Q2 2021 Steris plc Earnings Call
Good morning, everyone and welcome to the Steris plc second quarter 2021 conference call.
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Well.
After todays presentation, there will be an opportunity to ask questions.
Also note todays event is being recorded.
At this time I'd like to turn the conference call over to Julie Winter Vice President of Investor Relations Ma'am. Please go ahead.
Thank you, Jamie and good morning, everyone.
Today's call we have.
Rosebrough, our president and CEO, Mike Tokich, I, senior Vice President and CFO, and Dan Christie, Our Chief operating Officer I.
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.
Many important factors could cause actual results could differ materially from those in the forward looking statements, including without limitation those risk factors described in Steris those 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.
This is actually see 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 is it.
Additional information regarding these measures, including definition is available in todays release.
With reconciliations between GAAP and non-GAAP financial measures.
Non-GAAP financial measures I 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.
Those actions I will hand, the call over to Mike.
Thank you Julie and good morning, everyone.
Is once again my pleasure to be with you. This morning to review the highlights of our second quarter performance.
For the quarter constant currency organic revenue increased 2% driven by 100 basis points of volume and 100 basis points of price constant currency organic revenue for the quarter includes a total of about $5 million for prior year tuck in acquisitions, primarily in health care spread across capital equipment control.
<unk> and service.
Gross margin for the quarter was up 140 basis points to 45% and benefited from mix price and productivity.
EBIT margin for the quarter was 22.5% of revenue an increase of 220 basis points from the second quarter last year due to higher gross margin attainment and lower operating expenses, mainly for travel sales and marketing compensation due in part from business disruption from COVID-19.
The adjusted tax rate in the quarter was 21.1% and includes the benefit of stock compensation offset by unfavorable discrete item adjustments.
The income in the quarter grew 13% to 127.3 million and earnings increased to $1.48 per diluted share as compared to $1.32 per diluted share in the prior year.
Our balance sheet is a continued source of strength for the company.
<unk>, our cash position of 312 million access to available credit lines and a low leverage ratio, we are well positioned from a liquidity standpoint, even reflecting the anticipated additional leverage for the key surgical acquisition our debt levels remain so solidly in our comfort zone.
In the second quarter capital expenditures totaled $43.9 million, while depreciation and amortization was $54.4 million.
Free cash flow for the first half was $185.6 million, an increase of $23.6 million over the first half of last year, primarily due to improvements in that income and working capital somewhat offset by higher capital expenditures with that I will now turn the call over to Walt for his remarks.
Thanks, Mike and good morning, all I Hope you all have voted all will later today.
We're pleased to be with you to report such encouraging results for our second quarter.
Which reflect the resilience of our business and the good work done by Steris associates in.
In total constant currency organic revenue grew 2% year over year and improved substantially on a sequential basis.
We benefited from the continued recovery in procedure volumes during the quarter as well as continued strength in segments with exposure to COVID-19 related products and services.
Our release walks through the details, but I will touch on a few highlights of the quarter.
Life Sciences grew 16% in the second quarter, continuing its strong performance in particular for consumables well.
Well, it's difficult to dissect the 31% consumables growth in the quarter. We believe the underlying growth rate remained in the lower teens and the balance of the growth is due to COVID-19, prebuy in anticipation of vaccine production demand.
As we said all year, we do not anticipate maintaining these growth percentage levels in perpetuity.
In particular, our fourth quarter has difficult comparisons as last year's fourth quarter was the beginning of the life science consumable significantly COVID-19 related revenue uptick.
Rebounding from first quarter levels or A.S.T. segment grew 9% year over year in the quarter benefiting from continued demand for COVID-19 products sterilization as well as a significant recovery of procedure related medical device sterilization volumes.
As we said in prior quarters, we continue to invest aggressively in capacity expansions today as ti, reflecting our long term expectations for the growth in this business.
As anticipated our healthcare segment continued to be impacted by some disruption and procedures in the quarter declining 3% year over year, but improving nicely on a sequential basis.
Both consumables and service rebounded from first quarter levels with consumables revenue growing 6% year over year, while service revenue was flat.
Capital equipment shipments in the segment declined as we anticipated.
