Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to Stericycle's Third Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

Now I'd like to turn the conference over to Mr. Andrew Ellis, Vice President of Investor Relations. Please go ahead.

[Andrew Ellis, Stericycle, Inc.]

Hello and thank you for joining Stericycle's third 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. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts but rather on current expectations and projections of our management about future events and are, therefore, subject to risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the Safe Harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the US Securities and Exchange Commission.

Our past financial performance should not be considered a reliable indicator of our future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statement other than in accordance with legal and regulatory obligations. On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable US GAAP measures, please refer to the schedules in our earnings press release which can be found on Stericycle's Investor Relations website. 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 Jayne Miller, Stericycle, Inc.]

Thank you, Andrew, and welcome, everyone, to today's call. During the third quarter, Stericycle continued to proactively manage our business through the uncertain economic conditions driven by the COVID-19 pandemic. We delivered solid results in the quarter with strong free cash flow generation, additional net debt reduction and improved operating leverage. Our global revenues for Regulated Waste and Compliance Services showed organic growth over third quarter last year, and our Secure Information Destruction organic revenues improved compared to the second quarter of 2020, reinforcing the fact that our team provides essential services to healthcare providers and other businesses around the world.

Before reviewing the progress on our five key priorities, I'd like to give you an update on our global safety culture transformation. I am pleased to report that through the third quarter of this year, compared to the same period in 2019, our team reduced the total recordable incident rate by 22% and the vehicle accident rate by 30%. Our disciplined approach to safety has included increased investment in team member awareness and training as well as increased reporting of actual or potential safety incidents, no matter how small. We are leveraging driver cameras across our North American fleet, and we're providing more meaningful driver coaching based on the video footage.

During the third quarter, we began the rollout of a new proprietary defensive driver program which we expect to fully deploy across our global markets by the end of first quarter 2021. To emphasize the importance of this program, the executive leadership team, including me, took the training and we shared our feedback throughout the organization.

Next, let's shift to a review of progress on our five key business priorities. Over the past 18 months, I've discussed several foundational initiatives that we've launched to drive quality of revenue. These included a formal cross-functional deal review committee, realignment of the commercial incentive plans and the reorganization of our commercial leadership team around our service lines and key customer channels. We are now adding our next quality of revenue initiative, the implementation of a global customer pipeline management process and tool for both Regulated Waste and Compliance Services and Secure Information Destruction.

The new pipeline management tool is designed to help us improve revenue forecasting; create standardized daily, weekly and monthly key performance indicators; drive activity and performance metrics down to the sales rep level and provide daily data to adjust marketing investment based on demand signals. This pipeline management process is expected to provide greater visibility and accountability across the global commercial organization as we continue to pursue organic growth.

Looking at the third quarter results, we again experienced favorable revenue trends from the new services that we introduced during the second quarter. Our non-healthcare PPE waste disposal service is expanding our customer base to new channels while our priority and express document destruction services are being well-received by customers wanting time-sensitive pickup. While still early days with these services, we are encouraged by their ability to generate incremental revenue.

I'm proud of the relationships we've built with our customers, and never more so than during this year of operating complexities brought on by the pandemic. Our customers acknowledged our commitment by giving us some of our highest customer satisfaction scores across Regulated Waste and Compliance Services and Secure Information Destruction in all North America channels. It is apparent that our customers appreciate the value we bring, and we are realizing the benefits of our quality of revenue efforts as evidenced by organic growth of 1.9% in Regulated Waste and Compliance Services this quarter when excluding the impact on maritime waste services from the pandemic.

Moving on to operational efficiency. As we manage through volatile times, we remain focused on controlling variable and discretionary costs. With the safety of our team in mind, we continue to tightly manage travel. We are also closely monitoring our daily operational and consulting spend, and we are steadfast in our commitment to improve performance and efficiencies in our field operations. As I have shared on previous calls, our engineering and operations teams are partnering to implement operational process and performance improvements which have significantly contributed to our gross profit margin expansion during the third quarter.

We are making further progress on sizing and balancing our fleet and equipment, driving efficiencies in route and long-haul planning and optimizing our network and assets. Additionally, we have normalized our workforce following the furloughs experienced earlier this year. Today, all but a small fraction of our global team members have returned to work. We are hiring to meet service demands as necessary and continuing to invest in the development and training and engagement of our team.

As we advance operational efficiency efforts, we have driven productivity improvements. Last quarter, we reported the benefits associated with those efforts, generating sustainable operating cost reductions of $3 million to $5 million per quarter which did repeat this quarter. We are encouraged with our progress and seek to unlock additional cost-saving opportunities.

Turning to portfolio rationalization and debt reduction. As announced on our last earnings call, we successfully completed the divestiture of Argentina for $3.9 million in August, which represented our seventh divestiture since January of 2019. We remain committed to streamlining our portfolio to focus on core businesses.

In addition, we reduced net debt in the third quarter to below $2 billion, the lowest level in five years.

