Q3 2021 Sotera Health Co Earnings Call
Okay.
Good morning, this is to Wanda and welcome to <unk> third quarter 2021 results call.
You may find today's 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 Soltero health website.
On the call today are Michael <unk>, Chairman, and Chief Executive Officer, and Scott Leffler, 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 risks and uncertainties that can cause actual results to differ materially from those projected or implied.
Please refer to filter has helped SEC filings and the forward looking.
Statements slot at the beginning of the presentation for a description of these risks and uncertainties.
The company assumes no obligation to update any such forward looking statements.
Please note that doing the discussion today the company will present, both GAAP and non-GAAP financial measures, including adjusted EBITDA and adjusted EPS and the net leverage ratio.
A reconciliation of non-GAAP and GAAP measures for all rebel.
Remnant periods may be found in the schedules attached to the company's press release and in our 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 to give everyone an opportunity to ask questions.
I will now turn the call over to Sotirios, <unk>, Chairman and CEO Michael Pietrus.
Sir you may begin.
Thank you good morning, everyone and thank you for joining us and so Terra helps third quarter 2021 earnings call.
I am very pleased this morning to reporting another quarter of double digit revenue and adjusted EBITDA growth.
This is the fourth quarter that we report as a public company and we reported double digit top and Bottomline growth every quarter since going public in November 2020.
Many of you may recall from our past disclosures that <unk> health has delivered revenue growth every year since 2005, when a tracking begins.
We considered a consistency of performance combined with attractive long term growth opportunities.
Hallmarks of what makes this company so special.
Great to see that consistency and growth trajectory would play out in each quarter that reported as a public company and especially against what was a fairly strong 2020 baseline where we delivered growth in every quarter, even during the height of the pandemic.
Scott will provide more detail a moment, but here are some highlights of our third quarter performance.
We reported total revenue growth of 13% and adjusted EBITDA growth of 16% compared to the third quarter of 2020 as.
As well as adjusted EPS of 21.
Which was a 12 <unk> increase over the third quarter of last year.
<unk> performed well in the quarter, we mentioned last quarter that steerage Nx should ramp up a little faster than we originally assumed any remain near their peak pre pandemic levels that they reached in the second quarter.
Nordion called a record breaking second quarter with another strong performance in the third quarter delivering high double digit revenue growth driven by demand for industrial use cobalt.
Nelson Labs faced a more challenging third quarter as a result of lingering pandemic impacts.
We knew that declines in PPE testing would be a headwind in 2021, but demanded area is settled closer to prepay endemic levels.
A little faster than we originally expected.
We also have talked in the last quarter about the slower ramp up in medical device testing, which continue to impact Nelson labs in the third quarter as well.
While challenging in the near term we see these Nelson lab specific headwinds as short term in nature, we expect them to normalize in the next few quarters before they become tailwind for our business.
We're also encouraged by trends in specific testing categories, such as extractable unreachable and anti microbial testing.
As discussed on prior calls our team correctly anticipated growing demand for E mail testing in Europe as a result of the rollout of the new EU medical device regulations or MTR, along with broader reliance on this global test and is testing globally.
As a result.
This testing category is expected to see strong demand.
For at least the next several years.
Overall im very proud of the entire sitar health team for delivering another strong quarter and for the continued focus on meeting the needs of our customers health care workers and patients while continuing to maintain a safe work environment.
Importantly, the <unk> team continues to execute on our mission safeguarding global health, while still navigating this dynamic environment.
Everyday we counterexamples for her mission remains bigger than any one product or service.
For example, recently one of our <unk> facilities in the southeast urgently sterilize, an artificial heart and shifted to Spain to save the life of a patient.
Nelson Labs is actively testing commercial hand, sanitizers enhanced surface disinfectants for their efficacy against the Delta variant.
These day to day business activities underscore the integrity safety and excellence of our work and the commitment to our mission at the heart of many healthcare experiences each and every day.
We continue to focus on our strategic priorities, which include driving.
Driving operational excellence across our businesses.
Investing in growth initiatives, such as adding capacity enhancing infrastructure.
Strategic M&A and officially integrating acquisitions and further deleveraging.
Today I'm excited to speak about one of our growth activities, which spans multiple business units.
For many years <unk> and Nelson labs that serve critical roles as expert advisors to many of our customers in achieving their objectives as well as more broadly serving as thought leaders in the regulatory compliance arena.
This rule is especially important given the complex and changing regulatory environment.
These services have had the benefit of deepening and broadening our relationship with our customers and have driven our equity.
Thought leaders in the industry.
In order to provide more coordinated access and expertise to our customers. We recently created the sitar health expert Advisory services group, which includes thought leaders from both our <unk> and Nelson labs teams.
The new group will expand our ability to serve the needs of our nearly 6000 customers worldwide.
