Q3 2025 STERIS PLC Earnings Call

Good day and welcome to the stairs plc third quarter 2025 conference call. All participants will be in a listen only mode should you need assistance. Please signal 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 your Touchtone phone and Swift.

Speaker Change: All 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. Please go ahead.

Speaker Change: Thank you Jack and good morning, everyone as usual speaking on today's call will be my token senior Vice President and CFO and Dan Crusty, all our president and CEO I do have a few words of caution before we open for cameras.

Speaker Change: 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 is strictly prohibited.

Speaker Change: Most of the statements made during this review are or maybe considered forward looking statements my.

Speaker Change: Many important factors could cause actual results to differ materially from those in the forward looking statements, including without limitation those risk.

Speaker Change: Factors described in star as the Securities filings.

Speaker Change: Company does not undertake to update or revise any forward looking statements as a result of new information or future events or developments.

Speaker Change: <unk> SEC filings are available through the company and on our website.

Speaker Change: 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 in.

Speaker Change: Additional information regarding these measures, including definitions is available in our release as well as reconciliations between GAAP and non-GAAP financial measures.

Speaker Change: GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the board of directors.

Speaker Change: [noise] analysis and operational decision, making.

Speaker Change: Well it does cautions I will hand, the call over to Mike.

Mike: Thank you Julie and good morning, everyone.

Mike: Once again my pleasure to be with you. This morning to review the highlights of our third quarter performance from continuing operations.

Mike: For the third quarter total revenue reported as reported grew 6% with constant currency organic revenue also growing 6% for the quarter driven by volume as well as 240 basis points of price.

Gross margin for the quarter increased 90 basis points compared with the prior year to 44, 6%.

Mike: Positive positive price and productivity offset labor inflation.

Mike: EBIT margin decreased 10 basis points to 23, 3% of revenue compared with last year's third quarter litigation.

Mike: <unk> expense associated with our ethylene oxide trial, which began in December as well as increased health care benefit costs from higher utilization by employees all of our health care benefits program accounted for over $10 million of additional expense year over year in the third quarter.

Mike: The adjusted effective tax rate in the quarter was 24, 5% the year over year increase is attributable to unfavorable discreet items.

Mike: Net income from continuing operations in the quarter was $229 million.

Mike: Adjusted earnings per diluted share from continuing operations was $2.32 at a 11% increase over last year. We are pleased with our ability to grow earnings double digits all year.

Mike: With the help of lower interest expense.

Mike: The divestiture of the dental segment cap.

Mike: Capital expenditures for the first nine months of fiscal 2025 totaled $299 million and depreciation and amortization totaled $354 million capital expenditures were higher year over year, mainly due to timing.

Mike: We continue to pay down debt during the quarter ending with 2.2 billion of total debt total debt to EBITDA at quarter end was approximately 1.5 times gross leverage free cash flow for the first nine months of fiscal 2025 was $588 million well on track to achieve our full year guidance of approximately 700.

Dan Crusty: <unk> million dollars with that I'll turn the call over to Dan for his remarks.

Dan Crusty: Thanks, Mike and good morning, everyone. Thank you for joining us to hear more about our third quarter performance and our outlook for the fiscal year.

Dan Crusty: As you heard from Mike we had another strong quarter.

Dan Crusty: Looking at our segments health care constant currency organic revenue grew 7% in the quarter led once again by strong recurring revenue streams, our outperformance in consumables and services continues to be driven by procedure volumes in the U S as well as price and market share gains.

Dan Crusty: Healthcare capital equipment revenue declined 5% in the quarter due primarily to the timing of shipments.

Dan Crusty: Orders grew over 10% in the third quarter, which is reflected in the $435 million health care backlog.

Dan Crusty: Well order growth remains robust shipments were delayed by customer project delays.

Dan Crusty: Margins improved nicely in health care with volume pricing and positive productivity offsetting labor inflation.

Turning to a S T cons.

Dan Crusty: Constant currency organic revenue grew 10% with 10% growth in services and a small decline in capital equipment shipments.

