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Nordion Inc. (NYSE:NDZ)

F1Q 2014 Earnings Conference Call

March 7, 2014 10:00 a.m. ET

Executives

Ana Raman - Director of Investor Relations

Steve West - Chief Executive Officer

Peter Dans - Chief Financial Officer

Analysts

Douglas Miehm - RBC

Alan Ridgeway - Paradigm

Varun Choyah - CIBC

David Krempa - Morningstar

Neil Maruoka - Canaccord Genuity

Operator

Good morning, ladies and gentlemen. Welcome to the Nordion's First Quarter Financial Results Conference Call. (Operator Instructions)

I will now like to turn the meeting over to Ms. Ana Raman, Investor Relations. Please go ahead, Ms. Raman.

Ana Raman

Thank you, (Ruth). Good morning, and welcome to Nordion's first quarter fiscal 2014 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, better not necessarily limited to statements about our market position, our expected performance in Sterilization Technologies, including factors contributing to growth, our fiscal 2014 outlook including for moly-99, Cyclotron, Sterilization Technologies and Contract Manufacturing revenues, potential supply sources post-2016, our internal investigation costs and/or ongoing strategic review, as well as related effects and 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 first quarter fiscal 2014 news release that 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 West

Thank you, Ana, and good morning everyone, and thanks for joining us today. I'll begin with a review of the first quarter, followed by a brief update on the strategic review. And then, I'll hand the call over to our CFO, Peter Dans, who will take you through Nordian's financial results.

Now, if you would, please turn to Slide 5. Our first quarter results were in line with management expectations. Consolidated revenue of $70.8 million was up 32% from the first quarter of fiscal 2013, and it was primarily due to the shipment of higher moly-99 and Cobalt-60 volumes.

Consolidated segment earnings also increased significantly to $45.3 million, compared to $9.1 million in the same period last year, as a result of increased revenue, higher gross margin contributions and lower overall SG&A, mainly due to the sales of Targeted Therapies business, which closed last July. Foreign exchange also impacted our results during the quarter, which Peter will address.

Now, moving on to Slide 6, Sterilization Technologies; first quarter Sterilization Technologies revenue of $19.2 million was up 17% over the same period last year, reflecting increased Cobalt-60 shipments which include higher specific radioactivity field sources used for cancer treatment, as well as a shift in our customer mix towards customers that pay higher prices.

While Cobalt revenue increased 24% from Q1 2013, a decrease in sterilization other revenue partially offset these gains, which is primarily due to a decrease in production irradiation refurbishments.

During the first quarter, we signed a new three-year customer contract to supply Cobalt, and this contract helps us firm up our expected growth in Sterilization Technologies, and has already been reflected in our fiscal 2014 financial outlook of 10% to 15% annual revenue growth for this business segment.

Now, if you please turn to Slide 7, for Medical Isotopes. Medical Isotopes revenue in Q1 2014 of $51.7 million increased by $26.5 million or 105% compared to the same period last year. This was primarily due to the performance of our reactor isotopes product line, which received approximately $26 million in incremental orders as a result of disruptions with other suppliers. While we understand that these disruptions have now been resolved, we have been successful in securing additional volumes with customers for fiscal 2014, including signing a new one-year contract with minimal volume commitments for the sale of moly.

As a result, we expect fiscal 2014 revenue for reactive isotopes to increase by approximately 40% than the previous year, which is the top end of the 30% to 40% range initially forecasted for this fiscal.

Nordion continues to participate in constructive conversations with credible potential partners to secure long-term sustainable and economically feasible supply that aligns with the anticipated end of moly-99 supplier from the NRU reactor in 2016.

Cyclotron revenue increased by 128% in the first quarter over the same period last year due to redemption of Strontium-82 sales last April. Strontium-82 is the isotope used for the manufacturer of CardioGen-82, which is a cardiovascular PET imaging agent.

