Stericycle, Inc. (NASDAQ:SRCL) Q3 2022 Results Conference Call November 3, 2022 9:00 AM ET
Company Participants
Andrew Ellis – Vice President of Investor Relations and Enterprise Finance
Cindy Miller – Chief Executive Officer
Jan Zelenka – Chief Financial Officer and Chief Information Officer
Conference Call Participants
Sean Dodge – RBC Capital Markets
David Manthey – Baird
Scott Schneeberger – Oppenheimer
Michael Hoffman – Stifel
Operator
Hello all, and a warm welcome to the Third Quarter 2022 Stericycle’s Earnings Conference Call. My name is Luisa and I’ll be your operator today [Operator Instructions].
I now have the pleasure of handing over the call to Andrew Ellis, Vice President of Investor Relations and Enterprise Finance. Andrew, please go ahead.
Andrew Ellis
Good morning, and thank you for joining Stericycle’s 2022 Third Quarter Earnings Call. On the call today will be Cindy Miller, our Chief Executive Officer; and Jan Zelenka, our Chief Financial Officer and Chief Information Officer. The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are, therefore, subject to risks and uncertainties. Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the safe harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U.S. Securities and Exchange Commission.
Our past financial performance should not be considered a reliable indicator of our future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statement other than in accordance with legal and regulatory obligations. On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable U.S. GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle’s Investor Relations website at investors.stericycle.com. The prepared comments for today’s call correspond to an earnings presentation, which is also available at Stericycle’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 1 hour after the end of the conference call today until December 1, 2022. To access a replay of the call, dial (866)813-9403 in the U.S., (226)828-7578 in Canada or (44)-204-525-0658 if outside the U.S., Canada and enter a replay access code 984608. A replay of the webcast will also be available on the Stericycle Investor Relations website. Time-sense information provided during today’s call, which is occurring on November 3, 2022 may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Stericycle is prohibited.
I’ll now turn the call over to Cindy.
Cindy Miller
Thank you, Andrew. Good morning, and welcome to today’s call. Before we begin, I want to recognize all those who had been impacted by Hurricanes Ian and Fiona leading up to and in the wake of the hurricanes, we have continued to support our customers, the medical facilities and hospital staff that are working in extreme conditions. Stericycle is proud to support our customers to continue to safeguard the health and safety of our communities. To assist our Stericycle team members who have been affected, we mobilized our SteriCares fund, an employee-sponsored fund that is used to help support our employees who have suffered loss. As shown in our results, in the third quarter, we continued to build on our momentum in the second quarter as revenue, margin, adjusted earnings per share and free cash flow, all improved. Turning to the quality of revenue. We delivered another quarter of overall organic revenue growth, growing 10.9% with Secure Information Destruction increasing 32.3% and regulated waste and compliance services increasing 2.2%. In North America, organic revenue growth was 13.2%, with Secure Information Destruction increasing 36.1% and regulated waste and compliance services increasing 3.2%. The benefits of our surcharge and fee pricing initiatives that started in the first quarter and expanded in the second quarter continued to drive positive results in the third quarter. The service cost recovery fee we implemented for the North America hospital customers and the enhanced recycling recovery surcharge in North America Secure Information Destruction, contributed approximately $9 million in revenue this quarter. Combined with the $5 million we generated from this fee and surcharge in the second quarter, we are on track to deliver the previously shared $25 million of incremental revenue this fiscal year.
Turning to operational efficiency, modernization and innovation. We believe there is great value to unlock as we continue to invest in ourselves, including investing in our physical infrastructure and network. Over the past two years, we have opened four new greenfield autoclave facilities, including two in North America and two in the UK. We have also completed 22 upgrade projects, including improvements in autoclaves, shredders, washers and enhanced conveyance and Sharp’s processing. Let me share some of the progress we have made from our new Stockton facility after being operational for about a year. By optimizing the location of this facility near our Western U.S. customers and executing our transportation and long-haul plan. On average, we are driving approximately 20,000 fewer miles per month compared to last year, which drives cost savings and important sustainability benefits. With new facilities, we typically see productivity gains month-over-month, and Stockton is no exception. Over time for Northern California has been reduced by more than 40% for the 9 months ended September 30, 2022, compared to the same period in 2021. We have also achieved approximately a 4% improvement in average stops per day for the nine months ended September 30, 2022, compared to Stockton’s first full quarter of operations in 2021.
