Sotera Health Company ($SHC)

Good morning, everybody. I'm Luke Sergott, I cover Life Sciences tools and diagnostics at Barclays. With me, I have Michael Petras, CEO of Sotera Health. With that, I think you have the Safe Harbor. Do you want to read that or -- I mean, you don't have to.

I'll just refer to some of our SEC filings for risks and uncertainties that you may see -- reconciliation of any measures that we talk about today.

Sure, you don't have that memorized.

All right. I guess let's start off at the top. I think that the topic du jour right now is kind of energy costs and the impact of the various players across the space. So talk about how you guys are either hedged or I mean there's a lot of logistics within your business. So talk -- can you just kind of walk us through any other puts or takes there?

Yes. Some questions that we've been getting asked in recent are kind of two flavors. One would be on utility spend and the other one would be on just gas, ethylene oxide gas. So -- and both of those, we're in a pretty good spot. We don't see a material risk. We've got a lot of contracts fixed, not all of them on the utility spend. And overall, we're not a huge consumer of electricity and gas. On the gas side for ethylene oxide sterilization, our biggest market for that business is the U.S., and we're in a fixed long-term contract there. So we will not anticipate a material impact by some of the dynamics playing out right now.

And any supply chain constraints or given that -- the issues?

Nothing that we're aware of today.

Okay. And so that behind us, as we get into the other fundamentals, you guys had a decent quarter. So talk about the momentum that you've been building throughout the year. You're through the destocking across the other -- the space has seen and you guys were late in that cycle from a recovery, seeing volumes pick up and remain steady. So just give us a quick overview of how the year played out versus you guys thought? And then has that shaped and your thinking about as a jump-off point to begin the year this year?

Yes. If you look at it in 2025, we had over 5% growth on the top line, over 8% growth on the bottom line. So it did very well. The commitments were made across the businesses. Overall, we generated over $200 million of free cash flow. We had over 118 bps of margin expansion. We delevered. We repriced our debt. Our private equity sponsor sold down a ton of shares. They're now down about 12% after this past week's secondary, they're down about 12% of outstanding shares. So overall, we like where we settled in 2025 and the team did a really good job, and we're well situated for growth in 2026. The other thing we talked about in our last earnings call is 20 consecutive years of growth we've had in this business at 50-plus percent EBITDA, right now currently in the business. So overall, we're really optimistic how we finish '25 and looking forward into 2026.

Right. So from the drivers on that though, I mean, you had -- like when you think about Sterigenics in 4Q, you outperformed your largest competitor there by quite a substantial margin. That's kind of led into the feeling that there's a little bit of pull forward there, especially in light of how your 1Q guide came in from a sequential downtick. So talk about -- was there any pull forward or demand and how the order book is kind of filling up there to feel like to inform your outlook?

In any given quarter, our competitors could be a little bit better than us and we could be better than them. So I don't read too much into one specific quarter. So over time, we look at it within a quarter, you have customer dynamics, you have facility dynamics when shutdowns because you're loading cobalt, you're doing maintenance work. So there's several factors that go into it. Different customers have cycles going on within their business. When we look forward into 2026, one of the things we want to make sure people remember is the first quarter is typically the softest quarter of the business. It's been like that traditionally. And based on what we saw at the time of earnings, we gave a projection and it's shaping how we saw the first quarter playing out. But overall, we expect the business to deliver in total 5% to 6.5% top line in constant currency growth for the year and a little bit better on EBITDA of about 5.5% to 7% EBITDA growth. So overall, again, this business is going to perform again in 2026, and we feel pretty darn confident about that.

Yes. But when you're thinking about from a competitive standpoint, talk about some of the demand dynamics and how they're changing from your specific customers? And kind of what's baked into that seasonality, why 1Q is your weakest? Just trying to think of like, is it batch ordering from the hospitals and like you just kind of upstream and this is when it's getting shipped?

