Q1 2021 Sotera Health Co Earnings Call
Good morning, this is JD and welcome to the Terra Health first quarter of 2021 for results call. You may find today's press release and accompanying supplemental slides and the investors section of the company's web site at the tariff health Dot Com. This webcast is being recorded and a replay will be available and the investors.
Section of the city of health website.
On the call today are Michael Petra.
Yeah.
Chairman and Chief Executive Officer and <unk>.
Scott Leffler, Chief Financial Officer.
During the call some of the statements of the company May make 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 as the chair of Health S E C fives and <unk>.
And the forward looking statements slide at the beginning of its presentation for a description of these risks and uncertainties.
The company assumes no obligation to update any such forward looking statements.
Please note that during the discussion today the company will present, both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EPS and net leverage ratio of.
A reconciliation of non-GAAP to GAAP measures for all relevant periods may be found and the schedules attached to the company's press release and supplemental slides.
During the Q&A portion of today's call. Please limit yourself to one question and one follow up so that we can try and give everyone an opportunity to ask questions. I will now turn the call, which is the Terra health Chairman and CEO Michael Petrus.
Thank you operator, good morning, everyone and thank you for joining us the Sutter health first quarter 2021 earnings call. We're off to a strong start in 2020, one reporting double digit growth and both revenue and adjusted EBITDA and the first quarter.
And while managing the ongoing challenges the result of the pandemic.
The strong results from your first full quarters of public company sugars. The reminder, the suite.
The Terra health shifts and the.
Crucial position and the health care value chain as a leading global provider of mission critical and the and sterilization solutions lab testing and advisory services for the health care industry.
Compared to the first quarter of last year, we reported total revenue growth of approximately 13% of <unk>.
Adjusted EBITDA growth of approximately 15% and adjusted EPS of <unk> 18 cents.
We also continue to execute on our strategic priorities with the acquisition of <unk>.
<unk> laboratories capital deployment towards growth initiatives and further deleveraging.
Scott will go into more detail and our segment performance and our capital structure and a moment.
This quarter as in other quarters, our segments continue to focus on meeting the needs of customers health care workers and patients with.
We performed a critical testing of personal protective equipment like masks and gowns, and we sterilized many medical devices and pharmaceutical products.
Any of these products are being used and the global fight against COVID-19, we ensure this critical sterilization and testing is done while creating a safe environment for our employees through the pandemic.
While we are focused on growing our business. We are also intent and strategic use of our cash as well as capital deployment of.
Our capital deployment priorities remain unchanged as we continue to invest for growth Delever and pursue strategic M&A to grow the business for the long term.
Regarding our debt position, our net leverage ratio improved from four three times at year end two of four one times as of March 31, we are on track to deliver the two to four times long term.
Net leverage targets that we've previously communicated to you.
Through a combination of debt pay down and repricing our term loan.
First quarter 2021 interest expense declined by $35 million versus the first quarter of 2020.
From an operational standpoint, we continue to invest during the first quarter to ensure we are meeting customers' current and future needs.
Northern is investing and three long term cobalt supply development projects and <unk> continued to advance its nine active capacity.
Around the world.
For Nelson and labs, we continue to expand capacity and capabilities to meet customer needs from microbiological gain and distract from all each wells testing.
We're also making great progress and the build out of our European Microbiological Centre of excellence, which we expect to be completed by year end.
And the M&A front, we also completed two small transactions and the first quarter.
As we mentioned on our last earnings call, we welcome Bioscience laboratories to Nelson and Labs and March.
The local media and Bozeman, Montana Biosciences of provider of outsourced antimicrobial and <unk> testing and the pharmaceutical and med device and consumer products industries.
This strategic acquisition will complement nelson's already existing capabilities and the anti microbial and virology space.
Also of March we purchased the remaining 15% ownership of Nelson lapsed Fairfield.
This purchase had been negotiated in connection with the original acquisition of Triple Ultra labs in 2018.
Nelson Labs, Fairfield provides us with the expanded microbiological and analytical chemistry testing capabilities to serve the pharmaceutical and med device market segments.
We also continue to prioritize operational excellence projects across our segments in order to drive efficiencies and performance. We expect the operational excellence continue to drive margin expansion over time.
Taking a step back from our specific results I'll comment briefly on what we're seeing the broader markets, where we operate.
When we communicated in 2020 one guidance, we also indicating the assumption that there would be of gradual normalization of volume throughout the year.
I'd say the first quarter trended in line with that expectation as we saw a relatively weak start to the quarter in terms of volumes and then of gradual strengthening as the quarter progressed.
As one might expect there was some variability from a regional perspective the.
