Q2 2021 Sotera Health Co Earnings Call
Press release and accompanying supplemental slides in the investors section of the company's website at <unk> Dot com.
This webcast is being recorded and a replay will be available in the investors section of the so Terra health website on the call today are Michael Pietrus Qi.
Chairman and Chief Executive Officer, and Scott <unk>, Chief Financial Officer during the call. Some of the statements. The company makes may be considered forward looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implemented.
Please refer to <unk> SEC filings and forward looking statements slide at the beginning of this presentation for a description of the 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 measures, including adjusted EBITDA, adjusted EPS and net leverage ratio.
A reconciliation of non-GAAP to GAAP measures for all of the relevant periods may be found in the schedules attached to the company's press release and supplemental slides during the Q&A portion for today's call. Please limit yourself to one question and one follow up so that we can try to give everyone. The opportunity to ask questions I will now turn the conference.
Over to <unk>, Chairman and CEO Michael <unk>.
Thank you.
Everyone and thank you for joining us on <unk> second quarter 2021 earnings call I am very pleased this morning to be reporting another quarter of double digit revenue and adjusted EBITDA growth.
This performance builds on the strong growth we delivered in the first quarter. It rounds up a solid first half of 2021.
These operational and financial results serve as a great reminder, to secure health sits in a critical position in the health care value chain.
Importantly, the team continues to execute on our mission.
Safeguarding global health, while still navigating the challenges and changing dynamic of the pandemic.
Scott will go into more detail on our segment performance and capital structure in a moment, but here are some highlights of our second quarter performance.
We reported total revenue growth of 18% and adjusted EBITDA growth of approximately 18% compared to the second quarter of 2020 as well as adjusted EPS of <unk> 26.
Which was a 12% increase over the second quarter last year.
It's important to bear in mind Robert.
Pandemic has certainly impacted our top line last year, all three of our businesses still deliver growth in the second quarter of 2020.
While many companies are reporting growth compared to a fairly weak baseline from last year, we are delivering double digit growth compared to a quarter in which all of our business have delivered a consistently positive revenue growth has characterized our company for many years.
This strong performance is a reflection of our continued focus on our strategic priorities, including.
Driving operational excellence across all our businesses.
Deploying capital towards our growth initiatives, such as adding capacity and enhancing infrastructure.
Strategic M&A and efficiently integrating acquisitions, including airtime and Bioscience laboratories.
And further deleveraging towards our target levels.
At several points during this year, we indicated that our outlook for 2021 assumed a gradual normalization of volumes throughout the year overall I would say that 2021 is playing out the way we anticipated, but there are some nuances to how each of the businesses has been impacted by the recovery.
Those nuances are reflected in our second quarter results for each business.
<unk> had a solid quarter as its volumes continue to recover towards pre pandemic levels.
In fact stair Jack's volumes and utilization levels in the second quarter were near their pre pandemic high watermark reached in 2019, so in relation to our original outlook for 2021, I would say that <unk> has ramped up a little faster than we expected.
Nelson Labs continues critical testing of personal protective equipment, but that category as expected improves you communicated has now become a headwind year over year strong volumes in the second quarter of last year with testing related to pandemic was first surging.
As expected we've seen enough recovery in other non PPE testing category offset decline in PP&E related testing.
Overall, though I would see the normalization of non <unk> testing volumes, including testing related to new product development is going to be a slightly slower pace for Nelson lapsing periods at a faster recovery at <unk>.
The slower pace of recovery for services are.
Part of a much larger cycle of activity does not come as a surprise.
A surprise to us.
For Nordion.
A difficult comparison in the second quarter, given an unusual concentration of shipments in the second quarter of 2020, the team still delivered double digit growth for the quarter.
I am proud of the entire sutera health team for achieving a strong first half financial results and a continued focus I mean, the needs of customers health care workers and patients, while creating a safe work environment.
With the benefit of a solid first half performance combined with more momentum going into the remainder of the year, we are increasing our top and bottom line outlook for 2021, Scott will provide you more details on our total 2021 financial outlook in a moment.
Moving on to capital deployment, we continue to be disciplined in this area our capital deployment priorities remain unchanged as we prioritize growth investments further deleveraging and strategic M&A.
Our net debt leverage ratio improved once again in the second quarter.
Now I would like to highlight some of the key capital deployment growth investments for each of our three business segments.
For Nordion, we've been discussing per ton for some time nordion and investment of three long term cobalt 60 supply projects.
As we've mentioned these initiatives are longer term in nature and will diversify our supplier base. We continue to make progress in these development projects.
For Nelson Labs, we continue to be focused on expanding capacity and capabilities to meet the needs of our customers are great. Examples of our extract the old mutual's testing area, where we've made investments in both equipment and technical staff in order to service a significant demand growth we have seen in that area.
Earlier this year, we reported progress on the build out of our European Microbiological Center of excellence based in Germany.
