Sotera Health Company (SHC) Earnings Call Transcript & Summary

Welcome, and good afternoon, everyone. Please welcome to the stage, Vice President, Investor Relations, Jason Peterson.

No. I mean, no, we don't have any plans but we do have some backup questions if there are not a lot of questions. This is Sotera Health inaugural Investor Day since going public in 2020. We are so excited to be here. Well, I wanted to thank everybody who was able to make it here today in person as well as those who are joining via website. We have a fantastic program for you this afternoon, and I'm really excited for you to get to know our management team. So with that, let's go ahead and take a look at the agenda. So Chairman and Chief Executive Officer, Michael Petras, will kick off the afternoon and give a company overview as well as outline our key priorities. Next, B.J. Lehmann, Senior Vice President of Strategy and Corporate Development, will talk about our market positioning as well as some of the strategic opportunities that lay ahead of us. Following B.J., our 3 business unit presidents will each take the stage, as Joseph Shrawder from Nelson Labs; Michael Rutz from Sterigenics; and Riaz Bandali from Nordion, and they'll each do a deep dive into their businesses as well as talk about the unique position they have in their respective markets. Next, Kristin Gibbs, our Chief Marketing Officer, will take the time to walk us through our corporate responsibility journey; and Jon Lyons, our Chief Financial Officer, will go ahead and give his financial perspective on the company as well as outline our 3-year outlook. Finally, Michael Petras will take the stage again and wrap up the afternoon with some closing remarks. Now as you can see we have a couple of Q&A sessions slated for the afternoon. We'll get to as many of the questions as we possibly can in the allotted time that we have. Now let's go ahead and take a look at our disclaimer slide. I'm obviously not going to read every word on the slide. However, we will be making some forward-looking statements throughout the afternoon today, and we will be referencing some non-GAAP financial measures. Now before we kick things off, I want to go through a few themes that I hope resonate with you as we go through the presentations today. First off, this is a great company. We have over 3,000 employees working around the globe day in and day out to fulfill our mission of safeguarding global health. Second, we have fantastic businesses, businesses that operate in highly regulated markets and have high barriers to entry. And last and certainly not least, we have a bright outlook. We operate in large addressable markets, and we also have a lot of opportunity in front of us, as you'll hear today. So with that, let's go ahead and welcome to the stage, Chairman and Chief Executive Officer, Michael Petras.

Welcome, everybody. Thanks for coming today. Great venue we have here. So I'm really looking forward to spending the day with you. I'm Michael Petras. I've been CEO since 2016. I've had the pleasure meeting many of you, but not all of you over the last couple of years. Today actually marks a big day for us. This is the 4-year anniversary we took the company public. Ironic how it happened to work out. November 20, 2020 is the year we actually took the company public. So today is a 4-year anniversary, and we actually have the opportunity to celebrate with all of you today. And I'm looking forward to the opportunity to share with you what a great company we have. I've told you about that many times, but to hear from the rest of our team and the great work that goes on day in and day out across the company. Safeguarding global health is our mission. That is what we do across the company is Sotera Health. Sotera Health, as many of you may recall, comes from the words of Sotera, comes from a word Soteria, which is the Greek God of safety. And that's really what we pride ourselves on, safeguarding global health. We have 3 outstanding companies, Nelson Labs, SteriGenics and Nordion. And you'll hear from all 3 of them today. We have over 5,000 customers in 50 countries, over 3,000 employees that fulfill this mission every day of Safeguarding Global Health. We do that across our 62 facilities around the world. But the foundation around that are a couple of key elements I want to make sure that everybody understands. Our customer relationships are very strong. Our top 25 customers have been with us for over -- an average of over 10 years plus. We've got an $18 billion service addressable market, which B.J. and the team will take you through a little bit later today. 70% plus of our revenue are tied to multiyear contracts, and a foundation for the company is our commitment to our values and our culture. I want to make sure you understand those basic tenants when you think about this great company, Sotera Health, and our role of safeguarding global health. One of the points that to be very informative today is for all of you to hear from each of our business leaders on how we fulfill our mission across the value chain in health care. If it's starting early on with R&D materials, R&D materials management, packaging, we play a vital role across our 2 businesses with Nelson Labs and Sterigenics in helping fulfill key services in that area. As you work across the page and across the value chain, you see all the different places that our company interacts with our major customers in these significant steps around the value chain. And hopefully, it's very educational for each of you today when you learn about the company in all the places that we play across this value chain. Take a moment to reflect on our progress since 2020, when we went public. We've grown the business 8% on a compound annual growth rate since 2020, 8% on top line, 8% on bottom line adjusted EBITDA. Our free cash flow has been 10% growth on a compound annual growth basis since we went public, and we generated over $140 million of adjusted EBITDA growth since we went public in 2020. Beyond the numbers, I think there's a couple of key things that I'd like to discuss with you and talk about the resiliency of our model and our accomplishments since we went public in 2020. We've sustained growth on both the top and bottom line and significant margins of approximately 50% adjusted EBITDA margins across the company. We've had continued growth throughout several macroeconomic trends that have impacted all of us. So think back, if you reflect back to where we were in 2020, we had COVID, a global pandemic; we've had geopolitical unrest around the world; we've had economic challenges with labor markets and inflation and this company has delivered through all those cycles. We continue to perform and take care of our customers, have 80-plus percent customer satisfaction rates, and we've delivered the growth that I just showed you on the previous page. In addition to this, we've done a lot of activities around the governance of the company as well. We're transforming and moving our Board forward as our ownership changes over time, we continue to refresh our Board with independent directors and also all the work we're doing around the ESG initiatives. And today, Kristin will take you through quite a few of those. Now if you look at the right side of the page here, everything hasn't been exactly as we planned since 2020. It's not all perfect, blue sky, 75 degrees with no cloud, okay? The volumes have not been as strong as we had hoped for, right? The markets have been a little bit choppier the last several years. So our volume growth has been a little bit more challenged. Our cross-business unit opportunities have continued to do very well, but we're not near the level of entitlement. We'll talk to you a little bit more about that today and where we see opportunities to continue to expand that. Our free cash flow generation has been good, but not great. We've been in an elevated level of expenditures on CapEx. We've had higher interest rates. We will take you through some of that today, so you have a better appreciation of how we're thinking about free cash flow generation going forward. And then litigation. As you know, I've talked to many of you about litigation over the last several years. This has been a challenge for the company, and we have continued to work through it in a very pragmatic manner. I would tell you, I'm not going to give into a great deal of details around that today. We've got very significant and transparent disclosures that we've put out there on our website as well as on our security filings, so please refer to that. But a couple of things I do want to make sure that everyone walks away with a clear understanding around. There's over 100 ethylene oxide sterilization facilities in the United States. We're not alone. This is an industry challenge. We're seeing competitors now have to file bankruptcy to get away and protect themselves around some of the challenges in the industry. We are very well positioned at Sotera Health in our Sterigenics business in particular. We've got facilities that are safe and compliant. And we feel very confident about that and the continued investments we make and the barriers that, that's going to create. But I want to make sure you understand, it's an industry challenge, and it's one that we feel well positioned around. We'll continue to work through the litigation in a pragmatic and practical manner. But we believe when the science is fairly, fully and appropriately presented, we will prevail, we will prevail in the courts, and we've shown that before. So we want you to know when the science is out front and center, we will prevail. As I look forward and talk about what we're going to share with you today, the 4 key company priorities over the next 3 years. One is excellence in serving our customers with end-to-end solutions. The team will talk to you about the critical role we play in health care, and how we fulfill that mission of safeguarding global health across the entire supply chain. We will talk to you about how we're going to have a refreshed focus around winning growth markets, not all markets within health care are the same growth rates and projections. We will take you through how we're thinking about that, and how we're segmenting these markets and targeting some higher value areas, which can benefit from the services we offer across Sotera Health. The third key priority you'll hear about from our team today is driving operational excellence to continue to enhance free cash flow. We know how important free cash flow is for all our investor base, and we'll continue to make sure that you understand how we think about that, how we're driving operating leverage in our business, how we're looking for improving opportunities to continue to generate incremental free cash flow. And then as we've told you all along, we're stewards of the capital that we have at our disposal. We're going to be very disciplined in our capital allocation and our capital deployment. And we'll share with you our process as we've done in many occasions in the past. We have a disciplined capital allocation process. But at the end, our 4 key priorities are to help us deliver more incremental value. When I look at how to think about the company and positioning for the future, one page I want you to take away from today's presentation, what makes this company so unique and so special, okay? It's our foundation of our values and our culture that really helps drive this company. It's our trusted customer relationships, the stickiness we have with these customers. It's the large, expanding, growing markets, $18 billion TAM. It's the deep domain expertise. You cannot just walk into these businesses and say, you want to get into the sterilization business or a cobalt business or the lab business. There's deep expertise that comes along with this, and it's very important that you gain that credibility with your customers to create those sticky relationships. And lastly, I think you'll see today throughout the conversation, the significant competitive advantages and the barriers that are out there for others to get into the space. And we're very, very well positioned across this company. What is this all going to lead to? Between '25, '26 and '27, we see 5% to 7% annual growth rates and the revenue and over $500 million of free cash flow cumulative growth during the time period. So I'm going to turn it over to our team that you're going to hear from here the rest of the afternoon. I'm really excited about the opportunity for you. You hear from myself and John and Jason very often, but for me, it's really important for you to hear from the rest of the team here. So the leaders that run this company, the 3,100 people that make this company as great as that are listening to us around the world right now are led by the team that you're going to hear from today. So you'll hear from each of our division presidents. You will also hear from B.J. in just a minute here. who runs strategy business development for the company; and then Kristin, who runs, our Chief Marketing Officer. So I'm really excited about the opportunity for you to see the power of the people that help make this company as great as it is. So thanks for joining us today. And with that, I'll turn it over to B.J. Lehmann, who'll take you through some of the strategy and business development activities across the company.

