Stericycle(US:SRCL)2023-11-03 02:37Financial Data and Key Metrics - Q3 2023 revenues were $653.5 million, down from $690.3 million in Q3 2022, primarily due to divestitures of $32.4 million, partially offset by favorable foreign exchange rates of $6.1 million [18] - Organic revenues decreased 11.6% excluding foreign exchange impacts, driven by lower commodity index revenues, with sorted office paper pricing down over $100 per ton year-over-year [19] - Adjusted income from operations was $70.3 million (10.8% of revenues), down from $92 million (13.3% of revenues) in Q3 2022, with a 250 basis point decline due to lower paper and fuel surcharges, higher compensation costs, and a self-insurance settlement [21] - DSO (Days Sales Outstanding) improved in Q3 2023 compared to Q3 2022, driven by better timing of customer billing and collections [22] - Free cash flow guidance for 2023 was revised to $170 million to $190 million, down from $175 million to $205 million, due to higher capital expenditures and severance costs [45] Business Line Performance - Regulated Waste and Compliance Services revenues were $439.9 million in Q3 2023, down from $447.8 million in Q3 2022, but organic revenues grew 4.1%, driven by pricing actions [104] - Secure Information Destruction revenues declined 11.6% organically, mainly due to lower commodity index revenues and fuel surcharges, with recycling paper revenues down 7.6% ($16.3 million) [130][131] - International Regulated Waste and Compliance Services organic revenues increased 5.4%, driven by pricing levers, partially offset by lower waste volumes [180] Market Performance - North America Regulated Waste and Compliance Services organic revenues grew 3.9% during the ERP deployment, despite operational challenges [94] - International Secure Information Destruction organic revenues decreased 9.2%, mainly due to lower recycling revenues and fuel surcharges [20] - Customer satisfaction scores dropped initially during the ERP deployment but have since improved above pre-go-live levels [10] Strategy and Industry Competition - The company completed a targeted workforce reduction in October 2023, expected to generate $8 million in annual savings, with a $3 million charge [17] - The ERP deployment in the U.S. was largely completed, with 80% of volume running on the new platform, improving operational efficiency and customer experience [143][96] - The company is focusing on margin expansion through strategic initiatives, careful hiring, attrition, and targeted workforce reductions, supported by ERP technology investments [17][37] Management Commentary on Operating Environment and Outlook - Management highlighted the successful ERP deployment, with no significant system issues and improved customer engagement [96][97] - The company expects to achieve long-term margin expansion, with adjusted EBITDA growth of 13% to 17% starting in 2024, driven by operational efficiencies and cost savings [72][86] - Commodity price volatility, particularly in sorted office paper, remains a challenge, but the company has mechanisms to mitigate 60% of the volatility when prices fall below $192 per ton [32][181] Other Important Information - The company completed three divestitures in 2023, bringing the total to 19 since 2019, which has helped streamline operations and reduce debt [179][162] - Construction of the McCarran incinerator remains on track, with completion expected in the first half of 2024 [103] - The company was recognized for the third consecutive year by Women in Trucking as a top company for women to work for [186] Q&A Session Summary Question: ERP Deployment and System Dependencies - The company confirmed that the U.S. ERP deployment is largely complete, with only a few edge cases remaining. Canada and international operations are still transitioning, with a goal to fully move off legacy systems by 2025 [28][59][119] - Management expressed confidence in the system's stability, with most major issues resolved and a focus now on enhancements and user proficiency [47][63] Question: Commodity Price Volatility and Surcharge Mechanism - Management explained the surcharge mechanism, which offsets 60% of volatility when sorted office paper prices fall below $192 per ton. The company expects to mitigate 30% of the year-over-year decline in paper prices for the rest of 2023 [32][181] - The RISI rate has stabilized around $140 per ton, which is closer to the 15-year average, indicating a return to more normal market conditions [66][175] Question: Workforce Reduction and Cost Savings - The targeted workforce reduction in October 2023 is expected to generate $8 million in annual savings, with additional opportunities for cost savings through attrition and operational improvements [17][37][165] Question: Long-Term Margin Expansion and Free Cash Flow - Management reiterated the long-term outlook for 13% to 17% adjusted EBITDA growth, starting in 2024, driven by ERP efficiencies, cost savings, and strategic initiatives [72][86] - Free cash flow is expected to improve, with the company targeting a 50% free cash flow conversion rate, supported by operational improvements and reduced manual interventions [35][168] Question: National Accounts and Service Stops - Service stops in national accounts declined by 4% year-over-year, driven by customer site closures and reduced service frequencies. However, the company remains an essential service and retains these customer relationships [15][16][144]