Good morning, everybody. Hi, I'm Dave Windley with Jefferies Healthcare Equity Research. Appreciate your interest and attendance in Jefferies' 2026 Global Healthcare Conference. Also very pleased and appreciative of Sotera Health's attendance and participation. Michael Petras, the company's CEO outgoing CEO, has joined us. Michael, thanks for being here. I was going to start there. You did make a leadership change announcement. Tell us about what makes now the right time. Why are you comfortable in handing the reins over, and what brought the company to this decision?
Yeah. Great, David. Thanks for having us here. Before we start, obviously we're making forward-looking statements. Refer to our SEC filings for descriptions and details, reconciliation of some of the adjusted EBITDA and some of the other numbers and terms that we may have, you could refer to our filings. Again, thanks for having us here today. As David mentioned on our last earnings call, we mentioned a transition that I would be moving over to the Executive Chairman job, and Alton Shader will be taking over as the CEO. Alton is here today in the crowd. He's been on the job a little over a week. Alton's going to be having a chance to meet with a bunch of our investors today, so we're thrilled to have him here. This is something I've been talking about with the board for quite some time, David.
My personal opinion is eight years, two terms is kind of the right term for a CEO, and just bring fresh eyes and perspective to the business. We had talked about that in 2024, then some things happened, and the board and I decided to defer that discussion. Later in 2025, we started to pick it up again, trying to get to a place we are today. We're really thrilled with Alton as the leader. Alton's got 20+ years in healthcare medtech experience. He comes from Viant Medical, which is a contract manufacturer. Just about every customer that he has is a customer of Sotera Health's today. Just really thrilled with having him on board.
His match with the culture of the organization, his commercial skill set, his growth mindset, those are all big factors that the board and I looked at in evaluating and bringing Alton on. Alton started last Tuesday, I'm moving to Executive Chair role. I'll still heavily involved. As you know, I'm a large shareholder of the company still, this company's got great prospects. We've grown 20 straight years, we don't see that stopping anytime soon.
Got it. Most people in your position would have savored the opportunity to divorce yourselves of having to deal with guys like me. Alton, sorry about that. From a strategy standpoint, you touched on this a little bit, Michael, in those last comments, but are you foreseeing any changes or alterations in the strategic focus, strategic outlook for the company with the change in leadership, or is it pretty much all systems same and go?
Yeah. Listen, we've got a strategy. We go through a strategic planning process every year. It actually is starting now. Alton's going to have a chance. He's been spending time with the team already, but he's going to spend time, concentrate efforts around the three-year strategic plan, and this all comes together for a board discussion we'll have with our board every August. Listen, we have a pretty solid strategy. That doesn't mean it can't get better, it can't be accelerated. We expect Alton to bring value add to it, and figure out a way to just enhance that over time. We don't see wholesale changes in the strategy from where we sit today.
Okay. In terms of recent performance, moving to the business, in Sterigenics, I think, in Sterigenics and I think Nelson, January and February, you described as being a little lighter with some acceleration in March. Perhaps talk about the progression of activity and momentum in the business as we move into the middle of the year.
We're sitting here coming off the last earnings call. The guidance we gave was around Nordion. We'd said about 40% or 45% of the revenue would happen in the first half. We said that in the second quarter that Nelson would have slight growth over prior year, and we said Sterigenics would have similar growth on a constant currency basis to what they had in the first quarter. I could tell you, a lot of investors are asking me the question today. There's lots of noise around medtech and healthcare. I could tell you today, we're very confident in what we communicated just several weeks ago on the quarter and the total year outlook.
We're seeing continued progress in the business and particularly with Nelson, some of the things going on in the validation testing area that we signaled on our last call that we're seeing momentum around. I would just tell you overall, reaffirming where we were several weeks back, what we're seeing for the second quarter and the total year. We're in a pretty darn good spot.
Okay. Fantastic.
Alton's not going to screw that up. We've already had that conversation multiple times.
Right.
Right.
Here are the keys. Don't wreck the car.
Exactly.
The first quarter, there was some call-out on weather-related activity in the industry. Again, you had, I think, talked about January and February being a little slower. Relative to your comments that you just made about med device, should we think about the issues being the weather impact being customers having difficulty getting volumes to you, or is it more at the kind of their pull-through demand level that procedures didn't happen, therefore the system didn't need their product?
