Sotera Health Co (SHC) 2021 Q2 法說會逐字稿

Good morning. This is Michelle, and welcome to the Sotera Health Second 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 the risks and uncertainties that could cause actual results to differ materially from those projected or implemented. Please refer to Sotera Health's SEC filing and forward-looking statements slide at the beginning of this presentation for a description of the risks and uncertainties. The company assumes no obligation to update any such forward-looking statements.

Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EPS and net leverage ratio. A reconciliation of non-GAAP to GAAP measures for all the relevant periods may be found in the schedules attached to the company's press release and its supplemental slides. (Operator Instructions)

I will now turn the conference over to Sotera Health's Chairman and CEO, Michael Petras.

Thank you. Good morning, everyone, and thank you for joining us on Sotera Health's Second Quarter 2021 Earnings Call. I'm very pleased this morning we're reporting another quarter of double-digit revenue and adjusted EBITDA growth. This performance builds on the strong growth we delivered in the first quarter and rounds out a solid first half of 2021. These operational and financial results serve as a great reminder that Sotera Health sits in a critical position in the health care value chain.

Importantly, the team continues to execute on our mission, safeguarding global health, while still navigating the challenges and changing dynamic of the pandemic. Scott will go into more detail on our segment performance and capital structure in a moment, but here are some highlights for our second quarter performance.

We reported total revenue growth of 18% and adjusted EBITDA growth of approximately 18% compared to the second quarter of 2020 as well as adjusted EPS of $0.26, which was a $0.12 increase over the second quarter last year. I think it's important to bear in mind, while the pandemic certainly impacted our top line last year, all 3 of our businesses still delivered growth in the second quarter of 2020. So while many companies are reporting growth compared to a fairly weak baseline from last year, we are delivering double-digit growth compared to a quarter in which all of our business have delivered the consistently positive revenue growth that has characterized our company for many years.

This strong performance is a reflection of our continued focus on our strategic priorities, including driving operational excellence across all our businesses; deploying capital towards our growth initiatives, such as adding capacity and enhancing infrastructure; strategic M&A and efficiently integrating acquisitions, including Iotron and BioScience Laboratories; and further deleveraging towards our target levels.

At several points earlier this year, we indicated that our outlook for 2021 assumes a gradual normalization of volumes throughout the year. Overall, I would say that 2021 is playing out the way we anticipated, but there are some nuances to how each of the businesses has been impacted by the recovery. Those nuances are reflected in the second quarter results for each business.

Sterigenics had a solid quarter as its volumes continue to recover towards pre-pandemic levels. In fact, Sterigenics volumes and utilization levels in the second quarter were near their pre-pandemic high watermark reached in 2019. So in relation to our original outlook for 2021, I would say that Sterigenics has revved up a little faster than we expected.

Nelson Labs continues critical testing of personal protective equipment, but that category, as expected and previously communicated, has now become a headwind year-over-year, gaining strong volume to the second quarter of last year when testing related to the pandemic was first surging. As expected, we've seen enough recovery in other non-PPE testing categories to offset the decline in PP&E-related (sic) [PPE-related] testing.

Overall, though, I would say the normalization of non-PP&E (sic) [non-PPE] testing volumes, including testing related to new product development, is going to be in slightly slower pace for Nelson Labs compared to the faster recovery at Sterigenics. The slower pace of recovery for services that are part of a much larger cycle of activity does not come as a surprise to us.

For Nordion, they had a difficult comparison in the second quarter given an unusual concentration of shipments in the second quarter of 2020. The team still delivered double-digit growth for the quarter. I'm proud of the entire Sotera Health team for achieving the strong first half financial results and for their continued focus on meeting the needs of customers, health care workers and patients while creating a safe work environment.

With the benefit of a solid first half performance, combined with more momentum going into the remainder of the year, we are increasing our top and bottom line outlook for 2021. Scott will provide you more details on our total 2021 financial outlook in a moment.

Moving on to capital deployment. We continue to be disciplined in this area. Our capital deployment priorities remain unchanged as we prioritize growth investments, further deleveraging and strategic M&A. Our net debt leverage ratio improved once again in the second quarter.

Now I would like to highlight some of the key capital deployment growth investments for each of our 3 business segments. For Nordion, we've been discussing for some time Nordion's investment in 3 long-term Cobalt-60 supply projects. As we've mentioned, these initiatives are longer term in nature and will diversify our supplier base. We continue to make progress in these development projects.

For Nelson Labs, we continue to be focused on expanding capacity and capabilities to meet the needs of our customers. A great example is our extractable and leachables testing area, where we've made investments in both equipment and technical staff in order to service the significant demand growth we have seen in that area. Earlier this year, we reported progress on the build-out of our European microbiological center of excellence based in Germany. I am now able to say this new lab went live during the second quarter as quickly, qualifying customers to ramp up operations. I want to send my congratulations to the Nelson Labs team achieving this important milestone.

