Good morning. Hi, I'm Dave Windley with Jefferies Healthcare Equity Research, based in the States. Appreciate your interest in our London Healthcare Conference for 2025. The next presenter here at the 8:30 slot here in London is Sotera Health CEO Michael Petras is with us. Michael, really appreciate your being here. He's going to make some prepared remarks, and then we'll have a little bit of Q&A at the end. Michael, I'll turn it over to you. Thank you.
Yeah, great. Thanks, Dave, and thanks for having us here. As Dave mentioned, I'll give some prepared remarks, a little bit of overview of the company. For some of you who may not be as familiar, first of all, before we begin, some of the statements I may make today may be considered forward-looking statements. Please refer to the SEC filings for a description of the risks and uncertainties it could cause. Our actual results would materially differ from those projected or implied. The company assumes no obligation to update the forward-looking statements. In discussions, we talk about we'll have some document statements around adjusted EBITDA, adjusted net income, adjusted EPS, free cash flow on that average net leverage ratio. Please refer to our SEC filings for reconciliation. Get that out of the way here first thing. In the morning here, a little overview of the company.
For some of you who may not be familiar with it, Sotera Health is made up of three entities: Sterigenics, Nordion, and Nelson Labs. We have about 5,000 customers around the world in over 50 countries. We have over 3,000 employees. We provide end-to-end solutions for the med tech and pharma industry, and we've got 62 facilities around the world. Really foundational to this is our deep relationships we have with our customers. Our customers, on average, 10-plus years across our top 25 customers. We do business with 40 of the top 50 med device companies, nine of the top 10 pharma companies in the world, and just, you know, a phenomenal operating performance across the company and strong cash flows.
When you look at the company, you look across the healthcare supply chain, you could see all the different places that each of the businesses, Nordion, Sterigenics, and Nelson Labs, plays beginning early on in early product development all the way through final sterilization, which ultimately then gets distributed out to patients around the world. Talking a little bit more in specifics around each of the three businesses that are integrated and really come together as one company within Sotera Health, I'll start first with Sterigenics. Sterigenics is our largest business. This business here is a global leader in sterilization services. For some of you who aren't as familiar with it, I'll walk you through what we do in this business. The medtech or pharma companies make the product, they package it up, and they ship it to point of care, ultimately to hospital, surgery center.
Before it gets there, it goes through one of our facilities around the world, and we sterilize the product right through the packaging. It comes in on a pallet. We may unload that pallet in the boxes and put them into totes for gamma radiation sterilization, or we'll just load the pallets themselves right into a radiator or into an ethylene oxide chamber. We sterilize right through the product packaging and the boxes, and then ultimately that product is picked up at the end of the process by our customer. We do not own the product. We do not take any ownership of it. We don't take any responsibility for the shipping and handling. That comes into our facility. We sterilize it. They pick the product up and ship it to point of care.
We have 48 facilities around the world, across 13 countries and four continents, as you can see on the chart here. We have different modalities that are used for sterilization: gamma, which is cobalt-60, ethylene oxide, and E-beam are the predominant ones that we play in. We do not determine which modality is used. That is determined by the customer in conjunction with the regulatory bodies. Our second business is Nordion. Nordion is the only business of the three that is a product business. The other two businesses, Sterigenics and Nelson Labs, are service businesses. Nordion is the one business, a product business. In this business, as I mentioned earlier, Sterigenics does terminal sterilization, and they use gamma or cobalt-60. That is the key product that comes from Nordion. Nordion gets this product from a nuclear utility around the world. We get cobalt from Canada, India, China, Russia, Argentina.
We then bring it to our facility in Ottawa, Canada, and we put it into a usable form that's then sent out to sterilizers like Sterigenics and their competitors around the world. This is a one-of-a-kind facility. We just recently renewed for 25 years our site license in Ottawa, Canada. This is a really core capability of the company in having access to a critical material like cobalt-60 that's used for sterilization. I'll then move to our third business, Nelson Labs. This business is based in Salt Lake City, Utah, as well as Leuven, Belgium. In this business, we do microbiology testing and analytical chemistry testing. Independent test lab. Again, it's a service business. Same customers as Sterigenics.
