STERIS plc

Thank you for joining us today. Our fiscal 2027 earnings per share outlook is also unchanged at $11.10 to $11.30, growth of 9% to 11% over fiscal 2026. While the total cost of the North Carolina facility is anticipated to be $600 million, the impact on fiscal 2027 is expected to be approximately $75 million in additional capital spending. As a result, CapEx is now anticipated to be approximately $450 million in fiscal 2027. Free cash flow is now expected to be $800 million as the strong performance in the first quarter is helping to offset the additional CapEx spent for the year. For your modeling purposes, the investment in North Carolina will spread over the next three years. As of now, we expect the project to add approximately $350 million in capital spending into fiscal 2028 and the remaining $175 million in fiscal 2029. The project is in early phases of development and we will provide additional updates on timing as they become clear. Thank you to all of our associates for continuing to do what we do best, focusing on our customers and striving to do a little better each day. Thank you and that concludes our prepared remarks for the call. Operator, would you please give the instructions so we can begin the Q&A?

Thank you. 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 are 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, and then two. At this time, we'll pause momentarily to assemble the roster. The first question will come from Brett Fishpin with KeyBank Capital Markets. Please go ahead.

Good morning, guys. Thank you so much for taking the questions. Good update today. Just wanted to ask a little bit about the underlying trends in AST service. I know you've talked about a progression in growth through the year given the top 1H comps and inventory dynamics. But just curious like how you're still thinking about growth from here and if you still expect an uptake into 2H?

Thanks, Brett. This is Dan. Like you said, tough comps in the first half last year. We expect that to linger a bit, but we get into easier comparisons as we started seeing destocking in Q3. We would assume we'd see acceleration at that point and the growth rates of AST. Nothing has changed in the fundamentals, but coming out of the gate last year at 13% in the first six months has somewhat tamped down the growth right now.

All right, great. And then just to nitpick the other part of the business that was a little bit slower this quarter in healthcare capital equipment. I know you mentioned timing and the backlog number looked pretty strong still. So maybe just a little bit more background on what was going on with order timing and placements and how you think that could ramp as well.

Yeah, you can see our backlog swelled. So it really is just a timing issue. Orders were up 4%. We are making real traction in the market right now. I'm highly confident that, you know, for the fiscal year, we're going to show solid growth for our capital equipment business. And, you know, we're reaping the benefits of the last year and a half of solid capital sales as you look to the pull through that we're getting in our consumables and chemistry, consumable chemistry and sterility assurance and services.

All right, and last question from me. I think I caught, you might have said something about share gains in endoscopy. Maybe if you could just expand a little bit, you know, where in the portfolio you're seeing the gains. Thank you so much.

Yeah, let me rephrase that or clarify. We've seen higher growth in endoscopy in terms of procedural growth. And, you know, we have about a third of our healthcare franchise is correlated to endoscopy, so it's helping us. And we are gaining share in that space, I can assure you, both in the equipment side with the automatic endoscope processors, which are driving solid growth of our chemistries, our dedicated chemistries, as well as the services surrounding the repair of endoscopes and different instruments.

Okay, thanks so much. The next question will come from Patrick Wood with UBS. Please go ahead.

Beautiful. Thanks, guys. I've got two questions, please. I guess the first one, I'm too brain damaged to really wrap my head around some of the tariff stuff. But if we were to X out both the actual refund that you guys got, but then also the expense, so to truly treat it like it never existed, were underlying margins X all of that up? And if so, why? That's the first question. And then very quickly, second question, the 600 million deployment, that's obviously a big move for you guys. You know, What was it that, you know, you mentioned efficiencies and distribution outside, but that's a big move. So what was it that really tilted the scales in wanting to shift all that production?

