Sotera Health Co (SHC) May 19, 2026 Conference Transcript

Okay, thank you.

We're going to get started. We're going to start the afternoon sessions, and this afternoon we're going to start with the parahealth. Kinsara Health is an end-to-end sterilization and lab testing services company that caters to the med-surg equipment manufacturers as well as other end markets. And with the company, I'm happy to have John Lyons, CFO, and Jason Peterson with Special Relations. John, thanks for joining us.

Thanks a lot, Ryan. Good to be here.

I wanted to start with the leadership transition. That you guys announced recently. Just wanted to get an update, any more details on the succession timeline and any perspectives you could add just on Alden's, you know, background and experience that you're excited to have on board.

Great, thanks. And before we get started, I do have to cover the legal side, so I may make some forward-looking statements today. Please refer to our SEC filings for

a list of risks and incurtencies related to those, and I'll answer your question.

So, no, we're excited. I'm excited. I had a chance to talk to Alton a couple of times since he's been appointed. You know, the board ran an exhaustive search, you know, in coordination with Michael, you know, really looking for the right person for the role. You know, just from a timing perspective, you know, I think Michael was interested in taking a little bit of a turn. His view is that, you know, the CEO role should be two terms, you know, kind of four years, four years, and then move on, and he's nearly a decade, about a decade in, and so he felt like it was a time for transition for him, and I think it's a sign, too, of the position the company's in. And I think we'll talk about that a little bit later, you know, from a positive perspective. But Alton's starting next week. You've got a deep med device experience with Kilram Baxter, most recently a CEO of Viant. We're excited about what he brings, and what I understand is a very strong commercial orientation, and my conversation with him, he impresses me, impresses me as one who's very complete, so might have a commercial orientation, but a complete kind of package from operations and commercial strategies. So we're really excited to get him on board, and that transition starts next week. Great.

And then just maybe... Wanted to touch on the broader demand landscape, you know, you guys talked, first off, reported a very strong quarter in terms of volume as well as overall revenue growth, but I think you highlighted March as the strongest volume month in the year for Sterigenics. And then also mentioned April, those trends continue.

So any color just on the market dynamic,

where you're seeing this demand really coming from, or any other kind of color around, you know, types of customers or ways for us to appreciate it? Yeah, no, thanks, Ryan.

You know, Sterigenics, you know, obviously our biggest business, two-thirds of the company. You know, really important to see that vine and mixed growth in the business. And we look back on the quarters very, very much in line with what we, what we expected when we

guided for the year and gave some sort of guidance on, on the quarter, you know,

a little slow start to the year, January, January and February, which I think is pretty well documented across the space. You know, the weather had an impact on procedure volumes. It appears and certainly had an impact on our business. So we grew 6.1% on a constant currency basis. Would have been, you know, nearly 8% with the weather impact. So we felt good about the start to the year. March was really strong, as you mentioned. Probably a little bit of catch up from January and February with some of the weather impact. But again, net, net, it still was a sizable headwind quarter. We got off to a good start in April, and as we sit here today, we're feeling good about the guide that we gave, particularly as we ramp up in the second half. Our guide for Q2 is similar in growth to Q1, coming off a tough comp in Q2 of last year. Then the second half, the comps ease a little bit from... Our downtime, our maintenance schedule that has a headwind or tailwind, depending on what's going on. It's a headwind in the first half. It's a tailwind in the second half. We're seeing just good fundamental demand from our customers across the med device space. We've seen good demand to date, and we have good line of sight to what we're seeing going forward. And we also have our new x-ray facility coming online, which will provide a little bit of tailwind. And there's been a lot of discussion about another customer that's not big, but it's a pretty good transition for us in the EO space from an in-source to outsource perspective that's going to start contributing.

And how did those trends continue from April into May?

Yeah, I mean, we're middle of May. Like I said, we feel good about the guidance that we've given in those conversations and the indicators about where the market's going and what kind of demand we're going to see for the balance of the year continue to be there.

So I feel good about the quarter.

I feel good about the year.

Excellent. You just mentioned the customer converting from insourcing to outsourcing that you're expecting to contribute later in the year. Any other, you know, any way you can help us size or just put into context the contribution that you expect from that customer?

