Q3 2022 STERIS plc Earnings Call

February 9, 2022

Speaker 1: Good day and welcome to the Stairus PLC third quarter 2022 earnings conference

Good day and welcome to the stairs plc third quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

Speaker 1: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions.

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Speaker 1: I would now like to turn the conference over to Julie Winter, Investor Relations. Please go ahead.

Now I'd like to turn the conference over to Julie Winter Investor Relations. Please go ahead.

Thank you, Matt and good morning, everyone.

Speaker 2: Looking on, today's call, as usual, be my cookts, our Senior Vice President, and C F? O and Dan chrese o, our President, and C E o, and I do have just a few words of caution before we.

On today's call as usual be my tickets, our senior Vice President and CFO and Dan Kress, CEO , our president and CEO and I do have just a few words of caution before we open for comments.

Speaker 2: This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the express written consent of theress is strictly prohibited.

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 <unk> is strictly prohibited.

Speaker 2: Some of the statements made during this review are or may be considered forward looking.

Some of the statements made during this review are or maybe considered forward looking statements.

Speaker 2: many important factors could cause actual results to differ materially from those in the forward-looking...

Many important factors could cause actual results to differ materially from those in the forward looking statements, including without limitation those risk factors described in <unk> Securities filings.

Speaker 2: including without limitation, those risk factors described in THERAS's Security Science

Speaker 2: does not undertake to update or revise any forward-looking statements as a result of new information or

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

Speaker 2: There it says SCC filings are available through the company and on our web.

Yeah cause that SEC filings are available through the company and on our website.

Speaker 2: 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.

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 definitions.

Available in today's release, including reconciliations between GAAP and non-GAAP financial measures.

Speaker 2: consolidations between GAAP and non-GAAP financial motherfucking.

Speaker 2: non-GAAP financial measures are presented during this call with the intent of providing greater transparency

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.

Speaker 2: financial information used by management and the board of directors in their financial analysis and operational decision making.

With those cautions I will hand, the call over to Mike.

Speaker 3: 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.

Thank you Julie and good morning, everyone wants.

Once again my pleasure to be with you. This morning to review the highlights of our third quarter performance for.

Speaker 3: For the quarter, constant currency organic revenue increased 9%. Growth was driven by organic volume as well as 100 basis points of price.

For the quarter constant currency organic revenue increased 9%.

Both was driven by organic volume as well as 100 basis points of price.

Speaker 3: acquisitions added $333 million to revenue, which is broken down by

Acquisitions added $333 million to revenue.

Which is broken down by segment in the press release tables.

Speaker 3: to assist you with your modeling within the healthcare segment. Of the approximately $210 million in acquired revenue, about 60% is consumable revenue from both Key and Cantrell Medical.

To assist you with your modeling within the healthcare segment of the approximately $210 billion in acquired revenue about 60% is consumable revenue from both Keith and Cantel medical.

Speaker 3: passed the first year anniversary of the Key Surgical Acquisition in mid-November, so this quarter Key Surgical's revenue is split between organic and inorganic.

Pass the first year anniversary of the key surgical acquisition in mid November . So this quarter Key's Surgical's revenue is split between organic and inorganic.

Speaker 3: Gross margin for the quarter increased 90 basis points compared with the prior year to 45.1%. As favorable productivity, pricing, and acquisitions were offset by higher material and labor costs.

Gross margin for the quarter increased 90 basis points compared with the prior year to 45, 1% as favorable productivity pricing and acquisitions were offset by higher material and labor costs. We continue to face increased material labor cost, which totaled about $10 million in the quarter.

Speaker 3: We continue to face increased material labor costs, which toll about $10 million in the quarter.

Speaker 3: As we look at the fourth quarter of the fiscal year, we expect increased pressure on material labor of approximately $20 million. About twice as much as we anticipated just one quarter ago.

As we look at the fourth quarter of the fiscal year, we expect increased pressure on material labor of.

Of approximately $20 million about twice as much as we anticipated just one quarter ago.

Speaker 3: For the full fiscal year, we anticipate absorbing approximately $45 million in unplanned material and labor costs, all while continuing to serve our customers and deliver a record year of performance.

For the full fiscal year, we anticipate absorbing approximately $45 million in unplanned material labor costs, all while continuing to serve our customers and deliver a record year of performance.

Speaker 3: EBIT margin for the quarter was 24% of revenue, an increase of 40 basis points from the third quarter last year. RD expenses increased, and as anticipated, we are seeing operating expenses such as travel and sales and marketing costs return, somewhat limiting EBIT margin growth.

EBIT margin for the quarter was 24% of revenue an increase of 40 basis points from the third quarter last year R&D expenses increased.

As anticipated we are seeing operating expenses, such as travel and sales and marketing cost return somewhat limiting EBIT margin growth.

Speaker 3: We adjusted effective tax rate in the quarter was 21% higher than last year, but in line with our expectations. We now expect the full year tax rate to be approximately 21.5% reflecting year-to-date actuals at our expectations for the fourth quarter.

The adjusted effective tax rate for the quarter was 21% higher than last year, but in line with our expectations. We now expect the full year tax rate to be approximately 21, 5%, reflecting year to date actuals and our expectations for the fourth quarter.