Thanks, Michael. My name is B.J. Lehmann. I head Corporate Development and Strategy at Sotera, as Michael just said. I'm happy to be here to tell you more about the company. Today, I'm going to share some perspectives with you about growth, our strategy and opportunities that we have looking forward. Specifically, I'm going to cover a number of different items, including our growth drivers, the markets in which we play, the strategic direction and ultimately some of the specific focus areas that we're looking at for growth. My objective today is to demonstrate to you that we are well positioned for above-market growth. That growth is going to be driven by a strong foundation in our core business. There are a couple of key factors that are driving this. First of all, strong markets. We'll talk about that a couple of times today. My colleagues will hit on this, too. But this is really important. It's a key theme that keeps the business chugging along. But there's opportunity beyond that. We have strategic segments and a new focus around higher growth and higher profitability segments. We think this could give us tailwinds for additional growth. Finally, while we have leveraged the opportunities across our business units, there is substantial additional opportunity to grow that. We think that can have good impact over the next couple of years and beyond the next 3 years as well. The other major factor, of course, is acquisition and strategic collaboration. I'll give some perspectives about how we think about that, what our expectations are for the next couple of years, a bit later in the talk. Most of you know about the key factors that drive opportunity in health care and why it's such a good market for business and for our company. I'm going to focus on a couple of key factors that are especially important for us. Number one, the underlying positive health care utilization trends, aging populations, mean aging demographics that have higher utilization of health care services, including medical products, pharmaceutical products, higher procedures, et cetera. You all know that. Again, this provides a tailwind for the growth in the business going forward. Increasing regulation and regulatory change. This creates opportunities for the company. An example would be ST98, which is guidance around cleaning validation, which is important to a reprocessing business for medical devices. It's a big part of Joe's business. You'll hear about that later. But also importantly, the protection that the regulation provides. Michael just talked about this, it's very difficult to get in this business. Our regulatory position across the businesses provides significant barriers to entry for other competition. And then finally, product innovation. This is important for the sector's growth. It's important for our customers' growth, but it's also important for our company. It's important to our company because it allows us to grow our portfolio and renew that portfolio. It's also important because it allows us to capture opportunity. We get involved early in the development of new products. We provide services. These services get validated. And when they're validated, it allows us to create longer-term revenue streams for the company. So this is an important way for us to grow the business and ultimately shift the mix to higher-growth and higher-value segments. As Michael mentioned, we play today in an $18 billion service addressable market, comprising sterilization, lab services for medical device and services for the pharma industry on the testing side. The $4.5 billion sterilization market includes estimates for in-house sterilization. The medical device lab testing market, we estimate at $4.9 billion. And then the pharmaceutical services and testing that we provide today in the markets in which we play is another $8.3 billion. So this is a substantial market in which to play. Also attractive to us are the adjacent markets. You can see a number of them listed here on the testing side and in other areas. Together, this constitutes a substantial area for play, over a $45 billion total addressable market. Growth in our sterilization and lab services businesses is driven essentially by volume and price. Price is going to be tied to a number of key cost and market factors. I have some of them listed here. The inflation associated with the cost of our services. The supply and demand dynamics, you'll hear a bit about that from my colleagues a little later today. The investment we're making in upgrading our facilities and improving the value proposition to our customers, and then ultimately, the service value that we are delivering to our customers. On the volume side, the key drivers, of course, are the underlying volume growth in our key market segments. In the medical device area, we see low single-digit volume growth ahead of us over the next several years. In the pharma space in which we play, we are expecting mid-single-digit volume growth over that same time period. Now we have opportunity here to do better than that. And that is ultimately related to some of the initiatives we're undertaking to grow into segments with higher growth and profitability. I'll talk about those in a few moments. If we look at our revenue on a consolidated basis, we can look at region and segment. On a region basis, as many of you already know, we're heavily weighted to North America. There's been little change in that weighting over the past couple of years. On a segment basis, we remain oriented to medical device -- the medical device segments. However, over the past 4 years, we've grown our pharmaceutical mix from 13% to 17% of our consolidated revenue. We expect that to continue. In fact, it's one of our objectives as we move forward given the higher growth and profitability in certain of those pharmaceutical products segments. The other segment here represents other businesses, including sterilization in other segments, and businesses in the Nordion fold, including production or irradiators and sealed sources that are used for radiosurgery. So we're excited about our opportunities, and we see, looking forward, a focus on expanding our regional position, particularly with a focus on Europe, and of course, as I just mentioned, growing our pharmaceutical presence. We are undertaking a number of marketing, commercial and operational initiatives that are intended to enable us to capture this above-market growth. Part of this is an increased focus on strategic segments. Now what does this mean? Well, this means we're organizing around attractive segments. We're understanding the key trends. We're understanding the changing customer needs. We're understanding how our network can be improved or modified to serve these customer needs. Ultimately, this is about creating an expanded service offering and growth for the company. As we think about the segments, it's worth noting what drives our choice of segments. We think about a number of different factors that are listed on the graphic here. The size of the market matters, growth matters a lot to us, but value is also very, very important. We look at a couple of other factors as well, but these are key drivers in how we think about particular segments. Now as an example, one of the segments that we're focused on, I'm not going to go into all of them, obviously, for competitive reasons, but one that I will talk about is the diabetes segment. It's a large market segment. There are favorable demand dynamics in this particular segment. There is a ton of innovation. We expect that to continue looking forward. So it checks that box. Generally, it's a strong area for us. We have a large number of customers today that already provide diabetes products. So we want to build and grow this particular area. Now the types of things we're doing are not only oriented to increasing our services, but also to influence these market segments. So as an example, earlier the week -- earlier this week, I was on -- I was in a meeting with my colleagues to discuss a strategic collaboration with 1 of the other industry players in this segment to ultimately develop second-generation guidance for connected devices, right? So we're doing these things that actually put us in a place to influence how these market segments develop over time. Now the foundation for our past and future success is our distinctive capabilities and service delivery. We believe that we're better positioned than most of our competitors, have plenty of examples, I'll talk about a few. You'll hear more about these from my colleagues in a few minutes. Nordion is crystal clear. It's a very unique business. It delivers Cobalt-60 ultimately to users of gamma sterilization. That requires substantial capability; specific equipment, regulatory knowledge, strategic relationships with the particular sources of the Cobalt-60 sources. It's very unique. Nelson, is an example, is the go-to for our customers who have regulatory challenges related to testing. We're distinctive in the market, as Joe will tell you about. Sterigenics, we have network and expertise that is essentially second to none. We are a leader in the space. It makes us very distinctive relative to our competitors. Now what makes us unique as a company is the synergistic relationships across the business units. There's the Nordion-Sterigenics relationship. They both participate in the gamma sterilization market, working in parallel to ensure the health development and growth of the gamma sterilization market. On the Sterigenics and Nelson side, those businesses sit at the nexus of sterility, sterility insurance, and related services. This creates a strong position and leverage to better serve our cross-business unit customers. Now with respect to cross-business unit, Michael introduced this a few minutes ago. We've been doing pretty well in serving our customers. We have many customers that represent a large proportion of our revenues that buy from both of our core businesses, Sterigenics and Nelson. Customers tell us they like this. They like our services. Our customer surveys also show this. For example, if you look at our customer satisfaction results in our most recent survey on the left, what we find is that our customers who buy XPU, so again, they're buying from both Sterigenics and Nelson, so we're providing services from both businesses, have higher satisfaction rates than customers who buy services from a single business unit. When we ask them why that is, what they tell us is that it's the comprehensive lab and sterilization solution and solutions that makes the difference. It's the most important factor. Now from a revenue perspective, we see material opportunity to improve, as I mentioned before. And I point you to the right here to talk about a specific example. If we take our top 50 XPU customers, and we think about Nelson service revenue penetration, so I'm talking about Nelson revenue over Sterigenics revenue on a customer basis. If we aspire and deliver achievement of median penetration amongst those top 50 customers, that translates into $15 million of potential incremental annual revenue for Nelson. That's substantial. It would be material to Nelson business, and it represents the kind of opportunity we can get on the XPU side. So we're doing well, but we can do better. Now this is just a simple example. It's one example. We have many more XPU customers, so there's more opportunity there. For Sterigenics-only customers, we have the opportunity to cross-sell better than Nelson services, and for Nelson Services vice versa. So this represents a big opportunity. So I want to illustrate the nature of the opportunity with 2 examples. The first example is a recent example. This is a large medical device company. They approached us recently, as I said, with a very urgent need. They had challenges in manufacturing and in their supply chain. And as a result, they needed to be able to deliver product very quickly to the hospitals and doctors in their distribution network. We were able to bring together managers from both of our businesses to come up with a creative solution to meet their timeline, work across the businesses, across multiple facilities in our network and meet their 1-week turnaround time, delivering sterilization, testing and bringing the product back into their distribution network so they can serve their hospital customers and, ultimately, the patients. The second example here represents one that ties to more sustained development efforts on the XPU side. This is a large medical device in pharmaceutical company that we worked with for a number of years. We put an XPU effort against this. We leveraged our strong credibility and sterilization with this particular customer to open opportunities on this sterilely testing in microbiology side. We use the performance there to actually drive an opportunity for additional testing services that led to more sterilization work. We created a virtual cycle. The impact, 80% increase in revenues over a 4-year period. This is a substantial opportunity for us. And again, these are 2 small customer examples. If you scale that across our business, this is a significant incremental and additional opportunity for growth in the company. Finally, I just want to make a few points about our M&A strategy. Even though we have not completed a transaction in the past couple of years, we have been active. We've been engaged. We have been developing particular targets. We pursued several of them, not successfully. Looking forward, we see opportunities in growing our business through acquisition in and around our SAM. We see this with respect to tuck-in acquisitions. We see this also with acquisition of additional technologies and services to expand our service lines within the SAM. In addition to that, we see opportunities to grow the business in the adjacencies. Couple of examples, testing in other pharmaceutical service areas, we think that's a big opportunity. and radioisotope services, so building on Nordion's core capabilities to take this into servicing the new radiopharmaceutical and growing radiopharmaceutical area. So one last point I want to make about this. John will talk about some of the numbers going forward, M&A revenue is not built into our forecast. So we don't bake that in. Even though we have an attention to get transactions done, I think we're going to get that done over the next couple of years, we do not build that into the forecast. So as I wrap up, I want to leave you with a couple of key takeaways. Number one, we're in great markets with large opportunities to continue to grow. Number two, we're focused on several key priorities, really building our capabilities and success around attractive and growing segments, pharmaceutical in Europe. Our success in growing the company will be built around distinctive capabilities. And then finally, we envision above-market growth for the company built around our segmentation efforts, XPU and M&A. So I want to thank you for your time, and I'm going to introduce Joe Shrawder, President of Nelson Labs.

Good afternoon. It's a pleasure to be here today, and I'm grateful for the opportunity to explain to you why Nelson Labs is the preeminent lab testing company in the life science space, why we truly believe we have a strong future with great growth prospects supported by strong science and technical depth and expertise, a very high level of service and quality that our customers recognize and appreciate, a wide range of testing offerings and very durable customer relationships. Over the next few minutes, I'm going to discuss where we fit in the health care ecosystem, what we do, why we do it, what makes us unique and a little bit about how we're continuing to improve our operating performance. Our purpose is to make sure that the health care products that I use, that you use, your families, friends, everybody, are safe, are compliant and are effective. We have around 1,000 employees doing over 900 tests, and we've been doing this in Nelson Labs for almost 40 years. We test medical devices across many sectors of health care, cardiology, orthopedics, wearables. We test stents, endoscopes, pacemakers, catheters, artificial joints, almost anything you can imagine. And we test pharma products as well, Pharma packaging and manufacturing systems. We do this because we know, as you know, adverse reactions to contaminated drugs - huge risk for patients and for pharma companies. Long-term toxicity effects for medical devices that might be implanted into patients - huge risk, a disaster for a medical device company or for the patient. Injuries from inadequately disinfected or sterilized medical devices or reusable devices - it's a very real problem. And the regulatory environment is complicated for our customers. We protect our customers and patients from these very significant risks. We do this with 2 large labs that we have in the United States, 1 large lab in Europe and also 8 smaller labs that we have co-located with Sterigenics sterilization facilities around the world. This gives our customers the advantage of really great speed and throughput as B.J. was mentioning and that integrated experience between sterilization and testing. Traditionally, our business has been more medical device oriented, but over the last decade, we've become much more active as well with pharma, moving from about 12% of our business before the acquisition of Nelson by Sterigenics back in 2016 to about 1/3 of our business right now. Now I'd love to take all of you through our labs and show them to you in person. I can't do that. So the next best thing is this video, and I hope you enjoy watching. [Presentation]