In Q1, we signed a new two-year contract with Bracco Diagnostics to supply Strontium-82 supporting our expected annual increase in fiscal 2014, revenue for Cyclotron isotopes of 20% to 25% over the previous year.

Contract manufacturing revenue in the first quarter also increased, it was up $2.8 million or 146% over Q1 of 2013, primarily due to our contract manufacturing of TheraSphere for BTG subsequent to the sale of the Targeted Therapies Business last year.

We also manufactured Bexxar on behalf of GlaxoSmithKline through the first quarter. However, GSK discontinued the manufacturer of this product as of February this year. With fiscal 2014, we expect contract manufacturing revenue to be approximately $20 million, as a result of $13 million in expected revenue for the manufacture of TheraSphere, and $7 million in expected revenue for the contract manufacturer of Bexxar and the close out of the Bexxar manufacturing agreement. A forecast of TheraSphere decreased from 14 million to 13 million due to the impact of the weakening Canadian dollar.

Again in Q1 of fiscal 2013, Nordium initiated a review of strategic alternatives with a view to enhancing shareholder value. In Q3 of 2013, Nordium announced and completed sale of the Targeted Therapist Business to BTG reaching the conclusion of the first phase of our strategic review.

During Q4 of 2013 and to-date in fiscal 2014, we advance the second phase of the review. Ongoing activity in this phase continues to move the review forward. Completing the strategic review continues to be a 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, the management team remains fully engaged in the review, and we are working diligently with the objective of reaching a successful outcome.

Nordium's first quarter of fiscal 2014 was characterized by increased revenue and earnings, and the conversion of business opportunities into contractual relationships, both achievements demonstrating execution of our business objectives and improvement of our business in general. I'm pleased with the progress our team has made over the first quarter.

And with that, I would like to pass the call over to Peter Dans, who will discuss our financial results.

Peter Dans

Thanks, Steve, and good morning, everyone. Please turn to Slide 9. Consolidated revenue for operations of approximately $70.8 million increased by 32% from $53.7 million in Q1 2013. Excluding TheraSphere revenue approximately $12 million in the first quarter of fiscal 2013 and approximately $3 million in contract manufacturing revenue from TheraSphere in Q1 2013 normalized with the sale of the Targeted Therapies Business last July. Revenue was up approximately 63% in Q1 2014, compared with the first quarter of last fiscal year.

GAAP net income for Q1 2014 up 35.3 million was up significantly compared to the previous year's GAAP net loss of $0.3 million for the same period. We had adjusted net income of $36.5 million or $0.59 earnings per share, up from $2.9 million of adjusted net income in the first quarter of 2013 or $0.05 adjusted earnings per share.

Foreign exchange fluctuations impacted Nordion's first quarter results due to the weakening of the Canadian dollar relative to the U.S. dollar. The average U.S. to Canadian dollar exchange rate which is (directly) used to translate our income statements was $1.07 in Q1 2014 versus $0.99 during Q1 2013, a decrease of $0.08.

The U.S. to Canadian dollar spot rate, which is what we use to calculate our balance sheet currency impact was $1.11 at the end of our first quarter of fiscal 2014 versus $1.04 at the end of the fourth quarter, a decrease of $0.07.

As a result of the weakening Canadian dollar, we reported a non-cash, a non-operational foreign exchange gain of $20.9 million, primarily due to the over $300 million of cash and cash equivalents in U.S. dollars held in our Canadian dollar functional currency entity. This gain equates to a positive $0.31 per share impact on EPS. However, foreign exchange had a negative impact on revenue. Excluding the negative impact of foreign exchange of $3.3 million, our first quarter consolidated revenue increased by approximately 38%, compared with the same period last year.

Overall, gross margin percent in Q1 2014 was 53% up from 52% in Q1 of the previous fiscal year. This was primarily due to higher revenue from both Sterilization Technologies and the Medical Isotopes business, and the relatively fixed nature of production support costs.

