Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2021-Q2

[Operator]

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

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

[Andrew Ellis, ‎Vice President of Investor Relations]

Good morning and thank you for joining Stericycle's 2021 second quarter earnings call. On the call today will be Cindy Miller, our Chief Executive Officer; and Janet Zelenka, our Chief Financial Officer & Chief Information Officer.

The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts but rather on current expectations and projections of our management about future events and are therefore, subject to risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the Safe-Harbor statement, in our earnings press release and in greater detail within the risk factors and 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 statements 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 applicable US GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle's Investor Relations web site at investors.stericycle.com. The prepared comments for today's call correspond to an earnings presentation, which is also available at Stericycle's Investor Relations website. Throughout the call, we may reference specific slides from the presentation. This call is being recorded and a replay will be available approximately one hour after the end of the conference call today until September 3, 2021. To access a replay of the call, dial 877-344-7529 and enter the replay access code 67-22-399. A replay of the webcast will also be available on Stericycle's Investor Relations web site. Time sensitive information provided during today's call, which is occurring on August 6th, 2021 may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Stericycle is prohibited.

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

[Cindy Miller, President & Chief Executive Officer]

Thank you, Andrew. Good morning everyone and thank you for joining our second quarter earnings call.

I'd like to thank our team members for their continued dedication to protecting what matters. Because of our team members efforts and their focus on serving our customers, we delivered strong and continued revenue growth in Regulated Waste and Compliance Services and Secure Information Destruction. We also delivered solid cash flow, driven primarily by operational performance. I'm also pleased to announce that we've achieved a significant milestone in our transformation journey. At the beginning of August, we launched our North American ERP for financial and procurement processes and began the phased deployment of the ERP for Secure Information Destruction.

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

We delivered a strong second quarter with total revenue growth of 12.5% which continues a trend of four consecutive quarters of total revenue growth. In the quarter, we had organic revenue growth of 14.4%, primarily driven by our quality of revenue initiatives and ongoing recovery from the pandemic. Regulated Waste and Compliance Services had organic revenue growth of 7.6%, comprised of 6.4% growth in North America and 12.2% growth in International. Secure Information Destruction had organic revenue growth of 34.2% comprised of 30.1% growth in North America, and 72.2% growth in International. As a reminder, Secure Information Destruction was significantly impacted by the pandemic in the second quarter of 2020, experiencing significant reductions in customer stops. Since then, this business has continued to recover as we increase customer stops.

Like many organizations, we too have been impacted by labor shortages, particularly driver and operational team members. To date, we are addressing our internal needs through three main areas. One, recruitment. Two, market competitive compensation and benefits. And three, employee engagement and retention efforts. In the first half of 2021, we expanded our internal recruiting organization to target, attract and hire new team members. Over the past two years we've been focused on ensuring that all of our team members are competitively compensated for the value they provide Stericycle through ongoing market based wage adjustments.

I will now turn to our North American ERP deployment. At the beginning of August, we went live in North America with ERP capabilities for financial and procurement processes and began our phased commercial and operational deployment for Secure Information Destruction. This ERP will combine our core businesses onto one, state of the art. North American IT platform that will provide us with powerful digital, data and operational capabilities to fuel our continuing transformation. With the launch in August, we've established a streamline and modernize foundation for finance, procurement and analytics capabilities, including implementation of enhanced budgeting and forecasting capabilities. We also began deploying commercial, operational and order-to-cash technology for Secure Information Destruction that we will leverage to drive our quality of revenue and operational modernization and innovation key business priorities.

For our deployment, we have a customer first business continuity mindset. The commercial and operational components are being launched in a phased approach, which allows us to minimize customer impacts while continually improving the systems. To further minimize risk from customer or system disruptions, team members that normally support operational efficiency, modernization and innovation initiatives are now assisting with the ERP launch, and we added a temporary hyper-care team comprised of several hundred team members. We believe these measures support our customers' transition to the new Stericycle platform. And I couldn't be more proud of all of our team members efforts in achieving this important milestone in our transformation journey.

We continue to execute on our fourth priority by reducing our debt and debt leverage ratio. By generating $149.8 million in operating cash flow through the first half of 2021, and further paying down debt, we lowered our debt leverage ratio to 3.06 times compared to 3.89 times at the end of the second quarter of 2020. This significant improvement continues our progress towards achieving our long-term debt leverage goal below three times. This week we signed an agreement to divest our operations in Japan for approximately $10 million, which will be reflected in our third quarter results. I'm proud of the progress the team continues to make in executing on our portfolio optimization initiatives as this marks our 9th divestiture since 2019. Proceeds from this divestiture will be applied toward debt reduction.

