Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello, everyone, and thanks for joining. It's a pleasure to welcome you to Sotera Health's earnings call for the second quarter of 2025. Today's press release, along with the supplemental slides that go with it, are available in the Investors section of our site, soterahealth.com. This webcast is being recorded, and a replay can be accessed in the Investors 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 this call may count as forward-looking statements. What we discuss in those statements comes with risks and uncertainties, and because of them, actual outcomes could end up materially different from the projections or implications. To learn more about these risks and uncertainties, take a look at Sotera Health's SEC filings along with the forward-looking statements slide placed at the beginning of this presentation. No obligation is taken on by the company to revise any of those forward-looking statements. Also, keep in mind that during today's discussion, the company will share financial measures under both GAAP and non-GAAP, which include adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to net income, adjusted net income, adjusted EPS, net debt and net leverage ratio, plus constant currency comparisons. You can find a GAAP-to-non-GAAP reconciliation covering every applicable period in the schedules that accompany the company's press release, as well as in the supplemental slides for today's presentation. Our operator will assist us during the Q&A segment of today's call. To make sure everybody gets an opportunity to ask something, please limit yourself to one question plus one follow-up. If anything comes up after we wrap up, feel free to contact me or anyone on the Investor Relations team. At this point, I'll turn things over to Michael Petras, Chairman and CEO of Sotera Health.

Hello, everyone, and thanks for being with us on today's quarterly earnings call. We're pleased to report that Sotera Health turned in a robust second quarter, extending the solid results we posted in the prior quarter, with momentum building across our main businesses. That progress produced revenue growth of 6.4%, adjusted EBITDA growth of 9.8%, and an increase in adjusted EPS versus the second quarter of 2024. We're still putting money into our businesses to back organic growth, and we took additional steps to lower leverage, which underscores how committed we are to careful financial management and creating value over the long term. Turning to how each business performed. At Sterigenics, higher customer demand fueled robust volume and mix results during the quarter, producing 10.5% year-over-year revenue growth against the second quarter of 2024. The stronger volumes came from our main med device customers, plus ongoing momentum in bioprocessing that our latest facility expansion helped support. Nordion's second quarter revenue came in above what we expected relative to the second quarter of 2024, thanks to the timing of Cobalt-60 shipments. At our customers' request, some deliveries that had been set for the third quarter got completed during the second quarter. Nelson Labs posted second quarter revenue consistent with the expectations we laid out on our first quarter earnings call. Gains in core lab testing offset the impact we anticipated from expert advisory services. Higher core lab testing volume and mix, together with the optimization steps we took in a disciplined way, drove segment income margin expansion of over 500 basis points; that makes four straight quarters of year-over-year margin gains at Nelson Labs. With such strong momentum in the first half of the year, we're lifting our 2025 outlook for revenue and adjusted EBITDA. On revenue, we're increasing our growth outlook to 4.5% to 6% compared with 2024. We're also lifting our adjusted EBITDA growth outlook to 6% to 7.5%; these changes reflect better performance expectations and now assume no foreign currency impact for the full year. Jon will cover our 2025 outlook update in greater detail shortly; but first, I want to spotlight one example of how Sotera Health is essential to Safeguarding Global Health. Sterigenics and Nelson Labs together are vital to patient safety and to supporting FDA approval of pioneering treatments. From validation testing, including biocompatibility and packaging, through routine sterilization, our teams helped bring this new infusion set for advanced Parkinson's therapy to launch. This innovative drug delivery device aids quality of life by controlling tremors and rigid body movements. Our know-how helps customers bring new products to market, and it's a great illustration of the essential part we play in Safeguarding Global Health. Now Jon will take us through the financials.

