Good morning, welcome to the Sotera Health Fourth Quarter 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the call over to Vice President and Treasurer, Jason Peterson. Please go ahead.
Good morning, thank you. Welcome to Sotera Health's fourth quarter 2022 results call. You can find today's press release and accompanying supplemental slides on the investor section of our website at soterahealth.com. This webcast is being recorded, a replay will be available in the investor section of the Sotera Health website. On the call with me today are Chairman & Chief Executive Officer, Michael Petras, and Interim Chief Financial Officer, Michael Biehl. 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 in the forward looking statement slide at the beginning of this 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, net debt, net leverage ratio, and 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 its 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 and give everyone an opportunity to ask questions. As always, if you have any questions post-call, feel free to reach out to me and the investor relations team. I'll now turn the call over to Sotera Health Chairman and CEO, Michael Petras.
Good morning, everyone, welcome to Sotera Health's fourth quarter 2022 earnings call. This morning, we reported another quarter of year-over-year top and bottom line growth. We have achieved both top and bottom line growth in each quarter since becoming a public company in November of 2020, which speaks to the strength and resiliency of our business model. Consistent with my commentary during our third quarter earnings call, while we see improvement in certain areas of the broader macro environment, some headwinds still exist. Safeguarding global health remains our mission as we execute on delivering growth and profitability for our shareholders. Michael Biehl will provide more detail on the financial results in a moment, but first, I wanna highlight a few items from our fourth quarter and full year results.
We reported total revenue growth of 4.3% and adjusted EBITDA growth of 4% compared to the fourth quarter of 2021. We delivered adjusted EPS of $0.25 for the quarter, which is a $0.02 increase over the same period last year. For the full year, revenue grew by 7.8% and adjusted EBITDA grew by 5.2% compared to the prior year. I am proud that we've extended our streak of annual revenue growth, which we've achieved since 2005 when we started tracking it. Let me now shift to cover each of the business unit results. Sterigenics, our largest reporting segment, delivered 7.6% top line growth for the quarter. The segment saw solid demand across all modalities. For the full year, Sterigenics delivered 9.6% revenue growth.
Consistent with our Sterigenics strategy, we are making significant investments in additional capacity across our global network. Currently, Sterigenics is progressing with seven capacity expansions across all major geographies and modalities. We are also advancing our EO emission control enhancements across our North American facilities. These industry-leading enhancements underscore our ongoing commitment to ensure best-in-class operations for our employees, customers, and the communities in which we operate. Nordion, our other reporting segment within the sterilization services business, had a good year. At the beginning of 2022, we indicated that a total disruption of Cobalt-60 supply from Russia could result in an up to 3% impact on total Sotera Health revenues. I am pleased to say that the Nordion team has done an exceptional job navigating this geopolitical risk in 2022 and avoided the potential 3% revenue risk from Russian-supplied Cobalt-60.
We consistently message, Nordion's revenues are lumpy due to the timing of Cobalt-60 harvest supply schedules. As expected for the quarter, Nordion's revenue declined by 7.1%, which was driven by the timing of Cobalt-60 harvest schedules. When viewed on a longer-term basis, Nordion's revenue stream is very consistent. For the year, Nordion revenues were up 9.3%. 2022 was a challenging year for Nelson Labs, our lab testing and advisory service business. Fourth quarter 2022 revenue grew by almost 3% compared with the same period in the prior year, while revenues grew approximately 2% year-over-year or 4.4% on a constant currency basis. I am pleased with the Nelson team as they navigated through labor and supply chain challenges in 2022.
Overall, 2022 was a good year for Sotera Health considering the uncertainty driven by macroeconomic pressures in geopolitical events. As projected, we deployed the greatest amount of capital in the company's history to fund capacity expansions, Cobalt development-EO emission control enhancements in various operational excellence projects across each business. This level of investment speaks to the company's commitment to growth. Additionally, our balance sheet ended the year in a strong position with net leverage finishing at 3.2x, well within the long-term range of 2x-4x. As communicated in the press release last week, Sotera Health closed on the issuance of a $500 million Term Loan B.
