemic-related, whether it's vaccinations or testing, if some of that, a portion of that continues into the future, that's terrific. We are prepared. As I mentioned, we are well prepared with capacity and operations at the ready to handle it. So I think that's opportunity and an upside for us. But right now, I think we are well-positioned to make sure we can hit our 3% to 5% long range revenue growth targets based on the foundations that we had at this moment.

[Alexander Leach, Berenberg Capital Markets]

Okay. Great. And then looking ahead, how are you dealing with inflation? Is there a risk that impacting the Shred-It business tool and SOP pricing? And have you seen an impact there in Q1 related to inflation?

[Cindy Miller, President, Chief Executive Officer]

So inflation has interesting dynamics that we are watching in the business. Actually, inflation on sorted office paper pricing would be a benefit for us because as you can see, the dynamic in recycled paper is a price times volume dynamic. So we would get more for the paper.

In terms of inflation across other aspects, we are predominantly a service industry. So it's fueled, though that's a very modest part of our overall spend and some materials, which we have good contract in place. But we are monitoring. So we are watching the inflation dynamics going on. But we will also have low interest rates too. That is the other side of the whole economic dynamic that I think we will benefit from. So as sorted office paper pricing going up would be an upside for us.

[Alexander Leach, Berenberg Capital Markets]

Okay. Great. Thanks guys.

[Cindy Miller, President, Chief Executive Officer]

Thanks Alexander.

[Operator]

Our next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

[Scott Schneeberger, Oppenheimer]

Thanks very much. Good morning. So Cindy, curious on international in regulated waste, a very strong quarter. I know lower base but a strong quarter of organic growth. Just curious what's behind that and if that ties into the comments about the third-party disposal issues internationally? Thanks.

[Cindy Miller, President, Chief Executive Officer]

Yes. Scott, you are spot on with that. So one of the things we see there is, Europe is in a different position than the U.S. is, than most of the world is with reference to the pandemic. Not as much vaccine rollout, longer stays in hospitals. So it's a completely different dynamic for us. So what we have talked about, what we have been able to unpack is, we believe there is some over classification of waste, meaning not just COVID waste but in a room with a patient, all things are kind of being classified as regulated waste. And we are seeing an uptick.

Now the good news is, we have the capability where we are collecting it. But if it's pushing us to a little bit more dependence on third-party. And any time you get engaged with third-party, the revenue that you bringing in isn't necessarily the same quality that the revenue you bring in when you handle it on your own. So that's the dynamic there. But we are proud of the international team. We are certainly proud of the team right now in the throes of things in being able to do the things that they are doing. We upgraded, I think we mentioned, we upgraded two of the facility, two key facilities for us in the U.K. market so that we can help our folks continue to handle the waste that they are seeing. And I think that that's going to continue to be key for us in the future.

[Scott Schneeberger, Oppenheimer]

Great. Thanks. It sounds a go-forward opportunity. It's been a very impressive job you all have done with regard to deleveraging and getting very close to your below three target. Just curious, Janet, thoughts on how soon you could get there? From our math, it looks like you are getting pretty close? And thoughts on other uses of capital besides debt reduction since we are getting so close? Just any updated considerations there? Thank you.

[Janet Zelenka]

No, thank you. We are pleased with the continued pay down of debt. As you know, that's one of our top five priorities and the cash flow generation that we are seeing in the business. So we have the target to get below three in our long term guidance, a little farther out than what you are indicating. And that's because we have to get to the ERP and some other considerations that we are monitoring what that means in terms of cash outflow.

In terms of a more sophisticated capital allocation strategy than pay down debt, that is something that we are excited to consider in the future as this engine of cash continues to generate opportunities for us. We are not ready yet. We are thinking about what that will be. But you are correct that the cash engine of the business could generate additional opportunities for us and in the future at some point we will be talking about those options.

[Scott Schneeberger, Oppenheimer]

Okay. Thanks. Good job. I will turn it over.

[Operator]

Our next question comes from Gary Bisbee with Bank of America. Please go ahead.

