Stericycle, Inc.

Ladies and gentlemen, hello and welcome to the Q4 2022 Stericycle Earnings Conference Call. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star flow by one on your telephone keypad. I will now hand you over to Andrew Ellis, Vice President of Investor Relations to begin. Andrew, please go ahead when you're ready.

Good morning and thank you for joining Stericycle's 2022 Fourth Quarter Earnings Call. On the call today will be Cindy Miller, our Chief Executive Officer, and Jan Selenka, 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 other 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 such forward-looking statements. Factors that could cause our actual results to differ are described in the Safe Harbor Statement and 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 at investors.stericycle.com. The prepared comments for today's call corresponds to an investor 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 March 23, 2023. Replay information is available in the events section on StairCycle's investor relations website. Time-sensitive information provided during today's call, which is occurring on February 23rd, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of StairCycle is prohibited. I'll now turn the call over to Cindy.

Thank you, Andrew, and welcome to our fourth quarter earnings call. I'd like to start off today's discussion by thanking all of our team members and especially our frontline workers for supporting our customers and protecting what matters. I'm pleased to share that our fourth quarter results were in line with our expectations. Our quarterly results included organic revenue growth at 5.7%, free cash flow generation of $130.9 million, expanded margins, reduced debt, improved leverage, and continued portfolio optimization. As a company, we continue to focus on executing on our five key business priorities, and I'll start with quality of revenues. Organic revenues increased 5.7% led by secure information destruction, which grew 12.2%. Regulated waste and compliance services grew 2.8%, and in North America, organic revenues grew 7.6%, with secure information destruction increasing 13.2%, and regulated waste and compliance services increasing 4.9%. These results include the benefits from our service cost recovery fee and the enhanced recycling revenue surcharge that started in the first part of 2022. These two pricing levers contributed approximately $10 million of revenue in the fourth quarter and $24 million of incremental revenue for the year. Since 2019, we have been working on transforming the commercial function to drive greater consistency and accountability throughout the sales process. The foundation of our commercial excellence model includes the following. One, harmonizing over 120 global sales commission plans to a handful of sales commission plan types that standardize performance expectations and incentivize revenue growth and margin expansion while simplifying overall performance and plan administration. Two, improving governance over contractual language to include competitive standard terms and conditions. Three, redefining our value proposition to drive competitive differentiation and providing extensive training on value selling with a disciplined organic growth mindset. Four, implementing a new deal review committee to ensure consistent, disciplined value-based pricing, contracting, sales practices, and governance. Five, launching a pipeline management process and tools to better forecast and manage opportunities and performance throughout the sales cycle, resulting in pipeline growth, improved conversion rates, and higher quality sales, and six, creating a data infrastructure as part of our ongoing ERP deployment that allows us to draw greater insights into sales opportunities and service performance across the customer lifecycle. With these foundational elements now in place, we are advancing to the next phase of our commercial evolution to support our organic compounded annual revenue growth rate of 3% to 5%. which focuses on three key areas. Expanding service penetration, improving customer implementation velocity, and deepening customer partnerships by developing enhanced customer solutions. The first area is expanding service penetration. Drawing from our newly created data infrastructure, we will leverage insights to win, grow, and retain customers through cross-sell and up-sell initiatives and targeted sales offerings, which we expect will increase the value we provide to our customers. The second area is improving customer implementation velocity. This is focused on accelerating speed to revenue by decreasing the amount of time it takes from closing a deal to initially servicing customers. The third area is deepening customer partnerships by developing enhanced customer solutions. We plan to continue to commercialize innovative solutions and products we expect will drive additional revenue opportunities as we create safer and more sustainable working environments for our customers, their employees, and the communities in which we operate. I'll now move on to our next key business priority, operational efficiency, modernization, and innovation. This has been a keen focus for our operations and engineering teams over the past four years as we opened four new greenfield autoclaves facilities and have made upgrades to existing autoclaves, incinerators, shredders, and facilities throughout our network and improved our fleet. In 2023, these teams will concentrate their efforts on three areas, infrastructure and system modernization, fleet replacement and route and long-haul network improvements, and SafeShield container rationalization and modernization. The first area, infrastructure and system modernization, continues to progress. In 2023, our operations and engineering teams will be focused on finalizing the construction of our new state-of-the-art incineration facility in Nevada. We believe this facility will set the bar for high capacity medical waste incineration facilities in North America through its sustainable water usage design and technology aimed at minimizing emissions. In 2023, we also plan to upgrade over 20 facilities and leverage and deploy new system capabilities. The second area is fleet replacement and route and long-haul network improvements. We are focused on replacing and modernizing our trucks and trailers with more efficient vehicles. While this was hampered in 2022 by supply chain disruptions, we are starting to see more equipment deliveries. Route and long-haul network improvements began in 2022. We have reduced long-haul routes through a combination of removing routes from our network, strategically locating new facilities near our customers, consolidating facilities, and internalizing some third-party hauling. These investments are expected to improve our operational service model, which we anticipate will contribute to margin expansion over time. The final area is our SafeShield container rationalization and modernization projects. As a reminder, we are transitioning from over 150 container types to less than 20. To date, over 250,000 SafeShield containers have been deployed in North America, and we anticipate completing the rollout over the next four years. These award-winning containers are coated with an antimicrobial protective, which reduces the potential spread of infection while minimizing odor. They also feature an improved and more durable design in standard sizes that are nestable and stackable, allowing for more efficient transportation and storage. Turning to our ERP deployment, we are now four months into our regulated waste and compliance services pilot in Puerto Rico. I'm excited to share that the ERP is running smoothly as we have been able to onboard, service, bill, and collect cash from our customers. Based on this successful pilot, we continue to plan our ERP rollout to the U.S. regulated waste and compliance services commercial and operational functions in the second half of 2023. Now turning to debt reduction. As a result of strong free cash flow generation and divestiture proceeds, we reduced debt by $175.4 million and finished 2022 with a debt leverage ratio of 3.28 times. a year-over-year improvement of 33 points. We anticipate getting close to or hitting our three-times debt leverage ratio objective by the end of the first quarter of 2023. Finishing with portfolio optimization, in December, we divested our communications solutions business in North America for $45 million, and in January, we divested our Sanipic Plastics joint venture in Spain for $2.2 million. These are our 11th and 12th divestitures since 2019, and we applied the proceeds towards debt reduction. As a result, it has afforded us the opportunity to focus on core businesses and our key business priorities, like the ERP deployment and other investments in the company. Communication Solutions is the fourth and final divestiture from our legacy communication and related services business. I'll now turn the call over to Janet to review our financial results. Thank you, Cindy.

