Sotera Health Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 27, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Cetera Health 4th Quarter and Full Year 2023 Conference Call. All participants will be in a 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

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

Speaker 1

During the call, some of our comments may be considered forward looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results differ materially from those projected or implied. Please refer to Cetera Health's SEC filings and the forward looking statements slide at the beginning of the presentation for a description of these risks and uncertainties. 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 EBITDA, adjusted net income, tax rate applicable to adjusted net income, adjusted EPS, adjusted EBITDA margin, segment income margin, net debt and net leverage ratio as well as constant currency comparisons.

Speaker 1

A reconciliation of GAAP to non GAAP measures for all relevant periods may be found in the schedules attached to the company's press release and in the supplemental slides to this presentation. The operator will be assisting with the Q and A portion of the call today. Please limit yourself to one question and one follow-up, so that we can try and give everyone an opportunity to ask questions. As always, if you have any questions post call, please feel free to reach out to me and the Investor Relations team. I'll now turn the call over to Sotero Health Chairman and CEO, Michael Petros.

Speaker 2

Good morning, everyone, and welcome to today's call. This morning, we reported both top and bottom line growth for the quarter and the full year, while delivering 50% plus adjusted EBITDA margins. 2023 presented many challenges including macroeconomic and customer supply chain pressures, a shifting regulatory landscape and a lumpy cobalt 60 harvest schedule at Nordeon. Throughout the years, the Centerra Health team demonstrated resiliency, adaptability and unwavering commitment to the company's core values in the face of these challenges. In addition to the growth we delivered, we were successful in achieving a number of operational goals.

Speaker 2

At Sterigenics, we completed 4 capacity expenses and made significant progress on our U. S. EO facility enhancements. The Noridian team secured cobalt-sixty supply and successfully delivered 50% of its full year revenue in the Q4. The team also made good progress on the long term Cobalt 60 development programs.

Speaker 2

Nelson Labs achieved significant growth in its technical advisory services areas throughout the year. RCA, a business we acquired in 2021, continues to deliver strong revenue growth as RCA supports customers in their interactions with regulatory agencies such as the FDA. We also resolved a substantial amount of ethylene oxide litigation in 2023 with the Illinois settlement of 8 80 claimants as well as the recent settlement of approximately 25% of the personal injury claims in Georgia. We finished 2023 in a strong liquidity position with approximately $700,000,000 in liquidity, which is an increase of over $200,000,000 from the end of 2022. John will provide more detail on our financial results in a moment, but first I want to highlight a few items from our 4th quarter and full year 2023 results.

Speaker 2

We reported total revenue growth of 23.3 percent and adjusted EBITDA growth of 28.7% compared to the Q4 of 2022. For the full year 2023, revenue grew by 4.5% and adjusted EBITDA grew by 4.3% compared to 2022. 2023 marks another year in which we continue to streak of annual revenue growth, which we've achieved every single year since 2,005. With respect to the business units, Sterigenics delivered 6.5 percent top line growth for both the quarter and the full year. As we've discussed previously, Sterigenics, our largest reporting segment, has delivered consistent growth throughout its history.

Speaker 2

Serving its customer base through a comprehensive global network of 48 facilities, this segment has delivered a compound annual growth rate of 10% on its top line and 11% on its bottom line since becoming a public company. These growth rates speak to the durability of the business model as Sterigenics provide critical, often government mandated services, which represents a fraction of the overall product cost for our customers. Nordian, our other business within the Sterilization Services segment, delivered 134.2 percent revenue growth for the quarter. This performance was expected and was driven by the timing of Cobalt-sixty harvest schedules. As we've consistently messaged, Nordeon's revenues tied to the harvest schedule of our Cobalt 60 suppliers, which results in irregular revenue patterns on a quarter to quarter basis.