[Gary Bisbee, Bank of America]

Hi. Good morning. I know you were asked earlier about SG&A but I wondered if circle back to that for just a minute. When I look at the last three quarters, I guess, of 2020, you had talked about $3 million to $5 million of cost savings and I think call that roughly 80 basis points of efficiency couple quarters in a row which I think was effectively that $5 million. And yet this quarter, you called out 280 basis points of SG&A and 200 basis points of operational efficiencies. So it seems like those savings programs stepped up materially. But what else is involved there? And is there any of that that we should think is more Q1 specific and not something that would continue as we move through the year? And I heard you loud and clear on the incremental ERP, so you don't have to repeat that. But what were the other puts and takes this quarter that drove the margin? Thank you.

[Cindy Miller, President, Chief Executive Officer]

Thank you. We are pleased to the SG&A performance too and thank you for hearing the ERP because that will be a factor in SG&A performance going forward. The other will be, we believe travel will continue to ramp up as the opportunities open. Right now, internationally, travel is very restricted and we can't even get over the ocean to see our people over there. So there is some opportunity for increased travel expense in the second half of the year.

We did have dynamics, as you have heard, that in the overall margin some of that is more on cost of revenue that related to international disposal and weather. But SG&A is something we are watching. But the big story is the IT in the second half of the year that we will see and maybe some increased return to travel and some other expenses as the economies open up.

[Gary Bisbee, Bank of America]

And so excluding the ERP and we will layer that in for sure, is this a decent jumping off point? Or were there some other factors, because it was down quite a bit from the last couple quarters?

[Cindy Miller, President, Chief Executive Officer]

With all the puts and takes we have got going on in the business and from the dynamics, it's, I would say, the divestiture piece is structurally an ongoing piece, that 120 basis points, I believe, that we quoted that, that is structurally a change in how you should think about SG&A. The rest of it, we are encouraged by it and we continue to monitor it. But given the dynamics, I am reluctant to make predictions but we are pleased with the discipline that we see.

[Gary Bisbee, Bank of America]

Okay. And then just one follow-up on the ERP. So it sounds like the regulated waste business facilities is now a 2022 story. Does that change at all sort of cost, timing of going live, when you might achieve some of the efficiencies not only cost side but you have talk a lot about the operating potential, get better data you can make better decisions. Should we think that's a 2023 story at this point? Or is that how you thought about it all along and that's just really [indiscernible] today?

[Cindy Miller, President, Chief Executive Officer]

So thank you. I appreciate that question, just to give the history of the ERP. So as you know, we were going to go live last year. And then the pandemic hit. And then the ability to serve our customers was important as well as the safety with the shelter in place rules, et cetera to put it out. And it had been largely created as an in-person deployment. So what we are seeing going forward is that we are going to deploy in the summer. It seems like it's an open enough time to do that.

We have created a virtual ability to manage the ERP and we are going to start. And it's more than just Shred-It. It is the entire general ledger and financial systems, it's procure to pay, it's all the major processes plus the Shred-It facilities. And as you cascade through doing that plus the Shred-It facilities and maintain and stabilize the control environment to maintain our effective control environment just naturally flows that the RWCS facilities will hit into next year.

In terms of cost, most of the development we believe will occur this year. There may be some costs. We are still evaluating that peak into next year as we finish and deploy RWCS. We will learn a lot from the first deployment.

In terms of benefits, the benefits are the long range guidance and we can remain committed to that. We are continuing to get benefits of the parts of the ERP we have already deployed. Remember, we have the procurement system. We have the HR system. We have deployed a tax system. And we continue to evolve our data and analytics platforms. So those help us continue to provide benefits as we continue to deploy.

[Gary Bisbee, Bank of America]

Thank you.

[Operator]

Our next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

[Jeff Silber, BMO Capital Markets]

Thanks so much. I wanted to go back to an earlier question. I think you were asked if you could quantify the impact of the vaccine and anything else related to the pandemic? And I think you just said it basically offset some of the negative that you are still getting from that. Is it possible though to just to put a number around it? What is the positive impact you have gotten from some of the pandemic-related work in the first quarter?

