Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello, everyone, and thanks for joining. I'd like to welcome all of you to the earnings call for Sotera Health covering both the fourth quarter and the complete 2024 fiscal year. Our press release from today, along with the supplemental slides that go with it, are available in the Investor section of soterahealth.com. This webcast is being recorded, and once it's over, a replay can be accessed through the Investors section on the Sotera Health site. Joining me on this call are our Chairman and Chief Executive Officer, Michael Petras, and our Chief Financial Officer, Jonathan Lyons. Some of what we say today might be classified as forward-looking statements. The topics covered in those statements carry risks and uncertainties, which means actual outcomes could end up differing materially from what is projected or implied. For a full description of those risks and uncertainties, please see Sotera Health's SEC filings as well as the forward-looking statements slide included at the start of the presentation. The company undertakes no obligation to revise any of those forward-looking statements. On this call, we'll be presenting financial measures under both GAAP and non-GAAP, which include adjusted EBITDA, adjusted EBITDA margin, segment income margin, tax rate applicable to net income, adjusted net income, adjusted EPS, net leverage ratio, and free cash flow, along with comparisons on a constant currency basis. Reconciliations between GAAP and non-GAAP measures for all the relevant periods can be located in the schedules that accompany the company's press release and in the supplemental slides for this presentation. The operator will be helping us handle the Q&A portion of today's call. As usual, should any questions come up after we finish, please don't hesitate to contact me or the investor relations team. At this point, I'll hand things over to Sotera Health's Chairman and CEO, Michael Petras.

Hello everyone, and thanks for joining us today. Earlier this morning, we announced growth on both the top and bottom lines for the full year 2024, with revenue of $1.1 billion and adjusted EBITDA margins of roughly 50%. This past year represented the 19th year in a row that our annual revenue has grown, which speaks further to how resilient our business model is and the essential part we play in healthcare. Beyond that growth, we kept moving forward in 2024 on our strategic priorities. Customer satisfaction scores remained above 80% all year long, reflecting how focused we are on serving our customers with excellence. We also bolstered our balance sheet, successfully refinancing our capital structure and pushing maturities out to 2031; we ended the year with strong liquidity; at our Sterigenics business, we finished a capacity expansion and kept making substantial headway on our US EO facility enhancements. Nelson Labs saw margin improvement on a sequential basis as the year went on. Both Embedded Labs and expert advisory services posted double-digit revenue growth compared with 2023. The results in Embedded Labs show the cross-business unit synergies we talked about at our Investor Day last November. Nordion's revenue rose to upper single digits for the year, all while continuing to advance the cobalt development projects. The first cobalt installation went into a Darlington reactor, with a cobalt-60 harvest anticipated in 2028. I'd like to call out a few things from our fourth quarter and full year 2024 financial results. Let me start with the fourth quarter. As we anticipated, total company revenue fell 6.5% and adjusted EBITDA fell 8.3% versus the fourth quarter of 2023; on a constant currency basis, revenue fell 5.2% and adjusted EBITDA fell 6.7%. As we said on our last earnings call, Nordion revenue in the fourth quarter was expected to be down substantially compared to the prior year — 50% of Nordion's full year 2023 revenue came in the fourth quarter. Keep in mind that Nordion revenue can be uneven from one quarter to the next because of the timing of cobalt-60 harvest schedules. Over the long term, Nordion revenue is very consistent. Turning to full year 2024 compared with 2023, total company revenues rose 4.9%, or 5.4% on a constant currency basis, and adjusted EBITDA grew 3.9%, or 4.6% on a constant currency basis. Jonathan will walk us through the business results in greater detail later. I'd also like to take a moment to highlight progress on our corporate responsibility initiatives. We welcomed the President and CEO of Hemantix Corporation, Chris Simons, to our board in August of last year. Chris brings deep experience in the medical device industry, which we believe will serve us and our stakeholders well. In January, we named Vince Petrell as Lead Independent Director. Vince has served on our board since 2020 and brings a wealth of experience along with a deep understanding of Sotera Health's strategic vision and operations. On top of that, we published our third annual corporate responsibility report. All in all, 2024 proved to be a solid year for Sotera Health, and our focus remains on delivering excellence to our customers, while we anticipate generating growth again in 2025. We shared our initial 2025 outlook earlier today; for the entire year 2025, we anticipate another year of growth on both the top and bottom lines, with total company revenue growth expected in the 4% to 6% range on a constant currency basis versus 2024, and the midpoint falling inside our long-term 5% to 7% guidance range. Adjusted EBITDA growth is anticipated in the 4.5% to 6.5% range on a constant currency basis; now, Jonathan will walk us through our fourth quarter and full year 2024 financials and our 2025 outlook in greater detail.