In conjunction with this initiative I'm also pleased to announce that we recently closed on the acquisition of regulatory compliance associates or RCA.
<unk> is a leading provider of outsource regulatory quality and compliance advisory services sort of Biopharma and medical device industries.
Their deep bench of technical experts RCA will fit well within our new expert advisory services team enhancing our ability to drive downstream testing and sterilization services for both Nelson labs, and <unk> I want to offer a warm welcome to the <unk>.
Thus far in 2021, we've taken several steps to invest in our growth priorities. We've acquired two small but strategic tuck in acquisitions. In addition to purchasing outstanding minority Stakes or Fairfield lab in Shanghai sterilization operations.
We've also completed two share gentex expansions and one Nelson labs expansion in Europe.
We recently completed installation of a new E beam in Indiana with product qualification taking place during the fourth quarter.
We remain active in terms of growth investments with seven other active capacity expansions of different size at <unk>. We expect these to come online beginning later this year and continuing throughout 2022 and 2023.
In addition, we continue to invest in our <unk> facility enhancements, while also advancing the three long term cobalt supply development projects at Nordea.
Taking a step back from our specific results ill comment briefly and what we are seeing the broader markets, where we operate.
The market recovery in general has played out in a manner of fairly consistent with the assumptions. We made earlier in the year. However, there is no doubt that there is a continued impact from both the delta and the more recent acceleration of macro challenges indirectly related to pandemics, such as labor shortages inflation and supply chain disruptions.
While we have encountered all of these challenges in some form.
We've also been able to manage through them with only a modest direct impact to us we have seen more of an indirect impact to our customers who continue to experience some uncertainty and volatility in their own supply chains.
Given these challenges I would characterize the macro environment is uncertain, but we remain cost we remain cautiously optimistic.
As I mentioned earlier Nelson lapses accounted some challenges specific to that business, but our total company performance is a testament to resiliency to <unk> broader business model.
I want to make a comment about our 2021 outlook given that we have now completed three quarters reporting and based on what we know today, we are narrowing the outlook range that we provided to you in August during the second quarter call. When we raised our guidance Scott will go into the details, but at a high level, we're expecting 12% to 14% topline.
Growth in 13% to 14% adjusted EBITDA growth for the total year 2021.
Before I turn it over to Scott to cover the third quarter in more detail and comment further on our outlook I want to take a moment again to emphasize how probably the entire sitar health team I'll now turn the call over to Scott.
Thanks, Michael I'll first cover the third quarter highlights on a consolidated basis, and then provide some insight on each of the business segments, along with updates on capital deployment and leverage I'll end with more detail regarding our updated 2021 outlook.
On a consolidated total company basis for the third quarter revenue grew by 13% compared to the third quarter of last year to $226 million on a constant currency basis revenue grew 12% adjust.
Adjusted EBITDA also grew 16% from Q3 of 2000 $20 million to $117 million.
Adjusted EBITDA margins expanded by 140 basis points compared to Q3 of last year, driven largely by both pricing and operating leverage at both <unk> and <unk>.
Our strong operating performance combined with a $37 million reduction in interest expense resulted in adjusted EPS of <unk> 21 per share of 12% from Q3 of 2020.
Now, let's take a closer look at the segment performances.
In Q3, <unk> delivered 15% revenue growth and 19% segment income growth over Q3 of last year.
Revenue growth drivers for Q3 included organic volume and mix growth of more than 8% as well as pricing contribution of nearly 4%.
The remainder of the growth came from a combination of FX and contributions from Io trial recall that we closed the <unk> acquisition in July of 2020, so the inorganic contribution from that acquisition in Q3 of this year is much smaller than in recent quarters essentially we've lapped the date of the acquisition and thus Q4 year over year will <unk>.
A clean comparison.
Compared to the third quarter of 2020 segment income margins in Q3 of 2021 expanded by 180 basis points, driven by higher utilization levels and pricing as Michael mentioned <unk> volumes and utilization levels remained at the levels reached in Q2, when they were near their high watermark from 2019, we continue.
To make meaningful investments in <unk> capacity and expect to begin seeing revenue contributions from the expansion of Michael referenced beginning in the first half of 2022.
We also continue to make progress on the facility enhancements at our North American facilities.
<unk> Q2 revenue grew by 42% compared to Q3 of 2000 $20 million to $29 million Nordion segment income grew 59% to $16 million compared to the same period last year.
<unk> top and Bottomline growth were driven by a 31% benefit from volume and mix about 6% from pricing and a 5% FX impact nordion.
<unk> margins were up by approximately 620 basis points, largely driven by operating leverage on our higher sales and favorable pricing compared to Q3 of last year.
<unk> growth compared to Q3 of last year does benefit from what was a relatively weak comp given the timing of shipments last year, but they are overall 2021 performance. Nonetheless remained strong and ahead of our overall expectations coming into this year.
