Q4 2022 STERIS plc Earnings Call
Good day and welcome to the stairs P. L. P fourth quarter 2022 results conference call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Julie Winter with Investor Relations. Please go ahead.
Thank you Chad and good morning, everyone.
As usual I'm speaking on today's call will be Mike <unk>, our senior Vice President and CFO and Dan <unk>, our president and CEO I do have a few words of caution before we open for comments.
This webcast contains time sensitive information that is accurate only as of today.
Redistribution retransmission or rebroadcast of this call without the expressed written consent of <unk> is strictly prohibited.
Some of the statements made during this review are or maybe considered forward looking statements.
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.
The company does not undertake to update or revise any forward looking statements as a result of new information or future events.
Uh huh.
The 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 it.
Additional information regarding these measures including definitions is.
Available in today's release.
Also along with 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.
With those cautions and 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 fourth quarter performance for the quarter constant currency organic revenue increased 11% growth was driven by organic volume as well as 120 basis points of price.
Acquisitions added approximately $253 million to revenue in the quarter, which is broken down by segment in the press release tables.
Gross margin for the quarter increased 120 basis points compared with the prior year to 45, 5% as favorable productivity pricing and acquisitions were somewhat offset by higher material and labor costs.
We continue to face increased material and labor costs, which totaled about $20 million in the quarter as anticipated.
EIT margin for the quarter was 23, 6% of revenue an increase of 130 basis points versus the prior year.
This is impressive performance as operating expenses, including R&D increased plus the continued headwind from supply chain and inflation.
Adjusted.
Tax rate in the quarter was 22, 8%.
Net income in the quarter was $205.4 million and earnings per diluted share were $2.04.
At the end of the fiscal year cash totaled $348 million, we continue to focus on debt repayment as evidenced by our leverage ratio being now under two four times at the end of the fiscal year. Our focus on debt reduction provides us flexibility to continue making investments in growth capital expenditures and <unk>.
How's us many opportunities to continue to expand our businesses.
Year to date capital expenditures totaled 200.
At 87, 6 million, while depreciation and amortization totaled $553 $1 million.
Free cash flow for the year was $399 million.
As anticipated this is a decline from the prior year due to costs associated with the acquisition and integration of can't tell along with higher capital spending year over year.
As we look forward to fiscal 'twenty three.
We anticipate free cash flow generation of approximately $675 million as the majority of costs associated with the acquisition and integration of Cantel have occurred. We also expect interest expense to be higher year over year as rates continue to rise.
Total non operating expenses net is anticipated to be about $95 million.
In addition, we expect continue to continue reinvesting in our businesses with capital expenditures totaling approximately $330 million.
With that I will turn the call over to Dan for his remarks.
Thanks, Mike and good morning, everyone.
Thank you for making the time to join us to hear more about our fiscal 2022 performance and our outlook for fiscal year 2023.
As I look back on a year of fiscal 2022. It was a remarkable year for stairs not only did we navigate year two of a global pandemic, but we also completed the acquisition of cantel, well integrating key surgical and successfully transitioned leadership.
All while growing faster than anticipated.
I want to start by thanking the people Astaires for all they have done and continue to do to support our customers and each other.
Without all of you we would not be where we are today.
We started fiscal 2022 with an expectation of 8% to 9% constant currency organic revenue growth for the year.
After increasing our outlook twice this year, we ended the year with 13% constant currency organic revenue growth well above our increased outlook.
This growth was driven by continued outperformance of our S. T segment.
Double digit growth in health care.
And solid mid single digit growth in the life Sciences.
Dental is not yet included in the constant currency organic revenue growth.
This segment grew 4% year over year since the time of acquisition in June .
From a profit perspective, we ended the year with operating margins up 100 basis points, despite absorbing about $45 million and unplanned supply chain and inflation costs related to labor.
Helping to offset those costs we.
We were successful in Overachieving.
Our fiscal 2022 cost synergies targets for the can't tell acquisition.
