Q4 2023 Sotera Health Company Earnings Call
Operator: Good morning, and welcome to the Sotera Health fourth quarter and full year 2023 conference call. All participants will be in a listen-only mode.
Good morning, and welcome to the Superior Health fourth quarter and full year 2023 conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press star.
Operator: Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone.
And then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Vice President and Treasurer, Mr. Jason Peterson. Please go ahead. Thank.
Operator: To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Vice President and Treasurer, Mr. Jason Peterson. Please go ahead.
Jason Peterson: Thank you. Good morning, and welcome to today's call. You can find today's press release and accompanying supplemental slides on the investor section of our website, SoteraHealth.com. This webcast is being recorded, and a replay will be available on the investor section of Sotera Health's website.
Thank you good morning, and welcome to todays call you can find today's press release and accompanying supplemental slides on the investors section of our website at <unk> Dot com.
Jason Peterson: This webcast is being recorded and a replay will be available in the industrial section of the sheer terror health website on the call with me today are chairman and Chief Executive Officer, Michael Pietrus, and Chief Financial Officer, John lines. During the call. Some of our comments may be considered forward looking statements.
Jason Peterson: On the call with me today are Chairman and Chief Executive Officer Michael Petras and Chief Financial Officer John Lyons. During the call, some of our comments may be considered forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results that differ materially from those projected or implied.
Jason Peterson: Matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied.
Jason Peterson: Please refer to Sotera Health's SEC filings in the forward-looking statement slide at the beginning of the presentation for a description of these risks and uncertainties. The company assumes no obligation to update any such forward-looking statement. Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted net income, tax rate applicable to adjusted net income, adjusted EPS, adjusted EBITDA margin, segment income margin, net debt, and net leverage ratio, as well as a constant currency comparison. A reconciliation of gap to non-gap measures for all relevant periods may be found in the schedules attached to the company's 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 and give everyone an opportunity to ask questions.
Jason Peterson: Please refer to <unk> SEC filings and the forward looking statements slide at the beginning of the presentation for a description of these risks and uncertainties. The company assumes no obligation to update any such forward looking statements.
Jason Peterson: Please note that during the discussion today the company will present, both GAAP and non-GAAP financial measures, including adjusted EBITDA adjusted net income tax rate applicable to adjusted net income adjusted EPS adjusted EBITA margin segment income margin net debt and net leverage ratio as well as constant currency comparisons.
Jason Peterson: Yeah.
Jason Peterson: Our Richardson reconciliation of GAAP to non-GAAP measures for all relevant periods may be found in the schedules attached to the company's press release and in the supplemental slides to this presentation.
Jason Peterson: 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 and give everyone an opportunity to ask questions. As always if you have any questions post call. Please feel free to reach out to me in the Investor Relations team.
Michael Petras: As always, if you have any questions post-call, please feel free to reach out to me and the investor relations team. I'll now turn the call over to Sotera Health Chairman and CEO, Michael Peterson. Good morning, everyone, and welcome to today's call.
Jason Peterson: Now I'll turn the call over to <unk>, Chairman and CEO Michael Pietrus.
Michael Pietrus: Good morning, everyone and welcome to today's call. This morning, we reported both top and bottom line growth for the quarter and the full year, while delivering 50% plus adjusted EBITDA margins.
Michael Petras: This morning, we reported both top and bottom line growth for the quarter and the full year while delivering 50% plus adjusted EBITDA margin. 2023 presented many challenges, including macroeconomic and customer supply chain pressures, a shifting regulatory landscape, and a lumpy Cobalt-60 harvest schedule at Nordian. Throughout the years, the Sotera Health team demonstrated resiliency, adaptability, and an unwavering commitment to the company's core values in the face of these challenges.
Michael Pietrus: 2023 presented many challenges, including macroeconomic and customer supply chain pressures, a shifting regulatory landscape and a lumpy cobalt 60 harvest schedule. It nordion throughout the year. So that's the Terra health team demonstrated resiliency adaptability and unwavering commitment to the company's core values and the face these challenges.
Michael Petras: In addition to the growth we delivered, we were successful in achieving a number of operational goals. At Sterigenics, we completed four capacity expansions and made significant progress on our US EO facility enhancement. The NORADAM team secured Cobalt-60 supply and successfully delivered 50% of its full-year revenue in the fourth quarter. The team also made good progress on the long-term Cobalt-60 development program.
Michael Pietrus: In addition to the growth we delivered we were successful in achieving a number of operational goals.
Michael Pietrus: At <unk>, we completed four capacity expenses and made significant progress on our U S E O facility enhancements.
Michael Pietrus: The northern team secured cobalt 60 supply and successfully delivered 50% of its full year revenue in the fourth quarter.
Michael Pietrus: The team also made good progress on our long term cobalt 60 development programs.
Michael Petras: Nelson Labs achieved significant growth in its technical advisory services areas throughout the year. RCA, a business we acquired in 2021, continues to deliver strong revenue growth as it supports customers in their interactions with regulatory agencies such as the FDA. We also resolved a substantial amount of ethylene oxide litigation in 2023 with the Illinois settlement of 880 claimants, as well as the recent settlement of approximately 25% of the personal injury claims in Georgia.
Michael Pietrus: Nelson Labs achieved significant growth in its technical advisory services areas throughout the year RCA business. We acquired in 2021 continues to deliver strong revenue growth is RCA supports customers in their interactions with regulatory regulatory agencies, such as the F. D. A.
Michael Pietrus: We also resolved a substantial amount of ethylene oxide litigation in 2023, with the Illinois settlement of 880 claimants as well as the recent settlement of approximately 25% of the personal injury claims in Georgia.
Michael Petras: We finished 2023 in a strong liquidity position with approximately $700 million in liquidity, which is an increase of over $200 million from the end of 2022. John will provide more detail on our financial results in a moment, but first, I want to highlight a few items from our fourth quarter and full year 2023 results. We reported total revenue growth of 23.3% and adjusted EBITDA growth of 28.7% compared to the fourth quarter of 2022. For a full year 2023, revenue grew by 4.5% and adjusted EBITDA grew by 4.3% compared to 2022. 2023 marks another year in which we continue our streak of annual revenue growth, which we've achieved every single year since 2005, with respect to the business units. Sterigenics delivered 6.5% top-line growth for both the quarter and the full year.
Michael Pietrus: We finished 2023 and a strong liquidity position with approximately 700 million in liquidity, which is an increase of over $200 million from the end of 2022.
Speaker Change: John will provide more detail on our financial results in a moment, but first I want to highlight a few items from our fourth quarter and full year 2023 results.
Speaker Change: We reported total revenue growth of 23, 3% and adjusted EBITDA growth of 28, 7% compared to the fourth quarter of 2022.
Speaker Change: For the full year 2023 revenue grew by four 5% and adjusted EBITDA grew by four 3% compared to 2022.
Speaker Change: 2023 marks another year in which we continued our streak of annual revenue growth, which was achieved every single year since 2005.
Speaker Change: With respect to the business units.
Speaker Change: Steerage Anika delivered six 5% topline growth for both the quarter and the full year.
Michael Petras: As we've discussed previously, Sterigenics, our largest reporting segment, has delivered consistent growth throughout its history. Serving its customer base through a comprehensive global network of 48 facilities, this segment has delivered a compound annual growth rate of 10% on its top line and 11% on its bottom line since becoming a public company. These growth rates speak to the durability of the business model, as stereogenics provide critical, often government-mandated services, which represents a fraction of the overall product cost for our customers. Norty and our other business within the sterilization services segment delivered 134.2% revenue growth for the quarter. This performance was expected and was driven by the timing of the Cobalt-60 harvest schedule.
Speaker Change: As we've discussed previously stair Jennings, our largest reporting segment has delivered consistent growth throughout its history.
Speaker Change: Sure it's customer base through a comprehensive global network of 48 facilities. This segment has delivered a compound annual growth rate of 10% on its top line and 11% as bottomline since becoming a public company.
Speaker Change: These growth rates speaks to the durability of the business model is stair James provide critical often government mandated services, which represents a fraction of the overall product cost for our customers.
