Q1 2022 Sotera Health Co Earnings Call
Good morning, This is Joe and welcome to so Terra Health's first quarter 2022 results call. You may find today's press release and accompanying supplemental slides in the investors section of the company's website at so Terra health Dot com.
This webcast is being recorded and a replay will be available in the investors section of the Sutera health website.
On the call today are Michael Pietrus, Chairman, and Chief Executive Officer, and Scott Leffler, Chief Financial Officer during the call. Some of the statements. The company makes 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 so telehealth S E C 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.
The E P S, but net leverage ratio.
A reconciliation of non-GAAP to GAAP measures for all relevant periods may be found in the schedules attached to the Companys press release and in our supplemental slides.
There will be an option to ask questions. After today's presentation to ask a question. Please press Star then one on your telephone keypad during the Q&A portion of today's call. Please limit yourself to one question and one follow up so that we can try and give everyone an opportunity to ask questions. This conference is being recorded I would now like to turn the call over to so telehealth chairman and CEO .
Oh, Michael Pietrus. Please go ahead good.
Good morning, everyone and thank you for joining us sense of Terra helps first quarter 2022 earnings call I'm very pleased this morning to be reporting another quarter of double digit top and bottom line growth as compared to the same quarter in the prior year.
While both the pandemic and the geopolitical landscape if impacted the labor markets and supply change the macro environment continues to experience more disruption than many of us as seen in our lifetimes. Despite this backdrop should Terra health has continued to deliver growth consistently in each quarter, we have reported as a public company throughout our history Scott.
I'll provide more detail in a moment, but here are some of the highlights of our first quarter performance.
We reported total revenue growth of 12% and adjusted EBITDA growth of 10% compared to the first quarter of 2021.
Diluted EPS was <unk> 11 cents up seven cents per share and adjusted EPS was 22 cents, which is a 22% increase over last year.
Stair Genesis had a good year to start in the business continues to see robust demand across all major modalities to sterilization.
<unk> has also made meaningful progress and it's active capacity expansion programs in E O facility enhancements.
Nordion also had a strong quarter driven by the timing of cobalt 60 shipments. In addition to the benefit of a favorable comparable in last year's quarter.
Our nordion team deserves tremendous recognition for navigating the current geopolitical environment in order to maintain the cobalt 60 supply from Russia. Despite several complexities in the process.
I had mentioned on our March call. There are disruptions in the supply of cobalt 60 could potentially result in an impact of zero to 3%. That's a terror helps 2022 revenue to date, there has been no impact on our supply or answer Tara helps revenue based on deliveries that we've received since our last earnings call. We now.
We estimate the potential impact from a disruption in russias Russian supply to be reduced to a range of zero to 2% or so Terra health total revenue in 2022 again, many thanks to the Nordion team for navigating this environment, so well during the quarter.
While sturgeon action and already and are performing well Nelson labs, as we expected and communicated on our last call. It's been faced with a more challenging environment.
Nelson Labs had weaker performance in the first quarter, which was the last quarter in which Nelson labs experienced the largest impact from the unwinding of the elevated levels of pandemic related testing.
As we had mentioned on our last call Nelson Labs Hall disproportionate impact in the first quarter from labor related challenges, including reduced volumes due to almost omicron related absenteeism.
We are encouraged to see these various headwinds within Nelson labs, moving in a positive direction and we expect improvement towards more normalized levels in the second quarter the impact of home of crime and absenteeism has materially reduced Andy Nelson Labs management team is doing a very good job in managing staffing levels. Despite the competitive labor market.
We continue to manage our balance sheet, achieving net leverage of three four times. This is consistent with both our near and longer term leverage goals.
Based on the solid start to 'twenty to 'twenty, two and given that it's still early in the year. We are reaffirming the outlook that we communicated in our last call with revenue and adjusted EBITDA growth in the range of 7% to 11% and adjusted EPS growth of 6% to 13%.
Scott will recap all of the details of the outlook in a few minutes.
I also want to highlight some recent examples of how we deliver on our mission of safeguarding global health with the growth of bio processing stair Genex is sterilizing single use kits in bioreactor collection bags use reducing cell therapies to fight cancer and RCA. Our recently acquired expert advisory business, where we are.
