Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and welcome to the Stericycle Second Quarter 2020 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 Jennifer Koenig, Vice President, Investor Relations. Please go ahead.

[Jennifer Koenig, VP, Corporate Communications & IR]

Hello and thank you for joining Stericycle's second quarter 2020 earnings call. On the call today will be Cindy Miller, 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. 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 statements 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 Stericycle's Investor Relations website. The prepared comments for today's call correspond to an earnings presentation, which is also available on our Investor Relations website. Throughout the call, we may reference specific slides from the presentation.

I'll now turn the call over to Cindy Miller.

[Cindy Miller, President and CEO]

Thank you, Jennifer, and welcome, everyone, to today's call. During an unprecedented time that continue to be impacted by the closures and limited reopening of businesses because of the COVID-19 pandemic, Stericycle delivered a strong second quarter with meaningful year-over-year improvement.

Overall, our Regulated Waste and Compliance Services revenue remained steady compared to last year. The pandemic induced revenue decline initially seen in Secure Information Destruction in April improved in May and June with the reopening of multiple geographies.

While organic revenue was down due to COVID-19 compared to the prior year, we improved operating leverage, generated significant cash and lowered our debt-leverage ratio. This could be considered one of the most difficult quarters in modern times for any business. Around the world, populations were faced with shelter-in-place orders that dramatically impacted their economies. Companies had to quickly shift to work-from-home business models.

There were global shortages of key supplies, and we are now living through the attempts to reduce shelter-in-place orders and reopening of businesses which have been met with mixed success as certain regions are faced with rising COVID-19 cases.

In the face of continued uncertainty, our team is focused on serving our customers while ensuring the well-being of our workforce and tightly controlling costs across the organization. Our regulated medical waste services are critical to health care organizations around the world. And our industry leadership has led to national partnerships with key providers of expanding COVID-19 testing services.

On the Secure Information Destruction side of the business, we continue to reactivate customers as countries and states altered their shelter-in-place orders and allowed certain businesses to reopen by quarter's end. We brought back about half of our furloughed employees over the quarter as business demands warranted. We are encouraged by trends, but with increases in daily COVID-19 cases in certain geographies, we remain cautious.

Before Janet reviews the financial results in more detail, I'd like to review our progress on safety and our key business priorities. Reflecting on our commitment to this important area, our team continues to drive meaningful improvements in safety. Over the first half of the year, we reduced our total recordable incident rate by 31% and our vehicle accidents by 34% compared to the same period in 2019.

This improvement is the result of a multipronged program that we have been implementing over the past 18 months that includes a centralized global focus on safety, enhanced training programs and a shift to a behavior-based safety culture. This is great progress, and I'd like to thank our global team members who have committed to continuous improvement in this area.

I'll now shift to our five key business priorities, starting with quality of revenue. Despite the impact of the pandemic on elective surgeries and preventative care, we achieved relatively flat revenue for Regulated Waste and Compliance Services compared to second quarter last year.

The decline in our Secure Information Destruction revenue was a direct result of the pandemic and shelter-in-place orders. However, as specific countries or states begin implementing phase plans to reopen, our Secure Information Destruction business picked up reflecting the importance and necessity of our service.

During this pandemic, we've identified new ways to support our customers' evolving needs and launched three new services this quarter to support our customers as they face new business opportunities and challenges.

Starting with the medical waste business, we tailored an offering specific to COVID-19 testing centers. As you have likely read in the media, top retailers in the United States have announced plans to add and expand the footprint of testing facilities.

Given the breadth of our infrastructure, the strength of our brand and our ability to quickly adapt to non-traditional health care locations, today, we are providing service to more than 1,000 COVID-19 testing sites. As antibody testing advances and a vaccine is developed, we anticipate increased demand from these facilities.

Beyond health care setting, many businesses are now faced with managing soiled Personal Protection Equipment, or PPE. The disposal of COVID-related PPE in the non-health care setting is not regulated, but businesses are seeking medical waste solutions for the gloves and masks worn by employees to ensure their safety, and reduce the risk of spreading disease. Our offering includes both pickup and mailback options.

And third, in Secure Information Destruction, we have expanded our service offering for North American purge customers, who are customers requesting a onetime pickup. We now offer an express service with a two-day pickup guarantee, a priority service with a five-day guarantee and our normal select service.

The new express and priority offerings demonstrate our ability to be agile in response to changing trends and innovative in meeting the needs of our customers. These new service offerings strengthen our brand and differentiate our offering and enable additional opportunities to pursue organic growth.

