Sotera Health Company (SHC) Earnings Call Transcript & Summary

I mean I don't even know the number off the top of my head, but we were certainly running north of 5% in different areas. And I think you look at our price performance over the last couple of years, our price in Sterigenics ran hotter, I think, over 6% the last couple of years. And that was in response to the inflation environment that we're seeing. So we're really proud of the business. I think there was some skepticism going into that, would this business be able to overcome the inflation and we did.

Okay. On the Nelson side, like we were talking about the advisory business, there had been really strong, that's as you pointed out, kind of more of a consulting type business. So I'm curious a little bit lower margins than the traditional lab work that you do there. You are guiding to an increasing -- or kind of a ramp in Nelson margins over the course of the year. So maybe just given the strength in the advisory part of the business, maybe what's driving this ramp in Nelson margins.

Yes. Yes. No, good question, Sean. Thank you. When we look at it a couple of things, yes, it's been really strong, but the advisory business is inherently project-based and so a little episodic. We have some projects winding down. So we've kind of got two moving pieces in here that will help margins. One, we expect sequentially -- I'm sorry, the advisory services businesses will come down a little bit. But at the same time, we expect the lab services business -- the lab core testing side of the business to go up. And so those two things moving kind of in opposite directions will have a positive effect on margins.

And you talked before about the linkage between some of the sterilization work and the lab work. And so the expectation that lab volumes start to increase in the back half for the year, it would be tied to the destocking has...

We see some good positive signs in some of the funding environments and just what we're hearing from customers around what's coming towards us from a validation perspective.

Okay. If we think about sales cycles or just kind of visibility on the Nelson side of the business, how much you kind of lead time or advanced visibility you have into revenue there?

Similar to Sterigenics. it's also a pretty short cycle. So we'll give a quote, and it could be months before something shows up that are -- could never show up or shows up at our dock door and gets ready for a testing program that could take days to weeks or months, to actually drive revenue and get it done. So again, that's pretty short cycle. And we've just worked the same way, make sure we're close to our customers and understanding what the expectations they have and that we have the service ready to provide. And the great thing about what the team has been doing there, the customer satisfaction, the turnaround times, the service levels are really good in the business right now. And so we think we're well positioned for our customers when they're ready.

Okay. The final rule for the new NESHAP regulations were released not too long ago. You did have the proposed rule, the final rule looks like it's a little bit different than what was proposed. It sounds like most of the difference was around kind of the monitoring or the ongoing monitoring requirement. Maybe just give us little bit of a high level on what those are and what that means for Sterigenics.

Yes. I mean -- the good thing and the bad thing, may not be the bad thing. The good thing is we've been waiting for a rule for a while. We've been investing to make sure we are ready to comply with the rules where we thought the rule was going. So we're happy to finally have the rule. And we think we're in great shape to ultimately comply with it. Like I said, we've been investing for a while. I think we started investing back in 2019. And so we've had a lot of learning going on over the last couple of years, figuring this was new technology -- not necessarily new technology, new application of technology and figuring out how to make it fit with every facility, which might have a different footprint, different composition of chambers and those sorts of things. Michael and I did a review a couple of weeks ago with the team on the status of our work there. And we just -- we've come a long way, even in the 12 months I've been here, I've seen the evolution of that. And so we think we're ready for the rules. There are a lot of different monitoring requirements, different rules inside that, that we're working to get clarification, make sure we're prepared. So for example, on the permanent enclosure, PTE 204, it's required like the monitoring on the metric is a rolling 3 hour average. And so we have to go in our facility, making sure, you were like, okay, we're measuring it on a 3-hour average, and that where the blips and how they happen and make sure we're -- and we're already developing protocols that are helping us work towards being compliance in that, and then also clarifying all these different rules and how you comply.

And you talked about having already begun preparing for this back in 2019, knowing this was coming well in advance. How many facilities do you have that are subject to this? How many have been completed and how many are left to do as far as complying with the new more stringent regulations.

Yes, I think we have 8 facilities, EO facilities in the U.S. We're making great progress we've got -- I'd say we see the light at the end of the tunnel. We'll get a large way through the balance of our operations. And that so you go facility by facility and get 100%. You might have some of the different aspects of the program going in at different times in different facilities, but we'll be largely through this year, and we'll finish up next year.

If we think about just the dollars tied to this, how much have you spent already? And how much is left to go?

Yes. I mean, this year, we're going to spend $40 million. That will put us over $100 million on the program. I do expect that $40 million to step down a bit next year, but we still have a meaningful amount to go. I think really important, too, is we look at the regulations that came in we don't see material increase in what we expected to spend from what our plans were. But again, it's a big number, trending towards $150 million.

