Stericycle Inc

NASDAQ:SRCL

Earnings Call Transcript 2022-Q2

[Operator]

Hello everyone and welcome to the Stericycle Second Quarter 2022 Earnings Call. My name is Stacy, and I'll be coordinating today's call. [Operator Instructions]

I would now like to hand over to your host, Andrew Ellis, Vice President of Investor Relations, to begin. So Andrew, please go ahead.

[Andrew Ellis, Vice President of Investor Relations]

Good morning and thank you for joining Stericycle's 2022 second 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 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 one hour after the end of the conference call today until September 2, 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. and Canada and enter replay access code 770430. 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 August 5, 2022, may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without expressed written consent of Stericycle is prohibited.

I’ll now turn the call over to Cindy.

[Cindy Miller, President & Chief Executive Officer]

Thank you, Andrew. Good morning and welcome to today's call. As you will see in our results, our second quarter builds on the momentum we observed as we exited the first quarter. Our disciplined and proactive pricing actions helped offset inflationary cost pressures which led to a sequential quarterly margin improvement. Further, the frontline workforce shortage we experienced in the first quarter improved to approximately 10%, down from 12% at the end of the first quarter as we had fewer COVID-related absences and gained traction with our hiring.

Turning to our key business priorities. I'll start with the quality of revenue. We delivered another quarter of overall organic revenue growth, growing 5% with Secure Information Destruction increasing 12.2% and Regulated Waste and Compliance Services increasing 1.8%. In North America, organic revenue growth was 6.2% with Secure Information Destruction increasing 12.9% and Regulated Waste and Compliance Services increasing 2.8%.

Throughout the second quarter, we remained focused on executing our pricing strategy, utilizing our three pricing levers to help offset the continuing higher inflationary cost pressures we experienced in supply chain and labor-related costs which included higher wages over time and new team member onboarding. We estimate that in North America across both our core businesses, these pricing actions, along with SOP pricing and fuel surcharges significantly contributed to the growth rate. We expect that the benefits of our surcharge and fee pricing initiatives will continue to accelerate in the second half of 2022. For example, in the first quarter, we introduced the new service cost recovery fee for some North America hospital customers.

And in the second quarter, we enhanced our recycling revenue surcharge in North America Secure Information Destruction. These contributed approximately $5 million in revenue in the second quarter and are anticipated to contribute another $20 million in the back half of the year.

Turning to operational efficiency, modernization and innovation. I’m excited to share an update on our latest innovation, SMS revolution. This internally developed and newly patented technology modernizes our processing of sharps. This technology is currently installed in two of our facilities with additional rollouts planned.

We’ve already seen sharps processing capacity more than double in the two facilities, leading to at least a 1-shift reduction per facility. Continuing our trend of modernizing our facilities to drive operational leverage and safety improvements throughout our organization, we have begun constructing a next-generation incinerator to support operations and strengthen our medical waste competitive position on the West Coast. This facility will replace our recently decommissioned incinerator in Utah.

We anticipate that this facility will be operational in the next 18 to 24 months. Looking ahead to the 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 customers in preparation for the rollout next year. As we are now halfway through 2022 and considering the current economic uncertainty surrounding the impacts of inflation, foreign exchange rates and interest rate hikes, we are updating our guidance for the rest of the year, as Janet will explain later.

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 second quarter results.

As noted on Slide 5, revenues in the second quarter were $679.8 million compared to $672.7 million in the second quarter of last year. Excluding the net impact of divestitures of $14.8 million, unfavorable foreign exchange rates of $13.7 million due to the strengthening of the U.S. dollar and an acquisition of $1.8 million, organic revenues increased $33.8 million. Of this increase, Secure Information Destruction organic revenue growth was $25.7 million and Regulated Waste and Compliance Services organic revenue growth was $8.1 million.

As noted on Slide 6, Regulated Waste and Compliance Services revenues were $448.4 million compared to $463 million in the second quarter of 2021. Excluding the impact of divestitures and acquisitions and foreign exchange rates, organic revenues increased 1.8% in the second quarter.

North America Regulated Waste and Compliance Services organic revenues increased 2.8%. Underlying this 2.8% increase was approximately 2.9% growth from quality of revenue initiatives, including pricing levers and 1.9% growth contributed by maritime waste services. The growth in these areas was partially offset by an estimated 2% decline from lower COVID-19 related transactional volumes, such as vaccine and testing waste and patient engagement related call volumes in our Communication Solutions business.

