Q2 2022 Sotera Health Co Earnings Call
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Good morning, My name is Howard and I will be your conference call. Operator today at this time I would like to welcome everyone to the Terra health second quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If.
If you would like to ask a question during that time. Please press star one one on your telephone.
I'll now hand, the call over to the Vice President of Investor Relations drove Italian.
Good morning, and thank you welcome to sit Harrow Health's second quarter 2022 results call you.
You can find today's press release and accompanying supplemental slides in the investors section of our website at <unk> Dot com.
This webcast is being recorded and a replay will be available in the Investor Relations section of the severe health website.
On the call with me today are Michael Pietrus, Chairman, and Chief Executive Officer, and Michael Biehl interim Chief Financial Officer.
During the call some of the statements. The company makes may be considered forward looking statements.
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 <unk> SEC filings and the forward looking statements slide at the beginning of our presentation for a description of these risks and uncertainties.
Company assumes no obligation to update any such forward looking statements.
Please note that during the discussion today the company will present, both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EPS and net leverage ratio.
A reconciliation a reconciliation of non-GAAP to GAAP measures for all relevant periods may be found in the schedules attached to the company's press release and in our supplemental slides.
The operator will be assisting with the Q&A portion of the call today.
Please limit yourself to one question and one follow up so that we can try to give everyone an opportunity to ask questions.
I'll now turn the call over to <unk>, Chairman and CEO Michael Peters.
Good morning, everyone and thank you for joining us on the Terra health second quarter 2022 earnings call I am very pleased this morning to be reporting another quarter of year over year top and bottomline growth, especially when compared to our performance against an exceptionally strong quarter last year. In fact, the second quarter of 2022 represents the highest revenue.
And earnings quarter reporting history.
I am, especially proud of our team's performance in the face of continuing economic and geopolitical uncertainty, including high inflation currency fluctuations labor constraints.
Ongoing supply chain challenges.
<unk> continues to deliver growth and strong financial results. Despite this backdrop, while taking care of our customers and remain committed to our mission safeguarding global health.
Welcome to our interim CFO microbial to today's call. He will provide more detail about our financial results in a moment, but first I wanted to highlight a few items from our second quarter results.
We reported total revenue growth of five 8% and adjusted EBITDA growth of one 2% compared to the second quarter of 2021.
On a constant currency basis revenue grew by approximately 9%.
Recall that last year's second quarter benefited from high levels of demand for Covid related testing and Nelson labs, and significant cobalt 60 product shipments that nordion.
Adjusted EPS was <unk> 27 in the second quarter, which is a <unk> increase over the same period last year.
For the first half of 2022 Sutera health has total revenue growth of eight 5% and adjusted EBITDA growth of four 8%.
Versus the first half of 2021 on a constant currency basis first half 2022 revenues grew by approximately 11%.
Overall I am pleased with our first half financial performance and labor challenges I just referenced we will address our views on the second half of 2022 and the update to <unk> full year outlook shortly.
But now I'd like to discuss our three businesses results in some more detail.
<unk>, our largest reporting segment continues to deliver strong results in 2022 as the business saw good demand across all major modalities to sterilization and is running at high capacity utilization rates.
The team is working to offset inflation pressures and optimize operational efficiencies.
Sure John It's just working closely with the <unk> expert advisory services team to design efficient protocols to meet our customers' needs and regulatory requirements for optimizing capacity utilization for our <unk> facilities, and ultimately better servicing our customers.
To that end I'm happy to share that our thought leadership around <unk>.
Efficiency continues to be acknowledged by the industry. Most recently our expert advisory services team was recognized at a premier industry conference for the Eo cycle optimization work with a large global customer.
This work significantly reduced eo usage and cycle times with no compromise to sterility assurance levels. Another Great example of how our teams are working to fulfill so Terra house mission.
Sure James continues to make meaningful progress on our capacity expansion programs and facility enhancements.
May 2022, we announced the official opening of our new E beam line located in <unk>, Indiana facility.
We expect to bring additional install capacity online later in 2022 and over the next 24 months as we commission seven capacity expansion projects and two Greenfield investments.