For Nelson Labs, Q3 revenue declined by two 6% compared to the third quarter of 2000 $20 million to $52 million.
Segment income declined by approximately 11% to $21 million.
As Michael mentioned Nelson Labs is the one business unit that is experiencing noticeable headwinds relating to direct and indirect impacts from the pandemic.
The impact from winding down elevated levels of PPE related testing was more significant in Q3 than we had seen last quarter, representing almost a 9% revenue headwind.
We expect to see a similar headwind through Q1 of 2022, when we lap the periods with PPE testing tailwind.
With PPE testing headwind was partly offset by a 5% tailwind from the acquisition of Bioscience labs.
Favorable pricing was largely offset by non PPE volume declines, which was driven by deferrals in regulatory compliance related testing and the slower ramp up in medical device product development testing.
While it's disappointing to see that testing activity delayed into future quarters. It does give us optimism regarding our pipeline for 2022 and that any negative impact. We're currently experiencing is more of a short term effect.
As Michael mentioned, we're also encouraged by favorable momentum and some testing categories, such as <unk> and anti microbial.
Q3, 2021 margins for Nelson labs contracted by about 370 basis points compared to Q3 of last year, the mix shift away from higher margin PPE testing and layering in the Bioscience labs acquisition each created margin headwinds.
We've previously mentioned given our strong margin profile acquisitions tend to be margin dilutive at least in the near term. We're seeing some of that effect now from Bioscience and also will begin to see some margin dilution from the newly announced <unk> acquisition beginning in Q4. We view. These are shorter term effects, while we scale up the business.
Let me turn to some highlights relating to capital deployment and leverage our capex spend in Q3 was $16 million, bringing our year to date total to $61 million.
Our spending continues to be focused on growth initiatives facility enhancements and Nordion cobalt supply project.
As of September 30, we had $115 million in cash and maintain a strong liquidity position even after funding the $100 million prepayment of our 2026 first lien notes during Q3.
Our net leverage has now declined to three six times down materially from pre IPO levels above seven times net leverage.
The combination of our recent debt Paydowns and the repricing of our term loan in January have resulted in Q3 2021 interest expense of $18 million compared to interest expense of $55 million in Q3 of last year.
Our most recent debt Paydown also reduces our new annual projected interest expense run rate down to around $70 million.
Compared to interest expense of $215 million.
In 2020.
As Michael mentioned, we are narrowing the range of our full year guidance, taking into consideration nine months of reported financials as well as the most recent trends for each of our businesses.
Recall that we made meaningful increases to our outlook range in August compared to our initial outlook in March.
Overall, we remain comfortable that the company's performance will fall within the increased ranges communicated in August we're pleased with the trending of both <unk> and <unk>, but we are reducing the top end of the guidance range as a result of trends that we're seeing in the Nelson labs business.
As mentioned earlier were comfortable that many of those headwinds will become tailwind. So within the next few quarters, but we do not expect normalization to occur and what little remains of this year.
For full year 2021, we expect total revenues in the range of 920 million to $930 million.
Representing growth of 12% to 14% compared to 2020.
Adjusted EBITDA for full year 2021 in the range of 475 million to $480 million representing growth of 13% to 14% compared to 2020.
Adjusted EPS in the range of 87 to 88.
From a capital deployment standpoint, we will continue to prioritize growth initiatives debt repayment and strategic acquisitions.
As Michael indicated we have already closed on RCA, another small, but strategic tuck in acquisition.
Our updated guidance for 2021, Capex is now a range of $90 million to $100 million.
Overall, our capital deployment strategies have not changed.
Other assumptions underlying our previously communicated guidance.
Yes.
Before I turn the call back to Michael to wrap things up I wanted to echo the earlier comments about how proud we are of the entire team for delivering yet another quarter of double digit top and bottom line growth Michael back to you.
Thank you Scott before we wrap up and recognizing the importance of the eo topic to our stakeholders I want to make everyone aware of the new <unk> related resource we've added to the Investor Relations section of the <unk> health website.
This resources intent is intended to provide facts and background and encourage you to visit the site to review its content going forward, we plan to provide educational materials on eo and updates and Eagle matters that may be relevant to investors will be posted there at.
At this point operator, let's open the call for questions and answers.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.
So withdraw your question press the pound Keith.
Again, Thats all I wanted to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Matt <unk> with Credit Suisse. Your line is open.
Hi, Thanks, Thanks for taking my question and congrats on another strong quarter.
Sure.
Wanted to maybe just.
Explore the comments you made.
About <unk>.
PPE and also lives in the quarter.
It seems like we're all still even now.
I understand.
All of these businesses are affected by Covid.
Different types of searches.
Could you could you walk through.
I guess, what you what you had expected to happen in the back half year with.
With PPE and some of the testing dynamics.
So that's what changed in the third quarter.
Follow up.
