Q4 2021 Sotera Health Co Earnings Call
Good morning, this is normal and welcome to foot yourself fourth quarter 'twenty 'twenty. One results call you may find today's press release and accompanying supplemental site in the investors section of the company's website at <unk> Dot com.
This webcast is being recorded and a replay will be available in the investors section of Superior's website.
On the call today are Michael Pietrus, Chairman and Chief Executive Officer.
Scott Leffler, Chief Financial Officer during the call some of the statements and the company may make can 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 in.
Projected or implied.
Please refer to so terrorists health FCC filings and the forward looking statements slide at the beginning of this presentation for a direction for a description of these risks and uncertainties.
The company assumes no obligation to update any forward looking statements. Please note during today's discussion the company will represent both GAAP and non-GAAP financial measures, including adjusted EBITDA adjusted EPS and net leverage ratio a reconciliation of non-GAAP to GAAP measures for all relevant.
<unk> periods may be found in the schedules attached to the company's press release and the supplemental slides during the Q&A portion of today's call. Please limit yourself to one question and one follow up.
So that we can try to give everyone an opportunity to ask questions I will now turn the call over to Scott Harris.
Chief Chairman and Chief Executive Officer, Michael Pietrus.
Good morning, everyone and thank you for joining us on to Tara helps fourth quarter 2021 earnings call.
I'm very pleased this morning to be reporting another quarter of double digit revenue and adjusted EBITDA growth.
This is the fifth quarter that we've reported as a public company and we have reported double digit top and bottom line growth in every quarter since going public in November of 24 on our last call I remind you that the Terre Haute and delivered revenue growth every year since 2005, when our tracking begins.
With these positive full year results for 2021, we have now officially extend that streak yet another year against a healthy 2020 comparable which we grew even during the initial onset of the pandemic.
Scott will provide more detailed a moment, but here are some of the highlights on our fourth quarter performance.
We reported total revenue growth of 11% and adjusted EBITDA growth of 10% compared to the fourth quarter of 2020 as well as adjusted EPS up 23.
Which was up 14% increase over fourth quarter of last year.
<unk> capped off another good year with positive momentum in the fourth quarter continued to run near peak utilization level, while the team continues to manage our facilities at optimum levels.
<unk> finished the year strong with full year performance significantly outpacing its historical growth trajectory.
As we expected and discussed on our last call Nelson Labs continues to work through lingering pandemic impacts the combination of unwinding elevated PPE testing ongoing normalization of core testing activity and the impact of customer supply chain disruptions contributes to a weak quarter for the segment.
More recently pandemic related absenteeism and labor market challenges have had a negative impact on our lab business as well the Nelson labs team has taken decisive action to counter these headwinds overall, so terra health had a good quarter and strong 2021 on a consolidated basis that performance is also reflected in the careful managing.
One of our balance sheet as we achieved net leverage of three five times, representing an improvement of three quarters of a churn for the total year.
This is consistent with both our near and longer term leverage goals.
But even more importantly to the financial results were reporting today I am excited to detail for you a few of the countless examples of how our mission safe.
<unk> global health translates to making a difference in the markets, where we operate and ultimately for patients.
One example includes the testing of artificial skin for critical burn patients. This testing is performed by Nelson Labs. Another example is the sterilization of components used in robotic cardiac surgeries, which is completed to steer Genesis facilities, using New Orleans cobalt 60.
Also excited about the recent launch of the Nelson Labs, Mark, which is a verification program Keith and confirms the legitimacy of Nelson labs testing really to the efficacy and safety of certain products in the marketplace.
So Nelson labs, Mark is the culmination of years of validation testing and we're excited to be offering our customers and consumers a means to differentiate legitimate products from those that may not been adequately tested.
2021 was a significant year for us in terms of executing our strategic priorities complementing our financial performance with continued execution on organic growth initiatives and strategic M&A.
In addition, we continue to advance the rollout of our ESG strategy, where we're advancing our communication on topics that are critically important for our overall mission as well as internal and external stakeholders.
Among other elements our ESG program is helping drive forward, our our actions related to the FERC equity inclusion.
As an organization, we always seek to maintain a culture that supports a strong team this collaborative and diverse and attributes as well as ideas.
In addition in 2021, we launched the <unk> Academy. This is a new digital thought leadership library create to better serve our customers by leveraging the knowledge and expertise of our expert advisers, which also includes the expertise of our most recent acquisition regulatory compliance associates or RCA.
The <unk> Academy will our customers to access critical content to expand their knowledge base.
Our customers and many others in the industry realize our expertise to help them navigate the increasingly complex regulatory landscape.
Overall, I'm very proud of the entire <unk> team for <unk>.
<unk> a record year in 2021 and of course post first full year as a public company.
