STERIS plc Q2 FY2026 earnings call

Key Points

• Total as-reported revenue grew 10% in the second quarter, with constant currency organic revenue growth of 9%. Gross margin increased 60 basis points to 44.3%. EBIT margin increased 90 basis points to 23.1% of revenue.
• Net income from continuing operations in the quarter was $244.5 million, and adjusted earnings per diluted share from continuing operations were $2.47, a 15% increase over the prior year.
• Capital expenditures for the first half of fiscal 2026 totaled $180.1 million and depreciation and amortization totaled $241.1 million. Free cash flow for the first half of fiscal 2026 was $527.7 million.
• For fiscal 2026, revised outlook includes approximately 8%-9% as-reported revenue growth (reflecting favorable currency), constant currency organic revenue growth expected to be 7%-8%, all 3 segments expected to grow 7%-8% on a constant currency organic basis, AST services expected to grow 9%-10% offset by capital equipment declines, earnings outlook new range $10.15-$10.30, EBIT margins expected to improve 10-20 basis points, and free cash flow outlook increased to $850 million with CapEx unchanged at about $375 million.

For the second quarter, STERIS' segments showed the following performance:

• Healthcare: Constant currency organic revenue grew 9% in the second quarter. Service grew 13%, Consumables grew 10%, and Healthcare capital equipment revenue increased 4% with a backlog of over $400 million. EBIT margins for Healthcare in the quarter increased 100 basis points to 25.1%.
• AST: Constant currency organic revenue grew 7% for the quarter with 13% growth in services, offset by anticipated declines in capital equipment revenue. EBIT margins for AST were 45.3%, up 250 basis points from the second quarter last year.
• Life Sciences: Constant currency organic revenue increased 12% in the quarter, driven by a return of capital equipment shipments with growth of 39%. Service revenues grew 9% and consumables increased 7%. Capital equipment backlog was up over 50% to $114 million. Margins declined 70 basis points as volume and price were more than offset by tariffs and inflation.

Guidance Points

• As-reported revenue growth now anticipated to be 8%-9%, reflecting about 100 basis points of favorable currency.
• Constant currency organic revenue growth expected to be 7%-8%, an increase of 100 basis points from prior outlook.
• All 3 segments expected to grow 7%-8% on a constant currency organic basis for the year.
• AST services expected to grow 9%-10% offset by anticipated declines in capital equipment.
• Earnings outlook new range $10.15-$10.30.
• EBIT margins expected to improve 10-20 basis points in fiscal 2026, partially offset by a 50 basis point increase in effective tax rate.
• Free cash flow outlook increased to $850 million for fiscal 2026, with CapEx unchanged at about $375 million.

Risks

• Statements made during the call may be forward-looking, and many factors could cause actual results to differ materially from forward-looking statements, including risk factors described in STERIS' securities filings.
• Tariffs and inflation were mentioned as factors impacting margins, with tariffs in the quarter being 90 basis points and material and labor inflation about 130 basis points across the company.

Q: Just wanted to start on AST. I was curious if you guys could comment a little bit on what drove the second consecutive quarter of double-digit growth in services. And then just how you're thinking about sustainability of trends in that area going forward?

A: Yes. Thanks, Brett. This is Dan. I think it's more or the same. We continue to see pretty stable volume from our medtech customers. We continue to see recovery in bioprocessing, which was a negative drain on us for some quarters a year or so ago. And in addition to that, we've had a number of expansions going into place over the last 4 years. And that investment is facilitating our growth. So we're very confident in the 9% to 10% outlook that we have going forward. There's still a little noise out there. We have seen some juxtaposition of customer volume in terms of manufacturing location, but not in a real meaningful way. So we feel pretty good about our global footprint and how that facilitates those needs.

Q: Beautiful. Two quick ones. I guess, the first one, Healthcare on the service side also was very strong. What are you seeing there? Could you unpack that a little bit for us?

A: Yes. I mean a couple of things. Our service business in Healthcare is obviously our traditional rents turning service on our equipment and install work that we do that goes along with our capital. But there's a much larger component of that, that goes into our IMS repair business and then processing of instruments where we operate as a service. So volumes are strong. We've been doing very well for the last, I don't know, 5, 6 quarters, I would say, with double-digit growth. Some of that, we have said all along that, that's an area of the business that we're able to get price, and we have been able to get price because of the justification of significant labor increases that were going on for a number of years. And -- but as that has normalized, those things, you're going to see -- I believe what we're going to see is a bit of a slowdown from 12%, 13% to something less than that, but we are also going to see a coinciding slowdown in labor cost. So it's -- it should not affect the overall margin, but will slow down the top line a bit.

