Sotera Health(SHC) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total company revenues increased by 12.5% year-over-year to $248 million, with an 11.8% increase on a constant currency basis [10][16] - Adjusted EBITDA rose by 13.7% compared to Q1 2023, reaching $112 million, with adjusted EBITDA margins at 45.1%, a 50 basis point increase from the previous year [10][16] - Adjusted EPS was flat at $0.13 per share compared to Q1 2023, while GAAP net income increased to $6 million or $0.02 per diluted share from $3 million or $0.01 per diluted share in the prior year [17] Business Line Data and Key Metrics Changes - Sterigenics, the largest segment, reported a revenue growth of 4.1% to $166 million, driven by favorable pricing and foreign currency impacts, despite unfavorable volume and mix [5][18] - Nordion experienced a significant revenue increase of 181% to $24 million, attributed to the timing of Cobalt-60 harvest delivery schedules [11][19] - Nelson Labs saw a revenue growth of 10.8% to $58 million, supported by strong performance in expert advisory services, although core lab testing volumes declined year-over-year [11][19] Market Data and Key Metrics Changes - The company noted that the sterilization industry faces challenges due to updated EPA emission standards, but believes its investments will allow compliance without significant additional capital expenditures [7][12] - The overall market for ethylene oxide sterilization remains tight, with over 50% of medical devices sterilized using this method, indicating ongoing demand despite regulatory pressures [57] Company Strategy and Development Direction - The company reaffirmed its 2024 outlook, expecting revenue and adjusted EBITDA growth in the range of 4% to 6% compared to 2023, with variability driven by market recovery timing [6][22] - Capital expenditures are focused on Sterigenics' capacity expansions and enhancements, with a total of $205 million to $225 million expected for the year [25][21] - The company aims to maintain a net leverage ratio within the target range of 2 to 4 times, finishing Q1 2024 at 3.8 times [21][26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in slight improvements in volumes for both Nelson Labs and Sterigenics as the year progresses, with stabilization noted in certain categories [30][31] - The company is actively monitoring litigation related to ethylene oxide emissions, asserting confidence in its compliance and operational safety [12][34] - Management highlighted the importance of maintaining operational excellence and driving capacity from existing assets, especially in a tight market [59] Other Important Information - The company reported a strong liquidity position with over $660 million available, including more than $260 million in unrestricted cash [20] - Interest expenses increased to $42 million due to higher rates and a full quarter of a $500 million term loan [17] Q&A Session Summary Question: Volume trends and expectations for Q2 and Q3 - Management expects slight improvements in volumes for both Nelson Labs and Sterigenics, with stabilization noted in certain categories [30] Question: Updates on litigation related to ethylene oxide - Management stated it is early in the litigation process but remains confident in its defense and compliance with regulations [34] Question: Final NESHAP requirements and facility enhancements - Management indicated that approximately $40 million will be spent on facility enhancements this year, with significant progress already made [38] Question: SG&A expenses and run rate expectations - Management noted that there are no significant concerns regarding SG&A increases, attributing them to normal merit increases and variable compensation [39] Question: RCA dilution and margin expectations for Nelson - Management confirmed that while RCA has been a drag on mix, margins are improving, and they expect to approach mid-30% margins in the long term [45] Question: Capacity expansions and timelines - Management provided updates on three capacity expansions, with one going live soon and the others expected in late 2024 and 2025 [68]