Speaker 2

The team has unique expertise in navigating the complex Cobalt-sixty supply chain. And as I've stated earlier, the Nordon team did a fantastic job delivering 50% of its full year revenues in the 4th quarter. On a full year basis, Nordeon revenues were up 4.4%. Revenue in Nelson Labs, our lab testing and advisory services business grew 4.3% in the quarter versus the Q4 of 2022. Full year 2023 revenue was down approximately 1% versus the prior year.

Speaker 2

Nelson Labs continues to face the same headwinds we referenced on our Q3 2023 call, including the extension of compliance deadlines for European Union medical device regulations, decline in funding startups and smaller companies and lastly, softened demand for routine lot release testing tied to a slowdown in sterilization volumes. Overall, 2023 was a good year for Centerra Health considering the uncertainty driven by macroeconomic pressures, customer inventory destocking and geopolitical events. I also want to take a moment to highlight the progress we made on our corporate responsibility initiatives. I am proud of our team's accomplishments since the IPO in 2020. As part of our IPO, the Board established ESG oversight within our Nominating and Corporate Governance Committee.

Speaker 2

We also established an internal cross functional committee which reports in the Meet and we appointed 2 seasoned senior executives as co chairs to lead chairs begun in 2021 2022. Some of the highlights of our accomplishments include in the environmental area, we have been working with a third party software solution to establish in the first time published baseline environmental metrics. As previously mentioned, we continue our investment in industry leading state of the art emission controls at our yield facilities. We also published our first environmental management statement in our 2023 Corporate Responsibility Report. With respect to human capital, culture and communities, we published our formal human rights statement and disclosed initial human capital data.

Speaker 2

We completed a global employee engagement survey with 83% participation rate. Our Shotara Health Women's Network held an interactive session for our leaders with our Board Director, Anne Klee. We are proud to announce that in 2023, women represent more than 40% of our global leadership promotions. On the governance side, we welcome Karen Flynn to our Board. Karen brings Board independence to 91% and she adds valuable commercial experience in the farmer services space, which is an important aspect of our long term strategy.

Speaker 2

We also launched a formal enterprise risk management process with results that led us to prioritize 6 initial areas. These 6 areas are highlighted in our 2023 Corporate Responsibility Report. And finally, our team completed outreach to institutions holding 60 percent of the company's public stock float in 2023 and we held meetings on ESG topics with institutions holding approximately 40% of the public float. We greatly value these discussions and share the feedback regularly with our Board of Directors, including this past week. We look forward to continue to share our corporate responsibility accomplishments in the future.

Speaker 2

Earlier today, we provided our initial 2024 outlook. For the full year 2024, we expect to deliver another year of top and bottom line growth with total revenues and adjusted EBITDA growth expected to be in the range of 4% to 6% when compared to 2023. The variability within our full year revenue range will be largely driven by the timing and magnitude of the market recovery in both Sterigenics and Nelson Labs. Now John will take us through the financials in more depth.

Speaker 3

Thank you, Michael. I will first cover Q4 and full year 2023 results including updates on capital deployment and leverage. I will then conclude with additional details on the 2024 outlook. On a consolidated total company basis, 4th quarter revenues grew by 23.3% or 21.9% on a constant currency basis to $310,000,000 The 4th quarter volume growth was abnormally high with 50% of Nordeon's full year revenues landing in the period as Michael previously mentioned. 4th quarter adjusted EBITDA grew by 28.7 percent to $167,000,000 and adjusted EBITDA margins expanded by almost 2 25 basis points to 53.7%.

Speaker 3

Our reported interest expense for the quarter was $43,000,000 Reported net income for the Q4 of 2023 was $39,000,000 or $0.14 per diluted share. Adjusted EPS was $0.26 for the quarter, an increase of 0 point 0 $1 Now let's take a look at our segment performance for the Q4. In the Q4, Sterigenics delivered 6.5% revenue growth to $172,000,000 Revenue growth drivers for the quarter included favorable pricing of 5.8% and favorable changes in foreign currency exchange rates of 1.7%, partially offset by slightly unfavorable volume and mix of approximately 1%. Segment income grew 6.4% to $95,000,000 driven by favorable pricing and changes in foreign currency exchange rates, partially offset by higher costs and unfavorable volume and mix. Nordion's 4th quarter revenue increased by approximately 134 percent to $80,000,000 driven by favorable volume and mix of over 100% and pricing of over 30% as Nordeon generated 50% of its full year revenue in the quarter as expected.

