Sotera Health Company (SHC) Jefferies 2024 Global Healthcare Conference summary

Business performance and growth outlook

• Sterigenics, the largest segment, operates about 50 facilities globally and serves several thousand customers, with price increases in the 3.5%-5% range and volume recovery expected to reach traditional levels by 2025.

• Volume stabilization is observed through customer interactions, with some forward visibility for a few months; minimum volume thresholds in contracts have provided downside protection during recent volume challenges.

• Revenue growth guidance for 2024 is 4%-6%, dependent on volume recovery, especially in Sterigenics and Nelson Labs, with broad stabilization across major categories like surgical kits and hospital supplies.

• Pricing remains consistent, with Sterigenics slightly above the mid-range due to inflation, and normalization expected in 2024; pricing varies by modality but follows a global formula.

Regulatory environment and operational investments

• New EPA regulations for ethylene oxide (EO) emissions were released in April, with a two-year compliance window; the company feels well-prepared due to prior investments since 2018-2019.

• Additional compliance investments are expected to be immaterial, with total program costs around $150 million, most spent by 2024 and a small tail into 2025.

• EO emissions have dropped significantly due to facility upgrades and cycle redesigns with customers, enabling higher volumes with less EO usage.

• The company leads in EO reduction initiatives, though customer adoption depends on their resources and regulatory approvals; major competitors likely pursue similar strategies.

Nelson Labs and market dynamics

• Nelson Labs' growth has been impacted by European regulatory delays, reduced venture-backed R&D, and restocking trends, but validation volumes are expected to rebound in the second half of 2024.

• New USP regulations in bioprocessing are driving demand for extractable leachable testing, with Nelson Labs positioned as a leader.

• Med device testing constitutes over two-thirds of Nelson Labs' business, with improved funding in 2024 benefiting validation activities.

• Margins, which peaked above 40% during COVID, are expected to approach 30% in 2024 and normalize to mid-30s as volumes recover and labor is right-sized.