Q3 2023 Sotera Health Co Earnings Call
[music].
Good morning, and welcome to the Sutera Health third quarter, 20th twenty-three conference call.
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Now I'd like to turn the conference over the Vice President and Treasurer, Jason Peterson. Please go ahead.
Good morning, and thank you welcome to <unk> third quarter of 2023 earnings call. You can find today's press release, an accompanying supplemental slides on the investors section of our web site, So Tara health Dot com.
[noise] webcast is being recorded and a replay will be available in the industrial section of the Sutera health web sites.
With me today, our chairman and Chief Executive Officer, Michael Pietrus, and Chief Financial Officer, John Lyons.
During the call some of her comments may be considered forward looking statements.
The matter is addressing these statements are subject to risks and uncertainties that could cause the actual results to differ materially from those projected or implied.
Please refer to sutera helps S E C filings in the forward looking statements slide at the beginning of the presentation for 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 cats and non-GAAP financial measures, including adjusted net income adjusted EBITDA adjusted EPS net debt adjusted EBITDA margin segment income margin and net leverage ratio. In addition to constant currency comparisons.
A reconciliation of GAAP to non-GAAP measures for all relevant periods may be found in this schedules attached to the company's press release and in the supplemental slides for this presentation.
The operator will be assisting with the Q&A portion of the call today. Please limit yourself to one question and one follow up so that we can give everyone an opportunity to ask questions.
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I will now turn the call over to said Tara helped chairman and C. E O Michael features.
Good morning, everyone and thank you for joining should telehealth third quarter 20 twenty-three earnings call.
This morning, we reported year over your top and bottom line girls plus margin improvement consistent with our past commentary macroenvironment headwinds still exists such as rising interest rates inflation in customer supply chain challenges. The team has done a good job, but offsetting these headwinds as we execute on delivering our mission of safeguarding glow.
[noise] health.
I want to highlight a few items from our third quarter and year to date results.
Compared to the third quarter of 2022 total company revenues increased 5.8%, while adjusted EBITDA increased 7.3%, we delivered adjusted EPS of 21 cents for the quarter, which is a two cent decrease from the same period last year driven by increased interest expense.
Yeah.
Stare Jenex, our largest reporting segment delivered 6.7% top line growth for the third quarter of 2023 as compared to the third quarter of 2022 despite.
Ongoing customer inventory and supply chain challenges and some markets office.
Disturbed Jenex business has been and is considered as a consistent growth business.
Revenues grown more than 30% since we became a public company for approximately $500 million in 2022 $657 million over the last 12 months and.
Segment income has grown by $90 million during the same period.
This consistent growth of stairs <unk> is a testament to the great job that's been done by our team and a critical nature of our business, even when our customers are fighting through significant macroeconomic challenges.
<unk> is a strong business that plays a critical role providing government mandated sterilization services to over 2000 customers across 48 facilities in 13 countries.
More than 90% of sterilization services revenue comes from customers under multiyear contracts, we are very important to our customers and the commercialization of their health care products and ultimately.
In the role we play getting safe products to patients.
During the quarter the team completed another facility expansion project for which the customer product validation pages underway.
We also continued to make good progress in our facility enhancement C. In the United States. These industry, leading enhancements demonstrate our commitment to ensure best in class emission controls for employees customers and confusion, which we operate.
Nordion or other reporting segment within the sterilization services business delivered a 14% year over year revenue increase in the third quarter versus last year.
As communicated previously <unk> revenues tied to harvest schedules of our cobalt 60 suppliers, which results in irregular revenue patterns on a quarter to quarter basis.
The team has unique experience navigating a complex cobalt 60 supply chain and in Oregon team remains on track to deliver a significant portion of his full year revenue in the fourth quarter as plain in previously communicated.
Cobalt sixties uses sterilized approximately 30% of the world's single use medical devices and.
And it's critical to the global healthcare community dish. Another Great example of how we play a critical role in safeguarding global health.
Revenue in Nelson Labs are lab testing advisory service business experience at 2.1% decline versus the prior year quarter is testing volumes continued to be soft based on three primary drivers.
First the extensions of the deadlines for compliance with the European Union medical devices regulations.
Second the declined to funding for startups in smaller companies and lastly routine lot released testing tightest sterilization volume.
A bright spot for the Nelson labs business as the RCA performance RCA plays a critical role in helping customers remediate FDA audit findings as a consulting business. However, Archie margins dilute those of Nelson labs more generally.
And later the softer than expected volumes Nelson labs team is actively managing costs will remain focus on quality or staffing levels have stabilised turnaround times U utilization levels have improved and customer satisfaction scores or solid.
Turning to the 2023 outlook.
Due to the volume softness at Stare Jennison Nelson Labs, we expect that 2023 revenue and adjusted EBITDA will finish at the lower end of the 2000 twenty-three outlook range, we provided during our second quarter earnings call.
Now I would like to give a brief update on the ethylene oxide litigation in Georgia and.
In October we announced that stare Jack signed up by any term sheet to resolve 79 ethylene oxide claims against error jags for $35 million subject to the participation by all the plaintiffs we expect to complete this settlement by year end.
The settlement in no way constitutes an admission of liability or the admissions from our Atlanta facility, if ever pose any safety hazard to the surrounding community.
Settlement was driven by circumstances unique to one of the cases that was about to begin trial and the state court of Gwinnett County.
We continue to vigorously defend the approximately 240 remaining personal injury claims pending in the state Court of Cobb County, where we are optimistic to court will apply the rules of evidence properly and a porch stair junction opportunity to fully and fairly defend itself based on valid science.
The judge in Cobb County has already acknowledged the central importance of science to the old cases by implementing a case management order that places science and causation front and center and at 10 personal injury cases that will be decided first.
In contrast to the approach taken by the judges in Cook County, Illinois in Gwinnett County, Georgia, only cases in which the plaintiffs present sufficient scientific proof to the judge's satisfaction that the plaintiffs allege exposure D E O from the Atlanta facility could have caused and in fact did causing illness.
As a ledge will be allowed to go to trial before a jury.
We are confident that when the rules of evidence are applied properly the science and related evidence about <unk> refute claims that emissions from stare jenks facilities can or do cause cancer or the other harms alleged Neil litigation.
