Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello, and good morning. Thanks for joining us on Sotera Health's call covering results for the fourth quarter and the entire 2025 fiscal year. You can find today's press release along with supplemental slides in the investor section of soterahealth.com. A recording is being made of this webcast, and a replay should be posted in that same investor section of the Sotera Health site not long after we finish. With me on the line today are our Chairman and Chief Executive Officer, Michael Petras, and our Chief Financial Officer, Jon Lyons. Some remarks we make during this call could be characterized as forward-looking statements. Risks and uncertainties surround the topics discussed in those statements, and those factors might lead actual results to diverge materially from what has been projected or implied. For a fuller description of these risks and uncertainties, please see Sotera Health's SEC filings along with the forward-looking statement slide appearing at the start of the presentation. No duty is assumed by the company to revise any forward-looking statements of this kind. Be aware that on today's discussion, both GAAP and non-GAAP financial measures will be presented by the company, among them adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to net income, adjusted net income, adjusted EPS, adjusted free cash flow, net debt and net leverage ratio, plus 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. The Q&A portion of today's call will be handled with help from the operator. Kindly keep yourself to one question plus one follow-up. Should you have additional questions, don't hesitate to contact the investor relations team; with that, I'll hand the call over now to Sotera Health Chairman and CEO, Michael Petras.

Hello, everyone, and thanks for being here today. Earlier this morning, we reported results for another robust year, which pushes our streak of annual revenue increases compared to the prior year to 20 straight years. During 2025, revenue for the whole company rose 5.7%, reaching $1.164 billion — that works out to 5.2% growth in constant currency terms against 2024. Adjusted EBITDA was up 8.2%, or 7.8% in constant currency, while margins widened to 51%, which is an improvement of just about 120 basis points. On top of that, we generated adjusted free cash flow above $200 million in 2025. These figures reflect solid execution, rising need for the mission-critical services we provide, and careful financial stewardship. How the team performed in 2025 puts us in a good position for continued growth going forward. We also marked a number of noteworthy accomplishments over the course of the year. Customer satisfaction came in above 80%, which speaks to our dedication to outstanding service; we moved our portfolio forward in a number of important areas, among them our commercial efforts, and kept building momentum, with revenue from XBU customers growing 9% compared to a year earlier. Sterigenics posted roughly 8% constant currency revenue growth against 2024, helped by better volume and mix. We also made considerable headway on the program to upgrade EO facilities, and on building the new X-ray facility, which should open in 2026. Nordion had a solid year, with constant currency revenue growth of about 9%; during the fourth quarter, that team entered a cobalt development agreement alongside Westinghouse and PSEG; they also obtained a 25-year Class 1B license renewal for the Ottawa facility, the longest one the Canadian Nuclear Safety Commission has ever granted. Nelson Labs achieved growth in core lab testing over the year; its margins improved by 312 basis points, and it made headway on the clean room investment; when it comes to the capital markets, we lowered borrowing costs by 75 basis points on the $1.4 billion term loan and repaid $86 million of debt, which adds up to $13 million in yearly interest savings. We also increased the size of our revolver and extended it, adding $175 million of liquidity. During 2025, Sotera Health's public float grew to 80% of shares outstanding. We keep bolstering corporate governance, including by appointing a lead independent director. As you might have noticed, we brought Richard Kyle onto the board earlier this month. His experience leading a public company as CEO, his deep background in operations and governance, and his strong financial expertise will all be tremendous assets as we keep growing. We stay actively involved with our shareholders on a wide range of corporate responsibility efforts. 2025 was a solid initial step toward carrying out the 2025 to 2027 long-range plan that we laid out at our November 2024 Investor Day, and we expect this year to be another meaningful one for progress against those objectives. Earlier today, we released our 2026 outlook. For the full year, we anticipate total revenue climbing into a range of $1.233 billion-$1.251 billion, which means constant currency growth of 5%-6.5% against 2025, and adjusted EBITDA rising into a range of $632 million-$641 million, or 5.5%-7% constant currency growth. Prior to passing things over to Jon, I want to call attention to a change in our management team. In the press release we issued this morning, you may have noticed that, starting April 1st of this year, our Senior Vice President and General Counsel, Alex Dimitrief, will move into an outside advisor position with the company. I want to express my appreciation to Alex for the leadership and service he has given over the past 3 years. We feel fortunate that he will keep helping the company moving forward in an advisory capacity; and we are pleased to share that Erika Ostrowski, who spent the last 2 years serving as a Vice President, Deputy General Counsel, and Corporate Secretary under Alex's leadership, is being promoted to Senior Vice President and General Counsel for Sotera Health. Having shown strong leadership, sound judgment, and a deep understanding of our business, Erika is well positioned for continued success in her new role. Jon will take us through our 4th quarter and full year 2025 financials and our 2026 outlook in more depth.

