Thank you for joining us today. I'm Casey Woodring from the Life Sciences Tools and Diagnostics team here at JP Morgan. I'm pleased to introduce Sotera Health CEO, Michael Petras. Michael's gonna be doing another corporate presentation, then, we're gonna do a Q&A session afterwards. So with that, the floor is yours.
Great! Thanks. Thanks, Casey, and thanks for having us here today. You know, before we begin, some of the statements I make today may be considered forward-looking statements. Please refer to our SEC filings for a description of the risk and uncertainties could cause our actual results to materially be different and from those implied or projected. During the discussion, we'll also talk about non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted EPS, and net leverage. Please refer to our filings for reconciliation. For some of you who may not be as familiar with the company, Sotera Health is an outstanding company. We view our mission as safeguarding global health.
The word Sotera comes from the Greek goddess of safety called Soteria, and that's really what we see our company all about, is providing safe solutions for our customers. It's an outstanding business where our employees live every day the mission of the company of safeguarding global health. To take you through exactly what we do, I'll do a brief overview for some of you who may not be as familiar with the company, and their sterilization services site. We have two businesses. One is Sterigenics, one is Nordion. In the Sterigenics business here, this is our largest business segment. We have about 48 - approximately 48, 50 facilities around the world, and we provide terminal sterilization to the world's leading companies in med device and pharma companies.
Customers drop off their products to us, and we provide terminal sterilization within our facility, and then they pick the product up. We don't own the product. We don't take consignment of the product. We don't pay for the transportation in or out, but we provide a critical service of providing terminal sterilization, and we do that through one of three key modalities: either ethylene oxide, electron beam, X-ray, or Cobalt-60 gamma radiation. That leads me to our second business, Nordion. Our Nordion business is the only one of our three business that's a product business, and in this business, we sell Cobalt-60, which is one of the key ingredients for sterilization. We sell it to ourselves at Sterigenics, and we also sell it to our competitors around the world.
Cobalt's used for treatment of cancer, but it's also used in sterilization for making sure you have safe products that have no microorganisms, and that's one of the ways that Sterigenics sterilizes using Nordion cobalt. We've got about 40 customers in this business, about 400-500 shipments a year, versus the Sterigenics business has several thousand customers a year in sterilizing thousands and thousands of products and hundreds of thousands of cubic, millions of cubic feet of products sterilized. Our third business is Nelson Labs. Our Nelson Labs is one of the leading microbiological and analytical chemistry labs in the world. We do approximately 800 tests for med device and pharma companies. Again, this is a service business and not a product business. We provide critical tests to make sure the products are safe and meet the regulatory requirements.
So that's what we do in the company. How we do it? We provide these mission-critical services that are often government-mandated and government-regulated. We sell to blue-chip customers. We do business with 40 of the top 50 med device companies in the world, nine of the top 10 pharma companies in the world. We have facilities located around the world. In total, we have approximately 63 facilities across the company, as I mentioned earlier. We have about 48-50 of them within the Sterigenics business, the remainder are Nordion and our lab business. Key is having these global facilities and providing one-stop shop for our customers around the world, and they get access to all our facilities. Our integrated quality systems, our reporting systems, allow customers to deal with us around the globe. We, we have deep regulatory expertise.
This business is built for long-term growth, organically and inorganically, and I tell you, one of the key ingredients are the values of our company and the core foundation. What does this all lead to? It leads to a business that's grown every single year since 2005. So earlier this morning, we announced our revenue for 2023. We've announced that we're gonna be—our revenue is gonna come in between $1.04 billion and $1.05 billion. It'll be in that range. Again, that'll be another year of consecutive growth within this company. Our adjusted EBITDA through the third quarter was 50%+ margin. That's 5-0. We've got a big TAM.
We've got a very complex business, highly regulated, with consistent cash flow projections and ability to deliver on cash flow growth year in, year out. We're very well positioned. If you wanna be in the healthcare, if you want exposure to healthcare, this is a great business. We're not tied to reimbursement. We do not sell to hospital systems. Our customers are med device and pharma companies. Very difficult business to replicate, really unique position we have in safeguarding global health. On this chart, you see all the different products and categories in pharma and med device that we impact. We're involved in helping get these products to market, helping them stay in the marketplace by providing these critical services I just referenced on the previous page. Lots of these products come in contact with you on any given day.