Let me now turn to our North America ERP deployment. In the third quarter, we successfully moved the technical code functionality for Regulated Waste and Compliance Services into our production environment. Following the completion of this milestone, we launched a pilot at the end of October for Regulated Waste and Compliance Service customers in Puerto Rico. We are early days in this regional pilot, but the system appears to be working as designed. Over the coming weeks, we will fine-tune the system and gather our learnings in anticipation of a broader Regulated Waste and Compliance Services, North America ERP rollout in 2023. As a reminder, we already have over 5,000 employees using the new ERP platform today, which includes secure information destruction, finance, procurement and other back-office functions.
I’ll now turn the call over to Janet to review our financial results.
Jan Zelenka
Thank you, Cindy. I will start by summarizing our third quarter results. As noted on Slide 5, revenues in the third quarter were $690.3 million compared to $648.9 million in the third quarter of last year. Excluding the net impact of divestitures of $13.3 million, unfavorable foreign exchange rates of $18 million due to the strengthening of the U.S. dollar and an acquisition of $2 million, organic revenues increased $70.7 million. Of this increase, Secure Information Destruction organic revenue growth was $60.5 million and Regulated Waste and Compliance Services organic revenue growth was $10.2 million. As noted on Slide 6, Regulated Waste and Compliance Services revenues were $447.8 million compared to $461.7 million in the third quarter of 2021. Excluding the impact of divestitures and acquisitions and foreign exchange rates, organic revenues increased 2.2% in the third quarter. North America Regulated Waste and Compliance Services organic revenues increased 3.2%, mainly driven by our pricing levers including fuel surcharges and the service cost recovery fee, we have also achieved underlying volume growth in our core business, including maritime which was partially offset by lower mailback volume due to lower year-over-year COVID-19-related waste volumes.
International Regulated Waste and Compliance Services organic revenues declined 1.5% in the third quarter due to an expected normalization of volume as COVID-19-related waste continued to decline. As noted on Slide 6, Secure Information Destruction delivered revenues of $242.5 million compared to $187.2 million in the third quarter of 2021. Excluding the impact of foreign exchange rates, organic revenues for Secure Information Destruction increased 32.3%, mainly due to pricing, including fuel and other surcharges, higher recycled paper revenues driven by SOP pricing, increased service stops and nonrecurring typical ERP start-up challenges experienced in the third quarter of 2021. In North America, Secure Information Destruction organic revenues increased $57.3 million or 36.1% compared to the third quarter of 2021, when we deployed the ERP, which impacted both our volume and normal pricing actions. Of this 36.1% growth, service revenues contributed 27.3% and recycling paper contributed 8.8%. The 27.3% service revenue growth is comprised of approximately 25% due to price and 2.3% due to volume driven by stops.
Of the price growth, about half was driven by pricing levers and the other half by surcharges, including the fuel and environmental surcharges and the recycling recovery surcharges. Recycled paper contributed approximately $40 million more than in the third quarter of 2021, reflecting both higher SOP pricing and volume. In International, Secure Information Destruction organic revenues increased 11% or $3.2 million compared to the third quarter of 2021. This improvement was mainly due to increased service revenues as the business continued to recover from the economic impact of COVID-19 and SOP recycling revenue due to rising SOP commodity prices. Income from operations in the third quarter was $50.6 million compared to a loss from operations of $50.6 million in the third quarter of 2021. The $101.2 million increase was principally due to the FCPA litigation settlement accrual recorded in the third quarter of 2021 of $61 million, 2022 commercial pricing levers and incremental volume as previously discussed, resulting in revenue flow-through of $34.6 million, nonrecurring typical ERP start-up challenges in the third quarter of 2021 of an estimated $13.2 million, divestiture losses in the third quarter of 2021 of $10.9 million, and lower annual incentive compensation expense in 2022 of $3.6 million.