With customers to design effective configurations for secure shipment of gene therapy drugs being used in clinical trials.
Nelson Labs Europe location, we perform critical testing to ensure the safety of vials and application devices for more than 20 vaccines from COVID-19 to tetanus to hepatitis B and influenza.
These examples are just a few of the ways, we help ensure health care's consistently and reliably see everyday.
Overall, I'm very proud of the entire sutera health team for delivering another good quarter in positioning the company for continued success in 2022.
As always this is Tara health team maintained their focus on our mission safeguarding global health, while meeting the needs of customers health care workers and patients in being supportive of one another in the process.
Before handing over to Scott I'd like to comment briefly on the broader markets, where we operate.
As I had mentioned several times previously the direct and indirect effects of both the pandemic and the geopolitical landscape continue to be felt throughout the marketplace.
Supply chain disruptions labor market challenges inflation are especially impactful now thus.
Thus far we've been able to mitigate most of the direct impacts and are encouraged by our ability to largely offset inflationary pressures with pricing actions.
Even with the macro challenges in the markets. We serve have remained resilient, giving us reason to be optimistic regarding the remainder of 2022.
Now I'll turn the call over to Scott to cover the first quarter and our reaffirmed 2022 outlook in more detail.
Thanks, Michael.
First over the first quarter 2022 highlights on a consolidated basis, and then provide some insight on each of the business segments, along with updates on capital deployment and leverage.
And with a reminder of the details of our reaffirmed 2022 outlook.
On a consolidated total company basis for the first quarter of 2022 revenue grew by 12% as compared to the first quarter of last year to $237 million on a constant currency basis revenue grew by approximately 13%.
Adjusted EBITDA grew by 10% from Q1 of 2000 $21 million to $115 million adjusted EBITDA margins declined 90 basis points compared to Q1 of last year to 48.7%. The decline was driven entirely by margin compression within the Nelson lab segment, while boats dairy genetics and Nordion had March.
Expansion in the quarter I will discuss segment margins further in a moment.
Our strong operating performance drove adjusted EPS of <unk> 22 per share an increase of about 22% from Q1 of 2021.
Our reported interest expense of $10 million benefit from a mark to market gain on certain outstanding interest rate hedges, we have removed the effect of that gain in our adjusted EPS, excluding that gain Q1 interest expense would've been approximately $17 million.
Now, let's take a closer look at our segment performance.
In Q1, <unk> delivered 14% revenue growth to $149 million and 16% segment income growth to $79 million as compared to Q1 of last year.
Revenue growth drivers for Q1 included volume and mix growth of almost 10% as well as pricing contribution of more than 5%.
There was no inorganic contribution for the quarter and FX was a 1% headwind.
Compared to the first quarter of 2021 segment income margins expanded by more than 90 basis points to 53, 1% driven by operating leverage and pricing.
We are pleased with the progress <unk> made in driving forward both their active expansion projects and the enhancements at our North American E O facilities.
For Nordion Q1 revenue grew by more than 31% to $34 million compared to Q1 of 2021 Nordion segment income grew by about 37% to $19 million compared to the same period last year.
Nordion as revenue growth was driven by over 24% contribution from volume and mix and almost 7% from pricing FX was relatively flat for the quarter.
As Michael mentioned Nordion in year over year comparison is impacted by what was a relatively low revenue quarter in Q1 of 2021.
<unk> margins expanded by approximately 240 basis points to 55, 6% driven by operating leverage on higher sales and pricing.
For Nelson Labs, Q1 revenue declined by approximately 3% to $53 million compared to the first quarter of 2021 and segment income declined by approximately 26% to $17 million.
Revenue declines of 11% from pandemic related testing and more than 2% from one micron related absenteeism were mostly offset by an 8% benefit from acquisitions and 4% from price other core testing volumes and FX also each contributed a decline of about 1%.
Q1, 2022 margins for Nelson labs contracted by 990 basis points compared to Q1 of last year to 32%.
To highlight that this decline was in line with the expectations that we referenced on our last earnings call.
Compared to last year margin decline was driven primarily by almost 200 basis points of impact from lower mix of PPE testing over 250 basis points from acquisitions and about 300 basis points from AUM across impact unemployed absenteeism and testing volumes.
