Q1 2020 Earnings Call
Good morning, and welcome to Steris plc first quarter 2020 conference call.
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I'd now like to turn the conference over to your host today, Julie Winter Senior director of Investor Relations. Please go ahead ma'am.
Thank you Keith and good morning, everyone.
As usual on todays call, we have Walt rosebrough, our president and CEO and Mike <unk> Senior Vice President and CFO .
Do you have a few words of caution before we open again.
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In addition on today's call non-GAAP financial measures, including adjusted earnings per diluted share segment operating income constant currency organic revenue growth and free cash flow will be used.
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Including definitions is available in today's release.
[noise], including 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 I will hand, the call over to Mike.
Thank you Julie and good morning, everyone is 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 growth was 10% driven by volume and 120 basis points of price. We continue to experience strong underlying growth from our customers and success with new products.
Gross margin for the quarter increased 190 basis points to 44.2%.
I was favorably impacted by productivity price mix and currency somewhat offset by higher labor and material costs.
EBIT margin for the quarter was 19.5% of revenue an increase of 160 basis points from the first quarter last year.
Despite an increase in SG, they expenses, mostly relating to higher incentive compensation, given the strength of the quarter.
The adjusted effective tax rate in the quarter was 16.2% somewhat lower than we had anticipated due to favorable discrete items, primarily the benefit related to stock compensation expenses.
Net income in the quarter grew 23% to $105 million and earnings increased to $1.23 per diluted share benefiting from revenue growth margin expansion and a lower tax rate.
In terms of the balance sheet.
We ended June with 238.1 million of cash and 1.2 billion in total debt.
During the first quarter capital expenditures totaled $49.8 million, while depreciation and amortization was $47.1 million.
Free cash flow for the first three months declined as anticipated to $59.6 million due to the increased capital spending.
With that I will turn the call over to Walt for his remarks.
Thanks, Michael and good morning, everyone.
As you've already heard from Mike We started fiscal 2020 stronger than expected with growth meeting or exceeding our expectations in all four segments.
The additional volume and the lower effective tax rate drove earnings above our expectations for the quarter.
Based on our performance in the first quarter and revised expectations for the rest of the fiscal year, you're now updating our full year outlook.
Starting with revenue, we now expect constant currency organic revenue growth of 6% to 7% for fiscal 2020.
Up a 100 basis points from our original 5% to 6% range.
The updated revenue forecast suggests that the outperform outperformance in the first quarter holds for the year and that we will experience somewhat higher volumes than we originally planned over the remaining course of the year.
The two segments of our business that are driving the increased volume growth for the year versus our original plan, our healthcare products and ASP.
Healthcare products is seeing improved demand for both consumables and capital equipment.
Our new products have helped grow consumable sales in sterility assurance instrument cleaning chemistries and V Pro consumables.
On the capital equipment side, we have a strong backlog of capital equipment orders and a healthy pipeline going forward.
When our capital equipment growth significantly we can run into capacity constraints in our shared manufacturing facilities in any given period.
Our revenue forecast recognizes our efforts to run our plants at normalized run rate throughout the year, which creates some risk for potential timing issues in capital equipment shipments at quarter ends adherence.
DSD segment continues to deliver strong growth.
As increased demand from our core medical device customers continues and we fill the capacity of the expansions we have made in past years.
This encourages us about our significant expansion plans for ASP that we have previously reported.
With the additional volume growth we are for the total company. We are increasingly comfortable with approximately 75 basis point improvement in EBIT margin percentage.
We also anticipate that our effective tax rate for Fytwenty, we'll be at the low end of our original guidance of 19% to 20%.
With all these factors considered we now anticipate adjusted earnings per diluted share to be in the range of $5.38 to $5.53.
Up 10 cents from our original outlook.
While our first quarter exceeded consensus by 12 cents. It did not meet our internal plan by that much as a result, we continue to expect earnings in our revised forecast to be weighted about 45% in the first half and 55% in the second half.
