Sotera Health Co Q2 FY2022 Earnings Call

Good morning. My name is Howard and I will be your conference call operator today. I would like to welcome everyone to the Sotera Health Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now hand the call over to the Vice President of Investor Relations, Joe Vitale.

Good morning and thank you. Welcome to Sotera Health's second quarter 2022 results call. You can find today's press release and accompanying supplemental slides in the Investors section of our website at soterahealth.com. This webcast is being recorded, and a replay will be available in the Investor Relations section of the Sotera Health website. On the call with me today are Michael Petras, Chairman and Chief Executive Officer; and Michael Biehl, Interim 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 Sotera Health's SEC filings and the forward-looking statement slide at the beginning of our 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 our supplemental slides. 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 try to give everyone an opportunity to ask questions. I'll now turn the call over to Sotera Health Chairman and CEO, Michael Petras.

Good morning, everyone, and thank you for joining us on Sotera Health's second quarter 2022 earnings call. I'm very pleased to be reporting another quarter of year-over-year, top and bottom-line growth, especially when compared to our performance against an exceptionally strong quarter last year. In fact, the second quarter of 2022 represents the highest revenue and earnings quarter in our reporting history. I'm especially proud of our team's performance in the face of continuing economic and geopolitical uncertainty, including high inflation, currency fluctuations, labor constraints, and ongoing supply chain challenges. Sotera Health continues to deliver growth and strong financial results despite this backdrop while taking care of our customers and remaining committed to our mission: Safeguarding Global Health. I welcome our interim CFO, Michael Biehl to today's call. He will provide more detail about our financial results in a moment. But first, I want to highlight a few items from our second quarter results. We reported total revenue growth of 5.8% and adjusted EBITDA growth of 1.2% compared to the second quarter of 2021. On a constant currency basis, revenue grew by approximately 9%. Recall that last year's second quarter benefited from high levels of demand for COVID-related testing at Nelson Labs and significant Cobalt-60 product shipments at Nordion. Adjusted EPS was $0.27 in the second quarter, which is a $0.01 increase over the same period last year. For the first half of 2022, Sotera Health has total revenue growth of 8.5% and adjusted EBITDA growth of 4.8% versus the first half of 2021. On a constant currency basis, first half 2022 revenues grew by approximately 11%. Overall, I am pleased with our first half financial performance in light of the challenges I just referenced. We will address our views on the second half of 2022 and the update to Sotera Health's full year outlook shortly. But now I'd like to discuss our three businesses' results in some more detail. Sterigenics, our largest reporting segment, continues to deliver strong results in 2022 as the business saw good demand across all major modalities of sterilization and is running at high capacity utilization rates. The team is working to offset inflation pressures and optimize operational efficiencies. Sterigenics is working closely with the Sotera Health Expert Advisory Services team to design efficient protocols to meet our customers' needs and regulatory requirements while optimizing capacity utilization for our Sterigenics facilities and ultimately better serving our customers. To that end, I am happy to share that our thought leadership around EO efficiency continues to be acknowledged by the industry. Most recently, our Expert Advisory Services team was recognized at a premier industry conference for the EO cycle optimization work with a large global customer. This work significantly reduced EO usage in cycle times with no compromise to sterility assurance levels, another great example of how our teams are working to fulfill Sotera Health's mission. Sterigenics continues to make meaningful progress on our capacity expansion programs and facility enhancements. In May 2022, we announced the official opening of our new E-beam line located at our Sterigenics Indiana facility. We expect to bring additional installed capacity online later in 2022 and over the next 24 months, as we commissioned seven capacity expansion projects and two greenfield investments. As previously communicated, we continue to invest in industry-leading emission control enhancements to our EO processing facilities. We are committed to maintaining best-in-class operations for our customers, employees, and the communities in which we operate. Nordion, our other reporting segment within the sterilization business also had a very strong quarter, driven by the timing