Finally, let's review progress on the ERP system. As previously communicated, we have shifted the planned deployment of the rest of our North American ERP system until 2021.

However, we are not sitting idle. In the interim, we are making progress mining data from our legacy systems and tools to gain business insights, build scorecards and improve performance. Additionally, over the past several months we accelerated the deployment of certain technologies associated with our North American ERP system, including our new employee travel and expense system and a global tax management system.

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

[Janet H. Zelenka, Stericycle, Inc.]

Thank you, Cindy. I will start by summarizing our third quarter results. Total revenues were $636.4 million compared to $833.1 million in the third quarter of 2019. Of the $196.7 million year-over-year decline, the impact of divestitures accounted for $162 million and Secure Information Destruction revenues, excluding sorted office paper or SOP pricing, accounted for $36.6 million, reflecting pandemic-related business disruption.

As noted on slide 5, Regulated Waste and Compliance Services revenues were $415.5 million compared to $551.6 million in the third quarter of 2019.

Excluding the impact of divestitures and foreign exchange rates, organic revenues for Regulated Waste and Compliance Services increased 0.6%, or 1.9% when excluding the impact on maritime waste services from the pandemic, which largely support the cruise industry. Almost all of the maritime revenues are included in North America, so when excluding the impact of maritime, North America Regulated Waste and Compliance Services organic revenue growth was a positive 0.8%.

Secure Information Destruction Services delivered revenues of $187.3 million compared to $222.6 million in the third quarter of 2019.

Excluding a $1.3 million positive impact from SOP pricing, organic revenues declined 16.8%, reflecting pandemic-related business disruption. In North America, Secure Information Destruction organic revenues were down 14.3% compared to third quarter 2019, which reflected a decrease in service stops of approximately the same percentage. While still below pre-pandemic levels, Secure Information Destruction revenues improved sequentially quarter-over-quarter.

Communication and Related Services revenues were $33.6 million compared to $58.9 million in the third quarter of 2019. The impact of divestitures and foreign exchange rates accounted for approximately $23.6 million of the decline. Organic revenues declined $1.7 million.

Loss from operations in the quarter was $55.8 million compared to a loss from operations of $34.5 million in the third quarter of last year. The change was primarily due to divestitures, which included, one, higher year-over-year divestiture losses of $20.9 million, and two, decreased operating income of $8.6 million. The decline was partially offset by operational efficiencies and cost reductions of $8.2 million.

US GAAP net loss was $81.2 million or diluted loss per share of $0.89 compared to a net loss of $59.2 million or diluted loss per share of $0.65 in the third quarter of last year. The difference was attributable to the increased loss from operations of $21.3 million, primarily related to divestitures that I just mentioned, and increased tax expenses of $15.1 million due to higher non-deductible divestiture-related charges. This loss was offset by a reduction in interest expense of $12.2 million as a result of lower interest rates and lower debt balances.

US GAAP cash flow from operations for the first nine months of 2020 was $365.2 million compared to $201.2 million for the comparable period last year. The year-over-year improvement of $164 million primarily includes, one, lower payments for legal and professional fees, annual incentive compensation, and prepaid software totaling $50.5 million; two, lower accounts receivable of $26.6 million, driven by collections exceeding revenues and collection process improvements; three, lower accounts payable of $17.4 million, primarily driven by reduced costs; four, a US CARES Act net operating loss carryback refund of $48 million received in the quarter, which represents roughly half of the expected $100 million in refunds; five, government tax relief payment deferrals of $22.4 million, roughly split between the US and international; and six, advances received on executed service agreements of $19.2 million during the second quarter related to the Domestic Environmental Solutions divestiture.

Capital expenditures for the nine months ended September 30, 2020 were $94.7 million as compared to $161.2 million for the same period of 2019. The difference was primarily driven by the timing of 2019 investments in the ERP and 2020 disciplined capital management.

Adjusted income from operations was $101 million compared to $118.8 million in the third quarter of last year. Excluding the impact of divestitures and foreign exchange rates of $12.9 million, adjusted income from operations declined only $4.9 million despite an organic revenue decline of $35.8 million. This reflects continued operating leverage improvements as adjusted income from operations as a percent of revenues improved 160 basis points. Divestitures contributed approximately 150 basis points of this improvement. Operating efficiencies contributed almost 80 basis points. These were partially offset by 70 basis points of discretionary and one-time expenses that included an increase in the annual incentive compensation accrual.

Adjusted diluted earnings per share was $0.68 compared to $0.80 in the third quarter of 2019. As illustrated on the bridge on slide 8, the variance in adjusted earnings per share was due to the following: $0.12 reduction from the impact of divestitures and foreign exchange rates, $0.07 on favorability from a higher adjusted tax rate impact, $0.04 on favorability from lower income from operations primarily related to reduced revenues, and an $0.11 benefit from lower interest expense.

