Q2 2022 Steris plc Earnings Call
Good morning, and welcome to the stairs plc second quarter 2022 conference call.
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I would now like to turn the conference over to Julie Winter Investor Relations. Please go ahead.
Thank you grant and good morning, everyone as usual speaking on today's call will be Mike took its eye senior Vice President and CFO as well as Dan Kristy <unk>, our president and CEO.
I do have a few words of caution before we open for comments.
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Terraces 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.
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But those questions. So I'll hand, the call over to Mike.
Thank you Julie and good morning, everyone.
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 12% with growth across all segments growth was driven by organic volume as well as 130 basis points of price.
Acquisitions total added $346 million to revenue in the second quarter, which is broken down by segment in the press release tables.
To assist you with your modeling I will share some color on the acquisition revenue contribution within the healthcare segment.
Of the approximately $220 million in acquired revenue about 65% is consumable revenue from both Keith and Cantel medical about 20% of the balances capital equipment revenue.
With the last 15% being service revenue.
We will not be breaking that down any further as it's already difficult to differentiate some product lines as we are integrating the businesses quickly.
And that challenge will only increase with each passing quarter.
Gross margin for the quarter increased 120 basis points compared to the prior year to 46, 2% as favorable productivity pricing and acquisitions were somewhat offset by higher material and labor costs.
Abide material labor cost were about $10 million in the quarter significantly higher than we were expecting.
As we look at the second half of the fiscal year, we anticipate that higher material labor cost will continue to impact gross margin by approximately $20 million or more EBIT.
EBIT margin for the quarter was 23, 3% of revenue an increase of 80 basis points from the second quarter of last year as anticipated. We are starting to see some operating expenses, such as travel and sales and marketing cost return somewhat limiting EBIT margin growth.
The adjusted effective tax rate in the quarter was 22% higher than last year, but in line with our expectations for the full fiscal year.
Net income in the quarter increased to $203 million and earnings per share were $1 99.
Our balance sheet continues to be a source of strength for the company our leverage ratio at the end of the second quarter is now below two eight times.
As a reminder, we cash settled all of Cantel convertible notes during the second quarter.
Total cash settlement value was approximately $371 $4 million at the end of the quarter cash totaled $383 $5 million.
During the first half capital expenditures totaled $133 4 million, while depreciation and amortization was 200 point $201 7 million, reflecting recent acquisitions.
Free cash flow for the first half was $135 8 million as anticipated. This is a decline from last year due to costs associated with the acquisition and integration of Cantel medical and slightly higher capital spending year over year with that I will now turn the call over to Dan for his remarks.
Thanks, Mike and thanks, again to everyone for taking the time to join us today.
Our fiscal 2022 is shaping up to be another record year for <unk>, our first half turned out to be stronger than we anticipated with constant currency organic growth across the business.
In particular growth in our ASP segment remains strong with 23% constant currency organic growth year to date. Despite some tough comparisons in the second quarter of last year.
Health care has also rebounded nicely with 17% constant currency organic growth in the first half.
And record backlog of $311 million at the end of the quarter for the legacy <unk> products.
Life Sciences consumables have stabilized contributing 3% constant currency organic growth in the first half and our capital equipment business backlog has grown to a record $98 million.
Lastly, our newest segment dental reported 10% growth for the quarter in line with our expectations.
Underlying our performance procedure volumes in the U S have held steady as hospitals have learned how to manage through the pandemic.
While we continue to see pockets of the world that are more limited in procedure volume due to Covid outbreaks. Overall, we believe procedure volume is moving closer to pre pandemic levels.
We are cautiously optimistic about the coming months as Covid cases appeared to have peaked.
Now once again receding.
Despite the more difficult comparisons, we expect revenue to stay strong and our second half as we continue to benefit from these trends.
We also continued to make progress on the integration of cantel in the quarter.
The majority of our staffing changes have been made aligning stairs to better serve customers positioning us for growth going forward and contributing to cost synergies.