The rest of our outlook is unchanged as we continue to expect about $280 million in capital spending to fuel future organic growth in our businesses and $300 million in free cash flow for the year.
Our capital spending has started the year a bit light as Mike has said that we expected to ramp up over the next three quarters as our projects move forward.
On a completely different note as you likely saw in our proxy we had several board members retire as of our annual meeting.
Loyal Wilson had the foresight to be the initial primary investor in Steris over 30 years ago.
Has served on our board ever since.
And is made in Numerable contributions over his tenure.
Dr., Michael Wood has been a board member for 15 years and has brought a unique perspective of the surgeon and former CEO of the Mayo clinic.
Answer Duncan nickel former head of the NHS in the UK joined our board several years ago. As the result of our combination with synergy health, where he was chairman and a long standing board member.
All three of these individuals have made significant contributions to our company over many years.
We thank them for their service and wish him the very best.
In closing we started this year strong.
And continue to expect another year of record performance in Fytwenty.
We believe the short term and the long term future for Steris is bright and we appreciate your ongoing support.
We are now pleased to take any questions. You may have Julie can you start uniquely.
Thank you Walt and Mike for your comments Keith would you. Please give the infections and we'll get started on culinary yes, certainly we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are you a speakerphone please pick up your handset before pressing I gaze to try your question. Please press Star then sue.
Yes at this time, we will pause momentarily to assemble the roster.
And the first question comes from Matthew Mishan with Keybanc.
Great and thank you for taking the questions.
And an outstanding quarter.
Thanks, Matt.
Well, Mike can you going to start off with a is t. and.
He can help explain in the increased demand you're seeing.
And whether or not it's it's near term transitory due to a competitor issue or is this just large scale market share gains you're seeing over over a multiyear period of time.
You know Matt.
We have been very strong and his team now for several quarters.
Stronger than our expectation frankly, there has been some.
I think we reported last time, some modest increase probably due to Brexit.
In Europe .
There's been.
Some modest increase due to the.
Chicago closing that you referred to.
And then there's been just good underlying generic increases we've talked about this before.
We continue to put capacity in places, where our medical device customers are expanding and we havent seen.
Our.
The Oems who are making these devices generally speaking havent been building capacity.
For that.
Growth so by definition, they're outsourcing more and we have had the good fortune of picking up probably more than our fair share of that growth.
Due to having our plants in the right places and Thats why we have continued expanding.
Kind of on the comp if you will for the next 10 years and we will continue to do that so we are.
They were comfortable that we are growing a bit faster than the market, but I don't think it's radically faster and it's not due to any particular big swing of a customer a customer b or.
Someone from.
A customer moving.
To us are we call. This churn that our net churn has been roughly constant for quite a while we have picked up positively for quite a while but it's not at a range. So this is this is a quote for lack of better terms true growth in picking up the growth of.
The device customers and we're obviously getting a little bit better than our fair share.
Okay outstanding.
And then can you also give us a sense of the momentum you're seeing right now in your us.
Oh RC business.
You know, Matt this conversation not dissimilar from what we've been saying that is that business is continuing to grow its growing nicely faster than our average growth.
And it will grow in a little bit lumpy terms, probably in the short run, but I can tell you that the pipeline of people who are interested in doing things continues to grow and we feel very good about the growth prospects going forward.
All right and then lastly international versus first half versus us.
There have been other other companies that have indicated theres been some some international cap equipment delays.
Any chen trends, you're seeing like differently there versus versus here.
Yes, you know.
We've seen Europe is kind of flat. So if you look at that relative to the U.S. No question that it has not grown as the U.S.U.S. has been hot now for a while and continues hot in our view.
Latin America for US has kind of picked up.
Since the relative volume there is small it's hard to tell if we just picked up some orders or if the market is a little stronger, but we feel much better about Latin America and Asia Pacific has also done nicely. So we're comfortable there so that the kind of the weak spot. If you will for growth has been in Europe , the last little bit and I think thats consistent with what other people have reported.
