You know, volumes seem like they're better across all your customer types. Your closest peers seeing better volumes too. You know, from an outsider, and I think a lot of us in this on the street have been looking at this as a normalized market. You know, so is there anything about the last couple quarters though that you would say is like that where volume isn't durable or there's any transient factors that are leading to this uplift that would, you know, kind of dispel this normalization thesis?
No, we're seeing pretty consistent expansion across multiple categories of med tech across the board. So there isn't anything, you know. We've got lots of questions that, hey, tariffs had a big impact. We're not seeing material impact from the tariffs that are bringing volumes in.
How about maybe on that topic on supply chains and how some of your manufacturing partners, med tech manufacturing partners, are handling their supply chains? You know, I guess, how is that affecting or not affecting? I mean, you kind of said that there's not a bolus coming through, but you have to be seeing some kind of maneuvering of the supply chain. So just maybe help us out with what's going on out there.
Yeah, we're not seeing a lot of movement. I mean, early in the year, I saw a couple stat charges where folks were trying to get, you know, some volumes pulled in earlier before tariffs. But we're not seeing anything on a material basis. You know, we're well-positioned. We've got a very significant position here in the U.S. And if people were to insource, we feel we're well-positioned to help our customers in that front. But we're again not seeing significant shifts right now on the tariff side.
Not even geographically either, like manufacturer moving from one location to another or shifting supply?
Nothing more than normal. From what we're seeing.
Okay. All right. Great. I guess, where do you think we stand now? I, you know, this question comes up every now and then, but insource versus outsourced on sterilization, is the share still shifting towards outsourced? Just what are the latest dynamics there?
Yeah, in the Sterigenics business, you'd say overall, roughly, the market's about two-thirds outsourced, if you will. You know, close to moving towards 70%, if you will. But we don't see significant shifts in that from year to year. Over a period of multiple years, you see a little bit of shift, one or two points. But, we're not seeing a material change that is going to say that it's going to shift dramatically here.
Good. Are you, and I know you're a little removed from this, but for the ones those that insource, do you see them behaving any differently? And this is partly also in response to NSHAP regs and whether or not they're going to, they're willing to comply. I don't introduce NSHAP just yet, but maybe I just opened the door. I mean, how do you see that playing out?
Yeah. So let's just kind of walk through that. So if it may not be as familiar, NSHAP is a new standard that's coming out for the sterilizers, particularly around ethylene oxide. The rule was supposed to take effect in April of 2026. There's been a period of extension for a couple years. We were seeing more activity around that concern around people's ability to be compliant with that new reg coming, you know, April of 2026. But now it's been pushed out a little bit. We're seeing that concern is not as prevalent as it was before. We're not seeing any shifts. You know, we've had, you know, we had one significant customer that did work with us and did in-house that they've made a decision to outsource that. So we're seeing that volume will be coming over to us. It might take a little longer for the transition, but they've made commitments to move that volume to us.
Okay. And it sounds like, at least, a decent-sized customer. Does that play out over a multi-year period or multi-year?
Yeah, a couple-year period. Y eah. Starting late in 2026, probably going into 2027, 2028 as they get closer to the NSHAP timing. This is just a customer that said, "Hey, my core business is making medical devices. I don't want to go ahead and invest more money in my sterilization facilities. I could use that capacity and tap for other reasons.
All right. Do you think that's a one-off or, I mean, do others follow suit?
I mean, there could be some. Right now, I'd say we're not seeing a huge trend in that. That's what happens. You want again, I think that the lag and the timing has slowed down some of those conversations as well.
Okay. And maybe the answer is this is going to be the same here on that and the what you just said. But for those smaller regional players that do some of that outsourced kind of what we refer to as like the mom-and-pop players out there, how do you see them responding in this, you know, call it new environment that we're going to be entering into once NSHAP f ully takes effect?
You know, NSHAP is a challenging rule. I mean, it's very challenging. The emission controls that are very significant now. I think you're going to see some folks be challenged. They've gotten a little bit more time here over the next couple years. But I think the reality, at some point, when this rule comes into effect a couple years out, they're going to have the same challenges they would've had now if it was coming into effect.