These were partially offset by higher supply chain wage adjustments and other inflationary costs of approximately $19.2 million, higher bad debt expense of $9.2 million due to normalizing bad debt as well as continued North America secure information destruction billing and collection efforts mainly related to the ERP deployment, and higher headcount and onboarding costs of approximately $6.3 million. The higher supply chain wage adjustments and other inflationary costs were mainly from higher vehicle costs, including replacement, rental, lease and maintenance costs, higher utility and energy expenses and higher inflationary wage adjustments to attract and retain talent in the current labor environment. Noninflationary labor costs were driven mostly by higher headcount. While fuel-related costs have increased, they have been offset through our existing fuel and environmental surcharges. U.S. GAAP net income was $28 million or $0.30 diluted earnings per share compared to a net loss of $66 million or $0.72 diluted loss per share in the third quarter of last year. The difference was mainly related to higher income from operations of $101.2 million. Cash flow from operations for the 9 months ended September 30, 2022, was $43.1 million, compared to $202.2 million in the same period of 2021.
The year-over-year decline of $159.1 million was mainly driven by the expected FCPA settlement payments in the second and third quarters of 2022 of $81 million, timing of vendor payments of $36.2 million, an increase in DSO that equates to $30.3 million and higher interest payments of $9.3 million as shown on Slide 9. Overall, cash flow from operations was $61.5 million in the third quarter, $41.1 million higher compared to the second quarter of 2022. Adjusted income from operations was $92 million or 13.3% as a percentage of revenues up from $72.5 million or 11.2% as a percentage of revenues in the third quarter of last year. Adjusted income from operations increased 210 basis points as a percentage of revenues due to the following: revenue flow-through of 500 basis points, nonrecurring typical ERP start-up challenges in the third quarter of 2021 of 190 basis points, and lower annual incentive compensation expense of 50 basis points. These were partially offset by higher supply chain wage adjustments and other inflationary costs of approximately 280 basis points, higher bad debt expense of 130 basis points, higher headcount and onboarding costs of approximately 90 basis points, and higher ongoing IT operating expenditures of 70 basis points due to the shift in ERP costs associated with the North America Secure Information Destruction deployment in August 2021.
As noted on Slide 8, adjusted diluted earnings per share was $0.65 compared to $0.44 in the third quarter of 2021. Excluding the impact from divestitures and acquisitions and foreign exchange rates of $0.01. The remaining $0.22 year-over-year increase was driven by $0.31 from revenue flow-through, $0.11 from the nonrecurring typical ERP start-up challenges in the third quarter of 2021 and $0.05 from taxes, interest and other. These were partially offset by $0.16 from higher supply chain wage adjustments and other inflationary costs, $0.05 from higher headcount and onboarding costs, and $0.04 from expected higher ongoing IT operating expenditures. Capital expenditures for the 9 months ended September 30, ’22 were $106 million compared to $85.8 million for the same period last year with the $20.2 million change mainly due to the timing of cash payments. Free cash flow for the 9 months ended September 30, 2022, was an outflow of $62.9 million compared to an inflow of $116.4 million in the same period of 2021.
