STERIS Q3 2024 Earnings Report

STERIS EPS Results

• Actual EPS: $2.22
• Consensus EPS: $2.17
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $2.02

STERIS Revenue Results

• Actual Revenue: $1.40 billion
• Expected Revenue: $1.35 billion
• Beat/Miss: Beat by +$47.06 million
• YoY Revenue Growth: +14.80%

STERIS Announcement Details

• Quarter: Q3 2024
• Date: 2/7/2024
• Time: After Market Closes
• Conference Call Date: Thursday, February 8, 2024
• Conference Call Time: 9:00AM ET

STERIS (NYSE:STE) Corporation (NYSE: STE) is a global provider of infection prevention, contamination control and procedural products and services for the healthcare, life sciences, pharmaceutical and medical device industries. The company develops, manufactures and supports a broad portfolio of equipment and consumables designed to reduce risk of infection, maintain sterile environments and support critical clinical and manufacturing procedures.

Its offerings include sterilization and decontamination systems, instrument washers and washers-disinfectors, endoscope reprocessing solutions, surgical equipment and procedural disposables, and contamination-control products for cleanrooms and laboratories. In addition to hardware and consumables, STERIS provides validation, advisory and technical field services such as installation, maintenance, validation testing and training to help customers meet regulatory and operational requirements.

STERIS serves a worldwide customer base that includes hospitals and health systems, ambulatory surgery centers, pharmaceutical and biotechnology manufacturers, medical device companies, and research institutions. The company operates manufacturing, distribution and service facilities across multiple regions to support customers’ clinical and production needs and to provide local service and regulatory support.

Over time STERIS has expanded its product and service scope to address a range of infection-prevention and contamination-control challenges across clinical and industrial settings. The company positions itself as a partner to organizations seeking to improve patient safety, ensure regulatory compliance and maintain uptime for critical sterilization and reprocessing operations.

STERIS Q3 2024 Earnings Call Transcript

Key Takeaways

• In Q3, STERIS delivered 10% constant currency organic revenue growth, gross margin expanded 50 bps to 43.6%, adjusted EPS was $2.22, and YTD free cash flow jumped to $457 M, reducing debt to $3.3 B (2.2x EBITDA).
• Healthcare segment excelled with 12% organic revenue growth driven by procedure volume rebounds, price increases, market share gains, and continued backlog normalization.
• The AST segment grew 4% organic, missing expectations as European volumes lag and bioprocessing volumes contract, prompting a more conservative Q4 outlook.
• Life Sciences saw 20% organic growth (57% capital equipment), though short-term demand remains murky, while Dental revenue fell 6% due to a major customer’s cybersecurity disruption, excluding which revenue was flat.
• For fiscal 2024, management raised its constant currency organic revenue guidance to 7–8% (up 100 bps) and now expects adjusted EPS of $8.60–$8.70.

Presentation

[Operator]

Good morning, everyone, and welcome to the STERIS plc Third Quarter 2024 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please know 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 and then one using a touchtone telephone. To withdraw your question, you may press star and two. Please also note today's event is being recorded, and at this time, I'd like to turn the floor over to Julie Winter, Investor Relations. Ma'am, please go ahead.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thank you, Jamie, and good morning, everyone. As usual, speaking on today's call will be Mike Tokich, 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's SEC 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.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

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 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 information used by management and the board of directors in their financial analysis and operational decision-making. With those questions, I will hand the call over to Mike.

[Mike Tokich, SVP & CFO at STERIS]

Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our third quarter performance. For the quarter, Constant Currency Organic Revenue increased 10%, driven by volume as well as 270 basis points of price. Gross margin for the quarter increased 50 basis points compared with the prior year to 43.6%. Price more than offset continued material and labor inflation in addition to the negative impact from currency. EBIT margin decreased 80 basis points to 23.1% of revenue compared with the third quarter last year. The anticipated increase in our year-over-year incentive compensation expense, along with the mix shift in operating income from the AST segment to the Healthcare segment, impacted EBIT margins.

[Mike Tokich, SVP & CFO at STERIS]

We anticipate that the mix shift in operating income from AST to Healthcare will continue in the fourth quarter. The adjusted effective tax rate in the quarter was 22.6%. Net income in the quarter was $220.9 million, and adjusted earnings were $2.22 per diluted share. Capital expenditures for the first nine months of fiscal 2024 totaled $268.8 million, while depreciation and amortization totaled $430.8 million. Debt declined slightly to $3.3 billion in the third quarter. Total debt to EBITDA at quarter end was approximately 2.2x gross leverage.