The proceeds of this incremental debt financing, along with cash on hand, will be used to fund the $408 million ethylene oxide litigation settlement in Cook County, Illinois, paying off the existing borrowings under our revolving credit facility to further enhance liquidity and for other general corporate purposes. We are pleased that this issuance received such very positive interest from the market and puts us in a strong liquidity position moving forward. Although this new borrowing will initially increase our net leverage ratio slightly above four times, we expect net leverage to settle within our long-term target range of two to four times by the end of 2023. As for the Illinois EO settlement, the Plaintiffs' Executive Committee reports that the process is on track for participation rates to be determined by late April or early May.
We are scheduled to fund an escrow account for the settlement on May first, and subject to participation by substantially all the eligible claimants, we expect the settlement to be completed and the settled cases to be dismissed by late July or early August. I also wanna take a moment to highlight the progress made on our ESG initiatives this past year. While I reflect on how far we've come in the past year, I am proud of our team's accomplishments. As part of our IPO, the board established ESG oversight with our Nominating and Corporate Governance Committee. We established an internal cross-functional ESG committee, which reports in to me, and appointed two seasoned senior executives as co-chairs to help lead the identification and implementation of ESG initiatives consistent with our overall business strategy. During 2022, we achieved numerous corporate responsibility accomplishments.
I wanna highlight a few of the specific activities. In the environment area, we established consistent environmental health and safety metrics across our global businesses. We launched a new global EHS policy at an incremental EHS leadership, Engaged a third-party software solution to assist in establishing baseline EHS metrics. In addition, we continue our investment in state-of-the-art emission controls at our EO facilities. With respect to human capital, culture in our communities, we completed our annual global employee engagement survey with 84% participation. We launched the Sotera Health Women's Network, leveraging the work done at Nelson Labs on women's leadership development, and expanding its impact across the company. Additionally, we developed a new career website and completed our Leading For Our Future leadership development program, which had the project team focused on ESG activities.
In 2022, we also launched a new corporate responsibility website and published our first corporate responsibility report. In addition to the operational and financial performance, our ESG initiatives combined to make an impressive and very busy year for the team. We look forward to reporting on our ESG progress in future calls. As we look forward to 2023, we will continue to focus on our priorities. A few of these are investing for organic growth, which includes adding capacity, enhancing our infrastructure, and investing in Cobalt-60 development programs. We will continue to invest in upgrades to our North American EO emission control systems. We remain committed to our focus on operational excellence, which involves improving customer service across our businesses. We will continue to be disciplined with capital while de-leveraging our balance sheet during the course of the year.
Today, we also provide our initial outlook for 2023. For the full year 2023, we expect total revenues in the range of $1.055 billion-$1.090 billion, which represents growth of approximately 5%-9%. adjusted EBITDA in the range of $530 million-$550 million, resulting in growth of approximately 5%-9%. adjusted EPS in the range of $0.78-$0.86, representing a decline of 10%-19%, which is driven by increased interest expense and expected increase in our adjusted net income tax rate. Now, Michael Biehl will take us through the financials in more depth.
Thank you, Michael Biehl. I'll first cover the fourth quarter 2022 highlights on a consolidated basis, 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 the 2023 outlook. On a consolidated total company basis, fourth quarter revenues grew by 4.3% as compared to the same period last year to $252 million. This equates to 7.2% growth on a constant currency basis. Adjusted EBITDA grew by 4% from the fourth quarter 2021 to $130 million. Adjusted EBITDA margins were 51.5%, representing a slight decline from fourth quarter 2021 levels.
Our operating performance drove adjusted EPS of $0.25, an increase of $0.02 from the fourth quarter of 2021. Fourth quarter 2022 had a net loss of $320 million or $1.14 per diluted share, which includes a $408 million legal reserve recorded in the quarter. Compared to net income of $36 million or $1.13 per diluted share in the fourth quarter 2021. This legal reserve is related to the binding term sheets to settle the ethylene oxide claims in Cook County, Illinois. A reported interest expense of $32 million is burdened by a mark-to-market loss on certain outstanding interest rate hedges, for which we did not elect hedge accounting. We have removed the effect of that loss in our adjusted earnings per share.
