Sotera Health Company (SHC) Earnings Call Transcript & Summary

Good morning, and welcome to the Sotera Health Company 2021 Annual Meeting of Stockholders. Before we begin, please note that some statements made today may be considered forward-looking statements. The matters addressed in these statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our 2020 annual report on Form 10-K and our most recently filed 2021 Form 10-Q for a description of these risks and uncertainties. I will now turn the conference over to Mr. Michael Petras, Chairman of the Board of Directors and CEO.

Good morning. I'm Michael Petras, Chairman and CEO of Sotera Health. It's my pleasure to welcome you to Sotera Health's first Annual Meeting of Stockholders. I'd like to take a moment to welcome and introduce our Board of Directors. Our Board is comprised of individuals with deep experience in management, finance, strategy, ESG matters in health care or professional service industry expertise. Our Board brings a wide range of perspectives and judgment necessary to guide our strategies and my other execution. Joining us virtually today are Ruoxi Chen, Sean Cunningham, David Donnini, Stephanie Geveda, Ann Klee, C. Mihas, Jim Neary and Vince Petrella. I'm also very excited to welcome our new director nominee, Dr. David Wheaton. David has extensive experience in the biopharmaceutical industry, including health policy, patient safety and regulatory affairs. Also with us today are Aaron Schwartz and Greg Folger, representing Ernst & Young, our independent auditors. Copies of today's agenda, the rules of conduct and the proxy statement and annual report are available in the meeting materials section of the virtual meeting website. While we're excited to kick off our inaugural annual meeting, I want to acknowledge that today's virtual meeting format is different from many -- from what many of us are accustomed to. The decision to host our ingoing virtually was made in light of the continuing fight against the COVID-19 pandemic, public health official recommendations against public gatherings and our priority to protect the health and safety of our stockholders and others. Because of the virtual annual meeting format may be unfamiliar to many, I'd like to first ask our Corporate Secretary and General Counsel, Matt Klaben, to explain the mechanics of today's meeting, after which we will move to a -- to the formal items of business. There are 2 proposals. First is the election of our 4 directors to serve for a 3-year term, and second is ratification of the appointment of Ernst & Young as the company's independent auditors for 2021. After voting has ended, we will receive a preliminary report of the voting results in the meeting's formal proceedings will adjourn. Then I will give a short presentation of the company, and we have time for questions. Matt, will you take us through the procedures for today's meeting?

Sure, Michael. Good morning, everyone. First, I want to highlight the rules of conduct of the meeting. The only business to be conducted at the meeting are the matters set forth in your 2021 proxy statement and notice of annual meeting. Only stockholders of record as of April 1, 2021, certified beneficial owners on that date or their proxy holders are permitted to submit questions and vote at today's meeting. If you haven't already voted your shares or if you previously voted your shares and would like to change your vote, you may vote your shares during this meeting by clicking the Vote Here button at the bottom of your webcast screen. Please remember that if you already voted by proxy, it is not necessary to vote again. Voting will remain open until after the presentation of the 2 matters to be voted on at this meeting when we conclude today's formal proceedings. Second, at the conclusion of today's formal proceedings, we'll host a question-and-answer session, during which we intend to answer questions submitted during the meeting. You may submit questions at any time during this meeting by typing your question in the question box on your webcast screen. If we receive multiple questions on the same or very similar topic, we may consolidate those questions-and-answer them together or choose one question that represents the multiple questions. We do not intend to address any questions that are, among other things, irrelevant to the meeting matters or the business of the company, derogatory and bad taste or not otherwise suitable for the annual meeting. Recording of the annual meeting is strictly prohibited. Michael, back over to you.

Great. Okay. Thanks, Matt. With that, let's move on to the formal proceedings. The company's mailing agent has provided us with an affidavit indicating that the stockholders of record have received appropriate notice for this meeting. Our mailing agent commenced distributing materials to the stockholders on April 15, 2021. Accordingly, this meeting has been duly called. Stockholder voting has been open since 9:00 a.m. and will close after I announce the second proposal at this meeting. Scott Leffler, who has been appointed by the Board of Directors as the Inspector of Elections. On April 1, 2021, the record date this meeting, there were outstanding and entitled to vote a total 282,875,598 shares. Scott has tabulated the proxies and has informed me that there are at least 274,970,000 shares of stock represented by proxy or approximately 97% of all the shares entitled to vote at this meeting. The shares represented exceed 50% of the shares entitled to vote at this meeting, which means a quorum is present. Accordingly, this annual meeting is duly convened and will proceed to the transaction of business. I'll now move to a review of the proposals and the Board of Directors' recommendations to the stockholders. The first item of business is to elect 4 directors to serve on the Board of Directors. Each of whom will serve a 3-year term expiring at the annual meeting of stockholders in 2024. Information about the nominees is contained in the company's proxy statement. Since no other nominations were received prior to the deadline established in the company's bylaws, no additional nominations may be made at this meeting, and the nominations are now closed. Under our corporate governance guidelines, since these director elections are uncontested, the election of each director requires the affirmative vote of a majority of votes cast, excluding absences -- absentees. The Board of Directors recommends a vote for each of the 4 Director nominees. The second item of business is a ratification of the selection of Ernst & Young LLP as the independent registered public accounting firm for the company for the current fiscal year 2021 as described in the company's proxy statement. A majority of the votes cast at this meeting is required to ratify this proposal. The Board of Directors recommends a vote for the ratification of Ernst & Young LLP as the company's independent registered public accounting firm for 2021. I now ask Matt to give some preliminary voting results.