Speaker 3: That income in the quarter increased to $213.3 million and earnings per deluded share were $2.12.

Net income in the quarter increased to $213 3 million and earnings per diluted share were $2 12.

Speaker 3: Our balance sheet continues to be a source of strength for the company. At the end of the quarter, cash total 359.1 million.

Our balance sheet continues to be a source of strength for the company at the end of the quarter cash totaled $359 1 million, we continue to focus on debt repayment as evidenced by our leverage ratio at the end of the third quarter below two six times.

Speaker 3: We continue to focus on debt repayment as evidence by our leverage ratio at the end of the third quarter below 2.6 times.

Speaker 3: Year-to-date Capital Expandedatures told $214.5 million while depreciation and amortization told $319.3.

Year to date capital expenditures totaled $214 5 million while depreciation.

<unk> and amortization totaled $319 3 million.

Speaker 3: Three cash flow for the first nine months was $300.3 million. As anticipated, this is declined from the prior year due to cost associated with acquisitions and integration of the Cantel medical acquisition and higher capital spending year over year. I will now turn to...

Free cash flow for the first nine months was $303 million as anticipated. This has declined from the prior year due to costs associated with acquisitions and integration of the Cantel medical acquisition and higher capital spending year over year.

I will now turn the call over to Dan for his remarks.

Speaker 3: Thanks Mike and thanks again to everyone for taking the time to join us today. Fiscal 2022 is shaping up to be another record year for Starris. Our year-to-date results have been strong despite headwinds related to supply chain inflation that are impacting both revenue and profit.

Thanks, Mike and thanks, again to everyone for taking the time to join us today.

Fiscal 2022 is shaping up to be another record year for <unk>, our year to date results have been strong despite headwinds related to supply chain and inflation that are impacting both revenue and profit.

Speaker 4: In particular, growth in our AST segments remains very strong with 21% constant currency organic growth year to date.

In particular growth in our <unk> segment remains very strong with 21% constant currency organic growth year to date.

Speaker 4: Health care has also rebounded nicely with 13% constant currency organic revenue growth in the first nine months and record backlog of 382 million at the end of the court.

Health care has also rebounded nicely with 13% constant currency organic revenue growth in the first nine months and record backlog of $382 million at the end of the quarter.

Speaker 4: Life sciences consumables have stabilized as anticipated and have contributed 5% constant currency organic revenue growth for the segment in the first time months.

Life Sciences consumables has stabilized as anticipated and have contributed 5% constant currency organic revenue growth for the segment in the first nine months.

Speaker 4: The Capital Equipment Backlog and Wife Sciences has also continued to grow to a record 117 million.

The capital equipment backlog in life Sciences has also continued to grow to a record $117 million.

Speaker 4: As our backlog and healthcare in life sciences suggests, the underlying demand for our products remains very strong.

As our backlog in healthcare and life Sciences suggests the underlying demand for our products remains very strong.

Speaker 4: General Revenue with about flat in the quarter impacted by a slower than expected recovery in patient volume.

Dental revenue was about flat in the quarter impacted by a slower than expected recovery in patient volumes, we do anticipate that that revenue in the dental segment will begin to rebound in the fourth quarter.

Speaker 4: We do anticipate that that revenue in the dental segment will begin to rebound in the fourth quarter.

Speaker 4: The integration of Cantel is progressing ahead of our expectations as we indicated last quarter. We expect to exceed our cost energy targets by about 10 million and we are now approximately 35 million in total cost Does Disco 2020.

The integration of Cantel is progressing ahead of our expectations as we indicated last quarter, we expect to exceed our cost synergy targets by about $10 million and we are now approximately $35 million in total cost synergies in fiscal 2022.

Speaker 4: Reflecting our strong performance today, we are increasing our constant currency organic revenue outlook to the high end of our previous range and now anticipate approximately 11% growth for fiscal 2020.

Reflecting our strong performance to date, we are increasing our constant currency organic revenue outlook to the high end of our previous range and now anticipate approximately 11% growth for fiscal 2022.

Speaker 4: We are also increasing our earnings per deluded share outlook and now expect earnings to be in the range of $7.85 to $7.95, or $0.10 above the high end of our prior outlook. We do have a few known headwinds in the four-

We are also increasing our earnings per diluted share outlook and now expect earnings to be in the range of $7 85 to $7 95.

Or <unk> above the high end of our prior outlook.

We do have a few known headwinds in the fourth quarter.

We completed the divestiture of our renal business.

Speaker 4: which will reduce both revenue by about 45 million and deluded EPS by about five cents in the quarter.

Each will reduce revenue by about 45 million and diluted EPS by about <unk> <unk> in the quarter.

Speaker 4: In addition, we expect supply chain inflation to be incrementally worse by about 10 million sequentially as Mike discussed.

In addition, we expect supply chain inflation to be incrementally worse by about $10 million sequentially as Mike discussed.

Speaker 4: We do anticipate that we can offset some or all of those headwinds with higher cost energy from the Cantel integration and continued operational

We do anticipate that we can offset some or all of those headwinds with higher cost synergies from the cantel integration and continued operational improvements.