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

[Janet Zelenka]

Thank you, Cindy. I will start by summarizing our second quarter results. As noted on slide four, revenues in the second quarter were $672.7 million compared to $598.2 million in the second quarter of last year. Of the $74.5 million increase, Secure Information Destruction organic revenue growth was $52.2 million. Regulated Waste and Compliance Services organic revenue growth was $33.7 million and the positive impact of foreign exchange rates was $15.8 million. These increases were partially offset by the impact of divestitures of $27.2 million.

As noted on Slide 5; Regulated Waste and Compliance Services revenues were $463 million compared to $445.7 million in the second quarter of 2020. Excluding the impact of divestitures and foreign exchange rates, organic revenues grew 7.6% in the second quarter. North American Regulated Waste and Compliance Services organic revenues grew 6.4%. Of this 6.4% growth, approximately 3% was driven by quality of revenue initiatives, approximately 2% from COVID-19 related revenues, about 1.4% from an increase in the average weight per container, which we believe is due to increased elective surgery waste, and about 1% from Communication Solutions. These were offset by about a 1% decrease in maritime waste services revenue.

International Regulated Waste and Compliance Services organic revenue growth was 12.2% in the second quarter with the vast majority of the gains attributable to higher pandemic waste volumes as we support our customers through the pandemic. Secure Information Destruction Services delivered revenues of $209.7 million compared to $152.5 million in the second quarter of 2020 which reflects a 37.5% increase. Of the $57.2 million improvement, organic revenues accounted for $52.2 million or a 34.2% increase due to increased service stops as this business continues to recover from the impact of COVID-19. In North America, Secure Information Destruction revenues increased $43 million or 31.3% compared to the second quarter of 2020.

For Secure Information Destruction, we generate revenue in two ways. Servicing our customers through stops which comprised about 90% of revenues in North America in the second quarter and recycled paper, which comprise the remainder. North American revenues related to service stops increased 34.3% compared to the second quarter 2020. As a reminder, in the second quarter 2020, organic revenues significantly declined as Secure Information Destruction was directly impacted by the pandemic, and more restrictive shelter in place orders. When evaluating the second quarter 2021 against pre-pandemic results from the second quarter of 2019, service stops are down approximately 10%.

Recycled paper revenues were up 2.6% or about $0.5 million compared to the second quarter 2020. The increase in recycled paper revenues reflected higher SOP volumes, offset by lower SOP pricing, this quarter compared to the second quarter 2020 of $3.6 million. In international, Secure Information Destruction organic revenues increased 72.2% compared to the second quarter 2020. This increase was mainly due to increased service stops as this business continues to recover from the economic impact of COVID-19.

Income from operations was $55.6 million in the second quarter, compared to income from operations of $24.9 million in the second quarter of last year. The $30.7 million increase was primarily due to, one, quality of revenue initiatives and operating leverage improvements along with the continued ongoing economic recovery totaling $23.1 million. Two, nominal divestiture and impairment charges in the second quarter of 2021 compared to the second quarter of 2020 which had charges of $15.2 million, partially offset by, three, higher labor costs of $8.7 million. As a reminder, last year due to pandemic related business impacts, we made a decision to defer our normal merit increases to the third quarter. This year, we return to our normal cadence to providing merit increases in the second quarter. The merit timing accounts for approximately $4.7 to million the difference with the remaining $4 million due to higher labor costs from the ongoing competitive wage environment to attract and retain team members.

In the second quarter 2021, we spent $26.7 million related to the ERP with about 65% in operating expenditures and 35% in capital expenditures, on track with the overall annual estimated spin, I previously shared. US GAAP net income was $29.3 million or $0.32 diluted earnings per share compared to a net loss of $4.5 million or $0.05 diluted loss per share in the second quarter of last year. The increase was mainly related to higher income from operations of $30.7 million as explained earlier.

Cash flow from operations for the first half of 2021 was $149.8 million, compared to $207.3 million in the first half of 2020. As illustrated on slide seven, the year-over-year decrease of $57.5 million was mainly driven by an annual incentive compensation payout of $38.6 million in 2021 versus a nominal payout in 2020, and net higher income tax payments and other working capital changes in 2021 of $6.5 million. Additionally, 2020 experienced favorable cash flow from non-recurring items, including an advance received on a service agreement related to the divestiture of the Domestic Environment Solutions business in 2020 of $19.2 million, and government-related payment deferrals in 2020 of $15.7 million associated with pandemic related relief. These were partially offset by lower interest payments of $22.5 million, mainly as a result of lower debt balances.