We work with the medtech and pharma companies and help make sure that their products are safe, they meet the regulatory requirements, and help them get their products to market. You see a combination of testing we do around validation and then routine sterilization testing as well that we do within that business. Three outstanding businesses are integrated around the world. We took the company public in 2020, in November of 2020. It is coming out in about five years. Over that time period, we have had 7% CAGR on both top line and bottom line, trailing 12 months. EBITDA is $590 million as of the last quarter earnings. One of the things that is unique about this company is our ability to continue to grow through all cycles. We have grown every single year since 2005.
Even during the global pandemics and the Great Recession, this business continues to perform and has delivered growth every single year, which just underlines the importance and the critical role we play in healthcare and our ability to weather through all markets and economic conditions. It's an outstanding business. If you look at our most recent quarter that we just recently had, the earnings announcement, we've got on a third-quarter basis, we grew the top line 9%, adjusted EBITDA grew 12.2%, and our adjusted EPS was $0.09. On a year-to-date basis, we're up 6% on top line, 10% adjusted EBITDA growth over a prior year. On a year-to-date basis, EPS is $0.11 adjusted.
If you look at our liquidity, we've got approximately $900 million in liquidity, and we've got just under just about 3.3 times net leverage, which continues on our goal of getting it down to two to three turns. When we look at the company and where some of the key strategic priorities across the company, we laid these out last year at our Investor Day. The first one is excellence in serving our customers with end-to-end solutions. There's a lot of cross-business collaboration that goes on in what we call XBU. 40%+ of the Nelson Labs business is sterility assurance.
We have a significant amount of embedded labs within the Sterigenics facilities that Nelson owns and operates and fulfills the service end-to-end for our customers, starting with testing to help get the product ready for market, getting the product sterilized, and then ultimately taking the product through final sterility assurance before it's released to the customer for care for patients. Our second strategic priority is winning growth markets. As you now know, not all medtech and pharma companies are growing at the same rate. For us, it's really important as we segment the markets and look at the key verticals that are really growing and teaming up with the winners, and we've made significant progress on that over the last couple of years. That continues to be a strategic priority for us.
Driving operational excellence for us and enhancing our free cash flow has been a big focus for the company. We continue to make sure we have strong capital allocation in how we look at our CapEx and how we deploy it across the company, also focused on interest expense and other things like that can help generate free cash flow and obviously EBITDA growth. Lastly, I'll talk about a little bit later is our discipline capital allocation and how we think about that. Underlying all this is our mission of safeguarding global health, which is what Sotera Health stands for. Reiterating what we talked about at our Investor Day last year, we're looking at, you know, organic growth targets across all three businesses. On the Sterigenics side, we're looking at mid-single digits to high single digits organic growth.
On Nelson Labs is mid-single digit growth, and on Nordion is low single digit to mid-single digit growth on the top line in all three of these businesses, which translates in the 5-7% is the outlook for 2025 to 2027 for organic top line growth. From a capital allocation perspective, you can see on the chart here where we've deployed our capital over the last several years. The vast majority of this is focused on CapEx, and you see the CapEx allocation down at the bottom. A significant portion of the CapEx is around growth investments in cobalt-60 development, which is so critical to the Nordion business and making sure we have the capital in place so we can go ahead and continue to make sure there's a steady supply of cobalt-60 around the world, which the team has done an outstanding job with that.
Our priorities around capital allocation is first to continue to drive growth and strengthen our businesses and invest for organic growth. Opportunistically, we'll continue to look at M&A. We've done several acquisitions over the last 10 years. We'll continue to look for M&A opportunities that are creative and on strategy. We'll continue to look for opportunities to pay down the debt. We most recently just made a $75 million payment towards our debt to take our debt down. We've also lowered our interest rates by 75 basis points over the last quarter. Fundamentally, what we're trying to do, as I mentioned, is get to two to three times net leverage, retain the liquidity we need to continue to invest back in the business, and have a strong balance sheet.
