Stericycle Inc
NASDAQ:SRCL
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Stericycle Inc
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Hello, and welcome to the Q1 2023 Stericycle Earnings Conference Call. My name is Elliot, and I’ll be coordinating your call today. [Operator Instructions]
I’ll now like to hand over to Andrew Ellis, Vice President of Investor Relations. The floor is yours. Please go ahead.
Good morning, and thank you for joining Stericycle’s 2023 first quarter earnings call. On the call today will be Cindy Miller, our Chief Executive Officer; and Jan 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 other similar expressions, we are making forward-looking statements.
The 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 described 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 investor 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 25, 2023. Replay information is available in the Events section on Stericycle’s Investor Relations website. Time-sensitive information provided during today’s call, which is occurring on April 27, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Stericycle is prohibited.
I’ll now turn the call over to Cindy.
Thank you, Andrew. Good morning, everyone, and welcome to today's call. Overall, I am pleased with our first quarter performance, which is in line with our expectations for the year. We saw a solid performance and progress across our key business priorities.
Turning to our first quarter results. Our revenue performance benefited from the commercial actions started in 2022, which included leveraging our pricing actions. We delivered another quarter of overall organic revenue growth, growing 7.2% with Secure Information Destruction increasing 11.8% and Regulated Waste and Compliance Services increasing 5%. We are showing good progress on our quality of revenue initiatives that I discussed last quarter, which includes our commitment to expanding service penetration, improving customer implementation velocity and deepening customer partnerships by developing enhanced customer solutions.
In the quarter, gross profit margin expanded 130 basis points. Our actions on operational efficiencies, particularly in the areas of staffing and reduced overtime have helped us offset increases in other cost areas such as fleet and facilities allowing revenue growth to largely flow through to gross profit.
We continue to be encouraged by what we see being reported in the market with hospital staffing levels shoring up, return of elective surgeries and return to office trends. As a market leader in our core businesses, offering solutions and compliance support, we are well-positioned to take advantage of these trends as they evolve. Our infrastructure modernization efforts, including existing and additional future treatment capacity strategically placed in key geographic areas positions us well to support growth in our customer base. Further, we are pleased with our cash flow generation and strengthened balance sheet.
With regards to our operational modernization efforts, our new incinerator under construction in Nevada remains on schedule to go live in early 2024. We also have 20 additional projects underway, which include new autoclaves and conveyance systems.
Regarding our fleet modernization initiative, although vehicle deliveries remain behind schedule, to date, we have received almost 80% of our outstanding orders and anticipate receiving the remaining vehicles by mid to late summer.
Looking ahead to the US Regulated Waste and Compliance Services ERP deployment, the team is currently immersed in testing and readiness preparation and we continue to anticipate deploying it in the second half of 2023.
Now turning to debt reduction. We improved our debt leverage ratio to 3.05 times, a 23 point improvement since year-end, and we remain on track to achieve our three times debt leverage ratio in the first half of 2023. This is our lowest debt leverage ratio since 2015.
Finishing with portfolio optimization, in April, we divested our operations in Brazil, which was our last remaining Latin America business for an investing cash outflow of approximately $28 million. This represents our 13th divestiture since 2019.
I'll now turn the call over to Janet to review our financial results.
Thank you, Cindy. I will start by summarizing our first quarter results. As noted on slide 5, revenues in the first quarter were $684.3 million, compared to $664.2 million in the first quarter of last year. Excluding the net impact of divestitures of $16.6 million and unfavorable foreign exchange rates of $10 million, organic revenues increased $46.7 million. Of this increase, Secure Information Destruction organic revenue growth was $24.9 million and Regulated Waste and Compliance Services organic revenue growth was $21.8 million.
As noted on slide 6, Regulated Waste and Compliance Services revenues were $451.3 million compared to $452.6 million in the first quarter of 2022. Excluding the impact of divestitures and foreign exchange rates, organic revenues increased 5% in the first quarter.
In North America, Regulated Waste and Compliance Services organic revenues increased $22.4 million or 6.5%, mainly driven by our three pricing levers, which include pricing in existing contracts, new customer pricing and surcharges and fees. International Regulated Waste and Compliance Services organic revenues declined $0.6 million or 0.7% in the first quarter. This decline was due to lower waste volumes compared to the first quarter of 2022.
