Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen! Thank you for attending today’s Stericycle Q1, 2022 Earnings Call. My name is Jaquieda [ph]. I will be your moderator for today’s call. All lines will be muted on the presentation portion of the call with the opportunity for questions-and-answers at the end. [Operator Instructions].

I would now like to pass the conference over to your host, Andrew Ellis, with Stericycle. Andrew, please go ahead.

[Andrew Ellis, Vice President, Investor Relations]

Good morning, and thank you for joining Stericycle’s 2022 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 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 and 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 one hour after the end of the conference call today until May 26, 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 then the replay access code 281677. A replay of the webcast will also be available on Stericycle’s Investor Relations website.

Time-sensitive information provided during today’s call, which is occurring on April 28, 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, Chief Executive Officer]

Thank you, Andrew, and good morning and welcome to today's call. As Janet and I will discuss, we are encouraged by our overall organic revenue growth this quarter, and like all companies, we navigated the unprecedented convergence of COVID-19 variants, labor shortages, supply chain disruptions and accelerating inflation.

On our call I will highlight the positive trends we are experiencing with improving staffing levels and how our quality of revenue initiatives are able to mitigate accelerating inflation, which is providing us the confidence to reaffirm our 2022 guidance.

During my introductory remarks on prior calls, many times I've referenced the resilience and dedication of our front line workers as they face continued challenges. This quarter further demonstrated our team members commitment to servicing our customers as we overcame a 21% shortfall in driver staffing in North America in the first half of the quarter due to COVID-19 related illnesses that were clustered in specific markets and hiring challenges due to the nationwide driver shortage.

In March we began to see significant improvement in COVID-19 absences and our recruiting team made substantial progress, which collectively reduced our driver shortfall to 12%. As I reflect on our staffing journey over the past 18 months, we have insourced and invested in our recruiting team and technology, and increased wages in numerous markets to improve staffing. These actions coupled with our strengthened employee value proposition connected to our promise of “we protect what matters” contribute to the momentum we are seeing and our ability to attract talent in a challenging market.

Turning to our key business priorities, I'll start with quality of revenue. We delivered another quarter of overall organic revenue growth with 2.1% growth in the first quarter. We remain focused on our pricing strategy and continue to execute on our three pricing levers to mitigate the higher inflationary pressures we saw in supply chain and labor related costs, which included higher wages, overtime and new team member onboarding.

As a reminder, our three main pricing levers are as follows: One, for all multi-year contracts we adjust pricing at contract anniversary and renewal; two, for all new customers and purchasers of our one-time services, we adjust our rates at point of sale; and three, for many of our customers we also have surcharges and fees that provide inflationary cost protection for commodity and other price volatility. Examples include our new service cost recovery fee for some North America hospital customers, fuel surcharges in Secure Information Destruction and a portion of regulated waste and compliance services, and our recycling surcharge in North America Secure Information Destruction.

Our pricing actions have gained momentum towards the latter half of the first quarter, including our adjustment of surcharges and fees, which provides the most flexible mechanism to help offset inflationary costs. Throughout 2022 we estimate that we will introduce approximately $25 million of pricing from the surcharge and fee lever, excluding fuel surcharges which are offsetting fuel costs to mitigate supply chain and other inflationary cost pressures. As we have stated before, these charges generally lag the immediate impact of inflationary pressures.

The benefit from all of our expected pricing initiatives is included in our 2022 guidance as shown on slide 11. We continue to expect that these initiatives will have a larger impact on results in the second half of 2022.

Turning to operational efficiency, modernization and innovation, I'd like to update you on some important developments which also tied directly to our continuing ESG journey. First, I'm pleased to announce that we will be expanding our capacity in the New York metro area in the second quarter with the expected launch of our new Medical Waste Facility. This facility located in New Jersey is another important achievement in our long term facility modernization plan to strengthen our medical waste capabilities throughout the Northeast.

Similar to our Northern California waste facility that went operational in the third quarter of 2021, the New Jersey facility will strengthen our environmental efforts as it is strategically located to improve the efficiency of our network by reducing vehicle, fleet miles driven, fuel consumption and greenhouse gas emissions. This modernized automated facility is also anticipated to process waste more cost efficiently and reliably and improve employee safety. Our design efforts have focused on sustainability, including the use of a closed loop system that allows us to recycle steam that is used for heating the facility's washer system, as well as utilizing new technologies that minimize overall admissions.

And second, I'm excited to share our launch of our latest innovation, SafeShield Medical Waste Containers. These first-to-market containers are coated with an anti-microbial protectant, and the all-plastic construction is made with 15% recyclable content. The antimicrobial component is an additional protectant that further reduces the potential spread of infection and odor. The containers also feature an improved design and standard sizes that are nestable and stackable allowing for more efficient transportation and storage.