This was proven by the complete defense verdict returned in favor stare Jenks, almost a year ago and the foreign Incase in Cook County, Illinois.
More detailed information about the settlement and yield litigation is available in the 10-Q there'll be filed today and is always on the ethylene oxide pages on our Investor Relations Web site.
Prior to attorneys this call over to John to walk us through the financials in more detail I would like to take a minute to underscore our mission safeguarding global health, which is at the heart of our work we perform tests for medical and pharmaceutical products used each and every day to make sure the products are safe and meet regulatory requirements.
We sterilized millions of products each year that benefit millions of patients.
We supply cobalt 60 to enable gamma sterilization globally and for the.
Treatment of early stage breast cancer.
And Additionally, we provide critical scientific and regulatory expertise to help solve our customers challenges are.
Our mission critical services help protect millions of patients and healthcare providers around the world.
An example of our teams fulfilling our mission is highlighted in a video link located safeguarding global health slide in our third quarter of 2023 earnings presentation released this morning and available on Investor Relations website.
I encourage you to watch this video to learn how ignoring them plays a vital role in the treatment of breast cancer.
Now John I'll walk us through the financials.
Thank you Michael I will begin by covering the third quarter of 2023 highlights on consolidated basis, and then provide some details on each of the business segment, along with updates on capital deployment and leverage.
On a consolidated total company basis third quarter revenues increased by five 8% as compared to the same period last year to $263 million.
This equates to a 4.3% increase on a constant currency basis as foreign exchange turned to a tailwind as expected for the quarter.
And Justin EBITDA increased by seven 3% to $134 million as compared to the third quarter of 2022.
Adjusted EBITDA margins finished at 51%, which was an increase of more than 70 basis points versus versus both the third quarter of 2022 in the second quarter of 2023.
It just it EPS was 21.
Decrease of <unk> from the third quarter of 2022.
Driven by higher interest expense versus the prior year.
The reported net loss for Q3, 2023 was $14 million or five per diluted share inclusive of the 35 million dollar Georgia settlement.
Compared to net income of $25 million or nine per diluted share in Q3 2022.
Ah reported interest expense for the third quarter of 2023 was $41 million, which is an increase of approximately $17 million versus the same period last year.
The increase is driven primarily by the increase in interest rates and the $500 million term loan that closed in Q1.
Now, let's take a closer look at our segment performance.
For the quarter Stared Jenex delivered six 7% revenue growth to $168 million as compared to the third quarter of last year.
Revenue growth drivers for Q3, 2023 included favorable pricing of $6, 3% and favorable changes in foreign currency exchange rates of 2.2%.
Partially offset by unfavorable volume and mix of 1.8%.
Compared to the prior year quarter segment income for Q3, 2023 increased eight 9% to $93 million and segment income margins increased by approximately 110 basis points to 55.3% driven by favorable pricing, partially offset by unfavorable volume and mix.
As well as inflation.
<unk> third quarter revenue increased by 14.3% to $40 million compared to Q3 2022.
<unk> revenue increase was driven by favorable pricing of 9.4% and favorable volume and mix of $6, 9%, partially offset by an unfavourable impact from changes in foreign currency exchange rates of 2%.
Northern segment income increased 18.5% to approximately $24 million and segment income margin increase more than 210 basis points to 60% compared to the same period last year.
Segment income and margin changes versus third quarter of 2022 were driven by favorability and pricing vimen mix and partially offset by inflation.
For Nelson Labs third quarter of 2023 revenue declined by 2.1% to approximately $55 million compared to the third quarter of 2022.
Revenue was impacted by Vimen mixed declines of 8%, partially offset by a $4, 1% benefit from pricing and favorable changes in foreign currency of approximately 1.8%.
Nelson Labs third quarter of 2023 segment income decreased by 11.2% to $17 million and segment income margins contracted by approximately 320 basis points to $31, 3% versus third quarter of 2022.
This decline was due to the unfavorable vimen mix as well as inflation, partially offset by favorable pricing.
I will now turn to liquidity net leveraging capital deployment.
The company is in a strong liquidity position.
As of September 30th 2023, we had approximately $645 million of available liquidity, which includes $245 million in unrestricted cash and $400 million of available capacity on a revolving line of credit through.
Through the third quarter after adjusting for the $408 million, Illinois settlement, we generated over $145 million of operating cash.
This is a testament to the tremendous cash generating capability of this business.
Our net leverage ratio at the end of the third quarter was four two times. This was an increase from the year end 2022 level of $3 two times and was driven by the new $500 million term loan issued in connection with the Illinois ethylene oxide settlement.
R capital expenditures totaled $52 million for the third quarter of 2023 and $150 million on a year to date basis.
Over the past couple of years, we have been operating a period of elevated capital expenditures due to the U S. E O facility enhancements stare <unk> capacity additions and the strategic cobalt development programs.
Spending on the cobalt development and U S. E O facility enhancements programs totaled approximately $50 million in 2022, and we have spent nearly the same amount amount through Q3 of this year.
Our cobalt development programs are required to support the longterm growth of gamma sterilization or.
Last significant cobalt program was approximately 20 years ago.
It is also important to note.
The current development programs will begin to yield revenue late in the decade.
There are jenex has three active capacity expansion projects continuing.
Capital spending will be largely complete on the first of these this year.
Capital spending for the other two which are greenfields will be largely complete by the end of 2025.
As previously communicated we expect 2024 will be another year of heightened investment.
Based on our current view, we expect a significant reduction in capital expenditures for the U S. E O facility enhancements in cobalt development programs in 2025, and stare Jenex growth investments in 2026.
We have a great company and we will continue to invest in all three businesses to maintain and to grow sutera help for the long term.
As we complete the stage of elevated investment we expect to substantially increase the conversion of our strong operating cash flow to free cash flow, which is a key priority.
I would like to discuss our 2023 outlook.
Based on ongoing market softness we expect full year 2023 results to be at the lower end of our previous outlook.
Which is total revenues in the range of $1.35 billion to 105 $5 billion, representing an annual growth rate of approximately 3% to 5%.
Full year adjusted EBITDA in the range of $520 million to $535 million, representing an annual growth rate of approximately 3% to 6%.