U S market has shown a quicker recovery and volumes, while Latin America, and Europe, which are suffering from higher virus case counts and other pandemic related challenges have been slower to recover.
Overall, we are comfortable with both the broader market trending and our own performance that is why is the first quarter performance provides a solid foundation for the rest of the year, we are comfortable reaffirming the 2021 outlook provided.
Provided and on March 19th of this year.
Before I turn it over to Scott to cover the first quarter and 2021 outlook in more detail I want to take a moment again to emphasize how proud I am of the entire <unk> team as we continue to strive for excellence. During this challenging time I'll now turn the call over to Scott.
Thanks, Michael I'll cover the first quarter highlights from the Terra health on a consolidated basis, and then provide more detail by segment ill finish up with comments on our balance sheet and cash flows and some further details regarding our 2021 outlook.
For the first quarter of 2021 revenue grew by approximately 13% to $212 million on the constant currency basis revenue grew by approximately 11%.
Adjusted EBITDA grew by almost 15% to of $105 million adjusted EBITDA margins expanded by over 80 basis points compared to Q1 of last year.
Our strong operating performance resulted in adjusted EPS of <unk> 18 per share up eight cents from Q1 of 2020 before.
Before I provide segment level of detail I wanted to remind everyone of our methodology around reporting and corporate costs. We did not report a separate corporate segment, but instead of allocating all administrative costs to our segments.
And Q1 are segments are absorbing approximately $4 million of incremental administrative costs compared to Q1 of last year approximately $1 million of of the increase is attributable to the secondary offering we executed in March of this year, while the remainder is largely driven by the costs associated with being a public company.
These costs created some margin headwind for all three segments that margin headwind was particularly noteworthy from Nordea, we experienced margin compression as a result.
Now, let's take a closer look at the segment performance.
In Q1, and <unk> delivered 12% revenue growth and segment income growth over Q1 of the prior year revenue growth drivers for the first quarter included the acquisition of <unk>, which contributed 5% while price and contributed approximately 3% and organic volume growth contributed a little over.
The 2%.
Compared to the prior year first quarter segment income margins from Q1 of 2021 expanded slightly as favorable pricing and operating leverage were mostly offset by the incremental administrative costs associated with being a public company.
As Michael mentioned, we continue to make meaningful investments in store of genetics recently, we announced the expansion of one of our facilities in Europe, which was one of six stores and a <unk> expansion is expected to go live. This year. We also continue to make progress on facility enhancements at our North America facilities.
Nordion and reported Q1 revenue growth over prior year of 10% to approximately $26 million and segment income growth of 6% to almost $14 million.
Normally on the topline growth was driven by a 4% benefit from the strengthening of the Canadian dollar compared to the US dollar of three 6% increase from pricing and approximately 2% impact from volume primarily related to shipments of medical use of cobalt 60.
Margins fell by approximately 200 basis points, largely driven by the incremental administrative costs mentioned earlier.
Nelson and labs grew Q1 revenue versus prior year by more than 16% to $55 million and grew segment income by approximately 30% to $23 million. The Q1 and 2021 revenue performance continued to be driven by strong demand for testing related to personal protective equipment.
Which accounted for 10, 3% of of the growth.
Volumes were mixed and other testing categories. We are encouraged to see strong demand and some areas, including testing related to product development and antimicrobials.
Q1 of 2021 margins expanded by 430 basis points over the prior year quarter as Nelson Labs continues to benefit from a number of operational excellence initiatives as well as favorable pricing and mix.
Capex spend is tracking in line with our total year guidance with $21 million of spend occurring and the first quarter we.
We continued to spend primarily and the areas of ear of facility enhancements, Cirrhogenic and Nelson and labs capacity expansions and Nordion cobalt supply development with.
We finished the quarter with $108 million and cash flow.
<unk> increase over December 31 levels, even after funding approximately $25 million from the Bioscience Labs acquisition and Nelson Labs Fairfield buyout.
With combined cash and revolver availability of $390 million the company remains and our solid liquidity position to fund our operational needs and investments.
In March we further optimized our capital structure by amending our revolving credit facility to reduce the interest rate on borrowings and extend the maturity date to June of 2026, we remained undrawn on that facility all year.
We benefited from a significant reduction in interest expense in Q1, largely driven by debt pay down using IPO proceeds as well as the recent repricing of our term loan.
As Michael mentioned, our interest expense decreased by approximately $35 million compared to Q1 of last year.
Our net leverage ratio continues to improve with net leverage of four one times as of March 31, compared to four three times as of December 31.
We also executed a secondary offering in March which resulted in the sale of approximately 9% of already outstanding share through the public the secondary offering did not result, and the issuance of any new shares or and any proceeds to the company.