We are pleased that the integration of BioScience Laboratories, which Nelson Labs acquired in March, has been going well. Having BioScience Labs as part of Nelson Labs business is already creating revenue growth above BioScience's pre-acquisition baseline.

Lastly, we've made substantial progress on the Sterigenics capacity expansions as well as on the Sterigenics EO facility enhancements throughout the quarter.

Taking a step back from our specific results. I'll comment briefly on what we're seeing in the broader markets where we operate. As I mentioned earlier, the market recovery in general is playing out in a manner relatively consistent with the assumptions we made earlier in the year. Different from last quarter, we've seen a fairly broad recovery in the second quarter across both the Americas and EMEA. We find it to be an encouraging trend.

Having said that, I think it's important to maintain a cautionary tone. Everyone is aware of the continued presence of the virus and the risks associated with the new variants. We will continue to monitor the activities of our customers and the market.

In addition, we and our customers have encountered some challenges that serve as a reminder of how uncertain the macro environment is right now. For example, some of our customers have experienced delays in shipments dut to a variety of issues, including shortage of labor or raw materials or even availability of transportation services.

Moving away from the financial results. I want to share 2 initiatives that we have accelerated as part of being a new public company. First, we're developing a formal ESG program, taking a holistic approach to identifying what's important to us and to our stakeholders and will have the most beneficial effect on the environment, our employees and the communities in which we operate. As part of our focus on diversity, equity and inclusion, we have created a Diversity, Equity and Inclusion or DE&I Council. That council consists of employees from around the world and from different levels of the organization. The council reports to me and has clear actual goal towards broadening the company's diversity, equity and inclusion efforts. I recently met with the council to discuss our progress, and while still early, I look forward to sharing a bit more about these efforts with you on future calls.

Before I turn it over to Scott to cover the second quarter and outlook in more detail, I want to take a moment again to emphasize how proud I am of the entire Sotera Health team. Our team's level of focus on executing against our strategy, serving our customers with excellence and attention to delivering results is in a large part the reason that we are able to update our outlook today.

I'll now turn the call over to Scott.

Thanks, Michael. I'll first cover the second quarter highlights on a consolidated basis and then provide more detail for each of the business segments, along with updates on capital deployment and leverage. I'll end with more details regarding our updated 2021 outlook.

On a consolidated basis, Sotera Health in the second quarter delivered revenue growth of approximately 18% as compared to the second quarter of last year to $252 million. On a constant currency basis, revenue grew by about 14%. Adjusted EBITDA also grew approximately 18% from Q2 of 2020 to $135 million. Adjusted EBITDA margins contracted by 30 basis points compared to Q2 of last year, driven largely by unfavorable mix within the Nelson Labs and Nordion businesses, along with absorbing an incremental $4 million of administrative costs across the company largely associated with the ramp-up of public company costs. Our strong operating performance, combined with a $36 million reduction in interest expense, resulted in adjusted EPS of $0.26 per share, up $0.12 from Q2 of 2020.

Now let's take a look at the segment performances. In Q2, Sterigenics delivered 20.6% revenue growth and 22.4% segment income growth over Q2 of last year. Revenue growth drivers for the second quarter included organic volume and mix growth of over 8%, pricing contribution of approximately 4% and approximately 6% from the acquisition of Iotron. Compared to the second quarter of 2020, segment income margins in Q2 of 2021 expanded by 80 basis points, driven by higher utilization levels and pricing.

As Michael mentioned, we are pleased to see that Sterigenics volumes for the quarter have just about reached the high watermark established in 2019. We continue to make meaningful investments in Sterigenics. We are on track to complete 6 Sterigenics expansions this year, and we continue to make progress on the facility enhancements at our North America EO facility.

Moving to Nordion. Q2 revenue grew by 16.6% compared to Q2 of 2020 to $49 million. Nordion segment income grew 13.7% to $31 million compared to the same period last year. Nordion's top and bottom line growth was driven by a 9.5% benefit related to FX as well as an 8% increase from pricing, partly offset by slightly lower volumes. We had anticipated lower volumes compared to the prior year due to the concentration of shipments in Q2 of last year that Michael had mentioned earlier.

Nordion's margins fell by approximately 160 basis points, largely driven by unfavorable mix. I'll note that even with the year-over-year decline in margin rate, Nordion segment income margins are more than 63% this quarter. Like many businesses with a predominantly fixed cost base, Nordion's margins tend to be higher in periods of stronger top line performance as a result of favorable operating leverage. That was the case this quarter, just as it was in the second quarter of last year. In subsequent quarters with more modest top line performance, you can expect margins to settle back down to a point which brings their full year average back in line with last year.