As mentioned earlier, we are on track to deliver approximately 50% of <unk> full year revenue in the fourth quarter.
Four Nordion, we expect 2023 full year adjusted EBITDA margins to be similar to 2022 full year margins.
For the remainder of the business, we expect Q for it to be similar to Q3 for both top and bottom line.
Tax rate is expected to be in the range of 30% to 32%.
Weighted average diluted shares are expected to be in the range of $283 million to $285 million.
Adjusted EPS is expected to be in the range of 78 to 86 cents.
Capital expenditures are expected to be in the range of $200 million to $215 million.
And lastly, we expect net leverage to finish the year at or below four times.
Now I will turn the call back over to Michael.
Thank you John.
Four we moved to Q&A I would like to take a minute to express our condolences to the family friends and work colleagues of Matt Mashona from Keybanc, Matt had been following our companies since 2020 in just one week prior to his passing we're fortunate to spend time with them in Boston.
Matt will truly be missed.
At this point in time, let's open the call for question and answer.
I will now begin the question and answer session.
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Two.
The first question today comes from Sean Dodge with RBC capital. Please go ahead.
Yep. Thanks, good morning.
I just wanted to start with a quick clarification, Michael and your comments around the remaining Georgia cases, 240 remain Derek but in those counting he said the judge is going to require.
Those who provide some type of evidence of exposure that caused their illness. So.
Is it right that number could actually the number that actually go to trial code that'd be whittled down some or is that 240 number remaining cases that the number that have already cleared then.
That initial hurdle that that that have provided to approve and we'll go to trial.
Good morning, Sean.
So here's how it works is 240 cases, there were 10 cases that the judge has pulled out to kind of go through phase one in phase two phase one is general causation phase two specific causation.
So the answer your question is yes. The cases could go down so if a condition come through goes through phase one it has to pass through it's leukemia or breast cancer lymphoma. It has to go through phase one so given case highschool two phase one if it passes added goes to the page to if it passes that screen with the judge.
Then he goes to a trial jury and you take it through the whole case. So there is a case scenario here, where something gets knocked out in one of those first two pages.
Let's say a L. L. For example, it could not maybe maybe that pass phase one and phase two which means you will not go to jury trial. So yes, it could reduce the number of cases.
Does that is that okay. So a little complex I would want to make sure I'm being clear enough for you.
Nope Nope that's great.
That helps and then.
Maybe just on the <unk> emissions regulations.
Is there any any more updates you can share that you guys been communicating with the EPA in in any ideas on changes we could see in the final rule. It looks like that's expected known in Q1 of 24.
No we continue to engage with our regular regulators like we always do but we have no more visibility on exactly what's going to be in the final rule, but we again are very confident of the improvements we've put in place and the timing we expect on the knee SHAP is in the first quarter leap first quarter.
Okay, great. Thank you.
Thank you Sean.
The next question comes from Patrick Donnelly the city.
Ahead.
Hey, guys. Thanks for taking the questions.
Michael just as we think about the go forward you know, obviously somebody's headwinds are lingering.
Still right.
Still confident I should say in the high single digit organic growth profile. The business here you know a lot of companies would come out and discuss 24.
Relatively lower growth given some of the headwinds obviously you guys need low end here just curious if we should be thinking about the near term a bit differently and your visibility at the things improving as we work our way up to 24.
Yes, Patrick. Thank you we are confident in the ability to continue to grow high single digits in the business. As you know we felt some of the challenges from our customers and their supply chains and inventory challenges, but when you look at the mid to long range. We expect this business to perform in high single digits organically.
Mmm, Okay. That's helpful.
And then just on the margin profile. So no real changes in terms of the cost controls given the near term headwinds, but can you just talk about moving pieces on the margins, obviously pricing and a nice tailwind for you guys for a long time.
Any change to that algorithm as we work our way slower just anything we should be thinking about in the near term and in terms of the margin moving pieces. Thank you. Yeah. Yeah. Obviously volume is the biggest lever we have on driving margin and margin expansion, we do get price we've been able to prove that we are able to offset price inflation because of.
Operator: I don't know, I don't know, I don't know, I don't know, The operator will be assisting with the Q&A portion of the call today. Please allow yourself to one question in one follow-up so that we can give everyone an opportunity to ask questions.
Operator: As always, if you have any questions post call, please feel free to reach out to me and the investor relations team.
A R price actions, but again it all comes back to the value that we create with our customers and our customers pay for the service because it's so critical and important to them, yes price has been running a little higher than we had guided towards you know we've said, it's 355% over the long range, it's been a little higher net because inflation has been <unk>.
Michael Petras: I will now turn the call over to Sotera Health Chairman and CEO Michael Petras. Good morning everyone and thank you for joining Sotera Health's third quarter 2023 earnings call. This morning, we reported year over year top and bottom line growth plus margin improvement, consistent with our past commentary, macro environment, headwinds still exist such as rising interest rates, inflation, and customer supply chain challenges. The team has done a good job at offsetting these headwinds as we execute on delivering our mission of safeguarding global health.
Little higher than that we've been offsetting it but we expect that.
Price will continue in that range in the future. We also expect volumes to return to where they have been historically, which will continue to give us a great operating leverage with the team's doing a good job in managing through that you know the stair jenks facilities don't have a ton of labor, but Mike and the team has done a good job in managing around that and the same with Joe.
Michael Petras: I want to highlight a few items from our third quarter and year-to-date results. Compared to the third quarter of 2022, total company revenues increase 5.8% while adjusted EBITDA increased 7.3%. We delivered adjusted EPS of 21 cents for the quarter, which is a 2 cent decrease from the same period last year driven by increased interest expense. Stereogenics, our largest reporting segment delivered 6.7% top line growth for the third quarter of 2023. As compared to the third quarter of 2022, despite, I'm going customer inventory in supply chain challenges and some markets office.
The Nelson side and working through the volume challenges, they're you know they've been through a lot with the COVID-19. The the the the job prices that happened and then some of the regulation changes, but overall, we feel good about our ability and our margin rates continue to hold and there's we've proven out in our business model.
I appreciate it.
The next question comes from Luke.
<unk>. Please go ahead.
