Good morning and welcome to the Sotera Health Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 great job at offsetting these headwinds as we execute on delivering 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 healthcare products and ultimately, in the role we play getting safe products to patients. During the quarter, the team completed another facility expansion project for which the customer product validation phase is underway. We also continue to make good progress on our ethylene oxide facility enhancements in the United States. These industry-leading enhancements demonstrate our commitment to ensuring best-in-class emission controls for our employees, customers, and the communities in which we operate. Nordion, our other reporting segment within the sterilization services business, delivered a 14% year-over-year revenue increase in the third quarter versus last year. As communicated previously, Nordion's revenue is tied to the harvest schedules of our Cobalt-60 suppliers, which results in irregular revenue patterns on a quarter-to-quarter basis. The team has unique experience in navigating the complex Cobalt-60 supply chain, and the Nordion team remains on track to deliver a significant portion of its full year revenue in the fourth quarter as planned and previously communicated. Cobalt-60 is used to sterilize approximately 30% of the world's single-use medical devices and is critical to the global healthcare community. This is another great example of how we play a critical role in Safeguarding Global Health. Revenue in Nelson Labs, our lab testing and advisory service business, experienced a 2.1% decline versus the prior year quarter as testing volumes continue to be soft based on three primary drivers. First, the extensions of the deadlines for compliance with the European Union Medical Devices regulations. Second, the decline in funding for startups and smaller companies; and lastly, routine lot release testing tied to sterilization volume. A bright spot for the Nelson Labs business is the RCA performance. RCA plays a critical role in helping customers remediate FDA audit findings. As a consulting business, however, RCA margins dilute those with Nelson Labs more generally. In light of the softer-than-expected volumes, the Nelson Labs team is actively managing costs while remaining focused on quality. Our staffing levels have stabilized, turnaround times and utilization levels have improved, and customer satisfaction scores are solid. Turning to the 2023 outlook. Due to the volume softness at Sterigenics and Nelson Labs, we expect that 2023 revenue and adjusted EBITDA will finish at the lower end of the 2023 outlook range we provided during our second quarter earnings call. Now I would like to give a brief update on the ethylene oxide litigation in Georgia. In October, we announced that Sterigenics signed a binding term sheet to resolve 79 ethylene oxide claims against Sterigenics for $35 million, subject to the participation by all the plaintiffs. We expect to complete this settlement by year-end. The settlement in no way constitutes an admission of liability or admissions from our Atlanta facility have ever posed any safety hazard to the surrounding community. The settlement was driven by circumstances unique to one of the cases that was about to begin trial in the State Court of Gwinnett County. We continue to vigorously defend the approximately 240 remaining personal injury claims pending in the State Court of Cobb County, where we are optimistic the court will apply the rules of evidence properly and afford Sterigenics the opportunity to fully and fairly defend itself based on valid science. The judge in Cobb County has already acknowledged the central importance of science to the EO cases by implementing a case management order that places science and causation front and center in the 10 personal injury cases that will be decided first. In contrast to the approach taken by the judges in Cook County, Illinois and Gwinnett County, Georgia, only cases in which the plaintiffs present sufficient scientific proof to the judge's satisfaction that the plaintiffs alleged exposure to EO from the Atlanta facility could have caused and, in fact, did cause the illnesses they allege will be allowed to go to trial before a jury. We are confident that when the rules of evidence are applied properly, the science and related evidence about EO refuse claims that emissions from Sterigenics facilities can or do cause cancer or the other harms alleged in the EO litigation. This was proven by the complete defense verdict returned in favor of Sterigenics almost a year ago in the foreign case in Cook County, Illinois. More detailed information about the settlement and the EO litigation is available in the 10-Q that will be filed today, and as always, on the ethylene oxide pages on our Investor Relations website. Prior to turning this call over to Jon to walk us through the financials in more detail, I'd like to take a minute to underscore our mission, Safeguarding Global Health, which is at the heart of our work. We perform tests for medical and pharmaceutical products used each and every day to make sure the products are safe and meet regulatory requirements. We sterilize millions of products each year that benefit millions of patients. We supply Cobalt-60 to enable gamma sterilization globally and for the treatment of early-stage breast cancer. In addition, we provide critical scientific and regulatory expertise to help solve our customers' challenges. Our mission-critical services help protect millions of patients and healthcare providers around the world. An example of our team's fulfilling our mission is highlighted in a video link, look in the Safeguarding Global Health slide and our third quarter 2023 earnings presentation released this morning and available on our Investor Relations website. I encourage you to watch this video to learn how Nordion plays a vital role in the treatment of breast cancer. Now Jon will walk us through the financials.

