Sotera Health Co Q1 FY2021 Earnings Call

Good morning. This is Gigi, and welcome to Sotera Health’s First 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 on 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 may make 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 implied. Please refer to Sotera Health’s SEC filings and the forward-looking statements slide at the beginning of its 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, adjusted EPS and net leverage ratio. A reconciliation of non-GAAP to GAAP measures for all relevant periods may be found in the schedules attached to the company’s press release and its supplemental slides. I will now turn the call over to Sotera Health’s Chairman and CEO, Michael Petras.

Thank you, operator. Good morning, everyone, and thank you for joining us at Sotera Health’s First Quarter 2021 Earnings Call. We’re off to a strong start in 2021, reporting double-digit growth in both revenue and adjusted EBITDA in the first quarter while managing ongoing challenges as a result of the pandemic. These strong results are our first full quarter as a public company and serve as a reminder that Sotera Health sits in a crucial position in the health care value chain as a leading global provider of mission-critical, end-to-end sterilization solutions, lab testing and advisory services for the health care industry. Compared to the first quarter of last year, we reported total revenue growth of approximately 13%, adjusted EBITDA growth of approximately 15% and adjusted EPS of $0.18. We also continue to execute on our strategic priorities with the acquisition of BioScience Laboratories, capital deployment towards growth initiatives and further deleveraging. Scott will go into more detail on our segment performances and our capital structure in a moment. This quarter, as in other quarters, our segments continue to focus on meeting the needs of customers, healthcare workers and patients. We performed critical testing of personal protective equipment like masks and gowns, and we sterilized many medical devices and pharmaceutical products. Many of these products are being used in the global fight against COVID-19. We ensure this critical sterilization in testing is there while creating a safe environment for our employees through the pandemic. While we are focused on growing our business, we are also intent on strategic use of our cash as well as capital deployment. Our capital deployment priorities remain unchanged as we continue to invest for growth, delever and pursue strategic M&A to grow the business for the long term. Regarding our debt position, our net leverage ratio improved from 4.3x at year-end to 4.1x as of March 31. We are on track to deliver the 2 to 4x long-term net leverage target that we’ve previously communicated to you. Through a combination of debt pay down and repricing our term loan, first quarter 2021 interest expense declined by $35 million versus the first quarter of 2020. From an operational standpoint, we continue to invest during the first quarter to ensure we are meeting customers’ current and future needs. Nordion is investing in 3 long-term cobalt supply development projects, and Sterigenics continues to advance its 9 active capacity expansions around the world. For Nelson Labs, we continue to expand capacity and capabilities to meet customer needs for microbiological and extractable and leachables testing. We’re also making great progress on the build-out of our European microbiological center of excellence, which we expect to be completed by year-end. On the M&A front, we also completed 2 small transactions in the first quarter. As we mentioned on our last earnings call, we welcome BioScience Laboratories to Nelson Labs in March. Located both in Bozeman, Montana, BioScience is a provider of outsourced antimicrobial and virology testing in the pharmaceutical, med device and consumer products industries. This strategic acquisition will complement Nelson’s already existing capabilities in the antimicrobial and virology space. Also in March, we purchased the remaining 15% ownership of Nelson Labs Fairfield. This purchase had been negotiated in connection with the original acquisition of Gibraltar Labs in 2018. Nelson Labs Fairfield provides us with expanded microbiological and analytical chemistry testing capabilities to serve the pharmaceutical and med device market segments. We also continue to prioritize operational excellence projects across our segments in order to drive efficiencies and performance. We expect operational excellence to continue to drive margin expansion over time. Taking a step back from our specific results, I’ll comment briefly on what we’re seeing in the broader markets where we operate. When we communicated 2021 guidance, we also set an assumption that there will be a gradual normalization of volumes throughout the year. I would say that the first quarter trend is in line with that expectation, as we saw a relatively weak start to the quarter in terms of volumes and then a gradual strengthening as the quarter progressed. There was some variability from a regional perspective. The U.S. market has shown a quicker recovery on volumes, while Latin America and Europe, which are suffering from higher virus case counts and other pandemic-related challenges, have been slower to recover. Overall, we are comfortable with both the broader market trending and our own performance. That is why, as the first quarter performance provides a solid foundation for the rest of the year, we are comfortable reaffirming the 2021 outlook that we provided on March 9 of this year. Before I turn it over to Scott to cover the first quarter and our 2021 outlook in more detail, I want to take a moment again to emphasize how proud I am of the entire Sotera Health team as we continue to strive for excellence during this challenging time. I’ll now turn this call over to Scott.

