Q1 2024 STERIS PLC Earnings Call
Good day and welcome to the stairs plc first quarter 2024 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one touch.
Telephone and 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 MS. Julie Winter Vice President of Investor Relations. Please go ahead.
Thank you Jack and good morning, everyone.
As usual speaking on our call today will be my tickets I senior Vice President and CFO , and Dan Christiana <unk>, our president and CEO .
A few words of caution before we open for comments.
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Some of the statements made during this review are or maybe considered forward looking statements.
The important factors could cause actual results to differ materially from those in the forward looking statements, including without limitation those risk factors described in Sarasota Securities filings.
<unk> does not undertake to update or revise any forward looking statements as a result of new information or future events or developments.
<unk> 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.
Information regarding these measures, including definitions is available in our press release as well as reconciliations between GAAP and non-GAAP financial measures.
non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the board of directors in their financial analysis and operational decision, making.
With those questions I will hand, the call over to Mike.
Thank you Julie and good morning, everyone and it's once again my pleasure to be with you. This morning to review the highlights of our first quarter performance.
For the quarter constant currency organic revenue increased 11% driven by volume as well as 290 basis points of price.
Gross margin for the quarter decreased 30 basis points compared with the prior year to 44, 8% phase.
Favorable price was more than offset by continued material and labor inflation as well as lower productivity.
EBIT margin decreased 50 basis points to 22, 4% of revenue compared with the first quarter of last year, which reflects the decline in gross margin as well as the anticipated increase in year over year incentive compensation, which is recorded in corporate and other.
The adjusted effective tax rate in the quarter was 22, 6%.
Net income in the quarter was $198 2 million and adjusted earnings were $2 per diluted share.
Capital expenditures for the first quarter totaled $66 6 million, while depreciation and amortization totaled $137 9 million.
That declined slightly in the first quarter and totaled just over $2 9 billion.
Total debt to EBITDA was approximately two one times gross leverage.
Free cash flow for the first quarter of 2024 was $214 $5 million as we were able to collect on our strong fourth quarter revenue in.
Inventory remains elevated as we continue to focus on reducing lead times and meeting customer demand.
With that I will turn the call over to Dan for his remarks.
Thanks, Mike and good morning, everyone. Thank you for making time to join us to hear more about our first quarter performance and our outlook for the rest of the fiscal year.
As you heard from Mike We had a strong start to our new fiscal year exceeding our plans and the streets expectations.
Looking at our segments health care constant currency organic revenue grew 18% in the quarter, we experienced double digit growth across capital equipment consumables and service. This is driven primarily by procedure volumes in the U S continuing to rebound as well as price and market share gains.
In addition, the improving supply chain environment, coupled with our ability to reduce lead times.
Two a very strong quarter of capital equipment shipments.
Hospital capital spending remains robust as evidenced by our healthcare backlog, which totaled almost 500 million at the end of the quarter. Despite the strong shipments.
Large projects continue to drive orders, representing 40% of first quarter orders.
We are increasingly competent and confident in our expectations of a strong year for our health care segment.
Turning to a S T constant currency organic revenue grew 5% our performance in the quarter was impacted by two temporary situations inventory destocking and some categories of med tech and the year over year market decline of bio processing customer demand as.
As we said last quarter FY 'twenty four represents a bit of a reset and we do not anticipate returning to year over year growth in bio processing and fiscal 2024.
As far as the Med Tech inventory Destocking, we would not expect that to continue beyond the first half of the year and we anticipate customer inventories at that time, we will align with the procedural growth we are all experiencing.
As a result, our expectations are for stronger growth in the second half of the year for a S T.
Life Sciences revenue declined slightly in the quarter due to the timing of capital shipments, which more than offset the growth in service and consumables.
The underlying demand for the business remains strong as evidenced by our near record backlog.
Our full year expectations for the life Sciences segment continue to be mid single digit revenue growth. Despite the lumpy first quarter start.
Our dental segment first quarter revenue declined 4% on a constant currency organic basis as revenue was limited by customer destocking of inventory.
Particular for infection control products. However, we did see patient volumes improved for the first time post Covid. We are confident that we will achieve low single digit revenue growth for the fiscal year and dental.
All in we are pleased with the start to the year trends continue to shift in a positive direction and our ability to execute and ship products has greatly improved there are still pockets of uncertainty whether that'd be supply chain procedure volumes or inventory management.
