Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello, everyone, and thanks for joining. I'd like to welcome you to the earnings call for Sotera Health covering the first quarter of 2025. Today's press release, along with supplemental slides that go with it, is available in the investor section of our site, soterahealth.com; this webcast is being recorded, and a replay can be accessed in the investor section of the Sotera Health website. Joining me on the call are our Chairman and Chief Executive Officer, Michael Petras, and our Chief Financial Officer, Jon Lyons. Some of what we say during the call may count as forward-looking statements. The matters discussed in those statements carry risks and uncertainties that might make actual results differ materially from what is projected or implied. For a description of these risks and uncertainties, please refer to Sotera Health's SEC filings and the forward-looking statement slide at the beginning of this presentation. No obligation is assumed by the company to update any such forward-looking statements. I'd also note that during today's discussion, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to net income, adjusted net income, adjusted EPS, net debt, net leverage ratio, and free cash flow, as well as constant currency comparisons. You can find a reconciliation of GAAP to non-GAAP measures for all relevant periods in the schedules attached to the company's press release and in the supplemental slides to this presentation. The operator will be helping with the Q&A portion of the call today. Please keep yourself to one question and one follow-up so that we can give everyone an opportunity to ask questions. Should you have any questions after the call, please feel free to reach out to me and the Investor Relations team. I will now turn the call over to Sotera Health Chairman and CEO, Michael Petras.

Hello, everyone, and thanks for being with us on Sotera Health's call covering the first quarter of 2025. We're reporting what amounts to a strong beginning to the year, having either hit or surpassed what we were targeting in every one of our business lines, producing mid-single digit growth at the top line along with double-digit improvement on the bottom line, measured on a constant currency basis against the first quarter of 2024. Across the whole company, revenues were up 2.6%, which becomes 4.4% in constant currency terms, while adjusted EBITDA rose 8.8%, or 11.2% in constant currency, both measured against the first quarter of 2024. Adjusted EPS for the quarter came in at $0.14, which is $0.01 better than what we posted in the same period a year ago. At Sterigenics, our biggest reporting segment, top-line growth matched the guidance we gave on our fourth quarter 2024 earnings call, and margins expanded by roughly 30 basis points relative to the first quarter of 2024. Sterigenics holds a leading spot in a sterilization service addressable market worth $4.5 billion, supported by favorable underlying trends from an aging population, health care spending, product innovation, and strict regulatory requirements. The Sterigenics team is excellent at meeting these requirements, which is a key source of advantage when it comes to winning and keeping customer volume. Our position is strong, and we're optimistic as sterilization volumes keep improving. Nordion's first quarter revenue came in above what we had expected, because certain Cobalt-60 shipments that were initially set for the second quarter of this year moved into the first quarter at our customers' request. That timing shift will affect second quarter revenues, though Nordion's full year outlook stays the same. Nelson Labs beat the first quarter expectations we laid out on our fourth quarter 2024 earnings call. Stronger core lab testing volumes in the first quarter partly offset the revenue headwind coming from expert advisory services. Nelson's group continues to perform very well in the areas of laboratory optimization and pricing effectiveness, delivering a 479 basis point increase in margin compared with the first quarter of 2024. That marks the 3rd straight quarter in which Nelson Labs has achieved year-over-year margin improvement, demonstrating ongoing movement toward our target of low to mid-30s margins. This morning, we are reiterating the guidance we provided during February's earnings call. To remind everyone, our 2025 outlook anticipates revenue growth between 4% and 6%, along with adjusted EBITDA growth between 4.5% and 6.5%, measured on a constant currency basis against 2024. Jon will bring you up to date on FX, which is trending better than what we previously projected. Before I hand things off to Jon, I'd like to briefly address tariffs. As things stand, we don't anticipate that the tariff policies currently in place will significantly affect our operations. Service revenue makes up roughly 85% of the company's overall revenue, and we feel our strategy of centering the business on services leaves us well positioned to handle the present tariff landscape. Our sole product-focused business, Nordion, ships Cobalt-60 from Canada to the United States. At present, Cobalt-60 falls under a tariff exemption through USMCA. Also, before I turn it over to Jon, I want to go through a recent example that touched a large number of people and demonstrates the meaningful value we deliver to customers across every one of our business lines. Working side by side, our colleagues at Nelson Labs and Sterigenics lately were instrumental in obtaining FDA clearance for what is the first bionic pancreas ever. Over at Nelson Labs, the biocompatibility testing was carried out by our scientists, and our regulatory specialists assisted our clients in working through the many requirements needed to bring the product to market. After that, our Sterigenics team supplied the required sterilization of the product, something essential for device usage and for keeping patients safe. The combined know-how our teams bring in science, in quality, and in steering through the regulatory landscape gives our customers confidence that their products are going to be safe; for patients with insulin-dependent diabetes, that translates to 100% of their insulin doses being able to be fully automated, and this novel device is able to link up with many continuous glucose monitors. This stands as an excellent illustration of the way we engage early during the development stage for new products in order to serve our customers and expand our business, in the end moving product mix toward segments with higher growth and greater value. Safeguarding global health as our mission carries a big responsibility, and each day it makes me proud to watch our teams embody that mission. Now, Jon is going to walk us through the financials in additional detail.