[Cindy Miller, President, Chief Executive Officer]

Yes. So if you look at how we unpacked the North American growth, you started with the 3.8% growth. The ComSol growth of 1.3% is a good part of that is driven by us helping with vaccine-related outbound patient portal and other calling that is creating contracts and new customers and existing customers that are showing the value proposition. So it could be sustainable, it could be vaccine-related and testing-related. And then you unpack the rest, 2.5% of that we think is due to the sustainable quality of revenue initiatives that we have put in place to create growth in the business. And then the rest sort of washout in RWCS and our North America between the declines and elective surgeries and maritime where the cruise ships stopped sailing against the upsides we have seen from our mailback programs, our vaccination programs, our testing programs, et cetera. When you go to international, most of that growth is fueled by the pandemic-related waste and vaccination programs that are going on there. And then that's what's fueling some increased costs as well.

[Jeff Silber, BMO Capital Markets]

Okay. I realize it is difficult to quantify. I appreciate that. Generally, those type of businesses related to the pandemic. Did you say earlier that they are lower margin businesses than you typical core business?

[Cindy Miller, President, Chief Executive Officer]

No, we did not say that.

[Jeff Silber, BMO Capital Markets]

Okay. I must have misheard you. Okay. How does it compare margin-wise to your core business?

[Cindy Miller, President, Chief Executive Officer]

The vaccination and testing related businesses?

[Jeff Silber, BMO Capital Markets]

Yes.

[Cindy Miller, President, Chief Executive Officer]

There is a mix in there. But basically I am very impressed of how the commercial team has been very customer responsive and focused, but also been able to build pricing mechanisms to retain margin value.

[Jeff Silber, BMO Capital Markets]

Okay. Great. thanks for your help.

[Operator]

[Operator Instructions]. Our next question is from Ryan Daniels with William Blair. Please go ahead.

[Nick Spiekhout, William Blair]

Hi guys. Nick Spiekhout, for Ryan. Thanks for taking my question. I guess if you could provide just a little bit color on how the selling season is going? And with a particular, I guess, focus on the cross-selling of SID to RWCS clients?

[Cindy Miller, President, Chief Executive Officer]

Yes. I think that's a great question, Nick and one we are very excited about. We continue to. as we are creating a stronger commercial organization, all the training, all the quality of revenue improvements, a one of the keys is really putting forth a bundled solution, a solution where we can -- we have got a tremendous amount of products and services that we can help customers with in making sure that we cross-sell or that we present that to them has been a key focus for us.

So what I can say is, when you take a look at businesses, let's say RWCS as an example and you see all the years of decline of revenue, really no organic revenue growth at all and we saw the first signs of positive organic revenue growth and I think it dated back either sometime in 2016 or early 2017, I forget exactly when, but when you take a look at last quarter last year, Q1 of 2020, was the first time we had turned the corner and saw some growth. And now here we are a year later with all the uncertainties that came from this pandemic and all the work that the team has done, I couldn't be prouder of the fact that we are now talking about quality of revenue initiatives that we believe were about 2.5% of the 3.8% growth that we saw in North America.

So to me, what that's telling me, is we are selling regulated waste well. And when I see us sequentially growing quarter-over-quarter with secure information destruction, I have confidence that it's also because of the combined efforts for a lot of those cross-selling trainings that that we put in. So more to come, but very positive. Anytime an organization can really get some momentum behind organic growth, it's good news.

[Nick Spiekhout, William Blair]

Great. Thanks. And then I guess next one just kind of a clarification question. I think last quarter you targeted or you pointed to about $60 million in revenue left in that CRS business that was rolled into RWCS this quarter. Is that still the case, a good baseline to go off of?

[Cindy Miller, President, Chief Executive Officer]

Yes. So the baseline for the communication solutions is what we call the remaining business was about $60 million, that's the baseline from last year.

[Nick Spiekhout, William Blair]

Okay. Great. Thanks guys. Congrats on a solid quarter.

[Cindy Miller, President, Chief Executive Officer]

Thank you.

[Janet Zelenka]

Thanks Nick.

[Operator]

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

[Cindy Miller, President, Chief Executive Officer]

Thank you Betsy. And to everyone listening on this call, we greatly appreciate your interest in Stericycle and your shared excitement for our future. So thank you much.

[Operator]

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