[Mike Tokich, SVP & CFO at STERIS]

Free cash flow for the first nine months of fiscal 2024 was $457 million, compared with $262.8 million for the first nine months of fiscal 2023. The fiscal 2024 increase was driven by higher earnings and declines in cash used for tax and compensation-related payments, as well as a decline in capital expenditures. With that, I will turn the call over to Dan for his remarks.

[Dan Carestio, President & CEO at STERIS]

Thanks, Mike, and good morning, everyone. Thank you for taking the time to join us to hear more about our third quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, our third quarter continued the momentum we have experienced in our Healthcare segment the past few quarters, and we also saw a nice improvement in Life Sciences. Overall, we are pleased with our performance. We continue to expect that our Healthcare segment will outperform our original expectations for the fiscal year, offsetting macro challenges impacting demand in our other segments. Looking at our segments, Healthcare Constant Currency Organic Revenue grew 12% in the quarter. Supporting that performance, we had double-digit growth across capital equipment, consumables, and service again this quarter. This is driven primarily by procedure volume rebound in the U.S., as well as price and market share gains.

[Dan Carestio, President & CEO at STERIS]

As anticipated, backlog continues to normalize as we are shipping at a faster pace than new orders are coming in. Remember, our goal is to get back to historic production lead times and continue to meet customer demand. Speaking of demand, capital equipment orders in the Healthcare segment grew double digits in the quarter. Turning to AST, constant currency organic revenue grew 4%, which was below our expectations. While we have continued to see more normalized volumes in the U.S. for MedTech, outside of the U.S. remains softer than anticipated. In addition, bioprocessing volumes continue to contract. Until we have more clarity, we are taking a more conservative approach to our expectations for the fourth quarter. Life Sciences grew 20% in the quarter on a constant currency organic basis. We had another strong quarter of capital shipments, which grew 57% against relatively easy comparisons.

[Dan Carestio, President & CEO at STERIS]

Remember, in fiscal 2023, revenue for both capital equipment and consumables was shifted from the third quarter to the fourth quarter due to some supply chain constraints. Consumables grew 8%, and service revenue increased 12%. As you're hearing from others in the space, short-term demand remains a bit murky, and we continue to be optimistic about the long-term growth opportunities for this segment. Our Dental segment, third quarter revenue declined 6% on a constant currency organic basis. Revenue is limited by reduced orders from a large customer due to a temporary disruption of their operations as a result of a cybersecurity incident they experienced during the quarter. Excluding that disruption, revenue would have been about flat in the quarter, which reflects the decline in patient volumes.

[Dan Carestio, President & CEO at STERIS]

The lower volume, combined with the continued increases in material costs, led to a decline in EBIT margin for the quarter. Turning to our outlook. Fiscal 2024 is shaping up to be another strong year for STERIS, albeit not exactly the way we had anticipated. In the last few years, if they've taught us anything, it's the value of our diversified portfolio. Time and time again, we have benefited as one of our segments outperforms to compensate for challenges elsewhere. We are updating our outlook for the year to increase revenue to reflect the continued outperformance of our Healthcare segment. For the year, we now expect total revenue to grow 10%-11% on a constant currency organic basis. In constant currency, organic revenue growth of 7%-8%, each up 100 basis points from our prior ranges.

[Dan Carestio, President & CEO at STERIS]

This assumes low single-digit Constant Currency Organic Revenue growth in the fourth quarter, caused by the record-setting shipments in last year's fourth quarter. EBIT margins for the fiscal year will decline slightly from fiscal 2023, primarily reflecting the shift in operating income mix from AST to Healthcare. Adjusted earnings per diluted share are now anticipated to be in the range of $8.60-$8.70 for fiscal 2024. We recognize that this outlook includes some conservatism, but believe it is warranted until we see the AST customer destocking abate and have additional clarity on bioprocessing volumes. That concludes our prepared remarks for the call. Julie, would you please give the instructions and we can begin the Q&A?

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thank you, Mike and Dan, for your comments. Jamie, if you can give the instructions, we'll get started on Q&A.

[Operator]

Ladies and gentlemen, at this time, we'll begin that question-and-answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Patrick Wood from Morgan Stanley. Please go ahead with your question.

