Q3 2020 Earnings Call

The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments.

There's this SEC filings are available through the company and on our website.

and

Mission and today is call non-gaap Financial measures including adjusted earnings per diluted share segment operating income constant currency organic Revenue growth and free cash flow will be additional information regarding these measures including definitions is available in today's release including reconciliation between gaap and non-gaap financial measures wage. Gap 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 of operational decision-making with those cautions. And we end the call over to Mike. Thank you, Julie and good morning. Everyone is once again my pleasure to be with you this morning to view the highlights of our third-quarter performance for the quarter types of currency organic Revenue growth was 12% driven by volume and sixty basis points of price. We continue to experience strong underlying growth from our customer.

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A total of $13 or a hundred eighty basis points is included in constant currency organic Revenue growth for the quarter from the 8th tuck-in Acquisitions. We completed this fiscal gross margins for the quarter increased 40 basis points to 43.1% and was impacted favorably by productivity price and and mix somewhat offset by higher labor costs even margin for the quarter was 21.1% of Revenue and increase of thirty basis points from the third quarter last year despite an increase in expenses relating to higher incentive compensation due to our strong performance and a 9% increase in Rd expenses.

The adjusted effective tax rate in the quarter was 20% that income in the corridor grew 16% $224 and earnings increased to a dollar forty-five cents per diluted share of benefiting from revenue growth and margin expansion.

in terms of the

Balance sheet. We ended December with a hundred ninety nine point two million of cash and 1.1 billion in total debt during the third quarter Capital expenditures total of 55.5 million while depreciation and amortization was forty nine point six million dollars free cash flow for the first nine months declined as anticipated to 231 Orchard 238 Point 1 million dollars primarily due to the plant increase in capital spending. Our Capital expenditures have been lower through the first three quarters of the year due to the time of capital projects as a result. We are decreasing our full your expectations for Capital spending to $200 and increasing our free cash flow expectations the 340 million dollars with that. I will turn the call over to Walt for his remarks. Thanks, Mike and good morning everyone. Pardon me.

As you've already heard our third quarter continued the trend of outperformance. We've seen the last several quarters. We experienced solid growth across all of our segments and in total delivered double-digit constant currency organic Revenue growth for the third consecutive quarter exceeding our expectations are Healthcare, especially service segment had a significantly stronger quarter than we anticipated driven by double-digit growth in the repair business and continued contributions from new Outsource reprocessing centers coming online margins in the segment were impacted somewhat by start up for outsourced three processing centers and Personnel costs to support future growth.

My science also out performed in the quarter.

With good growth and consumables and a record level of Capital Equipment shipments, even with the strong shipments are increased Capital orders allowed us to in the quarter with record backlog my science AST continued its outstanding Revenue performance this year growing 15% on a constant currency organic Revenue basis for the court. We continue to see strong growth from our core medical device customers around the world.

And lastly Healthcare products delivered a solid quarter with particular strengths and consumables continue to benefit from our new consumable products as well as recently acquired businesses off. Our service maintenance Revenue has grown too and was augmented by installation Revenue due to the strong Capital shipments in the first half of the year.

Based on our performance year-to-date and expectations for the rest of the fiscal year. We are once again revising our full-year Outlook starting with Revenue. We now expect constant currency organic Revenue growth of approximately 9% for fiscal 2020 up from the prior 7 and 1/2 to 8 and 1/2 percent range.

this

Is do the outperformance in the third quarter our expectations for the fourth quarter reflect difficult year-over-year comparisons recall that are prior-year to for constipation. See organic Revenue growth was 9% in particular. We expect Capital Equipment to be roughly flat across the businesses in Q4 in healthcare products, which makes up the bulk up equipment Revenue. We have very difficult comparisons against the strong fourth-quarter last year as we mentioned in the past. We continue our efforts to level our Capital shipments and avoid for Thursday or spikes.