We support our customers from end to end in the product development, manufacturing and distribution life cycle really from start to finish from conceiving and developing a product to producing it and to finally shipping it, ensuring safety and compliance at every step along the way. It starts with a strategy for regulatory compliance and product testing, then we support the validation of the product design, including material assessment for biosafety, including extractable and leachable testing. We make sure that the packaging is effective and is going to preserve the product through transportation. If it's sterile, it needs to remain sterile. And we provide a report at the end of this validation testing that's necessary for regulatory approval for the devicemaker or the drugmaker to actually put the product on the market. We then support testing in the manufacturing environment and make sure that both the environment and the equipment used in manufacturing preserves stability and ensures the safe manufacturing the product. For products that are sterile when delivered to customers, we first validate that sterilization process. And then subsequently, we confirm the sterility of the product in release testing. If it's a reusable medical device, then what we're going to do is we're going to validate the cleaning instructions to make sure that when a product is used sequentially on multiple patients that is safely and effectively cleaned in between. When all the manufacturing steps are completed, we do testing that serves as a final QC check, a final safety check to make sure once again that the products that are released into the field are safe and that the customers are protected. As I mentioned, we do a lot of tests. Some are to validate the design and the manufacturing processes, some are routine lot release testing. I've listed many of the categories here on the page. You've seen several of these in the video that I showed you a moment ago. And we also have this expert advisory services offering that combines some regulatory, technical and quality consulting capabilities that really complements the testing and the whole product life cycle. Rather than try to walk through and explain each one of these tests one by one, I thought I'd give you an example. Imagine an implantable device. It could be an artificial prosthetic joint, a hip or a knee or it could be a pacemaker. These kind of products are expected to be in the human body for 10, 15, 20, sometimes even 30 or 40 years. That's a long time. And if there's something wrong or bad in that product, it can manifest over a long period of time. So with one of these products, we'll start with the manufacturer with a quality and a regulatory consultation, help that manufacturer understand what they need to do to get that product on the market and through the regulatory process, but we'll also help develop a testing plan to make sure that it's actually going to be safe as produced and distributed. We'll then move on to do the validation testing, make sure that the product is free from toxic leachable compounds, extractable and leachable testing, for example, maybe check for residual chemicals that might be left on a product after a manufacturing process. We'll do additional biocompatibility testing to make sure that fundamentally an implanted product is compatible with being in the human body. And we'll do this using lab tests to the greatest extent possible, trying to avoid animal testing whenever we can. When those test results come back, then our advisory services, again get involved to do a toxicology risk assessment and help the customer really understand and decide is this product really meeting the standards of safety and effectiveness that are required to put it on the market? As they develop the product and put it through manufacturing, then it goes to routine testing, sterilization process validation. Ultimately, regulatory filing support will come from the expert advisory services team again. Then we'll do the lot release testing at the end of the line. And in the event that somewhere over a product life cycle, there is an issue in the regulatory space that comes up, our expert advisory services are there again to help those customers with regulator questions, concerns, potential remediation either of the product or the documentation, and just help our customers with our expertise in the regulatory process. I gave you an example of an implantable device. You can imagine if it were a drug delivery device, there would be some additional testing, for example, particulates, make sure that there is no particulate matter that's going to pass into a patient when the drug is delivered, but largely the same process that we would go through. So to make it a little more real, I'll give another more specific example here of a real validation test. In this case, we're testing a product to make sure we're helping prevent hospital-acquired infections. Now according to the CDC, in the United States, about 5% of hospital admissions results in a hospital-acquired infection. These can be very serious. They can be harmful. They can be fatal. 700,000 a year in the United States alone, as many as 75,000 preventable deaths from hospital-acquired infections, $25 billion or more in excess health care cost, it's really a serious thing. Cross contamination from one patient to another from a reusable medical device is unfortunately one of the vectors for spreading these hospital-acquired infections and illnesses. This can happen with surgical instruments. It can happen with catheters. It can happen with dialysis machines, ultrasound probes. We all want to know what's reused on us and our family and friends is safe. I'm going to talk here for a minute about a flexible endoscope example. In the video, health care reprocessing validation was one of the areas that the camera swooped by. And what we do here is we'll take a customer's product that's been designed and theoretically ready to go on the market. Then we will artificially soil it with contaminants, with things that mimic what would be in the human body. We then follow that customer's expected instructions for cleaning, sanitizing, disinfecting that reasonable device. Then we put it through the testing, and we try every possible way to find whether there's any remaining microorganism that hasn't been effectively removed or disinfected to a safe level. Obviously, if we find something, that product is not yet ready to go to market, it's not safe, and we will work in consultation with that customer to either adjust and improve those cleaning instructions or possibly change the design of the product to make it safer. Once we get through and it passes the test, this documentation from the test process and from the report ultimately become part of the product filing and registration that allow that product to go on the market. Another example is routine sterility testing, a little more straightforward. We make sure that finished products that are supposed to be sterile actually are sterile, and we support the release of millions of these sterile products, devices and drugs, every year. The testing will either validate that the sterilization process is effective or it will determine that, in a rare case, where it hasn't. And if it hasn't been effectively sterilized, then we investigate. We can do further evaluation to determine exactly what the microorganism is that has not been sterilized. Again, we go back and work with our customer in identifying either where that came from or why that microorganism survived the sterilization process. Then it might be a process revision, might be resterilization. In the end, the test record is the record of conformity and safety that safeguards global health. And you saw a couple of examples of that also in the video that we showed. So I showed a couple of examples of many different tests that we do. What really drives the demand in our business is our combination of leading capabilities. First and foremost is quality. Our customers recognize us as the market leader in quality. Data integrity, reliability results are unquestioned. Our test results are what our customers trust and rely upon to know that they're putting safe products on the market. No regulator ever challenges the legitimacy of our reports when they're going into a regulatory filing. And in fact, when there is a question with our competitor testing, the FDA and other regulators often point back to us to ask us either to do a technical consult on the test results that somebody else developed or to redo the testing. So that's quality. Service is a big deal, too. Our service is prompt. It's predictable. We have a network of labs as I shared before, across the world. This allows us with that scale and the variety of labs to really make sure we can always provide the best service, the best turnaround time. And that's critical because we are on the critical path to either product release to the market through a product development cycle or actual lot release of products that are waiting to be confirmed for sterility. So we're integrated to our customer supply chains, and we have to give great service. Most importantly is our expertise. We have hundreds of leading scientists, renowned microbiologists and chemists. We participate in and often lead standards committees. We work hand-in-hand with regulators. We're often a reference lab for them. And when customers have a tough problem, we're the ones they come to, to solve it. All of these things lead us to having very durable customer relationships and customers who start with us stick with us. Now the way were to deploy these strengths strategically to drive growth in the business is in these 3 key areas that I'm going to get into. Commercial execution is the first, operational excellence, and accelerating growth in a few key strategic pillar areas. First of all, commercial execution. We're going to work to continue to optimize our portfolio mix. And what that means is we're focused on higher-growth product segments. We're going to focus on higher profitability product segments. We've got some targets in pharma, in biopharma, in wearables. B.J.mentioned the importance of the growth of that particular market. Digital products and in places where we have a strong intersection with Sterigenics because this cross business synergy is very important. We're going to continue to get as easy as we can to do business with. That means customers can self-serve, quote when they need to. They can do technical inquiries online or directly to our experts, and they have good visibility to results. We are also going to make sure that we continue to be very responsive when customers do need a technical expert, and that leads to the last point here, leveraging our technical expertise to continue to increase our presence with our customers, with our regulators. Often, we go hand in hand with our customers to our regulators to answer the difficult and tricky problems and questions that the regulators have about the safety of products. So more consultative selling, more direct customer support and support in their regulatory environment. Second area of focus is operational excellence. Now we've been driving some operating improvements over the last couple of years that have made some pretty important improvements to our productivity and to our service to customers. Now like many other companies, we contended with some elevated attrition coming out of the COVID pandemic. And this led to some productivity challenges and profitability challenges in our business. We've stabilized our workforce, and that's allowed us to reduce the amount of rework, increase the productivity, operate more efficiently with a more efficient head count. And now we're turning to invest in the new lab information management system. What that's going to do is allow us to continue to drive better service, more reliable throughput and scalability for future expansion and M&A in our business. Last area of strategic focus is growth acceleration. And I've bucketed this into 3 different pillars, 3 different categories. The first one is to really assurance. This is the core of our business. It represents 40%, 45% typically, of our testing revenue. And we're investing right now over $10 million in some new state-of-the-art clean rooms to extend our lead in the market in both throughput, turnaround time, capability and, obviously, quality as well. We're also on the verge of developing and introducing rapid testing methods that are going to shrink the customers' wait time for results of testing and allow them to release products and clear their inventory faster. And we're going to expand our services in those 8 co-located labs that I mentioned that were aligned with the Sterigenics facilities because of the importance and the impact we can have with that cross-business synergy and testing. Second column, pharma penetration. We're really very encouraged by the growth prospects that we've seen in pharma testing, and we start on a very strong foundation of our European lab that we acquired in 2017 that is a world leader in extractable and leachable testing for pharma. It's best in class. It's working for the top pharma, biopharma and CDMO companies around the world. We're going to leverage these capabilities and develop some lab capacity in North America to really extend our service levels, improve our service levels in this area, but we're also going to build on that strong European base to offer more pharma testing in Europe beyond the extractable and leachable, so we're kind of going in both dimensions there. And as there's continued demand for biopharma and bioprocessing, we're going to be aligned with the drug and equipment makers on supporting validation of bioprocessing components. Most importantly, on this page, is cross-business excellence. As B.J. mentioned, the opportunity here is significant. It brings real value for our customers and for our company. It provides that end-to-end service that integrates testing and sterilization. And this is not only cross-selling and lead sharing, this is providing a seamless, integrated experience and the combined technical depth of both companies. So to wrap up, Nelson Labs is well positioned for growth. We provide vital services that keep patients safe and protects our customers from risk. We're very well positioned with our quality and our service levels, our deep expertise and our breadth of services, remember those 900-plus tests. And also, not least, our unique alignment with Sterigenics sterilization business. I'm confident in the growth prospects of our business for many years to come. And now I'd like to introduce the President of Sterigenics, Mike Rutz.

Thank you, Joe. Good afternoon, everyone. My name is Mike Rutz, I'm the President of Sterigenics. On behalf of the over 1,600 Sterigenics employees, I'm really excited today to be here to share you an overview of our business. It's a great business, Sterigenics. What I'm going to go through today is a brief overview of what we do, I'm going to talk about what it is that makes us unique, and we're going to finish off with some of the key strategic priorities that we're driving across the business. I think what you're going to see today is that we have a complex business that provides an essential service to the health care supply chain. It's represented by very high barriers to entry. We've got very, very strong customer relationships, long-standing customer relationships. We're backed by a great team of industry-leading technical experts. And when all of this comes together, we're built to deliver consistent growth, both now and in the future. So let's go ahead and get started. So for over 90 years, we've been a global leader in the comprehensive sterilization solutions. We have a network of over 48 facilities, supporting over 2,000 customers. We're a provider of all major terminal sterilization technologies, and we're backed by a team of leading experts, all aligned in our mission to Safeguard Global Health with every product we sterilize. We're 1 of only 2 global providers that has this level of scale and capability. And we're the only fully integrated global provider of Cobalt-60 combined with our Nordion sister family. What I'd like to do now is play a short video of a representative ethylene oxide facility that will give you greater insight in terms of what we do every day. [Presentation]