Thanks, Michael. I'll start by walking through the consolidated results for the fourth quarter and the full year 2025, then finish with some extra specifics regarding what we expect in 2026. Looking at the quarter, revenues across the total company rose 4.6%, reaching $303 million, which works out to 2.5% on a constant currency basis compared with Q4 2024. That year-over-year figure captures the anticipated effect from the timing of Cobalt-60 harvests at Nordion. Adjusted EBITDA was up 2.7% to $157 million, or 0.5% in constant currency terms, and adjusted EBITDA margins came in at 51.8% for the quarter. Interest expense totaled $35 million during the quarter, which is a $6 million gain relative to Q4 2024. Net income came to $35 million, equal to $0.12 per diluted share. Adjusted EPS moved higher to $0.26, an increase of $0.05 over the prior year, helped by a lower tax rate along with solid operating performance and reduced interest expense, though higher depreciation partly offset those gains; at this point, let's dig into how each of our segments performed in the fourth quarter relative to the equivalent period a year ago. Sterigenics revenue was up 10.6% to $198 million, or 8% in constant currency terms. The improvement came from 4.3% favorable pricing, 3.7% volume and mix, plus a 2.6% benefit from foreign currency. Segment income rose 10.4% to $110 million, or 7.8% on a constant currency basis, reflecting favorable pricing, volume, mix, and foreign currency, with inflation partly offsetting those factors. As anticipated, Nordion's revenue fell 12.3% to $50 million, since the timing of Cobalt-60 harvest schedules produced an unfavorable volume and mix impact of 15%, partly offset by 2.4% favorable pricing. Nordion segment income dropped by 18.9% to $29 million. Segment income margins fell 466 basis points to 57.5%, mainly because of lower volumes and an unfavorable product mix. Nelson Labs revenue climbed 2.3% to $55 million, which was essentially flat in constant currency terms. Favorable pricing of 3.2%, foreign exchange of 2.5%, and core lab testing growth were partly offset by reduced expert advisory services revenue. Segment income grew 1.9% to $18 million, which represents a decline of 1.2% on a constant currency basis. The growth came from favorable pricing, expansion in core lab testing and foreign currency, partly offset by lower expert advisory services revenue and higher costs. Now let's move to the full year 2025 results versus the prior year on a consolidated basis; we achieved revenue growth of 5.7% to $1.164 billion, or 5.2% on a constant currency basis. Adjusted EBITDA rose 8.2% to $593.8 million, or 7.8% in constant currency terms, producing adjusted EBITDA margins of 51%, which is an improvement of 118 basis points. Interest expense improved by $9 million to $156 million, thanks to lower interest rates, the favorable repricing of our term loan, and $86 million of debt paydown. Reported net income for 2025 was $78 million, or $0.27 per diluted share. Adjusted EPS for the year came in at $0.86 per weighted average diluted share, which is an increase of $0.16 versus 2024, driven by operational growth, a lower tax rate, and improved interest expense, partly offset by higher depreciation. Now I'd like to discuss our balance sheet, how we generated cash, and how we deployed capital across the whole of 2025. Our adjusted free cash flow came in at $210 million, which keeps us squarely on pace to hit the cumulative target of $500 million-$600 million for 2025 to 2027 that we established during our November 2024 Investor Day. Spending on capital expenditures amounted to $138 million during 2025. Our company remains in a solid liquidity position. At December 31st, 2025, we hold roughly $940 million in available liquidity, which consists of $345 million in unrestricted cash along with close to $600 million of borrowing capacity through our revolving credit facility. Our net leverage ratio strengthened, reaching 3.2x by the end of the year, down from 3.7x during 2024, as we kept moving toward the long-term target of 2 to 3x. Now shifting to what we expect in 2026; across the full year, total company revenue should climb into a range of $1.233 billion-$1.251 billion, which works out to 5%-6.5% growth on a constant currency basis plus an anticipated 100 basis point gain from foreign currency relative to 2025; adjusted EBITDA should rise into a range of $632 million-$641 million, equal to 5.5%-7% constant currency growth along with an estimated 100 basis point effect from foreign currency. That foreign exchange tailwind should be concentrated in the first half of 2026, and the biggest effect is anticipated during the first quarter. Company-wide pricing should land at roughly the midpoint of the 3%-4% long-term range we target. Looking at 2026, Sterigenics ought to produce constant currency revenue growth in the mid to high single digits compared with last year, and the first quarter is anticipated to see growth in the mid single digits range; we anticipate that first quarter revenue will be the softest of the year; Nordion should see constant currency revenue rise in the low to mid single digits during 2026. Revenue for Nordion during the first half of 2026 should account for roughly 40%-45% of its full year revenue, and Q2 2026 revenue should be larger than Q1 2026; at Nelson Labs, full year 2026 constant currency revenue growth should come in at low single digits, while Q1 growth is expected to fall by low to mid single digits compared with Q1 2025. On top of that, Q1 2026 revenue should be the softest quarter of the year. For 2026, interest expense should land between $135 million-$145 million, based on the forward rate curve as it currently stands; we project an effective tax rate on adjusted net income of 27%-29%. Adjusted EPS should come in between $0.93-$1.01, fueled by operational growth together with lower interest expense. Depreciation should climb in 2026, matching the step up we saw during 2025; fully diluted share count should be in a range of 289 million-291 million shares on a weighted average basis. Capital expenditures should fall in a range of $175 million-$225 million during 2026; we anticipate making further headway on bringing our net leverage ratio down once again in 2026. Last of all, as is our custom, no M&A activity is baked into our guidance. Michael, I'm handing the call back to you now so you can give the closing remarks.

