Sotera Health Company - Earnings Call - Q1 2021
May 13, 2021
Transcript
Speaker 0
Good morning. This is Gigi, and welcome to Saterra Health First Quarter twenty twenty one Results Call. You may find today's press release and accompanying supplemental slides in the Investors section of the company's website at saterrahealth.com. This webcast is being recorded and a replay will be available on the Investors section of the Soterra Health website. On the call today are Michael Petrus, 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 Zotero Health SEC filings in 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. During the Q and A portion of today's call, please limit yourself to one question and one follow-up, so that we can try and give everyone an opportunity to ask questions. I will now turn the call over to Cernera Health Chairman and CEO, Michael Petrus.
Speaker 1
Thank you, operator. Good morning, everyone, and thank you for joining us for Sotaro Health's first quarter twenty twenty one 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 in our first full quarter service and reminder that Satera Health sits in a crucial position in the healthcare value chain as a leading global provider of mission critical end to end sterilization solutions, lab testing and advisory services for the healthcare 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, health care 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-nineteen. We ensure this critical sterilization and testing is done 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 and A to grow the business for the long term. Regarding our debt position, our net leverage ratio improved from 4.3 times at year end to 4.1 times as of March 31. We are on track to deliver the two to four times long term net leverage target that we've previously communicated to you. Through a combination of debt paydown and repricing our term loan, first quarter twenty twenty one interest expense declined by $35,000,000 versus the first quarter of twenty twenty.
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 three long term cobalt supply development projects and Sterigenics continue to advance its nine active capacity 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 and A front, we also completed two small transactions in the first quarter.
As we mentioned on our last earnings call, we welcomed Bioscience Laboratories to Nelson Labs in March. Located 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 broader markets where we operate. When we communicated 2021 guidance, we also indicated an assumption that there will be a gradual normalization of volumes throughout the year.
I would say the first quarter trended 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. As one might expect, there were 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. 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 Ceterra Health team as we continue to strive for excellence during this challenging time. I'll now turn this call over to Scott.
Speaker 2
Thanks, Michael. I'll cover the first quarter highlights for Ceterra 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 twenty twenty one, revenue grew by approximately percent to $212,000,000 On a constant currency basis, revenue grew by approximately 11%. Adjusted EBITDA grew by almost 15% to $105,000,000 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 $08 from Q1 of twenty twenty. 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 $4,000,000 of incremental administrative costs compared to Q1 of last year. Approximately $1,000,000 of the increase is attributable to the secondary offering we executed in March, while the remainder is largely driven by the costs associated with being a public company.
These costs created some margin headwind for all three segments. That margin headwind was particularly noteworthy for Nordeon, 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 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 one of six Sterigenics expansions expected to go live this year. We also continue to make progress on facility enhancements at our North America facilities. Nordion reported Q1 revenue growth over prior year of 10% to approximately $26,000,000 and segment income growth of 6% to almost $14,000,000 Nordion's top line growth is 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 $55,000,000 and grew segment income by approximately 30% to $23,000,000 The Q1 twenty twenty one 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 antimicrobials.
2021 margins expanded by four thirty 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 $21,000,000 of spend occurring in the first quarter. We continue 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 $108,000,000 in cash, a slight increase over December 31 levels even after funding approximately $25,000,000 for the Bioscience Labs acquisition and Nelson Labs Fairfield buyout. With combined cash and revolver availability of $390,000,000 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 June. We have remained undrawn on that facility all year. We benefited from a significant reduction in interest expense in Q1, largely driven by debt paydown using IPO proceeds as well as the recent repricing of our term loan. As Michael mentioned, our interest expense decreased by approximately $35,000,000 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 $890,000,000 to $920,000,000 representing growth of approximately 9% to 12% adjusted EBITDA in the range of $465,000,000 to $485,000,000 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 $281,000,000 to $283,000,000 shares on 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 $135,000,000 of interest expense savings annually from the paydown 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 schedule 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 $100,000,000 to $110,000,000 this year, which includes approximately $30,000,000 earmarked for previously planned special project spend related to EO facility enhancements and Cobalt sixty 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 Their hard work is evident in our Q1 results and has helped to position us for a solid 2021. Michael, back to you.