of Cobalt-60 product shipments. The second quarter 2022 revenue exceeded Nordion's second quarter 2021 revenue, which also benefited from very strong cobalt shipments. We've talked in the past that Nordion revenue is influenced by nuclear reactor site schedules, so quarterly revenues are non-linear. We continue to see this impact our quarterly results, including our strong second quarter performance and our second half 2022 expectations. The Nordion team executed extremely well this quarter, transporting a significant amount of cobalt-60 while navigating a very challenging geopolitical environment and an increasingly diverse global supply chain. Recall that this business procures Cobalt-60 globally, then uses the material to produce a finished product at our Auto Canada facility and then ships the products in compliance with stringent regulations to our global customers. I want to note that today, there are no sanctions that prohibit Nordion from accessing cobalt-60 from Russia. We operate in full compliance with all regulations. At this point in the year, we now estimate the risk of potential disruption in Russian supply at 1% or less of Sotera Health's total 2022 revenues. Nelson Labs, our third reporting segment also recorded a strong second quarter, improving upon some operating headwinds that existed in the first quarter of 2022. In fact, the second quarter of 2022 was Nelson Labs' highest revenue quarter in its history. The Nelson Labs team continues to extend its leadership position in testing and advisory services for medical devices and pharma markets, helping customers deliver their products to the market safely in a compliant manner. Demand for the quarter was stable and productivity meaningfully improved as Nelson Labs rebounded from labor constraints and Omicron-related absenteeism that were headwinds early in the year. You may recall that Nelson Labs benefited from strong pandemic-related testing, which was near peak in early 2021 and has normalized. Despite the continued headwind, the Nelson Lab team continues to grow revenue in other parts of the business, including other high-value testing areas. As I said in my opening comments, we are pleased with the solid start to 2022 delivered by our three businesses. The macroeconomic environment has been challenging, but we expect to maintain good momentum in the second half of 2022. With the benefit of a happy year behind us, we are now narrowing our full year outlook for 2022, taking into consideration the foreign exchange headwinds we're experiencing as well as other macroeconomic pressures that are likely to persist this year. We are confident in our pricing actions to be able to offset inflation, although as we have stated, there could be some lag effect depending on customer contract renewal timing. Regarding our outlook, our full year net revenue growth outlook is 7% to 10%, while our full year adjusted EBITDA is expected to grow 7% to 9%, both are consistent with our long-term growth objectives. We do not see any changes to our capital expenditures outlook of $140 million to $170 million in 2022. Before I turn the call over to Michael Biehl, I want to highlight some recent examples of how we deliver on our mission, Safeguarding Global Health. At Nelson Labs, we're working with a customer to bring to market a new gene therapy drug that can reduce dosing protocols for patients with severe hemophilia from over 100 doses per year to one dose per year, greatly improving the quality of life for many patients. It's this type of solution that directly impacts many patient lives and makes us very proud to play a role in the delivery of innovative healthcare products. At Nelson Labs, we are actively testing the effectiveness of surface disinfectants against the monkeypox virus. This is another example of how our teams work for clients to address potential global health risks in real time. At Sterigenics, we are working closely with a customer to establish a sterilization process for innovative heart valve catheters, which provide a less invasive alternative treatment to open-heart surgery. At Nordion, we are commissioning an additional production cell to focus on cobalt-60 recovery, enabling Nordion to fully utilize certain products that are approaching end-of-life in alternative applications. This investment reduces waste, and as a result, has a positive environmental impact. We are proud to share these examples of how our Sotera Health teams are working to ensure that healthcare is consistently, reliably, and safely delivered every day. Finally, I'd like to comment briefly on our recent organizational change. I want to formally introduce Michael Biehl, our Interim CFO, who has joined the leadership team at Sotera Health and will lead the finance organization while we conduct our national search for a permanent CFO. Michael brings a wealth of public company leadership and financial expertise to us, and we are happy to be working with Michael. Now, Michael Biehl will take us through the financials in more depth.