We expect to recover in the omicron related component in Q2, and see improvement and the acquisition related dilution as synergies ramp up in the second half of the year.
Now, let me provide some highlights relating to capital deployment and that leverage our capex for Q1 was $36 million, which is consistent with the increased levels of spend we have planned for 2022.
As of March 31, 2022, we had $121 million in cash and maintain a strong liquidity position, our net leverage declined to three point Forex.
Now I'd like to recap our reaffirmed 2022 outlook for full year 2022, we expect total revenues in the range of 1 billion to 1.3 billion representing 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%.
Adjusted EPS in the range of <unk> 93 sons to 99.
Representing growth of 6% to 13%.
And capex in the range of 140 million to $170 million for the year.
Our program of expansion remains consistent with our comments from the last earnings call, which includes seven capacity expansions at existing facilities and two greenfields for Sarah Jennings.
The other elements of our previously issued outlook remain the same as well.
As we look at the cadence of quarterly reporting I want to remind you that even for a business segment that often has period to period variability in performance Q2 of 2021 was an outlier for Nordion Nordion had a particularly high concentration of cobalt 60 shipments in Q2 of 2021 that we expect will not occur again.
And any single quarter this year.
We expect solid storage earnings results and improving Nelson labs performance in the second quarter.
Michael back to you.
Thank you Scott before we open it up for question and answer our next earnings call will take place. After the first Eagle trials begin so I wanted to provide a few comments.
The first trial is scheduled to get in Illinois on July 18th and conclude sometime in August our team is actively preparing for trial, although we cannot predict trial outcomes. We're comping their defenses to these claims and the safety of our operations, we anticipate a number of legal motions and court decisions over the next several months that could impact the try.
Allison drop media attention at this time, we do not intend to provide statements about pretrial developments nor trial updates I want to reinforce what we have stated many times and as the company intends to vigorously defend itself against these claims.
Our company plays a critical role in health care, and our employees and facilities operate in a safe and compliant manner. It's our employees' commitment to our company and our mission, which results since the Terra helps consistent and outstanding performance or so many years and gives me so much optimism over our outlook for 2022 and beyond.
Finally, I wanted to take a moment to introduce a new member of the <unk> team. Joe Fatality has joined US as the company's head of Investor Relations is with US on the call today, Joe is ramping up quickly and we're looking for and connecting with the investment community and the <unk> start.
At this point I'd like to turn it over to our operator, Joe and open it up for questions and answers.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Sean Dodge with RBC capital. Please go ahead.
Yes. Thanks.
Hum.
Nothing like you're pointing to more of a back half waiting there for revenue and EBITDA.
The pandemic effects wear off and non COVID-19 related activity begin to accelerate.
On the latter can you just give us an update on it.
It sounds like that's still the view there, but what kind of visibility do you have one on activity across Nelson beginning to to.
Normalized or accelerate as we get into the back half of the year.
Good morning, Sean its Michael.
Thanks for the question.
Allison team.
The visibility isn't till a level you havent hysteriagenic should nordion, but we still have good visibility there with the team you know obviously, we're dependent on some of the testing volumes.
To rebound, but the team delivered according to your expectations that we had here for the first quarter. We continue to get visibility there. We continue to stabilize the labor force, it's not all perfect yet at this point, but we feel confident on how we're looking at the second half in the second quarter and beyond more broadly.
Okay. Thanks, and then Michael you mentioned.
Yes.
Securing the minority on supply from Russia, but certainly some complexities youre having to navigate.
Over the course of that can you give us a little bit more detail on what those complexities are and you mentioned the potential impact for disruption from disruption in 'twenty, two but how should we think about that as we look ahead to 'twenty three and beyond.
Yes, Sean So I would tell you that personally I want to make it really clear we're compliant with all the rules and regs out there in this on this topic in particular coal.
Cobalt has not been sanctioned by the U S government, the Canadian government or the Russian governments are weak we continue to monitor that.
We just have to work through logistics and loading up containers getting them on vessels, making sure. The vessels can leave ports get arrived imports get unloaded in the banking you know there's just a lot of intricacies as you know when you do business on a global basis. So that's what the team as I referenced in my remarks has done a really good job staying on top of that.
