Sotera Health Company - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Good morning, and welcome to the Sotera Health second quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your touchtone phone. To withdraw from the question queue, please press Star, then 2. 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.
Jason Peterson (VP)
Good morning. Thank you. Welcome to Sotera Health's second quarter 2023 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, and a replay will be available in the investor section of the Sotera Health website. On the call with me today are Chairman and Chief Executive Officer, Michael Petras, and Chief Financial Officer, John 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 in 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 to 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 after the call, please 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.
Michael Petras (Chairman and CEO)
Good morning, everyone, and thank you for joining Sotera Health's second quarter 2023 earnings call. I would like to take a moment to introduce our newly appointed Chief Financial Officer, John Lyons. John comes to us from Owens Corning, a $10 billion global building and construction materials leader, where he served in various executive roles. Prior to John's time with Owens Corning, he served in several senior leadership positions at Cardinal Health after beginning his career in public accounting. John brings a wealth of financial acumen, as well as healthcare industry experience to Sotera Health, and we're excited to have him on board. I would also like to take a moment to thank Michael Beale for his contributions as the interim CFO for Sotera Health. Michael, thank you for your commitment and support over the past year in leading the company's finance organization.
As previously communicated, on June 30th, the settlement funds of approximately $408 million related to the Illinois ethylene oxide claims were released from escrow, and on July 6th, the claims against Sterigenics of the 879 claimants who opted into the settlement were dismissed with prejudice. Although we continue to believe these claims were without merit, we're pleased this settlement is finalized 1 month ahead of schedule, thanks to the efforts of our legal team and with a 99.7% participation rate. In a moment, John will review our second quarter 2023 results in more detail. First, I would like to review a few items from the quarter.
Total company revenues declined 4.3%, and Adjusted EBITDA declined 5.6% compared to the second quarter of 2022, driven primarily by the expected timing of Nordion's Cobalt-60 harvest schedules. We delivered Adjusted EPS of $0.21 for the quarter, which is a $0.06 decrease from the same period last year. Sterigenics, our largest reporting segment, delivered 5.6% top-line growth for the second quarter of 2023. Sterigenics continues to service our customers even though the global economic outlook is challenging, with lingering customer inventory and supply chain challenges and inflation. Although Sterigenics volumes are lighter than planned, the Sterigenics team is prudently managing costs, which has contributed to a 310 basis point segment income margin improvement compared to the first quarter of this year.
During the quarter, the team completed 2 expansion projects, and they continued to make progress on our EO facility enhancements in North America. These industry-leading enhancements demonstrate our commitment to ensure 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, experienced a 37% year-over-year revenue decline due to the timing of Cobalt-60 harvest schedules. We have good visibility into the timing of Nordion's revenue, as it's tied to the harvest schedules from our Cobalt-60 suppliers. As previously conveyed, Nordion's 2023 revenue will be particularly lumpy, as approximately 75% of the revenue is expected to occur in the second half of the year, with approximately 50% of the year's revenue occurring in the fourth quarter. Nordion does continue to source a portion of its Cobalt-60 supply from Russia.
At the start of the year, we stated that a total supply disruption from Russia could potentially result in a 0-3% impact on total 2023 Sotera Health revenues. At this juncture in the year, we are confident that there is 0 risk to Russian supply impacting total Sotera Health full year 2023 revenues. The Cobalt-60 supply chain is a complex one, and I'm proud of the continued efforts by our Nordion team to ensure availability. 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 a great example of how we play a critical role in safeguarding global health. Nelson Labs, our lab testing and advisory service business, experienced sequential growth and expanded margins of approximately 680 basis points over the first quarter of this year.
Revenues in the second quarter of 2023 were 2.8% below the prior year quarter, which had experienced record revenues. Volumes continue to be challenging in our lab business. In light of the softer-than-expected volumes, the Nelson Labs team is actively managing costs while keeping focused on quality and customer satisfaction. Due to the volume softness at Sterigenics and Nelson Labs that we expect to continue, we are adjusting our full year 2023 outlook. We now expect full year net revenue growth to be in the range of approximately 3%-5% and full year Adjusted EBITDA growth to be in the range of approximately 3%-6%. We are confident that we've taken into account weaker volumes and other market dynamics reflected in this adjusted range.
