STERIS plc (STE) September 15, 2026 Conference Transcript

All right. We're going to get started here. First of all, welcome to Dan from Staris. Thanks again for joining us. We're excited to unpack parts of the story. Before we get into it, there is a disclaimer on the Morgan Stanley website, so I suggest everybody go check that out. Dan, I just learned that it was Dan's 29th anniversary year at Staris, but importantly also five years as CEO, so congratulations on that. Maybe to start us off, you can reflect a bit about, you know, what you learned in the last five years about Starris and that CEO that you didn't appreciate when you first took the role on and maybe what you think investors still underappreciate about the story.

Yeah, thank you, and thank you for having me. You know, I think the one thing that I would really point to is how resilient and how durable the demand is for our products and services, in particular in the health care space. In a time where our customers are definitely under some financial crunch, Steris has emerged as really a provider that will work with them to help enable them to have better outcomes. And what do I mean by that? I mean, as hospitals need to generate more revenue, they need to turn surgeries. They can't ever have an OR shut down because of lack of sterile product. And running a sterile processing department in the basement of the hospital is not very sexy, but it is absolutely essential, and it enables the hospital to turn those procedures. It enables them to have compliant, safe outcomes and ensure that everything operates as intended. So we've had different conversations over the last year with the C-suite level of major health care systems, and while it's tightened, I guess, on capital spending from time to time, we just haven't seen an impact because of the value we're delivering.

I do think that your role and relationship within the hospital is actually a very unique one compared to some of the other medical devices out there. As we saw in the last earnings quarter, there was a lot of questions around hospital utilization rates and procedure volumes and quite a variance in views. Given your role and Sarah's role, can you share perspectives on what you're seeing from your customers and what you can kind of glean on the volumes?

What I can do is provide a lot of data that we have, or some anecdotal data, and then let people draw their own conclusions of what's going on in the market. And as a point of reference, we touch the space in many different ways. First, on the industrial side, we're a major supplier of industrial sterilization across the globe, largest industrial sterilization company in the world. And so we see roughly a third of the world's single-use medical devices come through one of our plants. What we have seen over the last, I don't know, year or so has been destocking in terms of volume, which is counter to what we're seeing in terms of procedure volume. So we'll just put that data aside for a second. And then if we talk about the data that we have on the hospital side of things, We run in-house and outsource sterile processing departments for many large health care systems, as well as we have embedded data in the equipment in the sterile processing departments that track consumption of instruments and trays. And so we see that across a broad network, in particular here in the U.S. And generally speaking, we continue to see some modest level of procedure volume growth across both acute cares and also the ASC market. Generally speaking, I've always said that in a good year, a really good year, we tend to see procedure growth at the high end of the range at like 4%, and in a not-so-good year, it tends to be at the lower end of the range. I'd say we're definitely at the lower end of the range, but growth nonetheless. less. There are some bright pockets, though, and not that that's not good because it is growth, but there are some bright pockets. In particular, we see it in endoscopy where we have a lot of exposure because we have a sterilization system that's specifically geared to reprocessing of endoscopes and also a large repair operation and a device business. But endoscopy, just as a market in terms of procedures is up somewhere between 7% and 8.5%. And due to some factors with screening age coming down and also the unfortunate, what seems like an increased occurrence of colon cancer in much younger people than previously seen. So anyway, but to the procedure rates, we have all this data that suggests that we are seeing growth in the North American market and broadly around the world as well.

Okay. That's very helpful as a framework. You know, just focusing on the P&L for you all, consistently you've talked about mid-to-high single-digit organic top-line growth, leveraging that to have double-digit bottom-line growth. What gives you confidence in the sustainability of this algorithm over, you know, near-term, mid-term, long-term?

Yeah, so let me start by saying, you know, 10, 12 years ago, Steris was approximately 80% of our revenue was from capital equipment. 20% was from reoccurring revenue streams. Today it's inverted, so 80% of our business is reoccurring revenue, which comes out of our chemistries franchise that goes through all of our washers and some of the low-temp sterilization machines that's in health care, as well as our life sciences products that go into aseptic cleaning and aseptic environments that are disposable or chemistries, and then a huge portion of that's now services. So when you have 80% of your revenue that's largely procedure-driven in a necessary environment, it's pretty easy to have that outlook because you have data of past months and years of trend analysis. So as long as we're headed in the right direction, we tend to stay that way. The only thing that can fluctuate a little bit from time to time is some of the capital purchases, in particular on the life science side. And generally speaking, health care has been very consistent for us over the long term.