On a consolidated basis, segment earnings were up significantly to $45.3 million from $9.1 million in the first quarter of fiscal 2013. Segment earnings were higher due to increased revenue from Sterilization Technologies and Medical Isotopes, higher gross margin contributions, lower overall SG&A and the positive impact from the foreign exchange gains previously discussed.

Sterilization Technologies revenue in Q1 2014 of $19.2 million was up $2.7 million or 17% from the same period last fiscal year. As the majority of revenue from the Sterilization Technologies business is denominated in Canadian dollars, the weakening of the Canadian dollar compared to the U.S. dollar negatively impacted segment revenues. Excluding the negative impact of foreign exchange of $1.4 million, revenues for the quarter increased by 25%, compared to Q1 2013.

Sterilization Technologies segment earnings for Q1 2014 of $7.1 million increased 101% from $3.5 million in the same period last year, reflecting the higher gross margin contribution from increased revenue and the relatively fixed nature of production support costs, as well as lower pension expense. Our foreign exchange impact affects gross margins negatively. It had a positive impact on SG&A as expenses are primarily in Canadian dollars.

Medical Isotope revenue in Q1 2014 of $51.7 million was up $26.5 million or 105% from the same period last year. The majority of Medical Isotope revenue is denominated in U.S. dollars. Therefore, foreign exchange only had a nominal impact on segment revenue.

Medical Isotope segment earnings for the first quarter of $25.1 million were up significantly from last year, primarily due to the increased revenue from moly-99 sales, a relatively high gross margin product, the relatively fixed nature of production support cost and lower pension expense. Foreign exchange fluctuations also had a positive impact on SG&A expenses.

Now, please turn to Slide 10. We had approximately $319 million of cash and cash equivalents on our balance sheet as of January 31, down $3.6 million from Q4 2013. During that first quarter we recorded $22.9 million of net cash inflow associated with our operations and other changes in working capital. The cash inflow was offset by $26.5 million in cash inflows largely related to annual incentive payouts, pension solvency funding and current service contributions and tax installments.

As of January 31, we had a net deferred tax asset balance of $58.7 million. During that first quarter, we incurred half a million dollars in costs related to our internal investigations. We continue to estimate investigation and remediation cost to be approximately $3 million for fiscal 2014.

We are pleased with Nordion's financial performance in our first quarter of this fiscal year. We continue to focus on managing our cost and cash levels prudently considering the requirements of our business and the ongoing strategic review.

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

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Our first question is from Douglas Miehm from RBC Capital Markets. Please go ahead. Your line is open. You may ask your question.

Douglas Miehm - RBC

Good morning. Hi, Steve. Hi, Peter.

Steve West

Good morning, Doug.

Peter Dans

Hi, Doug.

Douglas Miehm - RBC

Yes. Just wondering with respect to the opportunity out there for you guys to be able to resource moly, I know you have been at it for a little while. And I expect that you are going to be able to do something in that regard, but maybe you could just update us on some of the things you are seeing out there. And then in the event we get to 2016 and the government is contemplating closing down the reactor, do you think if no additional supply has been added worldwide, they would entertain the idea of extending the license on the reactor?

Steve West

Thank you, Doug. I will take those interesting questions. So, we continue to look at a variety of supply opportunities for post-2016. And when we do that, the most important thing for us is ensuring that there will be consistent supply technologies that will be available by 2016 or current technologies. And as I've previously indicated on calls, we believe that these would have to be LEU-based supply.

So, we haven't said anything publicly about that; and as you can imagine those kinds of discussions will have to remain confidential for now. I will observe that, although NRU has come to that question in a minute; it's related to not be producing moly-99 after 2016. There is still an aging fleet of reactors out there, not full conversion to LEU yet. So there is still a lot happening in that space. And I think Nordian's position in that is of a very strong credible processor, and we continue to have conversations that we believe could possibly lead to supply post 2016, but beyond that I am not really in a position to talk about the confidentiality.

Douglas Miehm – RBC Capital Markets

Okay.

