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 third quarter of 2025. Our press release from today, along with the supplemental slides, can be accessed in the Investors area of our site, soterahealth.com; this webcast is currently being taped, and a replay will be made accessible through the Investors portion of the Sotera Health website. Joining me on this call are our Chairman and Chief Executive Officer, Michael Petras, as well as our Chief Financial Officer, Jon Lyons. At points during this call, certain remarks we make might be classified as forward-looking statements. The subjects covered by these statements carry risks and uncertainties that may lead actual outcomes to differ materially from what was projected or implied. For a description of such risks and uncertainties, please consult Sotera Health's SEC filings and the forward-looking statement slide appearing at the start of the presentation. No obligation is taken on by the company to revise any of these forward-looking statements. Be aware that in today's discussion, the company will present both GAAP and non-GAAP financial measures, among them adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to net income, adjusted net income, adjusted EPS, net debt and net leverage ratio, alongside constant currency comparisons. Schedules accompanying the company's press release and the supplemental slides for this presentation contain a reconciliation of GAAP to non-GAAP measures for all relevant periods. Assisting with today's Q&A portion of the call will be the operator. To ensure everyone gets a chance to ask questions, kindly stick to 1 question and 1 follow-up. Should you have any questions once the call concludes, don't hesitate to contact me or anyone on the Investor Relations team. At this point I'll call — hand things over to Sotera Health Chairman and CEO, Michael Petras.

Hello, everyone, and thanks for being with us this morning. It's my pleasure to share that Sotera Health has posted yet another outstanding quarter, defined by robust revenue gains, adjusted EBITDA climbing by double digits, roughly 150 basis points of margin improvement, and an adjusted EPS figure that came in $0.09 higher than what we recorded in Q3 of 2024. Company-wide revenues rose 9.1% during the quarter, and adjusted EBITDA was up 12.2%. Sterigenics had another impressive quarter, posting top line growth of 9.8% versus the third quarter of 2024, fueled by steady results from our key medical device clients. At Nordion, revenues grew 22.4%, mainly due to how reactor harvest schedules lined up relative to Q3 of 2024. That revenue came in above what we had anticipated, since some customer deliveries that had been planned for Q4 ended up happening during Q3. Nelson Labs turned in third quarter revenue that fell slightly short of our forecast, yet growth in core lab testing along with operational enhancements lifted segment income and expanded margins. That represents the fifth straight quarter of margin expansion on a year-over-year basis at Nelson Labs, which speaks to how focused we are on execution. Beyond our solid quarterly results, we also bolstered our balance sheet by retiring $75 million in debt, which brought down our interest expense by about $13 million on an annual basis. Jon will go into further detail on that in a moment. With our strong results so far this year and the visibility we have for the rest of 2025, we are keeping our revenue guidance unchanged while lifting our adjusted EBITDA guidance. I've said it every quarter — Sotera Health plays an essential part in health care around the world. I'm happy to report that Nordion has just obtained a 25-year renewal of its Class 1B operating license — the lengthiest Class Ib license the Canadian Nuclear Safety Commission has ever issued. That achievement speaks to the strong, trusted relationship we have with the CNSC, along with their confidence in Nordion's safety culture and operational excellence. Thanks to this renewed license, Nordion will keep securing the worldwide supply of Cobalt-60 that underpins vital sterilization processes — among them those carried out by Sterigenics — and makes possible life-saving radiotherapeutic treatments for brain tumors and early-stage breast cancer. This accomplishment strengthens our mission of Safeguarding Global Health by guaranteeing a dependable supply of critical Cobalt-60 for our customers, the health care system, and patients for many decades ahead. At this point, I'll hand things over to Jon, who will take us through the financial details.

