STERIS - Q3 2026

Transcript

Daniel Carestio (President and CEO)

Good day, and welcome to the STERIS plc Q3 2026 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Julie Winter, Vice President of Investor Relations. Please go ahead, ma'am.

Julie Winter (Head of Investor Relations)

Thank you, Jack, and good morning, everyone. Speaking on today's call will be Karen Burton, our Senior Vice President and CFO, and Dan Carestio, our President and CEO. I do have a few words of caution before we open for comments. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the express written consent of STERIS is strictly prohibited. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website.

In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth, and free cash flow will be used. Additional information regarding these measures, including definitions, is available in our press release, as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial, financial information used by management and the board of directors in their financial analysis and operational decision making. With those cautions, I will hand the call over to Karen.

Karen Burton (CFO)

Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our Q3 performance from continuing operations. For the Q3, total as-reported revenue grew 9%. Constant currency organic revenue grew 8% in the quarter, driven by volume as well as 200 basis points of price. Gross margin for the quarter declined 70 basis points compared with the prior year to 43.9%. Positive price and productivity, primarily driven by volume, were more than offset by increased tariffs and inflation. EBIT margin decreased 40 basis points to 22.9% of revenue compared with last year, mainly driven by the decline in gross margin, which was somewhat mitigated by operating expense discipline.

The adjusted effective tax rate in the quarter was 24.2%, a small decline from 24.5% in the Q3 of last year. The year-over-year decrease was driven primarily by changes in geographic mix. Adjusted net income from continuing operations in the quarter was $249.4 million. Earnings per diluted share from continuing operations were $2.53, a 9% increase over the prior year. Capital expenditures for the first 9 months of fiscal 2026 totaled $278.8 million, and depreciation and amortization totaled $363.1 million. We ended the quarter with $1.9 billion in total debt. Gross debt to EBITDA at quarter end was approximately 1.2 times.

Free cash flow for the first nine months of fiscal 2026 was $736.6 million, with year-over-year improvement driven primarily by an increase in earnings and lower capital spending. With that, I will now turn the call over to Dan for his remarks.

Daniel Carestio (President and CEO)

Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our Q3 performance. Karen covered the quarter at a high level, so I will add some commentary on our segments. Starting with Healthcare. Constant currency organic revenue grew 8% for the Q3, with growth across all categories. Service continued its streak of outperformance, growing 11% in the Q3. Consumables also performed well, with growth of 8%. Healthcare capital equipment revenue increased 7% for the quarter, with backlog remaining over $400 million. Orders were down 1% year-to-date against difficult comparisons to last year. EBIT margins for Healthcare in the quarter decreased 100 basis points to 24.3%, as volume, pricing, and restructuring program benefits were more than offset by increased tariffs and inflation. Turning to AST.

Constant currency organic revenue grew 8% for the quarter, with 9% growth in services and 103% growth in capital equipment revenue. Services benefited from stable medical device volumes, bioprocessing demand, and currency. EBIT margins for AST were 45.1%, up 30 basis points from the Q3 of last year, as the additional pricing and volume were more than able to offset increases in labor and energy and the unfavorable mix impact from strong capital growth. Constant currency organic revenue increased 5% for life sciences in the quarter, driven by 11% growth in consumables. Capital equipment also performed well, with 7% growth and backlog holding over $100 million. Margins declined 20 basis points, as volume and price were more than offset by tariffs and inflation.

From an earnings perspective, we grew the bottom line 9% in the quarter to $2.53 per diluted share. Included in that number is approximately $16 million of pre-tax tariff impact, which primarily impacted our healthcare segment. Turning to our outlook for fiscal 2026. As noted in the press release, we are maintaining our outlook for the year. This includes approximately 8%-9% as reported revenue growth and constant currency organic revenue growth of 7%-8%. Our earnings outlook of $10.15-$10.30 is also being maintained, although with $10 million more in anticipated tariffs, the higher end of that range is less likely. Free cash flow is expected to be $850 million, and CapEx remains unchanged at $375 million.