Dan Crusty: Supporting growth in services Global Med Tech customers were stable and we saw growth in bio processing demand above our expectations.

Dan Crusty: EBIT margins for E. S T were flat year over year and increased nicely sequentially.

Dan Crusty: Well the additional volume was helpful. We continue to be impacted by higher labor and energy costs.

Dan Crusty: Constant currency organic revenue declined 1% for the life Sciences group in the quarter driven once again by strong growth in consumables and services offset by a decline in capital equipment revenue.

Dan Crusty: As expected the divestiture of the Ccs business on April 1st impacted our as reported revenue.

Dan Crusty: Margins increased to 42, 6%, a 390 basis point improvement benefiting from favorable mix pricing and the divestiture of six yes.

Dan Crusty: Turning to our outlook for 2025 with three quarters under our belt, we are tightening our ranges for revenue and earnings as mentioned in the press release, the biggest change since last quarter as the unfavorable impact of currency rate changes impacting both revenue and profit.

Dan Crusty: In addition, we were shy of our revenue expectations in the third quarter for healthcare capital equipment.

Dan Crusty: As a result, our outlook for as reported revenue from continuing operations is now approximately 6%.

Dan Crusty: Constant currency organic revenue growth is also expected to be approximately 6%.

Dan Crusty: Refracting.

Dan Crusty: Approximately 10 cents of impact from negative currency adjusted earnings per diluted share are now expected to be in the range of $9.05 to.

Dan Crusty: Two $9 15 set our.

Dan Crusty: Our expectations for free cash flow are unchanged at about 700 million with approximately $360 million and capital spending.

Speaker Change: Before I conclude I would like to comment on the first ethylene oxide case to be tried against isomedix, which ended in this trial last month as you heard from Mike we have incurred significant expenses defending isomedix.

Speaker Change: But we believe that when the evidence of Isomedix's safety practices and the scientific data related to ethylene oxide exposure is fairly presented a trial reasonable people will conclude that there is no connection between the unfortunate medical conditions of the claimants and isomedix operations.

Speaker Change: We believe the evidence presented during the four weeks of trial demonstrated that during the 44 months of Isomedix ownership is conduct complied with applicable law and was reasonable transparent and protective of our people our neighbors and the environment.

Speaker Change: After the court granted the plaintiffs request for Miss trial.

Speaker Change: We learned that the majority of the remaining jurors supported a verdict in isomedix is favor at the time that deliberations were terminated.

Speaker Change: The court has scheduled this first trial for week three the first case for retrial in May of this year and we will continue to vigorously defend isomedix in these cases.

Speaker Change: We have continued to invest in these facilities, we have created processes and procedures that meet or exceed the applicable environmental and regulatory standards.

Speaker Change: That concludes our prepared remarks for the call Julia would you. Please give the instructions. So we can begin the Q&A.

Julia: Thank you, Mike and Dan to your comment that can you. Please give the instructions for Q&A and we'll get started yes, ma'am. We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Julia: Youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and he would like to withdraw. Your question. Please press Star then two and our first question of today will come from Jacob Johnson with Stephens. Please go ahead.

Jacob Johnson: Hey, good morning, Thanks for taking my questions I guess I'll start with the inevitable healthcare capital equipment question, Dan you mentioned timing of orders and in three <unk> and you talked about the updated guidance yeah I'll start that.

Jacob Johnson: Order growth do you think this is this what youre seeing in healthcare capital equipment is just related to timing of orders and is it kind of specific to <unk> or are you seeing any hesitancy from hospitals on kind of capex spend right now.

Jacob Johnson: So the spending is still great because we're seeing the new orders come in what we're seeing is just delays the customers are just not ready from what they prescribed to us as the original one day when they make the order and then you know we're contacting customers a month or weeks in advance and they are saying guys, we're not going to be ready to take it at the end of the month.

Jacob Johnson: You know I can't say definitively at that this point that that's a trend because theres a couple of big orders that have moved the needle in the last quarter or two but generally speaking it's something that we're seeing that's occurring with our customers in terms of pushing out some of the timing of shipping.