As mentioned in our press release, we believe that the acquisition of the surgical instrumentation assets from Becton Dickinson will close much earlier than we originally anticipated.
As a result, we have updated our outlook for as reported revenue adjusted earnings per share and free cash flow.
We're feeling increasingly optimistic about our constant currency organic performance for the year.
Yet we are still holding our outlook to 6% to 7% growth.
We acknowledge that this is a somewhat conservative approach given our start to the year.
That concludes our prepared remarks, Julie would you. Please give the instructions and we can begin Q&A.
Thank you, Mike and Dan for your comments Jack can you. Please give the instructions for Q&A and we can get started.
Yes man to ask a question you May Press Star then one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys.
Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then Q and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from come from Matthew Ms. Han with Keybanc. Please go ahead Sir.
Hey, good morning, and thank you for taking the questions and really nice quarter.
To start the year.
So I just wanted to start on the capital equipment.
As you kind of think about how you had contemplated the phasing of your guidance did you pull forward some capital into the into the first quarter.
With with access shipments.
And also how are you thinking about the order environment versus versus the shipments are but I'm, assuming it's not one for one and you are thinking about bringing that backlog down.
In FY 'twenty four.
Yeah sure. Thanks, that's correct, what I would say as we we over delivered in terms of what we had anticipated from a manufacturing perspective in Q1.
We've we've been bitten a bit on the supply chain issues over the past year and so we're trying to do everything possible to manage to our customer demand, where they actually need the product now.
And we did a better job on delivery so that pulled forward some revenue that might otherwise have been in Q2.
But generally speaking you know are our ability to produce and deliver is getting better and our lead times are coming down across all of our capital equipment portfolios.
And in terms of the orders intake, yes, there is a point at which you will start to see declining backlog, obviously as we get back to much more normalized delivery times.
You know with the only caveat being there some of the large projects stuff, Matt that's got longer lead.
Okay, and then I.
Two more Oh, the task of both Oh, Brian .
You can catch it but it's amazing one H two H still 45 55 from a revenue and EPS perspective, and then secondly, just can you comment a little bit more around is that the drag from destocking, especially in some categories of med tech it seems a little bit counterintuitive. When you when you think about the current environment.
Yeah, we agree first off yes, the phasing remains as originally anticipated.
And in terms of the Destocking that we're seeing in Med Tech you know, we really started to see it in Asia Pacific and particularly around some sterile P P and and some of that was foreseeable given that you know the the national stockpiles have been filled and you know all that demand sort of went back to normal levels. What we are.
We're a little surprised of it is that we're seeing a pullback on our customers' level of inventory now having said that we shouldn't be surprised because we like everybody else have too much inventory right now so it's and as confidence comes back in terms of your ability to produce an ability to get supplies and supply chain. It solidifies the natural.
One would expect us to to wring out some of that inventory down to levels that are matching demand I don't think that process is going to take too long I think it's been going on for a period of months now.
And then I think what Youll see as you know.
The inventory demands align with the procedure rates, which are clearly higher so so Matt I agree with you that the two seem in opposite directions in terms of what we're seeing in health care in particular in our health care consumables business and we knew we know that our customers are seeing the same thing I think they've just got to whittle down some inventory.
Thank you very much.
The next question will come from Dave <unk> with JMP Securities. Please go ahead.
Great Good morning.
Good morning.
The health care number in the capital one got it.
The press you a little bit there and say you know how are you reducing the lead times and you called out market share gains I'm wondering if there is are there any new products or anything you'd highlight and.
How you put up a number like that.
Well I mean, Dave we're working off of.
Monster backlog that spilled into this fiscal year, and we had some challenges producing.
And you know as we got parts in you know our teams are already.
And we were able to push up stuff down the line pretty quickly and you know we would expect that to continue in terms of our ability to deliver on that backlog. So I wouldn't I wouldn't highlight any single product or any small group of products in terms of new.
New products or anything like that it's just general generally speaking I think our portfolio is in a really good spot in terms of how it is positioned not just on a competitive basis on a product by product, but also as a total portfolio in terms of what we can offer.
And so if we take the market share gains, it's sort of across the board or is there anything more specific there that you were.
Kind of calling out and any.