Yes, good morning, Matt It's Michael Thanks for the question.
On the PPD as we stated we always had PPE testing prior to the Covid pandemic.
And during the Covid, we saw the numbers significantly increase 2020 over 2019, and we are trying to forecast as we went into 2021 exactly how that would play out we saw numbers continue to climb in and testing remember we're doing a lot of testing a protective barriers here masks.
And and gowns and drapes and things of that nature, we just weren't exactly sure how quickly it would start to slow down that growth. If you will and so we had we had forecast in here that we projected that it would slow down and get close to 2019 levels.
Above that level, but it came down a little bit faster than we thought and some of the other testing that we expected to ramp up in.
In 2021 has just been a little slower but overall there is some really positive various going on its just the mix shift and as we've stated before the PPD a protective barrier testing is pretty high margins. So that also impacted the margin rates.
So overall the fundamentals were still very positive by Nelson. It is just our ability to forecast sitting here. During this pandemic of how quickly the other testing our normal test you would ramp back up and how quickly the PPE of protective barriers would go down that was the part that was just a little tough for us to forecast. So we expected what happened, but just as happy.
A little faster pace in both directions.
And Matt I'll, just add to that that if you.
About the sequencing of how the PPE story has played out so far this year.
Just to remind everyone about how significant the gyrations have been from quarter to quarter in Q1, we reported a 10% sales.
Tailwind for Nelson allowed from PPE, and then insight in the second quarter that 10% tailwind became a 5% headwind and so clearly there are huge gyrations and then the deterioration from a 5% headwind in Q2 now to almost a 9% headwind in Q3 was just a little bit faster.
Have a downtick than we had anticipated.
I also want to call. It the employees I give a lot of credit to NASA labs, they really pivoted to take take care customers on this PPD protective barrier now pivoting back into some of the other testing at a really good job by Joe and the team is doing with the Kansas service of customers because it is dynamic things are happening Matt in this pandemic that none of us expected.
Absolutely I appreciate the color and then and then again just on margins.
You touched on this call a little bit and we should know I guess a bit about the relative profitability of your different businesses, but is it fair to say that sort of the upside and nordion sort of also.
And a similar effect on mix.
They're already on it's really the volume fall through in the P&L. We saw this the business is performing very well.
We expect the fourth quarter to be in line.
Our expectations for overall, we've had a good year and margins are as we expected in that business.
Okay fair enough.
Alright, Thanks, Matt.
Thank you.
Our next question comes from the line of Tycho Peterson with Jpmorgan. Your line is open.
Hey, Thanks, Michael I can actually pick up where you left off on margins here, just thinking about higher labor cost inflationary pressures on the on the supply chain can you, maybe just talk a little bit about how you're thinking about addressing those in the current environment.
Good morning, Tycho, we're seeing the impacts on Inflations some materials some utility costs and then the labor side and we've been able to push through increases and we expect to be able to fundamentally do that as we progress throughout the rest of this year and into 2022, but those are the areas we're seeing it predominantly labor.
<unk> utility in a little bit on the direct material side on <unk>.
Okay, and no supply chain issues to flag in terms of any sort.
Right.
No.
Yes Tycho.
And some of our prepared remarks, where we see the supply chain is just like even the Nelson team or to stare Gen X team.
We're relying on our customers to get the supplies over to US right. So in the testing cases, Nelson, we've got delays where customers are having problems getting samples to us or sometimes the loads are little slower to be picked up at the <unk> because there is an issue with that.
Our customer getting a truck or something like that those are the kind of supply chain issues were seeing but overall, we feel pretty good about our visibility in this business is as we've stated in the past Nordion continues to work through the logistics.
They have to do with the meet the customer needs, but those are those are the examples we're seeing.
And then the recovery Nelson Labs, I know you said it will take a couple of quarters to normalize you said like antimicrobials in the announcement.
<unk>, given a little bit better, but how do you think about.
Pent up demand as that business starts to come back.
Yes, we look at it we're really talking about is we know the PPD will continue to unwind. If you will that's the headwind we referenced there.
We still feel very good about we've got 800 different tests. There are several sections, we break up to about $18 20 sections. Overall theres. Many sections that are doing very well. It's just the PPD wind down is the one that we're talking about but we see other areas ramping up well.
Building teams, it's not like we reduce it a bunch of costs or anything like that we're continuing to build out our teams because we know the backlog is we're starting to see orders come in as I've mentioned on one of our previous calls Tycho Theres a couple of sections in particular that are tied to regulatory and there's some uncertainty right now by the FDA, particularly on what.
<unk> requirements, they're going to have to we got we see customers starting to build some of that backlog with us which is a little higher than normal just waiting for the final sign off on protocols and what's required from the FDA.
Okay, and then last one on the capacity expansion projects I think you talked about six that had been slated to come online by the end of the year last quarter. Those are all still on track it sounds like and can you just update us on where you are for utilization I think you said you were able to push out last quarter Hysteriagenic, yes.
