Sotera Health Company (SHC) Earnings Call Transcript & Summary

[Audio Gap] Jason Peterson. So look, the way I like to start this is, give you an opportunity to level set on the quarter, how you see things, the good, the bad, the ugly from the quarter and the outlook, what's the state of Sotera Health?

Good. We're in a good spot. As you know, we had earnings, I guess it was last week now. We see pretty stable situation. Obviously, we expected a big second half for the Nordion business as we stated all year, and we see that playing out the way we expected in the [indiscernible] the fourth quarter and the year in total. And then Sterigenics and Nelson, we see that business being relatively flat for the rest of the year when you look at those in totality. But overall, we feel good about where we're at in bringing home the year [indiscernible].

Sterigenics, let's start there. For the last couple of quarters, year-on-year, you're up 5%. Kind of within that, you've reported volumes down 1 or 2 points. Obviously, we've all been monitoring kind of the destock cycle, if you will. It seems to be kind of with medical device customers -- I guess, step back, like what's been going on there? And do you have any evidence that we're about to see light at the end of the tunnel on order patterns?

Yes. I think context would be helpful in Sterigenics. This is a stable business. It's grown 30% over the last 3 years. Volume is plus or minus a couple of percent, right? It's not like you're up 20% and then you're down 10% the next quarter. It's a pretty stable business and a pretty tight [ TAM ]. We've seen customers having destocking. We called it early, we saw this playing out. We said volumes would be a little choppy in 2023, it's kind of playing out that way. Some categories are doing really well and other categories are down. It's not all bad just -- it's a mix. It's pretty diverse, they got thousands of customers. And you got volumes that are flat to down a couple of percent, but it's not like you're down 10%, 15%. It doesn't mean some categories aren't, but when you look at across their categories of products and diversity of their customers, pretty stable.

Geographically, any variances?

Yes. I would say we've actually felt U.S. has been a little choppier. Europe has been pretty resilient. I mean I give our team credit. If you look over the last several years, Europe continues to perform pretty well.

What about some of the category -- I mean knowing it's you're broadly exposed and there are some things up there, some things down like some of the COVID-era categories, the PPE is one that stands out, maybe kind of globally a reduction in stockpiling of items like that from governments is something we've monitored or flagged earlier this year. Stuff like that kind of do you feel like where does it stand in terms of...

Some of the PPE -- Remember, not all PPE is sterilized, but the portion that is sterilized, we've seen destocking of that, some in surgical kits. Obviously, you see some of the big bioprocessing companies, and although it's not a huge number for us, you've seen them destock. Food has been a little choppy in a couple of areas. But then I would tell you, overall, there are still categories that are doing pretty well within our portfolio also. So it's not all down. That's why the business is down a couple of percent, not down 20% or 30%...

How much is food as a portion of Sterigenics.

It's small, it's less than...

What kind of -- I mean what are you sterilizing there?

I'm not going to get into details of some of our customers, but there's some decontamination [ aspect of it ].

So I guess the point is taken, which is volumes are down too, up too, that's kind of the natural ebb and flow of this type of business, you have long-term contracts, you have a lot of visibility. It's steady. It's a highly consolidated market, kind of 2 players. When you build a long-term Sterigenics model and build a new plan and add a lot of capacity, is the volume -- what is the volume growth expectation? Is it 2? Or do you see a future where volumes growth, 3, 4, 5 consistently?

Yes. Well, we've stated over the long term, we think that business can grow high single digit organically. You got 4%, 4.5% price and then you get the rest in volume mix. So you get [indiscernible] 3%, 4%. That's something that has been in our long range. We are achieving that pre-COVID. We see that returning. Obviously, when you start to think about the out years, in the mid to long term, we see that returning to those kind of levels, it will be a gradual ramp-up as we go through '24. Is what we would expect.

