Q3 2021 Steris plc Earnings Call
Good morning, everyone and welcome to the <unk> plc third quarter FY <unk>.
For 2021 conference call all participants will be in a listen only mode.
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And at this time I'd like to turn the conference call over to Julie Winter Investor Relations Ma'am. Please go ahead.
Thank you, Jamie and good morning, everyone.
As usual on today's call, we have Walt rosebrough, our president and CEO Mike.
Mike <unk>, our senior Vice President and CFO, and Dan Christiana <unk>, our Chief operating officer.
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 terrace 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 on the forward looking statements, including without limitation those risk factors described in Sarasota 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.
They're supposed to 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 definition is available on today's 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.
Those questions I'll 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 third quarter performance for.
For the quarter constant currency organic revenue increased one 4% driven by 130 basis points of favorable price and 10 basis points of organic volume growth.
Gross margin for the quarter was up 110 basis points to 44, 2% and benefited from productivity price and acquisitions EBIT.
EBIT margin for the quarter was 23 six per cent of revenue an increase of 250 basis points from the third quarter last year due primarily to higher gross margin attainment and lower operating expenses for travel sales and marketing and compensation due in part from the business disruption from COVID-19.
Our adjusted effective tax rate in the quarter was 18, 4% somewhat lower than anticipated due to favorable discrete items.
Net income in the quarter grew 20% to 149.2 million and earnings increased to $1 73 per diluted share as compared to $1 45 per diluted share in the prior year.
Our balance sheet is a continued source of strength for the company or.
Our leverage ratio at the end of the third quarter as once again below two times as we continue to pay down debt post the key surgical acquisition consider.
Considering our cash position of $253 million access to available credit lines and a low leverage ratio, we are well positioned from a liquidity standpoint.
During the third quarter capital expenditures totaled $53 $8 million, while depreciation and amortization was $56 8 billion free.
Free cash flow for the first nine months was strong at $337.7 million, an increase of almost $100 million over the same period last year, primarily due to improvements in net income and working capital somewhat offset by higher capital expenditures with that I will now turn the call over to walk to Walt for his.
Our remarks.
Thanks, Mike and good morning, everyone. It's a pleasure to be with you to discuss our third quarter results, which once again demonstrate the resilience of our business and the great work of our associates to serve the needs of our customers.
Once again, we want to acknowledge that caregivers around the globe, who are on the front lines of this pandemic and doing such a tremendous job.
Looking back at the first three quarters of this fiscal year, the sequential improvement of our business is impressive.
We continued to experience the challenges of a global pandemic the worst impact on our business appears to be in the rearview mirror.
Despite significant numbers of new Covid, 19 cases, and some hospitals around the globe close to or add capacity procedures continue to occur.
Our most significant concern healthcare capital equipment achieved a critical milestone showing three straight quarters of sequential improvement and ending the third quarter with an all time record order months.
This resulted in near record backlog, which is greater than that before the pandemic at the end of Q3 last year.
Even with pockets of slowdowns in procedures due to COVID-19 uptick we are quite pleased with our position at this point of our fiscal year <unk>.
Constant currency organic revenue grew 1% in our third quarter driven by double digit growth in E. S. T, which was offset by flat to slightly down revenue in life Sciences, and healthcare on a constant currency organic basis.
Our strong growth on a S. T continues to be favorably impacted by demand for COVID-19 related single use products, such as PPE and COVID-19 testing materials as well as components used in vaccine manufacturing and packaging.
The business has also seen steady demand from its core medical device customers.
Life Science revenue was flat in the quarter.
With mid single digit growth in consumables and services offset by a decline in capital equipment shipments.
On the consumable side, we have been anticipating a return to more normalized growth for some time it.
It appears our customers are destocking, the excess inventory that was built up over the last three quarters.
With Covid vaccine with Covid vaccines now in production, we expect to see sustained high demand for our consumables offering but not at the extraordinary growth rate of recent quarters, when our pharma customers built inventory due to surety of supply concern for vaccine production.