Secure Information Destruction delivered revenues of $233 million compared to $211.6 million in the first quarter of 2022. Excluding the impact of foreign exchange rates, organic revenues for Secure Information Destruction increased 11.8% mainly due to pricing and higher recycled paper revenues.
In North America, Secure Information Destruction organic revenues increased $24.3 million or 13.4% compared to the first quarter of 2022. Of this 13.4% growth, service revenues contributed 10.8% and recycling paper revenues contributed 2.6%. The service revenue growth was mainly due to our three pricing levers, including fuel and environmental and recycling recovery surcharges.
Recycled paper contributed approximately $4.8 million more than in the first quarter of 2022, reflecting mainly higher SOP pricing. In International, Secure Information Destruction organic revenues increased $0.6 million or 2.1% compared to the first quarter of 2022. This change was mainly due to pricing levers offsetting reduced volume.
Income from operations in the first quarter was $40 million, compared to $5.9 million in the first quarter of 2022. $The 34.1 million increase was mainly due to growth profit improvement of $16.5 million, primarily driven by revenue flow through and lower selling, general and administrative expenses of $22.6 million, mainly due to lower adjusted items and bad debt expense. These were partially offset by a divesture loss of $5 million.
US GAAP net income was $11.2 million or $0.12 diluted earnings per share, compared to a net loss of $14.2 million or $0.15 diluted loss per share in the first quarter of 2022. The $25.4 million increase was mainly due to higher income from operations of $34.1 million, as I previously explained, partially offset by higher income tax expense of $5.6 million and interest expense of $4.1 million.
Cash flow from operations for the three months ended March 31, 2023, was an inflow of $49.5 million compared to an outflow of $38.8 million in the same period of 2022. The year-over-year increase of $88.3 million was mainly driven by accounts receivable of $32.9 million due to an improvement in days sales outstanding, higher operating income of $30.8 million, lower annual incentive compensation payments of $22.3 million and other net working capital improvements of $2.3 million.
Adjusted income from operations was $84.7 million or 12.4% as a percentage of revenues, up from $59 million or 8.9% as a percentage of revenues in the first quarter of last year. Adjusted income from operations increased 350 basis points as a percentage of revenues due to the following; one, gross profit flow-through of approximately 130 basis points mainly due to pricing; and two, lower selling, general and administrative expenses of approximately 210 basis points, mainly due to improved operating leverage against higher revenues and lower bad debt expense.
As noted on slide 8, adjusted diluted earnings per share was $0.49 compared to $0.32 in the first quarter of 2022. Excluding the impact from divestitures and foreign exchange rates of $0.02, the remaining $0.19 year-over-year increase was driven by $0.20 from gross profit flow-through, $0.01 from lower selling, general and administrative expenses, and $0.01 from lower income tax expense and other. These were partially offset by $0.03 from higher interest expense.
Capital expenditures for the three months ended March 31, 2023, were $36.4 million, compared to $37.5 million for the same period last year. Free cash flow for the three months ended March 31, 2023, was an inflow of $13.1 million, compared to an outflow of $76.3 million in the same period of 2022.
As noted on slide 9, the year-over-year improvement of $89.4 million was mainly due to higher cash flow from operations of $88.3 million. Our first quarter DSO as reported was 56 days compared to a DSO of 63 days in the first quarter of 2022. The difference was mainly driven by prior year timing of North America secure information destruction customer billing and collections.
As shown on slide 10, at the end of the first quarter, our credit agreement defined debt leverage ratio was 3.05 times and our net debt was approximately $1.45 billion. As Cindy noted, we divested operations in Brazil in April for cash consideration paid of approximately $28 million. The cash consideration included coverage of debt-like related long-term liabilities, which will be removed from our balance sheet in the second quarter. The transaction is expected to result in a second quarter divestiture pre-tax loss of approximately $100 million, mainly due to non-cash accumulated foreign exchange adjustments of $72 million.
In 2022, the business in Brazil was unprofitable favorably impacting adjusted EBITDA margin by approximately 20 basis points on a consolidated basis. Also in April, we made substantially all of the remaining FCPA settlement payments, which totaled about $8 million. Our first quarter results were aligned with our full year 2023 guidance, as shown on slide 11, and our guidance ranges remain the same.
I will now turn the call back to Cindy.