Speaker 3

Segment income increased by more than 160 percent to $53,000,000 and segment income margins expanded by 7 20 basis points to 66.8 percent. Nelson Labs returned to growth in the 4th quarter as 2023 revenue improved 4.3 percent to $58,000,000 compared to the same quarter last year. Revenue growth was driven by favorable pricing of 3.6% and foreign currency tailwind of 1.2%, partially offset by unfavorable volume and mix of 0.5%. Segment income decreased 7.8 percent to $19,000,000 and segment income margin declined by 420 basis points to 32.1 percent, which was driven by unfavorable volume and mix coupled with some inflationary pressure, partially offset by favorable pricing. For the full year, we delivered $1,050,000,000 in revenue, up 4.5% or 4.2% on a constant currency basis.

Speaker 3

We grew adjusted EBITDA 4.3 percent to $528,000,000 resulting in an adjusted EBITDA margin of over 50%. Reported interest expense for the full year was approximately $143,000,000 Reported net income for 2023 was $51,000,000 or $0.18 per diluted share. Adjusted EPS for the year was $0.81 per weighted average diluted share, a decrease of $0.15 primarily driven by higher interest expense and a higher tax rate. I will now turn to liquidity, net leverage and capital deployment. The company continues to be in a strong liquidity position.

Speaker 3

As of year end, we had approximately $700,000,000 of available liquidity, which included $296,000,000 of unrestricted cash $400,000,000 of available capacity under our revolving line of credit. For 2023, after adjusting for the $408,000,000 Illinois settlement, we generated $260,000,000 of operating cash, which is in line with prior years and demonstrates the cash generating strength of our business. Our net leverage ratio finished the year at 3.8 times, within our target range of 2 to 4 times. As you may recall, our net leverage ratio increased to 4.2 times in the Q2 of 2023 after the financing of our $500,000,000 term loan and subsequent $408,000,000 Illinois settlement payment. Since Q2 of 2023, our net leverage ratio has improved nearly half a turn, which demonstrates our ability to delever through growth.

Speaker 3

CapEx for the year finished at $215,000,000 As Michael mentioned, Sterigenics completed 4 capacity expansions during the year and made significant progress on the EO facility enhancements. We currently have 3 growth projects in process, 2 of which are greenfields. Nordeon's Cobalt-sixty development programs are progressing well. As I mentioned during our Q3 call, these are once in a generation long term projects that won't yield incremental cobalt until later in the decade. For Nelson Labs, we continue to invest in expanding our pharma capabilities and in our lab information management system that we are deploying across the business segment.

Speaker 3

Now I would like to discuss our 2024 outlook. For the full year, we expect total revenues and adjusted EBITDA to grow in the range of 4% to 6% with adjusted EBITDA margin similar to 2023 levels. We expect another year of solid price performance with 2024 being at the lower end of our long term stated range of 3.5% to 5% due to the moderation in inflation and timing of long term contract renewals at Nordeon. From a revenue cadence perspective, Q1 typically is the lightest quarter of the year for the company and we expect that to be the case again in 2024. In Sterigenics, we are assuming relatively flat volumes in the first half with slight recovery beginning in the second half of twenty twenty four.

Speaker 3

Versus 2023, Nordion revenues will be more balanced between the first half and second half with the Q1 again being the lightest quarter of the year, but stronger than 2023. For Nelson Labs, revenues for the first half of the year will be slightly lower than the back half with the Q1 being historically the lightest quarter of the year. In the past couple of years, we have provided visibility to the revenue associated with Russian cobalt supply. As of today, there is an approximate risk of between 0% and 3% of total company 2024 revenue. At this point, I would like to direct you to Slide 18 of the earnings presentation that is posted to our investor website under Events and Presentations, which outlines a change we are making to the calculation of adjusted net income.