Given the strength we have seen so far this year and our expectations for the fourth quarter. We now anticipate adjusted earnings per diluted share to be at the high end of our five $5.50 to $5.65 range as a result. We continue to expect another year of record performance in 2020. I believe the short-term and long-term future Force Terrace is bright, and we appreciate your ongoing support.

Before we open the Q&A. I would like to comment on coronavirus as you probably know China is a relatively small piece of stairs as Global Revenue. So we don't anticipate any material impact to revenue from the coronavirus as a result of China sales this fiscal year.

On the supply chain side, although the situation is fluid. We are in regular communication with our Chinese suppliers at this time. We believe we should be able to mitigate any issues that may arise so there are no material impacts to revenue due to the supply chain issues this fiscal year as well. We are in contact with our customers to understand how the situation is impacting them and what we can do to help we're also in contact with our people and are deeply concerned for their health and safety.

Our China operations have been closed since the Lunar New Year, except for limited operations to support political critical products and we will continue to follow the guidance of the government and do what is best for our people like most like most businesses. We have restricted travel to and from China across the company.

with that

We are happy to take any questions. You may have Julie. Can you open the call for Q&A, please? Thank you my career, Gary. If you would please give the instructions we can get started with Q&A month. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question comes from Dave to play with JMP Securities, please go ahead. Good morning. Thank you Walt one for you off the bat here off of one Q was a hot quarter. I'd love to ask you what you call this quarter pretty darned.

To get into a serious question here, but I guess there is no one-time impact here, right? There was no extra days or anything like that. You called out the pricing but and and I think the m&a said had a little contribution but overall no other one-time impacts in the quarter, correct. I wouldn't characterize any of the impacts of the core being normal.

Great that I guess.

You know if we look at those deals that you mentioned I think you said.

I think you said 8:00. I guess any color on them where they fall and you mentioned the contribution, but I guess it might be nice to know. You know what things you've added even though they suck the relatively small versus your base. Thanks a lot. Sure, Dave, you know, we're not going to get into the details of that as we mentioned the bulk of the revenue this year is coming in the hospital products business for health care products business. It's it's actually some at around the various units in that business. None of which are consequential, you know, it does a dog, you know point of half or so of of Revenue in the quarter and our best estimate is about a point for the year over time. So again, there's nothing here that's particularly material in Chicago is a couple of them. We think maybe for answering the long run, but we'll hold that until we see how they work out.

Thank you.

Even please go ahead. Good morning and congratulations on a great quarter.

Morning, good morning. Just just two for me, you know really solid from top to bottom both in terms of growth and The Leverage. I guess just a couple of things. We wanted to get our hands a little bit better of round and specifically we look at health care products. You had a really strong year-over-year increase consumables. I'd like to a little understand a little bit more about what drove that home, and then why I guess that offset that why we didn't see more margin expansion with that level of growth and that percentage of contribution in health care products come back on consumables within the the broader category there from the segment margin of just got one more follow-up after that. Thanks.

Yeah, Chris, it's it's Mike in that controls a portion of that growth is actually from some of the Acquisitions that we just needed. It's about eight to ten million dollars of that something of that nature Julie, right? Yeah. So for the for the quarter eight to ten million dollars of of impact favorable impact obviously on the revenue side from some of the Acquisitions. We we just completed the other point. Chris is as we mentioned our service has strong, you know service of part of consumables is we look at it and service profitability is not as strong on a monthly basis as as is the chemistry type products and and endoscopy type products. And so that has had more of an averaging affect. It looks more like Capital obviously on an hourly basis. It's pretty good became very little Capital but on our list basis, it's not as strong.

The next question is from Chris Cooley.

Certainly, and then I guess just you know, lastly for me as we as we look ahead and you know beyond the remainder of this fiscal year.

Seems to be a Hot Topic out there right now about capacity that could you just kind of maybe walk us through where you are in general terms from a capacity perspective thoughts on incremental capex and just you know, how you can see that business growing from a a longer-term perspective like so much.