Excluding this loss, fourth quarter interest expense was approximately $25 million. Let's take a closer look at our segment performances. In the fourth quarter, Sterigenics delivered another strong quarter with approximately 8% revenue growth to $162 million and 7% segment income growth to $89 million as compared to the fourth quarter of last year. On a constant currency basis, Sterigenics grew revenues over 10% compared to the fourth quarter of last year. Revenue growth drivers for the fourth quarter included favorable pricing of 5.6% and favorable volume and mix of almost 5%, partially offset by unfavorable changes in foreign currency exchange rates of 2.6%.
Compared to the fourth quarter of 2021, segment income margins contracted by 20 basis points to 55.1%, driven by the timing of pricing actions versus realized inflation. Sequentially, margins did improve in each quarter of 2022. Nordion's fourth quarter revenue declined by approximately 7% to $34 million compared to the fourth quarter of 2021, which is driven by the timing of Cobalt-60 supply schedules. Nordion segment income declined by more than 5% to $20 million compared to the same period last year. On a constant currency basis, Nordion's fourth quarter revenue declined by 3% versus the same period last year. Nordion's revenue change versus fourth quarter 2021 was driven by volume decline of nearly 14%.
Headwinds associated with changes in foreign currency exchange rates of over 4%, offset by favorable pricing of 11%. Nordion's margins were 59.5%, a 130 basis point improvement from fourth quarter 2021 margin levels, which is driven by pricing contributions, partially offset by mix. For Nelson Labs, the fourth quarter of 2022 revenue improved 2.7% to $56 million compared to the fourth quarter of 2021. Segment income of $20 million was less than 1% favorable versus fourth quarter 2021. On a constant currency basis, Nelson Labs grew revenues 5.3% compared to the fourth quarter of last year.
Revenue growth for the fourth quarter of 2022 was impacted by a 5.5% benefit from pricing, partially offset by headwinds associated with changes in foreign currency exchange rates of 2.6%. Fourth quarter 2022 margins for Nelson Labs contracted to 36.3% or approximately 90 basis points versus fourth quarter 2021 margin levels. This decline was driven by inflation, increased staffing in anticipation of incremental volume, partially offset by pricing improvements. Even though there was a margin decline versus the same quarter last year, fourth quarter 2022 was the highest margin rate for the year as margin expanded 180 basis points compared to the third quarter. Prior to providing highlights related to capital deployment net leverage, I would like to touch base on cash generation.
Due to the critical nature of the services we offer and the strength of our business model, we generated $278 million of operating cash flow during 2022. This robust cash flow allows us to fund operating needs and invest for future growth. As of December 31, 2022, we had $396 million in cash and over $475 million of available liquidity, and our net leverage fell to 3.2x of adjusted EBITDA. In November, we borrowed $200 million on a revolving line of credit to enhance liquidity in connection with litigation needs, which was held as cash on the balance sheet at year-end.
This revolver borrowing was paid off during the first quarter of 2023 with cash on hand and proceeds from the recent $500 million Term Loan B financing, which we have borrowed primarily to fund the Illinois EO litigation settlement. Our CapEx for fourth quarter and full year 2022 was $72 million and $182 million, respectively. Growth CapEx and facility enhancements drove the increased investment levels for 2022. Inflationary impacts as well as some opportunistic spend earmarked for 2023 drove our investments above the $170 million upper end of our 2022 guidance range. I want to provide additional color around our 2023 outlook. I'll start with a quantitative summary and finish with our assumptions.
For full year 2023, we expect total revenues will be in a range of $1.055 billion-$1.090 billion, representing an annual growth rate of 5%-9%. adjusted EBITDA will be in a range of $530 million-$550 million, also representing an annual growth rate of 5%-9%. Effective tax rate applicable to adjusted net income in the range of 30%-33%. I wanna provide some color on due to the increase compared to the prior year rate. As many of you may recall, 2017 U.S. tax reform provided for limitations on the deductibility of interest. U.S. tax reform provided for a change in 2022, whereby deductibility would be further limited.