And as we've commented frequently over the years capital equipment shipments in life science can be lumpy.
The decline in Q3 was strictly a matter of timing as capital equipment orders were strong in the quarter reflected in our life Sciences record capital equipment order backlog.
Healthcare benefited from the addition of key surgical during the quarter, which added about $15 million to healthcare consumable revenue.
While it's still early days, we are quite pleased with our integration efforts and what we're seeing so far in that business. We continue to have high expectations for key surgical going forward.
As I mentioned earlier, while the while the shipments for healthcare capital equipment declined year over year for the quarter. We did see sequential improvement from Q2 to Q3 and backlog ended above last year's levels.
We are cautiously optimistic about our fourth quarter and start of our new fiscal year regarding healthcare capital equipment.
As the risks appear to have declined throughout this fiscal year.
Our profit overall has exceeded our expectations as we continued to see the benefit of continued efficiency gains along with lower operating expenses.
The operating expense reduction is largely due to travel disruptions from the pandemic as we've said all year, we do expect some of those expenses to phase back in as travel resumes returning our operating expenses to more normal levels.
We are committed however to evaluating opportunities to permanently reduce expenses as we have learned that some things can be accomplished virtually.
Adjusted earnings for the quarter as Mike mentioned were $1 73 per diluted share or growth of 19% as we benefited from higher gross margins reduced operating expenses and slightly lower than anticipated tax rate.
With just two months remaining in our fiscal year, we like where we stand today and the long term positioning of our global portfolio.
Our thoughts on the full fiscal year have not changed materially from what we discussed last quarter.
Current currency organic revenue, excluding acquisitions should be about flat for the fiscal year.
That's impressive performance in this environment, but it is safe to say that we all look forward to getting back to normal and deliberate and delivering the revenue growth. We know we're capable of in the longer term.
Once again I would like to thank stairs people for their commitment to our customers those healthcare professionals, who continue to do is simply miraculous job on the front lines of this pandemic.
We also welcome the people of key surgical to our team.
And we're working through the process to complete the acquisition of Cantel medical and look forward to welcoming the can tell people to the stairs family as well.
Now before we open to Q&A I want to comment on our announcement that I'll be stepping down as CEO at the end of July.
The board and I have been working on my succession for years and while we have other capable candidates the anchor Sto, our current chief operating officer is our unanimous choice.
Dan The board and I had been working to prepare him for this transition.
And as the announcement said I will be available through July of 'twenty 'twenty, three as an advisor to management and the board.
As you all know I hold a significant amount of stairs stock and options and continue to be highly vested in our long term success.
Personally and financially.
When I came to stare us little over 13 years ago, the preponderance of investors and analysts advise me to exit the life science and AST tea business due to their moribund performance.
I worked with the executives of those groups to determine whether or not that was the way to go.
The answer is now abundantly clear and we have Dan and his teams to think for the improvements in those segments.
Dan's early executive leadership role was running sales and marketing for the S. T group.
The developed and implemented the strategy to improve that business.
A few years later I asked him to take on life Science as a general manager.
While maintaining the sales and marketing leadership for a S T.
He worked with that team and led the improvement in life Sciences, while continuing the success at a S T.
He then successfully integrated synergy healthy S T business as general manager of a S T and life Sciences.
Dan took on the leadership of our healthcare I P. T business several years ago, making him responsible then for all sterilization and disinfection products across the stairs portfolio.
And finally, he became responsible for all of our operations as Chief operating officer in 2018.
Terraces performance the past 13 years for which I have happily been able to take credit or significantly. The result for the work done by Dan and his management teams.
I am extremely confident that he is the right person to lead <unk> into the future.
Add to that confidence I could relate a similar story about many additional members of our senior management team, especially including our CFO, Our general counsel and the leaders of the commercial operations of business units upstairs.
Almost all of those leaders have been with us or companies. We've acquired for over 15 years and have stepped up and made significant improvements in their operations, while taking on increasing responsibility as we have grown.