[Patrick Wood, Equity Research Analyst of Medical Technology at Morgan Stanley]

Perfect. Thank you very much. You know, you guys still run one of the most efficient earnings calls of all time. It's, it's much appreciated. I guess maybe, starting with Healthcare, you know, as you said, double-digit growth across kind of all three of the main verticals. I'd love to unpack that a little bit. I mean, within the capital equipment side, I think last quarter was sort of 65%, let's call it, sort of replacement style projects, and then, you know, roughly a third kind of expansionary. Is that the same kind of thing you're seeing now? And, you know, should we expect, that consumables line to remain pretty strong given the, the sheer amount of equipment you guys have been installing through this year if we look forward?

[Dan Carestio, President & CEO at STERIS]

Yeah, I'll take the consumables. Mike, if you want to take the capital. Patrick, what I would say is, you know, the consumables is a function of really two things. One is obviously patient demand in terms of procedures, and obviously, in at least in the North American markets, demand is up, you know, across the board in terms of volumes flowing through hospitals. And then the other factor on that is just the sheer number of placements that we put out there over the last year in terms of maybe a little bit of share gain.

[Mike Tokich, SVP & CFO at STERIS]

Then on the capital side, obviously, you see that we continue to reduce our backlog levels, which is getting us more to our more normalized historic lead times and continuing to meet customer demand. But included in that, we did have double-digit orders growth within Healthcare in the third quarter. So, strong shipments in the quarter, but also good outlook with that double-digit growth in orders for future.

[Patrick Wood, Equity Research Analyst of Medical Technology at Morgan Stanley]

Amazing. And then maybe just quickly on AST. I guess, you know, within bioprocessing, you know, the companies there themselves have struggled to forecast their own demand, kind of famously, so I wouldn't want to necessarily put too much stock there. But the commentary seems generally more optimistic on the forward look, I would say, from some of the big players. You know, is that something that you think resonates with you as you move through the next few quarters, like things on the bioprocessing side could get a little bit, a little bit better? And then, equally with AST, how far through do you think we are on that inventory burn down, given the procedure volumes have been so strong? You know, I would have thought, you know, we don't have too long of that left. Is that fair?

[Dan Carestio, President & CEO at STERIS]

Yeah, we would've thought that, too, Patrick. So what I would say is that, you know, we've seen the turn in the U.S. market for the most part in MedTech destocking. And that's a function of the efficiency of the healthcare systems over here and procedure volumes being up significantly. Our customers have been able to burn down that inventory a little quicker. In Europe, where there's still, you know, a lot of fits and starts in terms of, you know, medical procedures, depending on the countries, we have not seen the burn down yet in inventory. But inevitably, this can't go on forever. I mean, eventually, those lines will cross.

[Dan Carestio, President & CEO at STERIS]

And then as it relates to the bioprocessing, destocking, you know, if we look over the long term, you know, historically and going forward, with the exception of the blip that occurred for a couple of years during the pandemic, more than a blip, a spike, you know, it has been a very solid, strong growth, subset of products that we, that we sterilize. Inevitably, I, I do believe that it will return to those, those levels of growth off of the reset number. The question is, when do we get to that reset number?

[Dan Carestio, President & CEO at STERIS]

And as you've heard from many of our customers and their earnings call and their outlook, they're taking a fairly conservative approach to the first half of the calendar year, but believe that many of them will see meaningful growth in the high single digits in the second half. If that comes true, that will translate to volumes for our AST business.

[Patrick Wood, Equity Research Analyst of Medical Technology at Morgan Stanley]

Love it. Having been treated in both the U.K. and the U.S., I'm glad I live here from a healthcare perspective. Thanks for the questions.

[Dan Carestio, President & CEO at STERIS]

You're welcome.

[Operator]

Our next question comes from Brett Fishbin from KeyBanc. Please go ahead with your question.

[Brett Fishbin, VP and Equity Research Analyst of Medical Technology at KeyBanc Capital Markets]

Hey, guys. Thanks so much for taking the questions. Just wanted to start off with a question on some of the margin dynamics. Understand the unfavorable revenue mix shift was the primary moving piece this quarter, but just wondering if you could give a bit more color on some of the previous key moving pieces around margins, like productivity and cost inflation, and how those have progressed into the back half.