I'm now able to say this new App went live during the second quarter as quickly qualifying customers to ramp up operations.
I'm on semi congratulations to the Nelson lapsing, achieving this important milestone we are pleased that the integration of Bioscience laboratories, which Nelson labs acquired in March have been going well.
<unk> Bioscience labs as part of Nelson Labs.
Business is already trading revenue growth above biosciences pre acquisition baseline.
Lastly, we have made substantial progress on the <unk> capacity expansions as well as on the <unk> facility had some throughout the quarter.
Taking a step back from our specific results I'll comment briefly on what we're seeing the broader markets, where we operate.
As I mentioned earlier, the market recovery and Charles playing out in a matter of relatively consistent with the assumptions we made earlier in the year different.
Different from last quarter, we've seen a fairly broad recovery in the second quarter across both the Americas and EMEA, we find it to be an encouraging trend.
Having said that I think it's important to maintain a cautionary tone everyone's aware of the continued presence of the virus and the risks associated with the new variance will continue to monitor the activities of our customers in the market.
In addition, we and our customers are accounted some challenge that serve as a reminder of how <unk> settled on settled the macro environment is right. Now for example, some of our customers have experienced delays in shipments due to a variety of issues, including shortage of labor or raw materials or even availability of transportation services.
Moving away from the financial results I wanted to share two initiatives that we've accelerated part of being a new public company first we are developing a formal ESG program, taking a holistic approach to identifying what is important to us and to our stakeholders.
And we will have the most beneficial effect on the environment, our employees and communities in which we operate.
As part of our focus on diversity equity and inclusion we have created a diversity equity and inclusion or D. Eni Council.
The council consist of employees from around the world and from different levels of the organization.
The counts reports EMEA is clear actual goal towards probably the companies the Hershey equity inclusion efforts I recently melted counsel discuss our progress and while still early I look forward to sharing a bit more about these efforts with you on future calls.
Before I turn it over to Scott to cover the second quarter and outlook in more detail I want to take a moment again to emphasize how product of the entire <unk> team.
Our teams will focus on executing against our strategy, serving our customers with excellence and attention to delivering results as and a large part of the reason that we are able to update our outlook today I'll now turn the call over to Scott.
Thanks, Michael.
I'll first cover the second quarter highlights on a consolidated basis.
And then provide more detail for each of the business segment, along with updates on capital deployment and leverage.
I'll end with more detail regarding our updated 2021 outlook.
On a consolidated basis.
So terra helped in the second quarter delivered revenue growth of approximately 18% as compared to the second quarter of last year to $252 million on a constant currency basis revenue grew by about 14%.
Adjusted EBITDA also grew approximately 18% from Q2 of $2000.20 million to $135 million.
Adjusted EBITDA margins contracted by 30 basis points compared to Q2 of last year, driven largely by unfavorable mix within the Nelson left and Nordion businesses, along with absorbing an incremental $4 million of administrative costs across the company largely associated with the ramp up of public company costs.
Our strong operating performance combined with a $36 million reduction in interest expense.
<unk> and adjusted EPS of <unk> 26 per share up <unk> 12 from Q2 of 2020.
Now, let's take a look at the segment performances.
In Q2, Cirrhogenic delivered 26% revenue growth and 22, 4% segment income growth over Q2 of last year.
Revenue growth drivers for the second quarter included organic volume and mix growth of over 8% pricing contribution of approximately 4% and approximately 6% from the acquisition of Io trial.
Compared to the second quarter of 2020 segment income margins in Q2 of 2021 expanded by 80 basis points, driven by higher utilization levels and pricing.
As Michael mentioned, we are pleased to see the <unk> volume for the quarter have just about reached the high watermark established in 2019.
We continue to make meaningful investments in <unk>, we are on track to complete.
Aerogenic expansions this year and we continue to make progress on the facility enhancements at our North America <unk> facility.
Moving to Nordion Q2 revenue grew by 16, 6% compared to Q2 of $2000.20 million to $49 million Nordion.
<unk> segment income grew 13, 7% to $31 million compared to the same period last year.
Nordion top and bottom line growth was driven by a nine 5% benefit related to FX as well as an 8% increase from pricing, partly offset by slightly lower volumes.
We had anticipated lower volume compared to the prior year due to the concentration of shipments in Q2 of last year that Michael had mentioned earlier.
<unk> margins fell by approximately 160 basis points, largely driven by unfavorable mix.
I'll note that even with the year over year decline in margin rate Nordion segment income margins are more than 63% this quarter.
Like many businesses with our predominantly fixed cost base nordion margin tends to be higher in periods of stronger top line performance as a result of favorable operating leverage that was the case this quarter just as it was in the second quarter of last year.
In subsequent quarters with more modest topline performance youre going to expect margins to settle back down to a point, which brings their full year average back in line with last year.
Overall nordion performance for the quarter was better than we had originally expected as some sales previously anticipated for the second half where instead realized in Q2 as a result nordion in second half of the year revenue is expected to be lower than the first half of the year, but still with full year revenue better than what we were expect.