Speaker 4: However, we are leaving some room on the downside of earnings range to reflect a continued unsearch.

However, we are leaving some room on the downside of our earnings range to reflect the continued uncertainty.

Speaker 4: All said we are very pleased with where we stand today in the underlying strength of our diversified business.

All said, we are very pleased with where we stand today and the underlying strength of our diversified business.

Speaker 4: I want to thank all of the associates at Starris for their hard work and continued dedication to serving our customers.

Want to thank all of the associates, it's terrace for their hard work and continued dedication to serving our customers.

Speaker 4: We look forward to updating you all with our progress in the future. I'll now turn the call back over to Julie to open up for Q&A.

We look forward to updating you all with our progress in the future I'll now turn the call back over to Julie to open up for Q&A.

Speaker 2: Mike and Dan, Matt, if you give the instructions, you can get started on Q&A.

Thanks, Mike and Dan Matt If you give the instructions we can get started on Q&A.

Speaker 1: Thank you. We will now begin the question and answer session. To ask a question you may press star then one on your touch tone phone.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Speaker 1: If you are using a speaker phone, please pick up your handset before pressing the

If you are using a speakerphone please pick up your handset before pressing the keys.

Speaker 1: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.

If at any time your question Thats been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay.

Yeah.

Speaker 1: Our first question will come from Matthew Mishan with Keeping. Please go ahead.

Our first question will come from Matthew <unk> with Keybanc. Please go ahead.

Speaker 5: Hey, good morning and congratulations on a really great year today. So far.

Hey, good morning, and congratulations on.

A really great year to date.

Speaker 5: My first question is on the progression of organic growth.

So far.

My first question is on the progression of organic growth, if I'm modeling it correctly I'm coming in somewhere in the fourth quarter around.

Speaker 5: If I'm modeling it correctly, I'm coming in somewhere in the fourth quarter around 5% which would be a sequential deceleration.

5%, which would be a sequential deceleration.

Speaker 5: How should we be thinking about that in terms of the procedural environment, and then how should we be taking into account?

How should we be thinking about that in terms of the procedural environment and then also how should we be taking into account.

Speaker 5: your ability to shift on healthcare capital equipment backlog.

Your ability to ship on the healthcare capital equipment backlog.

Speaker 5: given the massive number you have in orders versus maybe in a difficulty in supply chain and getting those extra customers.

Given the.

Massive number.

You have an orders versus maybe difficulty in supply chain and getting those actual customers.

Speaker 4: Yeah, I think the issue on the 5% is that

I think the issue on the 5% is that.

Speaker 4: Comps get tougher, you know, in terms of what we were looking at Q4 of last year.

And the comps get tougher in terms of what we're looking at Q4 of last year.

Speaker 4: And we've also baked in what we believe is some slowdown that we saw in January and continuing into summer February in terms of procedures as it relates to home-a-cron, in particularly across the US. So we've got that appropriately factored into our experts.

And we've also baked in what we believe is.

Some slowdown that we saw.

In January and continuing into some of February in terms of procedures as it relates to <unk> and particularly across the U S.

We believe we've got that appropriately factored into our expectations in terms of the capital equipment.

Speaker 4: In terms of the capital equipment, I mean, we're, you know, at this point, we're almost halfway through the quarter. And, you know, we have in our model forecast that we're providing, you know, an assumption that there's going to be some holdback of equipment that won't go just due to timing. But it's not an issue that we expect from an availability standpoint. It's more of an issue of, some extent, our customers appetite to receive that equipment within the quarter.

At this point, we're almost halfway through the quarter.

And we have in our model forecast it.

That we're providing.

On the assumption that there's going to be some holdback of equipment that won't go.

Just due to timing.

But it's not an issue that we expect from an availability standpoint, it's more of a an issue of <unk>.

Let me extend our customers' appetite to receive that equipment within the quarter. Nonetheless.

Speaker 4: Nonetheless, I think what we stated before, there was about a somewhere around a $20 million increase in backlog that we would have attributed to deferral or supply chain issues and things of that nature. I don't think Matt will flush that out this quarter. I think it would be unreasonable to expect that in the current environment. But we'll carry that backlog forward into the first quarter.

Nonetheless.

Think what we stated before there was about somewhere around $20 million.

Increase in backlog that we would have.

Tribute to deferral or.

Supply chain issues and things of that nature, I don't think that that will flush that out this quarter.

I think it would be unreasonable to expect that in the current environment.

But we will carry that backlog forward.

Into the first quarter of next year.

Speaker 5: Excellent. And then onto the operating margin. I mean, again, record operating margin in a difficult environment. How should we be thinking about the off-spat?

Excellent and then on to the operating margin I mean again.

Record operating margin.

Difficult environment.

How should we be thinking about the offsets.

Speaker 5: you guys have had to be inflationary impacts. As a look at the corporate costs, the corporate costs are the other costs, as well as as she made, did come down significantly from 2Q into 3Q. Are those the can tell synergy starting to be realized, and are they maybe coming in a little bit faster than they were previously? Then you have previously thought.

Do you guys have had to be inflationary impacts.

As I look at the corporate costs, the corporate costs or other costs.

As well as SG&A did come down significantly.