You talked about adding capacity. I mean I think clearly this -- and we just spoke with your peer, I mean, clearly, the supply-demand equation is out of balance in some ways in favor of, I think, the vendor and EO is especially tight but also there's a lot of demand for radiation sterilization and clearly, signs of more outsourcing. Within your $200 million CapEx this year, kind of what is the Sterigenics number? And how do you view kind of the growth investment that's happening there right now versus maintenance dollars.

So I would just tell you, in total, when you look at -- we'll have somewhere around the $200 million [indiscernible] guide range of CapEx. We don't break it out by business externally. I would just tell you, we are very focused on free cash flow and making sure we have the right conversion. And we're in elevated period right now of CapEx and so a couple of key programs going on. One is asset expansion on the Sterigenics side, which are being driven by our customer demand. It's all modalities in all geographies. We've pulled off a lot of those in the last several quarters. We just talked about one, we're activating now. When I look at the other -- big is the cobalt development. So that's another big program. I think the last major cobalt development we did was in early 2000s, right? And this is -- I had an investor ask me this morning and like why now? Why you're doing -- that's about where the supply and demand is -- there's enough demand right now of cobalt. We've got to get more supply out there, that's something that we're working on. This isn't something like I just put down the local hardware store and they [ have one ] cobalt [ today ] can I [indiscernible] deal and get it. It takes years and you got to line that up with the regulatory bodies. The Nuclear Regulatory Commission has got to approve that. You got to put a license amendment request and then you've got to work with utility partners. It's going to take quite a bit. These are multiyear projects. We still don't -- in our last call exactly how we see that capital outlay, but that's another aspect of critical development for us to make sure we can supply cobalt for next [ 30 ] years, right? So those are pretty good. And there's some aspects to the CapEx that we've talked about in the past that are just more facility enhancements to make sure we're complying with the new [ regulations ].

On Sterigenics. I've always been impressed by kind of the visibility you have and you don't build it and hope that folks come. There's kind of a lot of comfort you get around filling that space before the shovel goes into the ground. So maybe we could just refresh a little bit on your kind of Sterigenics capacity expansion underwriting cycle, kind of what are the dollars that you need to put out and what do you need to see on the demand side to get comfortable putting those dollars out.

In the company, the way we run it, first of all, just from overall capital allocation, we work with our teams. We have many we meet every 6 weeks or so, we look at all the capital demand and we make sure we [indiscernible] do I call it, right? Here's what we said we're going to do, here's what we're doing, looking back on previous programs and also we have a capital plan, and we've got one over the next 3 years we look at and then we look at within -- we sit down every 6 weeks and look at exactly where that capital is going, how we tracking against the programs, what's in the parking lot we could pull in, what can we put out based on what we learned. But these programs, we've got a process here in making sure we're getting returns. We try to target 20% IRR. And when I look at the Sterigenics programs, if you are putting in cobalt -- incremental cobalt for growth in a given facility, that's a great [ return ], that's I think [indiscernible]. Then you start to move down the returns, if you start to think about if you put in a chamber in an existing facility, a neo chamber. That's a pretty darn good return. [indiscernible] Cobalt, but it's pretty darn good return, right? Then you start to look at if you're going to put in a greenfield, right? Or if you -- let's take a step in between it. If you had to put in more brick-and-mortar within the existing facilities, you'll accommodate a chamber or an additional radiator, it's a little bit less recurring. And then you go down to the lowest if you're doing a greenfield. But we try to target 20%, some of those plus or minus, around that in total. And then we're really focused on locking in with our customers. In most cases, we try to get 40% to 50% locked up in commitments even before we start to [indiscernible], right? But these programs, it's not like we woke up this morning and said, "Hey, we need EO capacity. Let's put a program in together for 2024." I mean this is something we planned out over time. We have a team, a guy named John on our team that really looks at this supply and demand. He does production, sales, inventory kind of modeling the typical companies do and look at where our capacity is and making sure that we have a good view of utilization and execution and where we need that capacity over the long range. It's not done on a quarterly or monthly. I mean, obviously, there's some dynamics that happen day-to-day, but we do our capacity planning and capital -- so this is longer-range planning...

