Q2 2025 STERIS PLC Earnings Call
$25.00
Our expectations for free cash flow are also unchanged at about $700 million, with about approximately $360 million in capital spending.
For your modeling, we do have a few moving pieces we wanted to highlight. From a segment perspective, life science revenue is now anticipated to be about flat for the year, with declines in capital equipment somewhat mitigated by the strength in consumables.
Healthcare is now anticipated to grow mid to high single digits, with continued strength and recurring revenues.
The outlook for AST continues to be high single-digit revenue growth for the year, but we no longer expect to exit the year at double-digit revenue growth.
All in, we expect constant currency organic revenue growth to be 6-7% for the full fiscal year. From a profit perspective, we now anticipate margins to be about flat for the year.
All in, we are pleased with the first half of the fiscal year. The diversified nature of our segments continues to be a benefit to our total performance.
Speaker Change: That concludes our prepared remarks for the call. Julie, would you please give the instructions so we can begin the Q&A. Thank you, Mike and Dan, for your comments. Eric, can you please give the instructions for Q&A and we can get started.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: And our first question today comes from Jacob Johnson with Stevens. Please proceed with your question.
Speaker Change: Hey, good morning. Thanks for taking the questions. Maybe a couple on AST. First, just on the loss on the large equipment sale, can you frame up the magnitude of that loss, just how much of a headwind that was to margins in the segment given they were down?
Speaker Change: sequentially. And then I'm curious, I think that was still included in your adjusted EPS. Was this something that was contemplated in the guidance for the year or is this something kind of a bad, proverbial bad guy that you're overcoming?
Speaker Change: And, I mean, we had contemplated a loss, but not as large of a loss, so we were a little bit surprised by the amount. But it is a one-time event that will not reoccur. And it goes back to the original acquisition of Mevex.
Speaker Change: Back in, I think, 2020, we had taken quite a while to fulfill that order, and we had no ability to adjust the costing on that project.
Speaker Change: Thanks for that, Mike. And then, Dan, I heard you mention no longer exiting the year at double digits for AST, but then it seems like maybe some positive bioprocessing commentary there. You just talked about any kind of incremental headwinds you've seen in AST that could be offsetting bioprocessing, or maybe bioprocessing is not coming back as quick as...
Dan: We're actually very optimistic on bioprocessing being accretive to our growth, especially in the second half of the year.
Speaker Change: And, you know, I think at this point we're halfway through the year, and although the growth has been nice, it's not maybe where I'd hoped it would be from a med-tech perspective at this point, and although we see it continuing to improve based on run rate, I don't believe we're going to exit a double-digit multiple at this point.
Dan: I think we're going to get there eventually. I'd hoped it would be by fourth quarter, and what we're seeing now is probably a little later than that.
Got it. Thanks, Reggie, and I'll leave it there.
Speaker Change: Thank you. Our next question will be from Brett Fishman with KeyBank. Please proceed with your question.
Brett Fishman: Hey guys, thanks so much for taking the questions. Just one on the healthcare capital equipment updates.
Dan: So, appreciate the update, you know, moving from low single-digit growth expectation to flat, to slightly down. I was really just hoping if you could parse that out a little bit, maybe between, you know, progress year-to-date versus where you thought you'd be coming into the quarter, and then maybe a little bit around the backlog moving pieces and why that stepped up this quarter. Thank you very much.
Speaker Change: A little bit of detail, on the quarter specifically, it wasn't the best quarter for shipments. We ran into some weather-related delays and things like that with the hurricanes at the end of the quarter that did impact some shipments, especially in the southeast.
You know, our backlog remains incredibly strong.
Speaker Change: and we keep stacking up really strong order months on top of each other, especially in the healthcare organization.
Speaker Change: We're talking about margins of 1 or 2% in one direction or the other. I wouldn't spend too much time on this, and more importantly, we're more than offsetting it with the higher profit mix of consumables and services that's coming through.
Speaker Change: All right, cool. And then just as my follow-up on the operating margin expectation, is the change in language really just tied to the piece of...
Speaker Change: you know, call it sequential improvement at AST and the favorable revenue mix.
Speaker Change: And then maybe as just a follow-up to that, how do we get confident or investors get confident in your ability to return to a level of operating margin expansion for next year? Thank you again.
Speaker Change: performing at our expectations and exiting at double digits, we are not going to be able to drive that EBIT margin improvement. Other than that, I would say there's nothing else that we would point to that would stop us from obtaining our long-term goal of continuing to expand EBIT margin on an annual basis.
Speaker Change: Thank you. Our next question comes from Patrick Wood with Morgan Stanley. Please proceed with your question.
