Conference Transcript - SHC 2026-06-08

Evie Kozlowski, Analyst — Goldman Sachs

Good morning, everyone. I'm Evie Kozlowski, the life science tools and diagnostics analyst here at Goldman Sachs, joined here by Michael Petros, the CEO of Sotera Health. Thank you for joining us.

Michael B. Petras, CEO

Thanks for having us. Good morning.

Evie Kozlowski, Analyst — Goldman Sachs

Good morning. So you delivered a solid start to the year, 6.5 constant currency revenue growth, 20 basis points to meet with a margin expansion. You've also announced the CEO transition. So I guess, can you talk through the timing and then anything in Alton's background that kind of stood out to you as you were deciding on the successor?

Michael B. Petras, CEO

Yeah. So what you're referencing is I announced in the last couple of weeks that I'm going to transition from the CEO seat to the executive chair seat. I've been with the company 10 years now, and I've been talking to the board for the last couple of years about trying to do an orderly transition. And we decided, you know, I decided that was going to be something that would happen here in 26. We found Alton. We put a pretty thorough process together. And Alton's got 20 plus years in the med tech space. He worked at Baxter. He worked at Hillcatt-Ram. His most recent job is at Viant Medical. By the way, he'd be with us here today, but he's out at Salt Lake City. I just hung up the phone for him. He's out at Salt Lake City visiting the Nelson team and having a business review out there, which is great. Yeah, so Alton's outstanding. He's going to be great. We looked at him. There's a couple of things we really liked. When we did the search committee, we liked the fact that he's got a great value set that seems to be very compatible with the culture we have within the company. He's got long-established experience in the healthcare space. And also, we really liked his commercial expertise and his experience based in the commercial side that we thought would really help us in his growth mindset. So those are the things that really stood out to us.

Evie Kozlowski, Analyst — Goldman Sachs

Great. Awesome. And then serogenics, you know, mid-separated-digit, constant-cursive growth in 1Q, despite some weather-related headwinds. I guess, how should we think about the growth cadence as we move forward throughout the year, given the guide implies a slight kind of step up? I guess, is this mostly coming from the volume side or the price side?

Michael B. Petras, CEO

Yeah, it's coming from the volume side. We'll have a little bit of price. I mean, the price in that business has been pretty consistent, 4%, slightly above, as we had in the first quarter. But overall, you know, the second quarter, we've got it to, you know, growth that's pretty similar to what you saw in the first quarter on a constant currency basis. And we expect to see some step up as you get into the second half of the year. As I stated recently, you know, we're pretty confident where we sit today, looking at here we are sitting here June 8th. and reaffirming our guide for the second quarter and the rest of the year across the whole company, not just Sterigenics.

Evie Kozlowski, Analyst — Goldman Sachs

And then another thing we've kind of observed in some of the public medtech companies is a bit of a concern around decelerating volume growth for them. I mean, understanding this is only part of your Sterigenics business and outside of these few players you have broader exposure, but I guess how should we be thinking about the Sterigenics volume growth in the face of some of these medtech-related headwinds?

Michael B. Petras, CEO

Yeah, there's been a lot of questions around the medtech. I mean, there's winners and losers. We have thousands of customers in that segment. But overall, we feel pretty good about what the volume looks like. We think it should be slightly improved as it progressed throughout the year. Always could be better. But overall, we feel pretty confident about what we're seeing for the rest of the year in the guide we've provided.

Evie Kozlowski, Analyst — Goldman Sachs

And maybe talk to your ability to sort of drive pricing. I mean, we've seen in the past instances, like when we've had tech with de-stocking, maybe talk through some of your competitive advantages and your ability to drive price in those types of environments?