As previously communicated.
We continue to invest in industry, leading emission control enhancements to our processing facilities. We are committed to maintain best in class operations for our customers employees and the communities in which we operate.
Nordion, our other reporting segment within the sterilization business also had a very strong quarter driven by the timing of cobalt 60 product shipments.
Our second quarter 2022 revenue exceeded Nordion second quarter, 2021 revenue, which also benefited from very strong global shipments we've talked in the past that Nordion revenue is influenced by new nuclear reactor site schedule. So quarterly revenues are non linear.
We continue to see this impact our quarterly results, including our strong second quarter performance and our second half 2020 to expectations.
The nordion team executed extremely well this quarter transferring a significant amount of cobalt 60, while navigating a very challenging geopolitical environment and an increasingly diverse global supply chain.
Recall that this business procures cobalt 60 globally, then use the material to produce the finished product at our Ottawa, Canada facility, and then shifts the products in compliance with stringent regulations to our global customers.
I want to note that today, there are no sanctions prohibiting oreo from accessing cobalt 60 from Russia, we operate in full compliance with all regulations at this point in the year, we now estimate the risk of potential disruption in Russia supply at 1% or less of <unk> totaled 2022 revenues.
Nelson Labs, our third reporting segment also recorded a strong second quarter improving upon some operating headwinds that existed in the first quarter 2022. In fact, the second quarter 2022 was Nelson labs highest revenue quarter in its history.
And then Nelson labs team continued to extend its leadership position in testing and advisory services for medical device and pharma markets, helping customers deliver their products to the market safely compliant manner.
Demand for the quarter was stable.
And productivity meaningfully improved as Nelson last rebounded from labor constraints and omnicom related absenteeism, they were headwinds earlier in the year.
You may recall that Nelson lag benefit from strong pandemic related testing, which was near its peak in early 2021 and has normalize.
Despite the continued headwind then Nelson lab team continues to grow revenue in other parts of the business, including other high value testing areas.
As I said in my opening comments, we are pleased with the solid start to 2022 delivered by our three businesses.
The macroeconomic environment has been challenging, but we expect to maintain good momentum in the second half of 2022.
With the benefit of a half a year behind US we are now narrowing our full year outlook for 2022, taking into consideration the foreign exchange headwinds, we are experiencing as well as other macroeconomic pressures that are likely to persist. This year. We are confident in our pricing actions to be able to offset inflation, although as we've stated there could be some lag effect depending on customer.
Renewal timing.
Regarding our outlook, our full year net revenue growth outlook of 7% to 10%, while our full year. Adjusted EBITDA is expected to grow 7% to 9% both are consistent with our long term growth objectives, we do not see any changes to our capital expenditures outlook of $140 million to $170 million.
In 2022.
Before I turn the call over to Michael Biehl I want to highlight some recent examples of how we deliver on our mission safeguarding global health.
At Nelson Labs, we're working with the customer to bring to market a new gene therapy drug that can reduce dosing protocols for patients with severe hemophilia from over 100 doses per year to one dose per year greatly improving the quality of life for many patients.
It's this type of solution that directly impacts many patient lives and makes us very proud to play a role and delivery of innovative health care products.
At Nelson Labs, we're actually testing the effectiveness of surface disinfectants.
Against a monkey pox virus. This is another example of how our teams work with clients to address potential global health risk in real time.
At <unk>, we are working closely with with a customer to establish a sterilization process for innovative heart valve catheters, which provide a less invasive alternative treatment to open heart.
Surgery.
Ed Nordion, we're commissioning an additional production itself to focus on cobalt 60 recovery.
<unk> nordion to fully utilized certain products.
That are approaching end of life and alternative applications. This investment reduces waste as a result has a positive environmental impact.
We are proud to share. These examples of how our <unk> team is working to ensure health care is consistently reliably and safely delivered every day.
Finally, I'd like to comment briefly on our recent organizational change I wanted to formally introduce Michael Biehl, Our interim CFO , who has joined the leadership team at <unk> Health and will lead the finance organization, while we conduct a national search for permanent CFO , Michael brings a wealth of public company leadership in finance financial expertise to us.
