Sean Dodge • RBC Capital Markets

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CEO Michael Petras attributed the margin improvement at Nelson Labs primarily to enhanced labor productivity, better aligning staffing with order patterns. He also mentioned the consolidation of a smaller lab to improve operating leverage. He clarified that Expert Advisory Services is the lowest margin category and represents a low-double-digit percentage of Nelson's revenue, while routine and validation testing are roughly split 50/50.

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CEO Michael Petras confirmed that Nordion's revenue is expected to be up sequentially in Q4 but down year-over-year, with about 60% of its annual revenue in the second half. He noted Nelson Labs would be down mid-single digits due to expert advisory services normalization, while Sterigenics would see continued slight volume and mix growth. Regarding NESHAP, Petras stated that while challenging for the industry, Sotera Health is confident in its position and views the regulations as a net positive for Sterigenics.

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CFO Mala Murthy clarified that the ARPU decline was not due to the weekly pricing model, which is currently proportional to the monthly price. Instead, she attributed the decrease to the growing mix of international business, which has a lower headline price, and the accounting treatment of international taxes as a contra-revenue item.

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Chief Financial Officer Mala Murthy attributed the user count stability primarily to new user additions, driven by incremental advertising spend in international markets. She noted that other metrics like retention and churn have been largely stable throughout 2024. However, she cautioned that Q4 is seasonally a period where ad spend is judiciously pulled back, which impacts user additions in Q4 and can have a roll-over effect into Q1 of the next year.

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CFO Mala Murthy attributed the stabilization primarily to new user additions, fueled by incremental ad spend in international markets. She noted that other metrics like retention and churn have been largely stable in 2024. She also cautioned that the typical Q4 modulation of ad spend will impact user counts into Q1, with stabilization expected to progress through 2025.

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Executive Theodore Wahl explained that the timing of new business adds will cause quarterly margin fluctuations but affirmed confidence in the 86% cost of services target, driven by operational execution. He noted Q4 cash flow was impacted by pulling forward new business opportunities. Executive Matthew McKee added that new housekeeping and dining accounts typically take 90 and 120 days, respectively, to get on budget. CFO Vikas Singh highlighted that Q4 cash collections exceeded 100%, bolstering cash flow. McKee also provided specific payroll accrual day counts and their cash flow impact for each quarter of 2025.

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Executive Theodore Wahl confirmed strong momentum for the full-year cash flow target, citing over 98.5% collections in Q3, positive Q4 seasonality, and ongoing collections from Change Healthcare-related delays. He reiterated the strategy of increasing payment frequency and using promissory notes. Executive Matthew McKee stated there were 9 payroll accrual days in Q3 and there will be 3 in Q4. Wahl added that he is optimistic about 2025 growth, supported by a strong pipeline and consistent new business additions, though client retention remains a key variable.

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Executive Balaji Gandhi described the allocation as a continuous process focused on returns and paybacks. He noted that the total dollar amount spent on sales and marketing has remained stable for several quarters, suggesting the focus is on efficiency and maximizing returns from the existing budget.

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Executive Balaji Gandhi confirmed that the third and fourth quarters are seasonally the heaviest for the Network Solutions business, which is why the company intentionally set a wider revenue guidance range for the year. He noted that many sales activities are in progress during the fall.

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John Johnson explained the Q4 guidance reduction by citing two main factors. First, the guidance range accounts for a potential worsening of medical cost trends. Second, the underlying cost pressure is higher than implied by the $100 million special rate increase alone; the company also expects at least $50 million from normal-course annual escalators, which are also needed to offset the trend.

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Interim CEO Scott Wagner responded that the pace is a mix across the PBM environment. He framed ISP as a solution meeting employer demand for a complement to funded plans and highlighted the excitement around expanding the program to include brands, which serves a large market need for employers managing costs while providing benefits.

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CFO Steven Oreskovich stated that the Q4 guidance reflects a prudent assumption that full-year volumes will normalize toward original expectations after three quarters of outperformance. CEO Matthew Hawkins noted that while specific ROI for new GenAI tools is not yet public, they are being designed with client input to deliver tangible returns and address key industry pain points.

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President and CEO Jon Kessler explained that while Q2 performance was strong, the full-year outlook reflects a net effect. He quantified the outperformance versus internal expectations at about $10 million, which was partially offset by a roughly $5 million negative impact from a downward shift in forward interest rate curves affecting floating-rate cash and back-half placements.

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