When we look at how we position this business for success, you know, foundations of the companies are our values and our culture and living our mission of safeguarding global health. We have the customer relationships. We have large expanding markets. When we look at the long range, 2025 to 2027, we see 5%-7% growth on the top line, 5%-8% bottom line growth, and $500 million-$600 million in free cash flow over that three-year period. From an investment thesis, I think this is a good one-pager for you to kind of take away what makes this business unique. This is a very special company in really living our mission of safeguarding global health. We have a strong, growing, and addressable market at $18 billion. We're positioned for above-market growth. We have industry-leading expertise. You do not just get into these businesses.
There's significant barriers to entry and know-how that comes across the breadth and depth of our team around the world. We have a global network of customers, a global network of facilities, which is so important to our customers in being in close proximity to their facilities. We really try to locate these facilities around the manufacturing or distribution points of our customers because this is a critical service that they need, but they don't want to be shipping products great distance and incurring a lot of cost. We try to make sure we've got close proximity to our customers.
We have a strong and consistent financial profile, stable revenue, grown every single year, as I mentioned, since 2005, expanding customer value through our end-to-end service platform and really the cross BU and how we make it a seamless experience for our customers that are working across Nelson Labs and Sterigenics. Continue to be focused on free cash flow, as I mentioned, $500 million-$600 million over the three-year time period, and then discipline capital allocation. Dave, that's all I had for prepared remarks.
Great. Thanks. Come on over here and join me and make yourself comfortable.
Thank you.
Let me start you with questions around revenue growth and capacity. Your revenue growth has been pretty steady at year-to-date 6%, as you showed on the slide. It happens to be right in the middle of your LRP of 5-7%. Maybe break down how much of that is volume versus price mix to start.
Yeah. You know, if you look at the businesses, we're a consistent performer on the price side. Sterigenics gets about 4% price. Nelson Labs is, if you look at our long-range guide across the company, it's 3%-4% in total. Sterigenics is on the high end of that, and Nelson and Nordion on the lower end of that, the 3% plus range.
Got it. Thinking about invoking a little bit of the CapEx trajectory plan, you're on a multi-year capacity expansion campaign. You're investing in new reactor cobalt supply. Do you have the capacity in each of the businesses to continue to support the volume, to support that kind of 5-7% growth, say, over the LRP? I'm sure you're going to say yes, but even beyond that.
Yeah, we do. If you look at the most capital-intensive business, typically is the Sterigenics business. We've been in a period of heightened CapEx over the last couple of years because of some enhancements we're putting in our facilities, as well as some of the growth investments we're making in new facilities. We have an X-ray facility that's opening up early next year. We also have another facility that we're going to be opening up in late 2027, early 2028. That's going to situate us very well over the next several years on capacity. The other big place that we've been allocating capital is on cobalt development that I referenced earlier. That's really to ensure the long-term supply of cobalt. Today, you know, Canada is one of our largest and most strategic suppliers for that. We also buy cobalt from other regions of the world.
We've got a partnership with Westinghouse Corporation to try to bring capability to the U.S. and get cobalt supply to the U.S. That's another area that we've done significant capital deployment. We see that coming down over time. That is why we've given the guide that we have around the long-range CapEx and also help generate more free cash flow. We feel good about where we are in capacity, Dave, to answer your question.
You mentioned, so when we think about irradiation sterilization modality, so not gas, but X-ray, E-beam, you mentioned facility that you're opening is X-ray. Correct me if I'm wrong, but I think that's relatively new for you. How do you think about your kind of balance of investments across modality and kind of balance gamma versus E-beam, X-ray?