Speaker 3

By way of background, during Q2 of 2023, we closed on a 5 $1,000,000 term loan to fund the $408,000,000 Illinois EO settlement. Consistent with our treatment of EO litigation related costs, we excluded the interest costs related to $408,000,000 of this loan to calculate adjusted net income. Beginning in 2024, we will no longer make this adjustment. We have presented the impact this change would have had in 2023, so you have the right basis for comparison going forward. As you will see on the slide, adjusted net income is reduced from $230,100,000 to $202,300,000 The effective tax rate applicable to adjusted net income increased from 31.4 percent to 33.8 percent and adjusted EPS changes from $0.81 to $0.71 per weighted average diluted share.

Speaker 3

These are the appropriate basis for comparison for our tax rate and EPS guidance. For 2024, we expect interest expense between $170,000,000 $180,000,000 We are projecting an effective tax rate applicable to adjusted net income in the range of 31.5 percent to 34.5%. Adjusted EPS is expected to be in the range of $0.67 to 0 point 7 $5 We expect a fully diluted share count in the range of 283,000,000 to 285,000,000 shares on a weighted average basis. From a capital deployment standpoint, we will continue to prioritize organic growth and deleveraging as well as opportunistic M and A. And we expect capital expenditures in a range of $205,000,000 to $225,000,000 in 2024.

Speaker 3

As previously communicated, we expect 2024 to be an elevated level before we start to see a decline in CapEx spending in 2025 when we will start to see free cash flow generation accelerate. Finally, our guidance does not assume any M and A and we anticipate net leverage to improve in 2024. I will now turn the call back over to Michael for closing remarks.

Speaker 2

Thank you, John. As we look forward to 2024, we'll continue to focus on our priorities. A few of these priorities include expanding our global network through disciplined investment in Cobalt-sixty development and additional capacity. We'll continue to invest in upgrades to our U. S.

Speaker 2

EO emission control systems. We'll further enhance our 1 company capabilities through cross functional business unit initiatives, all while delivering top and bottom line growth with strong cash flow generation. I want to reemphasize the strength and durability of our business model. In 2024, we expect another good year of performance in spite of uncertain demand recovery. The fundamentals of the criticality of our services remain intact with our customers.

Speaker 2

We have long term relationships with the top medical device and pharma companies in the world that are supported by multiyear contacts. We will continue to execute for our customers and when market volumes improve, Centerra Health will benefit from that recovery. Our focus day in and day out is on our mission of safeguarding global health. This company plays a critical role in healthcare and we are in a strong position for growth once again in 2024. At this point, operator, let's open up the call for Q and A.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Sean Dodge with RBC Capital. Please go ahead. Yes.

Speaker 4

Thanks. Good morning. I just want to start on Sterigenics. Michael, you said the guidance assumes volume recovery in the second half of the year. Can you give us a sense of the proportions of Sterigenics revenue you're expecting first half to second half?

Speaker 4

I guess historically second half has always been bigger in terms of revenue. Is 2024 going to be a lot more pronounced? And then maybe if you could just

Speaker 5

talk about the visibility you

Speaker 4

have into that. Is it just expecting a market recovery? Is there something else you're seeing now that indicates that?

Speaker 2

Yes. Good morning, Sean. Yes, it will be similar to what we've seen in the past where second half's is typically a little bit better than first half. I don't think it's going to be dramatic, but as we said, relatively flat volumes in the first half for Sterigenics and improving in the second half. It's really trying to predict, as I stated in my comments around the recovery on the market volumes.

Speaker 2

We still see some destocking occurring in the channels, but we can tell you overall, we're not seeing it get worse. It's very stable both on the Sterigenics side as well as the Nelson side. It's not getting worse. We just the question is when the recovery will start to come back and we just want to give you visibility of how we are thinking about it as the year plays out.