As noted on Slide 9, the year-over-year decline of $179.3 million was mainly due to lower cash from operations of $159.1 million, which reflects the FCPA settlement payments in 2022 of $81 million and increased cash paid for capital expenditures of $20.2 million, as explained earlier. Our third quarter DSO, as reported, was 63 days compared to a DSO of 59 days in the third quarter of 2021, this difference was mainly driven by the timing of North American Secure Information Destruction, customer billing and subsequent collections as discussed in the prior quarter as well as higher revenue. DSO in the third quarter improved 1 day compared to a DSO of 64 days in the second quarter of 2022. As shown on Slide 10, at the end of the third quarter, our credit agreement defined debt leverage ratio was 3.76x, and our net debt was approximately $1.6 billion.
Now turning to 2022 guidance, which is noted on Slide 11 for the following forward-looking items. One, we are raising our organic revenue growth range to 5% to 7%, up from 4% to 6%. Two, we are maintaining our adjusted EPS range of $2 to $2.15. Three, we are maintaining our free cash flow range of $80 million to $100 million. As mentioned last quarter, this excludes other adjusted litigation items accrued for in 2022, which we anticipate being paid in the fourth quarter and would reduce free cash flow by approximately $16 million. In the fourth quarter, we anticipate free cash flow will increase approximately $100 million to $120 million sequentially compared to the third quarter of 2022. Of this expansion, we expect improvement on cash collections of approximately $40 million to $50 million, lower interest payments in the fourth quarter of approximately $25 million, vendor and other payment timing of approximately $30 million, and lower capital expenditures of approximately $7 million to $17 million. The forecasted improvement in cash collections in the fourth quarter is dependent on timing of customer payments. Four, we are maintaining our capital expenditure range of $125 million to $135 million.
I will now turn the call back to Cindy.
Cindy Miller
Thank you, Janet. I’d like to announce one more important update. Two weeks ago, we released our latest corporate social responsibility report. This year’s report highlights our continued progress in conducting business safely, responsibly and sustainably while advancing our strategic environmental, social and governance initiatives. A copy of this report can be found on our Investor Relations website. In summary, our financial results for the third quarter came in line with the overall expectations we shared last quarter from the proactive measures we have taken to combat inflationary cost pressures. And as always, I’d like to thank our customers, team members, 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first telephone question today comes from Sean Dodge of RBC Capital Markets.
Sean Dodge
Congratulations on the great continued progress in the quarter. Maybe starting with the surcharges. So there was a nice ramp in contribution from those in the quarter. Cindy, you said $9 million versus $5 million in the previous quarter. So I think that implies something like $11 million for the fourth quarter. If we think about the things that you’re doing to implement those sort of the negotiations, waiting for contract anniversaries and renewal, how much is still potentially left as we start to think about kind of the surcharge contribution, and how that rolls forward into 2023? It sounds like the inflationary environment is still a little challenging. I guess how much more juice do you have left in what you’re able to pass through and surcharges to mitigate that?
Cindy Miller
I think, Sean, that’s a great question. And first of all, I think I’m extremely — I talked about momentum and being happy with the momentum that we have in revenue. And part of that is because we’ve really — I think the transformation of our commercial group is really at play here. We’ve been — historically, we had been pretty inflexible, and certainly more, I would say, held at bay in terms of different conditions. So the nimbleness and the flexibility that the team showed early in the year and the engagement with our customers. These aren’t surprised type surcharges or fees. These are certainly great discussions that we’re having with a good bit of the customer base. So I think as we move forward, I think what we do know is I have no idea what’s going to happen with inflation. I have no idea if it’s going to turn into the recession that some folks talk about or if it will be mitigated and will be muted. So I think at least for us, what I do know is we are well positioned in that relationship with our customers, in order to be able to see what we can do moving forward based on where it goes. We’re very hopeful that it doesn’t see an upward tick beyond where it is. I know the Fed has taken some adjustments to make sure that doesn’t happen. So I think that’s where we are.
Sean Dodge
And then certainly, the forward outlook for inflation, difficult to ascertain. But if we think about kind of what you’re seeing now, I know diesel prices have bounced around, but they’re a little bit lower than they were this summer. How is staffing been for you? Kind of how is the wage rate backdrop in other parts of your cost structure, supply chain, have kind of these inflationary pressures began to show signs of stabilizing? Or are those still something that’s gotten more difficult as time kind of going on here?