Okay, great. I do want to go a level deeper on, you know, that top-line growth. And maybe if you could just share a little bit of how do we break that down, the sources of that top-line growth, between procedure growth, market share gain, pricing, new products, you know, any sense of relative contribution and which one of the four you think has the most runway in the near term?

Well, it's pretty simple math for us. I mean, start with price. It's not exciting, but it is important. You know, we get a couple hundred basis points of price, so that's two, right? And then you layer in procedure volume, which is material in terms of all of our recurring revenue businesses in health care, as well as AST, you know, our industrial sterilization business, and then somewhat related to our customers in pharma that are manufacturing the aseptic drugs. If you go back to what I was saying earlier, somewhere between 2% and 4%. So you stack that up, right? So you're at somewhere between 4% and 6%. And then you look at a little share gain. And then maybe we do a little small bolt-on M&A here and there, something like that that gets us up to a number that looks like mid to higher single digits. And then through that revenue scale, through our own internal initiatives on continuous improvement and cost savings and things like that, we're generally able to get meaningful margin out of that 7%.

And, you know, if we spend a little bit of time on the healthcare segment specifically, because it's now at $4 billion of annual revenue, so by law of large numbers and math, as the business gets larger, you know, that growth rate, delivering that mid- to high-digit growth rate, becomes harder and harder. How do you think about delivering that top-line growth versus converging to the procedure growth that we just talked about.

There's still a lot of market share out there to be had, both in North America and especially in Europe, where we have a much smaller presence in health care. So I'm confident long-term that our commercial teams have shown their ability to consistently win share. I think the model that we've developed in the U.S. market and Canadian market in particular, as we deploy that to Europe, we're going to be very successful there. It gives us a lot of room for growth. And there's also still a number of things that we can bring into the portfolio over the long term through our own, you know, R&D initiatives and things like that. We have a very good channel. We have very good technologies, and it's a matter of just expanding that for our customers.

I mean, if we pivot towards health care services, I mean, that has been a phenomenal growth driver and one of your strongest growth categories. What's structurally been driving that outperformance? And, you know, again, what does that outlook look like in the mid to long term?

Yeah, so you can really break that down into a couple businesses. One is about half of our revenue is our traditional maintenance business, repair business on our equipment, so the wrench-turning business. And that continues to do very well because we deliver a lot of value in terms of uptime for our customers in sterile processing in particular. and also we are able to get a little bit of price there but it's really the trust that they put in us to keep those machines running because they're critical we've also placed a lot of capital equipment over the last couple years and that's helping drive the growth there as well so service warranties turn into contracts in terms of the rest of our healthcare services business that's largely third party repair a lot of it is endoscopes or rigid scopes or some power tools used in orthopedic surgery And we create value for the customer by extending the light of those devices through basically replacing glasses or sensors or things like that. I mean, a high-end scope, you know, can be $60,000 to $80,000. And if we can repair that and keep it running for another five years, it's really super value as our customers are looking to sweat some of the assets as long as they can keep them delivered.

Yeah, okay. Makes sense. I mean, I think one of the crown jewels of the portfolio is the AST business, right? It's quite a differentiated asset. I'm sure you get a ton of questions from investors around it. You know, what do you think are the biggest structural drivers of growth for that AST business over the mid to long term?

That one gets clearly to procedure volume. And then also some to the mix of the product that we have. And that is as some devices get generally more sophisticated, more expensive, they require a more specialized approach to sterilization, which often allows us to price things at a much higher price based on the unique abilities of our plants to develop and design and deliver a very tight dose or a very specific cycle. So I think that long-term, our global footprint with well over 60 plants, I think it's touching 70 now, in Asia, Europe, and North America, Costa Rica, Dominican Republic, it just puts us in a place where customers who need resilient supply chains, who need to have flexibility, we're just in a great position to service that.

That's great. And I do think, you know, post-COVID, there's been an increasing focus around supply chain charity and how do you make sure that inventory is being kind of managed appropriately. If you could talk a little about within AST, how much visibility do you have on the underlying end market demand versus some of those short-term bursts that are more inventory movements within MedTech customers? And, you know, do you have what indicators tell you about de-stocking or inventory management being normalized now?