Speaker Change: Normally in our other business within the sterilization services segment delivered 134.2% revenue growth for the quarter. This performance was expected and was driven by the timing of cobalt 60 harvest schedules.
Michael Petras: As we've consistently messaged, Norian's revenue is tied to the harvest schedule of our Cobalt-60 suppliers, which results in irregular revenue patterns on a quarter-to-quarter basis. The team has unique expertise in navigating the complex Cobalt-60 supply chain, and as I stated earlier, the NordVon team did a fantastic job delivering 50% of its full-year revenues in the fourth quarter. On a full year basis, NordVon revenues were up 4.4%.
Speaker Change: As we've consistently messaged norton's revenue is tied to a harvest schedule or cobalt 60 suppliers, which results in irregular revenue patterns on a quarter to quarter basis.
Speaker Change: Team has unique expertise in navigating a complex cobalt 60 supply chain and as I and as I've stated earlier the nerve that team did a fantastic job delivering 50% of its full year revenues in the fourth quarter on a full year basis, Northern revenues were up four 4%.
Michael Petras: Revenue in Nelson Labs, our lab testing and advisory services business, grew 4.3% in the quarter versus the fourth quarter of 2022. However, for full year 2023, revenue was down approximately 1% versus the prior year. Nelson Labs continues to face the same headwinds we referenced on our third quarter 2023 call, including the extension of compliance deadlines for European Union medical device regulations, decline in funding for start-ups and smaller companies, and lastly, softened demand for routine lot release testing tied to the slowdown of sterilization lines. Overall, 2023 was a good year for Sotera Health considering the uncertainty driven by macroeconomic pressures. Customer Inventory Destocking and Geopolitical Events
Speaker Change: Revenue Nelson Labs, our lab testing and advisory services business grew four 3% in the quarter versus the fourth quarter of 2022.
Speaker Change: Full year 2023 revenue was down approximately 1% versus the prior year.
Speaker Change: Some labs continues to face the same headwinds we referenced on our third quarter 2023 call including.
Speaker Change: The extension of compliance deadlines for European Union Medical device regulations, the decline in funding for startups and smaller companies and lastly, soften demand routine lot release testing cause a slowdown sterilization volumes.
Speaker Change: Overall 2023 was a good year for <unk>, considering the uncertainty driven by macroeconomic pressures.
Speaker Change: Customer inventory destocking and geopolitical events.
Michael Petras: I also want to take a moment to highlight the progress we made on our Corporate Responsibility Initiative. I am proud of our team's accomplishments since the IPO in 2020. As part of our IPO, the board established ESG oversight within our nominating and corporate governance committee.
Speaker Change: I also want to take a moment to highlight the progress we've made in our corporate responsibility initiatives.
Speaker Change: I'm proud of our team's accomplishments since the IPO in 2020 as part of our IPO. The board established ishi oversight within our nominating and corporate governance Committee. We also established an internal cross functional committee, which reports to me and we appointed two seasoned senior executives as co chair is to lead the identification.
Michael Petras: We also established an internal cross-functional committee, which reports to me, and we appointed two seasoned senior executives as co-chairs to lead the identification and implementation of initiatives consistent with our overall business strategy. During 2023, we built on the initiatives begun in 2021 and 2022. Some of the highlights of our accomplishments include, in the environmental area, working with a third-party software solution to establish and, for the first time, publish baseline environmental metrics. As previously mentioned, we continue our investment in industry-leading, state-of-the-art emission controls at our yield facilities. We also published our first environmental management statement in our 2023 Corporate Responsibility Report. With respect to human capital, culture, and communities, we published our formal human rights statement and disclosed initial human capital data. We completed a global employee engagement survey with an 83% participation rate. Additionally, our Sotera Health Women's Network held an interactive session for our leaders with our board director, Anne Klee.
Speaker Change: And the implementation of initiatives consistent with our overall business strategy.
Speaker Change: During 2023, we built on the initiatives begun in 2021 and 2022.
Speaker Change: Some of the highlights of our accomplishments include in the environmental area. We've been working with a third party software solution to establishing a first time publish baseline environmental metrics. As previously mentioned, we continue our investment in industry, leading state of the art emission controls or Youll facilities. We also published our first environmental management statement in our <unk>.
Speaker Change: 23, corporate responsibility report.
Speaker Change: With respect to human capital culture in communities, we published our formal human rights statement and disclosed initial human capital data.
Speaker Change: We completed a global employee engagement survey with 83% participation rate.
Speaker Change: Our should turn health Women's network held an interactive session for our leaders with our board director and <unk>. We are proud to announce that in 2023 women represented more than 40% of our global leadership promotions.
Michael Petras: We are proud to announce that in 2023, women will represent more than 40% of our global leadership promotion. On the governance side, we welcome Karen Flynn to our board. Karen brings board independence to 91%, and she adds valuable commercial experience in the pharma services space, which is an important aspect of our long-term strategy. We also launched a formal enterprise risk management process, with results that led us to prioritize six initial areas.
Speaker Change: On the governance side, we welcome Karen Flynn to our board Karen brings in the board of independents to 91% and.
And she adds valuable commercial experience in the pharmacy services speech Sase wishes, an important aspect of our long term strategy.
Speaker Change: We also launched a formal enterprise risk management process.
Speaker Change: With results that led us to prioritize six initial areas. These six areas are highlighting our 2023 corporate responsibility report.
Michael Petras: These six areas are highlighted in our 2023 Corporate Responsibility Report. And finally, our team completed outreach to institutions holding 60% of the company's public stock float in 2023, and we held meetings on ESG topics with institutions holding approximately 40% of the public float. We greatly value these discussions and share this feedback regularly with our board directors, including this past week. We look forward to continuing to share corporate responsibility accomplishments in the future. Earlier today, we provided our initial 2024 outlook. For the full year 2024, we expect to deliver another year of top and bottom line growth with total revenues and adjusted EBITDA growth expected to be in the range of 4% to 6% when compared to 2023. The variability within our full-year revenue range will be largely driven by the timing and magnitude of the market recovery in both Sterigenics and Nelson Lab. Now, John will take us through the financials in more depth. Thank you, Michael.
Speaker Change: And finally, our team completed outreached institutions, holding 60% of the company's public stock float in 2023, and we held meetings on ESG topics with institutions holding approximately 40% of the public float we greatly valued these discussions ensure the feedback regularly with our board of directors, including this past week, we were.
Speaker Change: Forward to continuing to share our corporate responsibility accomplishments in the future.
Speaker Change: Earlier today, we provided our initial 2020 for outlook for the full year 2024, we expect to deliver another year of top and bottom line growth with total revenues and adjusted EBITDA growth expected to be in the range of 4% to 6% when compared to 2023.
Speaker Change: Variability within our full year revenue range will be largely driven by the timing and magnitude of the market recovery in both stare genetics and Nelson lapse.
Speaker Change: Now John will take us through the financials in more depth.
John Lines: Thank you Michael I will first cover fourth quarter and full year 2023 results, including updates on capital deployment and leverage I will then conclude with additional details on the 2020 for outlook.
John Lyons: I will first cover fourth-quarter and full-year 2023 results, including updates on capital deployment and leverage. I will then conclude with additional details on the 2024 outlook. On a consolidated total company basis, fourth quarter revenues grew by 23.3% or 21.9% on a constant currency basis to $310 million. However, fourth quarter volume growth was abnormally high with 50% of Nordion's full year revenues landing in the period, as Michael previously mentioned. Fourth quarter adjusted EBITDA grew by 28.7% to $167 million, and adjusted EBITDA margins expanded by almost 225 basis points to 53.7%. Our reported interest expense for the quarter was $43 million, and reported net income for the fourth quarter of 2023 was $39 million or $0.14 per diluted share. Adjusted EPS was 26 cents for the quarter, an increase of one cent.
John Lines: On a consolidated total company basis fourth quarter revenues grew by 23, 3% or 21, 9% on a constant currency basis to $310 million. The fourth quarter volume growth was abnormally high with 50% of <unk> full year revenues landing in the period as Michael previously mentioned.
John Lines: Fourth quarter adjusted EBITDA grew by 28, 7% to $167 million and adjusted EBITDA margins expanded by almost 225 basis points to 53, 7%.