Cindy Miller
I think what we are seeing — one of the reasons why we didn’t necessarily call out staffing this particular quarter is because we’ve — it’s maintained. It was a pretty drastic decline kind of coming out of the end of 2021 into the first quarter of ’22. And I’m very pleased that our efforts have helped stabilize the workforce where we are right now. So I think there are pressures on wages. I think — I read the news like everyone else, and I’ve seen a lot of contracts getting turned down with some pretty hefty increases in them in many, many different industries. So I would not speak as if everything is rosy. But I will say, I’m very pleased with the efforts internally of our frontline operators, of our support folks in making sure that we make Stericycle an environment that folks want to come and join and then eventually stay. So at this moment, we’re pleased with where we are.
Operator
Our next question today comes from David Manthey of Baird.
David Manthey
First off, thanks for providing the bridges, as always, that’s helpful in letting us understand the progress of the company. I’ve got 2 questions. First on the SIB business. Last year, I think you picked up 529,000 tons of paper, including that the dip that we saw in the third quarter of ’21 following the ERP implementation. Where do you think tons will shake out for this year based on the run rate you’re seeing right now? And then related to that, also in the SIB business, does your ability to pull these price levers in this segment, is that an indication of having better intelligence, better visibility because of the new ERP system?
Cindy Miller
I’ll start with that second question first. I think any time that you add technology to a business, certainly 1 that’s been as absent technology as we’ve been, I think you’ve got to harness that, and you’ve got to get better. So we do have greater insights into contracts, rates that are presented, pushback, rates we’ve agreed upon. So I think our market intelligence, which is really, I think, the core of your question, we’ve gotten smarter. And I think it shows. So that’s very good news for us. And then I think as we continue to stabilize the workforce, you do have the opportunity to feel confident in the value that you are going to provide when customers call. And then I think if you take a look in terms of the tonnage, you’re right. Last year, let’s say it’s about 530,000 tons. I think so far this year, we’ve got about 200 — let’s say, we’re about halfway through — so I think we should finish the mark probably a little bit ahead of last year. I would say we’re on track where, let’s say, 530,000, 540,000 is just a rough estimate right now. Year-to-date, I think we’re around — yes.
Jan Zelenka
Yes, we gave the second quarter number, which was 267,000 tonnes in midyear. And we saw increase in tons third quarter this year to third quarter last year. So that was due to improvement. Some of it was due to — we had some disruption last year. So it’s a little hard to measure, but we did see that increase in this quarter.
Cindy Miller
Dave, we should see some improvements, certainly not getting to prepandemic levels, but improved over last year.
David Manthey
And then as a follow-up, more broadly here, with all the price actions that you’ve taken, I guess it’s surprising to see gross margin not a little bit higher than we did. And I assume that’s because you’re still chasing these inflationary pressures in your own business. But — also with your operating expenses coming down as a percentage of sales, I think that they’re actually in dollar terms, a bit surprising as well. Can you sort of justify those two things? It seems like they’re moving in different directions for some reason.
Jan Zelenka
So I think you’re referring to gross margin versus what we saw in SG&A. So we have seen improvement in SG&A year-over-year. And we’ve seen margin expansion in EBITDA line. It’s more modest at the gross margin. That’s where most of the inflationary pressures are hitting us. So that’s why you’re seeing that split. Pleased with the pricing motion to cover all of our increases flowing through. And as Cindy mentioned, we saw over time year-over-year as well.
David Manthey
And Jenny, I mean, if you look at the dollars of operating expenses that actually come down every quarter of this year. And I’m a little surprised to see that given that your revenues are moving the other way, and I know a lot of that’s price. But could you just talk about what’s driving that?