At this time last year.
For Nelson Labs.
Q2 revenue grew as compared to the second quarter of 2020 by 13, 9% to $58 million.
And segment income grew by eight 3% to $24 million.
Earlier, Michael mentioned nuances to how the pandemic recovery is impacting Nelson labs testing volumes.
We saw in Q2 was the PPE related testing went from a tailwind in recent period, two a 5% year over year headwind on.
On the other hand, non PPE testing delivered enough organic volume growth to offset that decline.
This was noted in the strongest quarter since the pandemic began for the non PPE testing services, which grew 6% on volume and mix.
Nelson's non PPE testing services have delivered sequential volume growth improvements in four consecutive quarters.
In addition, bioscience labs delivered incremental growth over their pre acquisition baseline contributing over 7% to the segment revenue.
Favorable pricing also contribute at around 4%.
Q2 of 2021 margins contracted by 210 basis points over the prior year quarter.
A softening of demand for higher margin PPE testing resulted in an unfavorable mix of testing services during the quarter.
Next I'll cover some highlights relating to capital deployment and leverage.
Our capex spend is tracking in line with our full year guidance with $24 million.
Recurring in the second quarter, and bringing our first half total to $45 million.
As a reminder, we continue to project a $100 million to $110 million of capital expenditure for full year 2021.
Our spending continues to be focused on near and longer term growth initiatives <unk> facility enhancements and Nordion cobalt supply project.
As of June 30, we had $156 million in cash a $54 million increase over December 31 level, we were able to deliver this cash generation even after funding approximately $15 million of the Bioscience labs acquisition $12 million for the <unk> labs, Fairfield minority owner buyout.
In Q1, and about $8 million to buy out our minority partner fixed at our two facilities in China with.
With combined cash and revolver availability of $435 million.
The company remains in a strong liquidity position to fund our operational needs and investment.
We remain undrawn on our revolving credit facility.
Our net leverage ratio continues to improve with net leverage of three eight times as of June 30, compared to four three times on December 31.2020.
We've made excellent progress in delivering on our deleveraging commitment already achieving the top end of our stated long term goal of leverage between two <unk> and Forex.
Through a combination of debt paydown in repricing our term loan Q2, 2021 interest expense declined by $36 million versus the second quarter of 2020.
For the first half of 2021 interest expenses declined by over $71 million.
With our meaningful cash build and after funding other capital deployment priorities, we will fully redeem our $100 million.
First lean notes during the third quarter of 2021.
These notes are currently the highest cost debt in our capital structure and the redemption will save the company, an incremental $7 million per year of interest expense.
As Michael mentioned, we're very pleased to be in a position to increase our outlook for the full year from the initial outlook ranges that we provided on our March 9th call.
For full year 2021, we now expect total revenues in the range of $920 million to $940 million representing growth of approximately 12% to 15% compared to 2020.
Adjusted EBITDA for full year, 2021, and the range of 475 million to $490 million.
Presenting growth of approximately 13% to 17% compared to 2020.
And adjusted EPS in the range of 87 to 91 zone.
From a qualitative standpoint, our assumptions are as follows.
We expect continued improvement in the demand for our products and services through the end of the year as we've experienced already in the first half of 2021.
As I mentioned earlier, the outperformance by Nordion in the first half of the year means that both naughty on second half revenue and margins are expected to be lower than the FERC half of the year.
Based on this momentum coming out of the first half of the year, we expect <unk> to continue to deliver solid topline growth and margin performance in the second half of the year, while Nelson labs will continue to be impacted by the interplay of how quickly non PPE testing ramps back up compared to the decrease in <unk>.
Related to testing.
With respect to foreign currency, our guidance continues to be based on exchange rates in effect as of the time that we provide updates on guidance.
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.
Before I turn the call back to Michael to wrap things up I wanted to Echo <unk> earlier comments.
How proud we are of the entire team our team's hard work is evident in our Q2 and first half results and has helped to position us for a solid 2021.
Back to you.
Thank you Scott before we conclude I wanted to comment on recent developments relating to the <unk> century sterilization facility.
As many of you are aware there was a court order on June 29, which prohibits uncontrolled emissions from facility and ordered at Sterne <unk> worked with the New Mexico Attorney General and are monitoring protocol.
<unk> stared denies the allegations about the Santa Teresa facility <unk> has taken steps to ensure monitor and document compliance with the order.
<unk> has not yet reached an agreement and are monitoring with the attorney General has requested a hearing with the judge of the core can determined an appropriate monitoring protocol.
Having said that we have no reason to believe that the outcome of that process will hamper in any way facilities mission of sterilizing, two 5 million essential and often lifesaving medical devices, each and everyday.
I also wanted to remind everyone that we periodically post updates to the special notes. This section of our Investor Relations site that matters that may be relevant to investors, including updates with respect to ethylene oxide and how they may affect share Jackson facilities as referenced in our most recent posting to that site.