Which added approximately $40 million to our fiscal 2022 results.
Adjusted earnings per diluted share of $7.92 increased 28%, 28% compared with fiscal 2021 and reflect a new record for service.
Turning to fiscal 'twenty 'twenty three.
At a high level, we expect another very strong growth year for our business.
Our outlook for total revenue calls for approximately 12% growth.
Which includes two additional months of the Cantel acquisition.
All set by the impact of the renal care divestiture as well as approximately $30 million in unfavorable foreign currency.
Excluding all of that we anticipate constant currency organic revenue growth of approximately 11%.
Importantly, this outlook assumes that the procedure volumes will normalize in the U S. And then we do not experience any significant wave of disruption from Covid.
Our constant.
Our constant currency organic.
Revenue outlook reflects volume growth and includes 200 basis points of favorable pricing pri.
Pricing is essential to help offset the increased cost year over year.
For fiscal 2023, we expect an incremental $70 million, an extra ordinary supply chain and labor inflation cost above the $45 million we occurred in fiscal 2022.
This is in addition to our normal slow low single digit annual inflation amounts. All is included in our outlook, which we will work to come overcome every year.
In addition to the anticipated headwinds from supply chain and inflation, our fiscal year 2023 operating expenses will be higher as we get back to spending on travel sales and marketing and other expenses.
R&D spending is also anticipated to be higher as we continue to develop and bring new products to our customers.
Offsetting those headwinds to some extent will be cost synergies from the integration of cantel, which is expected to be incremental by approximately $50 million from the fiscal 2022 levels.
By the end of fiscal 'twenty 'twenty, three we will be approaching 100 million in total cost synergies achieved.
Taking into consideration all of the puts and takes we expect to show modest operating margin growth in fiscal 2023.
Our full year earnings per diluted share outlook is anticipated to be in the range of $8.55.
Two $8 75.
Or 8% to 10% growth over fiscal 2022.
Given all the moving pieces, we are pleased with this bottom line growth outlook.
As usual the range does provide us some conservatism on the low end.
But given all the uncertainty that exists we believe it is warranted.
All in all fiscal 2023 is expected to be another record year for stairs, our teams and our portfolios continue to come together to better meet the needs of our customers and the breadth of our offering allows us to take advantage of several significant trends in the industry by leveraging our relationships to cross sell within the business.
Segments.
I recently shared with our sales team and our first in person global meeting in three years that we honestly believe that stairs is positioned better today to meet the needs of our customers than ever before in history.
That concludes our prepared remarks for the call and Julie Please give the instructions. So we can begin the Q&A.
Thank you, Mike and Dan to your comments, Chad if you would give the instructions and I'd be happy to get started.
Certainly I want to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will be from Chris Cooley from Stephens. Please go ahead.
Good morning, Thanks for taking the questions and congratulations on a stellar year there in fiscal 'twenty two.
Just two for me if I may here. This morning, first just and thinking about kind of how you're looking at the year going forward.
11% constant currency growth, obviously is higher than what we've historically seen the company start start out with admittedly there is some different aspects.
Aspects to the business.
Just would appreciate if you can maybe call out where you're seeing strength, where you need to see some improvement just from operationally from a divisional perspective so.
So we can kind of think about that in terms of the drivers both the growth and then as a result margin as we go through the year and then I've got a quick follow up thanks.
Yeah. Thanks, Chris This is Dan. Thank you for the question you know it and sure we're seeing a fairly robust recovery in procedure volumes, you know on a quarter to quarter basis, as we move back into more normalized volume in terms of pre COVID-19 levels. We're not there yet we still have quite a ways to go.
And you know I think that the real governor on the recovery of those rates is gonna be staffing and the challenges that are that's generally present in the healthcare industry today in particular in the hospital segment.
<unk> said that as those volumes return.
That significantly benefits, our both our global health care business as well as the I S. T business and we've seen you know in the last couple of quarters, a recovery of of more and more devices.