This, combined with higher interest expense due to increasing interest rates, along with the large carry-forwards of nondeductible interest from prior years, has resulted in a larger valuation allowance and a higher effective tax rate for 2023. Adjusted EPS is expected to be in the range of $0.78-$0.86. This represents a decline of 10%-19%, which is primarily driven by increased interest expense as well as the increased tax rate. Fully diluted share count in the range of 283 million-285 million shares on a weighted average basis.
Capital expenditures to be in the range of $185 million-$250 million, representing continued elevated investments for growth as we continue to fund capacity expansions at both Sterigenics and Nelson Labs, as well as invest in EO emission enhancements in North America in Cobalt-60 development projects at Nordion. With the closing of the $500 million Term Loan B, our leverage will increase slightly above our long-term stated target range of two-four times. By year-end 2023, we expect to be back within this range. From a qualitative standpoint, our assumptions are as follows. We're anticipating labor market and inflationary pressures to continue into 2023, as well as some continued indirect impact from supply chain disruptions.
We expect that Russia will continue to face more sanctions as the war in Ukraine heads into its second year. We believe Nordion will continue to be able to navigate the challenges. Authorities around the world understand the importance of Cobalt-60 produced in Russia to the global healthcare system. Michael will touch on the risk associated with the disruption of Cobalt-60 supply from Russia in a minute. As we look at the cadence of quarterly reporting, I'll comment briefly on each business unit. We expect our largest and most consistent business, Sterigenics, to have lower volumes and margins in the first quarter, as typical, and will realize increased volumes and margin expansion through the rest of the year. Keeping with the typical cadence, the phasing of Nordion's financial performance is driven in large part by harvest and shipment schedules for Cobalt-60.
2023 will be particularly lumpy, as almost all of the first half 2023 revenues and segment income will occur in the second quarter, while approximately 75% of Nordion revenues and 80% of segment income will be realized in the back half of the year. Returning to a pre-pandemic quarterly cadence, Nelson Labs expected to have lower margins in the first quarter of 2023 and are expected to expand margins through the year. We expect margins to climb back to normal run rate levels in the mid to high thirties in the back half of the year. From a foreign currency standpoint, our guidance assumes that year-end 2022 rates remain relatively constant for the year. From a capital deployment standpoint, we continue to prioritize growth initiatives, de-leveraging our balance sheet, and long-term strategic acquisitions.
We do not assume any acquisitions in our guidance. I'll now turn the call back over to you, Michael.
Thanks, Michael. Prior to transitioning to the question and answer session, I would like to address the topic of Nordion's sourcing of Cobalt-60 from Russia, which has been previously discussed. Nordion has always had an outreach program to ensure that governments and regulators around the globe understand the importance of Cobalt-60 produced in Russia to the healthcare community, as approximately 30% of the global medical devices are sterilized using gamma radiation. We continue to engage in regular dialogue with these officials and are carefully monitoring the geopolitical situation to protect the supply of Cobalt-60. At the present time, we continue to receive supply of Cobalt-60 from Russia and believe that we'll be able to continue to procure Cobalt-60 from Russia. Our 2023 guidance is based on our current understanding of previously announced sanctions by the U.S., the U.K. , Canada, and the European Union.
That said, there is no way to predict with certainty how events and sanctions against Russia will unfold in the short, mid, or long term. If there was a full disruption of Cobalt-60 supply from Russia, we would expect an impact of between 0 and 3% of total Sotera Health 2023 revenue. This is identical to the guidance originally provided in 2022 and for which we experienced no impact. Before transitioning into the Q&A session, I want to reemphasize that Sotera Health remains in a strong position for both growth on the top and bottom line in 2023. Overall, we feel very good about the company's current and future prospects. At this point, operator, let's open the call for Q&A.
We will now begin the question and answer session. To ask a question, you may press star then one your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Sean Dodge with RBC Capital Markets. You may now go ahead.