We're happy to be working with Michael.
Now Michael Biehl will take us through the financials in more depth.
Thank you Michael and thanks for the opportunity to help the company during this period.
I'll first cover the second quarter 2022 highlights on a consolidated basis and then provide some details on each of the business segments, along with updates on capital deployment and leverage.
I'll conclude with some additional details around our update for the 2022 outlook.
As Michael mentioned, we had a very strong second quarter of 2022, the highest revenue and adjusted EBITDA quarter in our history.
It's worth reiterating that these results are being compared to what was previously the best quarter, and so Tyra health reporting history, making our Q2 2022 top line performance even more impressive.
On a consolidated total company basis revenue grew by 6% as compared to the second quarter of last year to <unk> $267 million.
Adjusted EBITDA grew by 1% from Q2, 2000 $21 million to $136 million.
Adjusted EBITDA margins were 51, 1%, representing a 240 basis point decline from second quarter, 2021 levels, but still reflective of strong capacity utilization and throughput.
The adjusted EBITDA margin declined compared to the second quarter of 2021 was driven primarily by timing of pricing actions versus realized inflation at <unk>.
Less favorable product mix at Nordion.
An unfavorable but an improving margin profile and Nelson labs.
Recall that Nelson lab has benefited from high margin pandemic related testing volumes through the second quarter of 2021 before those volumes starting to normalize.
It's important to note that Nelson labs did incrementally improve margins by 400 basis points versus first quarter of 2022 margin levels, which I will discuss in more detail in a moment.
Our strong operating performance drove adjusted earnings per share of <unk> 27.
The increase of <unk> <unk> from second quarter of 2021.
Which again was our highest adjusted EPS period before this quarter.
Around <unk> versus second quarter last year a.
A big driver of that decline was an impairment charge of $9 6 million related to a joint venture associated with our 2020 <unk> acquisition.
Due to a shift in business strategy. The joint venture will not proceed and the joint venture partner will continue to utilize existing <unk> facilities for their processing needs.
That impairment impacted diluted earnings per share by approximately <unk> <unk> this quarter.
Our reported interest expense of $14 million benefits from a mark to market gain and certain outstanding interest rate hedges for which we did not collect hedge accounting.
We have removed the effect of that gain in our adjusted EPS.
Excluding this gain second quarter interest expense would have been approximately $17 million.
Now, let's take a closer look at our segment performances.
In Q2, <unk> delivered 9% revenue growth to 158 million, 7% segment income growth to $85 million as compared to Q2 of last year.
Revenue growth drivers for Q2 included favorable pricing of 6%.
And favorable volume and mix of 5%, which was partially.
We offset by unfavorable foreign currency headwinds of two 5%.
Compared to the second quarter of 2021 segment income margins contracted by 90 basis points to 53, 9% driven.
Driven by foreign currency headwinds and the timing of contractual pricing actions versus realized in place.
Sequentially.
Margin did improve over first quarter 2022 levels.
As Michael mentioned, we are pleased with the progress <unk> is making on their active capacity expansion projects.
Team is also focusing on improved operating efficiencies to fully leverage our highly utilized capacity.
Priority on.
Q2 revenue grew by 3% to approximately $51 million compared to Q2 2021.
Both periods were historic high points for the business.
Nordion segment income declined by 4% to $30 million compared to the same period last year.
Again, both periods represent high levels compared to all other quarters.
<unk> revenue growth was driven primarily by pricing of 6% offset by a 3% of foreign currency headwinds for the quarter.
As Michael mentioned Nordion quarterly shipments are non linear.
Despite the strong first half revenue performance, our full year 2022 revenue expectations remain unchanged.
Dougherty as margins were 59, 4%, a 410 basis point decline from second quarter 2021 peak margin levels.
Product mix was less favorable than.
Second quarter 2021, and foreign currency headwinds also contributed to the shortfall. However.
However, overall, we are pleased with Nordion strong margin profile.
So Nelson labs.
