Sotera Health Company (SHC) Earnings Call Transcript & Summary

Okay. We can look to get started here, second day of the conference. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Michael, the CEO of Sotera, with us to kick off the day. Fresh off earnings, I think it was just Tuesday. A couple of days ago, you guys reported. So maybe we can start there. Maybe just kind of walk through the highlights of the quarter, given how fresh it is. You guys gave the new guidance. So maybe start with the quarter and then we can work our way to kind of some of the moving pieces on the guidance.

Yes. Good quarter. Overall, the business is performing well. We finished out 2022 pretty well. Lots of dynamics, lots of moving parts between labor challenges, inflation and supply chain. But over-all it came in slightly better than we expected, but we're optimistic about what '23 is going to look like.

Yes. Yes. And maybe on kind of starting on '23. You guys obviously get pretty healthy guidance, pretty back-end loaded, we're going to go piece by piece. But on Nordion, pretty self-explanatory. Maybe just talk through what that business is, right, with the harvesting schedule, why it's so back half loaded again, 1Q seems like very minimal revs. I think it's 75% or so in the second half then just talk through what that business is and why it is so back half loaded and the visibility you guys have.

Yes. That business has historically been very -- really a fancy word, we call it lumpy. It's been -- it's a lumpy business. And what really drives that -- so what that business does is it provides the key ingredient, cobalt. It's the only 1 of our 3 businesses that's a product business. So we get cobalt from nuclear reactors, right? So these big reactors around the world make electricity. And what we do is we get the cobalt out of the reactor and then we go ahead and take it through our processing facility in Ottawa and put it in a useful form for sterilizers and we ship that finished product, they're like pencils of cobalt, 18 inches long, we shipped that around the world, right? The timing challenges with this is the utility's primary purpose is to make electricity, all right? So it's when they do their maintenance or their shutdowns that they harvest. They pull the cobalt out and we're able to take it from there. So we're really tied to their schedules of maintenance shutdowns. And the way it works is, as Patrick referenced, in 2023, we see this throughout the year. This business is very steady. We see -- we have good visibility. We know where the reactors are. We know how much cobalts in it. We know when the harvest schedules are. I know they might slip a little bit a couple of weeks here or there, but we have good visibility. So what's happening is our probably most significant supplier that -- we get cobalt from -- Canada is our largest supply base and then you get Russia and you get India, China, Argentina. But our largest, most stable base this year, their harvest is late in the year. So the first quarter, as you referenced, Patrick, for Nordion, it'll be very, very small revenue, okay? And then the second half, 75% of the revenue for Nordion will come in the second half, and that's just a factor of the harvest schedules. And that might move up a little bit here or there, but that -- or back a little bit, but it's -- we know where cobalt is. We know the timing it will come out, we know what we got to do.

Yes. And to your point, I mean, I know it's always been lumpy. This is probably a little more than usual. But you guys in terms of the visibility, kind of the confidence level of that second half ramp, maybe just talk a little bit about that.

Yes. We're pretty happy, I actually was up with the CEO of the utility, just in the fourth quarter, just talking through it. This is a nuclear utility that has billions of dollars of revenue. They sell a small amount of cobalt. This is a high priority for them. We talk with them. I met with the leaders of both utilities up there and making sure that we've had visibility. So there's a whole -- they've got to have engineering. They've got to have maintenance crews, the safety people everywhere. This is a big shutdown for them. So -- and that's really the priority. We happen to be part of that. So we feel pretty good about it. It doesn't mean it couldn't move a little bit. But by and large, we have good visibility. We know what we got to do. And we've had this before. You're at 75% in the second half, but we've had significant lumps, if you will, like that in the past.

Yes. And you mentioned Russia, that's always -- once you want to hear that, you get some questions. Maybe just talk about the exposure, the variability that offers this year and kind of how you guys have shifted thinking in the last, let's say, year since kind of geopolitical tensions have come up.