Yes, we're still in the neighborhood of 80% the capacity programs as we've referenced we've got a couple of them. It came on online. This year, we've got several coming on the fourth quarter and then I think I believe one of those actually flipped it to the first quarter at the beginning of first quarter from a timing perspective, but overall, we're pretty good shape, we've got seven of them in process and then.
We've got a couple more in behind that that were working with the teams through.
Okay. Thank you. Thank you.
Thank you.
Our next question comes from the line of Patrick Donnelly with Citi. Your line is open.
Hey, guys. Thanks for taking the questions.
Maybe a follow up on Tyco's margin question it might be one for Scott in terms of you had the wage inflation you keep.
Acting as a headwind on margins as well as that comes out can you just talk about the moving pieces on the margin side as we go into <unk> and even 'twenty two how much are you able to pass along to customers kind of written into the contract just trying to get a feel for the margin given again labor inflation and PPE coming out against you kind of talk about maybe the tailwind and how we should think about that.
Algorithm.
Sure.
Im sorry, Im not sure if youre, asking specifically about Nelson labs, or just in general across the company but.
In general the businesses have always been very successful in passing on cost increases in the form of price a customer then certainly we don't see anything in the overall demand environment market environment that we think would interfere with our ability to do that in fact right now as we go through our annual.
Getting cycle were actually contemplating those some of those exercises and so.
Overall, we wouldn't expect any big margin pressure relating to that.
I think when you look at the margin profile of each of our businesses that we just reported here in Q3, we're comfortable that we can maintain those overall margin levels and continue to build on them over the longer term as we've expressed in the past I think earlier in my prepared comments I made a comment to the effect regarding Nelson labs that their margin compression that there.
Now relative to prior periods was driven primarily by the mix effect the adverse mix effect associated with the downtick in PPE testing and then also this is something that we've talked about in the past, but given how high the margin profile is for our businesses generally when we do acquisitions tuck in acquisitions there at least.
Somewhat dilutive to margins at least in the near term before we scale them up and implement various opex initiatives and so you'll see some amount of margin compression at Nelson labs, because of the Bioscience labs acquisition earlier, this year and maybe a little bit more relating to the new acquisition that we just reported as well.
But overall, Patrick we're still talking to Nelson last businesses, 40% EBITDA margins Alright for lab business that team does a really good job in bringing value to our customers.
Sure.
Absolutely, Yes, and then you touched a little bit on M&A, there and you guys mentioned you're at three six turns of leverage can you just talk about the appetite obviously you've done a couple of bolt ons, how we should think about the funnel across the three businesses any priorities in terms of one above the other and then again the appetite for size how large should we expect you to go or is the focus.
Still to continue to get that leverage down. Thank you guys.
Yes.
When we talk about our our capital deployment. The first thing is to continue to deploy capital for organic growth. That's our first priority. We will look at strategic M&A and also deleveraging opportunities and we have a robust list of pipeline that we continue to track with our teams.
I would say it's across all three businesses, probably more heavily weighted towards the nelson's side, but not exclusively Nelson.
From a size perspective. These are these are on the lab side, we've got a lot of them that are tucked in around this around the size that we've done here with Biosciences wells RCA.
And again for us, it's making sure that.
Strategically it fits with what we're trying to do.
Culturally the lines that we have plans on how we're going to leverage and drive synergies across the company. That's really what's important to us So I would say.
Don't expect us to call you up next quarter to tell you we're doing at $2 billion acquisition, that's not that's not how we're thinking about it right, but we're being very thoughtful in how we deploy capital.
M&A as well as organic growth.
That's helpful. Thank you guys.
Thank you.
Our next question comes from the line of Sean Dodge with RBC capital market. Your line is open.
Hey, Good morning. This is Thomas Keller on for Sean Thanks for taking the question.
Maybe shifting over to <unk> can you just talk a little bit more about the kind of visibility you have on a continuation of growth there and how much does the weakness on the lab testing side impact any of the sterilization volumes.
Yeah, Thomas its Michael we have pretty good visibility on Hysteriagenic side, we're in the long term contracts with our customers.
We continue to we're at very high utilization rates across our facilities right now.
We feel pretty good about where we are in that business. Just like we are across the nordion business as well and what we do in sterilization solutions in total across those two businesses.
And what was the second part of your question Thomas I'm, sorry, and the last piece that you want to understand how it relates to the lab piece.
Yes, Im going to say is there any kind of interaction like weakness in lab testing side does that impact any sterilization volumes that you might get.
No I mean, there is some new validation that come into play.
We're waiting for customers to help do validation across the two businesses I would tell you also sterility assurance.
About 40% of Nelson Labs business is taking product that.
