Good morning and welcome to the Sotera Health Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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's Third Quarter 2023 Earnings 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 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 net income, adjusted EBITDA, adjusted EPS, net debt, adjusted EBITDA margin, segment income margin and net leverage ratio, in addition to constant currency comparisons. A reconciliation of GAAP to non-GAAP measures for all relevant periods may be found in the schedules attached to 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 post-call, please feel free to reach out to me and the Investor Relations team. I will now turn the call over to Sotera Health Chairman and CEO, Michael Petras.

Good morning, everyone, and thank you for joining Sotera Health's Third Quarter 2023 Earnings Call. This morning, we reported year-over-year top and bottom line growth plus margin improvement. Consistent with our past commentary, macro environment headwinds still exist such as rising interest rates, inflation and customer supply chain challenges. The team has done a good job at offsetting these headwinds as we execute on delivering on our mission of Safeguarding Global Health. I want to highlight a few items from our third quarter and year-to-date results. Compared to the third quarter of 2022, total company revenues increased 5.8%, while adjusted EBITDA increased 7.3%. We delivered adjusted EPS of $0.21 for the quarter, which is a $0.02 decrease from the same period last year, driven by increased interest expense. Sterigenics, our largest reporting segment, delivered 6.7% top-line growth for the third quarter of 2023 as compared to the third quarter of 2022 despite ongoing customer inventory and supply chain challenges and some market softness. The Sterigenics business has been and is a consistent growth business. Revenue has grown more than 30% since we became a public company from approximately $500 million in 2020 to $657 million over the last 12 months. And segment income has grown by $90 million during the same period. This consistent growth at Sterigenics is a testament to the great job that's been done by our team and the critical nature of our business, even when our customers are fighting through significant macroeconomic challenges. Sterigenics is a strong business that plays a critical role in providing government-mandated sterilization services to over 2,000 customers across 48 facilities in 13 countries. More than 90% of sterilization services revenue comes from customers on their multiyear contracts. We are very important to our customers in the commercialization of their health care…

Thank you, Michael. I will begin by covering the third quarter 2023 highlights on a consolidated basis and then provide some details on each of the business segments, along with updates on capital deployment and leverage. On a consolidated total company basis, third quarter revenues increased by 5.8% as compared to the same period last year to $263 million. This equates to a 4.3 increase on a constant currency basis as foreign exchange turned to a tailwind as expected for the quarter. Adjusted EBITDA increased by 7.3% to $134 million as compared to the third quarter of 2022. Adjusted EBITDA margins finished at 51%, which was an increase of more than 70 basis points versus both the third quarter of 2022 and the second quarter of 2023. Adjusted EPS was $0.21, a decrease of $0.02 from the third quarter of 2022, driven by higher interest expense versus the prior year. The reported net loss for Q3 2023 was $14 million or $0.05 per diluted share, inclusive of the $35 million Georgia settlement, compared to net income of $25 million or $0.09 per diluted share in Q3 2022. Our reported interest expense for the third quarter of 2023 was $41 million, which is an increase of approximately $17 million versus the same period last year. The increase is driven primarily by the increase in interest rates and the $500 million term loan that closed in Q1. Now let's take a closer look at our segment performance. For the quarter, Sterigenics delivered 6.7% revenue growth to $168 million as compared to the third quarter of last year. Revenue growth drivers for Q3 2023 included favorable pricing of 6.3% and favorable changes in foreign currency exchange rates of 2.2%, partially offset by unfavorable volume and mix of 1.8%. Compared to the prior year…

Thank you, Jon. Before we move to Q&A, I would like to take a minute to express our condolences to the family, friends and work colleagues of Matt Mishan from KeyBanc. Matt had been following our company since 2020. In just one week prior to his passing, we are fortunate to spend time with him in Boston. Matt will truly be missed. At this point in time, let's open the call for question and answer.

We'll now begin the question-and-answer session. [Operator Instructions] The first question today comes from Sean Dodge with RBC Capital. Please go ahead.

Yes. Thanks. Good morning. I just want to start with a quick clarification, Michael, on your comments around the remaining Georgia cases. So 240 remain there. But in those counties, you said that the judge is going to require those who provide some type of evidence of exposure that caused their illness. So is that right that number could actually -- the number that actually go to trial, could that be whittled down some? Or is that 240 number in many cases, is that the number sort of already cleared that initial hurdle that have provided their proof and will go to trial?

Good morning, Sean. So here's how it works. There's 240 cases. There were 10 cases that the judge has pulled out to kind of go through Phase I and Phase II. Phase I is general causation, Phase II is specific causation. So the answer to your question is, yes, the cases could go down. So if a condition comes through -- goes through Phase I, it has to pass through -- if it's leukemia or it's breast cancer, lymphoma, it has to go through Phase I. So a given case has to go through Phase I, if it passes that, it goes to Phase II. If it passes that screen with the judge, then it goes to a trial jury, and you take it through the whole case. So there is a case scenario here where something gets knocked out in one of those first two cases. Let's say, ALL, for example. It could not -- maybe not pass Phase I and Phase II, which means you will not go to a jury trial. So yes, it could reduce the number of cases. Is that -- it's a little complex. I want to make sure I'm being clear enough for you.