Good morning.
<unk> for Luke maybe just to follow up on Sean's question earlier about.
The cases outstanding.
Is there a timeline right now for when we might hear about whether some of these cases are.
Michael Petras: Stereogenics business has been and is a consistent growth business. Revenue has grown more than 30% since we became a public company for approximately $500 million in 2020 to $657 million over the last 12 months. In segment income has grown by $90 million during the same period. This consistent growth of Stereogenics is a testament to the great job that's been done by our team in the critical nature of our business, even when our customers are fighting through significant macroeconomic challenges.
Exiting phase, one or phase two or if they're getting stopped.
Just curious about about timeline there.
Yeah, So good morning Shan.
There is there is a timeline setup phase one will get through general causation through October 24 phase two would be August of 2025, and then ultimately any surviving cases would go to a jury trial. They would start in September October of 2025 is the current timeline that we expect.
Michael Petras: Stereogenics is a strong business that plays a critical role in providing government mandated sterilization services to over 2000 customers across 48 facilities in 13 countries. More than 90% of sterilization services revenue comes from customers under multi-year contracts. We are very important to our customers in the commercialization of their healthcare products and ultimately in the role we play in getting safe products to patients. During the quarter, the team completed another facility expansion project for which the customer product validation phases underway.
Gotcha, that's really helpful. Thank you.
Then.
I'm hearing a lot about biopharma kind of tightening their budgets just wondering about what the effects are there for you guys. What your exposure there and if you are hearing anything similar on that demand environment and then.
Just <unk>.
Is expected to hit devices volumes kind of in the long run.
What kind of your sense of or your plan for capacity and is that kind of offset by any sterilization of some of the <unk> that will be used for GOP ones.
Michael Petras: We also continue to make good progress in our EO facility enhancements in the United States. These industry leading enhancements demonstrate our commitment to ensure best-in-class emission controls for employees, customers and the communities in which we operate. Nordian, our other reporting segment within the sterilization services business, delivered a 14% year-over-year revenue increase in the third quarter versus last year. As communicated previously, Nordian's revenue has tied the harvest schedules of our cobalt 60 suppliers, which results in irregular revenue patterns on a quarter-quarter basis.
Just curious about how you were thinking about that as well.
Yeah. So on the Biopharma side, we do business in Biopharma, we're probably onto the scale that we like to be in that segment, but we perform very well. They're obviously this year has been.
A headwind our customers and some that you reference they've had significant challenges on their volumes in inventory takedown, which has impacted the stair jenex volume in a meaningful way we.
We are bullish on that segment longterm when you when you look at the testing opportunities as well. We've also felt the impact of that to some degree although farm again, it's a smaller percent of total Nelson labs, but when you look at that segment at strategic to us longer term on the G. L. P. One.
Michael Petras: The team has unique experience in navigating the complex cobalt 60 supply chain and the Nordion team remains on track to deliver a significant portion of its full year revenue in the fourth quarter as planned and previously communicated. Cobalt 60 is used to sterilize approximately 30 percent of the world's single use medical devices and is critical to the global health care community. This is another great example of how we play a critical role in safeguarding global health.
There will be some volumes that are impacted longer term, but it's too far.
For the surgical procedures.
But there is a really mixed bag you know obviously you are seeing some communication recently with the diabetes companies and how well they are performing and we see the benefit of that our business too.
Michael Petras: Revenue in Nelson Labs are lab testing advisory service business experience at 2.1 percent the client versus the prior year quarter as testing volumes continue to be soft based on three primary drivers. First, the extensions of the deadlines for compliance with the European Union medical devices regulations. Second, the decline of funding for startups in smaller companies and lastly, routine lot-release testing tied to sterilization volume. A bright spot for the Nelson Labs business is the RCA performance.
So we think long term there's opportunities for us, particularly when you start to look at Prefilled syringe and some of the things that come from that.
That creates opportunities across the terror helps so we think it actually can be a net positive is prefill syringes. These injectables take on a bigger portion of the marketplace long term.
Gotcha. Thank you.
The next question comes from Michael Polak Police age. Please go ahead.
Michael Petras: RCA plays a critical role in helping customers remediate FDA audit findings. As a consulting business, however, RCA margins dilute those with Nelson Labs more generally. And later the softly expected volumes, the Nelson Labs team is actively managing calls for remain focused on quality. Our staffing levels have stabilized. Turn run times and utilization levels have improved and customer satisfaction scores are solid.
Good morning, Thank you for taking the questions Uhm I'm Gonna go back to the question about the high single digit.
<unk> I mean look Michael I appreciate over the mid to long haul that's the Northstar.
But as I look at you know.
24, being so close.
It does.
Unless I'm missing something unless you anticipate.
Market recovery this destock cycle.
Michael Petras: Turning to the 2023 outlook. Due to the volume softness at Stereogenics in Nelson Labs, we expect that 2023 revenue and adjusted EBITDA will finish at the lower end of the 2023 outlook range we've provided during our second quarter earnings call.
Cycle being over maybe the stereo jenex.
Capacity coming on line is more impactful.
Then then we're appreciating it just looked like high Tingles, maybe stretch place.
Place to start for 24 for now and so.
Michael Petras: Now, I would like to give a brief update on the Ethelene Oxide litigation in Georgia. In October, we announced that Stereogenics signed a binding term sheet to resolve 79 Ethelene Oxide claims against Stereogenics for $35 million, subject to the participation by all the plaintiffs. We expect to complete this settlement by year end. This settlement in no way constitutes an admission of liability or the admissions from our Atlanta facility have ever posed any safety hazard to the surrounding community.
You know I'll ask the question again, no you're not giving guidance today like.
What are the puts and takes as we sit here today to the frame.
Opportunity in 2024.
Yeah. My guess is you stayed we're not in a position to talk about 2024 guidance will do that in the first quarter. When we wrap up 2023 were going through that process right now with our teams.
Mid to long term, we expect the high single digits organic growth as we mentioned in a reference earlier.