Second quarter, 2022 revenue improved one 3% to $58 million compared to the second quarter of 2021.
Segment income of $21 million was 12% unfavorable to the second quarter 2021.
Note that second quarter revenue did grow $5 million or 9% from first quarter 2022, as Nelson labs rebounded from a low point in labor utilization.
Revenue growth for two second quarter 2022.
Favorably impacted by a 6% increase from recent acquisitions and a 5% benefit from pricing.
Those benefits were partially offset by a 5% decline in pandemic related testing volumes versus 2021, as well as foreign currency headwinds of two 6%.
Q2, 2022 margins for Nelson labs contracted the 36%.
Our approximately 500 basis points versus Q2 2021 margin levels.
This decline is primarily related to less favorable mix in Q2 2022 due to a reduction in pandemic related <unk> testing as well as dilution from acquisitions.
Nelson Labs did realize a 400 basis point improvement in margins from first quarter 2022.
As expected the 300 basis point headwind in first quarter of 2022 for mobile crime related capacity constraints diminish in the second quarter.
In addition high value testing services apart from those related to the pandemic drove the balance of the improvement.
While we expect that pandemic related testing is behind US. The Nelson lab team continues to drive margin improvement opportunities through acquisition synergies greater labor utilization and delivery of high value services.
Now I'd like to provide some highlights related to capital deployment net leverage.
Our Capex for Q2, 2022 was $36 million <unk>.
Consistent with the increased levels of spend that we communicated for our full year 2022.
Growth Capex and facility and <unk> continue to drive our increased investment levels and we are on track to invest.
$140 million to $170 million into the business in 2022.
As of June 32022, we had $140 million in cash and continue to have strong liquidity position to fund future projects.
Our net leverage remained three four times adjusted EBITDA for the quarter and is tracking to both our 2022 guidance and our longer term leverage goals.
Now I'd like to recap our update to the full year 'twenty 2020 to outlook for the full year 2022.
Have narrowed total revenues to a range of $1 billion to $1.022 billion.
Representing annual growth of approximately 7% to 10%.
We have narrowed our adjusted EBITDA range to $515 million to $525 million, representing annual growth of approximately 7% to 9%.
We believe the new range properly considers the foreign currency and macroeconomic headwinds we expect will continue in 2022.
This range also acknowledged that he expected lower product shipments for nordea onto the second half of the year. After Nordion strong first half performance.
Nonetheless, we still expect to deliver strong results in a challenging environment.
We have narrowed the adjusted earnings per share range to <unk> 93 to 97.
Reflecting the narrowed adjusted EBITDA flow through.
The other elements of our previously issued outlook remain the same.
Thank you Michael before we open it up for question and answer I wanted to provide a brief update on our Eo litigation, we cannot comment on the details of the litigation, but the first trial in Illinois was moved from July 18th start date to August 12.
In addition, <unk> has been pursuing insurance coverage for the iOS tort litigation Yeah.
Yesterday.
Court issued an order in reinsurance coverage lawsuit concluding that the defendant insurer <unk> duty to defend which may allow us to recover some of our defense costs and the Illinois yield litigation.
I wanted to reinforce what we have stated many times and Thats the company intends to vigorously defend itself.
Against these claims are.
Our company plays a critical role in health care, and our employees and facilities operate a safe and compliant manner as our employees' commitment to our company and our mission, which results in so Terra house consistent outstanding performance over so many years. It gives you so much optimism over our outlook for 2022 and beyond at this point Howard I'd like to open it up for question and answers.
Ladies and gentlemen, we will now open the lines up for questions and ask the question and answer portion of this call. If you would like to ask a question. During this call. Please press star one one on your telephone as a reminder, we would ask that you. Please limit yourself to one question and one follow up so that we can try and give everyone an opportunity to <unk>.
Ask questions.
Standby, while we compile the Q&A roster.
Our first question or comment comes from the line of Jason Weaver from Citi. Mr. <unk>. Your line is open.
Alright. This is <unk> on for Patrick Donnelly and then.
I was just wondering if you could talk about the case.
