Q4 2020 Sotera Health Co Earnings Call
Welcome to the city pair of health fourth quarter and full year 2020 earnings call.
The company would like me to read the following forward looking statement on their behalf.
Today, So Terry of health will be discussing its fourth quarter and year end 2000, and 'twenty results along with its 2021 outlook.
You can find today's press release and accompanying supplemental slides on the IR section of the company's website, that's the Terra health dotcom.
This webcast is being recorded and a replay will be available on the IR section of this of the Terra health website for at least one year.
Michael Pietrus, Chairman and Chief Executive Officer, and Scott left the Chief Financial Officer will be making comments on today's call followed by a question and answer period.
During the call some of the company's statements may be considered forward looking statements.
The matters addressed and these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied.
Please refer to the company's SEC filings and the forward looking statements slide at the beginning of September Health earnings presentation for a description of these risks and uncertainties.
So Terry of Health 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, and adjusted EPS and net leverage ratio.
A reconciliation of non-GAAP to GAAP measures for all relevant periods can be found and the schedules attached to flow Terra health earnings press release, and and the earnings presentation.
During the Q&A portion of today's call. The company asks that you. Please try and limit yourself to one question and one follow up to give everyone an opportunity to ask questions.
I will now turn the call over to chairman and CEO, Michael teach us.
Thank you operator.
Thank you everyone and thank you for joining us since the Terra and health first earnings calls of public company.
We're very excited to kick off this new chapter in our history.
I'd like to start by thanking all of our global team members who've been such an important part of building the secure health debt representing today are approximately 2900 associates live and breathe the company's mission of safeguard and global health and it's the tireless dedication that's allowed us to continue to serve our customers and the health care sector.
And that's uniquely challenging environment.
Considering that we recently went public there might be some of the investment community for still familiarizing themselves with our story and value proposition.
With that in mind I wanted to open the call with a quick recap of who we are.
So Terra health is a leading global provider of mission critical and and sterilization solutions.
And lab testing and advisory services for the health care industry.
We serve the market through our three best in class business units stair, Genex Nordion and Nelson labs.
<unk> and the Oregon continue to provide comprehensive sterilization services to the health care industry.
Together share Genex and northern area of the only vertically integrated global gamma sterilization provider and the sterilization industry.
Share Gen X Global network officer customers of complete range of outsourced.
Terminal sterilization services, primarily using the three major sterilization technologies gamma radiation.
Ethylene oxide processing and electron beam radiation.
The Oregon is a leading global provider of cobalt 60, and gamma radiators, which are key components to the gamma sterilization process.
Nelson Labs provides our customers for mission critical lab testing and advisory services, which assess the product quality effectiveness patient safety, and and and sterility of medical device and pharmaceutical products.
With the combined tenure across our business of nearly 200 years and your <unk>.
Industry recognized the scientific and technological expertise, we help to ensure the safety of millions of patients and health care practitioners around the world every year with that a little bit of background lets review the Companys financial results and some recent highlights.
It's only been a few months since our IPO in November when we issued 19% of our outstanding share sort of public and generated $1 2 billion of proceeds for the vast majority of these proceeds were used to pay down debt.
I am very pleased to be reporting strong results today, we delivered solid growth in 2020 for the fourth quarter, we reported revenue growth of 12% adjusted EBITDA growth of 20% and adjusted EPS of nine <unk>.
And for the full year 2020, we reported revenue growth of 5% adjusted EBITDA growth of 11% and adjusted EPS of <unk> 42 cents.
Our fourth quarter performance capped the year, which really helps us solidify how important our services are to the global health care sector.
Throughout the year, our business is focused on meeting the needs of customers health care workers and patients.
We performed critical testing and protected barrier devices like masks and gowns, and we sterilize medical devices and pharma products.
All while creating a safe environment for our employees to the pandemic for the.
The year, we were able to achieve growth across our business through a combination of organic growth and operational excellence initiatives.
During 2020, we continue to invest capital to keep pace with satisfying our customers' needs relative to additional capacity and testing services. We will continue to focus capital deployment efforts, along these lines and in order to reinvest for the future.
As the examples both northern and its share of change continue to invest and strategic initiatives, including three long term cobalt supply of development projects and in Oregon, and nine capacity expansion projects and stare Jennings.
And the Nelson lab side, we expect to complete the build out of our European Microbiological Center of excellence by the end of the year 2021.
We continue to prioritize deleveraging and have allocated almost all of the proceeds from the IPO towards debt Paydown and this has allowed us to reduce leverage of four three times adjusted.
The adjusted EBITDA as of year end and we also increased the size of our revolving credit facility for additional liquidity.
The paydown of debt at the end of 2020 combined with the repricing of our term loan and the first quarter of 2021 excuse us.
As expected to save approximately of $135 million of interest expense per year.
We are executing and several operational excellence projects across all of our business units. This has been and will continue to be of focus for <unk> health for both and operational efficiency perspective, and as well as the continued driver for margin expansion.
Regarding our 'twenty 'twenty, one outlook I wanted to begin by describing our approach and since the first time for sharing any guidance.