Speaker 4

Okay, great. And then on Nelson, maybe just any update on the margin outlook there. Aside from just more volumes coming through? Are there some cost actions you can take, levers you can start to pull to drive some improvement in margins in the Nelson business?

Speaker 2

Yes. As we've mentioned in the past, Sean, we got our position early in 2023 where we probably over resource based on the volumes. And we did that with an eye towards better service and making sure that if volumes came back, we had the people in place to really take care of that business. I would tell you that we'll see improvements as the year progresses. We're going to we get turnover in that business.

Speaker 2

We'll work that down. We're not going to be backfilling as many jobs until we see the volumes recover. But our goal here is to get to the mid-30s as we've mentioned. It will take us some time to get there, but that's ultimately where our aspirations are over time.

Speaker 5

Okay.

Speaker 2

It's a fine line there, Sean. We want to make sure we're there to service customers. That's the biggest thing when that volume comes. Okay. Thank you.

Operator

The next question will come from Dave Windley with Jefferies. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my question. Michael, I wanted to start on a little bit more strategic question. On these long term cobalt supply initiatives that you are working on, when and if those are successful, I know there's some development work around new reactors and things like that. What's the impact of that, I guess?

Speaker 6

You have a kind of a fairly stable and predictable growth rate, certain amount of medtech uses for sterilization. Would you expect that to lower your input costs? Would you compete on price for more market share? Does it allow you to supply or to serve volume that you're not serving today? I guess, I'm wondering, we really haven't discussed this.

Speaker 6

I don't think it much linked because it's far away. But what's the lever for you when you get more cobalt 60 supply?

Speaker 2

Yes. David, thanks for the question. So just for some folks who aren't as familiar, our cobalt development programs are really focused around working with OPG, Ontario Power Group, which is one of our longest term suppliers, getting more capacity there as well as the program we're working with Westinghouse. Our goal with these programs is to be

Speaker 7

able to keep up with

Speaker 2

the market growth over time. So there'll be a portion of it that replaces existing reactors that will go out of service for maintenance work, if you will, or just being retired. But then more importantly, it's also bringing us some additional capacity for longer term flexibility in our global supply chain. So we think ultimately, David, it's needed to keep up with the market growth over the long

Speaker 7

run. Okay. Okay.

Speaker 6

And then maybe on Sterigenics and following up on Sean's question, the volume and the destocking that you're seeing, do you have it sounds like you emphasized it's not getting any worse. That's good news. Do you have visibility into your customers how much more destocking they need to do? Any quantification of that to give you comfort that the volume kind of the correlation of your order patterns to underlying MedTech order patterns might start to tighten up a little bit in the second half?

Speaker 2

Yes. David, it's pretty complicated to supply chain with your inventory, their distribution channels as well as the health systems. We are not seeing it get worse as I stated. One example would be, I met late in the year, actually I'm sorry, it was the beginning of this year with 1 major medtech CEO and he said, listen, I took out $500,000,000 inventory in the back half of the year focused on working capital, right? So we saw that and we are seeing it across multiple customers.

Speaker 2

I think many of you follow the med tech space see that as well and bioprocessing space as well where people are taking it out and trying to get back to pre COVID levels or slightly below. As I mentioned, we're not seeing it get worse. We're not able to draw a great correlation in our square, David, because of some of the pockets in between us, if you will. But we are seeing that stabilize. We're not seeing it get worse.

Speaker 2

We're starting to see a little bit of recovery. But again, we feel pretty confident where we are in calling the visibility for the year on Sterigenics. It's really tied to volumes. We feel very good about our ability. If the volumes come, we're going to be in a position to service that, which will help us get more margin improvement over time as well.

Speaker 6

Great. Appreciate the answers. Thank you.

Operator

The next question will come from Luke Sergut with Barclays. Please go ahead.

Speaker 8

Great. Thanks guys. I'm going to follow-up on that with the destocking. I mean after dealing with it with the bioprocessing side and seeing all the devices. So is there any way that you guys could estimate like as to how much has been stocked or from a normal cadence?