Thanks, Michael. I’ll cover the first quarter highlights for Sotera Health on a consolidated basis and then provide more detail by segment. I’ll finish up with comments on our balance sheet and cash flows and some further details regarding our 2021 outlook. For the first quarter of 2021, revenue grew by approximately 13% to $212 million. On a constant currency basis, revenue grew by approximately 11%. Adjusted EBITDA grew by almost 15% to $105 million as adjusted EBITDA margins expanded by over 80 basis points compared to Q1 of last year. Our strong operating performance resulted in adjusted EPS of $0.18 per share, up $0.08 from Q1 of 2020. Before I provide segment level detail, I wanted to remind everyone of our methodology around reporting corporate costs. We did not report a separate corporate segment, but instead allocate all administrative costs to our segments. In Q1, our segments are absorbing approximately $4 million of incremental administrative costs compared to Q1 of last year. Approximately $1 million of the increase is attributable to the secondary offering we executed in March of this year, while the remainder is largely driven by the costs associated with being a public company. These costs created some margin headwind for all 3 segments. That margin headwind was particularly noteworthy for Nordion, which experienced margin compression as a result. Now let’s take a closer look at the segment performances. In Q1, Sterigenics delivered both 12% revenue growth and segment income growth over Q1 of the prior year. Revenue growth drivers for the first quarter included the acquisition of Iotron, which contributed 5%, while pricing contributed approximately 3% and organic volume growth contributed a little over 2%. Compared to the prior year first quarter, segment income margins in Q1 of 2021 expanded slightly as favorable pricing and operating leverage were mostly offset by the incremental administrative costs associated with being a public company. As Michael mentioned, we continue to make meaningful investments in Sterigenics. Recently, we announced the expansion of one of our facilities in Europe, which is 1 of 6 Sterigenics expansions expected to go live this year. We also continue to make progress on facility enhancements at our North America EO facilities. Nordion reported Q1 revenue growth over prior year of 10% to approximately $26 million and segment income growth of 6% to almost $14 million. Nordion’s top line growth was driven by a 4% benefit from the strengthening of the Canadian dollar compared to the U.S. dollar, a 3.6% increase from pricing and approximately 2% impact from volume primarily related to shipments of medical-use Cobalt-60. Margins fell by approximately 200 basis points largely driven by the incremental administrative costs mentioned earlier. Nelson Labs grew Q1 revenue versus prior year by more than 16% to $55 million and grew segment income by approximately 30% to $23 million. The Q1 2021 revenue performance continued to be driven by strong demand for testing related to personal protective equipment, which accounted for 10.3% of the growth. While volumes were mixed in other testing categories, we are encouraged to see strong demand in some areas, including testing related to product development and antimicrobials. Q1 of 2021 margins expanded by 430 basis points over the prior year quarter as Nelson Labs continues to benefit from a number of operational excellence initiatives as well as favorable pricing and mix. CapEx spend is tracking in line with our total year guidance with $21 million of spend occurring in the first quarter. We continued to spend primarily in the areas of EO facility enhancements, Sterigenics and Nelson Labs capacity expansions and Nordion cobalt supply development. We finished the quarter with $108 million in cash, a slight increase over December 31 levels even after funding approximately $25 million for the BioScience Labs acquisition and Nelson Labs Fairfield buyout. With combined cash and revolver availability of $390 million, the company remains in a solid liquidity position to fund our operational needs and investments. In March, we further optimized our capital structure by amending our revolving credit facility to reduce the interest rate on borrowings and extend the maturity date to June of 2026. We have remained undrawn on that facility all year. We benefited from a significant reduction in interest expense in Q1, largely driven by debt pay down using IPO proceeds as well as the recent repricing of our term loan. As Michael mentioned, our interest expense decreased by approximately $35 million compared to Q1 of last year. Our net leverage ratio continues to improve with net leverage of 4.1x as of March 31 compared to 4.3x as of December 31. We also executed a secondary offering in March, which resulted in the sale of approximately 9% of already outstanding shares to the public. The secondary offering did not result in the issuance of any new shares or in any proceeds to the company. Turning to our 2021 outlook. Let me both reaffirm the guidance that we provided on our March 9 call and provide some additional color on the rest of the year. I’ll start with the quantitative summary and finish with our assumptions. For full year 2021, we are reaffirming guidance of: Total revenues in the range of $890 million to $920 million, representing growth of approximately 9% to 12%; adjusted EBITDA in the range of $465 million to $485 million, representing growth of approximately 11% to 16%; a tax rate applicable to adjusted net income of approximately 28%; adjusted EPS in the range of $0.78 to $0.86; and fully diluted share count in the range of 281 million to 283 million shares on a weighted average basis. From a quantitative standpoint, I would like to reiterate, the year-over-year increase in weighted average shares outstanding is largely due to our IPO in November 2020. And we expect approximately $135 million of interest expense savings annually from the pay down of our debt and the repricing of our term loan, and the impact of that savings is reflected in our adjusted EPS guidance. From a qualitative standpoint, our assumptions are as follows: we are assuming continued normalization of volumes throughout the year and as Michael mentioned, we’re seeing trends in that direction thus far. We also talk a lot about the variability in Nordion’s performance, driven in large part by harvesting schedules for Cobalt-60. We mentioned on the last call an expectation that there will be a relatively even balance between sales in the first half of the year and the second half of the year. That is still our expectation based on cobalt delivery schedules in Q2. Having said that, there’s always the possibility that changes in the harvest schedule for Cobalt-60 can result in order shifting from one quarter into another. From an FX standpoint, our guidance has and will be based on exchange rates in effect as of the time that we provide updates. 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. We continue to expect CapEx spend to be in the range of $100 million to $110 million this year, which includes approximately $30 million earmarked for previously planned special project spend related to EO facility enhancements and Cobalt-60 supply development. 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. Their hard work is evident in our Q1 results and has helped to position us for a solid 2021. Michael, back to you.

