Sotera Health Company (SHC) Earnings

Management highlights

- Business Execution & Balance Sheet Health * The company delivered strong Q2 performance with solid execution across all business units. * Positive operating cash flow of $88 million was generated in the quarter, with capital expenditures totaling $46 million allocated to Sterigenics capacity expansion, EO facility upgrades, Nordion's Cobalt 60 development, and Nelson Labs clean room expansion. * Net leverage ratio improved to 3x, reaching the company's long-term target range of 2x to 3x, with strong overall liquidity. - New CEO Priorities * Alton, the new CEO, has prioritized deepening understanding of business operations, assessing internal talent, and evaluating customer partnership dynamics across business units. * Maintaining and strengthening the existing customer-first culture, with a focus on building urgency to deliver customer value across all teams. * Expanding cross-business unit (one Sotera Health) collaboration to deliver differentiated integrated solutions to customers, which is seen as a major untapped growth opportunity. - Operational Project Progress * The new X-ray sterilization facility is progressing on schedule, with customer validation underway and initial revenue expected to start flowing in Q3 2026. A second planned X-ray facility is back in full development after a brief pause, expected to be completed by late 2027 or early 2028. * All major capacity expansion and upgrade projects are progressing as planned. EO facility enhancements are expected to be substantially complete by the end of 2026.

Guidance

- Full year 2026 guidance was upgraded for both revenue and adjusted EBITDA: total company revenue is now expected to be $1.236 billion to $1.254 billion, representing 5.25% to 6.75% constant currency growth (with an estimated 100 basis point foreign currency benefit, and a slight expected foreign currency headwind in Q3). * Adjusted EBITDA guidance was raised to a range of $634 million to $643 million, representing 5.75% to 7.25% constant currency growth, with an estimated 100 basis point foreign currency benefit. * Adjusted diluted EPS guidance was improved to $0.95 to $1.01 per share, up from the prior range of $0.93 to $1.01. Interest expense guidance was narrowed to $135 million to $142 million (down from the prior upper bound of $145 million), and the adjusted effective tax rate guidance was updated to 27% to 28%. * 2026 full year capital expenditure guidance was set at $200 million to $225 million, driven by growth investments and EO facility upgrades. A meaningful step-down in CapEx is expected for 2027, with the company remaining on track to hit its three-year free cash flow target of $500 million to $600 million. * Segment income margin is expected to remain in the low to mid 30% range for the full year. Full year pricing is expected to be within the long-term 3% to 4% range, with progress on passing through pricing for EO facility upgrades on track. * Segment-level growth guidance maintained: Sterigenics expected to deliver mid to high single-digit constant currency full year growth, with an uptick in growth in the second half versus the first half; Nordion expected to deliver low to mid single-digit constant currency growth, with Q3 and Q4 revenues expected to be approximately equal; Nelson Labs expected to deliver low single-digit constant currency full year growth. * Net leverage ratio is expected to continue improving compared to 2025. Guidance does not assume any M&A activity.

Segment performance

Total segment income for the quarter was $20 million, representing a 0.6% increase year-over-year (a 0.6% decrease on a constant currency basis), with an overall segment income margin of 32.4%. The margin improved 438 basis points sequentially from Q1, landing within the company's long-term target range of low to mid 30%. Nelson Labs delivered 5.4% constant currency revenue growth in Q2, with a 438 basis point sequential margin improvement, and remains on track to hit full year low to mid 30% margins. Sterigenics delivered 7% constant currency revenue growth in Q2 on 2.7% volume growth, following a tough 10% growth comparison in Q2 2025. Nordion outperformed its full year first half revenue guidance target, with some second half expected revenue shifting forward to Q2 due to customer requests.

Risks & headwinds

- The EO sterilization segment remains subject to ongoing litigation in multiple U.S. jurisdictions. A small, immaterial New Mexico EO-related claim was settled in July 2026, fully resolving all claims in that matter. The Georgia EO litigation is going through the appellate process, with a ruling expected in spring or summer 2027; the company believes the lower court's rejection of plaintiff causation claims is well-supported. California EO litigation is proceeding through pre-trial processes, with trials currently scheduled for January and April 2027. No other material legal risks were discussed. * EO capacity remains slightly tighter in large chamber sizes in the U.S. market, though the company reports it has sufficient overall capacity to meet customer demand across most geographies and modalities. * The competitive landscape remains consistently fierce, with no material recent changes but ongoing pressure to retain and win customers.

Analyst Q&A

• Q: What are new CEO Alton's top first-year priorities, and what is the outlook for cross-business synergy and commercial strategy? /

  A: Alton's immediate priorities are learning the full business, assessing internal talent, understanding customer perception of the company, and strengthening the existing customer-focused culture. He identifies expanded cross-business unit collaboration (the one Sotera model) as a major untapped opportunity to deliver differentiated solutions, building on prior work to integrate the company's offerings. Alton notes the company already has a strong customer-first culture built by prior leadership, and his goal is to reinforce this across all teams.

• Q: What gave the company confidence to raise the high end of 2026 guidance this quarter, unlike last year when only the low end was raised after a beat? /

  A: The guidance increase reflects better-than-expected first half performance, specifically a meaningful projected uptick in Sterigenics growth in the second half of 2026 compared to the first half. It also incorporates the fact that Nordion outperformed its first half revenue guidance, with some expected second half revenue shifting forward to Q2 due to customer requests. The company's close customer visibility, healthy backlog and pipeline, and clear visibility into upcoming growth drivers (including a large new outsourced Sterigenics customer) informed the adjusted guidance range. Management's guidance philosophy remains consistent with prior leadership: to provide realistic, transparent guidance for investors.

• Q: What is the strategic rationale for the new X-ray capacity buildout, and what are its expected margin impacts? /

  A: The X-ray capacity is a strategic bet to complete the company's portfolio of sterilization modalities, allowing it to offer all options to customers (complementing, not replacing, its leading gamma/Cobalt 60 offering). The first new X-ray facility is on track, with initial revenue starting in Q3 2026 and is a key driver of the projected higher Sterigenics growth in the second half. Margin impact is expected to be minimal: X-ray facilities have low incremental fixed costs outside of depreciation, are not labor or material intensive, and most pre-operating costs have already been absorbed in prior periods.

• Q: Now that the company has hit its long-term net leverage target, what is the priority stack for capital deployment going forward? Is share buyback or M&A on the table? /

  A: Management is currently in the strategic planning process, evaluating capital allocation priorities to accelerate long-term growth. Alton confirms alignment with the existing priority of internal investment and M&A focused on the sterilization and Nelson Labs business segments. The company will share more concrete capital allocation priorities once the strategic planning process is complete.