Thanks, Michael. First, I'll walk through our consolidated results for the first quarter of 2025, then go into more detail on each business segment, along with updates regarding capital deployment and leverage. After that, I'll wrap up with further specifics about our 2025 outlook. Looking at the total company on a consolidated basis, revenues for the first quarter rose 2.6%, reaching $255 million, which comes to 4.4% growth in constant currency terms versus Q1 2024. Currency movements created a 180 basis point headwind during the quarter, and that impact was felt most heavily within our Canadian-based Nordion business. I'd also remind everyone that this quarter had one fewer selling day than Q1 2024. Adjusted EBITDA rose 8.8%, hitting $122 million, which works out to an 11.2% growth rate in constant currency. Margin expansion occurred across all three businesses, bringing the total company adjusted EBITDA margin to 47.9%, up 276 basis points from the first quarter of 2024. Interest expense for Q1 2025 came in at $41 million, an improvement from $42 million in Q1 2024. On a GAAP basis, our net loss for Q1 2025 was $13 million, or $0.05 per diluted share, and that figure includes the pending, previously disclosed $31 million settlement of EO claims in Illinois. That compares with net income of $6 million, or $0.02 per diluted share, in the first quarter of 2024. Adjusted EPS rose to $0.14 per share, a $0.01 gain over Q1 2024. Now let's dig into how each segment performed. During the first quarter, Sterigenics posted 1.9% revenue growth, reaching $170 million, or 3.9% in constant currency, which matched what we told you to expect on our Q4 2024 earnings call. Growth for the quarter came mainly from favorable pricing of 4.1%, partly offset by roughly 2% from unfavorable foreign currency exchange rates. Segment income rose 2.5%, reaching $88 million, helped by favorable pricing and partly held back by inflation and shifts in foreign exchange rates. Nordion's first quarter revenue climbed 36% to $33 million versus the same period a year ago, or 40.6% in constant currency. As Michael noted earlier, revenue exceeded expectations because certain Cobalt-60 shipments that had been set for Q2 2025 instead landed in Q1. Volume and mix overall improved 39.3% during the quarter. Partly offsetting that gain was a headwind of approximately 500 basis points from a stronger U.S. dollar relative to the same period last year. Nordion's segment income rose roughly 62% to $17.4 million compared with Q1 2024, while segment income margin expanded by nearly 860 basis points, driven mainly by growth in volume and mix. At Nelson Lab, core lab testing volume and mix for the first quarter of 2025 came in slightly above our expectations, which had already been tempered by the anticipated drop in expert advisory services revenue. Nelson Lab's revenue of $52 million fell 9.3%, as favorable pricing of 2.7% and gains in core lab testing were offset by the expert advisory services impact plus unfavorable foreign currency exchange rate changes of approximately 80 basis points. Segment income rose 7%, reaching $16 million, and segment income margins widened by close to 480 basis points. Favorable volume and mix tied to better core lab testing, pricing, and lab optimization fueled those gains, though they were partly offset by the anticipated drop in expert advisory services. Next, let's discuss the balance sheet, cash generation, and capital deployment. Our liquidity position is still solid. At the close of Q1, 2025, liquidity available to us stood at $715 million, encompassing over $300 million in unrestricted cash plus $410 million of capacity available through our