Q3 2024 Sotera Health Co Earnings Call
The
Speaker Change: Good morning and welcome to the Cetara Health, 3rd quarter 2024 conference call. All participants will be in listen only mode. Did you meet a system who's signalally conference specialist by pressing the star key by zero?
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch on phone.
Speaker Change: You wish Dr. from the question to you please press star then too.
Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Vice President of Investor Relations and Treasurer Jason Peterson. Jason, please fill a house.
Jason Peterson: Good morning and thank you. Welcome to Satera Health's third quarter 2020-24 earnings call. You can find today's press release in accompanying the supplemental slides on the Investors section of our website at Satera Health.com.
This web catch is being recorded and a replay will be available in the Investor section of the Satara Health website. On the call with me today our chairman and chief executive officer Michael Petras and chief financial officer John Lyons.
During the call, some of our comments may be considered forward-looking statements.
The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to Sotera Health's SEC filings in the forward-looking statement slide at the beginning of the presentation for a description of these risks and uncertainties.
Speaker Change: The company assumes no obligation to update any such forward-looking statements.
Speaker Change: Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA margin, segment income margin, adjusted net income, adjusted EPS, and net leverage ratio, in addition to constant currency comparisons.
Speaker Change: A reconciliation of gap to non-gap measures for all relevant periods may be found in the schedules attached to the company's press release and in the supplemental slides of this presentation.
Speaker Change: The operator will be assisting with the Q&A portion of the call today. Please limit yourself to one question and one follow-up so that we can give everyone an opportunity to ask questions.
Speaker Change: If you have any questions after the call, please feel free to reach out to me and the investor relations team. I will now turn the call over to Soterra Health Chairman and CEO, Michael Petras.
Michael Petras: Good morning everyone and thank you for joining Sotero Health's third quarter 2024 earnings call. This morning we reported year-over-year top and bottom line growth with volume and mix improvement in all three of our businesses versus the third quarter of 2023.
Michael Petras: Compared to the third quarter of 2023, total company revenues increased 8.5% or 8.9% on a constant currency basis while adjusted EBITDA increased 9%.
Speaker Change: We delivered adjusted EPS of $0.17 for the quarter, which is a $0.01 increase from the same period last year.
Speaker Change: Sterigenics, our large reporting segment, delivered 4.3% top-line growth for the third quarter of 2024, which included slight volume and mixed growth over the third quarter of 2023.
Speaker Change: During the quarter, the team completed one facility expansion project for which the customer product validation phase is underway. We also continue to make good progress on our North American EO facility enhancements to ensure we meet the stringent and complex NESHAP regulations by the required deadline.
Speaker Change: Nordean, our other reporting segment within the sterilization services business, delivered a 28% year-over-year revenue increase which was driven by the timing of the reactor harvest schedules.
Speaker Change: The NORDAN team fulfilled some shipments in the quarter that were planned for the fourth quarter in support of our customers' requests, which resulted in more revenue in the quarter than originally anticipated.
Speaker Change: I'm also excited to announce that Nordland has reached an important milestone for one of its cobalt development projects. Recently, the first insertion of cobalt was successfully installed into a Darlington reactor in Canada and we expect the first cobalt-60 harvest to occur in 2028.
Speaker Change: This project is a great example of how we are safeguarding global health by ensuring a steady supply of Cobalt-60 for our customers into the future.
Speaker Change: Nelson Labs, our lab testing and advisory services business, grew its top line 7% and bottom line 9% versus the third quarter 2023.
Speaker Change: We are pleased to see higher core lab testing volumes as well as improved margins in the business both sequentially and year-over-year.
Speaker Change: And at previous calls, we have mentioned the recent performance of our lower-margin expert advisory services.
Speaker Change: The strength of which has been tied to one-time projects. This volume is beginning to normalize, and we expect it will continue to do so as we lock the acceleration that began in the second half of 2023.
Speaker Change: www.microsoft.com.ca
Speaker Change: With the majority of the year behind us, we are reaffirming our full year 2024 outlook ranges for revenue and adjusted EBITDA. As a reminder, our 2024 outlook calls for both revenue and adjusted EBITDA growth in a range of 4% to 6%.
