Good morning. This is Twanda and welcome to Sotera Health's 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 soterahealth.com. This webcast is being recorded and a replay will be available in the Investors section of the Sotera Health website.

On the call today are Michael Petras, 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 Sotera Health SEC filings and the forward-looking statements slide 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 during 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 relevant periods may be found in the schedules attached to the company's press release and in the supplemental slides. [Operator instructions]. I will now turn the call over to Sotera Health Chairman and CEO, Michael Petras. Sir, you may begin..

Thank you. Good morning everyone and thank you for joining us on Sotera Health's third quarter 2021 earnings call. I am very pleased this morning to be 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 have reported double digit top and bottom line growth in every quarter since going public in November 2020. Many of you may recall from our past disclosures that Sotera Health has delivered revenue growth every year since 2005 when our tracking begins.

We consider that consistency of performance, combined with attractive long term growth opportunities to be hallmarks of what makes this company so special.

It has been great to see that consistency in growth trajectory play out in each quarter that we report 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 in a moment but here are some highlights for the third quarter performance. We reported total revenue growth of 13% and adjusted EBITDA growth of 16% compared to the third quarter of 2020 as well as adjusted EPS of $0.21, which was a $0.12 increase over the third quarter of last year.

Sterigenics performed well in the quarter. We mentioned last quarter that Sterigenics should ramp up a little faster than we originally assumed and they remain near their peak pre-pandemic levels that they reached in the second quarter.

Nordion followed a record-breaking second quarter with another strong performance in the third quarter, delivering high double digit revenue growth driven of demand for the 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 demand in that area has settled closer to pre-pandemic 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 continued to impact Nelson Labs in the third quarter as well.

While challenging in the near term, we see these Nelson Labs-specific headwinds as short term in nature. We expect them to normalize in the next few quarters before they become tailwinds for our business. We are also encouraged by trends in specific testing categories, such as extractable and leachables and antimicrobial testing.

As discussed on prior calls, our team correctly anticipate growing demand for E&L testing in Europe as a result of the rollout of the new EU Medical Device Regulations or MDR, along with broader reliance on this testing globally. As a result, this testing category is expected to see strong demand for at least the next several years.

Overall, I am very proud of the entire Sotera Health team for delivering another strong quarter and for their continued focus on meeting the needs of our customers, healthcare workers and patients while continuing to maintain a safe work environment.

Importantly, the Sotera Health team continues to execute on our mission, safeguarding global health while still navigating this dynamic environment. Every day, we encounter examples that our mission remains bigger than any one product or service.

For example, recently, one of our Sterigenics facilities in the Southeast urgently sterilized an artificial heart and shipped it to Spain to save the life of a patient. Nelson Labs is actively testing commercial hand sanitizers and enhanced surface disinfectants for their efficacy against the Delta variant.

These day-to-day business activities underscore our -- 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 operational excellence across our businesses, investing in growth initiatives such as adding capacity and enhancing infrastructure, strategic M&A and efficiently integrating acquisitions and further deleveraging.

Today, I am excited to speak about one of our growth activities which spans multiple business units. For many years, both Sterigenics and Nelson Labs have served 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 role 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 as thought leaders in the industry.

In order to provide more coordinated access and expertise to our customers, we recently created the Sotera Health Expert Advisory Services Group, which includes thought leaders from both our Sterigenics and Nelson Labs teams. The new group will expand our ability to serve the needs of our nearly 6,000 customers worldwide.

In conjunction with this initiative, I am also pleased to announce that we recently closed on the acquisition of Regulatory Compliance Associates or RCA. RCA is a leading provider of outsourced regulatory quality and compliance advisory services to the biopharma and medical device industries.

With 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 Sterigenics. I want to offer a warm welcome to the RCA team. Thus far in 2021, we have taken several steps to invest in our growth priorities.

