Steris Aktie

Good day and welcome to the STERIS plc Fourth Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Julie Winter, Investor Relations. Please go ahead.

Thank you, Chad, and good morning, everyone. Speaking on today's call will be Karen Burton, our Senior Vice President and CFO; and Dan Carestio, our President and CEO. And 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' securities 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. 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 press 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 cautions, I will hand the call over to Karen.

Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our fourth quarter performance from continuing operations. As anticipated, we ended this strong year with a lighter fourth quarter. For the fourth quarter, total as reported revenue grew 7%. Constant currency organic revenue grew 5% in the quarter, driven by volume as well as 230 basis points of price.

Gross margin for the quarter was 44%, down 30 basis points versus the prior year. We continue to realize positive pricing, which helped mitigate the impact of higher tariffs and inflation. EBIT margin for the quarter was 24.2% of revenue, a high for fiscal 2026. This was 60 basis points below the fourth quarter last year, mainly driven by inflation and tariffs. Incremental tariffs impacted our fourth quarter by approximately $10 million, which was below our expectations due to lower volumes in materials and products sourced from outside the U.S.

The adjusted effective tax rate in the quarter was 25.4%, an increase from 23.5% in the fourth quarter last year. The year-over-year increase was driven primarily by changes in geographic mix and unfavorable discrete items. Adjusted net income from continuing operations in the quarter was $278.3 million. Earnings per diluted share from continuing operations were $2.83, a 3% increase over the prior year, as the lower margin and higher tax rate limited earnings growth in the quarter.

Before I turn to cash flow for the year, I want to dig into the upward pressure on our tax rate for a moment. For the full year, fiscal 2026, our adjusted effective tax rate was 24.4%, an increase of 130 basis points from fiscal 2025. Our tax rate varies based on many factors, most notably geographic profit mix and discrete item adjustments, which include withholding taxes. Since we generate the majority of our profit in the United States, it is common that we need to move cash across borders to deploy capital. This movement may trigger U.S. withholding taxes.

Our fiscal 2027 guidance assumes that in accordance with our capital allocation priorities, we will increase the dividend, reinvest in our business, invest to grow through M&A and return excess cash to shareholders through our share buyback program. To fund some of these priorities, we expect to incur additional withholding tax putting further upward pressure on our effective tax rate. This is reflected in our estimate of 25% in fiscal 2027.

Capital expenditures for fiscal 2026 totaled $369 million, and depreciation and amortization totaled $486.5 million. We ended the year with a strong balance sheet, reflecting $1.9 billion in total debt. Gross debt to EBITDA at year-end was approximately 1.2x, well below our targets of 2 to 2.5x. Free cash flow for fiscal 2026 was exceptional at $982.9 million, with year-over-year improvement driven primarily by an increase in earnings, which more than offset the significantly lower contribution from working capital in fiscal 2026 compared with fiscal 2025.

To provide some context, recall that the working capital improvement that we generated in fiscal 2025 was primarily the result of targeted inventory reductions as we recovered from supply chain challenges. Going forward, we would expect our working capital will grow in line with volume. Once again, we are heading into a new fiscal year in a strong financial position with continued commitment to our capital allocation priorities. With that, I will now turn the call over to Dan for his remarks.

Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our fiscal 2026 performance and our outlook for fiscal 2027. Karen covered the quarter at a high level, so I will add some commentary on the year and then comment on our outlook. Fiscal 2026 was another record year for STERIS with 9% revenue growth, 7% on a constant currency organic basis. We are pleased to have translated this into 10% adjusted earnings per share growth despite the 80 basis points of impact from tariffs on margins.

Our businesses all hit new milestones this year, contributing to total company revenue of approximately $6 billion and adjusted net income topping $1 billion. This is an exciting time to be at STERIS, and we expect to continue to grow the business mid- to high single digits organically over time and leverage that to deliver double-digit bottom line growth. Supporting our growth, U.S. procedure volume continues to grow mid-single digits, a level we expect to be consistent in fiscal 2027. Procedure volume outside of the U.S. do continue to lag a bit, which impacts our AST segment a little bit more than Healthcare.

From a segment perspective, Healthcare reported another strong year, growing 9% as reported and 8% from a constant currency organic perspective. This growth was driven by another remarkable year for service, growing 12% and as well as 7% growth in consumables as we continue to pick up share, thanks to the breadth of our portfolio and the performance of our commercial teams. Capital equipment also grew nicely, up 6% for the year, stabilizing after the last several years of lumpiness. Capital equipment backlog ended just under $400 million, with orders up 2% in the fourth quarter.

This year, we reached new milestones in Healthcare business, generating $4 billion in revenue and $1 billion in operating income. We continue to be excited about what is yet to come as we expand our offering through organic and inorganic growth to deliver products and services that address the most pressing operational needs of our customers.

AST grew 10% as reported and 7% constant currency organic. This was a bit lighter than what we had anticipated with softness in the second half of the year. In particular, a slower fourth quarter for services due to the severe snowstorms in the U.S. early in the calendar year. For the year, our services business grew 11% as reported or about 8% constant currency organic, which aligns with our expectations for the business going forward. With over $1 billion in revenue, AST crossed a new milestone of its own, exceeding $500 million in operating profit.

Life Sciences grew 9% as reported and 7% constant currency organic, driven by 15% growth in capital equipment as our customers returned to capital investment again following last year's downturn. Consumables continued their steady path of growth at 8% and services improved 5% despite some more quarterly volatility than we usually see. Capital equipment backlog ended solid at just under $100 million. Life Sciences posted its own record year, exceeding $250 million in operating profit for the first time, reflecting strong operating margins.

Total company EBIT margins expanded by 10 basis points to 23.3% for fiscal 2026, despite incremental tariff costs of approximately $46 million, which trimmed our margin by 80 basis points. Lower interest contributed to our double-digit growth in adjusted earnings at $10.17 per diluted share. We also stayed true to our capital deployment priorities this year. We increased the quarterly dividend $0.06 to $0.63, our 20th year of dividend growth. We invested in ourselves, in particular, in AST expansions projects for X-ray globally.

In addition, we completed 2 tuck-in acquisitions that add to our Healthcare portfolio globally. And last but not least, we used $225 million for share buybacks. As you saw in our press release, the Board has approved a new $1 billion buyback authorization. Going forward, we expect to utilize excess cash to consistently buy back shares in the range of $200 million to $300 million per year.

Turning to our outlook for fiscal 2027. As noted in the press release, we anticipate as reported revenue to grow 7% to 8% in fiscal 2027. Changes in foreign currency are expected to be slightly favorable to STERIS. Tuck-in acquisitions in Healthcare are contributing inorganic revenue to our as reported outlook for the segment and total company.

There are 2 acquisitions driving this contribution. In the fourth quarter, we vertically integrated our supplier for MEDglas walls, extending our reach from the U.S. to global. In addition, early in the first quarter, we acquired a family of GI products that expanded our offering and improved our channel. These 2 acquisitions are expected to contribute combined revenues of approximately $45 million to fiscal 2027.

As a result, constant currency organic revenue growth is expected to be 6% to 7% for the total company. This outlook assumes approximately 200 basis points of price. From a segment perspective, we anticipate Healthcare and Life Sciences to grow 6% to 7% constant currency organic and AST to grow 7% to 8%. We are taking a more conservative approach on our outlook to AST to start the year. Our med-tech customers continue to manage inventory levels carefully, and we are heading into the new year with some difficult comparisons in the first half, leaving us cautious.

For fiscal 2027, EBIT margins are anticipated to expand approximately 50 basis points at the high end of our outlook. This assumes tariff spending is flat year-over-year and the benefit of a tailwind from our incentive compensation program. We will be making select investments in FY '27, driving incremental operating expenses, including kicking off a multiyear project to support our service workflows with upgraded technologies utilizing AI to improve quality, increase productivity and enhance the customer experience within both the Healthcare and Life Sciences segments.

Our fiscal 2027 earnings per share outlook is $11.10 to $11.30, growth of 9% to 11% over fiscal 2026. In fiscal 2027, free cash flow is expected to be $850 million and CapEx of $375 million. Underlying our free cash flow expectations, we expect that net working capital will grow in line with volumes. We will also use about $50 million for additional incentive compensation payments due in June and the remainder of our EtO settlement payments over the year. From a capital perspective, our capital spending priorities are shifting a bit as we are nearly done with our multiyear X-ray expansion in AST.

In fiscal 2027, we will build a new sterility assurance manufacturing plant in Mentor, Ohio, which will ultimately allow us to consolidate existing U.S. production into one new state-of-the-art manufacturing center of excellence to serve our Healthcare and Life Sciences customers. We will invest about $60 million over 2 years and expect that plant to be operational by the end of calendar 2027. Fiscal 2026 was a banner year in many ways for STERIS.