Yes. So one thing, Luke, I'm sorry, I didn't answer your first part of your question, which is pull-in. I should address that. This business isn't a pull-in business. Like we don't have warehouses on product. Customers drop it off. We have very limited space. The product is sterilized and they pick it up and take it. If they keep it in our facility longer than the planned cycle period, we charge them for that. So this isn't a business like we can't call up and say, brings 5 extra trucks today. We just don't have the capacity to do it. It's not a pull-in business. This isn't like a distribution business or a retail business where you could stuff the channel. And you could say, "Hey, I'll give you a little break on price, take the shipment." That's just not the way this works. Customers make the product, they ship it to us. We sterilize it, they pick it up, right? So there isn't -- so when you -- not every quarter is going to be up into the right. There's going to be some choppiness. There's lots of factors that go on. I know a lot of people say, "Hey, did you see a big tariff pull-in?" Second quarter was a really good quarter last year, right? It was just the timing of how things played out with shutdowns as well as activities from our customers. But when we look at the demand, back to your follow-on question here, when we look at the demand in this business, and what customers are asking us for Nordion, we have pretty darn good visibility. We know when the cobalt harvest schedules are. That's why we give guide like we did that we said, "Hey, 40% to 45% of the year will be done in the first half." We have a pretty darn good feel. That could shift by a couple of weeks here and there a month. But we know when the cobalt is coming out and the demand because, again, this isn't something I could just throw cobalt in the FedEx envelope and hope it arrives there, and they pick it up and they plug it in when they have a chance during lunch hour. This is something that kind of shut down the facilities. They got to make sure the homeland security is evolved. They're going to make sure that all the people are out of the facility in the area where the cobalt is going. I mean, these are well planned events. So there's not a lot of pull-in activity that could go on. And we didn't see that at all. People keep asking tariffs, did you see it in the second quarter? We didn't see anything material on that. And -- now listen, if people decide they want to in-source to the U.S. in a big way, we'll be ready for it.

Yes. On that, I guess, the change -- is there a change in the dynamic there from actually the hospitals like also the delivery -- the distributors from Medline, they talked about being able to ship 95% of their -- from an order that next day. So how does the sterilization process? And to your point like, "We don't care, we get the order, we sterilize it and they take it, do what they want with it." But how does this actually start impacting from -- are you seeing any changes in the order dynamics from customers?

No. I would -- we have 3,000-plus customers in that business. And every one of these customers wants to work on trying to free up working capital and be more efficient, right? I mean we've heard this for many, many years. Coming out of COVID, we saw a lot of instability around the inventories and cost takeout around freeing up working capital. We just haven't -- that's been pretty stable. We're not hearing lots of discussions. I'm sure companies like Medline are continuing to look for efficiencies in their supply chain. The delivery methods to hospitals. Hospitals are inefficient. They're -- hospitals got to figure out how to manage their inventory and supply. I mean there's a lot of customers, a lot of warehouses involved in between. We get the product and they take it then and take it through their distribution channels or ship directly to the hospitals. But overall, you'll see improvements, but we don't see a material effect on this impacting our volumes based on inventory. We just really aren't having those conversations with our customers now for at least 18 months.

Okay. And then from a utilization perspective.

I should clarify, there will be a customer here and there, but that's just normal.

3,000, right? So...

Yes. I'm sorry, you're asking...

On the health care utilization has been elevated. How does -- like when you're getting these orders from customers, like how far ahead in advance are they kind of planning out? And when you're starting to see these -- the volumes come in?

Yes. On Nordion, we have best visibility. Nelson, we have the least. And then Sterigenics is kind of in between. So we have several weeks out of planning over the next couple of months, they will tell us, "Hey, listen, over the next couple of years, this is the kind of capacity we're going to need because we're doing this or that with our supply chain. But on a quarterly basis, we'll get visibility of x number of trucks want to come in this week starting next week or the following weeks." So we start to get visibility around that earlier than we do in the Nelson business, for example.

Okay. And because the Nelson business you just -- that's like in-house the sterility testing to make sure everything is sterilized?

Yes. On that, about 55% of the Nelson business is routine lot release testing. So it comes out of sterilization. And then the other 45% is down around new product development and new regulations, R&D spend.