We were pleased that <unk> recently received an environmental permit from the New Mexico Environmental Department clearing the way for the next step in <unk> implementation of additional emission control enhancements at the century set facility.
That permit is a good example, I'll share Jackson constructive relationship with regulators in the state.
Back to our performance overall, we're very pleased with our operating results and financial results. Thus far this year, especially considering the continuing challenges posed by the global pandemic.
Thank you again, the <unk> team for their great execution, this quarter and for setting us up nicely for a solid second half of the year at this point operator, we'd like to open the call up for questions and answers.
Thank you as a reminder, if you have a question at this time. Please press Star then one to withdraw your question. Please press the pound key.
Our first question comes from the line of Matt <unk> with Credit Suisse. Your line is open. Please go ahead.
Thanks, so much and good morning, and congrats on a on a really solid strong quarter.
Couple of questions if.
If you could.
Maybe talk a little bit about.
The sort of <unk>.
Demand trends that Youre seeing.
That said I think one of your competitors earlier in the week talked about rising demand from some of your end markets.
In devices and sterilization.
And then I had one follow up.
Good morning, Matt This is Michael.
Yeah on the demand obviously, we're watching the covid situation and the impact on elective surgeries and from where we are the volumes have been pretty stable for us.
We're cautiously optimistic as the year progresses.
Assuming of the catastrophic.
<unk>, we think will continue to see growth in the second half of the year.
Okay.
And then on the margin front.
I appreciate the color.
Yeah.
Cross currents in the back half of the year here with Nelson.
And in the other businesses can you talk a little bit about the extent to which.
Margins on <unk> played a role here in the quarter or trends in margins in <unk> in the back half.
I'll address it first and Scott can add and obviously, we had margin expansion year over year I think it was about 80 basis points or so for <unk>.
The operating model is such that as you get volume coming across these facilities with the fixed costs you get good operating leverage so as volumes come back versus third fourth quarter next year, we would expect to see improvements.
Margin rate expansion.
Yes, I'll jump in and just add.
Absolutely agree with Michael's comment for <unk>.
Continued robustness in the underlying operating model persists and so in the second half of the year, we would expect to see a continuation of the favorable trend that we're reporting here in Q2 with the 80 basis points of margin expansion in that series that you reported here in Q2, one thing I would emphasize also is that obviously in our first year as a public company there are.
These.
These new costs that we're absorbing these new administrative costs associated with being a public company and we mentioned earlier $4 million of cost headwind in Q2 alone and it was $8 million on a year to date basis, and so that cost headwind in Q2 translated to about 170 basis points of <unk>.
Margin headwind that we had a total company overcame and so I think when you consider that and look at it there's still robust margin performance for <unk> across all three businesses and that really should give some comfort around the health of the underlying margin profile for the core business.
And if I could just squeeze in one more here I know.
But.
Youre a little bit unique in the way that you structure some of your contracts.
Around say wage inflation or input cost inflation.
That's becoming kind of a general concern across the economy can you talk a little bit about.
Should you see that or if youre seeing some wage inflation across your plants and facilities. They have that would factor into your how.
How we should expect that to play into your margins over time.
Yes, Matt This is Michael I would say we are seeing some inflation predominantly on the labor side being a service business like we are it would be on the labor side is primarily focused in the U S.
We feel we'll be able to cover any inflation in the way, we deliver price and are contracting with our customers, but overall, it's a manageable number but one impact that we are clearly seen across the economy here in the United States. This year, well aware with other businesses as well and just that Palomar labor overall.
Thank you thanks, Matt.
Thank you.
Minder Questioners, please limit yourself to one question one follow up question. Our next question comes from the line of Sean Dodge with RBC capital markets. Your line is open. Please go ahead.
Hey, Good morning. This is Thomas Keller on for Sean Thanks for taking the questions and congrats on a great quarter.
I guess just starting off.
Previously mentioned in our strategic planning window for each business unit that is kind of ran through July where.
Pharma and specifically on Nelson lab side was it a key focal area.
In August.
What are some of the takeaways from those meetings have any interesting changes strategic direction or anything like that.
Thomas Thanks for the question obviously.
Obviously, I'm not going to get into a lot of forward looking details, but just to kind of.
Close to that planning cycle, yes, as we stated in the past we have an operating system across the tier health and one of the key elements of that is a three year strategic planning.
And just completed that we're actually going to have a strategic planning session with the board next week and taking them through that three year plan, but I would tell you we're really optimistic about where we sit as a company and fulfilling our mission of safeguarding Global health and yes pharma is is a part of that strategy going forward as it has been up to this point as well.
Okay, great. Thanks.
You guys have a number of the new capacity expansions coming online over the next year or so.
You said everything is on track there is no notable delays or accelerations or anything.
How should we think about contribution from new capacity. This year, maybe next year, yes.