Adjusted income from operations was $105.7 million or 15.7% as a percentage of revenues, up from $85.3 million or 14.3% as a percentage of revenues in the second quarter of last year. Adjusted income from operations improved 140 basis points due to quality of revenue initiatives, operating leverage improvements and the continued ongoing economic recovery, which contributed approximately 210 basis points and divestitures of lower margin businesses, which contributed approximately 60 basis points and these improvements were partially offset by higher labor costs of approximately 130 basis points.

Adjusted diluted earnings per share was $0.67 compared to $0.46 in the second quarter 2020. As illustrated on the bridge on slide eight, the $0.21 improvement was due to the following. $0.13 favorability from higher adjusted income from operations, $0.05 favorability from a lower effective tax rate, primarily due to higher income with comparative levels of non-deductible expenses year-over-year, $0.02 favorability from interest expense, which was mainly a result of lower debt balances and $0.01 favorability from foreign exchange rates.

Our second quarter, DSO as reported was 56 days compared to a DSO of 46 days in the second quarter 2020. When excluding divestitures as of June 30th, 2021 from the trailing 12 month DSO calculation, DSO was 56 days in the second quarter 2021 compared to 51 days in the second quarter 2020. Short term movements in revenues and receivables related to the impacts of the pandemic are impacting DSO year-over-year. Capital expenditures in the first half of 2021 were $59.7 million compared to $74.6 million in the first half of 2020. The difference was mainly driven by lower ERP capital expenditures in 2021 compared to the first half of 2020. For full year 2021, we now anticipate spending $140 million to $160 million in capital expenditures. This represents a change from our previously shared range of $160 million to $180 million, mainly driven by expanded timelines due to supply chain delays.

Free cash flow for the first half of 2021 was $90.1 million compared to $132.7 million in the first half of 2020. The $42.6 million decrease was due to lower cash flow from operations, partially offset by lower capital expenditures, as explained earlier.

As shown on Slide 9; at the end of the second quarter, our credit agreement defined debt leverage ratio was 3.06 times, an improvement from 3.89 times as of June 30th, 2020 and below our maximum allowable ratio of 4.75 times. Net debt was reduced by $90.7 million in the first half of 2021 to approximately $1.65 billion. Although, we still operate with uncertainty due to the evolving recovery from the pandemic, I would like to provide some insights into what we see emerging related to third quarter revenues, as well as anticipated ERP-related expenditures for the rest of the year.

Looking forward to the third quarter 2021, it's important to remember that the pandemic continue to impact portions of our business in the third quarter of 2020, but less so than during the second quarter of 2020. After normalizing for the impact of divestitures on revenues in the third quarter 2020, which were approximately $19.7 million from the expert solutions and Argentina businesses, and excluding the impact of foreign exchange rates, which have been favorable for the past couple of quarters on revenues, we anticipate generating consolidated organic growth in the mid-single digits in the third quarter 2021.

Regarding the ERP, as Cindy mentioned we have launched the North American finance and procurement portion of our ERP and began our phased deployment for Secure Information Destruction. As noted on slide 10, we are on track to spend approximately $75 million to $85 million on the ERP implementation in 2021, which is in line with the ERP spending range I previously shared.

Beginning in the third quarter to the remainder of 2021, we also estimate having an additional $30 million to $35 million of ongoing IT operating expenses. Beginning in 2022 we estimate the total annualized ongoing operating expenses for running the new system to be $50 million to $60 million. These 2021 and 2022 ongoing IT operating expenditure ranges are in line with the estimates I previously provided. Following the phased deployment of Secure Information Destruction, we plan to implement the North American ERP for Regulated Waste and Compliance Services in 2022. While the first few days of our ERP deployment are going well, as with any major system implementation our ERP has the potential to cause disruption resulting in potential customer impacts and additional costs.

As Cindy mentioned, this week we entered into definitive sales agreement to divest our business in Japan for approximately $10 million. Revenues and EBITDA of Japan's operations which are recorded in International Regulated Waste and Compliance Services were approximately 1% of our consolidated totals for the second quarter 2021. The divestiture will result in a third quarter non-cash pre-tax loss of approximately $15 million.

Finally, we remain committed to our long-term outlook as summarized on Slide 11.

I will now turn the call back to Cindy.

[Cindy Miller, President & Chief Executive Officer]

Thank you, Janet. I'm proud of all of our team members for their continued execution against our five business priorities. The steady improvements in maturing this organization, throughout the second quarter have led to double-digit organic growth, achieving a significant transformation milestone by beginning the deployment of our North American ERP system, further progress in improving our debt leverage ratio and continued portfolio optimization.