Rina.
Not specifically I I I would tend to say.
We're in a really good position and sterile processing right now in our infection prevention technologies group.
But I think we're in a good position as well and in other areas of health care, but but right. Now I think is really doing carrying a lot of a lot of the load.
Well congrats thanks.
Yeah.
Your next question will come from Mike Matson with Needham <unk> Company. Please go ahead.
Yeah. Thanks.
A couple questions on the Becton Dickinson deal can.
Can you maybe talk about the the growth at that business. It had in recent years and then.
I know you gave us kind of the EBIT or EBITDA EBIT margin, but what about the gross margin of that business, how does that compare to your kind of corporate gross margin.
Yeah, I would say that Mike on the AR on the gross margin side its similar.
Growth rates would be similar and our long term view of health care mid to high single digits.
As we bring that portfolio of products into our health care segment, it's 100% health care. So I would say not much different from what we currently have from a margin perspective, both gross margin and a little bit it's actually a little bit higher on the EBIT margin standpoint. Unfortunately.
We are going to incur in the short run higher interest expense I think as I looked at some of the models that were out there I don't think everybody appreciated that we are going to use our full.
Revolving credit facility for the $540 million, which is equivalent to about $25 million interest expense. This year. So I think there is a little bit of a slower ramp because of that interest expense, but once we clear some of that expense out.
We will be back to what I'll call normalized healthcare margins.
Okay. Thanks, that's helpful and then.
I didn't hear you quantify the inflation impact I know by fiscal year, you're kind of given that every quarter.
And then just related to that you'd also called out lower productivity in terms of your gross margin. So I don't know if you can comment on either of those things or quantify them.
Yes. So we originally anticipated this fiscal year that we would have about $30 million and we've been using the term excess material labor inflation, we incurred $10 million of that $30 million in the first quarter.
Yeah.
Okay, and the productivity lower productivity that you called out can you talk about that or yeah, we really haven't quantified that but we are we are having the same issue that we've had in the past right. So we are touching our products multiple times as we're waiting on the parts so that productivity should improve throughout the year, which will help.
Not only our gross margin, but also get more of our EBIT margin back to flattish, which is where our original guidance was for.
For FY 'twenty four.
Okay got it so that's just sort of a byproduct of the supply chain correct.
Thank you.
Youre welcome.
The next question will come from Stephen E talk with Stephens incorporated. Please go ahead.
Good morning. This is Mac on for Jacob just a couple quick questions for me. Despite a sequential revenue decline dental margins increase sequentially.
What is the outlook for margins in this segment.
Yeah.
I'm sorry, what was the question until March dental margins.
A question they'd be long time, yeah long term, we said they should get they should rise to near the corporate average and you are seeing that are they are getting much more operationally efficient, which is really helping drive that EBIT margin improvement. There is still way to go but we are happy more than happy with the progress that they're making.
Within that within that segment.
Yeah.
Thank you and sorry, if you can't hear me just let me know I'll repeat the question but.
Healthcare operating margins are they are the highest it's been in some time two solid quarters in a row are there any one time benefits or is this a good run rate going forward.
Yeah.
Obviously volume is the biggest driver at this point in time.
We have seen our healthcare segment operating margins continuing to increase.
I don't know if we're ready to say this is this is the new high end and building off of there, but we are very pleased where we are at and as we continue to put more volume through and as the mix, especially the mix on the consumable side. If that continues to remain throughout the year. Obviously, there is still potential upside for those margins.
Great. Thanks for taking my questions.
Thank you.
The next question will come from Patrick Wood with Morgan Stanley . Please go ahead.
Amazing. Thank you I'll keep it to two and I will just also by the upfront if that's easier.
I guess the first one obviously everyone's talking about the big capital equipment number I'm just curious like how the conversation with your customers has gone I appreciate that some of this is working through the backlog and lead times on your end, but presumably it.
It seems like the customers are pretty healthy place that they're willing to be investing on the consumer on the capital equipment side.
To that degree I guess, the second one is essentially related to that which is the.
In some ways the more important component of the capital equipment side is the follow on consumables componentry for the for the rest of the year.
Is it fair to take a look at that strong conversion from the backlog and think about the consumable pull through and the growth on that side, whether it's to the rest of this year or going into next year.