<unk> chosen to focus and the full year and not the quarter quarters highlight what we believe are the most relevant factors for investors and can.
Connection with the earning calls.
We made pointed out the seasonality or timing variations if we see that this information will be helpful and understanding the overall business performance.
With that backdrop for full year 2021, we are providing guidance of total revenues and the range of $890 million to $920 million, which equates to growth of approximately 9% to 12%.
Adjusted EBITDA and the range of $465 million to $485 million representing growth of approximately 11% to 16%.
And adjusted EPS and the range of 78.
The 86.
Scott will cover the outlook and more detail, including our qualitative assumptions on trends as well as what.
We currently expect relating to the cadence.
As I conclude my remarks, I want to again take a minute to emphasize how proud of and with the tires of Terra health team and the remarkable accomplishments during a very challenging 2020 the.
The team stayed focused and executed extremely well we know many of our employee of challenged us like all of us on both the personal and professional level in 2020, while dealing with the global pandemic, we thank our employees for their commitment and dedication.
Success, we achieved as a result of the commitment and provides a strong operational and financial foundation exiting 2020 and entering 2021.
To our investors and equity analysts who cover US we've enjoyed the thoughtful discussions both during and since our IPO and we thank you for your continued support of the Terra health.
I'll now turn the call over to Scott to review of more depth of our 2020 operating results our capital structure and more insights into our 2021 guidance Scott.
Thanks, Michael.
I'd like to cover Q4, and full year of 2020 financials at a high level quickly and then provide more information by business unit and I'll end with some comments on our balance sheet and our 2021 outlook.
For the quarter revenue grew by 12% to $217 million adjusted EBITDA grew by 20% to $113 million benefiting from 330 basis points of adjusted EBITDA margin expansion.
Strong operating performance drove adjusted EPS of <unk> <unk> per share up for films from Q4 of 2019.
For the year revenue grew by 5% for $818 million, we expanded adjusted EBITDA margins by 250 basis points and adjusted EBITDA grew by 11% to $420 million.
And increase in interest expense and 2020 over the prior year resulted in the slight decline and adjusted EPS by a penny for 42 sons. Please.
Please note Q4 and full year 2020 results don't fully reflect the recent debt paydown and repricing, which we expect to have the 35 full year run rate impact on the adjusted EPS.
Next let's take a closer look of business unit performance.
And Q4 Stewart of Genesis delivered 11% revenue growth and 14% segment income growth for the year <unk> grew revenue by almost 6% and segment income by about 9%.
Focusing on full year performance drivers price and contributed almost 4% and organic volume growth and the acquisition of Io Tara and each contributed about 2% those were partially offset by some headwinds from our Atlanta facility being down during installation of its facility enhancements and some residual impact from the Willis.
The facility closure.
Segment income margin expanded by about 150 basis points for both the quarter and the year of <unk> ramped up capacity utilization across the network.
We continue to invest for the future of <unk>, including the mission control enhancements at our North American facilities and as Michael referenced nine active capacity expansion projects.
Nordea and reported Q4 revenue growth of 18% to approximately $29 million and segment income growth of 29% to $16 million for.
For the year Nordea and revenues were down slightly by 1% segment income increased approximately 7%, it's always important to bear in mind, how variable nor the onto the results can be from one quarter to the next based on our suppliers schedules for harvest and cobalt and that's what we saw in Q4 and favorable harvest schedules for industrial use.
Cobalt 60 drove the top line that effect typically normalizes over time and you can see that annuity on full year 2020 of results with revenue of $115 million, which is the only a slight decline over the prior year.
Nor the on the top line was impacted by a 5% decline and volumes for medical use of cobalt 60 shipments of industrial use of cobalt. Since you were relatively flat for the year of some deliveries from suppliers were delayed into 2021.
Nor the non segment income margins for both Q4 and the full year 2020 expanded by more than 450 basis points of price increases and the favorable mix contributed to the bottom line.
Nelson Labs grew Q4 revenue by more than 11% to $53 million and grew its segment income by almost 33% to $23 million for the year sales grew by 7% to $205 million and drove 19% bottom line growth. Our segment income grew to 86 million.
Nelson Labs topline performance was driven by demand for protective barriers testing, which is critical to ensuring the delivery of personal protective equipment.
The business performed very well last year from a margin standpoint, expanding segment income margin by nearly 700 basis points for Q4, and 400 basis points for the full year, but and.
Nelson and labs team under New segment President of Joseph Router has really embraced our company wide prioritization of operational excellence and continuous improvement. The result is a long list of Opex achievements for the Nelson and labs team. The contributed to this outstanding margin expansion.
Moving to our balance sheet, we continue to invest and the sutera health platform to promote our mission of safeguard and global health and 2020 prior to Q4 of the company's overall levels of Capex had been lower than normal as the pandemic impacted our ability to spend on budgeted projects. In addition, the acquisition of <unk>.
And another opportunity to add capacity or Q4 capex of $21 million included the spend relating to the facility enhancements and several capacity expansions of <unk> and melting and loans for.
For the year, we spent about $54 million on Capex.