Yes. One question that came up post earnings or maybe came up on the call. I can't remember was somebody said, "Hey, wait a minute, back-end loaded. Nordion, it must be Russia." It's not the Russia supply base that's impacting the back-end loaded. Their base is pretty stable throughout the year. it's our other large supplier that's driving that harvest schedule. As far as Russia, we said about 0% to 3% of our revenue could be impacted if we had Sotera Health revenue because there's a portion that is Sterigenics because they get cobalt as well as Nordion. We said about 0% to 3% of total revenue for Sotera Health could be impacted if we had a problem with getting cobalt out of Russia. We have not factored that in, it would be incremental to the guide. But we said the same thing last year at this time, and we worked through all that. I feel pretty confident about the -- our team has done a great job in working together.

Yes. So again, the risk in the Russia piece seems relatively minimal in terms of how you guys have managed that over the past year or so.

It does. I just want to make sure we call it out because that's something we don't control, but it's something we do a good job working through and the teams managed through it. We just want to make sure investors have visibility around that in the event something went unexpectedly in a different direction. But overall, we feel good about it.

Yes. Maybe just we can jump to Nelson Labs, another one where things should kind of ramp as the year goes, particularly on the margin piece. But maybe just on the business, maybe talk through kind of that Nelson Lab segment and the expectations for '23, what you're seeing?

Yes. So this is a service business, and we do microbiological and analytical chemistry testing for med device and pharma companies. Super business. We do 800, 900 different tests around the world. We have 13, 14 facilities around the world. Our big bases are in Salt Lake City as well as Leuven, Belgium, and we help make sure the products are safe and meet the regulatory requirements, if customers getting the problems and need a third-party objective person to come in and party, that's us. That business has done very well. When you look over the last several years, we bought that business in '16. Margins have expanded significantly. Revenues expand significantly. We've done 1, 2, 3 or 4 acquisitions in that business. What we had in 2020, 2021 is we just got a big bolus of really highly complex and profitable business around PPE testing, and we react to that. The team did a super job reacting to that. And the margins went up into the low 40s. That's not really where the run rate of that business is. This business is kind of mid-30s to high 30s kind of range. First quarter is always the lowest. It will be comparable to what you saw last year, first quarter. It's always the lowest, and then it will kind of ramp itself up in the second half -- second to fourth quarter, but not a crazy ramp. It will be a step up on a dollar basis, pretty consistent with the rest of the year quarter-to-quarter, relatively speaking. But I -- see that business, the keys in that business is high-quality testing and reporting, and the second one is just terminal time response. When customers need this, it's really important. The big overlap of this business in Sterigenics is 40% of their business is working on Sterile assurance, and making sure Sterile plants, Sterigenics and companies perform that they're consistent with that. But I'd say good business. I think you saw a bump up, 2021. We worked its way through in '22. And on top of that, we had COVID labor challenges because it's got labor in that business, pretty significant labor. So I think we're in a more normalized pattern. We expect another good year. We grew like 4.5% constant currency. I think something like that last year in that business and we expect it to continue to improve.

Yes. And I know the big kind of variables there, the demand on one side, the staffing on the other. Maybe just talk through where we are on those 2 dynamics and how you're thinking about that.

Yes. Exactly. So we had what happened during COVID is PP&E really took off, and we were one of a handful of labs around the world that could do that complex testing. We're getting -- I remember the first time a phone call, I got a call from 1 of the leaders in Asia called me, 1 of the public health officials that used to work with me and he said, "Hey, I didn't realize you guys did this testing." I said, "I didn't even realize how important it was at this point it was early on COVID." That really helped us understand this was a big opportunity. We moved our labor around and allocated there. It worked out well because some of the more complex new product development testing slowed down during COVID. Companies cut back on some of that work. with uncertainty. So I would tell you that, that was something that we had to work through as we got through '21 and '22. It was a little softer. In those more complex tests, which we call the validation area. And you look at that and then you had -- if you look at the first quarter last year, we had a situation where COVID hit. If you remember, a lot of people were shut down in January of last year because COVID, we had additional spike in COVID. So that labor was a challenge there. We had a lot of people out who couldn't get volume out the door. And then when you look at as the year progressed to labor markets, a big base of that business, I mentioned in Salt Lake City. And unemployment in Salt Lake was really low, like below 3%, like 2.3% or 2.4%, something in that neighborhood. So that was a challenge we worked through last year, but we're in a pretty good spot now. Validation business coming back a little bit gradually, which is good. And labor has been pretty stable. As you saw, third, fourth quarter, we stated that we're in a pretty good spot on the labor side, which has helped us. Our customer sat, I just looked at the scores recently, the customer satisfaction scores are great. They're in the -- actually in the '80s, and Net Promoters of Scores, near record highs, not at the highest point, but -- so I feel pretty good about hollow position on labor and buying should hopefully continue to come in.

