Sotera Health Co

NASDAQ:SHC

Earnings Call Analysis

Sotera Health Reports Strong Q3 2024 Growth and Outlook Reaffirmation

Sotera Health achieved a notable 8.5% revenue growth year-over-year in Q3 2024, totaling $285 million, with adjusted EBITDA rising 9% to $146 million. Adjusted EPS increased to $0.17, up by $0.01 from last year. Key segments showed varied performance: Sterigenics grew 4.3%, while Nordion surged 28% due to timing in reactor harvests. Looking forward, the company reaffirms its 2024 guidance, expecting revenue and adjusted EBITDA growth between 4% to 6%. Adjusted EBITDA margins are anticipated to approach 50%, with specific declines expected in Nelson Labs revenue in Q4. Overall, positive trends indicate a robust market position.

Sotera Health's Strong Q3 Performance

In the third quarter of 2024, Sotera Health showcased impressive growth, achieving a total revenue increase of 8.5% year-over-year, reaching $285 million. This was further bolstered by an 8.9% rise in constant currency terms, highlighting the company's resilience amid currency headwinds. Furthermore, adjusted EBITDA climbed 9% to $146 million, with margins slightly improving to 51.3%. These positive financial metrics reflect a solid operational performance across all business segments.

Segment Highlights: Sterigenics and Nordion Lead Growth

Within its key segments, Sterigenics contributed $176 million in revenue, marking a 4.3% increase due to favorable pricing and improved volume. However, segment income margins decreased slightly, down by 70 basis points to 54.7%, attributed to rising employee compensation costs. Nordion, on the other hand, experienced exceptional growth, with revenues surging 28% to $51 million driven by successful reactor harvest schedules, resulting in a substantial segment income rise of 31.9% to approximately $32 million and its income margin increasing to 61.8%.

Positive Trends in Nelson Labs

Sotera's Nelson Labs also posted a robust performance, with a 7% revenue increase to $59 million. This growth was fueled by a mix of improved volume and favorable pricing. Moreover, the segment's income rose by 9% to $19 million, along with a 56 basis point margin improvement to 31.8%. The management pointed out that core lab testing volumes are on the upswing, which should further enhance profitability.

Capital Management and Financial Position

Sotera Health maintains a strong liquidity position, boasting over $700 million of available liquidity, which includes $307 million in unrestricted cash and $400 million on its revolving line of credit. Capital expenditures for Q3 totaled $36 million, and the company anticipates generating positive free cash flow for the year. The net leverage ratio improved to 3.6x, aligning within the targeted range of 2x to 4x.

Outlook and Revenue Guidance for 2024

For 2024, Sotera Health reaffirms its guidance for net revenue and adjusted EBITDA growth in the range of 4% to 6%. In addition, the company anticipates total adjusted EBITDA margins to approach 50% by the end of the year. Notably, Sterigenics is expected to continue its slight volume mix improvement, while Nordion is projected to generate over 60% of its annual revenue in the second half of the year. However, Nelson Labs may experience a mid-single-digit revenue decline in Q4 due to the normalization of its expert advisory services revenue.

Long-Term Strategic Investments

Looking ahead, Sotera has strategic projects in place, including ongoing enhancements to its sterilization facilities and cobalt development initiatives. The milestone of successfully inserting cobalt into the Darlington reactor shows promise, with the first Cobalt-60 harvest expected in 2028. Overall, this reflects the company's long-term commitment to bolstering its operational capacity and fulfilling future market demand.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Sotera Health Third Quarter 2024 Conference Call. [Operator Instructions] 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, executive]

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 Investors section of our website at soterahealth.com. This webcast is being recorded, and a replay will be available in the Investors section of the Sotera Health website. On the call 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 for this presentation.

[Operator Instructions] 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, executive]

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 3 of our businesses versus the third quarter of 2023. Compared to the third quarter 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 1 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 1 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. And in previous calls, we have mentioned the recent performance of our lower-margin expert advisory services the strength of which has been tied to onetime projects. This volume is beginning to normalize, and we expect it will continue to do so as we lack 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% to 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 health care 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 better control and more confidently manage their diabetes.