Thank you, Janet. Earlier this month, we had an opportunity to host a Senior Leadership Summit, which was attended by over 300 leaders across our organization. This was an amazing opportunity to celebrate the progress we've made in transforming this business over the past few years and engaged and energized the team on advancing the next aspects of our journey.
As always, I'd like to thank our customers, team members, the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A.
Thank you. [Operator Instructions] Our first question today comes from Sean Dodge from RBC Capital Markets. Your line is open.
Yeah. Thanks. Good morning and congrats again on the great progress in the quarter. Cindy, maybe just starting -- if we could start with an update on the inflation or the cost backdrop. I guess, diesel has been in a pretty steady decline for six months. What's labor been like and how cost's been trending for trucks and supplies. I guess, the surcharges and structure you have in place now, are those sufficient, you think, to continue offsetting all of this, or are these not normalizing fast enough where you think there still needs to be some work done around maybe incrementing some of those out?
Yeah. Sean, thanks for that. That's a great question. Actually, what we are seeing is inflation, we still see it in -- and it's not equal across everything, but I'll give you an example. While we are starting to see some of our vehicles that we had orders come in. So a little bit of supply chain ease, the one thing that we are seeing continued inflation is when we look at maintenance costs and we look at rental costs, they still are pretty elevated.
So for us, that's something that really hasn't changed and it behooves us, we're going to be in much better stead once we get that full vehicle fleet or vehicle order in, so that we kind of get out of the rental business and then we've got newer vehicles that will not have as much maintenance required. If you take a look at inflation rates that are in a lot of the leases for our facilities and a lot of other things that we signed that came up for renewal during times when inflation was exceptionally high. If you want to say even Q1 of last year when it broke a 40-year record high.
So we still have leases that are going to continue with some of those pricings in there because you obviously sign them for a certain year period. And you had mentioned wages. I think the good news on wages for us is our staffing has stabilized. And as I've always said with a stable workforce, you can start to make some efficiencies and really drive some good things.
However, those -- that stability has come at a higher wage rate kind of a run rate than we've seen. I don't see that getting -- we're not saying that's getting any worse. We're very pleased with where we are. But, obviously, those continue to be in the run rate of the business. So, overall, I think there are still some pockets where we're seeing some pretty strong inflationary pressure. But we'll see how that continues throughout the rest of the year.
Okay. And then just clarifying on the contribution from the two surcharges, Janet, I think you said 130 basis point lift on gross margins in the quarter. My math would put that at about $9 million. That would be down just a little bit from the $10 million in the fourth quarter. Is that just because there was some pickup you captured early in last year. And so the $9 million would be incremental, or why also that decline sequentially?
And then if we think this year, you shifted the SOP schedule up again. I think that went into mid-February. So with that in place now, how should we think about surcharges those contribute incrementally in Q2 and maybe over the remainder of the year?
Yeah. So as you think about Q1 and our ability, we put surcharges in RWCS later in the year and we didn't have any in the first quarter of last year to speak of in RWCS other than some existing legacy, and then we continue to modify the floors that are existing on the FID surcharge for paper and just continue to tune all our pricing levers that we had, which are three through last year.
So what you're seeing is the benefit of all those levers hitting Q1, very solidly where we didn't have as many in place or -- and some were not even existing in Q1 of last year. So sequentially, you're going to get noise just based on what's happening in the scheme of things. But we're really pleased that the sustainability of the surcharges, and as we go forward in the year, you will see that we're going to lap some of that pricing that we put in the market and particularly in the second half of the year. So that's why the first quarter is looking that strong in that surcharge range.
Okay, great. Thanks again.
Thanks, Sean.
Our next question comes from David Manthey from Baird. Your line is now open.
Hi, good morning. Along the same lines here, when you think about approximate contract pricing. So the other two levers beyond surcharges, when we think about the 5% organic growth in RWCS, approximately how much do you think is related to those new contracts that are priced higher. And when you think about that -- those two levers of pricing, I assume some of that carries through the year, you probably have additional actions through the year, does that remain constant or move up or down?
YeAH. So if you look, I'll just start with -- if you look at our 3% to 5% growth rate for the year, we are reiterating that, and that's because you're going to start some of the pricing actions. However, we continue to leverage both of those pricing levers, which is renewal, and also in the beginning of the year, the CPI that we put in contract renewals at higher pricing and continue to surcharges according to what we see in inflation.