Yeah. It was a combination of both. It started with the customer end market. The procedural volumes were a little softer in January, February because of the weather. You heard that from many providers out there, which then flowed downstream into some of our customers being able to get product to us as well. We'll recover that volume over time, most of it, we think. Overall, we're not seeing that kind of noise, if you will, in the second quarter.
Okay. On the flip side, you kind of alluded to this, but are you seeing that volume come back to you in the second quarter or is that something you expect to be stretched over more time period?
Yeah, stretch over multiple times. Particularly the Sterigenics business is where we felt most of that impact. As I just stated, we see consistent with what we talked about several weeks ago with the revenue guide and constant currency basis being consistent with what we saw the first quarter.
Yeah. Focusing on Sterigenics and thinking about that end market, again, you've already referenced the noise a couple of times. Apart from seasonality, how do you think about the medium to longer term outlook for commercial activity with your sterilization clients?
Yeah. If we step back and look at our three businesses, we got Nordion, the cobalt business, we got Sterigenics, our largest division, which is sterilization. We have Nelson Labs, which is our testing in analytical chemistry. I'd say we have the least visibility on the Nelson side, we have the most visibility on Nordion because you're out working with nuclear utilities, and you know when the cobalt's going to be harvested, and you've got to plan for that delivery to our customers. Sterigenics has some visibility, several weeks and quarters out. One of the things that we talked about the last earnings call, people wanted to know, just like last year, people said, "Hey, we're not sure you're going to be able to deliver a backend loaded plan." Well, we did it last year, and we're telling you we're going to do it again this year.
Some things that we gave some sound bites to make sure that investors understood. There's a couple factors that are going into our confidence on it. One, we're having conversations with our customers and some of the demands that they have on truckloads and things that they need the back half of the year based on what they're seeing has been pretty consistent with us. We've got an X-ray facility which will have a small contribution in the second half that'll start to contribute. We've got one customer that had large in-house ethylene oxide sterilization. They decided to outsource that. We'll start to see a little bit of the impact from that late in the year.
The fourth thing is we had several days out in the first half of the year for maintenance improvements and facility enhancements that'll be less of a drag in the second half of the year. Those are the four things that I would tell you that should give you some confidence around what we're seeing in Sterigenics for the rest of the year.
Interesting. That is helpful. Good list. The customers that are pointing to that second half, I guess a couple of questions follow up on that. One is it your sense that any of that will pivot or toggle on the underlying like lower volumes? Do their volumes come back in terms of surgical volumes at the end market? Would that move those customers off of that inflection in the second half? Second part of that question would be, to what extent do you have firm order on that or kind of take or pay type protection on that volume?
If demand were to fall off dramatically, yes, we'd feel that impact, right? Customers aren't going to just blindly ship us product without their end demand, we don't see that happening. We feel pretty comfortable on what we've signaled. The answer to your other part of your question about take or pay, there's a significant portion of customer base within Sterigenics that does have take or pay. We haven't disclosed exactly what that number is, but that does give us some confidence as well as we move throughout the year. Listen, we provide a critical service. Our customers need our capacity to be able to provide the safety that's needed to patients in their care. We provide that safety net for them.
In a more general sense, you mentioned your X-ray facility. You're investing, I think still bringing on a second greenfield. You are working in the Nordion business with expanded partners that you could harvest cobalt from. How do you think about the longer-term landscape of, I'll call it modality mix in sterilization? Is there a change or not a change?
There'll be changes. I would just tell you, overall, the common theme to what you just described, the investments we're making is growth. Business has grown 20 consecutive years, and we see that growth continuing in the future, and that's what we're planning for. As far as modality, across all three business, right? The testing, the sterilization, as well as the cobalt supply. As far as the modality shifts, you'll see some shifts over time, but we don't see dramatic shifts. We're making sure that we're a full provider across all modalities to our customer base and making sure we're able to hit their needs. At the same time, we're making small R&D investments around some new evolving technologies that are less mature, but more niche oriented. We're also going to make sure that we have those options over the years to come for our customers as well.
Okay. In Nordion, I want to understand the supply-demand equilibrium and how your investments with, I think, the Westinghouse reactors would relatively affect that. Is demand far outstripping supply?
Yeah.
Currently?