John Lines: Our reported interest expense for the quarter was $43 million.
John Lines: Reported net income for the fourth quarter, 2023 was $39 million or <unk> 14 per diluted share.
John Lines: Adjusted EPS was <unk> 26 cents for the quarter, an increase of one set.
John Lyons: Now let's take a look at our segment performance for the fourth quarter. In the fourth quarter, Sterigenics delivered 6.5% revenue growth to $172 million. Revenue growth drivers for the quarter included favorable pricing of 5.8 percent and favorable changes in foreign currency exchange rates of 1.7 percent, partially offset by slightly unfavorable volume and mix of approximately 1%. Segment income grew 6.4% to $95 million, driven by favorable pricing and changes in foreign currency exchange rates, partially offset by higher costs and unfavorable volume and mix. Nordeon's fourth-quarter revenue increased by approximately 134% to $80 million, driven by favorable volume and mix of over 100% and pricing of over 30%, as Nordeon generated 50% of its full-year revenue in the quarter, as expected. Segment income increased by more than 160% to $53 million, and segment income margins expanded by 720 basis points. 66.8%
John Lines: Now, let's take a look at our segment performance for the fourth quarter.
John Lines: In the fourth quarter, <unk> delivered six 5% revenue growth to $172 million.
John Lines: Revenue growth drivers for the quarter included favorable pricing of five 8% and favorable changes in foreign currency exchange rates of one 7%, partially offset by slightly unfavorable volume and mix of approximately 1%.
John Lines: Segment income grew six 4% to $95 million driven by favorable pricing.
John Lines: And changes in foreign currency exchange rates, partially offset by higher costs and unfavorable volume and mix.
John Lines: New Orleans fourth quarter revenue increased by approximately 134% to $80 million driven by favorable volume and mix over 100% and pricing of over 30% as nordion generated 50% of its full year revenue in the quarter as expected.
John Lines: Segment income increased by more than 160% to $53 million in segment income margins expanded by 720 basis points to 66, 8%.
John Lyons: Nelson Labs returned to growth in the fourth quarter, as 2023 revenue improved 4.3% to $58 million compared to the same quarter last year. Revenue growth was driven by favorable pricing of $3.6 and a foreign currency tailwind of 1.2%, partially offset by unfavorable volume and mix of 0.5%. Segment income decreased 7.8% to $19 million, and the segment income margin declined by 420 basis points to 32.1%, which was driven by unfavorable volume and mix coupled with some inflationary pressure, partially offset by favorable prices.
John Lines: Nelson Labs returned to growth in the fourth quarter as 2023 revenue improved four 3% to $58 million compared to the same quarter last year Rep.
John Lines: Revenue growth was driven by favorable pricing of three 6%.
John Lines: And a foreign currency tailwind of one 2%, partially offset by unfavorable volume and mix of 5%.
John Lines: Segment income decreased seven 8% to 19 million and segment income margin declined by 420 basis points to 30 32, 1%.
John Lines: Which was driven by unfavorable volume and mix, coupled with some inflationary pressure, partially offset by favorable pricing.
John Lyons: For the full year, we delivered $1.05 billion in revenue, up 4.5% or 4.2% on a constant currency basis. We grew Adjusted EBITDA 4.3% to $528 million, resulting in an Adjusted EBITDA margin of over 50%. Reported interest expense for the full year was approximately $143 million; reported net income for 2023 was $51 million, or 18 cents per diluted share. Adjusted EPS for the year was $0.81 per weighted average diluted share, a decrease of $0.15 primarily driven by higher interest expense and a higher tax rate.
John Lines: For the full year, we delivered $1 5 billion in revenue up four 5% or four 2% on a constant currency basis.
John Lines: We grew adjusted EBITDA for 3% to $528 million, resulting in an adjusted EBITDA margin of over 50%.
John Lines: Reported interest expense for the full year was approximately $143 million reported net income for 2023 was $51 million or <unk> 18 per diluted share.
John Lines: Adjusted EPS for the year was <unk> 81 per weighted average diluted share a decrease of 15, <unk>, primarily driven by higher interest expense and a higher tax rate.
John Lyons: I will now turn to liquidity, net leverage, and capital deployment. The company continues to be in a strong liquidity position... As of year end, we had approximately $700 million of available liquidity, which included $296 million of unrestricted cash and $400 million of available capacity under our revolving line of credit. For 2023, after adjusting for the $408 million Illinois settlement, we generated $260 million of operating revenue, which is in line with prior years and demonstrates the cash-generating strength of our business. Our net leverage ratio finished the year at 3.8 times, within our target range of 2 to 4 times.
Speaker Change: I will now turn to liquidity net leverage and capital deployment.
Speaker Change: The company continues to be in a strong liquidity position as of year end, we had approximately $700 million of available liquidity, which included $296 million of unrestricted cash and $400 million of available available capacity under our revolving line of credit.
Speaker Change: For 2023 after adjusting for the $408 million, Illinois settlement, we generated $260 million of operating cash which is in line with prior years and demonstrates the cash generating strength of our business.
Speaker Change: Our net leverage ratio finished the year at three eight times within our target range of two to four times as you may recall, our net leverage ratio increased to four two times in the second quarter of 2023 after the financing of our $500 million term loan and subsequent $408 million, Illinois settlement payments.
John Lyons: As you may recall, our net leverage ratio increased to 4.2 times in the second quarter of 2023 after the financing of our $500 million term loan and subsequent $408 million Illinois settlement payment. Since Q2 of 2023, our net leverage ratio has improved nearly half a turn, which demonstrates our ability to delever through growth. CapEx for the year finished at $215 million.
Speaker Change: Since Q2 of 2023, our net leverage ratio has improved nearly half a turn which demonstrates our ability to delever through growth.
Speaker Change: Capex for the year finished at $215 million.
John Lyons: As Michael mentioned, Sterigenics completed four capacity expansions during the year and made significant progress on the EO facility. We currently have three growth projects in process, two of which are greenfields. Nordeon's Cobalt-60 development programs are progressing well.
Speaker Change: As Michael mentioned <unk> completed for capacity expansion during the year and made significant progress on the El facility enhancements.
Speaker Change: We currently have three growth projects and process two of which are greenfields.
Speaker Change: Nordion cobalt 60 development programs are progressing well as.
John Lyons: As I mentioned during our Q3 call, these are once-in-a-generation, long-term projects that won't yield incremental cobalt until later in the decade. For Nelson Labs, we continue to invest in expanding our pharma capabilities and in our lab information management system that we are deploying across the division. Now, I would like to discuss our 2024 outlook. For the full year, we expect total revenues and adjusted EBITDA to grow in the range of 4 to 6 percent, with adjusted EBITDA margins similar to 2023 levels. We expect another year of solid price performance, with 2024 being at the lower end of our long-term stated range of 3.5% to 5% due to the moderation in inflation and the timing of long-term contract renewals at Nordeon. From a revenue cadence perspective, Q1 typically is the lightest quarter of the year for the company, and we expect that to be the case again in 2024.
Speaker Change: As I mentioned during our Q3 call. These are once in a generation long term projects that won't yield incremental cobalt until later in the decade.
Speaker Change: For Nelson Labs, we continue to invest in expanding our pharma capabilities in our lab and in our lab information management system that we are deploying across the business segment.
Speaker Change: Now I would like to discuss our 2020 for outlook.
Speaker Change: For the full year, we expect total revenues and adjusted EBITDA EBITDA to grow in the range of 4% to 6% with adjusted EBITDA margins similar to 2023 levels. We expect another year of solid price performance with 2020 for being at the lower end of our long term stated range of three 5% to 5% due to the moderate.
Speaker Change: <unk> and inflation and timing of long term contract renewals at Nordea.
Speaker Change: From a revenue cadence perspective, Q1, typically the lightest quarter of the year for the company and we expect that to be the case again in 2024.
John Lyons: In Sterogenics, we are assuming relatively flat volumes in the first half, with slight recovery beginning in the second half of 2024. Compared to 2023, Nordeon revenues will be more balanced between the first half and the second half, with the first quarter again being the lightest quarter of the year, but stronger than 2020. For Nelson Labs, revenues for the first half of the year will be slightly lower than the second half, with the first quarter being historically the lightest quarter of the year.