I'll turn it over to Cindy if she has any other thought?
Yeah. I think too, on the RWCS side, Dave, it's important to note. As we had said, Q1 of 2022 is a very difficult quarter for us. If we take a look, I mentioned the inflation. We had tremendous staffing issues there were just major supply chain disruption. And really, we were still getting our sea legs from the ERP deployment in Shred. So that's -- while that's on the Shred side.
On the RWCS, I think as we move throughout the year, a positive note, I think, is the return of elective surgeries as we move through. So this won't be purely -- our plan is not to have it purely be a price story, which this year's Q-over-Q turns out to be as such, simply because we didn't have those pricing levers in Q1 of last year. But we see and we're very encouraged by the return of elective surgeries.
Now all hospitals don't rebound at the exact same time. However, we built into this year's plan, the thought that surgeries would come back. So for us, it was a positive sign that we're seeing that. And I think RWCS is well-positioned to continue to hit the plan for end of year.
Okay. Thank you. And second, Janet, when we just ask about long-term EBITDA margin targets, you would tell us that most of the free cash flow improvement you expected to see was due to higher profitability across the P&L. And then we can back into EBITDA margins of low to mid-20s. Does that math still hold for the changes that have happened to business as well as the adjusted free cash flow targets that you moved last quarter? Just trying to get a read on ultimately where we're headed.
Our long-term outlook stays the same as that I issued in February. Does that answer your question? So it is...
I believe
Yes, 13% to 17% adjusted EBITDA growth rate, which drives those higher margin rates and the free cash flow conversion rate of 50% to 60% with the following -- then and through 2027 and then an annual CAGR of 3% to 5% in revenue growth. So those are all
Yes, directionally, Dave you're definitely you're on track
Yes.
Yes, it sounds like it's in the same ballpark. Okay. Thank you very much.
Thank you.
Our next question comes from Scott Schneeberger from Oppenheimer. Your line is open
Thank you. Good morning. First question, I guess, I want to focus on regulated waste organic growth acceleration looked good. How did that compare to your internal expectations? What were some of the drivers and then kind of separately as an add-on on that theme. What are you expecting out of used paper prices? Just going forward, what are you seeing on that trend, Jan, maybe now a commentary on what percent the surcharges cover on that. Thank you.
Yes. Scott, this is Cindy. I'll take the first part of your question. So I think we're pleased with RWCS. We are on track with our internal expectations. But again, I want to say if we look at Q1 of this year versus Q1 of 2022, everybody, not just Stericycle, everybody woke up to over 9% inflation and it takes a little bit for anybody's pricing machinery to be able to implement if you're going to -- if a company is going to make any changes, -- it takes a little bit of time, whether it's contractual language, whether it's sitting down to figure out exactly where the cost is coming from, how -- what's the best strategy moving forward. So our year-over-year Q1 versus Q1 comparison, is certainly skewed heavily towards price on both the shred and the RWCS side.
However, we built that in for this year. Our plan is we plan on delivering, which is why we reiterated our guidance in terms of what we're going to grow on 3% to 5% and right down through with adjusted EPS, free cash flow, et cetera. So I think, overall, for us, it was a good execution quarter for us in terms of not looking at it compared to a weaker comparison, but looking at it internally, we're pleased -- we believe we've made some solid progress on good of the key priorities and certainly driving towards making this year's goals.
Yes. And in terms of the coverage of the paper surcharge and where we see paper rates going, I'll start with the paper rate. So we updated our footnote in the guidance to say, we looked at the recent paper trends as we look forward, and we still kept our guidance range is the same, which means that we're able to manage that. And the reason we're able to manage what we're seeing is a recent decline from our original SOP paper rates, is the ability of the surcharge to cover at least 50% of that on a revenue basis as it goes down, and would that shows up on the service revenue versus the paper revenue, whereas where price shows up.
And I think, Scott, one of the other things, I'm not quite sure if this was also what you were asking. It still works out to be about 90%, let's say, 90% is a service fee-based revenue stream and about 10% is from the RISI rate from the search -- or from the RISI rate itself.
Yes. And times the volume of the paper.
Okay. Thanks. Appreciate that. I want to touch briefly on the divestitures and just kind of inorganic profile. So Brazil being the last in Latin America, just curious commentary, what should we expect on divestitures going forward? What inning are you in? What would be left there? Any consideration on acquisitions at this juncture of tucking anything in, I realize you have a lot going on going into the summer, but just thoughts on the inorganic side. Thanks.