I will start by summarizing our fourth quarter results. As noted on slide five, revenues were $670.4 million compared to $657.3 million in the fourth quarter of 2021, excluding the impact of unfavorable foreign exchange rates of $15.7 million, divestitures of $10.8 million, and an acquisition of $2.1 million organic revenues increased 37.5 million. Of the increase, secure information destruction organic revenue growth was 24.5 million, and regulated waste and compliance services organic revenue growth was 13 million. As noted on slide six, regulated waste and compliance services revenues were $449.3 million. compared to $455.7 million in the fourth quarter of 2021. Excluding the impact of foreign exchange rates, divestitures, and an acquisition, organic revenues for regulated waste and compliance services increased 2.8%. North America regulated waste and compliance services organic revenues grew $17.9 million, or 4.9%, mainly driven by our three pricing levers, which include pricing and existing contracts, new customer pricing, and surcharges and fees. Overall volume was flat, with new sites' volume growth being offset by a decline in pounds per site collected from hospitals and national accounts, which we believe was mainly due to hospital staffing challenges. International regulated waste and compliance services organic revenues declined $4.9 million last or 5.3% in the fourth quarter. This decline was due to lower waste volumes compared to the fourth quarter of 2021. Secure information destruction delivered revenues of $221.1 million compared to $201.6 million in the fourth quarter of 2021. Excluding the impact of foreign exchange rates, organic revenues for secure information destruction increased 12.2%. mainly due to pricing, including fuel and environmental and other surcharges, and higher recycled paper revenues driven by SOP pricing. For the full year of 2022, our global recycled paper volumes were about flat year over year. In North America, secure information destruction organic revenues increased $22.8 million, or 13.2%, compared to the fourth quarter of 2021. Of this 13.2% growth, service revenues contributed 10.5%, and recycled paper revenues contributed 2.7%. The service revenue growth was mainly driven by surcharges, including the fuel and environmental and the recycling recovery surcharges. Recycled paper contributed approximately $4.6 million, more than in the fourth quarter of 2021, reflecting higher SOP pricing. In international, secure information destruction organic revenues increased $1.7 million, or 6.1%, compared to the fourth quarter of 2021. This change was mainly due to surcharges. Income from operations in the fourth quarter was $59.1 million, compared to $8.2 million in the fourth quarter of last year. That $50.9 million increase was mainly due to the following. commercial pricing levers resulting in revenue flow-through of $32 million, lower adjusted litigation settlement and regulatory compliance expenses of $17.8 million, lower bad debt expense of $6.8 million as we lowered the reserve and our allowance for doubtful accounts, mainly due to improved collections in the fourth quarter, lower annual incentive compensation expense of $5 million, and lower self-insurance expense of $3.4 million due to favorable trends in claims. These were partially offset by higher vehicle, wage, and utility-related inflationary costs of approximately $18.3 million. Additionally, in the quarter, overtime cost savings partially offset our higher headcount costs as we focused on optimizing our staffing model and driving operational productivity throughout our organization. Net income was $31.8 million, or 35 cents diluted earnings per share, compared to a net loss of 17.2 million, or 19 cents diluted loss per share in the fourth quarter of last year. The difference was mainly related to higher income from operations of $50.9 million. Cash flow from operations for the year ended December 31, 2022, was $200.2 million, compared to 303.1 million for 2021. The year-over-year decline of 102.9 million was mainly driven by the FCPA settlement payments of 81 million, timing of vendor payments of 32.3 million, and higher interest payments of 15.6 million. These were partially offset by improvements in DSO of two days, which has translated into approximately $16 million and operating and networking capital improvements of approximately $10 million. Adjusted income from operations was $90.6 million, or 13.5% as a percentage of revenues, compared to $64.2 million, or 9.8% as a percentage of revenues in the fourth quarter of last year. Adjusted income from operations increased 370 basis points, mainly driven by revenue flow-through of 480 basis points, lower bad debt expense of 100 basis points, lower annual incentive compensation expense of 80 basis points, and lower self-insurance expense of 50 basis points. These were partially offset by higher vehicle, wage, and utility-related inflationary costs of approximately 