We're also making swift progress implementing lean and we are very pleased with how receptive our new colleagues are to our passion for continuous improvement.
All said, we would expect to exceed our synergy cost targets for the year and also in total.
Yeah.
Looking at the full year, while we are increasingly confident in our ability to achieve our improved outlook provided last quarter. We are not increasing guidance further at this time.
While we over achieved earnings in the second quarter, we have a few offsets that will likely impact the back half of the year.
On the revenue side, our comparisons do get a bit more challenging and we do expect some headwinds from FX in particular from the euro and the pound.
In addition, while our teams have done outstanding work to mitigate the supply chain challenges. So far this year. It is difficult to predict the unknown implications. The current environment may have on the second half of the fiscal year.
All said, we are pleased with where we stand today and the underlying strength of our diversified business and remain optimistic that if it were not for supply chain and inflation uncertainties, we would be at the high end or above our adjusted EPS guidance range for the full year.
We look forward to continuing to update all of you on our progress. Thank you and I'll now turn the call back over to Julie to open up for Q&A Julien.
Thank you, Mike and Dan for your comment Grant would you. Please get the give the instructions and we can get started on Q&A.
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Our first question comes from Matthew Mitchell with Keybanc. Please go ahead.
Good morning, Congrats on a nice quarter.
Environment.
Hey, Dan just wanted to clarify the supply chain comments.
Alright.
Are you seeing supply chain issues right now that are impacting your ability to deliver on product and kind of.
And I guess, what I'm asking is as you go out to the third in your fourth quarter.
Where are you where are you potentially looking at having supply chain constraints is it does it impact you potentially.
With your backlog and capital equipment.
And being able to deliver in <unk> and <unk>.
Yeah sure Matt So what I would say is to date.
Other than the cost escalation of money of our precursor materials, we've been able to navigate the supply side of it and make sure that we have been able to keep up and meet customer demand.
And we had a little bit of excess sort of precursor inventories coming into the year as well as some safety.
In the current environment with the uncertainty around delivery time of these materials.
It may it could potentially result in sort of extended lead times for deliveries, we don't see a scenario where stock out would happen or anything like that.
But the ability to deliver on what now has over $400 million in backlog.
In the next six months.
Just from a if we miss production slots, it's going to be hard to get them back if we miss them because of supply shortages. So I.
I believe our teams will continue to do the outstanding work that we've been doing thus far but there are challenges.
Okay.
And then switching over to ASP growth is still it has been exceptional.
It typically viewed this business is more tied to medical devices.
But I guess, how should we think about Biopharma now.
As a percentage of sales.
And opportunities moving forward I am just trying to understand like the total bioprocess opportunity and where we are with it.
Yes, it is a high growth area for that business.
Currently it's.
It's not a significant portion of the total business and the vast majority of what we do say over 80% is what I would categorize as sort of traditional medical type product.
But nonetheless, it is growing very fast and we have a very good position with the companies and the customers that are that are accelerating growth and making a lot of investment for their capacity.
Okay.
And just lastly on the raw material inflation.
Impacting.
Just want to clarify that you expect $20 million or more and then in the back half.
Next two quarters, and whether or not youre seeing some of those costs.
Okay.
Peak out and start to decline where that would be sort of.
Worst case scenario for you at this point.
Yes, Matt So we experienced about $5 million of material labor cost in Q1 that doubled in Q2, and what we anticipate for the second half 'twenty.
$20 million or more.
For that combined third and fourth quarter, how that lays out by quarter.
Anyone's guess at this point in time, you read a lot in the papers about supply chain is potentially alleviating although we have not seen that yet obviously, it's impacting us more than we had just thought one quarter ago, when we revised guidance.
We want to make sure that you guys understood exactly what where we're at.
Anticipating to be the impact as we move forward for the rest of the fiscal year.
Okay. Thank you.
Youre welcome.