We are pleased with our performance year-to-date, delivering constant currency organic revenue growth of high single digits and double digits earnings per share, despite the tariff headwinds. That concludes our prepared remarks for the call. Chuck, would you please give the instructions, and we can begin the Q&A?

Operator (participant)

Will do. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And our first question for today will come from Brett Fishbin with KeyBanc. Please go ahead.

Brett Fishbin (VP and Senior Equity Research Analyst)

Hello, good morning. Thank you very much for taking the questions. Just was hoping maybe at a high level, you know, company-wide, you could just touch on how you're thinking about, you know, Q4 constant currency growth. Just thinking about, you know, you're, you're kind of tracking a little bit above the high end of the 7%-8% FY 2026 range and maintain 7%-8% for the year. So just kind of wondering if there's any incremental concerns or temporary items impacting Q4, or maybe if, you know, it sets up as we should be thinking about the higher end or potential upside. Thank you.

Karen Burton (CFO)

Yeah, Thanks, Brett. As we look at the Q4, 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 Q4. So that is why we're holding that 7%-8% constant currency. Last year's Q4 was a solid quarter, so it's a tough comparison as well, particularly in AST, where we had a really strong capital equipment Q4, which is not expected this year.

Julie Winter (Head of Investor Relations)

Brett, this is Julie. Just to add on Healthcare, too, we've been saying all year, we don't expect healthcare services to stay in the teens. We slowed a little bit to 11% in the Q3. We would expect continued slowing in that business in the Q4.

Brett Fishbin (VP and Senior Equity Research Analyst)

All right. Perfect. Thank you very much. And then, maybe just one more from me. You know, I was just interested, you know, to hear maybe a little bit more about what you're seeing around, you know, capital equipment backlog activity in both segments. You know, I think the Healthcare backlog is, you know, showing stability, you know, kind of in that same range it's been the last couple of quarters, but seeing some pretty strong growth out of the Life Sciences backlog. So just any thoughts on, you know, kind of what's going on there would be appreciated. Thanks again.

Daniel Carestio (President and CEO)

Yeah, Brett, this is Dan. You know, the life science one is easy because that's just a recovery comparison to where we were a little over a year ago when, you know, pharma wasn't spending as much. And, you know, we started booking strong orders Q3 last year, and that's continued, and 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, you know, 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, you know, 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, et cetera. So, we've been fairly resilient, whereas I know maybe some others have seen some capital slowdown.

Operator (participant)

The next question will come from Mac Etoch with Stephens. Please go ahead.

Mason Etoch (Equity Research Analyst)

Hey, good morning, and thank you for taking my questions as well. Maybe just to follow up on Brett's capital equipment question, life sciences. I'd, 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 U.S. onshoring and capacity expansions. Thanks.

Daniel Carestio (President and CEO)

You know, I'd say in general, Matt, any time there's a juxtaposition of manufacturing locations, we tend to benefit on the capital side of things because they're putting in new capacity. You know, 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, though, 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.

Mason Etoch (Equity Research Analyst)

Appreciate that. And then, you know, 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'll be able to maybe offset a majority of these costs in FY 2027, if that's possible.

Karen Burton (CFO)

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, you know, 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. Hey, Mac, this is Julie. Just to add on the Q3, the $10 million for the year is mainly driven by metals, and we see an uptick in metals with more capital equipment sales. So they, you know, the mix shift to capital has a direct impact on the tariff exposure for this year.

Mason Etoch (Equity Research Analyst)

I appreciate the color. Thank you all.

Operator (participant)

The next question will come from Mike Polark with Wolfe Research. Please go ahead.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

Good morning. Thank you. I'll stay on tariffs, and then I want to shift to AST. So just on tariffs, can you remind the $55 million, that's now in the guidance, is that six months, just December and March, or was there an impact in the September quarter as well? And I ask just because I'm trying to understand, like, what—how much we'll need to annualize.