In the quarter, we estimate that most of the growth was due to pricing as volumes continued to be impacted by the year-over-year decline in COVID-19-related services and the lagging recovery of elective surgeries. International Regulated Waste and Compliance Services organic revenues declined 2.3% in the second quarter as pandemic-related waste over classification volumes decreased from a peak in the first half of 2021.

As noted on Slide 6, Secure Information Destruction delivered revenues of $231.4 million compared to $209.7 million in the second quarter of 2021. Excluding the impact of foreign exchange rates, organic revenues for Secure Information Destruction increased 12.2%, mainly due to higher recycled paper revenues, driven by SOP pricing, partially offset by lower SOP volume. In North America, Secure Information Destruction organic revenues increased $23.3 million or 12.9% compared to the second quarter of 2021. Recycled paper contributed approximately 6.1% to the North America Secure Information Destruction organic growth as recycled paper revenues were up 57.1% or about $11 million compared to the second quarter of 2021.

The increase in recycled paper revenues reflected higher SOP pricing, partially offset by lower SOP volumes. Service revenues contributed approximately 6.8% to North America Secure Information Destruction organic growth or about $12.2 million, with the majority of the increase driven by fuel surcharges. Service stops were also up slightly year-over-year. In International, Secure Information Destruction organic revenues increased 8% or $2.4 million compared to the second 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 second quarter was $38.1 million compared to $55.6 million in the second quarter of 2021. The $17.5 million decline was principally from higher supply chain, wage adjustments and other inflationary costs of approximately $15 million, higher headcount, overtime and onboarding costs of $10 million, higher bad debt expense of $9.8 million due to normalizing bad debt as well as continued North America Secure Information Destruction billing and collection efforts related to the ERP deployment and higher adjusted litigation settlements and regulatory compliance expenses of $7.3 million. These were partially offset by revenue flow-through of $14.9 million, lower self-insurance expense of $7.3 million and lower annual incentive compensation expense of $7.1 million.

The higher supply chain wage adjustments and other inflationary costs were mainly from higher vehicle replacement costs, higher vehicle rental and maintenance costs as we continue to see delays in replacement vehicle deliveries, higher utility expenses and inflationary wage adjustments to attract and retain talent in the current labor environment. Non-inflationary labor costs were driven mostly by higher headcount and overtime to improve service levels. While fuel costs have increased, they have been offset through our existing fuel surcharges. U.S. GAAP net income was $10.5 million or $0.11 diluted earnings per share compared to net income of $29.3 million or $0.32 diluted earnings per share in the second quarter of last year. The difference was mainly related to lower income from operations of $17.5 million.

Cash flow from operations for the six months ended June 30, 2022, was an outflow of $18.4 million compared to an inflow of $149.8 million in the same period of 2021. The year-over-year decline of $168.2 million was mainly driven by the expected FCPA settlement payments in the quarter of $75.8 million, other timing changes in net working capital of $54.6 million, mainly driven by accounts receivable reflecting the continued North America Secure Information Destruction billing and collection efforts related to the ERP deployment and lower cash generated from income from operations of $37.8 million, as shown on Slide 9.

Adjusted income from operations was $82 million or 12.1% as a percentage of revenues, down from $105.7 million or 15.7% as a percentage of revenues in the second quarter of last year. Adjusted income from operations declined 360 basis points as a percentage of revenues due to the following higher costs. Ongoing IT operating expenditures of 220 basis points due to the shift in ERP costs associated with the North America Secure Information Destruction deployment in August 2021, supply chain wage adjustments and other inflationary costs of approximately 220 basis points, higher headcount, overtime and onboarding of approximately 150 basis points and bad debt expense of approximately 140 basis points. These were partially offset by commercial pricing levers, resulting in revenue flow-through of 140 basis points, lower self-insurance expense of 110 basis points and lower annual incentive compensation of 110 basis points. Adjusted diluted earnings per share was $0.48 compared to $0.67 in the second quarter of 2021.