Heating with the regulators monitoring.
You know the sanctions that are out there and making sure we're complying with them and you know as far as we've given guidance here on zero to 2%. If it has an impact potentially if if if something were to impact our ability to get cobalt, but at this point in time, we've had no impact to our supply we've been able to get it we're taking care of our customers you can talk to.
Our customers they really havent noticed that because of the great job. The team has done it nordion well, we've re sheeting cobalt as early as this as recent as this week. So we will continue to do that as far as 2023, we're not in a position to talk about so terra health or nordion or any of the business units for 2023 at this point in time.
Okay understood. That's helpful. Thank you Yep Yep.
Great.
Our next question comes from Amit <unk> with Goldman Sachs. Please go ahead.
Alright. Thanks, so much this is Phil on for Amit Thanks for taking the question.
So I think trying to parse out guidance it sounded like Nelson labs was largely in line with what the expectations you set forth <unk> looks.
It looks to have accelerated basically any way we cut it on a compounded basis or year over year, Nordion, obviously, a pretty strong quarter in general what would you say that the business outperformed your expectations coming into <unk> overall.
Yeah, Phil Good morning. This is Michael I would say in total yes, I mean, the pieces as we've communicated in the past Nordion can get lumpy at times, because we're working at harvest schedules from our utilities and as Scott referenced you know the first quarter last year was a lower quarter, the second quarter will be a larger quarter last year.
Right. So there's just some lumpiness, but I'd say overall.
We came in slightly better than expectations, and we're happy with the performance of the business through the first quarter.
Okay. That's very helpful. Thank you and I guess the second question in line with that reasoning is.
They they conservatism for the remainder of the year to not raise guidance after the quarter I know you guys provide.
Provide a reported topline ranges there FX headwind, that's countervailing there or what other factors are you taking into consideration that it led to not lifting after such a strong first quarter. Thanks. So much yeah, I'll I'll, let Scott address the FX in a second here, but I would just tell you. It's one quarter down we have three more quarters ago, we're optimistic about how 'twenty two.
Keep it up but theres lots of moving parts, our customers are dealing with challenges of getting materials in supply flows we're seeing are.
Some variation in that obviously theres a lot of moving parts in the business, but we feel good about our reconfirming. Our reaffirming if you will our 2022 guidance, which is really respectable with significant growth for the year. It's just early at this point, we've got one quarter behind us.
Yeah, and then specifically with respect to FX when we issued our guidance a couple of months ago. We did express in that time that there was an assumption embedded in the guidance that we would have about a 1% FX headwind for the year.
We did in fact fee a 1% headwind in our Q1 results as I referenced earlier, and we're still assuming that that scale of headwind relating to FX continued throughout the year.
Okay. That's very helpful. Thanks, so much guys.
Great. Thanks, Phil.
Our next question comes from Luca <unk> with Barclays. Please go ahead.
Hey, guys. Thanks for the question here can.
Can you.
Just a couple of clean ups here for Scott real quick on the M&A contribution in the quarter, especially in Nelson.
Much of it came from Bioscience, and then how much from RCA.
Thinking about whats kind of whats going to be flowing through the rest of the model for the year.
So we haven't broken out the specific contribution by by acquisition, but just to calibrate we acquired RCA Bioscience in March of last year, and so you're getting here in Q1 is still about two thirds of an incremental contribution from them and then you'll probably recall that it was in <unk>.
Member of last quarter that we acquired RCA, So youre getting really youre going to be getting a full quarter's worth of incremental contribution from RCA.
Through the first three quarters of this year and then a parcel in the fourth quarter.
Alright, okay.
And then I guess.
When you're talking about the pricing at Nelson.
Do you guys have a lot of our master service contracts, you've been able to take it I guess across all three of the businesses here, but can you talk about where you would have where it would be a little more lumpy versus being able to just pass on elevated costs.
I would I would tell you across all three businesses that we have stated in the past. These business are capable of passing on price. We have a very critical service that we bring that as a small portion of the overall cost of our customers' products and services. So I would just kind of give you that as an umbrella statement.
