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Nordion (NYSE:NDZ)

Q4 2013 Earnings Call

January 09, 2014 10:00 am ET

Executives

Ana Raman - Director of Investor Relations

Steve M. West - Chief Executive Officer, Director and Member of Technology Committee

G. Peter Dans - Chief Financial Officer and Senior Vice President

Analysts

Lennox Gibbs - TD Securities Equity Research

Neil Maruoka - Canaccord Genuity, Research Division

David Krempa - Morningstar Inc., Research Division

Mark Jarvi - Paradigm Capital, Inc., Research Division

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Varun Choyah - CIBC World Markets Inc., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the Nordion Fourth Quarter Financial Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Ms. Ana Raman, Investor Relations. Please go ahead.

Ana Raman

Thanks, Dave. Good morning, and welcome to Nordion's Fourth Quarter and Full Year Fiscal 2013 Earnings Call and Webcast. On the call this morning are our Chief Executive Officer, Steve West; and our Chief Financial Officer, Peter Dans.

The format for our call will be that Steve and Peter will provide their perspectives on the quarter, and then we'll open up the line for questions from sell-side analysts. Slides have been posted to accompany this webcast.

Please see our caution on forward-looking statements on Slide 2, and please note that today's comments do and our responses to questions may contain forward-looking statements within the meaning of applicable securities laws. These include statements about our industry position; our expected performance in Sterilization Technologies, including factors contributing to growth; our future financial performance, including revenues and earnings for Sterilization Technologies, sealed sources, Medical Isotopes, Cyclotron and Contract Manufacturing; our defined benefit pension plan and the estimated future deficit surplus, funding and valuation timing; our anticipated internal investigation costs; and our ongoing strategic review, as well as related decisions.

We indicate forward-looking statements by using words such as expect, plan, estimate, will, intend, believe, continue and similar expressions. All forward-looking statements reflect our current views and information with respect to future events and are subject to risks, uncertainties and assumptions, and we do not assume any obligation to update such statements except as required by law. You are cautioned not to place undue reliance on any forward-looking statements, as many known and unknown risk factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements.

Our risk factors are described are described in Nordion's quarterly and year-end's news releases and annual filings, including our 2013 Annual Information Form, which are available on SEDAR, EDGAR and the company's website.

Turning to Slide 3. All amounts mentioned are in U.S. dollars, except when otherwise noted. And though results have been prepared under U.S. GAAP, we have included certain non-GAAP measures. These include adjusted net income and adjusted earnings per share. These non-GAAP measures exclude certain items and are intended by management to provide investors with a meaningful, consistent comparison of the company's core operating results. This information should be considered as a supplement to and not a substitute for the corresponding financial measures prepared in accordance with GAAP.

More information regarding our non-GAAP measures, as well as reconciliation between the non-GAAP measures and corresponding GAAP financial measures is available in our fourth quarter and full fiscal 2013 news release, was issued this morning before markets opened. You can find it on our website at www.nordion.com.

With that, I'll turn it over to Steve.

Steve M. West

Thank you, Ana. And good morning, everybody, and thank you for joining us today. Our fourth quarter capped off a productive fiscal year, as we made significant progress on both the operational and strategic fronts. I will begin with a brief review of our year-end results and outlook for fiscal 2014, followed by a progress update on our business strategy and the strategic review. And then I'll hand the call over to our CFO, Peter Dans, who will take you through Nordion's financial results.

If you would, please turn to Slide 5. Our fiscal 2013 results were ahead of our expectations. Revenue of $232.8 million was down 5% from fiscal 2012, primarily due to a decrease in TheraSphere revenues as a result of the sale of the Targeted Therapies business in July. Excluding the impact on the Targeted Therapies sale, revenue was consistent with the prior fiscal year. The reduced revenue and retained general and administrative expense resulting from the sale of the Targeted Therapies business also contributed to lower segment earnings in fiscal 2013, along with higher costs associated with annual incentive plans and our pension expense.

