Sotera Health Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Cetera Health Second Quarter 2023 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Vice President and Treasurer, Jason Peterson.

Operator

Please go ahead.

Speaker 1

Good morning and thank you. Welcome to Cetera Health's Q2 2023 results call. You can find today's press release and accompanying supplemental slides on the Investors section of our website at ceterahealth.com. This webcast is being recorded and a replay will be available in the section of the Cetera Health website. On the call with me today are Chairman and Chief Executive Officer, Michael Petrus and Chief Financial Officer, John Lyons.

Speaker 1

Please refer to The company assumes no obligation to update any such forward looking statements. Please note that during the discussion today, The company will present both GAAP and non GAAP financial measures, including adjusted net income, adjusted EBITDA, adjusted EPS, net debt, adjusted EBITDA margin, Segment income margin and net leverage ratio in addition to constant currency comparisons. A reconciliation of GAAP to non GAAP measures for all relevant periods may be As always, if you have any questions after the call, please feel free to reach out to me and the Investor Relations team. I'll now turn the call over to Cetera Health Chairman and CEO, Michael Petrus.

Speaker 2

Good morning, everyone, and thank you for joining Terra Health's Q2 2023 earnings call. I would like to take a moment to introduce our newly appointed Chief Financial Officer, John Lyons. John comes to us from Owens Corning, a $10,000,000,000 global building and construction materials leader, where he served in various executive roles. Prior to John's time with Owens Corning, he served in several senior leadership positions at Cardinal Health after beginning his career in public accounting. John brings a wealth of financial acumen as well as healthcare industry experience to Cetera Health and we're excited to have him on board.

Speaker 2

I would also like to take a moment to thank Michael Beal for his contributions as the Interim CFO for Cetera Health. Michael, Thank you for your commitment and support over the past year in leading the company's finance organization. As previously communicated, on June 30, The settlement funds of approximately $408,000,000 related to the Illinois ethylene oxide claims were released from escrow and on July 6, the claims Against Sterigenics of the 879 claimants who opted into the settlement were dismissed with prejudice. Although we continue to believe these claims were without merit, we're pleased this settlement is finalized 1 month ahead of schedule, thanks to the efforts of our legal team And with a 99.7 percent participation rate. In a moment, John will review our Q2 2023 results in more detail.

Speaker 2

But first, I would like to review a few items from the quarter. Total company revenues declined 4.3% and adjusted EBITDA declined 5.6 percent compared to the Q2 of 2022, driven primarily by the expected timing of Noreon's Cobalt 60 harvest schedules. We delivered adjusted EPS of $0.21 for the quarter, which is a $0.06 decrease from the same period last year. Sterigenics, our largest reporting segment, delivered 5.6 percent top line growth for the Q2 of 2023. Ceragenics continues to service our customers even though the global economic outlook is challenging with lingering customer inventory and supply chain challenges and inflation.

Speaker 2

Although, CerroGenics volumes are lighter than planned, the CerroGenics team is prudently managing costs, which has contributed to a 310 basis point segment margin improvement compared to the Q1 of this year. During the quarter, the team completed 2 expansion Projects and they continue to make progress on our EO facility enhancements in North America. These industry leading enhancements demonstrate our commitment to ensure Best in class emission controls for our employees, customers and the communities in which we operate. Nordeon, Our other reporting segment within the Sterilization Services business experienced a 37% year over year revenue decline due to the timing of Cobalt 60 harvest schedules. We have good visibility into the timing of Noreen's revenue as it's tied to the harvest schedules from our Cobalt 60 suppliers.

Speaker 2

As previously conveyed, Noreen's 2023 revenue will be particularly lumpy as approximately 75% The revenue is expected to occur in the second half of the year with approximately 50% of the year's revenue occurring in the 4th quarter. Nordeon does continue to source a portion of its Cobalt-sixty supply from Russia. At the start of the year, we stated that a total supply disruption from Russia Could potentially result in a 0% to 3% impact on total 2023 Cetera Health revenues. At this juncture in the year, we are confident that there is 0 risk to Russian supply impacting total Terrahealth full year 2023 revenues. The Cobalt-sixty supply chain is a complex one and I'm proud Continued efforts by our neurodine team to ensure availability.