Coming through a S. T. In particular that are more highly elective high value type devices, so ortho spine and things like that of that nature. So as those those procedures begin to.
Recover and then start working off what's been a couple of your backlog of pent up demand, we were seeing higher growth opportunities and have we seen maybe in the past you know in addition to that you know we're coming into the year with all time record backlog from a capital equipment perspective.
And you know as we hope to flush that through over the course of the year that will obviously be a bit of a tailwind for us in terms of our revenue growth.
Appreciate the color and then just just as my follow up and I. Appreciate all the detail here, but a number of puts and takes.
When you look down to the middle of the P&L.
Go into fiscal 'twenty three.
Just kind of curious so you're talking about a return to kind of normality you when I think about SG&A, you're more broadly higher R&D as well.
Just I guess directionally.
How much of this is a return to normal how much of this is incremental investment that you're making for kind of the sustainability of the growth of the business.
Or you know what was the business maybe under invested in over the course of the last 18 to 24 months, just trying to get a better feel for.
Yeah.
What kind of structurally we should be thinking about longer term just from an expense rate. Thank you.
Yeah, Chris This is Mike I would say that the majority of what we're going to experience at least in the SG&A side is more a return to normal I would not say that we were under invested by any means and as Dan said in his prepared remarks, we've had our first sales meeting in three years. So you can imagine the expense of that.
Compared to the last two years that we didn't have that so that those are the types of increases we're talking about where youre going to see a little bit of a stepwise change, though is it R&D our R&D, we anticipate growing by double digits in fiscal 'twenty. Three so we continue to make investments in R&D to bring new products across all of our businesses so that.
If you look at the two a stepwise change that we are we are continuing to invest for the long term not that we were underinvested by any means we just think there's a lot more opportunity that we can bring forth, especially with the acquisition of cantel.
I appreciate that thanks, so much and again congratulations on a great year. Thanks, Chris Thanks, Chris.
The next question comes from Mike Matson with Needham and company. Please go ahead.
Yeah. Thanks, Thanks for taking my question I guess I'll start with just the first quarter are in.
In 'twenty three you've got a bit of a tougher organic comp I think so I mean I.
I didn't hear any kind of directional commentary around where you expect the revenue. So I mean is it safe to assume you're comfortable where.
Consensus was sort of modeling things I mean, I would assume its a lower youre expecting lower organic growth in the first quarter than the remainder of the fiscal year.
Yeah, Mike we have this is Mike so because we have not we have not made any comments, but to give you a little bit more color to help you with your modeling.
We would suggest that a from a first half for a second half we're about 45% first half, 55% second half, which is which is typical.
Of how we operate and to your point I think I would say you are correct. We do have a little bit of a tougher comparison in Q1, but we're not we're not going to give quarterly guidance at this point in time, nor have we had in several years and.
And just to clarify that's what is earning yes, you're correct.
Okay got it that's helpful.
Alright, and then.
You you mentioned you know that there are some trends in the industry. There, hoping steroid. So I was wondering if you could just talk a little bit more about that I assume one of them is the trend towards Cds, where they seem to kind of have to get outfitted with cleaning and sterilization equipment and whatnot, but maybe you can just talk about some of the industry wide.
<unk>.
Yes that is one clearly this sorry this is Dan.
And there's an awful lot of growth going on in investment both in acute care in an ASC as you know across the U S. In particular, and we're starting to see the recovery in Europe . So we've been really well position, but with our portfolio of products in particular with SPD <unk> and also you know and from an O our perspective over the past.
Few years, and we're nicely positioned to fill that to that need and that growth that we're seeing as it comes.
The other sort of tailwind that we're getting is as I mentioned before it is just general procedural recovery, which drives our consumables that drives our services it drives our ASD business.
So that's generally beneficial for sterile whenever we see procedure rates on the rebound and then you know sort of last but not least there's no shortage of investment going on in pharma in terms of a septic manufacturing as it relates to biopharma and to some extent a vaccine as well so.