Thank you very much.
The bank.
Sorry, Okay. Thank you and the next question comes from Chris Cooley with Stephens.
Good morning, appreciate you taking the questions.
Walter trying to think when the last time, it's been that I've seen you actually raised guidance on the first fiscal quarter and it's been some time.
I guess I suspect Chris you haven't found one [laughter], that's right, but my memory starts to lose me now at this age.
So I guess two quick questions for me.
One when we look at the quarter, obviously, it was very very strong.
But if we did one in that anything it's the rate of growth in the backlog did decelerate, both within healthcare capital and as expected our within the life Science space could you just maybe remind us what you're seeing there.
Well I think the life Science segment makes a lot of sense and as expected.
The the deceleration to basically 6% growth in the backlog year over year.
Little bit lower than maybe I would have anticipated, but just maybe talk to us a little about what you're seeing.
In the capital environment Health care capital environment in the short run and I have a quick follow up.
Yeah, Chris we're not seeing any deceleration of.
I'll call it pipeline order pipeline coming in fact, if anything it would be the opposite so.
Backlog is a relatively small piece of orders and you know its in its orders might have shipments. So we shipped we shipped a bit more.
In this quarter than you might have expected and the backlog fell a little bit but in terms of.
Order order rates pipeline.
We're not seeing any any decline. So this is a temporal change which often happens in capital in any given any given quarter and as you know we we've grown backlog a lot in the last 12 months and so big drops off a little bit doesn't concern is there some point, which in fact.
We have two types of order some that ship in.
12 to 18 months and some that ship in and use of more like six to nine and in health care and 12 to 24 and my science.
But.
There are some points if you have a lot of your backlog that is asap type backlog, having too much actually is as a problem. So.
We have a bunch of ASP as repeat orders from customers, we try to get them out as quickly as we can so this does not concern us at all and it does not reflect any concern in our view of orders coming in the pipeline for orders and Chris. This is Mike the other number that that well you are correct in the 6%, but if you look at sequentially, we are up $33 million or 21%. So again it has a lot to do with timing and fluctuations.
And we were up 7% growth in capital equipment for the quarter, which is a little bit higher than we typically see anyhow. So it's all about the timing again towards point I don't think there's any concern on our end, but I mean, I don't disagree Chris we see shrinking backlog then that would give you pause.
It's just the backlog of such a small piece your total shipments that the order rates coming in that were more interested in and that still looks strong.
Okay I appreciate the additional color to that's what I thought.
Just just lastly, then for me when you look at Citi.
I believe you've got a new high watermark for operating margin in the quarter.
Looking back historically, which is really impressive so talk to us maybe about where you are in terms of existing capacity utilization, maybe how the mix has shifted.
Across sterilization techniques, especially just trying to get a little bit better feel for is this can we improve upon this new high watermark as we go through the fiscal year or is this kind of the new new normal as we as we model that business. Thanks, so much.
Sure Chris Great question, and you know in terms of that our plants when when we grow faster than we expect and as we have said we are building plan. So our plans are getting pretty full and it's more a function of our plants being very nicely utilized right now on a percentage run basis than kind of any other factor. So.
You know that we will see temporal fluctuations in those numbers and right now we're running pretty hot I wouldn't I wouldn't bet my life on 44% the rest of the time, but.
Obviously, we've been.
Hi, Thirtys and low fortys for a while I think those numbers are reasonable numbers to be thinking about.
Congratulations on the quarter.
Thanks, Chris.
Thank you and the next question comes from Jason Rodgers with Great Lakes review.
Ah, Yes, I'm just looking at your improved outlook kind of health care product side, how much would you say that is due to the new product introductions is there anything on the consumable or the equipment side that you would consider a needle mover there.
Yeah, you know on that.
I've I've forgotten exactly the number but we have something on the order 2030.
New products that we introduced last year, which are really whats filling the pipeline for this year and we have 20 or 30, new products that we're going to introduce this year and I might even be a little on the light side on the health care.