Jan Zelenka
Well, it’s really disciplined cost management and efficiencies we’re gaining in the shared services function. So it’s nothing magical. It’s just fundamentals. So really putting in budgeting and cost management on a monthly basis, travel management. All those have been levers that we have pulled to keep those costs in line. We also have lower — and at the GAAP level, we have lower ERP costs too.
Operator
Thank you, David. Our next question today comes from Scott Schneeberger of Oppenheimer.
Scott Schneeberger
I have one for Cindy and then one for Janet. Cindy good to see the higher revenue guidance, organic revenue guidance, and I infer that’s a good bit from pricing. If we could delve into that a little bit more and maybe discuss the cadence of what you saw in the third quarter, in the fourth quarter, it sounds like you have a lot of momentum. Maybe don’t have to quantify, but some thoughts on kind of month-by-month progression as we transition 1 quarter to the other. And then it’s not clear to me, is your pricing yet exceeding inflationary cost or not yet and getting close? I couldn’t tell from the commentary and just a little bit more clarity on that.
Cindy Miller
A couple of things. I think you hit on it when you said momentum. I’m very, very pleased that we are seeing momentum, whether it’s in revenue growth because the quality of revenue initiatives have afforded us the opportunity to be a bit more flexible and nimble based on market conditions. If you’re going to talk about margin or whether it’s adjusted earnings per share or free cash flow, those things then come into the modernization, innovation and efficiency efforts that we have going on. And then lastly, I think momentum, we’re very, very pleased that we launched the ERP pilot in Puerto Rico recently. And we’ve — we’re getting quite a few learnings. We’ve got boots on the ground there. We’ve got eyes and ears working with the team there in Puerto Rico, and very pleased with that as well. So I think overall for us, the theme is momentum.
I think one of the things though that you talked about with reference to pricing, Scott, the question is, are we — is it at parity with inflationary cost, I can tell you, we still see a tremendous amount of pressure, whether it’s on vehicle cost maintenance, if it’s on leasing and rentals. And the cost of utilities and everything else is still seeing very strong pressure with reference to inflation. I feel comfortable and confident in the team that we are taking the necessary steps in terms of pricing in order to combat it as best we can. And I’m very, very hopeful that we’re not looking at anything getting much worse, if you will. So Janet, just a couple of comments then on the things Scott asked.
Jan Zelenka
So Scott, if you look at Slide 8 and our deck, you will see that we saw a revenue flow-through of $0.31 against inflationary costs of $0.16 in the quarter. So we did gain traction against the inflationary costs in the quarter. We actually try to split the higher headcount costs, which is an investment in the company of the $0.05 from the pure inflationary costs. So that’s some indication. And we believe — in order to maintain the guidance, we’re carrying that momentum into the fourth quarter.
Scott Schneeberger
And Janet, it looks like the kind of the sneaking two parter to you as well. It looks like you’re going to have quite a big amount of free cash flow in the fourth quarter, if my math is correct, atypically large. If you could kind of elaborate on what is expected there? And then the second part of the question, just real quick is, other income was a good guy in the quarter, a lot more than it normally is. If you could just address what’s driving that?
Jan Zelenka
So the other income is really FX translation, which is what’s causing that differential in the other income. So I’ll start there. To free cash flow, as I mentioned, we actually see cash from operations sort of maintaining. So then it’s really working capital improvements that we’re seeing in the fourth quarter to drive that, which is improved cash collections of $40 million to $50 million, lower interest of $25 million in terms of payments, vendor and other payment timing of about $30 million, and then a lower CapEx of $7 million to $17 million compared to Q3. So that’s a Q3 to Q4 momentum story. And those are the key drivers of the change.
Operator
Thank you, Scott. Our next question today comes from Michael Hoffman of Stifel. Michael?
Michael Hoffman
So I have five calls today. So I’ve dialed into yours late if I’ve asked any question you dealt with in the comments, I apologize. What I am trying to understand is how to think about margin momentum, which you clearly demonstrated, are — we’re clearly up year-over-year, but are we up sequentially to in 4Q to hit the marks? And then how do I think about….