Like myself, some of these joints are wearing out, so you see an example. Here's orthopedics, right? If it's your knees, as I felt going up and down the stairs here today, or your shoulder or your hips, you know, think about the power of what we do. We help these companies put together their sterility plans. Through Nelson Labs, we'll help them figure out the right sterility plans. We will then sterilize them in a facility by Sterigenics using Cobalt-60 from Nordion, and then at the end, we'll have Nelson Labs do testing to make sure the products are free of any microorganisms. That talks to you about the end-to-end capabilities we have across Sotera Health... that really helps our customers. I can give you numerous examples across these pages, but that's just one example of how our services are so critical.
It's less than 5% of total cost for a manufacturer, but it helps them get billions of dollars of product sales in the marketplace because of the services that we offer across the Sotera Health. Our customers rely upon us. It's very important. We've got over 5,000 customers around the world in, in approximately 60+ locations, in 65 countries around the world. As I mentioned, we do business with the top med device and pharma companies in the world. We have over 900+ laboratory tests, and really, when I look at the foundation of the company, it's, it's this integrated network we have, the end-to-end service options I just referenced it. We continue to have CAGR growth year in and year out, and we're able to meet the regulatory needs of our customers.
When our customers have a challenge, they come to us to help them get through the tough times. What does the growth look like in this business? Over the long run, we see this business as high single-digit organic growth. Let me walk you through the logic of how we get there. On the Nordion side of the business, we, we see low- to mid-single digits in volume and mix. On the Sterigenics side, we see volume and mix in mid- to high-single digits in volume and mix, and, and Nelson Labs, mid- to high-single digit in volume and mix. On pricing, throughout the company, we have the ability to get 3.5%-5% price per year.
This ties back to some of the strengths I told you earlier about the company in the global contracts, the sticky relationships that we have with our customers around the world. We looked at 3.5%-5% price range increase year in, year out. I would tell you that Nelson Labs is on the low end of that range, about 3.5%-4%. Sterigenics would be in the middle of that range, about 4%, and then Nordion would be in the higher end of that range at approximately 5% price per year. What does this all translate to? Is what you see on the right-hand side of the chart. As I look at where the company is coming out of 2023, we look into 2024, I don't see us achieving this long-range growth in 2024.
We'll get into our specific forecast when we do first quarter. At the end of February, when we do fourth quarter earnings, it will give a projection and outlook for 2024. I don't see us at these levels of growth in 2024. We'll have a slow recovery as we start to get in. These are longer-term projections, but we believe this business is set up for long-term growth. From a financial overview now, I'll transition and just give you a perspective. From 2019 to 2022, we've grown 9% on a compound annual growth rate. As I mentioned, we've got long-term customer relationships averaging over a decade across our top 25 customers. We have very high renewal rates. Over 90% of our sterilization services, sterilization services, remember, is a combination of Sterigenics and Nordion.
Over 90% of that revenue, or $700 million, are tied to multi-year contracts with our customers. On an adjusted EBITDA basis, you see the 10% growth over the last several years, 50% margin rates over the last three—you see each of the last three years. We've really differentiated service capabilities that allow us to achieve this, and we're able to benefit. Our margins are able to benefit from our operating leverage, our operational excellence, and favorable price year in, year out. It's an outstanding business, participating in a big market with consistent growth and sustainable margins. This chart here, I won't go into a ton of details here. This is a chart that we showed at the Q3 earnings call and just, you know, giving an update on where we were versus 2022 and where the year finished out.
You know, we had an overall strong performance through three quarters of the year, strong capital position and strong cash. We had a couple of other activities that I'll get into on the next page, but overall, you could see the growth in revenues and adjusted EBITDA year-over-year, as well as margin enrichment through three quarters of the year. On a net leverage basis, our long-term goal is to be 2x- 4x net leverage. We were tending towards a little, towards the lower 3% , 3x , as we were at this point last year. We took on additional debt earlier in the year to settle some of the litigation, and we drifted over 4%. Our guide for 2023 is we would be at or below 4x by the end of the year.