Speaker 1
Thank you, Scott. Overall, we're very pleased with our performance to start 2021, especially considering the continuing challenges posed by the global pandemic. As always, I want to thank the Saterra 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.
Speaker 0
Our first question comes from the line of Matt Miksic from Credit Suisse. Your line is now open.
Speaker 3
Hey, good morning. Thanks for taking the questions and a great start to 2021. 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 ads 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 one follow-up on litigation. Thanks.
Speaker 2
Thanks for the question. Appreciate it. So Michael mentioned nine capacity expansions that are active for Sterigenics and six 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.
Speaker 3
Okay. And on the Nelson side, maybe just the recent adds and the Center of Excellence. And I know it's 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 and what that does for the Nelson side of the business?
Speaker 2
Sure. One thing to keep in mind for capacity expansion either on the stereogenic 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 Ceragenics 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 were asking specifically about the Center of Excellence for Nelson Labs, 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.
Speaker 3
Great. And then if I could on litigation, I know it's I'm guessing it's not something that you're going to want to go into detail on because it is ongoing. But if you could maybe map out for us some of the events in the quarter and then some of the milestones coming up and how investors should think about those in the scheme of moving through the cases that are out there and getting to some potential resolution at some point on some of the newer cases?
Speaker 1
Yes. Good morning, Matt. This is Michael. I'll take that. So on the litigation side, if you look at you kind of look at Illinois first, that's going through the process of litigation, right?
Discovery and depositions and we were thinking these were going to come in some sometime in 2021. It looks like it's more likely in 2022 is when the first trials and it's the first five that will be coming up sometime in 2022. There are no specific dates yet. The court systems are pretty backed up because of COVID, and we're in line. I think the last I heard, we're our five cases were one to 1,300 in backlog or something of that magnitude in Illinois.
So it's going to matter how quickly they go through Illinois court system, but we're talking about a 2022 midyear event at least. On Georgia, a similar type of timeline, similar type of update as far as discovery going on, depositions have not started yet in that area. And again, that's rolling out later into 2022 as our current guess and expectation. We will be prepared if something were to change and the timeline was accelerated, but that's the current thinking. And then in Santa Teresa, New Mexico, which would probably be the one that's most recent, that was a suit brought by the AG.
Again, that suit was not about closing our facility. That suit was about putting in control for uncontrolled emissions. And I can tell you that we've been operating there since 1989. We've been compliant with all the rules and regs. And I'll also tell you that it's a critical element of the health care system.
2,500,000 devices a day are sterilized in that facility. And the other part, we've been working for many, many years with our regulators, NMED as well as the federal region, the EPA, and neither of them are party to this suit. Sometime later in the month of May, there'll be a court hearing with the judge. They had asked for a temporary restraining order. Based on the timeline, the judge has really moved forward and said, no temporary restraining order.
We'll have a discussion in a preliminary injunction hearing sometime later in the month of May. We obviously in all these suits, we feel very comfortable about where we stand, but it's a reality of something we have to deal with. And we're just continuing to run and operate the business. All our facilities are up and operating and we're providing critical medical supplies and pharmaceutical supplies to the healthcare industry.
Speaker 3
That is helpful, Michael. Thank you.
Speaker 1
Great. Thanks, Matt.
Speaker 0
Thank you. Our next question comes from the line of Sean Dodge from RBC Capital Markets. Your line is now open.
Speaker 4
Thanks. Good morning and I'll add my congratulations on the strong start to the year. Michael, you mentioned the gradual recovery in demand, but with still some regional variation. And Scott highlighted that as one of the underlying assumptions to the guidance was for a continued normalization. Do you have a sense of maybe from a volume perspective, how close are you now back to being at pre COVID levels?