Cindy Miller
Yes.
Michael Hoffman
We are? So we’re up sequentially too. That’s really cool. Okay. And based on what you’ve done and everything else being equal, when does this margin level peak off of just these actions versus the incremental benefit of the next round of ERP and all of those things, as we’re seeing you’re trying to model ’23?
Cindy Miller
No, but I think the 1 thing that you do talk about is technology is the great — it has been a great opportunity for us. It provides companies opportunities to rightsize, it provides companies opportunities to take away manuals. It provides an awful lot of things for improvements and efficiencies. And I think as much as we all would like the ERP to be completed, we still — just with this pilot, we still have a major rollout for two third of the revenue, a very large portion of the business in 2023. So I think, Michael, what I can say is, at this moment, definitively, we know that there will be step change and improvements in margin as we march towards the $400 million in free cash flow in our long-range plan. So further out. And we never said that it was going to be, as you know, and you’ve pointed out, it’s never — it’s never 5 steps up and you just continue climbing, sometimes there’s enough and a backwards before you keep marching towards that. So our goal is to make sure that we continue to improve margin as we move forward. We’re going to continue to leverage the ERP as we deploy it and then finally have the full business on a current platform in a kind of a technology void company, and then from there, I think it would be much easier for us to be able to talk about the — how do we march to that bigger free cash flow number. And obviously, that’s through kind of bigger step improvements in terms of margin.
Jan Zelenka
And Michael, as you look at our guidance, longer-term guidance, that 3% to 5% growth rate is a compound annual growth rate that we set. And that’s what we think is underlying this on a core basis once inflation and other things settled. So really will do our best to keep up with inflation, and we have some momentum on that. On pricing, as we layered it in this year, we will get full year impact next year of some of that. Indexes that are surcharge base will fluctuate with whatever the commodities are for fuel and environmental surcharges and the RISI rate surcharge we put on our service revenue, but we’ve also put in underlying core pricing actions, we’ll see some momentum. But when the dust settles, that 3% to 5% stay sort of our true north in terms of underlying growth rate.
Michael Hoffman
And then on the SID business, well, volume is interesting on paper. I would think the more compelling number is where you are on stops comparatively. I’d be interested. And then the other part of SID, I have to imagine that gross margins in SID have started to improve at a lot better pace than medical waste just because of the benefit of all the tools and you have yesterday’s data where you don’t have yesterday’s data and medical waste kind of thing. Is that a fair observation without getting into specific numbers?
Cindy Miller
I can tell I know that our operators just with reference to just daily engagement, we’ve gotten dashboards and morning reports, if you will, that give us full visibility into shred, which we do not have on the regulated side, and those are basics come to work in today’s day and age that we’re going to get in — as we continue to roll out regulated. So I think you’re spot on with that. And then with reference to stops, we’re seeing some improvement in terms of the stops. I can say we are not back to pre-COVID levels. But I think anytime you’re looking at organic revenue growth and with us having the stops a DSO transactional in terms of revenue, I think that that’s what we can look at.
Jan Zelenka
And Michael, our service revenue growth, which means the staff-based revenue growth, just was up 27.3%, 25% was due to pricing, and about 2.3% is due to volume, which is roughly equivalent to improvement in stops. And remember, we had the ERP disruption last year, so it’s hard to measure the true stop impact, but we’re encouraged with the stop improvement and as well as the overall revenue improvement.
Operator
Thank you for your question [Operator Instructions]. It appears we have no further questions from the audience. So at this time, I’d turn the call back to the management team for any closing remarks. Thank you.
Cindy Miller
So thank you, Luisa. So to everyone listening to this call. We appreciate your interest in Stericycle and your shared excitement for the future. Thank you very much.
Operator
Thank you all for joining today’s call. Have a lovely rest of your day, and you may now disconnect your lines.
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