Michael B. Petras, CEO

You know, pricing is always a challenging conversation with customers, but we need to get rewarded for the value prop and the value that we bring to our customers. Even in periods of decelerating stock, if you will, when they reduce the stock levels in 23, 24, we still achieve the price targets that we communicated. So we feel confident in our ability to get 4%. The other thing that we've been talking about over the last several quarters is NESHAP. NESHAP is a new regulation that's coming out from the government. There's one that's been proposed, and now they're being revised again. We'll talk about that, I'm sure, at some point. But we've put in significant capital against getting those improvements. We put about $200 million in, and we're also starting to see some of the benefits of that in our price equation as we've progressed throughout 2026.

Evie Kozlowski, Analyst — Goldman Sachs

Great. And then some of the other kind of end markets that you sell into, I mean, bioprocessing continues to be a high growth area in pharma. I understand it's a smaller portion of your business today, but I guess how are you thinking about potentially expanding into that market over time? And I guess what levels of growth could you see from those more niche applications?

Michael B. Petras, CEO

So as you stated, bioprocessing is a category for us. It's a smaller category relative to our competitors. I think we're under indexed. We should be gaining more share in that business. Our teams have been focused on that for at least the past 18 months or so. We're seeing nice growth year over year in that business, and we're seeing it in both Europe and the U.S., and we'd expect that to continue. But we have a lot of ways to go to catch our competition as far as how well-positioned they are there in bioprocessing.

Evie Kozlowski, Analyst — Goldman Sachs

Awesome. And then I guess, how do you stand from a capacity perspective within Sterigenics? Are there any sterilization methods where you feel capacity is maybe tighter on an industry-wide basis compared to others?

Michael B. Petras, CEO

Yeah, I'd say, you know, capacity, you know, on a global basis, you know, we're pretty good now. In any given pocket, you could have some more challenges. So, like, for example, a lot of people talk about ethylene oxide. Ethylene oxide is challenged from a capacity perspective, but really it's large pallet chambers where there's the most challenging capacity situation. When I say large pallet, I'm talking 14 pallet and above. That is really tight in the U.S. But, you know, around the world, you know, we feel we're pretty well situated with capacity to be able to achieve our plans that we've laid out for 26 as well as 27.

Evie Kozlowski, Analyst — Goldman Sachs

And I guess as you think about, like, kind of the global capacity expansion, is there any particular regions that you would look to expand into?

Michael B. Petras, CEO

Yeah, you know, today we have presence in all areas around the world. I'd say we have lower presence in Europe as well as in Asia. So over time with aerogenics, I think there's opportunities for us to expand our presence in those two geographies. Although we do have a nice base in Europe, I still think we're undersized with our competitors and clearly in Asia as well.

Evie Kozlowski, Analyst — Goldman Sachs

And I think you also talked about the decision to expand the X-ray capacity in the U.S. I guess what goes into those decisions? What level of commitment do you have from customers before deciding to go ahead and build?

Michael B. Petras, CEO

So for us, we do a three-year strategic planning process. We're in the midst of that right now. Now Alton and the team are working through that. We'll ultimately review that at the board level in August. But this is something that we do every single year. And when we lay out, you know, we look at supply and demand curves. We look at our capacity situation and try to figure out where we should make the investment. So right now, you know, we've got an x-ray facility coming up a latter part of this year. And then we have another facility coming up in late 27, 28. So we try to do a long-term capital plan and making sure that we're situated for the supply and demand. But we try to target 40% capacity, having a 40% commitment before we put it in. In particular, with the x-ray, we decided to go in with less of a threshold there just because that was more of a strategic investment for us. But overall, we feel pretty good about where we sit in capacity today.

Evie Kozlowski, Analyst — Goldman Sachs

And then I guess, do you see any competition come in from other sterilization techniques that maybe Sotera does not have in their portfolio and maybe help us understand why EO and some of the other methods you have are insulated from newer techniques in terms of the breadth of application?

Michael B. Petras, CEO

I mean, there's newer technologies that are being explored by many in the industry, but nothing of any scale. We've got R&D investments ourselves and a couple of smaller opportunities that we've been taking to market over the last couple of years, but nothing material that could have the impact of what you see with gamma sterilization nor ethylene oxide.