Now moving on to Sterilization Technologies, which is on Slide 6. In Sterilization, revenue increased 1% year-over-year, meeting our expectations with sterilization Cobalt shipments and reflecting an increase in shipments sealed sources that are used for cancer treatment. Throughout the year, our sterilization team handled the quarterly fluctuations of this business effectively, managing the logistics of our products in order to meet the demands of our customers.

In our fourth quarter, Nordion was represented by a team in Shanghai for the biennial International Meeting on Radiation Processing, or IMRP, where industry leaders and experts from around the world gather to share the latest developments in a radiation technology. Here, Nordion continued to strengthen its position as a leader in gamma processing and encouraged further conversations about how we can support continued adoption of gamma in meetings with our customers, presentations amongst peers and participation in working groups. I'm pleased with the outcome and progress we made at IMRP, and we expect to continue building on our position as an industry leader.

For fiscal 2014, we expect Sterilization Technologies revenue to increase by 10% to 15% compared with this previous fiscal year. Now while we consider sterilization to be a mature, low-growth business, we do anticipate higher than normal revenue growth in fiscal '14 due to 3 contributing factors. First, we expect continued growth in sealed source sales as a result of a customer managing and diversifying their sources of medical Cobalt supplies. Nordion has a unique set of competencies in the manufacturing and distribution of radioactive isotopes, which is an essential part of the value proposition to our customers. Field sources at Nordion sales are high specific activity isotopes, used primarily in medical equipment as radiation sources for cancer treatment. Nordion field sources are different in the Cobalt-60 used for sterilization of medical devices and irradiation of food. Field sources accounted for approximately 10% of Cobalt sales in fiscal 2013, and we expect this proportion to increase in fiscal 2014.

The second contributing factor to sterilization revenue growth in fiscal '14 is our expectation for contractual prices for customers to increase their share. Higher average selling prices, combined with sales that are weighted to our higher-priced customer segment, expected to have a positive impact on revenue and earnings.

Finally, Nordion experienced the delay of certain Cobalt shipments scheduled for the late fiscal 2013 due to the difficulty with shipping routines for certain customer destinations. This product is expected to be delivered to customers in this fiscal 2014.

So in summary, we expect Sterilization Technologies to continue to be a strong business, to contribute robust margins and contribute cash flow to fiscal year.

Now if you would, please turn to next slide, Slide 7, for our Medical Isotopes summary. Now Medical Isotopes revenue remained flat year-over-year, which was ahead of our fiscal 2013 expectations of an anticipated 10% revenue decline. This was primarily due to the performance of our Reactor isotopes product line, which received approximately $15 million in incremental orders as a result of disruptions at our Reactor in Europe that supplies certain of our competitors.

Our globally respected Medical Isotopes team ramped up Nordion's processing to meet the needs of the market and capture orders that were incremental to our base business and customers. We continue to work closely with AECL and our efforts to respond to additional demand of Molybdenum-99 arising from ongoing supply interruptions of both the European and South African reactors and processors.

Now we continue to receive incremental orders in our first fiscal quarter that we expect will exceed the approximate $15 million in revenue that we received in fiscal 2013 as a result of these supply disruptions. We have been successful in securing additional volumes with customers for fiscal 2014 and continue to negotiate other potential opportunities. As a result, we expect fiscal 2014 revenue for Reactor isotopes to increase by 30% to 40% on the previous fiscal year.

We are also experiencing changes in our customer mix in our Reactor isotopes business due to securing additional orders, which we believe may continue to shift based on the uncertain supply environment and our ability to successfully negotiate our further contracts.

Earlier in our fourth quarter, we announced that Nordion had entered into a comprehensive settlement agreement with AECL, solidifying our supply agreement with Medical Isotopes until October 2016. Nordion's priority continues to be securing long-term, sustainable and economically feasible supply that aligns with our critical time frame. Our constructive conversations are ongoing with credible, potential partners that we believe will contribute this objective.