Yeah. Demand is now outstripping supply currently. Thanks for that question, because I think there's a lot of misinformation out there. We're in a pretty darn good spot for the last several quarters where we've been able to supply all the demand for cobalt, and we anticipate being able to do that for the rest of the year. Now, let me step back a little bit and address a couple of the words you threw in there and what we're doing. When we look at supply chain planning and capacity planning, remember what happens in this business. We rely on nuclear utilities, that primary purpose in life is to generate electricity. Okay? In that, what they do is they also make cobalt for us, and we pull the cobalt out at the point of when they're doing refurbishments or maintenance of their facilities.
That's when we pull out the cobalt. We've got a global base of supply. Canada's the largest base and our most tenured supply base. We buy it from Russia, we buy it from India, China, Argentina. When we look at the time horizon on that business, we're making decisions seven, 10 years out based on what we know reactor life cycles are, when the utilities are going to be taking them out. We know that one of the utilities, OPG in Canada, one of our largest, most stable suppliers, great partner to us, they've got a reactor called Pickering, that's going to go out of commission here in the short term. We have now worked with them to develop Darlington, which is a reactor that'll now start to make cobalt. Okay? That was part of the strategy.
The second one that you referenced is Westinghouse. Westinghouse gets this opportunity longer term. Today, there's a limited number of utility reactors that can make cobalt around the world. Westinghouse gives us access to a new platform using our technology in conjunction with Westinghouse, to go to utilities to make cobalt in PWR reactors, pressurized water reactors. That would be a new reactor platform, an existing reactor platform that has not made cobalt before. Again, we've started to ramp that up. We haven't got any production out of it today. It'll be closer to 2030 when we get it. Again, we're sitting here in 2026, we've been planning for this for several years, and the intent there is to make sure we have supply long term to meet the growing demand for cobalt in the sterilization.
About 30%-40% of sterilization within Sterigenics business is cobalt-related, which is so critical coming out of Nordion. Sorry, David, I said a lot there.
No, I like that.
Hopefully that's helpful.
I think this is an interesting topic. I'm going to pause on it for a second. Can you give us a sense of how many Westinghouse reactors are out there operating?
Yeah.
Installed, and how does it compare to the current base-
Yeah.
...that you're fishing in?
Yeah. Today, let's just say there's less than 30 reactors around the world that are making cobalt, and the Westinghouse has a much larger installed base of hundreds of reactors. Now, it's not just simple like, here's a battery, go plug it in this reactor, it's going to start making cobalt. It's a pretty long development cycle. We've got the technology proven out with Westinghouse. Now we go to utility, and the utility has to go for a license amendment request with the U.S. Nuclear Regulatory Commission. They're basically saying, "Hey, I've got a safety protocol in my reactors that generates electricity. Today, we want to now insert cobalt in here to start making a byproduct here." All right? This isn't something that once it's proven out, you just go plug it in all over. We will control the ramp of that.
It's got to be something that works for us, Westinghouse, and the utility. Right now, we literally have one utility that we're working with that has one reactor to start with, that's gone for a license amendment request. Over time, as we see demand, we will engage additional utilities and reactors.
Got it. It gives you a long target list.
Exactly.
Does that also, in the long run, in so much as it really hasn't, and you assured me of this early on, but the Russia-Ukraine conflict hasn't proven to be anything that really clipped your supply. To the extent that not only does Westinghouse give you opportunity for additional supply, is there also a risk protection, risk mitigation element to that opened avenue?
Yeah. Obviously, we're in a geopolitical landscape that we play in. We buy cobalt from Russia, India, China, Argentina, Canada. That's something that we always think about when we look at diversification of our supply base. When I first joined the company in 2016, it was pretty much Canada, a little Russia. Today, we've got other bases that we looked at to diversify the company, and we'll continue to do that. This happens to be one opportunity to do that. We've done a phenomenal job. I give credit to the Nordion team and the work that they've done to work through and make sure we're compliant with all the rules and regs on this critical isotope.
Yep. Let's move on to Nelson. Think we arrived, I actually arrived at a different number and Jason corrected me, so I think this is a good one, that your core lab business in Nelson was about a mid-single digit grower in 2025. In 2026, you're looking for, I think, somewhere in the 2.5%-3% neighborhood growth. Is there a decel in there? What are the various factors influencing that outlook?