Yes, I would just say, yes, we've got six expansions that we're paying coming live this year.
And we also referenced in our remarks that we are proud of the fact that the Nielsen team under one one project of expansion that we just bought in center of Excellence has opened up.
In Germany. So that's good we're not going to get into specifics by facility, but we believe the need to put additional capacity in place to service the demands of our customers.
We as we've talked about in the past with a lot of our investors. We really are diligent in that process of how we think about capacity and making sure. We have some anchor customers. If you will before we start putting shovels in the ground or expansion.
Okay, great. Thanks, that's all for me. Thank you.
Thank you and our next question comes from the line of Patrick Donnelly with Citi. Your line is open. Please go ahead.
Hey, guys. Thanks for taking the questions.
Maybe another one just on the on the guidance can you just talk through Scott what pace of recovery, you're kind of thinking about for the back half again with elective procedure, let's say uncertainty in terms of some of the mixed signals we've gotten from some of the ortho players and then also just high level any way to think about <unk> versus <unk> in terms of the pacing there.
Sure.
Terms of the pace of recovery. If you go back to our guidance as originally issued back in March we had contemplated a gradual normalization of volumes throughout the year and so as Michael said, a few minutes ago or basically the year has played out more or less in the manner that we had anticipated one of the.
Key changes that we talked about already on the call here is that <unk> has benefited from probably a slightly faster ramp up in their area than we had originally contemplated in our guidance and so I don't think that meaningfully changes what we contemplate the second half of the year, we still see the opportunity there.
Is it going to be a continuation of what we saw in Q2, where we've hit our high watermark and we expect to see continued robust year over year growth, both topline and bottom line for the business.
We're not seeing any kind of a headwind in terms of any impact from the new variant yet as.
As far as how electric procedures may it may flow through to our volume one thing to recall is that last year in Q2, even during the worst of the pandemic shutdown activity. Our company delivered robust revenue growth in <unk>, even delivered in Q2 of last year, 4% revenue growth on a constant currency basis.
So the fact that our business has been so robust from a revenue generating standpoint, and even during the worst periods of the pandemic gives us some comfort.
We have line of sight to a strong performance for the second half of the year.
No. That's helpful and then Michael maybe just on the on the litigation front.
You talked a little bit about new Mexico is there any read through from your guys' perspective from the preliminary ruling to what the eventual outcome could be here. Obviously it was it was good to avoid the worst case scenario kind of a full shutdown as you talked about maybe just talk about your takeaways from from what happened and then maybe just a quick update on the timing for some of the rest of the litigation what we should be.
Looking out for over the next few quarters here.
So the last part of that question on the litigation Youre talking just more broadly across to the other sites, particularly Illinois, yes. Okay. So let me let me go there because that when I had been off the top my head so the litigation.
The trial dates have been the first three trial dates have been set.
The July of 2020 for Illinois July of 2020 to September 2022, and November of 2022. So that's the Illinois trial data shows that our first three cases, so those have been set and hopefully they'll they'll stick to that schedule they could move around depending on pandemic and everything else.
As far as new Mexico will continue to operate the facility. We continue to put improvements in that facility like we have for the last several years.
I think one point that I made in my remarks that I think it's really important for people and all the people that regulate us in that state New Mexico are.
The the Air Department or Department, they actually gave us a permit.
In June 11th for the improvements that we're putting in the facility that we've been working with them for quite some time and so we're going to continue to move forward on that process. We've got to get the construction permit on this the next step and we're in the throes of that right now.
As far as the core piece on uncontrolled emissions.
The AG is a view on it we have a view on it.
And I just think the big difference is practicality of some of the things being proposed relative to what we do today and running the operation. So we just need a third party to intervene and have that discussion don't know exactly that Moshe was just put it in the courts in the last couple of weeks. So I'm not exactly sure. When the judge is going to want to have a hearing on this it could be days it could be weeks it could.
B months, we're going to continue to operate the facility in a safe manner. We have all along and provide a critical service a $2.5 million devices, a day that we sterilize that facility, which is critical to health care.
Great. Thanks, Michael Thank you.
Thank you and our next question comes from the line of Matthew Michigan with Keybanc. Your line is open. Please go ahead.
Hey, good morning, guys.
First one on Nelson. Thank you said.
The testing was moving out.
At a slower pace are recovering at a slower pace.
Imagine med device and pharma development.
Changing too much.
Slower at this point.
Matt This is Michael I would say that we're seeing some of that activity around new product development, just ramping back up a little slower the routine testing a lot release testing that is is doing fairly well.
As we also mentioned in our remarks, we continue to deploy capital against extracting all leasable analytical chemistry, that's doing really well, but some of those other areas of new product development.
That may be a little bit slower in the validation area that we just got to keep an eye on but as Scott mentioned in the comments, we're really proud of the fact that our volumes outgrew. The PP&E testing it was a headwind in the quarters as we all expected.
Okay.
And then ill.