Q: Congrats on another strong quarter here. I heard你 on the updated outlook for the segment, and I appreciate the breakout of the service growth in AST. Wondering if you're willing to give maybe a similar perspective on the outlook for some of those Healthcare subsegments. Dan, I just heard you on service there, maybe detailing a little bit as maybe price comes off. But what about like consumables versus equipment? Any way to give a little bit of color there, rack and stack, help service top, consumables next, equipment bottom on kind of the growth. Anything there would be great.

A: Yes. I mean we would -- I mean you can do the basic analysis, and we consider our consumable business to grow on sort of the share we've gained in the history and procedure rate, right? And so I would expect that trend of good performance to continue. On capital, we're sitting on a huge backlog number right now, over $400 million in Healthcare capital. And our order rate remains strong. That comes down to really timing of shipments. We feel pretty good about the next 2 quarters, although we've got some tough comps in Healthcare capital. So it's hard to say specifically. What we're confident is that we're in a good position. But if you have to put a gun to my head, I would say service is probably going to be near the top, consumable second. And capital is going to grow, it's going to do fine, and it's kind of a bit of a wildcard in terms of timing.

Q: So just in terms of the Healthcare business, I mean, I know you kind of broke it out into the capital service and consumables. But I'm just wondering if you could give us any more detail around geographies, types of customers, hospitals versus ASCs, product lines, et cetera, that are driving the growth there. Is it pretty strong across the board? Are there any areas of those things where you would call out you're seeing particular strength.

A: Not really. I mean, we're seeing pretty good strength across the globe in terms of geographic and there still seems to be a lot of procedures going on and particularly strong in the U.S. more so than other places, but we're starting to see recovery in other places as well. So no, there's nothing I would call out specifically.

Q: I will say I forget what the record is for prepared remarks, but 9 minutes was pretty good again. So kudos. I got two big picture ones. Life Sciences, some growth mojo back, 12% in the quarter. Obviously, the comps are easy and capital equipment is up big off of a low base, but nevertheless, 12%. My question is thematic, this notion of reshoring, hearing about a little bit pharmas biotechs bringing, their manufacturing partners bringing manufacturing back towards the U.S. What do you think on this? Do you see any evidence that it's helpful so far here, anecdote that it could be helpful for you? What is the state of this theme for your exposure in this space.

A: Thanks, Michael. Yes, any -- in general, any time we see our large pharma customers moving or expanding capacity in manufacturing locations, whether that's new greenfields or whether that's existing sites, that generally bodes well for our capital equipment business. And there's probably more noise than there's substance to the amount of redistribution or construction of pharma at this point. But there is some. It is real. And I do believe we are getting maybe some benefit from that on the GMP side or the pharma side of our capital equipment. It's also, like you said, it's -- we're comparing against some pretty significant troughs when there was nothing going on in pharma for almost 18 months in terms of that type of work.

Q: The other one is in Healthcare, and I've been asked this once or twice a year for a good number of years running, but it's the topic of single-use scopes. And obviously, this is a function of your Cantel exposure. Like what is the state of that trend today? Has it really not lived up to what was once believed to be high expectations or those products are getting some traction? It's just small and therefore, not all that significant. I know once upon a time, not long ago, you talked about launching your own single-use scope. Maybe that's been a helpful offset. But what are you seeing there over the last year or 2? And what's on the horizon over the next year or 2.

A: Yes. I think what I would say and what we've been consistent in our messaging is that there is a place for single-use scopes, especially as it relates to small diameter scopes. So think of hysteroscopy, ureteroscopes, different nasogastric scopes, things like that, bronchoscopes. But the bulk of the business we have at STERIS in terms of everything that we do has to do with the large diameter scopes that you would use for colonoscopies. And the reason why it makes sense for the small diameter scopes is the cost -- the break frequency and the relative cost to fix them is pretty high versus when you look at large diameter scopes, they tend to be much more robust. They last a long time. They also cost a lot more upfront. So we've said all along, there's a place for certain aspects of disposable. And I think if you look a lot of the disposable scope manufacturers are highly focused on the small diameter scopes. And some of you even announced that they're not focusing at all on large diameter scopes for colonoscopy.