As illustrated on the bridge on Slide 8, excluding the net impact from divestitures and acquisition and foreign exchange rates of $0.02, the remaining $0.17 year-over-year decline was driven by $0.11 unfavourability from expected higher ongoing IT operating expenditures, $0.11 unfavourability from higher supply chain, wage adjustments and other inflationary costs and $0.08 unfavourability from higher headcount, onboarding and overtime costs. These were partially offset by $0.11 favorability from commercial pricing levers, resulting in revenue flow-through and $0.02 favorability from other. Capital expenditures for the six months ended June 30, 2022, were $70 million compared to $59.7 million for the same period last year, with a $10.3 million change mainly attributable to the timing of cash payments. Free cash flow for the six months ended June 30, 2022 was an outflow of $88.4 million compared to an inflow of $90.1 million in the same period of 2021.

As noted on Slide 9, the year-over-year decline of $178.5 million was mainly driven by the expected FCPA settlement payments of $75.8 million, timing changes in net working capital, lower cash associated with income from operations and higher cash paid for capital expenditures, as explained earlier. Our second quarter DSO reported was 64 days compared to a DSO of 56 days in the second quarter of 2021. This difference was mainly driven by the timing of North America Secure Information Destruction customer invoicing and subsequent collections as discussed in the prior quarter and higher revenue in the quarter.

As shown on Slide 10, at the end of the second quarter, our credit agreement-defined debt leverage ratio was 4.02x and our net debt was approximately $1.7 billion. If the FCPA settlement payments of $75.8 million in the quarter were excluded, the credit agreement-defined debt leverage ratio would have been 3.83x. As Cindy mentioned, we are updating our 2022 guidance which is noted on Slide 11 for the following forward-looking items. One, we are raising our organic revenue growth range to 4% to 6%, up from 3% to 5%.

Two, we are tightening our adjusted EPS range to $2 to $2.15 from $2 to $2.30. This updated adjusted EPS range includes lower net noncash expenses of $0.10 to $0.15 such as annual incentive compensation and depreciation offset by higher cash operating and interest expenses of $0.18 to $0.22.

Three, we have changed our free cash flow range to $80 million to $100 million from $125 million to $155 million. In addition to the anticipated higher cash expenses I just explained, we expect about $10 million to $15 million in lower net working capital. In addition, $10 million of FCPA settlement payments that we previously expected to pay in 2023 are now anticipated to be paid in 2022. Four, we are narrowing our capital expenditure range to $125 million to $135 million from $120 million to $140 million.

I will now turn the call back to Cindy.

[Cindy Miller, President & Chief Executive Officer]

Thank you, Janet. Reflecting our commitment to sustainability, I'd like to share two important updates. First, last week, we filed our 2022 CDP climate change survey. This represents another important milestone for our ESG program and includes expanded disclosures from our first filing in 2021. Second, I'm excited to share that our Chief Commercial and Chief Transformation Officers are both in Jacksonville, Florida today to launch our 5-year partnership with the National Park Foundation, the non-profit partner of the National Park Service. Jacksonville is the first of several locations where we are supporting landscape and wildlife conservation with a focus on wetland restoration.

In summary, we're encouraged by our second quarter momentum. The actions we have taken to combat inflationary cost pressures are starting to improve our margins and we believe these will benefit our results for the second half of 2022. As always, I'd like to thank our customers, team members, the communities we serve and our shareholders for their continued trust and having Stericycle protect what matters.

Operator, please open the line for Q&A.

[Operator]

[Operator Instructions] Our first question is from Michael Hoffman from Stifel.

[Michael Hoffman, Stifel]

Janet, if we could start with the free cash flow and the firehose of information coming out of some -- I may have heard the answer to this question, I apologize if you said it but I just need to walk through. If I take the midpoint of the old guide which is 130 and the midpoint of the current guide, including having to pay the $14 million for litigation, it's about a $54 million difference. So I know the litigation is $14 million of that. I know the $10 million for the FCPA but there’s -- what’s the remaining $30 million? I think I heard you say $10 million to $15 million for working capital. So we’ll call that $15 million. So what’s the remaining $15 million?

[Janet Zelenka]

Yes. So some of it's the cash expenses that will flow through that's higher which we can -- we itemize for you. In addition, if you look at the slide, we also highlighted that interest rates will be about $0.02 higher than prior guidance as a cash flow impact as well for the year. So it's basically the flow-through of the cash items from the adjusted EPS because we have offsetting noncash items and then the items you mentioned. So you pretty much have it, Michael.