Yeah, and I know I brought it up, and it's something that's turned into kind of a much bigger talking point around the business and the industry than it is in size of, than it is in size of customer, just because of the fact that it's, you know, relative to the new regulation. It was an outsource versus, you know, an in-source versus an outsource conversion. It's not like we have to build a facility for this customer. It's already an existing customer in different parts of the world and different places. It's a meaningful impact to the business, but, you know, it's not like we're going to go build a facility for them or anything like that. Got it. Okay.

The other driver of growth, you know, pricing has certainly been an area of strength, 4.5% of pricing growth in the first quarter. You've been guiding towards the high end of your historical range on pricing. Just, you know, maybe any sort of outlook as to the sustainability of that pricing power you guys have enjoyed?

Yeah, no, you know, I... I don't like to use the word pricing power. You know, there's a customer on the other end of all these discussions, you know, and those are never easy discussions. You know, I think we're recognized because we play an absolute critical role in healthcare. You know, we're in a highly regulated industry. What we do is not easy, and it's not core to what many of our customers do. And so there's good value for the work that we do, and I think we're recognized for that work. That's been demonstrated over years. I mean, the business has grown, care health has grown. Every year for 20 years. If you look at since we've been public, we've had good pricing improvement year on year. It's adjusted based on accelerating inflation earlier in the decade, and we've seen that consistent performance, and there's no reason we anticipate that changing. We've continued to deliver it quarter and quarter out, and I don't expect that to change.

Maybe then moving on to the Nelson Labs segment, I think you've finally lapped some of the difficult comps after a record year in late 2024. Margins in the business, I think, are still suboptimal relative to your targets. Just what gives you the confidence that you'll be able to... Execute on that margin story in Nelson Labs and just, you know, any sort of color on pipeline or, you know, you talked about validation projects and where there is a building pipeline. So any sort of visibility into that would be great.

All right. I think you had like five questions in there, Ryan. So I'm going to try to tackle them and just catch me if I miss anything. I'll back everybody up a little bit. You mentioned 2024. Yeah, the expert advisory services had a really strong record year in 2024. It was like a $230 million business overall, and it was $34 million. That was really driven by some one-time remediation projects. And we saw that coming, I think, in the end of 24, we started messaging that we saw a little bit of a cliff, a headwind coming related to those remediation projects cycling off and the expert advisory business suffering accordingly. The business dropped from 34 to about $10 million from 24 to 25 and had even a bit of a headwind coming into this year. As you mentioned, we're just lapping kind of the last comp on this Q1 of that headwind. So that's behind us. You know, in the middle of facing that headwind, we also improved margins over 300 basis points last year, and we got the margin rate into our low to mid-30s target that we had. I think what you're referencing on Q1, Q1 margins were down year over year. It's the slowest quarter of the year. January and February, like in Sterigenics, were really soft. The margins were. Pretty terrible, honestly, when I look at January and February, but that's really volume-oriented. It's a highly labor-intensive business, and volume matters a lot in the lab testing side. If you have a couple of slow months, you can't adjust your workforce that quickly. It becomes almost a fixed cost for you.

You know, it's kind of semi-fixed.

And so, you know, as we came into March, volumes were back where they're supposed to be. The EBITDA margins were back where they're supposed to, even on the high end of where I thought they might be. And so we're feeling good about the margin recovery in the business. When the volumes are there, the margin's there. And we saw that performance continuing. And as I look at the volumes for the rest of the year, there's a number of things that are coming through. Number one, you've got Sterigenix volumes. So when Sterigenix is processing, we're testing to support the lot release and validate that the sterilization was successful. So those accelerate. The validation pipeline, which we've said has been choppy, depending on new regulations, R&D funding, things like that, new products, those sorts of things coming through. We've got good visibility into a validation pipeline of work coming in. And normally, Nelson is very short cycle. And that can give us a little bit more visibility. So we've got the new regulations in with validation pipeline associated with that. Then we've got a couple of initiatives. We've got our new clean room coming online in the second half. We just did an open house. We've got a good pipeline building for that as it comes online in Salt Lake City. So we're excited. We see good revenue growth and feel good about the guide that we've given there for the back half acceleration. On the strategic...

Did I get them all? You did.

All right, good.

