Sotera Health Company - Q3 2024

Transcript

Operator (participant)

Good morning and welcome to the Sotera Health third quarter 2024 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations and Treasurer, Jason Peterson. Jason, please go ahead.

Jason Peterson (VP of Investor Relations and Treasurer)

Good morning and thank you. Welcome to Sotera Health's third quarter 2024 earnings call. You can find today's press release and accompanying supplemental slides on the investor section of our website at soterahealth.com. This webcast is being recorded and a replay will be available in the investor section of the Sotera Health website. On the call with me today are Chairman and Chief Executive Officer Michael Petras and Chief Financial Officer Jon Lyons. During the call, some of our comments may be considered forward-looking statements.

The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to Sotera Health's SEC filings and the forward-looking statement slide at the beginning of the presentation for a description of these risks and uncertainties. The company assumes no obligation to update any such forward-looking statements.

Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, segment income margin, adjusted net income, adjusted EPS, and net leverage ratio, in addition to constant currency comparisons. A reconciliation of GAAP to non-GAAP measures for all relevant periods may be found in the schedules attached to the company's press release and in the supplemental slides to this presentation. The operator will be assisting with the Q&A portion of the call today. Please limit yourself to one question and one follow-up so that we can give everyone an opportunity to ask questions. If you have any questions after the call, please feel free to reach out to me and the investor relations team. I will now turn the call over to Sotera Health Chairman and CEO Michael Petras.

Michael Petras (Chairman and CEO)

Good morning, everyone, and thank you for joining Sotera Health's third quarter 2024 earnings call. This morning, we reported year-over-year top- and bottom-line growth with volume and mix improvement in all three of our businesses versus the third quarter of 2023. Compared to the third quarter of 2023, total company revenues increased 8.5% or 8.9% on a constant currency basis, while Adjusted EBITDA increased 9%. We delivered Adjusted EPS of $0.17 for the quarter, which is a $0.01 increase from the same period last year. Sterigenics, our large reporting segment, delivered 4.3% top-line growth for the third quarter of 2024, which included slight volume and mix growth over the third quarter of 2023. During the quarter, the team completed one facility expansion project for which the customer product validation phase is underway.

We also continue to make good progress on our North American EO facility enhancements to ensure we meet the stringent and complex NESHAP regulations by the required deadline. Nordion, our other reporting segment within the sterilization services business, delivered a 28% year-over-year revenue increase, which was driven by the timing of the reactor harvest schedules. The Nordion team fulfilled some shipments in the quarter that were planned for the fourth quarter in support of our customers' requests, which resulted in more revenue in the quarter than originally anticipated. I'm also excited to announce that Nordion has reached an important milestone for one of its cobalt development projects. Recently, the first insertion of cobalt was successfully installed into a Darlington reactor in Canada, and we expect the first cobalt-60 harvest to occur in 2028.

This project is a great example of how we are safeguarding global health by ensuring a steady supply of cobalt-60 for our customers into the future. Nelson Labs, our lab testing advisory services business, grew its top line 7% and bottom line 9% versus the third quarter of 2023. We are pleased to see higher core lab testing volumes as well as improved margins in the business both sequentially and year-over-year. In our previous calls, we have mentioned the recent performance of our lower margin Expert Advisory Services, the strength of which has been tied to one-time projects. This volume is beginning to normalize, and we expect it will continue to do so as we lap the acceleration that began in the second half of 2023. With the majority of the year behind us, we are reaffirming our full year 2024 outlook ranges for revenue and Adjusted EBITDA.

As a reminder, our 2024 outlook calls for both revenue and Adjusted EBITDA growth in the range of 4%-6%. Jon will go through our 2024 outlook in more detail shortly, but first, I'd like to highlight an example of how our employees across the globe play a critical role in safeguarding global health. We take our role in healthcare seriously, and our mission is at the heart of our work every day. Continuous glucose monitors are undergoing complex technical innovation, including batteries and cybersecurity, which create new regulatory compliance challenges. Our teams at Nelson Labs and Sterigenics are providing integrated solutions for global manufacturers to address safety and regulatory needs so that patients can have better control and more competently manage their diabetes. Now, Jon will walk us through the financials.