Our <unk> health team maintained their focus on our mission safeguarding global health, while meeting the needs of customers health care workers and patients.
So as we look forward to 2022, we will continue our focus on our priorities, which include driving operational excellence across our businesses.
Vesting for growth, such as adding capacity and enhancing infrastructure and pursuit of strategic M&A and efficiently integrating acquisitions.
Earlier. This morning, we provided our guidance for 2022 for the full year 2022, our guidance is total revenues in the range of 1 billion to one 3 billion, which represents growth of approximately 7% to 11%.
Adjusted EBITDA in the range of $515 million to $535 million also representing growth of approximately 7% to 11%.
And adjusted EPS in the range of 93 to 99.
Representing growth of 6% to 13%.
We are targeting increased level of investment in growth oriented projects in 2022, reflecting a positive longer term view of the demand environment for our products and services. We will continue with the capacity expansions that we're active in.
Active coming into the year. In addition, we intend to kick off two new sterilization greenfields, while continue to invest in the major cobalt 60 supply development projects that we announced previously.
Scott will cover the outlook in more detail, including our qualitative assumptions on trends.
As well as what we currently expect relating to the cadence.
Now I will comment briefly on what we expected in the broader markets, where we operate and how they impact our businesses.
The persistent and evolving nature of the pandemic along with this actually impact on supply chain and labor market remains important factor coming into 2022.
For most of last year, we felt those impacts were more indirectly based on how they created challenges for our customers.
Recently, we are feeling the impact more significantly in terms of labor as there have been higher levels of pandemic related absenteeism as well as labor market disruptions in the form of labor shortages and wage inflation.
We've often said that our businesses are well positioned to pass through inflationary cost pressures to maintain our margin profile in this position has not changed.
Last year, we characterize the macro environment is uncertain, we remain cautious cautiously optimistic this year I would characterize the environment in a similar manner.
We are encouraged by the resilience of the markets, we serve but are cautious in light of the many unexpected turns at this pandemic as products.
I'll now turn the call over to Scott to cover the fourth quarter in more detail and comment further on our outlook.
Thanks, Michael I'll first cover the fourth quarter highlights on a consolidated basis, and then provide some insight on each of the business segments, along with update on capital deployment and leverage our <unk>.
And with more detail regarding our 2022 outlook.
On a consolidated total company basis for the fourth quarter revenue grew by 11, 3% as compared to the fourth quarter of last year to $241 million.
On a constant currency basis revenue grew by approximately 11, 5%.
Adjusted EBITDA grew 10% from Q4, 2000 $20 million to $125 million.
Adjusted EBITDA margins declined by 40 basis points compared to Q4 of last year driven entirely by margin compression within the Belton lab.
I'll provide more detail on that in a moment.
Our strong operating performance combined with a reduction in interest expense of more than $32 million resulted in adjusted EPS of <unk> 23 per share up <unk> 14 from Q4 of 2020.
As a reminder, the interest expense reduction resulted from the repricing of our term loan and plan to pay down debt consistent with our capital deployment strategy.
Now, let's take a closer look at the segment performances.
In Q4, <unk> delivered more than 11% revenue growth and almost 13% segment income growth over Q4 of last year.
Revenue growth drivers for Q4 included organic volume and mix growth of more than 8% as well as pricing contribution of nearly 4%.
There was no inorganic contribution for the quarter and FX impact was minimal compared.
Compared to the fourth quarter 2020 segment income margins expanded by more than 50 basis points, driven by higher utilization levels and pricing.
<unk> volumes remained near peak utilization level.
We continue to make meaningful investments in <unk> capacity and the enhancements that our north American facilities.
For Nordion Q4 revenue grew by 28% to $37 million compared.
Compared to Q4 of 2020.
Segment income grew 33% to $21 million compared to the same period last year.
<unk> on top and Bottomline growth were driven by a 19% contribution from volume and mix almost 7% from pricing and a favorable 2% FX impact nor.
<unk> margins were up by approximately 220 basis points, driven by operating leverage on the higher sales and favorable pricing compared to Q4 of last year.
For Nelson Lab, Q4 revenue increased by 2% to $54 million compared.
Compared to the fourth quarter of 2020 and segment income declined by approximately 13% to $20 million for the same period.
Year over year period.
As Michael mentioned Nelson Labs is the one business unit that is experiencing challenges relating to direct and indirect impact from the pandemic.
Similar to the third quarter <unk> experienced a 10% headwind from reduced PPE testing, which was largely offset by contributions from the acquisitions of Bioscience labs and RCA.
Favorable pricing also contributed a little over 3% of revenue with non PPE volumes largely flat.
Q4 of 2021 margin for Nelson lab contracted by about 620 basis points compared to Q4 of last year, driven most significantly by the lower mix of PPE and testing and margin dilution from the Bioscience lab and RCA acquisition.
