Good morning, and welcome to the Sotera Health Second Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Vice President and Treasurer, Jason Peterson. Please go ahead.

Good morning and thank you. Welcome to Sotera Health second quarter 2024 results call. You can find today's press release and accompanying supplemental slides on the Investors section of our website at soterahealth.com. This webcast is being recorded and a replay will be available in the Investors section of the Sotera Health website. On the call with me today are Chairman and Chief Executive Officer, Michael Petras and Chief Financial Officer, Jon 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 to differ materially from those projected or implied. Please refer to Sotera Health's 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. Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted net income, adjusted EBITDA, adjusted EPS, adjusted EBITDA margin, segment income margin, and net leverage ratio in addition to constant currency comparisons. A reconciliation of certain non-GAAP measures to the most directly comparable GAAP financial measures for all relevant periods may be found in the schedules attached in the company's press release and in the supplemental slides of 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. As always, if you have any questions after the 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 Petras.

Good morning, everyone, and thank you for joining Sotera Health's second quarter 2024 earnings call. Today, we announced both revenue and adjusted EBITDA growth compared to the second quarter of 2023, driven by volume growth in each of our three business segments. Compared to the second quarter of 2023, total company revenues increased 8.3%, or 8.8% on a constant currency basis and adjusted EBITDA increased 6.9%. We delivered adjusted EPS of $0.19 for the quarter, which is slightly down versus the second quarter of 2023, driven by higher interest expense. Sterigenics, our large reporting segment, grew the top line by 5.9% versus the same period in the prior year, delivering positive volume growth for the first time in several quarters. We continue to expect slight volume and mix growth in the second half of 2024 versus 2023. Nordion, our other reporting segment within the sterilization services business increased revenues by 29% versus the second quarter of 2023. The timing of reactor harvest schedules resulted in the favorable volume and mix increase, which was the primary driver for the growth. Nelson Labs, our lab testing and advisory service business, delivered its third consecutive quarter of top line growth as second quarter revenue increased 4% compared to the second quarter of 2023. We are pleased to see volume improvement within our core validation testing area while core routine lot release testing remains soft versus the second quarter of 2023. Our expert advisory services business continued its strong performance in the quarter. With the first half of the year completed, we are reaffirming our full year 2024 outlook. As a reminder, our 2024 outlook calls for both revenue and adjusted EBITDA growth in the range of 4% to 6% versus 2023. Jon will go through our 2024 outlook in more detail in a…

Thank you, Michael. I will begin by covering the second quarter 2024 highlights on a consolidated basis and then provide some details on each of the business segments along with updates on capital deployment and leverage. I will then finish up with some additional details on our 2024 outlook. On a consolidated total company basis, second quarter revenues increased by 8.3% as compared to the same period last year to $277 million. This equates to an 8.8% increase on a constant currency basis as foreign exchange was a headwind in the quarter. Adjusted EBITDA increased by 6.9% compared to the second quarter of 2023 to $137 million. Adjusted EBITDA margins were 49.7%, representing a 68 basis point decline from second quarter of 2023, driven by a decline in Nelson Labs segment margin. Adjusted EPS was $0.19 for the second quarter of 2024, a decrease of $0.01 from the second quarter of 2023, driven by higher interest expense. Net income for Q2 of 2024 was $9 million, or $0.03 per diluted share, compared to net income of $24 million, or $0.08 per diluted share in Q2 of 2023.The reduction in net income was driven by customary charges related to the recent successful refinancing of our debt structure. Our interest expense for the second quarter of 2024 was $40 million, an increase of almost $10 million versus the same period last year. The increase was driven by reduced interest income and a reduced benefit from favorable interest rate hedges that matured. Now let's take a closer look at the segment performances. For the quarter, Sterigenics delivered 5.9% revenue growth to $176 million as compared to the second quarter of last year. Revenue growth was driven by a pricing benefit of 4.9% as well as favorable volume and mix of 1.4%. These were…

Thank you, Jon. Overall, we're pleased with our performance in the second quarter and we're looking forward to the second half of 2024. Prior to moving to Q&A, I would like to take a moment to say that we are very excited to welcome Christopher Simon, President and Chief Executive Officer of Haemonetics Corporation to Sotera Health board of directors. Chris brings extensive commercial and strategic experience in the medical device industry, which we believe will serve us and our stakeholders well. At this point, operator, let's open the call for questions and answers.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dave Windley with Jefferies. Please go ahead.