Thanks, Michael. I'll start with the consolidated highlights for the second quarter of 2025, then walk through specifics for each business segment, plus updates on capital deployment and leverage. I'll wrap up with more detail on our revised 2025 outlook. Looking at the whole company on a consolidated basis, Q2 revenues rose 6.4% to $294 million, which works out to 6% in constant currency terms versus Q2 2024. Currency exchange gave us a tailwind of roughly 40 basis points during the quarter. Adjusted EBITDA climbed 9.8% to $151 million, or 9.5% growth in constant currency. On adjusted EBITDA, our margin was 51.2%. That's a 156 basis point gain versus Q2 2024, and the improvement was mainly thanks to a 514 basis point lift in the Nelson Labs segment margin. When we look at interest expense, it totaled $41 million during the second quarter of 2025, which matches what we saw in the same period last year. Turning to GAAP net income, we posted $8 million for Q2 2025, equal to $0.03 per diluted share, and this figure reflects the $34 million settlement of EO claims in Illinois that we've discussed before and that is still pending. For comparison, Q2 of 2024 gave us net income of $9 million, or $0.03 per diluted share. As for adjusted EPS, it reached $0.20 in the second quarter of 2025, which puts us $0.01 ahead of Q2 2024. Let's move on to the details for each segment. At Sterigenics, second quarter 2025 revenue was up a solid 10.5%, coming in at $195 million, which works out to 10% on a constant currency basis, compared with the second quarter of 2024. For the quarter, the growth broke down as a 6% favorable contribution from volume and mix, 4% from pricing, and roughly 50 basis points of benefit from foreign currency exchange. Segment income climbed 11.3% to $108 million, and segment income margins widened 42 basis points relative to Q2 2024. The gains in segment income and margin came from strong top line growth, though inflation partly offset that. Turning to Nordion, Q2 2025 revenue was 2.9% higher at $42 million, or 3.4% in constant currency, versus the same period a year ago. On the Nordion side, the top line moved up thanks to a better volume mix, which added 1.1%, plus 2.3% from pricing, though currency swings worked against us by 50 basis points. Segment income at Nordion landed at $23 million for the quarter, and segment income margin dropped 145 basis points to 55.3% versus Q2 2024, which came down to how supplier mix landed in the period. Looking at Nordion's year-to-date margins, they're more than 200 basis points above where they stood in 2024. Over at Nelson Labs, quarterly revenue was $57 million, down 3.3% from Q2 2024, as gains from core lab testing, a 2.8% pricing lift, and a 110 basis point foreign exchange tailwind were more than offset by the volume hit from expert advisory services that we had expected. On the segment income side, we saw a 13.9% increase, taking it to $20 million, and segment income margins widened by 514 basis points. The quarter's gains in both segment income and segment income margin came from favorable volume and mix improvements, benefits tied to optimization, and favorable pricing. Switching over to the balance sheet, cash generation, and how we're deploying capital: this quarter we delivered positive operating cash flow of roughly $57 million, and capital expenditures totaled about $31 million. Liquidity continues to be extremely solid. As Q2 ended, available liquidity was $918 million, made up of $332 million in unrestricted cash along with $586 million of capacity under our revolving credit line. To close out the quarter, net leverage stood at 3.5x. That's an improvement over the 3.7x net leverage recorded when 2024 ended, and we continue to move closer to our longer-term goal of 2 to 3x. As Michael mentioned previously, when comparing 2025 with 2024, we are now raising our outlook for constant currency revenue growth to a range of 4.5% to 6%, which is up from the 4% to 6% range we had previously. We also expect to deliver solid operating leverage, and we are increasing our outlook for constant currency adjusted EBITDA growth to 6% to 7.5%, versus the earlier 4.5% to 6.5% range. If we apply the average FX rates from Q2 2025, our current expectation is that foreign currency will neither help nor hurt full year revenue and adjusted EBITDA when compared with 2024. Previously, we had assumed headwinds of 1.25% and 1.5%, respectively. When it comes to total company price for 2025, we continue to expect it will finish near the midpoint of the 3% to 4% long-term range we've previously communicated. Turning to Sterigenics, we've raised our outlook for full year 2025 constant currency revenue growth, and we now expect growth in the mid- to high single digits. Regarding Nordion, our forecast for full year 2025 constant currency revenue growth is unchanged at mid-single digits. Close to 60% of full year revenue should land in the back half of the year, and Q4 2025 revenue is anticipated to fall mid-teens against Q4 2024 because of the timing of Cobalt-60 shipments; on top of that, the revenue risk tied to Russian supplied Cobalt-60 has eased to under 0.5% of total company 2025 revenue. On Nelson Labs, though core lab testing keeps getting better, we now anticipate full year 2025 constant currency revenues dropping in the low single digits because of the effect from expert advisory services; we anticipate a return to growth in Q4 2025 and still anticipate robust margin improvement at Nelson Labs for 2025. Turning to the other guidance items. Based on where forward rates sit right now, we still expect interest expense to land somewhere between $155 million and $165 million. For adjusted net income, we're projecting an effective tax rate in the 31.5% to 33.5% band. That improved tax picture comes from the recent change in U.S. tax law, which raised how much interest expense can be deducted to as much as 30% of EBITDA earned in the U.S. With our revenue and adjusted EBITDA ranges both revised upward, plus this more favorable tax rate, we now expect adjusted EPS of $0.75 to $0.82, compared with the prior $0.70 to $0.76 range. As for the fully diluted share count, we're still anticipating a weighted average of 286 million to 287 million shares. For 2025, we now anticipate capital expenditures between $170 million and $180 million, a decrease from the $190 million to $210 million we previously projected. Cost savings account for roughly 1/4 of that reduction, with the rest attributable to when large projects are scheduled. As we laid out at Investor Day, we still foresee CapEx of about $110 million in 2027, which underpins our target of generating $500 million to $600 million in free cash flow across 2025 to 2027; our expectation remains that the net leverage ratio at the end of 2025 will show improvement over 2024 as we pursue our longer-term objective of 2x to 3x net leverage. And last, consistent with our usual practice, no M&A activity is baked into this guidance. Michael, I'll hand the call back to you now.