They've done great work that is individually and collectively added to the success of our company.
The median tenure of our 27 members of our senior management team has over 15 years.
Longer than I've been with the company.
The median age is 53.
The most should be here for a good long time.
That talented senior management team along with the 13000 people of stairs are the bedrock of our past success and life Starer <unk> future is bright.
And Dan and I, both know it.
I'm looking forward to having more time to spend with my family beginning this fall.
I am blessed with the wife of over 40 years.
I meant to say a wonderful life of over 10 years.
And have two fantastic adult children and their spouses.
Who have given us nine you on grandchildren.
But I'm not stepping down until the end of July and will be fully engaged as CEO until that time.
After that I will be available to our management team and the board of directors for an additional two years.
We believe as stairs is stronger and better positioned than ever.
The cerus team stands ready to capture additional opportunities and we continue to be confident that the future of stairs is bright.
With that I will turn the call over to Julie for Q&A.
Thank you Mike for your comments, Jamie if you could please give the instructions and we can get started on Q&A.
Ladies and gentlemen at this time well begin the question and answer session.
To ask a question once again, you May press Star and then one using it touched on telephone to withdraw. Your question you May press are and true.
If you are using a speaker phone we do ask you. Please pick up your handset before pressing the keys to ensure the best on quality.
With that in mind once again it is all right and then wanted to ask a question.
Our first question today comes from Dave.
Thank you for Kelly from JMP Securities. Please go ahead with your question.
Great. Thanks, So Walter I, just wanted to get this timeline straight here. So you do a bunch of big strategic and accretive deals, but put a feather in your cap and then you step down and leave it to Mike and Dan to make it all work.
I understand your explanation, but I'd I'd love to just say what gives and how do you do that.
Yeah, you know a great question.
And my experience, there's always something going on and usually something being going on on the life of companies.
Whether it's an opportunity and acquisition the problem of crisis.
There's there's always something going on so the question really is what is the perfect time for a transition.
And the perfect time in my opinion for a transition is just before a successful CEO is ready to go.
And just after the incumbent CEO is ready to take over.
That's the perfect time for a change and that's where we are right now.
Thank you for that certainly going on I know you'll be involved we will certainly miss you.
Being as actively engaged I guess just as a quick follow up you mentioned key surgical I think you said $15 million.
I was just curious if you had any.
Color on it.
Where that stood day, maybe versus what you thought if there's any positive or negative surprises so far thanks a lot.
We're generally on track with what we thought with key surgical.
The timing of the transaction were happy to get it done in November, but that's right before the Thanksgiving holidays, and the Christmas holiday So.
Actually I think we said to do about $15 million and we beat it by a bit so we're pretty pleased there.
Thank you.
Our next question comes from Larry <unk> from Raymond James. Please go ahead with your question.
Thanks, Good morning, everyone.
Walter Congratulations here on.
What has obviously been a very successful.
Area and building a lot of shareholder value for.
For investors.
Terrace, and certainly wish you well, but I know, we'll get a chance to speak again here.
For it but for the times out.
I guess I wanted to just pick up on a couple of points on it.
On the succession, and then I had a couple of quick.
Sort of maintenance question, but.
First Walt.
You sort of talked about what you want to do with your time.
But why is now the right time for you to be leaving.
And in particular, because you indicated that you'd be in a sort of consulting role here for sure.
Till July of 2023, and then the second part of that question I'd really love to hear from Dan.
I think the.
One of the big Investor questions will be you know Gee. This is all happening.
Front.
The acquisition of Cantel.
And so I'd really love to hear from Dan sort of just his thoughts around how he sees approaching integration and.
And specific thoughts around key and can't tell specifically.
Sure Larry.
I think I sort of answered the first part of your question already I do think.
Again, there's always a significant.
Risks opportunities whatever in the life of a company. That's that's the beauty of it by the way. It's why Ceos work 60, 70 hours a week is because theres always something going on there is too much to do all the time.