And maybe if you could give us a sense of how steep of a recovery you're building in here for the remainder of the year?
Speaker 1
Yes. So we've talked to you in the past about the volumes assumptions we make around these businesses. And I would tell you, all three of them are below where our typical run rates of volume expectations are, and we expected that. The first quarter came in along the lines of what we thought, a gradual recovery, And we think that will build as the year progresses, Sean. Second quarter will be a little better than the first and the third will be a little bit better than the second.
And hopefully, the end of the year, we start getting back to the more normal levels that we see on volumes and mix in the businesses. I did mention in my opening comments the geographic variation. The U. S. Has come back a little bit better because I think the vaccines have really ramped up relatively quickly here.
Europe continues to be a challenge. I think we're seeing that across multiple industries, not just health care. And then we're also seeing similar characteristics, if you will, in Latin America, particularly in Brazil. So we're not hitting full volumes that we would hope, but our this is consistent with kind of how we built the plan for the year and what we communicated to you earlier. We see this ramping up second quarter should be a little bit better.
Again, though, we've got to kind of see how COVID, particularly in some of those markets like Europe Latin America and how quickly they come online. So we're cautiously optimistic, but we're taking the right actions to make sure we're here to satisfy our customers when they have the demand.
Speaker 4
Okay. And then in the Nelson Labs business, I think, you mentioned 10 points of that growth relating to increased testing of personal protective equipment. Was that feeling like that's COVID related and given hopefully we're nearing the end of this all? I guess how should we be thinking about kind of growth trajectories, kind of growth cadences in the Nelson Labs side for the duration of the year?
Speaker 2
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 pre pandemic levels, of course, offset by a ramp up in other testing categories. And so certainly then built into our own models, it 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 those 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 tests, 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 already beginning to wake back up again.
Speaker 5
Okay.
Speaker 4
That's very helpful. Thanks again.
Speaker 0
Thank you. Our next question comes from the line of Dave Windley from Jefferies. Your line is now open.
Speaker 6
Hi, thanks. Good morning. Thanks for taking my question. A follow-up to Sean's question there as it relates to the reopening and the comments, Scott, that you just made on Nelson. Is there also an impact on or by segment shift in activity from say Nelson to Sterigenics as you reopen?
I'm thinking PPE is coming down as much as it is. Is that or could come down as we reopen? Do you see the offset to that in some cases in say, Sterigenics instead? I just wanted to understand kind of the inter segment impact of reopen.
Speaker 2
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 standalone 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.
Speaker 6
Okay. And then on the regulatory side of things, has the new administration been in place long enough to have some people in seats that your government affairs activities can interact with and begin to get a sense? Do you have any clear view as to when EPA regulations might be landing updated regulations that is?
Speaker 1
David, this is Michael. I would tell you, we meet with and discuss with our regulators on an ongoing basis at both state, local and federal levels. They do have people in the seats that are running the EPA and they're competent people and we've been interacting with them. I will tell you from a timing perspective, NESHAP is the big standard that we're waiting for some new rules and regs around ethylene oxide. As I've reiterated in the past, we were hopeful in 2018, we were hopeful in 2019, 2020 and 2021 that we would see these new regs.
We are now hearing late twenty twenty two. That is the word we're getting out of the regulators that they expect this new NESHAP requirements and rules to come out in late twenty twenty two. I think that just speaks to the fact of how complex the issue is and the many stakeholders involved and the criticality of EO. Over 50% of the medical devices are sterilized with ethylene oxide or 20,000,000,000 devices a year. There's no known alternative for that material.
And people are operating in a very responsible way in handling this dangerous material. And I think people are getting a better appreciation of how complex the issue is. So what we're hearing currently, David, is late twenty twenty two for the new regs.
Speaker 6
If I could sneak one more in on that topic as a follow-up. Do you think that your or are you finding for example in Atlanta that your investments in your double scrubbing approach and tightened recapture approach are assuaging the concerns of the people that are bringing these actions in the cases where you've seen that?