Thanks, Jon. We're pleased with the solid quarter we posted, which stood out for ongoing momentum and allowed us to lift our guidance for the entire year. These results reflect how durable our business is and how capable our teams are; we're excited about the future and stay committed to running things with rigor so we keep creating value for our stakeholders. With that, operator, please go ahead and begin the question-and-answer portion of the call.

Michael, perhaps a question regarding the total numbers, especially Sterigenics. Considering how strong things look, I feel compelled to ask whether you noticed any type of pull-forward effect? It's great to see the entire year revised upward, clearly, but I'm just wondering what you've been told by customers or by people trying to build inventory before some of this tariff chatter? Is there anything worth mentioning there?

Patrick, I'd simply say — no meaningful tariff-related pull-ins or anything like that are showing up for us. Sure, a small amount occurs occasionally, yet nothing significant. The team — we observed this volume improving. Like we mentioned previously during the year, we stated that volumes would improve as the year went on, and we're watching the teams deliver on that; therefore we're thrilled about our current position with Sterigenics, and the future outlook remains favorable too.

All right, sure. I'd like to dig a bit deeper on this recovery. Could you step back for a moment? It seems like MedTech and bioprocessing both performed strongly during the quarter. Could you break down the two, what you're observing from each regarding where this recovery stands? It does sound like you may feel somewhat more assured about volumes. But perhaps discussing MedTech and BioProg volume against price would be useful, just to walk through your view and what you expect for the remainder of the year?

Thank you, Patrick. As stated during our prepared remarks, volume and mix rose 6% during the quarter compared with last year. Pricing increased 4% at Sterigenics; we observe that everywhere with our customers, with no segment really doing better than another. Bioprocessing, once again, represents a modest piece of our business, yet we experienced considerable expansion there, in line with what we anticipated. We also brought capacity online through one of our build-outs, and we're realizing the benefits of that expansion through our ability to capture volume from that performance. Beyond that, MedTech volumes remained fairly stable. We're noticing this across numerous categories. As we discussed before with all of you, we are segmenting certain end markets on which we're highly focused; and the team is achieving solid growth in those end markets we've targeted and are delivering against. So on the whole, bioprocessing grew at a higher rate, though from a smaller base, while MedTech saw solid volume during the quarter, and we expect that to remain favorable going forward as well.

I'd like to kick things off with something comparable to what we asked in the first quarter. Clearly, one standout for the period was the improvement in Nelson Labs margins. You noted the upside from favorable mix as expert advisory shrank further, I realize. But I'm wondering whether you could break down the various things driving that year-over-year gain — for instance, what portion came from service mix as opposed to other elements?

Sure. Brett, it's Michael here. What I'd say is that this aligns with the message we've been giving across the past several quarters. We indicated we'd expect margin expansion in the Nelson Lab business. Our view was that this business likely lands in the low to mid-30s. We're getting close to that territory; in fact, we're right there. The main actions the team has taken, which we discussed with all of you before, involve labor productivity and aligning it properly, and the team has executed very well in matching that against supply and demand. So we're seeing some optimization on the productivity front and with certain volumes. Then, on the whole, a beneficial mix, as you pointed out, shifting away from expert advisory services toward core lab testing. And I'd add that this business keeps delivering on price, with 3% price during the quarter. So all told, that marks 4 consecutive quarters of margin expansion, exactly as we told you to expect, and the team is coming through on it.

Let's switch topics for a moment. This quarter, an extension was announced regarding how long companies have to implement the revised EtO regulations. The EPA appears to still be reviewing the updated NESHAP rule. So I wanted to ask whether you have any reaction to that news, whether it alters your investment plans at all? And also, what do you make of the possible competitive effects of that choice?

Sure. Appreciate it, Brett. Regarding the NESHAP rule, our position is strong. We keep carrying out our plans on that front. Going forward, we will keep putting money into it. This gives us a chance to extract some price from certain vendors that, in our view, we've been moving a bit too quickly with on cost; even so, we remain committed to investing in it so we can wrap this up. As for us, the extra time simply creates a chance to enable ideal installation and validation of certain emissions controls at the facilities. That said, we're pleased with our standing there, and we're also pleased with how the competitive landscape looks over the long term.