Speaker 2

Cobalt-sixty is used to sterilize approximately 30 of the world's single use medical devices and is critical to the global healthcare community. This is a great example of how we play a critical role in Safeguarding Global Health. Nelson Labs, our lab testing and advisory service business experienced sequential growth and expanded margins of approximately 6.80 basis points over the Q1 of this year. Revenues in the Q2 of 2023 We're 2.8% below the prior year quarter, which had experienced record revenues. However, volumes continue to be challenging in our lab business.

Speaker 2

In light of the softer than expected volumes, the Nelson Labs team is actively managing costs, while keeping focus on quality and customer satisfaction. Due to the volume softness at Sterigenics and Nelson Labs that we expect to continue, we are adjusting our full year 2023 outlook. We now expect Full year net revenue growth to be in the range of approximately 3% to 5% and full year adjusted EBITDA growth to be in the range 3% to 6%. We are confident that we've taken into account weaker volumes and other market dynamics reflected in this adjusted range. We will continue to concentrate on executing our strategy to best serve our customers around the globe.

Speaker 2

Prior to John walking us through the financials in more detail, I'd like to take a minute to underscore our mission, safeguarding global health, which is at the heart of our work. We performed government mandated sterilization and validation testing for medical and pharmaceutical products used each and every day. We supply Cobalt-sixty for radiation oncology professionals to help treat brain cancer. In addition, we provide critical technical and regulatory expertise To solve our customers' product development and sterility needs, our indispensable services help to protect millions of patients And healthcare providers around the world. One such example of how we safeguard global health is via our team at Nelson Labs Europe, We performed extractable leachable studies for a single use nasal spray used in life saving rescue treatment of patients experiencing an opioid Overdose.

Speaker 2

In the spring of 2023, the product received FDA approval for the U. S. Market. The societal impact This FDA approval is significant as overdoses caused by the use of synthetic opioid drugs, including fentanyl, unfortunately Remain a major and chronic problem in our society. Another example of our teams fulfilling our mission is highlighted through a video link Located on the Safeguarding Global Health slide in our Q2 2023 earnings presentation released this morning and available on our Investor Relations website.

Speaker 2

I encourage you to watch this video to learn about how Sterigenics and Nelson Labs work in conjunction to ensure Critical sterilization and validation testing are performed for the successful delivery of vaccines around the world. Now, John will walk us through the financials.

Speaker 3

Thank you, Michael. I want to begin by saying how excited I am to join Cetera Health, which holds such unique position in the global healthcare supply chain. I look forward to working with our talented team and also look forward to meeting many of you in the near future. I will begin by covering the Q2 2023 highlights on a consolidated basis and then provide some details on each of the business segments, along with updates on capital deployment and leverage. I will conclude with some additional comments on our updated 2023 outlook.

Speaker 3

On a consolidated total company basis, 2nd quarter revenues declined by 4.3% as compared to the same period last year to $255,000,000 This equates to a 4.1% decline on a constant currency basis as foreign exchange headwinds are moderating for the company. As mentioned on the Q1 call, we expect continued moderation of foreign exchange headwinds and expect foreign currency to become a tailwind during the back half of the year. Adjusted EBITDA declined by 5.6% compared to the Q2 of 2022 to $128,000,000 Adjusted EBITDA margins were 50.3 percent, representing a 73 basis point decline from Q2 2022 levels. The decline in margins is driven by the lower volumes from Nordeon and Nelson Labs experienced versus Q2 2022. Importantly, EBITDA margins were up sequentially in Q2 on the improvement in Sterigenics and Nelson that Michael referenced earlier, as well as higher volumes from Nordeon.

Speaker 3

Adjusted EPS was $0.21 a decrease of 0.06 from Q2 of 2022, the result of lower EBITDA and higher interest expense versus the prior year. Net income for Q2 2023 was $24,000,000 or $0.08 per diluted share compared to net income of $30,000,000 or $0.11 per diluted share in Q2 2022. Our reported interest expense for the Q2 2023 was $31,000,000 which is an increase of approximately $17,000,000 versus the same period last year. The increase is driven by higher Rates on our variable rate debt as well as incremental interest on our $500,000,000 term loan that closed in Q1 of this year. Now let's take a look at our segment performance.