You know we have an awful lot of backlog in life Sciences, it's going to flush through this year as it relates to some of the expansions that are the investments we've seen going on in the industry and as those investments come online. That's a that's a tailwind for us with our our consumables business as they start to consume our chemistries and our packaging solutions.
Okay got it.
Well, yeah, I mean, obviously, but then a S T. That's driving our biopharma and procedural recovery as a as a tailwind for our ASD business.
Okay got it thanks, and then just as far as the free cash flow guidance goes I mean, I'm, having a little trouble getting to the 1 billion of.
Cash flow from operating activities in my model, I mean, I'm coming in higher than that but I. The only way I can kind of get there assuming your working capital was up a fair bit I mean is that a reasonable assumption that you know maybe you're stocking up on inventory things looked pre buying stocks can vote supply chain issues, we've heard that from other companies.
Yeah, Mike that's exactly right and we have been doing that for probably the last 18 months two years, where we've continued to carry higher levels of inventory.
When we ship the backlog.
Obviously, the inventory and if supply chain does.
Get a little bit easier, we will actually be able to bring that inventory level down as we go throughout the year.
Philosophy on inventory is gone from just in time to just in case. So there's an awful lot of contingency and supply chain continuity built into our inventory levels right now.
Okay got it thank you.
Youre welcome.
The next question is from Matthew Mission from Keybanc. Please go ahead.
Hey, good morning, and thank you for taking my questions I just want to start first with the healthcare capital equipment at least versus our model. It looks like it came in a little light in the fourth quarter.
Some of the backlog shifts from the fourth quarter into our FY.
FY 'twenty three.
Yeah, Matt as we've been talking about the last couple of quarters, we have seen a roughly $30 million ish.
That did not ship that wouldn't have been scheduled to ship on a normal course, if you will.
And then if you look at it and you say that's like ads per se as you compare the 11% organic growth.
For FY 'twenty three to what it is a more sustainable level of organic growth, we kind of back out that debt.
Capital equipment.
I guess price is probably not.
You know 200 basis points moving forward just what do you. How do you look at what is a sustainable level of organic growth compared to the 11%.
For 'twenty three.
Yeah, I would say, Matt we are still in the mid to high single digit revenue growth.
Our long term aspirations, obviously, we've done better than that over the last several years, but you know in general we would still stay with that that that that that forecast or that thinking from a long term perspective.
Okay.
And then Dan just your longer term thoughts on odd hospital capital spending.
They progressed through the year I think we've seen we've seen a couple of different opinions from from some companies on kind of where that.
Well, that's potentially moving.
Yeah, you know and we've seen those opinions as well I think some of the differences as you know the capital equipment. That's there or selling is typically 20000 to $100000 pieces of equipment. So these arent million $2 million of machines that are in the other the other point I would make is.
Well, what everything we sell basically is procedural rate driven and it's in this it's almost like a utility at timeshare for the hospitals they have to have it in order for them to accommodate an increase in surgical procedures.
That's why it's in tables or whether that stuff in the S. P. D. I'm. So so generally speaking.
Given the that the cost of our of our equipment and sort of the utility of it in nature, We see continued strong investment.
And how long it will last I don't know, but we don't see it changing anytime in the near future.
Excellent. Thank you very much.
The next question is from Michael Pollock.
Research. Please go ahead.
Hi, Good morning, Thank you for taking the questions one clarification on the response to Mike Madison's question the 45.
55, like Turkey, which is that was that a comment on revenue progression one age to age or E. P. S that Mike that was on the EPS and welcome back Mike.
Well come back to covering us.
Those three Mike's and my first question too.
Three mics to many and maybe on fiscal 'twenty three.
To level set comments or frameworks like this have been made in the past.
I think the.
I'm not struggling too much but would you be willing to level set and in your you know $5 1 billion give or take of of imputed revenue for fiscal 'twenty three how that splits out across the segments. Just so we can.