Thank you, Michael and thanks for the opportunity to help the company during this period. I'll first cover the second quarter 2022 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'll conclude with some additional details around our update for the 2022 outlook. As Michael mentioned, we had a very strong second quarter of 2022, the highest revenue and adjusted EBITDA quarter in our history. It's worth reiterating that these results are being compared to what was previously the best quarter in Sotera Health's reporting history, making our Q2 2022 topline performance even more impressive. On a consolidated total company basis, revenue grew by 6% as compared to the second quarter of last year to $267 million. Adjusted EBITDA grew by 1% from Q2 2021 to $136 million. Adjusted EBITDA margins were 51.1%, representing a 240 basis point decline from second quarter 2021 levels, but still reflective of strong capacity utilization and throughput. The adjusted EBITDA margin decline compared to second quarter 2021 was driven primarily by timing of pricing actions versus realized inflation at Sterigenics, less favorable product mix at Nordion, and an unfavorable, but improving margin profile at Nelson Labs. Recall that Nelson Labs benefited from high-margin pandemic-related testing volumes in the second quarter of 2021 before those volumes started to normalize. It's important to note that Nelson Labs did incrementally improve margins by 400 basis points versus first quarter of 2022 margin levels, which I'll discuss in more detail in a moment. Our strong operating performance drove adjusted earnings per share of $0.27, an increase of $0.01 from the second quarter of 2021, which again was our highest adjusted EPS period before this quarter. Diluted EPS for the second quarter was $0.11, down $0.04 versus second quarter last year. A big driver of that decline was an impairment charge of $9.6 million related to a joint venture associated with our 2020 Iotron acquisition. Due to a shift in business strategy, the joint venture will not proceed and the joint venture partner will continue to utilize existing Sterigenics facilities for their processing needs. That impairment impacted diluted earnings per share by approximately $0.03 this quarter. Our reported interest expense of $14 million benefits from a mark-to-market gain in certain outstanding interest rate hedges for which we did not collect hedge accounting. We have removed the effect of that gain in our adjusted EPS. Excluding this gain, second quarter interest expense would have been approximately $17 million. Now, let's take a closer look at our segment performances. In Q2, Sterigenics delivered 9% revenue growth to $158 million and 7% segment income growth to $85 million as compared to Q2 of last year. Revenue growth drivers for Q2 included favorable pricing of 6% and favorable volume and mix of 5%, which was partially offset by unfavorable foreign currency headwinds of 2.5%. Compared to the second quarter of 2021, segment income margins contracted by 90 basis points to 53.9%, driven by foreign currency headwinds and the timing of contractual pricing actions versus realized inflation. Sequentially, margin did improve over first quarter 2022 levels. As Michael mentioned, we are pleased with the progress Sterigenics is making on their active capacity expansion projects. The team is also focusing on improved operating efficiencies to fully leverage our highly utilized capacity. For Nordion, Q2 revenue grew by 3% to approximately $51 million compared to Q2 2021. Both periods were historic high points for the business. Nordion segment income declined by 4% to $30 million compared to the same period last year. Again, both periods represent high levels compared to all other quarters. Nordion's revenue growth was driven primarily by pricing of 6%, offset by 3% of foreign currency headwinds for the quarter. As Michael mentioned, Nordion quarterly shipments are nonlinear. Despite the strong first half revenue performance, our full year 2022 revenue expectations remain unchanged. Nordion's margins were 59.4%, a 410 basis point decline from second quarter 2021 peak margin levels. Product mix was less favorable than second quarter 2021 and foreign currency headwinds also contributed to the shortfall. However, overall, we are pleased with Nordion's strong margin profile. For Nelson Labs, Second quarter 2022 revenue improved 1.3% to $58 million compared to the second quarter of 2021. Segment income of $21 million was 12% unfavorable to the second quarter of 2021. Note that second quarter revenue did grow $5 million or 9% from first quarter 2022 as Nelson Labs rebounded from a low point in labor utilization. Revenue growth for second quarter 2022 was favorably impacted by a 6% increase from recent acquisitions and a 5% benefit from pricing. Those benefits were partially offset by a 5% decline in pandemic-related testing volumes versus 2021 as well as foreign currency headwinds of 2.6%. Q2 2022 margins for Nelson Labs contracted to 36% or approximately 500 basis points versus Q2 2021 margin levels. This decline is primarily related to less favorable mix in Q2 2022 due to a reduction in pandemic-related high-margin testing as well as dilution from acquisitions. Nelson Labs did realize a 400 basis point improvement in margins from first quarter 2022. As expected, the 300 basis point headwind in first quarter 2022 for labor-related capacity constraints diminished in the second quarter. In addition, high-value testing services, apart from those related to the pandemic, drove the balance of the improvement. While we expect that the pandemic-related testing is behind us, the Nelson Lab team continues to drive margin improvement opportunities through acquisition synergies, greater labor utilization, and delivery of high-value services. Now, I'd like to provide some highlights relating to capital deployment and net leverage. Our CapEx for Q2 2022 was $36 million, consistent with the increased levels of spend that we communicated for a full year 2022. Growth CapEx and facility enhancements continue to drive our increased investment levels, and we are on track to invest $140 million to $170 million into the business in 2022. As of June 30, 2022, we had $140 million in cash and continue to have strong liquidity positioned to fund future projects. Our net leverage remains 3.4 times adjusted EBITDA for the quarter and is tracking to both our 2022 guidance and our longer-term leverage goals. Now, I'd like to recap our update to the full year 2022 outlook for the full year 2022. We have narrowed total revenues to a range of $1 billion to $1.22 billion, representing annual growth of approximately 7% to 10%. We have narrowed our adjusted EBITDA range to $515 million to $525 million, representing the annual growth of approximately 7% to 9%. We believe that the new range properly considers the foreign currency and macroeconomic headwinds we expect will continue in 2022. This range also acknowledges the expected lower product shipments for Nordion in the second half of the year after Nordion's strong first half performance. Nonetheless, we still expect to deliver strong results in a challenging environment. We have narrowed the adjusted earnings per share range to $0.93 to $0.97, reflecting the narrowed adjusted EBITDA flow-through. The other elements of our previously issued outlook remain the same. I'll now turn the call back over to you, Michael.