Overall, Nordion's performance for the quarter was better than we had originally expected as some sales previously anticipated for the second half were instead realized in Q2. As a result, Nordion's second half of the year revenue is expected to be lower than the first half of the year but still with full year revenue better than what we were expecting at this time last year.

For Nelson Labs, Q2 revenue grew as compared to the second quarter of 2020 by 13.9% to $58 million, and segment income grew by 8.3% to $24 million. Earlier, Michael mentioned nuances to how the pandemic recovery is impacting Nelson Labs testing volumes. What we saw in Q2 was the PPE-related testing went from a tailwind in recent periods to a 5% year-over-year headwind. On the other hand, non-PPE testing delivered enough organic volume growth to offset that decline.

This was Nelson's strongest quarter since the pandemic began for these non-PPE testing services, which grew 6% in volume and mix. Nelson's non-PPE testing services have delivered sequential volume growth improvements in 4 consecutive quarters.

In addition, BioScience Labs delivered incremental growth over their pre-acquisition baseline, contributing over 7% to the segment revenue. Favorable pricing also contributed around 4%. Q2 of 2021 margins contracted by 210 basis points over the prior year quarter as the softening of demand for higher-margin PPE testing resulted in an unfavorable mix of testing services during the quarter.

Next, I'll cover some highlights relating to capital deployment and leverage. Our CapEx spend is tracking in line with our full year guidance, with $24 million of spend occurring in the second quarter and bringing our first half total to $45 million. As a reminder, we continue to project $100 million to $110 million of capital expenditure for full year 2021.

Our spending continues to be focused on near- and longer-term growth initiatives, EO facility enhancements and Nordion cobalt supply projects. As of June 30, we had $156 million in cash, a $54 million increase over December 31 level. We were able to deliver this cash generation even after funding approximately $15 million for the BioScience Labs acquisition, $12 million for the Nelson Labs Fairfield minority owner buyout in Q1 and about $8 million to buy out our minority partner stakes at our 2 facilities in China. With combined cash and revolver availability of $435 million, the company remains in a strong liquidity position to fund our operational needs and investments. We remain undrawn on our revolving credit facility.

Our net leverage ratio continues to improve, with net leverage of 3.8x as of June 30 compared to 4.3x on December 31, 2020. We've made excellent progress in delivering on our deleveraging commitment, already achieving the top end of our stated long-term goal of leverage between 2x and 4x.

Through a combination of debt paydown and repricing our term loan, Q2 2021 interest expense declined by $36 million versus the second quarter of 2020. For the first half of 2021, interest expense has declined by over $71 million.

With our meaningful cash build and after funding other capital deployment priorities, we will fully redeem our $100 million first lien notes during the third quarter of 2021. These notes are currently the highest-cost debt in our capital structure, and the redemption will save the company an incremental $7 million per year of interest expense.

As Michael mentioned, we're very pleased to be in a position to increase our outlook for the full year from the initial outlook ranges that we've provided on our March 9 call. For full year 2021, we now expect total revenues in the range of $920 million to $940 million, representing growth of approximately 12% to 15% compared to 2020; adjusted EBITDA for full year 2021 in the range of $475 million to $490 million, representing growth of approximately 13% to 17% compared to 2020; and adjusted EPS in the range of $0.87 to $0.91.

From a qualitative standpoint, our assumptions are as follows. We expect continued improvement in the demand for our products and services through the end of the year, as we've experienced already in the first half of 2021. As I mentioned earlier, the outperformance by Nordion in the first half of the year means that both Nordion's second half revenue and margins are expected to be lower than the first half of the year.

Based on this momentum coming out of the first half of the year, we expect Sterigenics to continue to deliver solid top line growth and margin performance in the second half of the year. While Nelson Labs will continue to be impacted by the interplay of how quickly non-PPE testing ramps back up compared to the decrease in PPE-related testing. With respect to foreign currency, our guidance continues to be based on exchange rates in effect as of the time that we provide updates on guidance.

From a capital deployment standpoint, we will continue to prioritize growth initiatives, debt repayment and strategic acquisitions that we identified throughout the remainder of the year.

Before I turn the call back to Michael to wrap things up, I wanted to echo his earlier comments about how proud we are of the entire team. Our team's hard work is evident in our Q2 and first half results and has helped to position us for a solid 2021.

Michael, back to you.

Thank you, Scott. Before we conclude, I want to comment on recent developments relating to the Sterigenics Santa Teresa sterilization facility. As many of you are aware, there was a court order on June 29 which prohibits uncontrolled emissions from the facility and ordered that Sterigenics work with the New Mexico Attorney General on the monitoring protocol. While Sterigenics denies the allegations about the Santa Teresa facility, Sterigenics has taken steps to ensure, monitor and document compliance with the order. Sterigenics has not yet reached an agreement on monitoring with the Attorney General and has requested a hearing with the judge so that the court can determine an appropriate monitoring protocol.