Thank you, Scott. Overall, we’re very pleased with our performance to start 2021, especially considering the continued challenges posed by the global pandemic. As always, I want to thank the Sotera Health team for their great execution this quarter. I also want to thank our customers and our investors for their continued support and partnership. At this point in time, operator, we’d like to open up the call for questions and answers.

Our first question comes from the line of Matt Miksic from Credit Suisse.

Thanks for a great start to '21. So I had a couple of questions on some of the things that you mentioned, Mike and Scott, following up on the sort of build for the year. And then one, if I could, just a broad question on litigation. So on some of the investments that you’ve made in Nelson and in the sterilization Sterigenics side of the business in terms of facilities, can you talk a little bit about the cadence of those adds and what the timing is for, sort of, additional growth or how that filters into the plan that you’ve laid out for the year in terms of top line growth? And then as I mentioned, I have 1 follow-up on litigation.

Thanks for the question. Appreciate it. So Michael mentioned 9 capacity expansions that are active for Sterigenics. And 6 of those expansions, we expect to go live this year. In the past, when we’ve talked about those expansions, we’ve characterized them as representative of our typical cycle of investment. And so I wouldn’t view those as investments or new capacity that as it comes online, is going to shift the growth trajectory from what we’ve communicated in the past. Those, again, are routine capacity expansions that enable the type of growth that we’ve expressed in the past as being achievable for the company.