Great. I want to highlight maybe one key point from that video, and that is safety. What you see here is a lot of boxes moving around. And at the core of our sterilization process is either an ethylene oxide gas process or a radioactive isotope process. That imply -- that requires us to be incredibly focused on safety. So safety is our #1 priority. We take a safety-first approach in everything that we do across the company, and that's for the safety of our employees, for the safety of the communities we operate in, and for the safety of the patients whose products -- who ultimately use our products. Now we'll talk a bit about the value chain and where we play in the value chain. Really, we play a critical role upfront in the R&D phase, working with our key customers to assist them in designing their sterilization processes. We assist in the material selection process. We can assist in the optimization of packaging, again, all to try to drive lower cost for sterilization and hopefully quicker time to market of products. And then in the downstream process, we receive finished goods from our customers, and we complete the sterilization process and then work closely with Joe and the Nelson Lab to complete all the appropriate testing before we ship that on to consumers. So we are the ultimate end process in the overall supply chain for these goods. Taking a look at the technology that we operate in. So there's 3 major terminal sterilization modalities. The first those being ethylene oxide, 39% of our revenue comes from ethylene oxide processing. Ethylene oxide is ideally suited for more sensitive products that require deep levels of penetration, so surgical kits, wound care, drapes and gowns, medical tubing. Those are products that require ethylene oxide sterilization given their construct and makeup. E-beam, which is a machine-generated electron beam, represents 12% of our revenue. That's again ideally suited for low-density products, like advanced applications, cross-linking catheters. And then finally, gamma, representing 49% of our overall revenue, really the workhorse for our business. Gamma using Cobalt-60, ideally for processing highly dense products like bioprocessing, pharma packaging, alcohol liquid wipes, and commercial foods or commercial products, foods, spices. You've probably heard a bit about X-ray as an emerging technology. We view X-ray really as a complementary capability to our gamma network. It is not a replacement for gamma. We believe gamma ultimately has the highest reliability. It is the most sustainable with its low energy usage. But X-ray has some advantages. It does provide tight dose uniformity, and it can handle a lot of the odd dose ranges that are more difficult to run in a gamma site. So again, it can offload some of the inefficiencies from our gamma sites and make our gamma sites more effective. So we will use X-ray, but in a fairly limited fashion. All right. Now I'd like to share a bit about what it is that makes the Sterigenics business so unique. On the following slides, I'm going to give you a little more insight on each of these, but let me kick this off. So first off, we operate in highly regulated industries. We operate unique processes, which requires a high level of technical and operational expertise. We have a global facility network that's located very close to our customers. And because of the quality of service and the criticality of the service we provide, we have had very long-standing customer partnerships. So first off, from a regulation standpoint, I mean, you can see we've got very stringent regulatory oversight. We've got over 600 audits per year across our facility of networks. You can see the broad range of different agencies that audit us, both domestic and globally. We need to be prepared for those audits every day. We need to be audit-ready every day. That requires that we've got incredibly robust processes, and we follow those processes and procedures to a tea. The other implications of this highly regulated industry is from a product standpoint. Products require very extensive validations and approvals. It's not uncommon for a validation to require 6 to 18 months depending on the number of jurisdictions that needs to get approved in. That's time-consuming and very costly for our customers to validate and/or revalidate a product. Our customers count on us for our technical expertise and operational experience. The position we play and the place we -- the role we play in the supply chain is quite unique. The technology that we operator are quite unique. So customers count on our expertise. In the design and innovation phase, it's about designing best-in-class processes to support their products, right? It's about the influence that we play in the industry to drive standards on our regulatory boards. From a regulatory compliance standpoint, our customers count on us to maintain compliance and consistency. And we have a very strong track record of safety and compliance within our sites. And then from an operational perspective, we've got over 1,600 engineers, operators, safety specialists with high levels of engagement, driving a consistent standardized operating system across all of our sites. We maintain one quality management system. We maintain one ERP system across all 48 sites, one EH&S safety program across all of our sites. That's how we enable consistency of service and of quality. As has been said a few times here, we operate a facility network of 48 facilities across 4 continents. These facilities tend to be relatively small in size, 40 to 60 people is typical. The site size may be 50,000 square feet to 60,000 square feet. We typically operate one of our modalities in a site, and they typically run 24/7 in terms of operations. What you'll see is it's critical where we locate, and we're generally located either near a customer manufacturing center or a distribution center or somewhere on a logistics route between the two. Logistics costs oftentimes are higher than the actual cost of sterilization for our customers. So location really matters if we're trying to drive overall landed cost for our customer base. The added benefits of this broader network is that we can provide integrated redundancy to our customers. 50% of our revenues come from customers who use more than 5 facilities. Customers value the global reach that we've got and the ability occasionally to move products around and adapt to their supply chain. The end fact of all this, it's very difficult to replicate this sort of network and incredibly expensive. I think as a result of the critical role we play, the consistency of quality and service that we provide to our customers, we've had the great benefit of long-standing customer partnerships, and we work with the great majority of both medical device companies as well as pharmaceutical companies across the globe. We typically work within a 3- to 5-year contract, and as you can see, 90% of our revenue is tied to multiyear contracts. None of this would be possible without the customer satisfaction that we're able to achieve, greater than 80% consistently on our customer satisfaction surveys. So you get a sense for what it is that makes us unique, but I want to be realistic. We're not a perfect company by any stretch. We've talked a little bit earlier about some of the volume challenges we've had, certainly recently. We recognize the importance of delivering revenue, growth as well as free cash flow growth to the company, to our investors. Accordingly, we've prioritized these key strategic areas to achieve or maintain industry leadership and allow us to continue to maintain consistent growth. The first of those being commercial effectiveness; the second being operational excellence; and the third being EO leadership, and I'm going to go into each of these now in a little bit of detail. From a commercial standpoint, I would say historically, Sterigenics has been very strong at account management. We focused on customer service, We focused on customer satisfaction, and that's really what's driven a lot of our success and it's a great foundation to build off of. As we move forward, however, our environment is becoming more complex, regulation is becoming more complex, customer innovation is becoming a larger contributor, and so it's important for us to take a more strategic view of our priorities within our commercial strategy. So you see here a mix of our segments, similar to what BJ showed for the company. Today, 68% of our revenue comes from medical device products, 15% comes from pharmaceutical products and about 17% comes from other categories, the largest among that being food and spice, the second largest among that being veterinarian supplies as well as organic matter decomposition. So the first priority is about targeting attractive segments within this segmentation, both within these segments and then subsegments within these. I think BJ did a great job of explaining how we're attacking this, but we have built out a product marketing capability to provide better insights so we can identify which of these markets are growing faster, which of these markets can we provide a higher value-added service to so that we can target those as we develop our growth strategies moving forward. The second key priority will be about delivering value through integrated service offerings. This is really our partnership with Nelson Labs. And again, I think BJ did a nice job to provide an example of a large medical device company, where, working together with Nelson, we are able to shorten cycle time to get a product approved and get it out to market and back out to customers, okay? So that's the increased value that we can provide, integrating our service offerings. It's also important when we create that value that we're able to capture that value. So whereas we do not want to run ahead of our value proposition, we also recognize the need to put in place analytics that allow us to make sure we are getting the appropriate value capture across our business. Next, I'll move to operational excellence. I've been an operations leader for many years in my career. We're still at the early onset, I would say, of driving operational excellence across our 48-facility network within Sterigenics. We've got a great base to operate from, which is a Sterigenics operating system, which historically has been very focused on our quality systems, our EH&S safety systems. We are now building off of that tool with a dedicated team of operational excellence leaders to support continuous improvement, skills and tools across our entire population of associates. So program, our Lean Six Sigma program, our leveraging of Kaizen workshops across the facility, again, to drive efficiency improvements, service level improvements and, ultimately, free cash flow improvements. Asset reliability and utilization is also a key priority for us. Our facilities are becoming more and more complicated. There's more and more complicated equipment going into our facilities as a result of the regulatory needs. So it's important we maintain that equipment properly. It's important that we have the appropriate spare parts to minimize downtime as we move forward. And then finally, it's important that we continue to maximize our procurement savings and cost avoidance across the network. So lastly, our focus on EO. I'm sure we could spend a lot of time on ethylene oxide. We view the regulatory changes that are coming as opportunity. Believe me, we believe fully that we operate our sites safely today, and all of our sites are in compliance today with the current regulations. But with the new NESHAP coming, we have to drive these upgrades, and we will drive the upgrades that are necessary to meet those new increasing guidelines. We've been at this for now almost 5 years as a company, enhancing our EO facilities. There's no one that is better prepared to take on these regulations than us. What I show here is a typical EO facility. This is similar to the video that you saw earlier. You can see ethylene oxide processing is quite complex. It's a multistep process from receiving to preconditioning, to processing, to aeration then we do a quality release before we ship it. The goals of the new regulation are really to, a, restrict the areas where EO is contained and put a permanent total and closure around those areas to create negative pressure. That means that when a door opens or closes in that area, none of that ethylene oxide gets out, that error that needs to be controlled for our primary emission streams at a 99.99% destruction. So we got to take all the EO out of that air before we release it in the atmosphere. And we need to do all of that while we're maintaining a safe work environment with very low EO levels for our operators. That's a complicated balancing act to make work successfully. And if all of our facilities look like this one, maybe that wouldn't be quite as difficult. The reality is, all of our facilities across our network, that's 9 facilities in the Americas, are all a bit different. The age of the equipment is different, the layouts are different, and that's really true across the broader ethylene oxide industry in the Americas. So each of these requires a very unique and specific solution set to meet these requirements. As I said, we're committed to adhere to the regulations and to meet the NESHAP time lines. We're investing approximately $170 million across our 9 facilities to make sure that's a reality. And to give you some sense, a new facility that was being built to meet these regulations, we estimate it would be $75 million or more to meet these. Okay? So again, we feel good about our position here. It's challenging. It's going to be challenging for the whole industry. We're likely going to see some fallout from this. I don't think every EO facility in the Americas, the 100-plus facilities, are going to make it through this process. So again, we believe we're very positioned to comply and ultimately take advantage of that. So with that, I wanted to just wrap up. I mean, this is an incredible business. I'm very proud and honored to lead Sterigenics. It's a business that's generating mid- to high single-digit top line growth over the long term. It's characterized by high barriers to entry, very high investments. We benefit from very long-standing customer relationships and partnerships. And maybe most important to me and the thing I'm most proud about, we have a great team. We have a great team of experts that are all united in our mission to safeguard global health every day. So with that, I'm going to wrap it up here. I'm going to invite Michael Petras, BJ Lehmann, and Joe Shrawder back to the stage for a Q&A session.

Okay. Thanks, Mike. We have a couple of folks wondering around with microphones in the audience, and then we also have some questions that come in online that Jason can help facility as well. So why don't we end there's a couple of questions over here. It looks like Sean and Patrick has some questions.

Sean Dodge Dogan, RBC Capital Markets. So maybe for Mike Rutz, in your closing comments, you mentioned the new NESHAP regulations. How meaningful could those kind of alter the sterilization landscape when we think about in-sourcing potentially moving to outsource energy share shifts among the outsourcers? And then probably jumping ahead a little bit to Jon's portion of the event. But to what extent is that contemplated in that organic revenue growth guidance?

Yes. Okay. I mean it's still early days, right? It's still early days in understanding exactly how this is going to affect the broader industry. I mean we just this week, right, we got news of a sterilizer going bankrupt or going into Chapter 11. So I think we're going to see how this plays out over time. And I'd say -- so it's still a bit uncertain. We clearly, however, it's going to change the landscape, right? This is a very complex rule to achieve. I think there are a number of large players like us that we'll find a way to achieve these regulations, right? And as I said, we're very committed to do that. So I guess, let's see how time plays out. We believe we're positioned very well. We're ready to capture some of that opportunity if it does come our way for certain. And we're -- right now, we're very focused on making sure we're compliant, making sure our customers know we're here to serve them. And let's see how it plays out over time, but we feel good about it overall. I think in terms of your second question, the value capture there, yes, the complexity, the cost to operate these facilities is going to go up. And I think we feel that, again, in alignment with I indicated, we're trying to -- we want to make sure we're capturing the value we provide to our customers. We intend to do that. We have not reflected a significant amount of that in our go-forward plans until we understand exactly how it's going to settle out.

Patrick Donnelly from Citi. Maybe one, I guess, for both Nelson and Sterigenics, you both touched a little bit on kind of the expansion into some higher growth areas, bioprocessing, being one specifically. I guess can you talk about increasing the exposure there if that's the objective, how that happens? I think you talked a little bit organic, inorganic? Is that something organically you guys are looking to push? And maybe just talk about the levers to expand there and what you're seeing from that market as well in terms of the recovery? And I just had a quick follow-up after that.

Sure. Thanks, Patrick. So I'll go first. One of the things we're looking to do more of is leveraging existing customer relationships that we have in the pharma space and biopharma from our Belgian operation that does a lot of extractable leachable testing really across other testing aspects and across other facilities. So we already have an in with many of these customers. So that's really probably the first lever. Second particular to bioprocessing, there is a new USP standard called USP 665 that's coming into effect with a compliance date of early 2026. That's going to require significantly more testing of plastics that are used in biopharma processing, and it's right in our sweet spot, which is extractable leachable testing. So those are just a couple of the levers that we have in Nelson.

Yes, I think from a Sterigenics perspective, we've been a relatively small player in bioprocessing. We absolutely view that as a large opportunity for us going forward in a targeted segment. That market has taken quite a hit. I mean, we see significant revenues down year-over-year. but it's starting to come back now. So we are starting to see some sequential growth. And I think it's heading on a positive direction, and we intend to take advantage of that.

Okay. That's helpful. And then maybe just quickly on Nelson, I know the margin opportunity there has been a big focus in recent quarters. I talked a little bit about it but we look to just -- and I'm sure we will in the financials as well. But just in terms of the opportunities, the levers you see on Nelson on the operational side, margin expansion, would be helpful just to pull the cure back a little bit there.

Sure, Patrick. Well, I would just give a little bit of history. It's important to remember that the margin rate at Nelson at the time of acquisition was in the low 20s, right? So we've made a substantial move from there. And while we had a brief peak during the COVID pandemic due to a surge of face mask testing and then it settled out a little bit, we're really confident in that mid- -- that low to mid-30% range for our EBITDA. This will change a little bit as our mix shifts in our business, as you probably know, we have the expert advisory services that come in at a slightly lower margin rate. And as that's a little bit lumpy, that does have some impact. But fundamentally, we think that this is a business that continues to produce some improved productivity and get solidly into that low to mid-30% range consistently.

Patrick, I would also add to that is the key in both Sterigenics and the Nelson business is volume, right? As volume continues to improve, that should help drive better operating leverage in both these businesses.