Having said that, we have no reason to believe that the outcome of that process will hamper in any way the facility's mission of sterilizing 2.5 million essential and often life-saving medical devices each and every day.

I also want to remind everyone that we periodically post updates to the Special Notices section of our Investor Relations site on matters that may be relevant to investors, including updates with respect to ethylene oxide and how they may affect Sterigenics facilities. As referenced in our most recent posting on the website, we were pleased that Sterigenics recently received an environmental permit from the New Mexico Environmental Department, clearing the way for the next step in Sterigenics' implementation of additional emission control enhancements at the Santa Teresa facility. That permit is a good example of Sterigenics' constructive relationship with regulators in the state.

Back to our performance. Overall, we're very pleased with our operating results and financial results thus far this year, especially considering the continuing challenges posed by the global pandemic. Thank you again to the Sotera Health team for their great execution this quarter and for setting us up nicely for a solid second half of the year.

At this point, operator, we'd like to open the call up for questions and answers.

(Operator Instructions) Our first question comes from the line of Matt Miksic with Crédit Suisse.

Congrats on a really solid, strong quarter. A couple of questions. If you could maybe talk a little bit about the sort of demand trends that you're seeing. That's -- I think one of your competitors earlier in the week talked about rising demand from some of your end markets in devices and sterilization. And then I had one follow-up.

Matt, this is Michael. Yes, on the demand, obviously, we're watching the COVID situation and the impact on elective surgeries. And from where we are, the volumes have been pretty stable for us. We're cautiously optimistic as the year progresses. We're assuming a catastrophic situation. We think we'll continue to see growth in the second half of the year.

Okay. And then on the margin front, I appreciate the color from the sort of the cross-currents in the back half of the year here with Nelson and the other businesses. Can you talk a little bit about the extent to which margins on Sterigenics played a role here in the quarter or trends in margins in Sterigenics in the back half?

I'll address it first, and Scott can add in. Obviously, we had margin expansion year-over-year. I think it was about 80 basis points or so for Sterigenics. The operating model is such that as you get volume coming across these facilities with the fixed cost, you get good operating leverage. And so as volumes come back versus third, fourth quarter next year, we would expect to see improvements and margin rates expansion.

Yes. I'll jump in and just add that I absolutely agree with Michael's comments for Sterigenics, that continued robustness in the underlying operating model persists. And so in the second half of the year, we would expect to see a continuation of the favorable trend that we're reporting here in Q2 with the 80 basis points of margin expansion that Sterigenics reported here in Q2.

One thing I would emphasize also is that, obviously, in our first year as a public company, there are these new costs that we're absorbing, these new administrative costs associated with being a public company. And we mentioned earlier $4 million of cost headwind in Q2 alone, and it was $8 million on a year-to-date basis. And so that cost headwind in Q2 translated to about 170 basis points of margin headwind that we as a total company overcame.

And so I think when you consider that and look at the still robust margin performance for Sterigenics and across all 3 businesses and that really -- it should give some comfort around the health of the underlying margin profile for the core business.

And if I could just squeeze in one more here. I know that you're a little bit unique in the way that you structure some of your contracts around, say, wage inflation or input cost inflation. That becoming kind of a general concern across the economy, can you talk a little bit about should you see that or if you're seeing some wage inflation across your plants and facilities, like how that would factor into your -- how we should expect that to play into your margins over time?

Yes. Matt, this is Michael. I would say we are seeing some inflation, predominantly on the labor side. Being a service business like we are, it would be on the labor side, and it's primarily focused in the U.S. We feel we'll be able to cover any inflation in the way we deliver price in our contracting with our customers. But overall, it's a manageable number, but one impact that we're clearly seeing across the economy here in the United States, as you're well aware, with other businesses as well and just that balance on labor overall.

(Operator Instructions) Our next question comes from the line of Sean Dodge with RBC Capital Markets.

This is Thomas Kelliher on for Sean. Congrats on a great quarter. I guess just starting off, you did previously mention you had a strategic planning window for each business unit that is going to run through July where, I think, pharma, and specifically on the Nelson Labs side, was a key focal area. I guess now that we're in August, what are some of the takeaways from those meetings? Do you have any interesting changes to strategic direction or anything like that?

Yes. Thomas, thanks for the question. Obviously, I'm not going to get into a lot of forward-looking details. But just to kind of bring it close to that planning cycle, yes, as we stated in the past, we have an operating system across Sotera Health, and one of the key elements of that is a 3-year strategic planning. We went and just completed that. We're actually going to have a strategic planning session with the Board next week and taking them through that 3-year plan. But I would tell you, we're really optimistic about where we sit as a company and fulfilling our mission of safeguarding global health. And yes, pharma is a part of that strategy going forward as it has been up to this point as well.