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 quarter, segment income for Q3 2023 increased 8.9% to $93 million, and segment income margins increased by approximately 110 basis points to 55.3%, driven by favorable pricing, partially offset by unfavorable volume and mix as well as inflation. Nordion's third quarter revenue increased by 14.3% to $40 million compared to Q3 2022. Nordion's revenue increase was driven by favorable pricing of 9.4% and favorable volume and mix of 6.9%, partially offset by an unfavorable impact from changes in foreign currency exchange rates of 2%. Nordion segment income increased 18.5% to approximately $24 million, and segment income margin increased more than 210 basis points to 60% compared to the same period last year. Segment income and margin changes versus third quarter 2022 were driven by favorability in pricing, volume and mix, and partially offset by inflation. For Nelson Labs, third quarter 2023 revenue declined by 2.1% to approximately $55 million compared to the third quarter of 2022. Revenue was impacted by volume and mix declines of 8%, partially offset by a 4.1% benefit from pricing and favorable changes in foreign currency of approximately 1.8%. Nelson Labs' third quarter 2023 segment income decreased by 11.2% to $17 million, and segment income margins contracted by approximately 320 basis points to 31.3% versus third quarter 2022. This decline was due to the unfavorable volume and mix as well as inflation, partially offset by favorable pricing. I will now turn to liquidity, net leverage, and capital deployment. The company is in a strong liquidity position. As of September 30, 2023, we had approximately $645 million of available liquidity, which includes $245 million in unrestricted cash and $400 million of available capacity on our revolving line of credit. Through the third quarter, after adjusting for the $408 million Illinois settlement, we generated over $145 million of operating cash. This is a testament to the tremendous cash generating capability of this business. Our net leverage ratio at the end of the third quarter was 4.2 times. This was an increase from the year-end 2022 level of 3.2 times and was driven by the new $500 million term loan issued in connection with the Illinois ethylene oxide settlement. Our capital expenditures totaled $52 million for the third quarter of 2023 and $150 million on a year-to-date basis. Over the past couple of years, we have been operating in a period of elevated capital expenditures due to the US EO facility enhancements, Sterigenics' capacity additions, and the strategic cobalt development programs. Spending on the cobalt development and US EO facility enhancements programs totaled approximately $50 million in 2022, and we have spent nearly the same amount through Q3 of this year. Our cobalt development programs are required to support the long-term growth of gamma sterilization. Our last significant cobalt program was approximately 20 years ago. It is also important to note that current development programs will begin to yield revenue late in the decade. Sterigenics has three active capacity expansion projects continuing. Capital spending will be largely complete on the first of this year. Capital spending for the other two, which are greenfields, will be largely complete by the end of 2025. As previously communicated, we expect 2024 will be another year of heightened investment. Based on our current view, we expect a significant reduction in capital expenditures for the US EO facility enhancements and cobalt development programs in 2025, and Sterigenics' growth investments in 2026. We have a great company and we will continue to invest in all three businesses to maintain and to grow Sotera Health for the long-term. As we complete the stage of elevated investment, we expect to substantially increase the conversion of our strong operating cash flow to free cash flow, which is a key priority. Now I'd like to discuss our 2023 outlook. Based on ongoing market softness, we expect full year 2023 results to be at the lower end of our previous outlook, which is total revenues in the range of $1.035 billion to $1.055 billion, representing an annual growth rate of approximately 3% to 5%. Full year adjusted EBITDA in the range of $520 million to $535 million, representing an annual growth rate of approximately 3% to 6%. As mentioned earlier, we are on track to deliver approximately 50% of Nordion's full year revenue in the fourth quarter. For Nordion, we expect 2023 full year adjusted EBITDA margins to be similar to 2022 full year margins. For the remainder of the business, we expect Q4 to be similar to Q3 for both top and bottom line. Tax rate is expected to be in the range of 30% to 32%. Weighted average diluted shares are expected to be in the range of 283 million to 285 million. Adjusted EPS is expected to be in the range of $0.78 to $0.86. Capital expenditures are expected to be in the range of $200 million to $215 million. And lastly, we expect net leverage to finish the year at or below four times.

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. Just one week prior to his passing, we were 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. The first question today comes from Sean Dodge with RBC Capital. Please go ahead.

Thank you. Good morning. I would like to start with a clarification, Michael, regarding your comments on the remaining cases in Georgia. There are 240 cases still pending, but you mentioned that the judge will require those presenting evidence of exposure related to their illness. Is it correct to say that the number of cases going to trial could potentially decrease? Or does the 240 figure indicate that these cases have already met the initial requirements and are set to go to trial?