Now Cyclotron revenue grew 18% in fiscal 2013 due to the resumption in April Strontium-82 sales, which is used for the manufacture of CardioGen-82. We expect Cyclotron revenue to increase by 20% to 25% in fiscal 2014, as we have experienced a greater demand for Strontium has continued into this fiscal year.

Fiscal 2013 Contract Manufacturing revenue increased by 38% from last year due to the initiation of TheraSphere manufacturing in July under our manufacturing and support agreement with BTG, which we entered into in connection with the sale of the Targeted Therapies business. We also continue to manufacture Bexxar on behalf of GlaxoSmithKline. GSK, however, had announced that it intends to discontinue the manufacture this product this February of this year, and we plan to manufacture Bexxar for GSK until then.

For fiscal 2014, we expect our Contract Manufacturing revenue to be approximately $14 million, which is just over 25% higher than it was in fiscal 2013 due to a full year of manufacturing TheraSphere for BTG.

Considering the outlook for each Medical Isotope product line, revenue for this business segment on a consolidated basis is expected to increase by 30% to 40% in fiscal 2014 from the fiscal 2013 base.

During Q1 of 2013, Nordion initiated a review of strategic alternatives, with a view to enhancing shareholder value. In Q3 of 2013, Nordion announced and completed the sale of our Targeted Therapies business to BTG, reaching the conclusion of the first phase of our strategic review. In Q4 of 2013 and to date in 2014, we advanced the second phase of the review and evaluated other strategic alternatives for the company. Ongoing activity in this phase continues to move the review forward. Completing strategic review continues to be our priority for Nordion in fiscal 2014. Certain decisions, including the use of the company's current cash, are expected to be made as part of or once the outcome of the strategic review has been finalized.

Our Board of Directors and management team are fully engaged in the review, and we are making progress on the second phase. We appreciate that shareholder desire has shown information about the current status of and the expectations for timeline and potential results for the strategic review. What I can say at this time that the current phase of the review is progressing. We are working diligently with the objective in reaching successful outcome.

I am pleased with the progress that Nordion has made in fiscal 2013, both with its operational and strategic achievements. In addition to the sale of Targeted Therapies, our achievements have allowed us to benefit from the moly-99 supply disruptions from global reactors and processes, boosted our Cyclotron and Contract Manufacturing businesses and positioned us to anticipate strong growth in our Sterilization business in fiscal 2014.

So now, I'd like to hand the call over to Peter Dans, who will discuss our financial results.

G. Peter Dans

Thanks, Steve, and good morning, everyone. I'll start with Slide 9. Nordion's fourth quarter results across the company's operations were in line with management's expectations. Consolidated revenues of approximately $51.3 million decreased by 31% from Q4 2012. Excluding TheraSphere in the fourth quarter of 2012 normalizing for the sale of the Targeted Therapies business, revenue was down 18% in Q4 2013 compared to Q4 of last fiscal year.

GAAP net income for Q4 2013 of $56.3 million was up significantly compared to the previous year's net loss of $43.5 million. On an adjusted basis, we had net income of $9.4 million or $0.15 earnings per share, down from $16.8 million of adjusted net income in the fourth quarter of 2012 or $0.27 earnings per share. Significant adjusting items include a $19.2 million gain related to cash settlements that we received from AECL and insurer related to our settlement with Dr. Reddy's, and the release of the valuation allowance of $40.4 million on deferred tax assets, which contributed to an income tax recovery of $29.9 million in Q4.

Gross margin percent in Q4 2013 was 49%, down from 59% in Q4 of the previous fiscal year. This was primarily as a result of the divestiture of the Targeted Therapies business, which removed TheraSphere, a higher gross margin product from our product mix following the completion of the divestiture in July.