Looking back at the last 5 years, our performance has really been remarkable. We delivered average constant currency organic revenue growth of 9%, and our compounded annual growth rate for adjusted earnings was 11% during what was one of the more tumultuous 5 years in our history here. Equally important, our Healthcare organization has transformed from a products and services focus to a valued partner to Healthcare customers to help enable them to solve some of their most pressing operational challenges that they are facing.

We are committed to partnering with our customers to enable them to meet their procedural growth needs, improve the delivery of quality outcomes and improve standardization and optimization as they manage critical inventory from the OR to the SPD and back. Thank you to all of our associates for continuing to do what you do best, focus on our customers and strive to do better every single day. That concludes our prepared remarks for the call. Operator, would you please give the instructions so we can begin the Q&A.

[Operator Instructions] And the first question will be from Brett Fishbin from KeyBanc.

I just wanted to start off with one on the FY '27 earnings guidance. I think you mentioned that you're thinking about operating margin expansion of approximately 50 bps at the high end of the range. I was just curious if you could walk through like some of the moving pieces. I think there are some questions around the impact of inflation and energy prices and then also what you're thinking around tariffs as compared to FY '26 as well as just the contribution from underlying performance.

All right. Thanks, Brett. We appreciate the question. I'll add a little bit of light to this and then Karen's going to pepper in a little bit more of a response on some of the details around tariffs, et cetera. I think there's a few things that we're going to work on really hard to maximize that 50 bps, and that's really going to be some operational improvements as well as a continued sell-through of our higher-margin consumables products that we'll see over the next fiscal year. The sort of upside in that is if we deliver a little better on the AST business, just given the margin profile there. And Karen, I'll hand it over to you to handle some of the tariff-related questions.

Great. Thank you. Yes. So the good news is in terms of tariffs, the recent changes are favorable to us and serve to offset the volume increase for next year. So in an odd twist, tariffs are an okay thing for us looking at '27. In terms of other -- opportunities, challenges, the bonus tailwind is about $20 million. And as we look at and have incorporated energy and particularly oil-driven costs, we have incorporated those. We have considered also how long this may last, looked at forward rates.

But the largest challenge and driver would be freight. We have opportunities to recover most of our freight out to customers through our freight recovery pricing. The day-to-day fuel associated with our fleet of service techs in the field is not significant. It's low single digits exposure. And when you look at our raw materials, we do have raw materials that are impacted by oil. That represents only about 20% of our COGS. And generally energy has certainly been meaningful, particularly to AST, but it is a small percentage of COGS in AST as well. So hopefully that helps you.

Yes. No, that's helpful. And then also just a question on guidance. I think you had some comments about the difficult comps in AST service to begin the year. So I just wanted to maybe ask more broadly how you're thinking about overall phasing for organic growth, whether you're calling for like a softer 1Q overall? Or if it was more specific to AST service given the comps?

Yes, really more specific to the AST comps. We started the year last year, first couple of quarters in double-digit growth in that business. And then saw a bit of slowdown in Q3 where we saw some inventory pullback from our customers. And then this past quarter got a little weird just with the snowstorms. We probably lost 150 to 200 basis points of growth there. So if you sort of stack all that up, I think one would expect a slower start in the first half and then significantly improving in Q3 and then pretty easy comps in Q4.

And the next question will come from Mike Matson from Needham & Company.

I guess just following up on the tariff question. What is your expectation for the USMCA renegotiation this year? And what have you assumed in your guidance with regard to that?

Yes, this is Karen. I will answer that. In terms of the USMCA review, a joint review is -- has a July 1 deadline. All 3 governments have emphasized the importance of continuity and avoiding disruption, but no real movement in those discussions yet. So we have not included any assumption for USMCA. We're assuming stagnant and that it will likely move into an annual continual review phase at least in the short term.

Okay. Understand. And then with the rollback or potential rollback of the ethylene oxide regulations under the new administration, what does that mean for STERIS? If anything, is there any sort of positive financial implications there?

Not really. I mean we're pretty much fully spent on upgrading our facilities, the NESHAP. Maybe there's some timing on compliance that's not as in the forefront in terms of something we have to do tomorrow versus something we can get done in the next 6 months. But there's no significant capital impact on us given where we are already with our facilities.

And the next question is from Dave Turkaly from Citizens.

You called out some tuck-in M&A in Healthcare, and then obviously $1 billion buyback. I was just wondering, should we be reading into that at all in terms of sizable transactions and/or maybe valuation in the sector?

Thanks, Dave. I would say no. I mean our M&A is erratic at times because it's when opportunities present themselves that have been worked on for a long period of time. We typically do small tuck-in M&A throughout the year. We're just calling these 2 out because they do have a material impact on the fiscal performance as we look next year of close to 100 basis points for Healthcare.

So in terms of the buyback, Karen shed some light on the tax that we pay as a result of moving money for doing distributions on dividends, but also for doing buybacks. That's been something that's been holding us back for a number of years, I would say. But the reality is that we understand going forward that doing some level of consistent buybacks is important for the health of our company.

Got it. And you called out the service in AST and the weather. So I was wondering that -- I know it's not a big component, but the capital component. I was wondering if you could just give us any color as to what was going on there in the fourth quarter.

On the AST side?

Yes.

Yes. I think that it's just lumpiness of that business. We sell $20 million, $30 million a year and sometimes that can be in 4 orders. And if you ship 2 of them in one quarter, one in another -- it's the way it spreads out, you can have a quarter with very little equipment sales but just equipment service parts and things like that. And then you could have the next quarter you could ship 2 machines and we're a hero, right? So you kind of have to look at it in the year in aggregate, I guess.

And the next question is from Mac Etoch from Stephens.

Maybe just to follow up on some of the AST questions, you called out some med-tech customers continue to manage inventory levels carefully. So can you just speak to what you saw in AST as the quarter progressed and particularly on the volume side?

Yes. So I mean, the organic volume was less than what we would've anticipated in the last 2 quarters. And like I said, Q4 is easy to understand because we had storms where we were shut down, our customers were shut down for a number of days in the Midwest and even the Southeast and the East Coast, right, which is where a lot of our big plants are. So that is what it is. They'll recover over time. The volume will come back, et cetera. But what we have seen and maybe it's post-tariff confidence in supply chains, maybe it's whatever, but we've seen some inventory reduction across the broader customer segment, right, in terms of med-tech.

And what we know is this. What we know is procedural rates are still consistently growing. So from a patient and provider perspective, the demand is still there. What we know is that when we see the revenue reports of our large public customers, that supports that growth as well. So we're seeing good top line sales from a lot of the large med-tech companies that show good growth over the last couple of quarters. And so if you sort of align those things with what we're running in terms of volumes, it points to a bit of an inventory pullback, which is the situation that we've seen over the last couple quarters.

Appreciate it. And then secondly, Healthcare and Life Sciences both had a pretty decent quarter from a capital equipment perspective. Backlog did decline sequentially. So I just kind of wanted to get your sense of how we should think about the progression for capital equipment revenue and backlog as it progresses through 2027.

I think a little bit on '26, we tend to ship a lot in Q4 and we tend to build a lot of capital and then we tend to push as much as we can just -- and it just seems to be the normal cyclical nature of the business. It's a lot better than it used to be. We used to have an extreme hockey stick here at STERIS, but it's somewhat mitigated now. So that's not abnormal for us to have a little bit of a drain on our backlog with a high shipment Q4. It's sort of norm for us here at STERIS.

In terms of the go-forward, our orders have remained solid. We're in a different position with the pressure that's being exerted on the health care systems in that we help enable them to get procedure volumes up and to run better quality and things that are important to them as they're looking for opportunities to generate more revenue and also save cost. So it's not -- it's -- I think we're in a pretty good position as we go forward with our large customers.

The next question is from Dave Windley from Jefferies.

I wanted to ask about the sterility assurance facility. I think you're suggesting that you're consolidating the number of facilities. I wondered how many or what operating efficiency you might expect to pick up when that is operational and kind of essentially the motivations for taking the step and consolidating into one facility.

Yes. Thank you, Dave. This is Dan. What -- yes, first off, we've got 3 different facilities, 2 of them happen to be here locally, and it just makes sense to consolidate. But the real driving issue here is this has been a really high-growth and high-margin business for us at STERIS and one that we've been really successful in picking up share in our Healthcare organization, in particular, as most every system now is at least dual sourced to STERIS. So we're pleased with the performance of the business.

In terms of the need to build the new facility, a, it's capacity driven; and b, there's a significant opportunity to put in what is a nearly fully automated manufacturing facility, really a center of excellence. So with that, over time, there will be some cost benefit on the savings. But more important than that, it's really supporting the long-term growth of a high-growth, high-margin business.

Got it. And then switching gears, I think I wanted to go back to your description on AST and the cadence that you were expecting for '27. I think you quantified for fourth quarter maybe STERIS lost 150 to 200 basis points because of weather. Are you expecting that to come back and is that coming back early in the year or more spread during the year? I was kind of juxtaposing the benefit of getting that pushed out volume into first quarter, but you talked about the comps being tough and how we should think about the balance of those 2 things.

