Sotera Health Company (NASDAQ:SHC) Q1 2024 Earnings Call Transcript May 3, 2024
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Operator: Good morning, and welcome to the Sotera Health First Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like now to turn the conference over to Vice President and Treasurer, Jason Peterson. Please go ahead.
Jason Peterson: Good morning and thank you. Welcome to Sotera Health’s First Quarter 2024 Results 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 Petras; and Chief Financial Officer, Jon Lyons. 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 to differ materially from those projected or implied. Please refer to Sotera Health’s SEC filings and the forward-looking statements slide at the beginning of this 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 net income, adjusted EBITDA, and 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 found in the schedules attached to the company’s press release and in the supplemental slides of this presentation. The operator will be assisting with the Q&A portion of the call today. Please limit yourself to one question and one follow-up so that we can 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 will now turn the call over to Sotera Health Chairman and CEO, Michael Petras.
Michael B. Petras: Good morning, everyone and thank you for joining Sotera Health’s first quarter 2024 earnings call. Today, we announced both top and bottom line growth compared to the first quarter of 2023 with growth coming from all three of our business units. Jon will provide more detail on our financial results in a moment, but first, I want to highlight a few items from our first quarter results. Total company revenues increased 12.5% and adjusted EBITDA increased 13.7% compared to the first quarter of 2023. We delivered adjusted EPS of $0.13 for the quarter, in line with the same period last year. Sterigenics, our largest reporting segment, delivered another quarter of top line growth of 4.1%. Volumes remained somewhat soft as customers continued to work through supply chain challenges.
Nordion, our other reporting segment within the sterilization services business, delivered 181% year-over-year revenue growth. As you may recall, first quarter 2023 was historically light for Nordion and the large year-over-year increase is driven in significant part to the timing of Cobalt-60 harvest delivery schedules from our suppliers, which are large utilities. Nelson Labs, our lab testing advisory services business, delivered top line growth of 10.8% compared to the prior year. This is the second consecutive quarter of year-over-year revenue growth in Nelson Labs, led by continued strong performance in our expert advisory services business. Core lab testing volumes are down year-over-year, driven primarily by the extension of the deadlines for the European Union Medical Device Regulations as expected.
This morning, we are reaffirming the outlook that we communicated in our last earnings call. As a reminder, our 2024 outlook calls for both revenue and adjusted EBITDA growth in the range of 4% to 6% versus 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 I would like to give an update on some recent ethylene oxide developments. With respect to the lawsuits that were filed in California, we are confident that Sterigenics is not responsible for causing the alleged illnesses. Based on what we know so far, these new lawsuits raise basically the same issues as the EO claims previously filed by the plaintiff firms and other jurisdictions this time in the context of the burden [ph] facilities and in particular circumstances of each of the new plaintiffs.
We believe the evidence will establish that Sterigenics has operated its facilities safely and in compliance with all regulations. We operate safely to sterilize vital medical products and devices and have consistently complied with and outperformed optimal regulations regarding our emissions. As the local regulator South Coast Air Quality Management District has consistently reported ethylene oxide levels in the surrounding residential communities with its background levels found in areas without nearby sterilization facilities. As long as we are able to put on a full and fair defense, we are confident in the judicial outcome. Although we acknowledge the challenges presented by lawsuits involving cancer and other serious diseases, we do not believe that ethylene oxide litigation will have a long-term material impact on the company.
We have posted a comprehensive list of FAQs that is available under the Ethylene Oxide section of our investor website, and we will update that periodically with pertinent information. Please recognize that we are in active litigation, we will not provide additional commentary beyond what I stated here and was included in our FAQs and SEC filings. As many of you know, in March, the EPA finalized the updated national emission standards for hazardous air pollutants, commonly referred to as NESHAP. Although the updated requirements will be very challenging for the sterilization industry to meet, we believe that our significant and proactive investments across our U.S. ethylene oxide facilities in EPA method tool for permanent total closure technology and other state-of-the-art emission controls have positioned Sterigenics to be able to comply with the updated standards within the time frame specified by the final rule.
We do not believe a material amount of additional CAPEX beyond our current plans will be required to meet the finalized regulations. Despite these challenges, let us not forget our mission, safeguarding global health. We help to ensure the safety of health care and protect the lives of millions around the world. One example of this is the role that Nordion plays in the treatment of brain cancer which is referenced in our earnings deck. We take our role in health care seriously, and our team is steadfast in our commitment to living out our mission day in and day out. Now Jon will take us through the financials in more detail.
Jonathan M. Lyons: Thank you, Michael. I will begin by covering the first quarter 2024 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 then conclude with additional details on our 2024 outlook. On a consolidated total company basis, first quarter revenues increased by 12.5% as compared to the same period last year to $248 million. This equates to an 11.8% increase on a constant currency basis as we experienced a total company foreign currency tailwind of just under 1%. Adjusted EBITDA increased by 13.7% compared to the first quarter of 2023 to $112 million. Adjusted EBITDA margins were 45.1%, representing a 50 basis point increase from the first quarter of the prior year, the majority of which is explained by higher Nordion revenues versus unusually light revenue in Q1 2023.