Jon Lyons (CFO)

Thank you, Michael. I will begin by covering the third quarter 2024 highlights on a consolidated basis and then provide some details on each of the business segments along with updates on capital deployment and leverage. I will then finish up with some additional details on our 2024 outlook. On a consolidated total company basis, third quarter revenues increased by 8.5% as compared to the same period last year to $285 million. This equates to an 8.9% increase on a constant currency basis as foreign exchange was a headwind in the quarter. Adjusted EBITDA increased by 9% compared to the third quarter of 2023 to $146 million. Adjusted EBITDA margins finished at 51.3%, which was an increase of 23 basis points versus the third quarter of 2023.

This increase in margins was driven by improved volume and mix at Nordion and Nelson Labs, as well as favorable pricing across all three businesses. Our reported interest expense for the third quarter 2024 was $42 million, similar to the same period last year. Net income for Q3 2024 was $17 million, or 6 cents per diluted share, compared to a net loss of $14 million, or 5 cents per diluted share in Q3 2023. Adjusted EPS was 17 cents, an increase of 1 cent from the third quarter of 2023. Now, let's take a closer look at our segment performance. Sterigenics delivered 4.3% revenue growth to $176 million as compared to the third quarter of last year. Revenue growth drivers included favorable pricing of 4.4%, as well as a 50 basis points increase from volume and mix.

This increase was partially offset by unfavorable changes in foreign currency exchange rates of 60 basis points. Compared to the prior year quarter, segment income for Q3 2024 increased 3% to $96 million. Segment income margins declined by approximately 70 basis points to 54.7% versus the prior year quarter, which was driven by higher employee compensation costs. Nordion's third quarter revenue increased by 28% to $51 million compared to Q3 of 2023 due to the timing of cobalt-60 harvest schedules. Nordion's revenue increase was driven by a volume and mix benefit of 23.2% and favorable pricing of 5.7%, partially offset by an unfavorable impact from changes in foreign currency exchange rates of 90 basis points. As Michael mentioned, we outperformed our expectations for Nordion with the shift of a couple of shipments from Q4 into Q3 to support our customers.

Nordion's segment income increased 31.9% to approximately $32 million, and its segment income margin increased approximately 190 basis points to 61.8% compared to the same period last year. Segment income and segment income margin changes versus third quarter 2023 were driven by favorable volume and mix as well as favorable pricing. For Nelson Labs, third quarter 2024 revenue increased 7% to approximately $59 million compared to the third quarter of 2023. Nelson Labs' revenue increase for the quarter was driven by favorable changes in volume and mix of 3.7%, as well as a pricing benefit of 3.1%. Nelson Labs' third quarter 2024 segment income increased by 9% to $19 million, while segment income margins improved by 56 basis points to 31.8% versus third quarter 2023. These improvements were driven by favorable volume and mix as core lab testing improved, as well as pricing benefits.

Nelson Labs also saw some benefit from labor productivity in the quarter, partially offset by increases in employee compensation costs. On a sequential basis, Nelson margins increased more than 275 basis points. I will now turn to the balance sheet, cash generation, and capital deployment. The company continues to be in a very strong liquidity position with over $700 million of available liquidity at the end of the third quarter, which included $307 million of unrestricted cash and $400 million of available capacity on a revolving line of credit. Our capital expenditures for third quarter 2024 totaled $36 million. As Michael mentioned earlier, Sterigenics completed one of its capacity expansions during the quarter. Free cash flow was positive in the quarter, and we continue to expect to generate positive free cash flow for the full year.

Our net leverage ratio improved during the quarter, finishing at 3.6 times and within our 2 to 4 times long-term range. Now, I would like to turn to our 2024 outlook. As Michael mentioned, we are reaffirming our outlook for net revenue and Adjusted EBITDA growth in the range of 4% to 6%. We expect full year total company Adjusted EBITDA margins to approach 50%. In Sterigenics, we continue to expect slight volume and mix improvement with Q4 similar to Q3 of this year. For Nordion, we continue to expect slightly more than 60% of full year revenue to occur in the second half of the year. For Nelson Labs, we anticipate Q4 revenue will decline mid-single digits versus the prior year quarter with a decline of Expert Advisory Services revenue. We expect Nelson Labs' full year margins to approach 30%.