Hi. Thanks. Good morning. Thank you for taking my questions. Michael, you commented on and we noticed that volume growth seemed to return in Sterigenics. Sounds like you're expecting modest amounts of that to continue through the year and perhaps you could elaborate on what you're seeing in the end markets and how that supports the continued volume growth. Thanks.

Yeah. Good morning, David. Thanks for your question. Yeah. As you noted, Sterigenics had nice volume improvement in the quarters, the first quarter and several quarters that they've had positive volume and mix. For the first half of the year, it came in flat, which was consistent with our expectations, and we see that slightly improving in the second half of the year. And we're seeing -- as we had mentioned in our last call, we continue to see stabilization of inventory levels with our customer base, although it's not a straight line with all customers in all categories. Overall, we continue to be encouraged and it's in line with our expectations that we'll continue to see improvement in the volumes with Sterigenics. So we're happy with their performance in the quarter.

Thank you for that. Could you add on kind of the difference in observed trends between, say, general hospital market versus bio lifesciences market?

Yeah. I would generally say, in the general hospital, it continues to stabilize. Bioprocessing, although not a large category for us, as we've mentioned in the past, we did see sequential improvement with the exception of one big customer as an outlier that I think if you followed some of their comments, they're seeing a little bit slower recovery in the marketplace as well. But overall, we feel good about the expectations going forward in those categories.

Okay. And then my last question on, you called out labor cost as an offset. I just wondered if you could give us a little more color on the inflation environment for and stability of your labor force. Thanks.

Yeah. In particular, we called out the Nelson side, and that's just merit increases, predominantly merit increases. Jon, anything else to add?

No. I think it's pretty stable. They've been doing great work to get the workforce in the right place, and...

Yeah. Jon, the team has done a nice job. As you saw, Nelson had another good quarter top line growth. The mix isn't ideal yet, but we continue to see improvement there. The labor force is stabilizing, turnover is stabilizing and actually down significantly. Net promoter score has been strong and employee survey results are good. So we're encouraged by what we're seeing on the Nelson side and hopeful that continues. We're seeing validation volume continue to move forward. So that's great.

Great. That's all for me. Thank you.

Great. Thanks, David.

The next question comes from Brett Fishbin with KeyBanc. Please go ahead.

Hey, guys. Thank you so much for taking the questions. Just wanted to follow up on Nelson Labs, staying on topic here. You mentioned the third consecutive quarter of growth, which was encouraging to see. So really just curious, like what areas you're seeing the most upside from a volume perspective.

Yeah, Brett. Thanks. As we've mentioned a couple of times throughout these calls, the expert advisory services business continues to do well, having nice growth, although it's slowing down, as we mentioned to you, we expect that to slow as you go into the back half of the year on a year-over-year basis because they had some big growth towards the end of last year. Where we are seeing nice growth in activity is on the validation, the more complex testing. Routine testing has been a little sluggish, but we're optimistic that we'll see improvements as the year progresses there.

All right. Thank you. And then just one follow up, maybe taking a little bit of a step back. At least for us, it felt like 2Q was broadly ahead of expectations really across the board, but guidance was generally left intact. So just with that framing, maybe if you could just touch on some of the primary reasons why you left the full year outlook unchanged and whether there's a level of conservatism that's baked into the rest of the year. Thanks very much for taking the questions.

Yeah, Brett. I would just say, the second quarter was in line with our expectations and we're still hopeful that we'll see the gradual improvements in volumes in the back half of the year, which is reaffirming our guidance as well of that 4% to 6% top line growth.

Okay. Thank you.

The next question comes from Patrick Donnelly with Citi. Please go ahead.

Hey, guys. Thanks for taking the questions. There's maybe one for you, Jon. Just on the margin side. It sounds like the labor environment is reasonable here in terms of a backdrop, volumes showing the early signs of the recovery. Can you just talk about the margin ramp as we think about the second half and the different moving pieces in the businesses? It feels like things are trending in the right direction there. So I just want to talk through the right way to think about it and then maybe just a launching point for '25, just at a high level would be helpful.

Yeah. Thanks for the question. Yeah, I mean, margins continue to be really healthy in the business in large part. The biggest thing, as you heard us on the call today is the Nelson margins. Very happy, the improvement that we're seeing sequentially, but the mix right now has those a little lower than we would target. As we said, we see that margin improving in Nelson. We see kind of normal evolution of margin in the other businesses with volume, and we'd expect those margins to approach 50% on the full year basis for the entire company, which would be your launching point for next year.