Sure, Chris, I'll let Mike talk about capex. But at a high level, you know, obviously are ethylene oxide plants are pretty full right now and and dead, you know, they've had increased pressure if you will or fullness and it just moved from the u.s. To overseas as we're now processing some things that would normally have processed in America wage overseas. So they're getting more for having said that we continue to add capacity. And so there's two ways we add one is by adding facilities or four grand a number of Chambers inside the facilities. The other is being more efficient with lean approaches inside those facilities and we're doing both so although we are off a more full than normal on the outside type facilities. We continue to grow the ability to grow if you will this by the same token on Thursday.

radiation side we can all

So continue to grow our ability to grow and there we've talked about a number of plants that are being built or added or opened across our Global Network and and we're doing so in a very technology neutral approach. That is we're we're adding e beam technology reading x-ray technology and I'm adding capacity in the Cobalt facility. So we do see that as as the approach with we clearly see greater growth in the e-beam and x-ray wage type facilities, then in the in any of the others actually and so that's where we're placing our money. Like I'm not going to talk about capex. Yeah Chris. So at the beginning of the year, our our view was we were wage we're going to spend about a hundred million dollars in growth capex in obviously that number has come down a little bit because of just the timing of projects and I think we have about eight recent phone number.

That that are being worked on that. We've announced our view would be it's just the timing issue. So next year I would.

Look at capex being probably at that elevated level once again and maybe even for the next year or two after that obviously with the growth that we're seeing from our customers from medical device industry off. We need to continue to add capacity to maintain the current growth and I would say I mean it's as I've talked about a lot we we see the medical-device business growing Thursday. We're in the middle of the baby boom right now and the Baby Boomers are largely entering the the the biggest part of the baby boom was entering the high Health Care spending years and things like Orthopedic implants wage and stands and all those good medical devices to improve our lives get used a lot more when you're 65 and 70 and 75 than when you're forty five and fifty and fifty five. So we see sustained growth for our customers on the unit volume at least for the foreseeable future and that creates sustained growth for our AST business as well as our Hospital.

So health care business, but I would add that given our Global Network it is I think easier and easier for Global type companies to talk to someone like us who has broad coverage. We can move from plant plate a to plant be if they need to for whatever reason and also they can count on a single quad system in single regulatory system. So I do think that is helpful for us to grow a bit faster than the market.

Our next question is from Matthew machine with KeyBank, please go ahead.

Great. Thank you for taking the questions like Julie morning morning. You mentioned that results were were ahead of expectation. You had straight quarters, um, uh that are consistent like this case. What in particular is surprising you about the sustainability of these trends

I guess about a Lancer in four or five years if they stay then I'll feel even more strongly about the sustainability. But you know, a lot of the things that we have been working on seem to be coming together right now. So, you know, if you walk through it, you know, we talked about the the nice growth in the healthcare services business office, you know both the the the equipment repair business is growing nicely as we've added and continue to add capacity the outsourced Solutions. I you know as I mentioned before we think it's going to look a bit different than the Americas than it looks in the UK and I think we're getting better at understanding that model than providing what our customers want and need off so that business has a pretty a pretty good growth rate. We think the life science business has continued kind of its long-term growth rate on the wage.

Chemistry side may be slightly off of some of the faster.

But still solid growth in that business and vaccines and biologics we think is a good space to be in and that's where we are on the AST side. I think I've already talked about that. But you know, we think that is a good grower and and on the health-care side of the business again, we we continue to add product to our portfolio. We continue to refine our sales approaches and and again particularly in the the

Industrialized countries, you know, we're we're facing the middle of the Baby Boom coming through and that's going to be like a big through a python in my opinion for the next ten years here. So, you know, there's underlying market demand is good. And and we're doing our jobs to pick up at least our fair share of that. Right and then the house your conversation evolved with the the major Health Care Systems, especially with your scale. I'm just trying to understand how interconnected some of the growth is across businesses like health care products and Faith care specialist services. Are they are they looking at you differently and and and and trying to consolidate more business with you?

