Stericycle, Inc.

Good morning, and welcome to the Stericycle Incorporated's first quarter 2021 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Ellis, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining StairCycle's 2021 First Quarter 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 perspective 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 just 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 our investor relations website at investors.staircycle.com. The prepared comments for today's call correspond to an earnings presentation, which is also available at StairCycle's investor relations website. Throughout the call, we may reference specific slides from the presentation. This call is being recorded, and a replay will be available approximately one hour after the end of the conference call today until May 27, 2021. To access a replay of the call, dial 877-344-7529 and enter the replay access code 10153262. A replay of the webcast will also be available on StairCycle's Investor Relations website. Time-sensitive information provided during today's call which is occurring on April 29, 2021, may no longer be accurate at the time of the replay. Any redistribution, retransmission, or rebroadcast of this call in any form without express written consent of StairCycle is prohibited. I'll now turn the call over to Cindy Miller.

Thank you, Andrew. Good morning, everyone, and thank you for joining us. I would like to recognize our team members in the essential role StairCycle plays in protecting what matters, the health and well-being of our team members, customers, and communities. Throughout the first quarter, we continued to innovate to match customer demands and strengthen customer relationships in a safe and sustainable way as they continue to fight the pandemic. As a result of those efforts, in the first quarter, we delivered strong and continued organic revenue growth in regulated waste and compliance services and generated solid cash flow driven by operational performance. Secure information destruction revenues improved sequentially quarter over quarter, despite continued disruption from the pandemic. Stericycle plays a key role in managing the reverse logistics associated with COVID vaccination-related waste, which contributed to our organic revenue growth this quarter. In the U.S., over 200 million doses have been administered, and medical waste from many of those are coming to Stericycle for disposal through our mail-back solutions and from the mass vaccination centers we support, such as the United Center in Chicago and Citi Field in New York. On today's call, I will start off by providing an update on our behavior-based safety culture transformation and then provide perspective on a few of our five key business priorities. As a reminder, they remain quality of revenue, operational efficiency, modernization and innovation, ERP implementation, debt reduction and debt leverage improvement, and portfolio optimization. I'll then turn the call over to Janet, who will discuss our first quarter financial results. Following our opening remarks, we will take your questions. First, let's discuss our behavior-based safety culture transformation. Safety is fundamental to Stericycle as an organization. In the first quarter of 2021, we continued to build on the significant safety improvements we made in 2020 and further improved our vehicle incident rate 5% on a rolling 12-month basis. We completed the defensive driving program and training in North America and are well on our way to roll this out in the international market. Turning to the quality of revenue, we delivered a strong first quarter in regulated waste and compliance services, with organic revenue growth of 6%, driven by a combination of the net positive impacts of our COVID-19 services and quality of revenue initiatives that I have shared on prior calls. The 6% organic revenue growth is comprised of 3.8% growth in North America and 16.4% growth in international. Turning to operational efficiency, modernization, and innovation. I previously described the modernization of our facility to manufacture mailbag kits, which significantly increased our productivity and our capability to meet the demands of our customers providing COVID-19 vaccinations. As a result of this modernization, we increased our production capabilities by 400%. We are well positioned to continue to provide strong support of this important global vaccination effort. I'm proud of how engineering and operations optimize the manufacturing processes and continue to stay in front of vaccine-related waste demand. And our mailbag service represents only one of several ways we are supporting the reverse logistics of vaccine-related waste. When considering all of the services we offer to dispose of sharks, including mailback, we could handle well over 700 million needles in North America on a monthly basis with our existing capacity. This highlights our ability to handle the entire U.S. vaccine rollout, even if it was accelerated. The transformation of our operations goes well beyond our mailback center. We have developed a systematic approach for optimizing and standardizing the design of our medical waste facilities. In North America, we are implementing larger autoclaves in five of our facilities, along with automated solutions that will improve safety, increase productivity, reduce operating costs and increase capacity. We are on track to complete these optimization upgrades in three more North American facilities in 2021. Internationally, we just completed two similar upgrades in key locations to support our UK business. I will now turn to our North American ERP deployment. As previously communicated, we shifted the majority of our planned deployment of our North American ERP system into 2021. Our current expectation is that this summer, we will start deploying the North American Finance and Accounting Procurement and secure information destruction portions of the ERP system, subject to passing several go, no-go gates that are standard leading up to deployment. The planned finance, accounting, and procurement deployment includes our North American general ledger, the integration of our source-to-pay platform with the ERP, and implementation of enhanced budgeting and forecasting functionality. The secure information destruction deployment will be conducted in several phases and includes commercial, operational, and order-to-cash functionality. The new commercial tools and functionality will automate existing processes and enhance our quality of revenue initiatives. The new operational functionality will include routing software that integrates with our ERP platform and will provide enhanced container management and tracking, which supports our operational efficiency modernization, and innovation priority. We anticipate completing the phased deployment to all North American secure information destruction facilities by the end of the fourth quarter. Following this deployment, we plan to implement the North American ERP for regulated waste and compliance services in early 2022. We will continue to monitor deployment readiness and timing along with the evolving pandemic dynamics that could impact our business, customers, internal control environment, and the safety of our team members, and we'll factor them into our deployment timing decisions. Lastly, I want to provide a quick update on our credit-defined debt leverage ratio. By generating $62.6 million in operating cash flow in the quarter, we were able to further pay down debt, and we lowered our leverage ratio to 3.28 times compared to 4.5 times at the end of the first quarter of 2020. This improvement continues our progress towards achieving our long-term debt leverage outlook. I'll now turn the call over to Janet to review our financial results.

