Sotera Health Company (SHC) Earnings Call Transcript & Summary

Yes. I don't want to get into particular because I'm not an expert. My team is going to write this up and submit the appropriate comments with the proper communication context. I would just tell you, time line is challenging, I think, for the entire industry. I'd say some of the some of the internal metrics around employee exposures and things of that nature are challenging. They have to be worked out. The external emissions, I feel really good about what we've done there. So I think there's a couple of things that the industry is struggling with that they'll articulate in the public comments. I don't want to get into exact specifics on which ones, but again, it's a complicated document with lots of input, and my team is working through that.

Okay. And I guess we talked about you investing ahead of this to prepare. The silver lining here is that it sounds like you're well ahead of a lot of your peers. And so longer term, is this a market share opportunity for Sterigenics?

Yes. It's too early to tell, but I feel really good about what the team has done, our learnings on this. I think if you look at a couple of the documents the EPA has got out there, they talk about a handful of facilities that have actually accomplished this, I'm pretty confident they're referencing many of our facilities in those few numbers that they do reference. It's going to be tough for many people to get to this level. They can do it with time and money, but small operators could be challenged in this. It's too early to tell what that means at the end of the day and result, but what we're going to do is make sure our facilities can operate and take care of the customers in the interim.

Okay. And then you -- in your opening remarks, but just the start to the year in Sterigenics, that was definitely a bright spot in the quarter. Maybe just give us an update on that part of the business and trends you're seeing in Sterigenics.

Yes. Sterigenics, good solid business. We have about 50 facilities around the world. Mike and the team are continuing to execute and take care of our customers. We continue to be bullish on how volumes could play out today. We've seen med device volumes and surgical procedures increasing. We'd like to see a little bit more of that translate into our volumes. Inventory has been kind of a mixed bag across customers, if it's drapes and gowns or surgical kits or cardiac devices, we do thousands of different devices, we sterilize. But overall, volumes are good. They're not great, but the team is well positioned.

And there, you've got a pretty kind of well-constructed kind of long-range looking organic investment plan that you've kind of built around your existing Sterigenics footprint. Give us a sense of how that's progressing, how much incremental new capacity you've got -- you plan to open up here over the next couple of years?

Yes, we have a pretty disciplined capital allocation process. As a matter of fact, we'll have our Board meeting next week, and we'll sit down and look at over the last 5 years, what our capital -- here's what we said we were going to do and here's what we've done and what the returns are. We target 20-plus percent returns on IRR capacity programs . A little higher on new -- existing facilities expansions and a little lower on brand-new facilities, but we look at this and try to work closely with our customers to understand what modality and what geography and the timing of that. So we feel pretty good about it. We've got 6 active capacity expansion programs going on. and we'll continue to progress those throughout 2023.

Okay. The -- if we turn to Nordion, you mentioned Q1 being a little light given the harvest schedule, but that's something that, if we just think about how that business works, you've got a lot of good kind of long-range visibility into. And so maybe just a little bit more context there.

I'd [indiscernible]. Down 70% is a little heavy. But that business, we have pretty good visibility on it. So let me explain how it works. Basically, nuclear utilities, their primary purpose in life is to generate electricity. And what they do, that's a big part of their social license, is they also help us with cobalt. And so the cobalt comes out when the utility does harvesting, when they do maintenance or refurbishment on the reactors. They are not going to shut down a reactor to grab our little cobalt out to get out to a gamma knife or the sterilization. So we kind of work in concert with them when they do their shutdowns. So we have visibility on that and it was -- and it's -- people ask, was this Russia related? It's not Russia related. This is probably our largest, most stable supplier that we've been using for many, many years for cobalt. And they just -- they told us last year, even just prior to last year, that their harvest schedule was geared towards second half of the year. So a large portion of their cobalt will come out in the second half of the year. So what happens is they shut down, we extract a cobalt with them. We ship it over to our facility in Ottawa, Canada, and then we process in a usable form to send to sterilizers like Sterigenics. It's quick turn. This stuff decays at about 12% a year. So we don't hold on to a lot of inventory. We might get caught at the end of the month and the end of the quarter, flipping over, but it's not like it sits there for months and weeks. It's a pretty quick turn. So we'll -- we have great visibility. We knew it. We projected to the investment community that second half of the year was going to be about 75% approximately of the cobalt.

Okay. And you mentioned, Russia. That's an area we certainly get a lot of questions on, but it's basically this year, you sized for less than 3%, and that number continues to get smaller as the year kind of progresses. So maybe just an update on Russia. There was cobalt that you got out of Russia as recent as I think it was last month, you said.

Yes, we -- Russia has been a supplier for us and the industry for cobalt for many, many, many years. It's unfortunate there's a geopolitical battle right now going on. We continue to get cobalt. What we try to do is people ask us if something were to happen, what could be the potential impact of the company? So we've given a forecast or guidance for the year, and that assumes cobalt continues to flow from Russia. In the event it didn't, it could be anywhere from -- we said 0% to 3% coming into the year, but since we got some cobalt in the first quarter, it's 0 to 2.5% now. And as the year progresses, we're hopeful that, that number continues to get smaller and smaller. But we're flowing cobalt every month.