Okay. And you guys have a number of the new capacity expansions coming online over the next year or so. And you said everything still on track there. There's no notable delays or accelerations or anything. I guess how should we think about contribution from new capacity this year or maybe next year?

Yes. I would just tell you, yes, we've got 6 expansions that we're planning on coming live this year. We also referenced in our remarks that we are proud of the fact that the Nelson team under one project of expansion, the Wiesbaden center Of excellence, has opened up in Germany. So that's good.

We're not going to get into specifics by facility, but we believe in the need to put additional capacity in place to service the demands of our customers. And as we've talked about in the past with a lot of our investors, we really are diligent in that process on how we think about capacity and making sure we have some anchor customers, if you will, before we start putting the shovels in the ground or expansion.

And our next question comes from the line of Patrick Donnelly with Citi.

Maybe another one just on the guidance. Can you just talk through, Scott, what pace of recovery you're kind of thinking about for the back half, again, with elective procedure, let's say, uncertainty in terms of some of the mixed signals we've gotten from some of the ortho players? And then also just high level, any way to think about 3Q versus 4Q in terms of the pacing there?

Sure. Well -- so in terms of the pace of recovery, if you go back to our guidance as originally issued back in March, we had contemplated a gradual normalization of volumes throughout the year. And so as Michael said a few minutes ago, basically, the year has played out more or less in the manner that we had anticipated.

One of the key changes that we talked about already on the call here is that Sterigenics has benefited from probably a slightly faster ramp-up in their area than we had originally contemplated in our guidance. And so I don't think that meaningfully changes what we contemplate for the second half of the year. We still see the opportunity there is going to be a continuation of what we saw in Q2, where we've hit our high watermark. And we expect to see continued robust year-over-year growth, both top line and bottom line, for the business.

We're not seeing any kind of a headwind in terms of any impact from the new variant yet as far as how elective procedures may flow through to our volume. One thing to recall is that last year in Q2, even during the worst of the pandemic shutdown activity, our company delivered robust revenue growth. And Sterigenics even delivered in Q2 of last year 4% revenue growth on a constant currency basis. And so the fact that our business has been so robust from a revenue-generating standpoint, even during the worst periods of the pandemic, gives us some comfort that we have line of sight to strong performance for the second half of the year.

That's helpful. And then Michael, maybe just on the litigation front. You talked a little bit about New Mexico. I mean is there any read-through from your guys' perspective from the preliminary ruling to what the eventual outcome could be here? Obviously, it was good to avoid the worst-case scenario of kind of a full shutdown, as you talked about. Maybe just talk about your takeaways from what happened. And then maybe just a quick update on the timing for some of the rest of the litigation, what we should be looking out for over the next few quarters here.

Yes. So the last part of that question on the litigation, you're talking just more broadly across the other sites, particularly Illinois?

Yes. Correct, yes.

So let me go there because that line have been off top of my head. So the litigation -- the trial dates have been -- the first 3 trial dates have been set. The July of 2020 -- this is for Illinois, July of 2022, September 2022 and November of 2022. So that's the Illinois trial dates. Those are the first 3 cases. So those have been set. And hopefully, they'll stick to that schedule. They could move around, depending on pandemic and everything else.

As far as New Mexico, we're continuing to operate the facility. We continue to put improvements in that facility like we have for the last several years.

I think one point that I made in my remarks that I think it's really important for people to know, the people that regulate us in that state, New Mexico, their department, they actually gave us a permit in June 11 for the improvements that we're putting in, in the facility. We've been working with them for quite some time now. So we're going to continue to move forward on that process. We've got to get the construction permit done, it's the next step, and we're in the throes of that right now.

As far as the court piece and uncontrolled emissions, the AG has a view on it. We have a view on it. And I just think the big difference is practicality of some of the things being proposed relative to what we do today in running the operation. So we just need a third party to intervene and have that discussion. Don't know exactly -- that motion was just put in the courts in the last couple of weeks. So I'm not exactly sure when the judge is going to want to have a hearing on this. It could be days, it could be weeks, it could be months.

We're going to continue to operate the facility in a safe manner that we have all along and provide the critical service of 2.5 million devices a day that we sterilize at that facility, which is critical to health care.

And our next question comes from the line of Matthew Mishan with KeyBanc.

Just first one on Nelson. I think you said the testing was moving at a slower pace or recovering at a slower pace. I imagine that device and pharma development isn't changing too much. What is slower at this point?

Matt, this is Michael. I would say that we're seeing some of those activity around new product development just ramping back up a little slower. The routine testing, a lot of release testing in that is doing fairly well. We're doing -- as we also mentioned in our remarks, we continue to deploy capital against extractable and leachable, analytical chemistry is doing really well. But it's in some of those other areas in new product development that may be a little bit slower in the validation area that we just got to keep an eye on. But as Scott mentioned in the comments, we're really proud of the fact that our volumes outgrew the PPE testing. That was a headwind in the quarter, as we all expected.