270 basis points. adjusted diluted earnings per share was $0.60 compared to $0.38 in the fourth quarter of 2021. As illustrated on the bridge on slide eight, excluding the impact of foreign exchange rates, divestitures, and an acquisition of a penny, the remaining $0.23 year-over-year increase was driven by $0.26 from revenue flow-through, $0.09 from favorable SG&A expenses, mainly due to lower bad debt expense of 5 cents and lower annual incentive compensation of 4 cents, 3 cents from lower self-insurance expense, and 3 cents from taxes and other. These were partially offset by 15 cents from higher vehicle wage and utility-related inflationary costs and 3 cents from interest expense. Capital expenditures for 2022 were $132.2 million dollars, compared to $116.9 million for 2021, which is in line with the guidance I previously shared of $125 to $135 million. Free cash flow for 2022 was $68 million compared to $186.2 million in 2021. As noted on slide nine, the year-over-year decline of $118.2 million was mainly driven by the lower operating cash due to FCPA settlement payments of $81 million and higher capital expenditures of $15.3 million, mainly attributable to the timing of cash payments and operational infrastructure investments. As a reminder, in the third quarter, I provided guidance on how we would achieve free cash flow expansion of $100 million to $120 million from the third to the fourth quarter. Sequentially, our free cash flow improved approximately $105 million as follows. About $47 million from improved collections, which was within our expected range of 40 to 50 million. This improvement was driven by substantially catching up on our North America secure information destruction billing and collection efforts from the ERP deployment in 2021, $25 million from lower interest payments, which was in line with expectations, 10 million of lower capital expenditures, which was within our stated range of spending seven to 17 million less in the quarter, approximately $20 million less in vendor payments, which was below our target of $30 million. Our fourth quarter DSO is reported with 56 days compared to 58 days in the fourth quarter of 2021. Sequentially, from the third quarter 2022 to the fourth quarter, DSO improved seven days. As shown on slide 10, at the end of the fourth quarter, our credit agreement defined debt leverage ratio was 3.28 times. Sequentially from the third quarter 2022 to the fourth quarter, our leverage ratio improved almost half a turn. Net debt was reduced by $175.4 million in the fourth quarter compared to the third quarter, reducing net debt for the year ended December 31st, 2022 to approximately $1.46 billion. Turning to the full year results on slide 12, Revenues were $2.7 billion compared to $2.65 billion in 2021. Excluding the impact of unfavorable foreign exchange rates of $53.4 million, divestitures of $52.7 million, and an acquisition of $8.1 million, organic revenues increased $155.8 million. Of the increase, secure information destruction organic revenue growth was $129 million and and regulated waste and compliance services organic revenue growth was 26.8 million. When 2022 and 2021 results are normalized to exclude the revenues from our most recently divested businesses, communication solutions and SaniPIC plastics, revenues were approximately $2.64 billion in 2022 compared to 2.52 billion in 2021. Income from operations for the year ended December 31st, 2022 was $153.7 million compared to $72.3 million in 2021. The $81.4 million increase was mainly due to commercial pricing levers resulting in revenue flow through of $116.7 million, lower adjusted litigation, settlements, and regulatory compliance expenses of $63.1 million, As we had accrued approximately $80 million for the FCPA settlement expenses in 2021 versus approximately $10 million in 2022, lower North America ERP implementation operating expenditures of $39.7 million, lower self-insurance expense of $11.7 million, and lower annual incentive compensation expense of $9.9 million. These were partially offset by higher vehicle wage, utility, and facility-related inflationary costs of approximately $65.5 million, higher ongoing IT operating costs of $33 million associated with our August 2021 ERP deployment now reported in our ongoing expenses, higher headcount onboarding and overtime costs of $27 million, and higher bad debt expense of $17.4 million. Net income for 2022 was $56 million or 61 cents diluted earnings per share compared with a net loss of 27.8 million or 30 cents diluted loss per share in 2021. The difference was mainly related to higher income from operations of 81.4 million as previously discussed. Adjusted EBITDA was $432.2 million in 2022 compared to $457.8 million in 2021. The $25.6 million decline was mainly due to higher ongoing IT operating costs of $33 million associated with our August 2021 ERP deployment now reported on our ongoing expenses. In 2022, communications solutions and SaniPIC