Those shipments were down 14% versus the second quarter of last year.
As you know, we break our capital business into either large projects or replacements.
We were pleasantly surprised to see replacement orders rebounding sequentially in the quarter, reflecting a return to more normal procedure volumes.
Total equipment orders have grown sequentially through October from the low point in May and have returned to about last year's levels.
Like most in our space, while we are pleased to see the sequential improvements in revenue from procedures to date, there is significant and uncertainty in the coming months as the gold with 19 pandemic appears to be escalating in many areas around the world.
We have seen recent procedure declines in parts of Europe.
It is too soon to tell what we will experience going forward in Europe and in the U.S. in the next six months.
That said, we are not planning a significant disruption a procedure volumes in the second half of our year.
As a result, we're planning for sequential revenue growth in the second half to result in about flat year over year revenue, excluding any impact from the anticipated key surgical acquisition.
Well, we are quite pleased with recent trends the situation is fluid and difficult to predict.
We still consider our healthcare capital equipment portfolio to have the greatest downside risk in the near term.
If procedures continue to improve in the pandemic subsides, we will expect some costs in our operations to start coming back to more normal levels in the second half of the year, which will limit our bottom line percentage growth somewhat.
As we said all along.
We manage this business for the long haul.
Our actions during this pandemic reflect that approach, including our decision to avoid unpaid layoffs or furloughs related to COVID-19.
We've worked hard to maintain jobs and compensation for our people putting programs in place to take care of those who need extra support and providing paid furlough for those people in operations that were impacted by decline in the business due to the pandemic.
Total cost for Cobot, 19 programs and expenses were four and a half a million dollars in our second fiscal quarter about half of what we saw in Q1.
Similarly, our approach to investments has not changed we continue to expand our aim is to keep footprint and to invest in R&D.
We've introduced a full suite of surgical products this year, including new operating room lights, several new surgical tables, and a next generation or I system.
On the infection prevention side of our business recently launched products include our new smaller footprint steam sterilizers.
And more rapid biological indicators among others.
We do not expect the consequential slowdown in our new product development efforts or in spending for R&D as a result of the pandemic.
Before we open the queue anyway, I would like to again, thank steris people for their commitment to our customers.
We have continued to be the heroes on the front lines of this pandemic.
While there is uncertainty in the near term given the COVID-19 situation, we like the positioning of our global global portfolio during the pandemic as well as when we come out of it.
We're working toward completing the previously announced acquisition of key surgical by calendar year end and look forward to welcoming Keith people to the Steris family.
We stand ready to capture additional opportunity and continue to believe that the long term future for Steris is bright.
With that I will turn the call over to Julie to open for acuity.
Thank you, Mike and Rob So your comments Jamie would you. Please give the instructions and we'll get started on couponing.
Ladies and gentlemen at this time well begin the question and answer session.
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Once again that is star and then one to ask a question.
We will pause momentarily to assemble the roster.
And our first question today comes from Dave Turkaly from JMP Securities. Please go ahead with your question.
Great Good morning, Tom.
For my Baby Dove, <unk> hundred basis points, you talked about in price I know I mean, I want to get into super detail about that but I think that's a little better than what you've seen of late and I was wondering if you'd just my comment on you know, where you're gaining Matt and particularly in this environment.
Yeah, Dave 100 basis points typically we are somewhere between 50 and 100 basis points. This quarter. Obviously, we were we were at that 100 basis points level and we are actually seeing price across all three of our segments in the second quarter.
So I would not point out one individual one but just across across each of our segments.
Great and then as a quick follow up you know you mentioned you called out some working capital improvements I'm just curious if.
We should view some of those is.
No permanent or is it sort of a one time or how are you looking at some of those improvements in that and how should we look at the moving forward. Thank you.
Dave I would say that you know from a working capital improvement standpoint, it was actually that have been successful in reducing our day sales outstanding.
Pretty significantly this year, although that is a little bit of of math, if you will because as EBIT does drop.
The days sales outstanding do a increase or decrease year over year.
And we have been offsetting inventory inventory is on the rise while we continue to have higher inventory levels. Because we are maintaining both surety of supply and we are level loading. So I would say that you know dsos favorable a couple of days, we should be able to continue to drive that at least this the remainder of this fiscal year I don't know about next fiscal year.