No, that's great. That helps. And then maybe just on the EO emissions regulations, is there any more updates you can share there? You guys have been communicating with the EPA, and any ideas on changes we could see in the final rule? It looks like that's expected now in Q1 of '24.

No. We continue to engage with our regulators like we always do, but we have no more visibility on exactly what's going to be in the final rule. But we, again, are very confident of the improvements we've put in place and the timing we expect on the knee shaft is in the first quarter -- late first quarter.

Okay. Great. Thanks again.

Thank you, Sean.

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

Hey, guys. Thanks for taking the questions. Michael, just as we think about the go-forward, obviously, some of these headwinds are lingering. Is it still right -- are you still confident, I should say, in the high-single-digit organic growth profile of the business here? A lot of companies have come out and discussed '24 as relatively lower growth given some of the headwinds. Obviously, you guys moved to low end here. Just curious if we should be thinking about the near term a bit differently and your visibility into things improving as we work our way into '24.

Yes. Patrick, thank you. We are confident in the ability to continue to grow high single digits in the business. As you know, we felt some of the challenges from our customers and their supply chains and inventory challenges. But when you look at the mid to long-range, we expect this business to perform at high single-digits organically.

Okay. No, that's helpful. And then just on the margin profile. I assume no real changes in terms of the cost controls, given the near-term headwinds. But can you just talk about the moving pieces on the margins? Obviously, pricing has been a nice tailwind for you guys for a long time. Any change to that algorithm as we work our way forward, just anything we should be thinking about in the near term in terms of the margin moving pieces? Thank you.

Yes. Obviously, volume is the biggest lever we have on driving margin and margin expansion. We do get price. We've been able to prove that we're able to offset price inflation because of our price actions. But again, it all comes back to the value that we create with our customers. And our customers pay for the service because it's so critical and important to them. Yes, price has been running a little higher than we have guided towards. We've said it's 3.5% to 5% over the long range. It's been a little higher than that because inflation has been a little higher than that. We've been offsetting it. But we expect that price will continue in that range in the future. We also expect volumes to return to where they've been historically, which will continue to give us great operating leverage. But the team is doing a good job in managing through that. The Sterigenics facilities don't have a ton of labor, but Mike and the team have done a good job in managing around that. And the same with Joe on the Nelson side and working through the volume challenges there. They've been through a lot with the COVID, the job crisis that happened and then some of the regulation changes. But overall, we feel good about our ability and our margin rates continue to hold in there as we've proven out in our business model.

Appreciate it.

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

Good morning. This is [Salem] (ph) on for Luke. Maybe just a follow-up on Sean's question earlier about the cases outstanding. Is there a time line right now for when we might hear about whether some of these cases are exiting Phase I or Phase II or if they're getting stopped? Just curious about the time line there.

Yes. So good morning, Sam. Yes, there is a time line set up. Phase I, we'll get through general causation through October '24. Phase II would be August of 2025. And then ultimately, any surviving cases would go to a jury trial, they would start in September, October 2025 is the current time line that we expect.

Got you. That's really helpful. Thank you. And then this -- hearing a lot about biopharma kind of tightening their budgets. Just wondering about what the effects are there for you guys? What's your exposure there? And if you're hearing anything similar on that demand environment? And then just on GLP-1, it's expected to hit devices, volumes kind of in the long run. What's kind of your sense of or your plan for capacity? And is that kind of offset by any sterilization of some of the pens that will be used for GLP-1? Just curious about how you're thinking about that as well.

Yes. So on the biopharma side, we do business in biopharma. We probably aren't to the scale that we'd like to be in that segment. But we have performed very well there. Obviously, this year has been a headwind. Our customers and some that you referenced, they've had significant challenges on their volumes and inventory takedown, which has impacted the Sterigenics volume in a meaningful way. We are bullish on that segment long term. When you look at the testing opportunities as well, we've also felt the impact of that to some degree, although pharma, again, is a smaller percent of total Nelson Labs. But when you look at that segment, it's strategic to us longer term. On the GLP-1, there will be some volumes that are impacted longer term, but it's too -- it's for the surgical procedures. But there's a really mixed bag. Obviously, you're seeing some communication recently with the diabetes companies and how well they're performing and we see the benefit of that in our business, too. So we think long term, there's opportunities for us, particularly when you start to look at prefilled syringe and some of the things that come from that, that creates opportunities across Sotera Health. So we think it actually could be a net positive as prefilled syringes and these injectables take on a bigger portion of the marketplace long term.

Got you. Thank you.