Our third quarter DSO as reported was 50 days compared to 46 days in the second quarter of 2020. When excluding the revenues from divested businesses from the trailing 12-month DSO calculation, DSO was 55 days compared to 52 days for the second quarter of 2020. As I mentioned in the prior earnings call, the second quarter DSO benefited three days from collections exceeding revenue at the onset of the pandemic, a trend which is normalizing as revenues increased in the third quarter.

Free cash flow for the nine months of 2020 was $270.5 million compared to $40 million for the third quarter of 2019. The significant year-over-year improvement of $230.5 million was due to higher cash flow from operations and lower capital expenditures. We expect capital expenditures in 2021 to return to pre-pandemic levels.

At the end of the third quarter, our adjusted debt-to-EBITDA leverage ratio as defined in our credit agreement was 3.75 times, which was below our maximum ratio for the quarter of 4.75 times. During the third quarter, we paid down approximately $135.5 million in net debt, decreasing total net debt to below $2 billion, the lowest net debt in the last five years. Since the beginning of the year, we paid down net debt of approximately $700 million. We currently have approximately $600 million available in our revolving line of credit to support the business.

I will now provide an update on our ERP system initiative. In the third quarter, we spent $13.6 million related to the ERP and anticipate spending between $15 million to $20 million in the fourth quarter. This places us at the lower end of our previously shared range of $30 million to $40 million for the second half of 2020. The third and fourth quarter spend is estimated to be roughly 75% operating expenditures and 25% capital expenditures for licensing, maintenance and continued enhancement of the development environment which will be adjusted out of operations.

We commenced the phased launch of some of the ERP shared services and data capabilities to unlock value sooner and reduce overall implementation risk. As Cindy mentioned, we recently deployed the North American employee travel and expense management and global tax management systems which are both part of our overall ERP capability suite. As we turn to our ERP spending outlook for 2021, we estimate ERP testing, training, data conversion and deployment costs of $45 million to $55 million which will be adjusted out of ongoing operations.

As previously reviewed, the total ongoing costs for running the fully deployed new system is expected to be $50 million to $60 million annually starting in 2022. In 2021, which is the planned deployment year, this is anticipated to be split between, one, the cost of maintaining the development environment until we go live which is estimated at $20 million to $25 million and will be adjusted out of earnings; and two, IT ongoing costs for running the system which are estimated at $30 million to $35 million. The actual split between these two categories of spend will be based on the system's deployment date.

I'll now turn to the fourth quarter and provide a few insights into preliminary October revenue performance. Within Regulated Waste and Compliance Services, preliminary October organic revenues in North America were about flat when compared to October of 2019. Excluding the impact on maritime waste services from the pandemic, we would've shown revenue growth in North America of approximately 2% in October. Looking at the preliminary results for our Secure Information Destruction business, our October North American revenues were down approximately 11% compared to October of 2019. Our service stop decline is similar to our revenue trend. Outside North America, Regulated Waste and Compliance Services preliminary results show slightly more than 4% organic growth. Secure Information Destruction Services in international markets declined in the mid-20% range compared to last year.

In a moment, I will provide an update to our long-range guidance. But first, I'd like to note that given the economic uncertainty we presently operate in because of the pandemic, the following outlook includes forward-looking statements as contemplated in our Safe Harbor provision at the opening of this call.

On our second quarter earnings call, we noted that we had commenced our annual process of updating our long-range plan and we continue to assess the evolving economic impacts of the pandemic. As a result of this planning process, we are providing our updated five-year outlook. One, we expect organic revenues to grow at a compounded annual rate of 3% to 5% with 2020 as the base year. Two, we expect to generate at least $400 million in annual free cash flow between 2024 and 2025, primarily driven by operating margin expansion. Three, we expect to achieve a covenant debt leverage ratio below 3 times between 2022 and 2023. This outlook is based on currently known items and certain business assumptions including current foreign exchange rates and estimates for SOP pricing. This outlook also excludes future acquisitions and divestitures.

I will now turn the call back to Cindy.

[Cindy Jayne Miller, Stericycle, Inc.]

Thank you, Janet. The past two and a half quarters have been among the most unusual and challenging time that businesses have had to face. Despite temporary business closures and economic uncertainty around the globe, our team has made meaningful progress towards Stericycle's transformation. This progress is demonstrated in our financial results but also in the cultural evolution of our team. We are building a team that is learning to be constructively dissatisfied and seeks continuous improvement. As our quality of revenue initiatives deliver organic growth, our commercial teams gain confidence and push further. As we use data to drive decisions, our leaders are asking for even more details and dashboards. And as we see the benefit of standardized processes, our field operations leaders are more enthusiastic for the next implementation. Our successes are contagious. I'm very proud of the progress we've made and excited about what lies ahead for our team members, our customers and our shareholders.

Operator, please open the line for Q&A.

[Operator]

We'll now begin the question-and-answer session. First question comes from David Manthey of Baird. Please go ahead.

[David John Manthey, Robert W. Baird & Co., Inc.]