Two Q3 Q are those the cantel synergies starting to be realized and are they may be coming in a little bit faster.

They were previously.

You had previously thought.

Speaker 3: Yeah, Matt, this is Mike. So yeah, we did anticipate that we are going to get more cost energies than you are exactly right. Those are going to show up first in the corporate side as we have taken.

Yes, Matt This is Mike. So yes, we do we did anticipate that we are going to get more cost synergies that you are exactly right. Those are going to show up first in the corporate side as we have taken.

Speaker 3: the opportunity to reduce the redundancy of the corporate cost, reduce the redundancy of the CEO , CFO . So that's where you're actually seeing those cost energy savings. And as Dan spoke earlier, we anticipate over-achieving those cost energies in this fiscal year by about $10 million.

The opportunity to reduce the redundancy of the corporate cost reduce the redundancy of the CEO CFO , So thats, where youre actually seeing those are those cost synergy savings and as Dan spoke earlier, we anticipate over achieving those cost synergies in this fiscal year by about $10 million.

Speaker 3: Some of that has already been reflected through the third quarter. There'll be a couple of single-digit million dollars that will still come through in the fourth quarter. But all in all, you know, that is very favorable to us. The other thing that we're seeing and I think we're like everybody else is, you know, our operating expenses have been bouncing around, especially around travel. We were anticipating more travel.

Some of that has already.

Been reflected through the third quarter there'll be a couple of single digit million dollars that will still come through in the fourth quarter, but all in all that is very favorable to us. The other thing that we're seeing.

We're like everybody else as you know our operating expenses have been bouncing around especially around travel we were anticipating more travel.

Speaker 3: and the third quarter which didn't happen, so you're seeing that a little bit lower operating expenses in total.

In the third quarter, which didn't happen. So you are seeing that a little bit lower operating expenses in total.

Speaker 5: So there was nothing really transitory in those numbers that would necessarily bounce back significantly into the fourth quarter and we're sort of at a good run rate on some of those other costs.

Okay.

There was nothing really transitory in those numbers, but that.

Would necessarily bounced back significantly into the fourth quarter.

I had a good run rate on some of those other costs.

Speaker 3: Yeah, for the most part, I mean, the only variance that I would see being out there is, you know, we are starting, our fourth quarter is the new year from a calendar from a benefit standpoint, so you will see some benefits costs that are normally higher, but you're over year, those should be equal. And then the other thing is, you know, at the end of the day, where does the management bonus occur? And if there is an over achievement, obviously, you will see that also reflected in the fourth quarter. Thank you.

Yes for the most part I mean, the only variance that I would see being out there is we are starting our fourth quarter as the new year from a calendar year from a benefit standpoint. So you will see some benefits costs that are normally higher but.

Year over year, those should be equal.

And then the other thing is at the end of the day.

Or does the management bonus occur and if there is.

And over achievement, obviously, you will see that also reflected in the fourth quarter.

Okay understood. Thank you.

Welcome it.

Speaker 1: Our next question will come from Chris Cooley with Stevens. Please go ahead.

Our next question will come from Chris Cooley with Stephens. Please go ahead.

Speaker 4: Good morning everyone. Congrats on a great quarter and we'll look to the great set up going into the next physical year. I know it's a little bit early for the next physical year guide, but just maybe with broad strokes as we look at the business.

Good morning, everyone and congrats on a great quarter, and what looks to be a great setup going into next fiscal year.

I know, it's a little bit early.

For fiscal the next fiscal year guide, but just.

Maybe with broad strokes.

At the business.

Speaker 4: kind of following on Matt's initial question there you know capital in particular and health care really has stepped up over the last several years and you do have a record backlog You just alluded to won't pull through all the way here in the physical force

Kind of following on Mats initial question there.

<unk> in particular in health care really.

It really has stepped up over the last several years and you do have a record backlog.

You just alluded to both pull through all the way here in the physical <unk>.

Speaker 4: But you just help us think about the end market there. Do we see a step up in the baseline growth rate for healthcare capital going forward? Is that a function of replacement, more efficiencies? Or is this something that we should really think about normalized?

Could you just help us think about kind of the end market. There do we see a step up in the kind of baseline growth rate for healthcare capital going forward is that a function of replacement.

More efficiencies or is this something that we should really think about normalizing.

Speaker 4: kind of reverting back those historic levels of growth on the health care capital side as we get out sometime mid-year by, or at least by mid-year next fiscal year. And I've got a quick follow-up.

Kind of reverting back to those historic levels of growth on the health care capital side, as we get out sometime mid year by or at least by mid year next fiscal year and I've got a quick follow up.

Speaker 4: Sure, Chris, this is Dan. So, you know, what I would say is there is some part of the backlog build that we're seeing now that's pent up demand on replacement. Things that just didn't happen at the same rate for six or nine months during the early, you know, first year or so of COVID. But there is some element of that. However, what I would say is the capital spending we're seeing from large hospitals.

Sure. Chris This is Dan so what I would say is there is some part of the backlog build that we're seeing now that pent up demand on replacement things that just didn't happen for at the same rate for six or nine months during the early.