Speaker 1
I will tell you, we're confident on our solutions that we put in place in Atlanta and they're working well and we're taking care of our customers. We already were far exceeding the regulatory requirements. That's just either further insurance around the ability to do that. I can't speak to the motives or the comfort level of these other parties because sometimes their motives don't clearly align with ours or the broader healthcare industry. So what I'll tell you is we're confident of our solution and we continue to move forward in making sure we operate in a compliant manner and provide a critical service.
Speaker 5
Great. Thanks for that.
Speaker 0
Thank you. Our next question comes from the line of Patrick Donnelly from Citi. Your line is now open.
Speaker 7
Hey guys, thanks for taking the question. Maybe just on the balance sheet side, you guys have obviously refied some debt. The annual interest rates come down and got some real savings there. Can you just talk about the flexibility that gives you? Obviously, you've invested a little bit inorganically.
Can you talk about the priorities here? Obviously, continuing to delever towards that 2% to four range, you're almost there versus continuing maybe some of these bolt on activities on the inorganic side. Would love just your general thoughts there.
Speaker 1
Yes. Patrick, is Michael, and then Scott could chime in for any further detail. Obviously, this business operated at pretty high levels of leverage in the past. We're down to 4.1 times as we've referenced in our opening comments. We feel very comfortable about our leverage levels and our flexibility.
We have $108,000,000 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 and 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.
Speaker 7
Okay. And then on the same topic, you guys have talked about some elevated CapEx over the next few years related to sourcing of new Cobalt 60 supply sources, facility enhancements at NEO sterilization. I guess how do think about balancing those investments with capacity expansions and then other inorganic opportunities?
Speaker 1
We've got a pretty detailed capital deployment plan and approach. We rack and stack them based on the demands and the needs of the business. And we work across the team. We have an investment committee that looks at these opportunities. But we feel comfortable with the visibility we've given you around cobalt development, EO facility enhancements as well as pursuing organic and inorganic growth opportunities.
Yes. I think just to add to that point, if you look at the guidance that we've given for CapEx here in 2021 of a range of 100,000,000 to $110,000,000
Speaker 2
We've also communicated in the past that around $30,000,000 of that number relates to these special projects related to Cobalt development and EO facility enhancements. So what's left after funding those two special projects is a pretty generous CapEx number relative to what we've spent in the past and certainly enough to continue to invest in growth initiatives to continue to drive the top and bottom line at the levels that we're accustomed to.
Speaker 5
Got it. Thanks guys.
Speaker 0
Thank you. Our next question comes from the line of Matthew Mishan from KeyBanc. Your line is now open.
Speaker 5
Hey, great. Thanks for taking the questions and also thank you for the incremental details in the script. Much appreciated. And a follow-up on the Nordian investments. What is the ultimate outcome of that?
Is it redundant to supply? Does it help you kind of smooth the cadence of revenue and harvesting there? Or does it open up capacity for new applications?
Speaker 1
Yes. Matthew, it's Michael. So thank you for recognizing additional details you asked us for. We want to be responsive. So thank you for recognizing that.
From a Cobalt development perspective, we're building out capacity for long term growth for the industry that needs Cobalt. That's what we're doing. I don't think it's going to smooth out variation from quarter to quarter because a lot of that is dependent upon or most of that is dependent upon the utility and when they're able to harvest the cobalt out of the reactor. But what we're building and investing is to get more cobalt for long term growth that the industry needs. That's what the end result will be.
Speaker 5
Okay. And then my next question is just how are your customers, especially medicalized customers, thinking about inventory? In the past contract sterilization could have been a little bit of a bottleneck. Are they trying to get ahead of the macro recovery? And are they careful of the pace of it?
And sort of what are you telling them on the capacity of turnaround time as things start to progress faster?