Cadence with second half the year more specifically in the third quarter and the fourth quarter and how.
How we should think about each of them respect until the.
And then in terms of revenues and earnings.
Thank you very much.
As we stated.
We are planning on a 1 billion to $1 22 in revenue and EBITDA for $5 15 to $5 25, we're optimistic as we look forward to the second half of the year stair Genesis continues to have nice growth going forward.
As we mentioned.
Our prepared remarks Nordion, we typically expect the first half and second half as we've communicated the past would be about equal in size.
As we referenced in the call some of the shipments came into the second quarter. So the second half will be a little lighter than the first half but.
But the total year expectations have not changed and we continue to see improvement in volume growth over prior year for Nelson in the second half of the year over the second half of last year.
Thank you very much and then one more just on pricing do you expect.
To continue the pricing through the second half Darren I think as we head into next year, what's your kind of outlook on that.
Thanks.
Yes, as we exceeded multiple times that we generate about three 5% to 5% price per year across the company.
Nelson Labs is typically on the lower end of that range and oriented on the higher end of that range and what I would tell you is all three businesses exceeded that performance.
In the second quarter as well as on a year to date basis, and we continue to see that carrying out throughout the year. As we also referenced in our comments, there's just some timing, particularly around some of the larger long term contracts. There is just some timing of when those actually take place based on contract renewal periods, but were confident about our ability to continue to.
Drive price to offset the inflation pressures.
Great. Thank you.
Thank you.
Our next question or comment comes from the line of Casey Woodring from J P. Morgan.
Mr. Woodring Hello, guys. Thanks for taking my question.
I'm just curious on so the revised down guidance, how much of that is supply chain versus FX can you just elaborate on the puts and takes there.
Why you decided to bring that down to touch.
Hi, This is Michael.
And roughly the eight eight.
$8 million decline in sales is all FX.
On the EBITDA.
Reduction of $10 million on the upper end range about a little less than half is.
Inflation and little less than half is related to FX and the rest is.
Volume and product mix.
Got it that's helpful.
And then so just wanted to clarify for notes and labs on the margin expansion side.
Covid headwinds subside in the back half of the year.
And also wanted to just wanted to confirm that and then.
<unk>.
Labor utilization that you talked about can you just elaborate on what you've seen there it seems like you've been able to navigate.
The tough labor market here.
Secondly, just wondering what's embedded in the guide for that dynamic. Thank you.
Yep. Thanks, Casey this is Michael <unk>.
And your first question around some of the Covid pandemic related as we talked about we had significant amount of PP&E testing that came in in 2020 one.
As we look to the second quarter or second quarter that was down significantly over second quarter of last year, and we expect the outlook to remain about consistent as far as the levels of that testing going through the rest of the year. Okay. So it's come down significantly where it was in 'twenty, one, but we see it at a more normalized rate.
Currently as far as Nelson as we stated in our last call. We expected the margins continued to rebound in that business and the team has done a nice job executing on that you asked about the utilization.
We continue to.
Do a nice job in stabilizing that workforce as we looked at the end of last year. There was a lot of turnover in the marketplace very tough challenging labor market as we all know that the omni crime hitting the first beginning of the first quarter. So we've been able to stabilize our turnover there and also our training and our productivity.
Starting to follow behind that but most importantly.
Our customer feedback the net promoter score and turnaround time metrics are going in the right direction. So we're really proud of what the team's doing there. So we're optimistic about us continuing to see growth over the second half of 'twenty one in the back half of 2022.
Thank you. Our next question or comment comes from the line of Amit <unk> from Goldman Sachs. Your line is open.
This is Phil on for Amit. Thanks for taking the question just following on to the lines of questioning that we've already heard on the Nelson side, it sounded like expectation to grow volumes year over year in two half expectation for continued pricing benefit.
And then it sounds like it's stable testing environment moving forward I know it was a 5% headwind in <unk> can you can you try and help quantify what the expectation is.
Things slowed in two half 'twenty, one what the Covid.
Testing headwind is from a percentage standpoint in the second half of the Air Force.