And previously we do expect investments to be expanded for the next several years as we fund projects related to <unk> facility enhancements and the development of new sources of cobalt 60 for Nordea and.
In addition to continued investment and new capacity and capabilities for <unk> and Nelson Labs and.
We finished the year with $102 million and cash and increase of almost $40 million from last year. We also upsized, our revolver and December of 2020, adding more than $150 million of incremental liquidity.
With the combined cash and revolver availability of $386 million, we believe the company of and a solid liquidity position to fund our operational needs and the investment.
We undertook substantial financing activity the resulted in deleveraging and interest reduction efforts prior to going public we have more than seven times net leverage and trailing 12 month interest expense of more than $210 million and December we announced that most of the proceeds from the IPO were used to pay down debt.
<unk> retiring our highest cost our second lien notes and the pro forma result, as of Q3 was the net leverage dropped all the way to four five times.
As of year end 2020, net leverage was further reduced to four three times and we're very pleased with the progress towards our long term targeted leverage levels and the two X. The Forex range and intend to continue with debt pay down is one of our capital deployment priorities in.
In addition to the debt Paydown and we also recently announced a highly successful repricing of our term loan which reduced our current effective interest rate by around 225 per cent.
For the combined impact on interest expense of the debt Paydown and repricing will be substantial we expect the interest expenses declined from the $215 million that we reported for 2022 of approximately $80 million on a full year run rate basis, and before any one time charges associated with the transaction.
The $135 million reduction will generate a significant amount of free cash flow that can then be deployed for other priorities such as the reinvestment and the infrastructure to accelerate growth additional debt paydown or opportunistic acquisition.
Finally, I want to provide additional color around our 2021 outlook as Michael mentioned, our incentive to provide full year guidance I'll start with the quantitative summary, and finish with our assumptions for.
For full year 2021 were providing guidance of total revenues and the range of $890 million to $920 million representing growth of approximately 9% to 12% adjusted.
Adjusted EBITDA and the range of 465 million to $485 million representing growth of approximately 11% of 16%.
Tax rate applicable to adjusted net income of approximately 28%.
Adjusted EPS and the range of 78 to 86.
And of fully diluted share count and the range of $281 million to 283 million shares on a weighted average basis.
There are two additional quality of quantitative comments worth calling out for.
First note that the increase year over year and weighted average shares outstanding is largely due to our IPO in November 2020.
And second as I referenced earlier, we expect approximately of $135 million of interest expense savings annually from the paydown of our debt and the repricing of our term loan and the impact of that savings is reflected in our adjusted EPS guidance for.
From a qualitative standpoint, our assumptions are as follows.
We are anticipating and improvement in the economy and the steady normalization of procedure volume throughout the year as.
As we look at the cadence of quarterly reporting there are two main points to emphasize for.
And we talked a lot about the variability and normally on the performance driven in large part by harvesting schedules for cobalt 60 based on how we see deliveries shaping up this year, we think there will be of relatively even balance between the first half of the year and the second half of the year, having said that there's always the possibility of the changes and the harvest schedule for cobalt 60.
And result in the order shifting from one quarter into another.
Second based on the timing of our first year 10-K filing with more than two months of the quarter already behind us we're able to provide more of an update on the current quarter expectations than we would normally provide at this stage from what we're seeing so far we expect revenue from Q1 to be and the range of $205 million to 210.
$10 million.
We expect to see 20% to 30 basis points of adjusted EBITDA margin compression and the first quarter compared to the first quarter of 2020, as we ramp up spend related to being a public company and meeting new requirements, such as compliance with Sarbanes Oxley and SEC filing requirements. This wouldn't change our expectation of adjusted EBIT.
The margin expansion on a full year basis.
From an FX standpoint, our guidance is based on exchange rates and effect as of the beginning of 2021.
As I mentioned earlier, we will continue to prioritize growth initiatives debt repayment and opportunistic acquisitions that we identified throughout the year and as we've communicated in the past, we expect new capex spend to be and the range of $100 million to $110 million. This year.
And that amount includes about $30 million earmarked for special project spend related to El facility enhancements and cobalt since the supply of development.
I know that was a lot and we're happy to take any questions. During the Q&A before I turn the call back to Michael to wrap things up I wanted to echo of his earlier comments about how proud we are of the entire team. Their work has helped us the Terra health and our strong position heading into 2021 and beyond.
And back to you. Thank.
Thank you Scott overall, we're very pleased with the performance in the fourth quarter and for 2020, especially considering the unique challenges facing the world.
Couldnt be more proud of our team for leading the company through this period, and especially satisfying for us to be able to engage with our investors and equity analysts and invite them to be part of the <unk> health journey with that the operator I'd like to open it up for question and answers. Please.
Thank you, ladies and gentlemen asked a remind us to ask the question you will need to press. The Star then the one key on your Touchtone telephone to withdraw your question press the.
Pound key please standby, while we compile the Q&A roster.
Okay.
And our first question coming from the line of Matt <unk> with Credit Suisse. Your line is open.
Thanks, Great.
I appreciate you taking the question so and welcome and your first earnings call and solid results to start.