Speaker Change: John will go through our 2024 outlook in more detail shortly, but first I'd like to highlight an example of how our employees across the globe play a critical role in safeguarding global health.
Speaker Change: We take our role in healthcare seriously and our mission is at the heart of our work every day. Continuous glucose monitors are undergoing complex technical innovation including batteries and cybersecurity which create new regulatory compliance challenges.
Speaker Change: Our teams at Nelson Labs and Sterigenics are providing integrated solutions for global manufacturers to address safety and regulatory needs so that patients can have better control and more competently manage their diabetes.
Speaker Change: Now, John will walk us through the financials.
John Lyons: Thank you Michael. I will begin by covering the third quarter 2024 highlights on a consolidated basis and then provide some details on each of the business segments along with updates on capital deployment and leverage. I will then finish up with some additional details on our 2024 outlook.
Speaker Change: On a consolidated total company basis, third quarter revenues increased by 8.5% as compared to the same period last year to $285 million.
Speaker Change: This equates to an 8.9% increase on a constant currency basis, as foreign exchange was a headwind in the quarter.
Speaker Change: Adjusted EdaDOT increased by 9% compared to the third quarter of 2023 to 146 million dollars.
Speaker Change: AdjustED.Margins finished at 51.3%, which was an increase of 23 basis points versus the third quarter of 2023. This increase in margins was driven by improved volume and mix at Nordion and Nelson Labs, as well as saleable pricing across all three businesses.
Speaker Change: Our reported interest expense for the third quarter 2024 was $42 million, similar to the same period last year.
Speaker Change: Net income for Q3 2024 was $17 million, or $0.06 per diluted share, compared to a net loss of $14 million, or $0.05 per diluted share, in Q3 2023.
Speaker Change: Adjusted EPS was $0.17, an increase of $0.01 from the third quarter of 2023.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Now let's take a closer look at our segment performance.
Speaker Change: Theragenics delivered 4.3 percent revenue growth to 176 million dollars as compared to the third quarter of last year.
Speaker Change: Revenue growth drivers included favorable pricing of 4.4% as well as a 50 basis point increase from volume and mix.
Speaker Change: This increase was partially offset by unfavorable changes in foreign currency exchange rates of 60 basis points.
Speaker Change: Compared to the prior year quarter, segment income for Q3 2024 increased 3% to $96 million.
Speaker Change: Segment income margins declined by approximately 70 basis points to 54.7% versus the prior year quarter, which was driven by higher employee compensation costs.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: www.microsoft.com.ca
Speaker Change: Nordeon's third quarter revenue increased by 28% to 51 million dollars compared to Q3 of 2023 due to the timing of Cobalt-60 harvest schedules.
Speaker Change: Nordeon's revenue increase was driven by a buy-in and mixed benefit of 23.2% and favorable pricing of 5.7%, partially offset by an unfavorable impact from changes in foreign currency exchange rates of 90 basis points.
Speaker Change: As Michael mentioned, we outperformed our expectations for Nordeon with the shift of a couple of shipments from Q4 into Q3 to support our customers.
Speaker Change: Nordeon's segment income increased 31.9% to approximately 32 million dollars and its segment income margin increased approximately 190 basis points to 61.8% compared to the same period last year.
Speaker Change: Segment Income and Segment Income Margin Changes versus 3rd Quarter 2023 were driven by favorable volume and mix, as well as favorable pricing.
Speaker Change: www.microsoft.com.ca
Speaker Change: For Nelson Labs, third quarter 2024 revenue increased 7% to approximately $59 million compared to the third quarter of 2023.
Speaker Change: Nelson Lab's revenue increase for the quarter was driven by favorable changes in volume and mix of 3.7% as well as a pricing benefit of 3.1%.
Speaker Change: Nelson Lab's third quarter 2024 segment income increased by 9% to $19 million, while segment income margins improved by 56 basis points to 31.8% versus third quarter 2023.
Speaker Change: These improvements were driven by favorable volume and mix.
Speaker Change: as core lab testing improved, as well as pricing benefits.
Speaker Change: Nelson Labs also saw some benefit from labor productivity in the quarter, partially offset by increases in employee compensation costs.
Speaker Change: On a sequential basis, Nelson margins increased more than 275 basis points.
