STERIS plc Q1 FY2026 earnings call

• Total as reported revenue grew 9%, constant currency organic revenue grew 8% driven by volume and price. - Gross margin increased 20 basis points to 45.3%. - EBIT margin increased 50 basis points to 22.8%. - Net income from continuing operations was $231.2 million, adjusted earnings per diluted share was $2.34, a 15% improvement. - Capital expenditures for the first quarter of fiscal 2026 totaled $94 million and depreciation and amortization totaled $119 million. - Continued to pay down debt, ending with $1.9 billion in total debt. - Gross debt to EBITDA at quarter end was 1.2x. - Free cash flow for the first quarter of fiscal 2026 was $327 million. - Announced 20th consecutive year of dividend increases with a 10% increase to $0.63 per quarter. - CFO transition to Karen, Mike stepping down as special financial adviser. - Healthcare segment: constant currency organic revenue grew 8%, capital equipment revenue grew 6% with 14% underlying order growth and backlog over $400 million, Service grew 13%, Consumables grew 5%, EBIT margin 24.2% up 10 basis points. - AST segment: constant currency organic revenue grew 10%, Services grew 12%, EBIT margin 48.6% up 150 basis points. - Life Sciences segment: constant currency organic revenue grew 4%, Consumables grew 8%, Services grew 3%, capital equipment flat, backlog up over 50% to $111 million, margins increased 260 basis points.

For the first quarter, Healthcare had constant currency organic revenue growth of 8%. Healthcare capital equipment revenue grew 6% with 14% underlying order growth and backlog over $400 million; Service grew 13%, Consumables grew 5%; EBIT margin was 24.2%, up 10 basis points. AST had constant currency organic revenue growth of 10%, with Services growing 12%; EBIT margin was 48.6%, up 150 basis points. Life Sciences had constant currency organic revenue growth of 4%, Consumables grew 8%, Services grew 3%, capital equipment flat; backlog up over 50% to $111 million; margins increased 260 basis points. Total as reported revenue grew 9%, constant currency organic revenue grew 8%, gross margin was 45.3%, EBIT margin was 22.8%, net income from continuing operations was $231.2 million, adjusted earnings per diluted share was $2.34, capital expenditures were $94 million, depreciation and amortization were $119 million, total debt was $1.9 billion, gross debt to EBITDA was 1.2x, free cash flow was $327 million.

• As-reported revenue expected 8%-9% growth due to favorable currency, constant currency organic revenue growth unchanged at 6%-7%. - Earnings outlook $9.90-$10.15, reflecting $45 million in tariff costs (up $15 million). - Free cash flow increased to $820 million for fiscal 2026. - CapEx remains unchanged at $375 million. - Each segment expected to grow constant currency organic revenue 6%-7% for fiscal 2026. - AST's revenue and growth in first quarter stronger than anticipated but outlook maintained for the year.

• Tariff changes: additional tariffs on metals (steel, aluminum, copper) and EU changes. - Healthcare benefit utilization leading to higher costs. - Regulatory changes (ESHAP compliance) and their impact on competitive landscape. - Macroeconomic factors affecting pharma company spending and vaccine volume.

Q: Congrats on the announcement, Mike. I just wanted to ask first on the revised tariff estimate, if you could just give a little bit more detail on specifically what drove the increased expectation, whether it was a change in policy or something you were seeing as you continue to do more of the analysis.

A: Yes. Brett, this is Mike. A couple of things drove the increase. First is the additional tariffs that we have seen on metals. Both steel and aluminum went from 25% to 50%, copper went from 0 to 50%, and the EU changed from 10% to 15%. Remember, when we guided in mid-May, we had more clarity than most, so these are changes since then, and that's why we are increasing and not decreasing our tariff exposure.

Q: Congrats, Mike. I think just first, I'd love to get your take on what's -- what you're seeing within the bioprocessing market. Just I think last year, you commented on some -- a slower start to FY '26. So I just want to get an update there.