Plastics' divested operations generated approximately $13 million in adjusted EBITDA. When 2022 results are normalized to exclude results from these divested businesses, 2022 adjusted EBITDA would have been approximately $419 million. Adjusted diluted earnings per share was $2.04 in 2022 compared to $2.19 in 2021. As illustrated on the bridge on slide 15, Excluding the impact from foreign exchange rates, divestitures, and an acquisition of $0.06, the remaining $0.09 year-over-year decrease was driven by $0.51 from higher vehicle wage and utility-related inflationary costs, $0.26 from higher ongoing IT operating costs associated with our August 2021 ERP deployment that reported in our ongoing expenses, $0.21 from higher headcount, onboarding, and overtime costs, and 3 cents from interest expense. These were partially offset by 73 cents from revenue flow through, 11 cents from the non-recurring typical ERP startup challenges in the third quarter of 2021, and 8 cents from lower taxes. As anticipated and discussed in our earnings call for the fourth quarter of 2021, our adjusted EPS of $1.25 in the second half of 2022 was better than our adjusted EPS in the first half of 2022 of 79 cents. The following 2023 guidance includes forward-looking statements as contemplated in our safe harbor provision as referenced at the opening of this call. Our guidance for 2023, which considers the current macroeconomic headwinds and healthcare staffing shortfalls, is shown in slide 16 and is as follows. We expect to grow organic revenues 3% to 5% on a base of $2.64 billion, which has been normalized for divestitures. Second, 2022 adjusted EPS was $2.04. After normalizing 2022 results for our two recent divestitures, the adjusted EPS baseline is $1.94. Next. In 2023, we expect to generate adjusted earnings per share in a range of $1.75 to $2.05. Anticipated underlying operating margin growth is expected to be tempered by higher incentive and stock-based compensation costs of approximately 20 to 25 cents and higher income taxes and interest of 10 to 15 cents. Third, 2022 free cash flow was $68 million. After normalizing 2022 results for our two recent divestitures, their free cash flow baseline is $55 million. As a reminder, we paid $81 million of the FCPA settlement in 2022. In 2023, we expect to generate free cash flow in a range of $175 million to $205 million. This takes into consideration our expectation that in 2023, We will pay approximately $10 million for the remaining portion of the FCPA settlement and $5 million to $10 million in adjusted FCPA monitor and related costs. Fourth, we expect cash paid for capital expenditures of $125 million to $145 million. Fifth, as Cindy mentioned, we anticipate getting close to or hitting our three times debt leverage ratio objective by the end of the first quarter of 2023. We are also providing our updated long-term outlook as shown on slide 17, which takes into consideration current anticipated macroeconomic trends and the impacts of recent divestitures and includes forward-looking statements. First, we continue to expect to achieve a compounded annual organic revenue growth rate of 3% to 5%. Second, going forward, we will be enhancing our guidance metrics by focusing on adjusted EBITDA growth and free cash flow conversion rates and transitioning away from an absolute free cash flow dollar target. We believe these metrics will allow our investors to consistently measure the performance of our business since we now have a full year of ERP ongoing IT operating costs included in our adjusted EBITDA baseline. We expect to achieve an average annual adjusted EBITDA growth rate of 13 to 17 percent through 2027 with 2023 as the base year. We expect to achieve a free cash flow conversion rate based on adjusted EBITDA of 50 to 60 percent beginning in 2024. These metrics translate into a free cash flow range between $325 million to $375 million between 2025 and 2026. This is lower than the previous outlook of at least $400 million in free cash flow in 2025, mainly due to expected short-term macroeconomic trends impacting the business that are reflected in the 2023 guidance, the recent communication solutions divestiture for which we had anticipated future free cash flow of $20 to $30 million, higher anticipated income tax payments of $10 to $15 million, and higher anticipated interest payments of $5 to $10 million based on the current interest rate environment. In the future, I will mainly discuss the long-term outlook in the context of adjusted EBITDA growth and free cash flow conversion rates. This outlook is based on currently known items and certain business assumptions, including current foreign exchange rates and estimates for SOP and other commodity pricing. This outlook does not contemplate a prolonged recession, inflationary environment, or persistent healthcare staffing challenges impacting volume. It also excludes any future acquisitions and divestitures. I will now turn the call back to Cindy.