After completing a successful pilot in 2021 and further innovating our solution based on customer feedback, we plan a nationwide rollout of this SafeShield Medical Waste Containers over the coming years. The launch of this initiative is an important step forward as we standardize and reduce our container network for more than 150 container sizes to less than 20.

Our focus on sustainability as we developed this initiative is also reflected by our work with plastics recyclers to palletized our old containers and sell them as recycled raw material. Further, because of SafeShield’s high quality construction and durability, it is expected to last considerably longer than our existing containers reducing our demand for plastics in the future.

Looking ahead to North America Regulated Waste and Compliance Services ERP Deployment, we remain on track to deploy pilots in the second half of 2022 for subsets of our North America Regulated Waste customers in preparation for the continued rollout next year. Our disciplined and detailed approach is a direct reflection of the complexity of the regulated Waste business.

And finally, last week we announced that we had reached agreements with the department of justice and the Securities and Exchange Commission, as well as Brazilian Authorities to resolve the FCPA investigations which focused on conduct prior to 2017 by employees in our Latin American operations. Resolving this legacy matter represents another important milestone in Stericycle’s business transformation journey, and I am happy to put this matter behind us.

Over the past several years, we have focused on fully remediating the issues identified during the investigation. This includes instituting new policies and procedures and internal controls and building a culture of compliance, integrity and accountability that align with our core values across our entire global organizations.

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

[Janet Zelenka]

Thank you, Cindy. I will start by summarizing our first quarter results. As noted on slide five, revenues in the first quarter were $664.2 million, compared to $668 million in the first quarter of last year, excluding a net impact of divestitures and acquisition, and foreign exchange rates of $17.5 million, organic revenues increased $13.7 million. Of this increase, Secure Information Destruction organic revenue growth was $18.4 million, which was partially offset by a decline in Regulated Waste and Compliance Services organic revenues of $4.7 million.

As noted on slide six, Regulated Waste and Compliance Services revenues were $452.6 million compared to $473.6 million in the first quarter 2021. Excluding the impact of divestitures and acquisition and foreign exchange rates, organic revenues declined 1% in the first quarter. North America Regulated Waste and Compliance Services organic revenues increased 0.1%. Underlying this modest 0.1% increase was approximately 2.3% growth for maritime waste services and 1.8% growth due to quality of revenue initiatives. The growth in these areas was mostly offset by a 4% decline in COVID-19 related transactional volumes, such as vaccine and testing waste and patient engagement related call volume in our Communications Solutions Business.

International Regulated Waste and Compliance Services organic revenues declined 4.7% in the first quarter, as pandemic related waste over classification volumes decreased from a peak in the first half of 2021. As noted on slide six, Secure Information Destruction delivered revenues of $211.6 million compared to $194.4 million in the first quarter 2021. Excluding the impact of foreign exchange rates, organic revenues for Secure Information Destruction increased 9.5%, mainly due to higher recycle paper revenues reflecting higher SOP pricing, partially offset by lower SOP volume.

In North America, Secure Information Destruction organic revenues increased $14.7 million or 8.8% compared to the first quarter of 2021. Recycled paper revenues were up 73.5% or about $10.4 million compared to the first quarter of 2021. The increase in recycled paper revenues reflected higher SOP pricing, partially offset by lower SOP volume. Additionally, service revenues were up 2.8% or about $4.3 million with service stops up slightly year-over- year.

In international, Secure Information Destruction organic revenues increased 13.6% compared to the first quarter of 2021. This change was mainly due to increased service revenues as the business continued to recover from the economic impact of COVID-19.

Income from operations in the first quarter was $5.9 million compared to $59.1 million in the first quarter of 2021. The $53.2 million decline was mainly due to one, increased cost of revenues driven by higher operating labor costs from wage adjustments over time and employee onboarding costs of approximately $11 million, and higher supply chain and other inflationary costs of approximately $8 million; and two, increased selling, general and administrative expenses driven by higher legal expenses of $12.3 million, mainly due to an additional accrual or $9.2 million related to the FCPA settlement, higher bad debt expense of $5.1 million as a return to a more normalized level, higher selling costs of approximately $4.8 million and higher medical claims of approximately $3 million.

The higher operating labor costs were mainly associated with maintaining competitive wages for existing team members and increased starting wages for new hires. In addition, overtime costs rose as a result of labor shortages, increased absences due to COVID-19 and lower productivity associated with training of new team members. Higher supply chain and other inflationary costs were mainly from higher vehicle rental and maintenance expenses, as we see continued delays in replacement vehicle deliveries, higher utility expenses and higher costs associated with supplies and disposable containers and liners. While fuel costs have increased, they have been offset through our existing fuel surcharges.