Speaker 3

For the quarter, Sterigenics delivered 5.6 percent revenue growth to $167,000,000 as compared to the Q2 of last year. Revenue growth drivers for Q2 2023 included favorable pricing of 6.7% and favorable Changes in foreign exchange rates of almost 1%, partially offset by unfavorable volume and mix of 1.7%. Compared to the prior year quarter, segment income for Q2 2023 increased 7.5 percent to $91,000,000 and segment income margins Increased by 100 basis points to 54.9 percent driven by favorable pricing, partially offset by unfavorable volume in mix and inflation. Nordion second quarter revenue declined by approximately 37% to $32,000,000 compared to Q222, which we expected based on the timing of Cobalt-sixty harvest schedules. Nordion's revenue decline was driven by unfavorable impact from buying the mix of nearly 39% And changes in foreign currency exchange rates of almost 4%, partially offset by a favorable impact from pricing of 5.7%.

Speaker 3

Segment income declined 40.7 percent to approximately $18,000,000 and segment income margin decreased 380 basis points to 55.6% compared to the same period last year. Segment income and segment margin changes versus Q2 2022 Due to the unfavorable volume and mix, offset by favorable pricing. For Nelson Labs, Q2 2023 Revenue declined by 2.8 percent to $57,000,000 compared to the Q2 of 2022. Revenue was impacted by unfavorable volume and mix of 6.9%, partially offset by a 3.6% benefit from pricing and favorable changes in foreign currency of almost 1%. Nelson Labs' 2nd quarter 2023 segment income decreased by 8.6 percent to $19,000,000 And segment income margins contracted by over 200 basis points to 33.9 percent versus Q2 2022.

Speaker 3

This decline was due to unfavorable volume and mix as well as inflation partially offset by favorable pricing. I I will now turn to cash generation, capital deployment and net leverage. As Michael mentioned earlier, on June 30, 2023, the settlement funds of approximately $408,000,000 related to the Illinois Ethylene Oxide Claims were released from escrow. This resulted in net cash used in operating activities of approximately $303,000,000 When adjusting for the $408,000,000 outflow, Cash provided by operating activities was a source of over $100,000,000 for the 1st 6 months of 2023, which was in line with the same period last year. As of June 30, 2023, we had approximately $635,000,000 of available liquidity, which includes $263,000,000 Cash and $372,000,000 of available capacity on our revolving line of credit.

Speaker 3

As expected, our net leverage ratio at the end of Q2 2023 was 4.2 times. This was an increase from the year end 2022 level of 3.2 times due to the new $500,000,000 term loan issued in connection with the ethylene oxide settlement And the associated $408,000,000 payment. Our capital expenditures for the Q2 2023 totaled $53,000,000 Growth CapEx and Facility Enhancements drove the increased investment versus Q2 of last year. Now turning to guidance. We are adjusting the full year 2023 outlook we provided in February.

Speaker 3

We now expect Total revenues to be in the range of $1,035,000,000 to $1,055,000,000 from our previous range of $1,055,000,000 to $1,090,000,000 representing annual growth rate of approximately 3% to 5%. From a quarterly shape perspective, as Michael mentioned, we anticipate that approximately half of Nordion's full year revenue will occur in the 4th quarter. In addition, we expect Sterigenics volumes to slightly increase throughout the remainder of the year and Nelson Labs revenue to remain relatively flat sequentially. For the full year, we expect adjusted EBITDA to be in the range of $520,000,000 to $535,000,000 From a range of $530,000,000 to $550,000,000 representing an annual growth rate of approximately 3% to 6%. The tax rate is now expected to be in the range of 30% to 32% from our previous range of 30% to 33%.

Speaker 3

Weighted average diluted shares remain in the $283,000,000 to $285,000,000 range. Adjusted EPS remains in the range of $0.78 to 0 $0.86 We now expect Capital expenditures to be in the range of $200,000,000 to $215,000,000 at the upper end of the previous range of $185,000,000 to $215,000,000 driven primarily by increased capitalized interest from higher borrowing costs. Lastly, we expect net leverage to finish the year at or below 4 times. Now I'll turn the call back to Michael.