Okay. And on the Nelson side, maybe just the recent adds and the center of excellence. And I know it’s part of your guidance, I’m assuming it’s part of your guidance for the year, but maybe just does that start to add here in the second quarter immediately in terms of the acquisition and maybe the cadence of the center of excellence, what that does for the Nelson side of the business?

Sure. So one thing to keep in mind for capacity expansions, either on the Sterigenics side or on the Nelson side, is that once these capacity expansions go live, there typically is a ramp-up period, an extended ramp-up period over a number of quarters and sometimes even years as they reach peak utilization levels. We have extensive qualification requirements both before we go live, and then each of our customers generally will have their own qualification for the products that they process in our facility or the testing that we do for them. So I wouldn’t look at these capacity expansions for either Nelson or Sterigenics as expansions that are going to move the needle here in 2021. There is going to be some incremental impact in the second half of the year from a couple of them, and that’s reflected in our guidance. You’re asking specifically about the center of excellence for Nelson Labs, and that is expected to go live in the second half of the year and, again, it will have some ramp-up. And so the incremental impact here in 2021 would be modest.

Great. Regarding litigation, I understand you may not want to share too many details since it is ongoing. However, could you outline some of the events from the quarter and the upcoming milestones, and explain how investors should consider these in relation to progressing through the cases and potentially achieving resolutions for some of the newer matters?

Yes. Matt, this is Michael. I'll take that. Regarding litigation, starting with Illinois, the process is ongoing, including discovery and depositions. Initially, we expected developments in 2021, but it now seems more likely that the first trials will happen in 2022, with the first five cases anticipated sometime that year. Specific dates aren't available yet because the core systems are significantly backed up due to COVID. As of the latest information, our five cases are among about 1,300 in the backlog in Illinois. The timeline will depend on how quickly the Illinois court system can proceed, but at this point, we're looking at mid-2022 for developments. In Georgia, we have a similar timeline and updates regarding ongoing discovery, but depositions have not yet begun. We currently expect things to unfold later in 2022. We're prepared in case the timeline accelerates. Moving on to Santa Teresa, New Mexico, this pertains to a lawsuit filed by the Attorney General. This suit does not aim to close our facility, but rather seeks to implement controls for uncontrolled emissions. We've operated there since 1989 and have consistently complied with all regulations. This facility is vital to the healthcare system, sterilizing 2.5 million devices daily. We have collaborated with regulators and the EPA, neither of whom are involved in the lawsuit. Later in May, there will be a court hearing. A temporary restraining order was requested, but the judge has indicated there will be no such order, and we will have a preliminary injunction hearing later in the month. In all these legal matters, we feel confident in our position, though we recognize that it's a reality we must address. We're continuing to run our business as usual, ensuring that all our facilities are operational and supplying critical medical and pharmaceutical products to the healthcare industry.

I want to congratulate you on the strong start to the year. Michael, you mentioned the gradual recovery in demand, though there is still some regional variation. Scott pointed out that one of the underlying assumptions for the guidance was a continued normalization. Do you have an idea of how close you are to returning to pre-COVID levels in terms of volume? Additionally, could you share how significant of a recovery you are anticipating for the rest of the year?

Yes, we've previously discussed our volume assumptions regarding these businesses. All three are currently performing below our typical volume expectations, which we anticipated. The first quarter aligned with our expectations of a gradual recovery, and we expect this to build throughout the year. The second quarter should show some improvement over the first quarter, and the third quarter should surpass the second. By year-end, we hope to return to more normal volume levels and mix within the businesses. I noted in my opening comments the geographical differences; the U.S. has rebounded somewhat, likely due to a swift vaccine rollout. However, Europe remains a challenge, reflected across various industries beyond healthcare, and we're seeing similar trends in Latin America, especially in Brazil. While we are not achieving the full volumes we desired, this aligns with our planning and previous communications. We anticipate an increase in the second quarter, although we need to monitor the impact of COVID in markets like Europe and Latin America and how swiftly they recover. We remain cautiously optimistic and are taking the necessary steps to meet customer demand as it arises.