Now Jon will walk us through the financials.

[Jonathan Lyons, executive]

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 3 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 $0.06 per diluted share compared to a net loss of $14 million or $0.05 per diluted share in Q3 2023. Adjusted EPS was $0.17, an increase of $0.01 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 point 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 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 3.6x and within our 2x to 4x 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 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 the 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 to $175 million range. Our effective tax rate on our adjusted net income is expected to be within the 31.5% to 34.5% range.

We expect the fully diluted share count to land at the upper end of the range of 283 million to 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 '26 and again in '27. 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, executive]

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 20. 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 are 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]

[Operator Instructions] And our first question will come from Sean Dodge of RBC Capital.

[Sean Dodge, analyst]

Yes. Maybe just starting with revenue, Michael, you'll 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 can give us on Nordion? I think 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, executive]

Yes. So Sean, thanks. Yes, you should expect Nordion to be up over the third quarter. It will be down significantly from last year as we 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, and 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, 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 shift in the end market happening there? Any conversations around more insourcers looking to outsource or any changes in just the makeup of the outsourced market. Are there any of those guys falling behind that could be market share opportunities over the, call it, medium long-term.

[Michael Petras, executive]

Yes. We continue to feel confident where we are on the NESHAP regs, although they're very challenging, and 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 to be a challenge and net-net, we view this as a positive for Sterigenics.

[Operator]

The next question comes from Patrick Donnelly of Citi.

[Patrick Donnelly, analyst]

Maybe the first 1 on -- I guess it 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, executive]

We saw volume and mix growth in Sterigenics in the quarter. We'll see slight improvements, similar to what we 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, analyst]

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 is picking up a little bit. Is there any reason we would be kind of outside that LFP? I think LFP is high single less we heard obviously have an 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 3.5, 4 or 5 price when you think about next year, just maybe high level the moving pieces and any offsets we should be thinking about would be helpful.

[Michael Petras, executive]

Yes. Thanks, Patrick. I don't want to give the specifics on '25 or 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 of this business, a price, 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.

[Operator]

The next question comes from Luke Sergott of Barclays.

[Unknown Analyst]

This is [ Salem ] on for Luke. Just piggybacking off of Patrick's question. I guess, just on a few more specifics on Sterigenics, right, that 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, executive]

Yes. Okay. 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, it's not always a direct line, strong correlation between procedure 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 like to see them a little bit more in the quarter from Sterigenics, but overall, it's consistent with what we communicated yet that we would see slight volume and mix improvements in the quarter and over the prior year and we did.

[Unknown Analyst]

Got it. That's helpful. And then just a small check up on litigation, just the Georgia cases, any updates on progress or time lines 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 I? And then any updates on the number of cases in California?

[Michael Petras, executive]

Yes. So I'll kind of start the back end come forward. On California, I think there still 18 claimants. That has not changed. And in Georgia, yes, the Phase I 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 I general causation work. Remember, there's 2 phases in Georgia. Phase I is general causation. And then after that, in case of survived that go to a specific causation, and we expect Phase I to hear something by the end of January from the judge.

[Operator]

The next question comes from Brett Fishbin of KeyBanc. .

[Brett Fishbin, analyst]

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, like as the mix continues to shift back toward the core testing and away from some of the larger project-based work, how you think about the long-term margin opportunity in that area of the business?

[Michael Petras, executive]

Yes. 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 of 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 incremental opportunities as well. So overall, we're happy to see the progress being made there, and as we told you would 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 SaaS scores continue to perform really well. I mean customers value what that business does in a critical role we play there.

[Brett Fishbin, analyst]

All right. And then just 1 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.

[Michael Petras, executive]

Yes. Great, Brett. A couple of goals for that Investor Day. One, I really want to make -- not any 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 health care. 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 in 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 will 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 20. Operator, are we there? Do we...

[Operator]

The next question comes from Casey Woodring of JPMorgan.

[Casey Woodring, analyst]

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 sort of 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, executive]

Yes. Thanks, Casey. So as we talked about, validation has been strong in 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 are some big numbers to overlap, but the team is doing a really nice job and continue to bring value to our customers in that area.