First year or so of Covid that there is some element of that however, what I would say is the capital spending we're seeing from large hospital systems in particular across the U S.

Speaker 4: particularly across the U.S. and as well as surgery centers and things like that nature is unprecedented right now. And we're well positioned with a really strong portfolio of capital equipment in life sciences and then also in our surgical business and our IP.

As well as surgery centers and things like that nature is.

Precedented right now.

We're well positioned.

With a really strong portfolio of capital equipment.

In life Sciences, and then also in our surgical business in our ICT business and I.

Speaker 4: And I think we're probably winning more than our fair share at this point in terms of our performance in the market. But the market's very hot and I don't know that I've ever seen this level of investment from our customers that we're seeing today. And I don't see it slow.

I think we're probably winning more than our fair share at this point in terms of our performance in the market, but the market is very hot and I don't know that I've ever seen in this level.

Investment from our customers that we're seeing today.

I don't see it slowing in the short term anyways.

Speaker 6: Thank you appreciate that color and then just kind of shifting gears to the life science segment.

Thank you I appreciate that color and then just kind of shifting gears to the life science.

Segment.

Speaker 6: and you to be impressed with the operating marching contribution that we see there as well as with AS.

Continue to be impressed with the operating margin contribution that we see there as well as with I S T.

Speaker 6: Can you just speak about thematically where you're seeing both of these?

Can you just speak about the medically where youre seeing.

Both of these portfolios.

Speaker 6: product mix shifting towards and really what I'm getting at here

Product mix shifting towards and really what I'm getting at here.

Speaker 6: Do we, is this a stair step where we're kind of flattening out here at these record levels for a little bit, but as the mix continues to shift?

Do we is this a stair step where we're kind of flattening out here at these record levels for a little bit, but as the mix continues to shift.

Speaker 6: You have a chance for another step up in margin, or do we need to think about the operating margin contribution from here really becoming more a function of volume through the plan expansion at the ASP side as we just think about it thematically going forward. Thanks so much.

You have a chance for another step up in margin or do we need to think about.

The operating margin contribution from here are really becoming more of a function of volume.

Through the plant expansion at the ISP side, because we just think about it the medically going forward. Thanks, so much.

Speaker 4: Yeah, I think in terms of AST, I would definitely point to Paulie.

Yes, I think in terms of <unk> I would definitely point to volume and we have a number of legacy older plants that are quite full that tend to contribute at the high end of our margin in the portfolio.

Newer plants as they come online are somewhat dilutive dilutive on a percentage basis, but in aggregate with the total business.

It doesn't really have a significant impact because there has been a steady diet of those plants coming on over the last few years.

So we would expect with the exception of Opex coming back we would we would expect the margin rates.

The ASC business.

Much.

In terms of the life science business.

The one caveat there is that there is some lumpiness to our capital shipments from quarter to quarter.

On the capital equipment business is generally at a lower margin than our service and our consumables business.

Speaker 4: So you know in a hole as we continue to grow consumables at a nice rate That will have an impact on the overall mark

So.

In whole as we continue to grow consumables at a nice rate.

And that will have an impact on the overall margin of the business. However, if we keep taking orders on the capital side of the business like we have I'm not sure that that is going to hold up.

Speaker 4: However, if we keep taking orders on the capital side of the business, like we have, I'm not sure that that is going to hold up.

Understood well congrats again on the great quarter. Thank you. Thank you thanks, Chris.

Speaker 1: Again, if you have a question, please press star then one. Our next question will come from Mike Matten with Needham and Company. Please go ahead.

Again, if you have a question. Please press Star then one our next question will come from Mike Matson with Needham <unk> Company. Please go ahead.

Speaker 5: Yeah, thanks. So I want to ask one about the renal care sale. We had estimated kind of 12 to 13 cents of dilution on an annualized basis. But I think you called out about $0.5 in the fourth quarter. Does that fight more like a 20 cent number on an annualized basis? And then can you just remind me what stagnant admit that falls or had fallen under previously, that revenue from that business?

Yes. Thanks.

Wanted to ask one about the renal care.

We had estimated kind of 12% to 13.

Dilution on an annualized basis, but I think you called out about five.

Fourth quarter does that imply more like it when he set number on an annualized basis.

Then can you just remind me what what's the admit that Paul.

Fallen under previously that revenue from that business.

Speaker 3: Yeah, Mike, this is like the majority of the revenue was falling under the healthcare side, so if you're gonna adjust the model going forward, there was a small piece that was in the life sciences business, but nothing really material. And then, as far as I've seen a couple of different numbers, is it three cents, is it five cents? Some of this is IR math, if you will. But part of the issue is we are anticipating paying down debt in the fourth quarter with the proceeds. We did not get...

Yes, Mike this is like the majority of the revenue.

Following on to the health care side, so if youre going to adjust the model going forward. There was there was a small piece that was it the life Sciences business.

But nothing really material.

And then as far as.

I've seen a couple of different numbers is it <unk> is it <unk>.

Some of this is IR math, if you will.

Part of the issue is we are anticipating paying down debt in the fourth quarter with the proceeds we.

We did not get.

Speaker 3: 190 million a portion of that was held back in escrow. We did not pay down debt.

190 million a portion of that was held back in escrow.