U.S. GAAP net loss was $14.2 million or $0.15 diluted loss per share compared to net income of $26.1 million or $0.28 diluted earnings per share in the first quarter of last year. The difference was mainly related to lower income from operations of $53.2 million, which was partially offset by lower income tax expense of $10.9 million.

Cash flow from operations for the three months ended March 31, 2022 was an outflow of $38.8 million compared to an inflow of $62.6 million in the same period of 2021. The year-over-year decline of $101.4 million was mainly driven by the timing of changes and net working capital of $67 million, including accounts receivable and accounts payable, and lower cash generated from income from operations at $34.4 million as shown on slide nine.

Adjusted income from operations with $59 million or 8.9% as a percentage of revenues, down from $110 million or 16.5% as a percentage of revenues in the first quarter of last year. Adjusted income from operations declined 760 basis points as a percentage of revenues due to the following higher costs: Ongoing IT operating expenditures from our ERP system of 200 basis points; labor costs of approximately 170 basis points; supply chain and other inflationary costs of approximately 120 basis points; bad debt expense of approximately 80 basis points; selling costs of approximately 70 basis points; and medical claims of approximately 50 basis points.

Adjusted diluted earnings per share was $0.32 compared to $0.71 in the first quarter of 2021. As illustrated on the bridge on slide eight, excluding the net impact from divestitures and acquisitions and foreign exchange rates of $0.02, the remaining $0.37 year-over-year decline was driven by $0.15 unfavorability associated with higher labor and supply chain and other inflationary costs, $0.11 unfavorability from higher ongoing IT operating expenditures and $0.11 unfavorability from higher selling costs, bad debt expense and other.

Our first quarter DSO as reported was 63 days compared to a DSO of 55 days in the first quarter of 2021. This difference was mainly driven by the timing of North America Secure Information Destruction customer invoicing and subsequent collections due to the ERP deployment as discussed in the prior quarter.

Capital expenditures for the three months ended March 31, 2022 were $37.5 million compared to $24.7 million for the same period last year, with the $12.8 million change mainly attributable to the timing of cash payments.

Free cash flow for the three months ended March 31, 2022 was an outflow of $76.3 million compared to an inflow of $37.9 million in the same period of 2021. As noted on slide nine, the year-over-year decline was $114.2 million and was mainly driven by the timing of changes in net working capital, lower cash generated from income from operations and higher cash paid for capital expenditures as explained earlier.

As shown on slide 10, at the end of the first quarter, our credit agreement defined debt leverage ratio was 3.81x. We amended our credit agreement to add back the FCPA settlement amount for purposes of calculating our adjusted EBITDA used in the credit agreement defined debt leverage ratio. Our net debt at the end of the first quarter was approximately $1.65 billion.

As we look to the remainder of 2022, we continue to anticipate that adjusted EPS will be lower in the first half of 2022 compared to last year. The first half of 2021 did not have the same level of inflationary pressures from wages, supply chain and other cost headwinds. In addition, compared to last year we have higher ongoing IT operating expenditures associated with our August 2021 ERP deployment now reported in our ongoing expenses. We expect the remainder of 2022 to benefit from the pricing actions as Cindy mentioned and improvements in our frontline staffing.

We are reaffirming our 2022 guidance reflected on slide 11. Of the approximate $90 million FCPA settlement costs accrued over the past three quarters, approximately $80 million is expected to be paid in the second quarter 2022 and was included within our 2022 free cash flow guidance. We expect to pay the remaining approximate $10 million of the FCPA settlement in 2023. We are also reaffirming our long term outlook as summarized on slide 12.

I will now turn the call back to Cindy.

[Cindy Miller, Chief Executive Officer]

As we wrap up the first quarter of 2022, I'm reminded of the tremendous progress we've made towards transforming this organization. Our dedicated and talented team continues to focus on our five key priorities and serving our customers while navigating the convergence of external risks, including COVID-19 variants, supply chain disruptions and accelerating inflation.

We are encouraged by the staffing improvements we are seeing and the solid pricing actions that we are implementing as we look to the rest of the year and beyond. And as always, I'd like to thank our customers, our 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.

[Operator]

Absolutely! [Operator Instructions]. The first question comes from a line of Michael Hoffman with Stifel. You may proceed.

