Sotera Health's Q3 2025: Contradictions Emerge on Sterigenics Volume and Pricing, Expert Advisory Services, Tariff Impact, and Nelson Labs Margins

Date of Call: None provided

Financials Results

• Revenue: $311,000,000, up 9.1% YOY (8.0% constant currency vs 2024)
• EPS: Adjusted EPS $0.26, up $0.09 YOY; GAAP diluted EPS $0.17 vs $0.06 in Q3 2024

Guidance:

• 2025 constant‑currency revenue growth 4.5%–6.0%, expected near midpoint
• Adjusted EBITDA growth raised to 6.75%–7.75% (prior 6%–7.5%); FX ~+25 bps
• Company pricing expected near midpoint of 3%–4%
• Sterigenics: 2025 CC revenue mid‑to‑high single digits; Nordion: raised to mid‑to‑high single digits; no 2025 Cobalt‑60 revenue risk
• Nelson Labs: 2025 CC revenues expected to decline mid‑single digits; segment margin low‑to‑mid‑30s%
• Interest expense $154M–$158M; adjusted EPS $0.81–$0.86; capex $125M–$135M; net leverage to improve; outlook assumes no M&A

Business Commentary:

* Strong Financial Performance: - Sotera Health reported total company revenues increased by 9.1% for the quarter, with adjusted EBITDA increasing by 12.2%. - The growth was driven by strong top line growth in Sterigenics and Nordion, as well as operating improvements in Nelson Labs.

• Segment Performance and Growth:
• Sterigenics delivered 9.8% top line growth, driven by consistent performance across core medical device customers.

• Nordion's revenue increased by 22.4%, primarily due to the timing of reactor harvest schedules and favorable customer pricing.

• Balance Sheet Strengthening:

• Sotera Health paid down $75 million of debt and lowered its interest expense by approximately $13 million annually.

• The company's strategic actions improved its net leverage ratio to 3.3 times at quarter end, down from 4.2 times in Q3 2023.

• Regulatory and Licensing Milestones:

• Nordion secured a 25-year renewal of its Class 1B operating license, reflecting a deep trusted partnership with the Canadian Nuclear Safety Commission.
• This milestone enables Nordion to secure the global supply of Cobalt-60, supporting critical sterilization processes and radiotherapy treatments.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Company reported Q3 revenue +9.1% and adjusted EBITDA +12.2% with adjusted EBITDA margin 52.7% (+147 bps YOY); paid down $75M of debt and expects ~$13M annual interest savings; reaffirmed revenue outlook and raised adjusted EBITDA outlook.

Q&A:

• Question from Patrick Donnelly (Citi): Are there certain areas seeing outsized volume recovery (e.g., medtech, bioproduction) and what is the expected volume trajectory from here?
  Response: Recovery is broad‑based across Sterigenics, including bioprocessing and medtech, and management expects volumes to continue improving.

• Question from Patrick Donnelly (Citi): Can you provide the latest on the broader litigation landscape and where other cases stand?
  Response: Most matters are progressing favorably: Illinois nearly wrapped with one remaining case; Georgia appeals reinstated a stricter causation standard and several bellwethers were dismissed; New Mexico has only an AG suit for July 2026; California trials expected in Jan/Apr 2027.

• Question from Jayden (JPMorgan): Are you factoring any expectation of a budget flush in 4Q from medtech customers? And are you seeing any impact from the government shutdown across the portfolio?
  Response: No budget‑flush expected; management is confident in the current guidance; government shutdown has minimal direct impact aside from some delays in Expert Advisory Services.

• Question from Luke Sergott (Barclays): Is the Expert Advisory weakness related to reduced FDA activity, and what explains the implied Q4 EBITDA margin step down?
  Response: Expert Advisory softness is driven by reduced FDA activity (management cited ~10% top‑line impact); expect Nelson margins to moderate in Q4 while Sterigenics margins remain largely stable.

• Question from Dave Windley (Jefferies): With Expert Advisory down, how is the rest of Nelson Labs performing (core lab testing) and what drives the Q4 cadence vs the strong Q3?
  Response: Core lab testing is improving (validation choppy in pockets) and is positively linked to Sterigenics volumes; Q4 softness mainly reflects Nordion timing/lumpiness and Expert Advisory headwinds, not weaker underlying demand.

• Question from Brett Fishman (KeyBanc): What mix shift in Nordion caused margin compression and will Sterigenics' mid‑ to high‑single‑digit growth be sustainable into 2026?
  Response: Nordion margin pressure was due to higher sales of lower‑margin radiator equipment (sporadic, not a long‑term concern); Sterigenics reiterated mid‑ to high‑single‑digit growth as sustainable per long‑range targets.