Okay. And then -- it's a tough question to ask, but can you walk through some of the differences between your Sterigenics business and your closest peer, AST, and help bridge the gap between your numbers and theirs? I mean it just seems like -- it just seemed like this quarter in particular, there was a larger gap.

What aspect of their business versus ours are you looking at when you say that?

The organic growth.

Oh, the organic growth. I think that's a function of timing and capacity of what's available. As we said, we're pretty disciplined in our capital deployment and making sure that we utilize our capacity. It's expensive capacity. We just don't have excess capacity around to give significant volume growth. We've told you all along during this process of becoming public, we're not a business that's going to throw out 20%, 25%, 15% kind of volume growth. We don't have that kind of excess capacity or available capacity at a given time. We've got a business that we feel very confident will continue to grow high single digits, and we'll continue to perform for our customers.

What capacity are you guys operating at, at this point with the new plants?

We're in the neighborhood of 80 -- a little low 80s, I would say.

And as Michael mentioned earlier, that represents getting back just about to the peak utilization levels that we had typically run at prior to the pandemic. And so, obviously, that's pretty high for us in terms of our routine operating level. And we do have these new capacity projects that are coming online later this year and subsequent to that as well, which opens things up for us a little more.

Yes. We work really closely, Matt, with our customers and just trying to align what their demands are versus our capacity plans because this is expensive capital, and we have a pretty disciplined process around that.

And our next question comes from the line of Tycho Peterson with JPMorgan.

I want to go back to the margin discussion earlier. I know you talked about Sterigenics. But for the 2 businesses that saw margins down, Nordion and the Nelson, can you just talk about how you're thinking about margins in the back half of the year? Do you expect those mix headwinds to reverse? And then you talked about wage inflation, but how about cost pressures on the supply chain? And how easy is it to kind of pass that along?

Sure. So I'll talk about -- I'll answer your margin question first. So with respect to Nordion and at the risk of being redundant, Nordion reported 63.4% margins for the quarter. And so really extraordinary by any measure. They just had a very, very extraordinary comp last year. And so while they grew the top line versus last year, the supply and customer mix for this quarter happened to be such that there was a slight year-over-year decline in margins. But overall, that is really just representative of some of the timing nuances as far as who they were selling to and who their shipments were coming from.

But I think I mentioned earlier in my comments that when you look at Nordion on a full year basis, we expect their margin profile to settle down to something that's in line with their margin profile from last year.

For Nelson Labs, really it's going to be determined by how this mix plays out in terms of the ramp-up of non-PPE-related testing compared to the decline in PPE testing. As we mentioned, that was a 5% headwind, the decline in PPE testing, and that happens to be very high profitability testing. And so depending on exactly how that nuance plays out, we may see some year-over-year decline still in Nelson's margin profile. But again, it will be dependent on the speed with which that comes down.

And Sterigenics, Tycho, I addressed earlier. We see margin expansion as volume continues to decline in the second half of the year there.

Okay. And then on supply chain, any cost pressures that could be passed on?

So the one I mentioned in reference earlier was the wages. That's where we're really seeing it. Other than that, most of our cost structure is people, being in the service business that we have. We've got a couple of other material items, but we don't think it's significant enough that it's an issue for us in being able to recover it, nor do we do on the labor side either.

Okay. And then on the capacity side, 80% is a decent step-up. I think historically, at Sterigenics, you've been kind of 73%, 75%. So does the additional capacity expansion, the 6 projects you talked about, get you back to kind of that low-70s range? Or can you just talk to the degree of which you are expanding capacity? And then also, how should we think about the Cobalt-60 supply agreements on the Nordion side as well?

Yes. So Tycho, our reference point would have probably been the 76% to 78% kind of range in the last couple of calls that we've talked about. And that's gone back to 80%, which is closer to where we operate. As we put additional capacity on, that will fall below the 80%. So just to give you some context, that's how we're kind of thinking about it as we look at these capacity expansions. And again, we try to have those committed with our customers, a large portion. It's not all the volume, but a large portion of that volume committed.

Your additional question, I'm sorry, was around cobalt? What specifically?

Yes. The 3 60 cobalt (sic) [Cobalt-60] supply projects for Nordion. How should we think about those coming online?

Yes. So those are long-term supply projects. We're going to be working -- this isn't something that you're going to see cobalt in '22 or '23. This is in the out-years. We start in -- we're worried about it and we plan about '25, '26, '27, '28, '29, '30 and beyond. These are long-term cobalt supply programs that we're working with utilities around the world. But we will continue to deploy capital against them over the next several years, Tycho, just to be more specific for you, consistent with what we've shared before.