Yeah, and I would also say that inventory our projection is inventory would would still be elevated by the end of the fiscal year. So I would say those two will pretty much naturally offset and we will continue to see as long as we see net income growth. We will continue to see free cash flow generation. In addition.
Our capital expenditures are also up and we as we spoken about many times are we do anticipate spending.
Over $100 million in expansion capital growth rates Ti so don't be surprised if you see year over year growth.
In in Capex.
By the by the end of the fiscal year, we were up $13 million in the first half and we project to be more than that up for the full year.
I would add another temporal one is government tax payments have been deferred.
Related to the Pandemic Act.
Got it. Thank you there's a mixed bag there. It's I would say you have obviously the government payments are temporal.
Capital spending is more longer term and I think as Mike is that the if you look out a bit longer term the inventory and receivables will probably reverse back to their more normal levels over time.
And our next question comes from Matthew make me Sean from Keybanc. Please go ahead with your question.
Hey, good morning, guys.
I didn't quite catch you know all of the all the guidance for the back half did you did you say you're going to be year over year flat for the full year on order again, a good basis and what do you what does that what are your plans for the second half versus the first half, but I didn't I didn't catch it all just wanted to clarify.
[music].
Yeah, Matt first of all well first of all good morning, but after good morning, we're not guiding just to be clear.
But you know we have to plan, even independent of the fair amount of uncertainty what's going on and so we're we're planning roughly flat year over year.
Revenue and it's that's largely speaking kind of all the same constant currency not constant currency, there's there's a.
Essentially no in fact I think no.
Or inorganic growth in the back half of the year. So that that's an irrelevancy unless key comes in place and we're not talking about key but orders of magnitude were kind of thinking flattish in its our consumables business or a recurring revenue business is continuing to grow.
So.
I'll call. It conservatism on whats capital is going to do for the back half of the year.
Okay.
Understood and then and then the contribution just for clarity purposes. The contribution from tuck in M&A over that over the next several quarters and I'm, assuming that that wins, a little bit as as those anniversary.
What do you see.
Carol.
It's tiny this quarter, Mike I saw a $5 million this quarter, Matt and by the time, we get to the third quarter I believe almost every one of those will anniversary. So it will be if not zero very very close to zero. So we won't even speak to it.
I think everyone is happy about that.
[laughter] unhappy we'd like to have more but [laughter], but we've got a significant one coming so that's fine.
All right.
And then like I said conceivable business.
Yes.
And maybe I could this is asking if it what is the capacity you could hear about a $200 million business right now you know plus or minus what does the capacity you could produce it if customers said just give me everything you've got.
Are you kind of matching it out at this point, it plus 30% or could it or could you actually kind of flex that up even further.
Yeah, we're not capacity constrained at this point, Matt and.
Barring the ability to get.
The components, which.
I'm not aware of any where we are struggling so but you know you always have to pay attention to supply chain issues, but barring some supply chain issues that I'm on and were up we could go up a great deal you have to remember that most of our work in this space in an IP T. and life science are sharing factories.
And so the capacity of those shared factories is greater now if everything goes up 50% and that's a problem but.
The capacity that we have in the combined.
Life Sciences T facilities.
I don't feel that we have a.
Significant surpassed capacity issues all.
All right excellent.
And I really love. This this last one I realize it's tough question given the volatility and then the overall breadth of the portfolio, but how much do you.
How much do you think you're outperforming your end markets by with share gains. It just it just it just seems like you're you're just well above where the market will be.
I don't know about quantity and particularly the short terms, Matt it's very difficult to have a feel for us versus everybody else. If you will as everybody reports it's helpful. But we have a lot of competitors that are not public. So it's still difficult to get that overall reach but I think.
We are.
Confident that word.
We're getting more than our fair share of wallet in virtually all of our spots.
Thank you very much like Julie.
Our next question comes from Larry Keusch from Raymond James. Please go ahead with your question.
Great. Thanks, Good morning, everyone. I guess first question here is you know one of the.
Really interesting things about the stairs portfolio is that you know you essentially.