Hi. Good morning, everyone. Thank you. First, on the ERP implementation costs. Just to be clear, you're saying that in 2021 you'll experience expenditures, I should say expenses of $20 million to $25 million to run the old system and $30 million to $35 million to run the new system with the $20 million to $25 million being adjusted out and the $30 million to $35 million obviously not adjusted out. Is that correct?

[Janet H. Zelenka, Stericycle, Inc.]

Good morning, Dave. So a little change on that. So what's going to be adjusted out is the cost to finish deployment of the system; that is not to run the legacy system. So the deployment – so we have a development system that we're maintaining right now, and we will continue to maintain till we flip it and turn the switch on and put it into production. At the time the switch turns into production, what is adjusted out of earnings will go up into normal operations and it'll be at a higher cost because then you actually have a full production system going as well as depreciation kicking in. So we will be maintaining the cost of the legacy system underneath that through the transition because we need to keep them running in the interim state. And we also need to keep a portion of that running beyond 2021 to support the international businesses.

[David John Manthey, Robert W. Baird & Co., Inc.]

Okay. All right. Thank you for that. And then as it relates to the capital expenditures for the ERP and for the total company in 2021, can you remind us what you're contemplating there?

[Janet H. Zelenka, Stericycle, Inc.]

So the deployment costs will be – we're estimating – we're still finalizing those plans around 40% capital and expense and the rest will be expense for those deployment costs that will be adjusted out of operations. When we turn the switch and we have that prorated portion of the running, that's all expense.

[David John Manthey, Robert W. Baird & Co., Inc.]

Okay. All right. And then second question is on your route planning efforts. You flagged long-haul as the opportunity you're targeting right now. Are you also looking at smaller service routes? And I guess I'm just trying to gauge where you think you are today versus where you could ultimately be, once you get better tools and better visibility into 2021 second half and into 2022.

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. Dave, this is Cindy. Thanks for the question. So yeah, we're – it's both, or I should say it's all.

So right now, as we're going into certain operations, and if we're making any equipment changes, improvements or getting more efficient in certain areas as you can imagine, it would benefit us to drive more volume into some of those areas.

So I would really call our optimization strategy very dynamic. So as we have – if we were to have an incinerator go down as you can imagine, we would take the opportunity to reroute to be most efficient. But if we have something new that's coming up and online, we do the same.

So for us, on that operational efficiency thing, we're talking about changing the overall way we operate. The overall master operating plans certainly on a macro level and then on a by facility level, all of those things are really quite dynamic and have the potential to change at any given point in time.

But optimizing it and making the decisions day-by-day, week-by-week and month-by-month to make sure that we're being as efficient as possible is really what the team is very, very focused on.

[David John Manthey, Robert W. Baird & Co., Inc.]

Okay. Thank you so much.

[Operator]

Thank you. Next question comes from Brian Butler of Stifel. Please go ahead.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Good morning. Thank you very much for taking my question.

[Cindy Jayne Miller, Stericycle, Inc.]

Good morning, Brian.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Just on the regulated medical waste, could you give a little bit of color on the 0.8% growth when you exclude the maritime? Is that volume or is that price? A little bit of detail there would be great.

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. I think I'll start and then if Janet wants to add anything. So, Brian, thanks for that question.

I think the 0.8% that we're looking at in terms of – it is organic growth, so we could get that a couple different ways. I think if you take a look at the quality of revenue initiatives that we've put out there so far, whether it's the deal review committee, that's helping to drive growth. If you take a look at – we have better customer engagement. That's based on the realignment that we've done with our commercial resources.

I think all of those things are – we're learning where to look. We're learning how to win. We're taking scalable solutions that we have learned that worked for certain areas, in certain size hospitals or certain segments of our customer base. And then we're figuring out how to make sure that we expand that and look more broadly.

So for us – and remember, we're doing – we're pleased with that number. And we're looking at this year versus last year when everything was normal, if you will. And I don't even know what normal is anymore. But that's what it was.

So for us today, to continue to show the positive growth year-over-year in still times that are kind of uncertain, we're very pleased by the efforts of the team.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Okay. Great. And then to follow-up on that. Just when you think about that October update that you gave, it sounds like ex the maritime again, the regulated medical waste is kind of getting close to, or if not above, maybe the pre-COVID levels, while SID continues to be impacted. Any color on kind of through the trends you're seeing on getting back to pre-COVID levels for both the regulated medical waste and the SID?

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. I think I'm not – I'm very, very cautious. I think we are very cautious in even trying to say when will we be out of. Because really, in essence, what you're asking is, will we be out of COVID? Will we be back to where prior to COVID life was?

And I think still today, as we've seen different economies, different geographies go back into shutdown mode, if you take a look globally, if you take a look here in the US, just based on some states, I don't – I can't talk to the trending.

What I am encouraged by is the numbers from a Regulated Waste perspective certainly year-on-year. We still continue to bring services forward that are bringing accretive value.

And then if I take a look at Secure Information Destruction, what we need to make sure we do is we continue to show incremental improvement from prior quarters and prior months.