Interest expense is expected to finish at the lower half of the $165 million-$175 million range. Our effective tax rate on our adjusted net income is expected to be within the 31.5%-34.5% range. We expect the fully diluted share count to land at the upper end of the range of 283 million-285 million shares on a weighted average basis. We now expect capital expenditures to fall in the range of $175 million and $185 million. Timing is the primary driver for the decrease in capital expenditures for 2024, driven by Nordion's cobalt development projects and some spending delays for our growth projects related to vendor performance. Given these shifts, we now expect our peak CapEx to be in 2025 and then to decrease in 2026 and again in 2027. Our guidance assumes foreign exchange rates at the end of the third quarter to remain constant for the remainder of the year. I'll now turn the call back over to Michael.

Michael Petras (Chairman and CEO)

Thank you, Jon. As you may have seen in our release this morning, Sotera Health will be hosting its first-ever investor day in New York City on November 20th. During the event, members of the company's management team will present business, strategic, and financial reviews, including growth plans and updates on our corporate responsibility journey. We're looking forward to this event and hope you'll either join us in person or via the webcast. Details on the event are included in the press release we issued this morning, as well as on our investor relations website. At this point, operator, we'd like to open it up for questions, please.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster, and our first question will come from Sean Dodge of RBC Capital. Please go ahead.

Sean Dodge (Equity Research Analyst)

Yep, thanks. Good morning. Maybe just starting with revenue, Michael, you all reaffirmed the full year guidance, but that now implies a pretty wide range for Q4. I guess seasonally, historically, Sterigenics and Nelson have both tended to have strong fourth quarters. Any reason that won't be the case again? I know you mentioned the dynamic with the expert advisory in Nelson. And then any more direction you give us on Nordion, that can be lumpy, but relative to the third quarter, if my math is right, should we expect Nordion to be up a little sequentially despite the Q3 pull forward you both mentioned? Is that fair?

Michael Petras (Chairman and CEO)

Yeah. So, Sean, thanks and good morning. Yes, you should expect Nordion to be up over the third quarter. It'll be down significantly from last year, as we've told you all year. In total, about 60% of the revenue will be in the second half of the year. So you can kind of figure it out from there. You'll see we talked about Nelson being down mid-single digits here in the fourth quarter, really driven by Expert Advisory Services. The core lab testing market, we're pleased to see that progress continue. And then on the Sterigenics side, we've had slight volume and mix growth in the quarter. We see that continue as the rest of the year plays out. So that should help give you a little bit more feel for how the year plays.

Sean Dodge (Equity Research Analyst)

Okay, great. And then as we get a little bit further past the release of the final NESHAP rules, have you seen any subsequent shifts in the end market happening there? Any conversations around more insourcers looking to outsource or any changes in just the makeup of the outsource market? Are there any of those guys falling behind that could be market share opportunities over the, call it, medium long term?

Michael Petras (Chairman and CEO)

Yeah, we continue to feel confident where we are on the NESHAP regs. Although they're very challenging, the team has continued to work against it. It's not an easy task. We think it's going to be a challenge for the industry overall. We're very optimistic of where we sit relative to the marketplace. We haven't seen definitive answers from customers yet or other competitors on exactly how they're proceeding on this, but we do anticipate it will be a challenge and net-net, we view this as a positive for Sterigenics.

Sean Dodge (Equity Research Analyst)

Okay, great. Thanks for taking the questions.

Michael Petras (Chairman and CEO)

Great. Thanks, Sean.

Operator (participant)

The next question comes from Patrick Donnelly of Citi. Please go ahead.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Maybe the first one on, I guess, would be more Sterigenics. Just in terms of volume recovery, I know that's kind of been a big focus point as the year has progressed. Where are we on that front, and what are you guys seeing on the volume side? Visibility into 4Q and beyond would be helpful just in terms of what you're hearing from customers and how confident you are in the trajectory here.