A: Yes, sure. This is Dan. I would say that for the last year or so, we've sort of seen some fits and starts in terms of volumes coming through the facilities. It's been pretty consistent now for, I would say, the last 4, 5 months and back to what we would see as a normal trajectory off of a reset base. So we believe at this point, it's fairly predictable. That's -- the assumption there is that we don't have customers overbuilding inventory, which is hard to fully understand. But nonetheless, it's been much more consistent in recent periods.

Q: Mike Tokich, it's been a pleasure. First question, I'm interested, Dan, in your perspective, the comments recently from one of your competitors in low-type sterilization. Six or so weeks ago, kind of an alarm bell sounded on procedure softness, purchasing delays in capital related to kind of regulatory and policy shift concerns at hospitals. Obviously, in these numbers from you, I see none of that. And so what did make of all that? Is this you're taking share? Any perspective would be welcome.

A: Mike, it's Dan. Yes, I mean, it's hard to say. I mean, we have a lot of data points from a number of the offsite centers that we run for hospitals in terms of volume, the volume we're seeing going through AST and what we've seen over time and in the recent quarter in terms of our backlog growth and order intake. So we feel like -- I'm not sure where they came to that conclusion, but we feel pretty good about our position and haven't seen any slowdown.

Q: And Mike, congrats on a great career at STERIS. It's been a pleasure working with you, and pretty impressive cash flow figure for you to go out on here. For my questions, I'll start on order growth, also really impressive in the quarter for both Healthcare and LifeSci. I know this stuff can be lumpy sometimes, but those are really strong results, especially for a first quarter. Can you talk about the capital demand environment you're seeing out there and how this order book and backlog contributes to the confidence you have on the full year revenue guide.

A: Yes. The orders have remained strong in both sectors. We haven't seen a slowdown, in particular, in the health care sector, we feel like we really have got a great portfolio and a very strong offering that is positioned STERIS very positively with our large customers who are looking to do more with partnership-type vendors, and STERIS fills that requirement. So I -- we feel pretty good. And having a lot of backlog does bode well obviously for the future in terms of our ability to schedule and predict the timing of those shipments as they go after customers over the fiscal year and into next.

Q: All right. Great. And then as follow-up and dovetailing off that cash comment I made on -- to Mike. The balance there -- the cash balance there is, I think, the highest it's been in a few years. You paid down a little bit of debt in the quarter. You bought back a small amount of stock. What do you do from here? The stock is cheap by historical standards. There's obviously a long M&A history at STERIS. Is M&A still that preferred use of cash? I think that -- I think it is, but can you talk about what you're seeing out there in that environment, what those discussions look like? Any preference you're leaning towards in terms of allocating that cash.

A: Yes. I think we still have time to think about it. But what I would say is we have been historically active on the M&A front. We continue to be. We have done some small transactions over the past couple of quarters. We continue to have those opportunities going forward. And as always, we're always looking for larger opportunities, and those come in time. And when they do, they do. It's hard to predict.

Q: So a couple on the Life Sciences business. We've seen with regard to what's happening in D.C. So there's been some cuts in vaccine spending, kind of reduced recommendations there. And then, broadly, we're seeing kind of a pullback in pharma company spending. But then at the same time, there's talk about trying to push more drug manufacturing into the U.S. or incentivize that. So how do you think all those things sort of shake out for that business.

A: It's a complicated landscape is what I would say at this point. Any time there's relocation of manufacturing, that tends to drive some benefit for our capital business because, obviously, new equipment to manage those aseptic environments. We've already seen the falloff in vaccines from where it was 3, 4 years ago. So I don't think that's really a headwind for us going forward necessarily. And given the growth that we've seen in other biological drugs and cell and gene therapies that require those aseptic environments, we feel pretty confident that despite whatever macro changes their way maybe in terms of location or specific type of drug, the demand is going to remain fairly high.

