Sotera Health Company

Good morning. This is Joe, and welcome to Sotera Health's first quarter 2022 results call. You may find today's press release and accompanying supplemental slides in the investor section of the company's website at soterahealth.com. This webcast is being recorded, and a replay will be available in the investor section of the Sotera Health website. On the call today are Michael Petras, Chairman and Chief Executive Officer, and Scott Leffler, Chief Financial Officer. During the call, some of the statements the company makes 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 Soterra 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 statements. Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EPS, and net leverage ratio. A reconciliation of non-GAAP to GAAP measures for all relevant periods may be found in the schedules attached to the company's press release and in its supplemental slides. There will be an option to ask questions after today's presentation. To ask a question, please press star then 1 on your telephone keypad. During the Q&A portion of today's call, please limit yourself to one question and one follow-up so that we can try and give everyone an opportunity to ask questions. This conference is being recorded. I would now like to turn the call over to Sotero Health's Chairman and CEO, Michael Petras. Please go ahead.

Good morning, everyone, and thank you for joining us on Sotero Health's first quarter 2022 earnings call. I'm very pleased this morning to be reporting another quarter of double-digit top and bottom line growth as compared to the same quarter in the prior year. While both the pandemic and the geopolitical landscape have impacted the labor markets and supply chains, the macro environment continues to experience more disruption than many of us have seen in our lifetimes. Despite this backdrop, Cetera Health has continued to deliver growth consistently in each quarter we've reported as a public company and throughout our history. Scott will provide more detail in a moment, but here are some of the highlights of our first quarter performance. We reported total revenue growth of 12% and adjusted EBITDA growth of 10% compared to the first quarter of 2021. Diluted EPS was $0.11, up $0.07 per share, and adjusted EPS was $0.22, which is a 22% increase over last year. Sterigenics had a good year to start, and the business continues to see robust demand across all major modalities of sterilization. Sterigenics has also made meaningful progress in its active capacity expansion programs in EO facility enhancements. Nordion also had a strong quarter, driven by the timing of Cobalt-60 shipments, in addition to the benefit of a favorable comparable in last year's quarter. Our Nordion team deserves tremendous recognition for navigating the current geopolitical environment in order to maintain the Cobalt-60 supply from Russia, despite several complexities in the process. I mentioned on our March call that a disruption in the supply of Cobalt-60 could potentially result in an impact of 0% to 3% of Cetera Health's 2022 revenue. To date, there has been no impact on our supply or on Cetera Health's revenue. Based on the deliveries that we have received since our last earnings call, we now estimate the potential impact from a disruption in Russian supply to be reduced to a range of 0% to 2% of Sotero Health total revenue in 2022. Again, many thanks to the Nordian team for navigating this environment so well during the quarter. While Sterigenics and Nordian are performing well, Nelson Labs, as we expected and communicated in our last call, has been faced with a more challenging environment. Nelson Labs had weaker performance in the first quarter, which was the last quarter in which Nelson Labs experienced the largest impact from the unwinding of elevated levels of pandemic-related testing. As we had mentioned on our last call, Nelson Labs hauled disproportionate impact in the first quarter from labor-related challenges, including reduced volumes due to Omicron-related absenteeism. We are encouraged to see these various headwinds within Nelson Labs moving in a positive direction, and we expect improvement towards more normalized levels in the second quarter. The impact of Omicron on absenteeism has materially reduced and the Nelson Labs management team is doing a very good job in managing staffing levels despite the competitive labor market. We continue to manage our balance sheet, achieving net leverage of 3.4 times. This is consistent with both our near and longer-term leverage goals. Based on the solid start to 2022, and given that it's still early in the year, we are reaffirming the outlook that we communicated in our last call with revenue and adjusted EBITDA growth in the range of 7% to 11%, and adjusted EPS growth of 6% to 13%. Scott will recap all the details of the outlook in a few minutes. I also want to highlight some recent examples of how we deliver on our mission of safeguarding global health. With the growth of bioprocessing, Sterigenics is sterilizing single-use kits in bioreactor collection bags used for producing cell therapies to fight cancer. At RCA, our recently acquired expert advisory business, we're working with customers to effective configurations for secure shipment of gene therapy drugs being used in clinical trials. And at our Nelson Labs Europe location, we perform critical testing to ensure the safety of vials and application devices for more than 20 vaccines from COVID-19 to tetanus to hepatitis B and influenza. These examples are just a few of the ways we help ensure healthcare is consistently and reliably safe every day. Overall, I am very proud of the entire Sotero Health team for delivering another good quarter and positioning the company for continued success in 2022. As always, the Sotero Health team maintained their focus on our mission, safeguarding global health while meeting the needs of customers, healthcare workers, and patients, and being supportive of one another in the process. Before handing over to Scott, I'd like to comment briefly on the broader markets where we operate. As I mentioned several times previously, the direct and indirect effects of both the pandemic and the geopolitical landscape continue to be felt throughout the marketplace. Supply chain disruptions, labor market challenges, and inflation are especially impactful now. Thus far, we've been able to mitigate most of the direct impacts and are encouraged by our ability to largely offset inflationary pressures with pricing actions. Even with the macro challenges, the markets we serve have remained resilient giving us reason to be optimistic regarding the remainder of 2022. Now I'll turn the call over to Scott to cover the first quarter and a reaffirmed 2022 outlook in more detail.