Michael Petras (Chairman and CEO)

Yeah, we saw volume and mix growth in Sterigenics in the quarter. We'll see slight improvements similar to what you saw in the third quarter and the fourth quarter. We are seeing things stabilize. We're not hearing as much inventory deceleration, if you will, or reductions. Overall, we're optimistic that volumes will continue to improve as time moves forward.

Patrick Donnelly (Managing Director)

Okay, understood. And then, Michael, I guess I know you guys aren't talking 25 just yet, but I guess when you think about the moving pieces that we have at the moment, kind of looking where we are here, again, the volume piece picking up a little bit, is there any reason we would be kind of outside that LRP? I think the LRP is high single last we heard. Obviously, you guys are having that analyst day in a couple of weeks. But any reason why we'd be off that algo of kind of mid to high single volume, a little bit three and a half, four or five price when you think about next year? Just maybe high level of the moving pieces and any offsets we should be thinking about would be helpful. Thank you, guys.

Michael Petras (Chairman and CEO)

Yeah, thanks, Patrick. I don't want to get into specifics on 25 or our long-range guide. We will do that at the investor day. We'll give you some feel on the longer range guide and outlook around CapEx, free cash flow, the business segments. One of the parts I'm really excited about is the opportunity for many of you to hear from our division presidents and talk about their businesses, which is a new opportunity for all of you. So we're looking forward to that. But the fundamentals in this business, ability to deliver price, continue to invest for organic growth, those all still remain intact. We'll continue to see volume and mix improvement as the time progresses. So overall, we're very optimistic about where we're looking going forward here.

Patrick Donnelly (Managing Director)

Okay, understood. We'll stay tuned for that. Thanks.

Michael Petras (Chairman and CEO)

Okay, thank you.

Operator (participant)

The next question comes from Luke Sergott of Barclays. Please go ahead.

Speaker 11

This is Seamus on for Luke. Good morning, guys. Just piggybacking off of Patrick's question, I guess just want a few more specifics on Sterigenics, right? It came in slightly lighter than maybe some expected despite some positive data points in bioprocessing this quarter, albeit it's a smaller part of your business. Devices seem to be largely over the hump. Could you just talk about visibility a little more there on destocking, especially with hospital systems maybe? What conversations are looking like there? And from your point of view, where are we seeing the most stabilization, and where do you still see some room to run on destocking?

Michael Petras (Chairman and CEO)

Yeah. Okay, good morning. One of the first comments you made was bioprocessing. Yes, it's a smaller portion of our business. We did see sequential growth quarter over quarter, down significantly still year over year. We're seeing several categories starting to move the right direction with volumes and with procedural activity. But as we've mentioned to you in the past, excuse me, it's not always a direct line and strong correlation between procedural volume and volume for Sterigenics or Nelson. But we're optimistic we'll continue to see volumes improve as time goes on. Yes, we would have liked to see a little bit more in the quarter from Sterigenics, but overall, it's consistent with what we communicated to you that we would see slight volume and mix improvements in the quarter over the prior year, and we did.

Speaker 11

Got it. That's helpful. Thank you for that. And then just a small checkup on litigation, just on the Georgia cases, any updates on progress or timelines on either personal injury or the property cases? We're still on track to see the initial set of cases, see a ruling in early 2025 on phase one. And then any updates on the number of cases in California?

Michael Petras (Chairman and CEO)

Yeah, so I'll kind of start at the back end, come forward. On California, I think the number is still 18 claimants. That has not changed. And in Georgia, yes, the Phase One hearings will start to progress. And we do expect, based on what the judge has told us, by early 2025 or late January 2025 is when we'd expect to hear something on the Phase One General Causation work. Remember, there's two phases in Georgia. Phase One is General Causation, and then after that, any cases that survive that go to Specific Causation. And we expect Phase One to hear something by the end of January from the judge.

Speaker 11

Awesome. Super helpful. Appreciate it, Michael.

Michael Petras (Chairman and CEO)

Thank you.

Operator (participant)

The next question comes from Brett Fishbin of KeyBanc. Please go ahead.