Matt Sykes from Goldman Sachs. I just had one question. I appreciate the analysis on the XBU opportunity. And I also appreciate that increasing penetration with existing XBU customers is where the line of sight more immediate is. But in terms of those customers that are Nelson customers, but not Sterigenics customers, could you maybe help us frame what that opportunity could look like, understand it's longer term than existing XBU customers, but still, I would think that there is an opportunity there to cross sell those customers as well.

Go ahead, Mike.

Yes. I think we have a great advantage with that the they can get engaged very early with the customer base. And that gives us -- that can give us if we're aligned in which we are now, how -- it gives us good insight in terms of what's coming down the pipe, so we can get involved early in some of the product development activities. So we are absolutely partnering upfront, leveraging that collective intelligence, so to speak, to make sure that we're there early on when products are being developed, when that testing is taking place to ensure that we can gain the benefits of the downstream opportunities.

BJ, if you have something to add?

Maybe I could just add a little bit to that. I think in particular, in the pharmaceutical segment, leveraging our relationships with Nelson customers allows us to see sterilization opportunities much, much earlier. So building on what Mike just said, there's a lot of growth in biologics. There are a lot of changes in delivery methodologies, single-use delivery, met devices that you wear things like that. And I think our involvement historically from a sterilization perspective, hasn't been as early as we've been involved in the development process with Nelson. So we're seeing more, and I think we will translate that over time.

Yes, I would just add, and it's not just in pharma, right, then as I explained in my pitch, way upfront product development is biosafety, biocompatibility testing. We know those products a year or more down the road, you need to have a sterilization process developed and validated. So if we can take those early indicators and work with Sterigenics, they can get in early on the game.

Brett Fishbin here from KeyBanc Capital Markets. Just had 2 questions. One, a little bit more backward looking. I'll start with that one. So we talk a lot about the core medical device and pharma end markets. And the 17% that's in other was a little bit higher than I was thinking. Maybe if you could just talk about how that portion of the Sterigenics performed over the past few years? And then I'll have a follow-up.

Yes. So as I mentioned, the key drivers in that would be food and spice product. That's the #1 category within that space. In general, I would say it kind of followed a little bit of the COVID trends. We had a little bit of a slowdown in that business, and it's come back now. And again, I would say it's fairly comparable, right, fairly comparable what we see in the med device market in terms of the trends that I would assume in that business.

All right. And then just thinking ahead, really for both Sterigenics and Nelson Labs, talked a lot about strategic focus on increasingly targeting the most attractive end markets and higher growth end markets. Can you just walk through specifically really in both segments, like which of the end markets and segments you're talking about?

Sure. I'll start. And BJ talked about some opportunities really across business, prefilled syringes and pharma, wearable devices, continuous glucose monitors, other AI-enabled things where there's more health care taking place out of the hospital than in the hospital and the patient is somewhat giving self-care and monitoring. This is a whole new field that's growing strong double digits, 20% or more. And we're really targeting that area to latch on to, to grow.

I would also tell you, Brett, within med device, there are winners within -- take orthopedics. There's some guys that are winning better than others. And the share those are the things that we look at as well in the segmentation. BJ, anything else you would add?

No, no, I'm a little careful about this from a competitive perspective. But I think you're absolutely right, Michael. I mean, we're digging into some of the subsegments. I talked about diabetes, but it's not diabetes. It's a couple of flavors of diabetes that we're really focused in on. I think that's true for a number of the medical device space.

Think of cardiology as well. There's different segments of cardiology are growing in other areas as well.

Jason Bednar from Piper Sandler. I wanted to unpack that, Mike, that opportunity you talked about with ethylene oxide. Just what does that exactly for you? Do have excess capacity where you could take on business that might get displaced elsewhere? Or does this manifest itself in something where you, as like a company that is more able to comply with these regs where you actually are the preferred provider, you have pricing power, maybe you can even go out there and roll up some of these other assets that aren't able to comply.

Probably yes to both of those. I'd say yes to both of those. Yes, I mean, we have some capacity to absorb and to take in more business. We have some. And I think we do also have an opportunity, as you mentioned, to play a larger role as we look across, and that could come in a variety of different ways. But I think our leadership position there, customers can trust us, they can have confidence in us. And as a result, that will pick up some business we anticipate.

Mike talk a little bit about the capacity because capacity in a generic sense, you have it, you don't, but the nuance is about chamber sizes. Can you just educate the market...

Yes, ethylene oxide is a bit unique, right? So it's not just about saying I have x amount of percent open capacity. It really is dependent on the chamber size itself. So we run 30-pallet chambers, which are ideal for high-volume products, but we also made 3-pallet chambers, 6-pallet chambers, which are really well suited for smaller more niche products. And so I may have capacity in a 3-pallet to 6-pallet. That's not going to be 1 of our major volume players, a lot of good. So we really do need to think about strategic and where is that capacity? What type of configuration is it in? And is it ideally suited for the various customers. So it's a bit of a complicated capacity analysis that we have to do in working hand-in-hand with customers and make sure, again, we're in the right place to support their business. So as this landscape evolves, we will make sure that we develop a capacity model and capacity plan to support that business.

And remember, embedded within Mike's answer, what part of the FDA filed. It's not Grand Prairie, Texas, Sterigenics. It's Grand Prairie, Texas Chamber 3, right? The recipes are based on specific chambers and specific facilities, which are part of the FDA file. So there's opportunities here. Not all capacity is the same is the point that Mike is making here. But we see opportunity as the competitors start to have some challenges around these new rigs, it's a matter what kind of capacity is going to be needed to fill those gaps. But we feel pretty good about where we're at. Right now, obviously, our volumes aren't at a level on our utilization is a little less, but there are constraints within our network as we sit today as well.

And BJ, just maybe coming back to the kind of the M&A conversation. We heard more about Nelson necessarily than we did about Sterigenics. I guess, can you talk about just maybe the interest level? Is it -- would you like to get the NESHAP reg compliance behind you before you move more aggressively on maybe acquiring other facilities? Or is it just that there's so many more other opportunities in Nelson that you'd rather target that first?

We're focused on both businesses. I think there are tuck-in opportunities in both businesses. Some of the opportunities we've looked at over the past couple of years have been sterilization opportunities. I mean, obviously, we think about the regulatory requirements, but not all of our opportunities that we're looking at are within the United States either. So we're going to pursue opportunities in both areas. I think with respect to some of the activity we're seeing around NESHAP, the Cosmed bankruptcy, et cetera, there might actually be some interesting plays here for us to pick up additional capacity, maybe run the operations better and get relatively high-quality assets where it doesn't require substantial additional investment. So I think there's opportunities in both directions.

Dan Baldini from Oberon Asset Management.

Would you mind pulling a little closer?

Dan Baldini, Oberon Asset Management. So I want to follow-up on a comment you made the Sterigenics presentation, where you said you expect mid- to high single-digit growth over the long term. And on the STERIS website, they've got a presentation with a slide for their Applied Sterilization Technology segment where they say they expect low double-digit organic revenue growth long term. And so I'm curious -- I mean, you mentioned a couple of times you were unhappy with your volumes. What's the sort of explanations for the there?

I can only speak to my numbers. And the fact is, based on the current environment that we see today, we feel 5% to 7% is roughly appropriate for what we see in today's environment. Again, we aspire certainly to achieve higher than that, and we believe there are pathways absolutely to do that. But that's where we felt comfortable right now, setting our guidance that we believe is realistic and is representative of the current market conditions that we see.

Jason, you have a couple of questions from online as well while we're circulating mics.

Sure. So you mentioned that pharma volumes are growing mid-single digit in med tech, low single digit. Are these in line with historical trends?

So I'm sorry, I didn't quite hear that well.

Mid-single digits on pharma, low single digits on med device are those consistent with historical trends?

I think they're representative of what we've seen historically, particularly over the past couple of years. I mean, if you take COVID out, I think those numbers are pretty much in line. I think they represent fair estimates of what we see going forward in the next couple of years in the areas in which we participate as well. There are certainly some subsegments where there's higher growth, just mentioned a few of those, and we're certainly going to try to orient our business more to those spaces. So I think there's some upside opportunity for our business to get above those industry and market level growth.

I'd say just looking at the penetrations of our business as a percent of total of pharma growing significantly over the last several years, there has been a little bit more for us in the pharma space, but we're a smaller player, but we have grown a little bit larger than the market, but we're still small, relatively speaking.

Steven Couche, Jefferies. The I'm wondering if the 5% to 7% consolidated top line growth target or the mid-single-digit Nelson target includes any success from the cross efforts? And then on the competitive environment in Nelson, can you give us a sense of how much of your petition, if any, is also integrated across sort of terminal sterilization and testing? And then for those that aren't, how much of a cost structure benefit does that give you when you have those co-located facilities?

So maybe I'll take the first question.

And then Joe, yes.

So with respect to your question, so the tie into the 5% to 7% forecast number. There is a limited amount of cross-sell success built into that. Our aspirations are much higher than is represented in that forecast. I think we have opportunities to get there. It may be a little bit back period focused. But I think we can do better. That's our aspiration.

It's not a big step up from our current run rate is the answer.

Yes. And on the second part, look, there's no company out there that has the degree of integration and the extent of labs that accompany the sterilization that Nelson Labs has the number of tests and just the scale and the scope of operations. So we feel that it's a real competitive advantage for us. I can't speak to the competitors' cost structure. I don't necessarily know what that is. But for us, it's less about the cost structure, and it's more about the service advantage in providing that comprehensive integrated service experience that keeps the customers coming to us.

Yes. Time for one more question, Jason. Why don't you give us one from the Internet?

Sure. For Nelson Labs, what drives stickiness with customers?

Yes. Okay. So first of all, it's not easy to switch labs. There's very significant have acquired by our customers or any lab customer to qualify and validate another lab through their quality system. So when we get them, we usually keep them. When you add to that the risk that our customers take on compromising quality, compromising service, going to somebody that has less technical expertise, less domain expertise, just less overall scale than we have, it leads to very durable customer relationships for us.

Good. Okay. Well, thank you, everybody, for sitting with us through the first half. We'll take a quick 15-minute break, and then we'll lead off, Riaz will lead off and take you through the Nordion business when we return from the rate. Okay. Thank you. [Break]

Thank you, everyone, and we are back from the break. Let me reintroduce Jason Peterson, VP of Investor Relations to the stage.

All right. Well, welcome back. Look, we're just going to jump right back in the presentation. So please welcome to the stage, Nordion's President, Riaz Bandali.

Good afternoon. I'm delighted to be here with you today to talk to you about a tremendous business in Sotera Health. Nordion is the clear global market leader when it comes to the provision of Cobalt-60 sealed sources that are used in gamma sterilization and in cancer therapy. Today, I'm going to walk you through why Nordion's capabilities and unique expertise make it the go-to company when it comes to everything related to Cobalt-60. I'm going to show you our facility in Ottawa, Ontario, that has tremendous processing capacity, the largest processing capacity in the world when it comes to Cobalt-60. I'm going to tell you how Nordion is the only company in the world that can get access to cobalt from all 5 cobalt-producing nations. I'm going to talk you through our thoughtful and proactive approach to ensure that we have a long-term supply of cobalt. And this supply comes from North America, thereby diminishing the risk for long-term access from supply from Russia. I'm going to tell you about how our customers count on Nordion to deliver all of their Cobalt-60 needs, and I'm going to walk you through how our infrastructure and our capability lends itself very well to look at other radioisotope solutions in some very attractive high-growth markets. But before I do all of that, I want to show you this video, which highlights our amazing capability in Ottawa, Ontario. [Presentation]