Jacob Johnson: Okay. That's helpful. And then maybe on the good guys side of things you mentioned bio processing outpacing expectation and a S. T. I think we've seen that for some of the bio processing reports. This morning. This corner just curious kind of what could if you could unpack kind of the trends you're seeing in that bio processing and mark.

Jacob Johnson: And what that could mean as we look out over the next year for a S D.

Jacob Johnson: Well I think in a general statement you know last year Q2, Q3 was kind of the trough that we saw in terms of demand through our facilities, which doesn't always necessarily correlate directly with the customers because it depends on where inventory is in the supply chain and how much inventory sits at the end customer right there customer Oh.

Jacob Johnson: But what are you seeing as they've reported their earnings in the comments. We've heard is that there seems to be some optimism and some positive trend of intake and obviously, we're seeing that flow through our R. I S T facilities.

Jacob Johnson: You know.

Jacob Johnson: I think that I'm optimistic to think that we've we've sort of worked through the inventory challenges and we've been consistent in our messaging, saying this has been a relatively small but high growth business for us for some time that we believe was taking a reset and you know I believe that we've worked through that reset period and hope to have more.

Jacob Johnson: Normalized growth going forward.

Speaker Change: I'm hopeful you're right on that as well Oh I'll jump back in queue. Thanks for taking the questions.

Brett Fishbein: Next question will come from Brett Fishbein with Keybanc. Please go ahead.

Brett Fishbein: Hey, Thanks, very much for taking the questions just one on the guidance I noticed in the press release that there was an indication that youre, assuming no tariffs for the remainder of the fiscal year, which I think it makes sense at this point based on what we know I'm just thinking ahead to FY 'twenty six could you help frame, how you're viewing the potential risk in the scenario of the tariffs.

Brett Fishbein: In fact reintroduced in regions, such as Canada, and Mexico. Thank you.

Brett Fishbein: Yeah, Brett we like others, we've done a thorough analysis looked at it many different ways and you know the situation is so fluid at this point in time, where we're not going to comment directionally as to what the impact could be we're going to take more of a wait and see approach, but I believe thus we are working hard behind the scenes to understand what the impact is and what our options are in order.

Brett Fishbein: To help alleviate some of that impact and remember we do have a facility in Quebec, Canada, and one facility in Monterrey, Mexico and in total there are about just under 10% of our cost of goods sold just to give you some frame of reference.

Brett Fishbein: Alright that that's a helpful metric to keep in mind. Thank you and then just a follow up question on cost I think you mentioned a step up in legal expense as one of the drivers of the elevated or or increased opex. This quarter. So just wondering if you could touch on how we should be thinking about you know legal expense on a go.

Brett Fishbein: Forward basis.

Brett Fishbein: And maybe also just the decision or accounting reason to not adjust if if there are abnormal type of expenses. Thank you.

Brett Fishbein: Yeah. They are all recorded in our corporate expenses they are not in the segment themselves.

Brett Fishbein: So this quarter.

Brett Fishbein: We incurred about just under $6 million in year over year increase in expenses and year to date, we're about just over $10 million.

Brett Fishbein: We anticipate probably another.

Brett Fishbein: A couple of million dollars five ish million in the fourth quarter from.

Brett Fishbein: From an expense standpoint, as a headwind.

Brett Fishbein: That we've included in our forecast.

The next question will come from Michael <unk> with Wolfe Research. Please go ahead.

Speaker Change: Hey, Good morning question on the S T seeing the services accelerate the 10% heard the bioprocess comments also heard.

Speaker Change: Med Tech customers stable, what does stable mean, just like revenue flat can you give us an update on where you think inventory management headwinds are.

Dan Crusty: That cohort yeah. This is Dan I'm, sorry that was probably vague.

Dan Crusty: It's not not flat, but back to what we would expect as more normalized growth ranges in the low single digits in terms of volume.

Dan Crusty: So just on a S T kind of putting it all together, obviously 10 pluses that then the target growth rate here, we're seeing it in the quarter.