revolving line of credit. You might have noticed in this morning's press release that I'm happy to report we closed an amendment to our revolving credit facility successfully. That amendment brought in roughly $175 million of additional liquidity and pushed maturity out to April of 2030. We want to thank our bank group for standing behind the company; we produced positive operating cash flow of about $56 million during the quarter. Capital expenditures in the first quarter of 2025 came to $20 million. And to wrap up, the quarter ended with a net leverage ratio of 3.6 times, which is an improvement over the 3.7 times net leverage we had at the end of 2024. As Michael noted, given the first quarter and our view of the rest of this year, we are reaffirming every outlook item we gave in February, apart from our foreign currency assumption, which has gotten better. To sum up, for full year 2025, we anticipate total revenues growing between 4% and 6% on a constant currency basis. We anticipate generating operating leverage that produces margin expansion and adjusted EBITDA growth between 4.5% and 6.5% on a constant currency basis. Back in February, we pointed to an approximate foreign exchange headwind of 2.25% on revenue and 2.5% on adjusted EBITDA, with the most pronounced impact falling in the first three quarters of the year. Using average March exchange rates, we now anticipate a foreign exchange headwind of roughly 1.25% on revenue and 1.5% on adjusted EBITDA, with the first three quarters of this year still seeing the most pronounced impact. At this point, we do not expect the tariff policies currently in place to materially affect our business. We still anticipate total company price landing near the midpoint of our long-term stated range of 3% to 4%. For Sterigenics, we expect volumes to strengthen as the year goes on, with full year constant currency revenue growth in the mid-single digits compared with 2024. On Nordion, we continue to expect revenues in the first and second half of 2025 to resemble 2024, with constant currency full year revenue growth in the mid-single digits. I'd also like to give an update on the revenue risk tied to Russian supplied Cobalt. Supply has seen no disruption, and as of today the approximate risk sits between 0% and 2% of total company 2025 revenue. For Nelson Labs in Q2 2025, our projection is a revenue drop in the low to mid-single digits compared with Q2 2024. That represents a better result than the decline recorded in Q1. For the full year 2025, we still anticipate constant currency revenue growth in the low to mid-single digits, along with margin improvement at Nelson Labs. Based on the current forward rate curve, interest expense should land somewhere between $155 million and $165 million. We project an effective tax rate on adjusted net income of 33% to 35%. Adjusted EPS should come in between $0.70 and $0.76, and on a weighted average basis we expect a fully diluted share count between 286 million and 287 million shares. When it comes to capital deployment, organic growth and deleveraging remain our top priorities, along with opportunistic M&A; for 2025, capital expenditures should still fall between $190 million and $210 million. As previously stated, we anticipate capital expenditures will drop over the coming years to roughly $110 million in 2027. This reduction in CapEx, combined with revenue growth, should help us reach our objective of producing $500 million to $600 million in free cash flow across the next three years. No M&A activity is assumed in our guidance. Lastly, we expect the net leverage ratio to improve slightly again in 2025. Michael, I'll hand the call back to you now.