When customers commit to fill half that new space, as an example, do the contracts say as it relates to volume and price over time and in duration, often how -- what's the average sign-up period?

Yes. Typically, our contracts are 3 to 5 years in nature, and they typically have price escalators built within them reflective off of some index formula that [ we agree to ].

What -- I'm curious, stepping back at the kind of the Sterigenics network level, how do you view capacity utilization right now? Is there a metric that you share or manage to?

No, we don't. I mean we -- listen, I tell Mike and the team and Ed, who's running our OpEx team, we can always get better and get more out of our existing capacity. That's the best return, right? It's getting more throughput of our existing capacity. So I don't have to deploy any more capital. But unfortunately, that's not the way it works as the demand coming out of the market long term. But we focused on operational excellence and making sure we're getting more out of our existing capacity because that's expensive. That's expensive. Our capacity is expensive. We got to make sure we get a return. It's very tight though right now. It's very tight. The industry needs capacity. We're going to be thoughtful on how we do that.

Yes. I guess another way to ask the question is, if you didn't add a -- add space at an existing facility or greenfield something, within the network as it stands today due to productivity and operational excellence, can you grow volumes at some single-digit rate?

Yes, we can grow volumes, [ we can get ] better and there's always things to do better operationally, to get more throughput. But listen, we do need this capacity or we [indiscernible]. Based on what we [indiscernible].

Yes. Maybe specifically on EO, I mean that kind of modality seems very tight for obvious reasons and just kind of regulatory uncertainty and maybe an unwillingness until you clear the EPA rulemaking to invest incrementally in the technology. Is there a way you can frame it at either the Sterigenics level or the market level kind of how out of whack demand for EO is versus the supply? Just to be more kind of precise like Zimmer has complained publicly that they struggle to get access to EO sterilization services. It's slowing them down. So I'm just curious if there's a kind of a numeric framework to level set how tight it is.

Yes, I would just tell you, it's a complex situation. So you think about when all this discussion started in 2018, you're on EO -- EO is going away, it's bad, it's just -- [ 50% ] of medical devices, 20 billion devices per year are sterilized with EO. And we continue to see the demand growing. We don't see it going away anytime soon. And our customers the way they're behaving with us, example you gave, I could give you an example. I was talking about our commercial leader yesterday, and examples are coming in on demand. Customers need more EO [ capacity ], right? It's not as simple as saying, I have a facility, I have a chamber because there's nuances within a facility. It might be [indiscernible] pallet chamber or 1-pallet chamber or a 15-pallet chamber, 30-pallet chamber and the designs of the sterilization cycle are all customized [ to the pallet to the ] chamber size, right? So it's really something you got to work through and understand what your customers and what their designs are going to be and exactly how you think about the longer range [indiscernible]. It's tight, I think it's going to be tight for quite some time. And listen, we're sensing that with these new regs, there's going to be less players in EO long term. I think EPA is going to come to that realization pretty quickly. And the FDA is aware of that as well.

Yes. all right...

But we're going to be beat it all. That's why we're making the investments, we're putting in right now and have been putting.

Yes. Just following that thread. I mean what is the -- what's your latest expectation for the EPA and the NESHAP and FIFRA rules next year and timing and kind of is it -- does the EPA now get it after what seemed to be a vibrant comment period, like what's going to happen?

Yes. At the end of the day, they're the regulators, they are going to make the rules. We are the industry. We give them our voice on these topics. We expect NESHAP to come out sometime in the first quarter. They've gotten a lot of input. We're hopeful that they're going to make modifications that are important to all stakeholders. I think FIFRA is going to take a little bit longer time period to get out to market. Exactly where they're going to settle these use regs, we don't know, but we feel pretty confident about what we've done and the improvements we put in. But that doesn't mean that there would be some small surprises that we'll have to adjust. But overall, I think all the stakeholders in the regulatory bodies realize the importance of [indiscernible] in totality of EO.