Thank you, Cindy. I will start by summarizing our first quarter results. As noted on slide four, revenues in the first quarter were $668 million compared to $785 million in the first quarter of last year. Of the $117 million decline, the impact of divestitures was $135 million, and secure information destruction revenues accounted for $26.8 million, reflecting pandemic-related business disruption. These declines were offset by regulated waste and compliance services' organic revenue growth of $34.1 million and the positive impact of foreign exchange rates of $10.7 million. As noted on slide five, Regulated waste and compliance services revenues, which now include the remaining part of communication solutions, were $473.6 million, compared to $566.9 million in the first quarter of 2020. Excluding the impact of divestitures and foreign exchange rates, organic revenues grew 6% in the first quarter. North American regulated waste and compliance services organic revenues grew 3.8%. Of this 3.8% growth, communication solutions contributed 1.3% as the healthcare industry turned to Stericycle to support vaccination and test-related communications and scheduling services. We estimate that the remaining 2.5% organic growth was primarily driven by quality of revenue initiatives. Positive and negative pandemic-related revenue dynamics netted to a minimal impact on overall growth as gains achieved from our COVID-19-related waste and mailback volumes, temporary testing centers, and non-healthcare PPE services offset declines in waste from elective surgeries and cruise ship-related maritime services. International regulated waste and compliance services organic revenue growth was 16.4% in the first quarter. with the vast majority of the gains attributable to higher pandemic waste volumes as we support our customers through the pandemic. Secure information destruction services delivered revenues of $194.4 million, compared to $218.1 million in the first quarter of 2020, which reflects a 10.9% decline. Of the $23.7 million decline, organic revenues accounted for $26.8 million or a 12.3% decline, reflecting pandemic-related business disruption. In North America, secure information destruction revenues declined $19.1 million, or 10.3%, compared to the first quarter of 2020. For secure information destruction, we generate revenue in two ways, servicing our customers through stocks, which comprised over 90% of revenues in North America in the first quarter, and recycling paper, which comprised the remainder. In the first quarter, the revenues related to service stops declined 9.8%, as many customers still had staff working from home. North American recycled paper revenues were down 19.4%, or about $3.4 million, compared to the first quarter of 2020. This decline is inclusive of positive trends in SOP pricing of $0.6 million compared to the first quarter of last year. As a reminder, we have been working to add SOP surcharges to customer service contracts. As we continue to renew contracts and win new business, these surcharges are now included in approximately 40% of North American customer contracts and offset approximately 60% of paper price volatility. On a sequential quarter basis, North American secure information destruction revenues increased 5.6% when normalized for working days. In international, secure information destruction organic revenues declined 21.2% compared to the first quarter of 2020 and included a modest $0.1 million benefit from SOP pricing. The decline in organic revenues was primarily due to the duration and severity of international lockdowns many of which continue today. On a sequential quarter basis, international secure information destruction revenues increased about 1% when normalized for working days and foreign exchange rates. Income from operations was $59.1 million in the first quarter compared to a loss from operations of $30.4 million in the first quarter of last year. Of the $89.5 million increase, The change was primarily due to, one, the first quarter of 2021 having no net divestiture losses compared to net divestiture losses of $58.3 million in the first quarter of 2020. Two, lower selling general and administrative expenses of $27.3 million after excluding the reduction in SG&A associated with divestitures of $29.1 million. And three, operational efficiency improvements of approximately $5 million. These were offset by, one, higher third-party disposal costs and international regulated waste and compliance services of approximately $6 million, two, the combined revenue flow through and cost impact of severe weather in North America of approximately $4 million, and three, lower operating income due to divestitures of $2.1 million. In the first quarter, we spent $20.3 million related to the ERP in line with the overall spend I shared on the last call, with about 90% in operating expenditures and 10% in capital expenditures. U.S. GAAP net income was $26.1 million, or 28 cents diluted earnings per share, compared to a net loss of $20.1 million, or 22 cents diluted loss per share in the first quarter of last year. The difference was related to higher income from operations of $89.5 million, as explained earlier, and lower interest expense of $6.6 million, mainly driven by a lower debt balance. These were partially offset by an increase in