The two acquisitions contributed approximately 190 basis points of dilution to segment income margins in Q4.
We view this impact from the acquisitions, both shorter term in nature, while we scale up the business.
Finally, Q4 was also affected by the increasingly challenging labor market as referenced earlier.
Now, let me provide some highlights related to capital deployment and net leverage.
Our capex for 2021 was $102 million, which reflected a significant acceleration of spend in Q4.
Our spending was and is focused on growth initiatives facility enhancements and nordion cobalt supply projects.
This is in response to both current and anticipated growth in customer demand.
As of December 31, we had $107 million in cash and maintain a strong liquidity position.
Our net leverage declined to three five times, representing a total improvement for the year of about three quarters of the term.
As previously communicated the combination of our recent debt Paydowns and the repricing of our term loan in January resulted in a reduction in full year interest expense from over $215 million in 2020 through about $74 million in 2021.
Finally, I want to provide additional color around our 2022 outlook.
Start with the quantitative summary, and finished with our folks.
For full year 2022, we are providing guidance of.
Total revenues in the range of 1 billion to $1 3 billion representing growth of approximately 7% to 11% adjusted.
Adjusted EBITDA in the range of $515 million to $535 million.
Also representing growth of approximately 7% to 11%.
The tax rate applicable to adjusted net income of 29% to 30%.
Adjusted EPS in the range of 93 to 99.
Representing growth of 6% to 13%.
And our fully diluted share count in the range of 280 million share grew 283 million shares on a weighted average basis.
Before discussing capital expenditures I wanted to add some color on our effective tax rate for 2022.
Some of you may recall that the 2017 tax reform provided for limitations on the deductibility of interest.
The tax reform at that time provided for a change in 2022, whereby deductibility would be further limited this increasing limits on deductibility combined with a large carryforwards of non deductible interest from prior period impact how we account for taxes and result in a slightly higher tax rate in 2022.
Moving onto Capex.
Our capex is projected in the range of $140 million to $170 million for the year. This level represents a material increase over our 2021, capex and an even greater increase over our historical spending level.
In 2022, we are increasing investment in a number of capacity expansion projects.
We plan to kick off two new sterilization Greenfields in 2022 that are expected to come online by 2024.
In addition, we expect to ramp up spend on Nordion long term cobalt development projects and continue to invest in more routine capacity expansions at existing <unk> Nelson lab facilities.
Our portfolio of capacity expansion project represents investments across all of our segments and in all major technology and geography for the company.
Our elevated spend particularly the kickoff of the two new sterilization Greenfield reflects our optimism regarding long term customer demand for our services.
As we've noted frequently in the past we did not make these types of investments unless the demand calls for it.
We also expect increased levels of spending related to our program with facility enhancements across our U S network.
Finally, we expect interest expense in 2022 to be in line with 2021, the rising interest rate environment should translate to increases in interest expense on the unhedged portion of our variable rate debt, which will offset some of the savings from debt pay down and the repricing in 2021.
From a qualitative standpoint, our assumptions are as follows.
We are anticipating labor market and inflationary pressures to continue through the first half of 2022 as well as some continued direct or indirect impact from ongoing COVID-19 related supply chain disruptions.
We have not assumed any specific geopolitical risk in our projections, but our focus on anticipating and managing these types of risks to the extent we are able.
As we look at the cadence of quarterly reporting I'll comment briefly on each business unit.
<unk> finished 2021 with positive momentum and we expect that to continue into 2022 with the greatest benefit from recent capacity expansions and pricing initiatives being realized in the second half of 2022.
As is always the case phasing of <unk> performance is driven in large part by harvest and shipment schedules for cobalt 60.
Based on how we see deliveries shaping up this year, we think there will be a relatively even balance between the first half and second half of the year.
Nelson Labs is expected to fuel continued pressure in the first half of 2022 from the same headwinds reflecting recent quarter.
That being the case, we expect segment revenue to be down in the beginning of the year with further margin deterioration to the low 30% range for early 2022.
Combined with realizing benefits from pricing and operational initiatives. We expect run rate segment income margins to return closer to more normal level in the second half of the year.
Nelson Labs, and <unk> will both experienced some lag between inflationary cost pressures in the first half of the year and the offsetting price benefits in subsequent quarters.
From an FX standpoint, our guidance assumes that current rates remain in effect for the remainder of the year.
Current rates would represent approximately a 1% headwind to total company revenue for the year and this headwind is reflected in our guidance.
From a capital deployment standpoint, we continue to prioritize growth initiatives and strategic acquisitions, we do not assume any acquisitions in our guidance.
I know that was a lot and we're happy to take any questions during the Q&A.
Michael I want to thank all of our team for their individual and collaborative efforts continue to put us in a strong position for future growth.
Michael back to you.