Yes, Scott, great question. I think for us, obviously, we've said core is the shred business as well as RWCS. We continue to look at all the markets and take a real good market analysis as to where is our opportunity not just to grow but to grow profitably in terms of our expectations for us to really drive the company forward to hit the long-range plans.
You're right. We've had 13 divestitures since 2019. However, we've also had one acquisition. That's why we changed portfolio. We changed it -- it originally came out as portfolio rationalization, and we started the engine of divestitures. But then we morphed it to optimization because we realize that a couple of things had to happen. And it started with we had to get a stronger balance sheet.
Once you get a stronger balance sheet, once you get more control of the financing, you have greater flexibility. So for us, we continue to evaluate all of our opportunities. I think we've shown a pretty strong track record in terms of certainly the divestitures, but even the acquisition, which has been contributing nicely. So for us, I think we continue to have portfolio optimization as one of our five key business priorities for a reason. So to your point, we are looking and evaluating everything.
You did bring up one very good point though, Scott, that I think is important to note as we come into Q2, we are looking to deploy the larger portion of our business on ERP for the second half of this year, which means starting in Q2, as you start training, as we start getting into that rhythm before you flip a switch, many of our people who already are doing great things working very hard. They will now start to take on two jobs.
If I look at the engineering department, if I look at a lot of the operators, if I look at a lot of the -- our IT folks, if I -- those folks have a great job right now and they're working very hard. But that ERP deployment means Q2, they start to take on additional responsibilities. And we start to borrow from Peter to pay Paul in terms of applying resources to the immediate at hand. So for us, whether it's acquisitions or divestitures, like you said, the group will be quite busy as we continue to move through the year.
Thanks. Appreciate it. Great job on getting that leverage down to. Congrats on that. I'll turn it over.
Thanks. Thanks much, Scott. We appreciate that.
Our next question comes from Scott Levine from Bloomberg Intelligence. Your line is open.
Hey, good morning, everybody.
Good morning.
Good morning.
So I wanted to drill down on the pricing just a little bit more. I don't know if you can estimate for us, how much of this is sticky versus temporary pricing that you think might have to be adjusted downward, if we see inflation abate in a meaningful way over the next few quarters?
Yes. Scott, that's a very good question, and we have been -- certainly, any time you put price increases into the market, whether it's in your base rates or whether you're looking at it in terms of surcharges and fees, you always have to look forward. You have to be able to say, hey, what's happening in the market? Where are we? What's happening with customers?
So for us, as we come into this year, what we're starting to do and what many companies do is you start to take a look at where is your base rate and figure out what's the adjustment that needs to be made with the base rate so that you're not necessarily just looking at surcharges and fees.
You've got to be reasonable enough in there that you have flexibility throughout the year based off of what the market gives you, to your point, hey, what's sticky and what isn't. I think as we continue to win new business and we look at growing the volume portion of the business that is in new sites, remember, we measure volume in terms of actual, whether it's a ton of paper or it's a pound of waste, we also measure volume in terms of are we winning new customers? What is the volume of new customers we're bringing into the fold?
So for us, we're starting a -- you've got to have a complex strategy that also helps combine what you're looking at and what you're selling at in terms of your base rates so that you can start to see what will the market bear moving forward outside of something that's based on whether it's a paper price or it's based on a fuel index or it's based on inflation. So I think key point for you to bring up, and I can tell you right now, while I can't give you the exact science to it, I can tell you it's something that we are looking at every day.
And I'd just add for -- in the Secure Information Destruction surcharges, we have two that are fuel and the one that was paper that I mentioned early, those flex with commodity prices, but we can keep tuning those based on -- and we keep penetrating the market based on those as well.
Got it. Great. Thank you. And I know you guys don't really focus on breaking down like the smaller customer side versus larger customer side much. But I was wondering if you can say whether there is any meaningful difference in trends you're seeing between either of those categories of customers. My sense was that the hospital side was where maybe you were seeing more pressure, maybe that's improving a little bit more. But any more color you can provide regarding that customer segmentation would be helpful.