[Michael Hoffman, Stifel]

Hi! Good morning! And a nice open to the year. Hope everybody's well there near Chicago. Cindy, Janet, I just want to make sure I – I wrote all these numbers down really fast with the PowerPoint and think I understand. If I pull out the COVID impact and paper, you're trending in the North America slightly over 4% organic growth in your Medical Waste business and you're just under 3% in Document Destruction. That's the big takeaway, is that you're – you’re in that 3 to 5 zone.

[Cindy Miller, Chief Executive Officer]

Yeah, the service – you know in North America if you look at the servicer revenue in the Secure Information Destruction, it was up over 2% and if you do all the puts and takes with the Regulated Waste Management Services in North America, you see underlying growth in our core business areas as we had this crossover of decline in the COVID volumes as we started to see increases in your core volumes, you know from maritime, from elective surgeries etc.

You do see in international, you do see a climb year-over-year because of the over classification of wastes unprecedented highs last year to this share, and then Secure Information Destruction International is also recovering.

[Michael Hoffman, Stifel]

Okay. So in the 2Q, can you give us a sense of how we should think about what that non-recurring head wind is, so we make that adjustment right. I've got a baseline of 3%, 4% organic of the two businesses, but what's my headwind?

[Cindy Miller, Chief Executive Officer]

Yeah, so it’s unclear exactly how the headwind in COVID in this crossover will occur, but we are encouraged by the core underlying growth to the quality of revenue issues and maritime and others. So I would say we expect to see that continue as the COVID decline continues – you know abates as it works out of the system. I don't have the exact cross over for you, because we're watching it closely, but that's the trends we’re seen.

[Janet Zelenka]

Can I say something there?

[Cindy Miller, Chief Executive Officer]

Yeah.

[Janet Zelenka]

I think Michael your right. What we did notice as we all personally reflect and have to look at our own vaccination cards, a good bit of the vaccination effort for the majority of folks, let's just say here in the U.S., that was a January, February to June, July effort to get however many millions of people got the vaccine. So we see it.

It all didn't happen in one month, but it has a bit of a tail. So it's a bit difficult for us to know exactly when, but I think you know we are encouraged as we're starting to see other portions of the business come back, whether it's shred, whether it's maritime, we think international is still pretty solid even though the year-over-year comparisons were difficult.

So I think that combined with a lot of the pricing actions that we’ve put in place that we believe certainly for Q2 and moving forward throughout the year will be kicking in. So I think it's, it’s a difficult – it's not great for precision, but I think directionally you're looking at it the right way.

[Michael Hoffman, Stifel]

Okay, if I remember all the data we've been looking at, the peak is sort of in the middle of that range – timeframe you gave and then it sort of starts to ease a little bit. So optically this probably isn't greater than a 4% headwind. It’s probably something 0% to 4%. If I'm - I'm modeling and this is not guidance, but that's the right way to think about it.

[Cindy Miller, Chief Executive Officer]

Yeah, I think there is some headwind from COVID. I think it’s more pronounced internationally still than it would be in North America as those headwinds start to subside.

[Michael Hoffman, Stifel]

Okay, cool. In your page 11, I mean, a little bit unclear, there’s numbered footnotes and then there's the asterisk footnote. The numbered footnote says the guide still reflects year-end of ‘21 FX and SOP, but the asterisks suggest you've incorporated current. So does the guidance reflect that currencies are moving and SOP is up a lot?

[Janet Zelenka]

No, the guidance stayed with the same rate. We stay in the same range even with those dynamics going, so we didn't really adjust the assumptions in the guidance.

[Michael Hoffman, Stifel]

Okay, so optically I think currency looks like between the three of them, they might actually counter balance each other; two are down if one is up. But the SOP is more positive, so that's a tailwind relative to the guide.

[Janet Zelenka]

Yeah, if paper continues it could be a tailwind. It has – we’ve seen that. Most of the foreign exchange headwinds are in EMEA, you know the European markets right now, right, which is where most of our business is in international.

[Michael Hoffman, Stifel]

Okay, and then can you share with us what your timing plans are for the ERP rollout domestically for Medical Waste? What's the thoughts about when that's going to start happening in earnest?

[Cindy Miller, Chief Executive Officer]

Yeah, I think you know we've looked at – we're trying to be as prudent as possible and that mitigate as much risk is possible, yet still drive the business forward as there right now is a growing chasm between the amount of data we can get out of the Secure Information Destruction side of the business versus it's really continuing to highlight the lack of that same type of information that we have on the regulated side. So we're all clamoring for the same thing.

But I think we're still moving forward with some pretty strong pilots that we think are very, very important. As you can imagine, you know for Shred we just had to worry – every facility did the exact same thing, just a couple of services. For this one now, with us having red bag waste in Sharps, pharma, consulting services and in some of those customers also a Shred component. This is much more complex in terms of its build and in terms of its testing and each one of those aspects of that portion of the business all have different data requirements.