Tough question to ask but can you can you walk through some of the differences between your <unk> business.
And your closest peer <unk> T and help bridge the gap between your numbers and there is I mean, it just it just seems like it seemed like this quarter in particular.
There was a larger GAAP.
What aspect of their business versus ours are you looking at when you say that the organic origin.
Yes.
Inorganic growth or the organic growth.
That's a function of timing and capacity of what's what's available.
We said, we're pretty disciplined in our capital deployment.
Deployment, and making sure that we utilize our capacity it's expensive capacity.
We just don't have excess capacity around to give significant volume growth.
Old you all along during this process of coming public we're not a business as kind of throughout 2025%, 15% kind of volume growth, we don't have that kind of.
Excess capacity available capacity at a given time.
We've got a business that we feel very confident will continue to grow high single digits.
And we will continue to perform for our customers.
What could look.
What capacity you guys are operating at this point when you're planning for your plants.
We're in the neighborhood of 80, a little low Eighty's I would say.
Okay.
And as Michael mentioned earlier that represents getting back just about to the peak utilization levels that we have typically run up prior to the pandemic and so obviously, that's pretty high for us in terms of our routine operating level and we do have these new capacity projects that are coming online.
Later, this year and subsequent to that as well, which opens things up for us a little more yes, we worked really closely matched with our customers and just trying to align with their demands are.
Versus our capacity plans because this is expensive capital and we have a pretty disciplined process around that.
Thank you very much.
Thank you and our next question comes from the line of Tycho Peterson with Jpmorgan. Your line is open. Please go ahead.
Hey, Thanks, I want to go back to the margin discussion earlier I know you talked about <unk> two businesses that.
Some margins down Nordion announced can you just talk about how youre thinking about margins in the back half of the year do you expect those mix headwinds to reverse and then you talked about wage inflation, but how about cost pressures on the supply chain and how long does it take kind of passed that law.
Sure. So I'll talk about I'll answer your margin question first and with respect and Nordion in.
At the risk of being redundant.
Normally on a reported 63, 4% margins for the quarter and so really extraordinary by any measure. They just had a very very extraordinary comp last year and so while they grew the top line versus last year, the the supply and customer mix for this quarter happened to be such that there was a slight year over year.
And margins, but overall.
That is really just representative of some of the timing nuances as far as who they were selling to and and who their shipments were coming from but I think I mentioned earlier in my comments that when you look at Nordion on a full year basis, we expect their margin profile to settle down to something Thats in line with their margin profile from last year for Nelson labs, really it's going to be the.
Chairman by how this mix plays out in terms of the ramp up of non PPE related testing compared to the decline in PPE testing as we mentioned that was a 5% headwind the decline in PPE testing and that happens to be very high profitability testing.
And so depending on exactly how that nuance plays out we may see some year over year declines still in Nelson's margin profile, but again it will be dependent on the speed with which that comes down.
And then <unk> Tycho I addressed earlier, we see margin expansion as volume continues to climb.
Climb in the second half of the year there.
Okay, and then on supply chain.
Crushers that can be passed on so on the one I mentioned and referenced earlier was.
The wages, that's where we're really seeing it other net most of our cost structure is people being in the service business that we have we've got a couple of other material item to we don't we don't think it's significant enough that it's an issue for us and be able to recover it nor do we do on the labor side either.
Okay, and then on the capacity side.
80% is a decent step up I think historically, it's Gary kind of keeping kind of $73, 75% does the additional capacity expansion. The six projects you've talked about get you back to kind of that that low seventy's range.
A range or can you just talk to the degree to which you are expanding capacity.
And then also how should we think about the cobalt 60 supply agreements on the audience side.
Well, yes, so tycho or.
Our reference point would have probably been the 76% to 78% kind of range.
In the last couple of calls that we've talked about and Thats gone back to 80, which is closer to where we operate as we put additional capacity and that will fall below the 80.
So just to give you some kind of I guess, how we're kind of thinking about it as we as we look at these capacity expansions and again, we try to have those committed with our customers. A large portion was not all the volume, but a large portion of that volume committed.
Your additional question I'm, sorry was around cobalt, specifically and then the 360 cobalt supply projects for Nordion, how should we think about those coming online. Yes. So those those are long term supply projects, we're going to be working this isn't something that you're going to see cobalt in 'twenty. Two 'twenty. Three this just in the out years, we start to get worried about and we.
<unk> about 25, 26, 27, 2029.30 and beyond.
These are long term cobalt supply programs that we're working with utilities around the world.
Okay. Thank you and we will continue to deploy capital against them over the next several years Tycho just to be more specific for you.
Consistent with what we've seen before.
Yeah.
Okay. Thank you very much okay. Thank you.
Thank you and our next question comes from the line of Marathon with Goldman Sachs. Your line is open. Please go ahead.
Thanks, Hey, good morning, maybe.
Maybe start with the analysis side and.
See if you could just remind us on the PPE covid kind of benefit.