Thank you, Michael. The polls are now closed. That I will report on the preliminary voting results of the 2 items of business that were presented. The inspector of elections has indicated that each of the 4 Director nominees has received at least 90% of the shares -- total shares voting, which means the 4 Director nominees have been elected to serve on our Board of Directors. The ratification of appointment of Ernst & Young as the company's independent auditor has been approved with at least 99% of the total shares voting. We will report the final voting results in a Form 8-K to be filed with the Securities and Exchange Commission. Mr. Chairman, back over to you.

Thank you, Matt. This concludes the formal portion of this meeting and our 2021 Annual Meeting of Stockholders is adjourned. We will now proceed to the business presentation portion of this meeting, followed by a question-and-answer session. I'm really excited this morning to take you through a presentation on our company overall and give you a great overview for the company. For some of you who may not be as familiar. Our mission is safeguarding global health, and we do that through our sterilization services, lab testing and advisory services businesses. I'll take a moment here to explain what we do, how we do it and the results that it leads to. We're a leader in sterilization services via 2 of our business units, Sterigenics and Nordion, and we're a leader in lab testing advisory services via Nelson Labs business unit. In the Sterigenics business, this is a service business. Here, the customers, many of the customers you might know, med device and pharma companies make their products, pack them up, put them in boxes, put them in cases, put them on pallets. They then ship to one of our Sterigenics facilities around the world. We have 50 facilities around the world. We take the product and we go ahead and provide terminal sterilization to make sure the products are safe of microorganisms. We go ahead and sterilize right through the packaged materials. We use 1 of 3 key modalities; cobalt gamma radiation, ethylene oxide or E-Beam. Our second business unit is Nordion. This business is based in Ottawa, Canada. In this business, this is the only one of our 3 business units. That's a product business. In this business, we provide our customers, sterilization companies like Sterigenics or Sterigenics competitors, we provide cobalt-60. The cobalt-60 is the key ingredient used for cobalt-60 gamma radiation sterilization. By having this business, Sterigenics and Nordion combined to be the only globally vertically integrated cobalt-60 sterilization company in the world. Our real core capabilities in this business is our long-term supply arrangements with utilities, our ability to procure and move and process this cobalt into a usable form for sterilization and then logistically to ship it around the world. This too is a very highly regulated business like the Sterigenics business. Our third business unit is Nelson Labs. In this business, we're one of the leaders in lab testing advisory services. This, too, is a service business. A lot of the customers that I referenced with the Sterigenics business, the med device and pharma customers overlap here with Nelson Labs. There's approximately 70% customer overlap between the 2 business units. In this business, we test products to make sure they're safe and meet the regulatory requirements. That gives you a little foundation of what we do, and how we do it. We really work with these blue-chip customers that I've referenced a couple of times share on multiyear contracts. We have very sticky relationships. We leverage our global network, which is really a competitive advantage for us. We have 64 facilities around the world. I referenced earlier the 50 in Sterigenics, and then we have 14 facilities between Nelson Labs and our Nordion business. We're a global leader in tactical and regulatory expertise. You don't just wake up one morning to see you want to get in these businesses. You have to have deep domain expertise, and that's really what we provide across our business units. We have significant levers for growth organically and inorganically. But key to this company is really the foundation of our culture, really in the focus around our value, safety, quality, accountability and excellence. What does this all lead to, and I talk to you about the businesses and how we do it, at least the very strong results. This company, Sotera Health has grown every single year since 2005. I want to repeat that. We have grown revenue every single year since 2005 in Sotera Health. We have over 50% adjusted EBITDA margins. We have a large and growing TAM of over $33 billion. We have a consistent track record of cash flow. We're well positioned for growth in the global health care market. This is a very unique asset. Our capabilities and scale and know-how are not easily replicated, and our customers depend on these mission-critical services that perform in any economic cycle. I hope you agree that this is a very unique asset. On the next page, you can see some of the products that we want to try to bring the life for you, for example, is a product that we interact with our customers day in and day out across the health care supply chain. On the med device side, there's many products, I'll give you an example of an orthopedic implant. In this instance, if it's a knee or hip replacement, we're involved early on with material characterization in our lab business. We'd be involved in help put drilling plans over Sterigenics. We would sterilize a product like this in