Keith.
And I appreciate all the color and certainly the the color on Q1.
Maybe if we could start with just.
What youre seeing in some of the end markets that you have exposure to and in terms of what's driving are informing some of the top line.
And you know.
Characteristics of Q1 and.
And maybe for those of us with broader exposure to general supplies and devices used in and surgery and some of the some of the and markets that represent your customers say.
And how the ebbs and flows of the last several months of impacted your your business.
And in terms of rising and falling demand for devices are preparing for and for recovery and then I have one follow up.
Okay, and good morning, Matt, It's Michael and thanks for joining us.
I'll try and address your questions.
2020 started out on the on the volume side pretty pretty good and then we start to get into the Covid period April May June July and we clearly saw like you did with some of the other companies you follow.
Procedures fell off we started to see in the.
Fall volume starting to come back.
And start to move and a positive direction and then we kind of hit the second dip of coal of Covid. If you will kind of over the holiday season and into January.
We expected this as we kind of looked at the numbers and how we build as Scott mentioned in his comments as well as we kind of gradually ramp the plan for the year.
We saw that coming so I would say the fourth quarter.
We were doing pretty well and you're starting to see volumes slow down a little bit with elective procedures going into January and February and we're feeling pretty good about where we are now and the second half of February into March and I would say, we see that across our businesses on the and the Nelson side, we continue to see volumes growing and the <unk> more directly.
Tied to the elective procedures and I, just referenced and the minority on side, we've had a little bit of movement around some areas that are a little tougher to get shipments in and out of because of the.
The COVID-19 impact and some in some countries, but overall, we were pretty optimistic and it's along the lines of what we expected.
And.
That's great and then just.
The capital allocation.
Nice job on sort of reallocating of realigning your cap structure and taking down the cost.
Of debt.
And I understand as you've articulated that you have a set of priorities for capex and in the facility.
Spansion and facility upgrades.
If you could talk a little bit about what the opportunities are the potential timing of your appetite.
For for investment strategically.
And in any of your end markets and core businesses over the next 612 months is that a part of the picture.
Or is that something that sort of comes on the back of some of the other spending priorities that you have thanks, yes, Matt.
We're going to continue to invest for growth and this business we feel.
Really good about the end markets that we partake and we feel very well very good about our position in these markets will continue to invest for organic growth as well as inorganic growth, but I don't want to lose sight of what we've told you. The other investors that were targeted at two to four times leveraged and the long term and we're well on that journey.
To that 0.1 of the other questions you may be asking around M&A and we've told you that you know as we look at the big Tam that we partake and there'll be small tuck in acquisitions that we could do at points in time and continue to enhance our capabilities or expand on our existing capabilities with that and mind. Just for example, yesterday, we closed on the transaction.
And the Nelson Lab site, where we bought a small lab that's focused on the anti microbial and virology capability and that just expands upon what we already do and Nelson labs, and we thought that would help accelerate our interest in the marketplace very accretive deals.
And help us on our journey to continue to grow both organically and Inorganically.
That's perfect Michael Thank you.
You bet.
Our next question coming from the line of Sean John Dutch with RBC capital markets. Your line is open.
Thanks, and good morning.
And congratulations on all of them.
And a great challenging the great 2020.
On the guidance going back to the comments, Michael you made on the impact of Covid and volume.
And if we think about how steroids index performed in 2020, what level of capacity utilization does that represent and I guess, how much more revenue could your existing footprint support.
And a more normal year without any benefit from the ongoing.
Capacity expansion of the Euro Youre investing and.
Good morning, Sean I would tell you and as we've talked about in the past.
And I can give you of macro number 70, 580% capacity utilization, but it really depends on the geographic location of that facility as well as the modality is it E O us in E beam is it the cobalt gamma radiation right because the customers the customers really drive where our needs are and work with.
And what they need us the fulfill as far as the sterilization capability. So I would say overall, we feel pretty good about our capacity and there are certain areas, where theres more opportunity for growth that we're deploying capital for expansions.
As I referenced in our opening remarks.
Okay, and then on the margin expansion opportunities and it seems like across their genetic minority on those are largely dependent upon revenue growth, so really coming from operating leverage with Nelson and you've done a lot of optimization work since fine that I think the 2020 of results are testament to that.
Can you give us the sense of how much cost reduction of our optimization opportunity remains there I guess, maybe kind of both nearer term here and in 2021, and then maybe a little bit longer term.
Yes, I would tell you as we've said multiple times, we see continued opportunity for margin expansion and this business.
We really focus on operational excellence and I want to make sure. It's clear this is and cost reduction per se, we're not going in reducing a bunch of has cut and a bunch of costs like we didn't do furloughs or anything like that during the course of the global pandemic. This is pure roll up your sleeves get and after operational excellence how do.
And you drive better utilization some of the things Youll Scott mentioned in his comments about Joe Schroeder and and the leadership out of Nelson Labs, just how we do the workflows, how we set up our media prep areas. We're looking at star limbs and investment that we've deployed capital against the to improve workflows.