That's excellent.

Question the answer to your question is yes. Yes, you know we are clearly seeing more interconnection between the health care service business and the health care products business, you know in some respects one is the customer of the other and so often times when we're looking at things we're we're able to talk to the hospitals about what their needs are Healthcare systems and what their needs are and you know for one it might be I I add a little more to offer visit to the CSD that I have the other one may say gee, you know, I'll add some more but can you take over some another might say gee we'd like you to run r o r c I still need to have centers in of the turn centers in our inventory surgery Center's I mean it it is a they are evolving their business model in this space dead.

and having the full spectrum of

Products and services across that space does put us in a different position to give them what they want independent of what we might think is the best thing and so it's like most of the things we do we work hard to be technology neutral approach neutral have a broad spectrum of things that we could offer our customer and let them choose which piece the spectrum they want.

That's really helpful called her. Did you also give us an update on the RC model you're talking about that a little bit more now. I think it previously quoted like fifty million on three contracts have those at least launch in our running as expected.

You know, you know, we don't talk about specific ones. We have now more Senators up. I don't know that we're going to give those numbers but we have more Sinners. I know we're not going to give location to talk about our customers. But we have more Sinners up. Some of them were like Micro Center's some of them are more like larger centres, but you know the numbers we have quoted for growth forecasts for the or sees we continue to exceed those which is a part of the reason HSS is beating our expectations. And then last question and it is it is a is a multi-part question, So just just warning you in the morning you and in advance. I thought you guys did at the FDA panel. I thought you did an excellent job. I thought you you guys were clearly did the on Thursday. We're clearly the adults in the room because you want to ask some follow-up questions on sustainable. You know, how long would it take to switch practices from traditional wage?

To sustainably out of facility, you know, what is the incremental cost of of implementing that a medium-sized facility? Does it require new equipment and like what would be

cost Savings of using less e o

I'm going to work backwards on your question man. It costs nothing in the facilities and does not require any consequential change to a commitment gas whatever. So that is a non cost item. It does cost our customers and us working together. We had to revalidate the fact that the process which uses oftentimes half the gas that the traditional process is use it does, you know, we have to make sure we know we're using less gas. So we don't have to validate that part of the question. We know there will be less affluent. So we know we know that's not an issue but and we also know the FDA pays particular attention to how much residual gas stays in the product. So if it gets implanted into the patient, that's okay, but we know that's better because we're starting out with less gas all those things are known. We we just need to be wage.

Absolutely, positively sure that we are sterilizing the device.

When we do that and and that requires validation by the customers and us we are working with the it also currently or historically requires the agency to look at it and approve. We are working with the agency to layout templates to make that far simpler for our customers and far less of a regulatory burden for our customers to be able to do that. So I'll come to switching the cost of switching cost is all around validation. Then then any other alcoholic material cost now, obviously it use a little less gas that Costco largely immaterial in the process. So as as of the delta in the gas usage is relatively in material and and frankly in most cases are total cost. Is it back to the transportation cost in the process of this is not a a big cost issue it is a get it right issue and and both within our customers are very serious to make sure that in in home.

Swing what's potentially the environment that we do not?

Take any risks that the product is not sterile, you know right now we're going to use a word that an oxymoron, you know today in many cases were over sterilizing now, once you kill all the bugs, you can't kill them again. So long were over gassing they're not really over sterilizing and to the extent were over gassing. We don't need to do that. It does it takes time but it's not you know, it's it's measured in months for any specific customer needs specific product, but there's awful lot of customers a lot of products out there. So it will take a series of years we believe but but we do think and you know the chief operating officer who grew up in that business absolutely believes in the set of target for his team to get down 50% using half the gas we used to use for the same level of requirements at and do that inside of five years, and we think we could hit those targets.

Thank you very much for taking the questions and congratulations to you offer for your success even like.