Speaker Change: www.microsoft.com.ca
Speaker Change: I will now turn to the balance sheet, cash generation, and capital deployment.
Speaker Change: The company continues to be in a very strong liquidity position with over $700 million of available liquidity at the end of the third quarter, which included $307 million of unrestricted cash and $400 million of available capacity on a revolving line of credit.
Speaker Change: Our capital expenditures for third quarter 2024 totaled $36 million. As Michael mentioned earlier, Sterigenics completed one of its capacity expansions during the quarter.
Speaker Change: Free cash flow is positive in the quarter and we continue to expect to generate positive free cash flow for the full year.
Speaker Change: Our net leverage ratio improved during the quarter, finishing at 3.6 times and within our 2 to 4 times long-term range.
Speaker Change: And I would like to turn to our 2024 outlook.
Speaker Change: As Michael mentioned, we are reaffirming our outlook for net revenue and adjusted EBITDA growth in the range of 4 to 6 percent.
Speaker Change: We expect full year total company adjusted EBITDA margins to approach 50%.
Speaker Change: In Sterogenics, we continue to expect slight volume mix improvement.
Speaker Change: with Q4, similar to Q3 of this year.
Speaker Change: For Nordeon, we continue to expect slightly more than 60% of full-year revenue to occur in the second half of the year.
Speaker Change: For Nelson Labs, we anticipate Q4 revenue will decline mid-single digits versus the prior year, quarter, with a decline of expert advisory services revenue.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: www.microsoft.com.ca
Speaker Change: We expect Nelson Labs.
Speaker Change: full year margins to approach 30 percent.
Speaker Change: Interest expense is expected to finish at the lower half of the $165 million to $175 million range.
Speaker Change: Our effective tax rate on our adjusted net income is expected to be within the 31.5% to 34.5% range.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: We expect the fully booted share count to land at the upper end of the range of 283 million to 285 million shares on a weighted average basis.
Speaker Change: We now expect capital expenditures to fall in the range of $175 million and $185 million.
Speaker Change: Timing is the primary driver for the decrease in capital expenditures for 2024 driven by Nordeon's Cobalt development projects and some spending delays for our growth projects related to vendor performance.
Speaker Change: Given these shifts, we now expect our peak CapEx.
Speaker Change: to be in 2025 and then to decrease in 26 and again in 27.
Speaker Change: Our guidance assumes foreign exchange rates at the end of the third quarter to remain constant for the remainder of the year.
Speaker Change: I'll now turn the call back over to Michael.
Speaker Change: www.microsoft.com.ca
Michael Petras: Thank you, John. As you may have seen our release this morning, Sotero Health will be hosting its first ever Investor Day in New York City on November 20th. During the event, members of the company's management team will present business, strategic, and financial reviews, including growth plans and updates on our corporate responsibility journey.
Speaker Change: We're looking forward to this event and hope you'll either join us in person or via the webcast. Details on the event are included in the press release we issued this morning as well as on our investor relations website. At this point, operator, we'd like to open it up for questions, please.
Speaker Change: Thank you very much.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: Thank you.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: And our first question will come from Sean Dodge of RBC Capital. Please go ahead.
Speaker Change: www.microsoft.com.ca
Sean Dodge: Yep, thanks. Good morning. Maybe just starting with revenue, Michael, you all reaffirmed the full-year guidance, but that now implies a pretty wide range for Q4. I guess seasonally, historically, Serogenics and Nelson have both tended to have strong fourth quarters. Any reason that won't be the case again? I know you mentioned that the dynamic with the expert advisory and Nelson.
Sean Dodge: And then, any more direction you give us on Nordeon, you know, that can be lumpy, but relative to the third quarter, if my math is right, should we expect Nordeon to be up a little sequentially despite the Q3 pull forward you both mentioned? Is that fair?
Speaker Change: Yeah, so Sean, thanks and good morning. Yes, you should expect Nordeon to be up, you know, over the third quarter. It'll be down significantly from last year as we've told you all year in total.
Sean Dodge: You know, about 60% of the revenue will be in the second half of the year.