Q: Okay. Got it. And then just one on the free cash flow guidance increase since your kind of earnings guidance is unchanged. I assume that's mainly driven by working capital. Is that right? And is that inventory or receivables or something else.

A: Mike, it is working capital, and it's both inventory and receivables that we believe we will get increased cash flow from. It's about $50 million in total. And since we did overachieve this first quarter, we are carrying that through for the year.

Q: Last month, I think President Trump granted 39 ethylene oxide sterilization facilities a 2-year regulatory relief from NESHAP compliance. However, I didn't see any of STERIS' EO sites included in that list. Could you clarify whether this is because your facilities didn't need the extension to be compliant? Or was this relief something that STERIS pursued but didn't receive? And more broadly, how do you see this regulatory development affecting the competitive landscape as well as your positioning in EO near term.

A: That's a loaded question. So there's a lot there. Well, first off, we didn't apply for it because we don't feel we need it. We've been way out ahead of this going back 4 years now in terms of our facilities. And as I've discussed before, because many of the STERIS facilities are newer, generally speaking, in the EO landscape, the engineering modifications that we've had to make to ensure that we meet compliance with NESHAP, we're not as significant as maybe some other older facilities. So we're confident in where we are and didn't feel it necessary. In terms of the competitive landscape, I mean, it extends the clock maybe on some facilities that may not elect to ultimately make the high-level investments in terms of meeting the compliance, NESHAP, but I don't think in the grand scheme of things, it's really all that material.

Q: But when we were together in June, we talked a little bit about outlook -- hospital outlook on volumes and potential impact of OB3. And I think at the time, it hasn't passed, obviously. Maybe hospitals were more tied up and trying to manage supply chain and issues around tariffs. I wondered if with the passage of time if management had more conversations with your hospital clients in terms of how they are assessing the potential impact of OB3 and declining coverage in Medicaid exchange, things like that.

A: Yes. I mean, it's -- we'll see how things play out, I guess, is what I would say. But generally speaking, I think it's going to be a challenge for our customers. Obviously from a cash -- from a payment standpoint. It's more of a -- it's more of how they're going to figure out how to manage that than it is a demand standpoint in terms of procedure rates ultimately. So -- and obviously, as indicated in this past quarter's orders, and we haven't seen any pullback, nor have we seen any pullback in current procedure volumes. So I kind of go back to what I said there is we think it's a payment reimbursement issue for our customers. And for health care system in general in the U.S., that's going to have to get sorted out under the new requirements.

Q: If you could remind me on FX. Does that largely flow through the -- are you kind of operationally hedged on the FX? Or do you see that have different effects on profitability than on the top line.

A: No, we are pretty much hedged. Unfortunately, with the top line increasing by 200 basis points from an FX standpoint. By the time you get to the bottom line of the FX, which is about $14 million or so, $15 million, we're going to have that offset the increased tariffs. So -- but in general, we are pretty much naturally hedged.

Q: Just one more for me. Dan, I'm curious where you think we are ending the proverbial inning question on the ASC build out in the U.S. And I asked specifically, we know orthos on its way as a prime example. But this summer, Medicare provided a path for like cardiac ablation to be done in the ASC now, which is a high-volume EP case. So kind of what's your feel out there? Is this still a mega trend? I'm curious for any fresh anecdotes on where you think we are in the cycle.

A: Sure. Yes. I don't think that really affects in terms of volumes going through AST. I think that's more of where procedures are going to be done as some shift continues.

Q: Sorry. I was asking with the lens of your capital business in health care, ASCs, ambulatory surgery centers.

A: Okay. That makes much more sense. Yes, whenever there's relocation of where procedures occur from a capital perspective, that's generally beneficial to us. I think there's -- it also requires us to meet an unmet demand, which is where you're going to have lower scale, less skill in terms of labor in those facilities, and we need to make sure that we have the proper training and compliance programs for those customers to ensure they can meet the demands of the patients in terms of providing safe and sterile reusable devices into the ASC market.