Yes. Where is Sterigenics in the, let's call it, EO enhancement cycle, I think 8, 9 facilities in the U.S., how many are done? How many are in process, how many are still to do?

We said -- I think on our last call, we said that we will have elevated CapEx and this year and next year. And after next year, we made a big development, [ Austin ] EO and cobalt development we'll start to see come down after 2024. But I think next year will be a U.S. facility [indiscernible] take a step down in 2025. I think we'll be in a pretty good spot. Now again, it's all contention upon what the EPA ultimately -- because we don't know the final rules yet, but we feel pretty good that next year we'll be able to get through the remaining [indiscernible]. So the vast majority of it in U.S.

Do you envision a point in time where you're comfortable and you don't -- you're not precise in your disclosures about the facilities you are building, the modality and the geography, but I'll just ask a general question, which is 2 to 3 years from now or maybe 18 months from now, the EPA has worked through its process. These regulations are identified. You can comply with them. Do you envision Sterigenics being comfortable building new EO facilities in the U.S.?

I think if the demand is there and we -- listen we always told the EPA all along is just give us the rule. Just give us the lines in the field. We know what's in bounds and out of bounds, and we'll do the best that we can to achieve those. And if they're practical and reasonable, I see a scenario where customers need us, and we would make investments to do that.

Yes. Maybe the other kind of angle here with the FDA is obviously an important stakeholder, and they're -- they seem to be fully aware of the tensions here. The EPA has got other interests and priorities, but the FDA is kind of working with industry who find an agreeable path forward. One of the things they seemingly have been doing is this master file program, and there's one on ethylene oxide. There's now one on radiation. I guess, is this important? Is it important to Sterigenics? What does it mean? Is it something you have interest in leveraging?

Listen, we're going to work with our customers on all modalities. I've talked to our team about this last week, one customer, come to us in 4 years. [indiscernible] There's opportunities. We'll continue to work with our customers to figure out if they want to switch a modality. This one customer in particular. We're helping them redesign their cycles to take a lot of EO... [indiscernible] matter, they want to switch modalities. We'll figure out [ something of that then ]. At The end of the day, we got to be sure we're meeting the needs of the customers, have the right capacity and the right location at the right time.

What's kind of the global opportunity for Sterigenics, just kind of -- are there markets, geographies that you're more active in because of your customers are pulling you there?

So today, we've got presidents in the U.S., Canada, Europe, South America, Asia. I'd say we're under indexed in Asia. There's things we'll continue to look at [ if we can get the ] right returns and figure out if it's the right partnership with our customers. But the long-term growth of Sterigenics is very solid on a global basis, very solid. It is a great business, great margins and a critical role we're playing out there...

I want to talk about the legal matters and then we can shift gears to Nordion and Nelson.

Well, that's good. It didn't take us that long.

It's on the Sterigenics thread, and then we'll go to the other 2 segments. I guess look, how encouraged are you? I mean, obviously, a very difficult situation. We've written a lot about this a lot. I think I feel for the company and how Illinois went down. It was, I think, in a lot of ways, felt like bad luck, wrong place, wrong time. But you put it in a box, you put a portion of Georgia in a box. How encouraged are you and kind of what are the kind of challenges from here to...

What I tell our employees, listen, we have a great company. It's a complex global business, highly [ regulated ]. We make 50% plus adjusted EBITDA margins. You don't -- by the way, I forgot my FLS statement -- oh boy...

Forward-looking?

Oh, yes, I forgot all this.

Well, you can put it...

I guess, before we begin, I guess I've already began. I'm wondering, I've probably got some lawyers. You said lawyers that means we think about it. Just to make sure some of our -- consider forward-looking statements, you can refer to our filings on the SEC website or our own website. Sorry about that. I'm sure my lawyers...

It's on the record.