Our next question comes from Dave <unk> with JMP Securities. Please go ahead.
Good morning.
That material and labor.
The $10 million is that split pretty evenly and I guess the.
The question I would like to as well is if it's $10 million in the next two quarters when you'd be discrete significantly this quarter. So I'm just curious as to why we might not see that happen.
Again, maybe even along with the synergy comment you made looking at the back half of the year.
Yes, Dave.
The split is more like 60% materials, 40% labor just to give you an understanding of that breakdown of $10 million and I think Dave for <unk>.
Our standpoint, there's just so much uncertainty surrounding.
The potential impact, maybe we're being a little bit conservative at this point, but again, it's the best guess that we have as to the potential impact and again.
For two quarters, and we have been surprised.
And the amount that we have been impacted.
Packed it negatively on the gross margin side for both materials and labor.
Just add to that I think we have a fairly decent idea clearly of what's going to happen relative to materials and labor cost escalation going into the third quarter.
Don't know that we can say that with a high degree of confidence when we talk about fourth quarter. So if we if we were a quarter a quarter out of fiscal year I think we might have a different position here.
Got it thank you for that.
And then you mentioned exceeding the cost synergy.
I would love me to put a parameter around that.
If there's a percent or any kind of number you could give but.
And also have you identified are there any revenue synergies because I think we haven't spoken about those in the past thanks a lot.
Yes, I would say that.
We're very confident on exceeding the $25 million target much.
Much of that is what we would say is in the bag because a lot of it has to do with.
Executive compensation.
Public company cost in a number of things that are already in the run rate. We still have some things to go get between now and the end of the year and as we do that.
We will get more and more confident on on what the actual number will be but we do know that it's going to be north of the $25 million.
Thank you.
Our next question comes from Chris Cooley with Stephens. Please go ahead.
Good morning, and thank you for taking the questions and congrats on another solid quarter, maybe just two quick ones for me I was hoping you could address profitability and maybe the composition of the backlog and specifically when you look at operating profitability youre hitting record levels.
Both today S T and also with <unk>.
<unk> Sciences looking back through my model I cant find it when it's been like this before so.
I guess in addition to the growth I'd like to better understand what's enabling you to reach these.
Credibly high levels of operating profitability.
And how sustainable they are when I think about both the.
D. A S T and the life Science segment has had.
You said.
Our revenue mix specific is that something that's structurally that's changed I just want to better understand that and then I'll follow back up on my backlog question.
I'll hit on the <unk> and I'll ask Mike to cover some of the life Sciences, because there's a little more detail there.
Think in terms of ASD, we still haven't seen Opex has come back opex come back to where it was pre COVID-19 and we planned it to be to be back sooner than later and the other thing I would say is that we have a number of facilities that are operating at extremely high utilization levels right now.
And the nature of the business is such that there is a very high fixed cost on each one of these individual plants.
The difference of run at 80% utilization versus 97% or something like that has got major implications on the drop through of profitability of the operation. So.
As we've talked about a number of times, we're in the process of building out a number of expansions in that business and as those come online.
We're not going to see a significant drop.
And profitability percentages, but we do believe going forward it will stabilize.
In the ranges of where it is today.
And then Chris on the life Sciences side.
Echoing Dan's comment regarding the operating expenses.
In life Sciences, we anticipated higher operating expenses throughout the year. It obviously.
The Covid impact has slowed some of that is the travel and marketing and sales expenses. Although we are starting to see those come back but that is one factor that is definitely adding to the increased operating profit and the other one that you alluded to already Chris is mix, we continue to see very good growth out of the consumables business.
And with the addition of Cantel.
Consumables business, although it was only up 1% organically. It is up almost 11%. If you include.
Can't tell acquisition. So we are seeing is.
Do you understand consumables are higher margins tend to be higher margins for us. So that is also helping drive the improved profitability margin.