We see the ability to continue to deleverage the company as we continue to grow our EBITDA and expand. On capital expenditures, in 2022, we spent approximately $182 million. In 2023, through the third quarter, we had $150 million of CapEx. We've guided for the total year, approximately $200 million to $215 million for 2023. We also recently have stated that we expect 2024 to be at a similar elevated level before we see a significant step down in 2025, and then even a lower level in 2026. The key areas across the business that's driving our CapEx, I'll walk you through each of these. We have significant capacity expansions within the Sterigenics business. Here, what we do is, when we put on customers, we work with our customers for additional capacity.
We work with them to get a commitment for approximately 40% of the incremental capacity we put in place. We target 20% IRR. We had approximately nine capacity expansion programs over the last couple of years. We have three left, one of which will be coming live in the first quarter of 2024. A second one will be coming on in 2025, and the third one in 2026, the last two being greenfields. We continue to make investments in our EO facility enhancements. These are the enhancements that are required to keep up with the new EPA expected regulations that will come out in the first quarter of 2024. We've spent approximately $30 million in 2023 through three quarters.
We expect, we expect it to continue to have spend in the fourth quarter , and then it's more spend in 2024. The other major development in CapEx is going into cobalt development. Remember how this business works: we get cobalt from nuclear reactors, that then we take to our facility in Ottawa, Canada. We process it into a usable form for the industry, and then we transport that cobalt around the world. A very complicated, highly regulated business, moving radioactive materials around the world. That is really what Nordion is great at. We have not done a cobalt development program since 2003. So we are doing a cobalt development program that we're in the midst of right now.
We'll have the capital, again, that falls in line in 2024, and then also 2025 before it steps down further in 2026. And then the last place that we're expanding is in the Nelson Labs business. We continue to invest. You know, this is not near as capital-intensive a business as the Sterigenics capacity. We have great returns. Again, we target on all our programs, 20+% IRR. But the Nelson Labs business, we've done expansions over the last couple of years, particularly around our pharma and our pharma capabilities. We're also in the midst of putting a new lab information management system. I'd like to take a minute and update you on the litigation, 'cause several of you've had questions around ethylene oxide litigation and some of the timelines associated with that.
So I'll walk you through each of the jurisdictions where we've been involved in some of that and just give you a quick update. In Cook County, Illinois, as you know, last year at this conference, I announced that we had reached a settlement for $408 million with 880 claimants in Illinois. So at that point in time, there were three claimants that had opted out of the settlement, but 879 or so had agreed at that point in time out of the 882. One of the claimants came back to us by the end of the year deadline and decided to opt in, so we are left with two claimants that have opted out. And then we've got 14 new cases have come in.
We have no visibility on those cases at all at this point in time, because the courts have not worked them up at all, and the plaintiff fact sheets haven't been provided to us. We feel pretty confident where we're sitting in the Illinois situation, with most of that, if not almost nearly all of it, closed out. We also, in Illinois, got a court issued order for insurance reimbursement for $75 million. So this is an insurance policy where our defense costs, we believe, are due to us by the insurance company. There was a debate, and the courts ruled in our favor on that for $75.5 million. We have an additional claim for $32 million that's pending.
We're hopeful that will be over $100 million in total claims that will be owed to us by the insurers. This is not gonna be resolved immediately. I just wanna be clear, as many of you know, you've dealt with insurance companies. This will be another couple of rounds of battles, but we feel very good about the, the initial court rulings and our position. On Atlanta, Georgia, there are approximately 300 cases or so in Georgia. We settled 79 of those late last year, and we just this week paid out the settlement of $35 million to those 79 claimants. The remaining 220 cases will go to the courts. Now, as you may recall from some of my past comments, this is gonna be handled in a different way, a lot more focus on science and causation.
The courts are gonna take them through a phase I, general causation, and a phase II, specific causation. If the 10 cases get through that, those first two phases, they'll ultimately go to a full trial in front of a jury. At the last update I gave you, we expected phase I hearings to start in late third quarter or fourth quarter of 2024. Those, as well as phase II, have all been deferred to 2025. So we do not see any trials in Georgia occurring in 2024. On Santa Teresa, there was approximately seven claims brought against us in December of 2020 from the Attorney General. Six of those have been dismissed, one of them still being debated in the courts. We feel confident about our position. There's one personal injury case in New Mexico that's been moved to federal court.