Thanks, Jon. Looking ahead to 2026, our momentum gives us encouragement, our balance sheet has gotten stronger, and we have faith in what we can do to generate growth over the long term, produce solid cash flow, and build shareholder value. The pledges from our November 2024 Investor Day remain within reach on schedule, and I have trust in this team's capacity to carry them out and come through for both customers and investors. Our attention stays on carrying out the objectives described before: being excellent at serving customers through end-to-end solutions, capturing growth markets, pursuing operational excellence that lifts free cash flow, and allocating capital with discipline. With that, operator, let's begin the question-and-answer portion of the call.

Yeah, thanks. Good morning. Perhaps we could begin with the guidance and those EBITDA margins — at the midpoint, that works out to roughly 20 basis points of expansion. And that comes after the quite meaningful improvement you delivered in 2025. As for what you're aiming for this year, is it purely operating leverage, or are there other dynamics at play that deserve a mention? Are you cutting costs, adding costs anywhere? Any unusual mix effects or anything along those lines? I suppose it seems like Nelson will grow somewhat more slowly, so that gives you a bit of a favorable mix benefit. Anything else you'd point to?

Hey, Sean, thanks for asking. No, your read on the midpoint of the guide and what it implies is exactly right. No, there's nothing out of the ordinary happening — just typical operating leverage and running the business.

All right, that's helpful. Now, regarding Sterigenics, you recently said that you had one — or at least one — customer who had been handling sterilization in-house and has now decided to send that work to you instead. Can you give us any additional context about that and what went into their choice? Did NESHAP account for all of it, or did other considerations also play a part in finally making that call to go external? And then perhaps anything on things like how big that transition will be and when it will occur. I realize you aren't factoring these into your guidance, but are we beginning to witness something like the ice cracking now, with the conditions being established for additional decisions of this kind to take place?

Yes, Sean, it's Michael here. Good morning. What I'd say is we don't, we don't see... I believe the phrase you used was ice breaking, or at this moment in time we aren't observing meaningful changes in that, in that area. As you know, the compliance window remains open for another 2 years. That single client you're bringing up, the one we've discussed before, will begin contributing some volume late in this year, and it will continue building through 2027 and 2028. As you know, many elements feed into these choices, you know, and in the end it's the customer who decides. I'm certain the demands of the new rules played a role. I'm not in a position to speak for the customer about every detail, and beyond that I have to honor certain confidentiality arrangements we have with them. On the whole, you know, we're making progress, consistent with what we shared before — that this customer would be moving their sterilization volume over to us.