• Question from Jason Bednar (Piper Sandler): Sterigenics pricing has slightly decelerated—where does pricing stabilize and any update on California claim counts?
  Response: Sterigenics pricing remains around the high end of the 3%–4% target with potential incremental niche‑app pricing over time; California currently has 83 personal‑injury claims.

• Question from Michael Polark (Wolfe Research): Given the advisory headwind, is it reasonable to expect Nelson to return to growth in 2026, and was there any material pull‑forward of medtech orders ahead of tariffs?
  Response: Management agrees returning to growth in 2026 is a reasonable expectation given routine testing trends; they see minimal evidence of material tariff‑related pull‑forward in order patterns.

Contradiction Point 1

Sterigenics Volume Recovery

It involves differing perspectives on the pace and consistency of Sterigenics' volume recovery, which is crucial for understanding the company's growth trajectory and financial performance.

Which areas are experiencing outsized volume recovery? Can you provide an update on litigation? - Patrick Donnelly(Citi)

2025Q3: Volume recovery is consistent across Sterigenics and multiple categories like bioprocessing and medtech. Expect this trend to continue. - Michael Petrus(CEO)

What is the impact of tariffs on Nordion's exemption and potential offsets, and what insights can you provide on Sterigenics' recovery and volume trends? - Patrick Donnelly(Citi)

2025Q1: Sterigenics is seeing volumes improve amid customer survey results showing strong positive feedback. - Michael Petras(CEO)

Contradiction Point 2

Pricing Contribution in Sterigenics

It involves differing reports on pricing contribution in Sterigenics, which affects revenue projections and profitability expectations.

What is Sterigenics' pricing contribution outlook? Are there any updates on California litigation cases? - Jason Bednar(Piper Sandler)

2025Q3: Pricing contribution stable at 3.8-3.9%. - Michael Petrus(CEO)

Did Sterigenics see a pull-forward effect from tariff concerns? Can you break down Sterigenics' volume and price contributions? - Patrick Donnelly(Citi)

2025Q2: With the Sterigenics segment's volume and mix increase outperforming expectations, the strong pricing execution more than offset inflation. - Michael Petrus(CEO)

Contradiction Point 3

Expert Advisory Services Performance

It involves differing explanations for the performance of Nelson Labs' Expert Advisory Services, which impacts investor understanding of the company's business segments and revenue drivers.

What is driving the ERP issues and the Expert Advisory business decline? What is behind the 4Q EBITDA margin decline? - Luke Sergott(Barclays)

2025Q3: Expert Advisory Services impacted by FDA lack of activity. - Michael Petrus(CEO)

What drives Sterigenics' volume recovery, and how will bio-pharma R&D spending impact your business? - David Windley(Jefferies)

2025Q1: Sterigenics, Nelson Labs was up 13%. It was strong across the quarter. The Expert Advisory Services again showed robust growth. - Michael Petras(CEO)

Contradiction Point 4

Tariff Impact and Strategic Positioning

It involves differing perspectives on the impact of tariffs and the company's strategic positioning in response to tariffs, which are crucial for assessing potential risks and opportunities.

What is the pricing contribution outlook for Sterigenics? Can you provide an update on the California litigation cases? - Jason Bednar(Piper Sandler)

2025Q3: We don't foresee significant positive demand due to tariffs. - Michael Petrus(CEO)

Can you shift operations, and is there a risk of increased demand if customers shift manufacturing due to tariffs? - Unidentified Analyst(Goldman Sachs)

2024Q4: We are prepared for tariff impacts, primarily on cobalt coming into the U.S. from Canada. - Michael Petras(CEO)

Contradiction Point 5

Nelson Labs Margin Improvement Drivers

It involves differing explanations for the drivers behind Nelson Labs' margin improvement, which are important for understanding the company's financial strategy and performance.

What is driving the ERP issues and Expert Advisory business decline? What caused the 4Q EBITDA margin decline? - Luke Sergott(Barclays)

2025Q3: The margin improvement at Nelson Labs is due to better labor productivity and labor efficiency. - Jon Lyons(CFO)

What are the key initiatives driving Nelson's margin improvement and how has lab consolidation impacted capacity? - Sean Dodge(RBC Capital Markets)

2024Q4: The primary driver for Nelson's margin improvement is better management of labor productivity, aligning with order patterns. - Michael Petras(CEO)