Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello everyone, and thanks for joining. I'd like to welcome you to the earnings call for Sotera Health covering our first quarter. You can find today's press release along with the supplemental slides in the Investors area of our site, soterahealth.com. This webcast is currently being taped, and a recording will also be posted in the Investors portion of the Sotera Health site not long after we finish. With me on the call today are our Chairman and Chief Executive Officer, Michael Petras, as well as our Chief Financial Officer, John Lyons. . Some of what we say on this call might be regarded as forward-looking statements. The subjects covered by these statements carry risks and uncertainties that might lead actual outcomes to differ substantially from what is projected or suggested. For an explanation of these risks and uncertainties, please look at Sotera Health's filings with the SEC and the forward-looking statement slide included at the start of the presentation. No duty is taken by the company to revise any of these forward-looking statements. Be aware that in today's discussion, the company will present both GAAP and non-GAAP financial measures, which include adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to net income, adjusted net income adjusted EPS, adjusted free cash flow, net debt and net leverage ratio as well as constant currency comparisons. You can find a reconciliation of GAAP to non-GAAP measures for all relevant periods in the schedules accompanying the company's press release and in the supplemental slides for this presentation. The Q&A portion of today's call will be handled by the operator. Kindly keep yourself to 1 question and 1 follow-up. Should you have additional questions, please don't hesitate to contact the Investor Relations team. Having said that, I'll hand the call over now to Sotera Health Chairman and CEO, Michael Petras.

Hello, everyone, and thanks for being with us today. Earlier this morning, we reported a solid beginning to the year, with revenue rising 6.5% on a constant currency basis and adjusted EBITDA up 6.9% in constant currency, which produced more than 20 basis points of margin improvement versus Q1 of the prior year. At Sterigenics, constant currency revenue increased 6.1% during the quarter, whereas Nordion posted 25.8% constant currency revenue growth and lifted margins by more than 290 basis points. Nelson Labs came in as expected, matching what we described on our previous earnings call. We are, as of today, reaffirming the 2026 outlook we gave during February's earnings call. To recap, we anticipate total company revenue climbing into a range of $1.23 billion to $1.25 billion, which equals 5% to 6.5% constant currency growth against 2025, and adjusted EBITDA rising into a range of $632 million to $641 million, or 5.5% to 7% growth in constant currency. While reaffirming our full year outlook, I want to restate how strong and resilient our business model is. We deliver mission-critical regulated services that sit deeply embedded within our customers' supply chains. Over 70% of our revenue comes from multiyear contracts serving long-tenured customer relationships via a global network of facilities. Our dedication to customers is a core company value; and during 2025, we achieved substantial gains in customer satisfaction scores at both Sterigenics and Nelson Labs. Over time, our business model has proven resilient, producing steady revenue growth throughout the past 2 decades across numerous economic cycles; we occupy a unique place in the health care supply chain and treat our mission of safeguarding global health with great seriousness. John will cover the financial details shortly, but first, I want to spend a moment highlighting several events from the quarter. On governance, besides adding Rich Kyle to our Board of Directors in February; we are pleased to welcome Ken Krause, who came onto our Board in March. Ken's leadership and demonstrated record of building shareholder value as a public company Chief Financial Officer for more than 10 years, together with his deep experience in strategy, finance and governance, will be enormous assets as we keep growing. I also want to thank Dean Mehas and Robert Kanas, 2 of our private equity board members, for their service and contributions to Sotera Health. Dean just finished his Board service and Rob will step off the Board later this month. Each offered valuable perspective and guidance, and we truly appreciate their impact over the years; in March, the private equity shareholders closed yet another secondary sale of existing shares, lifting our public float to roughly 90% of outstanding shares. Finally, I want to briefly address some favorable legal developments in Georgia. As a reminder, 8 of their personal injury cases were chosen into Phase I and Phase II causation proceedings, with a central focus on the science. The remaining 5 bellwether cases were dismissed by the Georgia State Court on March 30, 2026, after the plaintiff failed to establish general causation during the Phase I proceedings. To recap, back in October of last year, the court threw out the other 3 bellwether cases during the Phase II specific causation proceedings. Every one of the 8 bellwether cases has now been dismissed, and each is subject to appeal. While the order issued March 30 pertains specifically to the 5 Phase I full cases, the court's rejection of the plaintiff's general causation series represents a pivotal issue shared across all of the personal injury cases; in our view, this order highlights how unreliable the scientific support is for those claims that remain and ought to shape the way the remaining cases get evaluated; sound science will stay at the heart of our defense as we continue to stand behind the safety and importance of Sterigenics operations. To recap, updates regarding EO are available on our investor website. At this point, Jon will walk us through the financials in greater detail.