Thanks, Michael. To start, I'll go over our consolidated results for both the fourth quarter and the entire 2024 fiscal year, then walk through specifics for each business segment, plus updates regarding capital deployment and leverage. After that, I'll wrap up with further information about what we expect in 2025. Looking at the whole company on a consolidated basis, Q4 revenues came in at $290 million, which represents a 6.5% decrease, or 5.2% lower in constant currency terms, compared with the equivalent period a year earlier. As Michael noted earlier, the year-over-year comparison at Nordion drove this, since timing of reactor harvest schedules meant 50% of 2023 revenue landed in the fourth quarter. For the fourth quarter, adjusted EBITDA declined 8.3%, coming in at $153 million, which works out to 6.7% when measured on a constant currency basis, compared with Q4 2023. Our adjusted EBITDA margins came in at 52.7% during that quarter. Interest expense, as reported, was $41 million in Q4 — that's below the $43 million figure from the same period last year. Net income as reported for the fourth quarter of 2024 came to $12 million, or $0.04 per diluted share. Adjusted EPS for the quarter landed at $0.21, which represents a $0.02 decrease relative to Q4 2023. Now let's take a closer look at how the segments performed during the fourth quarter. At Sterigenics, revenue grew 4.2% in Q4, hitting $179 million, or 5.3% on a constant currency basis, compared with Q4 2023. During this quarter, our growth came from pricing that was favorable at 4.2%, along with a 1% benefit from volume and mix, though foreign currency exchange rate movements took away about 1%. Compared with the same quarter last year, segment income climbed 5.1% to $100 million, which equals 6.4% when calculated on a constant currency basis. Favorable pricing, together with volume and mix, drove that growth, while inflation and foreign currency exchange rate shifts worked against it. At the same time, segment margins widened by about 50 basis points. Nordion's Q4 revenue fell 29% to $57 million, as we had expected, because of an unfavorable volume mix of 31% and foreign currency exchange rate changes of 2.9%, with favorable pricing of 5.3% versus the comparable quarter last year providing a partial offset. Nordion's segment income dropped 34%, landing at $35 million. Meanwhile, segment income margins contracted by about 470 basis points, settling at 62%. The main culprits were unfavorable volume and mix, plus shifts in foreign currency exchange rates. Turning to the fourth quarter, Nelson Labs revenue declined 7.3%, coming in at $54 million — or 7% when measured on a constant currency basis — compared with the same period a year earlier. This downturn was driven by an unfavorable volume mix of 9.8%, which largely came from an anticipated shift in expert advisory services revenue that we talked about during our Q3 earnings call. On top of that, we consolidated a lab, and that move helped bolster margin improvement for the quarter. Favorable pricing of 2.9% provided partial offset to the volume and mix impact. Segment income fell 3.3% to $18 million, which works out to 2.5% on a constant currency basis. The decline came from unfavorable volume and mix along with higher employee compensation costs, partly offset by favorable pricing and labor productivity. Segment income margin was up 140 basis points year over year, reaching 33%, thanks to lower expert advisory services revenue, favorable pricing, and better labor productivity. Now let's move on to the full year results on a consolidated basis. Revenue came in at $1.1 billion, an increase of 4.9%, or 5.4% on a constant currency basis, compared with 2023. On an adjusted basis, EBITDA increased 3.9%, reaching $548.6 million — or 4.6% when you strip out currency effects. That works out to an adjusted EBITDA margin of about 50%. For the year, interest expense came in at $155 million as reported. Net income for 2024 was reported at $44 million, equal to $0.16 per diluted share. Adjusted earnings per share for the year reached $0.70 on a weighted average diluted share basis, which is $0.02 lower than 2023, largely driven by the increase in interest