Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. And welcome to Stericycle Fourth Quarter 2020 Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Andrew Ellis, VP of Investor Relations. Please go ahead.

[Andrew Ellis, Vice President, Investor Relations]

Hello. And thank you for joining Stericycle’s fourth quarter 2020 earnings call. On the call today will be Cindy Miller, our Chief Executive Officer; and Janet Zelenka, our Chief Financial Officer and Chief Information Officer.

The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward-looking statements.

Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are, therefore, subject to risks and uncertainties.

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

Our past financial performance should not be considered a reliable indicator of our future performance and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statement other than in accordance with legal and regulatory obligations.

On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable U.S. GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle’s Investor Relations website.

The prepared comments for today’s call correspond to an earnings presentation, which is also available on our Investor Relations website. Throughout the call, we may reference specific slides from the presentation.

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

[Cindy Miller, Chief Executive Officer]

Thank you, Andrew, and welcome, everyone. I’d like to start today’s call by saying how proud I am of our team members and the essential role Stericycle plays in protecting the health and well being of our customers and communities, as we continue to lead through the COVID-19 pandemic. 2020 presented unique challenges for our business and our team demonstrated resilience and dedication.

Despite these challenges, during the quarter, we delivered continued organic growth in Regulated Waste and Compliance Services, maintained Secure Information Destruction revenues in the fourth quarter in line with the third quarter, despite continued disruption from the pandemic and we completed our eighth divestiture since 2019. Further, we improve debt leverage driven by another strong quarter of free cash flow.

Of special note, I’m pleased with the progress our team members made, establishing an effective internal control environment by fully remediating our material weaknesses as of year-end. This achievement represents an important governance and execution milestone as we continue our transformational journey.

As the leader in Regulated Waste and Compliance Services, we remain committed to doing our part to restore a healthier world by supporting our healthcare customers, servicing COVID-19-related testing and vaccination sites with our vast network and infrastructure, including our recently modernized mailback distribution center.

Our team demonstrated leadership and commitment to protecting what matters by working with pharmaceutical companies and government agencies to align on standards for secure and compliant COVID-19 vaccine treatment protocols.

Additionally, Stericycle supports the front end of vaccination programs through our Communications Solutions business. We provide scalable patient hotlines, scheduling and appointment reminders for vaccinations. I am proud of the critical support we have provided to our customers as they navigate the continuing complexities of the pandemic.

The safety of our team members remains a top priority and I’m pleased to report that for 2020 our team reduced the total recordable injury rate by 21% and the vehicle accident rate by 33% compared in 2019.

We are particularly encouraged by our team members’ adoption of a behavior based safety culture. The cornerstones of which are defensive driving training, cameras in our North American fleet and transparent reporting an incident escalation processes.

Let us now transition to reviewing progress on our five key business priorities, which we introduced almost two years ago, when I became CEO. Starting with quality of revenue, Regulated Waste and Compliance Services revenues grew 1.7% for the full year and 3.2% for the fourth quarter when compared to 2019. When excluding the impact from the pandemic on maritime waste services, organic revenues increased 2.4% for the full year and 4.9% for the fourth quarter.

As Janet will highlight later on this call, this growth is being driven by both our quality of revenue initiatives and net positive impacts from COVID-19-related waste services. Building on the momentum of our previously outlined quality of revenue initiatives, including the global sales pipeline and RFP management process, I shared with you last quarter, we continue to transform our commercial organization.

Moving on to operational efficiency, we continue to deliver on our efforts to optimize, modernize and innovate our operations. As I have shared on previous calls, our engineering and operations teams are partnering to implement improvements, which have contributed to our gross margin expansion this quarter and for the full year.

In 2020, we have focused on right sizing and balancing our fleet and equipment, improving efficiencies in route and long-haul planning and execution, and developing a playbook to proactively manage our business through unprecedented times.

In the fourth quarter, we successfully completed our eighth divestiture in the past two years, with the sale of our product recall business for approximately $78 million. I am proud of the progress the team has made executing on our portfolio rationalization initiative and the benefits of that progress are clear.

Our ability to focus more deeply on our core businesses has led to elevated performance. We lowered debt and approved leverage. We generated higher cash flow and improved margins in our streamlined businesses. In 2021 and beyond, we will continue to evaluate opportunities to further optimize our portfolio of businesses.

Now turning to debt reduction, our strong cash flow generation supported by divestitures and improved operating margins help reduce net debt by $207.2 million in the fourth quarter and $900 million for the year. We finished the year with a debt leverage ratio of 3.54 times, a greater than 90-basis-point improvement since the end of 2013.

I will now turn to our North American ERP deployment. As previously communicated, we have shifted the majority of our planned deployment of our North American ERP system into 2021. Over the past several months, we rolled out certain technologies associated with our North American ERP system, including our new employee travel and expense system, and a global tax management system. This follows the successful deployment of our human capital management system in January 2020.

While we temporarily pause our deployment of the major ERP capabilities because of the pandemic, our teams have remained engaged in preparation of our phase launch, which we anticipate will commence around the middle of this year.

We will continue to monitor the evolving pandemic dynamics that could impact our business, customers and the safety of our team members and we will factor them into our deployment timing decisions.