And there is some investments that you've accelerated recently in diversifying your cobalt 59/60 supply over the long run. Maybe just a quick kind of like education on what you're doing there, and then a little bit on just the lead times.

Yes. So we've got to significant cobalt development programs going on. One of them is with OPG, Ontario Power Group, and we're working with them on Darlington reactor. This is a CANDU reactor. They've made cobalt and CANDU reactors for many years, and we are working with them to start to bring cobalt out of the Darlington reactors, which will happen in the next several years. These are long-range programs, take 3, 5 years minimum to get going. So we're doing a development program there. Again, that's with OPG, which is a long-term stable supplier for us. And the second one, we're in a partnership with Westinghouse. This has got more of a science project aspect to it. What we're trying to do is figure out in conjunction with them and utility operators how to get LWR, PWR reactors, pressurized water reactors, to start to make cobalt. If that happens, that opens up a fleet of nuclear reactors throughout the U.S. and on a global basis, but there's still a lot of development signs that's going to be several years, 2028, 2030. There's still more work to prove that, that will work. But that's something we're investing in as well. And then we've got a couple other we haven't publicly released, but these are all in the interest of supplying cobalt for the long-term growth of this market.

Okay. And then if we just turn to the third of your businesses, so Nelson Labs, so that was off to a little bit of a slower start to the year. Maybe just kind of walk you through what's going on with Nelson.

Yes. I was actually out there last week with the team, with Joe and the gang. First quarter is always typically a lower quarter for both them and Sterigenics, and that played out in first quarter. Like Sterigenics, we'd like to have a little bit more volume coming through. But overall, that team -- great business, and that business for some of you, may not be as familiar. It's an independent testing lab. So we do microbiological and analytical chemistry testing for the med device and pharma world. What we do in that business is help make sure the products are safe and meet their regulatory requirements. We're brought in as an independent lab to work with the med device and pharma companies. It's a fantastic business. We do about 800, 900 different tests, solely focused on med device and pharma.

And so you mentioned volumes there, you'd like to see come through a little bit quicker. What kind of -- I guess what kind of lead times do you have? What kind of visibility do you have on Nelson?

Yes. It's a shorter lead time business. If you look at it -- if you put it on a relative basis compared to the other businesses, Nordion is probably the longest, most -- Nordion has the most visibility. It's not like we're building a jet engine or a power plant, although we had that great level of visibility. But we have more visibility on Nordion that any business, then probably Sterigenics, and then Nelson's more weeks and a month or 2 where you have visibility, but not for 100% of the business. It's a shorter-cycle business. Customers do a sterilization of a product. They send it over to Nelson, [indiscernible]. Customer has a substitution of component, and they want to make sure that testing works and it meets the regulatory requirements, or they're doing -- they get a problem on the facilities, they send it to us to help them sort it out. So it's shorter in nature. Now some of the projects may take longer to play out, but it's typically a shorter cycle business.

Okay. And you recently added some headcount, some staff to Nelson in anticipation of the higher volumes coming through. Maybe just your thoughts on how long do you wait before you kind of work to adjust your cost base there?

Yes. In that business, we had a big bolster volume came in, in '21 -- 2020 and 2021, and we staffed up. But then you get into '22 when you start to get the COVID and the labor challenges. That's a labor-intensive business here in Salt Lake City, and that market was pretty challenging. So as the year progressed last year, we decided to make a concerted effort to really focus on service in our customer survey satisfaction work. And we staffed up in the last quarter of the year and it rolled into the first quarter, which we knew was a little lighter. If volume doesn't come in, we'll figure out how to trade that down. We have a decent amount of turnover in that business. We could trade down, but we wanted to go a couple of quarters and see how the volume plays out.

Okay. And then one of the ideas, one of the thesis behind that business was the cross-sell opportunity between Sterigenics and Nelson and vice versa, I would imagine. How big of an opportunity is that still? And is that unfolding like you thought?

Yes. We haven't publicly communicated those kind of synergies, but I would just give you an example. Like we -- I was out there just last week and we were talking about there's a big med device company. They had a new product. It was getting filed with the FDA, RCA. Part of the Nelson business helped with the regulatory filings, then the Nelson teams helped put together sterilization protocols. And then the product -- we ultimately put the protocols to work within Sterigenics, using Nordion cobalt. I mean it's really a nice end-to-end solution we could bring to customers. Lots of activity around validations like that as well. Customers come out with new products or new suppliers. They want to go to a new facility. We can help coordinate that within our facilities, which gets -- the customer benefit is one-stop shop and improve cycle times. Now I don't want to oversell it. The thing is not perfectly running. We do have 63 facilities around the world, so there's -- I don't want to state that we're perfect at, but those are the things that we're doing really well with the teams.

Okay. Great. We're out of time. Any parting thoughts, messages, anything before we...

No, great. We've got a critical role we play in healthcare in safeguarding global health. It's -- we're the people behind 40 of the top 50 med device companies, 9 of the top 10 pharma companies in the world, and it's -- we got 3,000 people who wake up every day safeguarding global health. It's a really great business. So thanks, RBC. Sean, thanks for your help.

Yes. Thank you, Michael. Okay. Great.