Good morning, Sean. Here's how it works: there are 240 cases. The judge has selected 10 cases to examine through Phase I and Phase II. Phase I addresses general causation and Phase II deals with specific causation. So, to answer your question, yes, the number of cases could decrease. If a case is related to leukemia, breast cancer, or lymphoma, it must first pass through Phase I. If a case makes it through that stage, it then moves on to Phase II. After successfully passing the judge's evaluation in Phase II, the case proceeds to a jury trial. There is a possibility that a case could be dismissed in one of the initial two phases. For instance, a case could fail to pass Phase I and Phase II, meaning it would not reach a jury trial. Therefore, it is indeed possible for the number of cases to be reduced. I hope that clarifies things 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 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. 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 the 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 on for Luke. Maybe just a follow-up on Sean's question earlier about the cases outstanding. Is there a timeline 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 timeline there.

Yes. So good morning, Salem. Yes, there is a timeline 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 timeline that we expect.

That's really helpful. Thank you. I'm hearing a lot about biopharma tightening their budgets and was wondering what effects that might have on your company and what your exposure is. Are you noticing anything similar in the demand environment? Also, regarding GLP-1, it's expected to significantly impact device volumes in the long run. What are your thoughts on capacity planning for that? Will it be affected by the sterilization of some pens used for GLP-1? I'm curious about your approach to this situation.

Yes, we are involved in the biopharma sector, although we haven't reached the scale we aim for in that area. This year has presented challenges due to our customers facing significant difficulties with their volumes and inventory reductions, which have significantly affected Sterigenics. However, we remain optimistic about this segment in the long run. The testing opportunities have also been impacted to some extent, even though pharma represents a smaller portion of total Nelson Labs. This segment remains strategically important for us in the long run. Regarding GLP-1, there will be some long-term volume impacts, particularly concerning surgical procedures, but the situation is quite varied. Recently, we've seen communication from diabetes companies expressing strong performance, which reflects positively on our business as well. We believe there are long-term opportunities for us, especially with prefilled syringes and related products, which could provide additional opportunities across Sotera Health. Therefore, we see potential for this to be a net positive as prefilled syringes and injectables gain a larger market share in the long term.

Got you. Thank you.

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

Good morning. Thank you for taking my questions. I want to revisit the topic of the high-single-digit growth goal. Michael, I understand the mid to long-term perspective is the focus. However, with 2024 approaching, I'm concerned that high-single-digit growth might be an optimistic starting point unless there's market recovery or the destocking cycle ends, or perhaps if the Sterigenics capacity is more significant than we realize. So, I'm asking again, even though you're not providing guidance today, what factors should we consider right now to assess the growth potential 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, in the fourth quarter, you've been clear that it would be a very heavy quarter. Now that we're a month into it, have some of these large shipments and deliveries already occurred, or are they still pending? I'm curious about your visibility and confidence regarding this significant step up. Additionally, regarding Nordion, this year was particularly uneven. We understand that this business can be unpredictable on a quarter-to-quarter basis, but it's more predictable in the medium term. What is your best estimate for the seasonal pattern in 2024? Will it be as lumpy as 2023, or perhaps a bit smoother?

Thank you, Mike, for highlighting the variability. Looking at the fourth quarter, we've consistently stated that 75% of the revenue is expected in the second half of the year, with 50% falling in the fourth quarter. We're reaffirming that today. Riaz and the team have excelled in executing this plan and have provided clarity throughout the year. While operational challenges can arise, we are confident in the Nordion team’s ability to generate around 50% of their revenue in the fourth quarter. As for next year, I know you're eager for insights into 2024, but I won't go into too much detail. It won't be as variable or back-ended as what we've seen in 2023. This year's performance was largely influenced by harvest schedules from the utilities. Our customers are eager for cobalt and we are working to meet that demand swiftly. It's important to note that demand for Nordion is strong, driven by the supply from the nuclear reactors. This year's performance was quite irregular with 75% occurring in the latter half, but we do not expect the same level of irregularity 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 Q4 for Nelson. I think last quarter, you said Q4 would look more like Q2 in that business. So has that expectation changed at all?

Hey, Casey, it's Jon Lyons. Thanks for your question. You mentioned the RCA impact, which did have a sequential effect, although it wasn't the most significant factor. Overall, our revenue decreased by a couple of million dollars sequentially, primarily due to volume and loss leverage in the business, which significantly contributed to the margin decline. Looking at the overall picture for Q4, on our last call, we suggested that Q4 might see a slight increase. However, as we assess the current state of our businesses, we're now projecting that Sterigenics and Nelson will be flat compared to Q3, and we are still determining how that will break down between the two.

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.