Super that's that really helps and then just just on the backlog when I look at it in total or just a core service record backlog that you're seeing there both in health care as well as in the life science sector.
Could you split out for US just kind of the composition of that backlog in terms of Newbuild.
Et cetera, when we think about the healthcare piece and on the life Science side I continue to be on the wrong side of this equation, but it just remains extremely strong.
Trying to grab a little bit with where youre seeing the.
The greatest level of demand right now and how we should think about that going forward is this kind of again, a mid single digit or low double digit type capital growth. When we think about the life science component going forward over the next kind of 12 to 24 months. Thanks, so much.
Sure This is Dan.
I'd say on the healthcare backlog, it's really strong across all product segments at this point, where that surgical where IDT.
And then in terms of project versus sort of short term work.
A year ago, we were almost exclusively long term projects and build and things like that and we've seen a significant recovery in the replacement business in the last six seven months I would say to where it's kind of back to pre COVID-19 levels in terms of replacement type spending so we've got a.
Our backlog is still not maybe what it would have looked like proportionally two years ago before the pandemic, but.
The last sort of six months or so.
So a order intake definitely is.
In terms of the life Science capital.
There's a lot of money being spent expanding.
Production in terms of biologics vaccines and gene therapies.
All of these different type of applications that require a septic manufacturing environments and as we've discussed before thats really stare says.
Sweet spot, we tend to we tend to benefit on the consumable side of that we tend to benefit and asps.
On the disposable side going into those manufacturing environment and then we also tend to benefit on the capital equipment side.
For GMP type equipment for sterilization into those type of environments as well.
The other thing I would mention is we have seen since the beginning of our fiscal year recovery and sort of research type spending which was really slow during the pandemic much of that is state or federal funded public institutional spending and that dried up pretty bad last year.
And we have seen our.
Our replacement business in what we would categorize Morris lab research come back at least on an order input to what it would look like pretty close to what it looks like pre pandemic.
I appreciate all the color and congrats on the quarter.
Thank you.
Our next question comes from Mike Matson with Needham <unk> co. Please go ahead.
Yes. Good morning, Thanks for taking my questions.
I guess I'll start with the dental business.
I heard the 10% growth. So that's that's good to hear but maybe talk about what youre seeing in that business I think prior when cantel. It's both separately they were talking about seeing kind of increased demand for infection prevention products because of because of the pandemic is that sustainable and I think cantel I'll talk about that.
Being sort of a high single digit growth business over time do you kind of agree with that.
I think it's early days for us at this point to put out any long term projections on dental frankly, we're still learning the business.
Like the performance sort of year to date any ways was tariffs and.
And we do believe the team over there is doing a really nice job managing the business in and also sort of the recovery coming out of the pandemic.
At this point, we do believe Theres connection in terms of where the infection control value piece.
To be able to quantify that to you at this time I. Just don't think we are in a position to do that yet.
Okay, No that's fine and then.
Youre one of hand.
A handful of med tech companies that has positive pricing.
So is there any ability to maybe raise the prices a little more to offset some of the inflationary pressures or even like free surcharges or anything like that.
Yes, what I would say is.
We're not a pure play med Tech I mean, if you think about it we've got an awful lot of business that deals with medical manufacturing and also pharmaceutical manufacturing and now actually dental as well.
And those have a little different structure around what can be done in terms of past costs throughs.
What we've consistently done historically at Cerus is tried to pass through enough to basically cover as much of inflation as we can were reasonable and where the customers will accept it.
And then we try to get the rest out of productivity gains within our manufacturing environment, which we've been pretty successful at over the years as well.
Okay, Thanks, and if I could just squeeze one more in on the hospital capital spending so.
We've seen various it seems to be very strong capital spending in 'twenty, one much better than I would've expected.
What are you hearing about calendar 'twenty two does it looked like that it's going to continue to be strong and into 'twenty two as well.
I do not see a changing in the foreseeable future based on what we've seen consistently in terms of work intake and also new projects that are still out there for opportunities for starz going forward.