Okay. That's helpful. And then maybe staying just on kind of the financials, nice to see the leverage continue to come down. Can you just remind us where we're going to be at the end of this year? And then again, I guess with the CapEx shifting down, maybe just the magnitude, how much that comes down, and what the cash flow could look like in the out years would be helpful. Thank you, guys.

Yeah. Thanks, Patrick. I mean, I guess, I would say first overall on the leverage, we continue to expect modest improvement versus prior year as we finish out this year. And as we sit here on the CapEx and overall on the balance sheet and leverage overall, we're very focused on driving free cash flow performance. We've got a pretty disciplined process. Michael and I operate here, and so we're pleased that we're able to push the CapEx number to the lower end of the range. We continue to expect positive free cash flow for the year, and we expect that to accelerate as we come into the next couple of years as we drive CapEx, complete some of these programs, and drive CapEx lower.

Remember, Patrick -- this is Michael. Remember, the big outliers are really driving the outsized CapEx right now as we're in an investment cycle on the Sterigenics for some capacity expansions. We got the NESHAP, EO, general facility enhancements, and then we have this Nordion CapEx for Cobalt development, which again, we haven't done something like that since around 2002 or '03. So we're just at an elevated level, as we've mentioned, in the past '24 and '23. We see that stepping down in '25 and '26, as Jon just referenced.

It's helpful. Thank you, guys.

The next question comes from Casey Woodring with JPMorgan. Please go ahead.

Great. Thank you guys for taking my questions. I guess, maybe the first, can you just walk through Nordion performance in the quarter and what looked to be a bit of a pull forward there? I think you had previously expected 65% of segment revenue in the back half, now it's 60%. And then, just curious on the visibility for that second half growth rate and maybe if you could give us a sense of the split between 3Q and 4Q from Nordion.

Yeah, I would just say -- this is Michael. I would say they came in relatively as expected. We do expect just a slightly greater than 60% of the total year revenue to come in the second half. One other point that we didn't call out, all the Russian cobalt we have in-house that we need for 2024, so we feel pretty good about the visibility as well on that side as well when we look at it, Casey. But overall, we feel good about where we sit with the Nordion piece.

And Michael may have addressed it, I didn't catch your second part of your question.

Just the split between 3Q and 4Q in that back half. 60% of full year in Nordion.

Yeah. In Q3, we referenced that we expect upper single-digit revenue growth in Q3, and the balance would be in Q4.

Got it. Okay. And then just on Sterigenics, curious on the destocking timing. Do you expect that by the end of the year you'll fully work through the noise there and enter kind of a normalized market environment in '25, or just kind of curious on how you're thinking about the forward outlook there.

Yeah. We would be hopeful that it stabilized. We continue to see the inventory levels stabilizing and volumes in the end markets continue to perform. We think we'd be pretty well situated going into '25, Casey.

Okay. And maybe just last one quickly for me, and then I'll hop back in the queue. Just now that you've had a little bit more time to digest the new litigation in California, just curious if you have any sort of sense of what the timeline to resolution will look like there. Thank you.

Yeah. Casey, no, I would just -- there's nothing new really on the litigation front. I would only just tell you, in California, the number of case count is consistent with where it was last time we spoke. We're working through case management activities, but we don't see anything in the near term as far as trial activity in California. Okay, thank you.

The next question comes from Luke Sergott with Barclays. Please go ahead.

This is Salem on for Luke. Thanks for taking our questions. I know you just touched on the LA litigation, any updates on Atlanta on relevant trial dates.

On the litigation front for Georgia, I would just say, there's nothing materially changing there. We expect the Phase 1 activity, remember, it's going to go to two stages of causation, Phase 1 and Phase 2. We don't expect either of those phases to start until -- we don't expect any of those to start before September of 2024 with rulings on that early into 2025. We've had a little bit of increase in the number of case counts in there in Illinois, but there's nothing materially significant changes on litigation since our last update.

Got it. Thanks for that. And it might be early to be asking about this, but there are some increasing fears of a hard landing or recession. Could you just remind us how the various businesses kind of typically respond in that type of environment? And you previously mentioned headwinds in Nelson coming from macro pressures on some SMID customers, for example. Thanks.