Yes. Just in terms of the progression through the year, I know you talked about the margins, obviously ramping as the year goes. How do you think about the revenue piece on that business? We know Nordion very heavily back half loaded, Nelson Labs margins back half loaded, but maybe just talk about the revenue piece.

Yes. So Nelson, the first quarter will be lighter as it typically is seasonality-wise. Second, third, fourth quarter will be a step up in dollars, I recall, over the first quarter. But it's not like you go second here and the third way up and fourth even higher. From a dollar perspective, it's pretty consistent around the same amount of dollars, we're expecting second, third, fourth quarter.

Yes. Okay. And then Sterigenics, obviously, the last big piece there. Maybe talk about, again, just let the others know what goes into that business and again, coming off a pretty good year, how you're thinking about '23 in that side?

Yes. So Sterigenics, that business, I think we did about 10% growth last year with about 2.5%, if I remember FX impact. So I think it's probably closer to 11.5% impact in growth last year on a constant currency basis. That's our largest, probably our most stable predictable business even during COVID. If you look at it quarter-to-quarter, we are growing with the currency, the FX impact, we're still probably putting up 7.5% to 8.5% growth at a couple of points on top of it for FX. So what this business does, is we do terminal sterilization for the med device pharma companies. So think about this, what happens is a med device pharma company makes the product, they package it up, they put it in the box, MasterCard and you put it on a palace and they ship it to point of care, hospital or surgery center or whatever, maybe a doctor's office. We're the last stop, if you will. What happens is the product comes to us. We open up the doors at the facility. The product comes in and we sterilize it with 1 to 3 different key modalities, either X-ray ebeam, Cobalt 60 that we get from Nordion or ethylene oxide. And we sterilize right through the boxes, everything. We don't open the boxes up or sterilize right through it, and we make sure that there's no microorganisms on those products. We make sure that we kill anything that can be dangerous to a patient. It's a service business. Product comes in. We don't take ownership of it. We don't ship it. We take ownership -- we take it in the door. We sterilize it. Let sit there a little bit post duration in the case of ethylene oxide and then they take it and pick it up the customer x number of days later. When I look at the year, first quarter is always typically lower margins in dollars are typically lower. But second, third, fourth quarter, you'll continue to see that business do well. That business does -- let's see, so if you got -- I said Nelson's probably in the mid-30s to high 30s that steri business is a low 50% kind of margin business.

Yes. Yes, margins are always pretty impressive.

Yes. And the Nordion is a little bit higher in that. In total, the company does a 50-plus percent adjusted EBITDA margins.

Yes. And maybe...

By the way I'm speaking, I've probably got to do my forward-looking statement. I got a piece of paper from where it's here in me somewhere. We forgot. I got it.

Okay.

Before we begin, I'd like to remind everyone that some of the statements I make a forward-looking statements. Please refer to our most recent 10-K filed with the SEC for discussions of risks and uncertainties that could cause our actual results to differ materially from the projected or implied forward-looking statements. We assume obligation to update the forward-looking statements and discussion we'll talk about non-GAAP financial measurements, including adjusted EBITDA, adjusted net income, adjusted EPS and net leverage. Refer to recent earnings or to our website for a reconciliation. Sorry about that. When I said adjusted EBITDA, it reminded me. Some lawyer is probably cringing on their keypad in my office.

It's all good. And maybe staying on kind of the sterilization business. I know in-house versus outsourcing, big focus for you guys. Maybe just talk about where we are, how you're thinking about that conversion. And what kind of prompted folks to kind of outsource.