Look at the three businesses Nelson is the one that was more reliant upon the shorter term on how to how to get that price because of the fact that it's more transaction oriented the contractors, our master contracts with releases against that in time versus the Nordion stared Gen X are more longer term in nature, So hopefully that answers your.
Your question I think I think it just confirms what you are suspecting, though yes. It does thank you yep Yep great.
Our next question comes from Matt and mixing with credit Suisse. Please go ahead.
Hi, Thanks for taking the questions and congrats on another strong quarter.
I just wanted to maybe see if you could expand a little bit on the trends in <unk>, we've seen in our med device side of our universe.
This kind of rebound in demand maybe faster than folks were expecting.
Fundamentals driving those businesses reaccelerate, a little bit faster and just wondering how we should expect that to translate into.
<unk> trends over the next.
Three or four quarters.
Any color on that would be would be helpful and I have one follow up.
Yeah, Good morning, Matt.
I would tell you we're optimistic obviously <unk> had a very strong first quarter and we're optimistic about the rest of the year outlook. What I will also tell you. There is a lot of variation from customer to customer and geography.
Obviously, if ill start there and I'll just kind of walk around the world from a <unk> perspective, I could Matt if you look at Asia. Obviously, there is the COVID-19 shutdowns going on within the facilities in the regions. There that has caused some some challenges we're looking to make sure. We take care of our customers Europe has had pretty strong demand and continues to perform.
I'm pretty well and then in the U S.
It's been a mixed bag, we have some customers doing really well and you see that in some of the earnings you have others that are feeling a little bit of the impact that you see and there are announcements as well. So we're monitoring that it's a matter of supply chain challenges theyre, having and getting components in getting things over some borders in some instances and then theres still a little bit of labor.
Impact obviously, a lot of people had the impact in January are.
What the absenteeism that we referenced in our remarks as well so I'd say overall, we're optimistic about it but we are cautious as we are seeing some variation from customer to customer. The other the other backdrop that I would give you from some other places that we have high visibility around is around hospitals.
Our hospitals have big backlogs in surgical volumes, but the challenges theyre, having right now of staffing. So many people have left the healthcare workforce within the provider network that it's been challenging, particularly around nursing care. That's also impacting end user demand, but overall, we feel positive about what the outlook is for <unk>, but as well.
<unk> health in total for 2022.
And I think you had a second question, Matt and I Hope I address your first one.
Yeah, absolutely thanks Super helpful.
Second is maybe if you could just provide sort of a.
It's a top down.
Respective on her.
How some of the rising input costs that we're seeing across our universe, it's been a big topic obviously.
For the first quarter earnings cycle and outlook for 2022 is labor costs rising energy costs shipping things like that and just wondering if you could give us some perspective on how your your sort of three major businesses are affected on a relative basis.
Based on those kinds of shifting costs. Thanks.
As we've stated in the past call it didnt get into a ton of details here till the thus far other referencing the inflation pressures that we're seeing it's around labor and energy utility spend those are really two buckets and the transportation costs. When you look across our three businesses, we don't have transportation costs within our.
Starer, <unk> and Nelson and the Nordion, where we do a transportation cost it's a pass through to our customers.
On the energy cost, we're seeing it across our businesses predominantly in the sheer genic side, because they are larger facility footprint around the world and then the labor side again, we see it across the businesses, but I would say, it's mostly in the <unk> and Nelson side, because they have higher labor as a percent of their total cost.
That's kind of our overview of where we're seeing the inflation. We don't have the materials side, we don't have transportation.
And across the businesses its really focused just in energy utility and the labor piece.
Thanks, so much.
Great.
Our next question comes from Patrick Donnelly with Citi. Please go ahead.
Hey, guys. Thanks for taking the questions Scott.
Scott maybe following up on that one in terms of the kind of the different moving pieces on the cost side can you just talk about the margin levers as we work our way through the year or maybe touch on pacing as well, obviously a lot going on between the Nelson margin pressure. Obviously some of the things you just touched on pricing just wanted to try to get a handle on kind of the puts and takes there and how we should think about as we progressed through the year.
Sure. So if I go business unit by business unit steroid <unk> first of all while there's not a ton of seasonality the impact of <unk> Q1 is the one quarter that does typically have a little bit of seasonality related pressure and so that that seasonality impact on the top line.