Thank you Scott before transitioning to Q&A I'd like to address a topic on the minds of many investors we do in our annuity business source some of our cobalt 60 from Russia. As we have previously disclosed we are monitoring the current geopolitical situation.
Taking appropriate action to protect the supply of cobalt 60 at the present time no customers have been affected our 2022 guidance is based on our current understanding of already announced sanctions, which we do not expect to have any impact on our Russian supply at this time.
There is no way to predict with any certainty how the events will unfold in the short or long term basis scenarios. We've looked at thus far EBIT situation fortunate dramatically worsen, we expect an impact of between zero and 3% of total Terror health 2022 revenue.
So to sum up as we move into the question and answer session. So Terra health continues to be in a strong position for growth on both the top and bottom line in 2022 overall, we feel really good about the company's current and future prospects at this point Norma we'd like to open up the call for question and answers. Thank you.
Thank you.
A reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
Please keep your questions to one question and one follow up.
Please standby, while we compile the Q&A roster.
Our first question comes from Matt <unk> with Credit Suisse. Your line is open.
Great Thanks, and good morning.
Appreciate all the color.
Then one just.
Question on the guidance.
EPS growth range.
Obviously at the bottom end of the range is below the sales growth range that you provided and Scott I just would love to understand.
What factors kind of potentially drive EPS to that level.
The other side, what factors would drive you to sort of the higher end and deliver some leverage and then I have one follow up.
Sure. Thanks, Matt.
So I think if you look at the guide in terms of the movement in adjusted EBITDA relative to the movement in revenue.
You can infer from that largely flat margins at the adjusted EBITDA level and so some other factors that we're contemplating in the other drivers of adjusted net income and adjusted EPS would include a modest increase in depreciation expense, which is reflective of some of the investments that we're making.
As I mentioned earlier, we're assuming relatively flat interest expense year over year, but we are assuming.
Modest increase in the tax rate applicable to adjusted net income.
Really on the kind of pre program change.
The corporate.
Corporate tax environment based on the 2017 tax reform.
Okay.
That flat ish, but not for the.
Depreciation tax rate and interest expense roughly is that is that the right way to think about it.
That's a fair interpretation, yes.
Hey.
And then just a follow up.
Michael if I could on getting.
<unk> gotten a lot of questions on Russia, and Ukraine, obviously.
You're expressing others with exposure have expressed some what.
It sounds like.
More and more comfort or more at least a starting position of we are not expecting a significant impact.
Any any context, you can provide potentially around the nature of the contracts and agreements that you have or the nature of the sanctions and how at this point you have a bit more confidence than maybe others might it at more.
More superficial level just looking at the.
The location of that relationship.
Yes, Matt. Thank you good morning.
What I would tell you is we buy cobalt from several sources around the world, Russia is one of them and we have a long term supply agreement with them like we do other utilities around the world remember, we procure it and then we transported over to our Ottawa facility to do final processing.
Based on what we see today and to talk with the.
The authorities are materials are not sanction at this point in time, and we feel that we're gonna be able to continue to move product around and get it to our customers.
Obviously.
It's a matter of managing some of our inventories from the inbound and the outbound shipments to our customers that ultimately matter, but at this point in time.
We're not impacting or projecting any.
Impact to our financials on that.
So in my prepared remarks gave you kind of a worst case scenarios, we see it right now if the situation were dramatically change.
And just to be clear on that at worst case scenario I mean, what would change it would be the materials wood wood would become sanctioned or.
And does that include some I don't know logistical challenges in getting getting supplies out what would what gets you to that June three or the high end of that it could be any of the above right.
Matt its hard to as you know this is an evolving situation right in exactly how the logistics paths are are maneuvering. If you will are evolving.
So if theyre sanction specifically on the materials segment.
The banking relationships, there's many factors that go into it.
I don't I don't have great visibility going into all the sanctions and the plants, obviously that others may be contemplating.
That's basically how we looked at it if we werent able to get the cobalt, we need that would be the downside impact.
Understood. Thanks, so much okay.
Alright Thats helpful. Thank you.
Our next question comes from Sean Dodge of RBC capital markets. Your line is open.
Yes, thanks and good.
Good morning.
I guess on the capacity expansions in <unk>, Michael you mentioned, two new sterilization Greenfields can you give us a little bit more background on those where are they are they going to be <unk> or a different technology, how much additional capacity does that add and then anything on the permitting process or kind of regulatory process involved.
The lead times, they have difficulty in establishing one of them.
These facilities from scratch.
Yes.
Sean we've been in dialogue with our customers as well as the regulatory authorities as well as people in the communities.
We always do when we look at expansions, while we're not going to get into specifics of how much capacity. It brings a what modality is we are making investments across our network on all technologies in all major geographies.