Thanks Beth. No problem. Again. If you have a question, please press * then 1 the next question is from Larry with Raymond James, please go ahead with that. Good morning. Everyone. Well, just want to start with you. Obviously this fiscal year to date has been really outstanding both in Revenue generation and and margin expansion. I'm just wondering you know, as we all start to think about fiscal twenty one and I recognize you're not providing guidance, but can you can you help us just think about any sort of puts and take that we should be considering for both, you know, as we sort of look at revenues and and and margins for next year.

You know Larry.

As you have said we're not giving guidance right now. And you know, I know in some respects that that can be frustrating for you guys cuz most companies are County or companies and you know quarter behind the calendar year. So as a result where Isaac quarter late versus calendar year kind of projections, you know, we have not we're in our planning processes that we have not concluded those processes that you know, as I mentioned. The the Chinese thing is a little fluidity there, but you know, I will say a couple of things to think about a we are starting from very nice growth rates, right? I mean, we're approaching double digits for the year, you know, 9% that that gives us stuff costs, but the flip side is, you know, last time we start out with uncertainties and device tax uncertainties and labor rates uncertainties and trade in for us trade is North America more than China. So the trade uncertainties in terms of NAFTA wage

and and and then

Brexit, and and last year we did have some tough constitute for which again we have tough, this year in Q4. So, you know, if you if you look all through that at a high level, you know, we think about this business for the markets. We're into being kind of a 46% constant currency grow and hopefully we get a point or so I'll share and you never know exactly when and how that's going to happen. Hopefully we get a little price. Hopefully we get a couple of Acquisitions in the next thing, you know, we're in those High single-digits. We're pretty comfortable right now with where we supposed it won't be toward the high end of that 46% rate in our constant currency growth rates of getting we haven't done our final analysis. We will obviously talk more about that in three months, but we're feeling good about the high side.

And I would assume again similar thoughts around around margins, but I mean, there's no reason to think that margins wouldn't expand going forward as you know, Larry. I'm not the office and expansion guy. I'm the margin growing guy. I I like real profit dollars, but but I don't have any reason to believe I am absolutely confident. We will be working to improve our cost position. We will choose on what to do in terms of how that how we handle that in terms of like a price increase or price increase. We we definitely are facing a little headwind on the labor side labor rates are clearly going up but you know, when we put all that together, we don't see any reason to be off our normal paths. Okay one more off your picture on man. I just had a couple of quick ones for perhaps or Mike but um, you know as you think about the the next steps within the sterilization regulatory pass

Way, could you could you bring us up to speed sort of what you think?

The EPA will ultimately wind up doing is it comes out with its its recommendations and then you know clearly the states of Georgia and Illinois have been challenging really more from a local government perspective. And I guess that's always the concern. Um, but but how do you think about you know, are there any states where you guys are operating where a local government could start to become more of an issue and in the operation of these types of facilities.

You know Lariat forecast in what governments are going to do is a little like forecasting elections and I I don't really think we have any great knowledge on that. I will say it. I I mentioned it last time we have been impressed with the way the FDA has taken this bull by the horns off knowing that there is you know, 57% of the devices are sterilized by ethylene oxide that need to be sterile. And so that's it's very important to them to keep those Supply chains moving. We I think they're doing a superb job of working on that the EPA and particularly because

FDA in the secretary Health have made it clear the the risks that the country takes on if we cannot sterilized with ethylene oxide in the intermediate-term. I think the wage I think they would have done a nice job, but I think they are doing taking a nice methodical approach. It would be very easy for them to make a snap judgment. But from what we see the way they've requested information the the way they're asking all types of players in this space, you know, the the manufacturers of the devices those who sterilize and those who are concerned about those issues in the environment. By the way, we're in two of those are all three of those three buckets that we concerned about the environment. We're concerned about sterilization were concerned about a device manufacturer being a device manufacturer so long it seems to me they're taking a very balanced approach to this process. We do feel our own opinion is we feel that we're at the high end of the industry in terms of the way we wage.