We have acquired two small but strategic tuck-in acquisitions in addition to purchasing the outstanding minority stakes at our Fairfield lab and Shanghai sterilization operations. We have also completed two Sterigenics expansions and one Nelson Labs expansion in Europe.

We recently completed installation of a new EBeam 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 sizes at Sterigenics. We expect these to come online beginning later this year and continuing throughout 2022 and 2023.

In addition, we continue to invest in our Sterigenics facility enhancements while also advancing the three long term cobalt supply development projects at Nordion. Taking a step back from our specific results, I will comment briefly on what we are seeing in the broader markets where we operate.

The market recovery in general has played out in a manner fairly consistent with the assumptions we made earlier in the year.

However, there's no doubt that there's a continued impact from both the Delta variant and a more recent acceleration of macro challenges indirectly related to the pandemic, such as labor shortages, inflation and supply chain disruptions.

While we have encountered all of these challenges in some form, we have 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 as unsettled, but we remain to be cautiously optimistic. As I mentioned earlier, Nelson Labs has encountered some challenges specific to that business, but our total company performance is a testament to resilience of Sotera Health's broader business model.

I want to make a comment about our 2021 outlook given that we have now completed three quarters of 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 are expecting 12% to 14% topline growth and 13% to 14% adjusted EBITDA growth for the total year of 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 proud I am of the entire Sotera Health team. I will now turn the call over to Scott..

Thanks Michael. I will 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 will end with more detail regarding our updated 2021 outlook.

On a consolidated total company basis for the third quarter, revenue grew by 13% as compared to the third quarter of last year to $226 million. On a constant currency basis, revenue grew 12%. Adjusted EBITDA also grew 16% from Q3 of 2020 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 Nordion and Sterigenics. Our strong operating performance, combined with a $37 million reduction in interest expense, resulted in adjusted EPS of $0.21 per share, up $0.12 from Q3 of 2020.

Now let's take a closer look at the segment performances. In Q3, Sterigenics 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 Iotron. Recall that we closed the Iotron 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 have lapped the date of the acquisition and thus Q4 year-over-year will represent 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, Sterigenics volumes and utilization levels remain at the levels reached in Q2, when they were near their high watermark from 2019. We continue to make meaningful investments in Sterigenics' capacity and expect to begin seeing revenue contributions from the expansions that Michael referenced beginning in the first half of 2022.

We also continue to make progress on the facility enhancements at our North American EO facilities. For Nordion, Q2 revenue grew by 42% compared to Q3 of 2020 to $29 million. Nordion segment income grew 59% to $16 million compared to the same period last year.

Nordion's top and bottom line growth were driven by a 31% benefit from volume and mix, about 6% from pricing and a 5% FX impact. Nordion's margins were up by approximately 620 basis points, largely driven by operating leverage on their higher sales and favorable pricing compared to Q3 of last year.

Nordion's growth compared to Q3 of last year does benefit from what was a relatively weak comp, given the timing of shipments last year, but their overall 2021 performance, nonetheless, remained strong and ahead of our overall expectations coming into this year.

For Nelson Labs, Q3 revenue declined by 2.6%, compared to the third quarter of 2020 to $52 million and 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 tailwinds.

This 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 and regulatory compliance-related testing and the slower ramp-up in medical device product development and testing.

While it's disappointing to see the testing activity delayed into future quarters, it does give us optimism regarding our pipeline for 2022 and that any negative impact we are currently experiencing is more of a short term effect.

As Michael mentioned, we are also encouraged by favorable momentum in some testing categories, such as E&L and antimicrobial. 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 have previously mentioned that given our strong margin profile, acquisitions tend to be margin dilutive, at least in the near term. We are seeing some of that effect now from Bioscience and also we will begin to see some margin dilution from the newly announced RCA acquisition beginning in Q4.

We view these as shorter term effects while we scale up the businesses. 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 projects.

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 3.6 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 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 as 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 are pleased with the trending of both Sterigenics and Nordion, but we are reducing the top end of the guidance range as a result of trends that we are really seeing in the Nelson Labs business.