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

Operator, please open the line for Q&A.

[Operator]

We will now begin the question and answer session. [Operator Instructions] The first question is from Sean Dodge of RBC Capital Markets. Please go ahead.

[Thomas Keller, RBC Capital Markets]

Hey, good morning. This is Thomas Keller on for Sean. Thanks for taking the questions. Cindy, as we think about the longer-term revenue growth guidance could you talk about a little bit about the trends you're seeing across the core medical waste business? I know you've mentioned before some changes being made about how your purge sales and new account adds, so are you starting to see a lift from that? And I guess on an account basis, do you have more customers now than you had five or six quarters ago?

[Cindy Miller, President & Chief Executive Officer]

Thanks so much for that question. I think a couple of things that we are seeing is, we're getting to a point where in order for us to continue to grow and we are looking towards that LRP of 3% to 5% revenue growth. We've got to continue to hit on our quality of revenue initiatives. So for us, we are seeing a return to some of the elective surgery levels we've seen before in Regulated Waste. However, we're still not seeing maritime business back yet. So, one is, we're seeing good things on one side and then still a lagging portion of the business or portion of revenue on the other. But I think if we look for the long-term, right now, I couldn't be any more excited about the launch of the ERP where we can really continue to drive more of our quality of revenue initiatives. But quite frankly the ERP is really going to help us on all of the business priorities that we're looking, whether it's modernization in some of the innovation thing. So I think a lot more to come as we get through the ERP successfully, and then be able to kind of hone our skill a little bit more in our ability to harness data and then make it bring some good things to us.

[Thomas Keller, RBC Capital Markets]

Okay, that's helpful. Thanks. And then, maybe on the margins; still making good progress there. I know you're not providing guidance, but can you give us a sense of how you expect EBITDA margins to turn it over the remainder of the year? If you got the benefits of the operational initiatives you have been working on and then Q3 restart the ERP and those associated costs? So on the non-GAAP measures do you think you can mostly offset that with the cost savings, you've been able to generate, or should we expect margins to come back in a little bit?

[Janet Zelenka]

Yes. So first, I'm going to start with a long-term. Look at what we see with this business and go to what's happening this year. So first of all, we're driving to expand free cash flow, which is primarily going to be driven by margin expansion, which it gets us to that at least $400 million by 2025 in the year, what we're going to see is a flip of costs that have generally been running below the line move to above the line. So as we continue to take cost adjusted out and move them into normal operations, adjusted income will have a shift and that's at $30 million to $35 million that I mentioned in my prepared remarks. So, we're going to have to start looking at GAAP, excluding, just a few discrete items as what our margin expansion number is because if you look at adjusted you're going to see that movement. So that's most significant thing I see happening through the rest of the year.

[Thomas Keller, RBC Capital Markets]

Okay, that's very helpful. That's all for me. Thank you.

[Operator]

The next question is from David Manthey of Baird. Please go ahead.

[David Manthey, Baird]

Thank you. Good morning. Janet, should we assume that you keep the legacy systems running parallel to the ERP through most of 2022, and how should we think about the SG&A step down? I know that's a ways off, but when we get into 2022, is that when we see it or is it straight through the year?

[Janet Zelenka]

Yes. Thank you for the question on the legacy application. So when you do a transition like we're doing in North America, you do need to keep the legacy going. And as I've mentioned before the legacy applications all support our international operations are a good portion of our international operations. So we're going to have to keep them going until we move the international operations to a modern platform as well. So I would say, it's a good projection to safe through most of '20, if not all of 2022, you will see that legacy cost stay. That's why we indicate that the $50 million to 60 million is an incremental on top of that legacy IT costs.

[David Manthey, Baird]

Okay. And then, to be clear on the CapEx statement that you made, you're seeing some supply chain delays, maybe you can clarify that, but the capital expenditure changes that you're talking about here, none of those are related to ERP, but maybe you could outline what they are related to and why?

[Janet Zelenka]

Yes, be happy to. So what we're seeing is that most of the delays are in not -- dozens and dozens of maintenance projects we're doing, not the core growth projects we're working on or the ERP. So when you add up dozens of work we're doing to refresh our operations and do that what I call the normal ongoing, we're seeing some delays which are sort of adding up to that change in cash, but our core growth initiatives and the ERP are on track.

[David Manthey, Baird]

Thank you very much.

[Operator]

The next question is from Michael Hoffman of Stifel. Please go ahead.

[Michael Hoffman, Stifel]

So this is where you get creative and try to ask seven questions in two. How are you doing Cindy and Janet?