Karen Burton (CFO)

We were $16 million in the Q3, Mike, and we would expect that to step up a little bit in the fourth. The $55 million is an annual run rate for fiscal 2026, and we have been incurring tariffs every quarter.

Operator (participant)

It seems that Mr. Pollock has disconnected. Our next question will come from Patrick Wood with Morgan Stanley. Please go ahead.

Patrick Wood (Managing Director)

Hey, guys. Two kind of both on the, like, macro and regulatory side. You know, CMS had two different proposals. There was obviously the PPE sort of onshoring, some of the API stuff on the drug side. Curious if you think that would have any effect as supply chain shifts, and if that could, that could affect you guys in a, in a positive way. And then the other one was, like, another CMS, you know, proposal. They're obviously getting rid of, for a lot of surgeries, the Inpatient-Only List. They did that obviously for Musculoskeletal, but they're doing it for some of the soft tissue surgeries and things. Is there a chance that that pulls more procedures into the ASC, and, and do you view that ASC shift as a, a good thing or a bad thing for you guys?

Daniel Carestio (President and CEO)

Yeah, sure, Patrick. This is Dan. Nice to hear from you. I would say that, you know, the ASC shift has generally been a positive for us. There's new capacity demands. There's also a higher degree of clinical support that those facilities need than maybe large acute care facilities in terms of sterilization, disinfection, and that's something that STERIS is uniquely positioned to provide, and we've been able to do that quite well. In terms of the PPE shift, I have not yet seen any material commitments of major manufacturing moving to U.S. at this point that would have an impact on... I mean, that would largely be an ASC play, right, in terms of PPE. That means that's sterile drape and gown type stuff.

But I've read about it, but I haven't seen any impact from it as of this point. In terms of your question on the API relocation, I have not seen an impact on that yet either.

Patrick Wood (Managing Director)

No, that's helpful. And then just very quickly as a follow-up, you know, we had chatted before about potentially, I don't know, it's hard for what you can and can't say, but, a bit more of a commercial push, in EMEA across some of your product, product lines on the sterilization side. Is that, is that still something, you know, a more integrated model and, and competing a little bit more aggressively in EMEA? Is that still something that's on the cards?

Daniel Carestio (President and CEO)

Absolutely. Yes, that's something we're committed to. We've made a lot of structural changes in EMEA in terms of how we're going to approach go-to-market. It's going to take a while to get that fully formulated and executed. It's a long process, but we're confident in the direction that we're heading.

Patrick Wood (Managing Director)

Awesome. Thanks, Dan.

Operator (participant)

Your next question will come from Mike Matson with Needham & Company. Please go ahead.

Mike Matson (Senior Equity Research Analyst)

Yeah, thanks. So I wanted to follow up on Mike Pollock's question on the tariff exposure in 2026. I think maybe what he was trying to get at was, like, what's the incremental exposure in 2027? I know you probably can't give us a dollar amount, and you're not giving guidance, but if you've been paying tariffs for basically all four quarters of 2026, does that imply that kind of any incremental tariff impact in 2027 will be small? You know, less than a quarter worth effectively, or?

Karen Burton (CFO)

I think that's a logical approach. You know, obviously, the tariffs did fluctuate during the year, especially in the first half of our year, as rates settled in. And we're seeing it come through and reflected in the different mix, but I think it's reasonable to say that it wouldn't be more than another quarter's worth, kind of level, based on current tariffs.

Mike Matson (Senior Equity Research Analyst)

Okay, thanks.

Karen Burton (CFO)

Yes.

Mike Matson (Senior Equity Research Analyst)

Yeah, I understand. Yeah, I understand.

Karen Burton (CFO)

Just to clarify what's in place right now.

Mike Matson (Senior Equity Research Analyst)

Yeah. Okay. And then just, you know, your leverage ratios at just over 1x. It's been—I think it's been a few years since you've done any acquisitions, so it used to be a pretty big part of the STERIS story. So maybe why haven't you been doing more deals? And, you know, what's the, you know, outlook? Is, you know, do you have a pipeline of things that you're looking at? And can we expect to see, you know, more in the next few years?