Yeah. Thanks for the question. I would just say these businesses have performed every single years. As we've talked about since 2005, we've had revenue growth every single year, strong margin, strong cash flow generation. That doesn't mean we won't get impacted by broader macro, but we are really confident in our ability to weather through and the stability of the business model is really a unique business, especially throughout healthcare. So -- and remember, we did see on the Nelson side, we had a surge up in demand with COVID and coming down, we had the great resignation activities that kind of creates some unstable environment there. But overall that business is a strong performer and we continue to expect that going forward. We look at Sotera Health in total. This is a great business that will weather through many storms and continue to deliver growth and strong cash flow. Okay.

Was there a follow-up, Luke?

No follow-up. Thank you.

The next question comes from Jason Bednar with Piper Sandler. Please go ahead.

Good morning, everyone. Wanted to start on the pricing side. I think you previously referenced last quarter an expectation of being at the lower end of your outlook, closer to maybe something like 3.5%. Sorry if I missed it, but is that still the assumption today? And then would also just be good to get your bigger picture perspective on the pricing outlook for your business as inflationary pressures have receded meaningfully across the market. Maybe talk about your ability to continue to push through pricing well above inflation. We've seen a lot of players have their pricing kind of moved back to where we were pre-pandemic, but your stock is still sitting in your historical range, which is still good to see.

Yeah. This is Michael. I would just say that our call in the past, I believe, was around the Nordion business. Across the company, we get 3.5% to 5% price. Nelson's on the low end of that. Nordion is typically on the high end of that. I think what we called out earlier in the year is the timing because last year Nordion outperformed. We expected to be on the lower end of the range this year for Nordion. Overall, in the quarter, we were up 4% price in the total company. We expect the business continue to form in the traditional 3.5% to 5% for the remainder of the year.

Okay. That's helpful. Thanks. And then just wanted to follow up on Sterigenics and the margin comps there. They get a little bit tougher here in the back half of the year. You committed to seeing some improvement in Nelson in the second half, which I know you talked about. You have some projects that are coming off. That'll be good. But can you comment more directly on Sterigenics? How much of that margin performance in that segment do you see being dependent upon top line growth improving from what we saw here in the second quarter?

Yeah. Thanks for the question. I think I said earlier on the call, margins continue to be really healthy in Sterigenics. Traditionally, we've seen the back half. That margin has some good leverage to it. So we've seen the back half with stronger revenues and some stronger margins. Assuming we see some stronger revenues, we could see a little bit stronger margin, but again, the margins today are really, really healthy.

Yeah. And I would just say, the one point to backdrop for the year-to-date numbers, just keep in mind, our first quarter is typically the lowest quarter there where you have less margin leverage coming through. So that's typically what we've seen in this business. But overall, we look at it -- we called out Nelson Labs, but if you look at the other two businesses, we have very strong, healthy margins and a great position in the marketplace.

Thanks. And just to clarify, when you say stronger margins in the second half, is that sequentially versus the first half or stronger year-over-year?

First half.

Okay. Perfect. Thank you.

Great. Thank you.

The next question comes from Michael Polark with Wolfe Research. Please go ahead.

Hi. Good morning. Thank you for taking the questions. First one on Sterigenics. I had in my notes that one of your capacity expansions, it was a brownfield I believe, was going to start filling in the second quarter. I'm curious, did that start -- did that happen as expected? And to what extent is that capacity expansion driving kind of the change in trend on volume and mix in Sterigenics going from the last four quarters down 1% or 2%, now we're up 1% or 2%. I guess, reframed, like new store versus same store kind of volume trends in Sterigenics, how do you see them in light of your commitment to expanding capacity?

Yeah, Mike. Thanks for the question. So that expansion has not impacted the quarter, second quarter. We actually are slightly delayed on that. We expect that to come up by the end of the year, normal construction type delay. So we did not have any good guide from that in the second quarter.

Helpful. Thank you, Michael. And then the follow up is on the routine testing volumes. And Nelson sounds like that's still weak. To what extent does the recovery in Sterigenics foreshadow a recovery in the routine testing volume at Nelson, if at all?

We would hope that those two are linked in the strong correlation as the year progresses.

Okay. Got it. Thank you.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Petras for any closing remarks.

Okay. Good morning, and thank you, everybody, for your time today. As you could see, we had a solid second quarter as expected. We're confident in our outlook going forward, and the company is very well positioned. So I want to thank you for all for your continued support and your questions and attention this morning and have a great day. Thank you. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.