Quickly also translates just because of the operating leverage in the business to to really the lowest margin profile of the year and so what we would expect for <unk> is that as they continue to ramp up the top line throughout the year sequentially. Then we would expect the margin profile to improve as well again based on the operating leverage in the business and incremental.
Some amount of incremental pricing that continues to flow into the P&L.
For Nelson Labs, obviously their authority is significantly impacted by the the normalization of these various factors that have impacted their recent result, as we mentioned in our prepared comments in Q2, we expect to see a sequential improvement for Nelson labs, primarily driven by the normalization of the omicron related.
Absent theism, which we cited as being about a 300 basis point impact in Q1.
And then it's in the second half of the year as Nelson and see the normalization of some of their other revenue streams and margin drivers that you see a more meaningful return to the quote unquote normalized levels from the first half of last year.
And then for Nordion as we've often referenced nordion in such a lumpy business and they have such a high proportion of their cost structure. That's fixed they're really at the end of the day their margin profile from quarter to quarter or is this going to be significantly driven by the harvest schedule, which translates to top line performance and again the operating leverage can can result in.
Some movement back and forth in their margin profile, but relative to last year's margin profile, we expect nordion to hold fairly steady.
Okay. That's really helpful. And then Michael maybe just on the litigation side, you know helpful to get some planning around that.
In the prepared remarks, what's the right way to think about maybe the timeline going forward. There, obviously touched a little bit on the start dates potential resolution maybe set a high level talk through kind of the catalyst set on that how can we keep an eye out for.
Yes, I would say, let's focus on 2022.
And kind of bite size. If you will 2022 right now the schedule is three trials.
July 18th as the first one as I mentioned then September 12 in November 7th those are the three dates for 2022 trials and Illinois now remember we don't set those dates those are set by the court. So there is subject to change, but we feel pretty confident that it will here to this schedule.
We would say that that would start in July 18th in there would probably be a ruling sometime in mid August to late August .
That's our best estimate of how long we think of given trial will start and then the next one will come right behind that starting on September 12, similar type of time pattern four to six weeks.
<unk> ruling that to be coming.
Coming out from the jewelry.
Great. Thank you guys. Thank.
Thank you.
Yeah.
Our next question comes from Matthew <unk> with Keybanc. Please go ahead.
Great and thank you for taking the questions guys.
I just wanted to start off with the with the capacity expansion, you're making instead of organics.
And one of the difficulties I guess in the current.
Environment is getting construction.
Moving forward in a long time and just your confidence.
As expansions.
That you're working towards are or are going through and progressing as scheduled at this point.
Yes, they are but we are seeing challenges, Matt with construction schedules and timing so right now as we as we referenced we continue to feel confident about the expansions, we're putting in place, but they they are subject to some changing in timing. We don't think it can be a year out or anything like that but there could be month to month movements based on.
<unk> and contractor availability and things of that nature I also should reference.
Matt asked the question earlier I think it was Matt that asks about inflation. This is an area too that we got to continue to monitor to an inflation in construction materials as well I referenced labor and energy and utility, but there is also some on the construction side too that I should reference.
Yes, there are a lot of mats upon themselves.
Yeah.
Matt.
And then I imagine you guys have probably spent a lot of time talking through.
The timeline of diversifying the supply of cobalt.
Throughout the last couple of months can you just talk about like the long term investments that youre, making and I realize that there are multiyear investments and then kind of any update on how youre thinking about the timeline of additional supply.
Yes, so we've got several projects that we referenced obviously, we've got the work going on in Canada with the expansion of the work with <unk> around around additional capacity coming on for cobalt development. We also have the work going on with Westinghouse.
Actually spent some time with him in the past quarter.
With the teams and the projects there with the leadership at Westinghouse we feel pretty good about those those are significant investments that are very strategic for us and it has to help diversify and expand capacity for cobalt overall.
We buy cobalt from all regions of the World, Canada, Argentina, China, India, Russia, and we look to continue to expand and hopefully we can get into United States with the Westinghouse relationship, but overall, we feel very good about it we're deploying capital <unk> team are doing a nice job in working at with our partners and.
We're optimistic about about the results of that in the out years.
Thank you very much.
Thanks, Matt.