income tax expense of $52.2 million compared to the first quarter of 2020, primarily as a result of a non-recurring tax benefit from the CARES Act of $39.4 million in the first quarter of 2020 and a higher taxable income generated in the first quarter of 2021. Cost flow from operations for the first quarter was $62.6 million compared to $82.1 million in the first quarter of 2020. The year-over-year decrease of $19.5 million was primarily driven by a higher annual incentive compensation payout of $38.6 million and higher accounts receivable of $9.2 million driven by increased revenues. These were partially offset by lower interest payments of $15.6 million primarily as a result of lower debt balances and improved operating and working capital performance of $12.7 million. Adjusted income from operations was $110 million, or 16.5% as a percentage of revenues, compared to $93.8 million, or 11.9% as a percentage of revenues in the first quarter of last year. Lower SG&A contributed approximately 280 basis points of the improvement. Quality of revenue and operational efficiency initiatives contributed approximately 200 basis points, and divestitures of lower margin businesses added approximately 120 basis points. These improvements were partially offset by higher third-party disposal costs and international regulated waste and compliance services of approximately 90 basis points, and severe weather impacts in North America of approximately 60 basis points. Adjusted diluted earnings per share was $0.71 compared to $0.52 in the first quarter of 2020. As illustrated on the bridge on slide 7, the $0.19 improvement was due to the following. $0.18 favorability from higher adjusted income from operations, $0.06 favorability from interest and other expenses, which was mainly a result of lower debt balances, $0.01 favorability from a net positive benefit of foreign exchange rates, offset by six cents unfavorability from the impacts of divestitures. Our first quarter DSO is reported with 55 days compared to DSO of 47 days in the first quarter of 2020. When excluding divestitures as of March 31, 2021, from the trailing 12 months DSO calculations, DSO was 57 days in the first quarter of 2021 compared to 55 days in the first quarter of 2020. Capital expenditures in the first quarter were $24.7 million compared to $39.6 million in the first quarter of 2020. The difference was mainly driven by $22 million less in ERP capital expenditures in 2021 compared to the first quarter of 2020 and the timing of planned 2021 capital expenditures. As a reminder, for the full year 2021, We anticipate spending $160 to $180 million in capital expenditures. Free cash flow in the first quarter was $37.9 million compared to $42.5 million in the first quarter of 2020. The $4.6 million decrease was due to lower cash flow from operations partially offset by lower capital expenditures. As shown in slide eight, at the end of the first quarter, our credit agreement defined debt leverage ratio was 3.28 times, an improvement from 4.50 times as of March 31st, 2020, and well below our maximum allowable ratio of 4.75 times. Net debt was reduced by $38.3 million in the first quarter, and total net debt is approximately $1.70 billion. As of March 31st, 2021, we had $970.8 million available in our revolving line of credit. Although we still operate with disruption and uncertainty due to the pandemic, I would like to provide some insights into what we see emerging related to second quarter revenues, as well as anticipated ERP related expenditures. As a reminder, the pandemic significantly impact portions of our business in the second quarter of 2020. shredding service stops declined as workers were sent home to shelter in place, cruise ships stopped sailing, and many elective surgeries were deferred. Because of those prior year dynamics, we expect that portions of our business may benefit from favorable revenue comparisons if the trends from the first quarter of this year continue into the second quarter. After normalizing for the impact of divestitures on revenues in the second quarter of 2020, which was approximately $27 million, From the divested environmental solutions, expert solutions, and Argentina businesses, we may generate organic growth in the low teens in the second quarter of 2021. We do not anticipate this level of organic revenue growth to continue through the second half of 2021 as we begin to lap the impact of the pandemic. Regarding the ERP, as Cindy mentioned, we will continue to monitor deployment readiness along with the evolving pandemic dynamics and we'll factor those into our ERP deployment timing. As noted on slide 9, we are on track to spend approximately $75 to $85 million on the ERP implementation in 2021, which is in line with the ERP spending range I shared last quarter. Beginning in the third quarter through the remainder of 2021, we also estimate having approximately $30 to $35 million of ongoing IT operating expenses. Beginning in 2022, we estimate the total annualized ongoing operating expenses for running the new system will be $50 to $60 million. The 2021 and 2022 ongoing IT operating expenditure ranges are in line with the estimates I provided last quarter. Finally, we remain committed to our long-term outlook, as summarized on slide 10. I will now turn the call back to Cindy.