So you know there's no perfect time in my view as it relates to that having said that.
The right time is again.
While I'm still very active very engaged love what I'm doing.
C D and.
And when Dan is ready.
Little more than ready is probably a little anxious to get my ass out here, but.
The short answer is.
That I think is the key is the timing of the.
The person, leaving in the successor now having said that.
If anyone who knows me knows that I'm not going to retire today.
I'll be in their 60 hours a week until July 29.
And there'll be lucky if they can get me out of here in less than 60 hours a week for the several months after that I love, what I do love the business.
For the last two or three years relative to purposes, I've been giving advice not driving the business anyway people. This senior management team of this business is extraordinary and they.
They don't need a whole lot of help true.
And people like Dan and Mike and the people to work with them.
There are more than capable of doing this work I mean true the matter as ive hardly been involved in tea.
<unk>, Dan is pretty much taken that on been more involved in cantel for semi obvious reasons and I had historic relationships there.
But in terms of implementing the work.
Haven't been implemented or for quite a while so these guys are perfectly capable I use guys in the.
Both sexes term by the way of a third of debt senior emptiness female so.
Serious about using it in the in the <unk>.
Sex neutral term, if you will but but.
These people know what they're doing and they will do a great job with or without me.
Dan I'll turn in the second half to you.
Yeah. Thanks Walt.
I would say as you know Larry since we started the process with can tell Mike total kitchen I have bled virtually all the diligence efforts in terms of research and working with the leadership cantel to get to the synergies we derived.
I know that we're very confident in our leadership team and their involvement in the diligence process as well.
And we're ready to execute once we get through the proper regulatory processes on that deal in terms of the time for me.
As a key opportunity here for stairs.
Is to look at the broader integration of key and stares sand can tell there is some some real synergies between the three businesses that we believe will play out in the future and we're well down the path already in terms of integration as it relates to key surgical and we're confident with where we are and the performance for the business and our management teams have done.
Roughly 50 deals over the last 678 years right. It's this is the I don't want to say, it's another day on the office is the big deal there is no doubt.
But we did a pretty nice job with these with these exact teams working on synergy on the integration of that fairly large deal you know five or six years ago. So we're confident in our our senior leadership's ability to execute on this deal and continue to be successful for stairs.
Okay terrific and then.
Just two quick questions here just on.
On the on the Asps margins again, obviously very impressive.
And certainly as I look back over time, I'm not sure that debt.
Hit this sort of margin level in the past.
So two questions there.
Kind of how much of the performance is being driven.
By opportunities around Covid, and how should we think about debt to sustainability and durability of that of that of that type of a margin.
Within the business in other words were there any one timers in.
In the quarter to think about and then the second question, perhaps for Mike is.
On the cash flow improvement again is.
Notable.
You have called out working capital is certainly one of the drivers there.
Again, what's the right way to sort of think about room to improve working capital going forward and also how does that sort of think about capex on a broad sense. Thank you.
Thanks. This is Dan I can tackle the ASP question first if that's okay. So.
We are getting some benefit right now in terms.
So coke.
And related products like testing kits and swaps and things of that nature clearly are in high demand and frankly, everybody was a three D. Printed these days is making swabs for test kits right now and those need to be sterile.
In addition, we are seeing increased demand from bio manufacturers syringe manufacturers and <unk>.
Folks involved in for supplying components into the manufacturing process for vaccine.
As well as significant growth in what we would categorize as bioprocess sterile disposable they're used in pharmaceutical manufacturing those had been on a strong growth uptake for number of years, but has been accelerated by the demand in vaccine production now having said that we're still seeing less than normal demand for mark.
For medical device customers, especially those that operate in the realm of more elective type procedures things like orthopedics and spine and things of that nature. So much of the core business has still been a bit suppressed in terms of normal growth rate.
Our north sea and.
And we believe.