[Michael Hoffman, Stifel]

Okay. All right. And so when you gave guidance -- well, actually, I don't want that to be my follow-up. My follow-up is on growth, growth and quality. So this is for Cindy. When I think about the two business lines and you think about your initiatives around the three to five and then underlying it is a quality of rev, so that's the operating leverage. Can we talk about what's happening inside. So in the medical waste, customer types between an independent hospital and national accounts, are we starting to see new customer growth? Or is there more churn because you’re choosing to retire customers because they can’t be quality. You can’t get the margin. And I’m thinking of this in both businesses. I mean along those segments then and [indiscernible] overall, where is the new customer adds coming ultimately to help support the sustainability of 3% to 5% as opposed to current environment’s price just because of all this inflation.

[Cindy Miller, President & Chief Executive Officer]

Thanks for that, Michael. It's a great question. And one of the things that I can say that we're very pleased with is we continue to see sequential growth. It zigs and zags between which business unit on any given quarter based on a comparable. But for the most part, underlying that is trends where we are winning new business. Now I will say on the regulated side, as you know, there were steady years of decline, specifically in our independent space, the independent space is what we call it now. So we continue to drive our efforts. Number one, we took a look in our or revamping of who we are. We've updated an awful lot of the services that we provide the independents.

And as a result, we are seeing improvement there and certainly gaining traction. And then on the larger hospital side, we are winning new logo. We are -- I think I've said before, regionally, we have different, when you say market share regionally, we're different sizes in different places and there's still plenty of opportunity for us to grow and I'm very pleased with the sales organization's efforts to win new logo and put us in places that help improve our density.

On the shred side, we're very happy with that. With an almost -- with a shutdown of the world and we continue to grow as we come out of that and as our customer base continues to get back into the office, certainly not there yet and the volume of paper may not be there. But I think that's a good story for us. And that is a constant push on winning new business. So the team is very focused on the organic part of growth.

[Michael Hoffman, Stifel]

Okay. Those are my two.

[Operator]

Our next question is from Sean Dodge from RBC Capital Markets.

[Sean Dodge, RBC Capital Markets]

Congratulations on the strong EBITDA production in the quarter. Maybe going back to the guidance. Janet, in your prepared remarks, you mentioned during Q1, there was a lot of disruption, extra costs related to absenteeism. I’m not sure if I missed it or not but to what extent did that normalize in Q2? And then as we look at quarters three and four, are there still some elevated levels of kind of one-timing cost that should continue to taper. Are there other costs you can drop out that would be additive to the acceleration of surcharges that Cindy, you mentioned? Just trying to understand how to think about maybe the visibility you have on the EBITDA cadence going into the back half of the year?

[Cindy Miller, President & Chief Executive Officer]

Yes. Sean, I know you asked that of Janet. I'm just going to jump in a little bit just with a few things. Janet can give a little bit more color. But I'll give you an example. That first quarter when we came off of the New Year, down about 22% on average which meant some places were worse off. We saw a tremendous amount of operational expense that had to go into -- it was in overtime, it was in moving and shifting resources to different places here in the country so that we can help out to continue to provide service for our customers. So we had a good bit of that expense quite frankly. We then saw some of that in terms of a peak, if you will, in terms of onboarding costs of new employees that we have now that we’ve put on. So I think as we move forward, a key for us is continuing to watch overtime and continue to reduce it in places where we have better staffing, make sure that we pull those types of costs out.

And also, we’re very excited about seeing those new employees start to ramp up in terms of their ability to be more productive. As you know, when you bring somebody on board, they’re not quite as – they don’t have the whole routine down as pad as someone who’s been around for a few years. So I think those are two key things that we see to your original question about our some costs going to taper off. For us to deliver in the second half, we need to make sure that we’re pressing on specifically both of those levers as we get into the back half of ‘22.

Janet, anything else to add?

[Janet Zelenka]

And as you talk about the guidance for the rest of the year, it really is building on the momentum we saw between Q1 and Q2. As you remember that we had always said that the first half was going to be worse than the second half. And I think we're seeing the momentum that we indicated that we would see in this quarter. And as we look at the latter half and what's underlying the guidance, I would roughly say that the improvement you're going to see is about 1/3 price, 1/3 volume and 1/3 efficiency speaking to Cindy's point about that we now have the staffing levels in a better place and that they are being trained and then they can drive improvements in the second half of the year.

