Sotera Health Company (SHC) Earnings Call Transcript & Summary

Hello, everyone, and thanks for being with us on Sotera Health's third-quarter earnings call. Today's press release and earnings presentation are available on the Investors page of our website, soterahealth.com. This webcast is being recorded, and a replay will be made available on the Sotera Health website's Investors section shortly after the call concludes. Joining me today are Alton Shader, our Chief Executive Officer; Jon Lyons, our Chief Financial Officer; and Michael Petras, our Executive Chairman. Certain remarks we make during today's call may be regarded as forward-looking statements. The subjects addressed in those statements involve risks and uncertainties that might lead actual results to differ materially from what is projected or implied. A full rundown of those risks and uncertainties is available in Sotera Health's SEC filings, along with the forward-looking statement slide that opens the earnings presentation. Nothing here obligates the company to revise any forward-looking statements later on. Also, keep in mind that today's discussion will cover financial measures under both GAAP and non-GAAP — among them adjusted EBITDA, adjusted EBITDA margin, the tax rate applicable to adjusted net income, adjusted net income, adjusted EPS, net debt and net leverage ratio, plus constant currency comparisons. You can find reconciliations of GAAP to non-GAAP measures for all relevant historical periods in the schedules attached to the company's press release and in the supplemental slides to the earnings presentation. During today's Q&A, the operator will help manage the session, so we ask that each person stick to a single question plus one follow-up. Should you have additional questions afterward, you're welcome to contact the Investor Relations team. At this point, I'll hand things over to Alton Shader, CEO of Sotera Health.

Good morning, everyone, and thanks for being with us today. For today, we announced healthy growth on both the top and bottom lines compared with Q3 of 2025. That was powered by strong execution along with a sequential improvement in adjusted EBITDA margin of almost 100 basis points. In the third quarter, our constant currency revenue grew 4.4%, and constant currency adjusted EBITDA rose 4% against the same period a year earlier. Sterigenics kept performing well, posting 8.2% constant currency revenue growth and 57 basis points of segment income margin expansion, even though the med device market showed some softness during the quarter, and that has carried into the early portion of Q4. Nelson Labs turned in another strong quarter, with revenue up 9.2% on a constant currency basis, as the team kept executing on complex projects that support our customers' regulatory needs. As expected, Nordion's results mirrored the timing of Cobalt 60 harvest schedules. The Nordion team did an excellent job delivering critical cobalt shipments for their customers and grew segment income margins by 71 basis points. Given our year-to-date performance and our current visibility into the rest of the year, we are reaffirming our 2026 constant currency revenue and adjusted EBITDA outlook. At Sotera Health, we worked tirelessly to help ensure the safety and availability of health care products that millions of patients depend on every day. Before John reviews the financials in more detail, I want to give some additional context around an example we shared on our second quarter call that shows how our teams make a meaningful difference for customers and patients. As we've said before, customers regularly come to Nelson Labs when they face time sensitive and complex challenges. During the second and third quarters, one of our customers faced an urgent regulatory testing need involving a product used in a significant percentage of surgeries performed around the world. The Nelson Labs team quickly mobilized its scientific and technical expertise, completed the required testing on an accelerated time line and helped the customer maintain the availability of a critical health care product. While this is one project, the impact was far broader: by helping our customers address a time-sensitive challenge, our team played an important role in supporting tens of millions of patients who rely on these critical medical procedures; this is exactly what we mean when we talk about putting customers first and delivering on our mission of safeguarding global health. I will now hand it off to Jon, who will walk us through the financials.