Those are returned to normalcy, if you will that will more than offset the short term impact of some of the COVID-19 related benefit now having said that vaccines aren't going away I don't anticipate seeing any slowdown in either the bioprocess disposable business.
Or any other packaging materials going into vaccines in the future. So we think that will sustain at a pretty high level.
And the margins.
Well the margins are a function of really utilization and scale of our global of our global footprint and as the plants right now are pretty full.
We're dropping through pretty strongly you know on on the revenue that we have we've got a number of expansions coming on line.
Those are metered out over time, where I don't foresee that having any significant impact on the overall margin rate a S T.
And then Larry I'll take the free cash flow so obviously.
Very strong free cash flow for the first nine months of the fiscal year and as I stated earlier the combination of increases in net income.
And working capital improvements, specifically, what I am talking and working capital improvements we've seen.
Fantastic efforts across our business and the collections of our outstanding <unk>.
Balances and actually our DSO has.
I was once again, but down about two days for the third quarter and we've continued to see improvements in those collection efforts throughout the whole year.
And that's on top of elevated inventory levels, which we continue to maintain surety of supply and level load. So if I look at longer term, obviously I don't know if the levels of a our collections will be this good sitting here next year, but obviously the opportunity for us is to reduce the inventory. So hopefully over time, we continue and should continue to.
Improve our free cash flow position as far as our capital expenditures year to date were up $11 million compared to where we were at this point last year, we anticipate to continue to spend at elevated levels not only for the rest of this year, but also as we look out for the next couple of years specifically around.
Our continued expansions into our a S T segment.
We spent roughly $100 million a year over the last couple of years on those expansions and sitting here today I would guess that we would continue to spend a couple of hundred million dollars at least annually for.
For the next couple of years going forward.
Okay very good. Thank you very much I appreciate it youre welcome.
Our next question comes from Chris Cooley from Stephens. Please go ahead with your question.
Good morning, Walter just want to say congratulations on your upcoming retirement, it's been a true on a pleasure to work with you. This last decade.
And I just want on also call out one of the gentlemen, how are you acknowledging this morning, what's always been extremely strong and hard working bench, but I don't think has been appreciated as much by the street, but also on acknowledged that you've always had a very astute steady hand at the keel throughout the entire time and youre going to be now, but look forward to.
Working with Dan.
Maybe just two quick ones for me here this morning.
First when we think about what youre seeing more so on the healthcare side.
With capital and debt.
Build just trying to get a better understanding of what types of projects, you're seeing there that drove that new record backlog in that segment.
And then secondly, I would like to.
A follow on to Larry's comment regarding the cash flow, which was extremely strong in the quarter.
Especially in light of what's transpiring just want to thank or maybe this is for Mike or for Dan If we should start to step up our expectations for.
Free cash flow generation, when we look at the yield versus the sales line historically.
You are trending up and clearly a S. T seems to be supporting that with higher higher margin. So just wanted to think about how we should think about cash flow on on a longer term basis as well. Thank you so much.
Yeah, Chris on the healthcare capital side, we've talked about it a bit probably less than we could ever should have is the number of new products. We have in this space right now is very very strong.
Virtually everything in our surgical line has been refreshed in the last.
12 to 18 months.
Room's lights tables, or I, and we have several new products that are in the infrastructure space, they're all doing nicely. So.
Surgical's clearly the operating room, what we call surgical is the operating room is very strong right now relative to last year.
I P. T continues to be just an extraordinary piece of business on the capital side. So between the two and I would say, although we had and still have a little trepidation about capital spending.
When things when when hospitals tend to pull back a little bit on capital one of the last places they tend to pull back is with the surgeons, who generate the income for the hospitals. So we have traditionally not pulled back as hard as some other areas.
When things go bad debt means we don't jump up as much when things get a little bit better, but I think it's a combination of a there was a little GAAP. When there wasn't so many orders I think there they seem to be back to quote unquote normal at least in our space on the surgical and <unk> space. So I'd say at a high level.
That's it now let the other guys talk about the cash flow question you asked.