We also continue to leverage the commercial advancements I've discussed on prior calls, including our deal review process, updated commission plans and pricing initiatives, all of which drive a more disciplined commercial approach and greater accountability.

Switching to operational efficiencies. We actively controlled variable and discretionary costs to align with revenue declines. Our engineering and operations teams continue to partner to centralize field oversight, improve planning processes and implement standard metrics. As a result, we've made meaningful progress on sustainable operational efficiencies, including rightsizing the fleet and productivity improvements.

As for portfolio rationalization and debt reduction, I'd like to remind you that on April 6, 2020, amid the challenging economic environment, we successfully completed the divestiture of the Domestic Environmental Solutions business for $462.5 million in cash. With net proceeds from the divestiture of $427.7 million, we paid down over $500 million in net debt in the second quarter.

And most recently, this week, we divested of our operations in Argentina for approximately $3.9 million, which will be reflected in our third quarter results. This marks our seventh divestiture in the last 18 months. Proceeds from these divestitures have and will continue to be applied toward debt reduction.

Before shifting to our fifth priority, our ERP system, I'd like to thank and congratulate Janet Zelenka for taking on the additional role of Chief Information Officer. This organizational change reflects our continued effort to streamline the company and manage costs. The timing was appropriate considering the simplification of our business following multiple divestitures and the deferral of deployment of the ERP system to 2021 due to the pandemic.

We made this decision to shift the schedule given the need for predictable travel and safe face-to-face teamwork during the deployment. We will continue to maintain and fine-tune the planned ERP system and data throughout 2020 with more focused preparations and employee training for next year's deployment.

I'll now turn the call over to Janet to further review our financial results.

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Thank you, Cindy. I will start by summarizing our second quarter results. Total revenues were $598.2 million compared to $845.8 million in the second quarter of 2019. Of the $247.6 million change the impact of divestitures and foreign exchange rates reduced revenues by $149.6 million and $9.9 million, respectively.

As noted on slide five, we Regulated Waste and Compliance Services revenues were $418.1 million compared to $553.2 million in the second quarter of 2019. Regulated Waste and Compliance Services continues to include health care hazardous waste services. It now also includes the small portion of international manufacturing and industrial revenue that remains following the divestiture of the Domestic Environmental Solutions business.

Excluding the impact of divestitures and foreign exchange rates, organic revenue in this service line declined 0.3% as a result of pandemic impacts, including a drop in our maritime business, which emerged in the middle of the second quarter. The lower cruise ship demand within maritime was worth approximately 1% revenue decline in North America.

Secure Information Destruction Services delivered revenues of $152.5 million compared to $229.4 million in the second quarter of 2019. Excluding the impact of SOP pricing, organic revenue declined 33.6%, which reflects the pandemic-induced shelter-in-place orders that closed customer locations in our North American and international markets.

In North America, Secure Information Destruction revenue was down 30%, reflecting a decrease in stops of 28% in the quarter. Revenue and stops were down as much as 40% at the start of the quarter in April and improved to an 18% decline in June when 28 states of the 42 that had closed were open for business for at least part of June. The net effect of SOP pricing was minimal and resulted in a $1.3 million benefit compared to the second quarter 2019.

Communication and Related Services revenues were $27.6 million compared to $63.2 million in the second quarter of 2019. The impact of divestitures and foreign exchange rates accounted for approximately $24.8 million of the decline.

Organic revenue declined 17.1% due to lower demand for our hospital scheduling services due to the deferral of elective surgeries and preventative care and lower recall volume compared to last year.

Income from operations in the quarter was $24.9 million compared to income from operations of $25.3 million in the second quarter of last year. The impact of divestitures of $8.4 million, offset by a benefit from foreign exchange rates of $1.5 million, reduced income from operations by $6.9 million.

In the quarter, we effectively reduced variable and discretionary costs to maintain operating leverage. Additionally, our current assessment is that we made sustainable operational improvements of approximately $3 million to $5 million in the quarter from transportation and productivity gains.

U.S. GAAP net loss was $4.5 million or $0.05 diluted loss per share compared to a net loss of $30.5 million or $0.33 diluted loss per share in the second quarter of last year. The 2019 comparable quarter included a loss on early extinguishment of debt of $23.1 million due to our debt refinancing.

Second quarter 2020 included lower interest expense of $14.3 million due to lower interest rates and our efforts to reduce debt, which was partially offset by an increase in tax expense of $11.7 million primarily due to higher discrete items.