Speaker 2

Thank you, John. As we move to Q and A, I want to reemphasize that Centerra Health is focusing on executing our strategy and is dedicated to our mission of safeguarding global health. At this point, operator, let's open the call up for question and answer.

Operator

Thank you. We will now begin the question and answer session. And the first question will be from Patrick Donnelly with Citi. Please go ahead.

Speaker 4

Hi. You have Brendan on for Patrick. Thank you so much for all the Clarity with the revised guidance. Actually wanted to ask on the EO settlement in Illinois with the 3 claimants that decided to opt out. Any idea what the timeline is moving forward?

Speaker 2

Good morning, Brendan. It's Michael. No, we don't. We're waiting on the courts to tell us The timelines and scheduling plans. Just so it's clear for you and others, we had the option To walk away on the deal, we went ahead and reviewed the claimants and all the fact sheet around that and we feel very confident about moving forward with the settlement with those 3 opt

Speaker 4

Great. Thank you. And then second question is a follow-up. How should we think of pricing in the second half of the year given the reduced volumes.

Speaker 2

We've said along this business about 3 point The 5% price, I think you ought to feel confident that it will be in that range looking forward.

Speaker 4

Great. Thank you so much.

Speaker 2

Thank you.

Speaker 5

And the

Operator

next question will be from Sean Dodge from RBC Capital. Please go ahead.

Speaker 6

Yes, thanks. Good morning and congratulations, John. Glad to have you here. Michael, the sequential improvement in Sterigenics margins, can you just walk us through in a little bit more detail what drove that? And then As we think about the expectation that volumes there will be a little bit softer than maybe initially Contemplated, how much adjustment or maybe how much more adjustment can you make to that cost structure in the short term to try and right size for that?

Speaker 2

Yes. Good morning, Sean. We'll continue to be efficient as best we can in our operations as we look across all three This is the volume softening. We've had some challenges as you've probably seen and heard in other areas that inventory destocking and inventory levels of some of our customers. But We feel pretty good about the margin levels and consistent performance we get out of Sterigenics.

Speaker 2

There isn't huge flexibility on that cost structure. There is some labor aspect within those operations, but Not large operations. If you take a given facility, 30, 40 people in a given facility, it's not like there's 400 or 500 per facility. So there is some limitations on that, but the team has done a really nice job on operating leverage and we continue to get price in that business. So we feel good about the margin levels within Sterigenics.

Speaker 6

Okay, great. And then on the EO emissions, the regulations there, any more updates or thoughts On the proposed rule there from the EPA and what the final rule could look like? And I guess have you been in communication with the EPA since the proposed rules were released?

Speaker 2

Yes. So we submitted comments and I think there was probably in total like something like 40,000 comments across the industry. Our expectation is the EPA, they're working on their consent order. So we expect them to have some type of adoption of a knee SHAP by March of 2024. That's the current time line that we're expecting to see final rules.

Speaker 2

We've had conversations with the regulators through different trade groups. They're aware of the inputs from us as well as many others.

Speaker 6

Okay. Great. Thanks again.

Speaker 3

Thank you,

Operator

Sean. And the next question is from Dave Windley from Jefferies. Please go ahead.

Speaker 7

Hi, good morning. Thanks for Michael, we've talked in the past about kind of the volumes that the industry, the kind of broader healthcare industry is seeing On the medtech side and amongst medtech hospitals, etcetera, there's been talk about improvements in those volumes. And you've commented about kind of the disconnect between that and what you are seeing. I wondered if you could comment on that. What indicators you're seeing in kind of ahead of you that make you think that the softness that you're experiencing is going to continue?

Speaker 7

And perhaps is pricing are customers Showing any sensitivity to the price that you're taking and is that affecting volumes at all? Thanks.

Speaker 2

Yes. Thank you, David. Hospital volumes have been rebounding and returning to pre pandemic levels in many facets around the world. We're seeing that. We do see inventory pressure at our customers.