Yeah. So Chris this is Mike.
Obviously, we are very proud of what we've accomplished this year from not only an earnings perspective, but also from a free cash flow standpoint, although again.
Whereas we are not giving guidance the rest of this year, we hope to give guidance I would think in the may time frame for the new fiscal year, but one of the other things that you got to be cautious about is as we do adjusted earnings on the P&L standpoint, we do not do adjusted free cash flow. So as we continue with with acquisitions, especially the.
<unk> and the cost of those integrations, especially around cantel, we're going on here.
We spent a significant amount of cash.
To get those cost synergies so I'd be just cautious if you. If you were to back out and start doing an adjusted free cash flow I would agree with you that it may be time to look at our stepwise change, but since we do not report that way I would just be cautious on how you look at it.
Thank you.
And our next question comes from Matthew Michelle on from Keybanc. Please go ahead with your question.
Hey, good morning, everyone.
And Walter leaving yet, but it's been on.
They're real pleasure seeing the evolution of strength over the last 510 years.
And congratulations.
So in honor of you, leaving I'm going to ask tough questions for Dan.
And a good man initiate hasnt initiation.
So Dan.
If you average out the last three quarters for life Sciences consumables. It's.
It's about 25% growth off of a pretty good base, which is good.
But I guess, it's just hard to believe that new vaccine demand is only up 25% can you give us a sense of like the mix of life Sciences consumables tied to vaccine and then also when and where are your life science consumables typically used in production.
In comparison to.
It's always been a tough comparison to getting there because they never really works out but to the beta bags to clarify for folks trying to make a connection with their 70 per cent order increase.
Okay.
Thanks, Matt and thanks for the challenge.
So what I would say yeah, I think we've talked about and you stated as well on a year to date based on our life science consumable business is up roughly 25% give or take and what we're seeing now is a little bit of pullback in terms of you know as our customers burn off some of the the inventory. They built early on in debt early phase of the pandemic.
And there was a lot of concerns about certainty of supply and we made it a point that stairs to serve our existing customers in pharma and never deviate from that and sell outside of market to make sure those folks knew that we would have those validated chemistries.
As demand.
<unk> horizons as they got into vaccine you know in terms of an actual percentage of how much is going to vaccine. It is it is impossible for me to say and the reason why is that many of the vaccine manufacturers are also had been long term large customers of stairs that use our products.
Bye.
Men often get on bioprocess.
Bioprocess cleaning perspective, and their normal day to day production of pharmaceuticals in Biopharma.
It's not as if we're tracking down to the shop floor level every application of products go into what we know those debt we are getting some uptick for.
On vaccine as as our customers.
Refocus in that area, especially around Covid.
And we believe that'll be a trend that continues.
In terms of the beta bag products, that's a sterile transfer products that has an integrated lift for an isolator.
Not something we do we are we are in the space of sterility maintenance since really assurance as it relates to bioprocess no doubt with our barrier products solution group of products and those have continued to do very well.
Since the beginning of the they've done well since the time of acquisition actually but they've done very well since the.
The pandemic really started in those products.
They were up in the well on a year and has stayed fairly consistent in terms of their growth as opposed to slowing down as we've seen in the chemistries piece, specifically on the Chemistries.
We have mainly two offerings. There one is what we call critical environment products in there.
Our disinfectants and Stirlands that on.
Largely used in either a septic manufacturing process.
Or highly regulated clean rooms for for <unk>.
Pharma manufacturing now.
Not a lot has changed in terms of their application with Covid.
There's just more application as it relates to increased vaccine production and then the other large.
Portion of our consumable business is what we would call bioprocess cleaners.
And those are chemistry used for cleaning out the actual buyer.
Biopharma equipment used in the manufacturing process. So in between production runs they assure they have the highest level of purity in terms of how they treat their their machine.
Painless still on the process.
Okay.
Excellent and I appreciate that answer them, while they're on Dan I'll start.