Yep. Thanks, good morning. On, on the guidance, Michael, you made the point Nelson's unusually second half weighted. Can you just walk through a little more on the visibility you have into that? I guess I get with Nordion, you have the harvesting schedule, so know pretty specifically when that'll come through. On Sterigenics and Nelson is the expected ramps there purely from ramping volumes or is there some pricing actions that you've taken that'll lag, that'll flow through more in the back half? Is this also new capacity that's opening during the year? Just hit on one on what's driving the heavy second half wave.
Yeah. Okay, great. Just our comments on second half, Sean, on the 75% of revenue and 80% of segment income was relative to Nordion. You will see a steady, strong and consistent business for Sterigenics throughout the year. Volumes will increase margins. You know, as I stated in my remarks, margins a little softer in the first quarter typically, but that'll continue to progress throughout the year. On the Nelson Labs side, you'll see growth, as the year progresses, you know, getting from first to the first quarter is always typically a little lighter, but second, third and fourth quarter will be, you know, will be good quarters and good volumes.
Yes, to answer your question on pricing, you know, as we've stated in the past, you know, some of our contracts renew at different points during the course of the year, and those will start to roll out and roll through as the year progresses as well. Overall, our largest business, Sterigenics, I just wanna make sure you understand, we'll have steady growth in year over year throughout the year.
Okay, great. Within Nordion, you said again, as a whole revenue is pretty concentrated in the second half of the year. The portion that's expected to come from Russia, when in the year is that expected to happen? You know, I guess based on the visibility you have in a harvesting schedule, does Russia contribute pretty evenly over the course of the year, or is there a particular quarter or two where that portion of the supply is particularly concentrated?
Yeah, I don't recall exactly by quarter, the cadence on that, but I could tell you that's not the big driver of what's going on in the second half that we referenced, if that's your question. That's more about some other supply harvest schedule timing. It's not-
Okay.
Question based. Yeah.
Okay. great. Thank you again.
Thank you, Sean.
Our next question will come from Patrick Donnelly with Citi. You may now go ahead.
Thank you for taking the questions. Michael, maybe just one on the litigation side. You know, nice to see kind of the settlement in Illinois. Can you just talk about, I guess, the process there in terms of the opt-ins, just in terms of trying to figure out the timeline. Then, you know, beyond that, maybe just a quick update on how we should think about the rest of the litigation. Just wanna make sure we have all kind of the catalysts set in our minds beyond this one, and if this changes your view of some of the other outstanding litigation.
Yep. Patrick on Illinois and the settlement, it's for $408 million. The Plaintiffs' representatives have committed that they would get 98.6% participation rate. If you do the math, that's about 12 people have the ability to opt out. The process, high level, how it works is they recently appointed a claims administrator. We have nothing to do with that process. They hire a claims administrator. The claims administrator allocates the money to the Plaintiffs, they come back to us probably late April, early May. We have 30 days after... I'm sorry. After the initial numbers go out to the Plaintiffs, the Plaintiffs have 30 days to evaluate it. It'll come to us late April, early May.
We'll be able to evaluate it. We think that this gets closed out sometime late July, early August. We have to fund the $408 million into escrow account on May first. At a high level, that's how it works. The four, what they're calling, trial plaintiffs, Kamuda, Schumacher and Fornek, have already signed and committed on their numbers. That's Illinois. On the other litigation, just to be clear, on New Mexico, there is no personal injury cases in New Mexico.
On Georgia, there's one personal injury case that'll come up in 2023, and the rest of them, have a pretty extended timeline, because Georgia is gonna be a different approach than what you saw in Illinois. Georgia, the first thing they have to do is go through a phase I to prove general causation, and then after that, it goes to phase II for specific causation. A very different approach than was taken in Illinois.
Understood. Okay, thanks. Maybe just a quick one on the margin side. You know, Nelson, obviously you've been tracking those margins here, the last couple quarters. Sounds like get back to the normal run rate in the second half. Can you just talk about that ramp? Is it just kind of the staffing pressures, volumes normalizing, what gets you there? Just a quick one, the interest expense. I didn't get the exact number for 23. I might have missed that. If you have that would be great.