Speaker 2

We see that as I mentioned last quarter, we're seeing it continue into this quarter. We'll see that Probably moving forward into the next quarter as well, so we've been thoughtful on how we look at our outlook on that side. That doesn't mean we're not seeing improvements in cardiac devices or orthopedic. It's just when you look at in totality, there's categories that are down, Particularly when you look at PP and E or you look at surgical kits and areas like that where there's lots of inventory buildup because people are scrambling to get it during the COVID time period. So I don't want you to walk away thinking that we're seeing it across the board.

Speaker 2

We've got significant customer growth in many, Many customers in the categories I just referenced. As far as price, listen, that's always a conversation we have with customers or somebody on the other end of that conversation. We feel confident about our ability to continue to get price because of the great service we bring and the criticality of our services. But that's always a delicate conversation. Sterigenics in the quarter continued to have a nice quarter and outside the volume and mix was just a little softer.

Speaker 2

But we factored it into our Going forward and we think as I mentioned just previously when asked, the company in total will get 3.5% to 5% price depending on which business you're talking about in our outlook.

Speaker 7

Right. Okay, great. And then, maybe relatedly, but bigger picture on your guidance, your Margin implication in the new guidance is not a lot, but slightly higher in fact than where it was in the past. So you're kind of taking cost out Faster than the revenue decline. Could you talk in a little bit more detail about the areas where you're able to do that Without further implicating or further compromising revenue?

Speaker 2

Yes. David, we don't we're going to continue to do the right things around And make sure there's a balance here taking care of our customers, but this is not a cost play. This business in total, as we've talked about many times, is a high single digit organic grower. We feel confident in our ability to return to those levels when we get through this abnormal time period, if you will, with some of the destocking and bio Processing challenges that are out there. I mean bioprocessing isn't a huge segment for us, but it does impact us as well, particularly in the Sterigenics side and a little bit in Nelson.

Speaker 2

When we look at our margin rates, we feel pretty confident that they're going to return to historical levels, as they did in the quarter. That you saw here, the Q1 was abnormally low, but as we messaged in the past, that's always our lowest quarter to year. But I don't want you to think this a big machete ripped a bunch of cost out play. That's not what this business is about. We feel confident in our ability to continue to grow this business in high single digits work through this current cycle we're in.

Speaker 2

So I just want to be clear with that, David. We'll continue to drive efficiency. Mike and Joe, In particular, our working operating efficiencies and routine. And as you may recall, late last year, We built up quite a bit of talent within the Nelson side to address potential demand that would come because we're really focused on service. Since that demand has not come through as strongly as we'd like, we've appropriately let some of those headcounts, if you will, tread down on a natural level, but I don't want you to think that we're getting super aggressive and just taking a bunch of cost out.

Speaker 7

Yes, got it. That's very helpful. Thanks for the additional detail.

Speaker 6

Yes, great. Thanks, David.

Operator

And the next question is from Luke Sergant from Barclays. Please go ahead.

Speaker 8

Great. Good morning. Thanks. Just a follow-up on, Wendy's question there. So on the volume side, you mentioned a little bit bioprocessing.

Speaker 8

Can you talk can you kind of break out Where the weakness was, med device versus the pharma non devices business that you guys have?

Speaker 2

So I would just say, Luc, on bioprocessing, we see that in the Sterigenics business mostly. It's not a huge portion, but it's good mix for the company. That industry, as you've seen with some of our customers that have publicly gone forth in the last weeks, they continue to struggle with volume. So that I would tell you that's where we're seeing it. We also have some food and cosmetics within the Sterigenics It's been a little softer in the current cycle and then also MedTech.

Speaker 2

On the lab side, it's med device and some bioprocessing in On the pharma side as well biopharma in particular.

Speaker 8

Okay. Any quantification on how the bioprocessing volumes are down? Just to frame it and then I have a follow-up on like your outlook.

Speaker 2

Yes, they're down significant double digits.

Speaker 6

All right. That's fine. Yes.

Speaker 8

Cool. And then so I'd

Speaker 2

say in excess of probably 30% or so.