Thank you, Michael. Before we open it up for question-and-answer, I want to provide a brief update on our EO litigation. We cannot comment on the details of the litigation, but the first trial in Illinois was moved from July 18 start date to August 12th. In addition, Sterigenics has been pursuing insurance coverage for the EO tort litigation. Yesterday, a federal court issued an order in the insurance coverage lawsuit, concluding that the defendant insurer owes Sterigenics a duty to defend, which may allow us to recover some of our defense costs in the Illinois EO litigation. I want to reinforce what we have stated many times: the company intends to vigorously defend itself against these claims. Our company plays a critical role in healthcare, and our employees and facilities operate in a safe and compliant manner, as our employees' commitments to our company and our mission result in Sotera Health's consistent and outstanding performance over so many years and give you so much optimism over our outlook for 2022 and beyond. At this point, Howard, I'd like to open it up for questions and answers.

Ladies and gentlemen, we will now open the lines for the question-and-answer portion of this call. Our first question or comment comes from Jason Reiver from Citi. Mr. Reiver, your line is open.

Hi. This is Lizzie on for Patrick, Donnelly, and Jason. I was just wondering if you could talk about the cadence of the second half of the year, more specifically in the third quarter and the fourth quarter and how we should think about each of the respective to the other in terms of revenues and earnings? Thank you very much.

As we stated, we're projecting $1 billion to $1.2 billion in revenue and EBITDA of $515 million to $525 million. We're optimistic as we look forward to the second half of the year. Sterigenics continues to have nice growth going forward. As we've mentioned in our prepared remarks, Nordion, we typically expect the first half and second half, as we've communicated in the past, to be about equal in size. As we referenced in the call, some of the shipments came into the second quarter. So the second half will be a little lighter than the first half. But the total year expectations have not changed, and we continue to see improvement in volume growth over prior years for Nelson in the second half of the year over the second half of last year.