Thanks, Michael. I'll begin by walking through our consolidated results for the third quarter of 2025, and then I'll break down how each business segment performed. Looking at the consolidated picture, Q3 revenues rose 9.1%, reaching $311 million, which works out to 8% on a constant currency basis when measured against the third quarter of 2024. Adjusted EBITDA climbed 12.2% to $164 million, or 11.2% on a constant currency basis, versus the third quarter of 2024. Adjusted EBITDA margins came in at 52.7%, which is 147 basis points higher than the prior year, thanks to better margins at both Sterigenics and Nelson Labs. Interest expense in the third quarter totaled $39 million, roughly $2.4 million better than the same period a year ago. Net income for Q3 2025 was $48 million, or $0.17 per diluted share, compared with net income of $17 million, or $0.06 per diluted share, in Q3 2024. Adjusted EPS came to $0.26, up $0.09 from the third quarter of 2024. Close to $0.04 of that gain was attributable to adjusted EBITDA growth, under $0.01 came from reduced interest expense, and the balance is tied to a lower tax rate; now let's dig into how our segments performed. Sterigenics kept up its strong showing in the third quarter, posting 9.8% revenue growth to $193 million, or 8.4% on a constant currency basis, against Q3 2024. That revenue growth came from favorable volume mix of roughly 4.6%, pricing gains of 3.8%, and a 140 basis point boost from foreign currency exchange. Segment income rose 11.6% to $107 million, or 10.2% on a constant currency basis, with margins up 90 basis points year-over-year at 55.6%, lifted by strong top line growth and partly held back by inflation. Nordion's third quarter revenue grew 22.4% to $63 million, or 23.6% on a constant currency basis, compared with Q3 of 2024. Nordion's revenue gain came from a volume and mix benefit of 18.9% plus favorable pricing of 4.7%, partly offset by an unfavorable 120 basis point impact from changes in foreign currency exchange rates. Nordion segment income rose 19.9% to approximately $38 million, or 21.2% on a constant currency basis, against Q3 of 2024. That segment income growth was fueled by increased volume and mix along with customer pricing. Segment income margin was 60.6%, a decrease of roughly 130 basis points, caused by product mix. On a year-to-date basis, Nordion segment income margins are up more than 70 basis points. Nelson Labs posted third quarter 2025 revenue of $56 million, a 5% decline from the same period a year earlier. Favorable contributions from pricing of 2.7%, foreign exchange of 1.4%, and core lab testing growth were offset by the decline in Expert Advisory Services. Nelson Labs' third quarter 2025 segment income increased 1.9% to $19 million, or flat on a constant currency basis, with margins expanding 229 basis points year-over-year to 34.1%. The improvement in segment income and margin came from volume and mix improvements, lab optimization, and favorable pricing. Now let's discuss our balance sheet, how we're generating cash, and what we're doing with our capital. So far this year, our operations have brought in $184 million in positive cash flow, and we spent $87 million on capital expenditures. Our liquidity remains very robust. When the third quarter closed, we had access to more than $890 million, which breaks down into just under $300 million in unrestricted cash plus roughly $600 million of borrowing room under a revolving credit line. We're still moving toward our longer-term net leverage goal of 2 to 3x. At the close of the quarter, our net leverage ratio had improved to 3.3x, compared with 3.7x at the finish of 2024 and 4.2x as of Q3 2023. As Michael noted, during this quarter we made strategic moves aimed at bolstering our balance sheet and bringing down interest costs. To start, ongoing growth in adjusted EBITDA along with cash generation allowed us to hit our contractual net leverage target, which set off a 25 basis point cut to the interest rate on our term loan; after that, in September, we repriced that term loan to shave off another 50 basis points and paid back $75 million on the facility. We anticipate these actions will produce roughly $13 million in yearly interest savings. I'd now like to move on to our outlook for the full year 2025. We're keeping our full year constant currency revenue growth guidance at 4.5% to 6%, and we expect revenue growth to come in close to the middle of that range. Thanks to ongoing gains from volume growth and operational improvements, we're lifting our constant currency adjusted EBITDA growth outlook to 6.75% to 7.75%, which is higher than the earlier range of 6% to 7.5%. Foreign currency should add about 25 basis points to both revenue and adjusted EBITDA growth, whereas the previous outlook assumed no impact. At the total company level, price for 2025 should still land near the midpoint of the 3% to 4% range we've stated as our long-term target. When it comes to Sterigenics, we still anticipate 2025 constant currency revenue growth in the mid- to high single digits. For Nordion, we've increased our full year 2025 constant currency revenue growth outlook and now anticipate mid- to high single-digit growth. On top of that, I'm happy to share that for 2025, no revenue risk remains tied to Cobalt-60; as for Nelson Labs, we now anticipate full year 2025 constant currency revenues to fall mid-single digits, since the effect of Expert Advisory Services outweighed the ongoing growth in core lab testing and better pricing. We expect segment income margin to end the full year in the low to mid-30s percent range. Now for other guidance items. Because of the balance sheet initiatives I described earlier, we're narrowing our interest expense range to $154 million to $158 million, an improvement over our prior outlook of $155 million to $165 million. On our adjusted net income, we expect an effective tax rate between 29% and 31%, which is better than the earlier range of 31.5% to 33.5%. Our lower tax rate on adjusted net income is a result of implementing new accounting rules tied to U.S. tax law modifications that took effect in July. Adjusted EPS is now projected between $0.81 and $0.86, which is up from the earlier guidance of $0.75 to $0.82. That $0.05 gain over the midpoint of the previous EPS range comes from $0.02 attributable to additional EBITDA generation and lower interest expense, while the remainder stems from the beneficial change in tax rate. Our fully diluted share count should stay between 286 million and 287 million shares. Capital expenditures are now anticipated to land between $125 million and $135 million, down from our earlier forecast of $170 million to $180 million, due to project timing and further cost savings. Even though the pace of spending has moved, our projection for cumulative capital expenditures across 2025 through 2027 has not changed. Additionally, we remain on course to meet the $500 million to $600 million cumulative free cash flow commitment we made at our 2024 Investor Day; we still anticipate that the net leverage ratio at the end of 2025 will show improvement over 2024. Lastly, as always, our outlook factors in no M&A activity. I'll hand the call back to Michael now.