We expect these greenfield to come on in the second half of 2024, and the nice part as Scott referenced is consistent with what we've done in the past we have significant customer.
Expectations around this and interest and ultimately will result in.
The commitments as we've put the shovels in the ground. So we're really optimistic about this and the big point I want you to take away from this is the end markets continue to see value in the services, we provide and the demand is there.
And that's reflected in our <unk> performance to date and it will be going forward as well.
Okay.
I guess and then Scott you had outlined.
Some of the influences on on net income for the year from the higher interest and tax if we think about EBITDA.
Related to these investments is there anything.
And Thats dragging on EBITDA as you build out this new capacity before it becomes revenue producing.
No certainly not with respect to our 2022 guide.
Okay alright, thank you.
Great. Thanks, Sean.
Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.
Hey, there you got Jason on for Patrick two quick questions first.
You noted in the outlook some embedded assumptions for things like supply chain inflation in labor supply and elective procedure recovery rates. Maybe can you just discuss first what youre seeing there in terms of trends for the year.
Yes.
Recovery piece adjacent and as far as the device volumes, we're seeing continuous increases in coming back obviously.
Towards the end of the year last year things got soft with elective procedures being shutdown and omni crime starting to take in but as we think about 2020 to see a gradual improvement similar to what we predicted last year.
Which were part of my comments going forward.
Sorry, what was the other question and Jason as well just on supply chain and maybe inflation in labor.
Yes.
<unk> chain, we predicted inflation in the business, we feel very good about our ability to offset that with price and other operational improvements in the business.
We see a challenging labor market as we mentioned in our comments clearly feeling it more in the United States and we are in other markets around the world.
In a business like <unk> and Nelson, where we've seen it we think that we will have some overhang of that inflation going into the first half of the year and then as we mentioned second half of the year, we'll be able to start to see some price and productivity to be able to offset that inflationary pressure.
Got it that's helpful. And then just one more question as leverage continues to drop.
Thank you guys get towards three times at the end of the year.
What level you're comfortable with.
Kind of what's your updated position on M&A and inorganic growth moving forward.
Yes, as we stated our long range objective was two to four times net leverage.
In that range today, we feel very proud of what we've been able to accomplish last year getting us down to three five times, our priority still and always has been to reinvest back in the business for inorganic growth Thats why youre seeing the heightened increase and acceleration around our capacity expansions the.
The capital is there the customer demand is there and one other point that we didnt referenced in our comments, we just completed our annual customer satisfaction survey.
Again had very high remarks across the businesses from our customers.
So we're really proud of what the teams are doing day in and day out we see the end markets being pretty strong and we're going to deploy capital for inorganic growth and then we'll be very thoughtful and strategic around M&A and.
And making sure it's on strategy and it delivers to returns that we would expect but overall really not a major change in our capital deployment strategy from what we've outlined in the past.
Great very helpful. Thank you.
Thank you. Our next question comes from Matthew Mission with Keybanc. Your line is open.
Great and thank you for taking the questions.
First guys can you talk a little bit about your visibility towards towards litigation progressing in Willow Brooke as expected in July as well as your thoughts on I notice of proposed rulemaking on DCF at some point by the end of the year.
Yes, Matt This is Michael let me take that.
We use this as opportunity to hit a couple of points on.
The <unk> situation first answering your question. The trials right now are set Illinois for July of 2020 to September 22, and November of 2022, So there'll be three trials right now that we see on plan.
For for the second half of the year, if you will.
<unk> to get those done we've got our teams very focused on our defence and we feel good about where we're positioned today, but ultimately it's can be decided in the courts as far as <unk>.
Overall developments, we continue to move forward, our GFE enhancements. Some of you may have noticed some of the activity towards the end of the year and then more recently the beginning of this year I'd first we'll call out New Mexico. There was a court order granted.
Both parties the attorney General and the company both proposals in front of a judge on how the facility we ought to be monitored going forward. We were pleased with the outcome of that the judge took an order that was consistent with our expectations and we are moving forward as our GSE enhancements that we will have completed here in 2012.
Two for the Santa Teresa facility.
Also another key point.
Although we've had a facility up and operating in Georgia for quite some time with improvements, which again are world leading in many aspects.
We're also pleased to see that recognized by the regulators and we were granted a new environmental air permit in Atlanta. During early parts of 2022. So so we're very encouraged by the things that we're doing in this area and we're going to continue to move forward with that strategy as far as niche App, which I believe is what youre referring to.
Now our current understanding is sometime in the second half probably late second half, we will see a new niche <unk> proposed rule that will be open for public comment.
So that is the current timing.
Multiple times, we've told the team here before we like to have this done earlier than we would've liked to seen in 18, 19, 'twenty or 'twenty one right now the government is is projecting second.
Second half of 2022, and we're anxious just tell us a new rules and we will make sure we exceed the expectations there.