Turning to our 2021 of the outlook, let me both reaffirm the guidance that we provided on our March nine call and provide some additional color on the rest of the year I'll start with the quantitative summary, and finish with our assumptions.
For full year of 2021, we are reaffirming guidance of total revenues and the range of 890 million to $920 million representing growth of approximately 9% to 12%.
Adjusted EBITDA and the range of 465 million to $485 million representing growth of approximately 11% to 16%.
The tax rate applicable to adjusted net income of approximately 28% and.
Adjusted EPS and the range of 78 to 86 films and fully diluted share count and the range of 281 million to 283 million shares on a weighted average basis.
From a quantitative standpoint, I would like to reiterate the year over year increase and weighted average shares outstanding is largely due to our IPO in November 2020.
And we expect approximately of $135 million of interest expense savings annually from the pay down of our debt and the repricing of our term loan and the impact of that savings is reflected in our adjusted EPS guidance.
From a qualitative standpoint, our assumptions are as follows.
We are assuming continued normalization of volume throughout the year and as Michael mentioned, we're seeing trends in that direction. Thus far we also talk a lot about the variability and audience performance driven in large part by harvesting schedules for cobalt 60, we mentioned on the last call and expectation that there will be of relatively even balance between sale.
And the first half of the year and the second half of the year debt is still our expectation based on cobalt delivery schedules and Q2.
Having said that there's always the possibility of the changes in the harvest schedule for cobalt 60, and result in the order shifting from one quarter into another.
From an FX standpoint, our guidance has and will be based on exchange rates and effect as of the time that we provide updates.
From a capital deployment standpoint, we will continue to prioritize growth initiatives debt repayment and strategic acquisitions that we identified throughout the remainder of the year.
We continue to expect capex spend to be and the range of $100 million to $110 million. This year, which includes approximately $30 million earmarked for previously planned and the special project spend related to the facility enhancements and cobalt 60 supply development.
Before I turn the call back to Michael the wrap things up I wanted to echo his earlier comments about how proud we are of the entire team their hard work is evident and our Q1 results and has helped to position us for a solid 2021, Mike.
And Michael back to you.
Thank you Scott overall, we're very pleased with our performance to start 2021, especially considering the continuing challenges posed by the global pandemic as always and I want to thank the <unk> health team for their great execution. This quarter I also want to thank our customers and our investors for the <unk>.
And your support and partnership.
At this point and time, operator, we'd like to open up the call for questions and answers.
As a reminder, task of question and you wanted to press Star one on your telephone to us.
And your question press the pound key please standby, while we compile the Q&A Ross true.
Our first question comes from the line of Matt makes it from credit Suisse. Your line is now open.
Hey, good morning, Thanks for taking the questions and.
And for a great start to the 'twenty one so a couple of questions on.
And some of the things that you mentioned, Mike and <unk>.
Got following upon on the sort of build for the year and then and then one if I could just a broad question on litigation and so on on.
And some of the investments that you've made and Nelson and.
And in the us.
Sterilization Stojan ex side of the business in terms of facilities.
Can you talk a little bit about the cadence of those ads and what.
The timing is for sort of additional growth or how that filters into the the plan that you've laid out for the year in terms of topline growth.
And then as I mentioned and I have one follow up on on litigation. Thanks.
Thanks for the question of I appreciate it so.
And Michael mentioned nine capacity expansions that are active for third Gen X and six of those expansions. We expect to go live this year and the path and we've talked about the expansions we've characterized them as representative of our typical cycle of investment and so I wouldn't view those as investments the ore capacity new capacity of that asset.
It comes online is going to shift the growth trajectory from what we've communicated in the past those again are routine capacity expansion of the enable the type of growth the.
And we've expressed in the past of being achievable for the company.
Yeah.
Okay and on the analysis side and maybe just the recent ads and the center of excellence and I know, it's part of your guidance Im assuming its part of your guidance for the year, but maybe just does that start to.
And here in the second quarter of immediately.
And in terms of the the acquisition and.
And maybe the cadence of the center of excellence and what that what that does for the analysis side of the business.
Sure. So the one thing to keep in mind for capacity expansion of either on the Cirrhogenic side or on the Nelson side is the once these capacity expansions go lives. There typically is a is a ramp up period and extended ramp up period over a number of quarters and sometimes even years as the reach peak peak utilization levels, we have extensive.
Qualification requirements, both before we go live in and the needs of our customers generally will have their own qualification for the products that the process and our facility or the testing that we do for them. So I wouldn't look at these capacity expansions for either Nelson or Cirrhogenic <expletive>.
And as expansions that are going to move the needle here in 2021.
There is going to be some incremental impact from the second half of the year from from a couple of them and.