[Sean Dodge, RBC Capital Markets]

Okay. That's very helpful. And then I guess if we step back here, so despite -- well, it looks like it to be a little more challenging inflationary environment than it was the case when you first contemplated the long-term guidance. You left your longer-term free cash flow guidance of $400 million between 2024 and 2025 unchanged. Maybe talk about are these inflationary pressures in your ability to mitigate them with price increases? Is there anything that’s changing there that maybe about the effectiveness of those that affects your conviction and your ability to achieve that $400 million? I guess anything about what we’ve seen inflationary pressures and surcharges that maybe changes your views on that $400 million?

[Janet Zelenka]

So I would say, we're certainly moving on certain times in the economy, recession, inflation, et cetera. So we are managing through that and being very proactive about it. But we did put that $400 million out there. And if you look at our cash flow, as we say for the year, if you add back basically $90 million of payments that are going to go out for the FCPA to that range, you can see we're on the trajectory for that $400 million even in yet another challenging year in the world. So it's a lot dependent on our execution and we will continue to monitor the economic trends. But right now, we think this business can generate the cash that we say.

[Operator]

Our next question is from David Manthey from Baird.

[David Manthey, Baird]

You noted in the press release timing of working capital items and then you cited that accounts receivable were $55 million higher. You might have addressed this in the preamble, I apologize if you did. But does that tell us anything about the pricing actions? Or is it higher paper prices or just randomness? Could you unpack that for us?

[Janet Zelenka]

The accounts receivable that we largely see in the quarter are largely driven by the Secure Information Destruction remaining catch-up we're doing on receivables. You may have mentioned -- heard me mentioned in the past couple of quarters. We think most of that will sort itself out by the end of the year. There's just some normal timing of other working capital changes. And I am encouraged by the catch-up we're seeing instead with the receivables exceeding the revenue in the last couple of months of the quarter. So that is -- that will right itself over time. And I think it's just normal stuff that happens at the end of the year with your cash flow of your net working capital.

[David Manthey, Baird]

Okay. And then just more of an open-ended question here. I think you talked before about 1/3 of your book coming up throughout the course of the year. And then, of course, you have these surcharges and you’re trying to move as fast as possible to reach equilibrium relative to your inflationary costs. Can you just talk about how well you think you’re positioned? How close you are to being caught up at this point? And how do you think about the third and fourth quarters as it relates to those inflationary prices that you’re demanding from your customers relative to the inflationary costs that you’re experiencing on your P&L?

[Cindy Miller, President & Chief Executive Officer]

Yes. Dave, great question. I think one of the things that we're most pleased about coming out of that first quarter is that -- we talked about prepricing levers. We talked about adjusting costs upfront for a customer that we're just acquiring sometime today, a new customer. We talked about having to pass through CPIs and renewals. And to your point, they are 3-year contracts but we are engaged with them. Even if it's a 3-year contract, they do have an anniversary date this year. So it may not be a renewal. But we are engaged with that book of business to pass through CPI costs which we've continued to adjust based on what current economic conditions are.

And then the other thing, I think, that really showed discipline and I think engagement with customers and flexibility and I think a little bit more nimbleness on our part is we talked a good game in terms of being able to pass through fees and surcharges and make adjustments. And then we saw momentum coming out of Q1 with our ability to turn those on, meaning you're giving customers the contractual amount of days in advance to let them know what's happening. You're out and one-on-ones with them. And I think based off of the tremendous amount of work that our commercial, finance and operations teams have done, we saw about a $5 million yield from those fees and surcharges in Q – in the first half of the year. Really, I would say it was end of Q1 and then Q2 is they all didn’t turn on at the same time. And we’re expecting that to yield about $20 million in the second half of the year.

That’s significant for us. But I think we’re also looking at it proactively. If we need to make any other adjustments to any of those surcharges or fees, if inflation were to take another big uptick, if we were to see something else, I think our position of being more flexible is a – we are in a much different stead today than we had been over the course of the last few years. And I think that’s a testimony to the team.

[Janet Zelenka]

And then, David, I just wanted to add, if you look at our overall retention rates, they're kind of consistent with the historical trends which I think is indicative of what Cindy is saying. And I just wanted to clarify, I said receivables were higher than sales, I meant collections are higher than sales for the last couple of months.

[Operator]

Our next question is from Scott Schneeberger from Oppenheimer.

