Sotera Health Co

NASDAQ:SHC

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Howard and I will be your conference call operator today. At this time, 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. [Operator Instructions]

I will now hand the call over to the Vice President of Investor Relations, Joe Vitale.

[Joe Vitale, VP, IR]

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.

[Michael Petras, Chairman and CEO]

Good morning, everyone, and thank you for joining us on Sotera Health's second quarter 2022 earnings call. I'm very pleased this going 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 remain 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 servicing 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 locating 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 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 use 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 Russia 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 exist in the first quarter 2022. In fact, the second quarter of 2022 was Nelson Labs' highest revenue quarter in its history.

The Nelson Labs team continue to extend its leadership position in testing and advisory services for medical device 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 in Omicron-related absenteeism that were headwinds early in the year.

You may recall that Nelson Labs benefit 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 the 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 delivery of innovative healthcare products.

At Nelson Lab, we are actively testing the effectiveness of surface disinfectant [ph] against the monkey pox virus. This is another example of how our teams work for clients to address potential global health risk in real time.

At Sterigenics, we are working closely with a customer to establish a sterilization process for innovative heart valve catheters, which provides 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 working to ensure health care 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.

[Michael Biehl, Interim CFO]

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 to 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 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 and 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 mobile crown-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 30th, 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.

[Michael Petras, Chairman and CEO]

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 insure owes Sterigenics duty 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, and that's the company intends to vigorously defend itself against these claims. Our company plays a critical role in health care, and our employees and facilities operate in a safe and compliant manner, as our employees' commitments to our company and our mission, which results in Sotera Health's consistent and outstanding performance over so many years and gives 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.

[Operator]

Ladies and gentlemen, we will now open the lines up for the question-and-answer portion of this call. [Operator Instructions]

Our first question or comment comes from the line of Jason Reiver from Citi. Mr. Reiver, your line is open.

[Lizzie Speyer, Citi]

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.

[Michael Petras, Chairman and CEO]

As we stated, we're playing in $1 billion to $1.2 billion in revenue and EBITDA for $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 on 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 year for Nelson in the second half of the year over the second half of last year.

[Lizzie Speyer, Citi]

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 kind of outlook on that? Thanks.

[Michael Petras, Chairman and CEO]

Yes. As we've stated multiple times that 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 of that range. And 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 price to offset the inflation pressures.

[Lizzie Speyer, Citi]

Great. Thank you.

[Operator]

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

[Casey Woodring, JPMorgan]

Hey guys. Thanks for taking my question. I'm just curious on -- so 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 to touch?

[Michael Biehl, Interim CFO]

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.

[Casey Woodring, JPMorgan]

Got it. That's helpful. And then so I just wanted to clarify for Nelson Labs on the margin expansion side, the COVID headwinds subside in the back half of the year. And also wanted -- I just wanted to confirm that. And then on the labor utilization that you talked about, can you just elaborate on what you've seen there? It seems like you've been able to navigate the tough labor market here pretty effectively. And I'm just wondering on what's embedded in the guide for that dynamic? Thank you.

[Michael Petras, Chairman and CEO]

Yes. Thanks Casey. This is Michael Petras. On your first question around some of COVID and pandemic related, we talked about we had a significant amount of PPE testing that came in, in 2021. As we look to the second quarter, our second quarter, that was down significantly over second quarter of last year, and we expect the outlook to remain about consistent as far as the levels of that testing going through the rest of the year, okay. So, it's come down significantly where it was in 2021, but we see it in a more normalized rate currently.

As far as Nelson, as we stated in our last call, we expected the margins to continue to rebound in that business. And the team has done a nice job executing on that. You asked about the utilization. We continue to do a nice job in stabilizing that workforce. As we looked at the end of last year, there was a lot of turnover in the marketplace, a very tough challenging labor market, as we all know. Then the Omicron hit in the first -- beginning of the first quarter.

So, we've been able to stabilize our turnover there and also our training and our productivity has started to follow behind that. But most importantly, our customer feedback, the Net Promoter Score and turnaround time metrics are going in the right direction. So, we're really proud of what the team is doing there. So, we're optimistic about us continuing to see growth over the second half 2021 in the back half of 2022.

[Operator]

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

[Unidentified Analyst]

This is Phil on for Amit. Thanks 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?

[Michael Petras, Chairman and CEO]

So, we're not getting into the second half level of detail on that, at this point, Phil. But what I would tell you is we continue to see momentum gaining in that business. We're optimistic about the volumes and the activity but do recognize we've got some broader macroeconomic needs that we continue to monitor.

But we had weak second half of 2021, so we would expect recovery here in the second half of 2022 even though the macro environment may be a little choppy. In the first half of the year, that PPE testing was about an 8% drag on a year-to-date basis versus last year. So, just give you some sense of magnitude. But the second quarter was about 5% in -- we've seen that being a more normalized rate going forward. .

[Unidentified Analyst]

Okay. That's helpful contact. 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?