We will continue to concentrate on executing our strategy to best serve our customers around the globe. Prior to John walking 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 government-mandated sterilization and validation testing for medical and pharmaceutical products used each and every day. We supply Cobalt-60 for radiation oncology professionals to help treat brain cancer. In addition, we provide critical technical and regulatory expertise to solve our customers' product development and sterility needs. Our indispensable services help to protect millions of patients and healthcare providers around the world.
One such example of how we safeguard global health is via our team at Nelson Labs year, which performed extractables and leachables studies for a single-use nasal spray used in life-saving rescue treatment of patients experiencing an opioid overdose. In the spring of 2023, the product received FDA approval for the US market. The societal impact of this FDA approval is significant, as overdoses caused by the use of synthetic opioid drugs, including fentanyl, unfortunately, remain a major and chronic problem in our society. Another example of our teams fulfilling our mission is highlighted through a video link located on the Safeguarding Global Health slide in our second quarter 2023 earnings presentation, released this morning and available on our investor relations website.
I encourage you to watch this video to learn about how Sterigenics and Nelson Labs work in conjunction to ensure critical sterilization and validation testing are performed for the successful delivery of vaccines around the world. Now, John will walk us through the financials.
John Lyons (SVP and CFO)
Thank you, Michael. I want to begin by saying how excited I am to join Sotera Health, which holds such a unique position in the global healthcare supply chain. I look forward to working with our talented team and also look forward to meeting many of you in the near future. I will begin by covering the second 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. I will conclude with some additional comments on our updated 2023 outlook. On a consolidated total company basis, second quarter revenues declined by 4.3% as compared to the same period last year, to $255 million.
This equates to a 4.1% decline on a constant currency basis, as foreign exchange headwinds are moderating for the company. As mentioned on the first quarter call, we expect continued moderation of foreign exchange headwinds and expect foreign currency to become a tailwind during the back half of the year. Adjusted EBITDA declined by 5.6% compared to the second quarter of 2022, to $128 million. Adjusted EBITDA margins were 50.3%, representing a 73 basis point decline from 2Q 2022 levels. The decline in margins is driven by the lower volumes from Nordion and Nelson Labs experienced versus Q2 2022. Importantly, EBITDA margins were up sequentially in Q2 on the improvement in Sterigenics and Nelson that Michael referenced earlier, as well as higher volumes from Nordion.
Adjusted EPS was $0.21, a decrease of $0.06 from second quarter of 2022, the result of lower EBITDA and higher interest expense versus the prior year. Net income for Q2 2023 was $24 million, or $0.08 per diluted share, compared to net income of $30 million, or $0.11 per diluted share in Q2 2022. Our reported interest expense for the second quarter of 2023 was $31 million, which is an increase of approximately $17 million versus the same period last year. The increase is driven by higher rates on our variable rate debt, as well as incremental interest on our $500 million term loan that closed in Q1 of this year. Let's take a look at our segment performance.
For the quarter, Sterigenics delivered 5.6% revenue growth to $167 million, as compared to the second quarter of last year. Revenue growth drivers for Q2 2023 included favorable pricing of 6.7% and favorable changes in foreign exchange rates of almost 1%, partially offset by unfavorable volume and mix of 1.7%. Compared to the prior year quarter, segment income for Q2 2023 increased 7.5% to $91 million, and segment income margins increased by 100 basis points to 54.9%, driven by favorable pricing, partially offset by unfavorable volume and mix and inflation. Nordion second quarter revenue declined by approximately 37% to $32 million compared to Q2 2022, which we expected based on the timing of Cobalt-60 harvest schedules.
Nordion's revenue decline was driven by unfavorable impact from volume and mix of nearly 39% and changes in foreign currency exchange rates of almost 4%, partially offset by a favorable impact from pricing of 5.7%. Segment income declined 40.7% to approximately $18 million, and segment income margin decreased 380 basis points to 55.6% compared to the same period last year. Segment income and segment margin changes versus second quarter 2022 were due to the unfavorable volume and mix, offset by favorable pricing. For Nelson Labs, second quarter 2023 revenue declined by 2.8% to $57 million compared to the second quarter of 2022.