[Mike Tokich, SVP & CFO at STERIS]

Yeah, Brett. The one thing we are missing that I did talk about, we've been talking about all year, is the incentive comp hole that we had to refill, which was about a $40 million headwind. The bulk of that, about $22 million of that, are impacted in the third quarter. So that is a huge hole that we had to fill in Q3. On the more favorable, positive side, we have seen price for the first time actually offset labor and inflation, and we did see flat productivity. We had seen negative productivity as we were moving, as we talked about moving products, especially the capital equipment, and touching those products several times in order to get them out the door in our manufacturing process. So we've actually seen an improvement, significant improvement in productivity.

[Mike Tokich, SVP & CFO at STERIS]

I think productivity was right around negative 150 basis points-200 basis points last quarter, and it's flat this quarter. So very good movement there from a manufacturing standpoint. That just shows that from a supply chain standpoint, we are seeing our, our supply chain continuing to ease and doing a nice job of reducing our backlog and getting back to more normalized lead times.

[Brett Fishbin, VP and Equity Research Analyst of Medical Technology at KeyBanc Capital Markets]

All right, great. And then just one other follow-up, a little bit of a longer-term question around AST. Just wondering if you could provide a bit of an update around your progress in adding more X-ray sterilization capacity as an alternative modality across your network. If I'm not mistaken, you have a couple locations already up and running, and I think there are some additional ones that might come online in the next few years. So just any additional details would be great. And thank you for taking the questions.

[Dan Carestio, President & CEO at STERIS]

Yeah, sure. This is Dan. The two U.S. sites will come online this calendar year. That's in Chicago, Libertyville, Illinois area, that is in testing phase now and should be running product in the next few months. And then the second one that will come online would be California, Ontario, California, and that will be in the fall.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

And then outside of the U.S., we have several projects underway.

[Dan Carestio, President & CEO at STERIS]

We do, yeah. I mean, we have the Asian site coming online as well now. And then I can't remember off the top of my head the pacing of a couple of the European sites, but there's a few of those that will come online in the next 18 months as well.

[Operator]

Our next question comes from Jacob Johnson from Stephens. Please go ahead with your question.

[Jacob Johnson, Managing Director and Senior Research Analyst of Life Sciences Tools and Pharma Services at Stephens]

Hey, hey, thanks. Good morning. Maybe just one on margins to start. Just on AST margins, I think they declined sequentially on a similar revenue base. Was that mix? Was that incentive comp? Just anything you'd call out there, and any thoughts on how we should think about that into the fourth quarter?

[Dan Carestio, President & CEO at STERIS]

As a general comment, Mike, I'll let you add to it. We typically see some decline in Q3, and that's because of the holidays, right? So there's not as many days of billing that goes on because customers have shutdowns often over the Thanksgiving week and over the Christmas holiday week between Christmas and New Year's. So unless we're sitting on backlog in the factories, we tend to lose some time there. So as a result, it has an impact on margin, but that's, that's a normal sequential trend that we see from Q2 to Q3. Unless there have been a few times in history where that has not—we've bucked that trend because bioprocessing volumes were through the roof or something, we had to run off, burn off backlog. But generally speaking, that's a normal thing you would expect.

[Dan Carestio, President & CEO at STERIS]

It's probably a bit exaggerated by the fact that we saw much lower volume than anticipated in the European plants.

[Mike Tokich, SVP & CFO at STERIS]

And we did actually have some cobalt loadings where we actually took our plants off of line for the quarter. I think we had six or eight cobalt loadings, so that also hurt from a productivity standpoint, which negatively impacted margins. Yeah.

[Jacob Johnson, Managing Director and Senior Research Analyst of Life Sciences Tools and Pharma Services at Stephens]

Got it. Thanks for that, Dan and Mike. And then just maybe as a follow-up on the Life Sciences segment, obviously, strong performance. Dan, it seemed like from your comments, some of that was just easy comps, but you also kind of struck some maybe positive turn around the longer term outlook there. I'm just curious kind of what you're seeing in terms of demand there as it relates to aseptic manufacturing clients, because that's been in focus somewhat this week.

[Dan Carestio, President & CEO at STERIS]

Yeah, you know, it's funny, in the Life Science business, when we ship and revenue product, that's really the ancient history for us, because oftentimes, those are orders booked a year in advance. As you indicated, we had really fairly easy comparisons to our Q3 last year in terms of shipments. And then, if you recall, we had a really nice Q4. So, you know, I think it's those two things. We're not ready to raise the flag yet in terms of long-term view of what's going on in aseptic manufacturing demand. We know that the long term is a great outlook, but short term, there's still some, you know, destocking that's going on, and there's still some pressure on big pharma right now.