[Janet Zelenka]

Thank you. Good, Michael. You're getting pretty good at that so.

[Michael Hoffman, Stifel]

Yes. So, just to help us on the $30 million to $35 million which turns into $50 million to $60 million next year, where do we put that in SG&A and D&A, how much splits between the two? And do we step up just take Q2 and then add that to it. Is that a good basis to how to think about it?

[Janet Zelenka]

Well, so, and I'll direct you. If you go to one of the slides in our deck, it is slide 10. That $30 million to $35 million will be in the second half of the year, and $8 million to $10 million will be depreciation expense of that and the rest will be basically SG&A. And then the $50 million to $60 million has a similar run rate for an annualized year on depreciation for the next year. And then that is essentially normal operating SG&A expenses.

[Michael Hoffman, Stifel]

And you said Q2 as the baseline data to, there is not some something going on sequentially?

[Janet Zelenka]

In terms of IT costs?

[Michael Hoffman, Stifel]

Yes. Just if I started with the Q2 total...

[Janet Zelenka]

Yes. We have the legacy systems running and then we're adding this on top of that.

[Michael Hoffman, Stifel]

Right. Okay. And then the second question. I appreciate the year-over-year directional on sales, but there is so much noise in the year-over-year, what's the trend sequentially from Q2 into Q3?

[Janet Zelenka]

Yes. I think it's probably in the same range is what we're seeing. We have so many dynamics going on, Michael, it's interesting to watch. So it really is dependent on maritime. The cruise has started to sale. But now we're watching what the variant impact will be. So, we took a middle of the road, if you will, on that range and what we see, given all the dynamics that seem to be emerging in the business, so it will be in the same range, but these key drivers, if things open up we have an opportunity to exceed. If business is starting to shut down again and we go to shelter in place orders, which we don't think will happen that would be an impact on it. So it is a hard business to predict right now because both of our core business acutely impacted by pandemic trends and in multiple ways.

[Cindy Miller, President & Chief Executive Officer]

And Michael, just one more thing to think about, I think from a sequential perspective, if you were to talk to us a couple of months ago, we were definitely anticipating and we saw everybody saying hey, return-to-work September 1st, return-to-work August 1, return-to-work October 1. And plans were coming through, there was anticipation of schools opening. And then just recently, if you look at most recent headlines in the last two weeks, that almost has flip flop. So I think for us, we are monitoring the situation as closely as we can. And then the one thing I think that we've at least develop some muscle memory for is being able to adapt to whatever those circumstances are. So, I think that just highlight a little bit about what we are looking at and what Janet had mentioned.

[Michael Hoffman, Stifel]

Perfect. Thanks.

[Operator]

The next question is from Scott Schneeberger with Oppenheimer. Please go ahead.

[Scott Schneeberger, Oppenheimer]

Thank you. Good morning. Cindy, I think I'll start out, I'm just curious, I know it's just discussed there is a lot of noise in the year-over-year comparison in what's going on. But on pricing, you alluded to some labor inflation pressures. Are you able to cover that? And that's kind of the direct question. And the higher level question is, how are you trending overall in the revenue quality on specific pricing initiatives for your large and small customers? Thanks.

[Cindy Miller, President & Chief Executive Officer]

So, great question, Scott. And a couple of things on pricing. I think we're getting more and more astute in the marketplace with our marketing team, our commercial team and our operators in understanding the dynamics of the different markets across the US in both of the businesses. And then understanding what is the fair value, what's the market value for the services and the value what we bring to our customers. I think as we continue to see this ebb and flow, as we improve our quality of revenue, and that includes improving contractual language where we're kind of centralizing it, standardizing it, getting more process behind it in comparison to how we had been a few years ago. Certainly we build into their opportunities for our customers to grow with Stericycle, but then also for us to be covered for different things. So, I think we're maturing better from a commercial organization to be able to stand up those contractual relationships whereby we can cover ourselves to a greater degree than maybe we had been before.

So, I think in terms of price and where are we. I would say that we learn a lot from what we win, but on any of the contracts where we don't, we learn an awful lot from that too. And I think that helps us keep in tune with what is going on in the market.

[Janet Zelenka]

And yes, I just like to add in. Of the 6.4% growth we saw in North America Regulated Waste and Compliance Services, about 3% of that was driven by the quality of revenue initiatives. And then about 2% from the COVID-related revenues, and at about 1.4% from an increase in the average week the container, which we think is due to elective surgery increase. So those quality of revenue issues are dropping to the bottom line. And they include gaining new business as well as pricing for value.