Just going back to capital equipment.
What was the impact on the backlog from the accounting change you made earlier in the year isn't masking the higher year over year number.
And then.
To continue with more questions, how should we think about orders versus shipments, especially as hospitals transition.
From the Covid surge to non Covid surge during the course of the calendar year.
Matt I'll take that first question about the impact of so when we made the adjustment in the first quarter for the <unk> deferral.
Starting to recognize that revenue.
As it is shipped rather than add on install it.
It was about a at about $15 million.
The uptick in revenue in the first quarter and throughout this year, we've really we've gotten rid of the backlog. If you will but last year. It is still reflected in the backlog and if you look year over year, there is about $12 million in last year's backlog.
So if you need to adjust last year's backlog, if you want a true apples to apples comparison, if you do that obviously, we would be at a all time record.
But that's why we're at near our record backlog because of that impact.
And we'd be we'd be 12 to 15 million over last year and $12 13 over the pressure on overhead the best spot we've ever had.
And then the second question sorry.
Should we think about the orders versus the person as shipments I mean, I mean, obviously caught on hospitals are obviously still dealing with.
But with the Covid charge.
Placing long longer term orders or are these are these.
On these orders on which they their life.
Marlin and replacement.
Yeah.
As you know our typical pattern is kind of 60 40.
We have been a little stronger heavier whatever the right term USA in terms of the big projects.
Recently.
But in order for us to have record order months.
On record backlogs, they both have to be chugging along so.
It is running much more like normal than it was for example, six months ago.
Okay and then the last piece for me would be.
How should we think about the operating margin level.
Compared to where we're at today as sales growth return.
Mix begins to normalize.
When you integrate two large acquisition.
But you know that's a lot of moving parts and so that has added a lot of moving parts.
Obviously the areas that had been very strong 10 have tended to be toward our higher margin products. So there has been a bit of a mix effect.
And as we ship more of the capital and as we do more of that there will be some I'll call. It mix effect, but as you know we don't plan on keeping our costs the same level ever and so we are working to reduce costs some of which we pass on to through lack of price increase to our customers some of which.
We take to the bottom line. So that's one set of mix was and then as we bring the other businesses.
On board.
It depends on which parts of those businesses are coming in there is a natural mix effect, but on the other hand, given the level of synergies that we see.
We think we will be offsetting offsetting that so.
So we think that.
If you were to look at it in a pro forma basis. If you will how those businesses all look today and add them together the margins are going to go up because we're going to take more than $100 million out of the out of the businesses.
That are coming on board. So we feel very good about debt and you know from our long Association that I only care about growing profit dollars.
As long as we can grow profit dollars double digits, that's what the teams.
Mandate is and if we happen to the margin happens to go up.
10 basis points or down 10 basis points out of holds any sleep over it but in the end.
It's pretty hard to grow revenue debt high single digits on margins and profit double digits, unless we grow margins and that's our that's our mandate.
Okay excellent. Thank you very much.
And our next question comes from Mike Matson from Needham <unk> Company. Please go ahead with your question.
Yes. Thanks.
So.
I just wanted to go back to the capital orders in the healthcare business.
Do you think any of the strength youre seeing there because the.
Pent up demand and sort of things that were deferred.
2020, because of the pandemic.
If that's the case I mean is that something that could be sustainable for some period of time.
Yes, Mike This is Dan I do think that we are experiencing.
Some of that effect and specifically I mean, we had.
Really tough time with sales reps getting access for three or four months give or take and just the debt don't ever underestimate the ability on our sales organizations ability to sell and being present is very important. So I think there's some catch up in those numbers.
But generally speaking you know when we talk to customers and hospital systems. You know there is a concern about the surge after the surge and that is what's going to happen with all of these backlog surgeries that are elective or semi elective once we get back to a normal steady state in terms of Covid and operating so I think that's also helping us.
In terms of the sustainability of the capital backlog on the orders we're seeing.
Okay. Thanks.
And then.