Have all these different businesses that can benefit and serve as hedges.
Within within during the pandemic there obviously supports the business at that aren't impacted as well so really what I was just trying to understand for the quarter is there any way to help quantify.
What you think the amount of tailwind was for revenue in the quarter and Conversely, what do you think the amount of headwind was for the quarter.
Well, Larry I guess I meant.
Is a tough question to answer but.
I think the easiest way to quantify it overall is.
We are running flat, which is better than.
Again, the segments that we tend to work in.
All things being equal about flat revenue and we did not anticipate pre goal, but being flat. So we would have said we would plan on being up probably this year, we would have expected to be up.
Single to maybe even into the low double digit numbers.
And as a result, I would argue that there were probably about 10% negative.
Headwind versus tailwind plus or minus.
So orders of magnitude that would be our best answer and you know it's the places are obvious right in as Steve We're doing P.P. and in life Science, where we're gearing up for the vaccines were getting a nice tailwind, but you know were procedural based company and health care and procedures have gotten beat up so that.
But the opposite side of the equation.
Okay very good.
Two two other ones.
[noise] on on a life sciences, so [noise].
You know Walt I guess I'm, just trying to again understand.
How we should think about the exposure there to vaccine production. So I'm wondering if you can talk a little bit about you know are you are you exposed more to one.
Type.
Vaccine technology versus another are you exposed to very specific customers that if they make it through.
That's that's a positive and if they don't that perhaps doesn't it.
Impact positively impact you as much.
And I guess the other part of that question is.
As you've seen improvements in that business and and and the profits come through.
How are you are you letting that drop to the bottom line are you in investing that again I'm just trying to think forward a little bit on this as to how you manage you know that the margins as you come off the other side of this.
Hey, Larry This is Dan Christie.
I can give you a little information on the market in particular.
With vaccines, that's really in Steris is sweet spot in terms.
New bar.
Everything Macshane is by definition, a sceptic manufacturing so it's manufactured in the general environment, and you know near sterile clean rooms, and the products that we that we sell in the services that we have are used to ensure that those environments can operate in an aseptic manner.
Yeah and in addition to what we're selling into vaccine from life Sciences. We've also seen a significant uptick in demand and a S. T. In terms of bioprocess precursor these are bags or liners or tubing sets and things like that used and used in a septic manufacturing specifically for vaccines.
And I wouldn't say that any one company or another in terms of.
The customers, we serve is more as a higher demand or a lesser demand based on their methods are all basically very similar methods and vaccine production and all require an aseptic environment.
[noise] and Larry I guess, if it were broadly enough across obviously, if if if.
All of our best customers happen to be the lucky ones were better and if there's a couple that are not our best customers.
Hi ones that will be a little worse, but.
I think we're pretty confident that.
The pre buys that we're seeing are a function of the people who are likely candidates. So we're pretty comfortable that we.
We will see.
Going effect.
And I think in this short to intermediate term its unlikely its going to shrink it just it can't keep growing 30% here forever.
Okay and on the margin question around you are you investing against the.
Often ability there how you how are you doing that yes. Great question, you know part of the margin expansion is.
Strictly a function of mix and so.
Some of that psychologists natural but but and secondly, as most companies I think we were.
Not at all clear how ugly this thing was going to get when it started and so you know we shut down.
Hiring in certain places we kept spending.
In the R&D functions that I caught the long term future, we kept spending but on the short to intermediate term things, we kind of took a step back.
And and we'll we'll pick some of that back up as we see the.
I'll call. It the long term look going forward, we are increasingly comfortable as as you might expect but there's still a lot of uncertainty.
Out there and we're watching that you know.
Well, you know normally we watch quarter to quarter watch and week to week right now and.
There are so many things going on some of which can be very positive and some of which could not be not so positive and so.
We're just being careful so we will lag the the spending piece, probably a little bit for a while that then we'll catch up at the appropriate time got it and then last one from me ask team you know margins just continue to be very impressive and [noise].
Continue to move higher.
You know how do we think about how are these kind of do you think this is kind of peakish margins here are you.
This incremental volume comes in whether it be around life sciences or are there. So.