U.S. GAAP cash flow from operations for the first half of 2020 was $207.3 million compared to $71 million for the comparable period last year. The year-over-year improvement of $136.3 million primarily includes, one, lower payments for legal and professional fees, annual incentive compensation, prepaid software and interest, totaling $54.8 million.

Two, lower accounts receivable of $56.5 million, driven by collections exceeding revenues due to the pandemic and from collection process improvements. Three, lower accounts payable of $25 million, primarily driven by reduced costs. Four, government relief tax-related payment deferrals of $15.7 million roughly split between U.S. and international. And five, advances received on recently executed service agreements of $19.2 million related to the Domestic Environmental Solutions divestiture.

Capital expenditures for the first half of 2020 were $74.6 million as compared to $108.2 million in the first half of 2019. The change was primarily driven by timing of 2019 investments in ERP and 2020 disciplined capital management.

Adjusted income from operations was $85.3 million compared to $105.6 million in the second quarter of last year. Excluding the impact of divestitures and foreign exchange rates of $14.7 million, adjusted income from operations declined only $5.3 million despite the $89.4 million reduction in revenue.

Adjusted diluted earnings per share was $0.46, compared to $0.56 in the second quarter of 2019. As illustrated on the bridge on slide eight, the year-over-year variance in adjusted EPS was due to the following, a $0.11 reduction from the impact of divestitures, $0.04, unfavorability from lower revenue flow through, $0.03, on favorability from higher adjusted tax rate, and an $0.08 benefit from lower interest expense.

Our second quarter DSO, as reported, was 46 days compared to 47 days in the first quarter of 2020. When excluding the revenues from divested businesses from the trailing 12-month DSO calculation, DSO was 52 days compared to 61 days for the first quarter of 2020.

We estimate the sequential quarter-over-quarter improvement is based on five days from the Domestic Environmental Solutions divestiture, three days from collections exceeding revenues due to the pandemic and an additional day from collection process improvements.

Free cash flow for the first half of 2020 was $132.7 million, compared to an outflow of $37.2 million in the first half of 2019. The year-over-year improvement of $169.9 million was due to better cash flow from operations and lower capital expenditures, as previously described.

At the end of the second quarter, our adjusted debt-to-EBITDA leverage ratio, as defined in our credit agreement, was 3.89 times, which was below our maximum ratio for the quarter of 4.75 times. During the second quarter, we paid down over $500 million in net debt.

Since the beginning of the year, we paid down net debt of over $550 million. We currently have approximately $500 million available in our revolving line of credit to support the business in the near term.

I'll now review the financial implications of shifting our ERP deployment to 2021. Year-to-date, we have invested $71.3 million in our ERP, with $44.1 million for capital expenditures and $27.2 million for operating expenses adjusted out of ongoing operations for development, testing and deployment and for the human capital management system launched in January.

Given the shift in the deployment of the ERP until 2021, we anticipate incurring $30 million to $40 million for the remainder of 2020, split roughly between capital expenditures and operating expenses for licensing, maintenance and continued enhancements of the development environment, which will be adjusted out of ongoing operations. We anticipate this cost will be offset by the $35 million to $40 million incremental IT ongoing cost we will avoid by not having to run both the new system and legacy systems in 2020.

Looking to the North American implementation in 2021, we anticipate incurring deployment costs, which will be adjusted out of ongoing operations. We are currently assessing the amount of these costs. We had previously estimated that these costs would be $20 million to $30 million during 2020.

Depending upon the deployment date in 2021, we will incur the pro-rated portion of the incremental IT ongoing costs for running both the new system and legacy systems, which are currently estimated at an annual run rate of $50 million to $60 million.

I'll now turn to the third quarter and provide a few insights into preliminary July revenue performance. Within Regulated Waste and Compliance Services, July revenues in North America were down approximately 1% when compared to July of 2019. The change in revenue continues to be impacted by the pandemic including the lower cruise ship demand within our maritime business. Excluding the maritime business, we would have shown revenue growth in North America, up about 1% in July.

Looking at preliminary results for our Secure Information Destruction business, our July 2020 North American revenues were down approximately 14% compared to July of 2019. This is consistent with about a 15% decline in service stops in July.

We remain encouraged by the service reactivation of our customers, where they're cautious as to how certain states may react to increasing numbers of positive COVID-19 test results.

Outside North America, Regulated Waste and Compliance Services remained relatively flat in July compared to last year. We anticipate that the reactivation of customers and revenues for Secure Information Destruction Services in international markets will lag North America.