Yes. I think that's a great -- that's pretty insightful, Scott, in terms of how we look at things. We're looking at hospital accounts. So the really big hospitals, the IDNs, the big networks. We are looking at national accounts the ones -- a company that would have a need for us in a lot of different cities, but they may not be really big places. And then we look at the independents. Those are more the doctors, the dentists, those types of offices that we see certainly in downtown, but then also in the rural parts. So I think -- I think what we are seeing is not all things, and I said this earlier, not all regions and not all areas of the country are equal.
We're seeing some areas where some of the hospitals have shut down, some of their satellites, if you will. And I want to say kind of getting smaller and stronger. We are seeing some similar things with some of the independents. However, in terms of what are we winning and at what price are we winning? We're very pleased with the commercial organization.
And the rhythm that they have going right now, really driving more metrics into the business, really driving more information that we're getting from the market based on the technology that we currently have and really making some better strategic regional decisions in terms of pricing for us to be able to win profitably.
So I think we are maturing in that process right now. And I would say, we're winning across the board in those three segments, specifically in RWCS, and I think that's attributable to really the maturity of the quality of revenue rhythm that we have going over these last few years.
Understood. One last one, if I can sneak it in. On the…
Sure. Go ahead.
… so the leverage -- I don't remember if you had a target where you expected leverage to hit by the by the end of the year, anything along those lines, but obviously, the leverage has come down meaningfully.
Just wondering if there -- on the capital return side, I'm guessing there's nothing to for this year maybe, but for next year, is there any elaboration you can provide whether your thoughts on the capital program and whether capital returns maybe in the offing for 2024, if not, that can happen this year?
Yeah. Thanks for the question. So we were pleased with the 3.05. We did have a target to achieve three times by the first half of the year with a chance of it in the first quarter and we came awfully close. So that was our target. So by the -- we still anticipate getting to that three or below by the second quarter of this year.
After that, we're going to be focused on investing in ourselves through the rest of the year in the ERP deployment. So the free cash flow generation that we have will continue to be used to pay down debt or our capital program internally.
As we get to 2024, we may have opportunities for other use of capital. As you mentioned, we haven't really refined that to a discrete menu. However, what would be on the menu. So as Cindy said, we changed portfolio rationalization to portfolio optimization. So there's potentially opportunity for tuck-in acquisitions.
And then, yes, you have the rest of the menu of options. And as we mature on that and get through this year with our head down on delivering what we said we're going to deliver, those are options we will have in the future to explore.
Got it. Great, Thank you.
Thank you, Scott.
Thank you.
Our next question comes from Tobey Sommer from Truist Securities. Your line is open.
Good morning. This is Jack Wilson on for Tobey. In terms of the 3% to 5% organic revenue guidance for 2023, how should we be thinking about the growth cadence for the remainder of the year with the 1Q growth and the return of electric surgeries built in?
Yeah. I think, Jack, welcome. It's nice to have you. We're looking forward to engaging with Tobey. But I think a couple of things that we have to really temper and take a look at. We've got a major deployment for a technology system, our ERP portion going in for RWCS in the second half of this year.
So we've built a lot of things into this year's plan, but we believe that all things aren't equal. Remember, this quarter shows -- shows really big numbers in terms of revenue growth, but it's compared to probably one of the most difficult quarters, I think, we may have faced in Q1 of 2022.
So I think what's more important is what are we looking at for 2023. We see positive signs in terms of hospitals getting their -- shoring up their staffing. We see positive signs in terms of people starting to go back for elective surgeries. Remembering that, it isn't the same for every hospital. It isn't as if a switch flipped and now everybody is back.
So -- but as the hospitals recover, we are well positioned to take advantage of that knowing that as soon as we get into the second half of this year, really with preparation in Q2 and then deployment in Q3, we've got a few other things that are going to be going on while we continue to service the customers that we have. So a lot to balance here, but I think a 3% to 5% growth in terms of the target is a good number for us to drive towards.
Okay. That makes a lot of sense. And then just maybe one on sort of the new facilities coming online in New Jersey and Nevada. How should we be thinking about the regulatory environment to getting these facilities sort of completed and online?
That's, again, I think anytime anybody talks about regulatory and trying to get something passed there is complexity there. But the good news for Stericycle is this is where we live. This is the arenas in which we live, providing a very vital service to communities where all of our facilities and where we do our work. So for us, we're very pleased with the progress, specifically, if I could just mention McCarran, just as McCarran Nevada is going to be about a 100,000 square foot facility, we're going to have two incinerators there.