Sterilization needed for the pandemic days or is that coming in at a higher price and that's influencing the margins higher just again trying to think about how we should [noise].
Really think about that that is a longer term margin in that business.
Sure the S.T. business as you know and we're very happy with the margins in that business, obviously, but that's our or less and you know when youre plowing.
Hundred million or so every time, you turn around to grow capacity.
The ROI see does not extraordinary it's good I mean that.
We're not complaining about there I see in that space and for me, it's a very good investment, but but.
Putting a lot of money to make that money in place to make that money. So you know I would not characterize it as over the top in terms of when you look at our Y.C. So we think there's room for improvement as those new facilities mature.
Its you know if you look back and you know you were with us quite some time ago. When every time, we out of the plant we had a knock off.
You know 50 to 100 basis points, because each plant affected.
The overall ROI for us today, we have over.
Over 50 plant so what.
How much difference, but if you look plant by plant those newer plants are not making that kind of money on all I see basis low on RMS oral IC basis that the.
Than the older plants are so.
It's a function of of those things.
Okay very good thanks very much appreciate it.
And our next question comes from Chris Cooley from Stephens incorporated. Please go ahead with your question.
Good morning, and thanks for taking the questions.
Well, maybe if we could start with a big picture one here this morning.
Polymer kind of following on what Larry was getting out there.
Structurally have a lift with your life science and those two franchises.
Seen accelerating growth.
You've taken some costs out of the model.
Sort of theirs planned investment going forward, but should we also see over the next 18 months is the business starts to normalize hopefully no from coated.
Should we see a natural lift as well in cash flow in the business versus historical levels or how do we think about the cash flow generation.
Not so much for the back half of this fiscal year, but but more so on on kind of a go forward basis should we see a natural lift there are there.
Uses of cash that well.
We will start to pick up there and I've just got a couple of follow ups.
Yeah, Chris I would say both in cost and as a result in cash.
You know, there's a lot of I'll call it sales and marketing expenses not going on in the world right now and it has a limited detrimental effect because none of our competitors are spending that money either but when when we return to the more real world I suspect so.
Strongly that we and our competitors are going to put boots on the street more and and travel more and do a number of things more that we cannot do so that will that will have some of the some normalization effect on earnings and cash will follow nationally with that so I think thats 0.1 0.2, though.
So we're taking as we grow.
Growing profitability and we have mixed more toward.
Some of those higher profit areas than that profitability will flow through in cash completely and then the only question is how much we're spending either an acquisition or for organic growth in order to.
The use of that cash in and we fully intend to spend as much as we can for those two things because that's that's what the future cash.
Cash flow generations are split if you if you pull out the investment side of it yes. The cash will grow again, we would we would hope to be able to spend as much of that is possible to grow in the future.
Yes in a reasonable way organically and through acquisition.
Appreciate that color and then maybe just two quick follow ups for me, but.
First could you just remind us when the last time was that right.
Re solidified your raw materials contracts more specifically for cobalt 60.
On that front a lot of discussion about thought here as of late as I'm sure you're aware and just one.
Visit when those were last revisited kind of the terms with those.
Those agreements and then one other quick follow up thanks.
Hey, Chris.
Appreciate the question.
We do not get into the details of our vendor contracts just like we don't get into details of our customer contracts.
Suffice it to say that we have visibility for a reasonable time, we tend to do both of those on the on a long term basis.
Particularly in the SD business and kind of everybody the the suppliers the vendors and the and the customers recognize that every once in a better spot. If we all know what we can and cannot provide and what people are going to do and not do so those tend to be intermediate to longer term contracts.
And that's that's the case.
Across the board.
Understood appreciate all the losses, and then I'll get back in queue.
Just want to make sure I am square in my assumptions correctly. So.
Your and your essentially flat directional planning for the full fiscal year ex key surgical.
You are or are not assuming I guess any incremental.
Headwinds from COVID-19 in the back half of year or you are still assuming.
Some incremental headwinds maybe whether it's from procedure softness as you cited parts of Europe are already experiencing now or maybe its purchasing patterns I know in prior conversations on these calls weve talked about hospitals carrying a little bit higher consumable inventory owned side than what they had in the past just this.