Okay.
Excellent and then.
This year I noticed there was a little bit of a wider reported sales growth range into the guidance than last year, I mean not by much.
But I would I would think that 'twenty one 'twenty two.
A little bit more clarity that maybe maybe you did early last year maybe.
Not.
But what's driving a little bit of that wider range kind of what what encompasses kind of a low end versus the versus the high end.
My recollection is the as far as the initial guidance that we issued in the early part of 'twenty. One it was consistent with us in terms of the.
Kind of a size of the range.
We did narrow the range as we got into the second half of the year, but I wouldn't yes, I wouldn't read anything anything into the size of the range. So this is just I think.
A representative of the different variable drivers of the business, obviously, there's a lot going on out there in the world right now and we just wanted to make sure that we're contemplating the range of factors.
Okay and then just last question on the cobalt.
There were some changes just could you just broadly frame how it got disruption.
<unk> that supply would impact minority in but then also how it has slowed down to <unk>.
So the impact would be that we can't get the cobalt that we need from Russia right. So we have some cobalt projected in our in our business as you are coming from Russia that we would then disperse the customers like <unk>. So the flow would be nordion doesn't get it and hence they won't be able to ship it to the customer is not.
Now recognize not all of our cobalt that we get in any given year goes out in the same year. There is a there's a time lag of processing and things of that nature to get out and we also have other sources of cobalt, hence the range that we gave you the zero to 3% across the whole company and the impact would be our ability to get it out to customers such as <unk> or <unk>.
Other customers that rely on nordion.
Thank you good to emphasize that that range of zero to 3% total company impact that Michael mentioned that would be inclusive of both the direct <unk> impact as well as any kind of downstream impact on <unk>.
Okay.
Yes.
Our next question comes from Luca <unk> with Barclays. Your line is open.
Alright, thanks for the questions.
I just wanted to follow up here on how you guys are thinking about the device recovery. So it seems that most most device guys think that the.
Second half is coming in full.
And your <unk> is at full capacity and your Capex expansions aren't going to bring any new capacity online till 'twenty four so I'm just trying to figure out where the upside to your numbers can come from.
Given the certain levels.
Yes, Luke this is Michel so a couple of points, we see similar type of recoveries in the second half the year being stronger than the first half similar to what Youre hearing from med device, but also recognize that we had several expansions come on late last year and we also have several that are in process that will be ramping up throughout.
'twenty, two and 'twenty three and then the two Greenfields that you mentioned and that I referenced will be 'twenty 'twenty four kind of second half. So I would tell you that we do have some capacity coming on board that we've talked to you about in the past, where we had three that have gone live in about seven of them in process, then we get to two greenfields that's.
What I would tell you to count on and then in addition to that also recognize some of the things that we've mentioned multiple times in the past is about the operational excellence work going on across the company and the work that Mike and the team are doing there too to drive even more efficiency and productivity out of our existing asset base. So we feel confident about our ability to deliver on the revenue that we get.
You are based on our capacity situation. So hopefully that's helpful. Luke.
And then I guess on those Greenfield opportunities are you guys is.
Is that mostly EEO or is that going to be are you guys planning to have new technologies implemented just trying to stay abreast of what's on the horizon here for you.
Yes.
We haven't specifically said publicly what the investments are what we are stating is that for me in all major geographies across all technologies, so that would be.
Cobalt.
X Ray E beam, that's what we would tell you at this point in time.
Alright, thanks. Thank.
Thank you.
Thank you.
Our next question comes from Tycho Peterson with Jpmorgan. Your line is open.
Hey, Thanks, you guys have touched on pricing a couple of times in the prepared comments can you just give us a sense of the magnitude you're expecting this year versus your historical sort of three to five and any just color across the three divisions, where you may see greater pricing potential.
Well I would say.
Really the incremental impact for 2022, obviously as inflation and as we've said.
We have a high degree of confidence that we can pass through any inflationary cost pressures in the form of price I would say when we look across our businesses the cost pressure that we see translate so probably around one 5% to 2%.
<unk>.
Inflationary cost pressure and so when you think about incremental price in 2022, we would expect to be able to recapture that one out to 2% with incremental price above and beyond the historical run rate.
As far as the other part of your question in terms of which businesses would be more or less impacted by it.
Overall, we think that each of our businesses is going to be able to.
Up whatever they.
Feel in terms of cost pressures.
Okay. That's helpful.
And then on the Russia situation I appreciate all the color and the fact, you are talking about zero to 3% impact here you have disclosed in the K that 20% of the cobalt E source comes from Russia. So I'm curious as we kind of think about the situation.
Are you looking at alternative sites at this point, how easy is it to switch.
And do you have kind of minimum volume requirements out of the two facilities in Russia that you are.
Beholding to even if you switch suppliers.