expense. Turning now to the balance sheet, cash generation, and capital deployment: the company continues to hold a robust liquidity position, and there are no borrowings outstanding under the revolving line of credit. Capital expenditures finished 2024 at $179 million. Michael already noted that Sterigenics wrapped up an expansion of capacity this past year, and work keeps moving forward in a meaningful way on both the improvements to our EO facility and the cobalt initiatives at Nordion. Operating cash flow reached close to $225 million during 2024, while free cash flow came in above zero for that same period. On top of that, our net leverage ratio saw a modest gain compared with 2023, closing out the year at 3.7 times. Turning now to what we anticipate for 2025: across the entire year, we're looking for total revenues to increase somewhere between 4% and 6% when measured on a constant currency basis, and the middle of that range sits inside the three-year goal we shared back at our November 2024 Investor Day. We're anticipating that operating leverage will come through, driving better margins and pushing adjusted EBITDA higher by somewhere between 4.5% and 6.5%, assuming currency rates stay constant. If we look at average exchange rates from January, foreign exchange is likely to work against us — roughly a 2.25% drag on revenue and about 2.5% on adjusted EBITDA — and that hit should be heaviest across the first three quarters. Tariffs are something we're still watching for possible effects, though nothing related to them has been factored into our guidance at this point. On pricing, we'd expect the total company figure to land near the middle of the 3% to 4% range we've laid out as our long-term target. When you look at how revenue flows through the year, the first quarter tends to be the company's softest period, and we're anticipating the same dynamic in 2025. For Sterigenics in Q1 2025, constant currency revenue growth should land somewhere between low and mid-single digits against Q1 2024, with steady gains building as the rest of the year unfolds. Turning to Nordion, the way revenue divides between the first and second halves of 2025 ought to follow the same shape we saw in 2024, and measured in constant currency, we're looking for mid-single digit growth across the full year relative to 2024. As for Q1 2025 specifically, a slight uptick from Q1 2024 is what we have in mind. For several years now, we've been giving visibility into the revenue risk tied to cobalt sourced from Russia. As things stand today, and consistent with what we've seen in earlier years, that risk sits at roughly 0% to 3% of total company revenue for 2025; at Nelson, we anticipate the revenue will be weighted toward the back half because of the tough comparisons involving expert advisory services, which we've already covered. Looking at Q1 specifically, Nelson Labs revenue should decline in the low double digits, while margins ought to improve relative to Q1 2024, and then get better sequentially as the year progresses; for 2025 overall, interest expense should land somewhere between $155 million and $165 million, using the current forward rate curve. Our projection for the effective tax rate on adjusted net income falls in the 33% to 35% range. We expect adjusted EPS of between $0.70 and $0.76. On a weighted average basis, the fully diluted share count should come in around 286 million to 287 million shares. When it comes to deploying capital, our priorities remain organic growth, paying down debt, and seizing opportunistic M&A. For 2025, capital expenditures should fall within $190 million to $210 million. As we've said before, we've been going through a multiyear stretch of elevated CapEx investment. That spending has now peaked, and we still anticipate CapEx will decline over the coming two years, reaching roughly $110 million in 2027. This lower CapEx, combined with revenue growth, will support our objective of producing $500 million to $600 million in free cash flow across the next three years. No M&A is baked into our guidance. Lastly, we look for net leverage to improve slightly in 2025. At this point, I'll hand the call back to Michael for his closing remarks.