Peter Dans

As far as the closing of NRU, a small point, but as far as we know, NRU will continue to operate post-2016. It's just that it won't be producing moly post-2016, so a small point there. Do we think the government would re-open its considerations in terms of its current policy? Yes, there would be an ongoing shortage. It's hard for me to speculate on how the government would think about that. The only thing worth noting is that the government continues to move forward on the GoCo model. And I believe the government has indicated that from a timeline standpoint, we would expect to have some arrangement in place before 2016 with a partner, but that's still work in progress as you know. And I think there are quite a few unknowns around how that's eventually going to pan out.

Douglas Miehm – RBC Capital Markets

Okay. And then, just as a follow-up question, any concern on your part with regards to your source of Cobalt supply that comes out of Russia right now, or do you think this is all going to pass over in dealing with issues with regard to that?

Steve West

Again, there is a lot of moving parts going on in the Ukraine. And we, like, everybody else are avidly watching that. As far as the impact on Nordian is concerned, there is no disruption in our supply. And in fact, along with -- when we look at our current demand and supply equation, we have no specific issues that concern us at this moment in time, as you know, Doug, we do have inventory of Cobalt. And we don't anticipate that this will be disruptive in anyway.

Douglas Miehm - RBC

Perfect, thank you.

Steve West

Thank you, Doug.

Operator

Thank you. (Operator Instructions). There are no further -- oh, we do have a question from Alan Ridgeway from Paradigm Capital. Please go ahead.

Alan Ridgeway – Paradigm Capital

Hi, good morning, guys. Thanks a lot for taking the questions. Peter, could you maybe just walk through for us the foreign exchange impacts on the business operationally, maybe just quickly review for us, which products are priced in U.S. dollars and which costs are in Canadian dollars or other currencies?

Peter Dans

Oh, sure, Alan. In terms of from an operational perspective, again, this excludes the $20 million gain that we recorded, which really is non-operational, non-cash. From a revenue perspective, the revenue that's impacted is primarily in Sterilization Technologies where the majority of our revenue is in Canadian dollars.

On the Medical Isotopes side, it's inversing that the majority is in U.S. dollars. The one contract, for example, TheraSphere contract manufacturing as you would have noted in our MD&A is in Canadian dollars.

So, from that perspective that's sort of the revenue picture. The majority of our SG&A and production support costs are in Canadian dollars based on the local currency. And then, from a cost of sale perspective, it varies. So, Sterilization Technologies, some of the Cobalt we received in the U.S. dollars, the Russian contract for example, and others are in Canadian.

And then, on the Medical Isotope side, again, one of the big components being our revenue share with ACL, so because our revenues in U.S. dollars, it's effectively a U.S. dollar type payment.

So, on an overall perspective, although, again, we see Canadian dollars had a negative impact on revenue. When you get down to the bottom-line, we're fairly well naturally hedged as a business.

Alan Ridgeway – Paradigm Capital

Right, so -- okay. That's very helpful. Thanks. And the follow-up from me then is also a bit of a housekeeping question. Just on the tax, how -- given you guys are sort of forecasting at this point, when do you think -- how long do you think your tax assets could last into the future? And I'll leave it at that. Thanks, guys.

Peter Dans

So, in terms of the future tax asset, again, we have a significant tax asset, $58.7 million which can offset federal taxes. And based on our earnings forecast, that would span out a number of years. Again, we haven't provided specific numbers around that long-term forecast. But again based on our tax modeling and looking at the federal impact, you can model that out.

Alan Ridgeway – Paradigm Capital

Okay. But where it would at least be on 2015?

Peter Dans

Yes.

Alan Ridgeway – Paradigm Capital

Okay, great. That's everything, thanks guys.

Operator

Our next question is from Varun Choyah from CIBC. Please go ahead.

Varun Choyah - CIBC

Good morning, gentlemen. Questions -- well, one question is a follow-up from me. On the Medical Isotopes side of the business, is the shipments this year going to be frontloaded to give you that 40% increase or is it going to be kind of like streamlined throughout the year?