Work the model a little bit more precisely.
We have not done that like it I think at this point in time, we will not but I will tell you that for the most part if.
If you look at growth a health care is going to be exceeding their their normalized growth I would say life sciences will be somewhere in maybe a little bit better than the normalized growth asps will be at its normalized growth and then obviously our dental we still don't have a true comparison at that point in time so.
Okay.
Dental what's the early assessment of dental I would say this is the one piece of the acquisition that hasn't.
Now impressed yet kind of how do you feel about that business. What are the you know work streams and initiatives for fiscal 'twenty three.
Hum.
As you continue to integrate it and learn learn that market.
Yep.
Dan Mike So yeah, we're we're happy with the business you.
I would say it is more affected.
Affected Ah recently in particular with the surge of Omicron that we saw in the January early February timeframe, and unlike health care, where it had very little effect.
Just the broad level of infections across the U S. In particular ended up postponing or delaying a lot of there's a lot of procedures in the dental space and if if if you want a fact check that call. Your dentist today and see if you can get in before July because there's a lot of pent up demand in terms of lost last time in the first couple of months anyways of this calendar year.
So we like the business, we think there's a ton of operating opportunities.
In terms of driving efficiencies through lean and continuous improvement.
That's going to take us some time, some time to wring out and make that business a little more efficient in terms of how they serve their customers.
But other than that it's it's on it's on a steady track of recovery in terms of demand barring what we saw the first couple of months of the calendar year.
Mike just to add to that a little bit I mean, we grew 4% since the acquisition.
Just a little below two dads play because of some of the Covid impacts, which is a little bit below the mid single digits anticipation that we would have for that segment to give you. Some some further clarity.
4%, that's like a pro forma corrado trade for the business Okay.
And if I can do one more the comments on R&D are interesting obviously stairs is not overly reliant on any single product and so I don't wish to over state the importance of any single product category with this question, but I have noticed that Ah you have recently launched relatively recently I think this year or late last a.
The single use Ureteroscope and I you know, it's always a topic that seems to come up from time to time and I'd just be curious about your efforts there and if you know this launches and appetizer to Ah some more products in and that single use scope category over time. Thank you.
For taking the questions.
Sure Mike So yeah. We're we're in a limited market release right now in terms of the new scope and we've received a lot of positive feedback from key opinion leaders and in it. It's early early days at this point and you know, we'll see we'll see how that goes and how it progresses over time, but what I would say is that stairs is uniquely positioned.
With our IMS business and vast understanding and engineering that we have around scope design.
From a repair perspective and that collaboration.
You know with the commercial teams has put us in a nice position in the urology space and so you know as that product begins to go into more realistic launch.
We will be able to provide some updated information on it at this point, it's just too early too early days for us to discuss it.
Thank you and the next question will come from Dave Windley from Jefferies. Please go ahead.
Alright, Thanks for taking my questions most of them follow ups you you've commented on a recovery in volumes broadly in thinking.
Health care and S T, but I'm wondering if you could.
Can you comment on whether you see the primary drivers of those volumes being kind of a recovery in pent up demand as you've mentioned, how much might be market share gains and any other contributors to that.
Yeah.
Well I mean, I think in terms of procedure volume that's pretty straightforward as you know we're we're back now in the U S market anyway somewhere around 95% pre COVID-19, depending on where you are region to region. Some some hospitals may be operating at 100% others are operating at 90 per centers.
And over time, I think as provided the staffing can step back up in terms of meeting the full demand we'll.
We will see that improve beyond you know what we saw pre COVID-19.
Because there is a lot of pent up demand, but there's also a lag now in terms of intake with the hospitals, you know getting people back into the system, where they're diagnosing disease and moving them towards surgery, where necessary that as Florida, Florida recover as well so it's going to take some time in.
In terms of overall rates in demand on the different businesses.
In terms of the overall growth rate I do believe were taking a bit of share across the majority of the business here is here at Starz, we've discussed that in the past and we've made very significant investments in our portfolio.