I would just, I wanna reiterate, the company continues to operate safely in a compliant manner with all the regulatory requirements, and we're gonna continue to vigorously defend ourselves against these EO claims. I'd like to give you a quick, brief update on our efforts on ESG. You know, corporate responsibility is very important to the company. We recently just published our corporate responsibility report at the end of the year. You know, this really follows and is aligned with our missions and our vision, and values of the company. Our value is, the values are so fundamental to our employees. We assess all our employees on their performance as well as the values. But our mission, as I mentioned, is very clear and very front and center with all our employees, which is safeguarding global health.
From a governance perspective, ESG is being overseen by our Nominating and Corporate Governance. Anne Klee chairs that committee. Anne used to be in charge of ESG and EHS for the General Electric Company. We have full board oversight, report outs on an ongoing basis. We did reach an outreach last year to over 60% of our outstanding shares, not our affiliated shareholders, such as the private equity firms, but all other shareholders. We did a 60% outreach. And then I'd also tell you, we added Karen Flynn, our newest board member. She comes from experiences at Catalent and West, which is very important because of her experiences in the pharma services area, which is strategically important to what we're trying to do as a company.
So we're thrilled to have Karen as a new independent director. And from an ESG and executive management perspective, I have two co-leaders on my senior leadership team, Kristin and Matt, who lead ESG, reporting to me on that, and then we have regular updates with the board. As I mentioned, we published our corporate responsibility report in December, and we also issued our human rights policy in January of 2024. So I've given you a great overview of the company. I'd like to summarize here some of the key points I wanna make sure everybody takes away in it. We have a strong financial profile in this company. We've grown revenue every single year since 2005. This company continues to perform during any economic cycle. Great company, growing every single year since 2005, 50%+ EBITDA margins.
We do this because of how important we are to our customers, the criticality of our services, and our performance day in and day out. We have deep expertise in this business and scale. We have a large market that we participate in that's growing. These are highly regulated businesses, and we have the ability to operate within this. You cannot just wake up tomorrow morning and say, I wanna run a sterilization facility. I wanna build one in my backyard, okay? Or I wanna get into the cobalt business. You don't go down the street to Home Depot or Lowe's and buy a container, throw cobalt in, and drop it in a FedEx envelope. It doesn't work that way. These are highly regulated, radioactive materials. We have containers that are 10,000 pounds in weight with, you know, concrete, you know, castings around them and shields.
These are highly regulated, complex business where we ship cobalt around the world. And you have Nelson Labs, which is doing over 900 tests in med device and pharma. We're really the expert in helping customers get out of trouble. I was pleased over the holidays, I got a note from our division leader. He sent me a note from one of our key customers in the diabetes area, saying we had a real problem here. We were on the verge of a recall, and we sent you guys some samples. Said we need help and understand what happened. And we responded to that, and they said, we've been doing business with Nelson Labs for 15 years. This is outstanding in how you guys helped us through the holiday season, get through a real crisis that we had going inside. That's what this company does.
It helps take care of customers and their customers, and keeping patients safe and safeguarding global health. We've got a platform here geared for long-term growth. We continue to invest for organic growth, but we've also done acquisitions. We've done 11 transactions over the last several years, two transformational in the Nelson and Nordion, and then nine bolt-on acquisitions. We have an experienced management team that's focused on how to drive free cash flow across the company and make sure we're making the right calls on capital deployment, but not forgetting our purpose, which is really in our mission, which is safeguarding global health. So with that, Casey, I'm happy to open up for any questions that you may have.
Great. All right, that was a great overview. Thank you. Maybe just to start, you know, on that pre-announcement, you reiterated the midpoint of your guide and tightened the range for the year, implying a beat in 4 Q relative to consensus. Can you just talk about what you saw in the quarter between your three business units relative to your expectations?