Okay. And what?
Again, we feel it's more about us. We feel very well-positioned on where we are as a company and be able to take care of our customers and our facilities and what we're going to be doing over the next several quarters and months to make sure we're ready for them.
Yeah. If we pull, like, pull out the crystal ball post-NSHAP taking full effect, I mean, what does the industry really get shaken up or is it more of a gradual, like, you might have a couple players that drop out? You know, it's a little bit of movement here and there. I just trying to understand, like, how much of an inflection point that actually are?
Yeah. I think when you look at it, you referenced the words mom-and-pop. I think they're smaller guys. So you're not going to see a dramatic shift w ith the mom-and-pops. I mean, you know, they're smaller in nature. You know, we've got pretty large facilities around the country that take care of our customers' needs. And I think that'll continue to be the situation.
Okay. When we look across the industry for outsourced sterilization, can you maybe talk about the need for capacity when we look at supply versus demand?
You know, capacity is pretty expensive in this industry. You don't just wake up tomorrow morning saying you're going to get the sterilization business. That's real money and capital. So when we look at these decisions around capital investment, you know, we're stewards of the capital for our shareholders. We got to be very thoughtful in making sure we're getting the returns on it. It takes time to do that. The capacity is tight. You don't wanna just spend a bunch of money on capacity if you don't have the ability to fill it up. So we're constantly looking at that balance and making sure we look at it on a multi-year trend basis. We just went through our three-year strategic plan in August. We continue to refresh that throughout the year with our team and our board to make sure we're aligned.
Okay. All right. When you look at bringing on new capacity, how much is already spoken for? Because then this gets into a couple facilities that you do have coming online. So maybe you can talk about some of that too.
Yeah. So we'll have one facility come on next year and then another one, that we're coming on, late 2027. It may even drag into 2028 depending on timing, how that plays out. We typically try to make sure we get about 40% of that capacity locked up before we put the shovels in the ground. That doesn't always consistently happen. There's some we do for strategic reasons. We think it's the right thing to do. For example, we did Markham Vale in the U.K., you know, back several years ago. We didn't have completely 40%. Now we're in a very good spot in that facility. So we try to have a significant amount of commitment before we put the shovel in the ground. But ultimately, we have a pretty good instinct of where our customers are and what they need help with longer term. And that's what we try to make sure we're well-positioned for.
Okay. These are long-cycle builds when you're adding a new facility. These are, you know, been in place and really in motion for multiple years, and we're still looking out 2027, 2028 before they're, you know, some of the later ones coming online. When we think beyond 2028, I mean, how are you considering, like, your longer-term strategic planning for new capacity? I guess, when do you make some of those decisions? I guess, maybe ask a different way. Would you have to be making those decisions today if you're adding a new facility that needs to come on in 2029 or 2030?
Yeah. No, we're in a pretty good shape capacity-wise with the plans that we've got in place. We get us through, you know, the three-year period 2025, 2026, 2027. Even as we look into 2028, we feel pretty good. There's some things we'll look at in the out periods beyond that. But again, we have a three-year strat plan that we look at typically in the Sterigenics business. When I think specifically, we look at that three-year strat plan and we make those decisions at that point in time. So where we're at today, we feel pretty good about the plans and the CapEx we deployed against that.
Okay. And I'm asking your main competitor this same thing. And it's something I've just been tossing around in my head. The thing I love about this industry is that pricing's great for outsourced sterilization. Both get really good price gains every single year. We also have more capacity coming on from both of you. Now, though, that capacity is filling a void. It's filling a need. Is there any risk that some of this excess, not excess capacity, but new capacity that's coming on maybe dampens some of those pricing gains? Or do you have those gains already almost locked in just given the multi-year contracts you've got set up?
Well, we do have multi-year contracts. You know, these contracts are three to five years in nature. They typically have evergreens in it. Listen, at the end of the day, we got to make sure we're pricing it appropriately for the value we bring our customers. This is a very small percent of the total product cost for our customers. In most cases, it's less than 5% of the customer's product cost. So it's, you know, you made some words about pricing, how strong, great. At the end of the day, it's about our value and what we bring to the customers and the markets and making sure. And you know, I can't speak for how our competitors price it or what their capacity situation is, utilization.