On a consolidated basis, segment earnings were down 55% to $13.2 million from $29.5 million in the fourth quarter of fiscal 2012. The absence of TheraSphere revenue as a result of the divestiture, lower Cobalt-60 sales volume together with the impact of fixed production support costs in Sterilization business, and overall decrease in moly-99 sales during the past quarter and a one-time $4 million payment in Q4 2012 by a customer for not meeting contractual commitments, all contributed to lower consolidated segment earnings in Q4 of fiscal 2013.

Now please turn to Slide 10. We had approximately $323 million of cash and cash equivalents on our balance sheet as of October 31, up $41.2 million from Q3. During our fourth quarter, in addition to the $22.6 million of net cash inflow associated with our operations, we received $14.4 million for a settlement with AECL, $9.4 million of net tax refunds and $4.9 million from one of our insurers related to our litigation settlement with Dr. Reddy. These cash inflows were offset by approximately $10.1 million in cash inflows, largely related to the internal investigation, strategic review and pension solvency funding.

As of October 31, we had net deferred tax assets of $63.5 million. Sequentially, the deferred tax asset increased by $22.3 million from our third quarter, affecting the release of a valuation allowance related to our investment tax credits.

Now please turn to Slide 11. Nordion amended its defined benefit pension plan so that there is a reduction in indexation on all future pension benefits for active participants earned from January 1, 2014 onwards. This amendment resulted in the reduction in our pension obligation of approximately $5 million. Along with the impact of applying higher discount rates due to increasing interest rates and a higher-than-expected return on pension plan assets, Nordion's going concern pension status returned to being slightly overfunded at the end of fiscal 2013. We believe that the impact of the changes in interest rates on discount rates and the return on plan assets would also positively impact our solvency funding deficit that Nordion must measure according to the Canadian regulations, which requires us to calculate our pension funding status on a wind-up basis.

The 2014 valuation is expected to be finalized in our third fiscal quarter. Based on the most recent actuarial valuation completed in 2013, Nordion had annual pension solvency funding requirements of approximately $16 million, including $3 million of current service contributions.

During fiscal 2013, Nordion made cash contributions with $6.4 million and funded $7 million through letters of credit to meet these requirements. We made additional cash contributions of $4 million during Q1 to meet our annual pension solvency funding requirements.

During our fourth quarter, we incurred $2.1 million in costs related to our internal investigation. The full year expense associated with this investigation was $11.8 million. Currently, we estimate the investigation and remediation cost to be approximately $3 million for fiscal 2014. Lower expected cost for fiscal 2014 reflects progress made thus far on the investigation. We also recognize that there are a number of factors beyond our control, including actions of regulators and enforcement agencies, which could increase these costs.

We made strong progress throughout fiscal 2013, working through certain contingent liabilities and strengthening our financial position. We continue to focus on managing our costs and cash levels prudently, considering the requirements of our business and ongoing strategic review and value for our shareholders.

This concludes my financial review. Dave, we can now open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Lennox Gibbs with TD Securities.

Lennox Gibbs - TD Securities Equity Research

Your Reactor isotope guidance, what is the underlying assumption there with respect to the duration of the shutdowns at NTP and NRG?

Steve M. West

Thanks for your call. Actually, our guidance is more driven by our conversations with our customers and the contractual arrangements that we've been able to put in place as opposed to us making any sort of specific judgment calls on when reactors are going to return to service. And perhaps that's a little different from historically a situation Nordion found itself in where, very often, we gave back anything that we got as a result of a temporary outage. So our guidance is really driven by the fact that, this time, we have secured our contractual arrangements with a variety of different customers that give us that kind of visibility in what our revenues are going to be.

Lennox Gibbs - TD Securities Equity Research

So it sounds as though those are relatively long-term contracts and would likely exceed the duration of the shutdowns? Is that what I should take?

Steve M. West

Yes, I think I'd use the word long-term in a context of sort of 12 months kind of time frame, which is about the longest you get in this business these days. I mean, you can have multi-year agreements, but generally, I think just because of the volatility in the supply situation around the last few years, as you know, a customer -- our customers have, number one, diversified supply; and number two, they've actually given themselves more flexibility by having shorter-term contracts. So in terms of guidance, the sort of standard contractual range from this business these days is sort of around the 12-month period.