Yes. It's been a couple of years since we've really done a deep dive on where those understand, but it was about 57% outsourced, 43% in-sourced. And some companies. So Patrick, when I say in-sourced, that means some of our customers, the med device pharma companies actually want to do sterilization in-house. And then the larger portion of the market is outsourced, which is where we come into play. There are some companies I think this is a core competency for them as a med device pharma company, and they want to keep that in-house. Some of them have it in-house and also use us to help them. For us, this is our business. This is what we do. These are complex businesses, particularly Sterigenics, highly regulated, pretty complicated stuff. So what we're seeing is a lot more interest, not that people are shutting down facilities and moving over to us, but instead of putting that incremental capacity in, they'll look to us and say, "Hey, I'm not going to put another chamber and I'm not going to open a new facility. What do you guys have?" And that's what we're seeing. Now that doesn't mean that others aren't opening up small -- there's 1 med device company that's had a propensity to do in sourcing for quite some time. They do some with us as well. And they're going to open up a new facility we understand as well. So it's a combination. But generally speaking, we believe this creates opportunities over time as regulation increases in this industry and the complexity, the capital intensity required, we think this creates more opportunities for us as people shift in overall though, you see a business here that's growing high single digits, low double digits, pretty consistent.

Yes. Yes. And like you mentioned, very complex, high barriers to entry, obviously. Maybe just talk about the competitive landscape, obviously, a pretty concentrated market, let's say. Just maybe just talk about what you see there, what the competitive advantages that you guys offer?

Yes. There is complexity in how you run these businesses, right? It's a highly regulated, it's capital-intensive. We've got over $1 billion of valuated assets across the company. This is a big part of Sterigenics. For us, it's a global network, that's a big differentiation. Us being able to go do a major med device pharma company around the world and then being able to work with us across their network because we try to be located close proximity to their manufacturing supply chain points. And when we talk to these companies, that's the benefit they can talk to us about U.S., they can talk to us about Europe. They can talk to about Latin America or South America, we've got a global base there. That's a big differentiation. Just our expertise, the amount of time we've been doing this, interacting with all the different regulatory bodies around these things, high-quality reporting and visibility. It's just hundreds and hundreds of years of experience that our people have, they've been doing this, really is a big differentiator, high quality, good service, good reporting and consistency from facility to facility in the global network.

Yes. And one question we get a lot is people kind of look at just general hospital volumes and try to figure out, is that the right way to -- are you guys just tracking that? Maybe just talk a little bit about kind of the market dynamics and the right way to think about it?

Yes, that's a good -- it's a good barometer. But like in this environment right now, I'm pretty involved with a large health system that Vice Chair of the Board. And what I'm seeing in volumes right now in the hospitals outsource -- or I'm sorry, outpatient and inpatient. The numbers are booming, November, December, January, February. We're not seeing that level translate back into our business yet. And people ask, why is that? I think there's never been a one-to-one correlation because there's lots of factors that go into that, right? Like where the inventory is, we're in a supply chain is situated. So I think we've got a period of time here where it's going to have to flush out a little bit. You can't they should be somewhat correlated, but there's going to be a period of time right now. I think we're the supply chain, some people built up a lot, they couldn't get components for a while. You saw, for example, in the consumer retail business, right? Guys couldn't get inventory. And all of a sudden, they got inventory. They got the TV showing up and they have way too much inventory then on. So I think you're getting some of that going through health care right now. And it will be interesting to see if this volume continues, which we think it will in the hospital systems side in '23. I think you'll start to see the supply chain start to normalize again. We don't have great visibility. And by the way, we do ophthalmology, orthopedic, cardiac, diabetes, urology, it's a very -- wound care. We got a very broad swath of products that we take care of.

Yes. And how do you think about in terms of just maybe it's a high-level exposure in terms of that hospital volume piece or hospitals in general. What's the right way to think about just kind of the business, maybe Sterigenics specifically or?