Speaker 8

Okay. That's helpful. And then so like on the recovery in the Cath, you talked about dairy volumes improving sequentially. Can you just give us a sense of how the quarter paced out, what your exit rates were? Anything that gives you that confidence where

Speaker 2

Yes. There is a cyclicality in this business a little bit as you saw 1st quarter to 2nd When we look at the Q3, I got to take you Sterigenics. We look at the Q3, we'll see a slight improvement, slight, if you will, Versus second quarter and slight improvement again in the Q4. And then on the Nelson side, obviously, on the Nordeon side, we gave prepared remarks on that 75% of the revenue will be in the second half with 50% of the total year's revenue will be in the 4th quarter. So you could kind of Figure how that it's a big hockey stick, which we knew all year long.

Speaker 2

In the Nielsen side, you're not going to see significant growth When you look

Speaker 6

at it, the back half

Speaker 2

of the year from the levels that we are at here in the second quarter, Q3 will be a little lighter than the 4th quarter, when you

Speaker 6

think about it that way.

Speaker 8

That's helpful. Thank you.

Operator

And the next question is from Casey Woodring from JPMorgan. Please go ahead.

Speaker 9

Great. Thank you for taking my questions and welcome, John. So, yes, as a follow-up to the Nelson point, it looks like Nelson revenue came in line with expectations today. So just wondering if the new guide is contemplating a slower recovery and Nelson in the back half than maybe what you had originally thought, Guiding the flat revenue here sequentially or was the revised guidance here mainly lower Sterigenics volume? And then just what are you hearing from customers in Nelson?

Speaker 9

Any sort of order trend commentary that you can give so far through 3Q?

Speaker 2

Yes. Casey, thank you. I would say on the Nelson Both Nelsin and Sterigenics have been factored in, the softness have been factored into the guide. Consistent with the comments I just made a little bit ago, you'll see Q3 a little lighter than you see the second and you'll see Q4 more in line with kind of second. So you'll have a relatively flat, if you will, second half of the year versus where we finished Q2.

Speaker 2

As far as what we hear from customers, One of the things we really are obsessed with is quality and service, making sure our Net Promoter Scores, we continue to see improvements in stability in that area, which We're proud of hit or miss. We've got some customers that have not made some new product testing a high priority for them, so that does have an impact. We know MDR has slowed down a little bit in Europe, which was having a big impact. And then we've done a really nice job in our biopharma area over the last Couple of years and that's a little choppier than we'd like. But overall, we're really confident on where the Nelson business goes long You also saw the step improvement in margin in the 2nd quarter that we told you to expect, being the 1st quarter is always the lowest.

Speaker 2

And when you look at where those margin levels Our ad that's pretty consistent with what we see here near term, but in the mid term we expect it to get to mid to longer term we expect it to be in the mid-30s as we've told you in the past.

Speaker 9

Got it. And then just a couple of quick follow ups. So CapEx expectations are picking up a bit on the year. Curious if that has anything to do with Further facility upgrades following the EPA proposal or if it's something else? And then just on leverage, how should we think about the cadence of debt pay down over the next few quarters, Particularly important here given the rising interest rate environment and then what should we be modeling for interest expense for the back half of the year?

Speaker 9

Thank you.

Speaker 3

Yes. Let me unpack a few of those. I think taking in turn, I think your first question was around CapEx. We've got about $100,000,000 we've spent through the first half of the year. Really all our programs are on track.

Speaker 3

We're out in front, I think of the PA regulations a little bit as we've been going on our facility enhancement. So there's no real change on what we've been doing there. We're executing our plans and really driving that improvement The biggest thing that changed as we have this rising rate environment is and some pretty extensive As we have an uptick in capitalized interest that's pushing us into the top end of the range. And to give you a flavor, it's a little north of $10,000,000 in total capitalized interest for the company

Speaker 10

for this year.

Speaker 3

I'll take your last question, failing to remember the second one right off the top of my head, around Paydown, that or actually that was your second question, sorry. We're evaluating a little bit of debt paydown. We feel really good. The team did a nice job, getting the term loan in place and improving our liquidity position. So we feel really good about the liquidity position that we have.

Speaker 3

And we're considering debt pay down as we look at the back half of the year and over the next year, but no immediate plans just yet. And then just lastly, as you think about interest expense, we do expect an uptick in interest expense in the second half. We did about there was about $1,000,000 of interest expense in the first half. We'd expect about a 40% increase versus that number in the second half and it's really Driven by a couple of factors, most notably the increasing rate environment we are in and we have some hedges that We're advantageous that are rolling on, a little more advantageous than the hedges that we have remaining. And then We have the annual or the a full 6 months of the term loan that came in at the beginning of February.