And thinking about our cost drivers, our actions to date have included temporary measures to manage through the impacts of the pandemic. We anticipate resuming investment in the business roughly in alignment with revenue recovery.

For example, we are bringing back some furloughed team members and improving travel as demand warrants. The executive team is committed to balancing the need for short-term cost savings with requirements for the long-term health of the business.

Specific to the third quarter, I'd like to make a note regarding the divestiture of our business in Argentina, which closed earlier this week. Revenues and EBITDA of Argentina operations were approximately 1% of our consolidated total. The divestiture will result in a third quarter non-cash pretax loss of approximately $115 million. Primarily associated with the reclassification of accumulated currency translation adjustments to earnings due to hyper inflationary impacts.

I'd like to provide an update on the $100 million related to cash tax refunds for 2018 and 2019 that we expected to receive from the U.S. CARES Act. In July, the company received approximately half of the expected refunds. We also deferred approximately $7 million in the second quarter of the anticipated $20 million full year benefit associated with U.S. employer-related payroll taxes that I mentioned on our last call.

Outside of the U.S., we have benefited from additional indirect tax deferrals of approximately $8 million during the second quarter of 2020 to be paid in early 2021. On the last call, we provided our expectations for the long-range outlook. We have commenced our normal annual process of updating our long-range plan which will factor in the evolving economic impacts of the pandemic.

I will now turn the call back to Cindy.

[Cindy Miller, President and CEO]

Thank you, Janet. Although the uncertainty of the pandemic remains a reality, our team continues to make steady progress against our key priorities and build a stronger foundation for Stericycle's future.

As demonstrated this quarter, we can be innovative and nimble in response to our customers' needs and significant business challenges, and we continue to drive meaningful progress towards revenue quality, long-term operational efficiencies, cash generation and debt reduction.

I am extremely proud of our team and the progress we've made over the past year. I remain excited about the many opportunities that lie ahead for us at Stericycle and the transformational journey that we continue to pursue every day.

Operator, please open the line for Q&A.

[Operator]

[Operator Instructions] Our first question will come from Sean Dodge with RBC Capital Markets.

[Sean Dodge, RBC Capital Markets]

Thanks. Good morning. Janet, the free cash generation, the $132 million, $133 million, you generated over the course of the first two quarters, it's certainly impressive. You mentioned the CARES Act items that you've got in your pocket now in July.

Beyond that, I guess, how should we be thinking about the free cash cadence into the back half of the year? Are there any other kind of notable items or things we should be aware of or planning for?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Yes. So thank you, Sean. So just to be clear, that amount we got in July was not part of the second quarter cash generation, which had a variety of factors going. So let me unpack what was, I think, generating sustainable cash generation and what was just because of some of the peculiarities that come with a pandemic and reduce revenues.

So if you look, we had a lower accounts receivable of $56.5 million, driven by the collections exceeding the lower revenues, and that is a factor of revenues being reduced. That is about worth three days of DSO. If revenues continue to climb and improve, you will see a use of cash of that three days of DSO, which is worth about $20 million to $30 million.

We did generate a sustainable improvement in cash collections of about a day that we hope to retain. We do plan to sustain the lower payments for legal professional fees. But we the onetime of the annual incentive compensation that we did not pay in the second quarter, that was because we did not achieve our financial results last year, so we didn't pay our incentive comp at full rate. That is more of a onetime benefit.

The prepaid software is due to lower software payments we're having right now as we put the ERP on deferrals. So I gave you sort of a trajectory of what we expect to spend on that going forward. The interest reduction is real. And should be continuing because we have lowered our debt, and we're seeing lower interest rates as well.

The lower accounts payable is due to lower costs that we're incurring right now. We do see some sustainable reduction in some costs, which I can go to, if you want, but they'll also increase as cost increase and align to support the business with revenues.

And then the government relief tax-related payment deferrals, they are onetime deferrals, and those were around $16 million. And we will see that through the rest of the year because we only incurred part of it, but that is a onetime as well.

So I hope that helps you unpack what is more unique to the quarter and the dynamics versus what is sustainable into the rest of the year.

[Sean Dodge, RBC Capital Markets]

Yes. That's great. Very helpful. Thank you. And then Cindy, on your operational initiatives, despite the delaying of the ERP and the disruption from the pandemic, you mentioned continued progress on those.