Jon, thanks. We're quite pleased with the quarter's results. Next, I want to bring everyone up to speed on the ethylene oxide, EO, personal injury claims in Cobb County, Georgia. This update is lengthy and goes into a lot of detail, but the key takeaway is this: although the matter remains pending in Cobb County and more work lies ahead, we believe the recent Phase I and Phase II decisions are consistent with the stance we've maintained from the beginning — once science is given a complete, fair and proper hearing, the evidence refutes the allegations the plaintiffs are making in these matters. As a reminder, the Cobb County Court put in place phase proceedings for 8 bellwether cases selected by the plaintiffs Council. The first phase was about general causation. The plaintiffs were instructed by the court that they needed to show that EO emissions from our Atlanta facility can cause the diseases they claim. In November 2024, the court excluded 2 of the 3 general causation experts put forward by the plaintiff, yet it allowed the third expert under a "new standard" that the court devised for these cases — a standard that did not require the plaintiffs to establish the exposure levels at which EO becomes harmful to humans. Both sides filed appeals. On Friday, October 31, the Georgia Court of Appeals rejected the trial court's "new standard" and vacated the trial court's Phase 1 orders. Consistent with the position we've taken, the Court of Appeals directed the trial court to use the proper standard — one that demands causation experts reliably determine the exposure levels at which EO turns harmful. The Court of Appeals further instructed the trial court to weigh whether plaintiffs can establish general causation through epidemiologic evidence and the background risk of the diseases in question, all of which arise in the general population absent any exposure to emissions. During the pendency of the Phase I appeals, 3 of the bellwether cases proceeded to Phase II, which concerned specific causation. There, plaintiffs were required to offer admissible expert testimony showing that the plans received doses of EO from the Atlanta facility sufficient to cause their diseases. The trial court on October 17 excluded each of the three causation experts put forward by the plaintiffs, and then dismissed all three cases because no reliable, admissible proof of specific causation had been offered. Claims for nuisance were also dismissed by the court, which observed that the plaintiffs offered nothing showing the Atlanta facility ran afoul of EPA, Georgia EPD or Cobb County requirements. Although only the 3 bellwether cases fall under the Phase II orders, our view is that the substantive reasoning behind these rulings matters just as much to the personal injury claims that remain. The Cobb County court will resolve that in due course, and the Georgia appellate courts if necessary. As we stand up for the safe and necessary work Sterigenics does, the science will remain at the forefront. You can find this statement, the trial court's Phase I and Phase II orders, and a ruling from the Georgia Court of Appeals on our website. With that, operator, let's begin the question-and-answer portion.