[Unidentified Analyst]

It's Daniel [ph] on for Scott. I’m curious on volume. It sounds like volume is progressing, maybe bit better overall here coming into the back half. Could you elaborate a little bit on the segment level and give us a little bit more color on the drivers?

[Cindy Miller, President & Chief Executive Officer]

I think are you asking -- and I'm sorry, are you asking drivers, meaning our actual service providers and the staffing situation or the drivers of revenue growth across any of the businesses?

[Unidentified Analyst]

The segment drivers of volume, so on the revenue side?

[Cindy Miller, President & Chief Executive Officer]

Yes. I think a couple of things. I think here's the best way to answer what we're seeing, I think, from an industry perspective. So in terms of -- we're continuing and our plan for the second half of the year is continuing on a positive growth trajectory. Organic revenue growth and that's in spite of, I think, from an industry perspective, elective surgeries still are not back to pre-COVID levels, whether it's -- I think there's been an awful lot of discussion about health care and labor shortages, doctors, nurses and support staff. What we're very positive about is demand seems to be there as everything that we're monitoring says that there is a waiting list. Unfortunately, it isn't matching the ability for the industry to staff it. So for us, we're continuing to see growth but certainly not -- we're not expecting it to be -- to have some big surge. I think that's going to continue to steadily increase. We do see COVID continuing to decline, home testing, vaccination declines. So we see that as a standstill but we're very positive over the fact that maritime has now been there in order to take the place of some of that COVID decline as we had hoped. So I see that continuing moving forward.

And then on the shred side, I think we're still not settled yet. I don't think the industry has settled yet in terms of everybody being back to what is the new normal. I know there are still some major tech companies and some really big companies that have set targets of September 1, the beginning of the New Year. So -- but yet, we're still very positive with the shred business as we continue to see stops are increasing and they have sequentially since the great lockdown, if you will. So, I think that's a pretty good industry outlook and maybe an idea of what we see as -- and we all know, as demand -- as the volume comes back, it will be in hospital rooms, it will be in surgeries and procedures. And I think that as we still see staffing shortages in hospitals, we're not quite there yet.

[Unidentified Analyst]

That’s very helpful. Shifting gears a bit to operational efficiencies. I mean if you can speak to how you’re progressing with initiatives like automation or route optimization. And maybe give us a feel for how offsetting that is to the cost inflation you’re exhibiting?

[Cindy Miller, President & Chief Executive Officer]

Yes. I think those are great questions and things that as we're getting more and more folks in the door and we're building up the Stericycle team, we're going back to the core transformation portion of who we want to be which is a far more efficient company. So we did see gains going through the pandemic -- leading up to the pandemic, going through it. And then, staffing did hurt us. But our goal internally is whatever we're going to turn around and give anybody as a yearly increase, we've got to figure out how to pay for it from productivity. Our focus for second half of the year for us to continue to drive results is we do need to see improved reductions in overtime. We are very focused on metrics that we now have, specifically on the shred side of the business with this new system. We are very focused on internal metrics that align with our financials to make sure that we are improving productivity, whether it's -- how we handle volume inside a plant, whether it's driver capabilities on road. But there's an awful lot of efficiency there.

And then on a broader note, if you take a look at the modernization or the automation that we're putting in, certainly, conveyance and a lot of the capital expense that we're putting into many of our facilities is making a difference. And then you've got bigger items like this SMS revolution, our newly patented technology for sharps processing. Anytime that you can put in a change of equipment and you can take down a shift, that's helping us in terms of we don't have to go hire new folks. We can redeploy those resources to other areas where we may already have staffing shortages and we're reducing costs as a result and potentially improving service. So, those are all very exciting for us. We continue to drive it. And I’m thrilled that the team is still doing these things in spite of the – a lot of the challenges that we are facing. So thanks for that question. As you can tell, I’m pretty excited about us getting back to our operational efficiencies.

[Operator]

[Operator Instructions] We have no further questions. I'll hand back over for any closing remarks.

[Cindy Miller, President & Chief Executive Officer]

Thank you. Thanks, Stacy. We appreciate it. To everyone listening on the call, we appreciate your continued interest and support in Stericycle and we also appreciate your shared excitement in our future. Thank you very much.

[Operator]

Thank you, everyone for joining today's call. You may now disconnect your lines and have a lovely day.