Brett Fishbin (VP and Equity Research Analyst)

Hey, guys. Thank you so much for taking the questions. Just on Nelson Labs, the segment margin took another nice step forward in the right direction and is now really healthily in that low 30s range that you guys have talked about. So just curious, as the mix continues to shift back toward the core testing and away from some of the larger project-based work, how do you think about the long-term margin opportunity in that area of the business?

Michael Petras (Chairman and CEO)

Yeah. Good morning, Brett. We're really pleased with Joe and the team are doing there. We've been very consistent in our performance around quality and service. We continue to improve in both those areas, although working off a very strong baseline. We're happy with the performance in the quarter. Core mix volume continues to testing volume continues to get better. We're hopeful that the margins will continue to perform in the area that you're seeing and now going into the future. So overall, Expert Advisory Services is just lapping some big numbers for that business.

But Eric and the team are doing a really nice job in bringing in incremental opportunities as well. So overall, we're happy to see the progress being made there. And as we told you, Wood and Joe and the team are doing a really nice job on that. So I'd say overall, and the best part is the customer satisfaction scores continue to perform really well. I mean, customers value what that business does and the critical role we play there.

Brett Fishbin (VP and Equity Research Analyst)

All right. Thank you. And then just one follow-up. We have the investor day coming up in just a couple of weeks. You mentioned the opportunity for some of the segment presidents to address the investment community. But just curious if you could provide maybe a little bit more of a teaser on what some of the main objectives of that event will be. And then without specifics, how you're thinking about providing some updated long-term financial objectives. Thank you so much.

Michael Petras (Chairman and CEO)

Yeah, great, Brett. A couple of goals for that investor day. One, I really want to make, not in particular order, but I want to make sure that you folks get to meet the leaders that run this business beyond Jon, Jason, and I. So it's been several years since we went public, and I want to make sure you get an opportunity to see the strength of our team. So that's one of the key goals. Two is to make sure that you understand the critical role we play in healthcare and just also give education around the business. For example, some of you said, "Hey, we'd like to understand the Nelson piece a little bit better." So Joe will walk you through some of the basics of how that business operates and some of the key value that we bring to our customers.

And then obviously, we're going to give you a longer range view on how we see CapEx playing out, revenue guide, as well as free cash flow. Things like that, I think, are going to be really important. And just strategically, how we think about M&A and what's in scope, what's out of scope. I think it'll be a really great opportunity for you to hear from the broader team, a complete discussion around the company. So those are the things you should expect to hear on November 20th. Operator, are we there?

Operator (participant)

The next question comes from Casey Woodling of J.P. Morgan. Please go ahead.

Casey Woodling (VP Equity Research)

Great. Thanks for taking my questions. Maybe to start, just can you break out Nelson performance in the quarter between routine testing, validation testing, and advisory services? I think last quarter, you talked about seeing nice growth on the validation side and maybe slower growth on the routine side, and then so just how do we think about the moving parts of the business there into 4Q? You noted advisory services will decline, but just curious by how much and how you expect routine and validation testing to trend in 4Q respectively.

Michael Petras (Chairman and CEO)

Yeah. Thanks, Casey. So as we talked about, validation has been strong the last couple of quarters. Again, we saw that in the third quarter. Routine, we're starting to see progress in the right direction there, which also helps drive with some of the sterilization volumes over time. So overall, we're positive on the outlook there as well. That doesn't mean there won't be some choppiness around the validation opportunities, but overall, we're pretty optimistic on how the core testing volumes are going. And Expert Advisory Services, as I mentioned a couple of minutes ago, there's some big numbers to overlap, but the team is doing a really nice job and continuing to bring value to our customers in that area.

Casey Woodling (VP Equity Research)

Okay, got it, and then I just want to ask one. This quarter, there's been a lot of talk across the industry around choppiness related to pharma R&D spending and biotech funding over the course of the last several months in particular. Just curious if you see any risk to the near term from some of these pipeline reprioritizations or cautious spending from those customers, particularly in Nelson, but just across the business. Just wondering how you're thinking about that dynamic, if at all.