Okay. I'll take the margin questions, and then Michael Biehl could address questions on interest. On the Nelson margin side, if you look at it, the last three quarters have kind of honed in on that mid-thirties, right? 36, 35 kind of range. You know, we had good improvement, fourth quarter over third quarter sequentially. Always the first quarter ends up being the lowest margin just because of volumes and how they fall, and there's a little bit of a seasonality impact. We're feeling pretty good about what the Nelson team's done.
Remember, one of the things we mentioned in our last quarterly call is that we went ahead and staffed up, anticipating a little bit more volume, but we didn't reduce the staffing because one of our key priorities is to make sure we take care of service rates, and turnaround times. I'm really pleased with the progress on our Net Promoter Score there, as well as our just overall turnaround time. You know, ironically, I was just looking over the past week. We got our customer satisfaction scores back, our annual survey for both Sterigenics and Nelson, both of them were very strong performance. I'm confident what we're doing there, we're seeing some nice pockets of growth.
From a margin perspective, you know, we see that first quarter is going to be a little lighter, but we see this business in the mid to high thirties, as I referenced earlier.
All right.
The interest expense, for 2023, we expect to be in the $160 million-$167 million range on a cash basis. That answer your question?
It does. Thank you, guys.
Thanks, Patrick.
Our next question will come from Matthew Mishan with KeyBanc. You may now go ahead.
Hey, good morning. Just a follow-up question on Nelson Labs. I believe when we, when you first came public, we were going through the process, you actually thought Nelson Labs was gonna be a double-digit growth business, and a kind of a driver for you guys. Where are you at now from like a longer term, like outlook on kind of where you think Nelson Labs will be from a growth perspective for you?
Yeah, we think over the long range, Matthew, we think this business will be high single digits, low double digits. If you remember, we talked about our company total gets about 3.5%-5% price across the whole company, depending on the business. Nelson's typically on the lower end of that, 3.5%-4%. Then on top of that, you get volume and mix that gets you high single digits, low double digits. We still feel confident about the long range, projections of that business.
When do you think you get back to that? What's holding it back at this point? It seems like some of your customers would be more normalized from a pushing product through like FDA at this point.
Yeah. We, you know, as you know, throughout 2022, we had, you know, if you kind of reflect on it, you had the PPE that was a very significant growth driver in 2021 and into 2022, which was very good mix, high margin, and the volumes. Then we had to reallocate our staffing to accommodate the customer needs. As that kind of played out, we saw other testing slowing down in the validation area. We've started to see that rebound a little bit and move in the right direction. I would say the validation volume has been the big one and the labor challenges that I think most labs are having challenges with. I feel really good about what Joel and the team are doing there on the cost and price management, the service side.
It, it really shows with what our customers are telling us on the customer sat work. Overall, you know, directionally, it's. We've got some pockets that are doing really outstanding. Overall, I think it's got a lot of momentum and, you know, just the work that we're doing with Sterigenics on validation, coordination and helping improve customer, turnaround times and really focusing on sterility assurance has been very helpful for both businesses.
All right. Thank you.
Our next question will come from Luke Sergott with Barclays. You may now go ahead.
Great. Thanks for the questions here. just on the... couple on the guide. Can you give me a sense, did you guys include the 0%-3% potential hit from the Cobalt-60? Is that baked in your guide?
No, it is not.
Okay. All right. That's fine. On the Atlanta litigation on the personal injury. When this starts, it's fair to assume that this will be a longer duration on the proceedings. Especially given the different phases of the proof of causation. Just trying to get a sense of timing here with this one that starts in 2023. How the others kind of roll in through 2024.
Yeah, I would Luke, the one case is 2023. October 2023 is the current scheduled timing. The future cases are gonna be an extended period of time, as you referenced. Those are in a different county, and there'll be two different phases, as I mentioned. The first one is general causation, and the second one is specific causation. That's gonna take a little bit more time to play out.
Okay. I mean,
24, 25, I would think.
Okay. All right. That's actually what I was looking for, because in the other ones it was a, you know, basically a one case per month, and this case...
Yeah
is probably safer to assume a lot longer than that. All right, that's fine.
Yeah. Yeah. Yeah.