So we feel comfortable as we move through this year. We will launch, a couple of pilots to get us through in order to learn from, to adapt and then continue with the roll out, and hopefully these pilots will be comprehensive enough that we will have viewed every possible aspect of the business, so that we can work very diligently to clean things up before we go with the – I want to say a broader launch.

Janet, any other color?

[Janet Zelenka]

Yeah, I’d just say, you know so the plan is, over the summer we're going to actually load the functionality capability for our WCS into the platform. Unlike before where we were taking everything on to development and moving into production, we have a full production instance of SAP and all the other suite of systems. So now it's about loading the code, which is a significant step and we plan to do that this year and then deploy pilots. It would put the capability into mark – you know some small markets to test it, so that’s the plan. So a couple of really big steps this year to test what we load and then based on those pilots, if we need to tweak more, we go right into deployment next year.

[Michael Hoffman, Stifel]

Okay. So just to be clear, there is a change of timing of deployment then or maybe I had a misperception that the best book was being deployed and…

[Janet Zelenka]

Yeah, we always intended to pilots this year and then decide, that's what I said last quarter. As we’ve looked at the timing of loading the code and the pilots, the update is we can - we more definitively can say we think it's going to go into 2023.

[Michael Hoffman, Stifel]

Okay and would you guys keep doing both domestic and international at the same time.

[Operator]

Excuse me Mr. Hoffman.

[Janet Zelenka]

I’m sorry, go ahead Michael, go ahead and finish.

[Michael Hoffman, Stifel]

Would you expect to do both domestic and international then at the same time at that point?

[Janet Zelenka]

So international has launched on the data side already on trying to get the team together, working on the data aspects of cleansing. So I don't know if we would launch at the same time, but we have started the motion on international, and we'll sequence that appropriately.

[Michael Hoffman, Stifel]

Okay, thank you very much.

[Janet Zelenka]

And that will be on a different and more modest deployment, but you know probably by country or by business. So it won't be as you know the risk profile that you know we see with moving our WCS as you know most of the business on to a platform.

[Michael Hoffman, Stifel]

Got it. Thank you.

[Cindy Miller, Chief Executive Officer]

Thanks Michael.

[Operator]

Thank you, Mr. Hoffman. Please be mindful to limit one question and follow-up. The next question comes from the line of Sean Dodge with RBC Capital Markets. You may proceed.

[Sean Dodge, RBC Capital Markets]

Yeah, thanks. Good morning! Cindy you mentioned the pricing levers you have to help mitigate the inflation pressures. Can you give us maybe just a little more detail on how much of those you haven’t placed out? Maybe what proportion of contract you've been able to push those across thus far? Should that proportion grow? And then maybe how much of a lag does tend to work on. You know I guess you're reaffirming guidance, for the year it implies a pretty steep back half ramp. So just a little help understanding, but maybe the visibility, the confidence you have on that.

[Cindy Miller, Chief Executive Officer]

You know Sean, I appreciate the question, because one of the things that I think, thank goodness we've done from a quality of revenue perspective is clean up data, clean up. We’ve worked very hard with contractual language, just to even standardize those across both business units and it’s certainly positioned us very well for the levers that we have. So just as a reminder, lever one, contract gets has an anniversary or is up for renewal. Obviously we are sitting with customers and renegotiating at that time for increases based off of you know current inflationary headwinds, so that's one.

Second one is, so today if someone were to call our Shred business this afternoon, we've had several iterations of new rate cards. We used to be a company where you put out one rate card for the year. We've now – the commercial modeling and the commercial strength is now where we are far more dynamic and reactive to both market conditions, economic conditions and competitive conditions. So we're changing those point of sale rate cards for transactional business immediately, and I think that that's – that has helped.

And then the last thing is surcharges and fees. So a lot of companies have and we finally have language in a good bit of the contracts to be able to push them through. We've got a new service cost recovery fee, we have recycling recovery surcharges and we have those – that capability, and I can tell you we've already adjusted those.

We've already taken our recycling recovery surcharge. We had that in place I think for the last year and a half if not two years. We've actually readjusted that one a few times already this year, and for the service recovery recycling fee, something similar. You make your estimates last November for what you think you want them to be coming into January 1, and then you see that January isn't matching, you know inflation continues, there are still issues, so we've made adjustments, and I would say that towards the latter half of Q1, certainly into Q2, a good bit of these are in full force with the contracts that are available to take them.