Dan Crusty: You know when we started the seven a few quarters ago. Okay. Maybe that was a sign of the turn we kind of faded a little bit can you just comment on your level of confidence that you know this.

Dan Crusty: Feels like a solid kind of step up or is it still that you know.

Dan Crusty: You're working to better understand what the situations really are and we could have a job around here on growth and a S. D for the next few quarters, though.

Dan Crusty: I don't think it's it's that far out I think what I would say is we're cautiously optimistic and the trend that we've seen in the last couple of quarters I would caution you in that you know we have seen sort of a manufacturing bullwhip effect from customers from time to time, so I'm not ready to declare victory and move on quite yet as it relates.

Dan Crusty: To one quarter, a 10% growth, but where we're are enthusiastic to see the trend back in the direction of where we'd like it to be.

Speaker Change: And if I could ask one follow up on health care capital I, you know I heard the comments timing of large ship a shipment delay the timing of large products projects get at it is there any part of this that's you know stairs, there's just kind of managing after.

Speaker Change: A three year period of ebbs and flows with the supply chain stuff kind of managing the revenue level in that line down to a place where you can.

Speaker Change: You can expect to grow it again in fiscal 'twenty six is there any element of that and an update.

Speaker Change: Today.

Speaker Change: I think it's it's too early to say we're in our planning process now for next fiscal year and I know, we're off cycle from a lot of companies but.

Speaker Change: We're just working hard to get through the fourth quarter to deliver for the customers and we will update you obviously at the next earnings call.

Speaker Change: Thank you yeah.

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

Jason Bednar: Hey, good morning, Thanks for taking the questions.

Jason Bednar: Maybe first one just to start your margin performance was really strong in each of health care and life science.

Speaker Change: Alright, I think a record for health care or at least the highest we've seen in our model. So congrats on all of that I I did want to ask just can talk about maybe the sustainability of these margins, especially in health care as we think through some of the moving parts if possible mixed shifts restructuring savings different dynamics that could impact here over the next several quarters.

Speaker Change: Yes, Jason This is Mike Yeah, I mean, if you look at health care and life Sciences, both they're both being impacted by by favorable volume.

Speaker Change: And mix and price and health care actually for the first time all year, we actually started seeing productivity improvements, which is great. Because we've been looking forward to seeing that I would say for the rest of this year. We probably are on track, we're not going to comment as to FY 'twenty six at this point in time, but we are definitely happy that we're seeing the law.

Speaker Change: Leverage in health care and don't forget on that life Sciences side next year is going to be a lot harder because of that mix favorable mix capital equipment should come back it's down 37% year over year. So we're definitely getting a big benefit out of the the higher consumables and service mix.

Speaker Change: But all in all we're very pleased with the margin improvement across the board for our segments.

Speaker Change: Alright, congrats yeah yep.

Speaker Change: If I could shift over to <unk>.

Speaker Change: E O update them.

Speaker Change: Limited in what all we can talk about here, but we have the retrial set for me can you say Dan does the timing here of this trial are the retrial affect other cases that were in line to be tried I think there was another one that had been set for the spring I. Just don't know if that ends up getting pushed out because of this retrial they have to be.

Speaker Change: Tried in a certain order.

Speaker Change: And then secondarily can you comment on whether any additional cases had been added for you beyond what was disclosed last quarter.

Speaker Change: Yeah sure. So you have it exactly right. The judge elected Artemis trial to push out what was originally scheduled in the second case group.

Speaker Change: To be pushed later into the summer sometime to be.

Speaker Change: I don't remember the exact tentative date, but and pull the first case back to the retrying, which is to make case, so and no. We do not have any additional cases at this point.

Speaker Change: Alright, thanks, so much.

Speaker Change: The next question will come from Patrick Wood with Morgan Stanley. Please go ahead.

Patrick Wood: Hey, guys. Thank you so much and apologies for the Crackly voice on my end.