So we're not getting into the second half level of detail on that at this point, Phil but what I would tell you is we continue to see momentum gaining in that business.
We're optimistic about the volumes and the activity, but do recognize we've got some broader macroeconomic things that will be continue to monitoring, but we had weak second half of 'twenty. One. So we would expect to recover here in the second half of 'twenty two.
Even though the macro environment may be a little choppy in the first half of the year that PPD testing was about 8% drag on our year to date basis versus last year. So just give me some sense of magnitude, but the second quarter was about 5% and we've seen it being more normalized rate going forward.
Okay. That's helpful context, thanks, and as we think about kind of the segment makes area just asking on the <unk> side anything to call out are noteworthy in the second half from either a comparable standpoint or that you expect to deviate from trend or is that kind of steady as she goes high single digit low double digit growth year over year on all those key components.
We've seen.
Yes, I think that's a pretty fair way to look at it I would also just call. It they had a strong third quarter last year right. So they're going to be working against that coming in but overall the team feels pretty strong about where they are and what they are seeing from customers I mean, they are I.
I don't want to understate, the macroeconomic challenges that we referenced in our comments customers are still dealing with shorter jumps in components and getting product manufacturing and there's still some challenges on the labor side within our customer base, but overall the <unk> team is as good opportunity for growth in the second half of the year.
That's helpful as well if I can sneak one just one more and it sounded like the entirety of the topline guidance reduction was related to FX, but as we think about the performance in the first half of the year would you say that.
Business outperformed our expectations and offset some of these macro challenges independent of the reduction to the top line for the full year that we're seeing today.
Yes, generally see that also recognize the fact that I did mentioned nordion had a little bit of volume that moved in from second half into the second quarter. So.
You got a discount that a little bit, but I would say <unk> and Nelson continuing to perform well as those in oriented nordion as we've discussed in previous conversations they've got that's what our business is good at though we're dealing with a pretty complex global supply chain and the team has done a phenomenal job of executing on that and take care of our customers.
Thanks for taking the questions Michael.
Thanks, Rob.
Thank you. Our next question or comment comes from the line of Mike <unk> from Wolfe Research Mr. <unk>. Your line is open.
Good morning, Thank you for taking the questions.
Hi.
I've seen in the last few months some scrutiny emerge around one of your facilities in Southern California, I believe Vernon is the name of the town and I Wonder if you wanted to.
Eo facilities in.
Just hoping Michael if you could offer some perspective on what's going on there.
Yes, I would first thanks, Mike for the question and good to hear from you I would first give a perspective.
We sterilize over 40 million medical devices in our la facilities.
As you May know in many now we're waiting on the EPA to come out with new rules and regs.
And Thats been a challenge we've been waiting on those roles for several years and we can't wait for the new rules to come out.
And.
We've gotten some attention and some of the local community and the regulators on that facility.
Our compliance with the rules and the regs there and we've reached an agreement with them on the timeline of our facility enhancements as I've mentioned on many of these calls we have an aggressive plan to do Eo facility enhancements across all our U S facilities, including the la facilities and what we did is we memorialize that in an agreement with.
The regulators in California.
To continue to move forward with that plan.
So we've got to continue to operate in compliance with the rules and regs, which our team is well accustomed to but that facility is continuing role in servicing our global health care market.
I appreciate that color, Michael and maybe the related follow up is on the EPA rule, making.
I did see.
And then I think just yesterday or earlier this week.
It seems like they're getting close to the proposed rule later this year is that your expectation or any other color on timing about when this finally kicks into gear after years of delay.
Yeah. Thank you for referenced in the years of delay we've been waiting for new rules and we're anxious to get them and we're pretty confident in the improvements we are putting in place are going to be reflective of industry, leading controls that we hope the EPA docks, we're leading out there with some things that we're doing that we think they should adopt across industry hopefully post that direction, if not we're going.
The operating and even more safe and compliant manner that would be required.
What we've seen right now yesterday, the communication you're referencing.
They said that they are working through submitting a new plan. It would go to OMB and we're hopeful that it'll be sometime in the second quarter third quarter 2023, when the rules finalized.