It's one of those where it is a waste-to-energy plant. We're going to recycle all the water that's used to process the waste. So it will be a zero process water discharge. It's expected to be the cleanest med waste incinerator. And I think -- it's exciting for us to see things advance, and we've got a very strong public relations and public affairs team that right now are certainly working with our operators to make sure that we're -- it's important not just to have a facility. You've got to make sure that you've got all the permitting, and we are well on our way to have that happen so that we can have McCarran open sometime in first half of next year.
Excellent. Thank you so much. I'll turn it over.
Thanks, Jan.
Our next question comes from Kevin Steinke from Barrington Research. Your line is open.
Good morning. In terms of secure information destruction, you're about, I guess, 18 months out from the ERP deployment in that business. And just wondering what you're seeing in terms of your ability to drive new customer growth in that business maybe based on insights you're gaining from the ERP? And just how also are return to office trends playing into the volume outlook and potential new customer growth.
Kevin, that's a really good question with reference to the 18 months. So one of the things that I think we are very -- we're happy about. Any time people come back to the office, that's a good sign. I also have noticed, and I'm sure many of you have too that for everybody that's coming back to work, there is another company that's announcing some pretty big layoffs. So it isn't as if the world is looking anything like 2019 yet. However, I think any time, as I said, folks come back, that's great. Your question was where are we in the -- with the ERP deployment? And here's what I think I'm most proud of. In that 18 months, we've gone from, hey, everybody, here's an issue. Here's a bug in the system, let's fix it to now we are with the technology, we're now looking at all the enhancements that we can make, which is really where you want to be in that kind of crawl, walk, run scenario. You start off fixing what bugs are in the system, and then you figure out, okay, this is running. You get it running smoothly. Everybody becomes comfortable with it, you start to understand data. And then you see, all right, with this data, if I had this enhancement, I would get that much more granular and I'd be able to fix something further upstream than what I can see right now. And I think we've morphed from the fixing things into the enhancing things, really starting to leverage data, we're looking at everything from route rebalancing, certainly on the operations side.
But then I think the other question you asked is, we are also now leveraging a good bit of that technology to improve the commercial rhythm, the sales rhythm. One of the things that you would have noticed is on quality of revenue, we talked about improving customer implementation velocity. Well, that really means from the time as an example in red, somebody signs up a customer, how quickly can I get out there to make that first service. When you're very manual, that can be very cumbersome and very labor intense. Right now with technology, that is affording us the opportunity to reduce that or speed up, I should say, to improve the velocity from the time of sale to the time we're actually servicing a customer. So, I think leveraging that ERP, we are hitting on the cylinders that we had outlined. And I still think that there's some runway for us to continue to improve.
Okay. Thank you. That's all I had. I'll turn it back over.
Appreciate it, Kevin.
Our next question comes from Brian Butler from Stifel. Your line is open.
Good morning. Thanks for taking my question.
Hi Brian.
Just on the first one, I know margins aren't really broken out between the two segments. But when you think about them in the improvement that you saw in the first quarter, any color we can see on how regulated medical waste or the SIB kind of are trending? Are they moving apart, or are they still kind of very close?
Yes. So both are in the same range of margins, and they both are staying aligned in that range. So both are good margin businesses, and that's why we consider them core. And you're not seeing a divergence there. The difference is a little bit more on cash because it is a lighter cash investment model than RWCS, as we modernize it. So cash is -- both generate cash and it is a nice contributor for our investment thesis that we're doing across both core businesses
Okay. And then you talked about elective surgeries kind of improving in the back half, and that was kind of built in. Do you have any color on the maritime activity and where that stands and how that fits into the guidance for 2023?
Yeah. I think we're we're seeing -- any time that customers are coming back and taking cruises, it's good news for us. So I believe that -- and remember, sometimes that revenue has a hint of seasonality to it. But I think where we are internally with reference to maritime, we're very pleased in terms of the growth in terms of the amount of cruise ships that are out and running and our ability to continue to process it. So it maritime, a good news story.
Okay. And then maybe my last one follow-up. I know you talked about the optimization of the portfolio, but I just wanted to make sure I understood. Is there anything really left outstanding? Any -- obviously, they're looking at all the time, what fits best. But is there any big items that remain or really you pared down now to what you see as kind of the core?