All right. And then as you were talking, you mentioned the onshoring piece there. This is not something we usually talk about within like outside of bioprocessing exposure, but you do have bioprocess exposure. But as you think about that coming on, do you guys have -- like how are you planning for a capacity perspective to meet that demand as it comes on?

Yes. So today, bioprocessing is low single digits for us. We had a very good year in 2025. We had significant growth over the prior year and on a sequential basis, we had good growth in the fourth quarter. We'll see that continuing in 2026. We're well situated for capacity. Our share position just isn't as large there as we'd like it to be. I think we've grown position. But when you're talking low single digits, I don't think it's worth arguing how much share we gain with our teams. So just we'll get more, right?

It's not enough.

Yes, it's not enough. Whatever it is, not enough.

All right. That's helpful. On that margin piece that we were talking about there, I mean, 50% margins you're talking about over 20 years. The price volume dynamics still hold to what you guys have seen in the past? Or are you starting to have to get -- give a little bit more on price as your competitors are getting bigger or anything like that?

We're pretty well situated on price. One of the things we want to be careful is we don't ever outrun our value prop, okay? So we got to make sure we cover our costs, and we want to make sure we're rewarded for the work that we do. We see 4% price in Sterigenics, 3% in Nordion, 3% in Nelson. The thing to keep in mind on Sterigenics, we also react to market dynamics. Where the capacity is, what geography, what modality. But overall, we feel very good about our pricing capability, where we are today and where we're going forward. And our customers recognize the value we bring them. We just have to make sure we don't run that. But overall, our pricing strength continues to -- we continue to demonstrate that and perform because we're getting paid for what we do.

Okay. And then -- I mean, Sterigenics, we stick on this topic. I guess you just talked about your pricing remaining in that same range as you've talked about, volumes to be up and down, but pretty consistent there to give you the mid- to high single-digit type plus growth for the business longer term. NESHAP regulations that just came out. So it's increased -- supposed to increase outsourcing, that's a typical trend what we see is like increased regulation lead to more outsourcing. So as your customers are having to think there on sterilization strategies internally, like are you starting to get more pickup there as we just got -- as we get the regulations continue to come through and digesting?

Yes. So let me -- there's a lot there. Let me unpack it a couple of facets. So NESHAP is a rule that's out there for sterilization companies. There's new regs put out, and we had to be compliant by April 2026, that's been extended now for April 2028. And the administration is looking at new rules for NESHAP and some tweaks to that existing rule. We'd expect to see some modifications to that rule over the next weeks and months, not exactly sure where it stands within the current administration. So that's something we'll be prepared to react to. But we are building our capability off of the existing rule that was in place that just got extended. We think that's going to be more stringent than the revision that's going to come out. Okay. So we feel very good about that. We will have the majority of that done this year in our facilities, okay?

And you think they're going to actually make it a little less stringent?

Our sense is they're going to make a little less stringent. We don't have the details of what that means. They're doing their work. We talk to these folks because they are regulators, but we don't know exactly what they're going to do. But we feel good about the level of controls that we're putting in are going to be at a very high level, right? So that -- we will have more visibility on what this revised rule looks like over the next several weeks and months. I'm not exactly sure on the timing of that. We are moving full speed ahead in 2026 to finish up. If you looked at our 10-K, we said we're going to spend about $50 million in environmental spend that -- and the majority of that is going through these facility enhancements. So now let's talk about what do we see in the broader landscape of competitor dynamics, right? When this rule first got out, there was a lot of concern from smaller players that they're going to be able to meet those standards. That concern has come down a little bit because of the fact that there was an extension of a couple of years. We've also been on the record to say that there's been one customer that's a big med tech company that all of us know that has made a decision to shut down our operation and outsource it. We're going to be the beneficiary of that. We'll start to see some of the volume in late '26, moving into '27 and '28.

Yes. I mean that's the whole pitch on the outsource, right? It's just like a $50 million to $100 million spend there to update your facility where they could be putting that into R&D?