That's called niche App.
We think that there'll be a potential it'll be published for public comment sometime late this year, but probably won't go into enforcement until second and third quarter of 'twenty, three but Mike I just wanted to make sure we're clear thats not our prediction, that's what we're hearing from them.
We've heard many dates before we're hopeful that they even do it faster.
Thank you Michael.
Thank you.
Thank you. Our next question or comment comes from the line of Matthew <unk> from Keybanc. Your line is open.
Taking the questions just first a follow up on the insurance.
The chart, you're talking about specifically for the Willowbrook litigation or is that is that.
Is that the broader for you.
It's sort of Willow Brooke litigation, which is the vast vast majority of our litigation costs.
Okay excellent and then you mentioned when you were talking about the <unk> outlook. You also mentioned the new range reflects macro and FX.
When you say macro and kind of what are you what is the.
What are you what are you kind of considering that maybe have changed.
We're talking FX inflation and just volume.
Supply chain is still those things those are the comments that Michael reflected on the first answer.
Alright, thank you.
Great. Thanks, Matt.
Thank you.
Our next question or comment comes from the line of Ben <unk> from Jefferies.
Hey, guys.
Wanted to ask kind of a question on the backdrop in general for surgical procedures, where do you think we are relative to kind of a pre COVID-19 baseline like just in percentage terms in <unk>.
How fast are we getting back to normal.
Yes.
Ben This is Michael I would say, we're pretty close I would say were probably still shy, but it's probably in the 90% to 95% range in that area. Some areas, we're seeing a little higher depending on if it's outpatient or inpatient one of the big challenges that you may be hearing across some of your other companies is the challenges going on in health care right now, particularly within health systems.
And their ability to attract labor there is a significant shortage of labor, which is constraining hospital operations. Currently in I would say that's more inpatient outpatient, but it's still a factor.
Got it and then just one more to follow up on the Naughty on margin.
I know you called out a mixed impacts I know the bulk of that is cobalt deliveries and I believe most of it is industrial theres a little medical in there, but then there's also kind of this maintenance and installation component can you just help delineate.
That mix impact in the quarter, but.
Yes.
Point, you just raised so we've got industrial and medical Cobalt and then we've got some of the service and equipment side, that's a little bit lower margin and in the second and third quarter, we've got a little bit heavier mix in those categories.
Okay. Thanks, guys.
So it <unk> surprising I just wanted to be clear within the total year forecast.
Not a surprise to us.
Yes.
Thank you. Our next question or comment comes from the line of Luke's There got from Barclays Dot Com. Mr. <unk>. Your line is open.
Hey, guys. Thanks for the question.
Can you talk just digging a little bit more on the.
Issues that you had talked about from your customers having component sourcing.
Any are there any indications or particular areas of weakness that that are you guys are looking at to be continue to be softer where you might see some recovery.
No.
Michael we don't have that level of visibility, we just know that they have intermittent problems, where theyre not able to get some components or things that they are able to deliver to truckloads of products to us for sterilization, but we don't have great visibility on that and also remember we can't speculate on what their inventory levels are doing either so we don't know exactly how that ties to the end market. We're just seeing some.
Spotted used here and there where customers have some challenges that they're working through.
Okay.
We have a very I'm sorry, Luke.
Rod product diversification ophthalmology orthopedic cardiac urological swing, we have a whole host of products. It's a very diverse portfolio that we sterilized for pharma as well so that one is going to drag something down but it is something that we do see occurring.
Okay. Thanks, and then any any pull forward from the Nelson business. We saw some last year. At this time is that is that more seasonality or.
Are you still expecting that second half weighting in and guidance.
We still expect a strong second half there is there is no pull forward.
Are any of these business, we don't pull forward like in.
The case annuity on just to be clear. This isn't something you can just ship something to a customer and say hey here. It is right. They have to shut down their operation to bring cobalt in right and that has to be well coordinate with the regulators and the safety committees and things of that nature. So I just wanted to be clear on this isn't we don't call those pull ins that those are all agreed to by customers indication now.