Yes, we've thought about this a lot. It's really tough to quantify, to be honest with you, because it's not just the volume through our plants, but there's also a considerable amount of surgical procedures that were canceled or deferred. And I think some of the large public health care systems commented on that in their earnings release.

So I think over time, provided that those procedures are still required, which they should be, our customers, meaning the health care facilities, will provide those procedures. And hopefully that drives the demand upstream into the med-tech sector, where they'll be producing the products for set procedures.

And our next question is from Michael Polark from Wolfe Research.

A follow-up on the margin guidance for fiscal '27. 2-parter. On tariffs, Karen or Dan, can you just remind us in fiscal '26 what was the total tariff headwind and what's considered in '27? And does '27 embed any contribution from refunds? That's first part. And the second part is the bonus tailwind that was spiked out. I guess, I don't understand why that's being modeled. Was there overachievement in fiscal '26 and you're modeling normalization in fiscal '27?

Thanks, Mike. This is Karen. I can help you with these. In terms of tariffs, our incremental tariffs in '26 was $46 million, which puts us at a total tariff spend between $60 million and $65 million, and that's what we're modeling for '27. We are not including any refunds in our '27 guidance. We have not recorded anything. When it comes, we will recognize it. And we've taken that position because it is difficult to know how quickly this will actually happen. On the bonus, you are correct. We did have overachievement in fiscal '26, and we are modeling 100% achievement in fiscal '27 as we usually do. So that's the differential of $20 million that I mentioned.

Helpful and very clear. A follow-up, different topic. Dan, your quote in the press release, "Deliver quality outcomes and drive compliance with standardization and optimization." It just feels like something that I haven't heard you say before, and I'm just trying to understand, particularly around the compliance and -- the compliance comment. What are you telling us there?

Yes. So we've been working for a long time to really put our system together in the sterile processing department where we're helping our customers drive compliance, making it easier for them to have access to IFUs at the sink, making it harder to move process -- products down the line in the SPD without confirmation that you're in compliance, doing things that hopefully eliminate unnecessary steps for our customers. And then in addition to that, overlaying on top of that SPM, which is basically our ERP for the Sterile Processing Department to allow our customers to track and trace compliance and inventory through the Sterile Processing Departments.

[Operator Instructions] The next question is from Jason Bednar from Piper Sandler.

I want to start here, everyone, just maybe first on the larger buyback authorization. Definitely seems like a commitment -- greater commitment than anything you've done historically. The authorization is twice the size, I think, of your last one. I think your comment here of $200 million to $300 million is more than what you normally commit to. Just how should we think about executing against that authorization, considering how pressured your stock has been here of late? Would you be open to moving above that upper bound of $300 million if the stock remains under pressure? Just maybe the flexibility versus like hard commitment to the ranges you provided here.

Thanks, Jason. This is Karen. Yes, we are looking at and planning for a use of excess cash, and that's where the $200 million to $300 million is. You are correct. Historically, we would typically offset dilution. So about $100 million, maybe do a little more depending on cash position and opportunity and stock price. Because of the withholding tax, we believe a measured approach is the right answer. There's -- we have this incremental hurdle when we do buybacks to overcome. So when we model the withholding tax, the lost interest, potentially having to borrow to go bigger, it starts to not make sense. So that is our plan. And what we see when we do that is that we take the hit for that withholding tax in the period and we start to see the accretion as we execute consistently and don't continue to grow that withholding tax cost incrementally year-over-year.

Okay. That makes sense. Maybe one other one here just on -- Dan, this is probably for you. Just given what we're seeing across the supply chain landscape and inflationary pressure on certain categories and just reminded of what STERIS went through a few years ago in sourcing what I think you termed the golden screw. There's a lot of discussion out there from other equipment players on things like chips. Can you talk about what you're seeing on that front? Do you have supply visibility on chips and other critical components? And if you could, maybe, Karen, layer on what's assumed in your guide here with respect to supply and COGS inflation?

Yes. Thanks, Jason. What I would say is we're a vastly different organization today than we were a few years ago when we went through the golden screw diaries or whatever we want to call it. It was a miserable time for all of us. For one thing, we've significantly invested in our supply chain resources here at STERIS. We've also done a lot of work to mitigate single-source supply. We've identified basically any critical parts where we strategically hold excess inventory, which Karen doesn't love, I can assure you, but we do that where we need to.

And so I think we're in a pretty good position, not to say something can't possibly trip us up. But I think we're much more resilient today than we were when we had the exposures a few years back, and we feel pretty good about our position.

And to follow up with your question on inflation, we don't expect anything that's outsized in terms of labor, pretty routine. And in raw materials, as I mentioned, we have got metals, plastics, electronics, chemicals are our largest inputs in terms of raw materials. But again, they represent less than 20% of COGS. So we have assumed some upward pressure with the ultimate -- the oil impact on those types of materials, and we have assumed some upward pressure because of oil for freight and fuel costs.

But I think we've done a measured job, not too aggressive, not too conservative and taken outside views in terms of how long this may last and ultimately what that is. So it's in there. If this war goes on for a long time and oil stays high for the whole year, we may be a little short.

Okay. And just specific to chips or other components, just is there any other inflationary assumptions that you had, just assuming what we have here today extends through the year? Or you've built in some upward cushion if prices continue to rise?

Yes. Keep in mind, like chips, in particular, as bad as that was for us a few years ago, our overall spend is irrelevant as it relates to chips. They're just incredibly important to be able to make a machine but it's not like our cost components like we're making an automobile or something like that. There's hundreds of dollars of chips in a steam sterilizer, let's say, not $6,000 of chips.

And the next question is a follow-up question from Michael Polark from Wolfe Research.

I'm interested in the vibe check on your Life Sciences customers. Obviously, you had a kind of recovery year in fiscal '26 from a growth perspective, guiding to something similar in fiscal '27. That constituency seems to be coming out of an extended COVID boom-bust cycle. There's enthusiasm around reshoring. Are you feeling that? Is there a world where Life Sciences has kind of, say, better-than-average growth over the next couple of years?

Yes. Thanks, Mike. It's Dan. I've been doing this a long time and Life Sciences kind of does the cycle in general or pharma does a cycle about every 7 years or so. So this one just happens to be post pandemic related, but it's not new. Yes, we're optimistic. The buying patterns are back on the capital side, clearly saw that in this year's number. Our service business lagged a little bit this year, but some of that is parts and some of that's a hangover of having a lousy capital year the year before and still having a lot of equipment on warranty. As that comes off, that should improve with this year's past deliveries but take some time.

But the real star in that business is our consumables, growing 8%, high-margin business, really continues to deliver for us. It's critically important for the performance of the sector -- of our segment rather. But generally speaking, with the reshoring and some of the builds we're seeing on the East Coast and the Carolinas, there's a lot of good stuff going on in Life Sciences right now. What's not great is it's all big pharma right now that's doing well. What's not great is the lack of investment in some of the smaller stuff. But that's really not our sweet spot anyways, and we feel like we're in a pretty good position to help those customers that are establishing new operations here as they're reshoring.

If I can do one more. I appreciate the comments on the small tuck-in deals in Healthcare. Obviously $45 million, heard it loud and clear, it's small. But on the MEDglas, is that a margin benefit in addition to a revenue opportunity worth calling out? And then on GI consumables, would you be willing to frame like what just for a better sense of what you're adding there?

Yes. Sure, Mike. On the MEDglas, no, it's not really -- it's going to be accretive to margins. It's a relatively low-margin product, but it's really important. And what it is, it's basically a very visually appealing glass that can be used in the walls of ORs as well as Sterile Processing Department that lends itself to easy cleaning and you can even put graphics in there in such a way that it makes dark spaces really bright. And it's been very popular as we sell OR rooms and as we build out SPDs. So that's what that is. And keep in mind, that was a vertical deal basically where we bought our supplier that we're distributing for.

In terms of the GI products, these are basic products. A lot of them have crossover with our STERIS Endoscopy. Some -- there's some small capital equipment in the portfolio that's beneficial. But really what we got is 20 or 25 sales reps that are established in the U.S., inventory that we can go out and chase more business from a GI products or device product standpoint.

Ladies and gentlemen, this now concludes our question-and-answer session. I would like to turn the conference back to Julie Winter for any closing remarks.

Thank you all for taking the time to join us this morning to learn more about our performance on the quarter and our outlook for the year. We look forward to seeing many of you on the road this summer.

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

Good day, and welcome to the STERIS plc Third Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ms. Julie Winter, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Chuck, and good morning, everyone. Speaking on today's call will be Karen Burton, our Senior Vice President and CFO; and Dan Carestio, our President and CEO. And 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 expressed 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' securities 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.

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 press 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 cautions, I will hand the call over to Karen.

Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our third quarter performance from continuing operations. For the third quarter, total as-reported revenue grew 9%. Constant currency organic revenue grew 8% in the quarter, driven by volume as well as 200 basis points of price. Gross margin for the quarter declined 70 basis points compared with the prior year to 43.9%. Positive price and productivity, primarily driven by volume were more than offset by increased tariffs and inflation. EBIT margin decreased 40 basis points to 22.9% of revenue compared with last year, mainly driven by the decline in gross margin, which was somewhat mitigated by operating expense discipline.

The adjusted effective tax rate in the quarter was 24.2%, a small decline from 24.5% in the third quarter of last year. The year-over-year decrease was driven primarily by changes in geographic mix. Adjusted net income from continuing operations in the quarter was $249.4 million. Earnings per diluted share from continuing operations were $2.53, a 9% increase over the prior year.

Capital expenditures for the first 9 months of fiscal 2026 totaled $278.8 million, and depreciation and amortization totaled $363.1 million. We ended the quarter with $1.9 billion in total debt. Gross debt to EBITDA at quarter end was approximately 1.2x.

Free cash flow for the first 9 months of fiscal 2026 was $737.6 million, with year-over-year improvement, driven primarily by an increase in earnings and lower capital spending.

With that, I will now turn the call over to Dan for his remarks.

Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our third quarter performance. Karen covered the quarter at a high level, so I will add some commentary on our segments.

Starting with Healthcare. Constant currency organic revenue grew 8% for the third quarter with growth across all categories. Service continued its streak of outperformance, growing 11% in the third quarter. Consumables also performed well with growth of 8%. Healthcare capital equipment revenue increased 7% for the quarter with backlog remaining over $400 million.

Orders were down 1% year-to-date against difficult comparisons to last year. EBIT margins for Healthcare in the quarter decreased 100 basis points to 24.3% as volume, pricing and restructuring program benefits were more than offset by increased tariffs and inflation.

Turning to AST. Constant currency organic revenue grew 8% for the quarter with 9% growth in services and 103% growth in capital equipment revenue. Services benefited from stable medical device volumes, bioprocessing demand and currency. EBIT margins for AST were 45.1%, up 30 basis points from the third quarter of last year as the additional pricing and volume were more than able to offset increases in labor and energy and the unfavorable mix impact from strong capital growth. Constant currency organic revenue increased 5% for Life Sciences in the quarter driven by 11% growth in consumables. Capital equipment also performed well with 7% growth in backlog holding over $100 million.

Margins declined 20 basis points as volume and price were more than offset by tariffs and inflation. From an earnings perspective, we grew the bottom line 9% in the quarter to $2.53 per diluted share. Included in that number is approximately $16 million of pretax tariff impact, which primarily impacted our Healthcare segment.

Turning to our outlook for fiscal 2026. As noted in the press release, we are maintaining our outlook for the year. This includes approximately 8% to 9% as-reported revenue growth and constant currency organic revenue growth of 7% to 8%. Our earnings outlook of $10.15 to $10.30 is also being maintained, although with $10 million more in anticipated tariffs, the higher end of that range is less likely.

Free cash flow is expected to be $850 million, and CapEx remains unchanged at $375 million. We are pleased with our performance year-to-date, delivering constant currency organic revenue growth of high single digits and double digits earnings per share despite the tariff headwinds. That concludes our prepared remarks for the call.

Chuck, would you please give the instructions and we can begin the Q&A.

[Operator Instructions] And our first question for today will come from Brett Fishbin with KeyBanc.

Just was hoping maybe at a high level, company-wide, you could just touch on how you're thinking about fourth quarter constant currency growth, just thinking about, you're kind of tracking a little bit above the high end of the 7% to 8% FY '26 range and maintain 7% to 8% for the year. So just kind of wondering if there's any incremental concerns or temporary items impacting 4Q, or maybe if it sets up as we should be thinking about the higher end or potential upside?

As we look at the fourth quarter, and as we said last quarter, we do have a bit of a slowdown in the second half. So -- and that would be my caution on getting too excited about the fourth quarter. So that is why we're holding that 7% to 8% constant currency. Last year's fourth quarter was a solid quarter. So it's a tough comparison as well, particularly in AST, where we had a really strong capital equipment fourth quarter, which is not expected this year.

Brett, this is Julie. Just to add on Healthcare, too. We've been saying all year, we don't expect Healthcare services to stay in the teens. We slowed a little bit to 11%. In the third quarter, we would expect continued slowing in that business in the fourth quarter.

All right. Perfect. And then maybe just one more for me. I was just interested to hear maybe a little bit more about what you're seeing around capital equipment backlog activity in both segments. I think the Healthcare backlog is showing stability kind of in that -- in the same range it's been in the last couple of quarters, but seeing some pretty strong growth out of the Life Sciences backlog. So just any thoughts on kind of what's going on there would be appreciated.

Yes, Brett, this is Dan. The Life Science one is easy because that's just a recovery comparison to where we were a little over a year ago when pharma wasn't spending as much. And we started booking strong orders Q3 last year, and that's continued, and it continues today and as those continue to flush out, we're just in a much better spot from a macro perspective than we were a little over a year ago. So that's positive.

On the Healthcare side, we've had strong orders all year. I mean, we're down 1% versus prior year, which was a blowout year in terms of order intake. So we have not felt any meaningful slowdown as it relates to capital spending. And I go back to what I've said many times is a lot of times, our products are treated almost the utility. They're needed for capacity. They're essential in the hospital. And if the procedures continue to grow at some nominal rate or location changes that capacity has to be put in place as it relates to sterilization disinfection, et cetera. So we've been fairly resilient, whereas I know maybe some others have seen some capital slowdown.

The next question will come from Mac Etoch with Stephens.

Maybe just a follow-up on Brett's capital equipment question, Life Sciences. I'd just like to know how you would characterize the current conditions in that end market and how conversations with customers are evolving around U.S. onshoring and capacity expansions?

I'd say, in general, Mac, any time there's a juxtaposition of manufacturing locations, as we tend to benefit on the capital side of things because they're putting in new capacity. Clearly, there's been some pretty big announcements in the last few months in North Carolina and Pennsylvania and other states, that have got commitments to build large new processing capacity. And fortunately for us, a lot of that capacity is aseptic manufacturing type products, which tends to be our sweet spot.

So it's definitely a positive macro for us right now. I think the more important thing is that despite some of the pricing pressures in pharma and some of the regulatory changes that may be coming there, nonetheless, they seem to be in a much better spot than they were 1.5 years ago, when there was some confusion. So all in all, it's been a positive for us.

Appreciate that. And then obviously, the $10 million increase in tariff-related costs that popped up on the press release, I'd just like to potentially get an update on your mitigation efforts and get your sense of how you will be able to maybe offset a majority of these costs in FY '27, if that's possible.

Sure. Yes, there's a wide variety of mitigation efforts going on, and we are optimistic about our ability to continue to absorb those as we go forward and fully as we move forward. They range from shifting product movement, supplier negotiations, alternative suppliers, honestly, the hardest work and the biggest part is looking for other cost reductions and ability to offset those costs with productivity improvements efficiencies in our facilities and across the offices back office as well.

Mac, this is Julie. Just to add on the third quarter and the $10 million for the year is mainly driven by metals, and we see an uptick in metals with the more capital equipment sales. So the mix shift to capital has a direct impact on the tariff exposure for this year.

The next question will come from Michael Polark with Wolfe Research.

I'll stay on tariffs and then I want to shift to AST. So just on tariffs, can you remind the $55 million that's now in the guidance? Is that 6 months just December and March? Or was there an impact in the September quarter as well? And I asked just because I'm trying to understand like what -- how much we'll need to annualize it?

We were $16 million in the third quarter, Mike, and we would expect that to step up a little bit in the fourth. The $55 million is an annual run rate for fiscal '26, and we have been incurring tariffs every quarter.

It seems that Mr. Polark has disconnected. Our next question will come from Patrick Wood with Morgan Stanley.

Two kind of both on the like macro and regulatory side. CMS had 2 different proposals. There was obviously the PPE sort of onshoring and some of the API stuff on the drug side. Curious if you think that would have any effect as supply chain shifts and if that could affect you guys in a positive way. And then the other 1 was like another CMS proposal, they're obviously getting rid of for a lot of surgeries, the inpatient-only list. They did that obviously for musculoskeletal, but they're doing it for some of the soft tissue surgeries and things. Is there a chance that, that pulls more procedures into the ASC? And do you view that ASC shift as a good thing or a bad thing for you guys?

Yes. Sure, Patrick. This is Dan. Nice to hear from you. I would say that the ASC shift has generally been a positive for us. There's new capacity demands. There's also a higher degree of clinical support that those facilities need than maybe large acute care facilities in terms of sterilization disinfection, and that's something that STERIS is uniquely positioned to provide, and we've been able to do that quite well. In terms of the PPE shift, I have not yet seen any material commitments of major manufacturing moving to U.S. at this point that would have an impact on -- I mean, that would largely be an ASC play, right, in terms of PPE that needs that sterile drape and gown type stuff. But I've read about it, but I haven't seen any impact from it at this point. And in terms of your question on the API relocation, I have not seen an impact on that yet either.