[Scott Schneeberger, Oppenheimer]

Got it. Thanks, guys. And yes, Cindy, back to you. I guess it's been a year now, since you had those three newly introduced services. Two of them were very COVID-related. The other was the Express and Priority pickup and information. I'd love a progress report on existing and thoughts on what may be coming because I know that's been a personal initiative you had in the focus area for the company?

[Cindy Miller, President & Chief Executive Officer]

Yes, I think a great question. Thanks for bringing that up, you're referencing, our non-healthcare PPE customers. So the non-traditional warehouses or non-traditional healthcare customers running warehouses and distribution facilities asking their people to use PPE equipment. And then you're talking about the COVID first it started as testing sites that were popping up all over the place, and now it's more of the vaccination distribution site. We continue to do very well with those in terms of those adding to our quality of revenue and to the organic growth that Janet had referenced. As the vaccines continue to roll out and move across the US, really across the world, we are well positioned for the ebbs and flows of those dynamics as well. Will there be more vaccines? We don't know, it depends on I guess what headline you read. So, I like where we're positioned with those.

And then, I think as we move through right now we're very focused on the ERP, most importantly minimal customer interruption is really the focus right now. But we're always thinking about what will our new data give us in terms of the ability to continue to innovate. So we'll be very ready to announce any of the types of changes in new services that we have but I think it's suffice it to say, we're putting in this ERP to make sure that we can become more nimble and really get ahead of our customers and what they might need.

[Scott Schneeberger, Oppenheimer]

Sounds good. Thanks.

[Operator]

The next question is from Gary Bisbee of Bank of America Securities. Please go ahead.

[Gary Bisbee, Bank of America]

Hi, good morning. The first question just on the balance sheet. Cindy, you talk about your priorities and you continue to say debt reduction. It's a pretty amazing job you've done getting basically right to that, 3% you targeted and two years ago that seemed like a just a lot to do when you are there. So when do you change that from debt reduction to thinking more broadly about capital allocation and I know the target is still getting below three times next year or the year after. How are you thinking about updating that or what a longer dated target from here would be? Do you ramp up M&A? Do you repurchase stock? Do you want the leverage to go well below three? I guess how are you thinking about that evolving? Thank you.

[Cindy Miller, President & Chief Executive Officer]

No. Great question, Gary and one that we do talk about. When I got here and took over and as well as then with Janet and the rest of the executive leadership team and the Board, getting the balance sheet stronger to be in a position to have choice and to be opportunistic in the market was a priority. And I am very proud of the work that the team has done it just being steadfast focused on that improvement. And quite frankly you don't just improve a balance sheet as everybody knows, it's because every other process, every other business unit is really focused on doing the right thing. So very proud of that. But I also would bring -- I think Gary, everybody's attention, we continue to invest in the company, which it isn't just about every dollar to debt reduction. And I think if you look at the ERP investment, if you look at our continued rollout, and if you as to what Janet had talked about in some of our capital expenditure projects, we are looking to modernize. We are looking to upgrade, to automate, to do a tremendous amount of things internally while paying down debt.

So, I think more to come and I think there'll be an opportunity with a stronger balance sheet for us to be a bit opportunistic as we look to the future and as we make those changes we will be more than happy to share that info with everyone, but certainly we are focused on a lot of different things right now.

[Janet Zelenka]

And then, Gary, this is Janet. Regarding the debt leverage ratio we're real pleased with where it is and you pointed to our guidance. about 2022, 2023 to get below three. And we are focused on that and we got there, close to their faster. I would want to point out with the movement of the IT costs above the line, they are no longer an add-back of the ERP development. So that is a factor for the debt leverage calculation.

[Gary Bisbee, Bank of America]

Okay. Yes, fair enough. And then just on the higher labor costs. I understand a big chunk of that was the timing of your merit increases, but how are you thinking about labor shortages and wage rates sort of looking forward over the next few quarters? Is this an issue, is that $4 million a good run rate to use for higher wages, or is there a risk of more of that and how material is that shortage of drivers and other people that you comment? Could this get worse is essentially the question? Thank you.

[Cindy Miller, President & Chief Executive Officer]

Yes Gary, I think that's a great question and one of the things that I think stands out to me there's two things. First one is Stericycle is not immune to what's happening in the marketplace by any stretch of the imagination. And as we listen and hear whether it's drivers or its plant workers or quite frankly, I don't know that I've walked into any place over the last couple of months where I didn't walk in and there'll be a help wanted sign in the window. So, we're not immune to that. But what I do like to point out on the labor shortage piece is, I want to say we've been focused on our really taking a look at our competitive wages for the last probably two years really getting more in touch with specific markets and trying to make sure that we improve our compensation and our benefits packages. And then, if you will, just at the very beginning of this year, we brought our recruitment and hiring in-house. So whether it's for recruitment, we were continuing to look at comp and Ben and then also for our engagement and retention initiatives.