Thanks, Alton. I'll begin by taking you through the consolidated financial results for the company, and then I'll go over the performance highlights for each of our business segments. Following that, I'll review the balance sheet, cash generation, and capital allocation, and I'll finish with an update on our 2026 outlook. On a consolidated total company basis, third quarter revenues increased 4.4% on both an as-reported and constant currency basis, coming in at $325 million, versus the third quarter of 2025. GAAP net income for the quarter was $58 million, or $0.20 per diluted share. Adjusted EBITDA rose 3.9% to $171 million, or 4% in constant currency. Adjusted EBITDA margins, meanwhile, expanded sequentially by almost 100 basis points, to 52.5%. For the year to date, our adjusted EBITDA margins finished 8 basis points better. Interest expense in the third quarter was $34 million, which is $5 million lower than the same period last year, reflecting the repricing actions we took and the $75 million term loan repayment completed last year. Adjusted EPS rose to $0.29 per diluted share, a 12% increase over the prior year. Now turning to segment performance: Sterigenics delivered revenue growth of 8.5%, generating $209 million, which equates to 8.2% on a constant currency basis. That was driven by favorable pricing of 4.8%, volume and mix gains of 3.4%, and a 30 basis point benefit from foreign currency. Segment income rose 9.6% to $117 million, which is 9.2% in constant currency, reflecting continued operating leverage and solid execution. The segment income margin improved 57 basis points versus the prior year, to 56.1%. At Nelson Labs, revenue grew 8.8% to $61 million, equivalent to 9.2% on a constant currency basis. That growth came from a robust volume mix of 6.6% plus favorable pricing of 2.6%, partly offset by a 40 basis point foreign currency headwind. Revenue growth exceeded expectations, as we saw more activity in expert advisory services during the quarter. Nelson Labs segment income was up 2.5% to $19 million, or 3% on a constant currency basis. Segment income margin declined 199 basis points to 32.1%, primarily due to business mix. Nordion reported $55 million in revenue for the third quarter, a decline of 12.4%, which is 11.5% in constant currency. Pricing contributed a favorable 2.2%, but that was more than offset by a 13.7% drop in volume mix and a 90 basis point foreign currency headwind. I'd like to add that while Nordion's revenue did decline this quarter, it actually came in ahead of what we had expected, thanks to certain shipments arriving earlier than anticipated. Segment income at Nordion was approximately $34 million, down 11.4%, or 10.4% in constant currency terms. Margins held up well — segment income margin increased 71 basis points versus Q3 2025, to 61.3%, reflecting operational productivity and favorable pricing. Turning to the balance sheet, cash generation, and how we deploy capital: operating cash flow through the year to date has hit $228 million, and $111 million of that arrived in Q3, reflecting solid generation for the period. Capex across the first nine months came to $145 million, with $53 million of it incurred in the third quarter. Those investments are funding Sterigenics capacity expansions and EO facility upgrades, Nordion Cobalt 60 development initiatives, and completion of a new state-of-the-art clean room at our Salt Lake City lab; we keep making strong headway in fortifying the balance sheet. Net leverage was 2.9x at September 30, 2026, an improvement putting us within our long-term target range of 2x to 3x. Moody's recognized that headway with a credit rating upgrade in early October. Segment income margin declined 199 basis points to 32.1%. Now, what we expect for the full year 2026. As Alton said, our 2026 revenue outlook is unchanged: constant currency growth of 5.25% to 6.75%, with reported revenue of $1.233 billion to $1.250 billion. We remain confident in the full year adjusted EBITDA outlook too, calling for constant currency growth of 5.75% to 7.25%, with adjusted EBITDA of $632 million to $641 million. Those reported ranges include an estimated 70 basis point benefit from foreign currency for the full year. Looking ahead, currency movements should be a headwind of over 100 basis points in Q4, and for the entire year we project consolidated adjusted EBITDA margins roughly level with the prior year. Expected margin gains at Sterigenics and Nordion are seen offsetting a decline at Nelson Labs. Our forecast still has total company pricing for 2026 landing inside our long-term range of 3% to 4%; we still anticipate Sterigenics will post constant currency revenue growth in the mid- to high single digits for 2026, a view accounting for the recent softness observed in the med device market, with fourth quarter constant currency revenue growth expected at about 6%. For Nordion, we now forecast constant currency revenue growth for the full year in the mid-single digits, backed by results so far this year and what we anticipate demand will look like through December. For Nelson Labs, given how we've performed year-to-date, our full year 2026 constant currency revenue growth expectation is now in the low to mid-single digits. Looking ahead to Q4, we anticipate growth will ease relative to third quarter levels, though we'll still see contributions from the expert advisory services activity we mentioned earlier. Our projection now calls for full year segment income margins to come in close to what we've recorded year-to-date. Moving on to a few other assumptions behind our outlook. Looking at where market rates stand, our 2026 interest expense outlook is now being narrowed to between $137 million and $140 million. On adjusted net income, the effective tax rate we apply is unchanged at 27% to 28%. As for depreciation expense, we expect growth in 2026 running modestly above 2025 levels. A fully diluted share count of 289 million to 291 million shares on a weighted average basis is still our anticipation. Taking all these factors into account, we believe we're still on track for adjusted EPS of $0.95 to $1.01 per diluted share in 2026. Segment income margin fell 199 basis points to 32.1%. Capital expenditures should come in somewhere between $200 million and $225 million. Our expectation remains that net leverage ratio will improve versus 2025. And lastly, no M&A activity is included in this outlook, consistent with our usual practice. With that, I'll turn the call back over to Alton.