[Michael Petras, Chairman and CEO]

Yes, I think that's a pretty fair way to look at it. I would also just call it, they had a strong third quarter last year, right? So they're going to be working against that coming in. But overall, the team feels pretty strong about where they are and what they're seeing from customers. I mean, they are -- I don't want to understand the macroeconomic challenges that we referenced in our comments.

Customers are still dealing with shortage on and components and getting product manufacturing, and there's still some challenges on the labor side within our customer base. But overall, the Sterigenics team has seen a good opportunity for growth in the second half of the year.

[Unidentified Analyst]

That's helpful as well. If I could sneak one -- just one more in. It sounded like the entirety of the topline guidance reduction was related to -- but as we think about the performance in the first half of the year, would you say that the business outperformed your expectations and offset some of these macro challenges independent of the reduction to topline for the full year that we're seeing today? Thanks.

[Michael Petras, Chairman and CEO]

Yes, I generally say that. I also recognize the fact that I did mention Nordion had a little bit of volume that moved in from the second half into the second quarter. So you got to discount that a little bit. But I would say Sterigenics and Nelson continue to perform well as does Nordion.

Nordion, as we've discussed in previous conversations, they've got -- that's what our business is good at, though, we're dealing with pretty complex global supply chains. And the team has done a phenomenal job executing on that and taking care of our customers.

[Unidentified Analyst]

Thanks for taking Michael.

[Michael Petras, Chairman and CEO]

Great. Thanks Phil.

[Operator]

Thank you. Our next question or comment comes from the line of Mike Polark from Wolfe Research.

[Michael Polark, Wolfe Research]

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?

[Michael Petras, Chairman and CEO]

Yes. I would first -- thanks, Mike, for the question, and good to hear from you. I would first give a perspective. We sterilize over 40 million medical devices in our L.A. facilities. As you may know and many know, we're waiting on the EPA to come out with new rules and regs, and that's been a challenge. We've been waiting on those rules for several years, and we can't wait for the new rules to come out.

In L.A., we've gotten some attention to some of the local community and the regulators on that facility. We're compliance with the rules and the regs there. And we've reached an agreement with them on the time line of our facility enhancements.

As I've mentioned on many of these calls, we have an aggressive plan to do EO facility enhancements across all our U.S. facilities, including the L.A. facilities. And what we did is we memorialized that in an agreement with the regulators in California to continue to move forward with that plan.

So, we got to continue to operate in compliance with the rules and regs, which our team is well accustomed to. But that facility plays a continuing role in serving the global health care market.

[Michael Polark, Wolfe Research]

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?

[Michael Petras, Chairman and CEO]

Yes. Thank you for referencing the years of delay. We've been waiting for new rules, and we're anxious to get them. And we're pretty confident in the improvements we're putting in place are going to be reflective of industry-leading controls that we hope the EPA adopts. We're leading out there with some things that we're doing that we think they should adopt across the industry and hopefully goes that direction.

If not, we're going to be operating in even more safe compliant matters than be required. What we've seen right now, yesterday, the communication you're referencing, they said that they're working through submitting a new plan. It would go to OMB. And we're hopeful that it will be some time in the second quarter, third quarter of 2023, when the rule is finalized, that's called NESHAP.

We think that there will be a potential -- it will be published for public comments sometime late this year, but probably won't go into enforcement until second, third quarter of 2023. But Mike, I just want to make sure we're clear. That's not our prediction. That's what we're hearing from them. We've heard many dates before. We're hopeful that they even do it faster.

[Michael Polark, Wolfe Research]

Thank you, Michael.

[Michael Petras, Chairman and CEO]

Thank you.

[Operator]

Thank you. Our next question or comment comes from the line of Matthew Mishan from KeyBanc. Your line is open.

[Matthew Mishan, KeyBanc]

Thanks for taking the questions. Just first a follow-up on the insurance -- the short insurance you're talking about. Is that specifically from the Willowbrook litigation? Or is that Broadway for you?

[Michael Petras, Chairman and CEO]

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

[Matthew Mishan, KeyBanc]

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 is the -- what are you kind of considering that's maybe changed a little bit?

[Michael Petras, Chairman and CEO]

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

[Matthew Mishan, KeyBanc]

Okay. Thank you.

[Michael Petras, Chairman and CEO]

Great. Thanks Matt.

[Operator]

Thank you. Our next question or comment comes from the line of Ben Flox from Jefferies.

[Ben Flox, Jefferies]

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?

[Michael Petras, Chairman and CEO]

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 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.

[Ben Flox, Jefferies]

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?

[Michael Petras, Chairman and CEO]

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, that's a little bit lower margin. And 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.

[Operator]

Thank you. Our next question comment comes from the line of Luke Sergott from Barclays. Mr. Sergott, your line is open.

[Luke Sergott, Barclays]

Hey guys, thanks for the question. Can you talk -- just dig in a little bit more on the issues that you talked about from your customers having component sourcing? Any indications or particular areas of weakness that are -- you guys are looking at to be -- continue to be softer where you might see some recovery?

[Michael Petras, Chairman and CEO]

No. Luke, this is Michael. We don't have that level of visibility. We just know that they have intermittent problems where they're not able to get some components or things that they're able to deliver the truckload to products for sterilization. But we don't have great visibility on that. And also remember, we can't speculate on what their inventory levels are doing either. So we don't know exactly how that ties to the end market.