Comes in from Sterilizers, and just validating that Australia plans work. So there is there is tie in there. It's on the new product development side, where there might be a little slower pipeline as we told you ramping that up but may cause and then theres a couple of other sections that aren't directly tied to terminal sterilization that we're seeing some regulatory delays.
And that's causing a little bit of a pain and Nelson, but not directly impacting <unk>.
Okay. That's helpful. Thanks, and then.
Can you talk a little bit more about the expert advisory service organization, I guess, including RCA and what type of potential that brings and how we should think about any sort of revenue contribution or growth yes.
It is something that we've had within our organization and it was set up with <unk>. They had a team of people within Nelson we knew for quite some time, we want to put these organizations together, we actually pulled that together within the quarter earlier in the quarter actually.
Under one of our leaders and we've got really it helps us give end to end expert advice to our customers they've asked us for this as we've done survey work with our customers over the last several years. The feedback has been pretty clear that there is high value and this work is all about our ability to drive thought leadership, you will see more from us in the upcoming months as we could see.
To push on that in the marketplace.
And help people with all the knowledge that we have in this space and how they come to us we're going to make it easier for them to interact in this area. RCA is just another piece of that equation for us and that team and what they bring us on the testing.
The services capability in consulting there for quality and compliance and regulatory affairs is very valuable they've got heavy focus on biopharma and med device, which is very strategic to us long term. So we're optimistic about it.
All right great. That's all for me Thanks, guys great. Thanks Thomas.
Thank you.
Our next question comes from the line of Dave Windley with Jefferies. Your line is open.
Hi.
Thanks for taking my questions good morning.
I wanted to ask a couple of maybe fairly granular ones one would be.
On the <unk> acquisition.
I believe I believe youre, saying thats closed and so I wondered how much that is contributing to the guidance for the balance of the year.
Minimal first of all it is.
Very small acquisition, it's a little over $30 million in purchase price.
But it obviously gives us the opportunity to accelerate our initiative around expert advisory services. So that acquisition I would say it was less about the immediate contribution and more about the longer term impact and so I wouldn't look at that as having any meaningful difference in terms of our certainly not our guidance for the last couple of months of the year and David This is Michael one of the other big benefit.
Of an asset like this with this expert advisory services is the ability for us to get involved with customers rolling out of the product development cycle, which then leads to more downstream sterilization and testing opportunities, that's really where the value is besides building out our thought leadership.
Got it and that will fold into Nelson or <unk>.
Okay.
And then on the.
In within Nelson as you talk about kind of the pressure for the next quarter or next couple of months of this quarter and then into <unk> of next year, but then it sounds like you expect.
The headwind from PPE to normalize and for that business to kind of pick up and grow as you would expect from a longer term trajectory standpoint.
How much visibility do you have on the <unk>.
Items that have been slow to pick up so to speak the new product testing and things like that do <unk>.
New clients give you some fairly substantial advance notice as to when those things are going to land.
It varies by category, we don't have as much visibility obviously, we do on the Nordion business for <unk> I would say in the Nelson, that's it's less visibility, but within Nelson.
There is variation depending on if it's a typical lot release, its something thats been sterilized against some sample over and we got to do a quick release.
Pretty short notice as products come in but then theres some longer product development cycles, where we're involved in extractable <unk> or some other areas.
Have more visibility to that pipeline low earlier, so I would say.
We've got about 55 percentage of that business is kind of a routine and about 45% as longer term validation life cycle.
Where we have a little bit more granular visibility is not necessarily in terms of customer specific order book, but for those tests.
Are being deferred into future periods, because they are waiting for updates to various regulations, then given our intimacy and understanding of.
The pace with which those new regs are going to rollout then we have a better sense for when the revenue testing revenue around around that compliance is going to pick up and that gives us some optimism around next year Scott. That's a good point so to that point of view it like last week I was out in the lab and I was wondering with the teams in different sections and I met with some of the leaders there.
Scott's point I saw the bulk of the backlog in particular with around the key projects that are delayed because of this regulatory sign off theyre waiting for so we visit but those are kind of sections. We have some visibility into that we're going to have validation group that I referenced earlier.
Got it great and then maybe bigger picture.
We haven't noticed that.
China laid out some fairly substantial investment plans into new nuclear power plants admittedly over a long term and maybe that makes it not particularly relevant for.
For near term for you, but I just wondered in your longer term naughty on.
Cobalt supply thought process does that nuclear plant investment in China created any opportunities for you.
David we by minimal amounts of cobalt today from China.
Do from other parts of the world.
That is something that we'll continue to look at and evaluate if its a fit for us.
It is.
Remember not all nuclear utilities can make cobalt it depends on the reactor technology and then we have to bring to market. Some of our intellectual property to help enable that like we're doing with the Westinghouse relationship.
Trying to bring that to market so.