Speaker Change: So you can kind of figure it out from there. We, you know, you'll see, we talked about Nelson being down mid-single digits here in the fourth quarter, really driven by expert advisory services. It's a core lab testing market. We're pleased to see that progress continue. And then on the stereogenic side, you know, we've had slight volume of mixed growth in the quarter. We see that continue as the rest of the year plays out.
Sean Dodge: So that should help give you a little bit more feel for how the year plays.
Speaker Change: Okay, great. And then, as we get a little bit further past the release of the final NESHAP rules, have you seen any subsequent shifts in the end market happening there? Any conversations around more insourcers looking to outsource or any changes in...
Speaker Change: in just the makeup of the outsourced market? Are there any of those guys falling behind that could be market share opportunities over the, call it medium, long-term?
Speaker Change: Yeah, we continue to feel confident where we are on the NESHAP regs, although they're very challenging, the team is continuing to work against it. It's not an easy task. We think it's going to be a challenge for the industry overall.
Speaker Change: We're very optimistic of where we sit relative to the marketplace. We haven't seen definitive answers from customers yet or other competitors on exactly how they're proceeding on this. But we do anticipate it will be a challenge, and net-net we view this as a positive for Sterigenics.
Speaker Change: Okay, great, thanks for taking the questions. Great, thanks Sean.
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Patrick Donnelly of Citi. Please go ahead.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Patrick Donnelly: Hey guys, thanks for taking the questions. Maybe the first one on, I guess it'd be more serogenics. Just in terms of volume recovery, you know, I know that's kind of been a big focus point as the year has progressed. Where are we on that front and what are you guys seeing on the volume side? Visibility, you know, into 4Q and beyond would be helpful, just in terms of what you're hearing from customers and how confident you are in the trajectory here.
Speaker Change: You know, we saw a volume of mixed growth in stereogenics in the quarter. We'll see slight improvements similar to what we saw in the third quarter and the fourth quarter.
Speaker Change: We are seeing things stabilize. We're not hearing as much inventory deceleration, if you will, or reductions. Overall, we're optimistic that volumes will continue to improve as time moves forward.
Speaker Change: Okay, understood. And then Michael, I guess, you know, I know you guys aren't talking 25 just yet, but I guess when you think about the moving pieces that we have at the moment, kind of looking, looking where we are here, you know, again, the volume is picking up a little bit.
Speaker Change: Is there any reason we would be kind of outside that LRP? I think the LRP is iSingle, last we heard. Obviously, you guys are having an analyst day in a couple weeks.
Speaker Change: But you know any reason why we'd be off that algo of kind of mid-high single volume a little bit, you know, three and a half four
Speaker Change: and I will see you next time.
Speaker Change: Yeah, thanks Patrick. You know, I don't want to give the specifics on 25 or our long-range guide. You know, we will do that at the investor day. We'll give you some feel on the longer range guide and outlook.
Speaker Change: around CapEx, free cash flow, the business segments. One of the parts I'm really excited about is the opportunity for many of you to hear from our division presidents and talk about their businesses, which is a new opportunity for all of you. So we're looking forward to that. But the fundamentals of this business, ability to deliver price, continue to invest for organic growth, those all still remain intact. We'll continue to see volume and mix improvement as the time progresses.
Speaker Change: So, overall, we're very optimistic about where we're looking going forward here.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Okay, understood. We'll stay tuned for that. Thanks. Okay. Thank you.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Luke Sergott of Barclays. Please go ahead.
Speaker Change: This is Salem on for Luke. Good morning, guys. Just piggybacking off of Patrick's question, I guess just want a few more specifics on Theragenics, right? It came in slightly lighter than maybe some expected, despite some positive data points in bioprocessing this quarter, albeit it's a smaller part of your business. Devices seem to be, you know, largely over the hump. Could you
Speaker Change: Michael Petras, Jason Peterson, Michael Lyons, Michael Petras, Jason Peterson, Michael Lyons,
Speaker Change: Okay, good morning. One of the first comments you made was bioprocessing. Yes, you know, it's a smaller portion of our business. We did see sequential growth, quarter over quarter, down significantly still year over year. We're seeing several categories starting to move the right direction with volumes and with procedural activity. But as we've mentioned to you in the past, excuse me, it's not always a direct line strong correlation between, you know, procedural volume and, you know, volume for Sterogenics or Nelson, but
Speaker Change: We're optimistic we'll continue to see volumes improve as time goes on. Yes, we would have liked to see a little bit more in the quarter from Sterigenics, but overall it's consistent with what we communicated to you, that we would see slight volume and mixed improvements in the quarter over the prior year, and we did.