[Dan Carestio, President & CEO at STERIS]

But in general, long term, you know, clearly aseptic drugs, injectable drugs, biologics, cell and gene therapy, all those type of things, all those markets we serve with sterilization-type products and services are going to be in high demand. Got it. Thanks for taking the question.

[Operator]

Our next question comes from Michael Polark from Wolfe Research. Please go ahead with your question.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Good morning. Thank you for taking the question. Might be too early, but I'd be curious for puts takes as we move into fiscal 2025. You know, penciling out the model here last night, see a path to 6% organic revenue growth, maybe a touch better pending AST and, you know, the historical STERIS posture on EBIT margin, 30 basis points-50 basis points of expansion. You know, that feels fair for now. I just, you know, as you get ready to plan for next year, do you feel like the environment allows for I mean, at a knowing there's portfolio puts and takes, but at an overall STERIS level, do you feel like it sets you up to shoot for that normal STERIS algorithm, or do you see it differently at this early stage?

[Dan Carestio, President & CEO at STERIS]

Mike, your opening comment, it's a bit too early for us to comment at this point in time. You answered your own question there a little bit. You know, obviously, we're in the middle of our planning process. We will, as we typically do, provide FY2025 guidance in May on our full year fourth quarter call. So that's where we stand right now.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Had to try. AST. I guess the AST question is two-parter. Obviously, we see procedures are back. I mean, MedTech broadly, behaving well. You're saying the U.S. is good, OUS still a little iffy. OUS, is there any kind of COVID-era product category that's still contributing to this? I'm thinking of PPE, or is it just the European kind of procedure recovery is more sober, and that's it?

[Dan Carestio, President & CEO at STERIS]

That's it. It's specific to Europe, too, because we've seen pretty decent recovery in our Asia Pacific plants. So, this is a predominantly European demand issue that's just... Well, not necessarily demand, it's ability to deliver healthcare issue that's taking longer to burn down inventories.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

But the second piece, I just like, large interventional, you know, multinational MedTechs, I'm thinking hips, knees, stents, pacers, stuff like this. Are these customers telling you that they maybe have a little too much and need to be slower on ordering? Or are you just, you know, you're not hearing that, and you're just-

[Dan Carestio, President & CEO at STERIS]

No, that's-

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Yeah.

[Dan Carestio, President & CEO at STERIS]

That's the communication we're getting, we've received from customers. We've had many say that they're burning down inventory as much as 40% from where their current levels were. You know, that's a function of what happened during the pandemic and post-pandemic, and inventory in the supply chains and manufacturing and in raw materials and everything got fairly bloated, you know, because of concerns around assurance of supply. And, you know, that compounded with a reduction in procedure rates over in Europe, it's taking longer to burn it down.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Appreciate the comments.

[Dan Carestio, President & CEO at STERIS]

Yeah. And, Mike, we will also get you trying.

[Operator]

Our next question comes from Jason Bednar from Piper Sandler. Please go ahead with your question.

[Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler]

Yep. Hey, good morning, everyone. I'll start first, following up maybe on some of the prior questions on segment margins. I was going to take a stab at fiscal 2025, but Mike already tried that, so, I'll go a different route. It sounds on the margin side, like you're not too worried about the AST profit level we saw, you know, third quarter is the seasonal low point. But is there anything structural keeping us from getting back to the upper 40% margin levels we saw in fiscal 2022 and the first part of 2023? Or are those just tough to match given the volume lifts you were seeing at the time? And then similar question, but on the other side, in healthcare, you know, how sustainable do you see segment margins in that segment?

[Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler]

I think it hit a new high this quarter. Is the strength there simply a function of the consumables and equipment volumes you're seeing, or is there, you know, any kind of uplift that's coming from the assets you acquired from BD?

[Dan Carestio, President & CEO at STERIS]

On the AST side, it's all volume, Jason. As this is a very high fixed cost base segment. The more volume we put through, the better opportunity we have to drive increased EBIT margin. So it's all volume. Dan, you want to address healthcare? Yeah, no, I don't see any fundamental changes really in the healthcare. It's that once again, as long as our delivery rates stay up high, it should be fairly consistent, plus or minus, you know, a basis point or two, one way or another from quarter to quarter.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

BD is-

[Dan Carestio, President & CEO at STERIS]

I don't want-

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Slightly incremental.