Um-
Thanks for asking that question. The reason, Luke, is you're talking about two different jurisdictions.
Yep.
2 different counties involved here. There's only one case in one county. The other ones are in Cobb County.
Okay. One last one for me on the litigation side. Any other upcoming or outstanding court proceedings outside that are similar to the one that you guys just got ruled favorably on with the Atlanta facility? Anything else across any of the other facilities there?
No. What you're referencing there is a certificate of occupancy, where the court ruled in our favor there that we could continue to operate that facility. No, and all the facility enhancements are there and we've performed very well and all the EO facilities are up and running. We don't have anything else like that pending.
Okay, great. Thanks.
Thanks, Luke.
Our next question will come from Casey Woodring with JP Morgan. You may now go ahead.
Hi. Thanks for taking my questions. Just one on CapEx. You increased CapEx 80% in 2022 and now guiding to another roughly 10% increase in 2023. Can you just elaborate on how much of this year's CapEx will go to EO enhancements versus capacity expansion and cobalt development? Do you have any sense of when those NESHAP guidelines will come out this year and how we should be thinking about those?
Yeah. Thanks, Casey. At a high level, you know, we put out a guide $185 million-$215 million on CapEx. Approximately 70% of our CapEx is directed towards growth CapEx. That's consistent to what we saw last year. You know, we have significant opportunities with our customers. As you know, we work with our customers on a large portion of that capacity, making sure we have commitments for 40%, 50% before we put the shovels in the ground. We continue to move forward with that. On the EO enhancements, it'll be approximately $32 million-$34 million, somewhere in that neighborhood in 2023.
Okay. Gotcha. Then one on Russia too. I think there was some noise over the weekend about several subsidiaries of Rosatom being added to the EU sanction list. Overall, how have your conversations been with your Russian suppliers and the U.S. government around the likelihood of sanctions this year? As a follow-up, you know, if the worst case plays out and there is a headwind in 2023, just how would that translate to 2024, you know, if you're running off your existing supply this year and can't procure in Russia? Thank you.
Yep. Casey, on the most current sanctions, our team has done a preliminary review of that. We do not see any impact on our ability to continue to supply cobalt. The team's done a phenomenal job working with that and with those challenges as well as the regulators around the world, maneuvering through that. We see that continuing. If there was an impact, as I stated in my prepared remarks, it would be 0%-3% of total Sotera Health revenue impact in 2023. At this point in time, we're not giving any guidance. Sitting here February 28th, in 2023, we're not giving any forward-looking guidance on 2024 at this point in time.
Our next question will come from Dave Windley with Jefferies. You may now go ahead.
Hi. Good morning. Thanks for taking my question. I noticed, Michael, in the deck that there's some mention of a push in Nelson Labs on the pharma side of the customer base, and I wondered if you could comment on that around whether, you know, that's part of the CapEx and is it also part of the staffing ahead, or is the staffing just for more the normal mix of business that you've seen over prior years?
Thanks, David. Hope you're doing well. Pharma's been a strategic priority for that business as well as the whole company for the last several years. As you may recall, you know, it's a pretty significant sand that we play in on the Nelson side. Yes, a portion of that CapEx, a large portion of that CapEx for Nelson Labs is targeted towards pharma. We're seeing nice growth in several pockets on the pharma side. From a staffing perspective, I would say most of that is med device, but there is some, when I look at, you know, particularly our Louvain business that has the largest pharma presence, you know, the headcount there is up significantly over the past two to three years, supported by the growth of our customer base.
Yes, we continue to make investments in pharma and Nelson.
Okay. That's interesting. For the other Michael, the tax rate and lack of deductibility of interest expense, your description there, I appreciate, first of all, but it also seemed to include or describe an element of catch-up to that. Maybe you mentioned, I think, carryover deductibility or something like that.
Yeah.
I wanted to ask the normalized level of that. Is there a point at which you get past some kind of anomalies and get to a different tax rate than what applies to 23?