Before turning the call over to Janet, I’d like to thank and congratulate Dominic Culotta for being named Chief Transformational Officer. Dominic began his career at Stericycle leading our engineering team, working tirelessly to centralize, standardize and optimize processes to improve our performance. And as we look to the future, the need to keep transforming is a critical element of our operations and culture.

This year, we began an effort to redefine our cultural values to align the beliefs and behaviors necessary to strengthen our business. Our future focus will be the implementation of the ERP and leveraging that technology to advance all our operations. Dominic’s long-term outlook, commitment to sustainability and experience leveraging technology positioned him well for this role.

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

[Janet Zelenka, Chief Financial Officer and CIO]

Thank you, Cindy. I will start by summarizing our fourth quarter results. Total revenues were $655.9 million, compared to $799.9 million in the fourth quarter of 2019. Of the $144 million decline, the impact of divestitures accounted for $133.7 million and Secure Information Destruction revenues accounted for $31.8 million, reflecting pandemic-related business disruption. This was partially offset by organic growth in Regulated Waste and Compliance Services of $17.3 million and a favorable foreign exchange rate impact of $4.8 million.

As noted on slide five, Regulated Waste and Compliance Services revenues were $439.8 million, compared to $546.1 million in the fourth quarter of 2019. Excluding the impact of divestitures and foreign exchange rates, organic revenues for Regulated Waste and Compliance Services increased 3.2%.

When excluding the impact from the pandemic on maritime waste services, which largely support the cruise industry, organic revenues increased 4.9%. Almost all of the maritime waste services revenues are included in the North America segment. So when excluding their impact, North America Regulated Waste and Compliance Services organic revenue growth was 2.9%.

Of this 2.9% increase, about half of the growth was driven by quality of revenue initiatives and the remainder by a net positive impact from increased COVID-19-related waste, mailback volume, temporary testing centers and non-healthcare PPE services, which was partially offset by continuing elective surgery deferrals.

In the fourth quarter, International Regulated Waste and Compliance Services organic revenue growth was 13.4%. The majority of the International revenue growth was attributable to supporting our customers through the pandemic, despite the deferral in elective surgeries.

Secure Information Destruction Services delivered revenues of $187.4 million, compared to $217.9 million in the fourth quarter of 2019. Excluding a negative $0.9 million impact from SOP pricing, organic revenues declined 14.2%, reflecting pandemic-related business disruption.

In North America, Secure Information Destruction organic revenues declined 12.9%, excluding the impact of SOP pricing compared to the fourth quarter of 2019. Reflective of a decrease in service stops. And International Secure Information Destruction organic revenues declined 21.3%, excluding the impact of SOP pricing compared to the fourth quarter of 2019.

Communication and Related Services revenues were $28.7 million, compared to $35.9 million in the fourth quarter of 2019. The impact of divestitures and foreign exchange rates accounted for approximately $6.5 million of the decline. Organic revenues declined $0.6 million.

Income from operations in the quarter was $93.2 million, compared to a loss from operations of $198.5 million in the fourth quarter of last year. The change was primarily due to, one, no goodwill impairment in 2020, compared to goodwill impairment of $207.4 million in 2019, two, an improvement in net divestiture gains and losses of $67.5 million, and three, a reduction and adjusting charges of $30.8 million noted on slide 21.

Also, I’d like to highlight that in the fourth quarter, we spent $17.1 million related to the ERP, with about 75% in operating expenditures and 25% in capital expenditures. In combination with a third quarter ERP spend of $13.6 million this puts us at the lower end of our previously shared range of $30 million to $40 million for the second half of 2020.

U.S. GAAP net income was $48.5 million or $0.53 diluted earnings per share, compared to a net loss of $219.3 million or $2.41 diluted loss per share in the fourth quarter of last year. That difference was related to higher income from operations of $291.7 million. Mostly related to no goodwill impairment in 2020 versus 2019, the impact of net divestiture gains and losses I already mentioned and lower interest expense of $7.3 million as a result of lower interest rates and debt balances.

The improvements were partially offset by higher income tax expense of $31.9 million, mainly due to net income in the fourth quarter of 2020 compared to a net loss in the fourth quarter of 2019.

Cash flow from operations for the year ended December 31, 2020, was $530.2 million, compared to $248 million for 2019. Of the year-over-year improvement of $282.2 million, approximately $160 million is COVID-19 government relief and divestiture cash benefits that are not expected to repeat, which includes, one, U.S. CARES Act net operating loss carry back refunds received in the third and fourth quarters of 2020 for a total of $110 million, two, government tax relief related payments deferrals of $30.2 million roughly split two-thirds U.S. and one-third non-U.S., and three, advances received on executed service agreements of $19.2 million related to the domestic environmental solutions divestiture in the second quarter.

The other year-over-year, changes in cash from operations were, one, lower payments for legal and professional fees, annual incentive compensation and prepaid software of $55.5 billion, two, lower interest payments of 26 million, and three, lower operating expenditures for ERP and related matters of approximately $20 million compared to 2019.