Michael Petras: The settlement was driven by circumstances unique to one of the cases that was about to begin trial in the state court of Gwinnock County. We continue to vigorously defend the approximately 240 remaining personal injury claims pending in the state court of Cobb County, where we are optimistic the court will apply the rules of evidence properly and afford Stereogenics the opportunity to fully and fairly defend itself based on valid signs. The Judging Cobb County has already acknowledged the central importance of signs to the EO cases by implementing a case management order that places signs and causation front and center in the 10 personal injury cases that will be decided first.
We are working through inventories with our customers.
The Destocked and that has had an impact on both stare <unk> and Nelson as well as some of the development efforts have had an impact.
What was that starts to burn off we expect some volumes to return, but obviously, we're talking about the lower end of our range today because of the fact that we're still seeing some of the challenges around that inventory side.
Shows we look at the 24, we're going to have to make some assumptions based on where we think our customers inventories are going to go I don't Wanna get into that level of detail today, because we're not prepared to do it but you see what's happening with the customer base in with their communicating via an inventory destocking challenges. So that's something that will be focused on as we communicate our guidance for 2004 as well.
Michael Petras: In contrast to the approach taken by the judges in Cook County, Illinois in Gwinnock County, Georgia, only cases in which the plaintiffs present sufficient scientific proof to the judges' satisfaction that the plaintiffs' alleged exposure to EO from the Atlanta facility could have caused and in fact did cause illnesses they alleged will be allowed to go to trial before jury. We are confident that when the rules of evidence are applied properly, the science and related evidence about EO refute claims that emissions from Stereogenics facilities can or due to cause cancer or the other harms alleging the EO litigation.
<unk>.
The follow up on <unk> on the fourth quarter, all year, you've been consistent that'd be a very <unk> heavy year.
A month into the quarter. It had some of these very large shipments.
And deliveries already happened or or are they yet.
Yet to happen I guess I'm, just curious for what level of <unk>.
Visibility and our confidence you have and to and to making this large.
Sequential step up and then.
I will extend minority on question and ask just this year with especially lumpy. We know this businesses lumpy and hard to predict quarter to quarter, but very predictable.
Michael Petras: This was proven by the complete defense verdict, returned in favor of Stereogenics almost a year ago, in the fornic case in Cook County, Illinois. More detailed information about the Settlement and the EO litigation is available in the 10 queue that we find today and is always on the Ethylene Oxide pages on our investor relations website.
Uhm over the mid Ron.
Best gas for seasonal pattern in 2024 lumpy like.
The lumpiness of 23, or maybe a little smoother.
Yep. Thanks.
Thanks Bye for all the Lumpiness there.
When we look at the fourth quarter, we've been very clear and consistent all year that 75% of the revenue would come in the second half, 50% would be in the fourth quarter, where we communicated yet again today.
Michael Petras: Prior to turning this call over to John to walk us through the financials in more detail, I'd like to take a minute to underscore our mission, safeguarding global health, which is at the heart of our work. We perform tests from medical and pharmaceutical products used each and every day to make sure the products are safe and meet regulatory requirements. We sterilize millions of products each year that benefit millions of patients. We supply cobalt six to enable gamma sterilization globally and for the treatment of early stage breast cancer.
The team has done a phenomenal job of executing against that and given.
Visibility to that throughout the year, there's always operational things that could happen, but we feel confident and we've reiterated that on a call. This morning.
We expect that already on team to deliver approximately 50% of the revenue in the fourth quarter as far as next year again, I know you really want me to tell you with 24, it looks like I.
Michael Petras: In addition, we provide critical scientific and regulatory expertise to help solve our customers' challenges. Our mission critical services help protect millions of patients and health care providers around the world. An example of our teams fulfilling our mission is highlighted in a video link, located in the safeguarding global health slide, and our third quarter 2023 earnings presentation released this morning, and available on our investor relations website. I encourage you to watch this video to learn how Noreum plays a vital role in the treatment of breast cancer.
I won't go into great specifics on it it will not be as Lumpiness back end loaded as you are seeing right now in 2023 this was unfair.
<unk> stated many times this has really driven by harvest schedules from the utilities, our customers want cobalt and they wanted as fast as they can get it and that's what we're doing to turn it as quickly as we can get it. So that is kind of just want to make sure when knows the demand is there for Nord yet, it's all driven by when the supply with the nuclear reactors.
This year was extremely lumpy with 75% in the back half of the year, we do not anticipated being as lumpy next year.
Jonathan Lyons: Now, John will walk us through the financials. Thank you, Michael. I will begin by covering the third quarter 2023 highlights on a consolidated basis, and then provide some details on each of the business segments, along with updates on capital deployment and leverage. On a consolidated total company basis, third quarter revenues increased by 5.8% as compared to the previous one. This equates to a 4.3 increase on a constant currency basis as foreign exchange turned to a tailwind as expected for the quarter.
Thank you.
The next question comes from Casey living with J P. Morgan. Please go ahead.
Great. Thank you for taking my questions. The first one is just around nothing labs, so margins declined more than 250 basis points sequentially wondering if you can expand on that looks like revenue seemed to be in line with expectations, but the.
The margins had been anticipated improved quarter over quarter was that all just the ICA dynamic that Michael you mentioned earlier it was something else going on there and then maybe just touch on what's assumed in four to you for Nelson I think collapsed 40, you said Fork you would look more like <unk> in that business, so pets that expectation changed at all.
Jonathan Lyons: Adjusted EBITDA increased by 7.3% to $134 million as compared to the third quarter of 2022. Adjusted EBITDA margins finished at 51%, which was an increase of more than 70 basis points versus both the third quarter. Third quarter of 2022 and the second quarter of 2023. Adjusted EPS was 21 cents, a decrease of 2 cents from the third quarter of 2022, driven by higher interest expense versus the prior year. The reported net loss for Q3 2023 was $14 million or $5 per diluted share, inclusive of the $35 million Georgia settlement, compared to net income of $25 million or $9 per diluted share in Q3 2022.
Hey, Casey, it's John Lyons, Thanks for the question.
You call it out the RCA piece had an.
An impact.
Sequentially not the biggest impact.
Really when you look at it we dropped revenue a couple of million dollars sequentially and there's just.
Primarily the volume and lost leverage in the business, that's really the biggest driver of the margin decline.