Thanks, Jon. Our track record shows we can keep expanding and handle difficulties across a range of market environments, and we anticipate doing that once more in 2025. Within the earnings presentation for this quarter that's available on our site, soterahealth.com, there's a slide we put in for reference that shows how Sotera Health achieved 19 straight years of revenue growth starting in 2005, which is the earliest point our audited financials reach; that spans the Great Recession of 2008 and 2009 and the COVID pandemic too, all of which shows how resilient our business model is and how varied our customer base is. The priorities we laid out at our November 2024 Investor Day remain our focus. Those priorities are, once more; first, delivering excellence to customers through end-to-end solutions; second, succeeding in growth markets; third, pursuing operational excellence so free cash flow improves; and fourth, deploying capital with discipline. With that, Joe, let's begin the Q&A portion of the call. Thank you.

Hi there, fellas. I appreciate you fielding the questions. Michael, perhaps this one's directed at you regarding tariffs. It appears you all are handling that fairly smoothly. Could you walk us through it? From what I gather, there's very little, or possibly no effect at all. Nordion, from what I understand, is excluded. Just how confident you are, everything around that scenario. Are there minor effects you're counterbalancing, through pricing or something similar? I'd simply like to hear about the overall situation and understand that you folks are managing this fairly well.

Yes. Hello, Patrick. Indeed, I'd state that right now, we feel quite assured, given the rules currently in place along with the policies. We're sure there won't be a significant effect on our business. The biggest piece we've been monitoring involved Cobalt moving from Canada into the U.S., which I mentioned earlier, and that is covered by USMCA. There are a few lesser ones, both direct and indirect, yet we don't regard it as a significant matter for our company.

All right, that's encouraging. Then perhaps just one more, regarding the overall situation. Sterigenics is still bouncing back, which is great to watch. Has anything shifted in the way you're approaching it? I realize the forecast has been for a fairly slow grind, basically matching what we observe in terms of volume, but I'd really like to get a bit more insight into what you're witnessing there. What's your thinking on volumes, for both Sterigenics and Nelson? And where do we stand along that recovery trajectory?

Yeah, I'd tell you our view on volumes is more positive. Like we've indicated, improvement will keep building across the year. We observed gains during the quarter, and what we're seeing now makes us optimistic, including in these early days of Q2. As we've mentioned, these operations are strongly aligned with our clients. In fact, we recently received our customer survey findings once more, and they came back extremely favorable, and at both Nelson and Sterigenics, volumes are beginning to rise, which gave us the assurance to restate our guidance as previously shared.

Okay, that's great to hear. Thanks, Michael.

Hey, everyone. We really appreciate you taking our questions. I just wanted to build on the Nelson Labs margin trends — the year-over-year improvement was notable and came in above what we had modeled, so I definitely get the favorable mix piece that's in play. But maybe you could elaborate a bit more on the other drivers you've flagged that have contributed to some of that improvement, and what your thinking is on how things track from, say, the 1Q levels through the remainder of 2025.

Sure, Brett, I'll handle that one. As we've mentioned on many occasions, the things that move that business are new regulation, new product spend, and sterilization volumes — and we are seeing those; they're showing up in this business. There are a few important regulatory items that we've spent several quarters working on and watching alongside our customers. Items related to reprocessing, and testing tied to certain bioprocessing products. That volume is beginning to come in, which is exactly what Joe and the team have been pointing to the whole time, and our confidence keeps building as those volumes get better. Like we said, we anticipate this unfolding across the year. So routine and validation volumes are improving. And on the margin rates, we've consistently communicated over the past several quarters that we view this business in the 30’s and improving from there, and we've now seen improvement for the last several quarters; they keep delivering on price. The labor piece is settled for them. As you're aware, for the last several quarters we've been quite stable when it comes to labor, and we've been able to demonstrate the margin improvement just as we forecasted and said would come through. So, you know, the team is performing really well on that front, and they're doing it while keeping service at very high levels. I saw some net promoter scores just yesterday that were likely among the highest I've seen in several years. So I'm really, really proud of what that team is accomplishing. And listen, customers value what we do. Take one customer right now, for instance, where we're seeing some volume come in that we had anticipated. They've run into some difficulties with the regulators. We've been there to help them work through those difficulties, and we're seeing that volume materialize in the quarters ahead, which is great. So the team is performing really well, and it has borne out precisely what we said we saw with this business. Regulation benefits this business. Customers running into challenges and needing our expertise, routine volume coming in from sterilization, and then also new product spend from VC or wherever it might be. So I'm really proud of what the team keeps doing there.

