Release Date: May 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sotera Health Co (SHC, Financial) reported a 12.5% increase in total company revenues and a 13.7% increase in adjusted EBITDA compared to the first quarter of 2023.
- Nordion, one of SHC's business segments, experienced a significant revenue growth of 181% year-over-year, primarily due to favorable volume and mix related to the timing of reactor harvest schedules.
- Nelson Labs, another SHC business segment, showed a revenue increase of 10.8% driven by favorable volume and mix as well as pricing.
- SHC is reaffirming its 2024 outlook for revenue and adjusted EBITDA growth in the range of 4% to 6% versus 2023, indicating confidence in the company's performance for the remainder of the year.
- SHC has made significant proactive investments in U.S. ethylene oxide facilities, positioning the company to comply with the finalized EPA NESHAP regulations within the specified timeframe without requiring a material amount of additional CapEx.
Negative Points
- Sterigenics, SHC's largest reporting segment, experienced soft volumes as customers continued to work through supply chain challenges, with a slight unfavorable volume and mix of 1.6%.
- The company reported an increase in interest expense to $42 million in Q1 2024 from $29 million in Q1 2023, driven by higher interest rates and the impact of a $500 million term loan.
- Adjusted EPS remained flat at $0.13 for the quarter, as improved operating results were offset by the increased interest expense.
- Core lab testing volumes at Nelson Labs are down year-over-year, primarily due to the extension of deadlines for the European Union Medical Device Regulations.
- SHC is facing ongoing litigation related to ethylene oxide claims, which poses potential risks and uncertainties, although the company remains confident in its compliance and operational safety.
Q & A Highlights
Q: Michael, can you discuss the current trends in volume across your business units, particularly noting any improvements or ongoing challenges?
A: Michael B. Petras (Chairman & CEO, Sotera Health Company) - We're seeing consistent trends with previous forecasts, expecting slight improvements as the year progresses. Nelson Labs is stabilizing, particularly in Expert Advisory Services, and Sterigenics is showing stable to slightly improved volumes. We remain confident in our guidance for the year.
Q: Can you provide insights into the recent ethylene oxide litigation in California and its potential impact on the company?
A: Michael B. Petras (Chairman & CEO, Sotera Health Company) - The new lawsuits are similar to previous ones and are early in the process. Regulatory data shows ethylene oxide levels are within normal background levels. We believe we operate safely and in compliance, and we are prepared to defend our operations vigorously in court.
Q: With the final NESHAP regulations published, were there any significant changes from the proposed rules, and how is Sotera Health progressing with facility enhancements to comply with these regulations?
A: Michael B. Petras (Chairman & CEO, Sotera Health Company) - The final rules are challenging, particularly around monitoring protocols. We've invested significantly and are on track with enhancements, expecting to spend around $40 million this year. We anticipate completing most upgrades by next year and are confident in our compliance strategy.
Q: How is the SG&A trend impacting the financials, and what should we expect going forward?
A: Jonathan M. Lyons (Senior VP & CFO, Sotera Health Company) - SG&A expenses are in line with expectations, with normal increases due to merit and variable compensation. We don't foresee any significant changes to SG&A trends for the remainder of the year.
Q: Can you elaborate on the expected margin trajectory for Nelson Labs, particularly in light of the RCA dilution?
A: Michael B. Petras (Chairman & CEO, Sotera Health Company) - While RCA has been a drag on margins, its performance is improving. We anticipate Nelson Labs' margins to approach 30% this year, with expectations for mid-30s margins in the long term.
Q: Regarding the capacity expansions at Sterigenics, can you detail the timeline and scale of these projects?
A: Jonathan M. Lyons (Senior VP & CFO, Sotera Health Company) - We have three ongoing expansions, with one set to go live in the next quarter. The other two, which are greenfield projects, are scheduled to come online late this year or early next, and the last one by the end of 2025.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