As mentioned earlier, we are comfortable that many of those headwinds will become tailwinds within the next few quarters but we do not expect normalization to occur in 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. And adjusted EPS in the range of $0.87 to $0.88. 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 strategy has not changed. The other assumptions underlying our previously communicated guidance remain the same.

Before I turn the call back to Michael to wrap things up, I wanted to echo his 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 recognize the importance of the EO topic to our stakeholders, I want to make everyone aware of a new EO-related research we have added to the Investor Relations section of the Sotera Health website.

This resource is intended to provide facts and background and I encourage you to visit the site to review its content. Going forward, we plan to provide educational materials on EO and updates on EO matters that may be relevant to investors will be posted there. At this point, operator, let's open the call for questions and answers..

[Operator instructions] Our first question comes from the line of Matt Miksic with Credit Suisse. Your line is open..

Hi. Thanks. Thanks for taking the question and congrats on another strong quarter. I wanted to maybe just explore the comments you made about PPE and Nelson Labs in the quarter. It seems like we are all still even now trying to understand how all these businesses are affected by COVID or different types of surges.

Could you walk through, I guess what you have had expected to happen in the back half year with the PPE and some of the testing dynamics? And sort of perhaps what changed in the third quarter? And then I have one follow-up..

Yes. Good morning Matt. It's Michael. Thanks for the question. On the PPEs, 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 were trying to forecast as we went into 2021 exactly how that would play out. We saw numbers continue to climb in testing.

Remember, we are doing a lot of testing of protective barriers here, masks 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 forecasts in here that we projected that it would slow down and get close to 2019 levels.

It's still 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 2021 has just been a little slower. But overall, there's some really positive areas going on. It's just the mix shift.

And as we have stated before, the PPE or protective barrier testing is pretty high margin so that also impacted the margin rates. So overall, the fundamentals were still very positive on Nelson.

It was just our ability to forecast sitting here during this pandemic of how quickly the other testing, our normal testing would ramp back up and how quickly the PPE or protective barriers would go down. That was the part that was just a little tough for us to the forecast.

So we expected what happened, but just it happened at a little faster pace in both directions..

And Matt, I will just add to that, that if you think 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 Labs from PPE.

And then 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 9% headwind in Q3 was just a little bit faster of a downtick than we had anticipated..

Yes. But I also want to call out the employees. I give a lot of credit to Nelson Labs. They really pivoted to take care of customers on this PPE protective barrier and then now pivoting back on some of the other testing, really good job by Joe and the team in doing whatever they can to service the customers because it was dynamic.

Things were happening, Matt, in this pandemic that none of us expected..

Absolutely. I appreciate the color. And then again just on margins. I think you touched on this in the 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 in Nordion sort of also had a kind of similar effect on mix?.

Nordion, it's really the volume fallen through in the P&L. We saw this. The business is performing very well. We expect the fourth quarter to be in line with our expectations. So overall, they have had a good year in margins as we expect in that business..

Okay. Fair enough..

All right. Thanks Matt..

Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open..

Hi. Thanks. Mike, I am going to have you to pick up where you left in margins, just thinking about higher labor costs, inflationary pressures on the supply chain.

Can you maybe just talk a little bit about how you are thinking about addressing those in the current environment?.

Yes. Good morning Tycho. Where we are seeing the impacts on inflation, some materials, some utility costs and on the labor side. And we have been able to push through increases and we expect to be able to fundamentally do that as we have progressed throughout the rest of this year and into 2022. But those are the areas we are seeing it.

Predominately labor, utility and a little bit in the direct material side, on Sterigenics..

Okay.

And no supply chain issues to flag in terms of sourcing, right?.

No. Tycho, as we said in our prepared remarks, where we see the supply chain is just like even the Nelson team or the Sterigenics team, we are relying on our customers to get the supplies over to us right.