Revenue was impacted by unfavorable volume and mix of 6.9%, partially offset by a 3.6% benefit from pricing and favorable changes in foreign currency of almost 1%. Nelson Labs' second quarter 2023 segment income decreased by 8.6% to $19 million, and segment income margins contracted by over 200 basis points to 33.9% versus second quarter 2022. This decline was due to unfavorable volume and mix, as well as inflation, partially offset by favorable pricing. I will now turn to cash generation, capital deployment, and net leverage. As Michael mentioned earlier, on June 30, 2023, the settlement funds of approximately $408 million related to the Illinois ethylene oxide claims were released from escrow. This resulted in net cash used in operating activities of approximately $303 million.
When adjusting for the $408 million outflow, cash provided by operating activities was a source of over $100 million for the first 6 months of 2023, which was in line with the same period last year. As of June 30, 2023, we had approximately $635 million of available liquidity, which includes $263 million in unrestricted cash and $372 million of available capacity on a revolving line of credit. As expected, our net leverage ratio at the end of Q2 2023 was 4.2x. This was an increase from the year-end 2022 level of 3.2x due to the new $500 million term loan issued in connection with the ethylene oxide settlement and the associated $408 million payment.
Our CapEx for the second quarter 2023 totaled $53 million. Growth CapEx and facility enhancements drove the increased investment versus Q2 of last year. Now turning to guidance. We are adjusting the full year 2023 outlook we provided in February. We now expect total revenues to be in the range of $1.035 billion-$1.055 billion, from our previous range of $1.055 billion-$1.09 billion, representing annual growth rate of approximately 3%-5%. From a quarterly shape perspective, as Michael mentioned, we anticipate that approximately half of Nordion's full year revenue will co-occur in the fourth quarter. In addition, we expect Sterigenics volumes to slightly increase throughout the remainder of the year and Nelson Labs revenue to remain relatively flat sequentially.
For the full year, we expect Adjusted EBITDA to be in the range of $520 million-$535 million, from a range of $530 million-$550 million, representing an annual growth rate of approximately 3%-6%. The tax rate is now expected to be in the range of 30%-32% from our previous range of 30%-33%. Weighted average diluted shares remain in the 283 million-285 million range. Adjusted EPS remains in the range of $0.78-$0.86.
We now expect capital expenditures to be in the range of $200 million-$215 million at the upper end of the previous range of $185 million-$215 million, driven by, primarily by increased capitalized interest from higher borrowing costs. Lastly, we expect net leverage to finish the year at or below 4 times. Now I'll turn the call back to Michael.
Michael Petras (Chairman and CEO)
Thank you, John. As we move to Q&A, I want to reemphasize that Sotera Health is focusing on executing our strategy and is dedicated to our mission of safeguarding global health. At this point, operator, let's open the call up for question and answer.
Operator (participant)
Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then one on 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. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. At this time, we will pause momentarily to assemble our roster. The first question will be from Patrick Donnelly with Citi. Please go ahead.
Speaker 10
Hi, you have Brendan on for Patrick. Thank you so much for all the clarity with the revised guidance. I actually wanted to ask on the EO settlement in Illinois, with the three claimants that decided to opt out, any idea what the timeline is moving forward?
Michael Petras (Chairman and CEO)
Hi, good morning, Brendan, it's Michael. No, we don't. We're waiting on the courts to tell us the timelines and scheduling plans. You know, just so it's clear for you and others, we had the option to walk away on the deal, we went ahead and reviewed the claimants and all the fact sheet around that, and we feel very confident about moving forward with the settlement with those three opt-outs.
Speaker 10
Great. Thank you. Second question as a follow-up. How should we think of pricing in the second half of the year, given the reduced volumes?
Michael Petras (Chairman and CEO)
You know, we, we've said all along, this business is about 3.5%-5% price. I, I think you, you ought to feel confident that it'll be in that range looking forward.
Speaker 10
Great. Thank you so much.
Michael Petras (Chairman and CEO)
Thank you.
Operator (participant)
The next question will be from Sean Dodge from RBC Capital. Please go ahead.
Sean Dodge (Equity Research Analyst)
Yeah, thanks. Good morning, and congratulations, Sean. Glad to have you here. Michael, the sequential improvement in Sterigenics margins, can you just walk us through in a little bit more detail what drove that? As we think about the expectation that volumes there will be a little bit softer than maybe initially contemplated, how much adjustment or maybe how much more adjustment can you make to that cost structure in the short term to try and rightsize for that?