Adjusted income from operations was $108.6 million or 16.6% as a percentage of revenues, compared to $122.6 million or 15.3% as a percentage of revenues in the fourth quarter of last year. Excluding the impact of divestitures and foreign exchange rates of $5.9 million, adjusted income from operations declined $8.1 million. Adjusted income from operations as a percent of revenues improved 130 basis points. The majority of this improvement was driven by divestitures of lower margin businesses, which contributed approximately 200 basis points, and quality of revenue and operating efficiency initiatives, which contributed almost 80 basis points. These were partially offset by an increase in annual incentive compensation of approximately 170 basis points.

Adjusted diluted earnings per share was $0.59, compared to $0.72 in the fourth quarter of 2019. As illustrated on the bridge on slide eight, the variance in adjusted earnings per share was due to the following, an $0.08 unfavorability from a higher tax rate impact, a $0.06 unfavorability from lower adjusted income from operations, a $0.05 unfavorability from the impact of divestitures and foreign exchange rates, and a $0.06 favorability from lower interest expense.

Our fourth quarter DSO is reported with 52 days, compared to 50 days in the third quarter 2020 and 60 days in the fourth quarter of 2019. When excluding the revenues from divested businesses from the trailing 12-month DSO calculation, DSO was 56 days, compared to 55 days in the third quarter of 2020 and 55 days in the fourth quarter of 2019.

Capital expenditures for 2020 were $119.5 million, as compared to $194.2 million for 2019. The difference was primarily driven by the timing of 2019 investments in the ERP and 2020 disciplined capital management.

Free cash flow for 2020 was $410.7 million, compared to $53.8 million for 2019. The significant year-over-year improvement of $356.9 million was due to higher cash flow from operations and lower capital expenditures.

At the end of the fourth quarter, our credit agreement defined debt leverage ratio was 3.54 times, which was well below our maximum allowable ratio of 4.75 times for the quarter. During the fourth quarter, we paid down $207.2 million in net debt, decreasing total net debt to $1.74 billion.

Since the end of 2019 we reduced our credit agreement defined debt leverage ratio by 91 points and paid down net debt of $900 million. As of December 31, 2020, we had $947.2 million available in our revolving line of credit to support the business.

In the fourth quarter, we closed a $500 million senior note offering and use the proceeds to pay down existing term and revolver debt, allowing us to extend our overall debt maturity profile at historically low long-term interest rates.

As Cindy mentioned, we successfully completed our eighth divestiture in the past two years, having divested of our global product recall business for $78 million in December. In 2020, this recall business had revenues of approximately $57 million, principally reported in the North America segment as part of Communication and Related Services. What remains with Stericycle is Communication Solutions, our Patient Engagement Services business, which represents approximately $60 million in annual revenue in 2020.

Turning to the full year results which began on slide 10, total revenues were $2.68 billion, compared to $3.31 billion in 2019. Of the $633.4 million decline, the impact of divestitures accounted for $483.7 million. Secure Information Destruction revenues, excluding the impact of SOP pricing accounted for $142.4 million and the SOP pricing impact accounted for $14.7 million.

In 2020, divested businesses generated approximately $195 million in total revenues. When 2020 results are normalized to exclude the revenues from divested entities, 2020 total revenues were approximately $2.48 billion.

Income from operations for the year ended December 31, 2020, was $31.9 million, compared to a loss from operations of $211.9 million in 2019. The change was primarily due to no goodwill impairment in 2020, compared to goodwill impairment of $228.3 million in 2019, offset by divestiture losses of $123.6 million in 2020, compared to divestiture losses of $103 million in 2019, for a net negative divestiture difference of $20.6 million. Also, I’d like to highlight that in 2020, we spent $102.1 million related to the ERP, with about half in operating expenditures and half in capital expenditures.

Net loss for 2020 was $57.3 million or $0.63 diluted loss per share, compared with $346.8 million or $3.81 diluted loss per share in 2019. The difference was related to previously mentioned higher income from operations of $243.8 million lower interest expense of $36.4 million and no loss on early extinguishment of debt in 2020 versus $23.1 million in 2019, which were partially offset by a lower income tax benefit of $16.7 million.

Adjusted EBITDA was $495.2 million in 2020, compared to $577.8 million in 2019. In 2020, divested entities generated approximately $25 million in adjusted EBITDA. When 2020 results are normalized to exclude the results from divested entities, 2020 adjusted EBITDA was approximately $470 million.

Adjusted diluted earnings per share was $2.25 in 2020, compared to $2.65 in 2019. As illustrated down the bridge on slide 15, the variance in adjusted earnings per share was due to the following, $0.29 unfavorability from the impact of divestitures and foreign exchange rates, $0.15 unfavorability from a higher tax rate impact, $0.12 unfavorability from the impact of SOP pricing, $0.10 unfavorability from lower adjusted income from operations, and $0.26 favorability from lower interest expense and other.

Although, we still operate with economic disruption and uncertainty as a result of COVID-19, I would like to provide some insights into what we see emerging in 2021 related to the preliminary January revenue, anticipated ERP spend, some cash flow dynamics and our long-term outlook.