Speaker 8

Is this like over a full year that's been stocked up and they're working down 6 months, something like that, so we can get I understand you're not going to call there on the timing, but just from a magnitude like have and going back in history, have you ever seen anything like this where we can kind of use that as a framework?

Speaker 2

Luke, unfortunately, we can't. Like I think all of you are struggling as you look at these big medtech companies and pharma companies, right? They're global nature. They've got multiple product lines if it's pharma and med device. We look at we have conversations with them.

Speaker 2

We look at their public filings around their inventory levels, their days sales on hand, and we try to do the best job we can. And we've talked to lot of our investors. They're having the same struggles looking through that with our customer base. But I would just tell you, we don't see it getting worse. So that would be the part that I want you to leave with as we continue to work through this overall throughout the channels.

Speaker 8

All right. Great. And then just on the margin guidance, flat margin year over year. As the volumes come back in the back half and your growth there accelerates throughout the year, Obviously, the pacing there should pick up in the margins, but I'm just wondering why we're not getting back to more normalized levels there. Is there any from an investment standpoint, if you guys can bucket out like the puts and takes there from the margin dynamics throughout the year?

Speaker 8

Yes.

Speaker 2

So I would look at it that when you look at 2022 and 2023, the margins are pretty consistent at just slightly over 50%. That's kind of where guides lead you in 2024. We're focused on really driving margin dollar growth, not necessarily rate expansion. But over time, if we get more operating leverage, as I mentioned minutes ago, I think that will help us with margin improvement. But right now, our guide is expecting flat margins at 50 plus percent.

Speaker 8

Okay. Thanks.

Operator

The next question will come from Brett Fishman with KeyBanc. Please go

Speaker 5

ahead. Hey guys, thanks so much for taking the questions. Just wanted to start off on one more follow-up around the revenue growth guidance. I'm just hoping if you could walk through some of the moving pieces, particularly around Nelson Labs and Nordeon and thoughts for the year. I think you gave some commentary on the phasing, but maybe if you could just give a little bit more on full year expectation and how to think about whether the step up in Nelson Labs performance in 4Q could proceed into 2024?

Speaker 2

Yes, Brett. I think it's all predicated on the volume recovery. As I stated in my remarks, that's the pluses and minuses around the guide that we've given. We expect Nelson will continue to improve over time. We've had good growth in our RCA business that's been able to help us offset some of the volume in the sterility side, as I've also mentioned some of the MDR compliance timing that's played out.

Speaker 2

On the Nordion, Nordion will be a consistent performer for us. It will be the lightest quarter, but in the Q1, but it will be over what you saw last year because as you know, last year was a really slow quarter. But overall, we're going to result in a growth rate that's slightly better than what you saw last year out of the Nordyam business.

Speaker 5

All right. Thanks for the color. And then just one follow-up I had. Maybe if you could just give a little bit more on how we should be thinking about the free cash flow set up for 2024. I think obviously you had a pretty big

Speaker 9

adjustment or moving piece in 2023

Speaker 5

around the settlement. But maybe the ongoing CapEx projects that you have going? Thank you. Yes, I think that's a good question. I think that's a good question.

Speaker 5

I think the ongoing CapEx projects that you have going? Thank you.

Speaker 3

Yes. Brad, thanks for the question. It's John Lyons. We do see a favorable position on free cash flow for the year. I think when you pull out the settlement, we are somewhere around $40,000,000 or $50,000,000 in 2023.

Speaker 3

A couple of moving pieces inside that as I look going into 2024. Number 1, we do have the Georgia settlement that paid out in January. So that's a moving piece. And then interest is going to be slightly elevated for the year compared to last and taxes will be slightly elevated. On the flip side, we'll have some EBITDA growth that will generate some cash and we have less of a headwind on working capital going into the year.

Speaker 3

And we're very focused on generating free cash flow and we'll keep driving it. And as we as I said before in Q3, we see CapEx coming down over the next couple of years and our free cash flow performance will really accelerate as we move into 20 5 and 2026.