Michael Petras (Chairman and CEO)
Yeah, good morning, Sean. You know, we'll, we'll continue to be efficient as best we can in our operations as we look across all three businesses as the volume softening. You know, we've, we've had some challenges, as you've probably heard, seen and heard in other areas, that inventory destocking and inventory levels with some of our customers. We feel pretty good about the, the margin levels and consistent performance we get out of Sterigenics. There isn't huge flexibility on that cost structure. There is some labor aspect within those operations, but they're not large operations. You know, if you take a given facility, 30, 40 people in the, in a given facility, it's not like there's 400 or 500 per facility.
There is some limitations on that, but the team has done a really nice job on operating leverage, and we continue to get price in that business. We feel good about the margin levels within Sterigenics.
Sean Dodge (Equity Research Analyst)
Okay, great. Then on the EO emissions, the regulations there, any more updates or thoughts on the proposed rule there from the EPA and what the final rule could look like? I guess, have you been in communication with the EPA since the proposed rules were released?
Michael Petras (Chairman and CEO)
We submitted comments, and I think there was probably in total, like, something like 40,000 comments across the industry. Our expectation is the EPA, they're working on their consent order, so we expect them to have some type of adoption of a NESHAP by March of 2024. That's the current timeline that we're expecting to see final rules. We've had conversations with the regulators through different trade groups. They're aware of the inputs from us as well as many others.
Sean Dodge (Equity Research Analyst)
Okay, great. Thanks again.
Michael Petras (Chairman and CEO)
Thank you, Sean.
Operator (participant)
The next question is from David Windley from Jefferies. Please go ahead.
David Windley (Managing Director)
Hi, good morning. Thanks for taking my question. Michael, we've, we've talked in the past about, kind of the volumes that the industry, the kind of broader healthcare industry, is seeing on the med tech side and, and, you know, amongst med tech hospitals, et cetera, there's been talk about, you know, improvements in those volumes. And, and you've commented about, you know, kind of the disconnect between that and what you are seeing. I wondered if you could, you know, could comment on that, what indicators you're seeing in, you know, kind of ahead of you, that, that make you think that the softness that you're experiencing is going to continue? And, and perhaps, you know, is, is pricing... You know, are, are customers showing any sensitivity to the price that you're taking, and is that affecting volumes at all? Thanks.
Michael Petras (Chairman and CEO)
Yep. Thank you, David. Hospital volumes have been rebounding and returning to pre-pandemic levels in many, many facets around the world. We're seeing, we're seeing that. We do see inventory pressure at our customers. We see that, as I mentioned last quarter, we're seeing it continue into this quarter. We'll see that, probably moving forward into the next quarter as well. We've been thoughtful on how we look at our outlook on that side. That doesn't mean we're not seeing improvements in cardiac devices or orthopedic. It's just when you look at it in totality, there's categories that are down, particularly when you look at PP&E or you look at surgical kits and areas like that, where there was lots of inventory buildup because people were scrambling to get it during the COVID time period.
I don't want you to walk away thinking that, you know, we're seeing it across the board. We've got significant customer growth and many, many customers in the categories I just referenced. As far as price, listen, that's always a conversation we have with customers. There's somebody on the other end of that conversation. We feel confident about our ability to continue to get price because of the great service we bring and the criticality of our services. That's always a delicate conversation. You know, Sterigenics in the quarter continued to have a nice, nice quarter on that side.
The volume and mix was just a little softer, but we factored it into our thinking going forward, and, and we think, as I mentioned just previously when asked, you know, the company in total will get 3.5%-5% price, depending on which business you're talking about in our outlook.
Casey Woodring (VP)
... Right. Okay, great. Then, maybe relatedly, but, but bigger picture on your guidance. Your margin implication in the new guidance is not a lot, but slightly higher, in fact, than, than where it was in the past. You're kind of taking cost out faster than, than the revenue decline. Could you talk in a little bit more detail about the areas where you're able to do that, without, you know, without further implicating or further, you know, compromising revenue?