[Dan Carestio, President & CEO at STERIS]

Go ahead, Julie.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

BD is slightly incremental-

[Dan Carestio, President & CEO at STERIS]

I don't want-

[Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler]

Okay, I don't wanna lead either of you, but it sounds like, Mike, you're saying nothing structural from getting—from STERIS getting back to the upper 40s in AST, and Dan, you're saying nothing structural that would keep you from maintaining the margin level you're at right now in healthcare.

[Dan Carestio, President & CEO at STERIS]

Yeah, correct.

[Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler]

Okay. All right, great. And then, over on Dental, I’m sure I probably have asked this a few different times now in consecutive calls. You’ve been reviewing internally the future plans for the asset. This was a weak quarter. You know, part of that out of your control, you had Henry Schein cybersecurity attack. But I guess maybe two questions on those items. Can you say first, whether in near term, trends have normalized, following that cybersecurity attack and the kind of the resolution we’ve seen with that business, and, and that issue? And then can you talk about, you know, the conversations you’re having regarding the future for this segment? Do you have a timeline on when you’ll announce a formal decision here?

[Dan Carestio, President & CEO at STERIS]

Yeah, I guess on the first, we have seen things normalize in terms of regular order pace and whatnot. The challenge is a lot of that revenue kind of evaporated and gets shifted into Q4, at least that's what we anticipate to some degree, or it found other venues to get to the customer, which we don't really have the ability to track or fully understand. So we'll see what the outcome is of that more definitively this quarter. On the other question, you know, we continue to look at the portfolio in general, but you know, no decisions have been made at this point. And as soon as we have something to update you and everyone else with on this matter, we will do so.

[Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler]

All right. Thanks so much, guys.

[Dan Carestio, President & CEO at STERIS]

Yep.

[Operator]

Once again, if you would like to ask a question, please press Star and One. To withdraw your questions, you may press Star and Two. Our next question comes from Mike Matson from Needham & Company. Please go ahead with your question.

[Mike Matson, Managing Director and Senior Equity Research Analyst of Medical Technologies and Diagnostics at Needham & Company]

Yeah, thanks. Just wanna add to one on use of cash. So, you know, I think you've done a fair bit of M&A. I don't recall any recent share purchases, but maybe I'm forgetting one. But can you maybe just give us an update on your kind of priorities and, you know, whether or not you'd be willing to come in and do some share repurchases?

[Dan Carestio, President & CEO at STERIS]

Yeah, Mike, our capital allocation methodology or process has not really changed over the last decade plus. We did, if you remember, last year in the fourth quarter, we did. We were opportunistic in share repurchase. We bought about $225-ish million of shares. We have not purchased any in FY 2024 to date. We've actually been focusing more on paying down debt since rates are higher. We feel there's value in paying down debt. So all of our excess cash has been going towards debt repayment, which has driven our leverage ratio. Even with the BD acquisition, we're at 2.2x gross leverage. So that's been our focus.

[Mike Matson, Managing Director and Senior Equity Research Analyst of Medical Technologies and Diagnostics at Needham & Company]

Okay, got it. And then, I believe you, you've been able to get a little more pricing, you know, in recent periods. You know, how sustainable do you think that that rate of price increases, you know, as we see inflation kind of slowing down here a bit?

[Dan Carestio, President & CEO at STERIS]

Yeah, I think that to some extent, you know, our ability to justify putting through price increases with customers has to be some basis of cost, you know. And, you know, as costs normalize in certain areas, you know, there will be a market trend towards, towards less, less price grab, I guess, is what I would say.

[Mike Matson, Managing Director and Senior Equity Research Analyst of Medical Technologies and Diagnostics at Needham & Company]

Okay. And then finally, just wanna ask one on the outlook for tax rate with Pillar Two. I mean, your rate's kind of well above that 15% level, but do you expect any sort of impact there, to your tax rate?

[Dan Carestio, President & CEO at STERIS]

Mike, nothing material from Pillar Two, if and when it does get implemented.

[Mike Matson, Managing Director and Senior Equity Research Analyst of Medical Technologies and Diagnostics at Needham & Company]

Okay, great. Thank you.

[Dan Carestio, President & CEO at STERIS]

You're welcome.

[Operator]

Our next question comes from Dave Turkaly from Citizens JMP. Please go ahead with your question.