Right. That's helpful. And then just very quickly as a follow-up. We had chatted before about potentially, I don't know, it's hard for what you can and can't say, but a bit more of the commercial push in EMEA across some of your product lines on the sterilization side. Is that still something a more integrated model and competing a little bit more aggressively in EMEA, is that still something that's on the cards?

Absolutely. Yes. That's something we're committed to. We've made a lot of structural changes in EMEA in terms of how we're going to approach go-to-market. It's going to take a while to get that fully formulated and executed. It's a long process, but we're confident in the direction that we're heading.

Your next question will come from Mike Matson with Needham & Company.

So I wanted to follow up on Mike Polark's question on the tariff exposure in '26. I think maybe what he was trying to get at was like, what's the incremental exposure in '27. I know you probably can't give us a dollar amount, you're not giving guidance, but if you've been paying tariffs for basically all 4 quarters of '26, does that imply that kind of any incremental tariff impact in '27 will be small, less than a quarter worth effectively or...

I think that's a logical approach. Obviously, the tariffs did fluctuate during the year, especially in the first half of our year as rates settled in. And we're seeing it come through and reflected in the different mix. But I don't -- I think it's reasonable to say that it wouldn't be more than another quarter's worth kind of level. Based on current risk...

Yes, I understand.

What's in place right now.

Yes. Okay. And then just your leverage ratio is at just over 1x. It's been -- I think it's been a few years since you've done any acquisition. So -- it used to be a pretty big part of the STERIS story. So maybe why haven't you been doing more deals? And what's the outlook? Do you have a pipeline of things that you're looking at? And can we expect to see more in the next few years?

Well, we've been active on smaller sort of bolt-on product acquisitions and some channel acquisitions over the last couple of years. Doing major transformative M&A is not easy. It's something that we feel we're good at, and we have the muscle for, and we're good at integration, but we also have a very disciplined approach at what meets our financial criteria and where we add value from a customer perspective. So we're looking. But at this point, we've kissed a lot of frogs and not a lot of them have turned out to be princess.

Your next question will come from Jason Bednar with Piper Sandler.

I got to follow the frog just some comment here. I'm going to start with cash flow guidance here. You left that unchanged, but look, based on where you're at for the first 9 months, that target, it just looks like layup. So I guess, why not bump that higher? I get not changing revenue, I get not changing the EPS guide. But are there any cash flow fluctuations you're anticipating at year-end that would keep you from clearing that guidance bar?

Jason, yes, I think it's you're right. We are very confident with that guidance. A lot of times in the fourth quarter, timing really matters. So we've got a heavy capital quarter. Some of those, that activity will shift into next year in terms of cash collections. So it's a little bit harder to predict in the fourth quarter, especially since it is winter and weather can play a part. So a little bit of conservatism there.

Okay. All right. Fair enough. And then for a follow-up, I did want to peek a little bit ahead to fiscal '27. So look, you're sitting on a healthy backlog that's no secret. The ASP momentum is obvious for you and the broader market. The Street is only modeling 6% growth for next year. Is there a reason you wouldn't be able to maintain your typical 7-Eleven growth algorithm beyond fiscal '26? I know a lot have asked about -- here today about tariffs being kind of the impact on tariffs in fiscal '27. But any other considerations we should have in mind, whether it's top line or margin related?

I mean, obviously, we're in the throes of our planning period right now. But I would say in a general sense, the macros don't look negative to us right now. It would -- and obviously, next quarter, we're going to give you guys some solid guidance of where we think we're going to land in fiscal '27. But at this point, I don't see a lot of downside or anything materially changes in the market today.

And the next question is a follow-up from Michael Polark with Wolfe.

Can you hear me?

Yes.

Yes, no.

I'm so sorry, what happened earlier. I don't know, it just dropped, and it took me a bit to get back to. So my follow-up -- my follow-up was going to be on AST services, if somebody asked us and you answered it, I missed it. But just in the quarter, on constant FX, AST services line up 6%. The prior 2 quarters was up 10% constant FX if that makes some assumptions on the math. So can we just get a little extra color on kind of how you've seen the fiscal year play out in AST, why the December quarter might have been a little bit below the prior 2? And what's a good way to think about constant FX AST services growth in this current March quarter?

Sure. Yes. What I would say is, Mike, we kind of had a strange start to the quarter. We don't get in to talk about months sequentially, but October was really weak, and then it got better in November, and then we had a really strong December. So -- and there's nothing I can point to. There wasn't anything uniquely geographic. There wasn't any customer subsegment that we look at that was off. It was just a general softness in the volumes that we're seeing across the global network. That seemed to have had red itself by December.

If I can just follow up there and then I'll cede. Any for several quarters now, we've been asking about just the tariff impact, customers changing order flows as part of their tariff mitigation. Any fresh view as to whether that could explain some of this kind of quarter-to-quarter-to-quarter movement?

There was speculation, and this is somewhat anecdotal, but we have heard from some customers, they built ahead of tariffs a bit and got product into different locations. I can't say definitively that it was a material impact on the volumes and maybe that's why there was some slight inventory adjustment that we saw in the fall. But we haven't seen any movements that have impacted us negatively because we're well positioned all around the globe to work with our customers for sterilization.

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.

Thank you, everyone, for taking the time to join us this morning to hear more about our performance in the quarter, and we look forward to seeing many of you on the road in March.

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

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to STERIS plc 2Q Fiscal 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Julie Winter, Vice President of Investor Relations. You may begin.

Thank you, Bella, and good morning, everyone. Speaking on today's call this morning will be Karen Burton, Senior Vice President and CFO; and Dan Carestio, our President and CEO, and we 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' securities 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. STERIS' SEC filings are available to 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 press 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 cautions, I will hand the call over to Karen.

Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our second quarter performance from continuing operations. For the second quarter, total as reported revenue grew 10%. Constant currency organic revenue grew 9% in the quarter, driven by volume as well as 210 basis points of price. Gross margin for the quarter increased 60 basis points compared with the prior year to 44.3%. Positive price and productivity, primarily driven by volume more than offset increased inflation and tariff costs.

EBIT margin increased 90 basis points to 23.1% of revenue compared with the second quarter last year, mainly driven by operating expense leverage. The adjusted effective tax rate in the quarter was 24.5%. The year-over-year increase was driven primarily by changes in discrete item adjustments and geographic mix.

Net income from continuing operations in the quarter was $244.5 million. Adjusted earnings per diluted share from continuing operations were $2.47, a 15% increase over the prior year. Capital expenditures for the first half of fiscal 2026 totaled $180.1 million and depreciation and amortization totaled $241.1 million. We ended the quarter with $1.9 billion in total debt. Gross to EBITDA at quarter end was approximately 1.2x. Free cash flow for the first half of fiscal 2026 was $527.7 million, a very strong start to the year, driven by the increase in earnings and improvements in working capital.

With that, I will now turn the call over to Dan for his remarks.

Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our second quarter and our increased outlook.

Karen [ reported ] the quarter at a high level, so I will add some commentary on the segments. Starting with health care. Constant currency organic revenue grew 9% in the second quarter, with growth across all categories. Service continued its streak of outperformance, growing 13% in the second quarter. Consumables also performed well with growth of 10%.

Healthcare capital equipment revenue increased 4% in the quarter with backlog of over $400 million. Orders were up 3% year-to-date and down slightly in the second quarter. EBIT margins for health care in the quarter increased 100 basis points to 25.1%, with volume, pricing, positive productivity and restructuring program benefits offsetting tariffs and inflation.

Turning to AST. Constant currency organic revenue grew 7% for the quarter with 13% growth in services, offset by anticipated declines in capital equipment revenue. Services benefited from stable medical device volumes, bioprocessing demand and currency. EBIT margins for AST were 45.3%, up 250 basis points from second quarter last year as additional volume, pricing and less capital equipment in the mix were able to more than offset increases in labor and energy.

Constant currency organic revenue increased 12% for Life Sciences in the quarter driven by a return of capital equipment shipments with growth of 39%. Service revenues grew 9% and consumables increased 7%. Capital equipment backlog was up over 50% to $114 million. Margins declined 70 basis points as volume and price were more than offset by tariffs and inflation.

From an earnings perspective, we grew the bottom line 15% in the quarter to $2.47 per diluted share. Included in that number is approximately $12 million of pretax tariff impact, which primarily impacted our Healthcare segment.

Turning to our outlook for fiscal 2026. As noted in the press release, based on our first half outperformance and expectations for the balance of the year, we are increasing most elements of our outlook. We now anticipate approximately 8% to 9% as reported revenue growth, which reflects about 100 basis points of favorable currency, a significantly lower impact than we anticipated last quarter. Making up for the shift in currency impact, constant currency organic revenue growth is now expected to be 7% to 8%, an increase of 100 basis points from our prior outlook. This improvement was driven by our first half outperformance. We now expect all 3 segments to grow 7% to 8% on a constant currency organic basis for the year.