Michael Petras (Chairman and CEO)
Yeah. David, we don't, you know, we we're gonna continue to do the right things around cost and make sure there's a balance here taking care of our customers, but this is not a cost play. This business, in total, as we've talked about many times, is a high single-digit organic grower. We feel confident in our ability to return to those levels when we get through this abnormal time period, if you will, with some of the destocking and bioprocessing challenges that are out there. I mean, bioprocessing isn't a huge segment for us, but it does impact us as well, particularly in the Sterigenics side and a little bit in Nelson. When we look at our margin rates, you know, we feel pretty confident that they're gonna return to historical levels, as they did in the quarter that you saw here.
The first quarter was abnormally low, as we, we messaged in the past, that's always our lowest quarter of the year. I don't want you to think this is a big, machete, you know, rip a bunch of cost out play. That's not what this business is about. We feel confident in our ability to continue to grow this business in high single digits and work through this current cycle we're in. I, I just wanna be clear with that, David. We'll continue to drive efficiency. You know, Mike and Joe, in particular, are working operating efficiencies in our team. As you may recall, late last year, we built up, we built up, quite a bit of, of talent within the Nelson side to address potential demand that would come because we're really focused on service.
Since that demand has not come through as strongly as we'd like, we've appropriately let some of those, those headcounts, if you will, tread down on a natural level. I don't want you to think that we're getting super aggressive and just taking a bunch of costs out.
Casey Woodring (VP)
Yeah, got it. That's very helpful. Thanks for the additional detail.
Michael Petras (Chairman and CEO)
Yep, great. Thanks, David.
Operator (participant)
The next question is from Luke Sergott from Barclays. Please go ahead.
Luke Sergott (Director)
Great, morning, thanks. Just to follow up on, Windley's question there. On the, on the volume side, you, you mentioned a little bit of bioprocessing. Can you kind of break out where the weakness was, med device versus the pharma, non-devices business that you guys have?
Michael Petras (Chairman and CEO)
I would just say, Luke, on bioprocessing, we see that in the Sterigenics business mostly. It's not a huge portion, but it's a good mix for the company. You know, that industry, as you've seen with some of our customers, have publicly gone forth in the last weeks. You know, they continue to struggle with volume. That, I would tell you, that's where we're seeing it. You know, we, we also have some food and cosmetics within the Sterigenics side that's been a little softer in the current cycle, and then also med, med tech. On the, on the lab side, it's, it's med device and some bioprocessing and some of the pharma side as well, biopharma in particular.
Luke Sergott (Director)
Okay, any, any quantification on, on how the bioprocessing volumes are down? Just, just to frame it, and then I have a follow-up on, like, your, your outlook.
Michael Petras (Chairman and CEO)
Yeah, they're down significant double digits.
Luke Sergott (Director)
That's fine.
Michael Petras (Chairman and CEO)
Yeah.
Luke Sergott (Director)
Cool. Then.
Michael Petras (Chairman and CEO)
I'd say in excess of probably 30% or so.
Luke Sergott (Director)
Okay, that's helpful. Like, on, on, on the recovery in the, in the back half, you talked about steri volumes improving sequentially. Can you just give us a sense of how the quarter paced out, what your exit rates were? Anything that gives you that confidence where you can say, you know, things are gonna start getting better and step up.
Michael Petras (Chairman and CEO)
Yeah, you know, there is a cyclicality in this business a little bit, as you saw, first quarter to second quarter. When we look at the third quarter, like, I'll take a Sterigenics. We look at the third quarter, we'll see a slight improvement, slight, if you will, versus second quarter, and then slight improvement again in the fourth quarter. On the Nelson side, you know, obviously, on the Nordion side, we gave prepared remarks on that. 75% of the revenue will be in the second half, with 50% of the total year's revenue being in the fourth quarter. You could kind of figure how that, it's a big hockey stick, which we knew all year long.
In the Nelson side, you know, you're not gonna see significant growth when you look at it, the back half of the year from the levels that we're at here in the second quarter. Third quarter will be a little lighter than the fourth quarter, when you think about it that way.
Luke Sergott (Director)
That's helpful. Thank you.
Operator (participant)
The next question is from Casey Woodring, from J.P. Morgan. Please go ahead.