So in the testing cases of Nelson, we have got delays where customers are having problems getting samples to us or sometimes the lows are a little slower to be picked up at the Sterigenics because there's an issue with our customer getting a truck or something like that. Those are the kind of supply chain issues we are seeing.

But overall, we feel pretty good about our visibility in this businesses, as we have stated in the past. Nordion continues to work through the logistics that they have to deal with to meet the customer needs. But those are those are the examples we are seeing..

And then the recovery in Nelson Labs. I know you said it will take a couple of quarters to normalize. You said like antimicrobials and E&L areas are a little bit better.

But how do you think about pent-up demand as that business starts to come back?.

Yes. When we look at it, what we are really talking about is, we know the PPE will continue to unwind, if you will. That's the headwind we referenced there. We still feel very good about some of the, we have got 800 different tests. There's several sections. We break up to about 18, 20 sections overall. There's many sections that are doing very well.

It's just the PPE wind down is the one that we are talking about. But we see other areas ramping up. We are building teams. It's not like we are reducing a bunch of costs or anything like that. We are continuing to build out our teams because we know that the backlog is we are starting to see orders come in.

As I mentioned on one of our previous calls, Tycho, there's a couple of sections in particular that are tied to regulatory and there's some uncertainty right now by the FDA, particularly on what test requirements they are going to have.

So 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 have 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 around 80% last quarter for Sterigenics?.

Yes. We are still in the neighborhood of 80%. The capacity programs, as we referenced, we have got a couple that came on online this year. We have got several coming on the fourth quarter and then I believe one of those actually flipped into the first quarter, the beginning first quarter from a timing perspective.

But overall we are in pretty good shape. We have got seven of them in process. And then we have got a couple more behind that that we will work with the teams too..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from the line of Patrick Donnelly with Citi. Your line is open..

Hi guys. Thanks for taking the questions. Maybe a follow-up on Tycho's margin question. It might be one for Scott. In terms of you had the wage inflation, you have PPE 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 4Q and even 2022? How much are you able to pass along to customers kind of written into the contracts? Just trying to get a feel for the margins, given again labor inflation and PPE coming out against you, kind of talk about maybe the tailwinds and how we should think about that algorithm..

Sure. And I am sorry, I am not sure if you are 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 to customers.

And certainly we don't see anything in the overall demand environment or market environment that we think would interfere with our ability to do that. In fact right now, as we go through our annual budgeting cycle, we are actually contemplating 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 are comfortable that we can maintain those overall margin levels and continue to build on them over the longer term as we have 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 they are seeing now relative to prior periods is driven primarily by that mix effect, the adverse mix effect associated with the downtick in PPE testing.

And then also this is something that we have talked about in the past that, given how high the margin profile is for our businesses, generally when we do acquisitions, tuck-in acquisitions, they are 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 will 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 are still talking to Nelson Labs business as 40% EBITDA margins, right. For a lab business, the team has a really good job in bringing value to our customers..

Absolutely. Yes. And then you touched a little bit on M&A there. And you guys mentioned you had 3.6 turns of leverage. Can you just talk about the appetite? Obviously, you have 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, I mean when we talk about 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. 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 toward the Nelson side, but not exclusively Nelson. From a size perspective, on the labs side, we have got a lot of them that are tucked in around the size that we have done here with Bioscience as well as RCA.

And again for us, it's making sure that strategically it fits with what we are trying to do, culturally it aligns and that we have plans on how we are 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 and tell you we are doing a $2 billion acquisition. That's not how we are thinking about it, right. But we are being very thoughtful in how we deploy capital around 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 Markets. Your line is open..

Hi. Good morning. This is Thomas Kelliher on for Sean. Thanks for taking the questions.

Maybe shifting over to Sterigenics, 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 weakness on the lab testing side impact any of the sterilization volumes?.

Yes. Thomas, it's Michael. We have pretty good visibility on the Sterigenics side. We are into long term contracts with our customers. We are 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 am sorry.

And the lab piece? You won't understand how it relates to the lab piece?.

