STERIS Pricing Spineometer: 2 of 5 Vertebrae

STERIS, a global provider of products and services to healthcare sterile processing departments including surgery centers and endoscopy, had a positive Q3 2024. Revenue rose 14.8% to $1.4 billion and earnings before interest and taxes rose 13% to $217 million over the same period last year.

A review of STERIS’s Q3 2024 earnings call held on 8 February 2024 and related financial reports provided insight regarding the importance of pricing on performance.

Mike Tokich, CFO of STERIS, began by calling out a 10% improvement in revenue driven by 270 basis points of price and 730 basis points of quantity sold.  Dan Carestio, CEO, added, “Our ability to justify putting through price increases with customers has to be some basis of cost.”  Both implied that price increases were more than offsetting labor and cost increases to bring the business back aligned with pre-pandemic conditions.

As for demand, STERIS managers report seeing a backlog of medical procedures related to the pandemic that is currently being cleared.

From industry benchmarks, we would expect to find 10 to 50 professionals engaged in pricing at STERIS.  Factors that would narrow this expectation range for STERIS include:

1. Global operations imply a need for pricing specialists distributed across North America, Europe, Asia Pacific, and Latin America.
2. Contract negotiations would be customer-specific and likely long-term. This implies a need for price guardrails for each contract and possibly clear and objective metrics to contractually adjust prices over each contract’s lifetime.  (Republic Services can provide a comparison.)
3. STERIS operates in a highly regulated industry which increases the barriers to entry and thus reduces competitive threats.
4. STERIS serves the life science industry which has somewhat predictable and growing demand, thus reducing industry uncertainty.
5. Care changes, such as a shift to ambulatory surgical centers in the United States, may have some impact on price capture for STERIS.

Combined, these factors imply that STERIS should operate at the lower end of this spectrum.

Even with this low bar, research into the investment by Steris in pricing yielded underwhelming results. A few analysts were identified as focused on pricing, yet pricing responsibility appears to require no specialized skills at STERIS.  Project managers, marketing managers, salespeople, and finance professionals all claimed pricing as one of their many skills.  I wouldn’t be surprised to hear that pricing discussions were often filled with tension at STERIS.  I am not sure how STERIS manages price changes, which would be necessary if a key chemical or input cost changed dramatically during a contract.  They likely outsource market research for new product pricing, which is common and often the best practice.

Given the importance and capability of pricing at STERIS as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of March 2024.

STERIS Pricing Spineometer: 2 out of 5 Vertebrae. (Management comments indicate a strong awareness of the importance of pricing yet there is little evidence of strategic organizational investment in this capability.)

STE (STERIS Plc) rose from 225 the day prior to their earnings call to 232 one week later. FY 2023 revenue of $5.0 billion with a 5.4% operating margin and P/E ratio near 190.

For FY 2023, a 1% improvement in price would yield a 5.5% improvement in operating profits holding all else constant at STERIS.