Yeah. It's ultimately driven by the customer telling us what they need on supply and where they're moving their supply chain. We've been investing in all modalities in all geographies over the last several years. The two I most recently referenced, one of being the X-ray. We've got X-ray capability today. It's pretty minimal, but we're putting in this new facility down in the southeast of the United States that'll open in 2026. You know, we're working with customers to look at that as an option as well. You know, the majority of our business continues to be gamma and cobalt-60, as well as ethylene oxide. We don't see that changing in the foreseeable future. There's still quite a bit of significant demand. We just want to make sure we have a full offering if needed.
We're not seeing great demand for it, but we see opportunity, which is why we made the investment.
Got it. On the margin side of things, your EBITDA growth is, you know, tracking about 4% faster than top line. You're seeing nice margin expansion. I think a decent contributor to that is the Nelson business and some right-sizing of that business and mix change in that business. Can you talk about the factors that are influencing margin, maybe specifically in Nelson and sustainability of those factors?
Yeah. Nelson Labs, you know, that business is, you know, mid to low 30s in EBITDA. It's our lowest margin business, believe it or not. The other two are 50% and 60% adjusted EBITDA. All three businesses have very strong EBITDA margins. You know, the capital allocation to the Nelson business, it's not a very capital-intensive business relative to some of the other ones, the other two. Nelson Labs, you know, has seen significant margin expansion, which has really settled in where we think this business will be in the 30-35 range. What's been, you know, driving that is there's a lot of labor content. So, getting the labor right with the order rates has been pretty critical and also rationalizing, you know, some of the facilities to provide better service and consistent service for our customers has been a priority there.
Lastly, there is a benefit of mix this year as well, which is Expert Advisory Services, which is our consulting arm within Nelson Labs. That's been, it's a lower margin business for us. It's below the 35% range. It's been a little bit positive mix. As we look forward, we feel pretty good about our ability to sustain growth in the 30-35% range. The other part that's really driving also that margin rate and other factor is the mix with lab testing. The lab testing services, it continues to grow. Matter of fact, I just got back. I was over in Leuven, Belgium yesterday visiting our teams. You know, we have a pretty significant lab business in Leuven, Belgium. That business continues to perform really, really well.
While we're on Nelson, can you talk about the competitive landscape there? I mean, it's that your Nordion and Sterigenics businesses are kind of oligopoly markets that they play. And I think Nelson has a more fragmented and competitive landscape. Talk about what the competitive landscape looks like there, please.
Yeah. You know, Nelson, to your point, Nelson Labs plays in a larger addressable market, but it's highly fragmented. There's many, many competitors. There's small labs around the world. There's a couple larger ones, but nobody has the breadth and depth that we have within the Nelson Labs business. We do 800 plus tests for the med device and pharma. And that's really a key differentiator. That is our core business. We don't do water testing. We don't do soil testing. We don't do air testing. We're focused on med device and pharma, which really makes us unique in our global platform.
That is also an area where you have made some acquisitions. You know, even going back to the IPO, the addressable market in Nelson was one that you kind of incorporated and looked at pharma-related activities that you might be able to expand in. How do you think about the kind of long-range expansion of Nelson capabilities, organically or inorganically?
Yeah. What really drives that business, just to kind of foundationally get set up, what really drives that business is the regulatory landscape. You know, as new regulations come in around the world, this team is really good at helping our customers make sure their products meet those regulatory requirements. That's really critical. Also, new product spending, venture capital money. We help these customers get their products to market. In the event that they have a problem with their products in the market, we also help them with remediation and make sure that the product is well situated. When we look at the addressable market, we're very well positioned in med device. That was a core foundation for the Nelson Labs business. We've expanded in the pharma, in pharma services, and we continue to see that growing as a percent of total.
When we look at M&A opportunities within the Nelson Labs and looking at that, we'd be rolling up some of the smaller labs. Pharma capability is one of the key things we look at, but also global expansion in that business as well.