No, you said this but with my lawyer is probably all cringing. But anyway, I would say, we've got a global business. It's a great business, right? We don't make 50-plus percent margins, just -- we play a critical role in health care, how do you regulate complex global businesses? I am sickened about the fact that we paid any money out of these legal [indiscernible]. Just it sickens me. Listen, my entire career, I've solved problems and worked with teams to get to things and I'm really struggling with the fact that we're paying out anything [ in Illinois ]. If it's Illinois or it's Georgia. Listen, if they focus on science and causation. There is no proof here that any of these facilities cause cancer, right? It's very clear. right? So we're going to work through it. It's just the way the legal system works in the United States. Maybe it's bad luck, maybe it's a bad timing whatever. Listen we have a business to run. We have a great company. We have great employees that wake up every day playing a critical role in health care. So we'll work through it. We're in a better spot than we were 6 months ago, we're in a better spot than we were a year ago. We'll continue to work through this, an unfortunate situation, but when the facts are out there, it's very clear. There's no causation here.

And Illinois is done?

Illinois, I think there's 11 cases or something, like 3 holdovers and 8 new ones that have come up. But in Illinois, you've got to be newly diagnosed [indiscernible] due to special limitations they've run out...

And Georgia, I guess the question would be kind of a portion of the plaintiffs you have settled, and a portion remain? Talk about that strategy and what happened there?

Yes. So listen, we've got to make sure we're being thoughtful. We've got a great legal team, and the -- as we're going through the case, so we had 1 case in Gwinnett County and the rest are in Cobb County. And we watch the Gwinnett case play out with the judge there. We weren't convinced we were going to get a fair trial. I mean it was very simple based on the rulings that were happening in the pregame, if you will, it became very apparent to us that we weren't going to be able to put on a defense. And we had to do the right thing to be responsible. So what we did is, we went to the law firm on the other side, the law firms involved and said, "If we sell this case, we want everything else that you've got as well in Cobb County and get it out of your system." So it ended up being about 79 cases in total of these legal people represented. And we said we're going to settle one case plus the other one. And we would assume that we don't make -- I'm sorry, we don't make the determination of how much each plaintiff gets. But I would be shocked if the one in Gwinnett County did not get an outsized portion of that $35 million.

And the remaining plaintiffs in Cobb, you like how the pregame is going?

Yes. I mean right now, everything we're seeing from that judge is science and causation is front and center. The way she's running the trial to this point, it's all going to be focused on proving causation first before we start getting into a jury trial. We'll continue to monitor that situation. And listen, we've got a team that's thoughtful. We have a very engaged Board. This is an important topic, and we make sure we think through it and look at all the decision points as facts unfold. Where we're sitting today, we feel good about causation being in front and center here, which was not the case in Gwinnett County.

Yes. Last one, and I know this is a painful topic, but it's important for the investment case. New Mexico made some noise a couple of years ago. It seemingly has fizzled out as -- is there anything there after the Attorney General filed for injunction?

Yes. So if we talk about the -- there's 1 personal injury case that we've moved to the federal court, if I'm mistaken. Still no development on that. And then I would tell you on the AG case, they brought a case against us with a bunch of claims, and it went through courts system and many of those claims were kicked out of the conversation, and there are some discussions on the remaining claims, 1 or 2 that are left that the AG has to bring to the court and prove that there's a claim here. There are some law firms involved in other geographies that decided to go to New Mexico AG, and say, "We can help you bring a case against Sterigenics." So we'll see how this plays out. We feel really good about what we're doing in that facility, the enhancements we've put in and just strong compliance we've got in that facility for many, many years.

Do you see any -- does all of this -- it's clearly a Wall Street topic. Does it impact customers?

So we always got to be mindful to customers on this. But I would just tell you, if you step back, I think of the conversations I had, the first phone call happened in 2018, customers were [indiscernible] is this a Sterigenics-only problem? And as time has come up, I think we've seen many facts play out. One, we're a great partner to them. We continue to supply critical services to them. There's 100 EO facilities. It wasn't like we had a facility in Chicago, nobody knew about them, nobody knew theey -- there's 100 EO facilities in the United States. 50% of devices have to go with EO. Customers have come to realize. We're a good company that's the only things like -- a lot of our customers, by the way, deal with litigation and challenges. I would just tell our customers are voting with their feet and they continue to do business. That's why Sterigenics does as well as it does because customers know we're there for them.