Thank you, Janet. This is an exciting time to be part of Stericycle. Every day, our team members show up, do the work, and continue to transform Stericycle. We remain confident our five key priorities are the right ones to unlock long-term shareholder value, and we remain focused on successful execution. And before we open it up for questions, I'd like to thank our team members, our customers, the communities we serve, and our shareholders for for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Sean Dodge with RBC Capital Markets. Please go ahead.

Thanks. Good morning and congratulations on the great performance this past quarter. Maybe on the revenue quality initiatives, Cindy, you mentioned that being a meaningful contributor to the organic growth in the quarter. Can you give us a sense of where you are in working through that opportunity? Have you been able to reprice most of the larger customer contracts? Or do you think you're still kind of in the early or mid-innings there?

Yeah, I think, Sean, thanks for that question. A couple of things. That was a key component. Um, you know, when we were early days in quality of revenue movement, it was, it was kind of like the one that we could get our hands wrapped around first. Um, we started the deal review committee where many of those large deals were brought into a central location where we took autonomy away from, um, you know, the field to a degree so that we could help, um, you know, get, get more standardized in terms of the service and the value that we were going to put forth since that time. We've done many other things. We've evolved Corey White, our chief commercial officer, and his team. We've realigned the sales incentive plan. We've put in a centralized RFP process, which we never had before. That's yielding great dividends for us. And we're still early days, a couple months into pipeline management, which was one of the latest technology engagements that we've put out for quality of revenue. And I can tell you, All of those collectively are helping to contribute to the growth that we're seeing. This last quarter, we're estimating about 2.5% of the growth came from quality of revenue. The other 1.3% from Comsol, which was another great story for us. But I think we're past just making sure that we're pricing for value on contract renewals. Right now, I think we are selling value. We are negotiating to value. And quite frankly, I think we're becoming a better partner to our customers as we learn more about all the capabilities that we're doing for them and being able to tailor to the forward look of the customer demand. So very excited about the efforts and certainly excited about the results for Q1.

Okay, great. And then on the secure information destruction business, good sequential progress there on revenue. I think first quarters tend to be big purge quarters. Maybe could you comment on how much of that purge work contributed to the quarter and then maybe how that compared year on year? I'm curious, was there a big decline in purge-related demand versus kind of the pre-pandemic first quarter of 2020?

You know, Sean, that's a great question. And one of the things that we find is it is some – you know, purged naturally from a sequential perspective is, you know, is first quarter, but it's all, you know, it also kind of rolls into second quarter post. income tax day, if you will. But I think, you know, we've got the automatics, you know, the customers that we come to regularly and then purge. I think we're positive in terms of us seeing sequential quarter over quarter improvement, as you had mentioned. That's key to us right now. And it's telling us that as businesses come back and they're open and they still see our service as an essential part of that opening. So that's good news for us. So I don't have the breakdown in terms of purge versus purge, but I can tell you we are very positive about continuing to see steady increases and steady improvement in that business since its precipitous decline in Q2 of last year.

Okay, thanks and congrats again.

Thanks, Sean. Our next question comes from David Manphy with Baird. Please go ahead.

Thank you. Good morning. Janet, I appreciate the confirmation on the OPEX dynamics on slide nine. And as we look at second quarter SG&A, And think about how that tracks relative to the first quarter. Should we assume some moderate upside there? It looks like you're guiding to sequentially revenues being a little bit higher. And then from there, we probably add in that 15 to 17 or 18 million per quarter for that 60 to 70 million run rate step up. So I'm looking at your total SG&A somewhere in the ballpark of 200 million. Is that, are we on the right track there?

I think that we're pleased with the performance on SG&A. We're in dynamic times with puts and takes that are going through the year. I think the key thing here to know is the ERP expenditures, which will hit SG&A. They're adjusted out for the year in sort of the gap basis, but then also when we turn the switch, you're going to see a flip of about $30 million to $35 million this year into SG&A for the new system going live. So that's a key dynamic in the second half of the year for SG&A. You know, certainly we hope that there's revenue flow through, but note the international dynamic that with the pandemic-related waste, we also have some higher costs going on internationally. So that will be – we actually should see improved margins in international if we have less COVID waste than the other way around is sort of the way to think about that dynamic.

Okay, so it sounds like there's nothing – unusual that we should anticipate other than that 30 to 35 million in the second half of the year that you've outlined. So that's good.