Looking at activities within Mike and the team over at <unk> looking at how the load the chambers holiday do turn times, how did your advanced shipment notifications. So we see continued opportunity for margin expansion and this business as we continue to drive more operational excellence across all businesses and I can give you similar examples on the the Oregon side as well.
Yes, Okay and.
Scott Scott Scott and John This is Scott good morning, I'll, just add to Michael's comments and <unk>.
And the past when we have talked about the drivers for margin across all three of our businesses. There are three categories that we focus on one of them and the benefit from from pricing actions and much of which of the contract.
And one of them relates to the operating leverage which you referenced and your question and then and then as Michael said, we are of a slate of Opex projects that we're working on across all three of our businesses and so two of certain extent at least we believe that all three of the businesses have the opportunity to benefit to some extent from each of those different drivers.
Okay very helpful. Thank you again.
Thanks, Sean.
Yeah.
Our next question coming from the line of Patrick Donnelly with Citi. Your line is now open.
Great. Thanks, guys and congrats on the first quarter out of the gates here.
And Michael maybe just a quick one for you we've got a bunch of and the rest of the questions just on the <unk> litigation the timelines of the expectations can you maybe just talk through that and what we should expect US we go through the year here and your guys' expectations.
Yeah, Patrick Thanks for the question.
We're in litigation, so I can't get into a lot of details on this but what I can tell us we feel very comfortable about where we are a net litigation.
And the work that our teams are putting together and our defense.
Ultimately, though it is kind of go in front of the trial jury and you know there's risks that come associated with that but right now.
It looks like the timing was initially planning here for late this year for some of those trials partake I would say nothing has been officially declared by the core chip, but there's a pretty high probability that the first trials will take place sometime in 2022, but one thing I wanted to make sure that everybody continues to learn about this whole iOS situation is.
It's just so critical to the health care industry, 50% and are more of the medical device and the us are sterilized with Eo.
We are very compliant systems, it's built into our culture and we continue to operate it.
And with high regard for the regulatory requirements and.
And really proud of what the team has done and we're going to continue to move forward and run these businesses like we have for years.
And we'll continue to take care of our customers who rely on the yield for for critical medical devices to be sterile.
Okay. That's helpful. And then on the back of that I guess have you had any update regarding IMO regulations and the us with the New administration and place and then also I think and Europe, you've kind of thought the impending medical device regulations could create of growth tailwind for you guys, maybe some greater capacity needs in that region can you maybe just talk to those two of those too.
Yes.
Patrick.
We're anxiously awaiting the new regs and niche App I would tell you I wish you would have come out in 2018 and wish it would come out of 19 I wish you would come out in 2020, and we're hopefully come out in 2021 with the New administration. They were hopeful they get something out and the first quarter of this year I think that it's very unlikely based on the fact that we're sitting here today and the early days of March.
<unk>.
And we're hopeful that something comes out later in the year. We also feel very confident around the solutions that we've started to deploy and our facilities and if I. If I represent the example would be in Atlanta, where we're capturing 90, 999% of the yield that we use my engineers would tell me. It's 90 990 999.
And that we use and that facility I think of lot of the improvements that we've put in place there are going to be kind of the key benchmarks and baselines that niche app users for the longer term.
But we don't know that until we see come out we continue to engage with our regulators like we always regulators like we always have.
I am hopeful that they just tell us the rules. So we can go execute and outperform against those rules, we're still waiting out of the Patrick It's a little frustrating.
But I hope they give direction to the industry of shooting rather and later, but I feel confident about the solutions for deploying currently and and MBR Scott one of you addressed the <unk> sure. Good morning, Patrick how are you doing this morning.
Good thanks and great.
Yes, so with respect to the medical device regulations in Europe. There is a new stage gave the we're hitting here in may of 2021, where there will be a requirement the either new medical devices introduced for the marketplace or even legacy medical devices that are up for re certification meet of different testing standard.
And if you go back to 2017, when we acquired a business called the toxic on Europe.
Part of that acquisition. It was anticipating increased demand in this area, we acquired a leadership position in the category of testing and call. The tractable and leasable testing that we've continued to invest and organically and we have seen solid growth for a number of years and that area, but with the the this new stage gate that I mentioned the upcoming now.
We are seeing an increase in demand and that area of at least the pipeline that we're anticipating for 2021, and we've incorporated the type of demand growth and our outlook for the year.
Great. Thank you guys.
Great. Thanks, Patrick.
And our next question coming from the line of Dave Windley with Jefferies. Your line is now open.
Hi, Good morning, Thanks for taking my question congratulations on navigating the challenging and eventful 2020.
And of a follow up to Patricks question on.
Your your investments and enhancements and facility you mentioned, Michael the Atlanta facility and you've kind of proof of concept on the new approach there as you mentioned the $99 99.
I'm wondering what what youre kind of cadence of horizon is for applying those same approaches to the rest of your facilities is that something that can get done in 2021 or is that a is that of multiyear horizon and.
And I presume youre going to say, yes, but I'll ask it anyway are you comfortable continuing to make that investment and all of those facilities ahead of the regulations, if they continue to be delayed.