Evie Kozlowski, Analyst — Goldman Sachs

And you mentioned the pricing earlier. We talked a bit about that, but I guess Sotero's business model is very critical for customers, and I think there's a lot of moving pieces around rising input costs for your customers. Has the environment changed your philosophy at all, and are you hearing more pushback from customers as they kind of start to look at their margins and their input costs?

Michael B. Petras, CEO

You know, always, as I stated earlier, pricing is always a challenging conversation. We just got to make sure we don't outrun our value proposition. But we feel confident in our ability. You know, we got across the company, 3% to 4% price, Aerogenics on the high end of that. And Nelson and Nardi on the lower end of that, we've been able to deliver that consistently, and it's because we do a really good job with our customers, which our customer satisfaction scores continue to show, and we don't try to outrun our value proposition. You know, we make sure we're getting paid appropriately. We cover our cost of inflation and other costs that we may incur. But we think we'll continue to be rewarded for the value we bring.

Evie Kozlowski, Analyst — Goldman Sachs

You mentioned the regulation front a bit earlier, but I guess there's been a lot of noise kind of around NESHAP regulations. It would help if you could put it into perspective, kind of comparing the most recently updated rule versus kind of previous versions and then comparing that to the pre-2024 regulation.

Michael B. Petras, CEO

Okay. Yeah, let me try to make that simple. So for folks that may not be as familiar, Neshef is the standard that is used for sterilizers that use ethylene oxide in this case. So pre-2024, I'm going to use numbers just to, you know, the numbers aren't represented, but I'll just try to help context this. If the pre-2024, the regs were at 2, and then post-2024, the 24 rule came out, and it's a 10, let's say, in the amount of regulation and controls. So there was a significant increase, is the point I'm making, in regulation and controls that are put in. And we've moved down that path, and we've spent nearly $200 million to put these controls in place. Now that 24 rule is being challenged and look to be more practical with the new proposed rules, that would be, I'm making a number up again, it would be more like a 7 just to give you context. So 2 went to 10 and now we're at 7. So it's significantly above the controls and regs that were pre-24, but it's below, it appears, whatever is going to be approved may be lower than the 24 rules. Does that make sense to you?

Evie Kozlowski, Analyst — Goldman Sachs

Yes, absolutely.

Michael B. Petras, CEO

absolutely okay so so now let's talk about we don't know exactly when these new rules are going to come out um we're hopeful to be over the next several months there's some comment periods that just recently closed we are building our facilities controls to the level of the of the latest rule that was put out in 2024 okay now there's some modifications that we think were necessary which have been incorporated in these new proposed rules which we're hopeful to get out there to make it more realistic and practical. But overall, you know, we're trying to put in the most stringent controls we can and make sure the environment continues to be safe and compliant with the requirements. I mean, these facilities are safe. The amount of ethylene oxide that's used and released out of these facilities is very, very small.

Evie Kozlowski, Analyst — Goldman Sachs

Okay. And you mentioned the CapEx component and maybe slight changes, but you're still going forward with that. I guess talk about maybe the extension and how that's changed the cadence of CapEx and when we should expect that to kind of roll off.

Michael B. Petras, CEO

So we intend to have the improvements completed by the end of this year with very little tail running into next year. So I think this year we're projecting $45 million to $50 million or something like that in the number for 2026 in our CapEx, and we expect to use most of that to complete our NCHAP compliance requirements.

Evie Kozlowski, Analyst — Goldman Sachs

Okay. And then I guess the other component of NCHAP was the potential reevaluation of the 2016 ETO iris value. If that remains an appropriate way to assess the risk, I guess what are the implications related to this metric and why does this matter for Sotera?