Lennox Gibbs - TD Securities Equity Research

Okay. And then just related quick follow-on. Just Let's if you set aside the supply disruptions for a second, again, on moly, how would you characterize the trend in global demand and price for the next 24 months? And I'll leave it at that.

Steve M. West

Yes. Thanks, Lennox. To be honest with you, I don't think there's been any dramatic shift in either demand or sort of overall pricing. I mean, clearly, in situations where there's a sort of potential shortage from a contractual arrangement, the customers have come to Nordion and we've been able to respond. Obviously, we have a spot price which would prevail if there was no contractual agreement. And that, of course, is probably one of the drivers as to why we've been able to secure now a more extended arrangements with some customers including some new customers, I might add, because of the insurance policy that this gives them around a, supply; and b, net-net, they're not paying spot prices. They're paying a contractually agreed price. So it's a significant benefit to them.

Operator

The next question is from Neil Maruoka with Canaccord Genuity.

Neil Maruoka - Canaccord Genuity, Research Division

Just a question on the higher prices for Cobalt-60. How sustainable is the projected price increase in 2014? I know a lot of it has to do with the product mix, but do you expect that pricing is going to reset after -- into 2015 at these levels, or are you looking at normalization into the following year?

Steve M. West

Yes. That's a great question. So this business is a little different from the one that I just referenced with Lennox in that the contractual arrangements with customers are multiyear contracts. So our sort of visibility on pricing certainly goes beyond 12 months, and some of these contracts are in the sort of 3-year time frame predominantly. So there's a couple of things going on here, and number one, I always wanted to sort of revert back to when you look at this business, it's always good to look at it over a relatively long time frame. And what we're seeing in 2014 is a little bit of a pricing shift because of a customer shift. There was a bit of a mixed shift in our customers that's going on. That's the first thing. And then secondly, in our contracts, we do have escalating prices. And so we're seeing some of that also come into play. And there's some catch-up because also, there were some shipments that did get deferred in the end of 2013, and we'll be making no shipments in 2014. So the growth of 10% to 15% is, I think, going to be a sort of a 1-year phenomena. But if you look at the overall business, if you cast your mind back 4 years and take 2014 into account, sort of compound annual growth rate of this business is still in that 2.5% to 3% range, and that's how we think about the business in the long term.

Neil Maruoka - Canaccord Genuity, Research Division

Okay, great. That's very helpful. And just a follow-up, just really into irradiators, do you have any visibility on irradiator demand? Do you expect to sell any this year? And maybe if you can provide a comment on GammaFIT, any traction you might be getting there?

Steve M. West

Yes. I mean, we -- demand. First of all, the demand part of irradiators that we are seeing is predominantly in Asia, which kind of supports our view of long-term growth opportunities in Asia, and they are a mixture of sort of classic irradiators and a little bit of some irradiators being for sort of more specific food use. We're seeing less of a strong expectation in the more developed economies, so it's a bit more of an Asia phenomenon. And we do have some challenges because it's very price-sensitive, it's a long way away from Canada and we're dealing with some local suppliers who just build designs that are not dissimilar to ours, and so it's a cost business. Fundamentally, at the end of the day, Neil, we want to see irradiators built and we want to see them commissioned, because we benefit from the Cobalt, both from the initial stocking and then the replenishment of the Cobalt in outlying years. So net-net, at the end of the day, we're pleased to see irradiators. Our own -- we have a pipeline which includes opportunities for GammaFIT, and it's a very, very long sales cycle. So in our current outlook, we are not expecting to have a significant irradiator sale, but it doesn't mean to say we're not working on it, and we continue to look at opportunities.

Operator

The next question is from David Krempa with Morningstar.

David Krempa - Morningstar Inc., Research Division

First one, just on the internal investigation based on your guidance, it seems like that would wrap up early in the year. Is that correct? And then secondly, can you talk about what's on the table still for strategic reviews? Would you be open to divesting the Isotope business and splitting the company up further?