I wanted to make sure I fully understand what you're baking in when you're talking about getting to flat year over year for the fiscal year excuse surgical appreciating theres, a tough fourth quarter comp. Thank you.
Yes, Chris again.
I'm, Tony planning and that plan could change next week or next month.
So and that's why we're not giving guidance there. So many uncertainties right now both positive and negative.
The we think its uncharacteristically difficult time to forecast, but having said that in general were not anticipating a huge reduction in.
Procedures like we saw in April May June.
In the March April May.
We're not anticipating that level of reduction which was pretty catastrophic.
But you know we will we do expect to.
People changes you know kind of spot.
Changes around that's kind of built into our thinking.
Yes, again, we do expect it.
And that in part of that is one assets. The other a bit you know we have a little more that we have a little more p. process and we have a little less we have a less pp and little more.
Of the procedural devices so.
We're balancing those issues and our best view of that is is that we come out about flat, having said that it is we still.
Given the history that we've seen to date, which is about the best thing we have to work off of and how.
Nice job on the facilities have done with the treatment protocols and Covidien I think that's kind of grossly under misunderstood and under appreciated is that.
The the facilities around the globe and the physicians and nurses around the globe have really improved their knowledge of how to deal with this.
Disease, so even as it heats up so there are a lot better at lot better positioned to take care of patients and as a result have done things too.
Be able to continue to operate their procedural spaces. It would only be in my view unless it goes a lot worse than anticipated it would only be.
Patients deciding do the concern of coal would that would reduce the.
Procedures, a great deal. So we have to wait that went out but in general we are expecting some spot spot issues around the globe.
But not an overwhelming production like we saw before we're expecting to see some additional PPG and processing as a result, and clearly we're anticipating.
Good growth with good volume in the life Science business.
For that.
Vaccine production, that's what a high level I'd say, that's pretty much. It we are being a bit cautious in our view of capital, even though orders have come back.
Quite a bit better than we expected the use of being flattish recently is.
Better than our anticipation, but you don't capital can bounce a little bit so were being a little cautious on our thinking about capital.
Okay.
Thank you.
Yet.
Our next question comes from Mike Matson from Needham and company. Please go ahead with your question.
Yes. Thanks, I just wanted to ask about gross margins I mean, they were up a fair bit year over year and sounds like some of that was driven by mix. So.
Is that something that's sustainable is that something that could potentially.
Go the other way is if your growth rates kind of revert back to more normalized rates in the different businesses.
Yes, I would say the single biggest thing on the quarter.
As that you saw the health care capital was down and kind of everything else was up and so that is a mix effect says health care capital comes back over a longer period, you'd expect that mix down on the other hand, if it comes back and everything still growing and we do see ASP My science growing faster in general than most of the hedge.
Care space, it's still a positive impact kind of long term temporal impact on.
Margins in my view.
Okay. Thanks, and then.
Just wanted to follow up on Larrys question about the life science business and the potential impact of the vaccine. So how do we think about that that business as the vaccine.
Start to be launched I mean does that mean that the.
The demand for your consumables with that decline because they there's been comps the stocking orders or would it can remain strong as the vaccines are.
Rolled out.
Thanks.
Yes, we don't have perfect visibility to that if we did we would be probably be gifting straw.
Differential guidance than what we're giving that.
That's a tough call my experience is in this space.
[music].
Vaccine, where I would call the pharma folks who are.
Running these facilities are the most conservative of our customers when it comes to supply chain. So my suspicion is they're going to hold a fair amount of inventory for a long time until they know that they are in.
In good shape and have.
No what they're running how much they're going to have to build and know what they are.
Requirements are going to be so I don't think in the short term, there's going to be a huge reduction.
You know as we work through this if indeed, there are overstocked, they will slow it down and they are not they won't but generally speaking.
You know they tend to be kind of concerned about supply chain appropriately conservative deal. Those factories you show one of those things down you're shutting down millions of dollars a day not millions of dollars a year, so they're they're pretty careful.
About their supply chains.
But again, we do not have perfect visibility that just like you to that person perfect visibility to who is going to be building win.