Michael B. Petras, CEO

That's a really good question. So thanks for asking. Not a lot of people ask that question. Embedded within this new proposed rule is to relook the 2016 iris level. And that's a risk assessment that was put out and it was a very, very, very conservative risk assessment. And that has actually been the basis for a lot of the litigation. This very conservative assessment was put out, and plaintiff lawyers have rallied around that. And I would just tell you that apparently in this new rule is being re-looked. I don't know exactly where that will stand and what the end result will be. But if a correct value is assigned in an appropriate context of that risk assessment is presented, that should be a meaningful impact on the litigation going forward. But that's still to be determined, right? And how then that'll be absorbed and incorporated within a given jurisdiction is still to be determined. But I'm hopeful that that becomes more realistic than what the prior reg had.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay. Then I think in the past, kind of as it relates to some of this regulation, you've talked about increased regulation actually means probably more outsourcing and kind of a better market environment for you, I guess. Do you think the kind of updated version of this rule still allows you to take some of the market share, and do you think there will be additional outsourcing on the back of it?

Michael B. Petras, CEO

Yeah, I would just say, you know, this company, Sotera Health, has regulations that impact this business all the time. If it's Nordiana handling cobalt, Nelson Labs, and the tests that they do and making sure the customer's products are compliant with regulatory requirements or Sterigenics and operating their facilities with all the different Nuclear Regulatory Commission requirements or EHS requirements from the EPA, we're not afraid of regulation at all, right? And to your point, it actually helps us because we have scale and we're pretty darn good at what we do. So we're not afraid of regulation. It's just clarity of what the rules are. Tell us what the rules are so we can abide by them and make sure they're realistic. And, you know, as long as that happens, we think we'll be able to continue to perform and excel, and that will create long-term opportunities for us on all three businesses.

Evie Kozlowski, Analyst — Goldman Sachs

And you mentioned the litigation front. I just want to kind of get a quick update there. I mean, I think in Georgia, you had a judge dismiss, you know, five of the remaining eight Bellwether cases, I guess. How should we think about this outcome regarding the remaining cases, and then what are the next steps within kind of the Georgia piece?

Michael B. Petras, CEO

Yeah, you know, on Georgia specifically, and I think at any of these courts, no court, nor has any plaintiff lawyer, been able to prove causation at this low level of ethylene oxide usage in emissions. I want to be very clear on that. There's been no causation proven anywhere in any of these courts. And Atlanta's just for the support of that. The other side tried to come in on general causation, specific causation, and prove that ethylene oxide at these very low minuscule levels caused the cancer of these plaintiffs. Listen, we have empathy for anybody who has cancer. All of us have got that in our lives, right? I've got family and friends that have all gone through this. But ethylene oxide at these low levels are not the cause of the cancer here. And so right now, you know, we had a judge in Georgia that put science front and center and showed that, you know, causation doesn't exist. And we're hopeful that that will apply to the rest of the cases in Georgia. Now, obviously, the other side is going to appeal this, and it's going to run an appellate process, which we probably won't have better visibility to the outcome of that until 2027. But at the end of the day, these facilities are safe. We operate in a compliant manner. And most importantly, this is critical. Ethylene oxide is absolutely critical. 50% or 20 billion devices a year, according to the FDA, are sterilized with EO. This is what keeps patients safe. And patients can have surgical procedures and get critical medical devices because we know that they've been sterilized properly with ethylene oxide, which could be the only source in a lot of these medical devices. So I think we've just got to have the proper context here of what's really going on.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, great. And then any update in California next steps you should look for?

Michael B. Petras, CEO

I'm not sure how current most people are. You know, there were some recent motions filed in California, a motion for summary judgment we wanted to pursue. We thought the probability of winning that would be low at this stage of the trial, but we thought any chance we can have to get in front of the judge and get the facts straight and clear. It's important for us, and we did that. Listen, there's a lot of time left still here between January and April 27th of trials, and we're hopeful that the courts continue to stay focused on science. And if the judge continues to stay focused on science, we feel confident that we're going to prevail. But at the end of the day, we still have to go into a local court in L.A., county, and it's left up to a judge and a jury to decide the outcome there. But we feel confident if science front and center, we're going to be in a good spot.