And I wanted to go back to one of the points you made, sort of the cross-sell between Sterigenics and Nelson Labs, and that's been a big part of the investment thesis of Nelson Labs. I think you had previously maybe sized a synergy opportunity of $15 million, and I'm just curious, you know, How you've progressed to that goal, or is that still a goal that's out there?

Yeah, thanks. Yeah, we did put that goal out there a year and a half ago. And so we're making good progress. It's never as fast as you want it to go. Our ex-BU customers, the customers that are doing business with both businesses, generated about 70% of the revenue for the two businesses. So it's a really critical customer base. That group of customers grew 10% last year, which was faster than the total enterprise. So we're feeling good about the progress we're making there, but we still got plenty of work to do, plenty of opportunity to accelerate that growth. And so we keep focused on it, but we're making good progress.

Okay. Switching gears to capacity, always a topic of conversation. I think you've been citing capacity utilization at 80%, or at least that's kind of the target. And now you're talking about adding to your capacity. So maybe just how do you feel today about your current capacity against that 80% target? Is there wiggle room, or I shouldn't say wiggle room, but do you feel like you're

nearing that target by modality? Yeah, so as we look at it, capacity utilization really comes down to a modality and geographic evaluation, because that's what drives the business. Customers need the right modality in the right location with the right service level to support them. And depending on where you are in the globe, well, generally speaking, EO is tighter than gamma. We got a good amount of capacity available in Gamma, and we have the ability to expand capacity in a lot of our sites to add to Gamma. EO is where there's a considerable amount of tightness. And that is even variable, too, on large chamber versus small chamber. So think about a truckload of pallets versus a less than full truckload of pallets. The large ones are pretty tight across the US and in different parts of the world, and the smaller ones have more availability. So that's a piece where we really focus on. You know, optimizing our facility throughputs to create capacity where the customers need us. Okay. But, you know, the big story is we've got room to grow and deliver against what we've committed to, especially with the new facilities coming online that will help support that too.

Okay. Maybe just to clarify, so the new facility you have coming online is more of the x-ray modality, and that will help, how does that sort of help to?

It doesn't help loosen some of the capacity. It doesn't help loosen the EO, but it's in a good place where we know customers are going to need us with that capacity, and so it's going to help support our growth. Got it. Okay.

And just the timeline for when that facility is expected to come online?

Yeah, as it's coming on right now, it should start to contribute in the second half. And then we have a second greenfield that comes on late 27, early 28, that'll start contributing in 28. Okay.

Um... Regarding the EO litigation, you had a favorable update in terms of the dismissal of the eight Georgia bellwether cases recently. How are you thinking about, I guess, the legal situation in Georgia? And then California is one of the next big sort of cases, which is more like early 2027. You know, anything investors should be paying attention to leading up to that.

Yeah. No, I think a couple of things. First off, what we've always said is when science is front and center and fairly represented in the courtroom, it proves that these claims have no basis. And that's what happened in Georgia. Science was in the courtroom. And, you know, it was demonstrated that there was no causality here between emissions from our facilities and the plaintiff's claims, and those cases were dismissed. We're going to go through the appeal process, obviously, that's a key thing. So we're not done there. But, you know, we are seeing, I think, when that is in forefront, in not just us, with other defendants, you're finding that, you know, we have a good posture. And we've, you know, in California's coming, we're going through the pre-trial motions and discovery and depositions and all those things. And we'll work to play that out. It appears so far that science is going to be front and center there. You know, it remains to be seen exactly how that plays out, and we'll continue to monitor it and make sure we manage it effectively like we've been managing these cases very effectively for the last few years.

And just... And trials are January and April of 27. And you mentioned you're already going through some of the pre-trial motions. Can you remind me, when is the Daubert hearing, or when do you get a sense of the presence of science?

Yeah, so that's happening over the coming months. So weeks, months, I mean, this is eminently happening. Helpful.

I wanted to talk about the NASHAP rule change that is in the proposal phase right now. And I know it's in the commentary. How has that been impacting the industry, I guess, from decisions like do we insource or do we outsource versus insource? Or do we build new facilities? Are you seeing that? Proposed rule where it potentially could be finalized. Is that already impacting the industry on decisions like those that I mentioned?