And that's reflected in our guidance you were asking specifically about the the center of excellence for for.
And for and up in the labs and that is expected to go live and the second half of the year and again it'll have some ramp up and so the incremental impact here in 2021 would be modest.
Great and then if I could on litigation.
And I'm guessing, it's not something that youre going to want to go into detail on because it is ongoing and.
But if you could maybe map out for us.
Some of the events and the quarter and then some of the milestones coming up and how and how investors should think about the and in the scheme of moving to the cases that are out there and getting to some potential resolution.
At some point on some of the newer cases.
Good morning, Matt This is Michael.
And I'll take that so and the litigation side. If you look at you kind of look at Illinois, first and that's going through the process of litigation right discovery and depositions and we were thinking you were going to come in sometime in 'twenty, one and it looks like it's more likely in 2022 is when.
The first trials and it's the first five that'll be coming up sometime in 2022, there are no specific page yet the.
Of course systems are pretty backed up because of COVID-19 and we're in line I think the last I heard we are our five cases were one of 1300 and backlog or something of that magnitude and Illinois. So it's going to matter and how quickly. The go through the the Illinois Court system, but we're talking about 2020 two midyear event at least.
And I'm not Georgia, a similar type of timeline similar type of update as far as discovery going on and depositions and that started yet net area.
And again, that's that's rolling out later into 2022 is our current.
Guests and expectation, we will be prepared if something were to change the timeline was accelerated but that's the current thinking and then and Santa Teresa, New Mexico, which would probably be the one that's most recent that was the suit brought by the EG.
And that shoot was not about closing a facility that was about.
Putting and controls for uncontrolled emissions.
And I can tell you that we've been operating there since 1989, we've been compliant.
With all of the rules and regs and all.
Also tell you that it's of critical element of the health care system to <unk> 5 million devices of day, or sterilize and that facility and the other part and we've been working for many many years with our regulators.
And then me and <unk>.
And the D as well as the federal region of the EPA and neither of them are party to the chute.
Sometime later in the month of May and there'll be a court hearing with the judge the had asked for a temporary restraining order based on the timeline and the judge US really move forward and said no no temporary restraining order will have a discussion and preliminary injunction hearing sometime later in the month of May.
Obviously and all of these suits, we feel very comfortable about where we stand but it's the reality of something we have to deal with and we're just continuing to run and operate the business all facilities are up and operating and we're providing critical medical supplies and pharmaceutical supplies to the health care industry.
That is helpful. Michael Thank you.
Great. Thanks, Matt.
Thank you. Our next question comes from the line of Sean Dodge from RBC capital markets. Your line is now open.
Thanks.
Good morning, and I'll add my congratulations on the strong starts of the year.
Michael you mentioned, the gradual recovery and demand, but with still some regional variation and.
As Scott highlighted that as one of the underlying assumptions of the guidance was for a continued normalization and.
You have a sense of of maybe from a volume perspective, how closer you know back.
Being at the pre COVID-19 levels and.
And maybe if you could give us a sense of how steep of a recovery.
Youre building and here for the remainder of the year.
And so we've talked to you and the past about the volume assumptions, we make around these businesses and I would tell you. All three of them are are below where were typical run rates of volume expectations are and we expected that the <unk>.
First quarter came in along the lines of what we thought a gradual recovery and we think that will build as the year progresses, Sean you'll second quarter will be a little better and that the first and the third will be a little bit better and the second and hopefully by the end of the year, we started getting back to the normal more normal levels that we see on volume and mix of the businesses.
I did mentioned in my opening comments the geographic variation.
The U S has come back a little bit better because the.
Of the vaccines and <unk> really ramped up relatively quickly here Europe continues to be of challenge I think rishi the across multiple industries not just health care and then we're also seeing similar.
Characteristics, if you will and Latin America, particularly in Brazil. So.
Hitting pull volume set we would hope, but this is consistent with kind of how we built the plan for the year and what we communicated to you earlier, we see this ramping up the second quarter should be a little bit better.
Again, though we've got to kind of see how COVID-19, particularly and some of those markets like Europe, and and Latin America, and how quickly they come online. So we're cautiously optimistic.
But we were taking the right actions and make sure we're here to satisfy our customers when they have the demand.
Okay and then in the.
The Nelson Labs, and then I think.
Scott you mentioned 10 points of that growth relating to increased testing of of personal protective equipment.
With that feeling like that's COVID-19 related and given hopefully we're nearing the end of this all I guess, how should we be thinking about kind of growth trajectories.
And kind of great cadences, and the Nelson lab side for the duration of the year.
So you know what and when we look at our guidance for the year. If you go back to the comment that we were assuming a normalization of volumes, we did and contemplate.