Preliminary January organic revenue growth for Regulated Waste and Compliance Services and Secure Information Destruction Services was generally consistent with the trends experienced in the fourth quarter. Regarding the ERP, as Cindy mentioned, we will continue to monitor the ongoing and evolving pandemic dynamics and we’ll factor those into our ERP deployment timing.

With that, I’ll now provide an update on our ERP system initiatives, assuming a deployment beginning in the middle of the year. In addition to our current ongoing IT spent, which we anticipate will continue at historical run rates in 2021, we estimate incurring an MRP spend of approximately $105 million to $120 million in 2021.

This spend is anticipated to be split into the following categories, one, approximately $60 million to $65 million of operating expenses that we anticipate will be adjusted out of non-GAAP earnings. These operating expenses will relate to testing, training, data conversion deployment and the cost of maintaining the development environment until we go live. This compares to ERP operating expenses of $50.8 million in 2020.

Two, approximately $15 million to $20 million an anticipated capital expenditures, compared to capital expenditures of $51.3 million in 2020.

And three, approximately $30 million to $35 million of expected ongoing it operating expenses for running the system after deployment, of which we anticipate approximately $8 million to $10 million of system depreciation. This is anticipated to be a new incremental ongoing IT operating expense compared to 2020.

After the ERP is fully deployed in North America, the total annualized ongoing operating expenses for running the new system are expected to be $50 million to $60 million, of which we anticipate approximately $17 million to $20 million of system depreciation.

Let’s take a moment to look at some anticipated changes in free cash flow for 2021. First, we had $160 million of COVID-19 government relief and divestiture cash benefits in 2020 that I mentioned earlier and are not expected to repeat.

Second, I’d like to highlight four anticipated incremental cash outflows in 2021 as follows, first, we anticipate spending $160 million to $180 million on capital expenditures compared to $119.5 million in 2020, second, we anticipate pain our annual 2020 incentive compensation payout of approximately $40 million in the first quarter of 2021, of which almost all is incremental to last year, third, as I mentioned earlier, we anticipate spending approximately, one, $30 million to $35 million in incremental ERP IT ongoing operating expenditures as part of our new ERP ongoing IT operating expense structure, and two, an incremental $10 million to 15 million in adjusted ERP operating expenditures that are adjusted out of non-GAAP earnings compared to 2020.

Lastly, we anticipate paying approximately half of the $30.2 million government tax relief related payments deferred in 2020. With approximately half repaid in the first quarter and the remainder repaid in the third quarter. We anticipate these payments will be offset on a full year basis by various tax-related refunds.

The following long-term outlook includes forward looking statements as contemplated in our Safe Harbor provision at the opening of this call. We are reaffirming our five-year outlook as follows.

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. And three, we expect to achieve a credit agreement defined 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.

So, with that, I will now turn the call back to Cindy.

[Cindy Miller, Chief Executive Officer]

Thank you, Janet. As we close the books on 2020, I have never been more excited about the future of Stericycle. As I said early on in 2020, we found that the urgent necessity to adapt and change, communicate and collaborate caused by the pandemic accelerated our team members’ acceptance of cultural change and buy in to the principle of constructive dissatisfaction.

It also accelerated our drive to standardize and centralize and modernize our operations, innovate in our go-to-market strategy and leverage data and metrics to make better decisions. We continue to transform virtually every aspect of the company and that was plainly evident as our team members rose to the challenge time and again in 2020.

The fruits of this transformation can be found in our double-digit percentage improvements in safety, organic growth in Regulated Waste and Compliance Services, operating margin expansion despite headwinds to our maritime waste services and Secure Information Destruction businesses, the completion of three divestitures, including our largest divestiture ever and the repayment of over $900 million in net debt, our team members ability to come together to deliver these results, has given us the confidence and energy to drive further transformation in 2021, including the implementation of our North American ERP system.

I’m proud of our accomplishments in 2020 and how we lived up to our commitment to protect what matters for our team members, our customers and the communities we serve. And most of all, I’m excited about the organizational resiliency and transformational culture our team members are creating every day.

Operator, please open the line for Q&A.

[Operator]

Thank you. [Operator Instructions] And the first question will come from David Manthey with Baird. Please go ahead.

[David Manthey, Baird]

Hi. Good morning, everyone. First off, Janet, just to clarify here on your guidance of the -- for the ERP expenditures the $30 million to $35 million in the back half of the 2021, split roughly evenly third quarter to fourth quarter and then a step up to $50 million to $60 million in 2022. That’s consistent with what you’ve told us before, correct?

[Janet Zelenka, Chief Financial Officer and CIO]

That is consistent with what I told you before, yes, Dave.

[David Manthey, Baird]

Okay. Thank you. And then just two quick ones here, what are your thoughts generally on higher interest rates and inflationary pressures that we may see in 2021? And then the second question is just on the current portfolio, how do you feel about it? Are there any other big pieces you think you might look to divest here in 2021? Thanks.

[Janet Zelenka, Chief Financial Officer and CIO]

Sure. I’ll take the interest rate and a bit on the inflation question and hand it over to Cindy on the divestiture. So, one thing we’ve done is restructured our debt to be less dependent on flexible interest rates.