We start with the conversation with our customers, right? And generally speaking, that gives us a guide. Now, there's some bias in it sometimes because they want to say they're going to utilize as much capacity so there's never an issue of us having not enough capacity for them. So we try to temper that, right? Beyond that, because we see a lot of the competitive landscape for a certain product offering, we're able to sort of put it all together in our minds and look at growth. and make some assumptions. Another thing that we see is we do a lot of the precursor materials for orthopedics that have to be cross-length during a radiation process. So a lot of times we'll see that as maybe a precursor to what is going to be either an increase or slowdown in our orthopedics demand because it typically takes a couple months for that to work its way through the manufacturing process. There's a number of different variables. But it's hard to say there's any one thing in particular. What I can say, though, is that we saw a lot of med tech get fat on inventory post-pandemic. We had the supply chain crisis, you know, the golden screw, all that kind of stuff. And, I mean, STAIRS itself, I think a year and a half ago, we've taken out $100 million of inventory of our own because everybody was keeping inventory for just in case, not just in time. So it's been about a year now. We've seen this pulldown amongst our large customer segment, which has caused a slowdown, a little bit of a slowdown in the growth rate AST. We fully expect that corrects itself in Q3, and our Q3 starts October, just to confuse everybody. But that's when we get past an anniversary of 10% growth for two quarters in the prior period, and we think we'll finally work it out, and we'll see normalized inventory levels for soon.

Okay.

That's very helpful.

I mean, Life Sciences, to pivot to the last business, Life Sciences has returned to stronger growth as customer capital spend has recovered. Can you give a little flavor for how we should think about the normalized growth rate for that business?

Yeah, the most important part of that business and the biggest part is our consumables business around aseptic manufacturing. These are chemistries that are used in critical environments for maintaining surface cleanliness and sterilization. And it could be something as, I mean, literally a two-ounce sachet of a disinfectant that's double-bagged and sterilized. Yes, we sterilize disinfectants. For this pharma, that's what they have to have so they can do a pass-through into a clean room. And that's the most important part of that franchise. It's very high profit. and that has always consistently grown mid to high single digits at times even gone over double digit it's just when we get into the capital business there's some lumpiness there because they're large long-term orders and we saw a real slowdown two years ago when pharma kind of got sideways and and then they paused and we had a bunch of equipment orders and we've been shipping a lot of product now and we're in really good shape so um but but the crown jewel of that business is the chemistry and the sterile barrier products that we sell into the aseptic environments.

I do want to talk about a major investment that you guys announced at your last earnings call. You are spending $600 million to build a new center of excellence in North Carolina. Talk to the list about the decision to make such a substantial organic investment and how you expect that to help accelerate both both the healthcare business and the life sciences business?

Yeah, so let me start by saying, yes, it is a huge investment. It's our biggest manufacturing investment Stairs has ever made. But I would also say it's the most low-risk investment you can make. I mean, it's sort of on yourself versus M&A or something like that. So when we acquired Cantel in 21, 22, I can't remember. It seems like 10 years ago. But they had a large chemistry manufacturing operation up in Plymouth, Minnesota. and Steris had a large chem operation in St. Louis, Missouri. Both of the operations were aging in nearing capacity at this time. There's no way to take one down to upgrade it, and even if we did, it wouldn't buy us the capacity we need. So we made a decision we were going to need to greenfield a site, and when we started looking at it, the place that made the most sense from the distribution logistics and also access to STEM STEM and engineering talent and manufacturing talent was south of Raleigh, North Carolina. So that's how we landed there. Now, why it's a good bet, it supports our chemistries business and life sciences and health care. These are both high single-digit growers, and they're both some of the highest margin profile in the company. Today, they represent over $700 million in revenue, approaching $800 million probably this year. and we have, you know, a decade of trend line that looks like this that says there's no way this is going to change and also based on the amount of equipment that we place that has these proprietary chemistries built into it, you know, it's a trend that we see continuing to increase. Other big opportunities to upgrade our manufacturing through automation, we're going to go from over 500 positions down to 350, give or take. Because of the automation, we're going to deliver in the plant. So it's a really exciting time, and we should get some pretty good leverage out of it.

Okay, great. I mean, yeah, exactly. We're going to go talk about margins next. Where do you see the greatest opportunity for margin expansion over the next several years? Obviously, this investment is one of them, but volume leverage, productivity, mix, pricing, supply chain, normalization, give us a little flavor for the drivers. It's a lot of things.

I mean, I think we've developed some permanent muscle as it relates to being able to pass through reasonable price increases. With our customers this year, we expect to get a couple hundred basis points. And I think that if things got sideways from a cost standpoint, we would be able to flex that up if we needed to. Volume coming back, particularly in the AST business, is a very high drop-through event. I mean, it's because it's such a high-fixed cost business. So as that returns, that will clearly help. And then, you know, the continued migration towards recurring revenues, and not at the cost of our capital equipment, but just that's by definition going to grow faster because of where it is, I think that will help our margin profile. And then last but not least is just cost, especially on the manufacturing side.