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

Hey, good morning. Thank you taking the questions. I want to go back to the question about the high-single-digit growth goal. I mean, look, Michael, I appreciate the mid to long haul, that's the North Star. But as I look at '24 being so close, it just -- unless I'm missing something, unless you anticipate market recovery, this destock cycle being over, maybe the Sterigenics capacity coming online is more impactful than we're appreciating. It just looks like high single's maybe a stretch place to start for '24 for now. And so I'll ask the question again, knowing you're not giving guidance today, like what are the puts and takes as we sit here today to frame up growth opportunity in 2024?

Yes. Mike, as you stated, we're not in a position to talk about 2024 guidance. We'll do that in the first quarter when we wrap up 2023, and we're going through that process right now with our teams. Mid to long-term, we expect the high-single-digit organic growth, as we've mentioned, and I referenced earlier, we're working through inventories with our customers. They've destocked, and that had an impact on both Sterigenics and Nelson as well as some of the development efforts that had an impact. As that starts to burn off, we expect some volumes to return. But obviously, we're talking about the lower end of our range today because of the fact that we're still seeing some of the challenges around that inventory side. So as we look into '24, we're going to have to make some assumptions based on where we think our customers' inventories are going to go. I don't want to get into that level of detail today because we're not prepared to do it. But you see what's happening with the customer base and what they're communicating and inventories and the destocking challenges. So that's something that we'll be focused on as we communicate our guidance for '24 as well.

The follow-up on Nordion, just -- the fourth quarter all year, you've been consistent that it'd be a very 4Q-heavy year. A month into the quarter, have some of these very large shipments and deliveries already happened? Or are they yet to happen? I guess, I'm just curious for what level of visibility and/or confidence you have into making this large sequential step up? And then I will extend the Nordion question and ask just -- this year was especially lumpy. We know this business is lumpy and hard to predict quarter-to-quarter, but very predictable over the mid-run. Best guess for seasonal pattern in 2024, lumpy, like the lumpiness of '23 or maybe a little smoother?

Yes. Thanks, Mike, for all the lumpiness there. When we look at the fourth quarter, we've been very clear and consistent all year that 75% of the revenue would come in the second half, 50% would be in the fourth quarter. We're re-communicating that again to you today. Riaz and the team have done a phenomenal job in executing against that and given visibility to that throughout the year. There's always operational things that can happen, but we feel confident, and we've reiterated that on our call this morning that we expect the Nordion team to deliver approximately 50% of their revenue in the fourth quarter. As far as next year, again, I know you really want me to tell you what '24 looks like. I won't get into great specifics on it. It will not be as lumpy and it's back-end loaded as you're seeing right now in 2023. This was a very -- as we stated many times, this is really driven by harvest schedules from the utilities. Our customers want cobalt and they want it as fast as they can get it. And that's what we're doing to turn it as quickly as we can get it. So that is -- I just want to make sure one knows that demand is there for Nordion. It's all driven by when the supply with the nuclear reactors. This year was extremely lumpy with 75% in the back half of the year. We do not anticipate it being as lumpy next year.

Thank you.

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

Great. Thank you for taking my questions. The first one is just around Nelson Labs. So margins declined more than 250 basis points sequentially. Wondering if you can expand on that. It looks like revenues seem to be in line with expectations, but the margins had been anticipated to improve quarter-over-quarter. Was that all just the RCA dynamic that, Michael, you mentioned earlier, or was something else going on there? And then maybe just touch on what's assumed in 4Q for Nelson. I think last quarter, you said 4Q would look more like 2Q in that business. So has that expectation changed at all?

Hey, Casey, it's Jon Lyons. Thanks for the question. Really, you called it out, the RCA piece had an impact sequentially, not the biggest impact. I think really when you look at it, we dropped revenue a couple of million dollars sequentially. And there's -- that's just primarily the volume and loss leverage in the business that's really the biggest driver of the margin decline. And as you look at the overall story in Q4, yes, we had been calling, I think, on the last call, that Q4 might be up a little bit. As we look at Q4 today and how we've seen things overall transpire across the businesses, we're calling for Sterigenics and Nelson in total to be flat to Q3 and having gotten specific as to how that might shake out between the two of them.

Got you. And then maybe just if I could fit one more in. Last quarter, you gave some color around bioprocessing as being the key driver or one of the key drivers for the full year guidance reduction. Just curious if the continued softness there is a contributing factor for why you're pointing to the low end of the full year guidance range here today? Or if the market softness you referred to when talking about the guidance is more generalized than that? Thank you.

Yes. Casey, this is Michael. Yes, bioprocessing has an impact on the guide. And then I would also tell you, it's a really mixed bag on the medical device side. We have some categories doing really well and others not, and some of it's really tied to our customers and some of the inventory challenges and supply chain challenges.

Got it. Thank you very much.

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

Thank you. I want to emphasize what a great business this is. We produced 6% top-line growth and 7% bottom-line growth in the quarter, and we also generated strong operating cash flow. We remain focused on living our mission of Safeguarding Global Health, and we like to thank our customers and investors for their continued support throughout the year. So thank you, and have a good day. Bye-bye.

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