Thank you, Janet. As always, I'd like to thank our customers, team members, and the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A.

Thank you. If you would like to ask a question, please press Start by 1 on your telephone keypad now. If you do change your mind, please press Start by 2. When preparing to ask your question, please ensure your line is unmuted. Please limit yourself to two questions at a time and a follow-up. You're welcome to register for another question, and we will come back to you if there is time. Our first question today comes from Sean Dodge from RBC Capital Markets. Please go ahead, Sean. Your line is now open.

Yep, thanks. Good morning, and I guess first, congratulations on the fourth quarter free cash flow performance. That was a big lift to get to the targets there, so well done. Maybe just starting with the 2023 guidance, the 3% to 5% revenue growth off the base adjusted for the divestitures. Cindy, the underlying drivers of that, the benefits you've been getting from pricing via the surcharges, those were, I think you said, $10 million in the fourth quarter. How should we think about the cadence of those over the course of 2023? I guess you have some levers left you can still pull on pricing, or is that pretty much tapped out? I guess that would be my first question.

No, Sean, thanks for that question, and thanks for the recognition on the free cash flow. That was a great job by everybody involved. So just a quick reminder, we've got three ways to get price. We have renewals. We've got new customers that we're going to win, new sites that we haven't started yet. And we've got surcharges and fees. So let's look at the surcharges. We, you know, everybody, especially, we felt the push of that capital I of inflation in Q1 of 2022 and reacted as quickly as we could. So it wasn't, we got some of the fees in, let's say, end, you know, really to the end of Q1, beginning of Q2, And then a lot of the other fees and surcharges, in contractual language, you've got to give 30 days or a 60-day kind of warning, if you will, that some of these are coming. So you may put them in to implement, but it doesn't necessarily hit the day that inflation hits you. So as we look at our opportunity to grow 3% to 5% over the long haul, a lot of things are going to go into it. We will at some points in time have an opportunity where we will lap certain customers that already have had the increase put in, but we have an awful lot of renewal customers whose contracts weren't opened yet, that those contracts will be open this year, and we will negotiate just as we did with the customer base last year. And then we've got new prices, new rate cards, new base tariffs built into all the new customers that we haven't hit yet. So I think in conjunction, we still have runway with reference to some surcharges and fees. But I think we also have opportunity now. I think a couple of things are a positive. Businesses are coming back to work. And right now, what we are seeing in the hospital side is visits are coming back. People are visiting the hospital. They're going back to the doctor. Elective surgeries is not, you know, hasn't shown itself to be a positive yet. But I think all those other signs are encouraging that if the economy stays relatively stable, we don't have another hit of, you know, high inflation that nobody expects. I think as things, if you will, maybe normalize, I think we are well positioned to capture that revenue growth and hit targets.

Okay. And then the ERP, so you said you completed the Puerto Rico pilot and North America, that rollout should begin in the second half of the year. Are there any updates you can share just regarding how long you expect the North American rollout to take? And, you know, I guess at this point, you know, what and when are the elements or transitions that you're kind of worried most about?