Did not pay down debt.

Speaker 3: and it took us a while to

One two.

It took us a while too.

Speaker 3: clear the maturities that we have, we have some 30 maturities that we waited to pay down debt. So there's some moving pieces here. Again, our best guess is it's around $0.5. So I wouldn't dramatically change for next year if it's $0.4 or $0.2. But again, more IR Matthews here than anything, more directly, didn't give you an indication. So

Clearly the maturities that we have we had some 30 day maturities that we waited to pay down debt. So so theres some theres some moving pieces here.

Again, our best guess is its around five so I wouldn't dramatically change for next year.

If it's four or $4 <unk>, who knows but.

More IR math used here than anything more directionally.

Give you an indication.

Okay.

Mike.

About half capital.

In your modeling.

Speaker 4: Okay, I got it. And then just the really strong ASP growth, I think in the past, you'd had some kind of COVID benefit in there from PPE and things like that. I mean, is that a factor at all of this quarter? Or is this really just demand from your kind of normal medicalized customers? Yes, it's demand from our normal MedTech customers. The PPE is diminished back to pre-COVID levels main levels, those pictures

Okay got it.

And then.

Just a really strong key growth I think in the past.

Some kind of Covid benefit in there from PPE and things like that I mean is that was that a factor at all this quarter or is this really just demand from your kind of normal medical device customers.

It's demand from our normal med tech customers PPE is diminished back too.

Pre COVID-19 levels are less than right now.

Speaker 5: Okay. All right, and then just finally, just given the strong backlog, great to see that, I guess, increase in backlog. But I'm wondering to what degree is that a function of the really strong orders that you're getting clearly, but is there some role for the supply chain issues there maybe limiting your ability? Like could you, could you meet this, fulfill those orders more quickly if these supply chain issues were happening right now?

Okay, Alright, and then just finally, just given the strong backlog great to see that increase.

The increase in backlog.

But I'm wondering to what degree is that a function of really strong orders that you are getting clearly.

But.

There are some roll for the supply chain issues, there maybe limiting your ability like could you could you meet them.

Fulfill those orders more quickly.

If these supply chain issues were happening right now.

Speaker 4: They would move a little quicker through the plant, but the percentage increase that we have in backlog.

Would move a little quicker through the plant, but the percentage increase that we have a backlog.

Speaker 4: unreasonable to expect our factories to turn those at the same rate that we were six or nine months ago, you know, realistically. So I think we said last quarter about 20 million dollars of capital shipments were deferred because of supply chain issues either on our end or on the cost.

Unreasonable to expect our factories to turn those at the same rate that we were six or nine months ago realistically. So.

I think we said last quarter about $20 million of capital shipments were deferred because of supply chain issues, either on our end or on the customer type of things.

Speaker 4: And like I said, I don't think we're going to flesh that through this quarter. It's going to take some time.

And like I said, I don't think were going to flush that through this quarter, it's going to take some time for those things work themselves out.

Speaker 4: And the other thing too is a lot of these orders because a lot of it's long-term capital investment from the particular healthcare sector. They're not asking for them to be delivered on March 15th, necessarily. So there's time to get these bills delivered for customer needs when they actually...

The other thing too is a lot of these orders because a lot of it long term capital investment from particularly the health care sector.

Not asking for them to be delivered on March 15th necessarily so theirs.

Time to get them built and delivered.

For customer needs when they actually need to put them in place and get them operational.

Yeah, Okay got it thank you.

Speaker 1: Our next question will come from Dave Turkley with JMP Security. Please go ahead.

Our next question will come from Dave <unk> with JMP Securities. Please go ahead.

Speaker 7: Hey, good morning. Can you hear me right? Yep.

Hey, Good morning can you hear me all right.

Yep.

Speaker 7: I'm sorry, I'm going to a bit of a spot but I think you said leverage with that 2.6 and Obviously the last videos you did have been very egregious, so I pointed to get it

Alright, alright.

But.

I think you said leverage is at two six.

Obviously last <unk> you did have been.

Very accretive so I just wanted to get a comment on maybe.

Speaker 7: your appetite here and where that leverage could go or what's your capacity right now to do deal with like that.

Your appetite here.

Where that leverage could go or Ken.

What's your capacity right now to do deals like that.

Speaker 3: Yeah, so yeah, as I mentioned, we have brought leverage down below 2.6 times at the end of two, two, three, obviously with the additional payment of about $170 million that we will put forward for the renal divestiture. Obviously, leverage will continue to drop lower than that by the end of the fiscal year. Right now, we are...

Yes, so as I mentioned, we have brought leverage down below two six times at the end of Q Q3, obviously with the additional payment of about $170 million that we will put forward for the renal.

Divestiture, obviously leverage will continue to drop.

Lower than that by the end of the fiscal year, So right now.

We are.

Speaker 3: and have the ability to, you know, more than one times from a leverage standpoint to do something from a M&A standpoint. As we've been saying all along, you know, the larger deals are few and far between. We will start getting back to more, I'll call tuck-ins. But again, as everybody knows, we've been really more focused on the integration of both T-surgical and Ken Telemedical. So. So.

The ability to.

More than one times.