Okay, great. Thanks again.

Thanks, Sean.

Hi, everyone. Thanks for letting us ask questions. Michael, I've got one for you about Sterigenics. Could you share your outlook for 2026, on both volume and pricing? We'd appreciate a bit of detail on segments such as bioprocessing and med tech. What's your view on how those areas will improve over the course of 2026, and what are you observing when it comes to demand?

Appreciate it, Patrick. Let me say that for the overall company, we've put out a long-range guide of 3%-4% on price. In 2025, Sterigenics landed at the top end of that band, exactly as we had predicted; our expectation is that the same will occur in 2026. On bioprocessing, our base is quite small, yet we posted substantial growth during the past year. We anticipate that carrying forward as we head into 2026; regarding med tech volumes, volume and mix improved as the year went on, and we look for that to keep going in 2026 too. As we mentioned on our previous call, we're noticing this across a number of categories, and I'd say we're also seeing steadiness there. The one additional item I'd point to, Patrick, when I consider this, is that the commercial segment has proven somewhat tougher, with certain volumes in that area, as we closed out 2025 and look toward 2026. On the whole, the core volumes — which truly form the bedrock of the business, that's med tech — are sitting in a fairly solid position.

Alright, that helps. I guess regarding Nelson Labs specifically — I'm aware you're facing those EAS challenges, and they're set to get better. It sounds like Q1 and Q2 might see a slight decline. What's your view on how things move forward across the year, and once that pressure lifts, perhaps for Jon regarding Nelson Labs profitability — I realize that's a major factor behind margin improvement. Does 2026 return to that low to mid 30% range? I'd just appreciate some detail on that. Thanks, everyone.

I'll take the latter portion of what you asked, Patrick, regarding profitability. As we see it, Nelson remains firmly in the low to mid -30s once more this year. Q1 might be, you know, the softest quarter. I'd anticipate it landing toward the lower end of that profitability range. Now, the earlier portion of what you asked — could you say it again — that concerned how Nelson's revenue develops over the course of the year?

Yes. Yeah, regarding those EAS headwinds, what's your thinking there?

Answer from Jonathan M. Lyons: Yeah, I'd say the largest headwind for us — expert advisory compensation actually carries a bit into the Q1 comp challenge. From this point we ought to get better, and this ought to be the final quarter in which we run into that type of headwind. It's a smaller headwind than previously, but still significant for the quarter.

Keep in mind, as Jon mentioned, the opening quarter tends to be the weakest one for that business. That pattern holds annually. Both margins and volumes come in lower during Q1.

Yep, understood. Thank you, Michael.

I'm Sam, filling in for Luke Sergott. Appreciate you taking our question. I might just build on what Patrick Donnelly asked regarding the 1Q guide, with Sterigenics picking up somewhat as the year goes on. I believe you mentioned something about how volumes are sort of speeding up as we exit the year, but could you address any factors in play there, given that Sterigenics is off to a somewhat slower start this year? Thanks.

Yeah. Thank you, Sam. As you know, with Sterigenics, similar to Nelson, the softest quarter tends to be the first one. Also, where we are right now, we're observing a slow beginning to the year. Part of that ties to shutdowns, and part of it involves some weather effects we experienced too. For Sterigenics in the first quarter, we're guiding toward mid-single digits.

Sam, understood — that helps. Regarding the X-ray site, when in 2026 does it actually come online, and are there any favorable factors tied to that launch? Could you also walk through the thinking behind adding the X-ray site and how that added competence lets us support clients and unlock fresh possibilities?

Sure, Sam. Across sterilization, every modality, we serve as a complete provider. Roughly 3 years back we reached that strategic choice — each year we review a 3-year strap plan alongside our board, and during that work, Mike and his group presented a strategic blueprint for adding further X-ray capacity on top of what we currently operate. Our expectation is that it comes online during the back half of this year. Customer qualification work is underway. As with every site, there will be a gradual ramp across time. During 2026 the effect will be minor, and after that we will see it building through 2027, 2028, and further out; this was a strategic investment for the long haul; we need to sit alongside the gamma sites. Right now we are engaged with certain clients on qualifications. Once more, it fits within our broader strategic blueprint of guaranteeing a complete service portfolio spanning every modality.