Yeah. Let's step back. What really drives that business is routine sterilization volume, new product spend, venture capital spend, and new regulation. Those are the things that really drive that business. Nelson's able to work through and help customers get products and make sure they're safe and meet the regulatory requirements. When you step back and look at, we see this business, slight growth here in the upcoming quarter, the quarter we're in today, second quarter. Then, we see growth throughout the rest of the year, so we can get to that low single-digit numbers that you're referencing.
Overall, we feel pretty darn good about where we're at because of some of these tests are more short term in nature, just routine lot release, and then there's more complex testing and validation tests that are based on new regulatory changes or things of that nature that the customer needs help with. I was telling one of the investors this morning, I had a call not too short time ago, a customer called, said, "Hey, we got an FDA issue here. We need you. We need Nelson Labs to help get our products to market." That's what we're great at. We're really good at helping solve those problems, and those are the kind of things that customers come to us for.
When we look at the long range of that and being able to connect that with the sterility plants and sterilization, it's really value add that we create for our customers. Overall, we feel pretty good about where we've guided you for the second quarter as well as the rest of the year.
On that point, I'm going to hover on that one for a second. This problem-solving, responding to FDA inquiry, FDA issues, is there a cyclicality to that? For example, I'm wondering, and I don't have as much perspective on the devices on the pharma side, but FDA's obviously going through a period of some disruption, change in leadership. Is that something that potentially stimulates more scrutiny, more issues, more need for those solutions?
Yeah. Let me answer that in multiple aspects. Within that business, we have a consultant business we've talked about in the past, RCA, which has had peaks and troughs all within the last year, right? The best year in the history, the lowest year in the history of that segment within Nelson Labs. That's really driven by FDA activity and some issues that customers may be having. What I was alluding to just moments ago was more where we could help customers with this problem, which could then lead to ongoing business for us after that, when they see our ability to help solve that. That's a key part. The other thing I would tell you is just when new regulation comes out, right?
When you have this new med device or you have this existing med device and new regulations, additional safety measures the FDA wants around that device, that's where we really excel in helping make sure these customers of ours are complying with those new regulations. The FDA involvement, David, is across multiple fronts. When they elevate their audits and things of that nature, we see elevated, yes, and it could come back down, which is what we saw with RCA. There's this more just when they put in additional regulations that require compliance, that creates an opportunity for us.
Okay. While we're on this also, the Expert Advisory Services, RCA was an acquisition. You've made a couple other acquisitions since coming public. The maybe challenges in the demand environment might have quieted that activity down. Going back to the top and change in leadership, M&A has not been as active. Is that something that resumes? Is something that ramps back up?
Yeah. I'd say when we look at M&A, it's also part of where you are in your capital structure and everything.
Right.
The timing wasn't right for us to do some M&A. We didn't see the opportunities that lined up with our capital situation and the market opportunity at that point in time. We will continue to look for M&A as our cash flow becomes more available. We'll look at, obviously, Sterigenics has lots of opportunities around that and opportunities to continue to accelerate growth in that business. Those are trade-offs we'll make versus buy ongoing and making sure we're good stewards of capital.
Yep. One more coming back to Nelson. I forgot this one. There's a complementary, you touched on it a little bit, between Nelson's capabilities and things that can then roll into regular sterilization volume with Sterigenics, and you have your cross-sell initiatives that you've ramped up. Can you give us a sense of how much of Nelson's business is tied to Sterigenics? And m aybe vice versa, how much of Sterigenics' growth-
Yeah.
...is caught by.
Yep.
Nelson?
Yeah. I'll just give you a couple high-level figures. I would tell you about 40% of Nelson's business is generally wrapped around sterility assurance. I would tell you about 20% of their revenue, approximately 20% of their revenue is tied to the embed labs right within the Sterigenics facility. There's strong correlation. We think there's real opportunity. We've showed it in our customer satisfaction scores, which by the way, we just recently reviewed our scores for 2025. We had phenomenal numbers again. The cross BU customers continue to be delighted. I think that's really one of the opportunities I think Alton will bring a lot of insights to in his experience on the commercial end and working with a lot of these same customers. We see opportunities to continue to accelerate that cross BU opportunity and the value prop.
There's several things that we're working on with the team right now, of how to increase our penetration with key customers around some of the services jointly we could offer between Sterigenics and Nelson. Guys that are doing sterilization but not doing as much testing with us, and then vice versa.