Our interest expense for the quarter was $42 million versus $29 million in Q1 of 2023. The increase in interest expense was driven by higher interest rates and having a full quarter of the $500 million term loan that was put in place during Q1 of 2023. Adjusted EPS was $0.13 per share, which was flat to the first quarter of 2023 as improved operating results were offset by increased interest expense. On a GAAP basis, net income for the first quarter of 2024 was $6 million or $0.02 per diluted share compared to net income of $3 million or $0.01 per diluted share in first quarter 2023. Now let’s take a closer look at our segment performance. In the first quarter, Sterigenics delivered 4.1% revenue growth to $166 million. Revenue growth drivers for the quarter included favorable pricing of 4.9% and a favorable impact from foreign currency of nearly 1%, which was partially offset by unfavorable volume and mix of 1.6%.
Segment income grew 3.6% to $86 million, driven by favorable pricing and changes in foreign exchange rates, partially offset by unfavorable volume and mix as well as inflation. Nordion’s first quarter revenue increased 181% to $24 million compared to the same period last year, while segment income increased to $11 million. As a reminder, Nordion had an abnormally low first quarter in 2023. Increases in Nordion’s revenue and segment income versus first quarter 2023 were driven by favorable volume and mix related to the timing of reactor harvest schedules. Nelson Labs’ first quarter 2024 revenue increased by 10.8% to $58 million driven by favorable volume and mix as well as pricing. Segment income increased by 8.8% to $15 million, also driven by favorable volume mix as well as prices.
Segment margin rates declined slightly versus Q1 of 2023 due to a shift in mix as we experienced strong growth in expert advisory services. Now I’ll provide details on liquidity, net leverage, and capital deployment. The company’s liquidity position continues to remain strong. As of Q1 2024, we had over $660 million of available liquidity, which included more than $260 million of unrestricted cash and $400 million of available capacity under our revolving line of credit. We delivered positive operating cash flow in the quarter, although it was lower than normal, primarily due to the payout of the Georgia settlement. Capital expenditures for the first quarter 2024 totaled $35 million. As we have communicated previously, our capital expenditure priorities are focused on Sterigenics’ capacity expansions and U.S. EO facility enhancements as well as Nordion’s cobalt development programs, which are critical to the long-term growth of the company.
Outside of the three current Sterigenics expansion programs, we do not expect material incremental capacity expansions in the near term for Sterigenics. Free cash flow was slightly negative in the quarter given the lower operating cash flow performance I previously mentioned. We do expect to generate positive free cash flow for the year. We finished the quarter with a net leverage ratio of 3.8 times within our target range of 2 to 4 times. As Michael mentioned, based on the first quarter and what we see for the remainder of this year, we are reaffirming the outlook we provided in February 2024. To recap, for the full year 2024, we expect total revenues and adjusted EBITDA to grow in the range of 4% to 6%. As stated during our Q4 2023 earnings call, we expect to be at the lower end of our long-term stated price range of 3.5% to 5%.
Full year 2024 adjusted EBITDA margin rates are assumed to be similar to last year. In Q2, we expect year-over-year margin rates to be down modestly as a result of a decline in Nelson Labs’ margin rates due to the change in mix I mentioned earlier. We do expect Nelson segment income margin rates to improve sequentially throughout the year with full year margin rates approaching 30%. From a cadence perspective, we expect slightly less than 45% of full year total company adjusted EBITDA to occur in the first half of the year. In Sterigenics we still anticipate slight volume and mix recovery beginning in the second half of 2024. At Nordion, we continue to expect the year to be more balanced than last year with approximately 35% of revenues to occur in the first half of the year.
Also, we now see Russian cobalt supply risk to be between 0% and 1.5% of total company full year revenue. For Nelson Labs, we expect volume and mix to be relatively flat on a year-over-year basis for the remainder of the year. We expect core testing volumes to improve while we lap some large projects and expert advisory services, which supports our expectation for sequential margin improvement. We continue to expect interest expense between $170 million and $180 million. And effective tax rate, our adjusted net income in the range of 31.5% to 34.5%. Adjusted EPS is expected to be in the range of $0.67 to $0.75. A fully diluted share count in the range of 283 million to 285 million shares on a weighted average basis. Capital expenditures in the range of $205 million to $225 million.
As previously communicated, we expect CAPEX to step down in 2025 and 2026, resulting in an acceleration of free cash flow generation. This is a high priority for the company. Our guidance does not assume any M&A, and we still anticipate net leverage to improve during the year. I’ll now turn the call back over to Michael.
Michael B. Petras: Thank you, Jon. As we wrap up our prepared remarks, I want to reemphasize that Sotera Health remains well positioned for growth throughout 2024. Our global network of 63 facilities provides our customers with excellent service day in and day out, and this team is proud of the critical role the company plays in the health care community. At this point, let’s open the call up for questions and answers.
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