[Dave Turkaly, Managing Director and Senior Equity Research Analyst of Medical Devices at Citizens JMP]

Hey, good morning. Sorry, I've been bouncing around a bit. You may have talked about this, but I wanted to just ask quickly, you know, any update on that Radiation Sterilization Master File Pilot Program, like in terms of participation or anything we should assume, anything you've learned or anything you think, you know, we could look at, in terms of how that might impact things moving forward?

[Dan Carestio, President & CEO at STERIS]

Yeah, you know, this is Dave, this is Dan. It's been very positively received by the customers and also by the regulators with the agency, FDA. And we're excited about the program because it does sort of create a lower regulatory barrier or switching barrier for our customers to have more supply chain flexibility when changing different modes of sterilization. So, you know, this is something that we felt was important to offer up to the industry and work with the FDA to get that approved, you know, so that there was much more flexibility in a time, you know, a couple of years ago, when everybody was exposed and challenged. So no, no material impact in the short term here, do we expect.

[Dan Carestio, President & CEO at STERIS]

But I think that longer term, it's a great program for us and bodes well for our customers.

[Dave Turkaly, Managing Director and Senior Equity Research Analyst of Medical Devices at Citizens JMP]

And then just quickly as a follow-up, that when you look at, like, EO, if they, if they're transferring from that, like, is the margin profile much different via the different modes in a AST that they might switch to?

[Dan Carestio, President & CEO at STERIS]

Not really, no.

[Dave Turkaly, Managing Director and Senior Equity Research Analyst of Medical Devices at Citizens JMP]

For you. Okay. Thank you.

[Dan Carestio, President & CEO at STERIS]

Yep, sure.

[Operator]

Our next question is a follow-up from Michael Polark from Wolfe Research. Please go ahead with your follow-up.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

... Thank you. Healthcare Capital, as I kind of run, review the numbers or the fresh set of numbers, and I know this is not how you manage it. You have customers waiting for product, and you want to ship as quickly as possible. But I kind of see the makings of a soft landing here for Healthcare Capital revenue in 2025. There had been a fear that, you know, it might likely be down as you kind of improve lead times and conversion rates. But again, I kind of, kind of see this kind of Goldilocks scenario where growth, growth decels for sure, but, you know, assuming orders continue at these current levels, you're still growing Healthcare Capital revenue in fiscal 2025. I know you don't have guidance out there, but I'm curious what you think of my theory.

[Dan Carestio, President & CEO at STERIS]

I love your theory, and I hope it plays out that way.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Okay. I had one other follow-up. Cobalt-60, I heard the comments on, you know, maybe a little bit of downtime from loading, and we obviously know that, you know, Nordion was exceptionally, calendar 4Q-weighted in terms of deliveries in calendar 2023. Is there some element that, you know, now that you're back to, like, full strength at those plants, you know, the gamma network speeds up in the short run? I'm just curious how that actually works.

[Dan Carestio, President & CEO at STERIS]

It does, but you know, we have to have the volume; is the issue. So we needed to take the cobalt because we'd gotten to a deficit position in many of those plants, because it's been, for some of them, over a year since they last loaded. But it doesn't. It should not have a material effect unless we get more volume than we anticipate, and if we do, we'll be able to run it because we'll have more capacity.

[Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research]

Thanks for taking the follow-ups.

[Dan Carestio, President & CEO at STERIS]

Sure thing.

[Operator]

Ladies and gentlemen, with that, we'll be ending today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thanks, Jamie, and thanks everybody for taking the time to join us, join us this morning. We look forward to catching up with many of you in the coming weeks.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Participants

Executives

• Dan Carestio, President & CEO
• Julie Winter, VP of Investor Relations and Corporate Communications
• Mike Tokich, SVP & CFO

Analysts

• Brett Fishbin, VP and Equity Research Analyst of Medical Technology at KeyBanc Capital Markets
• Dave Turkaly, Managing Director and Senior Equity Research Analyst of Medical Devices at Citizens JMP
• Jacob Johnson, Managing Director and Senior Research Analyst of Life Sciences Tools and Pharma Services at Stephens
• Jason Bednar, Managing Director and Senior Research Analyst of Medical Technology at Piper Sandler
• Michael Polark, Senior Equity Research Analyst of Medical Devices and Healthcare Technology at Wolfe Research
• Mike Matson, Managing Director and Senior Equity Research Analyst of Medical Technologies and Diagnostics at Needham & Company
• Patrick Wood, Equity Research Analyst of Medical Technology at Morgan Stanley