G. Peter Dans

So Dave, maybe I'll take the first part, and then Steve can comment on the second. So in terms of the internal investigation, the timing of the investigation is really driven by the work that we have to do with regulatory agencies, law-enforcement agencies, et cetera. So it's unclear as to when it will conclude. The level of activity, as we saw last year, ramped down in the second part of the year, and again, our expectation is that it will run at a lower level in 2014. Again, with the caveat that depending on the requirements that are put upon us that, that number could change going forward.

Steve M. West

David, Steve here. In terms of the strategic review, back to a little bit to what I said during my initial commentary, and we understand sort of a high desire and appetite for people to have little more insight into it. But frankly, it will be very challenging for us to sort of go through this process through the public domain, so we are keeping it fairly tight and confidential. And what I will say is that, as part of our strategic review, we're looking at all options for the company, which we include those that you mentioned. So we are progressing our activities in that area, we are looking for a successful outcome and I am -- so far, I'm pleased at the progress that we're making. Unfortunately, I can't give you anymore insights because I don't think it would serve us well, frankly.

Operator

The next question is from Mark Jarvi with Paradigm Capital.

Mark Jarvi - Paradigm Capital, Inc., Research Division

This is Mark Jarvi stepping in for Alan Ridgeway here. Just wanted to revisit the Sterilization business in the 10% to 15% growth. I wonder if you could maybe parse that out between what the fraction is from pricing improvement versus orders. And if you think there's sort of 2% to 3% long-term growth or pricing improvement year-over-year, what do you think in terms of the market demand and order growth?

Steve M. West

Yes, good morning, Mark. I'll handle that. I mean, I don't think we're going to kind of parse it out quite -- and segment it out quite that way. I mean, the things that are driving growth are a bit of a mixture on the Cobalt-60 side. I'd also bring your attention to the other aspect of growth, which is not taking our sealed source businesses, which has not really been, until this past year, such a significant sort of contributor. But it is now a 10% of that business, and so it becomes more significant. We do see that as a growth opportunity. For us, as time goes on, we like that business. We have very specialized expertise in it. And so it's now reached a sort of point where we can sort it out because, a, it is a high-growth business perhaps in the Cobalt business, albeit niche, and it is now sort of around sort of 10% and growing. So that does contribute quite to our growth as well. As far as standard Cobalt-60 goes, I mean, pretty much what I said earlier, we're always going to have, during the year, shift of customer mix. Obviously, larger customers have more leverage in pricing and smaller customers. I would say one of the trends that we're seeing, and this is very much evident when we were in our industry conference that I referenced as well in Asia, we are seeing growth in Asia. Now we do have some large customers in Asia. We also are seeing smaller customers growing in Asia. And so that mix might change over the next sort of 3, 4, 5 years, as we do see very good demand in Asia. And the business in Asia is slightly different to business in the other parts of the world in that it's not so much driven by Medical Devices. But you do see more other products, food, cosmetics, Chinese medicines and other things. So it's a slightly different growth driver. So I hope that helps you understand the business a bit better, Mark.

Operator

[Operator Instructions] The next question is from Doug Miehm with RBC Capital Markets.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

First thing, I just wanted to say is congratulations on getting the AECL situation behind you. I know it's probably painful to go through that, but I think it was a great move on your part, and I think it's good for shareholders. First question really has to do with the moly business. I'm just wondering in those discussions that you're holding with various parties today, in the event you were able to finalize some sort of the deal over the next while, would these types of deals be sufficient to maintain the level of revenues? Or would there be a step-down but, obviously, nowhere near the amount that we'd see under circumstances where you simply have the NRU shutting down?