Yes. I mean if you kind of look at -- the factors we look at is the hospital volumes, we look at R&D spend for the Nelson side. But if you're getting volumes 3%, 4%, 5% in the hospital side and patient activity, that should translate down. And I know I just described some of these things, but even during COVID, right? When all those procedures were shut down, you go back and look, I think Sterigenics grew 5% in the worst of those periods, right? And that's because of the diversity of everything we sterilize in those facilities. And that business has performed through all these cycles.

Yes. And you mentioned volume, the other lever you guys had is price, and it's quite the lever for you guys. So I think typical years, you're approaching 5%. Maybe talk about the pricing strategy, whenever people see that type of price how can these guys -- how can they keep pushing this, particularly with the margins you guys have? Maybe just talk about the strategy, how you guys are able to continue to drive really consistent price increases?

Yes. So across the company, we see the business delivers 3.5% to 5% price per year. 3.5% being the Nelson side, the low end of that range, in the middle of that range would be Sterigenics, and then the high end of that range would be Nordion. That's general -- strategically, that's how we look at last year in '22, all 3 businesses ended up outperforming that number, right? I think Nelson was 4.5%, 5%. Nordion was closer to 8%. And steri was in the 7-plus percent. That's an inflationary environment, and we have the ability to pass through price. Listen, people always ask us, "can't you get 10%, 12%?" We probably could. That's not -- what we try to do is be responsible about this thing and thoughtful. We got to make sure we have a value prop with our customers. That's what's most important in making sure we offset inflation in investment we have in the company. So that's how we kind of think in that case of 3.5% to 5%. Last year was a little harder than that because inflation was harder -- you saw -- we're one of a few companies out there that's able to offset most of that inflation. And inflation we see, by the way, is labor, utilities, a little bit on drug material, a little bit of ethylene oxide and a little bit on lab supplies, but then construction costs. Those -- that's really where we see it. But the team has done a phenomenal job in executing that.

Yes. And maybe you kind of mentioned price was above last year, which always begs the question, what's it going to look like this year? I guess what's your perspective, first, on kind of the inflationary pressures and then the pricing piece? Do you do annual increases? Does it kind of go as the year goes, but maybe on '23, and kind of the inputs there?

Yes. We think inflation and labor challenges will probably persist in 2023 throughout the year. I think different levels that you probably saw in 2022. The way our contracting is set up on the Nordion side. Like so if you look at approximately 90% of the Nordion, Sterigenics combined business is tied to multiyear contracts. It's a big number. So it's like, I don't know, I think that number is like $650 million or something like that or the $1 billion of revenue, we do somewhere in that neighborhood it's tied to multiyear contracts. So those have inflation adjusters in them that allow us, in most cases, to offset some of that with price. So when you look at Sterigenics, there's a lag occasionally on the Sterigenics side. So like if we gave somebody a price increase, their contract was up for a price increase in the fourth quarter in '22 and inflation started to pick up right now. We've had that lag because we're locked in for the next year. So that's kind of stuff that we see occasional -- there's a little catch-up, and you saw that as the year played out.

Yes. Okay. So we talked labor inflation, supply chain and another thing you mentioned. Maybe just how you think about that as we get into '23? Are things normalizing to a degree? What are you seeing in terms of budget?

Yes, for us, our supply chain is not super complex. We're more dependent on our customers in bringing the product. We're seeing to get a little bit okay. And I don't think it's where it was pre-COVID but it's more stabilized. Again, I don't know where the inventory levels sit, but that feels like there's still some noise in there.

Yes. And then maybe margins and we can jump to some of the litigation stuff as well. But the margin piece, as you touched on, I mean, it's a big highlight of the company, big numbers there. Pricing, obviously, a big lever. Just talk about the inputs. We talked a little bit about inflation, supply chain, labor, pricing. How those variables going to play out the puts and takes in '23 specifically? And then the right way to think about just that margin algorithm as the company just naturally grows kind of high single level you talked about?