So I think that's what brings us or gave us confidence as we looked internally you know to reaffirm guidance, and we believe that that flexibility in turbulent times as we can continue to adjust, affords us that opportunity.

[Sean Dodge, RBC Capital Markets]

Okay, thank you. And then the driver shortfall earlier in Q1 you mentioned and the significant improvement you've seen subsequent starting in March, can you put the numbers around that? How much of a drag did that create on cost early in the quarter and how much has that now reversed out as you exited the quarter? I guess you said labor was an $11 million headwind in Q1. How much should that abate you know as we kind of roll forward into Q2?

[Cindy Miller, Chief Executive Officer]

You know Sean, I'll start just with some directional and then if there's anything else that Janet wants to add, she can. You know our average was 21% down in drivers due to that, and a good bit of it was we came in down this year because of the driver shortage. So we've been running you know less than optimally because of that.

And then this is – we were hit with Omicron. This was the most impactful COVID disruption that we've had since the beginning of the pandemic. When we had, you know 21% on average across all of our facilities short of just drivers, that isn't the companywide workforce, just drivers. That meant you know a 79% average of people available to work and that wasn't the same across every building. We have some facilities with you know as few as eight and 10 drivers, that where we had two drivers you know available to work on any given day.

So when you see that, we jumped in to protect the customer mode and in order to do that, you know we infused travel cost, expense, moving management people, moving support staff, whether it was flying people to difficult – more challenged areas, whether it was driving people, putting people up in hotels, doing the things we need to do, because we realized with as many national and big customers, and then quite frankly even just local customers, everybody depends on us to make the service that they expect and I know our teams worked tirelessly.

There was a tremendous amount of overtime. There's a lot of working on Saturdays, a tremendous amount of working on Sundays and when you put that type of effort into it, obviously it shows up. But I can tell you, anytime you go from 21% as an average, and it is quieted down and now it certainly isn’t optimal, but when you can cut it to 12%, there will be easing of the travel expense and of all the other, there'll be easing of overtime. There's going to be some easing of some of those other pressures.

Janet, any other specific color?

[Janet Zelenka]

Yes, so as you look at the U.S. and also [ph] trajectory here, so we are seen easing. The momentum you know as we mentioned in pricing, but also in the cost easing, but we still expect the first half of this year to be lower than you know the first half of last year, because we start lapping two key things. We have the ERP cost that is now in our normal operating expenses and we had you know very little inflation in the second quarter last year.

We actually started to see that increase in the third quarter and then the fourth quarter into this quarter, so you're going to have a natural overlap of that, and then so we’ll probably see some inflationary pressures just like every other company in the second quarter, so that will be about the pricing actions being strong and us mitigating the costs that we saw due to the acute labor challenges we had in the first quarter, so those are the two key dynamics.

[Cindy Miller, Chief Executive Officer]

And the only other color that I can give you Sean is this. In March when we started to get some folks through the door and our HR team was really pulling through some candidates for us, an awful lot of the new folks that we bring in spend the first bit of their training sitting in the seat with another driver, you know still doing just one route. So when you talk about the tremendous amount of onboarding costs, training costs, testing costs, a lot of the other things that we saw with the efforts that the team put through, you know as we get back to a normal rhythm of hiring, I think a good bit of those types of things you know don't have the same trajectory.

[Sean Dodge, RBC Capital Markets]

Okay, that’s very helpful. Thanks again.

[Cindy Miller, Chief Executive Officer]

Thanks so much. Thanks Sean.

[Operator]

Thank you, Mr. Dodge. Again, be mindful to limit your questions to one and one follow up question. The next question comes from the line of David Manthey with Baird. Please proceed.

[David Manthey, Baird]

Yes, thank you. Good morning everyone. Do the pilots you're running this year, do they make up a material percentage of overall revenues of RWCS?

[Cindy Miller, Chief Executive Officer]

No, they don't. It's interesting. We were able to find discrete areas that had small revenue impact, but covered the capabilities that we needed to test that’s ideal for a pilot situation. So the risk profile is not high on the revenue, but they do accomplish what we're attempting to accomplish which was testing their capability. [Cross Talk]

[Janet Zelenka]

They are small, but complex.

[Cindy Miller, Chief Executive Officer]

Yeah.

[Janet Zelenka]

So they do all the waste streams, they have all the complexity with the data requirement. Some even cross over and combine and have a Shred component to it. So for us they are really good microcosms of what we're going to see.

[David Manthey, Baird]

Okay, and so my fault, I've got a two-part question, so I hope they’ll allow me the time here.

[Cindy Miller, Chief Executive Officer]

Yes, [Cross Talk] go ahead.