Speaker Change: In <unk>, we are assuming relatively flat volumes in the first half with slight recovery beginning in the second half of 2024.
Speaker Change: Versus 2023, Northern <unk> revenues will be more balanced between the first half and second half with the first quarter again being the lightest quarter of the year.
Speaker Change: But stronger than 2023.
Speaker Change: For Nelson Labs revenues for the first half of the year will be slightly lower than the back half with the first quarter being historically, the lightest quarter of the year.
John Lyons: In the past couple of years, we have provided visibility to the revenue risk associated with Russian cobalt supplies. As of today, there is an approximate risk of between 0% and 3% of total company revenue for 2024. At this point, I would like to direct you to slide 18 of the earnings presentation that is posted on our investor website under events and presentations, which outlines a change we are making to the calculation of adjusted net income. By way of background, during Q2 of 2023, we closed on a $500 million term loan to fund the $408 million Illinois EO settlement. Consistent with our treatment of EO litigation-related costs, we excluded the interest costs related to $408 million of this loan to calculate adjusted net income.
In the past couple of years, we've provided visibility to the revenue risks associated with Russian cobalt supply.
Speaker Change: As of today, there is an approximate risk of between zero and 3% of total company 2020 for revenue.
Speaker Change: At this point I would like to direct you to slide 18 of the earnings presentation that is posted to our investor website under events and presentations, which outlines a change we're making to the calculation of adjusted net income.
Speaker Change: By way of background. During Q2 of 2023, we closed on a $500 million term loan to fund the $408 million, Illinois E O settlement.
Speaker Change: Consistent with our treatment of litigation related costs, we excluded the interest costs related to $408 million of this loan to calculate adjusted net income.
John Lyons: Beginning in 2024, we will no longer make this adjustment. We have presented the impact this change would have had on 2023, so you have the right basis for comparison going forward. As you will see on the slide, adjusted net income is reduced from $230.1 million to $202.3 million. The effective tax rate applicable to adjusted net income increased from 31.4% to 33.8%, and adjusted EPS changed from $0.81 to $0.71 per weighted average diluted share.
Speaker Change: Beginning in 2024, we will no longer make this adjustment.
Speaker Change: We have presented the impact of this change would have had in 2023. So you have the right basis for comparison going forward.
Speaker Change: As Youll see on the slide adjusted net income is reduced from $230 1 million to $202 3 million.
Speaker Change: The effective tax rate applicable to adjusted net income increased from 31, 4% to 33, 8% and adjusted EPS changes from 81 to <unk> 71 per weighted average diluted share.
John Lyons: These are the appropriate basis for comparison for our tax rate and EPS guide. For 2024, we expect interest expense between $170 and $180 million. We are projecting an effective tax rate applicable to adjusted net income in the range of 31.5% to 34.5%.
Speaker Change: These are the appropriate basis for comparison for our tax rate and EPS guidance.
Speaker Change: For 2024, we expect interest expense between 170 and $180 million.
Speaker Change: We are projecting an effective tax rate applicable to adjusted net income in the range of 31, 5% to 34, 5%.
John Lyons: Adjusted EPS is expected to be in the range of 67 to 75 cents. We expect a fully diluted share count in the range of 283 million to 285 million shares on a weighted average basis. From a capital deployment standpoint, we will continue to prioritize organic growth and deleveraging, as well as opportunistic M&A, and we expect capital expenditures in a range of $205 million to $225 million in 2024. As previously communicated, we expect 2024 to be at an elevated level before we start to see a decline in CapEx spending in 2025, when we will start to see free cash flow generation accelerate. Finally, our guidance does not assume any M&A, and we anticipate net leverage to improve in 2024. I will now turn the call back over to Michael for his closing remarks. Thank you, John.
Speaker Change: Adjusted EPS is expected to be in the range of 67% to 75.
Speaker Change: We expect our fully diluted share count in the range of 283 million to 285 million shares on a weighted average basis.
Speaker Change: From a capital deployment standpoint, we will continue to prioritize organic growth and deleveraging as well as opportunistic M&A.
Speaker Change: And we expect capital expenditures in a range of $205 million to $225 million in 2024.
Speaker Change: As previously communicated we expect 2024 to be at an elevated level before we start to see a decline in capex spending in 2025, when we will start to see free cash flow generation accelerating.
Speaker Change: Finally, our guidance does not assume any M&A and we anticipate net leverage to improve in 2024.
Speaker Change: I will now turn the call back over to Michael for closing remarks.
Michael Pietrus: Thank you John as we look forward to 2024, we will continue to focus on our priorities. A few of these priorities include expanding our global network through disciplined investment in cobalt 60 development and additional capacity, we will continue to invest in upgrades to our U S. Eo emission control systems, we will further enhance our one company.
Michael Petras: As we look forward to 2024, we will continue to focus on our priorities. A few of these priorities include expanding our global network through disciplined investment in Cobalt-60 development and additional capacity. We will also continue to invest in upgrades to our U.S. EO emission control system.
Michael Petras: We will further enhance our one-company capabilities through cross-functional business unit initiatives, all while delivering top and bottom line growth with strong cash flow generation. I want to re-emphasize the strength and durability of our business model. In 2024, we expect another good year of performance in spite of uncertain demand recovery. The fundamentals of the criticality of our services remain intact with our customers.
Michael Pietrus: Capabilities through cross functional business unit initiatives.
Michael Pietrus: All while delivering top and bottom line growth with strong cash flow generation.
Michael Pietrus: I want to reemphasize, the strength and durability of our business model in 2024, we expect another good year performance in spite of uncertain demand recovery the fundamentals of the criticality of our services remain intact with our customers. We have long term relationships with the top medical device and pharma companies of the world that are supported by multi year contracts.
Michael Petras: We have long-term relationships with the top medical device and pharmaceutical companies in the world that are supported by multi-year contracts. We will continue to deliver for our customers, and when market volumes improve, Sotera Health will benefit from that recovery. Our focus, day in and day out, is on our mission of safeguarding global health.
Michael Pietrus: We will continue to execute for customers when market volumes improve so terra health will benefit from that recovery, our focus day in and day out is on our mission of safe guarding Global Health. This company plays a critical role in health care and we are in a strong position for growth once again in 2024 at this point operator, let's open up the call for Q&A.
Operator: This company plays a critical role in health care, and we are in a strong position for growth once again in 2024. At this point, Operator, let's open up the call for Q&A. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Operator: If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Sean Dodge with RBC Capital. Please go ahead. Yeah, thanks. Good morning. I just want to start on stereogenics.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: All your question.
Speaker Change: Press Star then two and at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Sean Dodge with RBC capital. Please go ahead.
Sean Dodge: Yes. Thanks, good morning, I, just want to start on on steroids.
Sean Dodge: Michael, you said the guidance assumes volume recovery in the second half of the year. Can you give us a sense of the proportions of stereogenics revenue you're expecting from first half to second half? I guess historically, second halves have always been bigger in terms of revenue.
Sean Dodge: Okay.
Sean Dodge: Michael You said the guidance assumes volume recovery in the second half of the year can you give us a sense of of the proportions of <unk> revenue, you're expecting first half the second half I guess historically second half and have always been bigger in terms of revenue in 2024 going to be a lot more pronounced.
Michael Petras: Is 2024 going to be a lot more pronounced? And then maybe if you just talk about the visibility you have into that. Is it just expecting a market recovery? Is there something else you're seeing now that indicates that? Yeah, good morning, Sean.
Michael Pietrus: And then maybe if you could just talk about the visibility you have into that is it just expecting a market recovery is there something else youre seeing now.
Michael Pietrus: That indicate that yes, good morning, Sean yes, it will be similar to what we've seen in the past where second half.
Michael Petras: Yes, it'll be similar to what we've seen in the past where second halves are typically a little bit better than the first half. I don't think it's going to be dramatic, but as we said, relatively flat volumes in the first half for stereogenics and improving in the second half. You know, it's really trying to predict, as I stated in my comments, around the recovery in market volumes. We still see some destocking occurring in the channels, but we can tell you overall we're not seeing it get worse. It's very stable both on the stereogenic side as well as on the Nelson side.