Thanks. Thanks, Patrick. I'll take the first one. I would love to not talk about tariffs as well. The gross margin is up absent tariffs. We got favorability from price productivity. um if the tariff refunds you did help us offset some of that cost it's included in the gross margin um but our our true tariff costs were 14 million in the quarter and i guess i wouldn't i wouldn't take those out they're not going anywhere and then uh patrick uh this is dan thanks for the question relative to the chemistry expansion

You know, if you look back when we acquired Cantel, with Cantel they had a large chemistry manufacturing facility in Minnesota, and we have our large facility in St. Louis, Missouri. The problem is that neither are really expandable, and both are going to be bumping up against the upper limits of capacity in the future. And in order to do anything, we were going to have to do something greenfield. So once we decided that and the consolidation was imminent, then we started determining what the location would be. and based on distribution efficiencies and access to talent, especially in the STEM world, we centered it on North Carolina. So this factory will be the factory of the future for us. There's going to be significant automation. It's going to look and feel like a pharmaceutical clean room. It's going to be very impressive.

Love it. Thanks, guys. The next question will come from Matt Etak with Stevens Inc. Please go ahead.

Hey, good morning, and thank you for taking my questions. Maybe just to start, there's been some, you know, concern around hospital utilization rates and procedure volumes. Obviously, you posted some pretty strong growth in your healthcare consumables franchise. I'd love to just double tap on the performance there and what you're seeing within that end market. Thank you.

Yeah, thanks, Max and Stan. You know, we haven't seen any slow down whatsoever and we see strong growth especially in the ASC market and in particular as I mentioned before in the area of endoscopy which carries a lot of weight you know with Staris in terms of our procedure growth impact. I understand and we're we are very involved in the conversation with our customers about the challenging environment that they are working in today and will work in the future as it relates to payment. but we do not see an immediate or long-term impact in terms of procedure and so as a result we feel confident in the resiliency of our customers for the long term.

I appreciate that and then maybe also I'd love to just get a sense of what you're seeing within life sciences. Onshoring is you know it's it's been talked about but it's still on the come and I just love to get a sense from what you're hearing from potential projects in the pipeline.

Yeah, you know, it's interesting. When you talk about onshoring, it's not just a move to the U.S. There's localization going on globally as tariffs become more of a plague in Europe and in the U.S. And so you'll see some duplication of manufacturing sites, whereas maybe in the past you might have one site globally that is focusing on one pharmaceutical product. as a result that's good for us because it creates need for expansion or augmentation of the manufacturing footprint which requires typically the tools you know sterilizers washers things like that to go into those aseptic manufacturing environments as well as it gives us more at bats and opportunities to install our chemistries into the cleaning processes so it is happening it's it's not an it's not a revolution you know but anytime there's disruption or change in manufacturing, generally that's a good opportunity for us.

I appreciate the call. Sure thing.

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

Hey, good morning. Thanks for taking the questions. Dan, I wanted to ask on or come back to AST. You referenced inventory, destocking. Is trajectory of volume growth just how you budgeted this year? Based on your conversation with customers, can you talk about what kind of visibility you have in that segment accelerating from the current level and not having that destocking issue persist?

Yeah, so we modeled it so we would expect it through Q2 and then see a ramp in AST in the second half of the year. That's what's playing out. You know, for the most part, and we would expect that to continue and start to see improvement, I would hope, by the end of the second quarter and definitely material improvement in terms of performance by Q3.

All right, perfect. And then, Karen, two for you as a follow-up here. First, for the avoidance of doubt, you've only received $4 million in total refunds. That's all gone into corporate. It's a 30 basis point benefit to gross margins. Feel free to correct me if any of that's off. Have you requested any other refunds or what's the status on those other refunds requests? And then on the restructuring, I heard all the costs. I know this is a longer dated project, but

you know when do we when should we expect to see savings from this project okay thanks Jason yeah on tariffs you are correct we received four million in the quarter the total that we have potentially available is about 27 million 24 of that is eligible for claim under the phase one and phase two claim processes. We have submitted all of those claims. So far what we're seeing is the initial phase one refunds coming in. In terms of restructuring, that's really the cost of shutting down and consolidating the old facilities. So all of those benefits are built into What we expect in the new facility, the benefits of consolidation and modernization.