And we constantly monitor that. And I think we are seeing that trajectory go in the right direction, but the trend as to when it will be like it was in February, if you will, I'm not good enough with a crystal ball to know when the economies or when the pandemic will be kind of lifted from the global economy.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Okay. And if I could slip one last one in.

[Cindy Jayne Miller, Stericycle, Inc.]

Sure.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Any update on the divestiture, just kind of the pipeline and timing? I know there's still some items out there, but what could we look...

[Cindy Jayne Miller, Stericycle, Inc.]

Sure.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

...for fourth quarter, 2021?

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. I think a couple of things. Having completed seven since January of 2019, and quite frankly it's been seven, we had one early on in the year in 2019. And then the bulk of them, the balance, have been over the last year or so.

We're still very busy handling current TSAs and running those side-by-side to make sure that the divestitures are going as they should. We do leave portfolio rationalization as one of the key priorities because it remains a priority.

We will execute I think when the time is right and when we believe that things are as best they could be. But right now, all business units I think continue to focus on our cultural transformation and on delivering value to our customers and focused on organic growth. So I can't give you anything specific; I just know that we continue to stay focused, and I think it's been evidenced in the results. As we get a little tighter and as we can put resources towards core businesses, I'm very proud of the results the team continues to deliver.

[Brian Joseph Butler, Stifel, Nicolaus & Co., Inc.]

Okay. Great. Thank you very much for taking my questions.

[Cindy Jayne Miller, Stericycle, Inc.]

Thank you. Thanks, Brian.

[Operator]

Thank you. Next question comes from Sean Dodge, RBC Capital Markets. Please go ahead.

[Sean Dodge, RBC Capital Markets LLC]

Thanks. Good morning and congratulations on the strong progress again this quarter. Janet, maybe on the gross margins. Those were up considerably both year-on-year and sequentially to a level you generated since 2016, and that's despite a drag from the lower SID activity and somewhat depressed paper prices. Is there any way you can help give us a sense or frame the amount of the drag the lower SID activity is having right now? I know, Cindy, you said pretty much everybody is back to work, but your route activity is still down 11-ish percent. And then as things continue normalizing, how should we be thinking about gross margins, the trajectory there into the end of the year and 2021?

[Janet H. Zelenka, Stericycle, Inc.]

So the – thank you for the question and good morning, Sean. So gross margin is largely mirroring the trends that we're seeing at the EBITDA level as well which is driven by divestitures and sustainable improvements that we're seeing in the performance which largely are hitting the gross margin line. So just to recap that, about half is due to divesting of low-margin business. So that's a good portion of the basis point improvement. But we're also seeing sustainable improvements; as we've mentioned, about $3 million to $5 million a quarter. Those largely hit gross margin because they're driven by the type of activities that happen in our cost of revenue line. And then last quarter, we had some discretionary improvements. This quarter, we're not seeing as much because we are hitting our internal targets. So we have upped our accrual from – compared to last year for our incentive plans.

[Sean Dodge, RBC Capital Markets LLC]

Okay. So I guess the 42% in this quarter, that's a fair kind of starting point or jumping off point for how we think about 4Q?

[Janet H. Zelenka, Stericycle, Inc.]

Yeah. It's a good – a good amount of that is sustainable because of divestitures and the sustainable operating improvements we're seeing.

[Sean Dodge, RBC Capital Markets LLC]

Got it. Okay. And then in RWCS, the maritime business was a bit of a drag in the quarter. Can you give us a sense of the size of that now? What was the revenue contribution from that in the quarter? And then as we think about any potential recovery there, is that just focused on cleaning cruise ships, so very closely tied to any activity there or is that business a little bit more broad I guess across maritime?

[Janet H. Zelenka, Stericycle, Inc.]

Yeah.

[Sean Dodge, RBC Capital Markets LLC]

And so what should we be looking at or tracking when we try to gauge to any stabilization or recovery?

[Janet H. Zelenka, Stericycle, Inc.]

Sure, Sean.

[Cindy Jayne Miller, Stericycle, Inc.]

Yes. So, Sean, I'll describe the business. Janet can give you some of the specifics. But in describing it, so we've got cruise ships that travel – once you're in international waters and you land at a port in the United States, all your waste is considered APHIS, meaning it has the potential to bring in things to the country that aren't – that you wouldn't be able to bring in at a border as an example if you got off a plane or something like that. So for us, that international, those lines really drive a good bit of – and they drive that business because we have to take that waste, treated it as if it potentially is carrying things that shouldn't be coming into the country, and then we take it and we handle it accordingly with other regulated waste. So it's either autoclaved or incinerated.

So for us, that's what that business is. So as you can imagine, as cruise ships are docked and people aren't on them and waste isn't being generated, there's really – that business essentially has been shut down. I think overall, that's part of – we've got about 5% of total revenue; Janet can correct me if I'm wrong. About 5% of total revenue of the regulated waste falls into some of the different categories that are in there, whether it's hazardous or maritime. And I think of that total, about half of that 5% is the maritime. Janet, do you want to give any other color or correct me?