Thanks, Michael. To start, I’ll walk through the Q1 2026 consolidated highlights, then share specifics for each business segment, and finish with more detail on how we see 2026 shaping up. In the first quarter, looking at the total company on a consolidated basis, revenue rose 10% to $280 million, which was 6.5% higher in constant currency terms versus Q1 2025. GAAP net income came in at $27 million, equal to $0.09 per diluted share. Adjusted EBITDA was up 10.5% to $135 million, or 6.9% in constant currency, and adjusted EBITDA margins widened by more than 20 basis points. Interest expense in Q1 2026 was $35 million, an improvement of $6 million from the same quarter a year earlier. Roughly half of that gain came from the term loan repricing and debt paydown we finished late in Q3 2025, with the rest coming from lower interest rates. Adjusted EPS rose to $0.18 per share, up about 29% year over year. Overall it was a solid first quarter, with results mostly matching what we expected, except for some favorable timing at Nordion. Now let’s turn to the segment results. Sterigenics posted 9.7% revenue growth to $186 million, or 6.1% in constant currency. Revenue growth for the quarter was fueled by favorable pricing of 4.5%, a foreign currency benefit of 3.6%, and improved volume mix of 1.6%. Localized weather effects in the U.S. during Q1 created a 1.7% headwind to Sterigenics volumes compared with the prior year quarter. Segment income increased 9.6% to $96 million, or 6% in constant currency, helped by favorable pricing, a foreign currency tailwind, and improved volume mix, partly offset by higher costs. At Nordion, first quarter revenue rose 29% to $42 million, or 25.8% in constant currency, compared with the same period last year. That was driven mainly by increased volume mix of 23.7% tied to the timing of Cobalt-60 harvest schedules, plus foreign currency tailwinds of 3.2% and a pricing benefit of 2.1%. Nordion segment income climbed approximately 36% to $24 million, or 33.1% in constant currency, with segment income margins expanding more than 290 basis points to 56.4%, driven by higher volume and mix, foreign currency benefits, and favorable pricing, partially offset by inflation. Nelson Labs revenue fell 0.7% to $52 million, or 3.8% in constant currency. Pricing benefits of 2.8% and a foreign currency benefit of 3.1% were more than offset by the change in volume and mix. Segment income declined by 11.5% to $15 million, or 15.1% in constant currency, with margins of 28%, reflecting lower volume mix, partially offset by favorable pricing and a foreign currency tailwind. Now I’ll touch on the balance sheet, cash generation, and capital deployment; in the first quarter, we generated $29 million in positive operating cash flow, including a $34 million payment for a previously disclosed legal settlement. Our adjusted free cash flow came in positive, and we expect that to pick up pace as 2026 goes on. On the capital side, we spent $46 million during the quarter, reflecting continued advancement on the Stardex greenfield builds, the EO facility upgrades, and the Cobalt-60 development efforts. Our liquidity stayed solid — at the close of Q1 2026, we had more than $900 million available. And we ended the quarter at a net leverage ratio of 3.2x, which puts us close to the 2 to 3x long-term target range. Like Michael said, we're reaffirming the 2026 outlook. Here's a recap of what we expect versus 2025. At the total company level, revenue should rise into a range of $1.233 billion to $1.251 billion, which works out to 5% to 6.5% constant currency growth plus an estimated 100 basis point benefit from foreign currency; adjusted EBITDA should climb into a range of $632 million to $641 million, equal to 5.5% to 7% constant currency growth and an estimated 100 basis point impact from foreign currency. That foreign exchange benefit should be entirely realized during the first half of 2026, while the second half impact is expected to be roughly neutral against the prior year. Company-wide pricing should land near the midpoint of our 3% to 4% long-term range; looking at 2026, Sterigenics ought to produce mid- to high single-digit constant currency revenue growth year-over-year, with second quarter year-over-year growth comparable to what we saw in the first quarter of 2026. Keep in mind that Q2 was our strongest growth quarter of 2025. At Nordion, we expect constant currency revenue growth in the low to mid-single digits for 2026. Nordion's first half revenue should account for roughly 40% to 45% of full year 2026 revenue. Turning to Nelson Labs, full year 2026 constant currency revenue growth should come in at low single digits, with a modest return to growth in Q2. Nelson Labs segment income margins should strengthen as the year progresses, yielding full year margins in the low to mid-30s. Given the current forward rate curve, interest expense should land between $135 million and $145 million. We're projecting an effective tax rate on adjusted net income of 27% to 29%. Adjusted EPS should fall in the range of $0.93 to $1.01; depreciation should keep rising in 2026, matching the step-up we saw in 2025. On a weighted average basis, fully diluted shares should be in the range of 289 million to 291 million shares. Capital expenditures should come in between $175 million and $225 million. We look for further improvement in the net leverage ratio during 2026. And last, as always, our guidance assumes no M&A activity; with that, I'll hand the call back to Michael.