But when we look at it, we're pretty disciplined around our capital allocation and also making sure we price it accordingly for the value prop. You know, we've got customers that rely upon us, but more importantly, end patients that need sterile products. And that's where we're going to make sure we're positioned to fulfill that because it's patient safety at the end of the day.
Okay, so still sounds confident on the ability to, you know, still get decent price in this industry even with new capacity coming online.
Yeah. So we, we've said, you know, last year at Investor Day, we said the total company will get 3%-4% price per year. We said Sterigenics will be on the high end of that. If you're asking me that question, the answer's yes. We proved that out again this year. I think you'll see us, you know, reinforce that over the future.
Yeah. No, you absolutely have. This kind of dovetails into the CapEx conversation. You know, CapEx has been running a little higher. No, I think there's been a lot of building, a lot of new investments going in on some of these new facilities. But, you know, the CapEx, I think trend line-wise, there's maybe some timing elements here this year where CapEx is a little bit lower and maybe steps up a little bit next year. But longer term, it's coming down, you know, more towards that $100 million, I think more maintenance-type CapEx. Is that, you know, you think we're at a point where $100 million is the right or $100 million, a little bit above $100 million is the right run rate going forward?
Yeah. So let's step back and kind of contextualize some of the things you mentioned there. So our CapEx right now, there's some big activities that are involved in our CapEx that are one of them is cobalt development. So cobalt development, you know, we haven't done a cobalt development program for our Nordion business since early 2000s. We're in the midst of doing cobalt development. So it's elevated levels that, you know, we see that coming down over the next several years. You know, we've got good execution with the teams and our partners on that program. So timing's in good spot. Capital's getting pushed a little bit. But overall, we're in a really good spot. So that will come down. The facility enhancements around the new NSHAP requirements that we were referencing earlier, you know, we're going to spend about $200 million over multiple years.
That comes off. A lot of that will be gone next after next year. I mean, we've got a tail on it next year. And then we have a couple greenfields that you've referenced that we're on the tail end too. So those are all coming down. We said that the maintenance in this business, the maintenance CapEx is about $60 million ± $10 million. And then on top of it, you have growth CapEx. So as we look at the out years, you know, we, you know, we're looking at, you know, if we're going to have incremental capacity or investments and growth, we got to make sure we get returns on those. But the bottom line is we see the CapEx coming down. To your point, 2026 was 2025 was lower than we thought it was going to be for several good reasons. That got pushed into 2026. But overall, we feel confident about where we've kind of said that the CapEx is going directionally.
Okay, and this I think the beauty here is it's really giving you lots of flexibility. Beauty of the CapEx coming down this year, giving you some flexibility on the cash side, paid down some debt, refinanced some of that debt, brought the overall interest burden lower for the company. You know, maybe for those in the room, that may not be as familiar, just remind us, you know, capital allocation plans going forward beyond just the CapEx piece. You know, what do you do with some of that cash? Your leverage is coming down, so maybe you respond there.
Yeah. Let's step back. You know, our leverage today, our net leverage is about 3.3. We've communicated to the investor base that we're going to get this down to net two to three times net leverage, you know, between now and the end of 2027 is what we communicated at our last investor day. Also, in that same time period, we said that we would grow on the top line 5%-7%. CapEx would be coming down. We'd be generating $500-$600 million of free cash flow between, you know, the time period 2025 to 2027, you know, excluding the litigation and all that other conversation. But the business is a strong cash performer. We've got, you know, very good margins. We bring a significant value prop to our customer base.
So as we look out, you know, we're continuing to focus on free cash flow and how we position the company and make sure the capital's deployed in the right areas to get the return. We did a lot of work on the balance sheet, as you mentioned. You know, a couple things from a capital structure. You know, our private equity folks have sold down shares. You know, recently in the last couple months, they've, you know, they've done secondary offerings. They're now 26% of our total equity. We've more than doubled our public float out there in the marketplace in the last two years. We're generating a significant amount of cash. So we're in a pretty good spot. We, you know, took the interest expense down.