Thanks, Michael. I'll first cover the first quarter 2022 highlights on a consolidated basis and then provide some insight on each of the business segments, along with updates on capital deployment and leverage. I'll end with a reminder of the details of our reaffirmed 2022 outlook. On a consolidated total company basis for the first quarter of 2022, revenue grew by 12% as compared to the first quarter of last year to $237 million. On a constant currency basis, revenue grew by approximately 13%. Adjusted EBITDA grew by 10% from Q1 of 2021 to $115 million. Adjusted EBITDA margins declined 90 basis points compared to Q1 of last year to 48.7%. The decline was driven entirely by margin compression within the Nelson Labs segment, while both Sterigenics and Nordion had margin expansion in the quarter. I will discuss segment margins further in a moment. Our strong operating performance drove adjusted EPS of $0.22 per share, an increase of about 22% from Q1 of 2021. Our reported interest expense of $10 million benefits from a mark-to-market gain on certain outstanding interest rate hedges, we have removed the effect of that gain in our adjusted EPS. Excluding that gain, Q1 interest expense would have been approximately $17 million. Now let's take a closer look at our segment performances. In Q1, Sterigenics delivered 14% revenue growth to $149 million and 16% segment income growth to $79 million as compared to Q1 of last year. Revenue growth drivers for Q1 included volume and mixed growth of almost 10%, as well as pricing contribution of more than 5%. There was no inorganic contribution for the quarter, and FX was a 1% headwind. Compared to the first quarter of 2021, segment income margins expanded by more than 90 basis points to 53.1%, driven by operating leverage and pricing. We are pleased with the progress Sterigenics has made in driving forward both their active expansion projects and the enhancements at our North American EO facilities. For Nordion, Q1 revenue grew by more than 31% to $34 million compared to Q1 of 2021. Nordion segment income grew by about 37% to $19 million compared to the same period last year. Nordion's revenue growth was driven by over 24% contribution from volume and mix and almost 7% from pricing. FX was relatively flat for the quarter. As Michael mentioned, Nordion's year-over-year comparison is impacted by what was a relatively low revenue quarter in Q1 of 2021. Nordion's margins expanded by approximately 240 basis points to 55.6%, driven by operating leverage on higher sales and pricing. For Nelson Labs, Q1 revenue declined by approximately 3% to $53 million compared to the first quarter of 2021, and segment income declined by approximately 26% to $17 million. Revenue declines of 11% from pandemic-related testing and more than 2% from Omicron-related absenteeism were mostly offset by an 8% benefit from acquisitions and 4% from price. Other core testing volumes and effects also each contributed a decline of about 1%. Q1 2022 margins for Nelson Labs contracted by 990 basis points compared to Q1 of last year to 32%. I want to highlight that this decline was in line with the expectations that we referenced on our last earnings call. Compared to last year, margin decline was driven primarily by almost 200 basis points of impact from lower mix of PPE testing over 250 basis points from acquisitions, and about 300 basis points from Omicron's impact on employee absenteeism and testing volumes. We expect to recover the Omicron-related component in Q2 and see improvement in the acquisition-related dilution as synergies ramp up in the second half of the year. Now let me provide some highlights relating to capital deployment and net leverage. Our capex for Q1 was $36 million, which is consistent with the increased levels of spend we have planned for 2022. As of March 31, 2022, we had $121 million in cash and maintained a strong liquidity position. Our net leverage declined to 3.4x. Now I'd like to recap our reaffirmed 2022 outlook. For full year 2022, we expect... Total revenues in the range of $1 billion to $1.03 billion, representing growth of approximately 7% to 11%. Adjusted EBITDA in the range of $515 million to $535 million, also representing growth of approximately 7% to 11%. Adjusted EPS in the range of $0.93 to $0.99, representing growth of 6% to 13%. and CapEx in the range of $140 million to $170 million for the year. Our program of expansions remains consistent with our comments from the last earnings call, which includes seven capacity expansions at existing facilities and two green fields for serogenics. The other elements of our previously issued outlook remain the same as well. As we look at the cadence of quarterly reporting, I want to remind you that even for a business segment that often has period-to-period variability in performance, Q2 of 2021 was an outlier for Nordion. Nordion had a particularly high concentration of Cobalt-60 shipments in Q2 of 2021 that we expect will not occur again in any single quarter this year. We expect solid stereogenics results and improving Nelson Labs' performance in the second quarter. Michael, back to you.