Thank you, Jon. Since 2016, serving as Sotera Health's CEO and Chair has been an honor for me; now that the company stands on solid ground following ten years of advancement, I feel the moment has come for a leadership change that will help Sotera Health keep evolving. After a succession process led by the Board and planned in a thorough manner, the Board has named Alton Shader to take over as SiteHelth's new Chief Executive Officer, starting May 26. Alton brings deep health care executive experience, having led and expanded worldwide health care organizations, among them buying Medical, Hill-Rom and Baxter. In my fresh capacity as Executive Chair and as a substantial investor in this business, I'm eager to collaborate closely with Alton so that the leadership handover is smooth and deliberate; conversations about priorities and what lies ahead for Sotera Health have already begun between us. I will likewise stay actively engaged in investor relations along with commercial and litigation strategies. As I move into my new position, I wish to express gratitude to our Board for the direction and backing given across the last decade. My thanks go to our 3,100 employees for their efforts alongside me and our leaders in keeping this company truly special and a wonderful place to work. I'm also grateful to our investors for standing with us since the company went public in 2020. Rest assured, my belief in our company endures, and I will stay engaged and dedicated to its long-term success; with that, Ray, please open it up for questions.

This is Thomas Keller calling in for Sean. Well, to begin with, Michael, congratulations on 10 years. I'd like to kick things off regarding Sterigenics and how the business has been realigned toward end markets with higher growth. How far along are you all with that strategy? My assumption is that getting the internal pieces arranged takes a while, and then there's winning and onboarding new business on top of that. Did Q1 see any gain on the volume or mix side, or is anything of that sort built into the full year guide?

Yes. Thanks, Tom. That's a priority for us as an organization. When we examine our activity across business units and our strategic selling efforts, key segments are where we're concentrating. During the quarter, Sterigenics delivered 1.6% growth in volume and mix. And then keep in mind, weather also had an effect on us. So we're pleased. The first quarter got off to a slow start because of the weather, which we more or less indicated the last time we spoke, but it ended on a strong note and we're optimistic about the outlook moving forward, both in terms of how March wrapped up and how the second quarter is beginning.

Next, when we look at capacity, how does utilization currently stand across the various modalities, perhaps relative to historical averages? And given the expansion still ahead, do you possess what's required to sustain a potentially greater degree of growth over the coming several years?

Yes. Thanks. Yes. On capacity, we're positioned well. Naturally, depending on modality and geography, pinch points will arise at particular moments. Yet our target is 80%. We're positioned well. Operationally, the team has performed nicely and worked to determine how additional output can be drawn from capacity we already have. In the X-ray modality, we have a facility that will begin coming online later in this year. After that, another 1 is scheduled for late '27, early '28, and we feel good about it. So on the whole, our capacity situation is positioned well. We're well situated and take care of our customers very well. On the call, I also mentioned that good customer satisfaction scores keep coming our way; the 2025 results just arrived, and year-over-year we saw a significant improvement. That's true both at Sterigenics and Nelson Labs. So the direction is right; what we see ahead really encourages us.

I have a brief inquiry regarding Sterigenics. The first quarter is typically viewed as the softest period for that business, yet you managed to beat what was anticipated. Do you continue to view 1Q as the smallest quarter of the year, and then perhaps just to add one more thing. Could you elaborate a bit on what you are observing in core med devices and bioprocessing volumes, specifically for Sterigenics.

Sure. Sterigenics delivered a strong quarter for us. We would have preferred it to be somewhat stronger, though clearly, weather is outside our control. A year ago, we experienced a notable second quarter, which we have discussed previously; so a solid quarter lies ahead in the second quarter, in line with the guidance we have just given you. We anticipate growth comparable to the first quarter on a constant currency basis. And Med Device posted a good, solid quarter. Looking at every end market we serve, bed device had a good, solid quarter, and bioprocessing rose significantly versus the prior year once more. Keep in mind, however, that it represents a small share of our overall business; nonetheless, it was meaningful growth compared with the previous year.