Evie Kozlowski, Analyst — Goldman Sachs

Awesome. Okay. I guess shifting to Nelson Labs, declined in 1Q, I guess, can you talk through some of the moving pieces across expert advisory services, testing, and validation, and then when you expect to lap some of the tougher comps in EAS?

Michael B. Petras, CEO

Yeah, so expert advisory services, we had a record year in 2024, and then probably the worst year in the company in 2025, so we had the tails of both cities going on within a very short window of time. If you exclude that out, which I never like to do because I don't like my team excluding anything out because at the end of the day, we're accountable to all of it. But if you exclude out the expert advisory services, the core lab business grew 5% last year, which is pretty darn good. This business does 30% to 35% margin, and lab space has been a little choppy, and this business continues to do pretty darn well. We'd like it to grow faster, obviously. As we look coming out of the first quarter, we said second quarter would have slight growth. We're very optimistic about our ability to deliver that. Sitting here on June 8th, we feel pretty darn confident we're going to be able to deliver that growth in the second quarter. And the outlook, we're optimistic. And the reason we're optimistic is routine testing continues to do well, but validation testing, which is based on new regulations and new product spend and some other things, we're seeing some nice activity there. So we're very optimistic on what we see for the rest of the year on Nelson Labs as well. It's a good business. It's very synergistic to what we do in the Sterigenic side as well.

Evie Kozlowski, Analyst — Goldman Sachs

Yeah, and I think you guided to margins low to mid-30s. The 1Q is maybe a little bit lower than that. Is it really just a function of better revenue growth, kind of getting the operating leverage on that?

Michael B. Petras, CEO

Yeah, in the volume. So the first quarter, we're not surprised by the first quarter performance. We guided to that. We knew first quarter was going to be where it came in. It came in along expectations. Always the way that business works, about 60-plus percent of the cost of that business is labor. So you're coming out of fourth quarter where volumes are pretty good. There's a seasonality impact that comes down. The first quarter is always the slowest, and it's been 10 years I've been here. And you have a choice. Do you get rid of the labor and then bring them back in the second quarter? But that doesn't work, right? You've got to make sure you can give high-quality, reliable service. So we have to plow through. The first quarter is always a challenge, and that's what materialized in our numbers in the first quarter. But we expect that to be right on track the rest of the year and the total margins to be right in that zone you just referenced.

Evie Kozlowski, Analyst — Goldman Sachs

And then earlier you mentioned the synergy opportunities between Nelson Labs and Sterigenics. I guess maybe talk through some of the specific cross-selling initiatives that you have and any challenges that maybe you've run into as you start to build on your progress there.

Michael B. Petras, CEO

So as we look at that business, I'd say about 40% of the Nelson Lab business is sterility assurance, which is highly tied to a lot of the work that goes on within Sterigenics. And approximately 20% of the revenue within Nelson Labs comes from embedded labs within Sterigenics facilities, either embedded or real close proximity to it. So, you know, there's a really unique value prop that we're able to give customers on lot release and then also more complicated validation testing. We've done a lot of work around this over the last couple of years. We've, you know, BJ's been, BJ Lehman, who runs our strategy and business development effort, has been leaning. She's done a really nice job on it, and we're getting it more and more into the organization. We've got a couple of key priorities that we've been focusing around, Guardian accounts, which are strategic accounts that are getting the benefit of the whole package of Sterigenics and Nelson. And then we've got a couple of other key segments that we're really focused on that we talked about at our investor day that are growing a little bit faster in the marketplace, and we've got incremental resources and focus in that area. And then we're just measuring it and holding teams accountable in driving growth. So we're very hopeful in what this looks like over the next couple of years as well.