[David Manthey, Baird]

The first part of it is, Cindy you mentioned easing in terms of the driver situation and my sense is what you’re talking about is turning overtime hours into normal full time employee hours. Probably you know it's more expensive than your base, but it's less expensive than overtime. Can you put a metric around that? When you say that situation is easing, what’s the net uplift you’re getting on the cost side from an improvement in that driver metric?

[Cindy Miller, Chief Executive Officer]

You know I think Dave, at this point in time one of the things that I can say is this, it's not – it has eased. Anytime you go from being down, you know having 79% of the work force show up to be able to drive to 88%, you know you get some improvement. However, we are still going – we still do have more overtime than we should. We still do have hiring that we have to do.

So I think – I don't think that we actually you know have it down pat [ph] yet as far as exactly what is that going to be. I just know that we've seen our ability to see some reductions in overtime; we see our ability for travel and expense. I think it was a tremendous headwind for us that really wasn't expected for the first portion of Q1 for us to deal with. So I think – I don't think we're certainly not out of it yet, but Janet any other specifics?

[Janet Zelenka]

Yeah, so when you look at the drivers of that wage adjustments, we expected it. We knew we were investing in wages which everyone do as we went into the year. The overtime was higher due to the impact of the Omicron you know going into the shortages and the employee onboarding costs accelerated, which is actually good news for us.

I would say if I had to guess most of it, I would say about half is in the wages side which will continue, but we had planned for it to cover and the other half was in the overtime and onboarding costs year-over-year, so that would be my best estimate on that, because of that $11 million that you saw in the wage inflation that we saw year-over-year.

[David Manthey, Baird]

Okay, that's helpful. So I guess the ultimate question here is you reiterated the guidance and I'm trying to understand where that confidence comes from? I mean we're simply hearing $0.32 EPS. You need to get well over 50 on average for the remaining three quarters to get to the low end of the range. And I think we just talked about one of the items, I guess this $25 million will help that $0.06 or $0.07 a quarter. I’m just trying to bridge the gap to get from where we are right now to where we're going and what's the mechanism or the key mechanisms that drive that type of improvement from here?

[Janet Zelenka]

Yes, so there's three aspects of this. There is the pricing levers. We quantified the one which is the fastest you can put in place, other than for the you know new rate cards switches, the surcharges, and that was not even including the fuel surcharge which does cover our cost and we've had it for a while. The other two levers are powerful as well. So when you look at all three pricing levers, they give us the momentum to flow through to cover costs.

Two, we're seeing subsiding of some of the you know acute situations that Cindy said in the first quarter, and we have planned for the other inflationary elements. Third, we also have the year-over-year comparative in the first half that we ease in the second half and then we see productivity kicking in, which is what we were missing in the first quarter, because any productivity we’re going to gain was chewed up by the travel costs and the shortages and everyone just doing their best to service the customer.

So those are the levers that are normalizing and we can gain traction on, and we have planned to gain traction for anything that we saw in January and February as we leave March with momentum.

[David Manthey, Baird]

Okay, that's helpful. Thank you very much.

[Cindy Miller, Chief Executive Officer]

Thanks Dave.

[Operator]

Thank you, Mr. Manthey. The next question comes from the line of Scott Schneeberger with Oppenheimer. You may proceed.

[Scott Schneeberger, Oppenheimer]

Thank you very much. Good morning all. I guess I'd like to start first on the destruction side of business. I think Janet you said service revenues were up, service stops up slightly. Could you just speak to the demand environment you know with reference to work from home and how you see that trending. And then obviously, it sounds like pricing is up a little bit more. If you can just speak to some of the initiatives there. Thanks.

[Cindy Miller, Chief Executive Officer]

So just for all the listeners, our Secure Information Destruction revenue split into two parts. It is the recycling revenue we get from recycling the paper, where we have contracts that are SOP or Sorted Office Paper based and that was up significantly. Volumes were down, pricing was up.

On the service upside, well we get paid by the stop. In North America our service levers are up 2.8% and they were up higher internationally. In North America I did say that the service stops were up slightly higher. We are seeing continued recovery in that space and we're pleased by what we’re seeing there. So you know really nothing to call out other than Shred continues to deliver what we expect it to deliver, and will gain momentum through the year.

[Scott Schneeberger, Oppenheimer]

Okay, thanks on that. And then can you just remind – and you had mentioned a moment ago that your fuel surcharges have been in place and it sounds like full coverage. Could you speak again on or just elaborate a little bit on how they are structured? On the full coverage is there much lag? And then kind of a bigger question to that is what is energy and what types of fuel as a percent of total company costs and if you can break that out at all? Thank you.