Yes. So we -- as I mentioned, the price is 3.5% to 5%. I gave you kind of the walk by age of the businesses and then volume and mix is the other big component that comes in. So on the Nordion side, you're going to be low single digits on volume and mix. On the Nelson side, you'll probably be mid-single digits in steri and volume and mix and Sterigenics will probably be mid slightly higher on volume and mix. When we look at margins, obviously, you have the price piece that you referenced, a lot of work the team is doing is around operational excellence. They're doing a lot of work trying to get more throughput more productivity out of the existing asset base and different lab tests we might run or churning more cobalt through more efficiently or more load to sterilization. So I would say volume growth really helps drive margin's expansion and maintain margins, price and then operational excellence. Those are the 3 big levers that I'd say we look at.

Yes. And then maybe just the long-term auto, I think it's high single-digit organic growth. What's the right way to think about margin expansion? Obviously, it's a high number now is there a continued room for expansion.

There is. But our focus is margin dollars. That's at the end of the day, margin dollars which you eat, and that's how you're going to pay for future investment opportunities. That's how we kind of look at it.

Okay. And then maybe we can dive into some of the litigation. Obviously, earlier this year, you had the EO piece in Illinois, kind of the settlement there. Maybe just quickly at a high level, just for the audience, just talk through what we're talking about here in terms of the EO litigation. And then obviously, the settlement was very well received when you announced it in January. What the progress is there? There's that 98% number. So maybe we can start high level, what's going on with the litigation and then we can kind of dive into Illinois?

So this is a pretty complicated story. It's been 1 out there since 2018. It's hard to do a high level on this for folks that maybe haven't been -- it's hard to know where the starting point in the room is. I'll just say this. So what this all started when the government came out with concerns that the ethylene oxide was more dangerous than they originally have thought. That's kind of the premise there is. So they started to put additional scrutiny on ethylene oxide. Some context here. The mono ethylene oxide used for medical sterilization is about 100 [indiscernible] in the United States that use ethylene oxide. Approximately 1% of ethylene oxide in the United States is used for medical sterilization. So it's 99% used somewhere else, okay? Chemicals, product manufacturing, just giving you some context, right? So they came out and said, this is more concerning that we got scrutinized and then it turned into a pretty dynamic situation in Illinois around one of our facilities in Willowbrook, and we've been operating that facility since 1984, okay? I've got pictures of that facility from 1984 it was our facility, train tracks and nothing around it, okay? Over the years, houses were built up and city halls across the street and everything else. And we've been operating in the permits and people knew what we did, and it turned into a very politicized situation in Illinois, where they said this facility is dangerous. And ultimately, we made the decision that it wasn't the right environment for us with the political landscape everything else. We had permits from the state to continue to operate, we shut down, they put a sealer on the business for a period of time, but we got the right to reopen that facility and we chose not to, all right? And then we had a bunch of plaintiff floors come in and start to bring 870 claims against us saying that people have cancer in the area, it's got to be you guys, okay? So we -- listen, I have empathy, I've got family members, immediate family members of all cancer I have empathies for that. Everyone is looking for an answer how they got cancer, right? We're pretty darn confident. There's no scientific evidence that shows that we cause cancer at the levels of ethylene oxide coming out of our facilities. The reports say in 70 years, 24 hours a day, 7 days a week. People aren't getting exposure to this low ethylene oxide from our facilities is causing cancer. So ultimately, we made a decision. This has been a pretty painful process. I get a lot of congratulations to your point on the settlement. I feel really bad about the fact that we had to make a business decision to pay $400 million, and there's no proof or causation here that shows that we cause cancer, right? So we -- it was a right business decision. There was a long biased media coverage in Illinois. We lost the first verdict. It was $360 million approximately. In Illinois, you have to put up a bond for your appeal to have the right to appeal a bad verdict of $500-plus million we had to put up. And then the cost of ongoing litigation, we just felt it's in the best interest of the company to settle that. So we reached a settlement. The markets reacted very positively to that. So we're in the middle of finalizing that with $408 million settlement for all 870 cases in Illinois.

Yes. And maybe just talk...

Sorry, long story. I'm not sure if you're -- beginning and end is...