Great Brian.
Hey, Dennis if you'd like to ask a question. It is star then one star then one to ask a question.
Okay.
Our next question comes from Michael <unk> with Baird. Please go ahead.
Hi, Good morning, I wanted to go back to Mike's comments on these these material and labor costs.
Trying to understand.
What had previously been considered in guidance and what is incremental today and thats limiting the guidance updates I heard 5 million in the first quarter $10 million in the second quarter you raised the earnings guidance. After the first quarter, presumably that raise included the $5 million in the quarter and probably considered.
The number for <unk>.
Is that fair.
And what what of that amount is incremental in the forecast today.
Today is at the full $20 million for two H or is it a portion of that and because you had a placeholder in for so any color here on those numbers and how they relate to the.
The progression of the forecast would be helpful.
Yes, certainly Mike So as you are right, we did incur $5 million in Q1, and when we did increase guidance, we anticipated an additional $10 million for the remaining three quarters.
We incurred $10 million.
Q2, so the $20 million plus is all incremental.
Two our revised.
Look at this point in time, which is one of the reasons why we're holding.
Our outlook steady compared to.
Where we raised last quarter and also compared to how we exceeded the second quarter results. So so hopefully that math ties out and makes sense to you. Yes, that's very helpful and just to put a final fine point on it.
Back to the $5 million and the progression in the build of these numbers. This is all incremental to the initial outlook that you put out.
Before that and you are correct that is correct yes.
Yes, okay.
Just more broadly on supply chain you Dan you mentioned.
What are the raw materials that matter for stairs. Most and is this does this stuff for your consumables business for your equipment production both.
Just curious for a bit more.
And so any color on what's what are the major.
Items that youre watching and which businesses are potentially most impacted.
I mean, it's our concerns are across equipment and also consumables, especially on.
On the chemistry side and.
That's the one that we're really watching to make sure that we always have adequate amount of brake harsher chemistry to continue to make our finished products in.
In terms of the other applications, whether it's <unk>.
Components that go into manufacturing capital equipment, whether it's electronics or steel or framing or whatever.
That's more of a cost management at this point as opposed to timing because we are seeing cost escalation there, but trust me there are issues across every aspect of manufacturing environments right now.
Delivery times, and just general availability and things of that nature.
If I can sneak one more in would appreciate an update on EPA.
EPA is progress on these potentially updated ethylene oxide emission standards, where we are in that rulemaking cycle or what.
What milestones may be ahead here in the next.
Three to 12 months or at least your latest expectation on that and then.
Specifically, there was an update I'm, losing track of time two to three weeks ago.
EPA believe sound letters too.
Close to 30 Eo facilities in the U S.
Asking for those facilities to report.
Emissions data starting in 'twenty three historically this was voluntary stair has had some facilities on that list I would also be <unk>.
Specifically curious for your feedback to that development. Thank you.
Yes sure. This is Dan so what I would say is I mean, we are in close communication with the EPA on this issue and we always fulfill any requests that they have from a regulatory perspective. So we're working with them to make sure they have the appropriate data.
<unk> Terrace.
In addition, we are optimistic that we do see some sort of a proposed rule sometime in the first calendar quarter. We had originally I personally had originally hoped for early January.
That's TBD, but hopefully we will see something sooner than later out of the agency that gets us to a final path and in the interim we've made some significant investments ahead of any regulation in anticipation of any change.
Where our facilities are now we are down to.
Just tying a few minor things in terms of what we think our enhanced improvements ahead of any regulatory.
Niche app rule that might change the requirements to operate.
Yeah.
Thank you.
Ladies and gentlemen, this will conclude our question and answer session.
I'd like to turn the conference back over to Julie Winter Investor Relations for any closing remarks.
Just wanted to take effect to thank everybody for joining us I know its a busy earning season. This time and we look forward to catching up with many of you last time.
Okay.
Thanks.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.