And as you look at the overall story in queue for yes, we had been calling I think on the last call that Q4 might be up a little bit as we look at Q for today and how we've seen things overall transpire across the businesses were calling for <unk> and Nelson in total to be flat to Q.
Jonathan Lyons: A reported interest expense for the third quarter of 2023 was $41 million, which is an increase of approximately $17 million versus the same period last year. The increase is driven primarily by the increase in interest rates and the $500 million term loan that closed in Q1.
Three and having gotten specific as to how.
How that might shakeout between the two of them.
Gotcha, and then maybe just if I could set one more than last four did he get some color around bioprocessing being the key driver or one of the key drivers for the full year guidance reduction just curious if they continued softness there is a contributing factor for why you're pointing to the low end up the full year guidance range here today or if the market softness you referred to.
Jonathan Lyons: Now let's take a closer look at our segment performance. For the quarter, Starragenix delivered 6.7% revenue growth to $168 million as compared to the third quarter of last year. Revenue growth drivers for Q3 2023 included favorable pricing of 6.3% and favorable changes in foreign currency exchange rates of 2.2%, partially offset by unfavorable volume and mix of 1.8%. Compared to the prior year quarter, segment income for Q3 2023 increased 8.9% to $93 million and segment income margins increased by approximately 110 basis points to 55.3%.
You know what I'm talking about the guidance is more generalized spend that thank you.
Yes.
Jesus Michael Yes file processing has an impact on the guide and then I would also tell you know so it really mixed bag on the medical device side, we have some categories doing really well and others not and some of it's really tied to our customers and some of the inventory challenges and supply chain challenges.
Got it thank you very much.
Jonathan Lyons: Driven by favorable pricing, partially offset by unfavorable volume and mix as well as inflation. Nordian's third quarter revenue increased by 14.3% to $40 million compared to Q3 2022. Nordian's revenue increase was driven by favorable pricing of 9.4% and favorable volume and mix of 6.9%, partially offset by an unfavorable impact from changes in foreign currency exchange rates of 2%. Nordian's segment income increased 18.5% to approximately $24 million and segment income margin increased more than 210 basis points to 60%, compared to the same period last year. Segment income and margin changes versus third quarter 2022 were driven by favorability in pricing, volume and mix and partially offset by inflation.
This concludes that question and answer session and I'd like to turn the conference back over to Michael patches for any closing remarks.
Thank you I want to emphasize what a great business as we produced 6% top line growth and 7% bottom line growth in the quarter and we also generate strong operating casual we remained focused on living our mission of safeguarding global health and we'd like to thank our customers investors for your continued support throughout the year. So thank you and have a good day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Jonathan Lyons: For Nelson Labs, third quarter 2023 revenue declined by 2.1% to approximately $55 million compared to the third quarter of 2022. Revenue was impacted by Vime and Mixed Declines of 8%, partially offset by a 4.1% benefit from pricing and favorable changes in foreign currency of approximately 1.8%. Nelson Labs' third quarter 2023 segment income decreased by 11.2% to $17 million and segment income margins contracted by approximately 320 basis points to 31.3% versus third quarter 2022. This decline was due to the unfavorable Vime and Mixed as well as inflation, partially offset by favorable pricing.
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Jonathan Lyons: I will now turn to liquidity, net leverage and capital deployment. The company is in a strong liquidity position as of September 30, 2023, we had approximately $645 million of available liquidity, which includes $245 million in unrestricted cash and $400 million of available capacity on our revolving line of credit. Through the third quarter, after adjusting for the $408 million Illinois settlement, we generated over $145 million of operating cash. This is a testament to the tremendous cash generating capability of this business.
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Jonathan Lyons: Our net leverage ratio at the end of the third quarter was 4.2 times. This was an increase from the year end 2022 level of 3.2 times and was driven by the new $500 million term loan issued in connection with the Illinois ethylene oxide settlement. Our capital expenditures totaled $52 million for the third quarter of 2023 and $150 million on a year-to-day basis. Over the past couple of years, we have been operating a period of elevated capital expenditures due to the USEO Facility Enhancements, Stereogenics Capacity Editions, and the Strategic Cobalt Development Programs.
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Jonathan Lyons: Spending on the Cobalt Development and USEO Facility Enhancements programs totaled approximately $50 million in 2022 and we have spent nearly the same amount through Q3 of this year. Our Cobalt Development Programs are required to support the long-term growth of gamma sterilization. Our last significant Cobalt Program was approximately 20 years ago. It is also important to note the current development programs will be in the yield revenue late in the decade. Stereogenics has three active capacity expansion projects continuing. Capital spending will be largely complete on the first of these this year. Capital spending for the other two, which are green fields, will be largely complete by the end of 2025.
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Jonathan Lyons: As previously communicated, we expect 2024 will be another year of heightened investment. Based on our current view, we expect the significant reduction in capital expenditures for the USEO Facility Enhancements and Cobalt Development Programs in 2025 and Stereogenics Growth Investments in 2026. We have a great company and we will continue to invest in all three businesses to maintain and to grow Sotera Health for the long-term. As we complete this stage of elevated investment, we expect to substantially increase the conversion of our strong operating cash flow to free cash flow, which is a key priority.
Jonathan Lyons: Now I would like to discuss our 2023 outlook. Based on ongoing market softness, we expect full year 2023 results to be at the lower end of our previous outlook, which is total revenues in the range of 1.035 billion to 1.055 billion. Representing annual growth rate of approximately 3 to 5 percent. Full year adjusted EBITDA in the range of 520 million dollars to 535 million dollars, representing an annual growth rate of approximately 3 to 6 percent.
Jonathan Lyons: As mentioned earlier, we are on track to deliver approximately 50 percent of Nordeon's full year revenue in the fourth quarter. For Nordeon, we expect 2023 full year adjusted EBITDA margins to be similar to 2022 full year margins. For the remainder of the business, we expect Q4 to be similar to Q3 for both top and bottom line. Tax rate is expected to be in the range of 30 to 32 percent. Weighted average diluted shares are expected to be in the range of 283 million to 285 million.
Jonathan Lyons: Adjusted EPS is expected to be in the range of 78 to 86 cents. Capital expenditures are expected to be in the range of 200 to 215 million dollars. And lastly, we expect net leverage to finish the year at or below four times.