When we look at our guidance for the year, if you go back to that comment that we were assuming a normalization of volumes, we did contemplate both the normalization of those protective barriers testing back to pre -- or at least closer to prepandemic levels, of course, offset by a ramp-up in other testing categories. And so certainly then built into our own models is a modest headwind associated with the protective barriers ramping back down. But as Michael mentioned, the other categories of testing, and remember, Nelson offers over 800 tests -- testing categories, there’s certainly an expectation that we’re going to have a tailwind from the rest of the testing categories to help -- or to more than offset that. And so I think we’ll be fine, and that’s why we were comfortable reiterating our guidance. And we did mention that we’re already seeing demand perk up in certain categories relating to different product development related to us, a lot of great activity in terms of antimicrobials that we believe will persist even beyond the pandemic and a number of other categories that are already beginning to wake back up again.

A follow-up to Sean’s question. As it relates to the reopening and the comments Scott made on Nelson, is there also an impact or segment shift in activity from Nelson to Sterigenics as you reopen? I'm considering whether the decrease in PPE is significant enough that we could see some offset in Sterigenics instead. I just wanted to understand the intersegment impact of reopening.

If I’m understanding your question right, I wouldn’t think about it in terms of any kind of a direct offset between or amongst our businesses. Really, I would look at each business on a stand-alone basis and just say that we’re beginning to see and expecting to see throughout the year a normalization for each of those businesses in their activity. And I think when you look at Q1 results, you already begin to see that for each of our businesses, and we’ll expect that to continue through the year.

Yes, David, this is Michael. We regularly meet with and discuss matters with our regulators at the state, local, and federal levels. There are qualified people currently managing the EPA, and we have been engaging with them. From a timing perspective, we are anticipating new rules and regulations regarding ethylene oxide under NESHAP. As I've mentioned before, we hoped to see these new regulations in 2018, and we continued to hope in 2019, 2020, and 2021. Now we are hearing from regulators that these new NESHAP requirements are expected to be released in late 2022. This highlights the complexity of the issue, the numerous stakeholders involved, and the critical importance of ethylene oxide. Over 50% of medical devices are sterilized using ethylene oxide, amounting to about 20 billion devices each year, and there is currently no known alternative for this material. People are handling this hazardous material responsibly, and there is a growing understanding of how intricate this issue is. So, what we are hearing now is that the new regulations will likely come out in late 2022.

If I could add one more question on that topic as a follow-up. In Atlanta, are you finding that your investments in the double scrubbing approach and tightened recapture approach are easing the concerns of the individuals bringing these actions in the cases you have encountered?

We are confident in the solutions we have implemented in Atlanta, and they are proving effective while we continue to serve our customers. We are exceeding regulatory requirements, which provides additional assurance of our capability. I cannot comment on the motivations or comfort levels of other parties, as their interests may not align with ours or those of the healthcare industry. What I can say is that we are assured of our solution and are committed to proceeding in a compliant manner while delivering essential services.

Can you discuss the impact of the recent refinancing of some debt on your balance sheet? You've reduced the annual interest rate and are realizing significant savings. How does this increase your flexibility, especially considering your recent inorganic investments? I’d like to hear about your priorities moving forward, particularly in relation to deleveraging towards the 2 to 4 range and potentially continuing with bolt-on acquisitions.

Yes, Patrick, this is Michael. And then Scott can chime in for any further details. Obviously, this business operated at pretty high levels of leverage in the past. We’re down to 4.1x, as we’ve referenced in our opening comments. We feel very comfortable about our leverage levels and our flexibility. We have $108 million, I believe it is in cash on the balance sheet at the end of the quarter. Our priorities are to continue to invest in this business for growth, to delever and to pursue strategic M&A. I feel we have the flexibility in our capital structure to accomplish those, and we’re optimistic about our ability to continue to drive the growth on high single digits that we’ve stated in the past.