We'll have about $13 million on an annualized basis of between the paydown and the lower interest expense. So overall, you know, the balance sheets are in a really good spot. Company's in a good spot. It's growing. Its stickiness with the customers. Many of the things we've been talking about for several years.
Yeah. So, what do you end up doing with that cash? Like, say, once we get into that two to three times leverage range, I mean, is there still a preference then to pay down debt absent other M&A opportunities? Or do you shift more to, "Hey, it's M&A or share repo"? I guess, how do you. Rank order that?
Yeah. You know, so first priority for us is organic growth, right? We wanna keep investing back in the business. We get great returns on that. We wanna make sure we continue to drive the 5%-7% top line growth within the business, so that'll be first priority. We'll continue to look at our debt leverage as well and make sure we've got a significant amount of our customer or investor base say they like it in two to three times, so we'll make sure we got that, which we're well on track to do. You know, we'll also evaluate, do we do buybacks or do we do debt pay down. You know, wanna look at where we are at that point in time and what the cost of our debt is and where the stock price is, and we'll make determinations on that.
And then, you know, don't forget the fact of M&A. You know, there's M&A opportunities when we look across the businesses, you know, particularly with Sterigenics. You know, we'll continue to look for opportunities there and bring strategic add-ons to the portfolio as well where we can.
Okay. You're going to respond with, "It depends." But I'm going to ask this anyway. If you have a preference between the segments in which you play if you were to do a transaction.
I would say listen, it's like all your kids, right? When they all ask for allowances, you wanna treat them all fairly and everything else. So I would just say they all have great opportunity. But, you know, Sterigenics is two-thirds of our business. We're very well positioned. We have some strategic tuck-ins we'd like to do over time. We'll continue to look at that. But that doesn't mean there aren't opportunities in other businesses as well.
Okay. All right. Great. Why don't we shift over to, to some of those other businesses? And I know we've, we've dominated a lot of the time with, with Sterigenics, but it's that important. Nordion, I guess, what's help me out with the long-term strategy with Nordion. It's a it's a pretty good cash generator on an annual basis. A little bit of lumpiness on, on the business, you know, going quarter to quarter. But, you know, you got a little bit of synergy between that business and what you're doing in Sterigenics. But from a strategic perspective, you know, just ask it bluntly, does it make sense still to own this asset? Is Sotera still the right owner?
Yeah. It's absolutely unbelievable business, 60% margin. We're the only global Cobalt-60 player in the world. We're completely integrated end-to-end on Cobalt-60 supply, the Cobalt-60 sterilization. Over 30%+ of the global sterilization market is gamma radiation or Cobalt-60. And, you know, we have a significant stake in the supply chain to that. Listen, it does have some lumpiness, as you said. But we give very clear visibility to the street, first half, second half, kind of percent the total. And margins are 60%+. Having that asset is really important to us as we look at our ability to position that business for long-term growth. And, you know, it's been a consistent grower and consistent performer year in, year out.
Okay. All right. No, that's helpful. And on Nelson Labs, how do you view the balance maybe between core testing and EAS longer term, maybe once EAS normalizes? And then the second part of the question on Nelson is, where do you think margins there stabilize? We've swung around quite a bit. If we look over the last five years, you know, between 30% and 40%, I think, on the EBITDA line.
Yeah. Again, let me give some context for folks that may not know all the acronyms and everything else. So within our Nelson Labs business, the primary business is testing. We do 800+ tests for med device and pharma companies. We've got labs all over the world. Within that business, we have a consulting expert advisory services business. Last year was the best year in the history of the company, in that business. And this year is probably going to be the worst or second worst year in the history of that company. So we're on both tails of that. You know, this business, the value is the strategic leads it gives to the Sterigenics and Nelson Labs and really helping customers through end-to-end, challenges. When we look at the core fundamentals in Nelson, it's all about the testing and the lab services capability.