Evie Kozlowski, Analyst — Goldman Sachs

Maybe speak to some of the end market dynamics within Nelson Labs. I mean, I think those end markets maybe have been a little bit more challenged. So maybe talk to how those are performing and then how Nelson is doing specific to even some of the broader trends.

Michael B. Petras, CEO

So, you know, Nelson Labs is a business that focuses on microbiology and analytical chemistry testing. You know, that area, you know, this business hasn't grown as much as we'd like over the last several years, but I think it's important to give context. I mean, during COVID, we had a big opportunity around PPE testing. The business had pretty significant growth and high margins. We weren't going to pass on that opportunity, and then the volume settled back down, and then you had the great resignation, and then after this, you had a lot of activity by the FDA and our expert advisory services, as I stated earlier, had a record year in 24, and then 25 a lot of that business went down but you know that business fundamentally that elson labs businesses and is a darn good business that's 30 35 margin for a lab business that's not very capital intensive that we think should be growing you know mid single digits over time um you know is a really darn good business we we're looking at assets that we looked at three four years ago that are down 40 50 percent you know in in revenue or value and you know we're We're not anywhere near that. This business, you know, is pretty strong in the end markets. When customers spend on new products, venture capital money comes in, new regulations come in, sterility volume goes up. Those are the big four volume drivers that impact this business.

Evie Kozlowski, Analyst — Goldman Sachs

And I guess shifting to Nordian, you've been investing more recently to ensure kind of future cobalt supply, including the Westinghouse partnership in the U.S. I guess what drove this decision to invest in more capacity in the U.S. and then how do you think about the cadence of CapEx investments that are going forward?

Michael B. Petras, CEO

Yeah, so there's two big, you know, cobalt development. We haven't done a significant cobalt development program since the early 2000s in that business, and we have two of them going on right now, and I think it would be helpful to give context on the two. One is Darlington. It's a nuclear reactor site, and it's part of OPG, Ontario Power Group. You know, they are, you know, they have been a longtime partner of ours for years, and they had a facility at Pickering that site was going down so we we worked with them to get Darlington to start making cobalt to offset the Pickering so that's basically why we did one cobalt one reactor was going down another one was going to be able to start to do cobalt so that was a just think of it as a replacement with a little incremental the bigger one that you're referencing is Westinghouse in Westing most of the cobalt we get today is I can do reactor platforms and the benefit with westinghouse is between our technology and their capability we're able to now go to utilities that have pressurized water reactor reactors okay that opens up a much larger base of nuclear reactors around the world a lot of them here in the u.s just because you have this reactor doesn't mean you can make cobalt though you've got to get the recipe and the know-how from us and westinghouse to make that happen So we are working with individual utilities to bring them up to speed. So we have the first utility we're working on right now, and we're working with them on bringing cobalt into that reactor platform. That's a long process. So we filed a license amendment or the utility, filed a license amendment request with the Nuclear Regulatory Commission. It'll take about a year to get approved. So sometime late fall, early winter, we should get approved from that. Then they'll be able to start making the cobalt. what then it'll get is cobalt in 2030. The reason we did this is that it gives us more supply long-term and also helps us with some of the geopolitical. So today we buy cobalt from Canada, as I mentioned. We buy it from China, India, Russia, and Argentina. This will give us an opportunity, if we needed to, to be able to scale other utilities over the next decade, if that's what we so choose to do. It gives us some nice flexibility. So when you think about the CapEx, when we get on the other side of these programs, which is why we're confident on the capex we've been talking about coming down. You know, we will, on the other side of the programs, the capex for Nordeon will go down significantly because these cobalt development programs will be behind us.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay.

Michael B. Petras, CEO

Sorry, long answer.

Evie Kozlowski, Analyst — Goldman Sachs

No, no, no, it's really helpful, it's really helpful. And then, you know, usually we think about cobalt as kind of being an input for the sterilization process, but are there any other kind of areas where you're seeing an increased use of cobalt, maybe like radiotherapy treatments in oncology or any other areas?