We currently have about $625 million of variable debt at the end of the year and about 1% change in interest rates is worth about $6 million. So it is not a significant impact to us and we think we can manage it. There -- the continued reduction of debt balances that as we indicated, our long-term guidance should also mitigate the impact.

And then in terms of inflation, we are -- with our centralized of our procurement and our management systems we are really getting very good at managing our third-party spends with our vendors and we also are very good at managing our new contracts with our customers in terms of inflationary protections in them. And with that, I’ll turn it over to Cindy for the divestiture question.

[Cindy Miller, Chief Executive Officer]

Hey. Thanks. Thanks, Janet, and thanks, Dave. Yeah. So a couple of things with reference to portfolio rationalization, we are looking -- we’ve done a lot, we’ve been quite busy and we have had the largest as everybody knows with environmental solutions.

I think where we are right now is, we’re still focused, we’re still opportunistic, we’re still evaluating geographies and a few other things. But I think we’re pleased with where debt levels are right now, but I don’t think we’re done.

As you know, we’ve taken the divestitures, the proceeds and put them down to debt and we’ve had some really good results. So for me, I think, we’re still staying pretty disciplined. We’re still focused on optimizing the portfolio as we have it. But I would say, I think, with confidence, we’re not looking at anything large. But I still think that we’ll take a look at opportunities as they as they pop up.

[David Manthey, Baird]

I appreciate the color. Thank you.

[Cindy Miller, Chief Executive Officer]

Thanks, Dave.

[Operator]

And the next question will be from Jeff Silber with BMO Capital Markets. Please go ahead.

[Jeff Silber, BMO Capital Markets]

Thanks so much. In your prepared comments, you talk a little bit about service stops declining in your Secure Information Destruction business. I’m just wondering, on a sequential basis, have you seen any change and what do you expect as kind of the reopening of the economy starts?

[Cindy Miller, Chief Executive Officer]

Yeah. Great question, Jeff. The one thing that we have found, a couple of things with reference to Secure Information Destruction, we know that about 60% of the cost is variable. And the discipline that and the learnings that we’ve had this past year is exactly how do we flex to demand. How do we how do we gear up when businesses are opening and then how do we flex back in order to make sure that productivity maintains and we’re driving the right things.

So for us, what the trends have showed us is, as businesses come back, we’ve seen a direct correlation to the stops improvements, and as customers get back to work, it is -- they still are extremely concerned about making sure that they keep their information secure and we play a significant role in that.

I like our position, as you know, the lead business, really the strong brand in this particular space. I appreciate the synergies that we have with our healthcare customers. But I think as people returned to work and businesses reopen, we saw demand for our services come back.

And if you’ll notice, we saw sequential improvement, Q2, Q3 and then what happened going into Q4 is a new strain of COVID and states that had opened, pulled back a bit, and kids weren’t going back to school in some places where maybe schools were open. And by Thanksgiving, it was, hey, don’t go visit your family. And those things continued through the fourth quarter and as a result, we saw kind of a flat line from Q3 to Q4.

And if we look globally, we look at the U.K., which is a strong shred market for us and we look there, they went back on almost the complete lockdown right after the New Year. So there’s a lot of volatility yet in terms of businesses open state-by-state, but certainly country-by-country. So we continue to watch it. But what we do see your original question, we do see a correlation, businesses come back and open up, we do see the increasing stops and the improvement in revenue.

[Jeff Silber, BMO Capital Markets]

Okay. That’s helpful. And you alluded to this in your answer, I wanted to drill down a little bit further. On prior calls you guys have talked about potentially providing Regulated Waste services to your Secure Information Destruction clients or other corporate clients as we see the return to work. I’m just curious, are you having any progress with that, any conversations as we reopen up the economy? Thanks.

[Cindy Miller, Chief Executive Officer]

Yeah. That is -- I did talk about the synergies that we do see with the healthcare shred as well. And Cory and his team have really put forth one of the other organic growth strategies they have is really driving cross-selling of the services, where you -- where we can have a greater service portfolio to customers, specifically in the healthcare industry and we are seeing success there.

I think the whole focus on organic growth, no matter where it is and getting the commercial team to act as one unit, I think, has really been instrumental and that will play a continued role in our ability moving forward.

[Jeff Silber, BMO Capital Markets]

Okay. Great. Thanks so much.

[Operator]

And the next question will be from Michael Hoffman with Stifel. Please go ahead.

[Aadit Shrestha, Stifel]

Good morning. This is Aadit Shrestha filling in for Michael Hoffman. Thanks for taking my questions. Just looking at the revenue bridge from 2020 on page 13 of the presentation, the SID sales were down around $142 million. Could you just provide some color and how much of this is permanent versus what can return on a reopening trade and what incremental margins?

[Janet Zelenka, Chief Financial Officer and CIO]

Yeah. So as Cindy mentioned, this is Janet. Good morning. As Cindy mentioned, we are seeing a correlation with the economic situation. We have unemployment and people returning to work and the shutdowns and the impact on Secure Information Disruption.

It’s one of the uncertainties that we have in the business right now and predictability going into next year when everything will reopen and it seems dependent on the trajectory of vaccinations and the trajectory of employment and people returning to work. So we are anticipating recovery. We just are dependent on those external factors. Cindy, anything you’d like to add?