Perhaps only one question regarding the volume rebound — it's great to watch that keep going. Are there particular segments where you're observing disproportionately strong improvement? I believe during the prior quarter, you mentioned MedTech and bioproduction somewhat. Could you share what you're noticing in those areas, plus what the outlook for the volume path looks like starting now?

Patrick, Michael here. We're observing fairly steady results throughout Sterigenics and throughout numerous — nearly every category, bioprocessing, MedTech at large. On the whole, we're witnessing solid volume recovery, and we anticipate that continuing moving forward.

All right, sounds good. Then I just have a brief follow-up, hopefully about the newest on the litigation. Maybe a fast one, regarding where a few of those other matters stand; and once more, if it seems like we can keep getting these kinds of updates, but we would really like to hear the most recent on the litigation overall and what your sense is there?

Yeah. Patrick, Illinois is finishing up. There's an April 2025 settlement that we reached, and it has been finished and shut. The one from July 25th is moving along nicely. That leaves just 1 case still open in Illinois. Regarding Georgia, I already provided a long update on that. As for New Mexico, at present there are no personal injury claims, and only the 1 suit filed by the AG over public nuisance remains, with trial scheduled for July 2026. Then for California, we were told not long ago that the initial trials should happen in January and April of 2027.

Jaden here, filling in for Casey. To start with Sterigenics, I just wanted to ask whether you're building in any assumption around budget flush during 4Q, and since you reaffirmed the full-year revenue outlook following your 3Q, could you speak to how conservative your '25 guidance is and what the puts and takes are behind it?

Sorry, could you say that question about Sterigenics again? I wasn't certain I caught the first part.

Question from an unidentified analyst: I wanted to ask whether you have included any assumption about a budget flush happening in the fourth quarter.

When you mention a budget flush, do you mean the government shutdown? Is that the thing you're pointing to with those words?

When you mention MedTech customers, do you mean those in MedTech or in bioprocessing?

A budget flush isn't something we anticipate — no. Looking ahead, we have confidence in the guidance and outlook we're providing here for the remainder of the year. I wouldn't call it aggressive, and I wouldn't call it conservative. We simply feel confident about where it stands compared with 1 quarter ago.

Okay, I understand. Now, as a follow-up, regarding that government shutdown you brought up: are you noticing any effects on the RCA business, or anywhere else in your portfolio?

When we examine it — keep in mind, there are no direct government sales within the business. There is a bit of an indirect effect, though it is quite minimal. It is not a material impact. We do experience a small amount of it in Expert Advisory Services, due to certain delays occurring and the activity there. But on the whole, we don't perceive a material impact on the company, and direct sales to the government are not something we have.

I’ve got two items for you. The first concerns the Expert Advisory business. Things appear to have deteriorated further in this area. Is that simply tied to insufficient FDA funding, fewer inspections, and the government shutdown? My second question relates to the implied step down in 4Q EBITDA margin. I’d like to understand what’s driving that. My guess is that it’s likely not Nordion volumes, but I wanted to check whether anything else is at play.

Yes, I’d say Expert Advisory Services within that RCA business is experiencing some effects from the FDA’s reduced activity. So that is definitely having an impact. It turned out worse than we had anticipated; however, on the whole, it has significantly affected the company’s top line. The impact is roughly 10 points. Jon, is it approximately a 10-point effect?

Yes.

There's a 10-point effect on the top line, but on the whole, core lab testing is getting better, which is exactly what we'd hoped for and expect to keep seeing. Jon, would you also like to take the margin question that Luke raised?

Yeah. Luke, when we turn to how margins shape up in Q4, our expectation is that Nelson comes down somewhat relative to where things stand at this Q3 high point. Within Q3, there's an advantage from certain costs that were quite low. Beyond that, Steri has been performing very strongly for us. A modest pullback there is possible, though it isn't anything to worry about, and for Sterigenics, margins across the year should stay steady, perhaps with a small increase over the year.