Steve M. West

Doug, and thank you for your comment. I echo your sentiment. Yes. So look, first of all, I'd say when we think about the conversations that we're having around supply, probably the most important thing for us is, if we're going to enter into an agreement and we're certainly progressing discussions along those lines, if we get to that point, we want to make sure that it really is a solid, sustainable, credible option. So that's the first sort of real caveat here, because no, we don't want to be doing science experiments with people. We want to have a solution that customers feel confident in, that will take us beyond the 2016 time frame during our shutdown. So that's the first sort of priority. The second one is, like everybody else, we would also like flexibility in our supply chain. So I think we would like, in the long term, to have a multisource supply as well on the commercially favorable terms. So those are the 2 elements that we are kind of working with. My feeling is that any particular 1 solution isn't going to be a total solution as a sort of one-time replacement for NRU. I think we're looking at a variety of solutions over a period of time that will phase in and maintain our position in the marketplace. Frankly, it remains to be seen if we can pull that off. But that's our ultimate goal, and that's the direction that we're taking.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Okay, I understand. The second question just has to do with the strategic situation. And I guess the -- I know it's very difficult to answer any questions, but I am curious as to whether or not, under all the avenues that you're potentially pursuing there, is there 1 avenue whereby there would be a use of 100% of that cash? And what I mean by that is not being paid out to shareholders or something like that where it would be invested in a new business or something like that.

Steve M. West

I think like I said earlier, Doug, we are not restricting ourselves in terms of options. I have indicated previously that in essence, our strategic review was not focused on acquisitions. So I'll leave it there.

Operator

The next question is from the Varun Choyah with CIBC.

Varun Choyah - CIBC World Markets Inc., Research Division

My question focused on the -- I guess the moly-99 business and securing our alternate supply. Are you also entertaining possible deals sourcing moly-99 from LEU sources, or it's solely focused on ATU sources?

Steve M. West

Varun, I think that looking at the current situation in a sort of the geopolitical theater, I don't think it would be really viable to pursue an ATU long-term supply. I think it's almost given that any supply option for everybody in this business is going to have to be LEU. That's the industry is moving to LEU, it said it's moving to LEU, there are consequences of moving to LEU in terms of different processing, waste and probably pricing. Well, I should say, both in terms of cost and end-user pricing, you see industry recognizes. I think the supply side of the industry certainly recognizes that. I think the demand side of the industry probably still has to bend its mind around some of that. But because it is still early days, but it would be inconceivable for me to really think that, when you talk about a sustainable source of supply, that it could ever be ATU.

Varun Choyah - CIBC World Markets Inc., Research Division

And as a follow-up to that question, in pursuing LEU sources, would you have to retrofit or upgrade your processing facilities? And would that incur like some long-term CapEx spend to kind of like process LEU isotopes?

Steve M. West

That's a great question. So in reference to our own processing facilities here at Nordion where they can be part of the supply chain for LEU, it would require some changes here. But the amount of capital that will be used, I think, would be -- I characterize it as relatively modest. It wouldn't be significantly large. At the -- at a reactor site, again, there will be requirements for capital, predominantly in either processing or waste stream management. Those will be the 2 areas. And there'll be some design costs as well around target design, because you do need different targets. But as far as Nordion's concerned and from where we sit in the supply chain and whatever business model we end up with, because that could change a little bit perhaps, we don't envisage that we would be having very large cost of capital in order to get to that particular objective.

Operator

Thank you. There are no further questions registered on the telephone lines at this time. I'd now like to turn the meeting back to Mr. West.

Steve M. West

Thank you, Dave. Well, I'm pleased with the results and achievements that we made in fiscal 2013. And I'd really like to thank our employees for their continued hard work, their dedication and their responsiveness.

In fiscal 2014, Nordion plans to continue moving forward with our strategic objectives of maintaining our market-leading position and our strong margins in Sterilization Technologies, as well as optimizing the value of our Medical Isotopes business, while securing a long-term solution for reliable supply. And finally, of course, we are very focused in reaching a successful outcome for the strategic review.

So I'd like to thank everybody for joining us on the call today. Thank you.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation.

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