That's was a good summary. And maybe just talk through the steps here. There was a certain time frame, get people to opt in, there's a 98% threshold. Maybe just talk about -- I don't know if you guys have inkling as to where that's shaking out or just your confidence level that this is resolved with?

Yes. So first thing is we got to show up with $408 million. It's got to be funded by May 1 into an escrow account. We went out and did a term loan B raise of $500 million that Jason and our team got completed in the last couple of weeks, very successful, just talks about the strength of the business and the number of people lined up. So we did $500 million term loan B. We have the capital we're putting in the account May 1 -- by May 1. And then what happens is the plaintiffs. So there's 870, there's 4 plaintiffs that are the trial plantiffs and Kamuda, Kamuda, Schumacher and Fornic. All 4 of them have signed up for an outsized portion of that $408 million, okay? And they're signed. And then the remaining 870, there's a claims administrator that is hired by the plaintiff firms. They hired an individual that will allocate the remaining dollars to the remaining 860-some claimants. They will do that in the month of March and April, and we're guessing by late April, early May. We will see the claimants and what the settlement is per person. We are not involved in that. That is -- they get the money, and they will sort that out. They come back to us. So then in the months of May -- May, June, we have a period of time to evaluate the payments by plaintiff. There's a couple of things that have been committed to. They committed to deliver 98.6% of the claimant. So roughly 12 people. They have to deliver everybody except 12 people that can have out. If those -- then the 12 people that don't sign up and don't opt in, there are certain conditions that if it trips any of those conditions, we can walk from the deal. And so for example, I'm just making it up, I don't remember the terms exactly. But if somebody had cancer and they live 0.1 mile from the facility. It was breast cancer, and they lived their 50 years, okay? That's a high risk case, we said we don't want -- if that person opts out, the deal is over, we -- so there's certain conditions they have to make sure that those claimants don't trip -- of those 12, all right? So that's 1 carve-out. And then the other one, there's something in there if you read the documents, there's something in there about 40 claimants. If the administrator determines that out of the 870 cases approximately that 40 or more of them do not have legitimate claims. So somebody -- a claimant number 856 cite cancer when they get the medical reports, the person had Propecia or something like that or diabetes, that's not cancer, right? So they could if there's more than 40 of those that reopen the discussion for us around the whole settlement amount. But we feel pretty confident this will get done. We've raised the money, and we're pursuing that. I think it will be late July, August kind of timing when this all gets wrapped up.

Okay. So in Illinois, is there -- once, let's say, 98% come in, you make the payment. Is there potential for more claimants to come after? Or is this kind of...

There is, but it would have to be someone that's newly diagnosed.

Okay. Yes. yes.

A very broad sweep in Illinois.

Clean floors. And then Illinois well handled. -- there's also cases in Georgia, New Mexico. I know Georgia, there's like there's caps. So maybe just kind of how you think about the litigation risk outside of the [indiscernible]?

Yes. So New Mexico, just to be clear, there's no personal injury claims cases over there. That's just what happens in that case is an outside law firm both the state says, hey we think we got a case here, and we'll share the proceeds with you if you get it. And so they file a claim of public nuisance, which we haven't been able to see that substantially in any which you perform yet. So that's a little different animal. In Georgia, on the personal injury side, there's approximately 300-plus cases there. Most of -- almost all of those are in Cobb County, there's one more in another county. And then so what happens, Georgia -- has got a different approach here. They're going to do Phase I and Phase II. So in Illinois, I'm sorry, I'm going to bore you through all this. I never went to law school, my mother is still upset probably about that, but I'm learning on the job. I would just tell you, Illinois, you got into the middle of the court case and it was a free for all. In Georgia, the judge is going to go through Phase I and Phase II. They're going to take cases for general causation. If the case proves general causation, then you go to specific causation. And those are 2 steps before you get into this whole trial and everything else. So I would tell you that there's a different standard in Georgia than there is in Illinois that's significantly different. One, again, getting a little technical. There's a Daubert expert standard that is the most common across the United States with the exception of Illinois and 4 other states have a Frye standard, which basically is the level of expertise you have to have to be able to say you're an expert is a much higher standard in Georgia than it is in the other states in the 5, 6 states, which Illinois was 1 of them. The other ways Frye, Daubert. So I would tell you that the causation is a different threshold of causation in Georgia. And then I would tell you the other thing is the cap that you mentioned. Out of the $360-some million verdict, $320 million of that something was punitive damages. I would tell you in Georgia's a cap at $250,000 per case currently. It's been challenged, but it's in the courts there, but it's -- there's a cap. So I think it's a very different landscape to media coverage, the biasness and the court system is very different.