Product side so.
It's not any one silver bullet, it's just a lot of new products that are picking up steam I mentioned, the ones, where we've seen some kind of significant growth I mentioned that in the tax do you know the.
For the sterility assurance products are growing quite nicely for US right now we have a number of new products in that space.
V Pro V Pro is driven not by new consumable, but by new products, New capital products as we place those new capital products and we have just a completely new line of V Pro now and those new capital products does do drive.
The consumables or allow the consumables to grow so.
And then our ICEE business again, we have multiple new products in the Israeli cleaning chemistries and those are just continuing to take hold we think we have the best line in and I see see though biomar by a significant margin. So they continue to grow so it's and it's not any one product and Theres a series of also sterilizers washers, particularly for Europe .
We're not seeing any one product be a dominant force here, it's just multiple products and the combination of them.
Washers sterilizers and the the things that go with them or I and tables and lights and the things that go with them. It's not so much a single product is the family of products working together that I think is the driver.
All right and any change in expectations for the impact on the Terrace I don't think it's immaterial, but I just wanted to check on that.
Good check.
As you know our best estimate at this time of the newest round of China tariffs is something on the order of a million dollars a year. So.
Although we don't like seeing a million dollars your disappear, it's well within the guidance range that weve laid out.
All right. Thank you.
Thank you.
And the next question comes from Mitch around go Paul with Sidoti.
Yes, hi, good morning.
Couple of questions first.
On the restructuring plan announced back in December I was just wondering if you're still.
I'm holding to about the 12 million of cost savings at half this year and a half next year.
Joseph has yet you are we are we are on target that a that $6 million will be mostly in the back half of the year, which is reflected in our outlook for the savings and we are definitely tracking on target. Good question.
Okay, Thanks, and make it looks like you might have done a tuck in acquisition.
This quarter I was just wondering if you had any additional color on that.
Yeah, we did a.
Small acquisition in middle of the quarter. It was a systems acquisition in our health care space, specifically in our IP T. infection prevention technology space.
That will generate somewhere in the neighborhood of around $10 million of revenue this year.
Okay. Thanks that was great and then just coming back on the life Sciences business I know that it's obviously been a little lumpy in the past, but if you look at it.
The last couple of years has actually been holding up.
Pretty well I was just wondering.
If you think going forward, we should continue to see kind of Cds.
Numbers in terms of where the backlog is.
Yes.
As we said we had this huge run up of business, probably three years ago now it's hard to remember but.
Where we were growing 2020, 5% a year for 18 months or 24 months or so and then we've we've sort of leveled off at that level, we're very comfortable that level, our backlogs remain roughly in the $60 million range and when we're in that range of backlog. We feel we can do these numbers on the capital equipment side.
In life Science.
You know, we're pretty comfortable that we're seeing.
Growth, but its modest growth more in line with single digit low single digit kind of growth not atypical of capital equipment.
But it is lumpy I know the this last quarter I get 30, 540% up so.
And and the previous quarter was off a little bit so thats kind of the way that business, where it's relatively small amounts of business that comes in large sizes. Those machines can be a million and a half dollars apiece. So you get a couple of those together and you have a really good quarter a couple of them slip into the next quarter you have a weak quarter.
But we're pretty comfortable sustaining that level at least at this point in time and our visibility on future looks that way as well so.
We're pretty comfortable there the consumable side is continuing to grow very nicely and we anticipate that continuing.
Okay. Thanks, that's very helpful and congrats again on a great quarter.
Thank you.
Thank you and once again. Please press Star then one if you would like to ask your question.
And the next question comes from Larry Keusch with Raymond James.
Hey.
[noise] good morning, everyone. So so two questions Walt.
You know look I appreciate the strong start to the to the year and the increase in the organic constant currency guidance to that 6% to 7% range, but.
Given that you just came off at 10% organic quarter.
How do we reconcile that you know the implied deceleration as you move through the year.