Casey Woodring (VP)
Great, thank you for taking my questions, welcome, John. Yeah, as a follow-up to the Nelson point, it looks like Nelson revenue came in in line with expectations today. Just wondering if the new guide is contemplating a slower recovery in Nelson in the back half than maybe what you had originally thought, you know, guiding the flat revenue here sequentially, or, you know, was the revised guidance here mainly lower Sterigenics volume? Then, you know, just what are you hearing from customers in Nelson? Any sort of order trend commentary that you can give so far through 3Q?
Michael Petras (Chairman and CEO)
Yeah, Casey, thank you. I would say on the Nelson, both Nelson and Sterigenics have been, have been factored in, the softness have been factored into the guide. Consists with the comments I just made a little bit ago, you'll see third quarter a little lighter than you did second, and you'll see fourth quarter more in line with kind of second. You'll, you'll have a relatively flat, if you will, second half of the year versus where we finished second quarter. As far as what we hear from customers, you know, one of the things we really are obsessed with is quality and service. Making sure our Net Promoter Score, we continue to see improvements in, in, in stability in that area, which we're proud of.
Hit or miss, we've got some customers that have not made some new product testing a high priority for them, so that does have an impact. We know MDR has slowed down a little bit in Europe, which was having a big impact. You know, we've done a really nice job in our biopharma area over the last couple years, and that's a little choppier than we'd like. Overall, we're really, you know, confident on, on where the Nelson business goes long term. You also saw the step improvement in margin in the second quarter that, you know, we told you to expect, being the first quarter is always the lowest. When you look at where those margin levels, you know, are at, that's pretty consistent with what we see here near term.
In the midterm, we expect it to get to, mid to longer term, we expect it to be in the mid thirties, as we've told you in the past.
Casey Woodring (VP)
Got it. Just a couple quick follow-ups. CapEx expectations are ticking up a bit on the year. Curious if that has anything to do with, you know, further facility upgrades following the EPA proposal, or if it's something else. Just, you know, on leverage, how should we think about the cadence of debt paydown over the next few quarters? You know, particularly important here, given the rising interest rate environment. You know, what should we be modeling for, for interest expense for the back half of the year? Thank you.
John Lyons (SVP and CFO)
Yeah, let me let me unpack a few of those. I think, taking in turn, I think your first question was around, around CapEx. You know, we, you know, we've got about $100 million we've spent through the first half of the year. Really, all our programs are on, on track. You know, we're out in front, I think, of the EPA regulations a little bit as we've been going on our facility enhancements. There's no real change on what we've been doing there. We're executing our plans and, and really driving that improvement across our network.
The biggest thing that changed is we have this rising rate environment, and some pretty, you know, extensive CapEx programs. We have an uptick in capitalized interest that's pushing us into the top, second, top end of the range. To give you a flavor, it's a little north of $10 million in total capitalized interest for the company for this year. Your, your, I'll take your last question. Failing to remember the second one right off the top of my head. Around debt paydown, you know, that. Or actually, that was your second question, sorry. You know, we're evaluating a little bit of debt paydown. You know, we feel really good.
The team did a nice job getting the term loan in place and improving our liquidity position, so we feel really good about the liquidity position that we have. We're considering debt paydown as we look at the, the back half of the year and over the next year, but no immediate plans just yet. Then just lastly, as you, as you think about interest expense, we do expect an uptick in interest expense in the second half. There was about $60 million of interest expense in the first half.
We'd expect about a 40% increase versus that number in the second half, and it, it's really driven by a couple of factors, most notably the increasing rate environment we are in, and we have some, we have some hedges that were advantageous that are rolling on, a little more advantageous than the, than the hedges that we have remaining. Then, we have the annual or the, you know, a full, a full 6 months of the, the term loan that came in at the beginning of February.
Casey Woodring (VP)
Thank you.
Operator (participant)
The next question is from Matthew Mishan from KeyBanc Capital Markets. Please go ahead.
Matthew Mishan (Director and Equity Reseach Analyst)
Hey, good morning. You guys said you completed 2 expansion projects in, in, in the quarter. Does the, does the softer volume environment impact your ability to kind of fill those over the near term?
Michael Petras (Chairman and CEO)
I'm sorry, Matt, I didn't hear that last part. You trailed off.
Matthew Mishan (Director and Equity Reseach Analyst)
Does the softer demand environment impact your ability to kind of fill that extra capacity over the near term?