[Cindy Miller, Chief Executive Officer]

Yeah. I think, yeah, we really are -- that particularly business, we’re finding is quite tied to the economy into employment. And as we see major sectors have hurt, certainly the U.S. economy, whether it’s retail or academic professional services, some of those not being fully open. We are seeing that.

So, our focus is to make sure that, as -- if there ever is a normal that that we all get back to pre-COVID levels. But it’s -- as Janet had mentioned, there’s still quite a bit of variables and volatility in there for us to predict.

[Aadit Shrestha, Stifel]

Thank you. Just one follow up question, what is the basis of organic growth of $36.5 million in regulated medical waste? Is it price or is it new customer additions or is it upselling to existing customers or some combination of all that?

[Cindy Miller, Chief Executive Officer]

I think that’s a great question, Aadit. And I think it is a combination of all of it. When -- we’re very proud of a lot of the changes that we’ve made in the commercial organization, really focusing on organic growth, but getting down to fundamentals. When you talk about basics of changing sales, incentive plans and leadership and then you get into how to do review committees pipeline management, revamping the ark with the RFP process, putting that in, we’re seeing growth that’s consistent. It’s not based on one particular segment of the Regulated Waste side, whether it’s not just hospitals, it’s not just nationals, it’s not just their independence, it really is a collective response.

And I believe we certainly aren’t, we’re not in it for some type of a price focus. We’re actually selling value, value that we bring in and I think we’re seeing that in terms of RWCS for specifically Q4, even with elective surgeries being down and certainly not having maritime revenue in there.

When you look at 3.2% growth in fourth quarter year-over-year and you look at without maritime it being 4.9, I think had Janet had said, it’s a lot of the cost of it or the quality of revenue initiatives we have, as well as our ability to position ourselves to play a big role in the vaccine -- in not just the vaccine, but also in the testing portion of the pandemic.

[Aadit Shrestha, Stifel]

Thanks so much for taking my call and I look forward to meeting you all one of these days once this is all over.

[Cindy Miller, Chief Executive Officer]

I too. Thank you much.

[Operator]

And the next question will be from Gary Bisbee with Bank of America. Please go ahead.

[Jay Hanna, Bank of America]

Yeah. Hey. This is Jay Hanna on for Gary this morning.

[Cindy Miller, Chief Executive Officer]

Hey, Jay.

[Jay Hanna, Bank of America]

I am kind of -- going back to where you just were speaking to with regard to Regulated Waste organic growth, if we think about it, excluding the maritime impact, so around 5%. Did you say half of that was generally from -- I don’t want to say, one-time but from an uptick in demand related to COVID? So like on a longer term run rate level, we’d be thinking more 2% to 3% maybe through the year, back after the year when things normalize.

[Cindy Miller, Chief Executive Officer]

I think -- I’ll start with that and then, Janet, if you have any comments. But one of the things I do, the way we do look at it is, Regulated Waste is a complete bucket. So a lot of things are in it, whether it’s unused pharmaceuticals, red bag waste, if it’s shots, if it is things related to the pandemic, if it’s anything related to flu shots or shingle shots or any other vaccinations during their seasonality or elective surgeries.

So what we’re really pleased with is how we’ve got the flexibility in within that service line that elective surgeries have been completely closed, opened a little bit, now back on the decline. Maritime, boats were out, crossing international waters, now they’re parked, now they’re docked, if you will, in harbors.

And yet, we’re still able to see growth. And we do have we can -- we’re very confident in the fact that, yes, we’ve got an uptick from the COVID, whether it’s the testing and the vaccinations and all of that.

But we also have our confident as we continue to win new hospitals. We’re growing our customer base. We’re having success in the independent segments of our business, having enhanced many of the offerings that we have.

So I believe we’ve got a strong organic growth story that is more than just related to the -- to COVID or to the pandemic. So I’m very excited about our ability to reach our long range targets when we talk about 3% to 5%. That’s the focus and I think we’ll get there.

[Jay Hanna, Bank of America]

Okay. Great.

[Janet Zelenka, Chief Financial Officer and CIO]

And I’ll just add on, you were talking about the numbers that, the 2.9% is North America when you take out the maritime and that is split between COVID-related and core growth driven by quality of revenue. And then maritime is mostly North America, so you would add that on top of that.

When you look at International we have a strong growth rate in Internationals that’s contributing to the overall global growth rate that is mostly driven by the COVID impact of serving our customers even with the deferral of elective surgeries.

[Jay Hanna, Bank of America]

Okay. Okay. Thank you. And then on free cash flow in 2021, just the use of that. It seems like there will be some more pressures this year, given some of the government-related topics. And maybe if we think about less divestiture proceeds too, should we expect the debt pay down to be a bit lower than what we saw in 2020 and are you comfortable or what’s your long-term perspective on what level you’re comfortable with leverage?

[Janet Zelenka, Chief Financial Officer and CIO]

So we’re trying to get to leverage to below 3 times between ‘22 and ‘23 -- in 2022 and 2023, and that’s what we’re comfortable with. So we’re still working to get it down. You’re right, we have done most of the large divestitures that contribute to that. So the cash flow generation of the business will be the probably the primary contributor going forward to driving the debt down.