Theres just a lot of complications as you know even if I told you where all the cobalt in the world is getting it moving it around the world that's really the competitive advantage. It in Oregon has so those are all factors, we take into consideration when we evaluate global supply options.
Got it thanks for the answers.
Thanks, David.
Thank you.
Our next question comes from the line of Matt <unk> with Keybanc. Your line is open.
Hey, Good morning, guys, just a first one on Eto I appreciate the transparency.
And that you guys are going to be providing more updates to.
The web site.
Wanted to get a sense from you what are the next few data points, where you think you will be able to provide.
Those updates to some updates to the website.
Updated thoughts on the timing.
Potentially a proposed rulemaking.
The shaft into next year.
Yes, Matt this is Michael.
Just.
Populated quite a bit information, we had several investors that should make it a little easier for us to get information on EEO as opposed to us having to do our research can you can you populate somewhere so that was very good feedback from the investment community. So that's what we've rolled out recently and so you had the ability to see that when I look at new data points, we're going to continue to exit.
<unk> on our facility enhancements like we've mentioned.
We're rolling that out throughout this year and into next year, and probably a little bit in the 'twenty three as well.
But as far as niche app.
Want the rules and regs.
Is anybody tell us the rules and we will make sure we we exceed the expectations. It's a moving target I know some people say whats going to happen as early as the fourth quarter. This year beginning of next year.
Our personal opinions as this is going to roll into 'twenty. Two remember what will happen is it will come out.
Then there'll be a public comment period. It could take 90 days and then beyond that there is some timing that goes it's kind of got OMB first.
Dan It's got to go to a public comment period, and then ultimately become the new regs. So I think it could be the latter half of next year, but again, we hope it sooner.
Terrible predicting what the government's going to do a new regulations.
Okay Fair enough and then switching over to annuity and there was there was an.
So that's at least the last two quarters.
And our model versus versus Nordion.
The <unk> is looking like it's coming in line with expectations, but.
There is some pull through into <unk>.
Pull forward into three Q from harvesting of some revenue that we should be paying attention to in the fourth quarter or early next year.
No theres nothing like that that we saw here in the Q3 results. There just having an outstanding year I will remind you that last quarter. When we in Q2, and we reported a record breaking quarter for annuity on at that time. We cited that there was about $5 million of sales in Q2 that we had previously contemplated for the fourth quarter.
<unk>.
But there was not that type of effect here in Q3, they just had a very very solid quarter and they're pointed to a pretty solid year overall, yes, Matt the other point I'd build off of as last year third quarter was a really low quarter for minority that theyre coming out so that a low comp they were working off of that business is a pretty consistent and we've said this all.
It's a very consistent business over the long haul there is some lumpiness from quarter to quarter, but overall the business performed very well and there was no pull in into the third quarter.
Okay.
Just last one on Nelson Labs, I guess is there a difference in.
Where are you at in expectations between the upfront validation testing and then the more routine testing that you do with it at 45 55 split.
Then when does Europe.
That facility in Europe start to impact results.
So yes, thanks, Matt.
Yes, I would say the validation testing who has been a little Florida for some of the new product development, that's a little slower than we expected.
That's question, how quickly our customers supply chain and product development efforts can ramp up that's the part I referenced that that was slower to ramp in the PPD came down faster than we thought in Europe.
<unk> Center of excellence that we referenced in our previous calls Thats doing very well the team's doing a great job execute initially and that team.
I have done an outstanding job over there really proud of what they are doing and the customers are really responding very well to that.
Thanks for the questions.
Thank you.
Our next question comes from the line of payment Pavan <unk> with Goldman Sachs. Your line is open.
Hey, good morning.
I kind of want to take all the puts and takes on the call just kind of ask it.
Bottomline question about 2022, which is obviously a lot of us on the call have had the model pre IPO debt.
That you had given us and it suggests double digit topline growth continues is there any reason to believe that double digit topline growth.
It won't happen in 2022 and that goes for the whole company, but also for announcing lads, if you exclude PPE.
It was also expected to grow double digits is there any reason to believe that those are not achievable next year.
Obviously, we're not going to get in the first quarter.
Discussions are even total year 2022 at this point when we get to the first quarter, we will announce what I would tell you is the fundamentals are all in place and we continue to be optimistic about the companys growth potential.
Price volume mix.
Utilization operational license those things are all in place the end markets are strong.
<unk>.
We are optimistic about the future we will be able to give guidance in 2022 in the first quarter of next year.
Okay.
And then just coming back to utilization on the inorganic side.
If you think about all the reporting so far this quarter, whether it's medical device companies or whether it's U S hospitals, all reported a slowdown.
In <unk> versus <unk>.
If I heard you right I think you said your can capacity.
Our utilization is kind of running at the same level. It was at <unk>, maybe correct me if im wrong, but.
Just help us reconcile how your business works versus how they all reported why is it that youre seeing fairly consistent results from <unk>, where everybody else saw slowdowns.