Yeah, it has impacted decisions. I mean, you think about the customer I referenced already that decided to go from in-source to outsource. Excuse me. But the timelines and the implementation timelines has just created uncertainty, but also just deferred it. We've deferred what were seemingly more imminent decisions that small players might make, small outsource providers might make to go out of business or sell their facilities or make improvements. It just kicked the can a little bit down the road as the regulators have reflected in potentially adjusting the regulations and moved the timelines out. So it's kind of just slowed things. Our dialogues with customers and other industry kind of slowed down from a much more heated level or heated pace than they were, you know, a year and a half ago. Okay. And you guys have made a lot of

investment in your facilities to meet the... the new standards that are now being proposed to be rolled back. If you could please help us understand, how does that still impact your competitive position in the market in terms of those investments?

We've made those investments. We're ready to comply with the standards that are finalized, whether they're the standards that were promulgated in 2024 or what's being contemplated Now, one thing to clarify, the old rule... Was difficult. The 2024 rule was really, really difficult. When we say rolled back the 2024 rule, what we'll call it the 2025 rule, it's still way more difficult than the old rule. So these, everybody's going to need. We have additional improvements, additional capabilities in their facilities to make sure to comply even with that rule. And then who knows where the rule might be two years from now. So we're continuing our investments. We're going to be an industry. We are an industry leader in this, and we're ready to be there, and we'll be there for the long term to support our customers.

Okay. Your guidance, it implies some high single-digit growth in the back half of the year. You know, after, I guess, more mid-single-digit growth so far in the first quarter, just, you know. You mentioned the new insourcing, shifting to outsourcing customer, the x-ray capacity, any other swing factors in terms of, you know, the visibility you have into the second half of the year?

Yeah, I mean, we're having great dialogue with our customers. You know, they want to make sure we've got the capacity there when they need it. And so we've got, you know, some visibility from that. Things can always change, but we've got good dialogue with our customers, what we expect. Good pipeline of validations, converting to normal sterilization. We've got lower maintenance downtime in the second half than the first, which will turn to a tailwind, and then we've got those couple of things that you referenced. So there's a bunch of things adding up to shape up for a really good second half.

I wanted to touch on your shareholder base. You know, there's been some change over the past few months since the end of last year, where you've seen some of the insider holders now fully sell their positions and the private equity sponsors. Maybe you could share with the audience, just how should investors think about your shareholder base now going forward, now that your private equity sponsors have liquidated their position?

Yeah, no, great. When I joined the company three years ago, 60% of the shares were held by the private equity owners. Our former private equity owners, you know, and it was an overhang on the stock, and now that's gone. So, you know, when I look back and I look at what we've done over the last years, and I'm tying it to when I started, I'm not claiming responsibility or, you know, pounding my own chest about what we've accomplished, but, you know, the private equity ownership is out. Our leverage ratio is back into a spot where I think it's more palatable for a lot of the investor bases. We were at like four times. Now we're nearly three times levered. We've taken interest expense. We're actually just closing on another repricing of our loan and our term loan. In the last nine months, we've taken out 100 basis points of interest cost out of the term loan. That's $14 million a year. You know, litigation had much more ambiguous kind of views around it. We've walked through how much clarity we have, still work to do, but things are much more clear and, I think, from my view, evidently manageable from where we are. And I think what that's doing is you're kind of pushing these things aside and everything that everybody loved about this business. The strength we have supporting customers in highly regulated markets, sticky customer relationships, critical to health care. We deliver price every year. We deliver growth every year for 20 years. People are now able to focus more on the fundamentals of this great business versus some of the challenges that we've had to deal with over the last few years. So I'm excited about where we are. I think it's a great opportunity to dig in and learn more about Satera Health.

Maybe just one final one. Any macro factors to the business, anything that investors should think about in terms of geopolitical or energy costs?

I mean, you know, energy is a very small, very small component. I came from glass melting industry. I thought about energy costs every day. I worry about supply. I don't worry about the cost because it's a pretty much, it's a very small base. And I don't worry about supply because I've done the diligence and know that we're in good shape from a supply perspective. So there's, you know, very small sales like into the Middle East, for example. So there's not a lot to worry about with respect to those kind of exposures right now.

Great. All right, we'll wrap there. Thank you very much.

Thank you, everyone.