Yes. To add to that point, the guidance we’ve provided for capital expenditures in 2021 is in the range of $100 million to $110 million. We have also mentioned previously that around $30 million of this amount is allocated for special projects related to cobalt development and enhancements to the EO facility. Therefore, after funding these two special projects, the remaining capital expenditure is quite substantial compared to our previous spending, and it is certainly sufficient to continue investing in growth initiatives that will support our top and bottom line at the levels we are used to.

Also thank you for the incremental details in the script, much appreciated. On a follow-up on the Nordion investments, what is the ultimate outcome of that? Is it return to supply? Does it help you kind of smooth the cadence of revenue harvesting there? Or does it open up capacity for new applications?

Yes, Matthew, it’s Michael. Thank you for acknowledging the additional details we provided. We appreciate that. From a cobalt development perspective, we are expanding our capacity for long-term growth in an industry that requires cobalt. That’s our focus. I don’t anticipate it will eliminate fluctuations from quarter to quarter, as much of that depends on the utility and when they can extract the cobalt from the reactor. However, our investments are aimed at securing more cobalt for the long-term growth that the industry demands. That is the ultimate goal.

Okay. My next question is about how your customers, particularly those in the medical sector, are thinking about inventory. In the past, contract sterilization has sometimes been a bottleneck. Are they looking to get ahead of the macroeconomic recovery, and are they cautious about the speed of it? What are you advising them regarding turnaround capacity as things begin to move more quickly?

Yes. So we’re working with our customers. We’re not seeing them build a bunch of inventory. We don’t have great visibility into that Matthew, because we don’t inventory product for them. But we’re seeing a steady supply of product coming through. We’re not seeing large boluses of product move in to get ahead of any inventory build or anything of that nature. We see that continuing to ramp up. We work with our customers around the world to find the right capacity and the right geography and the right modality to sterilize their products. And that’s something we constantly work with them. So I would tell you, we’re not seeing, like, huge inventory builds going on, but we don’t have great visibility. But within our facilities and the volumes we’re seeing run through our facilities, we’re not seeing that today.

Okay. Lastly, regarding the 15% ownership of Nelson Labs Fairfield, how should we account for that? Is it considered incremental revenue, or was it possibly reported below the line as minority interest?

No. Just to provide some background on that transaction, we currently refer to the business as Nelson Labs Fairfield. When we acquired it in 2018, it was known as Gibraltar Labs. At that time, we purchased 85% of the equity interest and negotiated the buyout of the remaining 15% to occur in 2021. Therefore, for accounting purposes, we consolidated 100% of that business into our financial statements. We recorded the fair value of the repurchase obligation as a liability on the balance sheet. In terms of how this transaction reflects in our finances, the cash outflow effectively offsets the balance sheet liability. There is a recognized benefit in our GAAP financials amounting to approximately $1 million, but this does not affect our adjusted P&L as we typically report the business's performance.

I’ll start with a question on Nelson Labs. EBITDA margins there have been pretty healthy, kind of north of 43% the last couple of quarters. And as you talked about, up 430 basis points year-over-year this quarter. Can you just talk about the sustainability of that kind of step-up from the high 30s to the low 40s for Nelson Labs?

Yes. Thanks, Tycho, for the question. We continue to perform. This business has expanded margins since we’ve owned it. It’s a great business, well thought of and respected by our customers and we’re really focused on the turnaround times and high-quality testing, which is what we provide to our customers. And we continue to look for operational excellence. Joe and the team there have done a lot of work around operational excellence and how they streamline processes and how they really run that business day in and day out. And I can tell you, the team has done a phenomenal job there. Obviously, price is a factor we get. We get some operating leverage with the volume as well. But overall, the team has done a really strong job on operational excellence, and we have a host of additional levers that we’re looking to pull in that business as we continue to progress this year into ‘22 and ‘23 and beyond. So we’re optimistic about where we are and the value proposition we bring our customers in the market.