Yes.
It's timing and depending on where the customers' inventories are right in how we don't have great visibility into that we've got some segments that are doing very very well within <unk> somebody companies that have have stated they've got a little softness we are seeing a little softness in their demand from us as well.
But overall when you look at the breadth and depth and diversity of the customer base there.
There are about two thirds of that business is med device and the rest is food pharma and some other.
We've got a good portfolio that helps us get through and it gives us a stable growth pattern here with <unk> for the last several quarters.
Okay, and just last one for me New Mexico any update on what's going on with the facility there or your discussions.
With the attorney.
Tony Channel et cetera, yes.
Yes, Amit Thanks for that question on New Mexico Suite, we had a hearing at the end of October where the parties. Both came in with a monitoring plan that the judges asked for we provided our proposal the AG provided theirs.
And we're waiting for the judge to rule on exactly what the go forward monitoring plan looks like.
We fully anticipate continued operating that facility, where we're providing sterilized products into the tune of about 2 million devices per date.
I would also tell you that the other very positive development.
Has been that both the NME D.
The air regulators.
Well as the local group permitting groups have granted permits for both the environmental permits as well as the construction permits which is very good which means that the key improvements that we've been putting in these <unk> facilities. We've got the authorities that make those decisions that approved and sign off on both those permits so we're moving forward.
With construction in that facility.
So that was also some of these very important no matter what the monitoring plan looks like we feel very good about the improvements we are putting in that are consistent with the other places that we've proven that they are industry leading.
Improvements with negative pressure double scrub and central discharge. So we're optimistic on that aspect as well.
Thanks, so much.
Thank you.
Our next question comes from the line of Luke <unk> with Barclays. Your line is open.
Hey, guys. Thanks for squeezing me in.
So I kind of want to go back to <unk> question on 'twenty, two I know youre not going to give any guidance there. But this is the only thing investors are really caring about right now and so if we take your annualized <unk> COVID-19 headwind is it safe to assume that that kind of rolls through.
Overall headwind into next year sort of like looking at maybe like 2% to 3% headwind.
We're not going to get into specifics on 'twenty to what Scott mentioned is the PPD.
We'll have a couple of quarters, where the PPD workshop and Nelson, but overall, we're optimistic about the growth for both Nelson <unk>.
Okay.
Yes.
And then I guess on the Bioscience labs acquisition any update to the expected contribution this year.
Any any changes to your expectations for that business.
So I think what we mentioned earlier.
They contribute contributed about 5% on Nelson's topline here in the third quarter and overall I think Thats representative of their current run rate that contributed a little bit more than that in Q2, but really it was just an extraordinary first quarter under our ownership given some some large south of that in the pipeline, but I think what you saw here in Q.
Three is representative of we're going to see going forward as well.
Alright. Thanks, So just a couple of housecleaning ones. Thank you. Thanks Luke.
Thank you.
Our next question comes from the line of Michael Pollack with Baird. Your line is open.
Check to see if you're on mute.
I'm here good morning can you hear me.
We can hear you Mike good morning, following on David When these question on regulatory compliance associates.
I heard just over $30 million of purchase price would you be willing to put a finer point on number one when exactly that deal closed what month and then run rate revenue.
If I had to guess I'd.
Buy something for $30 million.
Like that $6 million or so of run rate revenue.
Any other color would be helpful.
Yes, so as far as the timing of the purchase literally just occurred a week ago.
But again for these smaller acquisitions, we're not going to necessarily be in the habit of providing the breakdown in terms of the incremental revenue or earnings contribution but.
Obviously the amounts we're talking about are fairly immaterial to the overall scale of the business, but what's more important are the capabilities and the reach that we have acquired particularly with respect to the space, where we're looking to accelerate and expert advisory services as Michael was explaining earlier.
The real prize here is longer term in terms of the acceleration of revenue downstream towards more lab testing and sterilization activity.
The follow up if I may I'm curious just for an update on the proceedings in Illinois related to Epo still the timing believe first trial scheduled for next summer is that still intact any other.
Recent developments worth worth mentioned, thank you very much.
Mike I would tell you the trials for three key trials first three trials I guess are set for July 20 to September 22, and November 'twenty two.
We are happy that we have clarity from the courts now.
In the case management and actually when different pieces like discovery and depositions and all of that closes out. So we have clear timelines that both parties are adhering to and we expect the trials to start in July.
<unk>.
Basically the most current.
Thanks for your question.
Thank you.
I'm not showing any further questions in the queue I would now like to turn the call back over to Michael for closing remarks, great. Thanks to Wanda it's been nearly a year since our IPO and we want to thank all our investors and analysts for all your support during our first year as a public company.
Going to be leading such a great organization and company that delivered strong and consistent growth, while fulfilling our mission of safe guarding global health. So thank you and have a great day bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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