Speaker Change: got it that's helpful thank you for that and then just a small check up on litigation just you know on the Georgia cases any updates on progress or timelines on either you know personal injury or the property cases we're still on track to see the initial set of cases
Speaker Change: see a ruling in early 2025 on on phase one and then any any updates on the number of cases in California?
Speaker Change: Yes, so I'll kind of start at the back end, come forward. In California, I think there were still 18 claimants. That has not changed. And in Georgia, yes, the Phase 1 hearings will start to progress.
Speaker Change: And we do expect, based on what the judge has told us, by early 2025 or late January 2025 is when we'd expect to hear something on the phase one general causation work. Remember, there's two phases in Georgia. Phase one is general causation, and then after that, in cases that survive that, go to specific causation.
Speaker Change: and we expect phase one to hear something by the end of January from the judge.
Speaker Change: Awesome. Super helpful. Appreciate it, Michael.
Speaker Change: Thank you.
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Brett Fispin of KeyBank. Please go ahead.
Brett Fispin: Hey guys, thank you so much for taking the questions.
Brett Fispin: Just on Nelson Labs, the segment margin took another nice step forward in the right direction and is now really helpfully in that low 30s range that you guys have talked about. So just curious, like as the mix continues to shift back toward the core testing and away from some of the larger project-based work, how you think about the long-term margin opportunity in that area of the business?
Speaker Change: in both those areas, although working off a very strong baseline.
Speaker Change: We're happy to see the progress being made there and as we told you, Wood and Joe and the team are doing a really nice job on that. So, I'd say overall, the best part is the customer SAS scores continue to perform really well. I mean, customers value what that business does and the critical role we play there.
Speaker Change: All right, thank you. And then just one follow-up, you know, we have the Investor Day coming up in just a couple of weeks You mentioned the opportunity for some of the segment presidents to you know
Speaker Change: address the investment community. But just curious if you could provide maybe a little bit more of a teaser on what some of the main objectives of that event will be. And then without specifics, how you're thinking about providing some updated long-term financial objectives. Thank you so much.
Speaker Change: Yeah, great, Brett. You know, a couple goals for that Investor Day. One, I really want to make, not in any particular order, but I want to make sure that you folks
Speaker Change: get to meet the leaders that run this business beyond John, Jason, and I. So, you know, it's been several years since we went public, and I want to make sure you get an opportunity to see the strength of our team. So that's one of the key goals. Two is to make sure that you understand the critical role we play in health care.
Speaker Change: and just also give it, you know, give education around the business. You know, for example, some of you said, hey, we'd like to understand the Nelson piece a little bit better. So, you know, Joe will walk you through some of the basics of how that business operates and some of the key value that we bring to our customers.
Speaker Change: And then obviously we're going to give you a longer range view on how we see CapEx playing out, Revenue Guide, as well as free cash flow. Things like that I think are going to be really important. And, you know, just strategically how we think about M&A and what's in scope, what's out of scope. I think it will be a really great opportunity for you to hear from the broader team.
Speaker Change: a complete discussion around the company. So those are the things you should expect to hear on November 20th.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: Operator, are we there? Did we?
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Casey Woodling of J.P. Morgan. Please go ahead.
Casey Woodling: Great, thanks for taking my questions. Maybe to start, just can you break out Nelson's performance in the corridor between routine testing, validation testing, and advisory services? I think
Speaker Change: You know, last quarter you talked about seeing nice growth on the validation side and maybe slower growth on the routine side.
Speaker Change: and then so just how do we think about the moving parts of the business there into 4Q? You know you noted advisory services will decline but just curious you know by how much and how do you expect routine and validation testing to trend in 4Q respectively?
Speaker Change: Yeah Thanks Casey. So as we talked about validation has been strong the last couple quarters again. We saw that in the third quarter
Speaker Change: You know, we're pretty optimistic on how the core testing volumes are going. And expert advisory services, as I mentioned a couple minutes ago, there's some big numbers to overlap, but the team is doing a really nice job and continue to bring value to our customers in that area.