Yes, Tycho, we have a global network of cobalt suppliers, we get cobalt from Russia.
Canada, China, India, Argentina.
<unk>.
These are longer range agreements. This isn't something you can kind of pop in the oven and get it out in 10 minutes right. So two things that has to take time to bake.
We the reason we signaled to you that if there was a worst case scenario was because there arent a lot of offsets to be able to do that we will be able to manage to a certain degree any pressures we get based on the inventory we have in shipments coming in but theres not a lot of excess out there, but we feel really good about where we're at today.
And then Orient business and how well it's positioned for 2022 based on the long term global supply market and also recognize one of the things that we're doing strategically with our Capex is cobalt supply to open up more paths for us longer term to work, we're doing with Westinghouse the work, we're doing with some of the Canadian reactors and some other.
Investments that we Havent announced yet, but I would tell you that we continue to invest in cobalt development for long range supply and also diversification of our supply base. So hopefully that's helpful.
Yes, no that's very helpful. Thank you.
Thank you. Our next question comes from Dave Windley with Jefferies. Your line is open hi.
Hi, Thanks, a couple of follow up questions on one on Tyco's question on pricing. If you. If you are getting I expect to get.
Incremental price to capture.
Inflationary cost pressure that youre seeing.
What would you point then.
As the headwind factors that are preventing you from seeing EBITDA margin expansion too.
A similar degree.
As you normally would in 'twenty two.
So I would say David that there are two factors really one is that there is a small amount of price lag between the time that we identify a inflationary cost pressure and then the time that we are able to rollout offsetting price increases and so that doesn't have a longer term impact on the margin profile, but just at Cree.
It's a little bit of noise in the near term and then the other factor when you look at it on a business unit level is that as we said on our last quarter call and again on this one the normalization of activity that Nelson labs is really.
A few it's going to take a few quarters to work that out obviously, we have one quarter behind us in terms of Q4 performance, but we've got a little bit more time to go still for Nelson to normalize their results, including their margin profile and so that creates on a full year basis, a little bit of lag for the total company results, even though we would.
The second half of the year run rate to look a lot better than what they are going to see in the first half of the year.
Got it and that's a nice bridge to my second question.
Which is around Nelson margin I think in prior quarters as you began to lap the PPE.
<unk> and those were bigger than than were previously expected at least on our on our front you saw we saw margins and Nelson declining from maybe four.
42, 43% down to closer to 40%.
And I think the message was that that kind of reflected those PPE headwinds, obviously fourth quarter was was below that and youre expecting the first half of 'twenty two to be well below that what are the incremental pressures there that are taking.
Taking the margin down and Nelson 1000 basis points.
Sure. So there is some amount of incremental impact even beyond what we saw in Q3 from unwinding, a little bit more of PPE.
<unk> baseline that they had coming into the quarter as I mentioned in my prepared comments, we had almost 200 basis points of margin compression in Q4 that related just to the acquisition activity, which again is just something that we've said in the past is somewhat typical for us because our margin profile is so generous.
As a starting point really pretty much any way anyone we acquire is dilutive in the very near term and then eventually we scale them up to be to be closer to our margin profile.
But really the true new an incremental factor above and beyond those that we expect to impact us in the first half of the year relates to some of the new pandemic or incremental pandemic impacts that Michael mentioned Nelson labs being our most people heavy business had an outsized impact.
Omicron in early Q1.
And then other factors relating to the labor market and so we're pleased with the actions that they've taken in order to respond to those pressures in the early part of Q1, but it will take a little while to normalize that element of their of their operating model.
Got it and then last one on the acquisition comment that you made and I think in your prepared remarks, Scott you talked about.
Being a relatively short term item that would improve as you scale those businesses, perhaps you could talk about.
What timeframe, you're thinking about when you call that short term is that simply just lapping the acquisitions into organic or is it longer than that.
Well without getting into specific timelines for a specific drivers maybe I'll just answer that by reiterating one of the comments, we made which is that by the second half of the year. We are expecting Nelson labs run rate margin profile as a business to be back to close to what we call normal and as we said on our last call.
We view quote unquote normal for Nelson labs, as being something Thats close to the 40% segment income margin profile that they reported in Q3 of last year and so the.
The various headwinds that we're experiencing right now, including the one that you asked about.
The combination of all of the normalization factors would contribute to that.
More normal margin profile in the second half of the year.
Got it that's very helpful. Thank you.
Thank you. Our next question comes from Ahmed Hassan with Goldman Sachs. Your line is open.
Thanks, Hey, good morning, maybe start with Capex, just looking at the number comparing it to where your guidance was back at the time of the IPO.
This is much higher at the time of the deal with that debt already had included some of the growth spending that you anticipated in there just kind of curious if this is the new normal and if you can help us just talk through the buckets the maintenance versus growth Capex and also the kind of one time ongoing bucket of.