For AST, we now expect services to grow 9% to 10%, which will be offset by anticipated declines in capital equipment, particularly versus the tough comparisons in the fourth quarter.

We are also increasing our earnings outlook with a new range of $10.15 to $10.30. For your modeling purposes, we now expect EBIT margins to improve 10 to 20 basis points in fiscal 2026. This will be partially offset by a 50 basis point increase in our anticipated effective tax rate of approximately 24%.

We are also increasing our outlook for free cash flow by $30 million to $850 million for fiscal 2026. CapEx remains unchanged at about $375 million. We are pleased with our strong start to the year, and we are confident in our ability to meet these revised expectations.

That concludes our prepared remarks for the call. Julie, would you please give the instructions so that we can begin the Q&A.

Thank you, Karen and Dan, for your comment. Bella, can you please give the instructions for Q&A and we can get started.

[Operator Instructions] Your first question comes from the line of Brett Fishbin with KeyBanc Capital Markets.

Just wanted to start on AST. I was curious if you guys could comment a little bit on what drove the second consecutive quarter of double-digit growth in services. And then just how you're thinking about sustainability of trends in that area going forward.

Yes. Thanks, Brett. This is Dan. I think it's more of the same. We continue to see pretty stable volume from our medtech customers. We continue to see recovery in bioprocessing, which was a negative drain on us for some quarters a year or so ago. And in addition to that, we've had a number of expansions going to place over the last 4 years. And that investment is facilitating our growth. So we're very confident in the 9% to 10% outlook that we have going forward.

There's still a little noise out there. We have seen some juxtaposition of customer volume in terms of manufacturing location, but not in a real meaningful way. So we feel pretty good about our global footprint and how that facilitates those needs.

All right. Perfect. And then just one more for me. I think in the press release, you mentioned that operating margins took a step up despite several headwinds. I think you mentioned tariffs and inflation on the call today. Maybe if you could just touch on any other items that you might have been referring to? And then how much of an offset you're kind of viewing those collective headwinds against the underlying margin expansion?

So as you noted, we are referring to tariffs and inflation, both labor and material.

Okay. Sorry. Is there like any way to maybe approximate like how much those headwinds represented as an offset in the quarter to margins?

The -- yes, tariffs in the quarter were 90 basis points and material inflation was -- material and labor inflation was about 130 basis points across the company.

Your next question comes from the line of Patrick Wood with Morgan Stanley.

Beautiful. Two quick ones. I guess, the first one, health care on the service side. also was very strong. What are you seeing there? Could you unpack that a little bit for us?

Yes. I mean a couple of things. Our service business in health care is obviously our traditional rents turning service on our equipment and install work that we do that goes along with our capital. But there's a much larger component of that goes into our IMS repair business and then processing of instruments where we operate as a service. So volumes are strong. We've been doing very well for the last, I don't know, 5, 6 quarters, I would say, with double-digit growth.

Some of that, we have said all along is that's an area of the business that we're able to get price, and we have been able to get price because of the justification of significant labor increases that were going on for a number of years. And -- but as that has normalized, those things, you're going to see -- I believe what we're going to see is a bit of a slowdown from 12%, 13% to something less than that, but we are also going to see a coinciding slowdown in labor cost. So it's -- it should not affect the overall margin, but will slow down the top line a bit.

I got you. That makes sense. I guess one more, which is basically like on the modality side like X-ray, could you give us a sense of how that's contributed to growth is obviously an exciting modality?

Yes, we're very excited about it. We don't break out the technologies just -- it will become just a math exercise that we'd have to keep up with, that's not worth pursuing. We look at radiation as one technology and doses dose. And we use gamma and we use [indiscernible] we use x-ray. And although we're incredibly excited about X-ray, and that's a lot of the expansion capacity that we've built out. It's just one tool in our bag.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Congrats another strong quarter here. I heard you on the updated outlook for the segment and I appreciate the breakout of the service growth in AST. Wondering if you're willing to give maybe a similar perspective on the outlook for some of those health care subsegments. Dan, I just heard you on service there, maybe detailing a little bit as maybe price comes off. But what about like consumables versus equipment? Any way to give a little bit of color there, rack and stack, help service top, consumables next equipment, bottom kind of the growth. Anything there would be great.

Yes. I mean we would -- I mean you can do the basic analysis, and we consider our consumable business to grow on sort of the share we've gained in the history and procedure rate, right? And so I would expect that trend of good performance to continue. On capital, we're sitting on a huge backlog number right now, over $400 million in health care and capital. And our order rate remains strong. That comes down to really timing of shipments.

We feel pretty good about the next 2 quarters, although we've got some tough comps in health care capital. So it's hard to say specifically what we're confident is that we're in a good position. But if you have to put a gun to my head, I would say service is probably going to be near the top, consumable second. And capital is going to grow, it's going to do fine, and it's kind of a bit of a wildcard in terms of timing.

Okay. That's very helpful. And then, Karen, you're already at $530 million in free cash flow this year. Really impressive so far, but you typically generate far more free cash in the second half of your fiscal years. So is this just an abnormal year when I look at the -- your updated guidance, I like the raise, but is this just an abnormal year where you get more cash generation in the front end of the year and you've maybe had some things shift out of second half or pulled forward from second half into first half? Or is the guidance just really conservative here for the full year?

So I would say that we have seen stronger first half cash flow than is typical. The pulling the earnings a little bit forward into the first half is a contributor. We've also had some meaningful improvements in working capital, faster collections on those late fiscal '25 shipments. So I think the answer is all of the above. As you mentioned, it stronger earnings earlier in the year, improvements in working capital earlier in the year and a little bit of cautiousness.

Your next question comes from the line of Mike Matson with Needham.

So just in terms of the health care business, I mean, I know you kind of broke it out into the capital service and consumables. But -- just wondering if you could give us any more detail around geographies, types of customers, hospitals versus product lines, et cetera, that are driving the growth there? Is it pretty strong across the board? Are there any areas of those things where you would call out you're seeing particular strength?

Not really. I mean, we're seeing pretty good strength across the globe in terms of geographic and there still seems to be a lot of procedures going on and particularly strong in the U.S. more so than other places, but we're starting to see recovery in other places as well. So no, there's nothing I would call out specifically.

Okay. And then for AST, can you just give us an update on your capacity there? And are you currently capacity constrained? And if so, how fast can you address this? I think you've said earlier in this call that you are expanding capacity there.

Yes. It's a long process to expand capacity. In AST, from the time we decided to build a plant at the time its operational, it can be 2 to 3 years. So we have a number of expansions that have been completed. We have a number that are in process, and we have a number that are planned out into the future. And we've been pretty steadily bringing new capacity into the market now for the last 8 years. So we're in a good position in most geographies, if not all geographies in the world right now in terms of where we've added capacity to facilitate plants that are nearing their limit of capacity.

Your last question comes from the line of Michael Polark with Wolfe Research.

I will say I forget what the record is for prepared remarks, but 9 minutes was pretty good again. So kudos. I got two big picture ones. Life Sciences, some growth mojo back, 12% in the quarter. Obviously, the comps are easy and capital equipment is a big off of a low base. But nevertheless, my question is thematic this notion of reshoring hearing about a little bit, Pharma's biotechs bringing their manufacturing partners, bringing manufacturing back towards the U.S.? What do you think on this? Do you see any evidence that it's helpful so far here anecdote that it could be helpful for you? What is the state of this theme for your exposure in this space?

Thanks, Michael. Yes, any -- in general, any time we see our large pharma customers moving or expanding capacity in manufacturing locations, whether that's new greenfields or whether that's existing sites, that generally bodes well for our capital equipment business. And there's probably more noise in there is substance to the amount of redistribution or construction firm at this point. But there is some. It is real. And I do believe we are getting maybe some benefit from that on the GMP side or the pharma side of our capital equipment.

It's also, like you said, it's -- we're comparing against some pretty significant troughs when there was nothing going on in pharma for almost 18 months in terms of that type of work.

The other one is in health care, and I've been asked this once or twice a year for good number of years running, but it's the topic of single-use scopes and obviously, this is a function of your Cantel exposure. Like what is the state of that trend today? Has it really not lived up to what was once believed to be high expectations or those products are getting some traction? It's just small and therefore, not all that significant. I know once upon a time, not long ago, you talked about launching your own single-use scope, maybe that's been a helpful offset. But what are you seeing there over the last year or 2? And what's on the horizon over the next year or 2?

Yes. I think what I would say and what we've been consistent in our messaging is that there is a place for single-use scopes, especially as it relates to small diameter scopes. So think of histoscopes, ureteroscopes, different nasogastric scopes, things like that, brachyscopes. But the bulk of the business we have at STERIS in terms of everything that we do has to do with the large diameter scopes that you would use for colonoscopies.