Right. Yes. So companies have to decide. Some of our customers think this is a core competency they need to have and others say, "This isn't something we want to be involved in." And there's other companies that do that. And that's what we do. We don't make product. We're not taking -- we're not developing therapeutic solutions. We just sterilize. So customers come to us because they know that's our core competency. And some companies want to do it and some don't or some have a blend in between. We're going to make sure we're well positioned to service whoever -- wherever the customers end in that spectrum.

Yes. And so when the -- when you're thinking about this like as this new customer, you just called out, you see some volumes like talk about your pipeline of new customers coming out on top of those person, so we're thinking about incremental growth over the next few years.

One of the fallacies that people have here, I just talked to investors this morning and said, "Oh, we understand that ethylene oxide is 50% of the sterilization volume today, the modality, it's going to go to 40%." That's what we understand. We're not seeing anything like that. We continue to see strong demand for ethylene oxide. No matter what the scrutiny is around this, it's the dangerous material that we have to continue to do the right things and how we control it, but it's absolutely critical to the health care industry. So we're seeing ethylene oxide as a very key credible modality. We've got a pipeline of demand. And I'd say some of them may be NESHAP related, but we're not seeing the level of discussions we did 6 months ago or 8 months, maybe more like 8, 10 months ago, where people were saying, "Should I be sterilizing in-house or not," that slowed down a little bit, Luke. But we are still seeing -- when you look at our CRM and I meet with our sales team, if you look at the pipeline, the pipeline on volume, on ethylene oxide is very strong.

And I guess what caused it to slow down from 6 months ago? Is it just pushing them out?

Yes, pushing out the NESHAP, right. I mean what I want to be clear, what we're seeing slow down is the discussions of people shutting...

Yes, yes, yes. Bringing on new customers.

We're not seeing a slowdown in demand for ethylene oxide sterilization. I just want to be clear.

To be interpreted very different ways. So as the new customers are coming on, like I said, like is this something that could take you above your historic rate? Or is this just something as you think about this is part of just everyday business?

Yes, I think you ought to be thinking about it. We've said Sterigenics is mid-single to high single-digit growth. And you have to think about it within that. When we gave that guide, we understood this. Our aspiration are to grow low double digits in that business. But right now, we've guided to mid-single to high single digits.

Baby steps. Okay. On the technology piece, talk about why ethylene oxide is like sticking around for a sizable part of the market and why we haven't seen -- I mean, you have different limitations from X-ray to some of the other technologies, gamma ray, it's like just walk us through why you're not seeing any type of encroachment on the EO side.

Yes. So for folks who may not be as familiar with how this works, we as a sterilizer, we do not determine the modality. That's determined by the customer in coordination with the FDA, and it's based on the product characteristics, okay? And some materials can't take exposure to radiation. Some can't take the gas exposure. So it depends on the product composition and exactly which modality is used. But we continue to see strong demand for ethylene oxide based on the product pipelines of our customers and what they're continuing to develop as well as the continued growth in core products that already use ethylene oxide as a sterilization modality.

Can you talk about some of those products that are moving over to ethylene oxide, like what were they...

I wouldn't say we're seeing a big migration over. I'm just saying as new products come out.

It's still in there.

It's still in there, right? And existing products are growing in volumes.

Right. And so as you think about the different types of products, right, like you have your hips and knees. Are they going to be more X-ray or gamma? Or is that going to be ethylene oxide?

Hips and knees typically are gamma radiation is what we see.

Yes. And like -- so where is like ethylene oxide sweet spot? Is that just like kits [indiscernible] things like that.

Some cardiac devices. We also see it in some pharmaceutical applications as well.

So the non-U.S. and bolts of the hospital.

Yes, general hospital supply.

Got you. All right. So can we talk about the last piece here in the last 5 minutes on the litigation. Just provide us an update. You guys are making pretty good progress. I guess what kind of spooked some investors in some of the market at the time was when your general counsel stepped down, you guys brought him on. We thought that, that was a very -- from his background and on his experience, it was like it was a good add. So walk us through the reason why he stepped down and then just an overall update on the litigation.