Michael B. Petras, CEO

Yeah, so obviously the big use that we have today is for brain cancer treatment. And there's some other cancer treatments that are starting to explore the use of cobalt. We've been a very reliable supplier on the brain cancer side for many, many years. It's a good market for us. It's not a high, you know, the capital equipment, what happens is there's capital equipment in the market, and we supply the cobalt into that capital equipment. And then what happens is it deteriorates at 12% a year, just like cobalt does everywhere. and then we replenish it. So we see opportunities potentially over time in new cancer treatments. But right now, brain cancer is the big one that we're focused on. We use HSA, which is high specific activity cobalt, a little higher radiation flux than what you get with sterilization cobalt.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay. Then I guess turning to your guidance in 2026 guide, five to six and a half percent revenue growth range, I guess walk us through some of the moving pieces in this and then any potential swing factors we should be aware of?

Michael B. Petras, CEO

Again, I'd go back to, you know, 5% to 6.5%. I'd go back to looking at your prices, 3% to 4% in that area, and then volume and mix would make up the rest of that. I think the opportunity to, you know, do better than that would be focused around volume and mix. You know, Sterigenics and Nelson Labs, those two businesses had more volume and flux than that would help us over-deliver there. Nordian's pretty, you know, we give, you know, Learning is a little lumpy because it's depending on when the utilities harvest the cobalt out, but we've given pretty clear visibility. It's been our most predictable business over the last several years. I think that's pretty well situated for 26 as well.

Evie Kozlowski, Analyst — Goldman Sachs

And I guess there's been a lot of macro uncertainty, rising input costs, including freight, but maybe talk through how insulated your business is from some of these dynamics and then give us a sense for maintaining your guide in sort of an ever-changing macro environment.

Michael B. Petras, CEO

Yeah. Yeah, on the cost side, particularly to take fuel for transportation would be one that people talk about a lot. We pass that through, so we don't incur transportation charges. So customers drop off the product at Sterigenics, and then they pick it up. Customers ship the product to us at Nelson Labs. We test it, and we get the report to them. At Nordeon, we ship cobalt to them. We take it on, you know, big equipment with all kinds of, you know, where I'm looking for canisters in terms of vessels, if you will. And it's pretty expensive to transport, but that's a pass-through. So we don't make margin on that. So as costs go up on that, we just pass that through to the customers. So we're insulated from that perspective and across all three businesses on transportation and energy costs.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay. The other thing that kind of comes up is EO gas costs. I mean, you know, are you contracted out with those? Maybe talk through some of the dynamics with sourcing that.

Michael B. Petras, CEO

So we're in multi-year contracts there, and we pretty much have a price agreement on what we're going to pay for that product. So we're pretty well protected on that. You know, and just broadly on energy costs and operating our sterogenics, it's not a huge material number in our business.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay. Okay. And then, you know, you ended 1Q with 3.2 net leverage. You know, is the priority still to get between the two to three times range? And then maybe you're becoming more aggressive on the M&A front as you get closer to this range. And where in your portfolio would you focus on?

Michael B. Petras, CEO

Yeah. Okay. So our net leverage, as you stated, is 3.2 times net leverage. We've guided towards, over time, we think we can get this to two to three times, and we're well on track to do that. But our free cash flow is going to continue to accelerate in the business as we go forward. As far as capital deployment on M&A, all three businesses have opportunity. But I would tell you the near-term and mid-term opportunities seem to be focused more on the stereogenic side based on opportunities that are out there. And obviously, I want to make sure that Nelson Labs is in a more stable operating environment before we deploy a bunch more capital for M&A there. But strategically, we still want to build out farmer services over time in that business as well.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay, that makes sense. And then I guess as we think about some of the announcements that have been made from Pharma on sort of reshoring in the U.S., have you seen any disruptions in terms of where people are looking to build out capacity for sterilization on that front or any changes related to locations of your facilities?