Our next question comes from Dave Windley with Jefferies. Please go ahead hi.
Good morning, Thanks for taking my questions I appreciate the detail around Scott that you gave around the Nelson margin. I was my question is kind of targets I guess pricing strategy there.
You had you had given that Youll macron I guess, it was 350 basis points some labor some absenteeism I guess.
So the spirit of the question here is pricing strategy and how much are you attempting to cover with price versus how much of the margin recovery is simply labor coming back in and more operational excellence initiatives that drive that margin as you get into the the improvement in the acquisitions in the latter part of the year.
So we we mentioned the omicron impact on the margin profile in Q1 was about 300 basis points and that was meant to cover basically omicron related absenteeism, which not that there isn't continued absenteeism relating to the pandemic, but you know that in that.
Real surge that we saw in Q1, we would see as being largely mitigated in Q2. So the sequential improvement in margin profile from Q1 to Q2, we expect to be driven by the normalization in terms of <unk>.
Absenteeism.
The frontline lab technician and microbiologist level, which then of course translates to increased capacity and through throughput for the business, which of course translates to improved revenue profile.
And then the incremental improvements that we talked about in subsequent quarters.
Are really driven by yes, some amount of continued pricing initiatives in response to the inflationary pressures that we're seeing primarily on the labor force.
And then as I think you referenced a second ago. We are we believe seeing good line of sight to realization of some of the synergies associated with recent acquisitions and other operational excellence initiatives that we see manifesting throughout the year.
That's very helpful. So I think you as you as you guided us to expect pricing and Nelson is in the mid three range and that's what you got last year are you able to.
Kind of get more I think so that's the the more price sensitive of your businesses are you able to get more than that in a more inflationary environment or is it or is it still hard to extract that even even with those reasons.
We are able to get more I think Michael made a couple of comments to that effect a couple of minutes ago in response to a different question, but also as we mentioned in our prepared comments, we saw a little bit over a 4% contribution from price for Nelson in Q1.
And that increase versus the recent trends in pricing for Nelson is reflective of their ability to capture price in this.
Inflationary environment and so obviously nothing is not the only lab testing business that impacted in some way by the by the pandemic and so overall the market place for lab testing services is seeing some amount of these inflationary pressures and other disruptions and we see overall pricing opportunities continuing there.
David David This is Michael I would just add our focus right now is stabilizing the staffing.
Continue to improve turnaround times, and taking care of customers demand as it starts to come in and that's what the team's doing a really nice job looking at our NPS scores and also our turnaround times.
That's really where the team is focused right now on taking care of our customers is that demand starts to ramp.
Got it I appreciate that sorry, I missed the detail in the prepared last question just a clarification I think we were looking through past releases I think this unrealized hedging gain was new you called that out in your remarks talked about it being.
Excluded from your adjusted EPS I wondered.
Am I right that that's new and maybe you can explain.
The nature of that and then also clarify is it also excluded from adjusted EBITDA. Thank you.
Okay.
Sure so so.
The hedging program itself is not new what is new is the fact that the program the risk management program that we have around our variable rate debt is just had a lot more volatility P&L volatility associated with it just given what's going on out there on the macro environment is hard.
Interest rates rising.
And so so specifically with respect to your question about adjusted EBITDA.
Almost by definition. It is excluded interest rate on any type of interest rate related derivative is going to be excluded from adjusted EBITDA.
Again as you I think mentioned a second ago, we did exclude it.
Our adjusted net income number as well for purposes of calculating adjusted EPS. So the objective here is just to give people a cleaner view of the.
Both are.
Operating results of the adjusted EBITDA and adjusted EPS level without.
Without some of the near term noise associated with the Mark to market on our hedges got it I appreciate that thank you.
Our next question comes from Michael <unk> with Wolfe Research. Please go ahead.
Hey, good morning.
Two for me I recall last year <unk>.
Fluids is that Nelson all helpful. In framing the puts and takes there one of the mentioned was that.
<unk> was a constraint for certain customers.
There was a backlog building because the FDA was.
Folks are waiting for the FDA to provide some guidance.
On certain product.
Testing requirements.
Requirements and I believe that was related to scopes and.