Speaker Change: I guess two for me one would be obviously, you know under a slightly different political environment. Do you think there is any opportunity for the intensity of the legislative change around E O to loosen up a little bit or any change in how that might be implemented how do you. How do you feel about the new administration and how that might change.

Patrick Wood: It's us well.

Patrick Wood: Well I mean, the rules are already out there both in the I D and in the niche out and you know we've been working hard to make sure that we can we'll comply with that within the deadline and I think we're incredibly well positioned to do that clearly, there's a shake up going out of the EPA, but but it's unlikely theyre going to retract a rule that's already in place at this point.

Patrick Wood: In my view.

Patrick Wood: Yeah, I figured as much and.

Patrick Wood: And then the second one bit random one the endoscopy side of the business just curious what you're seeing them.

Patrick Wood: The demand for dual scopes on the volume side, but then also on the reprocessing side, how things are going to that thanks.

Patrick Wood: Yeah and in a general sense I mean, we've we've done we've continued to do really well, especially on the reprocessing side, we've placed a lot of capital and we have a lot of chemistry flowing through that capital.

Patrick Wood: That's sort of a you know the pull through that that we've got over the last I don't know a good year now of high capital shipments relative to med <unk> products.

Patrick Wood: Yes.

Patrick Wood: In terms of the endoscopy products.

Patrick Wood: We're doing fine we could be doing better frankly.

Patrick Wood: We're growing about at market in that space.

Patrick Wood: If you have one final one if you had to guess how much of your like say consumables business was accounted for on the repricing side with adults can be just as a proportion do you have a rough idea of where that sits.

Patrick Wood: Well I don't know Patrick.

Patrick Wood: Now the only thought about endoscopy in total it's about $1 billion.

Patrick Wood: That concludes our capital, though it's everything and everything yeah, sorry totally totally got it awesome. Thank you so much.

Patrick Wood: Again if.

Speaker Change: If you would like to ask a question. Please press Star then one our next question will come from Mike Matson with Needham <unk> Company. Please go ahead.

Mike Matson: Yeah. Thanks, Thanks for taking my questions.

Speaker Change: Wanted to ask one you know in terms of your <unk>.

Speaker Change: Conversations with your customers and you book, the hospitals and the life Science area.

Speaker Change: Are you hearing any.

Speaker Change: Concerns about potential policy changes that the new administration, maybe they're putting spending on hold until they kind of wait and see what happens with potential changes there.

Speaker Change: Yeah, No we haven't seen in fact, we had a really good orders quarter, both in health care and in life Science capital.

Speaker Change: After an abysmal year in terms of orders in life Sciences.

Speaker Change: You know are cautiously optimistic that pharma is doing what they typically do in their normal cyclical buying patterns and getting back towards investment you know in terms of our large health care system customers. We haven't seen any change in their direction I know theres a lot of uncertainty about how theyre going to get paid and you know all of those different things from a patient.

Speaker Change: From a governor government perspective.

Speaker Change: But we haven't seen it impact us at all at this point.

Speaker Change: Brian what we talk about this frequently our product.

Speaker Change: The majority of our products, especially the equipment side is really a utility and it's really a procedure driven it's not most of what we sell is not reimbursed product you know.

Speaker Change: From a government perspective.

Mike Matson: Okay, and Mike just to give you a few numbers around that fact, we are up about 14% order growth at health care year over year.

Mike Matson: Which is very strong for us and if you look at our backlog our backlog is roughly almost 80 $85 million higher than what we anticipated in that $3 50 range. So there's no concern there from our part on the order structure from the health care customers.

Mike Matson: Okay got it and then just wanted to get an update on ambulatory surgery centers I think you've talked about that being sort of a growth driver in the past is that still the case and.

Speaker Change: Do you have any products or anything you've launched your kind of target that that call point.

Speaker Change: Yeah, no we still see it that way, there's clearly migration going on you know out of large acute care into satellite.

Speaker Change: Smaller facilities and that's a trend that's been going on for quite some time Oh, we do have a portfolio that is specifically geared for that on the equipment side, both in <unk> and our surgical products as well as our S. P D sterile processing equipment and.