Yeah, I won't get into the particulars on the fourth quarter , because we haven't announced the full P&L, but at this point, we did give out the revenue numbers. You know, we feel confident in where we're at. As I've mentioned in my comments here today, we don't see 2024 as, you know, the long-term growth numbers for the business. We didn't see a material increase in volumes in the fourth quarter , but we're confident in our ability to execute and deliver on the total year growth, which we conveyed this morning.
Maybe just following up on that quickly, you said you didn't see a material increase, but would you say that volume stabilized in the quarter?
Yeah, I would say, if you remember, 2023, we had a, we had a situation where I call it lumpiness, but Nordion had 75% of the revenue in the back half of the year , which we had signaled early on in the year. The team did an outstanding job executing against that, so that they gave you, you know, a bigger fourth quarter than typical. I would tell you, the, the, the Sterigenics and Nelson side, you didn't see a material increase in volumes as the year progressed.
Okay. So, you know, on the volume side, last year has been softer due to inventory destocking. You talked about the mid-single to high single-digit volume and mixed growth contemplated in your long-term guide. You're not gonna do that next year. Just what's the right volume and mixed growth rate to assume for next year? You know, how long are these destocking impacts going to linger into 2024, and how should we weigh that versus sort of the comp dynamic coming up?
Yeah, we expect to... You know, again, I'll get into 2024's guide at the 27th or 28th when we do our earnings for the fourth quarter . But, you know, we expect the company to deliver growth again, just like we have since 2005, every single year. We expect that to happen again in 2024. And as far as the long-term, it'll be a little lower than I said to you, our long-range forecast, but we feel confident about it. And when you look across where we are with customers, you know, we have thousands of customers in the Sterigenics, in the Nelson Labs side. Thousands of customers, thousands of products across many categories. If it's orthopedic, if it's urology, if it's wound care, you know, you see labware, bioprocessing. There's lots of puts and take.
I think a lot of you in this room, as you talk to other investments that you have, it's tough to know exactly where these customers are. We don't see it materially getting worse from an inventory destocking level, and we're hopeful that the procedural volumes continue to be strong, which will be the benefit to both Sterigenics and Nelson.
Got it. That's helpful. So pricing across the business in 2023 has come in above the 3.5%-5% normal range. You've said that you raised prices mainly due to inflation. You know, just maybe walk through how you're thinking about pricing. Is that gonna come back down to the normal range? You know, if there's a lingering volume impact, would you take price actions next year? Is that decision really based on inflation? Maybe just, yeah, walk through pricing.
Yeah. So our business has about 3.5%-5% pricing per year. We've been historically running at that rate, the last year, so it's been a little higher than that, because of inflation. Some timing of, like, when cobalt came in, for example, and some of the higher cost cobalt came in, we had higher prices to offset some of that. We'll see when we look forward in 2024, I think it'll be more in that range of the 3.5%-5%, give or take a little bit on the Nordion side.
Okay. Maybe just shifting over to Sterigenics specifically. Would you characterize the recent performance as solely related to destocking efforts by your customers, or would you characterize some of the softness as an underlying demand shift? You know, what's your confidence in that long-term trajectory in the Sterigenics business and that volume growth that is contemplated in your long-term guide?
Very confident in the long-term growth of Sterigenics. So that business, remember, it's 2/3 of our business, approximately. It's 50+% adjusted EBITDA margins. It gets, so we're about, about 4% price per year, and volume and mix, as we said, should be mid- to high-single digits organically. You know, this business, it's, you know, it's not like you have +10% volume, -20% volume. It's not huge swings. It's plus or minus a couple points, right? So this year was down, and 2023 was down a couple percent. But, you know, it gives up a couple percent pretty easily. So I think it's plus or minus a couple percent here and there. We feel good about the long-range outlook on Sterigenics and how the volumes will shape out.
You've characterized the destocking headwinds as broad-based across customer segments in med tech, pharma, and then tools and bioprocessing within Sterigenics. Can you talk about how customer conversations have been between those different groups? I feel like there's been some disparate commentary from those companies in terms of the magnitude of destocking headwinds and the timing that they expect those will abate. So just wondering if you have any kind of perspective or visibility in terms of, you know, when that recovery will happen.