What this business is great at is helping customers get their products to market and helping their customers keep those products in the market when they have challenges around new regulations or FDA recalls or things of that nature. This is what the company's really good at. You know, fundamentally, about 40% of that business is sterility assurance. It's got strong connection and cross-business synergies with the Sterigenics business. You know, customer sterilizes, and then they have the routine testing done to make sure the product gets sterile to the microorganisms and, you know, come out new products. We work end-to-end with our customers on new validation.
Okay. You're hitting on, I think, I almost anticipated my next question, hitting on the XBU strategies, the cross-business unit strategy. This came up a lot at the Investor Day last year. You know, definitely some strategic synergies or synergistic value between Sterigenics, between Nelson. You know, where do you stand on executing on that XBU strategy? And do you think the street fully appreciates the opportunity here?
Well, I'm sure they don't fully appreciate. You know, we don't give a ton of visibility in the intricacies. But I could tell you our XBU customer base is growing faster in our core within the business. And that's one of the key metrics I look at with the team is how we're driving, you know, cross-business collaboration. And those customers that are tied in with us are growing faster in the core. We also look at our customer satisfaction rate higher as we've shared in the past and continue to be higher. We look at how do we make it easier for our customers and deal with their health and real value. You know, we've got embedded labs within the Nelson Labs embedded within the Sterigenics facilities, which have seen significant growth. We've made some capital investments over the last few years. Not a significant amount of capital, but we get great returns on that, and we'll continue to do that going forward as well.
Those growth rates for your XBU customers versus non, what's the magnitude? Can you talk about magnitude difference? Are we talking like a couple points, several points? I'm just trying to get a sense of.
Several points.
Several points of difference? Okay. And the mix of your customer base that currently you leverage on that XBU?
So, 70%. There's about 70% overlap between the customers. Now, you got to be careful because not everybody, it's not like for not the same person's making the purchasing decision each one, right? But it's 70% customer overlap at the parent level. And, you know, we segment that market. We're particular about which markets we go to and which customers want that value of an end-to-end service capability.
Okay. All right. Hey, we're down to a couple minutes. I don't wanna fully ignore EO litigation.
I thought we were done with Sterigenics. Done, done, done with the segment.
We got to still need to come back and talk about the litigation. But this, I think what's interesting here is, you know, relative to where we would've sat a year ago or two years ago. It, I really think you've moved down this path of really de-risking this part of the story. You know, you've had some settlements. You've had some wins go in your favor here recently in Georgia. California might be the main area where I still get investor questions. Just, is it how, how is this going to play out? Why doesn't—I'll maybe ask the question this way. Why doesn't California litigation in California keep you up at night?
Well, first of all, if you talk to my wife, she's telling you not many things to keep me up at night. I don't sleep a lot. But when I go to bed, I go to bed. So, I would just say, you step back and look at this company and the strength of the company in total. You know, strong customer stickiness, strong cash flow performance, good margins, sticky relationships, the multi-year contracts, pricing capability. You know, all that stuff is intact. When you step back, we had one bad trial in 2022 that went sideways on ethylene oxide. After that, I think you've seen the company manage this in a very effective manner with our board and the oversight we have around this thing. Litigation is something we're seeing all over the world, particularly the U.S. and across healthcare.
And it's just the nature of the business that you have to deal with. You know, I can't tell you why plaintiff lawyers take the angles and approaches they do. That's their business. That's what they wanna do. All I can tell you is it's been proven multiple times that when science is front and center in the courtroom, we're going to win the case. Okay? And that happened in the second case in Illinois shortly after that one in September 2022. You're seeing some of that show up in Georgia. And as we look at California, if the judge continues and the system continues to look at, you know, science and we get to put on the case, there's no causation here. We're fairly confident the science doesn't support it.
Okay. All right. Well, with that, we are ticking down out of time. So, that's a great place to end this thing on the de-risking of that piece of the story. Michael, thanks so much for being here today.
Thanks. Appreciate your support.
Yeah.
All right. Great. Have a good day.
Thanks.
Thanks.