Can you give us a sense of are you referring to the new operating plans you've developed for your facilities primarily there? I think you had rolled those out to the 14 facilities earlier this year. How many have you introduced those into now? And what kind of pace or cadence can you maintain going forward?

[Cindy Miller, President and CEO]

Yes. Thanks, Sean. I think a couple of things. Our frontline folks, first, one of the things that we're all most proud of, for Q2. And sometimes it gets forgotten. But we've we'd like to thank our global frontline team members who really were shoulder to shoulder as essential services with health care professionals around the world, really helping to keep all health care networks up and running. So we're very proud of those folks.

And then you add on top of all that they were doing, our operators and our engineers continued to just look at every way to use the pandemic as a transformational catalyst. And I mean a big kick start to really change the way we look at dispatching, the way we look at equipment that we have in our facilities, the way we look at containers, the way we look at processing, everything that we do.

And as a result of just an awful lot of folks being in operations and taking a different look with guidance from our engineering team to change the way we do business, we've rightsized, as an example. I think we've returned over 300 different power and non-powered type equipments, whether it's tractors or it's chassis or it's trailers. We found 300 extra.

Now were some of those because of some reductions in paper or collections or stops? Sure. But a good bit of it was we just found that we carried too much of a bench because we really weren't dispatching with discipline. We were more controlled by a day's event rather than planning a couple of weeks ahead as to what we would need.

So we've gotten much better with that. Those will be those are things that roll into that $3 million to $5 million of cost that we believe we're going to be able to continue to hold on to. We've improved, as an example, some of our stops per paid per total paid hour. We improved that from February to July, somewhere around 13% improvement. We've seen pounds per hour improve about 15%. We've seen containers process per hour improve about 10%.

When you start talking about all facilities, not just the ones I think what you were referencing, Sean, is our continuing effort to put in master operating plans in our facilities. And we've slowly gotten back to putting some of them in again, and we're seeing great work there.

But this was really work that we pushed all across the organization. And quite frankly, the way the team has responded, I just couldn't be prouder of what everybody's done. So thanks for asking that question.

[Sean Dodge, RBC Capital Markets]

Thanks. And congratulations on the performance in the quarter.

[Cindy Miller, President and CEO]

Thank you very much.

[Operator]

Our next question comes from Brian Butler with Stifel.

[Brian Butler, Stifel]

Hi, good morning. Thanks for taking my questions.

[Cindy Miller, President and CEO]

Good morning, Brian.

[Brian Butler, Stifel]

Just on the first one, when you think about the ERP and just the color you gave was very helpful, but I just wanted to look into 2021 and the spend you have for the back half, the 30 to 40, how much additional spend occurs in 2021? I apologize if I missed it in your comments. And then what does the timing look like?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Sure. So we are planning to deploy in the first half, the ERP. And what we will need to do is turn on the new systems. On an annualized rate, those cost about $50 million to $60 million. So that will be prorated based on when we turn them on. Like this year, we thought it was going to be $35 million to $45 million, based on our deployments. So somewhere in that range of a proration. Those will be ongoing operating IT expenses that we will add to a normal run rate and maintain the legacy costs that we have as well. So that will be additional.

And then we have deployment costs that we deferred into next year. We had estimated them on the prior call about $20 million to $30 million, I'm looking at those right now, so they may change a little bit. But that's roughly the estimate we have right now, and that should push the system out and all the work you need to do that.

[Brian Butler, Stifel]

And a follow up, what's the offset on the savings, again, just kind of to highlight what your expectations are on the annual savings once it's up and running?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Yes. So our business case for the ERP, since it's so foundational, is our long-range planning assumptions and the savings we're generating as we go through the business. It is we are we have a lot of technical in this business in terms of just our foundational ability to run the business on systems. So it is the foundational for the future growth, the future cash flow generation of the company.

[Brian Butler, Stifel]

And after kind of this quarter and how you guys performed through the COVID. Do you how do you feel about that $400 million free cash flow target? Is that something you could reach faster than expected?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Yes, I'm really encouraged by the cash flow generation that we've been able to demonstrate over the past few quarters. I really think it speaks to our ability to do that. And that is still our long-term plan right now is to achieve $400 million at the end of the five-year trajectory.

As I mentioned, we're going through our long-range planning process right now, and we will look at all the dynamics in the economy and the government, tax and everything and maybe update that. But I'm very, very positive about the cash flow generation of this business.

[Operator]

Our next question comes from David Manthey with Baird.