Yeah, it's, you know, it's tough to get exact clarity from the customers. We engage with them quite a bit. Remember, we're dealing across many different categories, if it's orthopedic, urology, wound care, cardiac, labware, bioprocessing. So you're at different stages. If you even look at some of the things being communicated on bioprocessing right now in the marketplace, you have four or five big players there, and they all have a different place of where they are in the cycle. You know, we've had some categories we're doing really well in and continue to grow, and we haven't seen as big an impact. In some of the general hospital categories, we've seen some challenges on it, and we're probably over indexed in that category in particular, where some of our customers had significant inventory. They're having problems getting supply during COVID.
They put multiple orders on multiple vendors, and ultimately, all that came in, and then their takeaway maybe wasn't as quick up as they had hoped on the outgo. So I'd say overall, though, we don't see the inventory level getting a lot worse. It's kinda stabilized, but it is a mixed bag when talking to our customers. Even if you take some of these big multinationals, global companies, they've got broad categories, right? They may have diabetes, they may have wound care, they may have pharma, they may have orthopedics. So it really varies within the company and their individual clients that sometimes are bought as part of consolidation for enrollups, and they don't have consistent processes across all of them.
Has the landscape changed at all in terms of insourcing versus outsourcing in the sterilization market? What do you think penetration looks like for outsourced sterilization right now, and how do you see those trending, both in the near and long terms? Just, you know, kinda curious if in-house sterilization is something companies can do to cut costs right now, given the macro, or is there not enough capacity? And then, you know, maybe longer term, you've talked before about the potential for outsourcing penetration tailwinds on the back of the new EPA guidelines. Just maybe talk about outsourcing penetration rates over time.
So, Casey, you have, like, five questions in that one. I'll try to make sure I got them all here. 57/43, outsourced to insourced, that's what we estimated at. Over the last six years I've been here, we've seen that move about 1% or 2%. We don't see big shifts occurring. I think one thing that could impact this over time is EO regulation. So we expect the new NESHAP rules, which is the rule for sterilization and emissions out of facilities on ethylene oxide, we expect those to come in March. And with that, it'll be interesting to see what the outcome is. If people decide to close up shop, they decide to outsource more, or they decide to put the capital investment in.
I think that's a big wild card here to play, and we are not anticipating a big shift to outsourcing, but that could be an upside over time that comes our direction. We'll continue to monitor that.
Maybe following up on that, the EO site enhancements you've made, I think you're sustaining the same level of CapEx spend in this regard next year before those investments drop off in 2025. How comfortable are you with those projections for next year? Is there a range of scenarios for EO facility CapEx, in terms of, you know, wherever the finalized NESHAP ruling falls? And then, you know, why would site upgrades go to zero? Will there not be a need to kinda continuously work to curb emissions, or kinda how should we think about that?
Yeah. I would say that we generally feel that the facility enhancement dollars that we put forth in 2023 will be relatively close to the same dollar amounts in 2024. The one exception would be if we get a big surprise on the new requirements, but we don't expect that, and we don't expect it to have a material impact beyond the $100 million+ that we've spent on these facility enhancements, or by the time we're done, we will be spending on these facilities. Overall, you know, we do continually do improvements in these facilities we have for 30+ years of continuing to make sure we operate in a compliant manner and continue to do continuous improvement.
We will continue to make investments, but that's typically captured within our maintenance bucket of CapEx every year ongoing.
So, uh-
We call out the facility enhancement 'cause this is an abnormally spent $100 million+ that we've spent on it. We wanna make sure that people understand that's not the normal CapEx.
Got it. Helpful. So just the three capacity expansion projects you have ongoing, one will be finished this year, then you, you've got two other greenfields to be finished by the end of 2025. How much additional capacity are you adding, in total here? And, you know, as you kind of work through the greenfield process, you know, what's the rationale for building those out in the first place? Do you think that, you know, you'll have the demand to kinda sustain that capacity utilization rate?