Yes. And maybe just the time line on Georgia, just I'm sure you as much as anyone wants it to be in the rearview.

Yes. I mean there's 1 case, that 1 outlier case in another county is late this year, October this year, and the other ones are going to be going to '24 to '25. But again, there's the causation steps you're going to go through the first before you get there.

Okay. And then the natural question. In terms of paying some fines as the balance sheet. You mentioned, obviously, you guys secured kind of a term loan. Maybe just talk about the balance sheet in general, where you are in terms of some of the payments and just the overall health of cash balance.

Cash is good. This business generated just short of $300 million in cash flow last year. It's projected to have another great year of operating cash flow in 2023. We have higher interest expense because we took out a term loan B that's 8-plus percent at $500 million. So we'll have higher incremental interest expense there, and also some of our debt is variable. So you're going to get a higher interest expense number in 2023. We got -- we'll fund the $408 million. We have great focus on capital deployment for CapEx. We spent a good amount of -- a little over $200 million in CapEx this year. But we have great discipline on working capital days payable outstanding, so we're good stewards of capital. So overall, we're in a pretty good spot, and then we have revolver capacity that's pretty significant as well, several hundred millions of dollars.

Yes. And as you mentioned, kind of the dealmaking piece has been a nice part of the story. You guys have done some good acquisitions integrated them really well. How do you think about the ability to kind of get back to M&A versus saving or kind of putting money aside to kind of, obviously, Illinois and who knows with Georgia, but what's the appetite right now? Is there a potential for that? Or is it more conservative wait and see capacity.

So our capital deployment priorities, first is for organic growth. When we deploy capital, we get -- we strive for 20% IRR in our programs become a 15% to 20% generally. That's our first priority. We have great capacity, opportunities for more growth. That's why you see the elevated CapEx. So that's our first priority. The second one will be deleveraging. We said we'd be 2x to 4x net leverage. We finished -- we finished just under that in 2022. That will drift up a little bit early in '23 because of this incremental $500 million. But overall, we still want to be in the 2x to 4x net leverage. And then strategic M&A is something that's really important. We've been -- we're still pretty active in dialogues with lots of different opportunities, and we want to make sure valuations are right. It's been a you saw there's a lot of M&A limitations in 2022 because of valuations. We continue to engage in that area. All 3 businesses have opportunity, and we've got a healthy pipeline. But right now, we haven't seen anything we want to act out.

Okay. I think we only have a minute left, Michael, maybe just when you think about the business, not only this year but going forward, I mean what areas are you most excited about? Where do you see the most upside as you work your way through '23 and then kind of beyond?

Yes. I would just tell you, if you think back, we went public in November 2020, we told people this business will be a high single-digit organic growth business. We'll have margins of 50-plus percent, while strong cash flow with sticky customer relationships. We will get price to offset inflation. That's basically with this company has done every single year since then, right, quarter in, quarter out. I'm excited about our ability to continue to grow this business organically. We got a lot of opportunities. We got to prioritize our capital and make sure we get up to the best programs. But if I just look Sterigenics continues to expand around the world, we've got expansion plans in all modalities in all geographies that will continue. If you look at Nelson Labs, we continue to grow a med device and pharma is a big opportunity for us. And the Nordion we're going to continue the opportunity to expand our service offering of the core capabilities and the strong fundamentals. This is a unique business in health care that's not impacted by payer reimbursement. And it's hard to replicate this model. So we're really proud of what the team does day in and day out and see in global health.

Great. We'll leave it there. Michael, thanks so much.

Great. Patrick, good to see you. Thank you.