Speaker Change: Okay, got it.
Speaker Change: And I just want to ask one, you know, this quarter there's been a lot of talk across the industry around shoppiness related to pharma R&D spending and biotech funding over the course of the last several months in particular. Just curious if you see any risk to the near term from some of these pipeline reprioritizations or cautious spending from those customers, you know, particularly in Nelson, but just across the business. Just wondering if, how you're thinking about that dynamic, if at all.
Speaker Change: Yeah, Casey, you know, that continues to be, pharma testing in particular, as well as the sterilization, continues to be a growth area for us.
Speaker Change: We've seen growth in those buckets and we expect that to continue. There is some choppiness around that, but overall our business is performing pretty well. What our team does, particularly I call out the team in Leuven, Belgium, and the work that they do in pharma testing continues to do very well. And yes, some of those projects are more longer in nature because of the validation type, but overall we like the long-term prospects of the pharma area for both sterilization and testing, and we're seeing synergies from that value prop as well on a cross-BU basis.
Speaker Change: Great, thanks. If I could just squeeze one last follow-up in. I'm just curious if you could parse out the driver of the CapEx cut for the year, how much of that is related to facility enhancements versus the COBOL program and anything else? And then if you could give any kind of color on how you expect that to trend in 2025, that step-up that you kind of mentioned. Thank you.
Speaker Change: Thanks for the question, Casey. A couple things. One, the biggest driver...
Speaker Change: Single biggest driver is really the timing of our cobalt development programs. We're well on pace, I think we shared that we had our first insertion of cobalt into Darlington and we expect the first harvest in 2028, so we're excited about that.
Speaker Change: That program continues to progress well, just some timing relative to some of the payments there. The Westinghouse program is still in good shape, but it's probably a little bit delayed in that regard. And then just the other things around some of our growth projects, some timing of vendor performance, just normal things when you're running big CapEx projects.
Speaker Change: You know, as we look forward, as I mentioned, we do see the peak CapEx for us in 2025 now. And, you know, probably the best, we're not ready to guide on it yet, but the best way to frame it would probably just take a look at our original guide for this year. And it should be somewhere in the ballpark of that.
Speaker Change: In case you just wanted a point to add to John, I think you mentioned facility enhancements. That's not really the big driver of the CapEx being a little softer for year-end here. That's more the growth projects and the Cobalt that John referenced.
Speaker Change: Got it. Thank you.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Jason Bednor of Piper Sandler. Please go ahead.
Speaker Change: www.microsoft.com.ca
Jason Bednor: Hey, good morning everyone. A question from us on stereogenics. Definitely good to see another quarter of volume growth in that segment. I'm just wondering if you can elaborate maybe a bit more on the pricing trend.
Speaker Change: I don't want to make too big of a deal about it, but it did take another 50 basis points step back, I believe, quarter over quarter.
Speaker Change: If you talk about what's happening there, why is that price and power?
Speaker Change: lessening even while your own variable costs around labor are rising or maybe alternatively do you see the higher labor costs that you're experiencing maybe giving you more ammunition to collect more pricing upside as contracts with your partners reset here going forward?
Speaker Change: You know, Jason, we said in the business overall, we'd get three and a half to five percent price across the company. We'd be on the lower end of that range this year. Stereogenics has squarely been in the middle of that, around four percent, four and a half, and that's about where it came in for the quarter. On a year-to-date basis, it's about there. We're not concerned about our overall value prop and our ability to get price in this business. So, not concerned about the price performance in Stereogenics relative to the overall business.
Jason: Okay, fair enough, Michael. I guess on that, on the second part of that question, do you just the cost that you're experiencing a labor side of that?
Jason: Give you more ammunition on going after price increases with your with your partners as you go forward
Jason: Yeah, if we're if we're concerned about the overall cost structure We have the ability to push price in the marketplace, you know But we got to always make sure we don't run our value prop with our customers
Speaker Change: But you look overall at what's going on with the compensation levels. We have a little bit of a reset on AIP, Incentive Comp from last year. We have some open-head jobs that we filled, as well as some overall wage increase, merit increases. But overall, we're not concerned about the cost structure on that business.