[David Manthey, Baird]

Hi, good morning. Thank you. On slide four, where you talked about operational cost efficiencies, some of those items, centralize field oversight, improve processes, implement metrics, productivity, fleet rationalization. All of those sound like things would be much easier to get at with better information systems. And you alluded to this in the prior question. Maybe for Janet again, could you discuss a couple of the wins you've been able to get here in the near term? And then how that operational improvement process might accelerate once you get an ERP system in 2021?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Yes, it's a great question. Thank you for that. So we have done this with really a lot of talent and spreadsheets. Pooling systems from systems that don't want to give you the data, but getting it out of the data and continue to iterate on a daily and weekly basis to get insights to drive the performance of the business. So it will be a lot easier, and we can take that talent to more high-level insights to drive even another step function change in the business going forward.

I will also say that we have leveraged two systems we did put in. We did put in the HR success factors system, which was our human capital management system. That has been really amazingly helpful in this time because we didn't even know where everybody was. We had we were managing our HR our human capital, our people, on spreadsheets, and now we have a system across the globe, and that was very helpful through this time.

We also put in a purchase order system in the end of 2018, which was extremely helpful because we built the processes through 2019 to centralize the purchasing controls around that system. And we were able to leverage that centralized management of procurement during this time to really provide disciplined cost management, and that system was key. So we are taking advantage of every system we have. And any modernization we've done plus the talent in the organization to extract data for analytics.

[David Manthey, Baird]

That's great color. Thank you. And a random question on your thoughts regarding hedging the risk from sort of office paper prices, any I think in the past, you talked about potentially some changes in the contract language or the structure.

Just could you update us on your thoughts there? It's obviously a major factor in the results up and down. And I just I'd be interested in hearing how you're thinking about potentially hedging that risk going forward.

[Cindy Miller, President and CEO]

Yes. Dave, this is Cindy. And thanks for joining. Thanks for the questions. I think one of the things I'm extremely proud of in Secure Information Destruction is several things. Number one, even during the pandemic, probably one of the most difficult quarters that I think any business has ever had to face at least since probably 1929.

We look at the fact that we still came out with a new service, whether it's express, its priority or select service in terms of the timing and the guarantee for us to be able to come out and take care of customers.

What we are seeing is maybe within the organic growth that we're looking at, as stops continue to come back in line and as customers reopen, we're certainly there to renew our service with them, and we have. And our engagement with customers, I think everybody is just looking to get back to normal.

But so stops are there. And remember, we don't get paid per piece of paper. We get paid for the service and for the value, for the consultative engagement that we bring, for the certifications that we bring to the table, when we are actually not collecting paper, we are securing sensitive information. And our customers and our engagement, that's really what it's built off of, just that premise.

So as we move forward, with folks sheltering and working from home, I think what's interesting to say is I just recently looked at a study and about 77% of companies today, prior to the pandemic, had some type of work-from-home process. And I think that we we'll figure out whatever the new normal is. But I think the key to us is continuing to be there for customers as they return.

Number two, we also understand realistically, Dave, not every business will have survived Q2. So it's our responsibility to provide this necessary service to whatever businesses potentially take their place in the world's economies and in the marketplaces. And I think we're very well prepared to do that in our shift to organic revenue growth, more of a hunter mentality.

So I'm still very excited about opportunities. And I'm also - I don't want to be premature, but when we rolled out three new services during this difficult time, I can tell you that our commercial team is actively involved in continuing to become even that much more innovative for future challenges and future opportunities in markets as they continue to open.

[David Manthey, Baird]

Okay. Thank you.

[Operator]

Our next question comes from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger, Oppenheimer]

Thanks very much. Good morning, everyone. I guess I'd like to start off asking with regard to the regulated base segment. And you've kind of touched upon this, but I'm curious what you've seen trend-wise, it's been nice stability in that segment? What are you seeing with large customers and small customers and good and bad kind of comparing and contrasting, as we move through the pandemic? And what you I know you're not going to provide guidance for the second half, but the trends that you're seeing in terms of bad things?

And then just then to loop onto that Cindy, these two new offerings that you just highlighted, are they going to be meaningful in the near term? Can they have a contribution in the second half?

[Cindy Miller, President and CEO]

Great questions. So what we are seeing, as we've said, without the maritime in, if we take a look at just the July snapshot, we're up about 1%. Now not all independent facilities, whether it's the independent doctors and dentist office and those type of things, not all of those are back yet, but we are seeing improvement there. Certainly, with a lot of concern from those folks wanting to make sure that they stay compliant and engage with us to make sure that we're doing what we need to do with their regulated waste.