Michael Petras (Chairman and CEO)

Yeah. Casey, that continues to be pharma testing in particular, as well as the sterilization, continues to be a growth area for us. We've seen growth in those buckets, and we expect that to continue. There is some choppiness around that, but overall, our business is performing pretty well. What our team does, particularly, I call out the team in Leuven, Belgium and the work that they do in pharma testing, continues to do very well. And yes, some of those projects are more longer in nature because of the validation type, but overall, we like the long-term prospects of the pharma area for both sterilization and testing. And we're seeing synergies from that value prop as well on a cross-view basis.

Casey Woodling (VP Equity Research)

Great. Thanks. If I could just squeeze one last follow-up in, just curious if you could parse out the driver of the CapEx cut for the year, how much of that is related to facility enhancements versus the Cobalt program and anything else. And then if you could give any kind of color on how you expect that to trend in 2025, that step up that you kind of mentioned as prepared. Thank you.

Jon Lyons (CFO)

Thanks for the question, Casey. A couple of things. One, the biggest driver, single biggest driver, is really the timing of our Cobalt development programs. We're well on pace. I think we shared that we had our first insertion of Cobalt into Darlington, and we expect the first harvest in 2028. So we're excited about that. That program continues to progress well, just some timing relative to some of the payments there.

The Westinghouse program is still in good shape, but it's probably a little bit delayed in that regard. And then just the other things around some of our growth projects, some timing of vendor performance, just normal things when you're running big CapEx projects. As we look forward, as I mentioned, we do see the peak CapEx for us in 2025 now. And probably the best, we're not ready to guide on it yet, but the best way to frame it would probably be just take a look at our original guide for this year, and it should be somewhere in the ballpark of that.

Michael Petras (Chairman and CEO)

In case you just want to point to add to Jon, I think you mentioned facility enhancements. That's not really the big driver of the CapEx being a little softer for year-end here. That's more the growth projects and the Cobalt that Jon referenced.

Casey Woodling (VP Equity Research)

Got it. Thank you.

Operator (participant)

The next question comes from Jason Bednar of Piper Sandler. Please go ahead.

Jason Bednar (Managing Director and Senior Research Analyst)

Hey, good morning, everyone. Question from us on Sterigenics. Definitely good to see another quarter of volume growth in that segment. Just wondering if you can elaborate maybe a bit more on the pricing trend. I don't want to make too big of a deal about it, but it did take another 50 basis points step back, I believe, quarter over quarter. Can you talk about what's happening there? Why is that pricing power lessening even while your own variable costs around labor are rising? Or maybe alternatively, do you see the higher labor costs that you're experiencing maybe giving you more ammunition to collect more pricing upside as contracts with your partners reset here going forward?

Michael Petras (Chairman and CEO)

Yeah. Jason, we said in the business overall, we'd get 3.5%-5% price across the company. We'd be on the lower end of that range this year. Sterigenics is squarely been in the middle of that around 4%, 4.5%. And that's about where it came in for the quarter. On a year-to-date basis, it's about there. We're not concerned about our overall value prop and our ability to get priced in this business. So not concerned about the price performance at Sterigenics relative to the overall business.

Jason Bednar (Managing Director and Senior Research Analyst)

Okay. Fair enough, Michael. I guess on the second part of that question, just the cost that you're experiencing on the labor side, does that give you more ammunition on going after price increases with your partners as you go forward?

Michael Petras (Chairman and CEO)

Yeah. If we're concerned about the overall cost structure, we have the ability to push price in the marketplace. But we got to always make sure we don't run our value prop with our customers. When you look overall, what's going on with the compensation levels, we have a little bit of reset on AIP incentive comp from last year. We have some open-head jobs that we filled, as well as some overall wage increase, merit increases. But overall, we're not concerned about the cost structure on that business.

Jason Bednar (Managing Director and Senior Research Analyst)

Okay. Perfect. That's helpful.

Michael Petras (Chairman and CEO)

We're able to maintain margins, by the way, is the bigger point. I think you were getting that. That should be clear.

Jason Bednar (Managing Director and Senior Research Analyst)

Yeah. Absolutely. Okay. And then on Nelson, maybe just one follow-up on the Expert Advisory Services point. Really appreciate the color on fourth quarter. Is that kind of the exit velocity for this business, this segment out of fourth quarter into 2025, how we should be thinking about that segment? Is this the low point, or did things maybe step a little bit lower against tougher comps? Just trying to understand as we set models for next year.