We have so much opportunity. we're pretty good too but we have so much opportunity to do much better and leverage the scale of the volume that we have through the existing operations and I think that that's going to help maintain us, at least keep us to where we're not seeing raising costs on our products over the long term and I will say the free cash flow generation profile of the business has improved quite a bit over the last two years and in fact last year you all generated over a billion dollars or nearly a billion of free cash flow with leverage and also a very good low spot. How do you feel about the capital allocation policies? Where does M&A stack up versus organic investment and share repo?

It's fluid and it's kind of a decision tree if you think about it. I mean, first and foremost, we pay a nice dividend and that increases every year and we would continue to do that. Secondly, any investments that we want to make on ourselves is the lowest risk investment and whether that's, you know, AST is winding down a bit in terms of a high investment period of four or five years and we're shifting to some operational enhancements. And we talked about Raleigh, but we also announced in RQ4 that we were building out a new sterility assurance center of excellence in Ohio. So making those bets in terms of capital makes a lot of sense. You know, thirdly is M&A. And I would say that easy sort of smaller tuck-in stuff is what we really like. From time to time, there's bigger deals that come up that fit in our space. But we're very disciplined in terms of what we're going to look at and what we're going to execute on. It has to be in a technology we know, so it has to be sterilization, disinfection, or adjacent to ways related to that or something in GI. And then it has to be either hospitals, caregivers, pharma manufacturing, or med tech. That's our world. It's a very small fairway, but we kind of own it in many respects. And then lastly but not least is share buybacks. And to the event that we're not doing M&A and we're still generating a billion dollars of cash and still able to invest significantly in ourselves in terms of our own capital for manufacturing or other things, then we'll buy back shares at a rate that's responsible. We currently have a billion-dollar authorization, and we plan to do $200 million to $300 million a year of share buybacks. Now, in a year or two, if we haven't done anything on the M&A side, we may have to rethink the size of that buyback. But for now, that's the plan.

You know, on the M&A front, are there pieces of the puzzle that you're missing? You touched on this a little bit, but that you're missing from a strategic direction of where you want to take the business. And that could be, you know, capabilities, but it could also be geographies that you'd like to further expand into.

I think a real focus for us is geographies, either through channel acquisition or in-country opportunities in the space that we're in, in terms of sterilization, disinfection. Some of those are still out there, and we continue to look at them and things like that. It's hard to say when and if anything will happen. And so really the focus is us taking over geographic expansion organically if something presents itself great. but we're working our portfolio to make sure we have the right products for the right markets, and I feel like we're there now.

I mean, look, I think people like to see what is the, over the 12- to 18-month outlook, what are the couple of things that you want people to focus on to give a flavor for where Asteris is heading? So if there's some KPIs or key pipeline or things to point folks to, that might be helpful.

I think if you're looking at the barometer of stairs in our health care business, look at our consumables business. That's really it, because that tells you a lot about procedure demand that's out there in the health care segment. I think we're all going to watch closely the inventory issues at AST. That turns in our Q3. So that's something I would watch. um outside of that the only thing i'll sort of reiterate is that we are we feel that we're differentiated in the health care space as not just a med tech device provider but actually a company that can work with customers to improve outcomes and improve their financial situation and make sure we drive patient safety so i think i think that that that acceptance of that in the marketplace which has been really well received thus far is going to be critically important for Okay.

Well, at the start of it, we talked about you hitting your five-year anniversary as CEO. And I guess to wrap, as you think about the five-year outlook, how would you measure success for Steris? And what do you think investors should take away as the key metrics and the key drivers of that that give them confidence and the continued ability to deliver?

Our stated goals are 7 and 11, 7% on top, 11 on the bottom. And, you know, maybe there's some tuck-in M&A involved in that, but that's pretty much organic. And we believe that we are in a position with the business that we can deliver that, provided that procedure volumes stay somewhere in a 2% to 4% range. We think that bodes well for us in our ability to execute. So you can compound that over five years. I think that we'll be a company that's providing the same level of customer benefit in Europe by year five as we are in the U.S. and we've got work to do there, but I'm confident that that'll be the case and I think we'll be in a much better position as a result of that.

Okay, fantastic. Well, thank you so much for taking the time. This is fantastic to unpack the story a little bit more and appreciate you being here.

Thanks, appreciate it.