Westerville, Ohio in our Sterigenics facility, using cobalt that comes from Nordion out of Canada. And then our team at Nelson Labs will make sure that this really assurance plan work. And actually, we have a safe product at the end here that is free of microorganism. This is the kind of end-to-end capability we bring to the marketplace. You see other examples on this page, collection swaps. We sterilized a lot of those collection swaps during COVID-19 in this global pandemic. We did that in our facility or in our Charlotte facility. Personal protective equipment, caps, gloves, gowns, masks, we're involved in sterilization, if it's required, but also in our Nelson lab business, we do a lot of work on looking at the materials and trying to assess -- to provide the filtration you need. Can you breathe through them? Are they flammable? Do they withstand sterilization if they need it? We really help as an independent third-party in that case in helping make sure the manufacturers have a product that's safe and meets the regulatory requirements. If you move to the right side of the page, a couple of examples on the pharmaceutical side on inhalation. Some of you may be familiar with folks that have asthma. They take these little inhalers, they squeeze down the low canister and gas is inhaled into the lungs. In this instance, we work with the manufacturers to look at the interaction between that little canister that holds the gas and canister and looking to make sure if there's any particulars that come off that canister and get into the gas that's immediately inhaled in the lungs. And we do a lot of work in trying to identify any of those chemicals that may be coming off those canisters. On the injectable side, we do a lot of work on sterilization of these products. So I would just tell you, across the day in the life of a typical health care application, Sotera Health plays a critical role in safeguarding global health and these mission-critical services that we offer to our customers. I'll now transition to give you a little reflection on our financials. On this page, you can see our financials from 2018 to 2020. As you can see, our business continues to grow on the top line on solid single-digit revenue growth, driven by our capacity expansions and increased demand for our services. We continue to perform on an adjusted EBITDA basis as well, growing double digits in that the last several years. We've had over 450 basis points of adjusted EBITDA margin expansion since 2018. On an EPS basis, you see here that we decreased our adjusted EPS in 2020. It was really driven by our interest expense increase, but we see that turning around in 2021. Speaking of 2021, if you go to the next page, you could see, we just recently announced our first quarter 2021 results, and we're really proud of the performance of our teams. Our revenue grew 13% across Sotera Health. Our adjusted EBITDA grew 15%, as I referenced a slide ago, our adjusted EBITDA has turned around and our adjusted EPS is now up 80% and -- on a year-over-year basis. So overall, we feel really good about how our team has performed in the first quarter this year, and we're optimistic about what the rest of 2021 looks like. This a short presentation on the company. I hope you could understand why I believe we're a global leader in the markets we participate in. We have strong financial performance. We've grown revenue every single year since 2005. We've had significant adjusted EBITDA margins, excellent visibility in the business. There's barriers to entry to try these attractive returns. We have a track record of performance. We have expertise, and we have scale, large growing and addressable market of $33 billion TAM. We are trusted partner at scale with our customers. As I mentioned here earlier, we have 64 facilities around the world. In our lab business, we have over 800 different tests that we perform for our customers. Our customers rely upon us for these mission-critical services. Strong operational excellence. We've got a platform that's geared for continued M&A. Over the last several years, we've done 10 transactions, 2 of them transformational, and that would be the Nordion business in 2014. And the Nelson Labs in 2016, and since then, we've done 8 bolt-on acquisitions. We have an experienced and established management team that's capable will continue to perform over the long run. So I hope you could see the excitement that the team I have here at Sotera Health and why we believe we have such a unique asset, and we're excited about the growth prospects that lie ahead. And now I'll hand things over to Matt, who will host the question-and-answer portion of the meeting. Thank you.

[Operator Instructions] Mr. Chairman, I don't see any questions at this time. And I turn it back over to you now for concluding remarks.

Thank you, Matt. That concludes today's meeting. As mentioned earlier, this is the first annual meeting of Sotera Health Company in historic moment for all of us. Thank you to our Board of Directors, who joined us virtually today. I'd also like to take this opportunity to thank our employees, who demonstrated tremendous flexibility and commitment this past year. Thank you to our customers and partners for your ongoing support. And finally, of course, thank you to our stockholders. On behalf of Sotera Health Board of Directors, we appreciate your continued trust and support as we execute on our strategy and mission of safeguarding Global Health. Thank you, and enjoy the rest of your day.

Thank you for attending today's meeting. This conference has now ended. You may now disconnect.