[Casey Woodring, analyst]

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 if -- how you're thinking about that dynamic, if at all.

[Michael Petras, executive]

Yes. 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, there's -- 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 BU basis.

[Casey Woodring, analyst]

Great. If I can just squeeze 1 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 in the prepared.

[Jonathan Lyons, executive]

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 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 I'd -- probably the best -- we're not ready to guide on it yet, but the best way to frame it would probably just take a look at our original guide for this year, and it should be somewhere in the ballpark of that.

[Michael Petras, executive]

And Casey, 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 of the growth projects in the cobalt that Jon referenced.

[Operator]

The next question comes from Jason Bednar of Piper Sandler.

[Jason Bednar, analyst]

A 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 point 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, executive]

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

[Jason Bednar, analyst]

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

[Michael Petras, executive]

Yes. 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, 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 and as well as some overall wage increase merit increases. But overall, we're not concerned about the cost structure on that business. And our ability to maintain margins, by the way, it's a bigger point. I think you were getting at. That should be clear, yes.

[Jason Bednar, analyst]

Yes, 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 -- is kind of the exit velocity for this business, the segment out of fourth quarter into '25, how we should be thinking about that segment? Is this the low point? Or do things maybe step a little bit lower against tougher comps? Just trying to understand as we set targets for next year.

[Michael Petras, executive]

Yes. 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 towards 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.

[Operator]

The next question comes from Dave Windley of Jefferies.

[David Windley, analyst]

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.

[Michael Petras, executive]

Yes. Great. Thanks, David. On your first question, on the one customer, yes, 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, we been answered Casey, I want to make sure I get your question as well. We did see sequential improvement in bioprocessing. We are seeing uplift opportunities at 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 bioprocessing.

[David Windley, analyst]

Okay. 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, executive]

Yes. So we've got supply base rate now. We buy cobalt from Canada, China, Argentina, Russia, we get it all around the world. As we look at our multiyear 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 great work that they're doing alongside our team and a big milestone getting that cobalt, as I call it, putting the low food bread in the oven and being able to bring it out in 2028 at Cobalt-60 is a big deal. So really proud of where that's going in. You saw the Nordion team had a good quarter here, and we're expecting a solid year from in total.

[David Windley, analyst]

Congrats on that. Heck of a long baking period. Appreciate the answers.

[Michael Petras, executive]

Yes. 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 the scientist works, yes.

[Operator]

The next question comes from Michael Polark of Wolfe Research.

[Michael Polark, analyst]

I have 2 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 2 is, in terms of what was really good over the last year or so, was it -- can you frame that 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, yes.

[Michael Petras, executive]

So yes, I'll have Jon respond to your question on the overall sizing it. But let me just tell you, as far as RCA and what the Expert Advisory team is doing, they help customers with submissions to the FDA, they help get new product launches get filed, pulled together and submissions. And when there's problems, they get involved.

So 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. And that is where RCA shines. I mean they've 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 dragged us in for. As far as the sizing piece, Jon, do you want to just give a rough sense on that.

[Jonathan Lyons, executive]

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

[Michael Polark, analyst]

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 2 is on NESHAP, is this set in stone like -- or is there still a negotiation or discussion being had on some of the particulars and do you think of presidential -- yes, like a different administration might impact time to compliance here. Any flavor for that?

[Michael Petras, executive]

Yes. 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 are planning about $150 million or so in total, it's probably going to be another $15 million to $20 million on top of that would be our gas base. 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 can kind of plug in what you'll see. I think this year, we're going to do $30 million-some, low $30 million, 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 into '25. Most of that spend will be behind us in '25. As far as NESHAP, the rules are set. I think what -- there's some discussions still between industry and the EPA is around clarification of exactly how do we achieve that, you put this measurement is that an absolute number? Is that an average? Is it an average over 3 hours, 3 days or 3 weeks or 3 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 fine tweaks around clarification of the rules that have been set.

And I don't see -- listen, people -- 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 a litigation and make sure people understand these facilities operate in a safe and compliant manner. And this low level of ethylene oxen 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. Okay.

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

[Operator]

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, executive]

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

[Operator]

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