You know Larry or we just had a high quarter and I don't I don't think we would characterize our entire business growing 10% a year going forward.
So obviously I mean, the math suggests a slowdown I'm.
I haven't done the actual numbers myself I'm guessing in the five to six range something like that to get to that which is well within our normal range. So we had a high quarter.
We're having a strong year, we anticipate continuing to have a strong year, but we were not ready to say were 10% growth at infinity. So I think that's pretty much a reconciliation.
Okay, perfect and then.
Just given that the dollar as you know generally continued to strengthen and <unk> can you remind us again, just how we should be thinking about.
Some of the impacts from the currencies, whether it be the Mexican peso or where the pound.
Yeah, Larry This is Mike so what in general what we tend to to like as a strong euro and a strong pound.
And then on the opposite side, we tend to like a weak peso and a weak Canadian dollar and the reasons for that is on the Canadian side and the Mexican side, we have manufacturing so the lower the cost of the better for US and then on the euro and the pound.
We have a sales channel so we get more benefit by having those currencies that.
The pound and the euro at a much higher.
Exchange rate than the dollar and the euro and pound are largely service businesses for us it's heavily more heavily weighted to service as opposed to product. So the revenue and cost travel together, but the margin component shrinks if its.
If it's if the the those currency shrink.
But I would say to Larry all people, who export which we do export a fair amount.
You know a and we export a fair amount from the United States, not just from Canada, and Mexico, and France, and Finland, where we have products.
And the UK, so we export from all those places too.
A lot of other countries and so you know pressure on those for as those currencies rise it puts pressure on us, but we're getting to where we're fairly neutral.
To those kind of questions because it it's rare for the five or six currency that reeled off where we have manufacturing plants to all be moving the same direction. He gets everybody else. So we're we're more.
Naturally hedged both on a profit basis and on a overall can we sell things that.
Ah against tougher currencies were more heads than we've ever been.
Okay, perfect and just lastly on that can you just remind me I just don't have it off the top of my head where were there any changes made to the FX outlook for the year on this quarter.
Oh, we did increase the negative impact for revenue to $10 million.
And we still believe EBIT is neutral so no no impact on the bottom line, but the increase on the negative side on the top line. Okay. Perfect. Thanks, Mike Thanks, a lot.
You're welcome Thanks, Larry.
Thank you and the next question comes on Dod there together with JMP Securities.
Thank you and congrats Walt.
Just one sort of a high level question here, we've kept it kind of.
Talked around this a bit but you know in the past.
Noting that in every time, there's a surgical procedure in a hospital, there's a revenue opportunity for Steris I'd love to get your thoughts on.
Hospital volumes procedure volumes and what you think is sort of happening.
If we look at this quarter really across segments in the medical device World, There's a lot of strength in.
I don't know.
Pointing to any specifics I'm curious if you're seeing anything that's maybe driving an increase in surgical procedures or no.
Operations.
Yeah, well I know you're exactly right. We clearly are seeing strength in medical devices in terms of volumes.
Uh huh.
Yeah every hospital that I've talked to recently tells me there are as busy and so we're seeing those facilities busy now you have to separate you asked about hospitals you have to separate inpatient care.
From inpatient surgeries from outpatient surgeries and.
For our purposes, we don't really care of the surgery is inpatient or outpatient in Bowie I use surgery in the broadest sense. It can be any number of procedures like in the endoscopy procedures, where are you at the das business.
Works really well if they're doing those procedure so.
Procedures in hospitals and door ambulatory surgery centers or G.I. centers or other procedural centers in our view it has clearly been strong.
We've said before for the long term if you look at the high level and for the long term, we have the baby boom in North America running through it in much of Western Europe and that baby boom. A you know once to have new gives a new shoulders in a scope me in.
Multiple other issues and as fast as ambulatory surgery is growing which it is in inventory surgery in the U.S. release, the fastest growing area for.
Our business as fast as it's growing it's also getting more complexity to it and they need to do have real sterilization capabilities in ambulatory surgery centers and other G.I. centers and by the same token there are more and more complex surgeries being done.