Speaker Change: Typically a little bit better than first half I don't think its can be dramatic, but as we said relatively flat volumes in the first half of <unk> and improving in the second half.
Speaker Change: Really trying to predict as I said in my comments around the recovery in the market volumes, we still see some destocking.
Speaker Change: Occurring in the channels, but we can tell you overall, we're not seeing it get worse, it's a very stable both on the stair genetic side as well as the Nelson site, it's not getting worse. We just the question is when the recovery will start to come back and we just wanted to give you visibility of how we're thinking about it as the year plays out.
Michael Petras: It's not getting worse. We just, the question is when the recovery will start to come back, and we just want to give you an idea of how we're thinking about it as the year plays out. Okay, great. And then on Nelson, maybe just any updates on the margin outlook there, aside from this more volumes coming through? Are there some cost actions you can take levers you can start to pull to drive some improvement in margins and the Nelson business? Yeah, as we've mentioned in the past, Sean, we got our position early in 23, where we were probably over resourced based on the volumes.
Speaker Change: Okay, Great and then on <unk>.
Speaker Change: Nelson, maybe just any update on the margin outlook. There aside from just more volumes coming through or are there. Some cost actions you can take levers that you can start to pull to drive some improvement in margins in the Nelson business, Yes.
Nelson: As we've mentioned in the past Shaun we gathered position early in 'twenty, three where we'd probably over resource based on the volumes and we did that with the eye towards.
Michael Petras: And we did that with an eye towards better service and making sure that if volumes came back, we had the people in place to really take care of that business. I would tell you that we'll see improvements as the year progresses. We have turnover in that business. We'll work that down.
Nelson: Better service and making sure that if volumes came back we had the people in place to really take care of that business I would tell you that we'll see improvements as the year progresses.
Nelson: We're going to get turnover in that business, we'll work that down we're not going to be back filling as many jobs until we see the volumes recover but our goal here is to get to the mid <unk> as we've mentioned it'll take us some time to get there, but that's ultimately where our aspirations are over time.
Michael Petras: We're not going to be backfilling as many jobs until we see the volumes recover, but our goal here is to get to the mid-30s, as we've mentioned. It'll take us some time to get there, but that's ultimately where our aspirations are over time. Okay. It's a fine line there, Sean.
Nelson: Okay.
Michael Petras: We want to make sure we're there to service the customers. That's the biggest thing when that volume comes in. www.TheBusinessProfessor.com OK, thank you. The next question will come from Dave Windley with Jeffries. Please go ahead.
Speaker Change: It's a fine line there Sean we want to make sure. We're there to service the customers. That's the biggest thing when that volume comes.
Speaker Change: Okay. Thank you.
Speaker Change: The next question will come from Dave Windley with Jefferies. Please go ahead.
David Howard Windley: Hi. Hi. Good morning.
David Howard Windley: Hi, Hi, good morning, Thanks for taking my question, Michael I wanted to start on a little bit more strategic question on the.
Operator: Thanks for taking my question. Michael, I wanted to start on a little bit more strategic question, the long-term cobalt supply initiatives that you are working on. When and if those are successful, I know there's some development work around new reactors and things like that. What's the impact of that, I guess? You have a fairly stable and predictable growth rate. A certain amount of medtech uses radiation for sterilization.
David Howard Windley: Long term cobalt supply initiatives that you are working on.
David Howard Windley:
David Howard Windley: When when and if those are successful I know theres, some development work around new reactors and things like that.
David Howard Windley: What's the impact of that I guess you have a.
David Howard Windley: Kind of a fairly stable and predictable growth rate in a certain amount of med tech users.
David Howard Windley: <unk> for sterilization would you expect that to lower your <unk>.
Michael Petras: Would you expect that to lower your input costs? Would you compete on price for more market share? Does it allow you to supply or to serve volume that you're not serving today? I guess I'm wondering, we really haven't discussed this. I don't think it will be of much length because it's far away, but what's the lever for you when you get more cobalt-60 supply?
David Howard Windley: Your input costs would you compete on price for more market share does it does it allow you to supply.
David Howard Windley: Or just serve volume that you're not serving today I guess I'm wondering we really havent discussed this I don't think it much linked because it's <unk>.
David Howard Windley: Far away.
David Howard Windley: What is the lever for you when you get more cobalt 60 supply yes.
Michael Petras: Yeah, David, thanks for the question. Just for some folks who aren't as familiar, our cobalt development programs are really focused around working with OPG, Ontario Power Group, which is one of our longest-term suppliers, getting more capacity there, as well as the program we're working on with Westinghouse. Our goal with these programs is to be able to keep up with market growth over time. There'll be a portion of it that replaces existing reactors that will go out of service for maintenance work, if you will, or just be retired. But, more importantly, it's also to bring out some additional capacity for longer-term flexibility in our global supply chain.
Speaker Change: Yes, David Thanks for the question. So just for some folks aren't as familiar you are cobalt development programs are really focused around working with LPG, Ontario power group, which is one of our longest term suppliers getting more capacity there as well as the program. We're working with Westinghouse our goal with these programs is to be able to keep up with the market growth over time should there be a portion.
Speaker Change: It replaces existing reactors that will go out of service.
Speaker Change: For maintenance work, if you will or just being retired but then more importantly, it's also bringing on some additional capacity for longer term flexibility in our global supply chain. So we think ultimately gave it its needed to keep up with the market growth over the long run.
Michael Petras: We think, ultimately, David, it's needed to keep up with the market growth over the long term. Okay, okay. And then maybe on sterogenics and following up on Sean's question, the volume and the destocking that you're seeing, do you have... It sounds like you emphasize it's not getting any worse. That's good news.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: Maybe on <unk> and following up on Sean's question.
Speaker Change: The volume and the Destocking that you're seeing do you have.
Speaker Change: Uh huh.
Speaker Change: Sounds like you emphasize it's not getting any worse. That's good news do you have visibility into.
Michael Petras: Do you have visibility into your customers, you know, how much more de-stocking they need to do, any quantification of that to give you comfort that, you know, the volume, and kind of the correlation of your order patterns to underlying MedTech order patterns might start to tighten a little bit in the second half? Yeah, David, you know, it's pretty complicated to supply chain with your customers who have inventory, their distribution channels, as well as the health systems. Now, we are not seeing it get worse, as I stated, one example would be, you know, I met late in the year, actually, I'm sorry, it was the beginning of this year with one, you know, major MedTech customer CEO.
Speaker Change: Your customers how much more destocking they need to do any quantification of that to give you comfort that the volume kind of the the correlation of your order patterns. The underlying med Tech order pattern might start to tighten up a little bit in the second half.
Speaker Change: Yes, David.
David: It's pretty complicated to supply chain with your customers, who have inventory their distribution channels as well as the health systems.
David: We are not seeing to get worse as I stated. One example would be late in the year actually I'm sorry. It was the beginning of this year with one major med tech customer CEO and he said listen I took out $500 million of inventory in the back half of the year focus on working capital.
Michael Petras: And he said, Listen, I took out $500 million in inventory in the back half of the year to focus on working capital. Right. So we saw that, and we are seeing it across multiple customers. I think many of you follow the MedTech space see that as well. And the bioprocessing space as well, where people are taking it out and trying to get back to pre-COVID levels are slightly below.
David: So we saw that and we are seeing it across multiple customers I think many of you filed the med tech space see that as well.
David: Bio processing space as well where people are taking it out and trying to get back to pre COVID-19 levels were slightly below as I mentioned, we're not seeing it get worse, we're not able to draw a great correlation in our square David because of some of the pockets in between US. If you will but we are seeing that stabilize we're not seeing it get worse.
Michael Petras: As I mentioned, we're not seeing it get worse; we're not able to draw a great correlation in our square, David, because of some of the pockets in between us, if you will. But we are seeing that stabilize; we're not seeing it get worse. We're starting to see a little bit of recovery. But again, we feel pretty confident where we are and calling the visibility for the year on stereogenics, it's really tied to volume. We feel very good about our ability.
David: Starting to see a little bit of recovery, but again, we feel pretty confident where we are in calling the visibility for the year on <unk>, it's really tied to volumes.