Yes. I have got to say, is there any kind of interaction, like weakness in the lab testing side.

Does that impact any sterilization volumes that you might get?.

No. I mean there's some new validations that come into play where we are waiting for customers to help do validations across the two businesses. I would tell you also, sterility assurance, remember about 40% of Nelson Labs business is taking product that comes in often from sterilizers and just validating that the sterility plants work.

So there is a 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 that might cause.

And then there's a couple other sections that aren't directly tied to terminal sterilization that we are seeing some regulatory delays and that's causing a little bit of a pain on Nelson but not directly impacting Sterigenics..

Okay. That's helpful. Thanks.

And then can you tells us 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. This is something that we have had within our organization and it was set up within Sterigenics. 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 have got, really it helps us give end-to-end expert advice to our customers. They have asked us for this.

So as we have done survey work with our customers over the last several years, the feedback has been pretty clear that there's high value in this work. It's all about our ability to drive thought leadership.

You will see more from us in the upcoming months as we continue to push on that in the marketplace and help people with all the knowledge that we have in this space in how they come to us. We are going to make it easier for them to interact in this area.

RCA is just another piece of that equation for us in that team and what they bring us on the services capability. And consulting there for quality and compliance and regulatory affairs is very valuable. They have got heavy focus on biopharma and med device, which is very strategic to us long term. So we are 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 this RCA acquisition. I believe you are saying that's 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 a 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, 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 in the last couple months of the year..

And David, this is Michael. One of the other big benefits of an asset like this or this expert advisory services is the ability for us to get involved with customers early on 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 Sterigenics?.

Nelson..

Nelson, okay. And then 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 1Q 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 items that have been slow to pickup, so to speak, the new product testing and things like that? Do 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, as we do on the Nordion business or Sterigenics. I would say in the Nelson, it's less visibility. But within Nelson there's variation depending on if it's a typical lab release. It's something that's been sterilized. They got us some sample over and we have got to do a quick release.

That's pretty short notice as products come in. But then there's some longer product development cycles, where we are involved in extractable and leachables or some other areas. We have more visibility to that pipeline, a little earlier.

So I would say we have got about 55% of the business is kind of routine and about 45% is longer term validation like cycle..

Where we have a little bit more granular visibility is not necessarily in terms of customer-specific order book but for those tests that 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 roll out, then we have a better sense for when the testing revenue around that compliance is going to pick up and that gives us some optimism around next year..

Yes. Scott, that's a good point. So to that point, David, like last week I was out in the lab and I was out wandering with the teams in the different sections and I met with some of leaders there.

And to Scott's point, I saw the book of the backlog in particular with around the key projects that are delayed because of this regulatory signoffs they are waiting for. So those are kind of sections we have some visibility into. That would go in that validation group that I referenced earlier..

Got it. Great. And then maybe a bigger picture. We happen to notice that China laid out some fairly substantial investment plans into nuclear power plants admittedly over a long term and maybe that makes it not particularly relevant for near term for you.

But I just wondered in your longer term Nordion cobalt supply thought process, does that nuclear plant investment in China create any opportunities for you?.

David, we buy minimal amounts of cobalt today from China, like we do from other parts of the world. That is something that we will continue to look at and evaluate if it's a fit for us. 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 are doing with the Westinghouse relationship and trying to bring that to market. And there's just a lot of complications, as you know.

Even if I told you where all the cobalt in the world is, getting it and moving it around the world, that's really the competitive advantage that Nordion 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 Mishan with KeyBanc. Your line is open..

Hi. Good morning guys. Just the first one on EO. I appreciate the transparency and that you guys are going to be providing more updates to the website.

I would just want to get a sense for you what are the next few data points where you think you will be able to provide some updates to the websites and your updated thoughts on the timing of potentially a proposed rulemaking from NESHAP into next year?.