Speaker Change: Okay, no, perfect. That's helpful. And our ability to meet paid margins, by the way, is the bigger point I think you were getting at.
Speaker Change: That should be clear. Yeah.
Speaker Change: Yeah, absolutely. Okay, and then on Nelson, maybe just one follow-up on the expert advisory services point. Really appreciate the color on fourth quarter. Is that, you know, it's kind of the exit velocity for this business, this segment.
Speaker Change: out of fourth quarter into 25, how we should be thinking about that segment. Is this the low point, or do things maybe step a little bit lower against tougher comps? Just trying to understand, as we said, models for next year.
Speaker Change: Yeah.
Speaker Change: Jason, maybe it was what you said. I kind of was mixing the total Nelson business and expert advisory. I'd say where you see the business trending towards is probably a good indication of what we expect going forward here and volumes continue to improve on the core testing side, expert advisory services probably settling back a little bit, which should give you a favorable mix in the business overall, if that helps.
Jason Peterson: Thank you.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Dave Windley of Jeffrey's. Please go ahead.
Dave Windley: Hi, good morning. Appreciate you taking my questions. I wondered, Michael, if you could comment on a couple of kind of volume-related stereogenics points. The first one would be
Dave Windley: I think you've talked in the past about being aligned with a medtech customer that has struggled with its own market share. I'm wondering if that situation has improved at all. And then the second area would be in kind of the bioproduction life sciences area.
Speaker Change: I think Casey asked the biotech funding question as regards to maybe Nelson, how is the life sciences bioproduction market as relates to sterigenics? Thanks.
Speaker Change: Yeah, great. Thanks David. Good morning on your first question on the one customer. Yeah, we're seeing improvement signs from that customer And they're working through some of their challenges or the last several quarters So that's a net positive for us and then the second one on bioprocessing as I mentioned in my comments earlier We in answer to Casey, I want to make sure I get your questions as well. We did see sequential improvement of bioprocessing We are seeing uplift opportunities of both Steri and Nelson
Speaker Change: Okay, thank you. And then if I could follow up on...
Speaker Change: your cobalt capacity you mentioned Darlington would you be I mean admitting that it's a 2028 harvest and so it's still quite a ways out but how how much does that increase
Speaker Change: capacity and maybe, if you would, talk about kind of the totality of programs and how much capacity they would add over time.
Speaker Change: Yeah, so you know we've got supply base right now. We buy cobalt from you know, Canada
Speaker Change: China, Argentina, Russia, you know we get we get it all around the world as we look at our multi-year strategic plan.
Speaker Change: We will bring on new capacity to help displace some as well as give us incremental. We're looking to keep pace with the overall market demand over time, David.
Speaker Change: We're not looking to build on a huge amount of incremental, but it's a shifting of some of that capacity as we see reactors come online and offline over the next 10 years or so, but
Speaker Change: We're very optimistic about Darlington, you know, OPG is one of our best partners out of Canada and you know, this is a program we've been working with them on for the last several years and we're proud of where that's progressing with the great work that they're doing alongside our team.
Speaker Change: a big milestone getting that cobalt, as I call it, putting the loaf of bread in the oven and being able to bring it out in 2028 if cobalt-60 is a big deal. So, you know, really proud of where that's going and, you know, you saw the Nordeon team had a good quarter here and we're expecting a solid year from end total.
Speaker Change: Yeah, congrats on that heck of a long baking period. I appreciate the answers. Thanks. By the way, I'm not so sure the team is doing all the hard work, but I appreciate the bread analogy, but for me it's in layman's terms. I'm not an engineer by background, but that's basically how scientists work.
Speaker Change: Thank you. Okay, thanks David.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: The next question comes from Michael Polark of Wolf Research. Please go ahead.
Speaker Change: Good morning. Thank you. I have two follow-up on expert advisory services and then a question on the EO upgrade program. On expert advisory services, Michael, can you remind us
Speaker Change: How big is this business as a portion of Nelson in percent terms or just dollar terms? That's part one and then part two is
Speaker Change: In terms of what was really good over the last year or so, was it...
Speaker Change: You know, can you frame that, the what?
Speaker Change: of what behind the bump. Was it device customers, pharma customers, was it a specific therapeutic category?