Right. So it's been a little bit of a challenge for Sterigenics but I guess the long-term silver lining here could be the increasing kind of onerousness of operating these potentially makes outsourcing a lot more attractive. So maybe just what proportion of sterilization is outsourced right now? And how do you think maybe these more stringent requirements change that...

I think a great thing about our -- what we -- one of the things we do really well is operate in highly regulated industries. And for EO, we are an industry leader, and we're going to be here for our customers so they can count on us. I do think you're going to see some things play out with the regulation where some folks may decide to exit, some folks may decide to outsource more after in-sourcing some. We do think the majority of sterilization services across modalities is outsourced today. I'm actually refining those numbers, but there's nothing that tells us it's going in a different direction than outsourcing.

Okay. And so if we think about just CapEx more broadly, you've guided the $205 million to $225 million this year. We talked about the spending on the facility enhancements, you've also been building some new capacity in the Sterigenics side. There's some investments you made in Nordion in the new innovation or Cobalt-60 development. How should we think about capital expenditures trending over the next couple of years as some of these capacity investments and the enhancements wind down?

Yes. No, good question. We have three big programs going on, the EO enhancements, the Cobalt development and the growth projects. And as I've said before, we expect those to start cycling down in '25 and '26. So we'd expect a sequential decline in CapEx. We're working through, we just starting up our strategic plan, so I'm not ready to give a precise target for where that will end up. But rest assured, it's a high focus for us. We want to make sure that we're supporting the business and also mindful of our free cash flow generation because it's really important that we start generating some strong free cash flow coincident with our strong operating -- ability to generate strong operating cash flow.

Could you give us a sense of, well, like a maintenance level for CapEx would be either in terms of percent of revenue or dollars?

Yes. And that maintenance number has come up a bit over -- people look back 4, 5 years ago with the business. We've had increased our level of maintenance, we're, I'd say, about $60 million of maintenance and that can be plus or minus $10 million in a given year. And when I look -- when I talk about maintenance, it's your typical facility maintenance, you got to fix the roof. You have some equipment you need to repair but also our replenishment of cobalt is our gamma facilities is included in that.

Okay. And then just turning to the litigation for a moment. You recently settled some cases in Georgia. Just maybe any update on the time lines there when the remaining ones are expected to go to trial and then how many cases remain in Georgia?

Yes. Yes, there's about 260 cases remaining. We're pleased to get that settlement behind us, I think we got 79 cases done. So we're happy with that. And we think we have a good opportunity to put on our defense because we think the science behind our defense is really strong. And we think we have an opportunity like in the Fornek case, we think we can win. And this next phase of the -- happens in Cobb County starting later this year with Phase I on the first 8 cases. once whatever survives Phase 1, general causation goes to Phase 2 specific causation, we'd expect a ruling on Phase 1 early. The next phase to come later in '25, and then if anything survives to the third Phase of a jury trial, we'd expect that in '26.

Okay. And there's also the situation in California. I think a lot of people naturally are going to look to what happened in Illinois and what happened in Georgia as a proxy or some way I'm trying to quantify California. Maybe just kind of outline for us the similarities and kind of the dissimilarities between California and the others?

Yes. I mean given the recent sees, I'll probably hold off on too many comments here, right? We've got a pretty, I think, extensive FAQ on our website, but I'd just say a couple of things. Number one, back to what I said earlier, we think the science in our defense is very strong, and we'll look to continue fighting on this because we don't think we cause the illnesses that been alleged. The second thing I would call out on this is around the local regulator who has published or publicly showed that testing in the neighboring community is background levels of EO. So we think that's a good fact just to point to. But again, we have an active litigation going on. So there's going to be many, many facts and many things to discover. And the last thing I would just highlight is that this has been pushed to the complex docket in California where I think they're better equipped to handle the complexity of the things that are involved in this type of litigation.

And is there anything kind of initial time line you can provide there?

I mean, I think there's no court management or there's no order yet on case management and it stayed right now pending that.

Okay Maybe just in our last few seconds here. We'll talk about balance sheet leverage, so 3.8x now. We talked about tapering CapEx, maybe just capital priorities and just where you feel comfortable with leverage kind of longer term?

Yes. Yes. I definitely am targeting lower leverage. We think we have a great opportunity to delever naturally as we expect this business to continue growing just like we have year after year, continuing to produce more EBITDA will help us delever. And is just from a priorities perspective, organic growth in the business. I expect we contemplate some debt paydown and then opportunistic M&A. I still think we have some opportunity there, and we'll continue to pursue things that we think are valuable for our shareholder.

Sounds good. That's a good place to leave it. With that Jon, thanks again, very much for being here.

Thanks Sean. Thank you for having us.