Yeah. Hi, Sean. This is Janet. Good morning. So we are anticipating right now based on the success of Puerto Rico and what the team is working on in the second half of the year to roll out the U.S. And that would be U.S. at once because we have enough confidence in what we learned from Puerto Rico. We think Canada would be a fast follower. That's a much smaller part of the revenue share. So really we would get the bulk in this year. So that is the plan. And that is what the team is targeting. What we're most worried about, this is the commercial and operational side of RWCS. The good news is we're in production, so I'm not worried about moving the system of production. I'm not worried about the shared services and general ledger or the payables for invoicing or vendors because that is in for both businesses. So we're really focused on the infield operations and the commercial side of this. The good news is we have 5,000 people who know how to use this. They are already explaining to the RWCS side, from the shredded side, how this works. That happened in Puerto Rico, and that was a good success. So the key area is data. I don't think it's as much functionality as it is getting all the data ready. For years of multiple different ways the data was captured in RWCS to the acquisitions to standardize it, clean it, certify it, and convert it and move it into the platform.

Okay, great. Thanks again.

Thanks, Sean.

Thank you. Our next question comes from David Manthey from Baird. Please go ahead. Your line is now open.

Thank you. Good morning, everyone. My first question, if you look at slide 15, it provides a very clear bridge from 2021 to 2022 EPS. Could you maybe provide us the major segments of the bridge from what you call the base 2022 EPS of $1.94 to the midpoint of your 2023 guidance at $1.90?

Yes, thank you. So thanks for capturing that. We do have a new, with the comps all adjusted out, we go from a base of 204, which we re-ended, to the 194 EPS. So really our key drivers are revenue flow through and margin expansion are one of the key drivers. We also get some benefit in the free cash flow side from a lower incentive compensation payout. But if you're looking at EPS, it's primarily due to core growth. And we also get some upside on bad debt. As we look year over year, we've captured receivables. So we really see a clear pathway by the different measures to get to that get to that growth.

Okay. And then on the longer-term outlook, 3% to 5% organic revenue growth seems very reasonable. But what gives you confidence in the 13% to 17% EBITDA growth over the next four years? I think if you stretch this out, the 2027 level would be something like 23% EBITDA margin. So here too, if you just talk about what are the key drivers behind the improvement from where we are to that level.

So a great question, Dave, and it's really a convergence of all the things we've been working in the business over the last three years. So it is the quality of revenue and the pricing into the contracts and the next phase of what we call quality of revenue in these areas of commercial excellence will continue to drive price, and volume in the market on a new platform. It is operational efficiencies that are driven by the modernization, a new incinerator going live, new autoclaves, modernized autoclaves, everything that Cindy mentioned, route optimization, and leveraging the systems that are not still fully in until we get to this year with the RWCF. And then you get the system reduction eventually of $20 to $30 million when we get the international off the platform, so you get an uplift there. And then from the new system and having everything in North America One platform, you get back office efficiencies. As we continue to reduce debt, you'll get lower interest expense coming through. That will be offset by some cash taxes that we see will be a higher cash taxpayer. So that is the bridge. that gives us confidence to put out that adjusted EPS growth rate and that free cash flow conversion rate.

And, Dave, I think the bigger story, that's a great question, and it's one, you know, unfortunately in this journey, we would have never picked to have all of those things, in essence, hit in relatively one year. If you think about this journey, without a pandemic, we would have had the ERP already in. We would have been chugging along with that. We would have been fine-tuning things. it would have been a much, maybe a more linear pace in terms of that type of growth. But unfortunately, you know, we're the little engine that could. We adapt to whatever we see that's out there in the marketplace. And as a result, Janet mentioned, those things just, they're going to converge maybe a little bit more close together than we would have liked. But it still doesn't, these are still goals and targets that we're well focused on hitting, and when they all converge, you know, that's, we'll handle that as we go through, but those are the expectations, and that's how we see line of sight to things. So I appreciate the question, but this journey, this transformation has really not been linear. We had good intentions in terms of laid out plans, but You know, sometimes pandemics just didn't show up when they should have or some high inflation or some potential recession. But I think everybody inside the organization is very focused on making sure that we maximize these opportunities that we've created as they hit.

I appreciate the commentary. Thank you.

Thanks, Dave. Appreciate it.

Thank you. Our next question comes from Michael Hoffman from Stifel. Please go ahead. Your line is now open.

Hi, Cindy and Janet. Thank you. I'm not sure which one to start with. Given that you're setting a baseline compounding for your EBITDA, can you tell us what the expectation is for your 23 EBITDA? And if And if it's not, because you're not disclosing that, then is there anything weird between the earnings per share at the midpoint and the EBITDA line that I have to think about to be able to back into it?