Right. There's that plus the ongoing cost of implementing the ERP through the year, plus there is the uncertainty that comes with putting in an ERP. But yes, those are the key dynamics.

Okay, but as far as the first piece there, the implementation that you're spending today ongoing, that's not stepping up. The 30 to 35, that represents the amount that's stepping up in the back half, right? That is correct. Okay, all right, so cool. And then just quickly to close the loop on that, Janet, could you tell us how you're preparing the people side of ERP implementation, updates on the training that you're doing for data capture and analytics? And are you expecting any short-term inefficiencies before you start seeing benefits from the system next year?

That's a great question. Thank you for it. So business readiness and change management is a key part of any ERP, and it's an area we're acutely focused on. We have a whole team focused on change management. Business readiness is actually, when we talk about go-no-go gates, business readiness is one of them, as well as your technical IP go-no-go gates like production, et cetera. We are deeply engaged in that. We have power users. We are building deep knowledge of the system through the testing we're doing, and we also have a training program. There will be natural inefficiencies as you train a workforce such as drivers out in the field and take them offline to understand how they use the handheld differently than they use today or with new capabilities they don't have today. So that is built in how we're thinking about the second half. You also may have extended call times initially with call centers, helping customers get through some changes that they will see. Even though they may be upgrades, they're different. So we have factored that into our thinking, and it's a really important part of the planning for the ERP.

Thank you very much.

Our next question comes from Brian Butler with Stifel. Please go ahead.

Good morning. Thanks for taking my questions. Good morning. Can you guys hear me? Yeah. Okay. Good morning. Yeah, yeah.

We have you, Brian.

All right. Just the first one, when you think about the divestitures, what remains out there? It looks like communications was rolled into the regulated medical waste in compliance services. So is that still for sale? Just a little color on what, I guess, what is still for sale and maybe some thoughts on, you know, timing of that.

Yeah, I think, you know, that's always a great question. We've left portfolio optimization as one of our five key priorities for a reason, but You know, I think we're focused on making sure that we take a really disciplined approach to capital, a disciplined approach to the core businesses, and really managing that way. I think the divestitures we've had up to this point in time have certainly helped. They've helped the balance sheet and certainly helped reduce debt. I think what we're looking at is we've always said we have core businesses, and then we've always said that we wanted to be in markets where we felt we had a strong commercial opportunity to grow quality revenue. So for us, we continue to look at that to see and make sure that we're in markets where, if you will, the juice is worth the squeeze. So for us, I think we're taking a disciplined approach to looking at all things and evaluating them. certainly with us having had our largest company to best insure last year. I think it was in Q2 of last year. So we've developed the muscle memory in order to be able to be flexible, and I think we're leveraging that to make sure that we're capturing what we might think would be the best deals out there. So for us right now, we're sitting back and being pretty opportunistic.

And I just wanted to add to that that, you know, we put Comsol into the RWCS business service line for a reason, is that it has a high overlap in hospital customers with what we have today. And it's been a real gem of a performer, as you can see, in the first quarter, contributing to the overall growth as the hospitals and other major medical providers see the value.

Yeah, and if, you know, Brian, if I just may, with reference to ComSol, since you brought it up, I just think it's important for us to talk about one of the things we know from that divestiture question you had, we did divest. We divested of the telephone answering service and the expert and recall business from underneath that CNRS umbrella. We've had an opportunity to restructure that organization in ComSol, communication solutions. I think the team under Corey White's direction has done a great job in better aligning costs We've enhanced and upgraded some of the service offerings. We've got live voice. We have, you know, natural language processing. We've got multi-language support. And I think what we're seeing in CommSol is, you know, it provides intelligent scheduling capabilities in various channels, whether it's on live, live voicemail, live voice, email, chat. It's great for referral management, which has really, you know, been key to our customers right now. communication reminders with reference to appointments and other engagements with hospital patients or doctor office patients. And we've got post-discharge services, patient hotlines. So for us, Janet was mentioning, it's a great synergy where it's affording us an opportunity to stay connected with our strong customer base where we are kind of on the back half of the logistics, provides us an opportunity to get up front and get engaged with customers. And the interesting thing that we're really seeing right now is we have seamless integration with our customer networks. We've got a comprehensive platform. And lastly, we're finding we have about 300,000 daily patient engagements and experiences a day on behalf of that large customer base that we have. And I think we're learning more about it as a result of the divestiture. And I think with it contributing the, you know, 1.3% of the growth that we had, the organic growth in North America out of the 3.8. You know, we're excited about where that's going.

Okay, so it would be fair to say that beyond normal business pruning of non-core assets that you find, there's really no large chunks remaining to be divested.