David David we've always been on the forefront of leader and in.
Operating these facilities and with the emission control systems that had been in place and we continue to feel confident of where we are.
And is up and running we've already put improvements into another couple of facilities that are near completion.
And then others that are falling behind in that same path I mean, some of the big improvements, we're putting in place would be negative pressure double scrubbing and then central edge discharge points. So we're moving along those paths.
Across some of our facilities, we think it will take place in 'twenty, one 'twenty, two and possibly in the 23 as well.
There is a chance there's incremental requirements that the government may require the EPA and I feel pretty good about how situated we are around some of those because we continue to look for new opportunities to continue to improve so there's other things that we're looking at as well.
The continued advanced our performance and these facilities, but I feel pretty confident about where we are what we deployed in our path forward and <unk>.
The fact that we don't have the new rules out yet.
And we believe it will be leading again and the industry and continue to lead and the industry with our control systems. It sounds good. Thank you for that pivoting the guidance I was hoping you could clarify and maybe Scott clarify.
The contribution of <unk> and this acquisition you mentioned the close yesterday to the revenue growth assumptions for 'twenty, one and then in our and our pre IPO discussions the the harvest cadence and Naughty on of the harvest timing was expected to make the fourth quarter of.
A really strong quarter exiting 'twenty, one and continuing into 'twenty two it sounds like from the the comments on the Oregon being more even in the first half and the second half maybe that timing may have changed and I just wanted to make sure I understood that.
Sure Thanks for the questions Dave.
So let me just.
The first question.
In terms of our 2021 guidance, we're not going to provide a breakdown in terms of the components of this time, but if you look at the disclosures we've made and the path to just a reminder, that we closed the <unk> acquisition at the end of July of 2020, and so obviously, the theres going to be a little year over year.
Year over year impact for the post acquisition period, and then for the January through July period of what we've disclosed is the Io trial and US pre acquisition revenue during that period was around $15 million and the facilities that we acquired with that acquisition were fairly mature and in terms of and ramped up the full capacity utilization.
You could expect the 2021 contribution to be similar for those periods.
In terms of your second question.
I guess first at the risk of stating the obvious for Nordea and there is always a little bit of shifting in terms of the cobalt harvest schedules and we certainly have seen that over the last few months as well and so you picked up on our on our point correctly is that when you looked at and audience relative.
Share of the company's revenue throughout 2021, it's going to be fairly stable, which is which is something that it has and our view has always been the for 2021.
Thank you I appreciate that.
Yes.
And our next question coming from the line of Tycho Peterson with Jpmorgan. Your line is open.
Hey, good morning.
I'll start out of the question on guidance, just wondering if theres any kind of segment level commentary you could give us not that long since we did the IPO model I'm just curious if theres any segment commentary that that has changed since and then if you were to see upsides and since you are guiding slightly above consensus, but if you were to see upside even above that what do you think of comes from the share.
Yes, so it's not our intent to go very deep right now in terms of the individual business unit.
The components for our 2000 and 'twenty, one guidance, but what I will just say in terms of the overall storyline in terms of everything we've ever said about the underlying drivers for each of our three business units as well as the strategic priorities really nothing has changed over the last couple of months since the IPO and so we do have.
Obviously, some tailwind and contemplated in terms of price and operating leverage and.
And then also us as Michael and I, both mentioned earlier, we're contemplating some steady normalization of volume its processing volumes out there and the medical device space and so obviously, that's going to have some impact and particular <unk> and Nelson labs, but all of these are consistent with some of the comments.
And we've always made about drivers of the business of Michael did mentioned in his comments that there are a number of capacity expansions that are underway for <unk>, some of which are going to be coming online during 2021, and obviously they will have some impact on our on our anticipated results as well.
Michael This is Michael I would just tell you you know just at the high level, we said, 9% to 12% growth on the top line and 11% to 16% of adjusted EBITDA, All three businesses will be contributing meaningful and achieving net.
Growth for the year that would be the only other comment I'd add the scotts.
And then on the Covid dynamics, you've talked about increased demand for services related the PPE biologics other quantifying pipe projects can you maybe just touch on is that something you can quantify is it material could that be upside the numbers and then the other side of it. We've had people ask me is there any risk to the three and 5% to 5% on pricing given the huge covered hardships by clients I know, it's all contractual.
Do they have and the ability to push back on pricing.
Yes, so when you look at the composition of our businesses for <unk> and allows us to organic growth in terms of the the customer composition and the underlying product lines.
We're providing services for it is of very very well diversified business and so you are right that we've talked about some particular product categories that we're contemplating benefiting of the result of Covid, but the reality is that in any given year. There is always going to be some that are up and some that are down and so I would say and just.
<unk> falls into that mix.
The the net impact of Covid I think when you just look at our top line and 2020, even with some of these product categories. The benefit of the net impact in all reality was negative because of the topline growth. We delivered last year was a little bit lower than we would normally hope for and.
As we said, we're expecting that normalization across the broader portfolio here throughout the course of 2021.
Okay. Okay.
Pricing for.
Sure and then also in terms of the pricing remember there for <unk> and for <unk>.