Yes, Thanks, Patrick So what I would just this is Dan by the way what I would say is the conversations with the customer it's interesting because you read.
The stress that the health care system in particular in the U S. But everywhere else is under financially I mean, their labor costs have gone up 20% in many places.
Yeah, the operate I'm pretty thin margins to start with so cash is a challenge now having said that.
Everybody agrees that procedure volumes are returning recovering and growing and there is pent up demand.
And the stairs equipment is seen more as a utility than it is a luxury.
Because they can't get the capacity to get instruments through and surgeries processed without sterile processing capacity without or without.
The SPD equipment. So we've you know.
Knock on wood, we've we've main remained pretty robust in terms of our order intake in and generally speaking the outlook is pretty strong for that to continue for some period of time and yes, as we as we place those units.
And have that real estate you know in the sterile processing department. The onus is on us to make sure that we get the Chemistries and all the other accessories consumables that go along with the steam Sterilizer, a washer or an a or you know whatever they may be but the pull through and that is consistently pretty strong and we haven't.
A highly focused dedicated channel.
And in health care organization to focus on that.
Super helpful. Thank you.
The next question will come from Michael <unk> with Wolfe. Please go ahead.
Hi, Good morning. Thank you for taking the questions I must say firstly accounted eight minutes of prepared remarks, including the disclaimers. So kudos there that might be an all time.
Called record.
My first question maybe.
Maybe a few parts to it as an S T.
You know what.
The fresh call out of Med Tech related Destocking.
Internally is your full year revenue expectation for ASD different than it was before.
No I think what I would say is that it.
It maybe weighted more negative in the front half of the year than we anticipated and we expect to recover some of that in the second half I mean, Mike if if if not for bio processing and the Destocking that we're seeing right now.
I can say confidently we'd be somewhere in the I don't know pick a number between nine and 12 kind of range as what we would've expected.
And I think that those two issues sort themselves out by year end and I think that the health care destocking, probably sorts it out sooner than year end.
Two follow ups there.
Bioprocess in Med Tech and bioprocess.
I think this is the third quarter.
You've called it out year on year.
So its definitely been in the run rate sequentially for at least two quarters. My question is.
June quarter versus March quarter did it.
Yes.
Deteriorate incrementally or is it kind of consistent Q over Q in terms of overall order pattern from those customers. It was flattish to the Q4.
The the reason why it sticks out a little more as it's at the comp in Q1 and also in Q2 are the two highest toughest comps for us.
And then on the.
Device customers I heard the Nash.
The national stockpile Callout I appreciate that.
In kind of interventional medicine, let's say the neuro.
Euro and cardio and ortho.
Any categories there that you.
Do you see as kind of especially.
Kind of noteworthy in terms of reducing inventory levels or would you call. It broad based X. The PPE stockpiling I would say, it's broad based and I would also say there are some that are still searching and building inventory, we see that in ortho and spine and pain management right now so but that's not it.
A huge amount of the volume flowing through our plant necessarily in the Grand scheme of things.
Okay I hope that was the three partner, but I consider that my first topic. My second is more straightforward on BD.
Transaction.
It's kind of very prudent entry price. So you are seemingly earning a return on the bi which is nice to see.
Over the mid to longer term do you anticipate revenue <unk> cost synergies from this portfolio.
I think mostly I mean, there's some cost synergies, but they're they're minimal I mean in terms of it and more has to do with scale and leverage on channels and things like that I do think there's some sell through synergies the way that instruments.
The BD instruments marry up with both our instrument repair business as well as instrument trace and tracking through the sterile processing department.
You know everything we do in terms of our washers and sterilizers in our infection prevention technologies group is dealing with.
Instructions for use for all types of different instruments, and I think having the instruments available through stare us having the ability to supply repair and manage the lifecycle through Washington sterilization back to the O. R is is a compelling story from a customer perspective.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Jason Bednar with Piper Sandler. Please go ahead.
Okay.
Hey, good morning, everyone. Thanks for taking the questions.
Wanted to start a little bit with the guidance rationale you beat consensus by about 115 cents.
Really strong free cash flow a quarter a revenue obviously as we have all talked about here was really strong, but you elected not to make any updates to full year guidance I know, we're only one quarter into the fiscal year. It sounds like there's some maybe early year fiscal year conservatism, but can you talk about the pushes and pulls that went into the decision to update or I guess.