Both the normalization of those protective barriers testing back to pre or at least closer to pre pandemic levels of course, offset by a ramp up and other testing categories and so certainly that and built into our own models as a modest headwind associated with the protective barriers ramping back down but but.
As Michael mentioned, the other categories of testing and remember in health and offers over 800 tough test.
Testing categories. The there is certainly the expectation that we're going to have a tailwind from the rest of the testing categories too.
To help for us.
And to more than offset that and so I think it will be fine and that's why we were comfortable reiterating our guidance and we did mention that we're already seeing demand perk up and certain categories relating to different.
Product development related to us.
Lot of great activity in terms of the Antimicrobials that we believe will persist even beyond the pandemic and a number of other categories that are that are already beginning to wake back up again.
Okay.
Very helpful. Thanks again.
Okay.
Thank you. Our next question comes from the line of Dave Windley from Jefferies. Your line is now open.
Hi, Thanks. Good morning, Thanks for taking my question a follow up the Sean's question there.
As it relates to the reopening and the comments Scott that you just made on on Nelson is there also and impact on us.
Or by segment.
Shift in activity from say Nelson to stare at Genex as as you reopen and.
Thinking you know of PPE is coming down as much as it is.
That are or could come down and as we reopened do you see the offset to that and in some cases and in say <unk>. Instead I just wanted to understand kind of the inter segment impact of reopen.
And if I'm understanding your question right I wouldn't think about it in terms of any kind of of direct offset between or amongst our businesses.
And really I would look at each business on a standalone basis, and just say the that we're beginning to see and expecting to see throughout the year of normalization for each of those businesses and their activity and I think when you look at Q1 results you already begin to see that for each of our businesses and we will expect that to continue through the year, Okay and then.
And on the regulatory side of things has the new administration and been in place long enough to.
And to have some people in seats that your government affairs activities can interact with and begin to get a sense do you do you have any clear view as to when.
EPA regulations might be landing updated and regulations that is David This is Michael.
I would tell you we meet with and discussed with our regulators on an ongoing basis at both of the state local and federal levels.
We do have people and the seats.
The running of the EPA and their competent people and we've been and interacting with them I will tell you from a timing perspective niche app is the big standard it we're waiting for some new rules and regs around ethylene oxide and <unk>.
Reiterated in the past we were hopeful and 2018, we're hopeful and 2019 2020 one that we would see these new rigs and we're now hearing late 2020 two.
That is the word we're getting out of the regulators that they expect this the new knee chef requirements and rules to come out in late 2022, I think that just speaks of the fact of how complex the issue is and.
And the many stakeholders involved and the criticality of Epo.
Over 50% of the medical devices are sterilized with ethylene oxide of 20 billion devices of year theirs.
No known alternatives for that material and.
And people are operating and a very responsible way and handling this dangerous material and I think people are getting a better appreciation of how complex. The issue of so what we are hearing currently David is late 2022 for the new regs.
Gee, if I could sneak one more and on that topic as a follow up do you think that your are you finding for example, and Atlanta that your investments and your double scrubbing.
<unk> and tightened recapture.
Approach our us waging the concerns of the people that are bringing these actions and the cases, where you've seen that.
I will tell you we're confident on our solutions that we put in place and Atlanta, and they're working well and we're taking care of our customers. We already were far exceeding the regulatory requirements that should see us even further insurance around the ability to do that I can't speak to the motives and sort of comfort level of these other parties because sometimes your motives from clearly aligned.
And with ours or the broader health care industry. So what I'll tell you is we're confident of our solution.
And we continue to move forward and making sure we operate and the compliant manner and provide a critical service.
Great Thanks, and thanks for that.
Yes.
Thank you. Our next question comes from the line of Patrick Donnelly from Citi. Your line is now open.
Hey, guys. Thanks for taking the question.
And maybe just on the one of the balance sheet side, yet you guys of obviously refined some debt and the annual interest rates come down and it gets real savings. There can you just talk about the flexibility that gives you obviously, you've invested a little bit inorganically.
You talk about the priorities here, you're obviously continuing to delever towards that two to four range, you're almost there versus continuing maybe some of these bolt on activities on the inorganic side would love just to see of general thoughts there yes.
Patrick This is Michael and then Scott <unk>, Chairman and for any further detail and obviously this business operated at pretty high levels of of leverage and the past we're down to four one times as we've referenced in her opening comments, we feel very comfortable about our leverage levels and our flexibility we have of $108 million I believe it is and cash from the balance sheet at the end of quarter. Our priorities are to continue.
And you invest and this business for growth.
To delever and to pursue strategic M&A I feel we have the flexibility of our capital structure to accomplish those and we're optimistic about our ability to continue to drive the growth and high single digits that we've stated in the past.