And the reason why it makes sense for the small diameter scopes is the cost -- the break frequency and the relative cost to fix them is pretty high versus when you look at large diameter scopes, they tend to be much more robust. They last a long time, they also cost a lot more upfront. So we've said all along, there's a place for certain aspects of disposable. And I think if you look a lot of the disposable scope manufacturers are highly focused on the small diameter scopes. And some of you even announced that they're not focusing at all on large diameter scopes for colonoscopy.

That concludes our Q&A session. I will now turn the call back over to Julie Winter for closing remarks.

Thank you, everyone, for taking the time to join us this morning to learn more about our performance in the quarter and our outlook for the year. We look forward to seeing many of you on the road later this.

Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.

Good day, and welcome to the STERIS plc First Quarter 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Julie Winters, Investor Relations. Please go ahead.

Thank you, Allen, and good morning, everyone. Speaking on today's call will be Mike Tokich, our Senior Vice President and CFO; and Dan Carestio, our President and CEO.

And I do have a few words of caution before we open for comments from management. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or rebroadcast of this call without the expressed 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' securities 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. 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 cautions, I will hand the call over to Mike.

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 first quarter performance from continuing operations.

For the first quarter, total as reported revenue grew 9%. Constant currency organic revenue grew 8% in the quarter, driven by volume as well as 230 basis points of price. Gross margin for the quarter increased 20 basis points compared with prior year to 45.3%. Positive price and productivity outpaced inflation and tariff costs.

EBIT margin increased 50 basis points to 22.8% of revenue compared with the first quarter of last year due to the improvement in gross margin and operating expense leverage. The adjusted effective tax rate in the quarter was 23.5%. The year-over-year increase was driven primarily by geographic mix and changes in discrete item adjustments.

Net income from continuing operations in the quarter was $231.2 million, adjusted earnings per diluted share from continuing operations was $2.34, a 15% improvement compared to the prior year.

Capital expenditures for the first quarter of fiscal 2026 totaled $94 million and depreciation and amortization totaled $119 million. We continued to pay down debt during the quarter, ending with $1.9 billion in total debt.

Gross debt to EBITDA at quarter end was 1.2x.

Free cash flow for the first quarter of fiscal 2026 was $327 million, a very strong start to the fiscal year, driven by an increase in earnings and improvements in working capital.

Last week, we announced our 20th consecutive year of dividend increases with a 10% increase to $0.63 per quarter as we continue to prioritize consistent dividend growth.

Before I close, I'm sure that you all read last night's release regarding our CFO transition. I want to take a moment to thank all of you for your continued support over the last 17 years, actually 18 years if you count the time I served as interim CFO. The time -- the company has grown significantly during that time in terms of revenue and profitability, being able to provide not only financial leadership, but also to provide strategic oversight throughout this significant period of growth has been a tremendous honor and accomplishment for me.

STERIS is on solid financial footing and has a proven financial team in place, which makes now the right time to transition the CFO position to Karen. Karen and I have worked together for the past 20 years at STERIS, and we have been working behind the scenes for many years preparing her for this role. I am confident in not only her financial ability, but also her leadership capability to lead this great company into the future.

I will be around for a while as a special financial adviser and look forward to supporting a smooth transition. With that, I will now turn the call over to Dan for his remarks.

Thanks, Mike, and good morning, everyone. Thank you for joining us to hear more about the start to fiscal 2026 and our updated outlook. Before we jump into the numbers, I do want to take a moment to recognize Mike for his long and successful career as CFO.

Mike's leadership and financial acumen have been essential to our success. Under his leadership as CFO, we have grown meaningfully in all aspects: revenue, earnings and market cap and have completed over 80 M&A transactions. He has built a strong global team, including Karen, and we are well prepared for this transition.

Moving on to our performance. Mike covered the quarter at a high level, so I will add some commentary on our segments. Starting with Healthcare, constant currency organic revenue grew 8% for the first quarter with growth across all categories. Healthcare capital equipment revenue increased 6% for the quarter with underlying order growth of 14% and ending backlog just over $400 million.

Service continued its streak of outperformance, growing 13% in the first quarter, and Consumables grew 5% compared with a strong first quarter last year.

EBIT Margins for Healthcare in the quarter increased 10 basis points to 24.2%, with volume, pricing, positive productivity and restructuring program benefits offsetting tariffs and inflation.

Turning to AST. Constant currency organic revenue grew 10% for the quarter with 12% growth in Services. Services benefited from currency, bioprocessing demand and stable medical device volumes.

EBIT margins for AST were 48.6%, up 150 basis points from the first quarter of last year as the additional volume and pricing were able to more than offset increases in energy and labor.

Constant currency organic revenue increased 4% for the Life Sciences group in the quarter, driven once again by strong growth in Consumables of 8%. Services revenue grew 3%, capital equipment revenue was about flat, with backlog up over 50% to $111 million.

Margins increased 260 basis points, benefiting from favorable mix, pricing and productivity.

From an earnings perspective, we grew the bottom line 15% in the quarter to $2.34 per diluted share. Included in that number is approximately $9 million of tariff impact, which primarily impacted our Healthcare segment.

Turning to our outlook for fiscal 2026. As noted in the press release, we are updating our outlook for as-reported revenue due to a significant shift in forward currency rates. We now anticipate approximately 8% to 9% revenue growth, which reflects about 200 basis points of favorable currency.

Constant currency organic revenue growth is unchanged at 6% to 7%. Each segment is expected to grow constant currency organic revenue in the range of 6% to 7% for fiscal 2026. AST's revenue and growth in the first quarter was stronger than anticipated. Despite the strong start, we are maintaining our outlook for the year at this time.

Our earnings outlook is also unchanged at $9.90 to $10.15, which now reflects $45 million in tariff costs, an increase of $15 million over last quarter. Fortunately, favorable foreign currency will offset that increase.

For your modeling purposes, at the high end of our earnings range, we would expect EBIT margins to be about flat. No change is anticipated to our effective tax rate of approximately 23.5%. Based on the strong start to the year, we are increasing our outlook for free cash flow by $50 million to $820 million for fiscal 2026. CapEx remains unchanged at $375 million.

That concludes our prepared remarks for the call. Julie, would you please give the instructions so we can begin the Q&A.

Thank you. Thank you, Dan, for your comment. Allen, can you please give the instructions for Q&A, and we'll have started?

[Operator Instructions] Our first question today comes from Brett Fishbin of KeyBanc.

Congrats on the announcement, Mike. I just wanted to ask first on the revised tariff estimate, if you could just give a little bit more detail on specifically what drove the increased expectation, whether it was a change in policy or something you were seeing as you continue to do more of the analysis.

Yes. Brett, this is Mike. A couple of things drove the increase. First is the additional tariffs that we have seen on metals. Both steel and aluminum went from 25% to 50%, copper went from 0 to 50%, and the EU changed from 10% to 15%. Remember, when we guided in mid-May, we had more clarity than most, so these are changes since then, and that's why we are increasing and not decreasing our tariff exposure.

No. Certainly makes sense there. And then I just wanted to ask one more follow-up on AST. Sounded like you're generally maintaining the 6% to 7% organic expectation, despite a double-digit start. So I was curious if that's more leans towards just conservatism after just 1 quarter of the year or if you're seeing anything changing that would make you expect certain quarters to maybe be below that range.

Yes. Brett, this is Dan. I would say it's general conservatism. There's some moving parts going on in MedTech with reflects some changing positions of manufacturing from our customers. And at this point, we feel very confident in the numbers that we're putting forward. And if things flow out a little better, maybe we do a little better.

Our next question comes from Mac Etoch of Stephens.

Congrats, Mike. I think just first, I'd love to get your take on what's -- what you're seeing within the bioprocessing market. Just I think last year, you commented on some -- a slower start to FY '26. So I just want to get an update there.

Yes, sure. This is Dan. I would say that for the last year or so, we've sort of seen some fits and starts in terms of volumes coming through the facilities. It's been pretty consistent now for, I would say, the last 4, 5 months and back to what we would see as a normal trajectory off of a reset base.

So we believe at this point, it's fairly predictable. That's -- the assumption there is that we don't have customers overbuilding inventory, which is hard to fully understand. But nonetheless, it's been much more consistent in recent periods.

Appreciate that. And then also, I noticed the Life Science segment saw a pretty strong increase in the segment's backlog sequentially. So I was just kind of curious to get your sense of what's driving the increase there, what your expectations are for the rest of the year.

Yes. A year ago, Life Sciences and Pharma kind of runs on these 16-month cycles when things go down a bit in terms of capital. During that time, we continue to do really well in our Consumables business. But as those orders dried up because of customer layoffs and some plant relocations and sort of extreme slowdown in vaccines and a number of other things, the capital orders dried up.

And what we've seen is that cycle is pretty much completed at this point. We've seen a very good strong order intake for quite some time now. And I feel pretty good about catching up on that space.

The next question comes from Michael Polark of Wolfe.