Yeah, so I understand what you're asking, Michael. So when we gave adjusted EPS guidance, but I would say that we are assuming increasing interest rates with an expected unfavorable impact of $0.05. So this is on the slide that we have in the deck, and we are expecting an unfavorable impact This wouldn't impact the conversion, but just so you know, $0.02 to $0.03 in depreciation expense. And we expect an effective tax rate in the range of 26% to 29%, which we think is a 5% to 9% impact because it's more normalized income tax levels in 2023. So those are some of the key areas that would back you into an expectation of EBITDA. And on an adjusted basis, if you're looking at GAPI, but we also have the indications of the adjusted items primarily in the FCPA area of costs that we have estimated.

Right. Okay. And then to go back to the 3% to 5% sales growth, so for 23, not the long-term compounding, can you unpack the mix between price unit growth and your SOP assumption, just so we understand what you're seeing in 23 versus the long term.

Yeah, so due to the headwinds we're seeing in the RWCS volume right now in elective surges, we're hopeful there. But I would say our growth in both Shred and RWCS, which I actually think is a good story as we forecast that range is more indexed to price on the lower range, and then if we have some tailwinds on volume as things recover in the market, we could get to the higher range. So I think it indicates that we have pricing power that's sustainable through next year. In terms of SOP, we estimated what it ended at December for the SOP pricing through the rest of the year, and, you know, those are our key assumptions in revenue.

And what's that number, just so we all have it accurately?

I will have someone... It's at 2.20, I believe. Yeah, 2.20.

Okay. Okay. So many more questions.

Well, the good news, I hope, Michael, is we have a lot of information thrown out in the slides.

Okay, so hopefully we'll have everything we can... Yeah, there's a lot to digest, and we do understand that.

Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott. Your line is now open.

Thank you. Good morning. Just following up on that SOP real quick. Janet, that's the end of December, the 220. Are you extrapolating that through 2023? Or you said you're making your?

Yes. So we don't predict SOP pricing. I think it's proven to be hard to predict. So we just, as an assumption, So assume the end of year as a flat through our guidance expectations.

Thank you. And then next question, the cadence through the year of 2023, how should we think about that? Maybe some thoughts on first quarter, how that may compare sequentially or year over year, just so we're out of the gate modeling appropriately. And is this Do you expect more to come through in the back half? How does this year look?

So actually when we looked at the quarterly cadence, it's not the same that we had last year where the first half was significantly different than the second half. We see sort of a reasonable steady cadence. Now the pricing levers will be the surcharges carry momentum into the first quarter, but then our other pricing levers start to carry momentum into the rest of the year as we continue to renew contracts. increase our rate cards and do other things. So we see a relatively stable, you know, we'll see what the macroeconomic headwinds do for us in terms of volume. But if, you know, we see the volume as we expect gates on what we're seeing today, I think we will not have that kind of impact. On the cash side, however, Q1 and Q3 are our heavy cash outlay areas due to interest, paying any bonus payments, et cetera. So you do see that in our seasonality on cash. Q2 and Q4 are higher cash generating quarters, and Q1 and Q3 are higher cash outlaying quarters.

Thanks. And then I'm going to bunch two questions into one for my final. You did do a great job with debt reduction and leverage reduction, and you're guiding that by the end of the first quarter, 23. You'll get down to the three or some three. What should we think about for your leverage going forward? It sounds like you all have outlined further debt reduction will be use of capital in But how should we think about that? What is your target thereafter? Because you kind of achieved this one and congrats for achieving it on time. And then the second part of the question is, it sounds like you have a lot of need for capital spend on facilities. Cindy, you mentioned it's not linear. You guided CapEx for 23. How should we think about CapEx in your longer term free cash flow? guidance. What element is CapEx in that as a percent of revenue or otherwise, however you have to qualify it? Thank you.

All right. So I'll hit the debt reduction first. And just to be clear, yeah, we think we'll get to the three times in the first quarter or get close. So it'll be in the first quarter or second quarter. But we think we're going to get close or hit it in the first quarter, just to be clear there. In terms of how we'll use our cash that we generate, we do have a capital expenditure for this year. So our first priority after reducing debt is to invest in ourselves. And you see that. And we're limited by the capacity of us to spend money, as we've learned in prior years through the major projects, the amount of people you need from engineers to IT people to everything to to execute on that. But as we look at our priorities for what we use with our cash debt, if all goes well, we'll generate cash and we'll continue to apply to debt. But it does leave us opportunities in the future to look at other capital allocation opportunities. But our first priorities will be this year debt and capital investment in the business. And in terms of long-term capital, it will range based on the major projects. I think we will move from heavy modernization as we complete some of those major projects like the incinerator center to, you know, making sure we maintain the right maintenance success going forward. The team is working on that plan. I think it's in the range of what you've seen before, but I don't have a precise target for capital. And then, you know, one of the other opportunities we have with the debt is three times is probably not enough if we want to get to investment grade. So it would probably have to be more in the two and a half times range. So, you know, that is something we may just naturally get to by the cash generation that we generate. And I think I answered both of your questions. Did I miss anything?