This case not update core guidance the way you did.
In short I would say, we did a really nice delivery in terms of our health care business this quarter.
And we're look we look at that business and we're very optimistic in terms of how they're going to perform over this year.
You know in terms of life science in I S. T. Theres, some things that have to get worked out there relative to timing of some of these events. We think we understand the market, we think with a high degree of confidence with all the data we have that we know how things are going to play out, but theres no, 100% guarantee and Theres no 100% accuracy on the Crystal and Crystal ball. So the short answer is we're taking a can.
Acervative approach and if things continue to do great well have a different conversation sometime in the future.
Okay, Alright makes sense and then I wanted to come back to the dental business as well here the core growth's been flat to down for I think four consecutive quarters now.
So the commentary, obviously getting getting easier going forward, but maybe looking backwards for Sir are there actions you're taking are you you have taken and exiting unprofitable areas of shutting down certain skus.
I really ask just because the performance we've seen so far does seem like it's running a little bit below market.
Trying to figure out if there's maybe some self inflicted pain here.
A positive ROI or if you see any other factors is contributing to the weakness for that segment.
Again relative to maybe the market or your peers and then just as a follow up here on a two parter what contributes to the optimism about getting back that business back to low single digit growth given where its been trending here.
Yeah, a couple of things I would say I think that we have a little more exposure than some of our peers per se because of the amount of PPE and infection control that is almost half of the business the stairs dental business and that that type of stuff got way overbought, and overstock and and it needs to needing to get burned down and also the comparisons of how much.
It was being used you know a few years ago versus now as it's a different time and a different world as it relates to that type of stuff. What I would say is on the instrument side you know the hue freedom brand and stuff is doing really well in terms of growth and we would expect that to continue and we would expect to see you know.
Innovation from a product perspective, and also cost management from manufacturing and delivery perspective, and and the team and their dental group has done a really nice job managing the opex until we see the market recover as well and making sure that we're not overspending.
Alright, thanks, so much.
Okay.
The next question will come from Matthew Ms. Han with Keybanc. Please go ahead.
Okay, great. Thanks for taking the follow up I just wanted to.
Talk about like longer term Gi procedures, one of the larger hospital systems.
It was saying that they're realizing pent up demand seeing a lot of strong growth for G. I.
And in Endoscopy, and and one of the factors. They are starting to see is like the change in guidelines.
You know, we do see the gauge for colon cancer screening down to 45 or 50, and that's starting to play through I was just hoping you could talk a little bit about about your endoscopy business suddenly they can't tell doctors and kind of how you're looking at that over the next year or two.
Yeah, what I would say is that the you know the drivers in terms of the 45 age recommendation has helped I mean, it does open up for a lot more screening the.
The sort of the governor on that for the past I don't know up until about a quarter ago or six months ago was really health care staffing and their ability to get colonoscopy scheduled I know that I personally tried to schedule one in December and they told me as soon as I could get in was the end of February .
So I think a lot of that's been sorted out.
So it does have an impact and that is reflected in particular in both our capital equipment with all the <unk> that we sell.
But it also is a major contributor to why we had such strong delivery and healthcare consumables.
In the first quarter.
And then a follow up on the on the corporate another I believe you mentioned that that was the incentive comp and that kind of a reset.
A reset of incentive comp.
Drive that is that type of year over year increase of from a dollar perspective, something we should be modeling in over the next several quarters as well.
Yeah, Matt if you recall, we called out last quarter that we will have a $40 million hole. If you will that we have to fill from an incentive comp.
Expense year over year, so that is a big driver of that increase in corporate expense a couple of the other drivers in there. We also opened a new distribution center in Indianapolis, Indiana. So that is also.
Out of this cost and then what are the other things that we're seeing.
As our usage of our employee health care benefits is on the rise. So we're also incurring slightly more expense. There. So those are the three main components that we saw in the first quarter, but for sure.
That $40 million, we called out last quarter.
Thanks, Mike.
Youre welcome Matt.
This concludes our question and answer session I would like to turn the conference back over to MS. Julie Winter for any closing remarks. Please go ahead.
Thank you everybody for taking the time to join US. This morning, and we look forward to seeing many of you out on the road this fall.
Yeah.
The conference has now okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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