[Cindy Miller, Chief Executive Officer]

Yeah, so fuel used to be a little under 5% and now it is at 5% of our overall cost of revenue, and the fuel surcharges constructed are – constructed as Cindy mentioned, in parts of our regulated waste services business and pretty much all of the Secure Information Destruction business and the way they are indexed, they pretty quickly cover the cost. Maybe a one month lag at most depending on how the index is going.

But those have been in place for a while, so they've always been part of the margin, you know kind of flow-through components if you look at our basis points. So you might see as the cost increases in the base, you know a slight change in the margin, but it’s not like other companies or just putting these in place now. They've been part of our dynamic for a while. Did that help answer your question?

[Scott Schneeberger, Oppenheimer]

Yeah, I appreciate that color. I’ll turn it over.

[Operator]

Thank you. [Operator Instructions]. The next question comes from the line of Alexander Leach with Berenberg Capital Markets. You may proceed.

[Alexander Leach, Berenberg Capital Markets]

Morning! Thanks for taking my question. Just to clarity on the last question, the surcharge surrounding fuel cost, it sounded as though last quarter that you could only utilize surcharges with some customers, but it sounds that it’s now, not now but it’s almost all customers that experience of surcharge on fuel is that right.

[Cindy Miller, Chief Executive Officer]

No. So what's interesting is we do have it on a portion of our regulated waste and we have it pretty much across our Secure Information Destruction, but those two combined cover our fuel costs. So we feel that that were appropriately covered, whether you have full coverage by a customer or not, and that has been an existing dynamics for a while. I hope that clarifies it.

[Alexander Leach, Berenberg Capital Markets]

Yeah, that's useful, thanks. And I was just wondering, what portion of contracts are you amending renewal versus anniversary. Is that not a concern that it’s going to take longer than half a year to build in pricing flexibility in the contracts, given that they range from three year to five years in length?

[Cindy Miller, Chief Executive Officer]

No, I think – that's a great question, but conceptually every contract that we have, an overwhelming majority of the contracts are roughly three years in nature, some are larger but not most, so – and every year they do have an anniversary, and it's at those anniversary dates that we have an opportunity to take a look at economic conditions and then be able to pass some charges through, whether it's at CPI or whatever.

So there's a steady flow every year as is the normal rhythm, even last year and the year before. So as we've gotten better with our contractual language, it's been easier for us to be able to have those anniversary CPI infusions, and then for the renewals, you know to go through whether it's negotiation or whatever, to talk about new terms and conditions for the contract moving forward for the next three years.

So I think it's been a normal rhythm, and it is pretty steady throughout the year as we are signing up many, many customers today for a brand new day and we’ll do the same thing tomorrow and every day as the calendar flows.

[Alexander Leach, Berenberg Capital Markets]

And if I could just set one more question in.

[Cindy Miller, Chief Executive Officer]

Sure.

[Alexander Leach, Berenberg Capital Markets]

Just on, staying on the topic of pricing, historically there’s been a proportion of customers that have been a little bit more price sensitive than others. Is there any concern that if you put through a number of surcharges through to customers that leveraging any further pricing will be difficult in this market?

[Cindy Miller, Chief Executive Officer]

Yeah, I think you know it’s a great question and in terms of who Stericycle is today, we're very aware of several things. We are aware of the engagements with our customers, as well as the competitive conditions of the marketplace, and like everybody that's in our market and certainly adjacent markets or even completely different markets, everybody's experiencing the same types of pressures.

So to a customer base, it's engagement with them, it's making everybody aware, it's having conversations, it's doing the thing you need to do as all companies are right now in order to if you will, push through what they are seeing in terms of headwind pricing. So that's, you know that’s – we don’t – we are I think going about it in the right way in terms of engaging with our customers and then also understanding what the market will bear.

[Janet Zelenka]

Yeah, I also would say that most customers across all segments including hospitals and others your seeing price increases. So they understand the nature, the underlying costs that are happening across the board, and you know we have a very good acceptance rate and a lot of what we said at the $25 million that Cindy mentioned in her script is already in the market.

[Alexander Leach, Berenberg Capital Markets]

Okay, great. Thank you.

[Cindy Miller, Chief Executive Officer]

Thank you.

[Operator]

Thank you, Mr. Leach. I would now like to past the conference back over to Cindy for closing remarks.

[Cindy Miller, Chief Executive Officer]

Thank you, Jaquieda [ph]. So to everyone listening to this call, we greatly appreciate your interest in Stericycle and your shared excitement in our future. So thank you very much.

[Operator]

That concludes the Stericycle Q1, 2022 earnings call. Thank you for your participation. You may now disconnect your lines.