Patrick Wood: Amazing, thank you for taking the questions. I've just got two, please. I guess on the first one, you know, I know it's quick, but have you heard from any of your customers around, you know, supply chain changes, tariffs coming in, do you have any expectations for how that might move things around and if there could be an effect, positive or negative, for you guys?
No, we haven't really, Patrick, and thanks for the question.
Patrick Wood: that have come online over the last couple of years with a lot of business that has located there as more of a friendship operation in anticipation of some challenges that might or may not occur as it relates to China.
Speaker Change: That's really helpful. And then I guess the only other one was, you know, there's not a lot of public data on it, but the EO litigation side of things. Do we have any update on that on upcoming news flow or anything you can help give us a sort of sense for how that's playing out in the over the next few months?
Speaker Change: Yeah, what I would say is we do have litigation related to the Waukegan, Illinois facility that we own for a little over three years, from 2005 to 2008, under the Isometics name.
Speaker Change: And we have provided some significant disclosures in the queue, and I would point to those and I think it's best that we continue on our path of not discussing ongoing litigation until there's something more definitive to discuss. But I'll refer you to the queue and ask that you look there.
Speaker Change: Our next question comes from Michael Pollark with Wolf Research. Please proceed with your question.
Michael Pollark: There's obviously a lot of stuff, a lot of products and services in those two lines. And you mentioned ShareGames as a driver of...
Speaker Change: the differentiated growth. Can you unpack that for us? What's going especially well? Is it in the sterile processing department? Is it OR consumables? Is it the repair stuff? Is it all of it? Where are you seeing differentiation in share?
Speaker Change: It's all of that, to be honest with you. We've shipped an awful lot of capital equipment over the last 18 months or so, and we've really positioned ourselves nicely as it relates to some of the large IDN GPO contracts on the consumable parts, especially in sterile processing.
Speaker Change: And I think it's just that and the fact that procedure volumes are particularly strong in the U.S. that's driving consumption of our consumables business as well as our services business, which is just having a gangbuster year as well.
Speaker Change: Can I ask as a follow-up on the balance sheet? It's obviously...
Speaker Change: Under-levered, let's say, versus your history. So can you comment on the M&A pipeline? How does it look? Seller expectations and if the M&A
Speaker Change: kind of opportunity set is not overly compelling at the moment, you know, is there a chance Daris becomes more assertive with share repurchase. Thank you so much
We cannot.
Speaker Change: comment on the M&A pipeline. I mean, if we have news and when it's appropriate, we'll discuss that. Clearly, we're in a position...
Speaker Change: where we have plenty, you know, financial powder, if you will, to move on something. And we definitely have the internal capacity for management and integration capability. But, you know, the timing of our abilities and opportunities don't always sync up, so we'll see how that plays out.
Speaker Change: But I would also add that from a deal standpoint, it is robust, but at the same point in time, most of what we're looking at is smaller, tucked.
Speaker Change: acquisitions, which is what we historically have done, and we did buy a hundred million dollars of shares back in the first half of the fiscal year, which is reflected in the balance sheet and the debt right now.
Thank you
Speaker Change: Thank you. As a reminder, if you wish to ask a question, please press star then 1 on your touch-tone phone.
Speaker Change: Our next question comes from Mike Mattson with Needham & Company. Please proceed with your question.
Yeah, thanks for taking my questions.
Speaker Change: just given kind of the general cooling and inflation we've seen, is there just, is this just sort of lagging kind of some of the other, I guess, costs or is there something else going on here that's causing those to be higher?
Speaker Change: I would say like the labor obviously is the lagging piece and we should anniversary that sometime during the fiscal year.
Speaker Change: Unfortunately, the energy costs are really something that are out of our control, and I think there is also a bit of a timing issue, too, because as we incur those energy costs, we cannot pass those on immediately. So there is definitely a little bit of a lag there, too.
Yeah, okay, and then you know bioprocessing I just
Speaker Change: was wondering if you could give us a sense of how much of AST that is. I think the last time I looked, or last time I heard you guys say something, it was...
Daniel Carestio, Michael Tokich
Speaker Change: It's less than that, I mean it's in the 6-8% of the AST revenue ballpark, something like that, and projected to grow nicely off that new level.
Okay. All right. Got it. Thanks. Yep. Sure thing.
Speaker Change: Thank you. Our next question is a follow-up from Michael Pollack with Wolfe Research. Please proceed with your question.
Michael Pollack: Thank you for taking the follow-up. I want to ask on AST, MedTech, customer trends. Dan, I think you mentioned...
Michael Pollack: It's not quite where you thought it could or should be.
Speaker Change: Do you think this is just the inventory management stuff, or is there something else going on that you've picked up? Thank you. I think it's two things. I do definitely think it's inventory management, you know, just like Starus has done a nice job of bringing down our inventory this year.
