Sotera Health Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Performance: Strong top line growth, double-digit adjusted EBITDA growth, margin expansion of ~150 basis points, and $0.09 adjusted EPS increase compared to Q3 2024. Total company revenues up 9.1%, adjusted EBITDA up 12.2%.
• Segment Specifics: Sterigenics had 9.8% revenue growth; Nordion's growth due to reactor harvest timing; Nelson Labs had margin expansion for fifth consecutive quarter.
• Balance Sheet: Strengthened balance sheet by paying down $75 million of debt and lowering interest expense by ~$13 million annually. Net leverage ratio improved to 3.3x.
• Milestone: Nordion secured 25-year Class 1B operating license, the longest ever granted by the Canadian Nuclear Safety Commission.

Segment Performance

• Sterigenics: Delivered 9.8% revenue growth to $193 million (8.4% constant currency) compared to Q3 2024. Segment income increased 11.6% to $107 million (10.2% constant currency) with margins improving 90 basis points to 55.6% driven by strong top line growth.
• Nordion: Revenue grew 22.4% to $63 million (23.6% constant currency) compared to Q3 2024. Segment income increased 19.9% to approximately $38 million (21.2% constant currency) but margin decreased 130 basis points to 60.6% due to product mix.
• Nelson Labs: Third quarter revenue was $56 million, a 5% decline compared to the same period last year. Segment income rose 1.9% to $19 million (flat constant currency) with margins expanding 229 basis points to 34.1% driven by volume and mix improvements.

Guidance

• Revenue: Maintaining constant currency revenue growth outlook 4.5%-6%, raising adjusted EBITDA growth outlook to 6.75%-7.75%.
• Segments: Sterigenics: mid- to high-single digits constant currency revenue growth; Nordion: raised to mid- to high-single digits constant currency revenue growth; Nelson Labs: full-year 2025 constant currency revenues to decline mid-single digits.
• Other: Interest expense range $154-158 million, effective tax rate 29%-31%, adjusted EPS $0.81-0.86, capital expenditures $125-135 million.

Risks

• Ethylene Oxide Claims: Pending personal injury claims in Cobb County, Georgia; Phase I and II rulings and court appeals discussed, with court of appeals vacating trial court orders related to general causation.

Question and Answer

Q: Maybe just one on the volume recovery, nice to see that continue. Are there certain areas you guys are seeing kind of outsized recovery?

A: Patrick, this is Michael. We're seeing pretty consistent performance across Sterigenics and across multiple -- almost all categories, bioprocessing, MedTech broadly. Overall, we're seeing good recovery in volumes, and we expect that to continue going forward.

Q: hopeful on the litigation update there. I guess maybe a quick one, just in terms of where some of the other cases are. And again, if that sounds like we can continue to see some of these updates, but we'd love to just hear the latest on the broad litigation side and how you're feeling on that front?

A: Yes. Patrick, Illinois is wrapping up. We've got April 2025 settlement that we did that's been completed and closed out. The July 25th one is progressing well. That will leave us with only 1 remaining case in Illinois. In Georgia, I just gave you a lengthy update there. On New Mexico, right now, there's no personal injury claims currently, and there's only the 1 suit brought by the AG for public nuisance that's set for trial in July 2026. And then in California, we've recently been informed that the first trials are expected in January and April of 2027.

Q: Just two for me is about the -- one on the Expert Advisory business. It seems to have gotten worse here. Is that just related to the lack of FDA funding, lack of inspections and kind of the government shutdown. And then the second one, is on the implied 4Q EBITDA margin step down? I just want to know what's going on there. I assume it's probably just not the Nordion volumes, but just wanted to see if anything else going on.

A: Yes, I would say Expert Advisory Services in that RCA business is feeling some of the impact from the FDA lack of activity. So that's clearly impacting it. It was worse than we expected. But overall, it's had a material impact on the top line for the company. It's about 10 points of impact. Jon, is it roughly about 10-point? Jonathan Lyons: Yes. Luke, as we look at the margins in Q4, we anticipate that Nelson will step back a bit from where they are at this peak in Q3. Q3 has the benefit of some pretty low expenses inside of that. And then we've been running really well in Steri. We could see a little bit of step back in that, but nothing alarming there, still stable margins for the year, maybe even slight growth for the year for Sterigenics.