And then one more, just on pricing. Do you expect to continue to get pricing through the second half of the year and as we head into next year? And what's your outlook on that? Thanks.

Yes. As we've stated multiple times, we generate about 3.5% to 5% price per year across the company. Nelson Labs is typically on the lower end of that range. Nordion is on the higher end. What I would tell you is all three businesses exceeded that performance in the second quarter as well as on a year-to-date basis, and we continue to see that carrying out throughout the year. As we also referenced in our comments, there's just some timing, particularly around some of the larger long-term contracts. There's just some timing of when those actually take place based on contract renewal periods, but we're confident about our ability to continue to drive prices to offset the inflation pressures.

Thank you. Our next question or comment comes from the line of Casey Woodring from JPMorgan. Mr. Woodring, your line is open.

Hey guys. Thanks for taking my question. I'm just curious on the revised down guidance, how much of that is supply chain versus FX? Can you just elaborate on the puts and takes there, why you decided to bring that down?

Hi, this is Michael Biehl. And roughly, the $8 million decline in sales is all FX. The EBITDA reduction of $10 million on the upper end range about a little less than half is inflation and a little less than half is related to FX, and the rest is volume and product mix.

Got it. That's helpful. I wanted to clarify regarding Nelson Labs and margin expansion, particularly as COVID-related challenges diminish in the second half of the year. I also want to confirm this. Additionally, could you elaborate on the labor utilization you've mentioned? It seems like you've successfully managed the difficult labor market, and I'm curious about what is included in the guidance regarding this situation. Thank you.

Thank you, Casey. This is Michael Petras. Regarding your first question about COVID and pandemic-related matters, we experienced a significant amount of PPE testing in 2021. As we move into the second quarter, our testing has decreased considerably compared to the same quarter last year, and we anticipate that this trend will remain consistent for the rest of the year. The level of testing has fallen significantly from 2021, and we now see it at a more normalized rate. Concerning Nelson, as we mentioned in our last call, we expected margins in that business to continue to improve, and the team has done an excellent job in making that happen. You asked about utilization, and we have successfully stabilized our workforce. By the end of last year, we faced high turnover due to the challenging labor market, which was further impacted by the Omicron variant at the beginning of the first quarter. However, we've managed to stabilize turnover, and our training and productivity levels have started to improve as a result. Most importantly, our customer feedback, including the Net Promoter Score and turnaround time metrics, are trending positively. We are really proud of the team's performance, and we are optimistic about continuing to see growth throughout the second half of 2021 and into the latter part of 2022.

Thank you. Our next question or comment comes from the line of Amit Hazan from Goldman Sachs. Your line is open.

Thank you for taking the question. Just following on to the lines of questioning that we've already heard. On the Nelson side, it sounded like expectation to grow volumes year-over-year in half expectation for continued pricing benefit. And then it sounds like a stable testing environment moving forward. I know it was a 5% headwind in 2Q. Can you trend help quantify what the expectation is as testing slowed in two half 2021, what the COVID testing headwind is from a percentage standpoint in the second half of the year for us?

We're not providing detailed forecasts for the second half right now. However, I can share that we're seeing positive momentum in that business. We're hopeful about the volumes and activity, although we are aware of the broader macroeconomic factors we need to watch. Given that we had a weak second half in 2021, we anticipate a recovery in the second half of 2022, despite some potential instability in the macro environment. In the first half of this year, PPE testing affected our numbers by about 8% compared to last year. To give you context, the second quarter impact was around 5%, and we expect this to stabilize going forward.

Okay. That's helpful context. And as we think about kind of the segment mix here, just asking on the Sterigenics side, anything to call out or noteworthy in the second half from either a comparable standpoint or that you expect it to deviate from trend? Or is that kind of steady as she goes high single-digit, low double-digit growth year-over-year on all those key components we've seen?