From a leverage at that point.

Do something from.

M&A standpoint, as we've been saying all along.

The larger deals are few and far between.

We will start getting back to more I'll call tuck ins.

But again as everybody knows we've been really more focused on the integration of both T surgical and cantel medical.

Speaker 3: The business development has been slowed at this point in time, but we are getting back towards with leverage being below.

So.

Business development has has been slowed at this point in time, but we are getting back towards with leverage being below.

Speaker 3: 2.5 at this point going forward. We are back to looking at opportunities to continue to grow the business, but more from a tuck-in standpoint as what you've seen in the past.

$2 five at this point going forward.

We are back to looking at opportunities to continue to grow the business, but more from a tuck in standpoint, as what <unk> seen in the past.

Thank you for that.

Speaker 1: Our next question is a follow up from Matthew Misham. With Keybank, please go ahead.

Our next question is a follow up from Matthew <unk> with Keybanc. Please go ahead.

Speaker 5: Hey, great. Apologies if I missed it. But I think previously you had reported FY22 numbers around like 4.6 billion. Is it fair just is that number still relatively in the past or is it 4.0 early closer to 4.5 or 4.5? Now with the address.

Hey, great I apologize if I missed it.

I think previously you had reported asps.

Slide 22 numbers around like $4 6 billion.

Is it fair is it is that number still relatively intact or at what point are we closer to <unk>.

<unk> five or five five now with the divestiture.

Speaker 3: I would say Matt, I would still use IR math that round up to 4.6.

I would say, Matt I would still use IR math that round up to $4 six.

Okay.

Speaker 5: and then on the inflationary impact into the fourth quarter, our

And then on the.

<unk> impact into the fourth quarter.

Alright.

Speaker 5: Are you sort of reporting this on a lag basis where you buy inventory at a higher cost a couple of months ago, and then it starts coming through in January , February , March? For these, the spot prices that you're seeing in the current market that could actually flow through into FY23. Now, this will be the actual amount we anticipate based upon the inventory turns at our very capitalization that we're talking about.

Are you sort of reporting on a lag basis, where you buy inventory at a higher cost a couple of months ago and then it starts coming through in January February March or are these the spot prices that youre seeing.

In the current market that could actually flow through into FY 'twenty three.

This will be the actual amount we anticipate based upon the inventory turns in our various capitalization that we're talking about.

Speaker 4: But is it something in which is getting better through, at least on a spot basis, where you see, you know, going out a couple more months, the prices are starting to come down, or should we think about this, this 20 million level incrementally flowing through into next year? Matt, is this the day? Is it too early to say? We have definitely seen spot prices for certain materials come down.

Okay, but is it is it is it something in which is getting better through.

At least on a spot basis.

Where do you see going out a couple of more months. The prices are starting to come down or are should we think about this.

The $20 million level incrementally flowing through into next year.

This is Dan it's too early to say, we have definitely seen spot prices for certain materials come down precipitously and we've seen other ones, where we have vendors not even willing to quotas costs three months out based on uncertainty on their app. So.

Speaker 4: And we've seen other ones where we have vendors not even willing to quote us cost three months out, you know, based on uncertainty on their end. So our hope is that we see it come down over the next three to six months, but I think we're going to be living with some of these deflite changes challenges for a while.

Our hope is that we see it come down over the next three to six months, but I think we're going to be living with some of these supply chain challenges for awhile.

Excellent. Thank you.

Speaker 1: This concludes our question and answer session. I would like to turn the conference back over to Julie Winter for any closing remarks.

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

Speaker 2: Thanks everybody for taking the time to join us this morning. We know it's just the earning season and then look forward to kissing us with any of you offline.

Thanks, everybody for taking the time to join US. This morning, we now anticipate earning season and look forward to catching up with many of you offline.

Speaker 1: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Speaker 8: I.

[music].

Speaker 1: Good day and welcome to the Starris PLC 3rd quarter 2022 earnings conference.

Good day and welcome to the stairs plc third quarter 2022 earnings conference call all participants will be in a listen only mode.

Speaker 1: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing stars and zero. After today's presentation, there will be an opportunity to ask questions.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.

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Please also note that this event is being recorded.

Speaker 1: of a now-elect on the conference over to Julie Winter, Investor Relations, please go ahead. Thank you.

I would now like to turn the conference over to Julie Winter Investor Relations. Please go ahead.

Thank you, Matt and good morning, everyone.

Speaker 2: Speaking on today's call as usual, be Mike Cuckett, so our Senior Vice President and CFO , and Dan Crestio, our President and CEO . And I do have just a few words of caution before we...

Speaking on today's call as usual be my tickets, our senior Vice President and CFO and Dan Kristy <unk>, our president and CEO and I do have just a few words of caution before we open for comments.

Speaker 2: The floodcast contains times sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebrag test of this call without the express written consent of Starris is strictly prohibited.

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 cerus is strictly prohibited.

Speaker 2: Some of the statements made during this review are or may be considered forward looking.

Some of the statements made during this review are or maybe considered forward looking statements. Many important factors could cause actual results to differ materially from those in the forward looking statements.

Speaker 2: Many important factors could cause actual results to differ materially from those in the forward looking.

