Sotera Health Co. Q3 FY2026 earnings call

• Strong Execution & Growth: Delivered solid top-line and bottom-line growth versus Q3 2025, with constant currency revenue growth of 4.4% and adjusted EBITDA growth of 4%.
• Margin Expansion: Achieved sequential adjusted EBITDA margin improvement of nearly 100 basis points to 52.5%, reflecting continued operating leverage across segments.
• Sterigenics Resilience: Continued strong performance with mid-to-high single-digit growth expectations, despite emerging softness in the medical device market in Europe affecting late Q3 and early Q4.
• Nelson Labs Strategic Shift: Demonstrated ability to handle complex, time-sensitive regulatory challenges for customers, highlighting the value of Expert Advisory Services (EAS). While core lab testing remains strong, EAS activity drove recent growth, though management notes this is not expected to be a permanent structural shift in revenue mix.
• Nordion Operational Efficiency: Despite lower revenue due to harvest timing, Nordion delivered critical shipments and significantly improved margins through operational productivity and favorable pricing.
• Balance Sheet Strength: Net leverage improved to 2.9x as of September 30, 2026, within the target range of 2.0–3.0x, leading to a credit rating upgrade from Moody’s in October.
• Capital Allocation: Prioritizing organic growth investments and strategic M&A in sterilization services. EO facility enhancements are on track for completion in Q1 2027.

Sterigenics: Revenue of $209 million, up 8.5% (8.2% constant currency), driven by favorable pricing (+4.8%) and volume/mix (+3.4%). Segment income increased 9.6% to $117 million, with margins expanding 57 basis points to 56.1%. This segment represents approximately 64% of total revenue. Nelson Labs: Revenue of $61 million, up 8.8% (9.2% constant currency), driven by strong volume/mix (+6.6%) and pricing (+2.6%). Segment income rose 2.5% to $19 million, but margins declined 199 basis points to 32.1% due to business mix shifts toward expert advisory services. This segment represents approximately 19% of total revenue. Nordion: Revenue of $55 million, down 12.4% (11.5% constant currency), due to a 13.7% decline in volume/mix from Cobalt-60 harvest timing, partially offset by favorable pricing (+2.2%). Segment income decreased 11.4% to approximately $34 million, though margins improved 71 basis points to 61.3% due to operational productivity. This segment represents approximately 17% of total revenue.

• Reaffirmed 2026 Full-Year Outlook: Maintaining constant currency revenue growth guidance of 5.25% to 6.75% ($1.233 billion to $1.250 billion reported) and adjusted EBITDA growth of 5.75% to 7.25% ($632 million to $641 million).
• Adjusted EPS: Expecting full-year adjusted EPS of $0.95 to $1.01 per diluted share.
• Interest Expense: Narrowed outlook to $137 million to $140 million based on current market rates.
• Tax Rate: Effective tax rate applicable to adjusted net income remains at 27% to 28%.
• CapEx: Anticipated capital expenditures in the range of $200 million to $225 million for the full year.
• Segment Specifics:
  • Sterigenics: Expects Q4 constant currency revenue growth of approximately 6% (flat sequentially from Q3) due to European med device softness; full-year growth remains mid-to-high single digits.
  • Nordion: Now expects full-year constant currency revenue growth in the mid-single digits.
  • Nelson Labs: Now expects full-year constant currency revenue growth in the low-to-mid single digits; Q4 growth expected to moderate from Q3 levels but remain positive.
• Free Cash Flow: On track to deliver $500 million to $600 million in free cash flow over the multi-year period defined in previous Investor Day presentations.
• Share Count: Fully diluted weighted average shares expected between 289 million and 291 million.

• Medical Device Market Softness: Emerging weakness in the global medical device market, particularly among European customers, impacting Sterigenics demand in late Q3 and Q4.
• Foreign Exchange Volatility: Anticipated foreign exchange headwind of more than 100 basis points in Q4, though an estimated 70 basis point benefit is assumed for the full year.
• Regulatory and Litigation Uncertainty: Ongoing litigation in California, Georgia, and Illinois with key trial dates and appellate deadlines scheduled for 2027, creating potential financial and operational liabilities.
• Business Mix Variability: Fluctuations in Nelson Labs’ revenue mix, specifically the rise of project-based Expert Advisory Services, which may impact margin stability compared to core lab testing.
• Harvest Timing Risks: Nordion’s revenue is subject to variability based on the timing of Cobalt-60 harvest schedules, which can cause significant quarter-to-quarter revenue fluctuations.

Q: Analyst asked about the wider EBITDA guidance range and specific unknowns for Nordion.

A: CFO clarified the range is historical norm, not a philosophical change. Margins improved despite lower revenue due to successful resolution of operational issues from the prior year and strong day-to-day execution by the team.

Q: Analyst queried visibility into MedDevice softness, customer bookings, and impact on 2027.

A: CEO noted softness started mid-late Q3, primarily in Europe, causing a reduction in customer optimism. Q4 growth is expected to moderate to ~6% (flat sequentially). Management is currently planning for 2027 and will provide updated guidance in February 2027.

Q: Analyst sought details on Nelson Labs' deceleration and underlying growth drivers.

A: CEO explained that while Q3 was strong (9.2% CC growth) due to Expert Advisory Services (EAS), Q4 growth is expected to moderate. However, confidence remains high, supported by increased guide to low-to-mid single digits and continued strength in EAS.

Q: Analyst asked about idiosyncratic factors for Sterigenics 4Q guide, including the new X-ray facility and pricing levers.

A: CEO highlighted that the NC X-ray facility and outsourced customers contributed to Q3 growth and will support Q4. Despite softness, demand is relatively stable. Pricing is expected to remain at the higher end of the 3-4% long-term range.

Q: Analyst inquired about cross-business unit selling opportunities and capital allocation priorities post-leverage target achievement.

A: CEO stated that ~70% of Sterigenics/Nelson Labs revenue comes from shared customers, offering significant cross-selling opportunities. Capital deployment will prioritize organic growth and strategic M&A in sterilization, while also evaluating buybacks and debt paydown to optimize shareholder value.