Yeah, Brian, good question, but unfortunately, not one that I'm going to be able to answer in terms of giving you specifics. The last thing that Stericycle would ever want to do would be to put out there something that is potentially that we're looking at on either an acquisition or a divestiture certainly prematurely. So for us, we just continue to look at the market. We continue to drive accretive revenue. We continue to drive the commercial organization as well as the operations portion to work as efficiently and as they possibly can. So within those parameters, we've got a pretty good track record, and I think we're going to continue down that path. So apologies that I can't tell you anything more than that, but quite frankly, we've never really done that.
Okay. Thank you for taking the questions.
Thank you.
Our next question comes from Michael Hoffman from Stifel. Your line is open.
Yeah. I apologize to double team. We have had calls this morning, so we're overlapping. Following on Brian's question, I guess the -- you're not done. Is a fair answer, though. There's more to do. You won't tell us what it is. That's fine, but there's a little bit more to do.
It remains a key business priority, Michael, so I appreciate you highlighting that. And good morning, by the way.
Good morning. I'm drinking quarterly earnings out of a firehouse morning. Sorry.
So you are -- and we -- as a matter of fact, when I heard Brian come on, I figured that's where you were. So it's -- we appreciate you taking time to catch up with us.
The other question, Nevada is going to come online next spring, but you've been moving waste around the country because to your credit, you closed Utah to manage the community relation, but volume had to move. What's that incremental cost for moving that? Because I'm assuming you're bearing it.
Yeah. Well, I'll tell you, well, we won't give the specifics in terms of the costs, I can describe it for you. Number one, facilities that are all around -- all on the West Coast are right now overburdened. So that's taxing equipment it's taxing our people in order to be able to continue to provide the right type of service. Number two, we've got third parties involved that we really want to be out of the third-party business. We've got that with reference to whether it's disposal capabilities, incineration capabilities, long-haul capabilities. So there's an awful lot of third-party which, quite frankly, has been quite expensive as we take a look at this last -- the last year or so. A good bit of costs have been flowing through that that have been difficult.
And then just our own long haul. Certainly, far more long haul runs from the West Coast to different parts of the US than we would -- than is optimum. So when McCarran comes up and running, and remember, facility opens, you make sure everything works, you get the rhythm of the facility, and then you start to build yourself up to capacity and capability.
I like where this is positioned. I really -- we're very, very excited about, not just what it's going to do -- certainly, what it's going to do for us internally. But for this being the type of facility that we're building, this is really going to set the model and the standard moving forward in the industry. So that's exciting.
And then all the other facilities that surround this area on the West Coast, I think they're going to get a big sigh of relief because sometimes you can push them too hard as well where they run beyond -- they're not efficient either. So we get this facility online. I think we're going to see – I think the operators are going to be very happy. But I think most importantly, our customers are going to be happy in the fact that we're going to be able to continue to grow and provide them terrific service.
So just to be clear for everybody listening that in first half of 2024, a lot of that goes away and therefore, having nothing to do with ERPs and all that, you just open up a new facility and rebalance the operating leverage of the model for that alone.
Yes. I think that's one of the things that we had looked at when we spoke to everybody about guidance and long-range plans and those types of things, we do have that taken into consideration in terms of opportunity. Just remember, it isn't a switch flip it all doesn't -- I think for everybody listening, it isn't, hey, the door goes open and all of a sudden, everything goes away, we've got to work through some things.
Again, it's a crawl, walk, run. However, the long-term outlook for us, with that facility, when we do get it all up and running, we do get rid of all the other contracts that we have with third party. We work on making sure that we rebalance the routes, we make sure that we've got our internal network going. That's a process. And once that's there, to your point, Michael, that's how we see our way to providing the long-term outlook that we did with some pretty good adjusted EBITDA growth rates and some free cash flow conversion rates.
Okay. Thanks for taking the extra question. So I was waiting for your call.
Appreciate it. Thanks for your time.
This concludes our Q&A. I'll now hand back to Cindy Miller, CEO, for any final remarks.
Thank you, Elliott. So to everyone listening to this call, we greatly appreciate your interest in Stericycle and your shared excitement in our future. So thank you very much.
Ladies and gentlemen, today's call is now concluded. We like to thank you for your participation. You may now disconnect your lines.