Yes, yes. Okay. So what your referenced is Alex Dimitrief, we made an announcement a couple of weeks ago that Alex is going to retire for the second time on April 1 to become an adviser to the company. So Alex and I were very fortunate to have the relationship. Alex and I worked together when he was at General Electric. He was the General Counsel at GE and he had 20-plus years of litigation experience way before that at [indiscernible]. Outstanding. Alex came to us and said, "Hey, listen, I'll come to this for 2 years and help the company because I think you guys are being wrong and that will help you. It's been over 3 years. I want to go back and try retirement again. It's pretty simple. I just talked to Alex yesterday a matter of fact. I talk to him almost every day. So Alex is an adviser to the firm.

He's still there?

Yes, he's still going to be an adviser. He's going to be paid a monthly stipend to be an adviser to handle just litigation. Erika Ostrowski, our General Counsel, is outstanding. She's been with us over 2 years. We brought her in for succession planning, for Alex's job. By the way, she's got a litigation experience in her background. She's got significant litigation experience, too. She'll be the General Counsel. She's been running the legal department for some period of time now. And Alex will continue to work with the litigation committee and myself, it's a team sport around the litigation, and Alex will stay involved and Erika is going to be running the legal department, orderly transition that we plan for.

Working on again.

Basically, yes. You just had history, so I don't know...

Yes. But provide us where we are in that litigation -- Atlanta, like how many cases are there and how this is going to progress?

Yes, okay. So outside of the September '22 event, where we had a really bad verdict in Illinois, then we had a complete win in the second case in Illinois that enabled the settlement that we were able to get behind us. I would say the company, particularly the Board has done a really super job in managing this whole dynamic and working through it with a lot of help from our inside management team as well as outside legal advisers. So overall, it's in a manageable spot. We got to deal with it, and we're working through it. In Georgia, let's take that for the most of the cases, there's 400-plus cases. I don't want to overcomplicate things. There's -- the judge is putting science front and center. There's a Phase I general causation and a Phase II specific causation, okay? You have to get through Phase I to get to Phase II. I'll take the Phase II, it's a little simpler. There were 3 cases that went to Phase II and all 3 of them were dismissed, okay? The plaintiffs are appealing that and we'll be ready for that game. That will happen late this year. The appellate process will start to play out. They haven't even submitted the appellate papers yet up to the courts for Phase II, so it's going to take time, right? Phase I is general causation. The plaintiffs put 3 experts together, we objected to and said it's junk science. Two of them were rejected by the courts. We think all three should have been. We appealed to appellate courts and say there's a standard that all these have to meet. And we think all 3 of them did not meet that standard. And we think that all 3 of them ought to be dismissed and not be able to testify here. The appellate courts came back and said there cannot be a new standard. They all have to be following the same standard. So there is a hearing with the courts next week on March 18, where the courts are going to hear arguments from both sides on how we think the judge ought to take that feedback from the appellate courts. We feel very good about it. There's no legitimate science that supports the position. We've said that all along. We feel very good about where we are in these cases. But at the end of the day, we're in state court and things can play out and there's risk to it. That's why we make sure investors know that. When you focus on science, it's going to be proven that ethylene oxide at these levels are not causing it. And that's what we're going to make sure that the judge knows they have the standard they have to meet and they can't be junk science.

And on the expert panel, I think that the big question was like the judge was saying, look, you're going to have to have experts in this. But to us, the bigger question is like, okay, so they're going to have some of these guys in here, but what extent can they talk about what you're saying, like -- ethylene oxide at these levels are...

That is our objection. They do not have any science that proven dose relationship here. And that's what we're telling -- that's the standard in Georgia, and you have to prove that. And if they can't prove that, those experts are not going to be a lot to testifying that subject. Yes. So we -- listen, our team is ready. I mean, we've got mock prep going on this week. I had a call with them on Monday when this team will be ready. There is no science to support the position these plants are taking, and we're going to make sure that they hear our side of this.

All right. Thank you.

Thank you. Appreciate your time.

Yes. You, too. All right.