Michael Petras (Chairman and CEO)

Yeah. Jason, maybe it was what you said. I kind of was mixing the total Nelson business and expert advisory. I'd say where you see the business trending toward is probably a good indication of what we expect going forward here. Volumes continue to improve on the core testing side. Expert Advisory Services probably settling back a little bit, which should give you a favorable mix in the business overall, if that helps.

Jason Bednar (Managing Director and Senior Research Analyst)

Yep. Definitely does. Thank you.

Michael Petras (Chairman and CEO)

Okay.

Operator (participant)

The next question comes from Dave Windley of Jefferies. Please go ahead.

Dave Windley (Managing Director)

Hi. Good morning. Appreciate you taking my questions. I wondered, Michael, if you could comment on a couple of kind of volume-related Sterigenics points. The first one would be, I think you've talked in the past about being aligned with a med tech customer that has struggled with its own market share. I'm wondering if that situation has improved at all. And then the second area would be in kind of the bioproduction life sciences area. I think Casey asked the biotech funding question as regards to maybe Nelson. How is the life sciences bioproduction market as it relates to Sterigenics? Thanks.

Michael Petras (Chairman and CEO)

Yep. Great. Thanks, Dave. Good morning. On your first question, on the one customer, yeah, we're seeing improving signs from that customer, and they're working through some of their challenges over the last several quarters. So that's a net positive for us. And then the second one on bioprocessing, as I mentioned in my comments earlier, in answer to Casey, I want to make sure I get your question as well. We did see sequential improvement in bioprocessing. We are seeing uplift opportunities in both Steri and Nelson. We are seeing significantly down double-digit year over year, though, still within the quarter for Sterigenics. But we think that market will continue to be an opportunity for us, although we aren't a huge player in there. We do see opportunities for that as the numbers improve over time in the value.

Dave Windley (Managing Director)

Okay. Thank you. And then if I could follow up on your cobalt capacity, you mentioned Darlington. Would you be, I mean, admitting that it's a 2028 harvest, and so it's still quite a ways out, but how much does that increase capacity? And maybe, if you would, talk about kind of the totality of programs and how much capacity they would add over time.

Michael Petras (Chairman and CEO)

Yeah. So we've got supply-based right now. We buy Cobalt-60 from Canada, China, Argentina, Russia. We get it all around the world. As we look at our multi-year strategic plan, we will bring on new capacity to help displace some as well as give us incremental. We're looking to keep pace with the overall market demand over time, David. We're not looking to build on a huge amount of incremental, but it's a shifting of some of that capacity as we see reactors come online and offline over the next 10 years or so. But we're very optimistic about Darlington.

OPG is one of our best partners out of Canada. And this is a program we've been working with them on for the last several years, and we're proud of where that's progressing with the great work that they're doing alongside our team. And a big milestone getting that cobalt, as I call it, putting the loaf of bread in the oven and being able to bring it out in 2028. Cobalt-60 is a big deal. So really proud of where that's going. And you saw the Nordion team had a good quarter here, and we're expecting a solid year from them total.

Dave Windley (Managing Director)

Yep. Congrats on that heck of a long baking period. Appreciate the answers. Thanks.

Michael Petras (Chairman and CEO)

Yeah. By the way, I'm not so sure the team is doing all the hard work. Would appreciate the bread analogy, but for me, it's in layman's terms. I'm not an engineer by background, but that's basically a scientist how it works. Yep.

Dave Windley (Managing Director)

Thank you.

Michael Petras (Chairman and CEO)

Okay. Thanks, Dave.

Operator (participant)

The next question comes from Michael Polark of Wolfe Research. Please go ahead.

Michael Polark (Senior Equity Research Analyst for Medical Devices)

Good morning. Thank you. I have two follow-up on Expert Advisory Services and then a question on the EO upgrade program. On Expert Advisory Services, Michael, can you remind us how big is this business as a portion of Nelson in percent terms or just dollar terms? That's part one. And then part two is in terms of what was really good over the last year or so, can you frame that the what behind the bump? Was it device customers, pharma customers? Was it a specific therapeutic category? I'm just trying to better understand the step down and kind of. Yeah. Thank you.