So, I think it's something we've been focused on. I'm very proud of the efforts that we've done. And I'm really proud of our ability to continue to do our best for our customers right now under some challenging conditions. Janet, anything else you'd like to add?

[Janet Zelenka]

Yes. So, thanks for pointing out that the 4.7 was due to the merit timing and as we look at compensation there is a couple of drivers. One is the key underlying competitive pressures which Cindy says, which we're addressing. The other is that we did ramp up and for this quarter and the next to put the ERP in as you heard, we've added support. So those are kind of two dynamics going on there, but we do have the ERP. And we do have the team that's usually focused our productivity working on that. So your best defense of that is modernized systems and productivity improvements that leverage and so we just put it in this week. So we're at the beginnings of that. But those are our opportunity areas and tools that we didn't have just a few days ago, to help us with this challenge.

[Gary Bisbee, Bank of America]

Okay, thank you.

[Cindy Miller, President & Chief Executive Officer]

Thanks, Gary.

[Operator]

The next question is from Jeff Silber of BMO Capital Markets. Please go ahead.

[Jeff Silber, BMO Capital Markets]

Thank you so much. And one of the prior answer you just mentioned quickly the Delta Variant, I was wondering if you could drill down a little bit, how is that impacted the different business lines? As an example in the SIB business, I'm just curious that you had some customers that started off increasing services and might be holding back now, and they decide to open up their office is a little later?

[Cindy Miller, President & Chief Executive Officer]

Yes. I think, Jeff, great question. What we are really happy with in terms of shred is how it continues quarter-over-quarter to improve with the customer stops and as businesses are coming back, they are calling and they do want, they understand it's an essential service to keep their businesses compliant. So we are getting those calls. So I'm very, very pleased with that. What I would say more with reference to Delta Variant, I think, we are eagerly anticipating when businesses do bring employees back into offices, when schools do open back up, when universities do go back to more of on campus in classroom type of settings, because as you know that obviously is an indicator and would be a help in terms of stops and volume.

So like I said, a couple of months ago announcements of businesses going back, big businesses starting to go back let's use September versus as an example in the last two weeks with the Delta Variant discussion, there is some changes to that. So, I think we're very pleased with how the business is recovering, but when will it get to full recovery or when will we hit normal, I think that story hasn't been written yet.

[Jeff Silber, BMO Capital Markets]

Okay. And if I could switch place to the ERP implementation. I know it's really early. But in the past, the management team have talked about the inability to get timely information. Has that improved at all? Are you getting reports quicker, so you can make decisions quickly?

[Janet Zelenka]

So this is Janet, thanks for the question. So we will get reports quicker, it is the first week. I'll give you an example is like someone came in and said, I'm seeing revenue come in, like I had to wait to the end of the month, et cetera but there's a lot of tuning to do. It's just the first week, so there is nothing actionable now from it, but the promise is there, and the team is getting excited with the [indiscernible] possibility.

[Jeff Silber, BMO Capital Markets]

All right. That's great to hear. Thanks so much.

[Operator]

The next question is from Kevin Steinke of Barrington Research. Please go ahead.

[Kevin Steinke, Barrington Research]

Good morning. In relation to the ERP rollout. I wanted to ask about your change management initiatives around that, which are always important component in terms of training and helping you get through that process. So can you talk about your efforts on that front in the investments that are being made in change management?

[Cindy Miller, President & Chief Executive Officer]

Sure, I can start and then if, Janet, wants to chime in a little bit. First with the ERP. That training component that change management. One of the things that I said was a terrific change management catalyst for us. I think the silver lining if anybody could have one out of the pandemic was how much we had to change the way we do business, change the way we interact with each other, change the way businesses look at tomorrow, our business units, that happened starting last year. So, I think we've developed a really good muscle memory, in terms of hey, today is different than yesterday and we need to be able to adapt. Our customers' needs are different today. We need to be able to adapt. So I think, we've had strong preparation for this. I think the team has planned very well and very proud of all the folks that are associated with our internal rollout. I think there has been unprecedented, within the company, kind of collaboration between departments to make sure that as the systems rollout day-by-day that we continue to knock down any of the potential issues that have popped up. So I'm very, very pleased with how internally we're adapting to change.