[Jay Hanna, Bank of America]

Okay. Thank you.

[Cindy Miller, Chief Executive Officer]

Thanks, Jay.

[Operator]

The next question comes from Sean Dodge with RBC Capital Markets.

[Sean Dodge, RBC Capital Markets]

Thanks. Good morning. Janet, the numbers you gave for normalized revenue and EBITDA for 2020, so kind of normalized for the divestitures the $2.48 billion and the $470 million? Should we think about those, I guess, it’s been good jumping off points for 2021. So if we kind of take that $2.48 billion revenue number and we add in what we think revenue growth or kind of organic growth for med waste and then make some assumptions around like a reopening and paper prices and Secure Information Destruction, that kind of gets us to where we need to be? And then EBITDA, maybe some more costs you can take out as you finish up these operational initiatives? And then, I guess, what would flow in incrementally from the ERP beginning here mid-year, is that kind of it, I guess, at least directionally am I heading the right way?

[Janet Zelenka, Chief Financial Officer and CIO]

Yeah. Sean, I think, you have -- you’re heading in the right way and those are good jumping off points. And we thought with all the noise in the year, it was important to give those to you and you did capture one of the spend elements at the end there, which is the ERP spends, that everything else that you mentioned would be the kind of drivers that you would see happen in our business.

The uncertainties are Secure Information Destruction, when maritime will come back up when the cruise ships will start failing. And in that -- the turn that we’re seeing in terms of going back to normal Regulated Waste Services, such as elective surgeries versus the COVID, which we think will be a positive force, as you see the core growth expanding, but there’s still the pandemic going on.

[Sean Dodge, RBC Capital Markets]

Got it. Okay. And then…

[Cindy Miller, Chief Executive Officer]

Sean. Yeah. Sean, this is Cindy. Just one more thing on that. We’re following very closely a lot of the surgical suppliers equipment, the hospital updates that we’ve been getting in. And elective surgeries and getting those back to normal is certainly a focus of theirs and they’re trying to figure that out.

And they’re -- the best that we’ve seen, where they are thinking sometime end of Q3, potentially into Q4 for possibly being at pre-COVID levels, but yet, we’re -- that’s still yet to be seen. So those are the things that we’re looking at in order to try to help guide us. But again, that is still a big question.

[Sean Dodge, RBC Capital Markets]

Sure. Okay. And then on the long-term free cash flow guidance, Janet, you said that, should primarily be driven by operating margin expansion. Can you give us a sense of how much expansion or what level you expect to be at in order to generate the $400 million? And then as we think about the trajectory margin, is this going to be a little bit of a slower start at the beginning and then a hockey stick up in 2024 or will the progression be a little bit more linear?

[Janet Zelenka, Chief Financial Officer and CIO]

Well, when you look at the EBITDA level, as you can see, we have to get to the ERP this year. So that is an outlay of expenditures that will have -- that have an impact on that trajectory. And then, I -- we’re looking for steady progress, as we get to that target.

[Sean Dodge, RBC Capital Markets]

Okay. Great. Thank you again.

[Cindy Miller, Chief Executive Officer]

Thanks, Sean.

[Operator]

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

[Scott Schneeberger, Oppenheimer]

Thank you very much. Good morning. Cindy, I’d love to start off on kind of following up on some earlier questions on Regulated Waste segments, before the pandemic, a lot of focus on hospital chains and on independence on improving pricing and you talked about the revenue quality. I’m just curious what you’ve seen, though, since COVID disrupted. How were the conversations, the sales conversations going with, say, existing customers on renewals? Just -- obviously, a great quarter on growth and congratulations for that. But specifically on pricing, what are the trends that you’re seeing and kind of what are you thinking for over the interim 12 months, what type of pricing dynamic should we expect contributing to this to the growth in the segment? Thanks.

[Cindy Miller, Chief Executive Officer]

Yeah. No. Thanks for the question, Scott. I think one of the things that has happened -- that had to happen is we are getting more engaged with customers having far greater dynamic conversations about how we can help, about unmet needs that that we might be able to fill and those conversations are becoming more collaborative and more relationship as opposed to commodity here’s a price. And as you get into value selling and as we really put forth the value of all the capabilities that we have, the conversations with the hospitals continued to be very strong.

And let’s make -- let’s be certain, we’re not out here making sure that anybody is set to make a short-term price decision for short-term gain, we’re looking to make sure that we engage with our customers where we can support them so that we have longer term relationships built on the future.

So I think is, I will give you an example, in independent -- on an independent side, we’ve gone back to take a look and say, hey, how -- what greater value can we bring, because the pandemic certainly brings a lot of regulation, a lot of uncertainty to many of those smaller independent doctor and doctor facilities.

So, we’ve enhanced our consulting services. We’ve targeted it towards what’s happening today and what do people need to be aware of, as opposed to just say, a package deal of just the basics of OSHA, and HIPAA and several other things.

So I think our customer base is appreciating how we’re adapting to, to how we can get ahead of what their concerns might be, and as a result, I think, that -- those quality of revenue initiatives on price, I think, had been had been reasonable and consistent.