Mike Tokich, it's been a pleasure. First question, I'm interested, Dan, in your perspective, the comments recently from one of your competitors in low-type sterilization. Six or so weeks ago, kind of an alarm bell sounded on procedure softness, purchasing delays in capital related to kind of regulatory and policy shift concerns at hospitals.

Obviously, in these numbers from you, I see none of that. And so what did make of all that? Is this you're taking share? Any perspective would be welcome.

Mike, it's Dan. Yes, I mean, it's hard to say. I mean, we have a lot of data points from a number of the offsite centers that we run for hospitals in terms of volume, the volume we're seeing going through AST and what we've seen over time and in the recent quarter in terms of our backlog growth and order intake. So we feel like -- I'm not sure where they came to that conclusion, but we feel pretty good about our position and haven't seen any slowdown.

Can I ask a real boring one in the updated guidance? It was FX benefit offset by incremental tariffs. And then you called out in the press release higher employee health care benefit costs. We all see what's happening with managed care. I can attest Wolfe internally has been struggling with higher premiums for the coming year.

Is that what this is? And kind of -- I'm interested in any fresh perspective because you're obviously on the front end of your fiscal year. And as I think we roll into calendar 2026, I suspect we'll hear this from a lot of other companies. So what are you seeing on that front?

Mike, it's actually utilization of our employee health care benefits is where we're seeing that. We did increase premiums as we typically do, low single digits. But at the same point in time, we are seeing just utilization causing that increase in cost.

Our next question comes from Jason Bednar of Piper Sandler.

And Mike, congrats on a great career at STERIS. It's been a pleasure working with you, and pretty impressive cash flow figure for you to go out on here. For my questions, I'll start on order growth, also really impressive in the quarter for both Healthcare and LifeSci. I know this stuff can be lumpy sometimes, but those are really strong results, especially for a first quarter.

Can you talk about the capital demand environment you're seeing out there and how this order book and backlog contributes to the confidence you have on the full year revenue guide?

Yes. The orders have remained strong in both sectors. We haven't seen a slowdown, in particular, in the health care sector, we feel like we really have got a great portfolio and a very strong offering that is positioned STERIS very positively with our large customers who are looking to do more with partnership-type vendors, and STERIS fills that requirement.

So I -- we feel pretty good. And having a lot of backlog does bode well obviously for the future in terms of our ability to schedule and predict the timing of those shipments as they go after customers over the fiscal year and into next.

All right. Great. And then as follow-up and dovetailing off that cash comment I made on -- to Mike. The balance there -- the cash balance there is, I think, the highest it's been in a few years. You paid down a little bit of debt in the quarter. You bought back a small amount of stock.

What do you do from here? The stock is cheap by historical standards. There's obviously a long M&A history at STERIS. Is M&A still that preferred use of cash? I think that -- I think it is, but can you talk about what you're seeing out there in that environment, what those discussions look like? Any preference you're leaning towards in terms of allocating that cash?

Yes. I think we still have time to think about it. But what I would say is we have been historically active on the M&A front. We continue to be. We have done some small transactions over the past couple of quarters. We continue to have those opportunities going forward. And as always, we're always looking for larger opportunities, and those come in time. And when they do, they do. It's hard to predict.

And Jason, you will see over the next couple of quarters without M&A activity. We will continue to build a cash position because we have almost no prepayable debt remaining. Everything that we will have on our balance sheet are either private placement notes, which I think the next tranche is due not until 2027. And then we have the public bonds. Off top of the head, the first tranche there was a 10-year tranche. And I think that's 30, 32 or 30, 33.

So that will -- don't be surprised if cash does continue to build in the short run.

Right. And then obviously, we will continue to do buybacks as we typically do to offset dilution mainly. We were, as you can imagine, blacked out this quarter because of -- by announcement, unfortunately, we were able to take advantage of that, but we should get back to at least offsetting dilution in the short run.

[Operator Instructions] Our next question comes from Mike Matson of Needham & Company.

Yes. So a couple on the Life Sciences business. We've seen with regard to what's happening in D.C. So there's been some cuts in vaccine spending, kind of reduced recommendations there. And then, broadly, we're seeing kind of a pullback in pharma company spending.

But then at the same time, there's talk about trying to push more drug manufacturing into the U.S. or incentivize that. So how do you think all those things sort of shake out for that business?

It's a complicated landscape is what I would say at this point. Any time there's relocation of manufacturing, that tends to drive some benefit for our capital business because, obviously, new equipment to manage those aseptic environments.

We've already seen the falloff in vaccines from where it was 3, 4 years ago. So I don't think that's really a headwind for us going forward necessarily. And given the growth that we've seen in other biological drugs and cell and gene therapies that require those aseptic environments, we feel pretty confident that despite whatever macro changes their way maybe in terms of location or specific type of drug, the demand is going to remain fairly high.

Okay. Got it. And then just one on the free cash flow guidance increase since your kind of earnings guidance is unchanged. I assume that's mainly driven by working capital. Is that right? And is that inventory or receivables or something else?

Mike, it is working capital, and it's both inventory and receivables that we believe we will get increased cash flow from. It's about $50 million in total. And since we did overachieve this first quarter, we are carrying that through for the year.

Our next question comes from Justin Wang of Morgan Stanley.

I'm filling in for Patrick. So last month, I think President Trump granted 39 ethylene oxide sterilization facilities a 2-year regulatory relief from NESHAP compliance. However, I didn't see any of STERIS' EO sites included in that list.

Could you clarify whether this is because your facilities didn't need the extension to be compliant? Or was this relief something that STERIS pursued but didn't receive? And more broadly, how do you see this regulatory development affecting the competitive landscape as well as your positioning in EO near term?

That's a loaded question. So there's a lot there. Well, first off, we didn't apply for it because we don't feel we need it. We've been way out ahead of this going back 4 years now in terms of our facilities. And as I've discussed before, because many of the STERIS facilities are newer, generally speaking, in the EO landscape, the engineering modifications that we've had to make to ensure that we meet compliance with NESHAP, we're not as significant as maybe some other older facilities. So we're confident in where we are and didn't feel it necessary.

In terms of the competitive landscape, I mean, it extends the clock maybe on some facilities that may not elect to ultimately make the high-level investments in terms of meeting the compliance, NESHAP, but I don't think in the grand scheme of things, it's really all that material.

The next question comes from Dave Windley of Jefferies.

Mike, congratulations on a good career. I hope I wasn't the straw that broke the camel's back. It just made you think it was time to go, jokingly.

Thank you. You're half of this vine. Thank you.

But when we were together in June, we talked a little bit about outlook -- hospital outlook on volumes and potential impact of OB3. And I think at the time, it hasn't passed, obviously. Maybe hospitals were more tied up and trying to manage supply chain and issues around tariffs.

I wondered if with the passage of time if management had more conversations with your hospital clients in terms of how they are assessing the potential impact of OB3 and declining coverage in Medicaid exchange, things like that.

Yes. I mean, it's -- we'll see how things play out, I guess, is what I would say. But generally speaking, I think it's going to be a challenge for our customers. Obviously from a cash -- from a payment standpoint. It's more of a -- it's more of how they're going to figure out how to manage that than it is a demand standpoint in terms of procedure rates ultimately.

So -- and obviously, as indicated in this past quarter's orders, and we haven't seen any pullback, nor have we seen any pullback in current procedure volumes. So I kind of go back to what I said there is we think it's a payment reimbursement issue for our customers. And for health care system in general in the U.S., that's going to have to get sorted out under the new requirements.

Got it. And then a more boring one. If you could remind me on FX. Does that largely flow through the -- are you kind of operationally hedged on the FX? Or do you see that have different effects on profitability than on the top line?

No, we are pretty much hedged. Unfortunately, with the top line increasing by 200 basis points from an FX standpoint. By the time you get to the bottom line of the FX, which is about $14 million or so, $15 million, we're going to have that offset the increased tariffs. So -- but in general, we are pretty much naturally hedged.

And our next question comes once again from Michael Polark of Wolfe.

Just one more for me. Dan, I'm curious where you think we are ending the proverbial inning question on the ASC build out in the U.S. And I asked specifically, we know orthos on its way as a prime example. But this summer, Medicare provided a path for like cardiac ablation to be done in the ASC now, which is a high-volume EP case. So kind of what's your feel out there? Is this still a mega trend? I'm curious for any fresh anecdotes on where you think we are in the cycle.

Sure. Yes. I don't think that really affects in terms of volumes going through AST. I think that's more of where procedures are going to be done as some shift continues.

Sorry. I was asking with the lens of your capital business in health care, ASCs, ambulatory surgery centers.

Okay. That makes much more sense. Yes, whenever there's relocation of where procedures occur from a capital perspective, that's generally beneficial to us. I think there's -- it also requires us to meet an unmet demand, which is where you're going to have lower scale, less skill in terms of labor in those facilities, and we need to make sure that we have the proper training and compliance programs for those customers to ensure they can meet the demands of the patients in terms of providing safe and sterile reusable devices into the ASC market.

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

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

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