Michael Petras (Chairman and CEO)
Over the near term, no. Actually, one of those is, is actually doing very, very well. I would say, I would say not. Mm-mm.
Matthew Mishan (Director and Equity Reseach Analyst)
Okay. Then, Michael, I think Nelson Labs has been a recurring, negative theme for, for almost a couple of years now. Just how much time do you personally plan to spend on Nelson Labs in the second half, digging in on that business?
Michael Petras (Chairman and CEO)
I dig in that business very frequently, and I, I would just make sure we understand that. One of the things we've talked about in the past, that business has been a consistent performer pre-pandemic. It was probably the mid-30s in margin rates. We got a big bolus of volume that came in on PP&E that was great mix, that we really did a great job digesting. It took our margin rates up significantly higher than our expectations. We were able to execute against that, and coming out of that, it's been a challenging environment with labor and volume. I'd say overall, you know, I spend quite a bit of time there, but Joe and the team, you know, are doing a really good job. You know, lots of good work in, in growing our pharma business and our presence there, continue to drive customer satisfaction.
Really overall, the thought leadership they bring across the industry and the company has been good. Not the volumes we'd like, though, so we've got to continue to work on that. It's, it's something that we all spend time on and making sure we're doing the best we can and, and taking care of our customers in that segment.
Matthew Mishan (Director and Equity Reseach Analyst)
Thank you.
Operator (participant)
Again, if you have a question, please press star then one. The next question is from Michael Polark from Wolfe Research. Please go ahead.
Michael Polark (Senior Equity Research Analyst)
Good morning. Thank you for taking the question. Another twist on the guidance update. You know, Michael, to your credit, earlier this year, you were calling out potential destocking amongst device customers. You were saying that ahead of your close peer, who is now also saying it. You know, I look at the quarter, and you missed the street a little bit. You hit us. Sterigenics was, again, a little light versus the street, in line with us. If you hadn't told me any adjustment to the full year, I would have, I think, with a straight face, been able to pencil out the back half as it previously was, so kind of getting back to your old range. You know, look, thematically, you seem to have anticipated some of these challenges.
I'm just wondering what changed. You know, is it just thematically, you had it, numerically, it was softer, and that's, that's the answer? You know, and maybe bring in John here. John, just, just curious if there's kind of a change in guidance philosophy, now that you're in the seat? Any color on this front would be great.
Michael Petras (Chairman and CEO)
Yeah. You know, thematically, you know, at the time when we talked last time, Mike, we saw some concerns around the softness, but you don't know exactly where. As we've talked about in the past, we don't know exactly where our customers' inventory levels are. You know, we've got thousands of customers on the Sterigenics side, and how that's gonna play out, it's a really mixed bag. As I mentioned earlier in this call, we've got some categories that are doing really, really well, and then there's some others that aren't, and just the impact of that. I think it's to your point, thematically, we've seen it. Numerically, you know, we wanted to make sure we're being thoughtful as we give guide the rest of the year based on what we're seeing.
We are still very bullish on this business overall and our ability to continue to deliver significant growth year in, year out. It's just right now, we wanna make sure we're being responsible in messaging to you. John can give you a reaction to, you know, philosophy on guidance, but-.
John Lyons (SVP and CFO)
Yeah. My, my initial reaction is that Michael and I are very much aligned, on our approach to this. You know, we wanna tell you what we see in a timely manner. We wanna look down the field and make sure we're telling you what we see and hitting the numbers that we put out there. It's very important to us, and we'll continue to work at it.
Michael Polark (Senior Equity Research Analyst)
Helpful. For the follow-up, just, can you refresh us on just Sterigenics capacity expansion projects? How many are in process, and over the next, say, 18 months, how many would you expect to start going live and filling up?
Michael Petras (Chairman and CEO)
Yeah. We've got 4 of them still in process, and those will start rolling out 1 late this year and then a couple into next year and the following year.
Michael Polark (Senior Equity Research Analyst)
Thank you so much.
Michael Petras (Chairman and CEO)
Thank you.
Operator (participant)
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Petras for any closing remarks.
Michael Petras (Chairman and CEO)
Great. Thank you, Chad. Thank you, everybody, for joining us this morning. I appreciate your time and support ongoing, and have a great day. Thank you. Bye-bye.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.