Okay. Coming back to balance sheet, you mentioned capital structure. You're on track to achieve your LRP targets for free cash flow over the three-year period, I think $500 million or $500 million-$600 million, and improving your profile there. How do you think about deployment of capital as it becomes more available?
Yep. Thanks for calling that out. Yeah. We committed at our November 2024 investor day for the time period 2025, 2026, 2027. We would do $500 million-$600 million in free cash flow. I'm telling you today, we're still very confident in our ability to deliver against that. When we look at capital allocation, the number one priority would be organic growth. The second one would be M&A, and strategic M&A that fits along our strategy. The third and fourth would be, do we do buybacks? Do we go ahead and pay down debt? Our net leverage ratio is around 3.2x . We're trying to get it down below three.
As we start to free up that capital and start to look at where we would deploy it against those other two priorities after we get through the first two, that's still something we'll work through, depending on where we sit today. One of the things that we looked at, quite honestly, is, David, and I think we talked about this briefly last time, the PE folks owned about 31 million shares, about 12% of our stock coming out of earnings call. One thing we seriously considered at the Board was, do we go ahead and buy some of the remaining tail shares that were left? Fortunately, the demand was so strong we didn't have to get in the middle of that. All those shares were bought out by the public markets, which was great, and we kept our powder, which is super.
One of the other things we've done since earnings that maybe you didn't notice, we also reduced our debt by 25 basis points. We're down to SOFR + 2.25%. That's down about 100 basis points from where it was last year. When you look at our interest expense between the little pay down we did as well as refinancing, we've got about $14 million of interest expense. We're just constantly working against that. How do we get to more free cash flow in the business? We see that accelerating as CapEx comes down as well.
Thanks for that. For clarity, the interest expense number, the $14 million, is the decline? That's the savings number.
Yeah. Between the rate coming down as well as the slight payback that we did last year. Coming out of last year was about $11 million, we told you our run rate. With this latest 25 basis points, it's about another $3 million, so it's total of $14 million.
Got it. Okay.
Think about it that way.
Moving to the litigation here quickly before we end, there was a recent announcement out of California on a summary judgment. Is there an opportunity for the company to appeal, or what are, generally speaking, next steps?
Yeah. David, this litigation takes many twists and turns throughout the process. The trials are set for January and April 2027. We've got a strategy we're working. We submitted a motion for summary judgment, as you referenced. We lost that. We understood where it was in the timing of this process that the probability of getting that victory at that stage was low, but there were a couple of things we wanted to make sure we got on the record as part of our strategy. What we're most hopeful is this judge continues to focus on science, and if he does that, we feel pretty darn good about the prospects of us winning in those trials. Listen, it's a state court. There's risk in that, and we're going to continue to evaluate that as a board, as we look through this.
Overall, we're going to be well prepared for the trials in January and April.
Got it. While we're on it, you've had some progress in Georgia. The Phase One, Phase Two process has generally, I think, fallen in your favor.
Yep.
Can you give a similar update there?
Yeah. What you referenced, basically the quoted experts from the plaintiff side weren't able to show causation, which is pretty darn critical in these cases. The courts found on our side on that, which is what we've always said, that if you put science front and center, we're going to prevail, and that's what's happened thus far. The plaintiffs are going to appeal. That process is taking a little longer than most people would think it should take. I think we'll have the outcome of those appeals, phase one and phase two, I won't get into too much detail what that is, sometime spring, summer of 2027. Again, if science is front and center, we feel very good because there's no causation proof that ethylene oxide, these low levels, are causing the cancer that's being alleged here.
Yep. This process through the courts, the legal progress is the word I meant to use, progress through the courts is encouraging. The case counts in these various regions seem to continue to kind of grow. Is there an event or a time lapse that would put a cap on that? What would prevent the case counts from growing?
Yeah. I won't get too much into detail, there's this thing called statute of limitations that come into play, and then there's folks. I can't speak for plaintiff firms on how they think about these things, there's some actions that they take that can have an impact on why you see case counts going up at any given time. At the end of the day, if it's junk science and that gets proven out in the court, that it's junk science, I don't care what the case count is. We'll resolve these. At the end of the day, there's no causation here, and we're going to keep fighting that, but we've got to get the courts to see it the same way, and so far in Georgia, they are.
Got it. I think that brings us to...