Yes. Matt, this is Michael. We just populated quite a bit of information. We had several investors that said make it a little easier for us to get information on EO. As opposed to us having to do our research, can you populate somewhere? So that was very good feedback from the investment community. So that's what we rolled out recently.

So you have the ability to see that. When I look at new data points, we are going to continue to execute on our facility enhancements like we have mentioned. We are rolling that out throughout this year and into next year and probably a little bit into 2023 as well.

But as far as NESHAP, we want them rules and regs as bad as anybody, right? Tell us the rules and we will make sure we exceed expectations. It's a moving target. I know some people said it was going to happen as early as fourth quarter this year, beginning next year. I think it's our personal opinion is, this is going to roll into 2022.

Remember what will happen is, it will come out and then there will be a public comment period. That could take 90 days and then beyond that, there's some timing echos. It's got to go OMB first. Then it's got to go to a public comment period and then ultimately become the new reg. So I think it could be the latter half the next year.

But again, we hope it's sooner. I am terrible at predicting what the government's going to do on new regulations..

Okay. Fair enough. And then switching over to Nordion, there was an upside in the last two quarters in our model versus Nordion. You had said that 4Q looks like it's coming in line with expectations.

But was there some pull through or pull forward into 3Q from harvesting of some Nordion revenue that we should be paying attention to in the fourth quarter or into early next year?.

No. There's nothing like that we saw here in the Q3 results. They are just having an outstanding year. I will remind you that last quarter, in Q2, when we reported a record-breaking quarter for Nordion, at that time we cited that there was about $5 million of sales in Q2 that we had previously contemplated for the fourth quarter.

But there was not that type of effect here in Q3. They just had a very, very solid quarter and they are pointed to a pretty solid year overall..

Yes. And, Matt, the other point I would build off of this, last year third quarter was a really low quarter for Nordion that they are coming out. So they had a low comp they were working off of. That business is pretty consistent. We have said this all along. It's a very consistent business over the long haul.

There's some lumpiness from quarter-to-quarter. But overall, the business performed very well and there was no pull-in into the third quarter..

Okay.

And just last one on Nelson Labs, I guess, is there a difference in where you are at in expectations between the upfront validation testing and then the more routine testing that you do with that 45/55 split? And then when did that facility in Europe start to impact results?.

So yes, thanks, Matt. Yes, I would say that the validation testing has been a little slower. That's for some of the new product development. That's a little slower than we expected. That's a question of how quickly our customer supply chain and product development efforts can ramp up. That's the part I referenced.

That was slower to ramp and the PPE came down faster than we thought. In Europe, the Wiesbaden Center of Excellence that we referenced on our previous calls, that's doing very well. The team's doing a great job executing, Michel and that team have done an outstanding job over there.

Really proud of what they are doing and the customers are really responding very well to that. So thanks for the questions..

Thank you. Our next question comes from the line of Amit Hazan with Goldman Sachs. Your line is open..

Thanks. Hi. Good morning. I kind of want to take all the puts and takes on the call. Just kind of ask you a bottomline question about 2022, which we, obviously a lot of us on the call, have had the model pre-IPO that you had given us and it suggests double digit topline growth continues.

Is there any reason to believe that double digit topline growth won't happen in 2022? And that goes for the whole company but also for Nelson Labs. 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?.

Yes. Amit, obviously we are not going to get in first quarter discussions or even total year 2022 at this point. When we get to the first quarter, we will announce it. What I would tell you is the fundamentals are all in place and we continue to be optimistic about the company's growth potential.

But price, volume, mix, utilization, operational excellence, those things are all in place. The end markets are strong and 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 Sterigenics 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, they all reported a slowdown in 3Q versus 2Q.

And so if I heard you right, I think you said your kind of capacity or utilization is kind of running at the same level it was as 2Q. Maybe correct me if I am wrong.

But if not, just help us reconcile how your business works versus how they all reported? Why is it that you are seeing fairly consistent results from 2Q to 3Q, where everybody else saw a slowdown?.