So in April I saw a steady stream of communications from FDA and largest goat manufacturers that suggested to me that perhaps the bottleneck is in the process of resolving which reads for me as potentially something good on the margin for Nelson into the back half of the year.
Am I misremembering, one and two if not.
Are you seeing this constraint either.
Ease as well.
Yes, Mike It's Michael I would tell you that we.
We referenced in our past comments around some of the regulations around FDA that they're still waiting for clarification I don't know that we ever got into particulars are being sculpsure or whatnot, but I would I would tell you that it still hasnt completely been resolved.
What we are seeing customers and some of those section start to look at building out their pipeline with us for testing, but we haven't realized all the benefits of that because there is an absolute there is not absolute clarity yet on the regulatory requirements.
Okay.
Our collection is right I'm, just not getting specific into what test sections, but I would tell you we still have that uncertainty, but we're confident it's going to be resolved and it can be helpful for Nelson labs business.
Okay helpful. Thank you and then just capital deployment look do you have a lot of a lot of moving pieces in the macro this year for most companies you have historically done a steady stream of tuck in M&A, I'm curious where that.
That initiative force ranks in calendar 'twenty, two and just how the pipeline might look at this point in time.
We're always going to deploy capital for growth and our priority is really.
Internal organic expansion and we've got a healthy diet. It as you know with the investments, we're making in cobalt as well as our facilities had Nelson <unk>. So that's always going to be a priority. We see good returns on that we see strong customer demand and we're making sure. We can fill those thats really our number one priority we were continuing to look at M&A and we have a pipeline.
We continue to follow and track and.
And we have nothing to tell you of any significance at this point in time, but.
But our strategy hasn't changed and how we look at M&A.
Thank you so much.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Casey Woodring with J P. Morgan. Please go ahead.
Hi, guys. Thanks for taking my questions.
<unk> this quarter price contributed 5% and volume, 10% I know you have capacity expansion projects coming online in the back half of the year and then you've also talked about price increases flowing through as the progressive. So I just wanted to get your thoughts on what pricing volume growth contribution will look like for the full year.
In this business relative to what we saw in <unk>.
So Casey I'll take that we don't get into specifics on forecast by business unit, but what we have said in the past is these businesses have 3% to 5% price Theyre Jenkins is kind of in the middle of that Youll see a little bit of an outperformance there in the quarter and we've been saying that this business is mid to high single digits.
Total when you factor in volume and mix I would tell you it's still be thinking along those lines.
We're optimistic about what the rest of the year looks like but I would just reiterate what we've told you in the past as far as general guidance around Sutera health growing high single digits is where our focus has been a combination price volume and mix.
Okay, and then just on the pricing piece, you talked about how youre going to realize more pricing benefits in the back half of the year. Just wondering why you Couldnt pass price on sooner.
And then is there something structural about the contracts were.
They are more heavily weighted towards the back half. Thank you.
No.
In general we've always talked about the fact that our businesses do have a very.
Generous flexibility in terms of passing through price to the marketplace, but we've never pretended that we have perfectly dynamic pricing model where.
You you got an increase in your utility rates on day, one and you increase prices on day two so that there is some amount of structural lag in the system and that's where you you do see the inflation impact in a given period takes a quarter or two for us to really rollout in a structured and disciplined manner across our.
Thousands and thousands of customers the offsetting price increases so it's really just that price lag that.
The results and the effect that Youre talking about in case, the only other thing I'd add to Scott's comment we have great businesses.
Bring significant value to the industry overall, okay, but it's a value proposition we got to make sure. We continue to get right with our customers and they recognize the importance of what we do and us being.
A key supplier in high quality.
Supplier to them. So there's a balance there we want to make sure. We're also respectful of is well. It's a critical service that we bring it's often government mandated we just got to do a really good job of it that's where we're going to keep earning our stripes every day with our customers.
Okay got it thank you.
This concludes our question and answer session I would like to turn the conference back over to the CEO , Michael Pietrus for any closing remarks great.
Alright, Thank you Joe and thank you everybody for taking the time this morning, and we're proud of what the team has performed how the team has performed here in the first quarter and we're optimistic about the rest of 2022 2022. So thank you for your ongoing support and we will be talking to you here in the near future. Thank you and have a great day bye bye.
Okay.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.