Nordion is counted on to deliver a solution set to a customer that includes getting cobalt to them at a specific time, at a specific location, on a specific date and at a specific quantity. The other thing our customers count on us to do is to be able to get them a specific activity level associated with the sources we provide them. That allows them to have the optimal activity level to treat the specific products that they sterilize at their gamma sterilization facility. And they know that Nordion is the only company in the world that can do that for them because we have access the global supply from the 5 different producing countries that produce cobalt, and we can mix those activity levels to optimize what they need from a single source. They don't spend any time whatsoever thinking about the complexity of the supply chain that it takes to pull off those objectives. They just know Nordion will handle that all for them, and we do. We handle everything from securing access to Cobalt-59 targets that are made to our exacting standards, taking those targets and assembling them into bundles, taking the bundles and assembling them into adjuster rods. And then working with our nuclear reactor partners to insert those adjuster rods into nuclear reactor cores where for a period of 18 months to 60 months, depending on the reactor type, that Cobalt-59 is activated into Cobalt-60. And we then work with our nuclear active partners to harvest that cobalt, get it transited to our facility in Ottawa, Ontario, where it's processed rapidly into sealed sources that are delivered around the world in our transport packages in a highly compliant manner. Our customers also count on us to be able to help them with end-of-useful life sources, which is about 20 years after a gamma sterilization source has been in the field. To recover these sources, and over the last few years, we've been able to recycle over 99% of the cobalt from these sources. Nordion offers a one-stop shop solution when it comes to our customers and all of their Cobalt-60 needs. Nordion is a very distinctive company with distinctive capabilities that provides us with a very unique competitive position. We have access to a global supply of cobalt. We're continuing to invest in and build out that access to supply for several decades, and we have very dialed in relationships with our suppliers that allow us to process cobalt quickly and get it transited to our customers very efficiently. Our engineering, operations, safety, regulatory and logistic teams are the best in the world when it comes to dealing with high volumes of radioactive material that's used for critical health care applications and getting that material transited to anywhere in the world. We continue to invest in and improve our 2 cobalt processing facilities. All of this capability has led us to be able to establish long-standing and trusted relationships with our 40 customers worldwide. I'll talk about all of these now over the next few slides. Nordion is able to get access to cobalt from all 5 cobalt producing nations. And again, let me reemphasize that's important because we have the capability using our processing capacity to customize the blend of that cobalt to optimize the sealed source that's used by our customer so that it's specific for and optimal for the product base that they're treating at their site. The vast majority of our cobalt comes from Canada, from 2 nuclear reactor facilities that are within a 3.5- to 7-hour drive from our facility in Ottawa, Ontario. We also get supply from Russia. And over the last 2.5 years, we've been working very actively with governments from around the world so that they understand the importance of maintaining healthy supply change because they have access to cobalt that can be used to sterilize medical devices in their countries. They in turn have been working very actively with us to make sure that the inbound Russian supply is maintained in a sanctions-compliant manner, and we expect that operation to continue. We also are informing them of the investments that we're making to assure nations around the world of long-term access to supply, and I'll talk about that a bit later. Now we don't control when a cobalt discharge occurs. That is very linked to the maintenance timeframe for a nuclear reactor. So that can result in some quarterly lumpiness of when we can access our supply. But what I would say is that the timeframe for understanding when that harvest occurs is very well known by our team. And we have optimized the processes so that we can quickly take that harvest and transition that into sealed sources that are delivered to our customer sites. Every year, we also work very actively with our customers to ensure that we are fully aware of what their delivery dates are. So -- because we can optimize the time frame from being able to get that cobalt harvested to making sure that our customers are ready to accept it on site, this business becomes very predictable on an annual basis. And the demonstration of that is that last year, we were able to get 50% of our cobalt volume harvested, processed and out to our customers within a 7- to 8-week period in Q4. We're the only company in the world that has that kind of capability. On the video, you saw our Class 1B licensed nuclear facility. That Class 1B licensing is only one step below the licensing that's issued to nuclear reactor sites. That facility has some very specialized infrastructure and capability, which includes 6 high-processing hot cells, all can deal with a large volume of radioactive material, all of them have the automated manipulators that you saw on the video. We also have 2 large capacity storage and processing pools for cobalt. These pools are 20 feet in depth because they need to have sufficient shielding to make sure that the operators working around those pools are safe. We have a specially designed nuclear ventilation system. We have a specifically designed building management system. And one thing I couldn't show you in the video that we continue to invest in and build out is our safety and our security processes and infrastructure around that facility. Our specialized expertise as well as our infrastructure that we have on that site allows us to be able to work with our customers to plan their cobalt delivery to within days. And for some of our European customers where we can use our site just north of London for staging our cobalt, we can get them their cobalt within hours of when they need it. Why is that important? Because it minimizes the downtime that they need to do cobalt loading at their site. We also have an expert installation team that works and receives cobalt on-site for our customers at times and make sure that they install that cobalt quickly, efficiently and safely, again, thereby, minimizing the downtime associated with cobalt loading. Now I showed you all of this on the video. Why am I emphasizing this again? Because if you look at this infrastructure and the equipment that we have at that site, at this scale, that infrastructure is almost virtually irreproducible, right? It would be very, very difficult and very, very costly to build a facility of that scale, and I wouldn't want to even think about the time line to get that licensed. I have no hesitation to tell you that our logistics and our regulatory team is the best in the industry when it comes to dealing with getting large volumes of radioactive material that are used for critical health care applications transited all around the world. They work with a select group of Class 7 license carriers to be able to get cobalt transited by sea, by land and by air. These 2 teams working together have been able to keep cobalt flowing during a global pandemic. They've been able to keep it flowing after the ports were recovering with a tremendous amount of congestion post the pandemic. They've been able to keep cobalt flowing inbound from Russia over the last 2.5 years in a sanctions-compliant manner. And I'm very pleased to say that this year, those teams have been able to get cobalt into a region that was strive with a military conflict because our customer needed the cobalt there to be able to sterilize medical devices that were much needed in that region. These 2 teams working together are able to leverage the largest transport package fleet in the world. You saw that in the video as well. These transport packages are 10,000 pounds. They're steel containers. They are led shielded. They are specifically designed for the safe and effective transport of large volumes of radioactive materials all around the world. They have been certified and licensed by the regulatory authorities that you're seeing on this slide as well as several others. And we've been working for years to make sure that, that transit of material occurs in a safe and compliant manner all around the world. All of this capability in this infrastructure has led to very long-standing and trusted relationships with our customers. All of our relationships have been in place for over a decade. Our retention rate with our customers is over 95%. And our annual revenue is linked to multiyear customer contracts that we have in place that, from a volume commitment, guarantees us about 90% of our revenue on an annual basis. When it comes to our go-forward strategy for Nordion, there are 2 main priorities. One is to make sure that we maintain our market leadership in the Cobalt-60 market for the next several decades. The way we're doing that is by making sure that we focus on our customers knowing we've got access to the long-term supply of cobalt, talking about the advantages of gamma sterilization and looking at applications that can broaden the use of high specific activity cobalt. We also believe our second priority is to focus in on leveraging our tremendous infrastructure and our capability and our expertise to look at providing radioisotope solutions for customers who've been telling us there's a market need for trusted supply stores for areas like radio therapeutics. And BJ mentioned that when he was talking about opportunities to expand the serviceable and the total addressable markets for Sotera Health. Let me cover each of these. So the first one, I want to talk about is the investments we're making on ensuring that we have a long-term access to cobalt supply. These investments are proceeding well. The first investment that we're making is to enable the production of cobalt at the Darlington Nuclear Reactor site. This site is about 3.5 hours away from our facility in Ottawa, Ontario. We're very pleased with how this project is going. It's tracking on time. It's tracking on budget. As you recently heard, we actually have adjustor rods loaded in the first nuclear unit at Darlington. They're undergoing a transition from Cobalt-59 into Cobalt-60, and we're expecting the first delivery of cobalt from the site to occur in early 2028. The second ongoing investment is a different type of investment. It's actually investing in a new technology that's a first-of-a-kind technology to produce cobalt in pressurized water reactors. We have some very interesting and valuable IP that we're using in conjunction with our partner, Westinghouse, to develop this new technology. For comparative purposes right now, cobalt is produced in 20 CANDU units around the world and in 7 Russian graphite moderated reactors. There are 277 pressurized water reactors around the world and 64 of them are located in the U.S. We're seeing strong signs with regards to the proof of concept when it comes to using this technology, and we're in discussions with U.S. utilities to talk about the time frame to get this technology licensed and producing cobalt. The third thing I would mention right now is an option that we have in front of us, and it's an option that's reemerged, and it's being driven by the resurgence and interest in nuclear energy around the world. and the reliance on nuclear energy in Ontario. Ontario gets 66% of its power from nuclear energy. And what that means is that we've seen a transition in terms of being able to keep the Pickering reactors operational. Those reactors were scheduled to shut down in 2024. There's already been a license extension to keep them operating until 2026. And every sign we're seeing is indicating to the fact that these reactors will be refurbished and extended for their useful life into the 2060s. And that presents an interesting opportunity for us to consider the continuation of cobalt production with our longest-standing production site, that's at Pickering, and with our long standing -- our longest-standing production partner, which is Ontario Power Generation. Now Mike mentioned earlier that every sterilization modality has its use, and it has an applicability for a medical device set that's best suited for that sterilization modality. What I would say is that in terms of sustainability, reliability and simplicity, cobalt wins and gamma sterilization wins. Two weeks ago at a large-scale industrial radiation processing conference that we have every 2 years, I had a chance and the Nordion team had a chance to talk to our customers and the other attendees at that session to show them that from a sustainability perspective versus X-ray, cobalt gamma sterilization is much more energy efficient. It emits a lot less greenhouse gas, and as I've talked about, we've got a very robust recycling program at Nordion. Our customers are getting more and more increasing and paying much more attention to sustainability metrics as they think about running their business. So it was clear, from a sustainability perspective, gamma sterilization is very, very effective and efficient, but also from a reliability perspective. Our customers continually tell us when you think of reliability, and I'm defining reliability as uptime of the sites that are performing sterilization, gamma sterilization sites are significantly more reliable than any other of the modalities. The last thing is simplicity. And simplicity plays into why gamma sterilization is reliable. But also because gamma sterilization has been in place for decades, the process is around safely and efficiently operating a gamma sterilization site are well honed. We also are at Nordion investing in new technologies that can help gamma sterilization companies use their sites more efficiently. The expertise base that Nordion possesses can easily be leveraged into other areas. It's very unique, and as I've mentioned before, there are customers who are looking for a safe, secure supply with a reliable partner for the generation and processing of radioisotopes in growth markets. One such area is the emerging field of radio therapeutics and the impressive advancements that they've made in the clinical treatment of cancer. These customers have come to talk to us about the fact that they are worried about the long-term supply and reliable supply of those radio isotopes, and that gives us an opportunity to actively consider whether our unique skill set can be impactful to customers in that market, and we are actively considering that right now. We also have an opportunity on the cobalt side to think about other services we can offer to our customer base, and we're thinking through that as well as other applications for high specific activity cobalt, and we're working with other partners to think through that as well. We think all of these are really tangible growth vectors for Nordion. What I would say is none of this has been factored into our go-forward growth projections. So in conclusion, what I'd like to say is that the 200-person team at Nordion is very proud of the role it plays in Safeguarding Global Health through the provision of Cobalt-60 sealed sources that are used in gamma sterilization and in cancer therapy. From the perspective of this team, we feel like we've got a unique skill set that can be leveraged into other areas that enable the growth of Nordea as well as the fact that we are investing heavily to make sure that we maintain our market leadership when it comes to all aspects of Cobalt. Thank you very much for your attention. And with that, I will turn it over to Kristin Gibbs, the Chief Marketing Officer of Sotera Health.