What I will say, I think from a trend perspective, might be this. I think there's still a portion of the population, while elective surgeries and preventive care is coming back, let's remember one thing, the highest risk group for going outside and engaging and not having the best success with the pandemic is the older population, the over 75, over 80, over 85. And also, quite frankly, that happens to be a very large portion of the population that spends some time in doctors' offices.

So I think there's still a little bit of the pent-up demand, if we want to take a look at it in terms of maybe from some age brackets, whereas I know several other folks who've had their knee surgeries or other elective surveys and are their back with their preventive care, I think there might still be some hesitancy in that segment of the population in terms of fully returning to regularly scheduled visits and care and that type stuff. So going forward, though, very, very positive.

When we start talking about launching new services, which I'll talk about, as you would ask, our ability to adapt we're making pickups in parking lots on a regular basis, with time-sensitive meeting timing requirements in some of our contracts where customers want us to make a morning pickup prior to 8 o’clock and afternoon pickup and an evening pickup at certain times.

And with SLAs in accordance with us meeting those commitments and we've been doing exceptionally well. I couldn't be prouder of the operations as to how they've adapted to the requirements and wanting to partner with our customers. And quite frankly, Scott, long gone are the days where we perform and try to do collect revenue just for the sake of revenue.

Our new service offerings are value accretive. They'll continue to grow. And we make sure from the discipline we have right now in terms of pricing and the discipline we have wrapped around our operations, making sure that everybody is involved at the table when we talk about how are we going to price and what's the value of this service in the marketplace. The services that we've put out recently, we're very excited about them.

And but to your point, we don't have a crystal ball to know how long will people be wearing PPE equipment in grocery stores or in some other warehouse settings. So the service that we've created for the non-traditional health-care-type settings, not just where are the facilities, but in warehouse work, where people are wearing PPE equipment, I don't have a crystal ball to say how long will people be wearing those things.

But I do know right now that for the service we're providing, we're bringing value certainly to our customers, but also to the company in terms of our ability to do what we do at the premium that should be expected.

[Scott Schneeberger, Oppenheimer]

Great. Thanks. A real quick follow-up. And I guess, Janet, more for you. Cindy, you gave a nice overview of Janet taking on the CIO role. And Janet, I think maybe it's not broadly known your background in IT. If you could just share kind of how you plan your vision for integrating your CFO and CIO responsibilities?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Sure. So thank you for that. Yes, I have been a CIO as well as the CFO. I actually was CIO before I became a CFO in my career journey. And I think there's great ability to have synergy between the two roles, especially as we roll out our ERP. A lot of the capabilities are really foundational to the financial management of the business, and so making sure that, that happens, okay, as well as all the other IT points.

And then the control environment. The control environment between IT and finance are very linked, and that is an area of keen focus for me as well. So those are a couple of the key areas of my priorities, and I think they link very well between finance and IT.

[Scott Schneeberger, Oppenheimer]

Thanks.

[Operator]

Our next question comes from Ryan Daniels with William Blair.

[Nick Spiekhout, William Blair]

Hey, guys. Nick Spiekhout in for Ryan. I know you've talked about how listed contracts aren't volume based, and they're just kind of almost like a garbage stop. But I'm wondering like if you've experienced any pushback on pricing given the likely reduction in volume or the reduction in stops, like for instance, if I only need a garbage truck to come to my house once a month, I probably don't want to be paying the same amount for it. I was wondering if you'd experienced all that at all?

[Cindy Miller, President and CEO]

Yes. That's a great question. And I think as businesses have returned, we work with all of our customers to help really support them whether they're getting through difficult times or support them when they're at the height of their growth. So we've always been flexible. We've always been adaptive.

I will say, as we move forward, the one thing that I think our customer base understands is as opposed to it being the collection of paper, we are collecting their sensitive information that they're entrusting with a top certified company, with well-trained drivers, with well-trained plant processing people, who understand exactly how you handle somebody's sensitive information that needs to be handled securely.

So for us, I think all you can do is take a look at average and the continuing rising cost of data breaches to know. I think the average data breach right now and or problem with Secure Information is somewhere tops $8 million just on average. And when you take a look at that, folks understand the sensitivity and the importance of the service that we provide.

So I can appreciate we're folks who might not have to deal with it often talk from a shred perspective about it being paper. But as this is paid by stop, it's paid from a service fee perspective, the value is in the security, the value is in the certification, the value is in who we are and the relationship with the customer, not by piece.