Okay and then on the same topic you guys have talked about some elevated capex over the next few years related to sourcing of new cobalt 60 supply sources facility enhancements at <unk> sterilization.
Do you think about balancing those investments with capacity expansions and the other inorganic opportunities.
We've got a pretty detailed capital deployment plan and approach.
We rack and stack them based on the demands and needs of the business and we work across the team and the.
Best of the Canadian looks at these opportunities, but we feel comfortable with the the visibility we've given you around cobalt development yield facility enhancements as well as pursuing organic and inorganic growth opportunities.
I think just to add to the point of if you look at the guidance that we've given for Capex here and 2021 of the range of $100 million to $110 million and we've also.
We bought the communicated in the past the around $30 million of that number relates to these quote unquote the special projects related the cobalt the development and.
The facility enhancements and so what's left after funding the two special project is a pretty generous capex number relative to what we've spent and the path and certainly enough to continue to invest and.
And and growth initiatives continue to drive the top and bottom line at the levels that we were accustomed to.
Got it thanks guys.
Thank you. Our next question comes from the line of Matthew of Michel <unk> from Keybanc. Your line is now open.
Hey, great. Thank you for taking the questions and also thank you for the incremental details and the script much appreciate it.
And the follow up on the annuity and investments.
What is the ultimate outcome of that is it is it was done and supply.
Hope you're kind of smoothed the cadence of revenue and harvesting there.
Or does it open up capacity for new applications.
Yeah.
Michael Thank you for recognizing additional details you asked of us where we want to be responsive. So thank you for recognizing Matt from of Cobalt development perspective, we.
We're we're building out capacity for long term growth for the industry that needs cobalt.
What we're doing I don't think its kind of smoothed out.
Variation from quarter to quarter because of lot of that is dependent upon or most of it is dependent upon the utility and when theyre able to harvest the cobalt out of the reactor, but what we're building and investing is to get more cobalt for long term growth of the industry needs.
The end result will be.
Okay.
And then my next question is just how are your customers the meta, especially medical device customers.
And thinking about inventory and.
And the past contract sterilization could have been a little bit of of a bottleneck.
Are they trying to get ahead of the macro recovery.
And are.
The careful of the pace of it and kind of what are you telling them on the capacity of of turnaround time as things start to book rise faster.
And so.
We are working and our customers, we're not seeing and build the bunch of inventory, we don't have great visibility into that Matthew because we don't inventory product for them.
But we're seeing a steady.
Steady supply of product coming through we're not seeing large bolus of product moving in to get ahead of any inventory build or anything of that nature.
See the continued to ramp up you know we work with our customers around the world to find the right capacity.
And in the right.
Geography, and the right modality to sterilize their products and that's something we constantly work with them.
So I would tell you we're not seeing like huge inventory builds going on but we don't have great visibility to it but within our facilities and the volumes, we're seeing run through our facilities, we're not we're not seeing it today.
Okay, and then lastly, just.
The 15% ownership of <unk> labs.
<unk> per field, how should we be accounting for that is that is that incremental revenue as debt.
Something you were getting.
And below the line and minority interest or something like that.
Just think of your a little bit of history on that transaction. So we refer to that business as north of about Fairfield today, when we acquired it in 2018.
It was the acquisition of Gibraltar labs, and when we acquired it in 2018, and we acquired 85% of the equity interest and effectively we pre negotiated the buyout of the remaining 15% to take place here in 2021, and so the accounting for that.
The time was that we consolidated 100 per cent of that business into our P&L for reporting purposes, and we put the fair value of the repurchase obligation on the balance sheet as of <unk>.
The ability and so in terms of how that transaction flow through our financials, what you see us that the cash outlay basically offset the balance sheet liability. The there's actually a benefit of a true up benefit and our GAAP financials to the tune of about $1 million or so but it doesn't impact the.
And at least up of the adjusted P&L as we typically present the performance of the business.
Okay. Thank you Scott Thank you Michael.
Thank you.
Thank you. Our next question comes from the line of Tycho Peterson from Jpmorgan. Your line is now open.
Hey, Thanks, and some of the question on Nelson Labs EBITDA.
EBITDA margins, there have been pretty healthy kind of north of 43%. The last couple of quarters and as you talked about a 430 basis points year over year. This quarter can you just talk about the sustainability of that kind of step up from the high <unk> to the low 40 square for now some of that.
Yes.
Thanks, and thanks Tycho for the question, we continue to perform this business expand margins since we've owned it.
Great business, well thought of and respected by our customers and we're really focused on the turnaround times and high quality testing, which is what we provide to our customers.