Good afternoon. It's a pleasure to be here. I'm Kristin Gibbs, Chief Marketing Officer. And I'm just going to take a few minutes and provide you with an update on corporate responsibility. And specifically, I want to cover the role of responsibility at Sotera Health, the progress that we've made since our IPO, and our commitment and focus areas going forward. Safeguarding Global Health, as you've heard this afternoon, is really inextricably linked with corporate responsibility. Our services, you've heard about them this afternoon, are really built around ensuring the safety of patients -- for millions of patients around the globe, whether it's the radiation that treats brain cancer or it's ensuring the safety and the sterility of vaccines and syringes, or even think of a health care setting, the drapes and the gowns that each and every one of us see, that is our work in action, and it really comes with tremendous responsibility. And our mission and our business is clearly aligned with the UN SDGs of good health and well-being as well as gender equality. It's our values that really drive our business. You've heard a lot about safety, customer focus, people, integrity and excellence. These values we take extremely seriously. They are posted at all 62 of our global facilities. They're incorporated into our employee communications as well as our corporate presentations. But probably most notably, they are a part of our annual performance review process, where we measure our employees annually on not just what they achieve, but how they achieve it and living our values is the metric there. So if you look at our journey, as I mentioned, it began with our IPO in 2020. And this chart really just shows the evolution that we've had since then. In '21, we developed our ESG strategy. We conducted the gap analysis, the materiality matrix. And at that same time, we elevated EHS to become a corporate function reporting to Michael Petras, our CEO. In 2022, we launched our first corporate responsibility report. And if you took a look at that, you would notice that's when we started to disclose environmental metrics as well as human capital metrics, and we continue to expand our EHS leadership at that time. I am proud to say that we are going to publish our third corporate responsibility report by the end of this year. In 2023, we began our shareholder engagement. And some of you in the room and those on the webcast, I know have provided us valuable insight and really have -- and your time to give us insights that have helped shape our ESG strategy going forward. And so I really appreciate that, and I know I speak for our entire team. And probably notably, I want to recognize the fact that in the last 12 months, we've named 2 independent directors to our Board. Last November, we named Karen Flynn, who brings a tremendous amount of pharmaceutical and commercial experience from being a leader of both Catalent and West Pharmaceuticals. And then just this past August, we named Chris Simon, who's the CEO of Haemonetics, as our latest independent Director. And prior to Haemonetics, Chris was the global lead for the medical device practice at McKinsey. All of this progress over the last 4 years is really predicated on strong engagement and oversight with our stakeholders. Our internal ESG Committee is a cross-functional executive committee. It's chaired by myself and my colleague, Erika Ostrowski, who is our Deputy General Counsel. And we're responsible for setting the strategy and accountable for making progress on our ESG initiatives. We are very thankful for the tremendous oversight that our Board also offers. And in particular, I want to recognize Ann Klee, who is the Chair of our Nominating and Corporate Governance Committee, for her active engagement as well as her thorough review of our corporate responsibility report. And I just want to highlight for a second Ann has tremendous experience at EHS, and she brings that to these conversations into this review. For those of you who don't know, she led the EHS practice at GE for over a decade. And so it's wonderful to have her experience and her knowledge as part of our engagement. And then as I alluded to, our external stakeholder engagement is invaluable. So it's our shareholder outreach, it's our customer surveys, and you heard a lot about our satisfaction reviews as well as our employee engagement and our proxy adviser and rating firm assessments. All of this serves as tremendous insight to shape our way forward. And so as we think about our way forward, we're focused on the following 4 things, thoughtfully navigating what's becoming an increasingly complex ESG environment. We look forward to enhancing our environmental and our human capital disclosures, maintaining our investor engagement as well as the insights from our stakeholder -- our external stakeholders, and then ultimately, living our mission of Safeguarding Global Health, which, I think you would agree, comes with tremendous responsibility. So with that, I thank you for your engagement and your time, and I look forward to engaging with you in the future here as our ongoing shareholder engagement continues. So now I'd like to introduce Jon Lyons, our CFO. Thank you very much.

Thanks, Kristin. I'm Jon Lyons. I'm the CFO of Sotera Health. I'm thrilled to be here with you today. I hope you've had a great day meeting our team and learning more about our business. I'm ready to tell you about the financial story. I'm going to start with a little bit of history. I'm then going to talk about our financial strategy, which is about growing the company, accelerating free cash flow generation and driving disciplined capital allocation. Then I'm going to share our outlook, which includes organic revenue growth of 5% to 7% on an annual basis, adjusted EBITDA growth of 5% to 8% on an annual basis, and free cash flow conversion of 35% of adjusted EBITDA in 2027. Now let's turn to the history. You've heard today about the critical role we play in health care and the unique position that we have in our markets. I think that's reflected in the results we've delivered over time. Since 2020, we've grown revenue at an 8% rate in a pretty choppy environment. That's over $300 million of growth, and we're now over $1.1 billion in revenue. We've also been able to grow adjusted EBITDA at the same clip of 8%. That's a $140 million increase in adjusted EBITDA, and we're now over $560 million of adjusted EBITDA. And while it's not where we want it to be, we've increased our free cash flow generation from 2020 to where it is today, at about a 10% rate to nearly $140 million of free cash flow. I think we've had a solid track record of performance in this time period. As we move forward, we've shared with you our 4 operating strategies or 4 operating priorities and the business presidents shared their plans with you just today. Consistent with that, we have a very simple financial strategy. We're going to relentlessly drive organic revenue growth. We're going to expand margins. We're going to continue -- we're going to continue operating a disciplined capital allocation framework, and we're going to accelerate free cash flow generation. Our ultimate goal is to generate shareholder value through growth and discipline. So starting with revenue. Putting the pieces together from what you heard today, we see Sterigenics, our largest reporting segment with about 2/3 of our business, growing in the mid- to high single-digit space for revenue. Nelson Labs, which comprises about 20% of the business, we expect to grow in the mid-single digits area. And then Nordion, which Riaz just talked about, we expect in the low to mid-single digits. When you put all the pieces together, we see 5% to 7% annual revenue growth for the next 3 years. That's based on a market that we expect to grow in the low single digits and price of 3% to 4%. Now on to moving and expanding adjusted EBITDA margins. We already have outstanding adjusted EBITDA margins. And if we held them constant, I think we'd enjoy really nice growth in this. So our goal is to expand them. Each of the presidents shared their operating strategies with you. They boil down to essentially 2 things, one, operating our facilities really well to serve our customers really well. That's one of the most important things we have to do. The other is managing our costs and driving operating leverage. We will need some support -- we will need some investment to support our growth. But even with those investments, we plan to expand margins by at least 50 basis points. Importantly, the faster that we grow, the faster we could expand or the more that we could expand margins. So when we look at our 5% to 7% revenue growth, we see the opportunity to expand margins and grow 5% to 8% adjusted EBITDA. This growth in revenue and adjusted EBITDA is a key aspect of accelerating our free cash flow generation. And before we get to free cash flow and CapEx, let's talk a little bit about our approach to capital allocation and starting with a little bit of history. On the top left-hand side of this chart, I've broken out where our capital has gone over the last several years, 2020 to year-to-date '24. We spent about $170 million on tuck-in acquisitions in Sterigenics and Nelson. And we spent over $600 million in CapEx. The bottom left-hand side of this chart then breaks down that CapEx. About 1/3 of that has gone to maintenance for our facilities, 1/3 of it has gone to growth investments across the business, but predominantly in Sterigenics, about $100 million -- which remains about $100 million each in EO facility enhancements. So we're a large way through that investment that Mike spoke about. And also cobalt development, which Riaz just spoke about, we've made considerable investment there, about $100 million thus far. As we look forward, the first thing in our capital allocation strategy is about maintaining a healthy balance sheet. The important aspect of that is having adequate liquidity. We had $700 million at the end of the quarter. So we feel good about our position there. We need to ensure that we have access to capital markets to fund the company in a variety of environments. An important action we took earlier this year was to refinance the debt portfolio, and we now don't have any material debt maturity until 2031. So I'm very pleased about our balance sheet position as it sits today in those regards. The other important areas are leverage. And we've targeted a 3 to 4 -- 2 to 4x leverage ratio in the past. And right now, we sit at 3.6x. Our goal and our expectation is to move that to the 2 to 3x, and we're hoping to have that done in 2027. From there, it's about what are we doing with our money? The priority for us will always be -- the top priority for us will always be organic growth. This is a tremendous business, and we want to make sure we have the investment to maintain it and to grow it. After that, it's about opportunities and opportunistic activities. You heard about our focus on M&A, and so we will focus on a niche and near -- the core and near adjacencies. And we'll also consider debt paydown as well as share repurchase over time. So now let's get specific on where we see CapEx evolving in the business. It's -- this is obviously a very important part of our goals to improving the free cash flow generation. On the left-hand side, I've shown a baseline. This baseline is about $200 million, which is the average of the actual CapEx that we spent in 2023 of $215 million and the midpoint of our guidance for 2024 of $175 million to $185 million. As we mentioned on the earnings call, we now expect our peak CapEx to occur in 2025. But from this baseline, over the period, we still see a considerable step down. We'll complete our U.S. EO facility enhancements in 2026, consistent with the compliance deadline that we have for those regulations. We'll largely complete the Sterigenics' remaining growth actions. We have -- as a reminder, we have 2 greenfields we're putting in. One will be complete in '25, the other one will be largely complete in '26 with some spending trailing into '27. And we'll also complete the Nordion cobalt development projects that Riaz spoke about in the period. All those actions in the activity progress there will get us to a little over $100 million of CapEx. I've shown $130 million on this page with a focus on some unidentified growth. As we think about unidentified growth, this comes down to we have a great business, and we're holding ourselves accountable to finding other growth opportunities. We're only going to do that if it makes financial sense. And that brings me to the right-hand side, which is our process. Just to outline the approval process, for example. Michael approves any project over $500,000. I personally approve any project over $250,000, and those are only the projects that happen to get through the business presidents who I hope you heard today, their voices and the important focus they have on free cash flow generation and value creation. As we look at our projects, we target an internal rate of return of 20%. Another important aspect in consideration as we think about evaluating a project is the payback period. We want to make sure that we're getting cash as early as possible in these programs. Finally, we have a monitoring process we call say-do to make sure we're delivering on the commitments that we make and tracking the progress on the programs that we've approved. So how does that all come together when we look at free cash flow? Over the past few years, we've been a bit inconsistent with our free cash flow generation. We faced into legal settlements, defense costs, we've had rising interest rates and elevated CapEx, that weighed down on our free cash flow performance. On the left-hand side of this chart, I have normalized this a bit to remove the impact of the settlements and the litigation costs. So you could see more of the underlying performance. As we move forward, and as I mentioned a little bit earlier, there's 2 big drivers driving improved free cash flow: number 1 is the revenue and EBITDA growth that we aspire to deliver. And the second is the lower CapEx that I just spoke about. We also expect some modest improvement in our interest expense. On the right-hand side, I've laid out 2 goals here. And I just call out a couple of things. We did not -- this does not reflect any settlements that we might have or EO defense costs, so it's consistent with the chart that I show on the left. It also doesn't reflect our expectation that we recover $110 million insurance defense costs that we've been awarded that's still pending in appeals. On the right-hand side, are the 2 goals. We're targeting cumulative free cash flow generation of at least $500 million from the period '25 to '27. And in 2027, we're targeting free cash flow conversion of adjusted EBITDA of 35%. This business has tremendous free cash flow generating capabilities, and our goal and our focus is delivering on it. In summary, we believe our financial strategy will deliver attractive financial performance that importantly endures over time. Over the next 3 years, we're targeting 5% to 7% revenue growth per year, margin expansion that leads to 5% to 8% adjusted EBITDA growth per year, maintaining a healthy balance sheet with improving leverage. Free cash flow conversion of approximately 35% of adjusted EBITDA in 2027 and $500 million or more of free cash -- cumulative free cash flow of the period '25 to '27. We will continue to be disciplined allocators of capital with a goal of generating exceptional shareholder value. With that, I'd like to close the formal remarks and invite my colleagues back to the stage for Q&A.

Okay. Thank you. We'll take questions now. Patrick?

Patrick Donnelly from Citi. Maybe just one on the long-term algorithm there. Can you just talk about the pricing impact? I think the prior guide, it was 3.5% to 5% tailwind moved down a little bit in this one maybe 3% to 4%. Just what you're seeing on the pricing side, expectations would be helpful to talk through that.

Yes. I would say the biggest move would be on the Nordion side. The Nordion, as you know, has been running a little higher on price the last several years and quarters. And that's settling back a little bit as we told you this year, as we look forward the next couple of years, we typically had them in the higher end of that range, if you recall, and I'd say they would settle down in the midrange roughly in that guide going forward. That's why we've tightened that range a little bit of 3% to 4%.

Okay. That's helpful. And then maybe one on the cash flow. Helpful to talk through the bridge there. Can you just talk about, I guess, what levers there are? Obviously, again, the CapEx piece is big, some of the but certainly been a big focus for investors just in terms of unlocking more, as you guys know, which is probably why you spend so much time on it. But I would love to just talk through how you think about unlocking more on the cash flow side against such an attractive EBITDA number and then just getting that conversion higher. Jon, maybe it would be helpful to just talk through how you look at it. And again, is there conservatism baked in that number? -- how to think about it?