You know our move toward sustainably. Oh a couple of years ago now certainly

Industry and we're clearly seeing people being very interested in that approach. Now, we also know about know the design of our facilities in the way we talk and the way we remediate the gases at the at the high end or the the good end of the industry. So we we're very comfortable that we have been in our safe for people to end our communication, but that doesn't mean we can rest on our Laurels we tend to get safer and safer which is why we do this 50% reduction and and we're always looking at the way that we handle the gas inside and outside facilities will continue to do so, by the way, that's not just a comment about the United States. That's a comment about the world. We are not, you know, assuming that the only people that care about ethylene oxide gas or American and so, you know that that's our approach we're comfortable as comfortable one can get I guess cuz you can always have something occur. You are correct in my own view the bigger dead.

Risk in the short run at least is is the is local and state governments. But you know, I do think now that it's very clear that both e. Gauged there's more likelihood that people will wait and see what that what that result is. And then based on that result will take appropriate actions.

Okay, very good.

And then uh from like, um, just wanted to think a little bit about the Investments within HSS, you know, the operating margin of that of that page is trying to down over the past three quarters. I think it's 10.7% Discord on operating margin basis from 14.6 in the for the fourth quarter of nineteen. So it's just just again want to make sure I'm understanding the the Investments. It seems pretty straightforward. But just to make sure we're understanding that and then what's the right way to think about, you know, again, you know margins for this month is going forward. And then the second question Mike is you know, you you talk about a hundred basis points or so wrote being added by m&a this quarter of this year off. What what is the threshold for when you kind of pull that out of organic growth because you still characterizes organic consequence of growth, but there's a hundred basis points in there from birth.

So just try to understand what the threshold is Bank.

Yeah, certainly. Larry all answer the the second question first. Typically, what we do is when we do any type of material acquisition, we would separate that out and actually disclose that separately so that we we are not in this the boat that we're in today. We're we're trying to call out or consequential organic Revenue growth and then also note at the same point time what the what the Acquisitions added said. Unfortunately this year, you know doing eight Acquisitions that were all individually in material, but if you aggregate them all together, they become material. So that's the reason we chose our the way we want to disclose that this year is make sure that everybody understands that the impact and there's a pretty significant impact in a third-quarter 180 basis points in the quarter for consecrated organic Revenue growth that it is understood and we're being as transparent as possible. We don't like going down that path. Obviously we would prefer to do, you know an acquisition in separate that wage

And go back to our historical reporting.

But this year is an anomaly hopefully but again with eight acquisitions.

Combined being in the in the in the combination of all being relative we have to do something so that we're we're again truly being transparent your your first you want to say something and just to be clear off on that. We Mike says we don't like that. He's talking the accounting right issue is not the businesses. We like those businesses. We love duck in businesses. If I can do 10 more next year to look like these a price ten more next year. We'll be talking about this again I suspect but but it's not that we don't like the businesses. We just don't like the reporting of it. We don't want to be changing our consult rotate every month because of some small businesses really the issue, right? That's that's the point and then your first question regarding the HSS business obviously as as Walt mentioned in his script them did have start-up costs for the new o r c s and in addition to that we are continuing to have people costs to support the future growth in in HSS. I mean our long-term wage

This business is still mid-teens. We haven't come off of that. Obviously. You are seeing the benefit of the revenue the Top Line growth, but it does come with

A little bit of start-up costs which we've talked about for two years now in a row and as we bring facilities online, it probably takes roughly 12, maybe eighteen months depending on the size of the facility to get to break even and then start actually adding profit to to that business, so it's not unusual and it's not a surprise To Us by any means. Okay? Perfect. I appreciate that. Thank you very much.

You're welcome. This concludes our question-and-answer session. I would like to turn the conference back over to Julie winter for any closing remarks.

Thanks everybody for joining us again this morning. Hope you have a great day.

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

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