Okay, thank you for that context. For my follow-up, I'd like to pose something along the lines of a comparable inquiry regarding Sterigenics' volume growth. I believe you made a remark that you're beginning to observe certain indications of enhancement on the volume side. Is there any specific end market—meaning more med tech, or perhaps recovery and bioprocessing, or modalities? Any additional specifics on where you're starting to notice those signs of improvement that are anticipated to drive what you described as the continuous improvement for the remainder of 2025? Thanks so much.

Yes. Yes Brett, across the quarter the Sterigenics team experienced volume improvement. As I noted in my comments, we expect that to persist. Bioprocessing has delivered substantial growth versus the prior year and sequential growth, though once again, it represents a small share of our overall business; we told you there were a couple of customers facing some difficulties that we're working through alongside them; however, if you exclude those, the underlying trends across a core customer base are quite strong. So we feel quite good about our position in the outlook, and volumes keep improving throughout the year, as we communicated.

Thanks a lot.

Hello, good morning, and I appreciate you taking my questions. It's encouraging to see the settlement reached recently regarding those Illinois cases. Could you walk us through the way your legal approach has developed and how you evaluate exposure on the cases that are still open? Your risk approach varies between states. An update on where that stands would be helpful.

Sure. What I'd say is that I won't go into extensive specifics. There's a great deal of disclosure available to you in the documents we file. That said, we hold the belief that with emissions at the level our facilities produce, cancer is not something we are causing. We also feel deep sympathy for patients battling cancer; it's incredibly hard on a family. We'll take this into the court system and mount a forceful defense. If we're given the chance to present a case grounded in the science and the facts, which is what we demonstrated in the Fornek trial, our expectation is that we'll prevail, and we'll keep monitoring the situation. Each of these jurisdictions has its own nuances—the judge, the plaintiff, the surrounding circumstances, what evidence is permitted—and our approach will keep adapting. There are particular factors we watch for throughout this process, and we'll keep working it through. That said, we will defend ourselves aggressively, since this company runs its operations safely and in compliance; and when the science takes center stage, our confidence in our position is very high.

Great. Thank you for that; and then perhaps an update on the cross-selling efforts involving Nelson and Sterigenics. What have you accomplished when it comes to aligning those points of sales contact more effectively, and anything you've done regarding incentives to promote that opportunity for cross-selling?

Yeah, so incentives have been in place for the past 2 years. As we discussed at our Investor Day, this is a space where we will keep expanding at our XBU with some of our key strategic customers around key categories. You know, BJ is heading up that initiative across the company. He's growing the team around it. We're seeing good progress on the service side of it. Our embedded labs within Nelson Labs, they receive a lot of volume from the Sterigenics side. It keeps expanding and delivering substantial margin, which has been very good. And I shared an example on today's call of one product example; we're working end-to-end with our customers on solutions in a growing segment of the market; and remember, roughly 70% of the Sterigenics and Nelson Labs revenue comes from shared customers; so we feel good about the continued progress we're making there, and our customers are responding and reacting in a positive manner as well.

Great. Thanks Michael.

Great. Thanks, guys. First thing I wanted to ask about is the margin situation here — I get that Nordion gave you a boost in 1Q. But since you moved that up, help us understand what we should expect for 2Q margin.

On the Nordion piece specifically, I'd say just keep in mind that those volumes simply moved out of the second quarter into the first quarter. And Luke, one more thing I want to highlight: that was the final day of the quarter, in 1Q, okay; so I think that's worth noting too; but looking at the whole picture, we anticipate margin gains across the year will mainly come from the Nelson side, with a fairly steady margin rate in the remaining businesses; that's my view on it moving forward.