Helpful. All right. Let's shift to Nelson Labs. How do you get this thing going again?

Nelson Labs is a great business. 800-plus test, medical device and pharma products. They're doing well. They've been through a heck of a lot with COVID, COVID volumes and then the labor situation. Really good business, continues to bring critical services to our customers. And we saw -- we recently did a little add-on with a business called RCA, that continues to bring value and help -- right now, a lot of customers are getting FDA audits. And we hear about it throughout the industry. And the guys at RCA are pretty involved in that, which is great. So it's a good business. I'm hopeful it continues to -- continue to improve and get to a better spot as we go through '24 and into '25.

What -- I get this question, and I used to follow this world more closely. Public or private companies or divisions of large companies, who are Nelson's closest competitors?

Yes, that's a very fragmented -- we play in about a $7 billion SAM, somewhere in that neighborhood, we're updating those numbers as we go through our planning process [ here ]. I would tell you, we're a couple of hundred million bucks. It's a pretty big fragmented market. When you look at -- there are several small private companies, private equity backed or just family-owned businesses that are med device, pharma based. But then there are these bigger players like a Eurofins, like [indiscernible], like an SGS that have broad test offerings beyond med device to pharma. We don't do air, we don't do water, we don't do soil. Some of those other firms do that. They do have a medical device pharma presence, which is what lays on top of what -- I'm sorry. But when you look at pure play, 800-plus tests is a pretty darn -- route.

And I look at Sotera, I mean, serve a diverse customer base, seems device-centric, but this business especially kind of gives you an activity to pharma as a customer. I guess we've talked about this over the years. I mean how -- as you think about inorganic opportunities and continuing to grow the platform, like how important is further serving the pharma customer to Sotera.

Yes. I would tell you, if I look over the last several years, Sotera Health has grown its pharma presence, Sterigenics and Nelson Labs. Nelson has been on the forefront of that. We did an acquisition back in Leuven, Belgium, but [ haven't seen a repeat ], that's been great for us, and we continue to see an opportunity for us [ to enter ] pharma capabilities in both Sterigenics and Nelson.

One financial one, and no guidance, obviously, but expectations for Nelson growth margin over the next couple of years? Can it grow mid-singles plus high singles and kind of the margin has bounced around and there was some kind of COVID stuff that had to come out? And I guess what's the -- what's the good planning state?

Yes. I would say, the business got -- when we bought the business, it was like low to mid-20 margin range and EBITDA. It's gotten as high as the low to mid-40s, that's too hot. That's not really where that business -- there was some favorable mix during COVID. This business is probably more in the neighborhood of the 35-ish kind of margin range, its what I would think. And we expect it to have good growth over the mid- to long term. And we'll continue to -- you'll see that recovery. Listen, everybody sees what's going on in the lab space, right? I mean you look at people that supply that space and how their volumes are down significantly. We've seen a lot of competitors either shut down, lay off people in a meaningful way. We've seen some of our customers who in-sourced during COVID their lab space and now they're laying those people off. We have people that left us, that are calling us to come back. What we've tried to do right or wrongly, we've tried to maintain that employee base in a pretty stable place, which has put some pressure on margins because the volumes haven't come in. You can argue, should we have been a little bit more aggressive, but we're not in a position we're going to take out 200 people or something like that. We [indiscernible] 20 people for [ 12 ] months, and maybe we should hire 14 of those, not 20 of them back and things like that. But overall, I think that's one of the things we -- you got to be really careful in that business because labor is so critical. And if you screw up that recipe, your service can fall. That's what happened during COVID, we had the resignation with people and everything in the first half of last year, as everybody remembers that bump in COVID in January, February and then by March, April, the labor market kind of got [indiscernible]. That really s****** up our service [ stake ].