I stand by what I said. You know, we continue to know the core and evaluate our options. So I think we'll see where that shakes out.

Okay. Second question, just on the ERP, you provided great detail on kind of the expense. Can we review maybe the expected benefits as the rollout go out and how to think about maybe modeling that and what the potential is, you know, in the remainder of either 2021 or as we head into 2022?

Sure. You know, it's a great question. I'll start off with Janet. Is there anything else that she'd like to add that would be great? But I think when we tried to take a look at putting in an ERP, there's been an awful lot of technical debt, I think, in terms of all the disparate systems that we've had up to this point in time. So we've realized that a good bit of us, everything, for us being able to make our long-term guidance plan, we've got to have this ERP implemented and successful. A good bit of whether we're talking about $400 million in free cash flow, if we're talking about the continued debt leverage, if we're talking about being able to grow, all of those requires the infusion of the technology capabilities that the ERP is going to provide for us. So while we have – we're doing our best to continue to work efficiently and optimize what we're doing in standardized processes, and we're doing our best to make sure that we're continuing to drive the quality of revenue. But the capabilities that the ERP will bring – You know, that's what's going to take us into the numbers that we've put out there. Janet, anything that I've missed?

No, I think you covered it. Basically, the business case is the whole long-term guidance that we've given because it's so foundational to the business.

Okay, great. Thank you.

Thanks, Brian. Our next question comes from Alexander Alach from Barenburg Capital Markets. Please go ahead.

Morning and congrats on the quarter. My first question is sort of around the vaccine work that you guys mentioned. How much of a benefit are you seeing from that exactly? And do you expect that to roll off in H2? And on the flip side, there's sort of conversation that we may have to get annual boosters for the vaccine going forward. So is that an opportunity and some upside to revenue for you guys?

You know, that really is a great question. Here's what we're very pleased with. We have a large portion or a portion, we have a portion of our regulated waste, whether it's the decline in elective surgeries, people staying away from hospitals and doctor's offices, and a complete shutdown of another portion of the business in maritime. When we talk about, you know, those pieces being down, and yet what we've seen is our ability to be nimble enough to capture, you know, this opportunity called COVID or this opportunity called the pandemic. So for us, we see COVID really coming in, whether it was the nimbleness we showed when it was all about testing and all about non-healthcare PPE disposal. And now we're looking at it just being added to with reference to vaccine logistics. So we think, you know, that portion of the business is really helping to offset what we're seeing in declines and other key portions of the business with elective surgeries and maritime services. And then on top of that, our growth we're seeing certainly is based off of our quality of revenue initiative. So for us, here's what I know. I think we are prepared. We've got strength in our quality of revenue right now. We're seeing growth. We are positioned, if some of this pandemic-related crisis You know, whether it's vaccinations or testing, if some of that, a portion of that continues into the future, that's terrific. We're prepared. As I had mentioned, we are well prepared with capacity and operations at the ready to handle it. So I think that's an opportunity and an upside for us. But right now, I think we are well positioned to make sure we can hit our 3% to 5% long-range revenue growth targets based on the foundations that we have at this moment.

Okay, great. And then looking ahead, how are you viewing inflation? Is there a risk to that impacting the shredded business at all and SOP pricing? And have you seen an impact there in sort of Q1 related to inflation?

So inflation has interesting dynamics that we're watching in the business. Actually, inflation on sorted office paper pricing would be a benefit for us because inflation As you can see, the dynamic in recycled paper is a price times volume dynamic, so we would get more for the paper. In terms of inflation across other aspects, we're predominantly a service industry, so it's fuel, though that's a very modest part of our overall spend, and some materials, which we have good contracts in place but we're monitoring. So we're watching the inflation dynamics going on, but we also have low interest rates, too. That is the other side of the whole economic dynamic that I think we'll benefit from. So us sorted office paper pricing going up would be an upside for us.

Okay, great. Thanks, guys.

Thanks, Alexander. Our next question comes from Scott Schneeberg with Oppenheimer. Please go ahead.

Thanks very much. Good morning. Cindy, curious, on international and regulated waste, a very strong quarter, I know a lower base, but a strong quarter of organic growth. Just curious what's behind that and if that ties into the comments about the third-party disposal issues internationally. Thanks.