Speaker Change: I think a lot of our Medtech customers are taking the same opportunity. And then sometimes, you know, what I've seen is the classic bull whip effect. You know, we saw pretty strong growth.
Speaker Change: and AST for end of Q4, early Q1, and then we saw a slowdown where they had maybe overproduced a bit and are keeping tighter controls on inventory. Overall, what I would say is procedure rates is what drives that business.
Speaker Change: And right now the procedure rates versus the AST growth are not matched up. And I think that as those converge we'll see better growth out of AST. I mean all that 6%, it's not that disappointing. Let's not be over critical here. It's just we hold that business to a very high standard.
Speaker Change: Understood. Since I'm here, I'll ask one more. On life sciences, the margin has been perking up. You commented on it. Is it simply lower equipment as a portion of that segment, so it's a mixed thing, or are you taking other kind of self-help actions to defend profit? Thank you.
Speaker Change: It's all mixed. That consumable business is growing incredibly nicely, and that is the higher margin business there. And that is more than offsetting, you know, the decline in capital, and from a profit perspective, but from a percentage perspective, it's driving it up.
Thanks for taking the follow-up. Sure thing.
Speaker Change: Our next question comes from Jason Bednar with Piper Sandler. Please proceed with your question.
Jason Bednar: Hey, good morning everyone. Thanks for taking my questions and apologies up front here if I'm asking anything that was already covered. Just juggling a few calls here this morning. I want to start on EO, and again, apologies if you can't answer these, but I'll try anyways. Can you specify whether, you know, what you've disclosed in the 10-Q this morning, whether you're a co-defendant or sole-defendant in those cases where you are defending against?
Michael Pollack: Why not settle these cases out of court, maybe looking for, not necessarily your entire legal strategy, but there is risk in going to trial, of course. And then can you help us with what kind of insurance you might have against this situation?
Speaker Change: Yeah, you know, other than M&A strategy, the other thing we absolutely don't talk about is legal strategy. So I'll refer you to the comments that are in the queue and just say that we'll stay pat on our comments around ongoing litigation at this time.
Speaker Change: Okay, I mean, I guess, Dan, the insurance piece isn't part of legal strategy, and the defendant versus code versus soul is more factual. I mean, any comment on either of those?
I have no comment, no.
Okay, okay, fair enough
Speaker Change: In AST, the outlook sounds like maybe a hair lower today.
Speaker Change: No, it's just, honestly, it's just the volumes that we've seen year-to-date and the trend. If we were up a point-and-a-half higher year-to-date, we'd be telling you no change in the ASDO outlook for the whole end of the year. But based on run rate, we've adjusted that to take a much more conservative approach.
Speaker Change: confidence in seeing improved margins within that segment, adjusting, of course, for the equipment loss here. That was kind of an idiosyncratic drag. But looking forward, does the delayed timing and getting back to double-digit growth in AST affect how you think about incremental margins in that segment?
Speaker Change: Now adjusting out the one-time lots on the capital from Mevex, we would expect margins to be strong in the second half of the year.
and ASD in particular.
Okay, all right. Thank you.
David Turkaly, David Turkaly, David Turkaly, David Turkaly
Speaker Change: Our next question comes from Mike Madden, a follow-up of Needham & Company.
Speaker Change: Margin is now expected to be flat. You're still reiterating the EPS guidance, so I mean is it just still kind of fall within that that range maybe at the lower end or something or is there something else going on in the P&L to offset that?
Speaker Change: Yeah, Mike, it does fall within the range, but we are seeing a favorable impact on interest expense. We now expect interest for the full year to be about $90 million.
Okay, got it. Thanks.
Speaker Change: Thank you. Our next question comes from Jacob Johnson with Stevens. Please proceed with your question.
Jacob Johnson: Hey, thanks, everybody else that didn't follow up, so I figured I'd join them.
Speaker Change: On the life sciences business, the strong consumable demand, can you flesh out kind of what you're seeing in that business, what's driving that demand? And just curious, I think there's a lot of debate around kind of what's going on with pharma demand, maybe at a higher level, kind of what are you seeing from those customers right now?
Speaker Change: Yeah, I would say keep in mind we've got somewhat easy comps last year. There was a lot of de-stocking going on in our consumables business.
Speaker Change: in particular in the barrier product space as well as the chemistry space. So against those relatively easy comps, we've seen very strong recovery from our core customers that are back in full production.
Got it. Thanks, Jay. Good follow-up. Thank you.
Speaker Change: Thank you. This will conclude our question and answer session. I would now like to turn the conference back over to Julie Winter for any closing remarks.
Julie Winter: Thanks, everybody, for taking the time to join us today. We'll be at a few conferences here this fall, and look forward to catching up with my.
Any of you, then.
Speaker Change: The conference is now concluded. Thank you everybody for attending today's presentation. You may now disconnect.