Yes, I think that's a reasonable perspective. They had a strong third quarter last year, so they'll be comparing against that this time. Overall, the team feels confident about their position and the feedback from customers. However, I want to acknowledge the macroeconomic challenges we've mentioned. Customers are still facing shortages in components and difficulties in product manufacturing, as well as some labor-related issues. Nevertheless, the Sterigenics team has identified good growth opportunities for the second half of the year.

That's helpful as well. If I could ask one more question, it seems the entire reduction in topline guidance was related to certain factors. Considering the performance in the first half of the year, would you say that the business exceeded your expectations and mitigated some of these macro challenges, regardless of the topline reduction we are observing today? Thanks.

Yes, I would generally agree with that. I also acknowledge that Nordion experienced a shift in volume from the second half to the second quarter, so that should be taken into account. However, I believe Sterigenics and Nelson are both performing well, as is Nordion. As we have discussed previously, our business excels in managing complex global supply chains. The team has done an outstanding job executing on this and serving our customers effectively.

Good morning. Thank you for taking the questions. I've seen in the last few months some scrutiny emerged around one of your facilities in Southern California, I believe, Vernon is the name of the town. And I wonder, it's one of your EO facilities. And I'm just hoping, Michael, if you could offer some perspective on what's going on there?

Thank you for the question, Mike. It's good to hear from you. I want to provide some context. In our L.A. facilities, we sterilize over 40 million medical devices. As many are aware, we are currently waiting for the EPA to introduce new rules and regulations, which has been challenging for us as we've been anticipating these changes for several years. In L.A., our facility has attracted attention from both the local community and regulators, but we are compliant with the current rules and regulations. We have established an agreement with the regulators regarding the timeline for our facility enhancements. As I have mentioned in previous calls, we have a robust plan for EO facility enhancements across all our U.S. sites, including those in L.A. We formalized this commitment in an agreement with California regulators to ensure we can move forward with our plans. Our team is experienced in maintaining compliance with these rules, and this facility continues to be vital for serving the global health care market.

Appreciate that color, Michael. And maybe the related follow-up is on the EPA rule making. I did see a memo, I think, just yesterday or earlier this week, that it seems like they're getting close to the proposed rule later this year. Is that your expectation? Or any other color on timing about when this finally kicks into gear after years of delay?

Thank you for mentioning the delays we've experienced. We are eager for the new rules and feel confident that the improvements we are implementing will align with industry-leading controls that we hope the EPA will adopt. We are taking the lead on several initiatives that we believe should be embraced industry-wide. If the EPA does not follow this path, we will ensure that we operate in a manner that is even safer and more compliant than necessary. Regarding the communication you mentioned, they indicated they are working on a new plan to submit to OMB. We are hopeful that the rule, known as NESHAP, will be finalized sometime in the second or third quarter of 2023. It is expected to be published for public comments later this year, but enforcement may not begin until the second or third quarter of 2023. However, I want to clarify that this is not our prediction, but rather what we have been hearing from them, and we have been given many deadlines in the past. We remain optimistic that the process may move more swiftly.

Thank you for addressing the questions. I would like to follow up on the short insurance you mentioned. Is that related specifically to the Willowbrook litigation, or does it pertain to Broadway?

It's for the Willowbrook litigation, which is the vast majority of our yield litigation costs.

Okay. Excellent. And then you mentioned when you were talking about the 2H outlook, you also mentioned the new range reflects macro and FX. When you say macro, kind of what are you considering that's maybe changed a little bit?

We're talking FX inflation in just volume and supply chain things. Those are the comments that Michael reflected on the first answer.

Hey guys. I just wanted to ask kind of a question on the backdrop in general for surgical procedures. Where do you think we are relative to kind of a pre-COVID baseline like just in percentage terms? And how fast are we getting back to normal?