Yeah, Scott, you're spot on with that. So one of the things we see there is Europe is in a different position than the U.S. is, than most of the world is with reference to the pandemic. You know, not as much vaccine rollout, longer stays in hospitals. You know, so it is it's a completely different dynamic for us. So what we have talked about, what we've been able to unpack is we believe there is some over classification of waste. You know, meaning not just COVID waste, but in a room with a patient, you know, it's all things are kind of being classified as regulated waste. And we are seeing an uptick. Now, you know, the good news is we have the capability. We're, you know, we're collecting it. But it's pushing us to a little bit more dependence on third party. And any time you get engaged with third party, you know, the revenue that you're bringing in isn't necessarily the same quality that the revenue you bring in when you handle it on your own. So that's the dynamic there. But, you know, we're proud of the international team. We're certainly proud of the team right now in the throes of things, in being able to do the things that they're doing. We have, we've upgraded, I think we mentioned, we upgraded two of the facilities, two key facilities for us in the UK market so that we can we can help our folks, you know, continue to handle the waste that they're seeing. And I think that that's going to continue to be key for us in the future.

Great. Thanks. Sounds like a go forward opportunity. The, you know, it's been a very impressive job you all have done with regard to, to deleveraging and getting very close to your below three target. Just curious, Janet thoughts on, on, how soon you could get there from our math. It looks like you're getting pretty close. And thoughts on other uses of capital besides debt reduction since we are getting so close. Just any updated considerations there. Thank you.

Well, thank you. We're pleased with the continued pay down of debt. As you know, that's one of our top five priorities and the cash flow generation that we're seeing in the business. So, you know, we have the target to get below 3%. In our long-term guidance, a little farther out than what you're indicating, and that's because we have to get through the ERP and some other considerations that we're monitoring what that means in terms of cash outflow. In terms of a more sophisticated capital allocation strategy than pay down debt, that is something that we're excited to consider in the future as this engine of cash continues to generate opportunities for us. We're not ready yet. We're thinking about what that will be. But you're correct that the cash engine of the business could generate additional opportunities for us. And, you know, in the future at some point we'll be talking about those options.

Great. Thanks. Good job. I'll turn it over.

Our next question comes from Gary Bisbee with Bank of America. Please go ahead.

Hi, good morning. I know you were asked earlier about SG&A, but I wanted to circle back to that for just a minute. When I look at the last three quarters, I guess, of 2020, you had talked about $3 to $5 million of cost savings, and I think you called out roughly 80 basis points of efficiency a couple quarters in a row, which I think was effectively that $5 million. And yet this quarter, you called out 280 basis points of SG&A and 200 basis points of operational efficiency. So it seems like those savings programs stepped up materially. But what else is involved there? And is there any of that that we should think is more Q1 specific and not something that would continue as we move through the year? And I heard you loud and clear on the incremental ERP, so you don't have to repeat that. But what were the other puts and takes this quarter for that drove the margin. Thank you.

Yes, thank you. We're pleased with the SG&A performance, too, and thank you for hearing the ERP, because that will be a factor in SG&A performance going forward. The other will be, you know, we believe travel will, you know, continue to ramp up as the opportunities open. Right now, internationally, you know, travel is very restricted, and we can't even get over the, you know, the ocean to sea. our people over there. So, you know, there's some opportunity for increased travel expense in the second half of the year. We did have dynamics, as you heard, that in the overall margin, some of that is more in cost of revenue that related to international disposal and weather. But SG&A is something we're watching. But the big story is the IT in the second half of the year that we will see and maybe some increased return to travel and some other expenses as the economies open up.

And so excluding the ERP, and we'll layer that in for sure, is this a decent jumping-off point or are there some other factors? Because, you know, down quite a bit from the last couple quarters.

You know, with all the puts and takes we've got going on in the business and from Dynamics, I would say the divestiture piece is structurally an ongoing piece. That 120 basis points, I believe, that we quoted, that is structurally a change in how you can think about SG&A. The rest of it, you know, we're encouraged to try. We continue to monitor it. But given the dynamics, you know, I'm reluctant to make predictions, but we're pleased with the discipline that we see.

Okay. And then just one follow-up on the ERP. So it sounds like the regulated waste business facilities is now at 2022. Does that change at all, you know, sort of cost, timing of going live, when you might achieve some of the efficiencies, not only cost side, but you've talked a lot about the operating, you know, potential, get better data, you can make better decisions. Should we think that's really a, you know, 2023 story at this point, or is that how you thought about it all along and that's just really changed my perception today?