[Janet H. Zelenka, Stericycle, Inc.]

Yeah. So thank you, Cindy. So in Regulated Medical Waste and Compliance Services, about 5% is what we call the other category, and about half of that is in this maritime area and roughly is around $25 million in revenue that is impacting our top line.

[Sean Dodge, RBC Capital Markets LLC]

Okay. So $25 million of revenue in the quarter and we should think about that being down?

[Janet H. Zelenka, Stericycle, Inc.]

No. That's annual, that's annual. So...

[Sean Dodge, RBC Capital Markets LLC]

Okay. And how much is that down? A lot?

[Janet H. Zelenka, Stericycle, Inc.]

It's down significantly. I mean, it's down a lot because no cruise ships are sailing.

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah.

[Janet H. Zelenka, Stericycle, Inc.]

So you have no ships coming back to port to be able to unload waste. So I did see an announcement that on November 1 the cruise ships were allowed to start sailing again, but there'll probably be a delay and I think they're only going with their staff initially. But it's in the news. It's something we're monitoring because that will be driving that revenue stream.

[Sean Dodge, RBC Capital Markets LLC]

Okay, great. Thanks again.

[Cindy Jayne Miller, Stericycle, Inc.]

Thanks, Sean.

[Operator]

Thank you. Next question is from Scott Schneeberger, Oppenheimer. Please go ahead.

[Scott Schneeberger, Oppenheimer & Co., Inc.]

Thanks very much. Good morning. I guess thanks for the update or the look at October in the prepared remarks. I was curious. Could you take us through first on Regulated Waste, what progression you saw perhaps on a monthly basis through the quarter, and kind of compare and contrast what you think was pandemic-related and just overall business improvement? I know that's tricky to do. Maybe some thought on what you're seeing as far as discretionary services back at healthcare providers and what type of – what inning were you in in people coming back and having those perform just to get a sense of the demand trend in that segment progressing forward. Thanks.

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. I'll start with that one, Scott. It's great to talk to you. I think what we're seeing is we continue to see even from a year-over-year and where we are, we are seeing improvement in Regulated Waste. We're very encouraged by it. We do have the new service that we had launched within that which is taking non-traditional healthcare customers that are generating some PPE and we're picking that up and processing it accordingly with all the other regulated waste. Now certainly that's early days with that particular service. But I think in a macro level in view of what we're looking at, it still is almost geographically – it aligns with geographies that are more open.

We are seeing the discretionary services kind of coming back online. And as I think many of the other healthcare customers and different hospital groups that also report on their progress, I think they can see it, too, in terms of whether it's cancer screenings and some of the other discretionary things, hip replacements. And some are back to pre-pandemic levels and then others are still lagging, and I think we are a general reflection of that certainly as that's the core of what we do. So I think as – I think a potential vaccine will affect that. I think geographies and economies opening back up to a greater degree will continue to affect it, but we remain cautious and certainly pretty vigilant in continuing to manage our costs based on what we're seeing per geography for demand.

[Scott Schneeberger, Oppenheimer & Co., Inc.]

Cindy, I'm going to follow-up with basically the same question on Secure Information. Just curious how that's trending through the quarter. And where do you think we are with – we kind of have a sense of back to work, but how it's directly affecting your business?

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. I think – no, that's a great question. There's a couple things that we continue to monitor in order to take a look at the business. First, very pleased with the fact that we are seeing sequential improvement quarter-on-quarter. As you know, we had good organic growth Q3 of 2019. We just started to see organic growth, saw it again in Q4 2019, saw it again in Q1 of 2020, and then of course the shutdown kind of throttled that opportunity. But right now, we're monitoring things like business in professional services, where are they in terms of opening back up and being at full force. We're looking at the world of education and academia, where are they in terms of being back and open. And as you know, that's all over the board just from county-to-county, let alone state-to-state. We look at retail, where we have a customer revenue base in retail.

So for us, positive signs over the fact that we are seeing sequential improvement. And then I think as evidenced by what we said in October, that's a sequential improvement from where we finished in Q3. So I think signs are looking it isn't – I think it's directly commensurate with how open we are in little – I always say the economy is opening two steps forward and maybe in some places you still take one step backwards. So – but overall then, if you look on the flip side, I think our team continues to do a terrific job in managing the variable costs that's associated with those stops, and I'm very proud of their efforts. So for us, I think it continues to improve and we're excited about where we're going.

[Scott Schneeberger, Oppenheimer & Co., Inc.]

Excellent. Thanks, Cindy. Take care. I'll turn it over.

[Cindy Jayne Miller, Stericycle, Inc.]

Thanks, Scott.

[Operator]

Thank you. Next question is from Ryan Daniels of William Blair. Please go ahead.

[Nicholas Spiekhout, William Blair & Co. LLC]

Hey, guys. Nick Spiekhout in for Ryan. Thanks for taking my questions. I guess going off the last line, I appreciate kind of the year-over-year month of October breakdown for growth in RWCS and then SID. Was that kind of tracking from the close of Q3? Like, is it a similar growth rate or a little bit better? Kind of what's the number there?