Q: Maybe follow up on Nelson and ask the -- is the other side of the coin, Michael, the core lab testing and the pickup there. So just kind of thinking about the balance, if Expert Advisory is feeling this headwind and that's kind of prisoner to what the government does on funding an FDA. What does the rest of the business look like? And what's the demand quotient there?

A: Yes. Thanks, David. I'd say overall core lab testing is doing pretty well. We'd like to continue to see more growth. The routine volumes or some of the flow volumes are picking up like we see in the sterilization volumes. Validation has been a little bit choppy. But we've got some pockets, particularly with some of the new regulations, some of the requirements of extractable leachable testing and bioprocessing components and things of that nature are all doing well. So overall, we're seeing some nice growth in the lab testing core. We'd like to see it better. But overall, it's going the right direction. And fundamentally, we're seeing the Embedded Labs growth continue. The linkage with the Sterigenics piece and the volumes there are clearly having an impact in a positive way.

Q: Just had a quick one on Nordion. I noticed the very strong revenue growth in the quarter in excess of 22%. But I think you noted that there was some margin pressure from the mix -- and was just curious kind of like what type of mix shift with Nordion was causing some margin compression. And does that persist moving forward?

A: Brett, it's Michael here. So when you look at the business, it's tough to talk about margin pressure in the Nordion business when you see the margins that we put up in that business. What we're referencing there is product sales, and particularly production of radiators equipment sales. That's a lower margin, and we saw some growth in that in the quarter. We'll see that sporadically here and there, but we don't see that as a material impact long term. The margin rates continue to be very strong in that business, as you know.

Q: Congrats on the quarter here. I wanted to first start on Sterigenics pricing. It decelerated ever so slightly. I know we're talking tens of basis points on a sequential basis. But I think you've been trending down 50 to 60 basis points year-on-year in the last few quarters. I think this is also the smallest pricing tailwind we've seen in at least a few years. And look, it's still good, it's better than a lot of other health care verticals. But where do you think this pricing contribution stabilize? Is this a level do we need to drift lower and then maybe the follow-up there would be, I think you've talked in the past about stronger opportunities in pricing in Sterigenics in light of the investments you've been making in your facilities, is that potentially a reversal of sorts as we think about pricing going forward for Sterigenics.

A: Yes. Thanks, Jason. We said last year in November, we talked about price across the company in 3% to 4%. We said Sterigenics would be the high end of that range, and that's basically where they're coming in at. We see that continuing. We don't see any concern around that. it's 3.8%, 3.94%. It's right in that neighborhood. We see that. We can't call it that closely. But we also look at some of the NESHAP opportunities, and those are things that we would say that could come on top of that over time as we roll out that program and the regulations get set in the marketplace. So that would be above that run rate.

Q: Nelson, if I'm doing the math for 4Q, maybe in constant currency terms, flattish year-on-year. Obviously, the comp gets easier as we lap in this advisory services headwind. My question is for '26, and I'm not asking for formal guidance, but with this big advisory headwind now in, is it reasonable to expect, given what you're seeing on routine testing to expect Nelson to return to growth in '26?

A: Yes. Yes. That's a logical conclusion, Mike. We're not getting into '26 guidance, but you're thinking about it the right way.

Q: My follow-up on Sterigenics, last quarter after your clear acceleration and a good number from your competitor, the discussion was around order patterns ahead of tariffs. And so I'm curious, 3 to 6 months later, do you have any better feel for whether in the second or third quarters, there was maybe a little bit of extra pull forward of ordering for MedTech customers as they maneuver supply chains ahead of Trump tariffs.

A: Yes. We -- as I mentioned in the past, we have a pretty rigorous process in doing commercial reviews and buying reviews with the team. And we're seeing very minimal impact from that. I mean there's -- the only reason I even tell you any is because we have a couple of facilities. If we look back on it, there were some stat fees that came in with some last-minute requirements from customers, but nothing material. When you look at the overall scale the business to an approximately $300 million of revenue per quarter across the company in total or $190-some million in Sterigenics, there's nothing material that we're able to see.