Got it. Appreciate it, Michael.

Thank you.

Hey there, good morning, everybody. Appreciate you taking our questions. So, perhaps setting aside the segment discussion for a moment. At a broad level, I believe you mentioned that in 2025, revenue coming from the cross-selling or XBU customer base grew 9% compared to the prior year. I was wondering if you might unpack that a bit. How large is that customer group as a share of the total, I'm curious, and then perhaps any additional detail on what you believe generated that extra 400 basis points of growth in that cohort versus the whole company?

... Yes, Brett, there are a number of initiatives underway throughout the BUs. We have, you know, hundreds of customers conducting business on both platforms, and beyond that, we also have strategic pilots in certain key segments that we're really aiming to speed up. We've observed considerable growth, as I mentioned, that 9%, yet within those pilots specifically, it's actually larger than that. The team is performing very well when it comes to capitalizing on the value proposition throughout Sotera Health and delivering the capabilities from start to finish; we, you know, we keep monitoring our customer satisfaction scores. You know, Sterigenics on the whole, well, I'd say to begin with, at the company level, those are above 80% overall. Sterigenics figures were considerably higher still during last year. The XBU customers remain above that average. We'll keep seeking ways to speed that up. There's a great deal of commercial effort happening with the teams, and we're optimistic about seeing still more benefits from it in 2026.

All right, excellent. So as a second question, I figured I'd raise the topic of capital allocation. The narrative, as I see it, keeps improving, and net debt along with net leverage keeps steadily getting better. I'm simply curious whether there's any minor shift at the margin in the way you're approaching additional moves here — things such as organic investment and paying down debt compared with the possibility of perhaps completing a bolt-on acquisition during this year. Thanks a lot.

Yeah. Thank you, Brett. Our priorities haven't changed from what we shared previously. Funding organic investments comes first for us, and we want to be certain we're earning the right returns from those; we made a commitment to a free cash flow target covering the 2025 to 2027 period; that commitment still stands as of today. The CapEx guidance we provided in the outlook for 2026 sits inside that framework. The business, as you know, will keep performing well and producing cash flow, and that will remain the priority, just as we've described previously.

All right, great. Thanks again.

Thank you.

Hello there, and good morning. This is Christine Rains, sitting in for Max Smock. I wanted to revisit those 2 Sterigenics growth projects that are currently active. Regarding the X-ray facility, since you know the history, you've mentioned a goal of roughly 40% customer utilization prior to starting construction, and the project didn't reach that level, though clearly it matters strategically. I'm curious how far under that 40% typical benchmark you are seeing things right now, and whether you're factoring in any margin dilution for the segment in 2027 until utilization builds up, and then as well, could you share some detail about the sterilization modality for that other facility being built.

All right, I apologize. You've packed, like, 7 questions into that single one. Let me attempt to unpack this. A few perspectives.

All right, I apologize for that. Thanks.

No problem. So let me take you through it. In the past we've said that before any shovels go into the ground, our target is 40% utilization. That's the level we hope to have locked in with customers. This particular one comes in somewhat under that figure. We've also communicated a goal of 20% IRR on the investments we make. Clearly, when we're adding cobalt to a facility that already exists, or an EO chamber in one that already exists, the return sits above that 20%. Greenfield projects land beneath it, and this one will be beneath it too, obviously, since it's a full greenfield. From a strategic standpoint, this matters to us, because we believe certain segments of the market want X-ray, and we're delivering that service to those segments; we continue to believe the remaining modalities will, for the most part, be the biggest modality segments. We'll see this one ramping during the back half of the year. Let me think — I want to get to all of your questions. Regarding Sterigenics margins, Jon noted we'll get modest margin improvement in 2026, and that will be mostly powered by Sterigenics, where we stand right now; it includes a portion of the costs that will arrive alongside low volumes at the X-ray facility, and that same dynamic will carry on as we look toward 2027. I believe I've covered everything. I'm not sure whether anything else slipped past me.