STERIS plc Q3 FY2026 earnings call

Key Points

• Total as-reported revenue grew 9%, constant currency organic revenue grew 8% driven by volume and price.
• Gross margin declined 70 basis points to 43.9% due to increased tariffs and inflation.
• EBIT margin decreased 40 basis points to 22.9%.
• Adjusted net income from continuing operations was $249.4 million, earnings per diluted share $2.53, a 9% increase.
• Capital expenditures for first nine months of fiscal 2026 totaled $278.8 million, depreciation and amortization $363.1 million.
• Ended quarter with $1.9 billion in total debt, gross debt to EBITDA 1.2.
• Free cash flow for first nine months of fiscal 2026 was $7.368 billion.
• Maintaining fiscal 2026 outlook: as-reported revenue growth 8%-9%, constant currency organic growth 7%-8%, earnings $10-$10.30, free cash flow $850M, CapEx $375M.

For the third quarter, total as-reported revenue grew 9%. Constant currency organic revenue grew 8%.

• Healthcare: Constant currency organic revenue grew 8% with service growing 11%, consumables 8%, capital equipment 7% and backlog over $400M. EBIT margin decreased 100 basis points to 24.3%.
• AST: Constant currency organic revenue grew 8% with services growing 9% and capital equipment 103%. EBIT margin was 45.1%, up 30 basis points.
• Life Sciences: Constant currency organic revenue increased 5% with consumables growing 11% and capital equipment backlog over $100M. Margins declined 20 basis points.

Guidance

• Maintaining fiscal 2026 outlook: as-reported revenue growth 8%-9% and constant currency organic revenue growth 7%-8%.
• Earnings outlook $10 to $10.30, with higher end less likely due to $10 million anticipated tariffs.
• Free cash flow expected to be $850 million, CapEx unchanged at $375 million.

Risks

• Tariffs and inflation impacting margins.
• Mix shifts affecting EBIT margins.
• Macro-economic uncertainties potentially impacting future performance.

Q: Good morning. Just was hoping maybe at a high level, company-wide, you could just touch on how you're thinking about fourth-quarter constant currency growth.

A: Thanks, Brett. As we look at the fourth quarter and as we said last quarter, we do have a bit of a slowdown in the second half. So and that would be my caution on getting too excited about the fourth quarter. So that is why we're holding that 7% to 8% constant currency. Last year's fourth quarter was a solid quarter, so it's a tough comparison as well. Particularly in AST where we had a really strong capital equipment fourth quarter, which is not expected this year.

Q: I was just interested to hear maybe a little bit more about what you're seeing around capital equipment backlog activity in both segments.

A: Yeah, Brett. This is Dan. You know, the life sciences one is easy because that's just a recovery comparison to where we were a little over a year ago when pharma wasn't spending as much. And, you know, we started booking strong orders Q3 last year, and that's continued it continues today and as those continue to flush out. You know, we're just in a much better spot from a macro perspective than we were, you know, a little over a year ago. So that's positive. On the healthcare side, you know, we've had strong orders all year. I mean, we're down 1% versus prior year, which was a blowout year in terms of order intake. So we have not felt any meaningful slowdown as it relates to capital spending. I go back to what I've said many times is a lot of times our products are treated almost as a utility. They're needed for capacity. They're essential in the hospital. And if the procedures continue to grow at some nominal rate, or location changes, that capacity has to be put in place as it relates to sterilization, disinfection, etcetera. So we've been fairly resilient whereas I know maybe some others have seen some capital slowdown.

Q: Hey, good morning, and thank you for taking my questions as well. Maybe just a follow-up on Brett's capital equipment question, life sciences. I'd just like to know how you would characterize the current conditions in that end market and how conversations with customers are evolving around US onshoring and capacity expansions.

A: Thanks. I'd say in general, Mac, any time there's juxtaposition of manufacturing locations, we tend to benefit on the capital side of things because they're putting in new capacity. Clearly, there's been some pretty big announcements in the last few months in North Carolina and Pennsylvania and other states that have got commitments to build large new processing capacity and fortunately for us, a lot of that capacity is aseptic manufacturing type products, which tends to be our sweet spot. So it's definitely a positive macro for us right now. I think the more important thing is that despite some of the pricing pressures in pharma, and some of the regulatory changes that may be coming there, nonetheless, they seem to be in a much better spot than they were a year and a half ago when there was some confusion. So, all in all, it's been a positive for us.

Q: Obviously, the $10 million increase in tariff-related costs, that popped up on the press release, I'd just like to, you know, potentially get an update on your mitigation efforts and you know, get your sense of how you will be able to maybe offset a majority of these costs in FY '27 if that's possible.

A: Sure. Yeah. There's a wide variety of mitigation efforts going on and we are optimistic about our ability to continue to absorb those as we go forward and fully as we move forward. They range from shifting product movement, supplier negotiations, alternative suppliers. Honestly, the hardest work and the biggest part is looking for other cost reductions and an ability to offset those costs with productivity improvements. Efficiencies in our facilities and across the offices. Back office as well.

Q: I got to follow the frog to some comment here. I'm going to start with cash flow guidance here. You left that unchanged. But look, based on where you're at for the first nine months, that target just looks like a way out. So I guess why not bump that higher? I get that changing revenue. I get that changing the EPS guide. But are there any cash flow fluctuations you're anticipating at year-end that keep you from clearing that guidance bar?

A: Hi, Jason. Yeah, I think it's you're right. We are very confident with that guidance. A lot of times in the fourth quarter, timing really matters. So we've got a heavy capital quarter. Some of that activity will shift into next year in terms of cash collections. So it's a little bit harder to predict in the fourth quarter, especially since it is winter and weather can play a part. So a little bit of conservatism there.

Q: Can you hear me?

A: Yes. Yes. Now.

Q: I'm so sorry. I what happened earlier, I know. It just dropped in took me a bit to get back to you. So my follow-up yeah. My follow-up is gonna be on AST services. If somebody asked this, you answered it, I missed it. But just in the quarter, in constant FX, AST services line up 6%. The prior two quarters was up 10% constant FX. If I make some assumptions on the math. So can we just get a little extra color on kind of how you've seen the fiscal year play out in AST, you know, why the December quarter might have been a little bit below the prior two and, you know, what's a what's a good way to think about constant FX, AST services growth in this current March quarter?

A: Sure. Yes. What I would say is, Mike, we kind of had a strange start to the quarter. We don't get in and talk about months sequentially, but October was really weak. And then it got better in November, and then we had a really strong December. So and there's nothing I can point to. There wasn't anything uniquely geographic, wasn't any customer subsegment that we look at that was off. It was just a general softness in the volumes that we're seeing across the global network that seemed to have had righted itself by December.

Q: If I can just follow-up there, then I'll cede. The any for several quarters now, we've been asking about just the tariff impact, customers changing order flows. As part of their tariff mitigation? Any fresh view as to whether that could explain some of this kind of quarter to quarter to quarter movement.

A: There was speculation, and this is somewhat anecdotal, but we have heard from some customers they built ahead of tariffs a bit. And got product into different locations. I can't say definitively that was a material impact on the volumes. And maybe that's why there was some slight inventory adjustment that we saw in the fall. But we haven't seen any movements that have impacted us negatively because we're well-positioned all around the globe to work with our customers for sterilization.