[Janet H. Zelenka, Stericycle, Inc.]

Yeah. So good morning. This is Janet. So we're not going to get into the intra-quarter. There's just a lot of turbulence in the markets right now. I do think if you look at the quarter before and that month and you look how we've been trending for the first month of the quarter, it does show improvement, and we're optimistic about that.

But there's still a lot of turbulence in the market. And so we are managing a very stable set of customers. If you see that we've been able to achieve maintaining a good portion of our revenue in this particular market, and they also are continuing to be open for business largely. But there are other businesses that, depending on what happens internationally or here, could change based on the economic conditions with the pandemic.

[Nicholas Spiekhout, William Blair & Co. LLC]

Okay. Do we think it should be kind of like similar to this quarter, where we saw sequential growth with SID, whereas RWCS kind of lagged a little bit more in line with kind of how it was performing last quarter?

[Janet H. Zelenka, Stericycle, Inc.]

So I would look at that. But for maritime, we are encouraged by the strength of our Regulated Medical Waste business growth, and that continued into October. And we're encouraged by that.

[Nicholas Spiekhout, William Blair & Co. LLC]

Okay.

[Janet H. Zelenka, Stericycle, Inc.]

So I'm not saying – I wouldn't say that RWCS is lagging in any way, shape or form.

[Nicholas Spiekhout, William Blair & Co. LLC]

Got you. Thanks. And then just to finish off. I know I asked this last quarter, but I guess it's worth asking again. Any contracts coming up with SID? Has there been any pushback at all? Or maybe any clients that have maybe re-assessed their need for kind of that service at this given time?

[Cindy Jayne Miller, Stericycle, Inc.]

I think that's a good question. But I think what – our Secure Information Destruction contracts, just imagine we've got – certainly, we do have some larger customers and some national contracts.

But it really is an awful lot of smaller, local, just engagements with the small and medium-size business owners. So for us, it is a give and take. It is a constant discussion with them. We are staying very close to them as their conditions change, whether they're open or they're closed or even allowed to be open or closed.

So we see that that's become part of our every day. But in terms of, are we seeing any major clients or any contracts, I can say no, we're not. We don't see anything like that. But we are continuing to manage just the volatility potential that's within that service line.

[Nicholas Spiekhout, William Blair & Co. LLC]

Awesome. Thanks. I appreciate it.

[Cindy Jayne Miller, Stericycle, Inc.]

Thanks, Nick.

[Operator]

Thank you. The next question is from Jeff Silber of BMO. Please go ahead.

[Jeffrey M. Silber, BMO Capital Markets Corp.]

Thanks so much. You mentioned the October trends kind of segmenting between North America and international. And even looking at what happened in this last quarter, can you remind us where you are internationally? I'm just curious why the trends are so different from North America?

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. So from an international perspective, for the regulated, I think that's what you're asking, a strong position in the UK, Spain, Portugal. And then large operation in South Korea for the regulated medical and then also in Romania, that being the core – and Brazil. So those being the core spots for our service outside of the US. So – also Canada, sorry. I'm just assuming North America, but I just said outside the US.

So what we are seeing is strength everywhere, but yet it's different. As countries open up, you'll see a surge. And then as they take a step backwards, there's the potential for the turbulence there, as once certain areas close back up, then you think about the discretionary services that drive some of the growth in the Regulated Waste side.

So it really is a volatile global market at this moment. But we're very encouraged by what we're seeing for October. And then very excited about us being able to institute the next quality of revenue initiative, which is the pipeline management piece, for us to be able to even get greater visibility into the forecasting and into the revenue streams and into what's happening across the customer bases.

So we're – a lot of things for us are going to help us get better certainly to continue to manage through the volatility.

[Jeffrey M. Silber, BMO Capital Markets Corp.]

Okay. That's helpful. And I appreciate you giving us your long-term outlook. I'm just curious when you think you'll be comfortable enough providing nearer-term guidance. For example, do you expect to provide 2021 guidance when you report your fourth quarter numbers?

[Janet H. Zelenka, Stericycle, Inc.]

Thank you for the question. Not reached a decision on that yet. I think it really depends on the economic turbulence and uncertainties in the market on whether we introduce annual guidance again.

[Jeffrey M. Silber, BMO Capital Markets Corp.]

Okay. Appreciate that. Thank you.

[Operator]

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

[Jay Hanna, BofA Securities, Inc.]

Hey. This is Jay Hanna on for Gary today. Just sort of going back to that margin discussion from earlier. I think this quarter, you quoted both operational efficiencies and cost reductions. So just more on that cost reduction side. How do you see that trending going forward as sales sort of start to improve from here?

[Janet H. Zelenka, Stericycle, Inc.]