Michael Petras: Now I'll turn the call back over to Michael. Thank you, John.
Michael Petras: Before we move to Q&A, I would like to take a minute to express our condolences to the family, friends, and work colleagues of Matt Mishon from Keybank. Matt had been following our company since 2020 in just one week prior to his passing, we were fortunate to spend time with him in Boston. Matt will truly be missed.
Operator: At this point in time, let's open the call for a question and answer. For now, begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
Operator: At this time, we will pause momentarily to assemble our roster.
Sean Dodge: The first question today comes from Sean Dodge with RBC Capital. Please go ahead. Yes, thanks.
Michael Petras: Good morning. I just want to start with a quick clarification, like I'm going to comment around the remaining Georgia cases. So 240 remain there. But in those counties, he said the judge is going to require those to provide some type of evidence of exposure that they call their illness. So the right that number could actually, the number that actually go to trial, could that be whittled down some or is that 240 number remaining cases?
Michael Petras: Is that the number that have already cleared that initial hurdle that have provided their proof and will go to trial? Good morning, Sean. So here's how it works. There's 240 cases. There were 10 cases that the judge has pulled out to kind of go through phase one in phase two. Phase one is general causation, phase two is specific causation. So the answer question is, yes, the cases could go down. So if a condition comes through, go through phase one, it has to pass through if it's leukemia or it's breast cancer, lymphoma, it has to go through phase one.
Michael Petras: So a given case has to go through phase one. If it passes that, it goes to phase two. If it passes that screen with the judge, then it goes to a trial jury and you take it through the whole case. So there is a case, the scenario here where something gets knocked out in one of those first two cases. Let's say a l l, for example, it could not, maybe not pass phase one in phase two, which means it will not go to a jury trial. So yes, it could reduce the number of cases. Is that clear? It's a little complex. I want to make sure I'm being clear enough for you. No, that's great. That helps.
Sean Dodge: And then maybe just on the EO emissions regulations, is there any more updates you can share there? If you guys have been communicating with the EPA and any ideas on changes, we could see in the final rule. Looks like that's expected now in Q1 of 24. No, we continue to engage with our regulators like regulators like we always do, but we have no more visibility on exactly what's going to be in the final rule. But we again are very confident of the improvements we've put in place and the timing we expect on the knee shop is in the first quarter late first quarter. Okay, great. Thank you. Thank you, Sean.
Patrick Donnelly: The next question comes from Patrick Donnelly with city. Go ahead. Hey guys, thanks for taking the questions. Michael, just as we think about the go-forward, you know, obviously some of these headwinds are lingering. You know, is it still right, you know, are you still confident, I should say, in the high single-digit organic growth profile of the business here? You know, a lot of companies have come out and discussed 24s, relatively lower growth, given some of the headwinds, obviously you guys move to low end here, just curious if we should be thinking about the near term a bit differently and your visibility of the things improving as we work our way into 24.
Patrick Donnelly: Yeah, Patrick, thank you. We are confident in the ability to continue to grow high single-digit in the businesses you know. We've felt some of the challenges from our customers and their supply chains and inventory challenges, but we look at the mid-the-long range, we expect this business to perform in high single-digit organically.
Michael Petras: Okay, that's helpful. And then just on the margin profile, I assume no real changes in terms of the cost controls given the near-term headwinds, but can you just talk about moving pieces on the margin? I've seen pricing in a nice tailwind for you guys for a long time. Any change to that algorithm as we work our way forward and just anything we should be thinking about in the near term in terms of the margin moving pieces.
Michael Petras: Thank you. Yeah, obviously volume is the biggest lever we have on driving margin and margin expansion. We do get price, we've been able to prove that we're able to offset price or inflation because of our price actions, but again, it all comes back to the value that we create with our customers. And our customers pay for the service because it's so critical and important to them. Yes, price has been running a little higher than we have guided towards.
Michael Petras: You know, we've said it's 3.5 to 5 percent over the long range. It's been a little higher net because inflation has been a little higher net. We've been offsetting it, but we expect that price will continue in that range in the future. We also expect volumes to return to where they've been historically, which will continue to give us great operating leverage. But the teams do a good job in managing through that.
Michael Petras: You know, these stairjunks just at least don't have a ton of labor, but Mike and the team have done a good job in managing around that. And the same would show on the Nelson side and working through the volume challenges there. You know, they've been through a lot with the COVID, the job crisis that happened and then some of the regulation changes. But overall, we feel good about our ability and our margin rates continue to hold in there if we've proven out in our business model.
Michael Petras: Appreciate it.
Luke Sergott: The next question comes from Luke Sirbot with Barclays. Please go ahead.
Unnamed Speaker: Good morning. This is Salem on for Luke. Maybe just a follow-up on Sean's question earlier about the cases outstanding. Is there a timeline right now for when we might hear about whether some of these cases are exiting phase one or phase two, or if they're getting stopped? Just curious about timeline there.
Unnamed Speaker: Yes, so good morning, Sam. Yes, there is a timeline set up phase one. We'll get through general causation through October 24. Phase two would be August of 2025. And then ultimately any surviving cases would go to a jury trial. They would start in September October 2025. It's a current timeline that we expect.
Michael Petras: Gotcha, that's really helpful, thank you. And then, hearing a lot about biopharma kind of tightening their budgets, just wondering about what the effects are there for you guys, what's your exposure there, and if you're hearing anything similar on that demand environment, and then just on the DOP ones, it's expected to hit devices, volumes kind of in the long run. What's kind of your sense of or your plan for capacity, and is that kind of offset by any sterilization of some of the pens that will be used for DOP ones, just curious about how you're thinking about that as well.
Michael Petras: Yeah, so on the biopharma side, we do business in biopharma, we're probably aren't to the scale that we like to be in that segment, but we have performed very well. There obviously this year has been a headwind, our customers, and so on that your reference, they've had significant challenges on their volumes and inventory take down, which is impacted the sterilization environment in a meaningful way. We are bullish on that segment in long term, when you look at the testing opportunities as well, we've also felt the impact of that to some degree, although farm again is a smaller percent of total Nelson labs, but when you look at that segment, it's strategic to us longer term.