If you can quantify the benefit from last year, just so we get a sense of what the headwind can or might be as you kind of move to a fully normal environment. Hopefully next year, and then maybe help us quantify that impact.
<unk> seen so far this first half of this year would be helpful. Yes. So we.
And the the PPE related testing was about a 5% headwind for us here in this quarter and I would say that represents unwinding a little over half of the total benefit.
We had seen from from Covid area from PPE testing and so there is some incremental headwinds to come but its more modest than what we saw this quarter.
Okay.
And then just one follow up on the.
Regulatory environment I want to make sure. The question is at least ask as it relates to other states. If you kind of think beyond New Mexico, Georgia, and Illinois have you seen any other states increasing regulatory requirements on <unk> that you would call out or kind of copycat type of actions you see risk of.
Those similar actions in other states, where you have <unk> facilities, and then Relatedly as you kind of think about impact of medical device players who do the same thing BD is still facing scrutiny in Georgia, and they've had disclosed make more disclosures. There what are you seeing and hearing from medical device players in Ito.
Arena as it relates to this then.
Wanting to be in the Eo game or changing their stance on that thanks, so much yes as far as amid this michael as far as new regs.
New restrictions being put on by other facilities around the country were not seeing that.
Obviously, we have facilities in multiple states, we work with our regulators on an ongoing basis and we continue to operate in those facilities.
Can't tell you about <unk>.
Something else showing up I mean, I can't predict some of the irrational activity that's happened in the past.
And what that means for forward, but what I can tell you is we're in compliance with our permits and the rigs and we continue to provide a critical service. If you will to all the customers in our supply chain as far as our facilities are all up and running here in the United States and they have been for quite some time regarding.
The disclosures in Georgia in BD I would just make a comment BD is somebody that has a combination of outsourcing of sterilization in sourcing of sterilization thats been something that.
<unk> been doing for many years not all customers look like BD in that instance.
We're not seeing a large trend people doing a large in sourcing of of sterilization, let alone E L.
I'll take it to one other spot that you didn't ask but I would imagine is on your mind emit.
The niche App, which is the regulations for the sterilizers right now our current belief is that it's probably going to be a 2022 event.
The government and the administration has signaled that it might be late this year when they get the rules out for public comment, which means we probably wouldn't see anything until 2022 as a as a new requirements.
But again, we feel very comfortable with the improvements we are putting in our facilities that they're going to be able to.
Exceeds the expectations of new regulations that are out there.
Did I answer all your questions and submit because they know it's an important topics with you and others I want to make sure I answered your question appropriately.
Yes, no I appreciate I think the last piece of it is just whether you've seen any change in behavior from from folks that are in sourcing medical device company. They are in Sochi, and their desire to move to outsourcing just given the continued noise in various states on this topic as I think I referenced in one of our previous.
Calls.
We have the situation with a customer this asked us to put additional capacity and they are in house provider today, and they're looking to expand our outsource relationship with us in one of our capacity expansions. They have not told us is because of the regulation, okay, but I have a strong suspicion. This my own personal opinion here and our team.
<unk> that that was a factor and then moving some of their volumes over to us.
I would not call it a trend I would call. It a data point at this point, where we've got a customer that has come to us and said hey, we'd like you guys to scale up some capacity for us and we're commenting that as part of our six expansion programs that we referenced.
Thanks, so much thank you.
Thank you and our next question comes from the line of Dave Windley with Jefferies. Your line is open. Please go ahead.
Hi, Thanks for taking my question good morning.
Wanted to touch.
To ask Michael around pharma as an end market you had quantified an addressable market in your IPO materials that was pretty substantial you've mentioned a couple of times in this call extractable, <unk>, which I think particularly leans in that direction.
Wondered if you could elaborate a little bit on on the growth that youre seeing in that in <unk> and then what other initiatives do you have in place to further penetrate pharma.
Yes, David.
Thanks for the question on the pharma Yeah, we've talked about the fact that our business is $33 billion in total across the Terra health of Tam and then we've talked about the $29 billion source lab and then we've also walked it down to seven.
The $7 billion kind of number in the pharma services for our lab.
As part of our strategic planning process, we continue to refine those numbers in our strategy and how we're going to attack that larger Tam. We are seeing significant growth in extractable Leach falls, but I also want to be clear.
What are the strategic elements of that is not only attract bill Leach bowls.
For pharma, but also med device as new regs MTR in Europe in particular come to market and some other requirements by the regulators, we see extractable Leach was not only in the pharma, but also in the med device space. So we continue to see growth in both areas both segments, What's extractable <unk> and then we also have additional.
<unk> pharma services that we're pursuing I would tell you.
We've seen extract will leach was doing really well, but we're also seen other areas of new product development on pharma services has been a little slower right now and some of the volume size that to the point that was asked earlier about about some of the volumes on Nelson labs, but overall, we're optimistic our strategic plan still has pharma is a big part of it.