I think on one of our calls yesterday, I've had some of the operators, talking about we just continue to get better. And it's interesting to, we have an ERP update call several times a day and as you know we are phasing out the ERP. We're rolling it through the US with strength, and we have so many of our operators on the calls that have yet to face the phase, they didn't get the phase yet. The phase is coming to them and we're learning so much from every day that I'm very, very pleased overall. And I know it's early days, but certainly an awful lot of good things going on within Stericycle. So, Janet any other comments about change management?

[Janet Zelenka]

Yes. So, I'm really excited about that question because it's a big passion for me change management. And I think there's two aspects to it, it's the hard concrete from two, this is how you did before, this is how you do in the future. And then there's the human aspects of change. And we have addressed both of those head on with the dedicated change management team that has been supporting each of the processes, plus an external partner to help us with that. So, for example, on the hard concrete front too, we've built journey maps for the customers to suppliers and the different roles in the business. We have built hundreds of standard operating procedures and training them and we've rolled out training both virtual and in the facilities for example to drivers who are in the facilities before go live it and with interactive in person training, which was a benefit of shifting that to an area where we could get people out to the field to help with the training.

And then, the human aspect of going through that, what I used to do before it's not how we do it today and how to help people with that change journey and also change leadership training for our leaders to help them with that too. And that has resulted in a very positive collaborative attitude to approaching this changed.

[Kevin Steinke, Barrington Research]

Okay, great. It sounds like a lot of thought and effort has gone into change management. So that's good to hear. And I just wanted to secondly, ask about last quarter you talked about you had started up a systematic approach to optimizing and standardizing the design of your medical waste facilities. And you started to implement that at a few facilities. Is that kind of ongoing, is it going to continue to be rolled out across all your facilities going forward and what sort of operational gains or cost savings are you seeing out of that?

[Cindy Miller, President & Chief Executive Officer]

Yes, I think it's definitely. Anytime, a company that as we've said, is just a patchwork of 400 different acquisitions. Equipment looks different, the facilities looks different, the layout is different, how we process waste is different, the containers are different. And it really is a very large effort for us internally to try to standardize and modernize as much as we can. So, we did talk about facilities. And we continue with that with that process to make sure that, whether it's upgrading or putting in new systems and new equipment. And then if we're going to go ahead and put into equipment we go ahead and we've developed what we believe would be some - with the engineering team, how should a facility to be laid out, how can we maximize our productivity in every facility. So that continues and it remains a very big part as it's listed is one of the key priorities. So, anytime we're going to put anything in to a facility or modernize, we certainly do look to see how we can standardize things so that we can gain all the operational efficiencies that we should be.

[Operator]

The next question is from Ryan Daniels of William Blair. Please go ahead.

[Ryan Daniels, William Blair]

Hey, guys, Nick speaking on for Ryan. Thanks for taking the question. So, solid trends past couple of quarters we've said, wondering how much of this is kind of being driven by new client wins versus kind of existing clients is coming back on line and exhaust the route? And then kind of regarding that how has kind of cross selling those services been with RWCS?

[Cindy Miller, President & Chief Executive Officer]

Very insightful question. Nick and I appreciate it. Anytime you're going to grow your business and you're looking for an organic growth strategy, you've got to have a healthy mix of both. So the customers are coming back and they're saying, hey, I'd like my service to get restarted. But then you also have to add the next new customer. So I'm very proud of the commercial group and how we're looking to do that. So I want to say it's a healthy mix of both. And then in terms of cross selling, our efforts that's a quality of revenue initiative where we realized we needed to get the commercial side of the organization understanding the full suite of services because we do have a strong mix of customers that need both. So, I think when you look at any of the organic revenue growth that we've had it's because we are starting to hit on all of those cylinders including cross selling, new clients, having other customers come back and restart their services. So it's a mix of everything.

[Ryan Daniels, William Blair]

Great, thanks. And then, I guess on the quarter-over-quarter decline in RWCS, is there any kind of dynamics to call out there that's I guess a little bit of seasonality and divestiture side of dynamics?

[Cindy Miller, President & Chief Executive Officer]

Yes. So, basically it's a seasonality factor when you're looking quarter-over-quarter, RWCS is doing well during these times. And you can see that with the continuing focus and results we're seeing from the quality of revenue initiatives. The underlying dynamics in there of course having maritime continues to lag underneath that, but there is also a seasonality component to that.

[Ryan Daniels, William Blair]

Got you. That's what I assumed. Thanks, guys.

[Cindy Miller, President & Chief Executive Officer]

Thanks so much, Nick.

[Operator]

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

[Cindy Miller, President & Chief Executive Officer]

Thank you, Kate. So to everyone listening on the call, we greatly appreciate your interest in Stericycle and your shared excitement for our future. Thank you very much.

[Operator]

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