And for Naughty on over 90% of the revenue for those two businesses generated under long term contracts and those contracts of built in price escalators of annual price escalators and so.
The even absent of any kind of change and the market dynamic we would anticipate.
The kind of rhythm of price increases under the existing contracts would continue for the foreseeable future, but also just more generally we don't see any changing dynamic out there and the marketplace right now in terms of the pricing pressure.
Okay. That's helpful. And then just last one and want to go back to the when Lee's question on the facility upgrades, because you talked about $26 million to $32 million of Capex for.
And from nine projects. This year and then earlier on the call. You said this could last kind of two to three years in terms of the upgrade cycle should we assume kind of a third of third a third in terms of the number of facilities you are going to be upgrading or how should we think about the pacing.
Sorry, one thing I think you may of next of a couple of comments, because we talked about facility expansions, which would be.
There are nine active capacity expansion projects right now and so that was intended to referred to sort of kind of typical routine of investment and growth initiatives.
And that's different from the comments that we made of about about the pacing of our investment and facility enhancements for <unk> because of just to clarify that and the facility enhancements I think we've said before the fourth quarter debt, we're gonna be talking about.
Excess of $30 million over the next couple of years for facility enhancements and those those are over multiple years Tycho.
Okay, Okay, but you can't give us the bogey as to how much will be done by the end of this year I'm just kind of think about the pacing here. So in total across all across our facilities. This year environmental enhancements and included as well as just ongoing environmental enhancements will be about $15 million.
Just to give you some context across all of the facilities across all of <unk> health.
The large portion of it obviously is the yield enhancements.
Got it thank you and then.
And just kind of gives you a ballpark right.
Yes.
Thanks, Michael.
And our next question coming from the line of and then Hassan with Goldman Sachs. Your line is now open.
Oh, Thanks, Hey, good morning, and I also went out of kind of start with the 2021 guide and maybe try to put together and number of things you've said, so far and the call. It sounds like you've obviously got some inorganic benefit and your 'twenty. One guide it sounds like also that your your Covid impact as you think about it from a net.
Respective and 'twenty I think you said was the negative impact to you.
And you obviously had some impacts from Willow broke and Atlanta, So I'm trying to better understand what the true kind of underlying 2020 base was that we would drive off up because if we kind of of Jessica just those things that I mentioned.
The 2021 underlying growth that would suggest somewhere towards the mid single digits I Wonder if you could comment on that and tell me. If that's the kind of the true range and is it kind of lower than what would be normalized because you are still seeing COVID-19 impact or just how are you.
And on package of what I, what I just said.
Sure sure and so let me, let me try and unpack that a little bit.
I think the part of your question is when a little bit deeper the than we've gone so far but looking at our full year revenue growth for 2020, we delivered 5% revenue growth.
And there was some inorganic contribution there and so <unk> contributed about 1% of the total company's growth and so sort of outside of that you are at 4% revenue growth and so I'm not sure. How you you got to the implied kind of mid single digit number.
On a normalized basis I guess, what we're saying is the what.
What we would normally expect absent of the pandemic is some amount of topline growth.
And is higher than that and consistent with what we've said and the paths around viewing the business of at least the high single digit grower and I think thats reflected well and the and the guidance that we're giving you for 2021 as well.
Okay. Okay.
And on the.
On the middle of the P&L.
Your outlook implies about a 200 basis point margin expansion, which is great. If that maybe you could just help us understand obviously, you talked a little bit about pricing already but are there any other moving parts that you could talk to and gross margin in particular, we didn't get a sense of what that was and an adjusted basis. In 2020. If you can just help us understand and.
And where that came out and what your expectations are for 'twenty, one that would be helpful. Thanks, So much.
Yes, so I mean, I guess, what I'll say us to reiterate a comment I made a few minutes ago, which is the overall of the business is.
It's the same business that we've been talking about since the IPO and the period, leading up to it.
The financial profile of each of our three business units is the same as the business that we were when we IPO and in November and so in terms of the underlying drivers. It's really all of the same major storylines and the same financial profile that we've been talking about.
Margin expansion, we do expect the continuously benefit as I said earlier across all three business units from the key categories of drivers, which would be price across all three business units operating leverage to at least some extent across all three business units and then this organizational focus on Opex is.
The real and you see it and the margin expansion that we just reported for Nelson labs.
And how significantly we can move the P&L with the organizational focus and execution and that area and so really that's what the drivers that we see continuing to impact the business here in 2020, one as we deliver on our guidance.
Thank you.
Our next question coming from the line of Matthew <unk> with Keybanc. Your line is open.
Okay and then.
Sorry to go back to us.
I think it would be helpful. Though.
What is the FX component of.
And the guidance of the 9% to 12% how much of the is coming from from FX.
So we're not breaking up the guidance.
And that way, but.
First of all one of the things we indicated us that we are basing the guidance on FX as of January.
And so remember so of you anchor yourself the January FX rates compared to last year. Obviously, there are some currencies out there that are going to be of tailwind and the business. The most significantly impacted by that as nordion and and so when you when you look at where the Canadian dollar sits now with Nordea and being.