Speaker 9

Thank you.

Operator

And the next question is from Matthew Mishan from KeyBanc. Please go ahead.

Speaker 5

Hey, good morning. You guys said you completed 2 expansion products in the quarter. Does the Softer volume environment impacts your ability to kind of build those over the near term?

Speaker 2

I'm sorry, Matt. I didn't hear that last part, you trailed off.

Speaker 5

I said does the softer demand environment impact your ability to kind of fill those that fill that extra capacity over the near term?

Speaker 2

Over the near term, no, actually one of those is actually doing very, very well. So I would say not.

Speaker 5

Okay. And then Michael, I think Nelson Labs has been a recurring, like negative theme for almost a couple of years now. Just how much time do you personally plan to spend on Nelson Labs in the second half like digging in on that business?

Speaker 2

I dig in that business very frequently. I would just make sure you understand that one of the things we've talked about in the past. That business has been a consistent performer pre pandemic. It was probably in the mid-30s in margin rates. We got a big bolus The volume that came in on PP and E that was great mix that we really did a great job digesting.

Speaker 2

It took our margin rates up Definitely higher than our expectations. We were able to execute against that. And coming out of that, it's been a challenging environment with labor and volume. I'd say overall, I spent quite a bit of time there, but Joe and the team are doing a really good job. Lots of good work in growing our pharma business and our presence there, Continue to drive customer satisfaction, and really overall the thought leadership they bring across the industry and the company has been good.

Speaker 2

Not to the volumes we'd like though, so we've got to continue to work on that. But it's something that we all spend time on making sure we're doing the best we

Operator

The next question is from Michael Pollock from Wolfe Research. Please go ahead.

Speaker 10

Good morning. Thank you for taking the question. Another twist on the guidance update. Michael, to your credit earlier this year, you were calling out potential destocking Amongst device customers, you were saying that ahead of your close peer who is now also saying it. And I look at the quarter and you missed the Street a little bit.

Speaker 10

You hit us. Sterigenics was again a little late versus the Street in line with us. As I if you hadn't told me any adjustment to the full year, I would have, I think, with the straight face been able to pencil out The back half as it prior as it previously was, so kind of getting back to your old range. And so look, Thematically, you seem to have anticipated some of these challenges. I'm just wondering what changed.

Speaker 10

Is it just Thematically, you had it numerically, it was softer and that's the answer or and maybe bring in John here. John, just curious if there's kind of A change in guidance philosophy, now that you're in the seat. So, any color on this front would be great.

Speaker 2

Yes. Thematically, at the time when we talked last time, Mike, we saw some concerns around the softness, but you don't know exactly where as we've We don't know exactly where our customers' inventory levels are. We've got thousands of customers on the Sterigenics side and how that's going to play out. It's a really mixed As I mentioned earlier in this call, we've got some categories that are doing really, really well. And then there's some others that aren't and just the impact of that.

Speaker 2

I think it's To your point, thematically we've seen it. And numerically, we wanted to make sure we're being thoughtful as we give guide the rest of the year based on what we're seeing. We are still very bullish on this business overall and our ability to continue to deliver significant growth year in, year out. It's Just right now, we want to make sure we're being responsible in messaging to you. John can give you a reaction to philosophy and guidance.

Speaker 3

Yes. My initial reaction is that Michael and I are very much aligned, on our approach to this. We want to tell you what we see in a timely manner. We want Look down the field and make sure we're telling you what we see and hitting the numbers that we put out there. It's very important to us, and we'll continue to work at it.

Speaker 10

Helpful. For the follow-up, just can you refresh us on just Sterigenics capacity expansion projects? How many Are in process and over the next say 18 months, how many would you expect to start Going live and filling up.

Speaker 2

Yes. So we've got 4 of them still in process and those will I appreciate your time and support ongoing and have a great day. Thank you. Bye bye. The

Powered by Quartr
Earnings Conference Call
Sotera Health Q2 2023
00:00 / 00:00