Daniel Carestio (President and CEO)

Well, we've been active on smaller sort of bolt-on, you know, product acquisitions and, and some channel acquisitions over the last couple of years. You know, doing major transformative, M&A is, is not easy. It's something that we feel we're good at, and we have the muscle for, and we're good at integration. But we also have a very disciplined approach at what meets our financial criteria and where we add value from a customer perspective. So, we're looking, but at this point, we've kissed a lot of frogs, and not a lot of them have turned out to be princes.

Mike Matson (Senior Equity Research Analyst)

Okay. That's a good way to put it. Thank you.

Operator (participant)

The next question will come from Jason Bednar with Piper Sandler. Please go ahead.

Jason Bednar (Research Analyst)

Good morning, everyone. I got to follow the frog kissing comment here. I'm gonna 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 not changing revenue, I get not changing the EPS guide, but are there any cash flow fluctuations you're anticipating at year-end that would keep you from clearing that guidance bar?

Karen Burton (CFO)

Hi, Jason. Yeah, I think it's... You're right. We are very confident with that guidance. A lot of times in the Q4, timing really matters, so we've got a heavy capital quarter. That activity will shift into the, into next year in terms of cash collections. So it's a little bit harder to predict in the Q4, especially since it is winter, and weather can play a part. So a little bit of conservatism there.

Jason Bednar (Research Analyst)

Okay. All right, fair enough. And then for a follow-up, I did wanna peek a little bit ahead to fiscal 2027. You know, look, you're sitting on a healthy backlog, that's no secret. The AST momentum is obvious, for you and the broader market. The street's only modeling 6% growth for next year. Is there a reason you wouldn't be able to maintain your typical 7/11 growth algorithm beyond fiscal 2026? I know a lot have asked about here today about tariffs and kind of the impact on tariffs in fiscal 2027, but any other considerations we should have in mind, whether it's top line or margin related?

Daniel Carestio (President and CEO)

I mean, obviously, we're in the throes of our planning period right now, but I would say in a general sense, the macros don't look negative to us right now. You know, and when obviously, next quarter, we're gonna give you guys some solid guidance of where we think we're gonna land, in fiscal 2027. But at this point, I don't see a lot of downside or anything materially changing in the market today.

Jason Bednar (Research Analyst)

All right. Perfect. Thanks.

Operator (participant)

The next question is a follow-up from Michael Pollock with Wolfe. Please go ahead.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

Hey, good morning. Can you hear me?

Karen Burton (CFO)

Yes, we hear you now.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

I'm so sorry, what happened earlier, I don't know, it just dropped and took me a bit to get back-

Daniel Carestio (President and CEO)

No worry.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

So, my follow-up on, yeah, my follow-up was gonna be on AST Services. If somebody asked this and you answered it, I missed it. But just in the quarter, you know, in constant FX, AST Services line up 6%. You know, 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 good way to think about constant FX AST services growth in this current March quarter? Thank you.

Daniel Carestio (President and CEO)

Sure. Yeah. What I would say is, Mike, we got to have a strange start to the quarter. You know, 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. There wasn't any customer sub-segment that we look at that was off. It was just a general softness in the volumes that we were seeing across the global network, that seemed to have righted itself by December.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

If I can just follow up there, and then I'll cede. Any, you know, for several quarters now, we've been asking about just the tariff impact, you know, 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?

Daniel Carestio (President and CEO)

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 a 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.

Michael Polark (Senior Equity Research Analyst in Medical Devices)

Thank you, Dan, and I'm sorry again about the snafu earlier.

Daniel Carestio (President and CEO)

Oh, no issue.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Ms. Julie Winter for any closing remarks. Please go ahead.

Julie Winter (Head of Investor Relations)

Thank you, everyone, for taking the time to join us this morning to hear more about our performance in the quarter, and we look forward to seeing many of you on the road in March.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.