As it relates to health care and life sciences over the years.
And also you know and significant capacity expansion investments in I S. T and consequently, I think where we're doing a little bit better than market in those spaces.
Great. Thanks, and follow up different topic around capital structure, you mentioned leverage I think was two four times mentioned rising interest rates and.
And a big recovery in the coming year and your free cash flow expectations.
Maybe just talk about general capital deployment priorities.
Priorities and is is I'm kind of getting at how much floating interest rate debt do you have an as is the rising interest rate environment encouraging you to pay off more of that more quickly.
Yeah. So.
I would say that in general as we are.
Anticipating about $675 million and free cash flow that our capital priorities have remained.
Basically the same for the last decade or more Oh, we're off the top we believe in increasing our dividends we've done that 16 years in a row.
Next would be to continue to invest in ourselves and we're continuing to do that we've got about anticipating about $335 million of Capex, which is almost $50 million higher compared to the prior year and we have a lot of that capex is going to be continued directed into our a S. T segment as we continue to.
Spanned.
Our facilities and our opportunities in that segment.
Third would be looking towards M&A, we've done over 50 transactions in the last 10 years or so are most of those are tuck ins in nature.
And I would imagine that most of those are in the future as we continue down the M&A path will be tuck ins and then finally just.
From a repurchase share repurchase standpoint, just to offset dilution and we had that built into our plan for this year. We did do about $25 million of share repurchases in Q4, but we had a hiatus on share repurchases for the last 18 months or two years, so from a prioritization standpoint.
That is how we operate and how we have continued to operate over the last several years.
Yeah.
Thank you.
Dave just I think you've asked about that about a quarter of our floating rate debt.
Okay. Thanks.
And again, if you have a question. Please press Star then one.
The next question is a follow up from Chris Cooley from Stephens. Please go ahead.
Oh, Thanks for taking the follow up here just two quick follow ups for me if I may could you speak to the margin profile in the dental business, just trying to get a better sense of.
We saw a sequential progression downward throughout fiscal 'twenty two.
How much of that decline in the fourth quarter was volume related and it does sound like that impacted you from a response to a prior question, but just.
When we should maybe start to expect stabilization, there or maybe lift better and then it's just a quick follow up would be curious if you could discuss or.
Provide any additional color when you think about the a S. T build out that continues to take place our.
Emphasis on different sterilization modalities in particular, our X ray here in the United States and abroad. Thanks, so much.
Dan I'll take that that's one and I'll give you the S. T. One if that's okay. It sounds good.
The margin profile of dental Chris you are correct, we have seen a degradation in our EBIT margins in that business.
In the first quarter that we had dental they were still not being impacted are like the rest of the business from a materials and labor inflationary standpoint that has changed dramatically in the back half of our fiscal year. So that is one large driver.
The impact negative impact to dental and then as we talked about earlier our volumes.
With patients has definitely had a negative impact.
On that business.
So I would say that in general we would look to have dental above our corporate average.
We continue to.
Streamline that and get more ingrained in the operations of that business longer term, but definitely volume and then the inflation is definitely having a larger impact on that segment on its own.
Understood.
Yeah, and Chris on the on the a S. T question you know we're in the process of a pretty significant build out across our network and actually across multiple techniques and technologies. We have you know a few E beam plants going in we've got a couple of Yo expansions.
In addition to the numerous X ray facilities that are currently in one phase of build or another which you know construction during the COVID-19 environment and labor shortages, there's been nothing short of challenging for the last couple of years, but it's definitely looking looking up recently so in particular in the U S. There's theirs.
Three facilities that will come online over the next couple of years are the earliest will be late very late this fiscal year, most likely and in Illinois, and then followed by either California or a gesture in New York.
Thank you.
Yeah.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Julie winter for any closing remarks.
Thanks, everybody for taking the time to join US This morning, and look forward to catching up with many of you.
In the coming days.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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