STERIS plc (STE) Earnings

Management highlights

### New Greenfield Chemistry Manufacturing Facility - The company is building a new $600 million facility in North Carolina, driven by a lack of expansion capacity at the existing Cantel (Minnesota) and STERIS (St. Louis) chemistry manufacturing sites, which are already approaching their maximum capacity limits. - The new facility will be a highly automated, future-focused factory designed with pharmaceutical-grade clean rooms, selected for its distribution efficiencies and access to STEM talent. - Capital spending for the project will be spread over three years: $75 million in fiscal 2027, $350 million in fiscal 2028, and $175 million in fiscal 2029. The project is in early development, with further timing updates to come as it progresses. - The new facility will initially be cost neutral, but will deliver operating leverage over time as scale increases; automation will dramatically reduce long-term labor requirements despite higher upfront capital costs. All restructuring costs are tied to closing and consolidating older facilities, with savings incorporated into the new facility's long-term projections. Tariff Refunds and Margins - The company received $4 million in tariff refunds in the reported quarter, providing a 30 basis point benefit to gross margins. A total of $27 million in potential refunds is available, with $24 million in eligible claims already submitted across Phase One and Phase Two claim processes; initial Phase One refunds are currently being processed. - Gross margins increased even excluding the impact of tariff refunds, driven by favorable price productivity dynamics. Total tariff costs for the quarter were $14 million, and these ongoing costs are expected to remain.

Guidance

- Fiscal 2027 earnings per share guidance is maintained at $11.10 to $11.30, representing 9% to 11% growth over fiscal 2026. - Fiscal 2027 capital expenditure guidance is revised upward to approximately $450 million, up from prior projections, to account for $75 million in initial spending on the new North Carolina facility. - Fiscal 2027 free cash flow guidance is maintained at $800 million, as strong first-quarter performance offsets the impact of the additional capital spending. - AST Services full-year organic growth guidance is unchanged at 7% to 8%, with management still expecting growth acceleration in the second half of fiscal 2027 after inventory destocking concludes, with material improvement expected by the third quarter. - Solid full-year growth is reaffirmed for the healthcare capital equipment business, backed by a growing order backlog.

Segment performance

Segment-specific absolute financial results and revenue contribution percentages were not provided in the available transcript. Key qualitative performance observations are as follows: 1) AST Services: Current growth is suppressed by tough year-over-year comparisons from 13% growth in the first half of the prior year and ongoing customer inventory destocking; the segment is still on track to deliver 7% to 8% organic growth for the full fiscal year. AST capital equipment revenue is small (totaling $18 million to $30 million annually) and lumpy quarter-to-quarter due to the large, infrequent nature of electron beam accelerator orders, with a quarter-over-quarter decline resulting from shipment timing. 2) Healthcare: Capital equipment orders grew 4% in the quarter, with a backlog increase indicating slower near-term results are purely a timing issue; solid full-year growth is expected. Healthcare consumables, chemistry, and sterility assurance services are seeing strong growth, pulled through by prior capital equipment sales. Endoscopy procedural volumes are growing at a strong pace, with the company gaining share in automatic endoscope processors, complementary chemistries, and endoscope repair services, and endoscopy represents one-third of the company's total healthcare franchise. Healthcare consumables overall has not seen any slowdown from broader hospital utilization or payment headwinds, with particularly strong growth in the ASC market. 3) Life Sciences: Global manufacturing localization trends (including onshoring to the U.S. and regional duplication of production facilities to avoid tariffs) are creating steady new opportunities for the company's sterilization equipment, washers, and cleaning chemistries in aseptic manufacturing environments.

Risks & headwinds

- No explicit material risks or operational failures were discussed in the available transcript. General headwinds referenced include ongoing tariff volatility globally, hospital payment pressures, and persistent labor shortages in sterile processing departments. AST services near-term growth is currently suppressed by customer inventory destocking, though this is a temporary dynamic that is already incorporated into full-year guidance.

Analyst Q&A

• Q: What is driving the recent strong endoscopy procedural growth you're seeing, and where are you gaining share in this market? /

  A: Strong endoscopy growth is partially driven by recent guidelines shifting routine colon cancer screening to start below age 50, which has increased patient intake and awareness of the procedure. STERIS is gaining share across multiple endoscopy-related segments: automatic endoscope processing equipment, which pulls through sales of the company's dedicated cleaning chemistries, as well as endoscope and medical instrument repair services. Endoscopy represents one-third of STERIS's total healthcare business, so strong growth in this area provides a meaningful boost to overall segment performance.

• Q: What drove the decision to build the new $600 million North Carolina manufacturing facility for chemistry products, and what are the expected benefits? /

  A: Following the acquisition of Cantel, STERIS had two existing chemistry manufacturing facilities in Minnesota and Missouri, but neither site can be expanded, and both are approaching their maximum capacity limits. This required a greenfield new build to support future growth. North Carolina was selected for its distribution efficiencies and access to STEM talent. The new facility will be highly automated with pharmaceutical-grade clean rooms. It will be initially cost neutral, but will deliver operating leverage and reduced long-term labor requirements as scale increases.

• Q: How is AST Services growth expected to trend for the rest of the fiscal year, and is the 7% to 8% organic growth guide still intact? /

  A: The 7% to 8% organic growth guidance for AST Services remains unchanged. Current growth is muted due to tough year-over-year comparisons from very strong 13% growth in the first half of last year, plus ongoing customer inventory destocking. Management expects destocking to last through the second quarter, with growth acceleration starting by the end of Q2 and material improvement in growth rates by the third quarter, which aligns with the original annual budget. New capacity facility go-lives planned for the rest of the year are already baked into the guidance to support this accelerated growth.

• Q: What is the current status of the PREDIS AI collaboration for sterile processing, and can it meaningfully impact STERIS revenue in the near term? /

  A: The AI and robotics collaboration for sterile processing departments is still in very early development. STERIS is excited about the technology's long-term potential, as sterile processing faces significant ongoing labor challenges, and many routine tasks could eventually be automated with AI or robotic assistance. The technology remains nascent, and the company will provide updates when the collaboration reaches a more mature, commercially meaningful stage.