Thanks, Jonathan. Looking ahead to 2025, we'll keep concentrating on the things that matter most. During our Investor Day back in November, we laid out what those priorities are: delivering end-to-end solutions with excellence for our customers, succeeding in growth markets, pushing operational excellence forward so free cash flow improves, and staying disciplined when it comes to our capital deployment initiatives. With that, operator, please open the line for Q&A.

Hi, everyone. Appreciate you letting us ask some things. Michael, perhaps a question about how volumes look overall — what we observed during the quarter, and how that ties into what you're projecting for the full year. It'd be useful to get a bit of that Q1 color, especially regarding Sterigenics and Nelson. How are you charting the path back for volumes, and clearly items such as destocking? How do you factor that element in as you move through 2025, and what assumptions sit beneath it?

Yeah. Morning, Patrick. Broadly speaking, looking back at 2024, things unfolded largely the way we anticipated, with steady gains as the months went on. During our prior earnings call, we mentioned we'd hoped for somewhat stronger volume increases at Sterigenics and Nelson. Still, going toward 2025, we keep seeing that same steady upward trend. There could be a slight carryover at Sterigenics as we enter the first quarter. Even so, that represents a very small slice; we aren't picking up many remarks about it, and we expect volumes will keep getting better over the course of the year, just as happened in 2024.

All right, that's useful. Then, Jonathan, perhaps regarding margins, as we consider how things will unfold across the year, could you walk us through the various elements? I'm always interested in learning about the pricing assumptions baked into the guidance, and how we ought to approach thinking about margins as we move through 2025. Thanks for that, everyone.

Yes. Absolutely; this year has us enthusiastic. On a constant currency basis, we certainly anticipate some margin progress ahead. Toward meaningful margin gains, since the guidance for top line shows EBITDA expanding somewhat more than the top line. Looking ahead, I'd simply remind everyone that Q1 tends to be the weakest quarter. In my view, that applies to both revenue and margin. And at this stage, Patrick, that's likely the main item I'd direct you toward. Another point worth mentioning, Patrick, is the results you observed at Nelson, where margins could keep getting better, and we would anticipate sequential gains as the year moves on. That part of the business too. Joe and the team are carrying out exactly what we laid out before.

Got it. Thanks, everybody.

Yes, thank you. Morning to you all. Michael, perhaps building on the comments you made regarding Nelson and the margin gain — Jonathan referenced some recent efforts by your group that ought to deliver benefits in Nelson margins that last over a longer horizon. Could you share a bit more about what was done there and what sort of outcome you anticipate?

Sure, Sean. If you look back to the start of last year, the closing stretch of '23, one problem we faced was that labor productivity wasn't handled as effectively as we wanted, since our expectation was that volumes would bounce back more quickly than they actually did; and Joe, along with the team, responded during 2024. The margin gains became visible. In my view, that positions us well going into 2025. The main item, then, is labor productivity and ensuring our labor requirements line up with how orders are coming in. Also, our service has performed exceptionally well there. The largest tallies of — we even sold January. The service performance figure set a record as last year closed, leaving us in a very solid position. So that, I'd say, is the main item. Jonathan also pointed out that a smaller lab was consolidated, with some of its volume shifted back into the core business operations. Those are the main items. Still, the largest effect comes from matching labor productivity to order patterns.

All right. Then, regarding Nelson, those 3 divisions—prior to this, I believe you discussed having expert advisory, routine, and validation. Earlier, I think you said expert advisory represented roughly a low double-digit share of revenue. What's the approximate split for the remaining 2? Also, is there a significant margin gap among each of them? Therefore, when the mix shifts across Nelson's various divisions or functions, does that substantially affect total segment margins as well?

No, I wouldn't put it that way. I'd call it fifty-fifty, though it may shift quarter to quarter based on where validation trends move. Still, it's obvious that among those 3 categories, expert advisory carries the smallest margin if you examine it; and as you noted, it accounts for a low double-digit percentage of the total. What matters most is really pushing that core lab volume, since that brings a more favorable mix in expert advisory services. Yet the crucial element for expert advisory services is our capacity to create leads that assist in spanning business units for Sterigenics and Nelson. That's another major value opportunity. However, since that volume is somewhat lumpier on the expert advisory services side, that's the reason we want to highlight it and inform you, just as we did during the fourth quarter and what we anticipate for the first quarter.