Relative to like revenue mix, your allocation of your own time, do you spend more of it on Nelson versus its size or...

I -- Mike, listen, I would tell you, if you talk to all 3 of my leaders, they're like, go call the other guy. I was on phone with Riaz last night, who runs Nordion. I needed to -- ask him about something for December. He's like, "Don't you have something to do with Mike's Budget tomorrow?" Yes. So listen, I would say they all want me to spend more time. I spend a lot of time with all 3 businesses. Obviously, Joe and the team have got a lot going on at Nelson, so I make sure I spend time. But I'm engaged with each of the businesses every single week. I'm not flying to 30,000 feet. I could tell you that. And we've got a lot of work to do. This week, we're going to be spending most of the week to go in [indiscernible] budget. Or we'll [indiscernible] 2024 budget.

We have 10 minutes. I want to talk about Nordion. I think this got to be one of the biggest moat businesses I've studied personally, essentially you're a single source in the Western world. It's strangely timed, lumpy. It's extra lumpy. This year. I know I said this on the call, you seemed to think I used the word lumpy too many times in my question. But I guess I'm still -- like I'm still trying to figure out why this year is -- like what is actually happening? Why is this year lumpier than normal?

Yes. So one thing I want to take a minute and also reflect and thank our team, our finance team and Jason and some of the stuff going on. I mean, when you step back and look at '23 coming into the year with 75% in Nordion's revenue in the back half of the year, volume is a little choppy and Nelson and Sterigenics, litigation out there, raising money, we are very focused on cash. Listen, basically, Nordion had hardly any revenue in cash coming in the first half. And by the way, we had elevated CapEx as you called out earlier, so the team has done a great job in managing the cash and making sure that we're in a good spot to settle the litigation, pay it out, continue to invest for the long term, and making sure we don't lose sight. So I give our teams a lot of credit on the finance side on what they did. And remember, we had an interim CFO at the time. So there's -- I give the team a lot of credit. So let's talk about Nordion specifically because people don't put the piece together, Mike, there's a lot that went into that. This year was a really lumpy year. We couldn't do anything about it. It's a harvest schedule as utilities. Remember these utilities -- they make -- they generate electricity. That's what they do. That's their primary purpose. And they shut down based on what their maintenance schedules are. And that's when they pull the cobalt out. So it was back-end loaded for them. Listen, I talked to -- I'm going to go up to see OPG's leader next week. And we're engaged with these guys. They pay a lot of attention to us, but they still have the utility to run. So the reality is in the back half of the year is when the harvest schedules were for our utilities. It's not customer demand doing this. The customer demand is there. It's the supply side. So now the team is planning to get all this cobalt in. We've got what we need here to deliver the year, and now we got to turn and get it out to our customers. Next year will be lumpy, but not near as lumpy as this year. This was just all bad luck whatever, is just the way the timing works out, but I give the team a ton of credit. They called it early, and we're going to deliver it. That's what the team gets paid to do and they're going to do it.

How far in advance are harvest schedules scheduled?

We have good visibility there. I don't know exactly the time, but we had good visibility. The team told us this is going to happen. That's why we signaled to the Street so people didn't get spooked on the way the quarters were going to play out this year. We at least had visibility. Like I got pretty good visibility for '24 is going to play out. I'm going to get more visibility this week when the team comes in and lays it out. It's going to be smoother than it was this year. We'll still have a back-end element, but not -- not 75 -- not 25-75...

And to be clear, none of this was Russia-Ukraine War risk?

I mean the cobalt, I think as we signaled in our last couple of calls, we continue to take down the risk factor around Russian supply, everything we needed we've had in-house for several weeks and months for -- anything we were counting from Russia we've had in-house in the year.

And then as you zoom way down...

By the way, it's our largest, most dependable suppliers that have had the harvest schedules back end of the year. If that helps at all.