We feel very good about our ability if the volumes come we're going to be in a position to service that which will help us get more margin improvement overtime as well.
Michael Petras: If the volumes come, we're going to be in a position to service that, which will help us get more margin improvement over time as well. Great. I appreciate the answers.
Speaker Change: Great I appreciate the answers thank you.
Operator: Thank you. The next question will come from Luke Sergut with Barclays. Please go ahead.
Speaker Change: The next question will come from Lukas <unk> with Barclays. Please go ahead.
Luke Sergut: Great. Thanks, guys. I'm gonna follow up on that with the destocking. I mean, after we deal with it on the bioprocessing side and see on the devices. So is there any way that you guys could estimate, like, how much has been stocked or, you know, from a normal cadence? You know, is this like over a full year that's been stocked up, and they're working down, you know, six months, something like that. We can get I understand you're not going to call there on the timing, but just from a magnitude, like have, And going back in history Luke, unfortunately, we can't, like I think all of you are struggling with as you look at these big med tech companies and pharma companies, right? They're global in nature, they've got multiple product lines if it's pharma or med device.
Lukas: Great. Thanks, guys I'm going to follow up on that on the Destocking I mean, after we're dealing with it with the bioprocess ing side seeing on the devices. So is there any way that you guys could estimate like.
Lukas: How much has been stocked or.
Speaker Change: From a normal.
Lukas: Cadence is this.
Lukas: Like over a full year, that's been stocked up and they're working down six months something like that so we can get I understand you're not going to call. There on the timing, but just from a magnitude like have.
Lukas: And going back in history, you have you ever seen anything like this where we can kind of use that as a framework.
Speaker Change: Look unfortunately, we cant like I think all viewers struggled with as you look at these big Med Tech companies and pharma companies right, they're global nature to get multiple product lines of its pharma and med device. We look at we have conversations with them. We look at their public filings around their inventory levels. Our days sales on hand, and we tried to do divest job, we can and we've talked a lot of our investors there I haven't.
Michael Petras: We look at, we have conversations with them, we look at their public filings around their inventory levels, their daily sales on hand, and we try to do the best job we can. And we've talked to a lot of our investors; they're having the same struggles looking through that with our customer base. But I will just tell you, we don't see it getting worse. So that would be the part that I want you to leave with as we continue to work through this overall throughout the channel. All right, great.
Speaker Change: Same struggles looking through that with our with our customer base, but I would just tell you we don't see it getting worse. So that'd be the part that I want you to leave with is we continue to work through this overall throughout the channels.
Speaker Change: Alright, Great and then just on the margin guidance.
John Lyons: And then I just on the margin guidance, flat margin year over year. You know, as volumes come back in the back half, and you're, growth there accelerates throughout the year, obviously, the pacing there should pick up in the margins, but I'm just wondering why we're not getting back to more normalized levels there. Is there any, you know, from an investment standpoint, if you guys can buck it out, like the puts and takes there are from the margin dynamics throughout the year? Yeah.
Speaker Change: Flat margin year over year.
Speaker Change: As the volumes come back in the back half and your <unk>.
Speaker Change: Growth there accelerates throughout the year.
Speaker Change: Obviously, the pacing there should pick up in the margins, but I'm just wondering why we're not getting back to more normalized levels. There is there any you know from an investment standpoint, if you guys can buck it out like the the puts and takes there is from the margin dynamics throughout the year.
John Lyons: So, you know, I would look at it that when you look at 22 and 23, the margins are pretty consistent at 50, just slightly over 50%. That's kind of where our guides lead you in 2024. We're focused on really driving margin dollar growth, not necessarily rate expansion, but over time, if we get more operating leverage, as I mentioned a few minutes ago, I think that'll help us with margin improvement, but right now, our guide is expecting flat margins at 50 plus percent. OK, thanks. The next question will come from Brett Fishbin with KeyBank. Please go ahead.
Speaker Change: Yeah. So I would look at it that when you look at 22% and 23 the margins are pretty consistent at 50, just slightly over 50% that's kind of where our guides lead you in 2024.
Speaker Change: We're focused on really driving margin dollar growth not necessarily rate expansion, but over time, if we get more operating leverage as I mentioned minutes ago, I think that will help us with margin improvement, but right now our guidance expecting flat margins at 50 plus percent.
Speaker Change: Okay. Thanks.
Speaker Change: The next question will come from Brett Fishbein with Keybanc. Please go ahead.
Brett Fishbin: Hey guys, thanks so much for taking the questions. I just wanted to start off on one more follow-up around the revenue growth guidance. I'm just hoping if you could walk through some of the moving pieces, particularly around Nelson Labs and Nordeon and thoughts for the year. I think you gave some commentary on the phasing, but maybe if you could just give a little bit more on full year expectations and how to think about whether this step up in Nelson Labs performance in 4Q could proceed into 2024. Yeah, Brett, you know, I think it's all predicated on volume recovery.
Brett Fishbein: Hey, guys. Thanks, so much for taking the questions just wanted to start off on one more follow up around the revenue growth guidance I'm, just hoping if you could walk through some of the moving pieces, particularly around Nelson labs, and Nordion and thoughts for the year. I think you gave some commentary on the <unk>, but maybe if you could just give a little bit more on full year expectation and how.
Brett Fishbein: To think about whether this step up in Nelson lapsed performance in <unk>.
Brett Fishbein: Could could proceed into 2024.
Brett Fishbein: Yes.
Brett Fishbein: I think it's all predicated on the volume recovery as I stated in my remarks, that's the pluses and minuses around the guide that we've given we.
Michael Petras: As I stated in my remarks, that's the pluses and minuses around the guide that we've given. We expect, you know, Nelson will continue to improve over time. You know, we've had good growth in our RCA business that's been able to help us offset some of the volume on the sterility side. And as I've also mentioned, some of the MDR compliance timing that's played out. And Nordeon will be, you know, a consistent performer for us. It'll be the lightest quarter in the first quarter, but it'll be better than what you saw last year.
Brett Fishbein: We expect.
Brett Fishbein: Nelson will continue to improve over time, we've had good.
Brett Fishbein: Good growth in our RCM business has been able to help us offset some of the the volume on the surety side as I also mentioned some of the MTR compliance timing. It's played out an annuity on nordion it'll be.
Brett Fishbein: A consistent performer for us it would be the lightest quarter, but in the first quarter, but it will be over which you saw last year because as you know last year was a really slow quarter, but overall, we're going to result in a growth rate that's slightly better than what you saw last year are the nordion business.
Michael Petras: Because, as you know, last year was a really slow quarter. But overall, we're going to end up with a growth rate that's slightly better than what you saw last year out of the Nordeon business. All right, thanks for the color.
Speaker Change: Alright, thanks for the color and then just one follow up I had.
John Lyons: And then just one follow-up question I had. Maybe if you could just give a little bit more on how we should be thinking about the free cash flow setup for 2024. I think, you know, obviously, you had a pretty big adjustment or moving piece in 2023 around the settlement. But maybe, outside of that, is there anything changing significantly that we should be thinking about for 2024 outside of the ongoing CapEx projects that you have going? Thank you. Yeah, Brad, thanks for the question. It's John Lyons.
Speaker Change: Maybe if you could just give a little bit more on how we should be thinking about the free cash flow setup for 2024, I think obviously you had a pretty big adjustment are moving piece in 2023 around the settlement well maybe outside of that is there anything.
Speaker Change: Changing significantly that we should be thinking about for 2024 outside of the ongoing capex projects that you have going.
Speaker Change: Yes.
Speaker Change: Thanks for the question, it's John Lyons.
John Lyons: You know, we do see a favorable position on free cash flow for the year. I think when you pull out the settlement, we're somewhere around 40 or $50 million in 2023. You know, a couple of moving pieces inside that I look going into 2024. Number one, we do have the Georgia settlement that paid out in January, so that's a moving piece. And then interest is going to be slightly elevated for the year compared to last. And taxes will be slightly elevated.
John Lyons: We do see a favorable position on free cash flow for the year I think when you pull out the settlement were somewhere around $40 million to $50 million in.
John Lyons: In 2023.