No.
Improvement has that changed now is that a is that a larger number than what it was when we first.
When you referred to it coming on as a public company.
Sure so.
Just one anchor point for you, which is that we estimate out of the range of $140 million to $170 million of spend in 2022, we estimate that about 60% of that planned spend is going to be directed towards growth investments and.
And there are a number of factors that drive that higher than our historical average, but clearly the largest by far is going to be the impact from incremental growth investments I think we've talked in the past about the fact that capacity expansion is not all capacity expansions are created equal the capacity expansions that we've talked to you about throughout.
<unk> 2021.
And most of the capacity expansions that we have active right now really are add ons to existing facilities that come at a very modest cost. So it is really.
<unk>.
Big move from our part anytime we do a greenfield in obviously to be launching two greenfield at the same time really hopefully sends a positive message as far as the longer term outlook that we see.
I wouldn't necessarily look at this level of spend as being representative of the long term run rate because as you mentioned it is reflective of the special onetime projects, we have a ramp up in spend relating to the nordion long term cobalt development projects and that will only spend it will only continue for a few years.
And the elevated level of spend relating to the <unk> facility enhancements.
2022 impact of those that specific category for facility enhancements will be around $30 million out of out of the range that we cited but again the greatest emphasis is around is around growth investment, which is a reflection on the very strong demand environment.
Okay and.
Just as a second question just coming back to supply chain issues out there.
Covered covered Russia and in pretty good detail, but you obviously talk about in general other supply chain challenges that youre seeing can you just give us some more color on.
Some of the risk factors that you're looking at right now for the year as it relates to supply chain outside of cobalt.
Yes, Matt I would I would say this is Michael I would say, it's mostly driven around the customers and some of their labor challenges as well.
We mentioned in the past the indirect impact that we're seeing and we still do have some of that particularly.
And then Nelson lab side, where customers are just having problems getting samples in ore.
Other projects, we might be working with them on they may be taking people in redeploying them to production jobs as they have absenteeism. So we're having some moving parts around that aspect of the supply chain ability to get drivers were.
We're hopeful that that gets to a more normalized level as we go into 2022, but that is those are examples of things that we're seeing our customers that are impacting downstream us.
Thank you.
Thank you.
Thank you.
Our next question comes from Luke circa with Barclays. Your line is open.
Thanks, Hey, guys. Just thanks again for let me follow up here I just wanted to follow up on the Russia and the cobalt situations. So I assume that given how <unk> played out that you guys were able to get the LNP harvest that was planned and then is that zero to 3% total impact can you give us an idea of that.
What it was expected to be harvested this year or if theres any expectations on duration of the sanctions just anything that you can give us on when.
Sure.
What's baked into guidance here.
Yes, so lou.
We.
We've said on the guidance side is that Nordion will have another strong year coming off a strong year of 2021 also recognize as we've said in the past there is some lumpiness or variability from quarter to quarter. So it's not going to all be.
Smooth growth every single quarter, there's ups and downs that occur within the Nordion.
Business based on timing of harvest that you yourself are referencing we harvest quite a bit of cobalt in 2021.
With the utilities and we've got several several curious in process already.
What we are highlighting the zero to 3% of total <unk> revenue.
Worst case impact if the situation gets really bad that is based on what we see today and that is based on 22 impact now recognized all the cobalt we get in 'twenty two doesn't necessarily mean it was projected to go out the door in 2022 and revenue theres timing aspects that depending on when the harvest was container fleets processing.
There is many aspects of the supply chain as we've walked through in the past with many of you. So I would tell you. The view that we're giving you is based on a 2022 I'll look we haven't done anything to think beyond that.
Okay. That's helpful.
And just can you walk us through just one more time on on timing of when you guys harvest and then when it goes out the door usually.
Yes.
All varies by where it's coming from the World, If it's Argentina, Canada, Russia.
If it's <unk>.
India China.
Varying degrees based on transit lanes and timing of that so I don't want to get into particulars. There's no like one answer for everybody. It all depends on the processing.
The supply chain logistics.
But straight line I get cobalt from Russia that elusive in sales so thats why youre seeing.
Some numbers that we've referenced in the past our higher levels of supply we get from COBOL at any given time from Russia that does not translate dollar for dollar in revenue impact.
So that's why we wanted to make sure. We gave you some general guidance of what we're seeing today based on the sanctions and if it became a worsening situation.
Okay. That's helpful. Thank you.
Great.
I want to thank everyone for your time today.
Hopefully you feel the excitement we have across the business, we are well positioned in <unk> for a strong 2022, and we continue to invest for long term growth all while safeguarding global health. So thanks for your time and enjoy your day Bye bye.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect everyone have a wonderful.
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