Yes, we have, of the three expansions that are in place, one of them is a true expansion of an existing facility, two others are greenfields. We work with our customers to make sure we have an understanding from them of what their needs are over time. The last full greenfield we did was 2018. So the two that we've got underway right now are predicated upon the demands that our customers are telling us about. We work with them to try to get about 40% committed before we put the shovels in the ground. We target 20%+ IRR on all our CapEx programs. Greenfields are a little bit lower than that, typically, with just straight-out expansions being higher than that.
Can you talk GLP-1s for Steri? It seems like you're pretty well positioned whichever way they, they impact the broader market. You sterilize pre-filled syringes as well as the bariatric surgery and diabetes products. Maybe can you talk about your opportunity in GLP-1s either way? Do you see this having an outsized impact on the business, you know, whichever way the market kind of progresses?
Yeah. As we've stated in the past, pharma's an area that's really an interesting opportunity for us. We've continued to grow over the last several years, both in Nelson and Sterigenics. We see the opportunity continuing as more biologics and biopharma opportunities come up. If companies want to go full in-house, end-to-end, and have aseptic manufacturing, we play a role, but not near as large a role. But over time, if you think about smaller companies as they work to get products to market, and they have different components for your end products that need sterilization or testing or regulatory support, we're well-equipped to position to help them if it's GLP-1s or what other product categories within the biopharma space.
Maybe shifting over to Nelson. In 2023, you saw kind of three key headwinds: extension of deadlines for compliance with EU med device regulations; you had macro-related funding pressure on smaller customers; and then routine lot release testing tied to sterilization volume came in, you know, softer than expected. So maybe can you update us on each of those headwinds and, you know, how you expect those to roll off over the course of next year?
You know, very consistent what we expected to see the year end out on that. Those three headwinds. When we built the year at the beginning of 2023, we did not expect the MDR to be deferred like it was for a couple of years, so that had an impact that we weren't expecting. But as the year progressed, it's been pretty consistent along those three categories and the impact we felt. We think there'll be a gradual improvement in 2024, but we don't think Nelson gets to the long-term growth algorithm that we know of, of mid- to high-single-digits volume in mix until past 2024.
Okay. And then just on the margin piece for Nelson, I think Q3 was impacted by RCA, but that's, you know, expected, given it's a consulting business. But prior quarters, Nelson, had an impact from higher staffing levels and, and lower volumes, and so it, it sounds like you've right-sized the staffing levels here, exiting 2023 and into 2024. So what are the levers for margin expansion in Nelson? Is it solely volumes returning or, or anything else that, we should be aware of?
Yeah. You know, on that business, you know, that business we try to target around the mid-30s. You know, when you look at it compared to Sterigenics at 50+% , in Nordion, it's 60+% , you say, boy, that's an underperformer. But I tell you, a lab business that performs in the mid-30s is a pretty darn good lab business. So we feel pretty confident about the performance there. You know, the business, what will really drive margin expansion in rate there is volume. Volume is the biggest thing, but we'll continue to focus on operational excellence and then price. We get about 3.5% price in that business a year, so all those are contributors to helping us with margin expansion over time, but volume is the biggest driver that could really help.
And then-
I'm sorry, Casey, just one thing to keep in mind. You know, the business has about 60% or so of its cost is in labor. You got to be really careful. There's a fine line there. We have really critical employees there, and they play a critical role in being able to deliver for our customers. You got to be careful that you don't over-index and take a lot of cost out just to try to get the cost structure in line. You got to make sure you have the expertise to be able to meet the customer's needs when the demand comes through. So that's the nuance in that business that's a little different than our other two. I just want to make sure people are aware of.
Okay. And then maybe, shifting over to Nordion. As you noted, pretty lumpy this year. Why do you think 2024 will be a bit more smooth? Just maybe give us some detail on the harvest schedule for next year, your visibility into that business, and, any sort of kind of growth prospects.
Yeah. So if you look at our three businesses, I would tell you Nordion has the most visibility, then a little less visibility would be the Sterigenics, and the least visibility would be Nelson Labs. So Nelson Labs is a really short-term, short-cycle business. Steri, we get a couple of weeks to a couple of months of demand visibility, but Nelson, Nordion, we get a much longer. We know... I want to explain a little bit for some of you who may not be as familiar with what Casey's referring to. We get our cobalt from nuclear utilities. These nuclear utilities' primary purpose in life is to generate electricity. So when they pull the cobalt out is when the reactor is offline for maintenance.