Michael Petras (Chairman and CEO)

Yeah, I'll have Jon respond to your question on the overall sizing, but let me just tell you, as far as RCA and what the expert advisory team's doing, they help customers with submissions to the FDA. They help get new product launches, get files pulled together and submissions. And when there's problems, they get involved. As we've mentioned on this call, we're experiencing in our business, and our customers are experiencing a lot more increased scrutiny from the regulators and FDA visits and audits. That is where RCA shines. I mean, they're dragged in to help on problems. They've had some med device customers have issues, but I'd also say there are very significant pharma customers that have had FDA challenges, and they've called us in to help them be a third party to get through that cycle.

So that's where we've seen the uplift in that activity. More so than the new filings, Michael, it's more around some of the problems that they've had around compliance issues that they've dragged us in for. As far as the sizing piece, Jon, you want to just give a rough sense on that?

Jon Lyons (CFO)

Yeah, Mike, it's roughly, call it, low double digits % of the total pie of Nelson.

Michael Polark (Senior Equity Research Analyst for Medical Devices)

Appreciate all that. Follow-up on EO. Can you update us on just how much left do you have? How close to the finish line are you in terms of the U.S. modernization? And then part two is on NESHAP. Is this set in stone, or is there still a negotiation or discussion being had on some of the particulars? And do you think a presidential, yeah, a different administration might impact time to compliance here? Any flavor for that? Thank you.

Michael Petras (Chairman and CEO)

Yeah. Okay. So we're pretty far along on the NESHAP requirements. We'll have a significant amount of spend next year, as we've said all along, but we were planning about $150 million or so in total. It's probably going to be another $15-$20 million on top of that, would be our gas phase. We talked to you in the past that we said was an immaterial amount. That's roughly what we're seeing on this. So you could kind of plug in what you'll see. I think this year we're going to do $30-some million, low 30s. We'll probably have comparable numbers next year in that area, although I don't know exactly how it forces out. I know Mike and the team have taken us through that program in detail. So we'll see that carry out in 2025.

Most of that spend will be behind us in 2025. As far as NESHAP, the rules are set. I think there's some discussion still between industry and the EPA is around clarification of exactly how do we achieve that. Hey, you put this measurement, is that an absolute number? Is that an average? Is it an average over three hours, three days, or three weeks, or three months? I think there's some clarifications around that that the teams are working through in the associations, but I don't see us seeing a big change in the absolute rules themselves. It might be some finer tweaks around clarification of the rules that have been set.

And I don't see, listen, a lot of people said, "Hey, if there was a different administration, the industry wouldn't be going through this." I think it's been a challenging dynamic for the industry in total, regardless of the administration that's in there. I just think there's been a ton of misinformation. These sterilization facilities, particularly ours, operate at safe levels. Okay? And we firmly believe this. We're going to continue to push this in the litigation and make sure people understand these facilities operate in a safe and compliant manner. And this low level of ethylene oxide, we're very confident these emissions are not causing cancer. And I just think that there's still a lack of education around this that we're going to continue to push and make sure people are informed around.

Jason Peterson (VP of Investor Relations and Treasurer)

Thank you, Michael.

Michael Petras (Chairman and CEO)

Okay. One other thing, Mike, just to know, and I'll repeat it. We've got ethylene oxide information out there on our website. We'll continue to use the frequently asked questions that'll be in there on our ethylene oxide section of our website. So if there's any updates on these kind of things, that are material, we'll make sure we post them there during the quarter as well. All right. Any other questions?

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Michael Petras for any closing remarks.

Michael Petras (Chairman and CEO)

Great. Well, thank you, everybody, for taking the time. We're proud of what the team's doing here. Good solid quarter along the expectations that we previously communicated to you. And we look forward to seeing you on November 20th in New York City and giving you the opportunity to meet some of our team and hearing the great things that Sotera Health does in safeguarding global health. So thanks and have a great day. Bye-bye.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.