Speaker 5

All right. Thanks for taking the questions.

Speaker 7

Appreciate it.

Speaker 2

Thanks, Brett.

Operator

The next question will come from Casey Woodring with JPMorgan. Please go ahead.

Speaker 10

Hi. Thank you for taking my questions. Just to follow-up on the CapEx guide, the $205,000,000 to $225,000,000 this year, is that the floor or could the finalized Vishap ruling drive that high potentially? And maybe if you could just break down for us how much of that number is on EO facility enhancements versus the capacity expansion projects and the cobalt development programs underway? And then you just mentioned now that the elevated CapEx this year will take a step down in 2025.

Speaker 10

Can you just give us a sense for how many of these costs this year are non repeating?

Speaker 2

So, Casey, I guess you got the one question out with 15 compounds. I'll try to answer as best we can. We're expecting the guide to be $205,000,000 to $225,000,000 on CapEx. We've got about $40,000,000 in there for GFE. The cobalt development is a significant investment this year as we stated this last year and this year are the biggest years around that.

Speaker 2

As far as NESHAP, we expect to hear something in NESHAP sometime in the month of March. It could be earlier March. We're waiting for the final guide from the government. There could be incremental cost on it depending on exactly where that comes from. But based on what we know today, we feel pretty confident of our position and our ability to meet the requirements.

Speaker 2

Again, we took a very industry leading approach on this and how we're trying to resolve the emission challenges that are expected by the EPA. But overall, we feel pretty good about the cap guide that we're given for 2024. I think I got all your questions. There were several in there. I'm sorry if I missed one.

Speaker 10

Yes. No, that was helpful. Just as a follow-up to, so you completed 4 Sterigenics capacity expansion projects in 2023. You have 3 left to finish. I think you mentioned at our conference last month that you have one of those coming online this quarter.

Speaker 10

Just curious if you can quantify the increase in overall Steregenics capacity by the end of these expansion projects? And then if you could walk through what your capacity utilization expectations are for 2024 and if the softer volume environment is weighing on margins at all and would then create an easier comp once demand normalizes?

Speaker 2

Okay. So yes, we have one of the 3 capacity projects in process that's coming live in the Q1. We don't get into particulars on how much incremental capacity that will generate for the market. But overall, again, we try to get commitments for our customers for approximately 40% of those expansions before we do that. That doesn't mean it happens in everyone, but that's what our guide is.

Speaker 2

And I would tell you that as we look at those programs, one of them will come this year and then we'll have one late in 2024 and into 2025 for the other ones. I think I got all of them. The capacity utilization, I think, was your other question. We target about 80%.

Speaker 10

Okay, got it. Thank you.

Operator

The next question will come from Patrick Donnelly with Citi. Please go ahead.

Speaker 9

Hey guys, thanks for taking the questions. Michael, maybe one just on the pricing side. It sounds like this year is going to be a little more at the low end of kind of that long term 3.5% to 5% algorithm. Is that just I know you touched on some of the timing stuff. Is that all I just want to kind of talk through what you're hearing from customers on the core business.

Speaker 9

It sounds like the Nordion piece is maybe dragging that down a little bit, but what are you hearing on pricing? And again, what's the right way to just think about going forward beyond this year as well?

Speaker 2

Yes, Patrick, thanks for the question. Yes, we feel confident at 3.5% to 5%. We just wanted to signal to you this year could be on the lower end of that range driven by the point that you just referenced. The longer term, it's just the nature of what is some of the longer term contracts for Nordion rolled off. We had a very strong Nordion price performance in 2020 3, which would just soften a little bit in 2024.

Speaker 2

We are not concerned about our long range ability to generate price based on the value proposition we offer to our customers.