Peter Dans

So, in terms of the profile on the Medical Isotope business, as you are aware, in the first quarter we had significant upside due to the reactor issues with our competitors. Again, we were able to secure additional volumes during the year, but we would expect that those volumes were tapered downwards as we work through the year.

The other thing on the reactor isotopes is the NRU does have a scheduled monthly maintenance, which will -- we expect to begin at the end of our fiscal second quarter.

Varun Choyah - CIBC

Okay. Thanks. And one follow-up from me is, do you have an update on the GammaFIT sales pipeline. Are you seeing any activity on emerging markets purchases for GammaFIT?

Steve West

Thanks, Varun. I'll take that. It's a long lead-time kind of product. We continue to talk to folks about GammaFIT as well as other options of low capital costs. But at this moment in time, we don't see installing a GammaFIT in 2014.

Varun Choyah - CIBC

Okay, great. Thanks for that. That's all I've got.

Steve West

Thank you, Varun.

Operator

Our next question is from David Krempa from Morningstar. Please go ahead.

David Krempa - Morningstar

Hi, guys, thanks for taking my question. Can you elaborate well on the strategic review whether you've taken anything off the table? And also, can you elaborate on why the process is taking so long, it just seems like the opportunity cost of this cash sitting idle is destroying a lot of shareholder value, the longer it sits they are earning no return?

Steve West

Thank you, David. No, I can't give you any specific insight into the strategic review, other than the fact that we continue to move forward. In terms of the time that it's taking, I would point out that when we commenced the strategic review in Phase I that led to sale of the TheraSphere business and therefore the cash that has appeared on the balance sheet. Phase II, of the strategic review commenced in Q4, 2014. So it's not that long ago.

And I think you would appreciate that Nordion as an organization in terms of its business is quite complex. We are highly regulated company with a rather unique set of businesses and unique footprint. So, that might itself add complexity. We continue to move forward on evaluating our options in the strategic review. And at this moment in time, we believe that with further clarification we'll be in a better position to determine the -- what happens to the cash that sits on the balance sheet.

Operator

Thank you. Our next question is from Neil Maruoka from Canaccord Genuity. Please go ahead.

Neil Maruoka - Canaccord Genuity

Good morning guys.

Peter Dans

Good morning.

Neil Maruoka - Canaccord Genuity

A question on your sterilization revenue, in my understanding there was a couple of shipments that were delayed in Q4 due to logistic issues. But were those delivered in Q1, or were they further pushed out?

Steve West

No. Those shipments are going to appear in 2014, not necessarily in Q1. I think we will see that revenue in Q2.

Neil Maruoka - Canaccord Genuity

Okay.

Steve West

The shipments have left our premises.

Peter Dans

One shipment did make it (inaudible).

Neil Maruoka - Canaccord Genuity

Sorry, I couldn't hear what Peter said.

Peter Dans

Sorry, Neil. So, the first shipment did actually make it into our Q1 results; and the second one now we expect to be in our Q2 results.

Neil Maruoka - Canaccord Genuity

Okay, great. And just a follow-up on the question on irradiator, do you have any visibility on installation of standard irradiators this year?

Steve West

Are you are referring to that larger PIs that --

Neil Maruoka - Canaccord Genuity

Yes.

Peter Dans

Yes. We have a pipeline for sure, and we are working on both in terms of new irradiators and refurbs as well. My view at the moment is that we don't see an installation of a large irradiator in 2014 at this moment in time, but we do have a pipeline. There is interest. We are still seeing some I think reticence around making some large capital installations, both in U.S. and Europe as well as in Asia, but we do continue to work with potentials on our pipeline.

Neil Maruoka - Canaccord Genuity

Okay, great. Thank you.

Operator

Thank you. There are no further questions at this time. So I would like to turn it back over to you, Mr. West.

Steve West

And I'll turn it over to Ana.

Ana Raman

Thanks, everyone for joining us today. If you have any questions, please feel free to follow-up directly with me. Thank you.

Operator

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

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