Well, I think in the next couple years, it's gonna be in this range. Then as we pay, obviously, as we pay down interest, you know, debt and interest expense goes down, that'll start to affect the tax rate too because, you know, there'll be less interest expense that we have to put a valuation on because the deductibility limit, you know, will start to go down. The limit won't go down, but, you know, in terms of our actual interest expense will go down.
Got it. Okay. Then, Michael, in terms of, I mean, you have at times, made some small bolt-on acquisitions. Capital, you do list growth, as your first item in your capital kind of priority strategy. Is it right to think that that's probably the organic CapEx investments that you're making, and then beyond that, you're paying down debt or are acquisitions still part of the growth capital deployment, menu currently?
Yep. On the CapEx that's projected and the guide of $185-$215, that is all around organic growth. There's no M&A assumed in our guidance on revenue or capital deployment. It is still part of our list, as you say. It's probably in the right place that you reference it. The first would be organic growth. The second would be de-leveraging. The third would be strategic M&A. I could tell you, we continue to build the pipeline around that area and are tracking that market in several opportunities. At this point, we have nothing to report, and there's been nothing built into the guide for 2023.
Got it. That's good for me. Thank you.
Thank you.
Again, if you have a question, please press star then one. Our next question will come from Mike Polark with Wolfe Research. You may now go ahead.
Hi, good morning. Thank you for all the detail. very short-term focused one and then a bigger picture follow-up. On the first quarter with the moving pieces in Nordion, the low revenue expected due to harvest timing, can you just help with an enterprise adjusted EBITDA target for the first quarter to make sure models are aligned, you know, versus, say, the prior year of $115 million, you know, flat with that, down a little bit, up a little bit? Any color there would be helpful.
Yeah. I would just tell you that as we mentioned, in the first half, most of the Nordion revenue is gonna fall in the second quarter. With that, you can assume very little Nordion revenue in the first quarter. Other than that, you know, we're not gonna give the specific quarterly guidance. We just wanted to make sure, Mike, that you guys had an understanding and appreciation for the dynamics that you've seen with the Nordion lumpiness. You know, in particular, the first quarter was gonna be a slow start. As we've mentioned, 75%-80% approximately of the operating segment income will be in the second half.
We just wanna make sure that as you guys think through this, that you don't get surprised on where the first half or first quarter performance comes in based on that.
Understood. The follow-up is on Sterigenics. Can you remind us, you know, kinda your position in the bioprocess disposable space? You know, that has been, I think, a tailwind, both due to structural and COVID-era reasons over the last few years. It seems to be maybe, moderating a little bit as we move beyond COVID as a, as a world. You know, what is your exposure there? Are you seeing a notable, kind of change in volumes and trend and, any other color as you look forward and, bioprocess as a, as a catalyst for Sterigenics?
Yep. As we've stated in the past, we do participate in that market. I think our competitors have grown faster than we have over the last couple of years, and I think that's a big driver. That was our suspicion, because I think they're in a better, market share position with bioprocessing than we are. Now with bioprocessing slowing down a little bit, our growth probably isn't as impacted as much, right? That's the good side of not having as much market share. That continues to be a strategic, area for us. We continue to see opportunities for growth there. We're just in a lower share position relative to others in the marketplace. Over time, we see that change. Right now, we're probably getting a little bit benefit of that, Mike.
That isn't necessarily the way I'd like to get it, but that's how it's playing out.
Understood. Thank you so much.
Thank you.
It appears there are no further questions. This concludes our question and answer session. I'd like to turn the conference back over to Michael Petras for any closing remarks.
Great. Thank you, Andrew. Thank you, everybody, for participating today. You know, we're very proud of what we accomplished in 2022, you know, a very solid year. Lots of dynamics in the marketplace, with labor and inflation and just geopolitical, but I'm really proud of what the team's accomplished. Also, our ability to manage through the litigation situation. We're really optimistic about 2023 and our growth prospects and continue to capitalize on these strong end markets that we play in. The stickiness we have with our customer base, the long-term contracts, in the high customer satisfaction ratings that we're seeing from our customers, which have been consistent throughout many years. We're really optimistic about 2023, and we thank you for your continued support. Have a great day. Thank you. Bye-bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.