So one of the things we're excited about is our ability to manage our variable costs in this timeframe and through all the activities we've done through the engineering and operations team and the commercial team to get more efficient, and what we do every day is driving cost reductions. As we've mentioned, there's about $3 million to $5 million of sustainable, what we believe are sustainable cost efficiencies that are in the quarter. And we saw those last quarter, we're seeing those this quarter, and we believe those are sustainable. And as I mentioned, the other structural change in the business is the divestiture of low-margin business which is contributing to an improved operating leverage performance.

[Cindy Jayne Miller, Stericycle, Inc.]

And Jay, if I can just say one thing. I think you bring up a great point for us. But to me, what Janet is talking about is we really are in an evolution of our cultural mindset across all things we do, and cost management is one of those. It is a team of folks right now that are accepting change, and that change that they're accepting is we're having greater visibility and accountability to see what everybody is doing. And then in the reaction to that accountability, we're becoming more disciplined, and I think that really is the cultural change in mindset that we're seeing move in the right direction so that we are holding on to cost reductions.

We are looking to continually improve. And I think those are all the things that we're looking to achieve once we implemented the ERP because we have greater visibility. And for us to be in the position where we are right now quite frankly is helped by the pandemic and having to operate differently. I think that's – we're seeing the great results of that across the board from safety to all the quality of – all the key priorities that we have as we move forward.

[Jay Hanna, BofA Securities, Inc.]

Okay. And then on that long-term breakout you gave, would you be willing to comment on sort of the breakout between your expectations for organic growth longer-term between shredding and the Regulated Waste business?

[Janet H. Zelenka, Stericycle, Inc.]

So at this point, what I will say is that we are excited about both of our core businesses and they both contribute to that growth projection.

[Jay Hanna, BofA Securities, Inc.]

Okay. Thank you.

[Cindy Jayne Miller, Stericycle, Inc.]

Thanks, Jay.

[Operator]

Next question is from Alexander Leach of Brenberg Capital Markets (sic) [Berenberg Capital Markets] (00:53:40). Please go ahead.

[Alexander Leach, Berenberg Capital Markets]

Hi, guys. Thanks for taking my question. What's the environment been like for new customer additions particularly in RWCS in light of all these quality of revenue initiatives that you've implemented?

[Cindy Jayne Miller, Stericycle, Inc.]

Yeah. That's a – I really appreciate that question, Alex, because that really gets really to the heart of us trying to figure out how to grow. So for us, I think we are seeing strength, and a good bit of this pipeline management that we're putting in will also afford us the opportunity to see into actual sales and engagement by resource right down to the sales rep level. But I think what's being evident, or at least what we're seeing is we are seeing encouraging organic growth as we improve in shred quarter-over-quarter. And I feel very positive about our ability to continue to grow across all of our business units because we are seeing encouraging signs, whether it's regulated year-over-year or demonstrated with quarter-over-quarter improvement in shred. So a lot of these initiatives really are going after broadening every salesperson's patch of land that they're responsible for, and I think we're early days in that effort but I'm sure more to come.

[Alexander Leach, Berenberg Capital Markets]

Okay. Great. And then looking at CapEx. Are we at the moment at a more normalized level of capital expenditures? I know that you guys mentioned pre-pandemic levels for CapEx in 2021 in your remarks. But is that, again, sort of more elevated CapEx as a result of the ERP implementation and what's sort of at play there?

[Janet H. Zelenka, Stericycle, Inc.]

Yeah. Thanks for joining our call today by the way. This is Janet. So CapEx is actually lower this year than what we would normally expect. And as I mentioned in my script, we anticipate next year to getting to what I call pre-pandemic levels of capital spend. And we also will have capital spend on deploying the ERP which we deferred out of this year due to the pandemic. But the trajectory of capital is also an operational story. So in the business, there was no central capital management process or budgeting process, and that was instituted in first quarter of this year which resulted in a pause in some – a lot of the projects, whether they be maintenance or discretionary just to assess them, make sure we were doing them in the most cost-effective and efficient manner and thought it through everything.

And so we were getting ready to launch those, and then the pandemic set in. So we have maintained our maintenance capital and some discretionary, but those two quarters just sort of suppressed what would be normal spending. We are ramping up our capital spending. We are not intending not to invest in the business; we are doing so. And I think we will see some sustainable savings based on a centralized process, but we also want to make sure we bring all our facilities and our fleet into where they need to be in terms of the investment. So we don't see this level of lower capital spend continuing. We anticipate to bring it back to normal levels next year.

[Alexander Leach, Berenberg Capital Markets]

Okay. Great. Thanks, guys.

[Operator]

This concludes our...

[Cindy Jayne Miller, Stericycle, Inc.]

Thanks, Alexander.

[Operator]

Excuse me. This concludes our question-and-answer session. Now I'd like to turn the conference back over to Ms. Cindy Miller for closing remarks.

[Cindy Jayne Miller, Stericycle, Inc.]

Thank you, Nick. So we'd just like to close by telling everyone thanks for listening to the call. We appreciate your continued interest in Stericycle and your shared excitement for our future. So thanks much, everybody.

[Operator]

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