Thanks, Patrick. I mean we want to make sure always that we -- what we put out, we can deliver against -- but as I look at the levers, clearly, that CapEx is the biggest single lever that we have and making sure we remain disciplined in that process, putting capital that makes sense for the business, makes sense from a return perspective, I think continues to be the most significant. The business doesn't have a big working capital demand as it is. We do have some opportunities. We'll continue to drive inside that, but it's not terribly material. And I think as we go, I think one of the nuances that we have to face into is as we grow, we have the benefit right now of NOL from a tax perspective that will exhaust in this time frame. So in 2027, we expect at this stage based on the assumptions that we'd be a full U.S. taxpayer with that. And we've got to make sure that as we look globally, we're managing that tax expense as best as possible. We've actually taken some actions in that regard, but it's something we have to continue to push for. Maybe one thing I would add is we keep pushing for more growth, too.

Sean Dodge, RBC. So maybe, Jon, on the margin expansion target, the 50 basis points over that period. You talked about operating the businesses better, but then also operating leverage being the 2 drivers there. As we think about kind of how you build to that 50 basis point plus over that period, is it expected to be pretty linear? Are there stair steps in there? And kind of any more color around any of that?

Yes. I mean I think we'll have some variability year-to-year, and we could see outsized growth in given years, right? I mean, as I mentioned, the 50 basis points, I say at least is really around the low end of the range and the stronger that we perform from a growth perspective, I would expect us to do better. So in years that we are at the higher end of that range, I would expect that we might get some better improvement.

Okay. And then maybe kind of similarly on CapEx, you said that should peak in 2025 at the $200 million level. As we think about how that kind of develops then over '26 and '27, is that going to be a nice kind of linear step down there? Or as we see these expansion projects and those roll off, will it step down kind of meaningfully in '26 and '27?

Yes. So just to clarify, I think you said peak at $200 million. The starting point is $200 million. The peak would be in '25, so inherently above the $215 million that we spent last year as a starting point, just to clarify that. But I would expect a step down year-by-year, consistent with what we've kind of talked about before.

Yes. And remember, Sean, we had anticipated this year being the peak with some timing of projects that we told you in the last quarter that get pushed out will make next year the peak. But we see a path down as Jon, portrayed. Jason, are there any questions online that have come in?

Sure. With respect to cobalt development projects, will that smooth out the Nordion lumpiness from quarter-to-quarter?

I'll cover that one, right? So those development projects are really focused in on ensuring that we have stable long-term access to supply, and we can assure our customers that we have access to that supply. But because of the way that nuclear reactor discharge schedules work and because they vary between nuclear reactor sites, it still will be some lumpiness in terms of quarterly access to cobalt. But as I was talking about, despite that quarterly lumpiness, we have a very predictable business on an annual basis because of how honed in our processes are from harvest to getting products to our customers as well as how much planning we do with our customers around when they need cobalt.

Jason, you have another one while we're waiting for the microphone front here?

Sure. With respect to CapEx, is there a portion of CapEx that is needed to keep up with general market growth?

Yes. I would say over the last several years, as we've been growing and investing in growth CapEx, we've been -- we have -- as Mike mentioned, we have parts of our business that are really tight on capacity. So a lot of our investment has been about our expectations for maintaining and growing with the market versus being able to grow on an outsized basis.

Jason.

Maybe dovetailing off that last question and going back to...

Jason, can you hold the mic a little closer. Thank you.

Yes. Sorry about that. So dovetailing off that last question and going back to that cash flow bridge that we had out to 2027, it looks like you're pulling back on or maybe moderating some of those growth investments, the Sterigenics investment. So I guess, how do you have us reconcile or how would you have us reconcile the top priority for the business being organic growth, but at the same time, pulling back on some of those investments?

Yes. Jason, I would say it's a reflection of trying to demonstrate what's possible from a free cash flow perspective and from a CapEx perspective versus what we hope would be probable and that we find good projects that we want to continue to invest, and we get a lot of support from folks in this room for seeing the investments, and they're happy to us be allocating our capital that way.

Yes. The other thing I would add to that, a couple of things from a context perspective. On the facility side, the EO facility enhancements, we view that as another significant advantage for us in the marketplace and be able to position ourselves really well. And then the growth CapEx, also just from a context perspective, remember, our last greenfield was Markham Vale in the U.K., Mike, it was at or '16, '17? So this is unusual. We have 2 greenfields going in. We don't think we have the need for that going forward. Most of the other capacity expansions we've done are incremental to existing facilities. So just have that in context as well.

And then maybe going off of Patrick's question earlier, he was asking on pricing relative to the old plan, the old long-term outlook. Maybe touching on volumes. So price was the -- Nordion that changed on the price side. Is it -- you've gone from mid-single to high single volume mix growth in the old long-term plan to low single digit, I think, 2% to 3% today now in the updated plan. Is that -- what's the delta there? Is that Sterigenics and Nelson exclusively? Or any way to quantify how you're seeing the change by segment?

Yes. Thanks, Jason. So I would say a couple of things. As we step back and look at things and look at the marketplace, I think when you go back 4 years ago, you were a pretty difficult market trying to predict what was going to happen and as we've stepped forward to today and what we've provided today is an outlook that we think is something that's achievable and a reflection of coming through it's been pretty choppy environment. And so I don't -- I can't tell you exactly bridge 1 by one, but I would say the approach has been what do we see in the marketplace going forward and let's guide towards that. And I think there's a lot of different assessments that were made back in 2020 that the things were difficult to predict.

Yes. The only thing -- the other thing I'd add is if you listen to where Mike has had a mid-single to high single digits organic growth, his price has been a pretty consistent performer. We'd expect that to continue. And the range there is just based on the volume and mix that comes beyond that. So we feel pretty good about where that situated going forward. Although as I said at the opening and to reflect John's comments, 2020, what we looked at in volumes and where we're at today has moved a little bit. It hasn't been as steady and as robust as we'd like, but we still feel pretty good about it to be able to give you that 5% to 7%. But within that, our largest business, Sterigenics, I just referenced. Jason, do you have any others online there?

With respect to say-do analysis on your investments, can you just talk about that process?

Yes. A couple of things there that I would look at. One is just the ongoing monitoring of projects in flight. Are they -- has the business case changed? Are we delivering against our time lines projects recently completed monthly basis, how is the revenue performing? Or how is the product performing versus the expectations? And then taking a step back when -- after some time and looking back and say, okay, how did it do? You're a few years out, you've been in play. Are you performing against those business cases as you expected? And what -- and importantly, business cases are inherently going to be wrong, right? You don't want them to be wrong by a lot unless it's to the upside and you have to make sure you're learning from those and instituting those learnings as you evaluate new projects moving forward.

Yes, I'd say typically, we look at a 3-year time period after a project is launched. We look at 3 years back and how it's performed. And also besides the work that we do internally here, we also review that with the board on a frequent basis throughout the year as well. That would be the only other things I'd add to Jon's comments. I'm sorry, go ahead, Jason.

How do you see the tax rate evolving over time?

Yes. Thanks, Jason. As we move through, I think everybody who's probably looked at the company knows that the modeling the tax rate, it might be amongst the most difficult things we have to do. But as we look, the challenge with the tax rate has been our interest disallowance as we've been limited there, which has required some valuation that gives you kind of a funky tax rate. Over the long term, I mean, beyond the 3 years, depending how things evolve, this should trend more towards -- into the 20s. But short term, it should improve over time as we grow revenue -- or I'm sorry, grow income and decrease interest expense, you should get some improvement in it.

Brett.

You talked a little bit about M&A as a capital allocation priority. Maybe if you can just elaborate a little bit more around like how eager you guys are for bolt-on acquisitions to reemerge as part of the story and then what your top 1 or 2 priorities from an M&A standpoint would be?

Yes. So reflecting back on what BJ covered earlier, we've been engaged at several opportunities, making sure they align with where we are organizationally has been important. A couple of them have it aligned valuation-wise or just culturally some things that we found challenging when we looked at. But when you look at what's in scope, what BJ talked about, there'll be tuck-in acquisitions, the Nelson and Sterigenics side. Those would be -- we'd look in the U.S., we look in Europe as well, not so much in Asia, but that could be a possibility. When we then look at on the Nordion side, it's going to be more synergistic with some of our core capabilities that Riaz shared with you today. One of the areas we talked about was radiopharma , that's not the only area we're looking at. But looking at businesses that can leverage the strength that we have in logistics, handling regulatory nuclear materials, things of that nature that could leverage our strong compliance and regulatory knowledge would be the spot that I would tell you. Don't expect this to call you up tell you $1 billion-plus acquisition. We don't see that in the cards right now. But we do see activity. We continue to monitor. We've got a couple of things in the pipeline right now. I don't know if anyone get over the line as we always say. But it's something that we think is incremental to what we showed you here today as well. We just want to make sure you get a framework of how we think of what's in scope and out of scope. We're not going to call more so, we're starting to manufacture products, medical devices or pharma devices. That's just not what we want to do with business. In the back, Matt.

Matt Sykes from Goldman Sachs. Just a quick 1 on Nordion and the radiopharma opportunity. Are there things that you could do organically to move into that area given the synergies that might in your existing business? Or does the radiopharma -- does move into that area require?

So Matt my answer to that would be dependent on scale, right? So we used to actually be involved with radiopharma on the first generation of radio therapeutics. We divested of that business. We still have some of that expertise in-house. So it just depends on the scale of how much we want to get involved, what the radio isotopes are because the production technologies for the radioisotope varies. So I think we'd look at that on a radio isotope in opportunity-by-opportunity basis. And I think we can do a little bit of both.

I also like to make sure 1 thing is clear, Matt, that didn't come up -- we're not looking to get into therapeutic development space. I just want to be very clear, that's clearly out of scope. We're not looking to take risk on therapeutic development. We would be a back-end supply chain solution for the customer base that we engage with. Jason, go ahead.

So from an investor engagement standpoint for ESG, how long have you been doing this engagement who's involved in that from the [indiscernible].

Great question. So we started our outreach to investors in 2023, so we basically are in our second year of engagement myself, the other Co-Chair of our ESG Committee, [indiscernible], who I mentioned, along with Jason Peterson, are involved in these calls that we hold.

Great. Any other questions on the group before I go into my closing remarks. Okay, Jason, anything else? Okay. Great Okay. Thank you. So hopefully, you saw today, when we reflect on this company, and you heard from the team say, our 4 key priorities across the company as we look forward into the future, serving our customers with excellence across the entire and the solutions that we offer to our customers, winning these growth markets is segmenting the right areas, the right spots that we can cater incremental value for the business, driving operational excellence to continue to enhance our free cash flow and disciplined capital allocation. At the end of the day, these are the core fundamental priorities that we have the teams focused on. Hopefully, you've got good appreciation to that. And you've got from that today in listening to our teams. As I mentioned, this is a critical page to walk away with from today's session. But there's a couple of other things that I hope you took away with. One, I'm hopeful, 1 of our objectives here was to educate you on our business in more depth. We've engaged with several of you on conversations every quarter. We've engaged with your investor conferences. I'm hopeful that you walk away to the better appreciation and understanding of these businesses as a more depth by hearing from each of the business presidents today. The other thing I hope you walk away with is getting a better appreciation of the breadth and depth of this team. Also, the great markets that we play in that are growing, the barriers to entry and the competitive advantages that exist for us as a company the [indiscernible] I just talked briefly a moment ago about the mergers and acquisition opportunities. Hopefully, you've got a better understanding of what's in scope and out of scope as we think about this as a business. But most importantly, I want to make sure you understand, appreciate the critical role we play in health care and the responsibility that comes along with that for each and every 1 of our employees that we recognize. And I also want you to take away with the financial stability and durability of this business. Although volumes are great like them to be right now. This company continues to perform through all cycles. It's a phenomenal business that's well appreciated by our customer base, sticky relationships, highly regulated business with deep domain expertise has significant competitive advantages. And I hope you can understand why we're so excited around our ability to fulfill our mission of safeguarding Global Health. So with that, I want to thank everybody for your attendance today, both here in the room and on the webcast. Thank you for your ongoing support and engagement of the company as we continue to mature as a public company. We're very appreciative of that, and we're hopeful this is a beneficial day for all of you. So thank you, and have a great day.