Remind us on just as acquisitions as a topic in light of, you know, your free cash flow focus and improving, you know, reducing CapEx, improving free cash flow generation, the other demands on cash. What is your appetite for acquisitions at the moment? Is it high, or would you say you're kind of putting that on the back burner for the time being?
I would tell you that, you know, when we look at our businesses, we just completed our three-year strategic plan, which we do every August, September with the board. We feel very confident in our organic growth rates, and we're going to continue to deploy capital to make sure we fulfill the organic growth rates. We see opportunity for M&A across the board. It's got to be on strategy and lined up with our businesses and what we're trying to do. I don't see us stepping out and putting a fourth leg of the stool, if you will, at this point in time. You know, obviously in the Nelson Labs business, we want to continue to have stability in the performance of that business. We've had some volatility over the last couple of years. We are being thoughtful.
If we were to do M&A there, it's got to be very strategic and on target and high execution probability. When I look at the other businesses, Sterigenics is one business that we'll continue to look for opportunities to tuck in acquisitions. We would, you know, we've got areas that we're looking at that either gives geographic expansion or more density in a given modality. We continue to look at that and we'll be very, we'll be very inquisitive around that. On the Nordion side from an M&A perspective, we'll look at ways that we could potentially diversify that business that can leverage the core capabilities we have, you know, logistics, handling safe material, very complex challenges that our customers need in their supply chain.
Got it. Let's, we got a few, a couple of minutes left. Let's come back to the biggest business, Sterigenics. Med device is the biggest driver. Bioprocessing is also an element of the business. Maybe start with the med device side. And the volume, one of the things that you and I have talked about multiple times is the med tech volumes have appeared to be stronger for longer than those volumes were showing up in your business. In recent quarters, you've seemed to track more closely to those med device volumes. What has happened to bring that correlation tighter? And what's your near-term outlook for that continuing?
Yeah. We continue to feel positive about the growth that we're seeing in the Sterigenics business. You know, they obviously have had the last several quarters, we've seen more consistent growth that we expect. You know, when I segment this around the world and look at that business, Europe has been a consistent performer for us for the last several years. It's not the largest portion. The U.S. is the largest portion for that business, but Europe has been a consistent grower. Again, I spent time this week with the team over here, and we've seen consistent growth for several years. On the U.S. side, which is our large portions of Sterigenics business, we saw consistent growth 2018, 2019, 2020, and then 2021. And then we started to see some choppiness the last couple of years.
It felt like it was significant resetting of inventory levels by some of our key customers. We're seeing that become more stable. We're not hearing, you know, we get normal discussions around a customer here or there that may be doing some adjustments of their inventories or levels around the world, but we're not seeing the consistency of challenges that customers had over the prior couple of years, which has been a little more choppy on the Sterigenics side.
Yeah.
We feel really good about where we're situated with Sterigenics volumes going forward.
Does reshoring of activity under the current U.S. administration create any opportunities for you to see volume improvement in North America?
As I mentioned, you know, the U.S. is our largest market. We're very well situated. If there was a significant movement to reshoring onto the U.S. territory, we would feel a benefit of that because of how well situated we are. Right now, we're not seeing a significant move of that in the short term, but we would be very well positioned now with our capacity and our locations and the technology modalities that we have.
I mean, maybe in general terms, the story is similar in terms of inventory management, but bioprocessing, you know, the investment community has watched go into a de-stock and restock cycle. How has that influenced or shown up in your business?
It's a very small % of the total for Sterigenics, but we've seen significant growth in there, but it's still a very small % of the total. It's up from where it was pre-COVID levels as a % of total, but it's still really small. The other place we're seeing bioprocessing, again, regulation on the Nelson Labs side, there's some new requirements in USP 665, which is, you know, extractables and leachable testing for bioprocessing components. The Nelson Labs team is helping customers work through that. That's another place that we've had significant impact with our customers on the Nelson Labs side.
Okay. I think we're at time. Michael, thank you very much for your time.
Thanks, Dave.
Thank you to the audience for your interest.
Okay.
Hope you enjoy the conference.