Okay.

Sorry. I heard the comment earlier around capacity expansion and modernization. Are there going to be cost savings or efficiency moves with this new facility or is this more cost neutral?

Initially, it'll be cost neutral. But over time, as we drive scale through the operation, we'll get considerably more leverage out of it by having the combined volume all in one location. And we're also deploying significant amounts of automation to the process, which does increase the front end cost, obviously, but our labor requirements are going down dramatically in order to operate the facility.

Got it. Very helpful. Thank you.

The next question will come from Michael Polark with Wolf Research. Please go ahead. Hey, good morning.

AST services follow-up for the rest of the year, still fair to model seven to eight organic for that segment. And over the last few years, a lot of growth capex into AST to expand capacity. Are there go-lives penciled the rest of the fiscal year that kind of might help the growth be higher in 2H than we're going to see here in 1H. Thank you.

Thanks, Mike. This is Dan. I'll answer this, and maybe Karen wants to add to it. In terms of the modeling, yes, we still fully expect AST to deliver in the 7% to 8% range. No change there. In terms of the builds that we have coming online, yeah, The biggest driver is going to be recovery from inventory destocking, going back to more normalized volume coming through the facility. Those builds facilitate that, but that's obviously baked into our number in terms of how we understand it.

And the incremental depreciation with bringing those online is built into our modeling, and it's a pretty equal pace over the course of the year. So you will see depreciation build in that segment.

And maybe for the follow-up, the mentions of increased procedure volumes in endoscopies specifically to which you have a high exposure just stood out to my ear as well. What do you think is driving that? Yeah, I'm curious for your two cents on that.

Thank you. I mean, there's been a change that's been promoted now over the last couple of years about the early age of detection that has shifted down below 50 years now. So more people are eligible or being pulled in for endoscopies. I think there's more awareness around colon cancer at this point and it's driving maybe some intake as a result. I can't sit here and tell you that it's sustainable at the high level that it's at right now but what we saw was a really strong quarter in endoscopy and we also saw that amongst some of our other peers that play in the same space and based on the information we have from our service organization and everything else we're happy with the growth we're seeing there.

Thank you. The next question will come from Mike Mattson with Needham & Co. Please go ahead.

Yeah, thanks. So I wanted to ask one on the PREDIS AI collaboration that was announced in March. So what is your view of robotics and AI and sterile processing? And is this collaboration something that could generate meaningful revenue for STERIS?

Thanks, Mike. I appreciate the question. It's early development right now. We're very excited about the technology. I do think there's a world in the future where there's some AI or robotic assist that's meaningful in the SPD. As we know, there's a huge challenge of labor in that environment, and there are certain tasks that over time could be automated, like any other process. We're working hard on what's fairly nascent right now, and when we have something more material to talk about, we will do that. But at this point, it's just early days.

Yeah, I understand. And then just in AST, capital declined again. I know it's a tiny part of that business, but one, can you explain what happened? And two, can you just remind us what the capital is that you're selling in that business? Thanks.

So the capital is typically accelerated. They're electron beam accelerators that we sell to MedTech customers typically or other applications for electron beam. It's a lumpy business because these projects can be anywhere from $2 to $10 million a unit, even more. So in a quarter where we don't ship a unit, you see a huge change versus prior period if we shipped a unit. The total revenue of the equipment business fluctuates, but call it somewhere between $18 and $30 million a year. It's just purely timing, and it's too small to really spend any time on.

Okay, thank you.

This will conclude our question and answer session. I would like to turn the conference back over to Julie Winter for any closing remarks.

Thank you all for taking the time to join us this morning. Look forward to catching up with many of you offline and on the road later this fall.

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