Michael, congratulations...

To the agent — fine. Patrick, go ahead.

That is the first one. Congratulations on the transition and the move. I suppose maybe one regarding Sterigenics. Could you discuss what you observed on the volume side as the quarter went on, just the visibility there? It seems like you are in a fairly good position, but perhaps walk through the various markets and what you witnessed as the quarter went on and the expectations here moving forward?

Yes, Patrick, January and February were somewhat softer, as I said, especially tied to weather. However, as the quarter went on, March was our best volume quarter in the last 3 or 4 years for March. So 1 month doesn't make a year, but we are optimistic about that, and April began strongly. So — we feel quite comfortable with the guidance we have provided here, and we are seeing good growth, and we expect that to keep going as the year moves on with some of the items we have, that x-ray facility coming out; we'll see some growth from that. We have a customer conversion that we discussed before that will begin to have an impact late in the year. And then overall, just the amount of engagement with our customers and some of the commitments that we see coming from them. We feel good about how Sterigenics is positioned coming out of the first quarter.

Patrick, turning to the margin side of things: can you take us through the pieces? Pricing seems to keep working in your favor — anything new to report there? And how should we be thinking about margins as we move forward? Jon here — thanks for asking. We're pleased with where margins stand, consistent with what the guide suggests, right? During the quarter we saw margins improve. And as the guide indicates, we expect improvement across the full year, with Sterigenics really driving that — we look for solid operating leverage there, while margins stay steady across the rest of the segments. Even so, we have strong confidence in the chance to deliver yet another year of margin gains, following the margin gains we achieved in the prior year. So our outlook on that is positive.

Let me attempt to approach the Sterigenics matter from a different angle. Setting aside the effect of weather, you delivered roughly 8% constant currency during 1Q, indicated that you anticipate comparable constant currency expansion inthenextperioddespite April getting off to a robust beginning, and the weather factor is absent. Does that represent a deceleration compared with the 8% excluding weather? Is this merely a comparison problem? Is it simply being cautious? Or might there be additional elements at play that we ought to consider regarding Sterigenics during the second quarter.

Yes. Thank you, Max. The key point, which I referenced earlier in my script, is that Q2 of the prior year represented our strongest quarter for growth; therefore, it truly comes down to a comparison matter rather than anything else.

Then perhaps one about Nelson Labs. You mentioned it matched what you'd anticipated for the quarter. Could you walk us through how testing growth compares with expert advisory services, and specifically, what kind of drag did the latter create in 2Q? Also, margins declined quite sharply versus the prior year. So please explain what drove that. And a forecast for that segment's margins across the rest of the year would be really useful too.

Sure. Thanks, Max. Michael here. It landed exactly where we anticipated, as we told you. Regarding Nelson during the first quarter, what we observe. EAS — this marks the final quarter carrying that drag as we lap it; testing volumes dipped somewhat against the previous year. Yet looking at certain activity, routine volumes are recovering. Our service in that space has been exceptional; and with sterilization volume rising, that same correlation and momentum on routine testing will keep showing up. It isn't strictly one for one, though a correlation does exist. Then regarding validation, we're beginning to see pipeline form in certain longer-term projects as we move toward the later stages of 2026; we've indicated margins reaching the low to mid-30s, matching what we've discussed on this subject across the past several quarters.

Congratulations, Michael. I'd like to approach the topic of Sterigenics from a somewhat different angle. The margin expansion in 1Q was clearly strong, even with the headwinds caused by weather. Yet when we consider the wider inflationary environment, could you assist us in assessing how sustainable Sterigenics margins will be across the year, and whether ongoing cost inflation might actually give the team a chance to capture additional price during the year?

Yes. Thank you, Joseph. We aren't observing meaningful inflation within that business. We keep managing it effectively. Our primary inputs are essentially labor, plus gas and cobalt. We're positioned well on those. We've established pricing in a manner that ensures our value stays positive; during the quarter, Sterigenics recorded roughly 4.5% price, a bit higher than the 4% we had guided toward; however, we still view that business as being in a solid position and receiving rewards for the value it delivers to our customers. And nothing material on the inflation front worries us as we stand here today.