Just more of a housekeeping question I was wondering about the.
You are excluding some COVID-19 incremental costs from your adjusted EPS. This isn't the first quarter, obviously that you've done that but I just wanted to ask about if you could clarify what those costs are and kind of how you determined how much falls into that.
That line item. Thanks.
Yeah, certainly Mike and we've been I'll call. It consistent if you will all year.
Surrounding this and.
The makeup of that is.
As we have put.
Employees on furlough.
And what I mean for all of their they're not doing anything for the company. So they're they're pretty they're just off completely so we've taken the opportunity to capture those costs also we've been able to get some government reimbursement for those folks at the same time, so we're netting.
That cost into.
The adjustments in addition to that we have had to put in some training tools.
We've done some enhanced cleanings some different protocols that we've also done in our facilities across the globe.
We've made some modifications to our buildings, obviously traffic patterns have changed signage has changed so all of those costs surrounding that is what we're capturing and we're identifying separately as the COVID-19 incremental costs as we're adjusting those out to date, we're about just over $20 million for the first nine months and that has significantly dropped.
From the first quarter levels, and we anticipate it will continue to drop as most if not all of our employees are back to work and recall.
We were also very proud that we did not have to lay off anybody. This was our intention of keeping our folks hull and when our customers were ready to come back to work we were there right alongside with them. So yes, I think Mike.
Pretty much described it just to be clear those furloughed employees are all paid 100% other base pay and so the governments of the world, depending on which part of the world there in.
Make up some portion of that but never all of it and so that's been the costs and that's really the most significant costs that we have captured and in most cases, where there is certainly one of those government subsidy. It is absolutely clear that they cannot do anything well.
While we are.
While they're on furlough, if you will and we have taken that approach on anyone who we have captured in this is that they are absolutely not working and.
And absolutely being paid 100% of their pay.
Okay got it thank you.
Once again, if you would like to ask a question. Please press star and then one.
And our next question comes from Michael <unk> from Baird. Please go ahead with your question.
Hi, good morning.
A question on the leadership transition.
Two parter number one would you expect.
On backfill for Dan's CLO rollout somebody else in your organization. That's part one and then part two for Dan.
Dan how many direct reports.
Do you have today and once you get up and running in the new seat.
How many direct reports what do you expect to have at that point.
Yeah sure Michael Thanks, So in terms of backfill I would say no not in the existing role I would not expect us to operate going forward with the CLO.
And in terms of my direct reports are currently you know I have eight or nine give or take right now.
And what.
What I would say is it likely.
With the acquisitions coming in and some changing roles within the organization debt. The number of direct reports I have on the commercial side of the business will consolidate to some extent under under leadership that we have in place. So I would expect that.
On it.
And that's the direct reports.
811, or eight to 12 or something like that but.
I think over time will will sort of transition to something that looks more like that.
And then yes.
Yeah, if I comment on that.
That's eight to 12 is kind of what we think senior executives should have and you know.
It's a heck of a lot easier to save money. If we all have eight to 12 and we don't have for extra chiefs.
Running around and so that's been a hallmark of.
One other ways that we operate efficiently use virtually everyone on my staff virtually all the time, except by the way for me right now on them almost on vacation I think you'll have three for left.
But everybody else is eight to 12, and that's just kind of the way we operate.
I appreciate that color. The second question was on on the Cantel transaction. It sounds like there is no new news in terms of the timeline.
Would just be curious for a brief update there.
<unk> with.
Regulators.
How are those progressing and then.
Has there been a date set yet for.
The cantel shareholder vote.
Yeah, it's still too early for any real news there we're going through the process.
Determining.
For the various countries, we do or don't need to file in and then getting those files and so its way too early to comment at this point.
Okay.
And ladies and gentlemen, and having no additional questions I'd like to turn the conference call back over to management for any closing remarks.
Thanks, everybody for taking the time.
And ladies and gentlemen that will conclude today's conference call. We do thank you for joining you may now disconnect your lines.