Michael B. Petras, CEO

No, I mean, this isn't something you just, you know, go pop up a tent and start sterilizing tomorrow. So, you know, it's pretty well thought out. I would just tell you that overall, if there's a big insourcing effort that needs sterilization volume, we're very well-situated for that because we're one of the largest sterilizers, if not the largest here in the U.S., and we're very well-situated. That would be a good positive for us, if that was a meaningful impact.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, great. And then maybe talk to you some of the competitive dynamics, if any. I mean, you talked a little bit about the outsourcing earlier, but any other kind of external sterilization companies and where you feel you are with the competitive side?

Michael B. Petras, CEO

We're very well-situated. Obviously, in Asia, we don't have as significant a presence as we do in the U.S. and Europe, but we're very well-situated competitively. We've got one global player that competes with us that is a very good company that we have to compete with all the time, and then there's a bunch of smaller regional players that are out there in the marketplace as well. But I'd say in U.S. and Europe, we're very well-situated. Even in Latin America, South America, we've got some pretty good presence in what we do in Brazil, what we do in Mexico. And I would tell you that in Asia, it's probably an opportunity that we're not as big a force there outside of what we do in China and a little bit in Thailand.

Evie Kozlowski, Analyst — Goldman Sachs

Okay. And as you think to expand into that region, would it be more sort of organic, built-in-the-ground-up, green-filled type capacity expansions, or would you look to acquire some of maybe the smaller players in that region?

Michael B. Petras, CEO

Good question. A combination of both. And we'll look at the trade-offs. You know, speed to market is very critical for us and how quickly, you know, we have customers that want us in a given geography. We'd have to look at, is it better off the bill and can we get there in the timelines they want and get exactly what we want? Or do we buy something and then maybe have to adapt it to get to our standards? So we'll look at both options and look at the most efficient way to deploy capital and get the best returns in the quickest period of time we can for our shareholders.

Evie Kozlowski, Analyst — Goldman Sachs

Are there any other, like, regulation considerations as you look to expand into geographies to keep in mind? relative to maybe what you see in like the U.S. and Europe?

Michael B. Petras, CEO

I mean, it's, you know, regulate, you know, as I mentioned earlier, these businesses all have, you know, if it's the Nuclear Regulatory Commission, the FDA, the EPA, you know, we look at these regulators around the world and the different places that we have to. So there's one geography right now that we just talked with the team in the last week ago. Alton and I met with them and, you know, making sure we understood how the regulators thought about this one given modality going into their geography. That's absolutely something you've got to be considering.

Evie Kozlowski, Analyst — Goldman Sachs

Okay, okay. And then, I guess, just to kind of, we have about a minute left. So, you know, you recently paid down debt, private equity sponsors sold off some other positions, and then, you know, you've had some positive news on the litigation front. So, I guess, what do you think is the most underappreciated part of the Sotera Health story, and what are you most excited about as you kind of move through the next year?

Michael B. Petras, CEO

Yeah, to your point, I want to kind of double down on a couple of those points. You know, our private equity ownership, they sold their last 31 million shares here in the last months. so they're completely out, which is an exciting time for the company. We're well-positioned with the new shareholder base, so it's great. Our leverage has come down to 3.2 times. We just repriced our debt again. We've taken now probably 100 basis points out of our debt in the last year. That's about $14 million of incremental interest expense that we've been able to save. So the company is very well-positioned. I would tell you, if you're looking to be in health care, this is a great company. We've grown 20 consecutive years. We get price every single year. We've got big competitive barriers to entry. Our free cash flow is accelerating. If you want to be in a spot, this is a great place to be in health care with a lot of uncertainty. We're a stable force, and we're kind of guys behind health care. I don't know how people know. It's a great company, great cash flow, and great employees that live safeguarding global health every day. So thank you for having us here, and I appreciate your time. Thank you so much.