And we continue to look for operational excellence, you'll Joe and the team there have done a lot of work around operational excellence and how the streamline processes and.
How they really run net business day in and day out and I could tell you. The team has done a phenomenal job. There obviously price is a factor we gave we get some operating leverage with the volume as well, but overall the team's done a really strong job on operational excellence and we have a host of additional levers that we're looking to pull net business as we continue to progress.
This year into 'twenty, two and 'twenty three and beyond so.
And so we're optimistic about where we are and the value proposition, we bring our customers and the market.
Okay, and then on the COVID-19 dynamic I appreciate.
Commentary there I'm curious are there any kind of structural changes you think coming out of the pandemic in terms of outsourcing rates accelerating here.
Theres just not wanted to do it and health.
And any change and kind of the trend there.
And that's seen easing nature in the trends there I'm just I'm thinking through your question as I'm answering and here, we don't see anything that's dramatically going to change that in sort of outsource view.
Related to COVID-19 may.
And maybe down the road as some of these new rigs come in debt might change some of the the dynamics and the market, but I'd say, it's too early to call that at this point in time. So the answer. Your question is no. We don't see anything changing the in house outsourced dynamic based on COVID-19.
Okay, and then last one and just curious if you can give any color on Q2, you know if I go back the last quarter, you actually gave <unk> guidance. So I'm just curious why.
You are not giving <unk> guidance and any kind of bench.
The benchmarks you can put out there for us.
So Tycho we gave US total year guidance that was our plan and the recent we felt it was necessary to give us.
The first quarter guidance, because we're only a couple of weeks away from that.
We're going to stick to annual guidance and continue to give visibility to and annual guidance range and.
We will continue to keep you informed as we progressed throughout the year of these quarterly calls, but we're not going to do quarterly.
The forecast. So it was just the last time, we had a couple of weeks left and we felt that was the responsible thing to do to make sure that you had visibility was such a short window there.
Understood. Thank you just.
Minder, though that we did provides us some from qualitative guidance on specific the nordion given given the shifting order patterns, there and we are and our full year guidance still reiterating the qualitative for this and that Nordea and it's going to be fairly balanced between the first and second half of the year.
Thank you. Our next question comes from the line of Luke Ceragon from Barclays. Your line is now open.
And hey, guys.
Couple of quick ones from me so on the guidance with the M&A and the recent acquisition of Bioscience is that expected to contribute anything incremental or is that already contemplated.
Within your prior guidance.
So yes at the time that we originally issued guidance back in March that was basically at the same time that we closed this acquisition. So so we did already contemplate the acquisition of Bioscience, but also just bear in mind that Youre talking about an acquisition that the out of $15 million purchase price and so.
It's clearly immaterial in relation to the overall size of our company.
Yes.
Yes.
And then I guess can you talk a little bit about us.
The margin dynamics baked into guidance I know Tycho dug into this a little bit but just from us.
A mixed perspective, and how that's going to flow through of just so we have an idea of the pacing here.
Sorry, I'm not sure if I, if I understand the exactly so were as.
As Michael mentioned, we're not really breaking down the quarter in terms of our guidance.
What I'll say is that and we've talked about this a little bit on the last call is the Q1 is the one quarter, where we feel some impact, particularly at the <unk> from seasonality and so given the the operating leverage at <unk> and this is true to some extent with nothing labs as well Q1 margins.
And are a little bit depressed and thats the aggravated by the ramp up of the public new public company costs that I mentioned, and then kind of the one off costs associated with the secondary.
So based on that I would look at our Q1 margins as being a starting point and then we would expect to continue to build on our margin profile through the year, but we're not providing anything more granular than that at this point.
Okay, and then lastly here just the <unk>.
And any change on the near term capital deployment strategy ahead of the the lockup next week.
No it's hard for us.
We just go ahead and operate the business investors make their decisions on what they're doing with their shares over time, but.
But listen we're going to continue to just run the business.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Amit Hazan from Goldman Sachs. Your line is now open.
Thanks, Hey, good morning, everyone I wanted to actually come back to <unk>.
Margins for a second and just.
And maybe have you help us think through just the volume impact versus margins, obviously, you're seeing some pretty good margin improvement to kind of put the public company stuff aside for a second but thats happening on depressed volumes everywhere. So I just have to imagine you're going to see improved leverage here. If volume is do indeed come back through this year and into next year. So how much.
How should we think about that how much leverage should you would you have us as volumes come back. If you can give us some color on that and are there other offsets on the other side of this.
Some of the feed and stuff that youre doing higher margin or anything like that and any color around around this story would be would be helpful.
Yes so.