We're just seeing some spottages here and there, where customers have some challenges that they're working through. We have a very -- I'm sorry, Luke, just remember, we have a very broad product diversification, ophthalmology, orthopedic, cardiac, urological, so we have a whole host of products and it's a very diverse portfolio that we sterilize as well. So, it's not one is going to drag something down, but it is something that we do see occurring.

[Luke Sergott, Barclays]

Okay. Thanks. And then any pull forward from the Nelson business? We saw some last year at this time. Is that more seasonality? Or -- are you still expecting that second half weighting in guidance?

[Michael Petras, Chairman and CEO]

We still expect a strong second half. There's no pull forward. We don't -- in any of these businesses, we don't pull forward. Like in the case of Nordion, just to be clear, this isn't something you could just ship something to a customer and say, hey, here it is, right? They have to shut down their operation to bring Cobalt in, right? And that has to be well coordinated with the regulators and the safety committees and things of that nature. So I just want to be clear on it, this isn't -- we don't call those pull-ins.

Those are all agreed to by customers. In the case of Nelson, that phenomenon really isn't playing we're executing as best as we can to improve turnaround times to meet their quality and safety and timings those requirements.

[Luke Sergott, Barclays]

Okay, great. Thanks.

[Operator]

Thank you. Our next question or comment comes from the line of Sean Dodge from RBC Capital Markets.

[Thomas Kelliher, RBC Capital Markets]

Good morning. This is Thomas Kelliher on for Sean. Thanks for taking the questions. So, I guess starting off on Nordion. I guess, 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?

[Michael Petras, Chairman and CEO]

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.

[Thomas Kelliher, RBC Capital Markets]

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 time line? 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?

[Michael Petras, Chairman and CEO]

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 is progressing very well. What we want to try doing is across our platform of labs is standing on lab information management system that will give us great productivity, give us 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.

[Thomas Kelliher, RBC Capital Markets]

Okay, that’s all from me. Thanks Michael.

[Michael Petras, Chairman and CEO]

Great. Thanks Thomas.

[Operator]

Thank you. Our next question or comment is a follow-up from Mr. Mike Polark from Wolfe Research. Your line is open sir.

[Michael Polark, Wolfe Research]

Follow-up. I have two more topics, if I may. Curious, Michael, for your perspective on the update in the Georgia courts in June. You had a favorable ruling from Cobb County. They dismissed all of the claims against you. I guess, can you just discuss briefly what happened there? And perhaps if there's any kind of lateral from that ruling or legal decision to what's going on in Illinois.

[Michael Petras, Chairman and CEO]

So, welcome back Mike for a second time here. So, I would say on this one, there was a particular customer in Georgia that had their employees file claims against them around their sterilization practices. We were brought into that lawsuit. We are indemnified by the customer, and we put a motion to dismiss in process, and we're happy that the courts ruled in accordance with the laws. We were pretty confident that, that should be how played out --.

We are indemnified by the customer, and we put a motion to the Smith in process, and we're happy that the courts ruled in accordance with the laws. We were pretty confident that, that should be how it played out, and we were just missed from the case. We're continuing to battle through the other litigation in Illinois.

We -- as I mentioned, the first trials will start on August 12th. We went on July 18th when they were scheduled. We're pushing to get forward and have our day in court on these. There is risk associated with that, as we all know, but we feel confident about our positions and how that goes forward.

[Michael Polark, Wolfe Research]

Appreciate that. And then the second one was just a clarification on the mentioned during the prepared remarks. On the impairment joint venture, I heard Iotron. I just didn't get what that is. I noticed you've carved that out of adjusted profit, so it's a GAAP item. But if you could just add any color about what that mark was? Thank you.

[Michael Petras, Chairman and CEO]

Yes, Mike, this is Michael again. So, we purchased Iotron. At the time we purchased we had a joint venture that was in early stages of being started up and the business direction has changed with how to proceed with that, which we think is a good outcome.

Our Iotron acquisition has continued to perform very well. And a part of that, the JV was we were going to do sterilization and decontamination of some products, which now will continue to absorb within our existing footprint and Sterigenics facilities, which we think is a good thing. As far as the financial, Michael?

[Michael Biehl, Interim CFO]

In terms of the financial impact, $9.6 million charge was taken out of adjusted EBITDA at about a $0.03 impact on fully diluted earnings per share. And that is really part of the impairment that was required.

[Michael Petras, Chairman and CEO]

But from a business strategy perspective, we're very comfortable with what the outcome and how this is proceeding. And Iotron been performing very well for us, and the team has done a great job integrating there.

[Michael Polark, Wolfe Research]

Thank you for the follow-up.

[Michael Petras, Chairman and CEO]

Great.

[Operator]

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.

[Michael Petras, Chairman and CEO]

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 got some challenges. The team is doing a really good job and executing and fulfilling our mission of Safeguard and Global Health. So, thank you for your time and your support, and have a good day. Bye, bye.

[Operator]

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