Thanks, Jon. We feel good about how we've performed across the first 3 quarters of this year, and our attention stays on carrying out our priorities. Our team's dedication to coming through for customers, along with how essential what we offer is throughout the whole company, keeps making an impression on me. With that, operator, please open up the line for questions.

So maybe just regarding the guidance. Your EBITDA range for this year is somewhat broader heading into Q4 than it typically has been. Is that simply a philosophical shift? Do they have to do something with timing uncertainties surrounding Nordion? Perhaps just widen the outlook a bit more. And then could you sort of walk us through what the larger unknowns are right now as we head into late Q4.

Sean, thanks for asking. I'll need to go back and check, but I'm fairly certain we haven't consistently narrowed our EBITDA over the years. I think it's a fairly typical range for us, if you look across the last 3 to 5 years. And of course there are some moving pieces as we wrap up the year here. So really nothing has changed that brought this about.

All right. And then perhaps regarding Nordion. I realize revenue declined due to harvest timing. But could you provide a bit more detail on how you managed to boost margins there even with the lower revenue?

Yeah. No, thank you, Sean. We had solid operational execution during the quarter and year-to-date. There were a few items we needed to resolve from last year that the team has concentrated on in the everyday running of the operation, and we succeeded in enhancing that, and that truly is the performance; so genuinely strong effort from the team to achieve that.

Thanks for the question. So to begin with, you guys mentioned some softness on the Med Vice side — forgive me if I missed it, there was something moving around between calls. Could you speak to the visibility there and how that shapes your 4Q, and more importantly, what are your customers telling you — like what are the order bookings showing? I know it's shorter cycle, but how are you thinking about this carrying through to '27?

Yes, thanks for the question. I'll handle that one. At a high level, we did well in Q3 and remain confident in our full year outlook, and I'd highlight really strong quarters from Sterigenics, with 8.2% constant currency growth, and Nelson Labs, with 9.2% constant currency growth. Looking ahead, we do expect some moderation in Nelson Labs growth compared with the 9.2% we delivered in Q3, but we do expect that business to grow in Q4. For Sterigenics, we remain confident in our full year outlook for mid- to high single digits of growth. However, we did see some softness at the end of and the start of Q4 here, and based on what we're seeing in the business and what our customers are communicating to us, we are not expecting the sequential Q4 growth that we normally see in Sterigenics. And this really informed our guide.

All right. So then, I suppose, when you consider that absence of sequential growth — I mean, look, the big question is simply how long does this deceleration persist? Or is this a case where — do we hit bottom here in the middle of 27% and then build from there?

Yeah. I mean, our — obviously we're right in the middle of planning for 2027 at the moment, and we'll share what we anticipate for 2027 on our Q4 earnings call in February, and obviously we're staying quite close to our customers and doing everything we can to grasp the sort of pullback in optimism that they've told us about as we move here into Q4.