Let me add to what was said about the Nelson margin gains. You're getting close to your goals now — low to mid-30s for this year. So I'm just wondering how much room is still there in that business, and in the end, where do you believe margins can reach, if volumes return to the utilization level you're aiming for?

Sure, Luke. Where we stand right now, I'd say, lines up quite well with our forecast, and that's the way it should look moving ahead. We're sitting in the low 30s, correct — low to mid-30s. That's the range you ought to anticipate. I doubt we'll get near the 40s that showed up during COVID, since, as we've said before, that came from some favorable mix and a bolus of big volumes. Still, I believe this business ought to be capable of delivering in line with the margin rates we have now. That's how you should view it going forward.

All right. Then as a follow-up, you've got a competitor doing the same thing. Their focus leans a bit more toward gamma and X-ray. They posted solid growth this quarter. It's not as if Steri had a weak quarter on volume either. I'm just curious — they showed somewhat elevated growth, so are you seeing demand internally rise for gamma and X-ray, and possible share gain there? Has some technology advancement come along that lets them get that higher capacity for that sterilization technology?

Yes. Luke, clearly, you'd need to ask them about how they performed, but what Sterigenics has accomplished here makes us very proud — 10.5% growth this quarter, 6% volume and mix. We're seeing this across modalities. Our X-ray base isn't huge. There's a new X-ray we announced that's coming up in the Southeast by the end of the year. The gamma side is somewhat weaker, but still good progress there, and ethylene oxide keeps performing really well, and e-beam performs really well. So on the whole, really proud of what the Sterigenics team is doing, and it lines up with what we told everybody we were going to do, which is grow volumes as the year moves forward, and the team is executing against that. And here we are today in early August, and we're optimistic about where we stand going forward.

I'd like to zero in on Sterigenics, and I'll get all my questions out there at once. Regarding the growth that you're observing, would you say it's largely same-store, or how much — I believe you mentioned something about expanding capacity. I'm not sure whether you can break that down at all, what each of those is contributing. Then, partly following up on what Patrick asked before: plenty of MedTech companies are out there attempting to rework their sourcing supply chains so they can get around tariffs. So I'm not asking whether anything got pulled forward — instead, more broadly, are you noticing activity across your network as many of these businesses try, once again, to rework their supply chain? Does that have any effect on Sterigenics?

Yes. Appreciate it, Jason, this is Michael. Our same-store sales delivered solid performance. As I mentioned, we did gain additional volumes through one of our European expansions, which we had anticipated, yet on the whole, same-store sales came in strong, along with that other expansion. On the pull forward topic, MedTech — there are numerous moving pieces at the moment with these customers and precisely how they are attempting to optimize their supply chain. We're holding many conversations with them across the globe about where they will ultimately land, but as I said before, we didn't observe material numbers rising on account of that. Still, our objective overall is to collaborate closely with our customers and assist in optimizing opportunities on their behalf. Looking ahead, a few opportunities are percolating that might prove interesting as they seek to optimize their supply chains; however, at present, we're simply eager to serve them as well as we possibly can using the facilities we currently have.

Jason, one more quick question for you, Michael. Do you figure you're sitting in a favorable position? I suspect you already know how you'd answer, but with those businesses working to relocate their supply chains — and having every reason to do so — does it feel like you're holding all the cards when it comes to pricing, such that you could push for a higher price than would typically be the case?

Honestly, I'm not sure — look, this isn't about exploiting the circumstances. What gives me confidence is where we stand in the market and the capacity we have within the U.S., where our footprint is fairly substantial; so should companies wish to shift operations to the U.S., we believe our positioning is quite strong for that. Beyond that — another point worth remembering — we've discussed putting money into added capacity. One particular program had been under ongoing review, and we've now chosen to go ahead with it, which will make the most of opportunities in the U.S. that our customers have requested help with. The economics have shaped up nicely, thanks to the pricing they've locked in for us along with the build cost we need to offset, and earlier in the year our Board didn't reach a decision to move ahead on it. So we're feeling quite positive about it joining the fold. That said, it won't arrive until late '27 or thereabouts; but — so once more, Jason, we're aiming to be responsive to our customers at large.

Regarding Sterigenics, volume and mix rose 6% during 2Q. You said you aren't truly observing any pull forward. So can we reasonably expect comparable volume and mix expansion across the back half? And could you perhaps take us through how it lands quarter by quarter? Plus I have one more question after that.