Okay. And then on the COVID dynamic, I appreciate your commentary there. I’m curious, are there any kind of structural changes you think coming out of the pandemic in terms of outsourcing rates accelerating here? Customers just not wanting to do it in-house? Any change in kind of the trend there?

We are not observing any significant changes in the trends. As I consider your question, I want to emphasize that we do not anticipate any major shifts in the in-house versus outsourced perspective related to COVID. It’s possible that upcoming regulations could alter some market dynamics, but it is too early to make that determination. Therefore, the answer to your question is that we do not foresee any changes in the in-house outsourced dynamic due to COVID.

Okay. And then last one. I’m just curious if you can give any color on 2Q. If I go back to last quarter, you actually gave 1Q guidance. So I’m just curious why you’re not giving 2Q guidance and any kind of benchmarks you can put out there for us?

Yes. So Tycho, we gave total year guidance. That was our plan. The reason we felt it was necessary to give the first quarter guidance because we’re only a couple of weeks away from that. We’re going to stick to annual guidance and continue to give visibility to an annual guidance range. And we’ll continue to keep you informed as we progress throughout the year in these quarterly calls, but we’re not going to do quarterly forecast. It was just the last time we had a couple of weeks left, and we thought that was a responsible thing to do to make sure that you had visibility with such a short window there.

Just a reminder, though, that we did provide just some qualitative guidance on specific to Nordion, given the shifting order patterns there. And we are, in our full year guidance, still reiterating the qualitative position that Nordion is going to be fairly balanced between the first and second half of the year.

Our next question comes from the line of Luke Sergott from Barclays.

Just a couple of quick ones for me. So on the guidance with the M&A and the recent acquisition of BioScience, is that expected to contribute anything incremental? Or is that already contemplated within your prior guidance?

When we initially provided guidance back in March, it coincided with the closing of the BioScience acquisition, which we had already accounted for. It's important to note that the acquisition price was $15 million, making it relatively insignificant compared to the overall size of our company.

Got it. And then I guess, can you talk a little bit about the margin dynamics baked into guidance? I know Tycho dug into this a little bit. But just from a mix perspective and how that’s going to flow through, just so we have an idea of the pacing here.

Yes. I’m not entirely sure I fully understand the question. As Michael mentioned, we’re not really providing breakdowns of our guidance by quarter. I can say that Q1 is the quarter where we are experiencing some impact, especially at Sterigenics due to seasonality. Given the operating leverage at Sterigenics, and to some extent at Nelson Labs as well, Q1 margins are somewhat lower. This is compounded by the increase in costs related to being a public company and the one-time costs from the secondary offering. So, I view our Q1 margins as a baseline, and we expect to improve our margin profile throughout the year. However, we aren’t giving more detailed information than that at this time.

Okay. And then lastly here, just any change on the near-term capital deployment strategy ahead of the lockup next week?

No, it's difficult. We simply focus on running the business. Investors will make their decisions regarding their shares over time. We will keep operating the business as usual.

I want to return to the topic of margins for a moment. Could you help us understand the relationship between volume impacts and margins? It's clear that you're experiencing notable margin improvements, even though these changes are occurring with lower volumes across the board. I assume that if volumes increase this year and next, you will benefit from improved leverage. How should we view that? What kind of leverage can we expect as volumes rise? Any insights on this would be appreciated. Additionally, are there any counteracting factors we should consider? For example, is some of the PPE work you're doing contributing to higher margins? Any details on this would be helpful.

Yes. If you look at where we concluded 2020, our total adjusted EBITDA margins were 52.1%. As I noted in response to the previous question, we expect a decline in Q1 due in part to seasonal factors. This explains why our total company margins in Q1 are below 50%. However, the Q4 figures are more indicative of our company's ongoing run rate once you factor in the seasonality of Q1. You can view that as a baseline, and we anticipate continuing to build from that point.