Okay, I'd like to begin with Nelson Labs. You brought up that 1 big customer this quarter, I believe, and it sounds like we should expect a slowdown next quarter. But could you help us put a number on how much of an effect that had in 3Q? And then what would you say the underlying growth in that market was?

Yes. Regarding Nelson Labs, we're clearly happy with how the third quarter turned out, with 9.2% constant currency growth. The team is performing really well when it comes to serving their customers and truly assisting them with critical testing and remediation needs. Just as you said, we don't anticipate Q4 delivering another quarter of growth similar to what we saw in Q3; even so, we have plenty of confidence in that business going forward. As you're aware, we raised our guide from low single digits to low to mid-single digits. And we did observe some strength coming from the EAS business in Q3, and we also expect that business to contribute additional growth in Q4.

All right, great. Then turning to the 4Q guidance for Sterigenics — I get the med device remarks. I believe that's a trend we've observed pretty widely. But perhaps you could walk us through a few of the more idiosyncratic items, such as the x-ray facility that's coming online, the bigger customer that was set to come online during the back half, and how those ought to affect 4Q? And then regarding pricing, it landed somewhat above what we had expected for the quarter. So maybe just explain what's assumed in that 6% for pricing during the fourth quarter?

Sure; so once more, we're pleased with how we did in Q3 here, 8.2% constant currency growth, 120 basis points of sequential growth on the top line; so the team performed really well. We've gained from the 3 factors we've talked about previously — the favorable shutdown days, the outsourced customer that we have, and the North Carolina X-ray facility as well. So those did add to our growth in Q3, and we anticipate they will add to growth in Q4. I'll point out that although we're discussing a 6% constant currency growth figure for Q4, demand in this business looks relatively stable to us. So we're seeing — we noted that we aren't seeing the sequential growth we would typically expect. We're essentially seeing flat revenue performance in Q4 for Sterigenics compared with Q3. So on the whole, while we've observed a bit of softness here early in Q4, the environment is pretty stable at present, and this business is incredibly resilient. It has been across the years, and we keep seeing that as we wrap up the year.

Great; and is pricing included in that? Is it still kind of at the upper end of the — the 3% to 4%? Or is there upside leverage there?

Yes. What I mean is that pricing at Sterigenics has really been consistent, and obviously it reflects a number of factors — at the top of that list is the value we deliver to our customers every day. We're at the higher end of that range, and here in Q4 as well we would expect to stay at the higher end of that range.

Great. Perhaps just to piggyback on a few of those remarks regarding med device. You mentioned the softness began at some point during 3Q. Could we get a sense of when in that quarter you first started noticing it? And then your thinking about the more recent performance you highlighted for 4Q? Is there any sort of, I suppose, possibility that conditions could worsen or deteriorate further given some of the medtech prints we've seen so far this quarter?

Sure. We began to observe some of that softness around the middle to latter part of Q3. And that softness mostly originated with our European customers. So that has been the main impact that, again, we saw at the close of Q3 and here at the start of Q4. Our guide reflects what we're seeing in the marketplace and what we're hearing from our customers. And again, we are in Q4, sequentially, and we're going to be flat versus Q3; so we're not really seeing anything much beyond a fairly stable demand environment here. And again, as we've gone and truly gotten close to our customers here, essentially, this is a reduction in some of their optimism for Q4. It isn't uniform across any particular segment or any group of customers, but you bring all the data together and you've got this reduction in optimism, and we diluted that in our guide and we're confident in our guidance.

Got it, that's clear—and perhaps just one more from me. Is there any update at all on the litigation side, say the count of plaintiffs in California, or anything in that vein?

Yes, certainly. As for the litigation, our approach is to defend the company, and we're carrying out that approach. I can bring you up to date on a few of the main cases. In Georgia, an appellate ruling is due by spring of 2027; in California, our initial trials are set for January and April of 2027; and in Illinois, every one of our cases now sits before a single judge, and pretrial proceedings are underway.

I wanted to ask whether you could give some color on how that large customer situation is developing — the outsourcing choice and how it's being carried out — and whether that development, if I can put it that way, has prompted or sparked any further discussions along similar lines.