Release Date: August 05, 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 an 8.3% increase in total company revenues compared to Q2 2023, with an 8.8% increase on a constant currency basis.
- Adjusted EBITDA grew by 6.9% year-over-year, reaching $137 million.
- Nordion segment saw a significant revenue increase of 29% compared to Q2 2023, driven by favorable volume and mix.
- Nelson Labs delivered its third consecutive quarter of top-line growth, with a 4% increase in revenue compared to Q2 2023.
- The company successfully completed a $2.3 billion refinancing of its debt structure, reducing expected 2024 interest expense by approximately $5 million and extending maturities to 2031.
Negative Points
- Adjusted EPS for Q2 2024 was $0.19, a slight decrease from $0.20 in Q2 2023, primarily due to higher interest expenses.
- Net income for Q2 2024 was $9 million, down from $24 million in Q2 2023, impacted by charges related to debt refinancing.
- Adjusted EBITDA margins declined by 68 basis points to 49.7%, driven by a decline in Nelson Labs segment margin.
- Interest expense for Q2 2024 increased by almost $10 million compared to the same period last year, due to reduced interest income and less favorable interest rate hedges.
- Nelson Labs' segment income decreased by 11% year-over-year, impacted by higher labor costs and unfavorable volume and mix.
Q & A Highlights
Q: Michael, you commented on, and we noticed that volume growth seemed to return in Sterigenics. It 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?
A: Yes. David, thanks for your question. Yes. As you noted, Sterigenics had nice volume improvement in the first quarter in 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 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 the performance in the quarter.
Q: Could you add on kind of the difference in ops or observed trends between, say, general hospital market versus bio life sciences market?
A: Yes. I would generally say 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 is an outlier that I think if you follow 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.
Q: And then my last question on -- you called out labor costs as an offset. I just wondered if you could give us a little more color on the inflation environment and stability of your labor force.
A: Yes. In particular, we called out [storage] at the Nelson side, and that's just merit increases, predominantly merit increases. Jon, anything else to add on that?
Jonathan Lyons: No, I think it's pretty stable. They're doing great work to get the workforce in the right place and --
Michael Petras: Yes. Joe and the team has done a nice job. As you saw, Nelson had another good quarter of 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 hopefully that continues. We're seeing validation volume. We continue to move forward. So that's great.
Q: Just wanted to follow up on Nelson Labs staying on top at 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.
A: Yes, 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, we expect that the 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.
Q: All right. And then just one follow-up. Maybe taking a little bit of a step back at least for us, it felt like Q2 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?
A: Yes. 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.
Q: Just 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 to the right way to think about it then maybe just a launching point for '25, just at a high level would be helpful.
A: Yes. Thanks for the question. Yes. 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 a full year basis for the entire company, which would be your launching point for next year.
Q: 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 of that comes down and what the cash flow could look like in the out years would be helpful.
A: Yes. 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.
Michael Petras: 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 enhancement. And then we have this Nordion CapEx for cobalt development
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