Yes. We’re focused on it and continue to grow margin dollars and driving growth in the business. As you know, we’ve given guidance of 9% to 12% top line growth and 11% to 16% adjusted EBITDA growth. And that’s really where we’re focused on how we’re keen to drive growth in this business.

And kind of related to that, some of the possibilities that might happen is, as this year and next year ensue, is that we’ll see greater volumes than what is in normal year, just given ability to recapture prior procedures and things like that. What does capacity look like for you if that were to happen? How much excess capacity would you have in the system if that were to transpire later this year and into next?

Yes. I’d say we’re today, across the Sterigenics network, we’re at 73%, 75% capacity approximately, and that varies by region, by technology, but that’s a general directional comment. On the Nelson side, we feel we’ve got ample supply, especially with all the work going on in productivity that Joe and the team are doing there, as well as what’s going on in the Sterigenics side, we feel good. And in the Nordion side, it’s really driven around cobalt timing and the harvesting and how quickly we could turn that around. Those are the things that really impact our capacity. So, overall, I’d say we feel good at where we’re at with the outlook for the rest of the year.

All right. Just a last quick one for me for Scott. Inflation, obviously, everywhere in the news. Can you just give us a sense of your own input costs, other costs you have and considerations as they relate to inflation, any pressure you’re seeing already and your ability to pass those on to customers if they were to accelerate.

Yes. So obviously, we’re going to be impacted by that to, at least some extent, like any other company out there. In terms of our input cost, obviously, being primarily a service company, excluding Nordion, then that insulates us at least somewhat from some of the inflationary forces out there. I would say the biggest one that we’re worried about is wage-related inflation because, certainly, we’re seeing that type of pressure out there across our network, across all 3 of our businesses. But one thing that I’d remind you of, and this goes back to, in the past, when we’ve talked more fundamentally about the nature of our relationships with our customers is that a lot of our contract-based services and commercial relationships have built in price escalators that, in many cases, are actually linked to some type of index that would protect us against inflationary factors. And so that gives us some comfort that we’ll be able to maintain margins in the event of a more aggressive inflationary environment.

Thank you for the detailed information on EPA rulemaking. I have a follow-up question. Earlier this week, specifically on May 10, I saw that the federal register noted the EPA has expanded its data collection efforts concerning EO and commercial sterilizers. My question is, why is the EPA taking this action? What do you think is motivating them? Additionally, what new information are they seeking that they haven’t pursued in the past?

Yes, Michael, I'm not entirely sure, but I think you might be referring to the toxicity reporting. That is something the EPA has not required in the past. I don't anticipate any issues for Sterigenics if that becomes a new requirement. We aren't required to report under the EP CRI as of now, but we already report our emissions to all the state authorities due to our permit. Therefore, I don't expect that to become a problem. I suspect they are trying to gain more visibility into ethylene oxide emissions across the industry as a whole.

I was surprised to see BD announce a significant facility in Arizona to enhance its infrastructure, including sterilization. I believe this facility will use ethylene oxide. I'm curious about your thoughts on this. Is this just a one-time event? Any insights you can provide on this development?

Yes. Obviously, BD is a very strong player in the med device space. And I don’t know all the particulars. It appears from what I’ve read in the public releases that they’re doing a large hub for manufacturing sterilization. They do have some in-house EO sterilization today. I don’t know if that’s a consolidation of existing capacity into a hub arrangement or if that’s truly incremental. But I don’t see that as a material long-term impact to us or the industry from an outsource, in-source perspective, if that’s what you’re asking. Great. Thank you. Hopefully, you could see we’re off to a strong start this year. And Scott and I look forward to seeing you at some of the upcoming investor conferences that we have going on. But thank you for your time. And operator, that concludes our call for today. Bye, bye.

This concludes today’s conference call. Thanks for participating. You may now disconnect.