No, you got it, Janet. Thank you. I appreciate it. I'll turn it over.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. Our next question comes from Kevin Steink from Barrington Research. Please go ahead, Kevin. Your line is now open.

Good morning. I just wanted to clarify your comments around the 3% to 5% organic revenue growth guidance for 2023. It sounds like you're maybe making some macro headwinds into that. Is that correct? Or, you know, just any more comments on the macro and how you see it impacting 2023?

So we are seeing that there's some durability in some of the headwinds. And so we do think elective surgeries will recover. If they recover faster, that will help us than the current pace of recovery that they're having. So that's one of the key drivers of what I'd say is a headwind versus tailwind. So we did have some of that factored in, and that's why you have a range of 3% to 5%. And then at the EPS level, there is persistence in some of the inflationary pressures that a lot of people are seeing in the market. So we were, you know, I would say appropriate given what we're seeing today in persistent inflation. If some of those mitigate, because it's not just about fuel, it's about containers that are based on petroleum-based products. It's based on current rent and other utility costs, et cetera, that have stayed high. So we factored that kind of persisting in 2023, which is why, you know, that is in the baseline. Headwinds are factored into that range, and tailwinds could give us some opportunity.

Yeah, and Kevin, just a general reminder for, and for everybody, how we look at volume. I think it's important, you know, lots of companies look at volumes different ways, even hospitals. But for us, volume turns into, we talk about volume in two different ways. Number one is we'll win a new site, a new customer, right? And if we've got a subscription fee, as an example, with an independent doctor's office, an independent customer, we'll get a subscription fee that covers everything. And weight may not, the physical weight or the pounds that we may pull out of that place might not matter because it's a subscription fee. Then we'll look at hospitals and national accounts and volume could take on a different, volume has a different metric. Volume will be how many pounds are we pulling out based off of elective surgeries that are performed. And there's a price per pound component to that. And in the hospital and national accounts, that's about 35% to 40% of revenue that that weight, the actual weight that what we pull out generates. So for us, we'll see hospitals talking about visits are up. And that's great news. People are out and about and they're going back to hospitals and they're going back to doctors. More importantly, we're encouraged and we're hopeful that staffing in these hospitals and in the healthcare network continues to show improvement. And if that does, there should be an assumption that elective surgeries at some point in time, the knees, the hips, And a lot of those types of orthopedic surgeries come back as they generate a good bit of waste. And as that kind of returns to a normal, that is opportunity for us because we're well positioned to handle that volume. So for us, when we say volume was flat in Q4, that meant we were winning more sites. We were bringing in new customers on both sides of the business. So volume on sites was positive. but volume in terms of weight wasn't. So that kind of yielded a flat look for Q4 in 22. But I think, as Janet had said, hospitals get staffing more in line. People are feeling more comfortable going back to hospitals and to the doctor's office. I think that to follow will be elective surgeries, and I think that's a good sign for us.

Okay, great. That's very helpful color. And just one other one. Um, have you, uh, contemplated in the 2023 guidance, any sort of potential disruption to revenue from the ERP rollout in the U S I know, you know, you, you had a lot of learnings from the secure information destruction rollout that the pilot in Puerto Rico is going well, but, um, You know, just any comments on, you know, potential impact there or any assumptions around that?

Yeah, Kevin, you're kind calling it learnings. We did have learnings, you know, from on the shred side. But I think Janet can give maybe more specific color. I'm very confident. You know, we came out of the gate in Puerto Rico and certainly hit the usual snafus that you would hit. But that's why we chose to do it in a pilot. And I think we've had quite a few months to work through any of those little ahas or surprises. So Janet, you feel pretty comfortable with it.

Yeah, if you look at the range that we have, and you look at the disruption that we attributed at the EPS about $0.11 for SHRED, and that was putting it into production for the first time, only a couple hundred people knowing the system. first time doing data conversion, et cetera, I think our ranges cover any potential risk there, and we're working to not have that be a risk factor.

Okay, thank you very much.

Thanks, Kevin.

Thank you. That concludes our Q&A session, so I'll hand back over to Cindy Miller for closing remarks.

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

Thank you, ladies and gentlemen. This concludes today's call. Thank you for joining. You may now disconnect your lines.