So just because Michael and the Sotera Health team need cobalt, doesn't mean I can call up the utility and say, hey, turn the electricity off so we can get our cobalt out. It doesn't work that way. So they run their electricity generation, and then when they're doing their shutdowns, which they give us great visibility on, we then pull the cobalt out. So the way the cycle worked in 2023, which is every year there's some variation in lumpiness, the real official term we have is lumpiness, there was some of that lumpiness. It was a little heavier in 2023, where 75% of Nordion's volume was in the second half because of the harvest schedule. It will be lumpy in 2024. We'll give more clarity on that when we lock the details down.
It will not be near as lumpy as it was. It won't be 25/ 75, but there will be some, some weighting that'll be slightly off, you know, smooth, steady. Again, though, the customer demand is there. You know, you've got to coordinate. By the way, getting it out of the nuclear reactor, getting it over to our facility in Ottawa, Canada, putting it in the usable form to sterilizers, then shipping it around the world to the sterilizers, making sure they shut down their operations, and then drop the cobalt through the ceiling into the 25-foot deep pool inside their facility. Everything I just described there is not simple, all right? That's what these guys do, and they're great at it. So recognize it's getting it out of the utility is only one step in that supply chain.
These guys and gals do a great job in getting that product to our customers and getting it into use in their facilities. So that's all something we coordinate, and, you know, the fact that they had 75% the second half of the year is a big deal in their ability to execute on that.
Okay. We have a couple minutes here. I'd like to open it up to the audience for questions in case anybody has any. Nope? All right, we can keep, keep going here. Maybe just on the litigation, I think you've talked a lot about Georgia in the past, but just on the New Mexico case, you noted the one personal injury case that is in the state with no trial date set. I'm just curious, how would you assess risk that if, you know, that case does go to trial, cases could then snowball and reach maybe similar levels of some of the lawsuits you've seen in the past?
Yeah, I think that the risk of seeing anything close to Illinois in any of our litigation, I think is very remote. The dynamics there were very unique back in 2018. The one case, we don't have a lot of great visibility. The courts have not spent a lot of time on it. There hasn't been a lot of workup on the claimant themselves. It's been moved to federal court. We'll see if it ultimately sticks there or if it gets transitioned back to state court. And in these cases, we feel very, very confident when we're able to put on the science and causation. When we're able to talk about science and causation, we feel really good about our chances to win.
Then last one here. During the presentation, you talked about prudently managing costs during this kind of period of volume volatility. Can you just elaborate on that? What are you doing to protect margins, and are there any cost action levers you can pull in 2024 here?
This is not a cost-out business. This is a growth business that's focused on how to continue to grow and take care of our customers as demand continues to come to our business. We'll do the right things around cost. If it's Nelson Labs and making sure we got the right labor mix there based on where the demand is, you know, Sterigenics, similar type of things. And Nordion, you know, it's a heavy fixed cost environment, it's just making sure we can execute when the volume and the timing. You saw our margins were lower in the first two, three quarters of the year because of the fact there was no volume. You know, we're not gonna go get rid of a bunch of people just because the volume's back-end loaded. So this is not a cost game.
This is all about how do we drive growth and take care of the markets? We have big TAMs that we're playing in, and this company's gonna continue to grow year in, year out.
Great. Maybe the last couple seconds here, what do you think is most misunderstood about Sotera Health?
I just think it's a phenomenal company. I understand it really well. I think I'm not misunderstood. And I think the people that are invested in this understand that as well. This business, if you just step back, we went public in November of 2020. We told you we'd grow every single year. We've done that. We told you we'd get 50% margins. We've done that. We told you we'd have sticky customer relationships. We've done that. We told you we'd have great cash flow generation. We've done that. You know, yes, we've had litigation. Every company's got some challenges. That's one I don't like, but we're dealing with it, and the team's done a phenomenal job in working through it.
This is a company that's really built to perform in the long run and plays a critical role in healthcare, and I'm thrilled and honored to be leading this team that takes us there.
Great. Well, that about does it. Thank you, everybody, for joining us.
Great. Thanks .