All right. Excellent. Many thanks once more.

Excellent. Thank you. I'd like to circle back once more to the topic Jonathan raised regarding the Nelson Lab and the shutdown of that facility. What I'm getting at is that the worry here is essentially that once volumes begin recovering and, you know, demand starts picking up, will you folks have sufficient capacity at Nelson to handle that demand and return to normal levels — and if you're shutting it down because that reflects the present demand situation, then is there something structural or longer-term in the demand and volumes at Nelson that's pushing you to resize your capacity for a lower demand level going forward?

Yes; Luke, Michael here. Capacity is in a solid place for us in that business; there was a lab producing revenue but not much EBITDA, and we managed to combine it and gain additional operating leverage in the business; that's the main point. So from a capacity standpoint, we're fine.

Okay. And then, I suppose, just to wrap things up here as you all consider the entire year and the guidance, did you all separate out — kind of came into this a bit late. But did you separate out anything regarding by segment and how you're viewing that?

Yeah. We did, you know, I would simply say to you, in the first quarter, we provided some visibility during Q1. Correct? On a cost of goods currency revenue basis, for Sterigenics we anticipate low to mid-single digits. As we move through the year, we ought to see the full year at mid-single digits. Constant currency revenue growth. Regarding Nordion, I think of what we said was that the split between first half and second half as a percent of the total will resemble 2024. And once more, for this business, we anticipate mid-single digits in constant currency revenue growth. Yep. Plus a bit of growth in Q1. Yes. Then for Nelson Lab, you'll see a low decline of low double digits during the first quarter compared with last year. However, margins should be stronger than they were in last year's first quarter. And revenue growth should be back-end loaded owing to the expert advisory comparisons. And we simply expect for the full year, they'll be considering low single digits, mid-single digits in constant currency revenue growth; and then I'd also say, aside from that, remember the point I raised, which is we'll see sequential margin improvement as the year progresses on the Nelson side. So that's roughly how I view the segments. Jonathan, anything else that they're — I believe that addresses it.

Great. Thank you.

Hello. I'm Evian, calling in for Matthew. I appreciate you taking my questions. Starting with the first one, could you share an update regarding how the cross-selling initiative between Sterigenics and Nelson Labs is progressing? And then, does that benefit get factored into the 2025 guide?

Yes. Good morning. Yeah. Things are moving along nicely. The XPU activity is going well. We mentioned in our prepared remarks the continued growth of embedded labs that we're seeing within Nelson Labs, which really gains from Sterigenics volume uplift as well; so and it is included in the 2025 guide.

All right, that's helpful. And so I take it tariffs haven't been factored into the guidance. Should they end up having an adverse effect, are you able to make some adjustments here and there? And secondly, could demand stall if customers have to reconfigure their production because of tariffs?

Yes. I'd note we still haven't considered an upside demand scenario, but as I work through my response, I don't expect that situation to materialize. Just remember, we don't yet have a clear picture of what these tariffs might actually look like. We're getting ready for that. If you think about Canada, that's where the biggest hit would land, and we're fairly confident in our capacity to let customers take on that tariff; take cobalt, for instance, being imported into the United States. So we believe that's manageable for us. And I'd say that's the main item. Regarding tariffs, that's what's on my mind at the moment.

Thanks.

Yeah, thanks. Pharma, a smaller portion of what we do, should keep getting better throughout the year, in our view. Same with med device. Casey, across the board, we generally expect improvement on the Sterigenics side. Med device, pharma, Commercial will be somewhat more uneven. There are some dynamics on the commercial side that could make it somewhat more uneven; and bioprocess, we did see sequential growth as the year went on in Q4, again on a volume basis; so we'd look for that to carry into 2025 as well.