STERIS Plc (Ireland) Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Total revenue grew 6% with constant currency organic revenue also 6% growth. Gross margin increased 90 basis points to 44.6%. EBIT margin decreased 10 basis points to 23.3%. Net income from continuing operations was $229 million. Adjusted earnings per diluted share was $2.32, up 11%. Free cash flow for first nine months of fiscal 2025 was $588 million, on track for full-year guidance of ~$700 million.
• Segments: Detailed performance of Healthcare, AST, and Life Sciences Group.
• Legal Matters: Incurred significant legal expenses related to ethylene oxide trial, first case ended in mistrial, retrial scheduled for May. Continues to invest in facilities to meet environmental standards.

Segment Performance

• Healthcare: Constant currency organic revenue grew 7%. Consumables and services outperformed due to U.S. procedure volumes, price, and market share gains. Healthcare capital equipment revenue declined 5% in the quarter due to timing of shipments, but orders grew over 10% with a $435 million backlog. Margins improved with volume, pricing, and productivity offsetting labor inflation.
• AST: Constant currency organic revenue grew 10%, with 10% growth in services and a small decline in capital equipment shipments. Services growth supported by stable global med tech customers and bioprocessing demand above expectations. EBIT margins flat year over year but increased sequentially, impacted by higher labor and energy costs.
• Life Sciences Group: Constant currency organic revenue declined 1% due to strong consumables and services growth offset by capital equipment revenue decline. Margins increased to 42.6% due to favorable mix pricing and divestiture of CECS.

Guidance

• As-reported revenue from continuing operations now expected to be ~6%, constant currency organic revenue growth ~6%. Adjusted earnings per diluted share expected in range of $9.05 to $9.15. Free cash flow guidance unchanged at ~$700 million with ~$360 million capital spending.

Risks

• Currency rate changes impacting revenue and profit.
• Potential reintroduction of tariffs in Canada and Mexico affecting cost of goods sold.
• Elevated legal expenses related to ethylene oxide litigation.

Q: Hey. Good morning. Thanks for taking the questions. I guess I'll start with the inevitable healthcare capital equipment question. Dan, you mentioned timing of orders in 3Q, and you talked about the updated guidance. You also talked about strong order growth. Do you think this is what you're seeing in Healthcare Capital Equipment is just related to timing of orders? Is it kind of specific to 3Q? Or are you seeing any hesitancy from customers?

A: No. The spending is still great because we're seeing the new orders come in. What we're seeing is just delays. The customers are just not ready from what they prescribed to us as the original date when they make the order. And then, you know, we're contacting customers a month or weeks in advance, and they're saying, guys, we're not gonna be ready. Take it at the end of the month. You know, I can't say definitively at this point that that's a trend because there's a couple of big orders that have moved the needle in the last quarter or two. But generally speaking, it's something that we're seeing that's occurring with our customers in terms of pushing out some of the timing of us shipping.

Q: Hey. Thanks very much for taking the questions. Just one on the guidance. I noticed in the press release that there was an indication that you're assuming no tariffs for the remainder of the fiscal year, which I think makes sense at this point based on what we know. Just thinking ahead to FY26, could you help frame how you're viewing the potential risk in the scenario that tariffs are, in fact, reintroduced in regions such as Canada and Mexico? Thank you.

A: Yes, Brett. Like others, we've done thorough analysis, looked at it many different ways, and the situation is so fluid at this point in time. We're not going to comment directionally as to what the impact could be. We're going to take more of a wait-and-see approach, but believe us, we are working hard behind the scenes to understand what the impact is and what our options are in order to help alleviate some of that impact.

Q: Good morning. Question on AST, seeing the services accelerate to 10%. Heard the bioprocess comments. Also heard MedTech customers stable. What does stable mean? Just, like, revenue flat. Can you give us an update on where you think inventory management headwinds are with that cohort?

A: This is Dan. Sorry. That was probably vague. Not flat, but back to what we would expect as more normalized growth ranges, the low single digits in terms of volume.

Q: Hey, guys. Thank you so much. And apologies for the crackly voice on my end. I guess, two from me. One would be, obviously, under a slightly different political environment, do you think there's any opportunity for the intensity of the legislative change around EO to loosen up a little bit or any change in how that might be? How do you feel about the new administration and how that might change EO's use?

A: Well, I mean, the rule's already out there, both in the ID and in the final rule. And, you know, we've been working hard to make sure that we can comply with that within the deadline, and I think we're incredibly well-positioned to do that. Clearly, there's a shakeup going on at the EPA, but it's unlikely they're going to retract a rule that's already in place at this point, in my view.

Q: Yeah. Thanks for taking my questions. Just want to ask one, you know, in terms of your conversations with your customers and, you know, both the hospitals and the life science area. You know, are you hearing any concerns about potential policy changes with the new administration, or is it more of a hold until they kind of wait and see what happens with potential changes there?

A: Yeah. No. We haven't seen it. In fact, we had a really good orders quarter both in healthcare and in life science capital. After an abysmal year in terms of orders in life sciences, we, you know, are cautiously optimistic that pharma is doing what they typically do in their normal cyclical buying patterns and getting back towards investment. You know, in terms of our large healthcare system customers, we haven't seen any change in their direction. I know there's a lot of uncertainty about how they're gonna get paid and, you know, all those different things from a patient and from a government perspective, but we haven't seen it impact us at all at this point. You gotta keep in mind, we talk about this frequently. Our product, the majority of our products, especially the equipment side, is really a utility. And it's really procedure-driven. It's not a reimbursed product, you know, from a government perspective.