And our next question comes from the line of Amit Hazan with Goldman Sachs.

Maybe start with the Nelson side and see if you can just remind us on the PPE COVID kind of benefit. Just help us, if you can, quantify the benefit from last year just so we get a sense of what the headwind can or might be as we kind of move to a fully normal environment, hopefully, next year. And then maybe help us quantify that impact, what you've seen so far this first half of this year would be helpful.

Yes. So we mentioned that the PPE-related testing was about a 5% headwind for us here in this quarter. And I would say that represents unwinding a little over half of the total benefit that we had seen from COVID -- or from PPE testing. And so there is some incremental headwind to come, but it's more modest than what we saw this quarter.

Okay. And then just one follow-up on the EO regulatory environment. I want to make sure the question is at least asked as it relates to other states, if you kind of think beyond New Mexico, Georgia and Illinois. Have you seen any other states increase regulatory requirements on the EO that you would call out or kind of copycat type of actions? Do you see risk of those similar actions in other states where you have EO facilities?

And then relatedly, as you kind of think about impact to medical device players, we do the same thing. BD is still facing scrutiny in Georgia, and they've had to disclose -- make more disclosures there. What are you seeing and hearing from medical device players in the EO arena as it relates to them wanting to be in the EO game or changing their stance on that?

Yes. As far as -- Amit, this is Michael. As far as new regs and new restrictions being put on by other facilities around the country, we're not seeing that. Obviously, we have facilities in multiple states. We work with the regulators on an ongoing basis, and we continue to operate in those facilities.

I can't tell you about something else showing up. I mean I can't predict some of the irrational activity that's happened in the past and what that means for the forward, but what I can tell you is we're in compliance with our permits and the regs. And we continue to provide critical service, if you will, to all the customers in the supply chain.

As far as -- our facilities are all up and running here in the United States, and they have been for quite some time. Regarding the disclosures in Georgia in BD, I would just make a comment, BD is somebody that has a combination of outsourcing of sterilization and insourcing of sterilization. That's been something that they've been doing for many years. Not all customers look like BD in that instance. We're not seeing a large trend of people doing a large insourcing of sterilization, let alone EO.

I'll take it to one other spot that you didn't ask, but I would imagine it's on your mind, Amit. The NESHAP, which is the regulations for the sterilizers. Right now, our current belief is that it's probably going to be a 2022 event. The government and the administration has signaled that it might be late this year when they get the rules out for public comment, which means we probably wouldn't see anything until 2022 as new requirements.

But again, we feel very comfortable with the improvements we're putting in our facilities that they're going to be able to exceed the expectations of new regulations that are out there. Did I answer all your questions, Amit? Because I know it's an important topic to you and others. I want to make sure I answered your question appropriately.

Yes. No, I appreciate it. I think the last piece of it is just whether you've seen any change in behavior from folks that are insourcing, medical device companies that are insourcing in their desire to move to outsourcing just given the continued noise in various states on this topic?

Yes. As I think I referenced in one of our previous calls, we have a situation with a customer that's asked us to put additional capacity. And they are an in-house provider today, and they are looking to expand their outsourced relationship with us in one of our capacity expansions. They have not told us it's because of the regulation, okay? But I have a strong suspicion, this is my own personal opinion here and our teams that, that was a factor in them moving some of their volumes over to us. But I would not call it a trend. I would call it a data point at this point, where we've got a customer that's come to us and said, "Hey, we'd like you guys to scale up some capacity for us." And we're commenting that as part of our 6 expansion programs that we've referenced.

And our next question comes from the line of Dave Windley with Jefferies.

Wanted to ask, Michael, around pharma as an end market. You had quantified an addressable market in your IPO materials that was pretty substantial. You've mentioned a couple of times in this call extractables and leachables, which I think particularly leans in that direction. I wondered if you could elaborate a little bit on the growth that you're seeing in that extractables and leachables. And then what other initiatives do you have in place to further penetrate pharma?

Yes, David, thanks for the question. On the primary. Yes, we've talked about the fact that our business is $33 billion in total across Sotera Health, the TAM. And then we've talked about the $29 billion outsourced lab. And then we've also walked it down to $7 billion kind of number in the pharma services for our lab.

Part of our strategic planning process is we continue to refine those numbers and our strategy and how we're going to attack that larger TAM. We are seeing significant growth in extractable/leachables. But I also want to be clear, one of the strategic elements of that is not only extractable/leachables for pharma but also med device. As new regs, MDR in Europe in particular, come to market and some other requirements by the regulators, we see extractable/leachables not only in the pharma but also in the med device space.