And that phenomenon really isn't paying we're executing as best we can improve turnaround times to meet their quality and safety and timing this requirements.
Okay, great. Thanks.
Thank you. Our next question or comment comes from the line of Sean Dodge from RBC capital markets.
Good morning. This is Thomas Keller on for Sean Thanks for taking the questions.
So I guess starting off on Nordion, given the visibility of tied to harvesting schedules for cobalt 60 are you able to comment on the share that is expected to come from Russia in like 2023 or is it more or less in the exposure this year.
Yes, Thomas this is Michael we're not in a position to talk about 2023 at the appropriate time, we'll talk about 2023 guidance in the company in total and we will give some color on the Nordion pizza as well at this point, we're not focused on 2023 guidance.
Alright, that's fair. Thank you and then and now but I've seen a few references to the global lab information management system can you give us an update on the timeline and what some.
Some of the backend benefits might be and what does it mean from a cost efficiency standpoint.
Would that have any impact on longer term margins.
Yes.
This is something that we've been implementing for quite some time now actually I just had a review with the team a couple of weeks. We wanted an update is progressing very well what we want to try doing this across our platform of labs is to analyze in one lab information management system that will give us great productivity gives.
It gives us better digitization of some of the testing and reporting.
Consistency.
And also help drive more standardization, which should drive some productivity.
And it also gives us a platform for more M&A.
We can build off of that is how we're thinking about it.
Yeah.
Okay. Many thanks, Michael great. Thanks.
Thank you.
Next question or comment is a follow up from Mr. Mike Pollard from Wolfe Research. Your line is open Sir.
The follow up I have two more topics if I may.
Curious Michael for your perspective on the update.
<unk>.
Georgia courts in June you had a favorable ruling from Cobb County, they dismissed all of the claims against you I guess can you just discuss briefly.
What happened there and.
Perhaps if theres any kind of lateral from from that ruling or legal decision too.
To what's going on in Illinois.
Yeah.
So welcome back Mike for a second time here. So I would say on this one there is a particular customer in Georgia that had their employees filed claims against them around their sterilization practices. We were brought in to that lawsuit.
We were indemnified by the customer.
And we put a motion to dismiss and process and we're happy that the courts ruled in.
In accordance with the loss, we were pretty confident that that should be how it played out there were dismissed from the case.
We're continue to battle through the other litigation in Illinois.
We as I mentioned, the first trials will start on August 12, we wish they would have started on July 18th when the rescheduled we're pushing to get forward and have our day in court on these.
There is risk associated with that as we all know, but we feel confident about our positions in.
And how that goes forward.
I appreciate that and then the second.
One was just a clarification on the mentioned during the prepared remark on the impairment.
Joint venture I heard <unk> I, just didn't get what that is I noticed you've.
Carved that out of adjusted profit so its a GAAP item, but if you could just.
Any color about what what.
What that Mark was thank you.
Mike This is Michael again, so we purchased <unk> at the time, we purchased them they had a joint venture.
That was in early stages of being started up.
And the business direction has changed with how to proceed with that which we think is a good outcome.
Our <unk> acquisition.
Has continued to perform very well.
And part of that the JV was we were going to do us sterilization and decontamination of some products, which now will continue to absorb within our existing footprint <unk> facilities, which we think is a good thing as far as the financial microcode reiterate in terms of the financial impact $9 6 million charge.
Was taken out of it.
Adjusted EBITDA at about a <unk> <unk> impact on fully diluted earnings per share.
That is really.
Part of the impairment that was required.
But from a business strategy perspective, we're very comfortable with the outcome and how this is proceeding.
And all transplant performing very well for us and the team has done a great job integrating there.
Thank you for the follow up.
Alright.
Thanks.
I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. <unk> for any closing comments.
Great. Thanks, Howard and thank you to everybody who participated today.
Really proud of what our team has been able to accomplish in the first half of the year, we're optimistic about the second half even though the environments.
Some challenges the team is doing a really good job in executing in fulfilling our mission of safeguarding global so thank you for your time and your support and have a good day bye bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yes.