In the acute settings, and so even though it looks like Oh Gee, we only did five surgeries, but two of them are double transplants.
That's very different than doing five scold me. So I think both the complexity of surgeries in acute care continues to rise in inventory surgery, we're seeing faster growth as the less intensive procedures are moving more and more of the inventory setting where patients want them to be.
And then and we have this push of the baby boom coming through who is going to require more and more in all across the western world or the industrialized world and then the non industrialized world as their GDP per capita rises more and more people can afford this kind of health care. So we think the long term outlook for the rate of procedures is quite good and which is why we've invested in that space.
Thank you for all the detail.
Thank you and next is a fall from Matthew Mishan with Keybanc.
Right Okay great.
You just have a follow up to a to David's question.
I guess, just how has your vote your value proposition to the hospital system kind of yes, especially with the rise of in share of the seas.
Changed over like the last couple of years.
Well you know, Matt I would say I don't think it's radically change in a couple of years, but what we have done as you have seen as we bring more and more products and services around this procedural space and so we are stronger today due to the family of products and services you know, bringing in Imus. So we can help them with their surgical instruments, bringing in the O. RC concepts bring in the mobile units that were if they're out of capacity. We can help them out. In addition to all the new products and services that we brought him into the healthcare product. We just are a much stronger entity and more able to help them in many different ways in the procedural areas and so.
But I wouldn't call. It a radical change you know in the last two years, but if you look at the last dozen years, you know were very different entity. When we're facing the hospital procedures that we were 10 years ago, let's say.
Okay.
And then last quarter, you talked a little bit about.
Some some.
Stocking ahead of Brexit, Utah, and you talked about that.
As well as a shift in manufacturing in life Sciences positively impacting sales by about $5 million to $10 million and then you also talked about.
The headwind from your your larger restructuring that you're absorbing on top of that can you just talk a little bit of maybe about the timing of those.
And when do you expect to see to see that those shifts.
Through 2020.
Yeah, Matt Great question, then I'll kind of try to walk through the two or three items that you mentioned actually.
First of all these be Brexit and well always be Brexit, we said at the time were pretty sure. There was about 5 million pull forward and we had no idea how much else it might be and so we were guessing in the $5 million to $10 million range. We still don't really know because you know we don't have visibility to do all that space, but but the fact that the quarter stayed very strong.
Suggest that it wasn't 10.
Did you know it was probably closer to the five number that we were well aware of plus or minus a million or two but as you know we were feeling a bit more comfortable that if it was the the known numbers plus a little as opposed to the no numbers times, two or three or four.
So and so that's 0.1 0.2, given the fact Brexit has not adjudicated you know we do think whatever that number is some point in the future and I suspect it would be after it may be well after.
The dust settles on how.
The UK is going to Brexit or not.
You know I would but I wouldn't see I think they just speaking from ourselves. The buildup. We've made we're not playing to pull it down and then build it back up again, we're just letting it sit there until they sort out Brexit et cetera, We think I think thats. The most logical thing. So you tell me when and how they are going to exit and I'll give you the answer but I think we're more comfortable within a few million dollar range.
In terms of our plant closure, we saw exactly what we expected there was order pull forward and those orders fell off in the quarter. So that we're over that that's done that's part of the reason we feel comfortable.
Even more coupled with a forecast because we absorbed that without in fact, not only without a loss, but that's still was at our plants. So we absorbed that that one.
And in terms of the the the product closures that that will still.
Be out there over probably the next 12 to 15 months, but it's relatively small numbers will be spread over a large number of months. So I don't think you'll notice it.
I think I hit all the topics there Matt.
Yeah, I think you have them.
Thank you and as our interim questions or would like to return the Florida, Julie winter for any closing comments.
Thank you Keith and thank you everyone for joining us this morning and for your continued support if there have a great day.
Thank you the conference.
Good. Thank you for attending today's presentation you may now disconnect your lines.
[noise].