Speaker Change: And we do have dedicated channel in that space as well, so we're putting resources and people and R&D investment into it and I'm confident that we're going to be well positioned in that space.

Speaker Change: Okay got it thank you.

Speaker Change: Yeah.

Speaker Change: The next question is a follow up from Michael <unk> with Wolfe Research. Please go ahead.

Michael: I appreciate it two more if I may on health care services I I have a suspicion about how are you going to answer this but can you just unpack I mean, the growth drivers that are really good performance teens.

Michael: Again, I believe it's all organic has been so for a while it is this sustainable what's the what's a good.

Michael: Base case here on growth profile as we roll into next year.

Michael: It's complicated it's just what I would say, but in a good way I think you know what.

Michael: We have a lot of that is a significant portion of our services businesses are traditional equipment services right and we've placed a lot of equipment over the last couple of years and that the equipment comes off of warranty and we have a very high contract rate in terms of making sure that we get those folks onto our contracts and where they don't get all of our contracts. We have a great partnership program with them.

Michael: So imagine if the health care facilities to ensure that they are buying our parts in and using us for consultation on service repair.

Michael: You know in terms of our general repair business for scopes and things like that.

Michael: That's been a really strong piece of business for US you know, maybe it even gets stronger or people delaying capital purchases on scopes and need more repair not sure hard to say, but generally speaking we don't see those trends reverting. The only thing I would say is that as inflation continues to come down our ability to get the level.

Michael: All of price to cover our costs that we've seen over the last year and a half or so in the services business will probably come down a bit as well.

Speaker Change: Helpful Life Sciences, maybe tying in the bioprocess take from a S. T. I know, they're typically different kind of customer cohorts, but how would you assess the prospects for life sciences to return to organic growth over the next year or so what are you seeing from those customers well, what I would say.

Michael: Yes.

Michael: Life Sciences, and a whole this year as a whole this year, it's not that impressive, but but it's because of the capital slowdown that we've seen there. The the engine of that business is really our consumables business and we're seeing significant growth in that space.

Michael: And actually a few quarters ahead of what we've seen in the bioprocess and customers have a S T where theres a lot more destocking going on so we're we're optimistic on the growth trends that we're seeing there and and and our position in the Asa uptick manufacturing environment of a pharma.

Michael: Thanks for taking the follow ups yeah.

Michael: Sure thing.

Speaker Change: The next question will come from Dave <unk> with citizens. Please go ahead.

Speaker Change: Hey, good morning, sorry, jumping around a little.

Speaker Change: I know you'd want to give guidance. So this may not fly, but arguably shot so Mike you mentioned, 14% order growth you mentioned the backlog.

Speaker Change: The level.

Speaker Change: And just looking at the trends and obviously realizing that health care has gotten a lot bigger.

Speaker Change: But in the overall business at.

Speaker Change: It seems like there's a shift kind of towards that even towards the mid to higher single digit.

Speaker Change: I'm just thinking out loud here that that seems like something we've seen for a while now and maybe that's a new normal.

Speaker Change: So if you have any comment on that.

Speaker Change: Oh, no we're very happy where we are and where we have been with health care, obviously, a nice try I'm trying to get us to talk about 'twenty six.

Speaker Change: We will wait to talk about 'twenty six until may but again, we're very pleased where we're at the only thing we're little displays with is just the timing of the shipments right because where we're taking the orders, it's taking us a little bit longer as Dan talked about to get those orders out the door, but at the end of the day as long as it is in backlog our cancellation rate is nil.

Speaker Change: It has been nil. So we are confident that those orders get out and we'll talk more about the timing of when those shipments happen in the next quarter.

Speaker Change: Great. Thank you.

Speaker Change: 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.

Speaker Change: Thanks, everybody for taking the time to join US we will be on the Berlin, a bet in both virtual and in person conferences over the next few months and look forward to catching up with everyone.

Speaker Change: We aspire to become a conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: Okay.

Speaker Change: [music].