Speaker Change: I'm just trying to better understand the step down and kind of...
Speaker Change: I'll have John respond to your question on the overall sizing, but let me just tell you, as far as RCA and what the expert advisory team is doing.
Speaker Change: They help customers with submissions to the FDA, they help get new product launches, get files pulled together and submissions, and when there's problems, they get involved. So as we've mentioned on this call, we're experiencing in our business and our customers are experiencing a lot more increased scrutiny from the regulators in FDA visits and audits.
Speaker Change: And that is where RCA shines. I mean, they're dragged in to help on problems. You know, they've had some med device customers have issues, but I'd also say there are very significant pharma customers that have had FDA challenges, and they've called us in to help them be a third party to get through that cycle. So that's where we've seen the uplift in that activity. More so than the new filings, Michael, it's more around some of the problems that they've had around compliance issues that they've dragged us in for. As far as the sizing piece, John, do you want to just give a rough sense on that?
John Lyons: Yeah, Mike, it's roughly, you know, call it low double digits, percent of the total pie of Nelson.
Speaker Change: Appreciate all that. Follow-up on EO, can you update us on just how much left do you have? How close to the finish line are you in terms of the U.S.?
Speaker Change: modernization and then part two is on NESHAP.
Speaker Change: Is this set in stone, or is there still a negotiation or discussion being had on some of the particulars?
Speaker Change: Do you think a presidential, yeah, like a different administration might...
Speaker Change: impact time to compliance here. Any flavor for that? Thank you.
Speaker Change: the NESHAP requirements, we'll have a significant amount of spend next year, as we've said all along. But we were planning about $150 million or so in total. It's probably going to be another $15 to $20 million on top of that would be our gas base. We talked to you in the past that we said it was an immaterial amount. That's roughly what we're seeing on this. So you can kind of plug in what you'll see. I think this year we're going to do $37 million, low 30s. We'll probably have comparable numbers next year in that area, although I don't know exactly how it forces out. I know Mike and the team have taken us through that program in detail. So we'll see that carry out into 2025. Most of that spend will be behind us in 2025.
Speaker Change: As far as NESHAT, the rules are set. I think what there's some discussion still between industry and the EPA is around clarification of exactly how do we achieve that. You know, hey, you put this measurement, is that an absolute number? Is that an average? Is it an average over three hours, three days, or three weeks, or three months?
Speaker Change: I think there's some clarifications around that that the teams are working through in the associations.
Speaker Change: but I don't see us seeing a big change in the absolute rules themselves. It might be some finer tweaks around.
Speaker Change: clarification of the rules that have been set and I don't see, listen you know people, a lot of people said hey you know if there was a different administration you know the industry wouldn't be going through this. I think it's been a challenging dynamic for the industry in total regardless of the administration that's in there. I just think there's been a ton of misinformation. These sterilization facilities, particularly ours, operate at safe levels.
Speaker Change: And this low level of ethylene oxide, we're very confident these emissions are not causing cancer. And I just think that there's still a lack of education around this that we're going to continue to push and make sure people are informed around.
Speaker Change: Thank you, Michael. Okay, you know, one other thing, Mike, just to know, and I'll repeat it, you know, we've got ethylene oxide information out there on our website. We'll continue to use the frequently asked questions that'll be in there on our ethylene oxide section of our website. So, you know, if there's any updates on these kind of things, that are material, we'll make sure we post them there during the quarter as well.
Speaker Change: Thank you, everyone. Bye-bye.
Speaker Change: www.microsoft.com.ca
Speaker Change: www.microsoft.com.ca
Speaker Change: All right. Operator, any other questions?
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Michael Petras for any closing remarks.
Michael Petras: Great. Well, thank you everybody for taking the time. You know, we're proud of what the team's doing here. Good, solid quarter. Long expectations that we previously communicated to you, and we look forward to seeing you November 20th in New York City and giving the opportunity to meet some of our team and hearing
Speaker Change: Great things that TerraHealth does in safeguarding global health. So thanks and have a great day. Bye. Bye
Speaker Change: www.microsoft.com.ca
Speaker Change: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
Speaker Change: Presents THE BING ON THE TICK THE BING ON THE TICK THE BING ON THE TICK