Michael Petras: On the GLP one, there will be some volumes that are impacted longer term, but it's too, it's for the surgical procedures, but there's a really mixed bag. Obviously you're seeing some communication recently with the diabetes companies and how well they're performing and we see the benefit of that in our business too. So we think long term, there's opportunities for us particularly when you start to look at pre-filled syringes and some of the things that come from that, that creates opportunities across the terror health. So we think it actually could be a net positive as pre-filled syringes and injectables take on a bigger portion of the marketplace long term.
Unnamed Speaker: Gotcha, thank you.
Michael Pollock: The next question comes from Michael Pollock with Wolf Research. Please go ahead. Good morning, thank you for taking the questions. I want to go back to the question about the high single digit growth goal. I mean, look Michael, I appreciate the mid to long haul, that's the North Star. But as I look at 24 being so close, unless I'm missing something, unless you anticipate market recovery, this B-stock cycle being over maybe the stereogenic's capacity coming online is more impactful than we're appreciating.
Michael Pollock: It just looks like high singles maybe a stretch place to start for 24 for now. And so I'll ask the question again knowing you're not giving guidance today. Like, you know, what are the puts and takes as we sit here today to frame up growth opportunity in 2024? Yeah, Mike, as you stated, we're not in a position to talk about 2024 guys.
Michael Petras: We'll do that in the first quarter when we wrap up 2023. We're going through that process right now with our teams. Mid the long term, we expect the high single digits organic growth, as we mentioned and I referenced earlier, we're working through inventories with our customers. You know, they've destocked and that's had an impact on both stereogenics and Nelson as well as some of the development efforts that had an impact. You know, with that, it starts to burn off.
Michael Petras: We expect some binds to the return, but obviously we're talking about the lower end of our range today because of the fact that you know, we're still seeing some of the challenges around that inventory side. So as we look into 24, we're going to have to make some assumptions based on where we think our customers inventories are going to go. I don't want to get into that level of detail today because we're not prepared to do it.
Michael Petras: But you see what's happening with the customer base and what they're communicating to you and inventories in the desocking challenges. So that's something that we'll be focused on as we communicate our guys for 24 as well.
Michael Petras: The follow-up on Nordeon, just the fourth quarter all year, you've been consistent that it's be a very four-q heavy year. You know, a month into the quarter, have some of these very large shipments and deliveries already happened, or are they yet to happen? I guess I'm just curious for what level of visibility and our confidence you have into making this large sequential step up, and then I will extend the Nordeon question and ask just, you know, this year was especially lumpy.
Michael Petras: We know this business is lumpy and hard to predict quarter to quarter, but very predictable. Over the mid-run, best guess for seasonal pattern in 2024, lumpy like the lumpiness of 23, or maybe a little smoother? Yeah, thanks Mike for all the lumpiness there. When we look at the fourth quarter, we've been very clear and consistent all year, that 75% of the revenue would come in the second half, 50% would be in the fourth quarter, we're re-communicating that again to you today.
Michael Petras: Rios and the team has done a phenomenal job in executing against that, and given, you know, this ability to that throughout the year. There's always operational things that can happen, but we feel confident, and we've re-interested on our call this morning. We expect the Nordeon team to deliver approximately 50% of their revenue in the fourth quarter. As far as next year again, I know you really want me to tell you what 24 looks like.
Michael Petras: I won't get into great specifics on it. It will not be as lumpy and as back-end loaded as you're seeing right now in 2023. This was unfair, you know, as we stated many times, this is really driven by harvest schedules from the utilities. Our customers want cobalt, and they want it as fast as they can get it, and that's what we're doing to turn it as quickly as we can get it.
Michael Petras: So that is, just want to make sure everyone knows that the man is there for Nordeon. It's all driven by when the supply with the nuclear reactors. This year was extremely lumpy, with 75% in the back half of the year. We do not anticipate it being as lumpy next year. Thank you.
Casey Woodring: The next question comes from Casey Woodring with JP Morgan. Please go ahead. Great, thank you for taking my questions. The first one is just around Nelson Labs, so margins decline more than 250 basis points sequentially. I wonder if you can expand on that. Looks like revenues seem to be in line with expectations, but the margins had been anticipated to improve quarter-over-quarter. Was that all just the RCA dynamic that Michael, you mentioned earlier, was something else going on there?
Casey Woodring: And then maybe just touch on what's assumed in 4Q for Nelson. I think last quarter, you said 4Q would look more like 2Q in that business, so has that expectation changed at all. Hey Casey, it's John Lyons. Thanks for the question. You know, really you call it out. The RCA piece had an impact sequentially, not the biggest impact. I mean really when you look at it, you know, we dropped revenue a couple of million dollars sequentially.
Casey Woodring: And there's, you know, that's just primarily the volume in loss leverage in the business that's really the biggest driver of the margin decline. And as you look at the overall story in Q4, yeah, we had been calling, I think on the last call, that Q4 might be up a little bit, as we look at Q4 today, and how we've seen things overall transpire across the businesses. We're calling for Stereogenics and Nelson in total to be flat to Q3, and having gotten specific as to how that might shake out, between the two of them.
Casey Woodring: Gotcha, and then maybe just if I can set one more in. Last quarter you gave some color around bioprocessing as being the key driver or one of the key drivers for the full-year guidance reduction. Just curious if the continued softness there is a contributing factor for why you're pointing to the little end of the full-year guidance range here today, or if the market softness you referred to, you know, when talking about the guidance is more generalized than that.
Casey Woodring: Thank you. Yes, Pethus Michael, yes, bioprocessing has an impact on the guide, and then it would also tell you, you know, it's a really mixed bag on the medical device side. You know, we have some categories doing really well on others not, and it's something that's really tied to our customers and some of the inventory challenges and supply chain challenges. Got it, thank you very much. This concludes our question and answer session. I would like to turn the conference back over to Michael Petrus for any closer remarks. Thank you.
Michael Petras: I want to emphasize what a great business is. We produce 6% top line growth and 7% bottom line growth in the quarter, and we also generate strong operating cash flow. We remain focused on living our mission of safeguarding global health, and we like to thank our customers and investors for their continued support throughout the year. So thank you, and have a good day. Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. [inaudible]