Helpful. The long term, you're bringing cobalt cooking onshore, into the States. This is a known investment program. It obviously takes a lot of dollars and a lot of time to do it. Will this -- I mean, I guess, maybe the question is this, like in 5 to 10 years, what is the U.S. as a portion of your Cobalt-60 supply?

Very small, still.

Still small? Okay.

Yes. We're doing cobalt development with Westinghouse, which we hope to get from U.S. utilities engaged and [indiscernible] in cobalt, but we're also doing developments with OPG, who is our already existing partner, and that's going to be [indiscernible] a really critical supplier in this, and we'll continue to invest there. So I mean our development programs are both U.S. and in Canada. And over time, we'll have capability in the U.S., but it's still going to be a long time. 5 years, really small. 10 years, more meaningful.

And the genesis of this once upon a time, why do this? Grow supply and diversify.

Exactly both. It's important for us. There's demand out there. We've got -- we're working with one of our Canadian suppliers on what their reactor schedules look like. And one of the reactors going to be mothballed. There's still some uncertainty around that. So we've got to have some development to offset that potentially. And then also long-range supply growth, the market wants more. Okay. It's not a demand issue on the Nordion side. It's a supply timing...

Yes, we have 5 minutes. I want to hit on your balance sheet and then ask 1 about your shareholders. And I guess if I feel a frequent concern is that you have a couple of billion of debt, rates are going up. You just highlighted that the team has done a great job managing cash this year. How much comfort is there here around -- in the current rate -- interest rate paradigm, cost of capital paradigm, the balance sheet and your ability to fund everything that you want to do.

Yes. We spend -- cash is king, right? So we've got to look at free cash flow conversion. We know it's not where we want it to be. But over the long term with the investments that we're making. We're very confident about it. We got great cash flow from operations day-to-day. And our leverage rate now is slightly above 4x on a net basis. We said we'd be at or below 4 by the end of the year. We were tracking in the low 3s last year at this time, and then we had to take on the additional debt to go ahead and resolve the Illinois litigation. Interest rates are high. We're going to continue to look at that and monitor things we could do to optimize it. We got to be mindful of the fact that interest rates -- interest expense is a big portion the cash so we got to monitor that, but I feel good about our ability to continue to invest in this business because of the strong cash flow generated. The things day to day that happen under the hood, we're making sure accounts receivable and accounts payable and inventory management, working capital, those are things that we've got to do.

Yes. The last topic is you still have 2 large private equity shareholders. I get this question, so I'll ask it here. I mean -- how do they feel about everything? They typically run products with defined lives. I think 1 of them might be towards the end of kind of that cycle than the beginning or closer to the end. I guess what happens here? And then do they want liquidity?

Yes. Listen, they've been great investors, they're very engaged in the business. They've made good returns on it because they've taken risk on this investment. They've been very thoughtful in helping us move this company and continue to make investments in the company and navigate through some of the challenges we've had as well. Eventually, they're going to sell share, right? And yesterday, we announced -- we added a new Board member, a new independent Board member. We brought Karen Flynn on. People will say, "Why did you bring Karen?" One, another independent director to pharma services is something that's important to us strategically, right? And she came out of West Pharma. She came out of Catalent. Some of the capabilities that we're looking to build in the company -- she's got a lot of commercial experience. You look at our Board. We don't have a lot of commercial people on our Board. So Karen, is a nice little fit. We're going to continue to migrate the Board. Eventually, the PE folks are going to sell down and leave. And we're going to make sure the company is positioned to do that. They'll ultimately decide when they're going to -- I don't believe they're going to be reckless about it, on how they sell the shares, but that's ultimately their decision. But at the end of the day, they've been great investors, very supportive of the company and deploying a lot of capital for growth, which we've been doing since I joined the company in...

Good. We need to leave it there, Michael. I appreciate you being here.

Thanks for having us.

Yes, thanks for the conversation.

Ongoing support and great. Have a good day.

Thank you, Sotera. All right.