Ben, this is Michael. I'd say we're pretty close. I'd say we're probably still shy, but it's probably in the 90%, 95% range in that area. Some areas we're seeing a little higher depending on if it's outpatient or inpatient. One of the big challenges that you may be hearing across some of your other companies is the challenges going on in healthcare right now, particularly within health systems and their ability to track labor. There's a significant shortage of labor, which is constraining hospital operations currently. And I would say that's more inpatient than outpatient, but it's still a factor.

Got it. And then just one more to follow up on the Nordion margin. I know you called out a mix impact I know the bulk of that is Cobalt deliveries, and I believe most of it's industrial, there's a little medical in there, but then there's also kind of this maintenance and installation component. Can you just help delineate that mix impact in the quarter a bit?

Yes, it's the points you just raised. So, we've got industrial and medical cobalt and then we've got some of the service and equipment side, which is a little bit lower margin. In the second and third quarter, we've got a little bit heavier mix in those categories. By the way, not surprising. I just want to be clear, within the total year forecast, it's not a surprise to us.

Hey guys, thanks for the question. Can you elaborate more on the issues your customers are facing with component sourcing? Are there any specific areas of concern that you're monitoring to see if they might experience some recovery?

No, Luke, this is Michael. We don’t have that level of visibility. We just know that they have intermittent problems where they’re unable to secure some components or deliver products for sterilization. However, we don’t have clear insights on that. Also, keep in mind that we cannot speculate on their inventory levels or how that relates to the end market. We're observing occasional issues where customers are facing challenges that they are addressing. Additionally, remember that we have a very broad product diversification, including ophthalmology, orthopedic, cardiac, and urological products. Our sterilization portfolio is quite diverse, so it's unlikely that any one issue will significantly impact us, but we are seeing these occurrences.

Thanks. Is there any pull forward from the Nelson business? We saw some last year at this time. Is that more seasonality, or do you still expect that second half weighting in guidance?

We still anticipate a strong performance in the second half. There is no pull forward. In our businesses, we do not engage in pull forward practices. For instance, in the case of Nordion, it's important to clarify that you cannot simply ship something to a customer and say, here it is. They must pause their operation to bring in Cobalt, which requires careful coordination with regulators and safety committees. To be clear, we do not refer to those as pull-ins; they are all agreed upon with customers. Regarding Nelson, that situation isn't happening; we are doing our best to enhance turnaround times to meet their quality, safety, and timing requirements.

Good morning. This is Thomas Kelliher on for Sean. Thanks for taking the questions. So, I guess starting off on Nordion. Given the visibility tied to harvesting schedules for cobalt-60. Are you able to comment on the share that is expected to come from Russia in like 2023? Or is it like more or less than the exposure this year?

Yes, Thomas, this is Michael. We're not in a position to talk about 2023. At the appropriate time, we'll talk about 2023 guidance in the company in total, and we'll give some color on the Nordion piece as well. But at this point, we're not focused on 2023 guidance.

Okay, that's fair. Thank you. And then, Nelson, I've seen a few references to the global lab information management system. Can you give us an update on that timeline? And what some of the back-end benefits might be? And what does it mean from a cost or efficiency standpoint? And would that have any impact on longer-term margins?

Yes. This is something that we've been implementing for quite some time now. Actually, I just had a review with the team a couple of weeks ago on an update as to how it is progressing very well. What we want to try doing is across our platform of labs is standing on a lab information management system that will give us great productivity, help us drive better digitization of some of the testing and reporting, consistency and also help drive more standardization, which should drive some productivity, and also give us a platform for more M&A that we could build off of. That's how we're thinking about it. Great. Thanks, Thomas.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Petras for any closing comments.

Great. Thanks, Howard, and thank you to everybody participating today. I'm really proud of what our team has been able to accomplish in the first half of the year. We're optimistic about the second half, even though the environment presents some challenges. The team is doing a really good job executing and fulfilling our mission of Safeguarding Global Health. So, thank you for your time and your support, and have a good day. Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.