So have we worked with customers to help everybody get through the pandemic just like we all have been trying to? Of course, we have. But I don't see anything longer-term at this point as making me feel any less positive in terms of our ability to continue to grow shred.

[Nick Spiekhout, William Blair]

Great. Thanks. That's helpful color for sure. And then you mentioned how July was tracking for the business, volume-wise, at least for SID. How was that related to June? Was June also kind of trending up? And was that a further trend on June? I apologize if I missed that, I just...

[Cindy Miller, President and CEO]

No, no, that's a great question. We have seen continual improvements. Now remember, June is a bit June and into July, I think, are still a little odd in the fact that states kind of there was a lot more that said, hey, we're open as we got through May and into June. And then there's been maybe some attempts to go back to closing a little bit just because of the cases.

So we've seen steady improvement. But I think and we certainly have seen between June and July. June stops, I think was down maybe close to 18%; July, I think Janet had mentioned around 15%, still an improvement. But I think we're still cautious simply because it's been open and closed and then open again and close again. And I'm sure that's quite difficult for our customers to have to manage. But we're right there with them in order to be in to help them with servicing. So we'll see how it continues through the through Q3. But I'm pretty positive as we move through the months that we're going to see continual improvement.

[Nick Spiekhout, William Blair]

Great. Thanks, guys. Thanks for taking my questions.

[Operator]

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

[Jeff Silber, BMO Capital Markets]

Thank you so much. You've obviously been making a lot of changes to the business during this pandemic. I'm wondering, can you give us an update by the major segments? What the incremental and decremental margins are now by each segment?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

I think by segment, the margin for our shred and Secure Information Destruction and regulated medical are roughly comparable. I think which might be more helpful is to go through the drivers of our operating leverage improvement because I think that might be what you're trying to assess.

So they're really split into three major categories. So the first is the divestiture. So we divested of a low-margin business, primarily the Domestic Environmental Solutions business and the - to a lesser extent, the communication in terms of the size. But those were those account for about a third of the operating leverage improvement you're seeing at the adjusted EBITDA or even the adjusted EBIT level.

And then we mentioned about $3 million to $5 million of sustainable savings. Those cross both of the main core segments that we have. And that's about a third of the operating leverage improvement. That's at $3 million to $5 million I mentioned in my script.

And the last is discretionary costs that we also pulled the trigger on across all the core segments that's about another third. And those are things like travel and some other things, project work that we could pull as we watched what the economic conditions were.

So those discretionary costs will probably feed back into the business that we're committed to, to have them be aligned with the revenue improvement that we see going on. We hope to see the sustainable costs go below continue to drop to the bottom. And the divestitures will just by function of them not being part of our business anymore.

[Jeff Silber, BMO Capital Markets]

Okay. That is helpful. I appreciate that. I guess, along with the ERP improvements, and I guess we'll see a bit more next year. But do you envision a time or what do you need to see in order to reinstate guidance? And even if it's not on an annual basis, maybe on a quarterly basis, estimates were all over the place. So I think providing a framework might be helpful.

[Janet Zelenka, EVP, CFO and Chief Information Officer]

Yes. So I think since stability in the economic conditions and since our Secure Information Destruction is so impacted by the pandemic and the shelter-in-place orders, stability in what we're seeing with geographies and staying open or closed and sustainability of their economic environment would probably lead us to think about reintroducing guidance. And we will continue to try to provide what information we can as I did in this call of key pieces of it going forward as we see what happens in the business.

[Jeff Silber, BMO Capital Markets]

Okay. If I could just sneak one more in. You mentioned a few times on the call your long-range planning. When do you think you'll be in a position to share that with us?

[Janet Zelenka, EVP, CFO and Chief Information Officer]

So the long-range planning process goes through now into the fall. Last time, I think I discussed it in the fourth quarter call. So that would be a likely place that I'd put it, which is in the first quarter. But if I have insights before then, I would be happy to share them.

[Jeff Silber, BMO Capital Markets]

Okay. Looking forward to it. Thanks so much.

[Janet Zelenka, EVP, CFO and Chief Information Officer]

You’re welcome.

[Operator]

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

[Cindy Miller, President and CEO]

Thank you, Ely. And to everyone listening to the call, I would just - I'd like to say you appreciate your continued interest in Stericycle. And we appreciate your shared excitement in our future. So thanks much for today. And I'm sure we'll be talking to you soon.

[Operator]

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