Speaker 1
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 continue to ramp up. We work with our customers around the world to find the right capacity in 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, we don't have great visibility there.
But within our facilities and the volumes we're seeing run through our facilities, we're not seeing that today.
Speaker 2
Okay.
Speaker 5
And then lastly, just the 15% ownership of Nelson Labs' Fairfield, how should we be accounting for that? Is incremental revenue? Or is that something you were that may have been below the line in minority interest or something like that?
Speaker 2
No. Just to give you a little bit of history on that transaction. So we refer to that business as Nelson Labs Fairfield today. When we acquired it in 2018, it was the acquisition of Gibraltar Labs. And when we acquired it in 2018, we acquired 85% of the equity interest.
And effectively, we pre negotiated the buyout of the remaining 15% to take place here in 2021. And so the accounting for that at the time was that we consolidated 100% of that business into our P and L for reporting purposes and we put the fair value of the repurchase obligation on the balance sheet as a liability. And so in terms of how that transaction flows through our financials, what you see is that the cash outlay basically offsets the balance sheet liability. There's actually a benefit a true up benefit in our GAAP financials to the tune of about $1,000,000 or so, but it doesn't impact at least not the adjusted P and L as we typically present the performance of the business.
Speaker 5
Okay. Thank you, Scott. Thank you, Michael.
Speaker 8
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your line is now open.
Speaker 9
Hey, thanks. I'll start with a question on Nelson Labs. EBITDA margins there have been pretty healthy, north of 43% the last couple of quarters, and as you talked about, up four thirty basis points year over year this quarter. Can you just talk about the sustainability of that step up from the high-30s to the low-40s for Nelson Labs?
Speaker 1
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 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 2022 and 2023 and beyond. So we're optimistic about where we are and the value proposition we bring our customers in the market.
Speaker 9
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?
Speaker 1
Not seeing anything major in the trends there. I'm just I'm thinking through your question as I'm answering it here. We don't see anything that's dramatically going to change that insourceoutsource view related to COVID. Maybe down the road as some of these new regs come in, that might change some of the dynamics in the market. But I'd say it's too early to call that at this point in time.
So the answer to your question is no, we don't see anything changing the in house outsource dynamic based on COVID.
Speaker 9
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?
Speaker 1
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, we'll continue to keep you informed as we progress throughout the year on 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 felt that was a responsible thing to do to make sure that you had visibility with such a short window there.
Speaker 9
Understood. Thank you.
Speaker 2
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.
Speaker 0
Thank you. Our next question comes from the line of Luke Sergott from Barclays. Your line is now open.
Speaker 10
Thanks. Hey, guys. Just a couple of quick ones for me. So on the guidance with the M and A and the recent acquisition of BioScience, is that expected to contribute anything incremental? Or is that already contemplated within your prior guidance?
Speaker 2
So yes, at the time that we originally issued guidance back in March, that was basically at the same time that we closed this acquisition. We did already contemplate the acquisition of BioScience. But also just bear in mind that you're talking about an acquisition that had a $15,000,000 purchase price. So it's clearly immaterial in relation to the overall size of our company.
Speaker 10
Got it. Thanks. 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.
Speaker 2
Yes. Sorry, I'm not sure if I understand exactly. So we're as Michael mentioned, we're not really breaking down the quarters in terms of our guidance. I guess what I'll say is that and we talked about this a little bit on the last call, is that Q1 is the one quarter where we feel some impact, particularly at Serigenics from seasonality. And so given the operating leverage at Serigenics and this is true to at least some extent with Nelson Labs as well, Q1 margins are a little bit depressed and that's aggravated by the ramp up of these public new public company costs that I mentioned and then kind of the one off costs associated with the secondary.
So based on that, I would look at our Q1 margins as being a starting point and then we would expect to continue to build on our margin profile through the year, but we're not providing anything more granular than that at this point. Okay.
Speaker 10
And then lastly here, just any change on the near term capital deployment strategy ahead of the lockup next week?