Speaker 2: including without limitation, those risk factors described and there is the security side.

<unk> without limitation those risk factors described in cirrhosis securities filing.

Speaker 2: Company does not undertake to update or revise any forward-looking statements as the results of new information.

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

Speaker 2: There's those SEC sign links available through the company and on our website.

Their SEC filings are available through the company and on our website.

Speaker 2: In addition, on today's call, non-get financial measures, including adjusted earnings per deluded share, adjusted operating income, constant currency organic revenue growth, and free cash flow will be used. Additional information regarding these measures.

Additional information regarding these measures, including definition is available on today's release.

Speaker 2: reconsiliation between gap and then GAAP financial months.

Reconciliations between GAAP and non-GAAP financial measures.

Speaker 2: And yet financial measures are presented during this call with the intensive providing greater transparency.

Speaker 2: and all financial information used by management and the Board of Directors and their financial analysis and operational decision making.

Questions I will hand, the call over to Mike.

Speaker 3: Thank you Julie and good morning everyone. It's once again my pleasure to be with you this morning to review the highlights of our third quarter performance.

Thank you Julie and good morning, everyone is once again my pleasure to be with you. This morning to review the highlights of our third quarter performance.

Speaker 3: For the quarter, constant current to organic revenue increased 9%. Growth was driven by organic volume, as well as 100 basis points of price.

For the quarter constant currency organic revenue increased 9%.

Growth was driven by organic volume as well as 100 basis points of price.

Speaker 3: Acquisitions added $333 million to revenue, which is broken down by

Acquisitions added $333 million to revenue.

Which is broken down by segment in the press release tables.

Speaker 3: to assist you with your modeling within the healthcare segment of the approximately 210 million in acquired revenue. About 60% is consumable revenue from both key and cantelematical.

To assist you with your modeling within the healthcare segment of the approximately $210 million in acquired revenue about 60% is consumable revenue from both key and Cantel medical.

Speaker 3: passed the first year anniversary of the key surgical acquisition in mid-November. So this quarter, key surgical's revenue is split between organic and inarget.

Pass the first year anniversary of the key surgical acquisition in mid November . So this quarter Key's Surgical's revenue is split between organic and inorganic.

Gross margin for the quarter increased 90 basis points compared with prior year to 45, 1% as favorable productivity pricing and acquisitions were offset by higher material and labor costs. We continue to face increased material labor costs, which totaled about $10 million in the quarter.

Speaker 3: We continue to face increased material labor costs, which told about $10 million in the quarter.

As we look at the fourth quarter of the fiscal year, we expect increased pressure on material labor of.

Of approximately $20 million about twice as much as we anticipated just one quarter ago.

Speaker 3: For the full fiscal year, we anticipate absorbing approximately $45 million in unplanned material labor costs, all while continuing to serve our customers and deliver a record year of performance.

For the full fiscal year, we anticipate absorbing approximately $45 million in unplanned material labor costs, all while continuing to serve our customers and deliver a record year of performance.

EBIT margin for the quarter was 24% of revenue an increase of 40 basis points from the third quarter last year R&D expenses increased.

And as anticipated we are seeing operating expenses, such as travel and sales and marketing cost return somewhat limiting EBIT margin growth.

Speaker 3: The adjusted effective tax rate in the quarter was 21% higher than last year, but in line with our expectations. We now expect the full year tax rate to be approximately 21.5% reflecting year-to-date actuals at our expectations for the fourth quarter.

The adjusted effective tax rate in the quarter was 21% higher than last year, but in line with our expectations. We now expect the full year tax rate to be approximately 21, 5%, reflecting year to date actuals and our expectations for the fourth quarter.

Speaker 3: That income in the quarter increased to $213.3 million and earnings per deluded share were $2.12.

Net income in the quarter increased to $213 3 million and earnings per diluted share were $2 12.

Speaker 3: Our balance sheet continues to be a source of strength for the company. At the end of the quarter, cash total 359.1 million.

Speaker 3: We continue to focus on debt repayment as evidence by our leverage ratio at the end of the third quarter below 2.6 times.

Speaker 3: Year-to-date Capital expenditures totaled $214.5 million, while depreciation and amazement totaled $319.3.

Year to date capital expenditures totaled $214 5 million, while depreciation and amortization totaled $319 3 million.

Speaker 3: Three cash flow for the first nine months was $300.3 million. As anticipated, this is declined from the prior year due to costs associated with acquisitions and integration of the Cantel Medical acquisition and higher capital spending year over year. I will now turn to...

I will now turn the call over to Dan for his remarks.

Speaker 4: Thanks Mike and thanks again to everyone for taking the time to join us today.

Thanks, Mike and thanks, again to everyone for taking the time to join us today.

Speaker 4: Fiscal 2022 is shaping up to be another record year for Starris. Our year-to-date results have been strong, despite headwinds related to supply chain inflation, that are impacting both revenue and profit.

Fiscal 2022 is shaping up to be another record year for cerus, our year to date results have been strong despite headwinds related to supply chain and inflation that are impacting both revenue and profit.

Speaker 4: In particular, growth in our AST segments remains very strong with 21% constant currency organic growth year to day.