Speaker 9

Okay. That's helpful. And it sounds like over the past couple of quarters, maybe you had some good dialogue with investors. Obviously, there's a pretty concentrated holding at the top there. I mean any intel or insight into kind of what the initial holders are kind of thinking about in terms of potentially things like secondaries, things like that in terms of just the concentration of the holdings up top given that you seem like you can chat with them a good amount?

Speaker 2

Yes. Well, they're on our board, so I do chat with them quite a bit. At the end of the day, there are shareholders. They've got to make decisions on when they sell the stock. They're not going to be reckless about it.

Speaker 2

They're very thoughtful in that. It's been a great investment for them. They're very supportive of the company. And over time, they'll eventually sell their positions. We all know they're private equity firms and that's what they do.

Speaker 2

But overall, they're being very thoughtful how they ramp that down. They want to make sure they're not doing it in a reckless manner.

Speaker 9

Understood. Thanks, Michael.

Speaker 3

Thanks, Patrick.

Operator

The next question will come from Michael Pollard with Wolfe Research. Please go ahead.

Speaker 7

Thank you. Good morning. Nordeon, 1Q, look, I hear the somatic comment, but the range we could paint, you could drive a bus through. So like what's the right number for Nordion revenue in the Q1? Should we look at $22,000,000 $21, dollars 25,000,000 $30,000,000 something like that or not quite that high?

Speaker 2

Yes. Michael, we're not going to get into particulars on individual businesses by quarter. It will be up from last year, won't be as high as 2022, is the way I would think about it. It's just last year was really abnormally low because we came in a position, as you recall last year, we hardly had any inventory at all coming into the year.

Speaker 7

The follow-up below the line interest expense and tax. The question on taxes, why is the tax rate so high? And is there a path to get it lower? And then on interest expense, I'm just trying to do the bridge 23,000,000 to 24,000,000. John, here the comments clear on Illinois.

Speaker 7

It was excluded last year, it's included this year. If I do that, dollars 116,000,000 of interest expense last year, it's Illinois is probably $35,000,000 So now I'm 150 and you're guiding 170 to 180. What else is going on there? Is that just cycling in kind of higher rates generally on the overall balance? Or are you modeling an incremental draw at some point in the year?

Speaker 7

I just want to fully understand the bridge from 23% to 24% uninterested.

Speaker 3

Yes. Thanks for the question. And I just want to make sure that folks understand and clarify. As we look at this, we reported today $0.81 of EPS on an adjusted basis for 2023. When we make these adjustments, right, the new baseline for comparison is $0.71 And yes, the tax adjustment there sticks out a little bit leaving the higher tax rate.

Speaker 3

The trick we have here on our tax rate and why it's elevated is our excess interest expense that we can't deduct for U. S. Tax purposes. That because of our outlook not being able to deduct that in future and get the benefit, we have to take a valuation allowance against that, which leads us to a higher tax rate. Continuing to grow is a path to reducing the tax rate over time and lowering things like interest expense that drive up U.

Speaker 3

S. Taxable income and our ability to use the interest deductions will help improve it. So Mike, the other thing

Speaker 2

I would just add, there's no incremental new debt contemplated in the guide. And the number that we finished last year at 1.4 3 compared to the guide of 170 to 180 that's just the timing run out of the loan that we put in last year and that rolling out is for full year and also the higher interest rate environment. That's all.

Speaker 7

Got it. Thank you.

Speaker 2

Okay. Great. Any other questions, operator? Is that it, Chuck?

Operator

That is it. I would like to pass the call back over to Mr. Petrus for any closing remarks.

Speaker 2

Great. Thank you, everybody, for getting together this morning. As you can see, we're really proud of what we accomplished in 2023. We're excited and optimistic about 2024. We have a great business here that plays a critical role in healthcare.

Speaker 2

We have sticky customer relationships. We continue to bring real value to our customers day in, day out. But really, we're providing a safe environment for our employees, the patients and the communities where we operate. So we're really proud of what the team is doing, and we look forward to more conversations with you all in 2024. Thank you, and have

Speaker 3

a great day. Bye bye.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Sotera Health Q4 2023
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