So, thank you. Appreciate that question, just to give the history of the ERP. So, as you know, we were going to go live last year, and then the pandemic hit, and the ability to serve our customers was important, as well as the safety with the shelter-in-place rules, et cetera, to put it out, and it had been largely created as an in-person deployment. So... What we're seeing going forward is that we're going to deploy in the summer. It seems like it's an open enough time to do that. We have created a virtual ability to manage the ERP. And we are going to start. And it's more than just Shredit. It is the entire general ledger and financial systems. It's procure to pay. It's all the major processes plus the Shredit facilities. And as you cascade through doing that plus the Shredit facilities, and maintain and stabilize the control environment to maintain our effective control environment just naturally flows that the RWCS facilities will hit into next year. In terms of cost, most of the development we believe will occur this year. There may be some costs. We're still evaluating that week into next year as we finish and deploy RWCS. We will learn a lot from the first deployment. In terms of benefits, we are, you know, the benefits are the long-range guidance, and we remain committed to that. We are continuing to get benefits of the parts of the ERP we've already deployed. Remember, we have the procurement system, we have the HR system, we have deployed a tax system, and we continue to evolve our data and analytics platforms. So those help us continue to provide benefits as we continue to deploy. Thank you.

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

Thanks so much. I wanted to go back to an earlier question. I think you were asked if you could quantify the impact of the vaccine and anything else related to the pandemic. And I think you just said it basically offset some of the negatives that you're still getting from that. Is it possible, though, just to put a number around it? What is the positive impact you've gotten from some of the pandemic-related work in the first quarter?

Yeah, so if you look at how we unpacked the North American growth, You know, you started with the 3.8% growth. The console growth of 1.3% is a good part of that is driven by us helping with vaccine-related outbound patient portal and other calling. That is creating contracts and new customers and existing customers showing the value proposition. So it could be sustainable. It could be vaccine-related and testing-related. And then you unpack the rest. Two and a half percent of that, we think, is due to the sustainable quality of revenue initiatives that we have put in place to great growth in the business. And then the rest sort of wash out in RWCS in North America between the declines in elective surgeries and maritime, where the cruise ships stop sailing, against the upsides we've seen from our mailback programs, our vaccination programs, our testing programs, et cetera. When you go to international... Most of that growth is fueled by the pandemic-related waste and vaccination programs that are going on there. And that's what's fueling some increased costs as well.

Okay. I realize it is difficult to quantify. I appreciate that. Generally, those type of businesses related to the pandemic, did you say earlier that they're lower margin businesses than your typical core business?

No, we did not say that.

Okay. I must have misheard you. Okay. How does it compare margin-wise to your core businesses?

The vaccination and testing related businesses? Yeah. You know, there's a mix in there, but basically I'm very impressed by how the commercial team has been very customer responsive and focused, but also been able to build pricing mechanisms to retain margin value.

Okay, great. Thanks for your help.

As a reminder, if you have a question, please press star, then 1. Our next question is from Ryan Daniels with William Blair. Please go ahead.

Hey, guys. Nick Speakout in for Ryan. Thanks for taking my question. I guess if you could provide just like a little color on how the selling season is going with a particular, I guess, focus on the cross-selling of SID to RWCS clients.

Yeah, I think that's a great question, Nick, and one we're very excited about. We continue to, as we are creating a stronger commercial organization, all the training, all the quality of revenue improvements, one of the keys is really putting forth a bundled solution, a solution where we can You know, we've got a tremendous amount of products and services that we can help customers with, and making sure that we cross-sell or that we present that to them has been a key focus for us. So what I can say is, you know, when you take a look at businesses, and let's say RWCS as an example, and you see all the years of decline of revenue, really no organic revenue growth at all, And we saw the first signs of positive organic revenue growth. And I think it dated back to either sometime in 2016 or early 2017. I forget exactly when. But when you take a look at last quarter, last year, Q1 of 2020 was the first time we had turned the corner and saw some growth. And now here we are a year later, you know, with all the uncertainties that came from this pandemic and all the work that the team has done, I couldn't be prouder of the fact that we're We're now talking about quality of revenue initiatives that we believe were about 2.5% of the 3.8% growth that we saw in North America. So to me, what that's telling me is we're selling regulated waste well, and when I see us sequentially growing quarter over quarter with secure information destruction, I have confidence that it's also because of the combined efforts for a lot of those cross-selling initiatives cross-selling trainings that we've put in. So more to come, but very positive. Anytime an organization can really get some momentum behind organic growth, it's good news.

Great. Thanks. And then I guess next one is kind of a clarification question. I think last quarter you targeted or you pointed to about $60 million in revenue left in that CRS business that was rolled into RWCS this quarter. Is that kind of still the case? Is that a good baseline to go off of?

Yeah, so the baseline for the communication solutions is what we call the remaining business was about $60 million. That's the baseline from last year.

Okay, great. Thanks, guys. Congrats on the solid quarter.

Thank you.

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

Thank you, Betsy, and to everyone listening on this call. We greatly appreciate your interest in Stericycle and your shared excitement for our future, so thank you much. The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.