John Lyons: Moving pieces inside that as I look going into 2024.
John Lyons: Number one we do have the Georgia settlement that paid out in January.
John Lyons: It's a moving piece and then interest is going to be slightly elevated for the year compared to last and taxes will be slightly elevated.
John Lyons: On the flip side, we'll have some EBITDA growth that will generate some cash, and we have less of a headwind on working capital going into the year. We're very focused on generating free cash flow, and we'll keep driving it. And as I said before, in Q3, we see CapEx coming down over the next couple of years, and our free cash flow performance will really accelerate as we move into 2025. All right, thanks for taking the question. I appreciate it. Thanks, Fred. The next question will come from Casey Woodring with J.P. Morgan. Please go ahead.
John Lyons: Flip side, we'll have some EBITDA growth that will generate some cash and we have less of a headwind on working capital going into the year and we're very focused on generating free cash flow and we will keep driving it and as we.
John Lyons: As I said before in Q2 Q3, we.
John Lyons: We see capex coming down over the next couple of years and our free cash flow performance will really accelerate as we move into 'twenty five 'twenty six.
Speaker Change: Alright, thanks for taking the questions I appreciate it thanks Brett.
Speaker Change: The next question will come from Casey Woodring with J P. Morgan. Please go ahead.
Casey Woodring: Hi, thank you for taking my questions. Just, yeah, to follow up on the CAPEX guide, the 205 to 225 million this year, is that the floor, or could the finalized NESHAP ruling potentially drive that high? And then maybe if you could just break down for us how much of that number is for EO facility enhancements versus the capacity expansion projects and the Cobalt development programs underway. And then, you know, you just mentioned now that the elevated CAPEX this year will take a step down in 2025. Can you just give us a sense of how many of these costs this year are non-repeating? So, Casey, I guess you got the one question out of 15 compounds.
Casey Woodring: Hi, Thank you for taking my questions.
Casey Woodring: You have to follow up on the Capex guide the $205 million to $225 million. This year is that the floor or could finalize reshaped ruling drive that high potentially and then maybe if you could just breakdown for us how much of that number is on facility enhancements versus the capacity expansion projects and the cobalt development.
Casey Woodring: <unk> underway and then you just mentioned now that the elevated Capex. This year will take a step down in 2025 can you just give us a sense for how many of these costs in the share of non repeating.
Speaker Change: So Casey I guess, you've got the one question 15 compounds I'll try to answer as best we can.
Michael Petras: I'll try to answer those as best I can. We're expecting the guide to be 205 to 225 on CapEx. We've got about $40 million in there for GFP. The Cobalt development is a significant investment this year, as we stated last year and this year are the biggest years around that. As far as NESHAP is concerned, we expect to hear something from NESHAP sometime in the month of March. It could be earlier in March.
Speaker Change: We're expecting the guide to be 205 to $2 25 on Capex, we've got about $40 million in there for <unk>.
Speaker Change: Cobalt development is significant.
Speaker Change: Investment this year as we stated this last.
Speaker Change: Last year and this year the biggest years around that as.
Speaker Change: As far as niche app.
Speaker Change: We expect to hear something in niche up sometime in the month of March it could be earlier March were.
Michael Petras: We're waiting for the final guide from the government. There could be incremental costs associated with it, depending exactly where that comes from. But based on what we know today, we feel pretty confident of our position and our ability to meet the requirements. Again, we took a very industry-leading approach to this and how we're trying to resolve the emission challenges that are expected by the EPA.
Speaker Change: Waiting for the final guide from the government there could be incremental costs of that depending on exactly where that comes from but based on what we know today, we feel pretty confident of our position and our ability to meet the requirements again, we took a very industry leading approach on this.
Speaker Change: How we're trying to to resolve the mission challenges that are expected by the EPA, but overall, we feel pretty good about the cap guide that we're giving for 2024.
Michael Petras: But overall, we feel pretty good about the cap guide that we've been given for 2024. I think I got all your questions, there were several, I'm sorry if I missed one. Yeah. No, that was helpful.
Speaker Change: I think I got all your questions through several millions or I'm, sorry, if I Miss one.
Speaker Change: Yes that was helpful.
Michael Petras: Just as a follow-up, too, you completed four stereogenics capacity expansion projects in 23. You have three left to finish. I think you mentioned at our conference last month that you have one of those coming online this quarter. Just curious if you can quantify the increase in overall stereogenics capacity by the end of these expansion projects, and then if you could walk through what your capacity utilization expectations are for 2024, and if the softer volume environment is weighing on margins at all and would then create an easier confluence once demand normalizes. Thank you. Okay. So, yes, we have one of the three capacity projects in process that's coming online in the first quarter. We don't get into particulars on how much incremental capacity that'll generate for the market, but overall, again, we try to get commitments from our customers for approximately 40% of those expansions before we do that. That doesn't mean it happens with every one, but that's what our guide is. And I would tell you that as we look at those programs, one of them will come this year, and then we'll have one late in 2024 and into 2025 for the other one. I think I have got all of them.
Speaker Change: Just as a follow up too. So you completed for stereotactic and capacity expansion projects. In 2003, you have three left to finish. Thank you mentioned at our conference last month that you have one of those coming on line. This quarter. Just curious if you can quantify the increase in overall sterile <unk> capacity by the end of these expansion projects and then if you could walk through what your capacity utilization.
Speaker Change: <unk> expectations are for 2024.
Speaker Change: If the softer volume environment is weighing on margins at all and then create an easier comp when once demand normalizes.
Speaker Change: Okay.
Speaker Change: Yes, we have won one of the three capacity projects in process Thats coming live in the first quarter, we don't get into particulars on how much incremental capacity that will generate for the market, but overall again, we tried to get commitments for our customers for approximately 40% of those.
Speaker Change: Those expansions before we do that that doesn't mean it happens on every one but that's what our guide is.
Speaker Change: And I would tell you that as we look at those.
Speaker Change: <unk> one of them will come this year and then we will have one late late in 'twenty four and into 2025 for the other ones I think I got all of them are capacity utilization I think was your other question, we target about 80%.
Michael Petras: Capacity utilization, I think was your other question; we target about 80%. Okay, got it. Thank you. The next question will come from Patrick Donnelly with Citi. Please go ahead.
Speaker Change: Okay got it thank you.
Speaker Change: The next question will come from Patrick Donnelly with Citi. Please go ahead.
Patrick Bernard Donnelly: Hey, guys, thanks for taking the questions. Michael, maybe one just on the pricing side, it sounds like this year is gonna be a little more at the low end of kind of that long-term three and a half to five algorithm. Is that just, I know you touched on some of the timing stuff. Is that all?
Patrick Bernard Donnelly: Hey, guys. Thanks for taking the questions.
Patrick Bernard Donnelly: Michael maybe one just on the pricing side. It sounds like this year that would be a little more at the low end of kind of that long term three to five algorithm.
Patrick Bernard Donnelly: Is that just I know you touched on some of the timing stuff is that all I just wanted to kind of talk through what you're hearing from customers on the core business sounds like minority on piece, maybe dragging that down a little bit, but what are you hearing on pricing and again, what's the right way to just think about that going forward beyond this year as well.
Michael Petras: You know, I just want to kind of talk through what you're hearing from customers on the core business. It sounds like the Nordeon piece is maybe dragging that down a little bit. But what are you hearing on pricing? And again, what's the right way to think about that going forward beyond this year as well? Yeah, Patrick, thanks for the question. Yeah, we feel confident three and a half to 5%. We just wanted to signal to you that this year could be in the lower end of that range, driven by the point that you just referenced the longer term, it's just the nature of what it's been longer term contracts for Nordian rolled off. We had a very strong Nordian price performance in 2023, which would just soften a little bit. We are not concerned about our long-range ability to generate prices based on the value proposition we offer our customers.
Speaker Change: Yeah, Patrick Thanks for the question, Yeah, we feel comps of three 5% to 5%. We just wanted to signal to you. This year it could be in the lower end of that range driven by the point that you just referenced the longer term. It's just the nature of what it's been a longer term contracts for nordion rolled off we had a very strong nordion price performance in 2023, which will just soften a little bit 24, we are not concerned about.