The Canadian company of its.
Primarily CAD based in terms of their revenue base.
And I'm going to be the most significantly impacted the cirrhogenic us a little bit.
As heavily index domestically and a little bit under index internationally, and so they'll have some amount of tailwind from the euro and some other currencies that we operate and.
But not as larger and impact of some other companies that are more heavily internationally and the okay.
Excellent and then I'm just trying to help people build of the.
And better models and some of it.
The modest change that looks like and reporting between between the IPO and and and.
And this initial one so just if we could just walk through of couple of them.
Are you no longer excluding depreciation from the gross margin line.
And then it did look like segment income.
By segment at least Youre presenting number like segment income versus previously it was it was the adjusted EBITDA by segment for the just those two moving pieces there would be helpful.
Sure so the.
The term segment income, which is the the metric that we use of the management team for evaluating the business is defined to essentially approximate and adjusted EBITDA metric and so really it's just the nomenclature of question there.
Regarding your other question.
Yes so.
Prior to the IPO and the.
Private equity based company, we did have a tendency to think about the business in terms of our gross margin for.
All of our perspective, the excluded depreciation and amortization expense, but obviously are reporting now.
Forms more closely to euro of cap on the conformance.
Conformance of U S GAAP on that so it would incorporate the DNA.
And then there were two different just different metrics people are using.
People are using.
<unk> revenue from the S. One and you guys had a lot of the pro forma and making some adjustments we're definitively on the reported revenue from the XY and outright.
That's correct and when we did our revenue and pre release and January we did reference a pro forma revenue number of that contemplated the pre acquisition time period for for <unk> for the January through July period, and not number and separately been disclosed for the <unk>.
The million dollar impact.
But youre right, we are showing you and all of our reporting today just for the clean GAAP.
Revenue numbers.
Okay that was helpful. Thank you very much guys.
Thanks.
Okay.
And as a reminder, ladies and gentlemen ask the question. Please press star one.
And our next question coming from the line of Michael Park with Baird. Your line is open.
Hey, good morning, Thanks for taking the question.
Santa Teresa facility I am hoping for a fresh comment on.
And your expectations for operational status of that facility is 2021 progresses, perhaps here.
Engagement with the attorney general and that states and where.
And I know you are upgrading all of your year of facilities for emission controls, but where does that facility specifically said in terms of timing.
Timing of those investments.
Michael Hi, it's Michael Peter So.
New Mexico.
And to be clear with debt facilities up and running fully operational and really critical to the health care system. A lot of surgical kits are sterilized for the whole United States for that facility shows for a really critical facility.
That relies on sterile surgical kits.
And.
And we're fully operational the AG request was not to demand closure, but they were more focused on seizing uncontrolled emissions real releases and we continue to make enhancements and that facility, we've been and dialogue for quite some time with the regulators there and the normal permitting process to work through that so I.
Can't get into a lot of details on the litigation other than there's a bunch of lawyers filing papers back and forth doing the lawyer thing which is unfortunate.
We feel pretty confident and where we are and how well that business is performing and I.
And I would just tell you that a lot of the information reported is not very accurate, but I don't want to get into the level of detail around that we'll let we'll let of third party determined that but by and large the most important point is the facilities up and running our customers rely upon us we have continued.
Belief that debt facility will continue to operate and will continue to perform the critical role and health care that we provide there, but we clearly have improvement plans for all of those facilities, including Santa Teresa and and we've been engaged with the regulators on those topics for quite some time.
Maybe one follow up for Scott on the interest expense below the line here you.
Clearly $80 million run rate and pro forma for the debt reduction and the term loan repricing.
My sense of the number for the first quarter is not $20 million million divided by four so can you just comment so that we don't.
Have EPS to.
The two wonky here and the first quarter and what the interest expense for <unk> should be.
Sure. So I guess of couple of comments one of the gist of.
A reminder, that our referencing our numbers on an adjusted basis right and so we provided adjusted EPS guidance and so there is going to be.
A noncash charge associated with the pricing activity.
And with the repricing activity that we executed in early January but I'm going to kind of eliminate that effect from my answer but.
So we executed the repricing in January and so we would expect to get most of the full year impact because of at this point, we've already done the debt pay down in December and the repricing and January and so out of that the $80 million run rate number assuming all other things being equal in terms of the the interest rate environment and so.
You should get most of that effect here in 2021, and you would really just have to adjust for the stub period of January okay.
Yes.
Thank you.
Yes.
Right.
And that's all the time, we have for questions today I would now like to turn the call back over to Mr. Michael <unk> for closing remarks, great well, we thank everybody for joining us for our first earnings call. We're very proud of what the team's accomplished in 2020, and we're really optimistic about what the future holds for us in 2020, one we believe us for very unique asset.
And market growth competitive.
Well positioned versus the competition and.
And good growth opportunities for 16 and move forward. So thanks for joining us today, and we look forward to our future engagements and some of the upcoming investor conferences and have a great day. Thank you.
Ladies and gentlemen, and that does conclude the conference for today. Thank you for your participation you may now disconnect.
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