Sotera Health Co. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Growth and Resilience: 2024 marked the 19th consecutive year of annual revenue growth, with $1.1 billion in revenue and ~50% adjusted EBITDA margins. Customer satisfaction rates remained over 80%.
• Balance Sheet and Refinancing: Successfully refinanced capital structure, extending maturities to 2031, and finished the year with strong liquidity.
• Business Unit Progress: Sterigenics completed capacity expansion and EO facility enhancements; Nordion made progress on cobalt projects; Nelson Labs improved margins; Embedded Labs and expert advisory services had double-digit growth.
• Corporate Responsibility: Welcomed Chris Simons to the board, named Vince Petrell as Lead Independent Director, and published the third annual corporate responsibility report.

Segment Performance

• Sterigenics: Fourth quarter 2024 revenue was $179 million, a 4.2% increase or 5.3% on a constant currency basis compared to Q4 2023. Drivers included favorable pricing (4.2%) and volume/mix (1%), partially offset by foreign currency. Full year 2024 revenue increased, with growth from pricing, volume, and mix.
• Nordion: Fourth quarter 2024 revenue decreased 29% to $57 million due to timing of reactor harvest schedules. Full year 2024 revenue grew to upper single digits, with progress on cobalt development projects, including first cobalt installation in Darlington reactor expected to harvest in 2028.
• Nelson Labs: Fourth quarter 2024 revenue declined 7.3% to $54 million, but segment income margin improved 140 basis points to 33% due to lower expert advisory services revenue, favorable pricing, and improved labor productivity. Full year 2024 had sequential margin improvement.
• Embedded Labs and expert advisory services: Both realized double-digit revenue growth versus 2023, demonstrating cross-business unit synergies.

Guidance

• 2025 Total Company: Revenue growth expected 4%-6% on a constant currency basis, adjusted EBITDA growth 4.5%-6.5% on a constant currency basis.
• Foreign Exchange: Expected foreign exchange to be a headwind of ~2.25% on revenue and ~2.5% on adjusted EBITDA, with first three quarters most impacted.
• Interest Expense: Expected between $155 million and $165 million.
• Adjusted EPS: Expected range of $0.70 to $0.76.
• Capital Expenditures: $190 million to $210 million in 2025, with peak CapEx behind us, expecting decrease to ~$110 million in 2027.
• Free Cash Flow: Goal to generate $500 million to $600 million over next three years.
• Net Leverage: Anticipate slight improvement in 2025.

Risks

• Tariffs: Uncertainty around tariffs, particularly on cobalt entering the US, which could impact customers and require management.
• Revenue Risk: Approximate risk of 0%-3% of total company 2025 revenue from Russian cobalt supply.
• Supply Chain: Potential impact of tariffs and supply chain issues on material costs and customer demand.

Question and Answer

• Q: Patrick Donnelly on volume recovery and margins A: Michael Petras noted gradual improvement expected in 2025, with Sterigenics expected low to mid-single digits in Q1 2025 constant currency revenue growth, and Nelson Labs expected sequential margin improvement.
• Q: Sean Dodge on Nelson Labs margin improvement A: Michael Petras mentioned labor productivity alignment with order patterns and lab consolidation as key factors in Nelson Labs' margin improvement.
• Q: Luke Sergott on Nelson segment mix A: Michael Petras discussed Nelson Labs' segments (expert advisory, routine, validation), with expert advisory being low double digits of revenue, and key focus on balancing labor productivity with order patterns.
• Q: Evian on cross-selling and tariffs A: Michael Petras stated cross-selling between Sterigenics and Nelson Labs is included in 2025 guide, and tariffs on cobalt are a challenge but customers expected to absorb impact.
• Q: Casey Woodring on Sterigenics end markets and CapEx A: Michael Petras discussed Sterigenics end markets expected to improve, with CapEx focus on organic growth and deleveraging, expecting gradual improvement in margins as greenfields come online.
• Q: Brett Fishbin on guidance swing factors and pricing A: Michael Petras noted volume as the biggest swing factor for 2025 growth, with Sterigenics expected high end of 3%-4% pricing range, Nelson and Nordion on the low end.
• Q: Dave Windley on CapEx and cobalt project A: Michael Petras discussed CapEx scrutiny for returns, and confidence in Nordion's cobalt project harvest in 2028 with OPG as partner.
• Q: Michael Polark on tariffs and Sterigenics competitor disconnect A: Michael Petras mentioned tariffs on cobalt and past exemptions, and noted competitive disconnects are minority, with focus on customer execution and operational performance