Speaker Change: Our long range ability to generate price based on the value proposition, we offered our customers.
Michael Petras: Okay, that's helpful. And it sounds like, you know, over the past couple quarters, maybe you had some good dialogue with investors. Obviously, there's a pretty concentrated holding at the top there.
Speaker Change: Okay. That's helpful.
Speaker Change: And it sounds like over the past couple of quarters, maybe you had some good dialogue with investors, obviously, theres a pretty concentrated holding at the top there I mean, any intel or insight into kind of what the.
Michael Petras: I mean, any intel or insight into kind of what the initial holders are kind of thinking about in terms of, you know, potentially, things like secondaries, things like that, in terms of just the concentration of the holdings up top, given that you seem like you chat with them a good amount. Yeah, well, they're on our board. So I do chat with them quite a bit. You know, at the end of the day, there are shareholders. They've got to make decisions on when they sell the stock. They're not going to be reckless about it. They're very thoughtful in that. It's been a great investment for them, and they're very supportive of the company. And over time, they'll eventually sell their position, as we all know, to their private equity firms, and that's what they do.
Speaker Change: The initial holders are kind of thinking about in terms of potentially.
Speaker Change: Things like secondaries and things like that in terms of just the concentration of our holdings up top given that you seem like you're chatting with them a good amount.
Speaker Change: Yeah, well they are on our board, so I do chat with them quite a bit.
Speaker Change: At the end of the day, there are shareholders they've got to make decisions on when they sell the stock theyre not going to be reckless about it they're very thoughtful in that it's been a great investment for them. They are very supportive the accompanying over time they'll eventually sell their position as we all know there are private equity firms and that's what they do.
Michael Petras: But overall, they're being very thoughtful about how they ramp that down; they want to make sure they're not doing it in a reckless manner, understood. Thanks, Michael. Thank you, Patrick. The next question will come from Michael Polark with Wolf Research. Please go ahead, um, Thank you. Good morning, Nordeon 1Q.
Speaker Change: But overall, they're being very thoughtful how they ramped that down they want to make sure they're not doing it in a reckless manner.
Speaker Change: Understood. Thanks, Michael.
Michael Pietrus: Thanks, Patrick.
The next question will come from Michael Paul Polak with Wolfe Research. Please go ahead.
Speaker Change: Thank you good morning, Nordion <unk>.
Michael K. Polark: Look, I hear the thematic comment, but the range we could paint, we could drive a bus through. So what's the right number for Nordeon's revenue in the first quarter? Should we look at 22 and 21, 25, 30 million, something like that? Or not quite that high?
Speaker Change: Look here the somatic comment but.
Speaker Change: The range, we could paint you could drive a bus through so like what's the what's the right number for <unk> revenue in the first quarter should we look at 'twenty, two and 'twenty $125 million to $30 million something like that.
Speaker Change: Or not quite that high.
Michael Petras: Yeah, so we're, you know, Mike, Michael, we're not going to get into particulars on individual businesses by quarter. It'll be up from last year, but won't be as high as 2022. This way I would think about it. It's just, you know, last year was really abnormally low because, as you recall, last year, we hardly had any inventory at all coming into the, The follow-up below the line, interest expense, and tax. The question on tax is, why is the tax rate so high and is there a path to get it lower? And then on interest expense, I'm just trying to do the bridge from 23 to 24.
Speaker Change: So.
Speaker Change: Mike Michael we're not going to get into particulars on individual businesses by quarter it'll be up from last year will be as high as 2022 is the way I would think about it.
Speaker Change: It's just that last year was a really abnormally low because we came into position as you recall last year, we hardly had any inventory at all coming into the year.
Speaker Change: The follow up below the line interest expense and tax the question on taxes why is the tax rate. So high and is there a path to get it lower and then on interest expense I'm just trying to do the bridge.
Speaker Change: <unk> 23 to 24, John here the comments clear on Illinois. It was excluded last year. It's included this year.
Michael K. Polark: John, hear the comments clear on Illinois. It was excluded last year. It's included this year. If I do that, $116 million of interest expense last year, Illinois is probably $35 million. 150, and you're guiding 170 to 180. What else is going on there? Is that just cycling in kind of higher rates generally on the overall balance? Or are you modeling an incremental draw at some point in the year?
Speaker Change: If I do that $116 million of interest expense last year.
Speaker Change: Illinois is probably 35% and I'm.
Speaker Change: 150, and you're guiding $1 70 to $1 80, what what else is going on there is that just cycling and kind of higher rates generally on the overall balance or are you modeling incremental draw at some point in the year I just want to fully understand the bridge from 'twenty three to 'twenty four uninterested.
John Lyons: I just want to fully understand the bridge from 23 to 24 on it. Yeah, thanks for the thanks for the question. And I just want to make sure that folks understand and clarify, you know, as we look at this, we reported today 81 cents of EPS on an adjusted basis for 2023. When we make these adjustments, the new baseline to come for comparison is 71 cents. And yeah, the tax adjustment there sticks out a little bit, leaving the higher tax rate. The trick we have here with our tax rate and why it's elevated is our excess interest expense that we can't deduct for US tax purposes.
Speaker Change: Yes. Thanks for the thanks for the question and I, just want to make sure that folks understand and clarify as we look at this we reported today 81.
Speaker Change: EPS on an adjusted basis for 2023, when we make these adjustments right the new baseline for comparison at 71 fence.
Speaker Change: And yes, the tax adjustment there sticks out a little bit leaving to a higher tax rate. The trick we have here on our tax rate and why it's elevated is.
Speaker Change: Our excess interest expense that we can't deduct for U S tax purposes.
John Lyons: Because of our outlook not being able to deduct that in the future and get the benefit, we have to take a valuation allowance against that, which leads us to a higher tax rate. Continuing to grow is a path to reducing the tax rate over time, and lowering things like interest expense that drive up US taxable income and our ability to use the interest deduction will help improve. So my guarantee, I would just add, there's no incremental new debt contemplated in the guide, and the number that we finished last year, 143, compared to the guide, 170 to 180, that's just the timing run out of the loan that we put in last year, and that rolling out is for a full year, and also the higher interest rate environment. Got it. Thank you. Okay. Great. Any other questions, Operator? Is that it, Chuck? That is it.
Speaker Change: Because of our outlook not be able to deduct that in the future and get the benefit we have to take a valuation allowance against that which leads us to a higher tax rate.
Speaker Change:
Speaker Change: Continuing to grow as a path to reducing the tax rate over time, and lowering things like interest expense that drive up U S tax taxable.
Speaker Change: Taxable income and our ability to use the interest deductions will help improve it.
Speaker Change: So my guess the thing I would just add theres no incremental new deck contemplated in the guide and.
Speaker Change: The number that we finished last year at $1 43, compared to the guide of 170 to 180 that shifts.
Speaker Change: Timing run out of the loan that we put in last year.
Speaker Change: We're only rolling out is for full year and also of a higher interest rate environment.
Speaker Change: That's all.
Speaker Change: Got it thank you.
Okay, great any other questions operators added Chuck that is it I will like to pass the call back over to Mr. <unk> for any closing remarks, great. Thank you everybody forget together. This morning as you can see we're really proud of what we accomplished in 2023, we're excited and optimistic about 2024, we have a great business here to place a critical.
Michael Petras: I would like to pass the call back over to Mr. Petras for any closing remarks. Okay. Thank you, everybody, for getting together this morning. As you can see, we're really proud of what we accomplished in 2023. We're excited and optimistic about 2024. We have a great business here that plays a critical role in healthcare. We have sticky customer relationships because we continue to bring real value to our customers day in, day out. But really, we're providing a safe environment for our employees, the patients, and the communities where we operate. So we're really proud of what the team's doing, and we look forward to more conversations with you all in 2024. Thank you, and have a great day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. www.soterahealth.com
Speaker Change: On healthcare, we have sticky customer relationships.
Speaker Change: We continue to bring real value to our customers day in day out, but really we're providing a safe environment for our employees the patients and the communities where we operate so we're really proud of what the team soon and we look forward to more conversations with you. All in 2024, Thank you and have a great day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].
Yeah.
Speaker Change: [music].