You look at where we finished 2020, our total company margins adjusted EBITDA margins were 52, 1% and so as I mentioned in response of the the last question, we do see a dip in Q1, and that's driven in part by seasonality and so that's why you have total company margins here in Q.
You won that are below 50%, but I think when you look at those Q4 numbers. That's more representative of the run rate that we're at is the company when you adjust out and the seasonality of Q1, and so I think you could look at that as the starting point and that we'd expect to continue to grow off of that.
We're focus of it and continue to grow margin dollars and driving growth of the business. As you know, we've given guidance of 90% to 12% the topline growth and 11, 16% adjusted EBITDA growth and that's really where we're focused on organic.
The team to drive growth of this business.
And and and kind of related to that some of the possibilities that might happen is the theory and next year and Sue is that we'll see greater volumes and what is and normal year.
Just given us.
Ability to recapture of prior procedures and things like that.
What does capacity look like for you if that were to happen.
How much excess capacity would you have in the system.
If that were to transpire later this year and into next year.
We're today across the stair agenda ex network or at $73, 75% capacity approximately net varies by region by technology, but that's a general directional comment and.
And the Nelson side, we feel we feel we've got ample supply of especially with all the work going on and productivity that the.
Joe and the team are doing there as well as what's going on and the <unk> side, we feel good and and minority and side, it's really driven around cobalt timing and the harvesting and and how quickly you could turn it around those are the things that really impact our capacity. So overall I'd say, we feel good of where we're at and what the outlook for the rest of the year.
And just a last quick one from me for Scott and.
Inflation, obviously everywhere and the new debt can you just give us a sense of your own input costs of the other costs, you have and considerations as they relate to inflation and your pressure youre seeing already and your ability to pass those on to the customers if they were to and salary.
Yes so.
Obviously, we're going to be impacted by that sort of at least some extent like any other company out there.
In terms of our input costs, obviously being a primarily a service company and excluding Naughty on then that Insulates us somewhat from some of the inflationary forces out there I would say the biggest one that we're worried about is the wage related inflation, because certainly we're seeing that type of pressure out there across our network across all three of our businesses.
But one thing that I would remind you of and this goes back to and the path. When we have talked more fundamentally about the nature of our relationships with our customers is that a lot of our contract based.
Services and commercial relationships have built and price escalators that.
And in many cases are actually linked to some type of index that would protect us against inflationary factors and so.
And so that gives us some comfort that we'll be able to maintain and maintain margins and.
And the event of a of a more aggressive inflationary environment.
Thanks Us.
Thank you. Our next question comes from the line of Michael <unk> from Baird. Your line is now open.
Hey, Good morning, you provided good details on the EPA rule, making thank you for that I did have a follow up earlier. This week just on May 10th I believe on the Federal Register it was posted that the EPA has expanded its data.
Quest state of collection efforts as it relates to <unk> and commercial Sterilizer. So.
My question is why why is the EPA doing this or why do you think the EPA is doing this number one and number two what are they looking for now that they havent been looking for previously.
Yeah, So Michael I'm, not exactly sure, but I think you might be talking about the tox tissue reporting.
I think that might be what you're referencing and.
And.
That is something that the EPA has not required and.
In the past I don't see any issue for <unk>, if that ends up being of new requirement.
We're not required to report under the E. P. Cri as of today, but we currently report of emissions for all of the state authorities already because of our permit so I don't foresee that being an issue.
I think they're trying to get more of my suspicion is you're trying to get more visibility to the ethylene oxide emissions.
More holistically across the industry.
Okay.
The other one I had was on the topic of.
Outsourcing and sourcing and the terminal sterilization and I was a little surprised to see.
BD and early April announce.
Substantial facility in Arizona to expand it.
Infrastructure, including sterilization and I believe that.
The facility will use.
And so curious for your views on this is this is this a one off.
And any insights you can can share and.
Without without talking specifically about this customer just any insights you can share on.
Yes that development yeah.
Obviously, the BD is a very strong player and the med device space and I don't know all of the particulars. It appears from what I've read and the public releases that Theyre doing a large hub for manufacturing sterilization.
They do have some in house yields sterilization to date I don't know if that's of consolidation of existing capacity into a hub hub arrangement or if that's truly incremental.
But I don't see that as the material long term impact to us or the industry from an outsource and source perspective, Thats, what youre asking.
Okay. Thank you very much.
And Q.
Thank you at this time I am showing no further questions I would like to turn the call back over to Michael Petra for closing remarks.
Great. Thank you hopefully you can see we're off to a strong start this year and Scott and I look forward to the seeing you and some of the upcoming investor conferences that we have going on but.
Thank you for your time and the operator that concludes our call for today.
This concludes today's conference call. Thank you for participating you may now disconnect.
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