Yes. Amit, it's timing and depending on where the customer's inventories are, right. And we don't have great visibility into that. We have got some segments that are doing very, very well within Sterigenics. Some of the companies that have stated they have 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, the diversity of the customer base there, where about two-thirds of that business is med device and the rest is food, pharma and some other, we have got a good portfolio that helps us get through and gives us a stable growth pattern here with Sterigenics for the last several quarters..

Okay. And just the last one for me, New Mexico.

Any updates on what's going on with the facility there or your discussions with the attorney general, et cetera?.

Yes. Amit, thanks for that question on New Mexico. So we had a hearing at the end of October where the parties both came in with a monitoring plan that the judges asked us for. We provided our proposal. The AG provided theirs and we are waiting for the judge to rule on exactly what the go forward monitoring plan looks like.

We fully anticipate continuing to operate in that facility, where we are providing sterilized products to the tune of about two million devices per day.

I would also tell you that the other very positive development has been that both the NMED, the air regulators, as well as the local permitting groups have granted us permits for both the environmental permits as well as the construction permits, which is very good, which means the key improvements that we have been putting in these EO facilities, we have got the authorities that make those decisions that approved and signed off on both those permits.

So we are moving forward with construction in that facility. So that was also something that's 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 have proven that they are industry leading improvements with negative pressure, double scrub and central discharge. So we are optimistic on that aspect as well..

Thanks so much..

Thank you. Our next question comes from the line of Luke Sergott with Barclays. Your line is open..

Hi guys. Thanks for squeezing me in. So I kind of wanted go back to Amit's question on 2022. I know you are 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 4Q COVID headwind, is it safe to assume that that kind of rolls through as an overall headwind to next year? So like looking at maybe like 2% to 3% headwind?.

We are not going to get into specifics on 2022 but what Scott mentioned is the PPE. We will have a couple of quarters where the PPE works off in Nelson. But overall, we are optimistic about the growth for both Nelson, Nordion and Sterigenics..

Okay. Thanks. And then I guess on the Bioscience Labs acquisition.

Any update to the expected contribution this year? Any changes to your expectations for that business?.

So I think what we mentioned earlier is that they contributed about 5% to Nelson's topline here in the third quarter. And overall, I think that's representative of their current run rate.

They contributed a little bit more than that in Q2, but really it was just an extraordinary first quarter under our ownership, given some large tests that they had in the pipeline. But I think what you saw here in Q3 is representative of what we are going to see going forward as well..

All right. Thanks. That was all. Just a couple of house cleaning ones. Thank you..

Yes. Thanks Luke..

Thank you. Our next question comes from the line of Michael Polark with Baird. Your line is open. Check to see if you are on mute..

I am here. Good morning.

Can you hear me?.

We can you, Mike. Good morning..

Thanks. Following on Dave Windley's question on Regulatory Compliance Associate, 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 would buy something for $30 million, a business 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, it literally just occurred a week ago. But again, for these smaller acquisitions, we are not going to necessarily be in the habit of providing the breakdown in terms of the incremental revenue or earnings contribution.

But I think, obviously, the amounts we are 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 this space where we are looking to accelerate an expert advisory services.

And 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. Curious just for an update on the proceedings in Illinois related to EO, still the timing believe first trial scheduled for next summer. Is that still intact? Any other recent developments worth to mention? Thank you very much..

Yes. Mike, I would tell you the trials, the three key trials, first three trials, I guess, are set for July 22, September 22 and November 22. We are happy that we have clarity from the courts now and the case management and actually when different pieces like discovery and deposition and all that closes out.

So we have clear timelines that both parties are adhering to and we expect the trials to start in July. So that's basically the most current. Thanks for your question..

Thank you. I am 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 Twanda. It's been nearly a year since our IPO and we want to thank all our investors and analysts for all their support during our first year as a public company. I am honored to be leading such a great organization and company that delivers strong and consistent growth while fulfilling our mission of safeguarding 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..