I should also mention another effect of this has been our capital and I've talked about capital health care being at risk our capital Life Sciences at all time Records, all time record backlog all time record shipments.
Everything you want to look at so the capital equipment in life Science is quite strong and we don't citing the short to intermediate term.
Okay. Thanks that was very helpful.
And then.
Just on that I heard your commentary around the orders improving since they kind of bottomed in may but it does look like the healthcare backlog was down double digits year over year. So is that just more of a lagging indicator or something is that why that's not it's not showing any kind of better year over year change.
It is you may recall that.
In the first quarter.
We had an accounting change.
That resulted in roughly.
$15 million of all our eye being recognized in the first quarter.
To that number for this quarter is probably more in the 10 to 12 million range. So.
So if you looked at this based on the auto similar.
Approach you.
I would say that the backlog is roughly.
Plus or minus a little bit but.
So it's down, but it's not down double digits and and.
So that's it in the short run but capital is capital has been under pressure.
More pressure than.
Than many of the consumables and we'll just have to see just it's nice to see that the replacement business seems to be returning which is roughly 60% of capital orders. So yes, we will see the next several months.
It's been a sequentially moving the right direction and we hope it continues that way.
Okay, great. Thank you.
You bet.
Once again, if you would like to ask a question. Please press star and then one.
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Our next question comes from Michael Paul Arc from Baird. Please go ahead with your question.
Hey, good morning, Thanks for taking the question just a couple here I'm curious on P. P E and F. T. Walt do you have a view.
It did volume from that category in total flat sequentially versus the June quarter up down Im just curious how that that piece is trending.
Yes. This is Dan I think its been more governed by supply that has been demand at this point and as the suppliers have ramped up on the raw material.
We're seeing similar levels that we saw in Q1, maybe maybe a slight uptick.
We do believe there will be sustained increased demand at some level for P.P. onto the future as well.
Yes, the requirements for those products for certain procedures have changed.
Even with or without the pandemic.
As you fill back up on P.P. stays at these kind of elevated new norm levels, let's assume and electives recover.
Presumably your global network is quite tight tense.
A significant amount of capex going into S. T are there other issues that arise where preference is discussed between.
Where you make decisions about who gets access to.
To the facility isn't one or is there enough capacity.
The chart does.
Those frictions donor eyes I'm, just curious how that in a world over the next handful of quarters as we learned to live with US electives recover p. stays elevated is there is there a risk that your capacity gets [noise].
Very tight.
Well one there's a reason why we're building a number of patch right now across the globe in North America, Europe, and Asia, we have more builds going on nasty than ever in my lifetime right now because.
Because we see long term increased demand in terms of customer.
Capacity constraints at a given site it does happen from time to time, and we work with our customers to crosswalk.
Elevate our multiple methods of sterilization, so that for some period of time it may not be optimal for their supply chain, but we can get the product sterilize and to the market.
[noise] helpful.
Yeah, No I would say Mr. Christy always tells me that it's like Jello Theres always room for Jello's always room for one more customer.
And I'm sure you're not.
Yeah running facility is that every hour of the day or is that Oh, yes, yes, no. We are except for essentially Christmas day in the Western World, We run 24 seven.
Got it.
The other topic was SGN Ed just.
No you're not putting a fine point on the back half, but in the context of a of.
And ex key surgical revenue expectation of flat year on year.
How would you frame ash DNA.
Dollars for fiscal 21 in the context of that revenue out like reasonable to expect those dollars are flat is there.
As there are quite a bit of such that the ratio is similar year on year.
For the full year or what do you what do you expect variance one way or the other.
Yeah, Mike for the for the first half obviously, we saw a lot of favorability there in the second half, we would say there's going to be favorability, but nearly not as much and that obviously for the full year. We would say we would expect to see a decline in total.
And then obviously as we look to the future we will give guidance hopefully at that point in time, when we know more about but definitely.
Definitely anticipate that we would be spending.
More operating expenses in the second half of the year versus the first half.
Thank you very much.
And ladies and gentlemen, with that we'll conclude today's conference today's question and answer session I'd like to turn the conference back over to management for any closing remarks.
Thanks, everybody for taking the time to join US This morning stay healthy.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining you may now disconnect your lines.