And the other thing, too, Scott, and I think was a big fundamental we had to change was we had so many existing contracts, where just contract language was all over the Board, depending on some of the acquisitions that had come into the fold that we’ve gotten to the point where we’ve -- we’re standardizing those.

And in those standardization, comes many safeguards for both the customer and Stericycle, in terms of annual agreed upon percentage increases and a lot of the basics that really were missing from our contract structure. So I think those things will help certainly position our ability to continue to grow as we move into the future.

[Scott Schneeberger, Oppenheimer]

Sounds good. Thanks. And for my follow up, on the second quarter call, you introduce three new services. So I just kind of curious if you could provide a bit of a progress report about what you’ve seen, one, two were primarily COVID related and then the third being Secure Information Destruction kind of tearing the offering. But also, as a second part of the question, is there more -- is there a pipeline being generated of new business offerings, you kind of just mentioned it in Regulated Waste, but our view are there -- is there a potential for over the coming year, you’re introducing, hey, we come up with this or that and it’s big enough that, says, mentionable on one of these calls? Thanks.

[Cindy Miller, Chief Executive Officer]

And Scott, I swear that that, Cory White and the commercial team probably are jumping up and down and thrilled that you asked that question that I might think that they asked, they might have paid you to ask that one. We are thrilled with the adoption of, as an example, in Secure Formation Destruction, the expressed in priority kind of tiered pickup services that that we rolled out.

We’re seeing 8% to 10% right now is a -- is pretty much a running average of the requests when someone calls in for a purge service that they are taking either express or priority. And we’ve been doing, providing great service to those folks for that request and I think that that’s continuing to grow.

On the RWCS side, it was the non-healthcare customers with PPE that remains consistent, continues to grow. We continue to have opportunities that are out there with folks that want to do the right thing in terms of handling what or providing, I think, a greater safety measure for their employees. So that’s gone well.

And then the COVID sites, whether we started testing and having to make pickups and parking lots and be adaptive from that perspective. Same is true for a lot of the vaccination sites now, so that’s continuing nicely.

But I’ll give you another example. You asked about a pipeline. Yes, we’ve got an internal committee. I think any company that wants to make sure that they remain relevant tomorrow has to figure out what do we need to innovate and how do we need to change in order to be ready for tomorrow. And that was that was one thing that we really -- that was one of a few things that we certainly didn’t have going here within Stericycle that we do now in terms of new product, new service developments and that group is certainly active.

And I’ll give you an example, while it’s not headline news, just adapting and enhancing the consulting capabilities that we’re providing our independent customers, it’s extremely appreciated by them and it’s something that they were looking for. So it’s an enhancement that was necessary. But that came because we realized we do have to change in order to meet their unmet needs. So thanks for the question.

[Scott Schneeberger, Oppenheimer]

Great. Thanks.

[Operator]

And the next question will come from Alexander Leach with Berenberg Capital Markets. Please go ahead.

[Alexander Leach, Berenberg Capital Markets]

Hi, guys. Thanks for taking my question. Most of my questions were answered in the Q&A already. But maybe if we just shift to a bigger picture question, how you guys thinking about the potential transition to significantly more remote working often the pandemic and potentially the impact it could have on volumes for Secure Information Destruction?

[Cindy Miller, Chief Executive Officer]

Yeah. I think that’s a great question, Alexander and thanks for thanks for asking it. I think what we’re talking about are a couple of things. So first, we know that about 77% of all companies out there currently, well, before the pandemic had some type of capability for their employees to work-from-home. So it’s not a new concept. The concept is, certainly we all understand at one point in time we all were forced to be at home.

But so the thought is, there’s work-from-home, how does that translate into office-from-home. And we are engaged with many customers, who are very concerned about the potential information that, if someone was in an office on the third floor of the building, would walk down the end of the hall and make sure that their paper was put into a bin so that it can be handled appropriately and there is a concern for folks generating paper at home.

So we’re in -- we’re -- it’s part of that pipeline, if you will, that that Scott had just asked about. We realized that we’re going to need to come up with better solutions for our customers in order to be able to control that. Right now we have many companies where employees stop by the office and bring the paper in and we continue to make the pickups there. So we’re getting adaptive to it. But they’re obviously, we need to continue to focus on that.

And as you had said, effect on tonnage, anytime that people aren’t at work generating paper, anytime that there’s -- those type of circumstances. Obviously, it will affect tonnage. We were a company that on average did about 700,000 to 750,000 tons of paper per year, SOP paper.

And right now, I think, we finished 2020 somewhere around, I want to say 560,000 tons. So there was a decline. And as a result of that -- that’s a direct result of the fact that people aren’t work generating paper.

[Alexander Leach, Berenberg Capital Markets]

Sure. Thanks. Thank you, Cindy, to get your thoughts on that. That’s it for me. Thanks.

[Operator]

Ladies and gentlemen, this concludes our…

[Cindy Miller, Chief Executive Officer]

Thanks, Alexander.

[Operator]

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

[Cindy Miller, Chief Executive Officer]

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

[Operator]

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