If I could ask on income will go back for a clarification on.
Your comments around PPE, Scott talked about kind of half of the benefit from last year.
Winding.
I guess.
It's kind of a two part question I suppose is.
Is your assumption in your guidance today, your overall guidance that the covid related.
Headwinds and <unk> are largely.
Done by the end of this year and you step into the next year in a more normal environment or should we think about these types of things bofa.
Kind of headwinds now with PPE or or.
Slower new development recovery things like that that you've named.
Are those going to be things that could leak over into next year.
Sure. So just to clarify when I was talking about how much of the PPE related benefit we already saw unwind that was.
Relative to this 5% headwind in Q2 in relation to the amount of the tailwind that they saw in Q2 of last year and so.
And so we will continue to see some headwind in terms of year over year comps in the subsequent quarters. If you even go back to our Q1 results. When we reported them we reported at that time, a fairly sizable tailwind for Nelson labs associated with PPE testing and so you would expect to continue to see some headwind associated with.
The continued unwinding of that in subsequent sequential quarters.
Not to take away from obviously the benefit associated with ramping up other categories of testing.
And in terms of kind of the overall storyline around any headwinds we may have associated with unwinding covid benefits really it is this category of testing with PPE and testing and Nelson labs, which is the only meaningful covid related tailwind that we have to unwind.
But I would add one comment to Scott just to be clear I'm trying to.
I understand your question will further we do not expect PPD testing at Nelson to get a big pop up from this variant activity if that was embedded in your question I'm not sure.
I wanted to make sure we don't expect a big Guy if the very it really ramps up we don't think there's we're not assuming a large increase in PPE testing for Nelson going forward does that does that help I think that may have been it does it does help.
Actually probably wasn't wasn't something that I hadn't thought about but thank you for adding I guess the broader part of the question was really to get at if you've commented on things like slower recovery in new product development things things like that that are are generally some uncertainties.
And headwinds to your business right now as you stand here right now are those things that you think.
Our.
Unwinding to kind of normal in this calendar year or is it still too hard to hard to say again kind of do you step into 'twenty two.
On a more normal basis, we're cautiously optimistic that we'll see recoveries in the second half, but we're not we're not super aggressive in how we think about at this point because of some of the uncertainty out there.
Thank you okay. Thank you.
Thank you and our next question comes from the line of Michael Clarke with Baird. Your line is open. Please go ahead.
Good morning. Thank you a question on the six active capacity expansions in stereo <unk>, how many of those are alive and filling now versus.
We'll be live by the end of the year.
Question, one on it and then can you just remind us what's the mix.
That investment between Eo Gamma machine generated radiation North America versus Europe, I, just would love a flavor about where where the capacity is going in.
Yes.
Michael I would say that all six of the expansion projects that we referenced are to come on.
Going forward they are not none of them are up and running.
None of them are greenfields, there are expansions of existing facilities.
And I would say there is a couple of Io.
And a couple in the radiation space.
Okay perfect.
The follow up on Nordion, and I think I heard correctly I may have not 8% benefit from pricing in the quarter. My question is was there anything one timing.
Contributing to that number.
Or is that.
Is that the level of pricing you are getting an already on this year and is that a reasonable input for.
The years beyond.
Well I think if you go back to our Q1 numbers.
<unk> price number that we reported for Nordion was a little bit lower than what we typically see and so this one is a little bit higher than there is.
Some we always talked about lumpiness in one way or another for Nordion and for better or worse is a little bit of lumpiness in pricing also depending on which customers you're selling to in a particular quarter and how recently they may have had a contractual price reset or something like that and so if you look at the price contribution from Nordion on a year to date basis, it's a little bit more modest.
<unk>.
It's a little over six 5%.
I think youre going to look at that as being fairly representative of obviously, what they're tracking to the other thing that I'll comment on with respect to <unk> Q2 performance.
Earlier I had mentioned that there was some amount of benefit in terms of pulling forward sale not pulling forward per se, but realizing sales in the second quarter that had originally been contemplated in the second half of the year I would say that that represented about about $5 million or so of their revenue here in Q2, whereas the rest of their.
Performance I would say is true true organic performance, which was better than what we had been expecting.
As of this time earlier this year in the second half of last year. When we were looking at 2021 outlet.
Thank you very much.
Thank you and as a reminder, if you have a question at this time. Please press Star then one.
And Im showing no further questions at this time and I would like to turn the conference back over to Michael Partridge for any further remarks. Thank you Michelle and thank you to everybody who participated this morning's call. We're proud of the fact that the company continues to perform well during this global pandemic.
Demonstrates the resiliency of our model and the critical role we bring in safeguarding global health to the global healthcare marketplace. So thanks for all your support and we appreciate your time. This morning have a good day bye bye.
This concludes today's conference call. Thank you for participating you may now all disconnect everyone have a great day.
Okay.
Yes.
Okay.
[music].
Yes.
Okay.
[music].
[music].
[music].