Speaker 1
No. As far as listen, we just go ahead and operate the business. Investors make their decisions on what they're doing with their shares over time. But listen, we're going to continue to just run the business.
Speaker 5
Okay, great. Thanks.
Speaker 0
Thank you. Our next question comes from the line of Amit Hazan from Goldman Sachs. Your line is now open.
Speaker 8
Thanks. Hey, good morning everyone. I want to actually come back to margins for a second and just maybe have you help us think through just volume impact versus margins? Obviously, you're seeing some pretty good margin improvement. We'll kind of put the public company stuff aside for a second, but that's happening on depressed volumes everywhere.
So I just have to imagine you're going to see improved leverage here if volumes do indeed come back through this year and into next year. So how much how should we think about that? How much leverage should you would you have as volumes come back? If you can give us some color on that. And are there other offsets on the other side of this?
Is some of the PPE stuff that you're doing higher margin or anything like that? Any color around this story would be helpful.
Speaker 2
Yes. So if you look at where we finished 2020, our total company margins adjusted EBITDA margins were 52.1%. And so as I mentioned in response to the last question, we do see a dip in Q1 that's driven in part by seasonality. And so that's why you have total company margins here in Q1 that are below 50%. But I think when you look at those Q4 numbers, that's more representative of the run rate that we're at as a company when you adjust out the seasonality of Q1.
And so I think you could look at that as a starting point that we'd expect to continue to grow off of that.
Speaker 1
Yes. We're focused on continuing 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 continue to drive growth in this business.
Speaker 8
And kind of related to that, some of the possibilities that might happen as this year and next year ensue is that we'll see greater volumes than what is in normal year, just given ability to capture 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?
Speaker 1
Yes. I'd say we're today across the Sterigenics network, we're at 73%, seventy five percent 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 then the Nordion side, it's really driven around cobalt timing and the harvesting and how quickly you 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.
Speaker 8
All right. Just a last quick one for me for Scott. Inflation obviously everywhere in the news yet. Can you just give us a sense of your own input costs, costs you have in considerations as they relate to inflation, any pressures you're seeing already and your ability to pass those on to customers if they were to accelerate?
Speaker 2
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 costs, 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 three 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.
Speaker 8
Thanks, folks.
Speaker 0
Thank you. Our next question comes from the line of Michael Polark from Baird. Your line is now open.
Speaker 11
Hey, good morning. You provided good details on EPA rulemaking. Thank you for that. I did have a follow-up. Earlier this week, just on May 10, believe, the Federal Register, it was posted that the EPA has expanded its data request, data collection efforts as it relates to EO and commercial sterilizers.
So my question is why is the EPA doing this? Or why do you think the EPA is doing this, number one? And number two, what are they looking for now that they haven't been looking for previously?
Speaker 1
Yes. So Michael, I'm not exactly sure, but I think you might be talking about the toxicity reporting. I think that might be what you're referencing. And that is something that the EPA has not required. In the past, I don't see any issue for Sterigenics if that ends up being a new requirement.
We're not required to report under the EPA CRI as of today, but we currently report our emissions to all the state authorities already because of our permit. So I don't foresee that being an issue. I think they're trying to get more my suspicion is they're trying to get more visibility to ethylene oxide emissions more holistically across the industry.
Speaker 11
Okay. The other one I had was on the topic of outsourcing, insourcing in terminal sterilization. I was a little surprised to see BD in early April announce a substantial facility in Arizona to expand its infrastructure including sterilization. I believe that facility will And so curious for your views on this.
Is this a one off? Any insights you can share on without talking specifically about this customer, just any insights you can share on that development?
Speaker 1
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 EOS 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.
Speaker 11
Okay. Yes. Thank you very much.
Speaker 1
Thank you.
Speaker 0
Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Michael Petrus for closing remarks.
Speaker 1
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.
Speaker 0
This concludes today's conference call. Thanks for participating. You may now disconnect.