So we continue to see growth in both areas, both segments with extractable/leachables, and then we also have additional pharma services that we're pursuing. And I would tell you, we've seen extractable/leachables do really well, but we're also seeing other areas of new product development on pharma services being a little slower right now in some of the volume side that -- to the point that was asked earlier about some of the volumes on Nelson Labs. But overall, we're optimistic. Our strategic plan still has pharma as a big part of it.

If I could ask on -- go back for a clarification on your comments around PPE. Scott talked about kind of half of the benefit from last year unwinding. I guess it's kind of a 2-part question, I suppose. Is your assumption in your guidance today, your overall guidance, that the COVID-related headwinds and tailwinds are largely done by the end of this year and you step into the next year in a more normal environment? Or should we think about these types of things, be they kind of headwinds now with PPE or slower new development recovery, things like that, that you've named, are those going to be things that could leak over into next year?

Sure. So just to clarify, when I was talking about how much of the PPE-related benefit we already saw unwind, that was relative to this 5% headwind in Q2 in relation to the amount of the tailwind that they saw in Q2 of last year. And so we will continue to see some headwind in terms of year-over-year comps in the subsequent quarters. If you even go back to our Q1 results when we reported them, we reported at that time a fairly sizable tailwind for Nelson Labs associated with PPE testing. And so you'd expect to continue to see some headwinds associated with the continued unwinding of that in subsequent sequential quarters, not to take away from, obviously, the benefit associated with ramping up other categories of testing.

And in terms of kind of the overall storyline around any headwinds we may have associated with unwinding COVID benefits, really it is this category of testing, this PPE testing in Nelson Labs, which is the only meaningful COVID-related tailwinds that we have to unwind.

David, I would add one comment to Scott's, just to be clear of trying to understand your question a little further. We do not expect PPE testing at Nelson to get a big pop-up from this variant activity. If that was embedded in your question, I'm not sure. I just -- I want to make sure we don't expect a big guy -- if the variant really ramps up, we don't think there's -- we're not assuming a large increase in PPE testing for Nelson going forward. Does that help? I think that may have been going on.

It does help, but it actually probably wasn't something that I had thought about. I guess what -- the broader part of the question was really to get at if you've commented on things like slower recovery in new product development, things like that, that are generally some uncertainties and headwinds to your business right now as you stand here right now. Are those things that you think are unwinding to kind of normal in this calendar year? Or is it still too hard to say? Again, kind of do you step into '22 on a more normal basis?

We're cautiously optimistic that we'll see recoveries in the second half, but we're not super aggressive on how we think about it at this point because of some of the uncertainty out there.

And our next question comes from the line of Michael Polark with Baird.

Question on the 6 active capacity expansions in Sterigenics. How many of those are live and filling now versus will be live by the end of the year? That's question 1 on it. And then can you just remind us what's the mix of that investment between EO, gamma, machine-generated radiation, North America versus Europe? I just would love a flavor about where the capacity is going in this year.

Yes. Yes, Michael, I would say that all 6 of the expansion projects that we referenced are to come on going forward. They're not -- none of them are up and running. None of them are greenfields. They're expansions to existing facilities. And I would say there's a couple EO and a couple in the radiation space.

Perfect. The follow-up on Nordion. I think I heard correctly, I may have not, 8% benefit from pricing in the quarter. My question is, was there anything onetime-y contributing to that number? Or is that at the level of pricing you're getting in Nordion this year? And is that a reasonable input for the years beyond?

Well, I think if you go back to our Q1 numbers, the price number that we reported for Nordion was a little bit lower than what we typically see. And so this one's a little bit higher. And there is some -- we always talk about lumpiness in one way or another for Nordion. And for better or worse, there's a little bit of lumpiness in pricing also, depending on which customers you're selling to in a particular quarter and how recently they may have had a contractual price reset or something like that.

And so if you look at the price contribution from Nordion on a year-to-date basis, it's a little bit more modest. It's a little over 6.5%. And I think you're going to look at that as being fairly representative of, obviously, what they're tracking to.

The other thing that I'll comment on with respect to Nordion's Q2 performance, earlier, I had mentioned that there was some amount of benefit in terms of pulling forward sales -- not pulling forward per se, but realizing sales in the second quarter that had originally been contemplated in the second half of the year. I would say that, that represented about $5 million or so of the revenue here in Q2. Whereas the rest of their performance, I would say, is true organic performance, which was better than what we had been expecting as of this time earlier this year and in the second half of last year when we were looking at 2021 outlook.

(Operator Instructions) I'm showing no further questions at this time. And I would like to turn the conference back over to Michael Petras for any further remarks.

Thank you, Michelle, and thank you to everybody who participated in this morning's call. We're proud of the fact that the company continues to perform well during this global pandemic. It demonstrates the resiliency of our model and the critical role we bring in safeguarding global health to the global health care marketplace.

So thanks for all your support, and we appreciate your time this morning. Have a good day. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Everyone, have a great day.