STERIS Q3 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 6, 2025
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Operator

Good day and welcome to the STERIS PLC Third Quarter 2025 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 than one on your touchtone phone. And to withdraw your question, please press star than two. Please note this event is being recorded.

I would now like to turn the conference over to Ms Julie Winter. Please go-ahead.

Julie Winter
Vice President, Investor Relations and Corporate Communications at STERIS

Thank you, Chuck, and good morning, everyone. As usual, speaking on today's call will be Mike Tokit, our Senior Vice-President and CFO; and Dan Crecio, our President and CEO. I do have a few words of caution before we open for comments. This webcast contains time-sensitive information and is accurate only as of today. Any redistribution, retransmission or rebroadcast of this call without the expressed written consent of Steris is strictly prohibited.

Some of the statements made during this review are or may be considered forward-looking statements. 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 Steris' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. Steris' 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. Additional information regarding these measures, including definitions, is available in our 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 cautions, I will hand the call over to Mike.

Michael J. Tokich
Senior VP & CFO at STERIS

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 3rd-quarter performance from continuing operations.

For the 3rd-quarter, total revenue reported -- as-reported grew 6% with constant-currency organic revenue also growing 6% for the quarter, driven y volume as well as 240 basis-points of price. Gross margin for the quarter increased 90 basis-points compared with the prior year to 44.6%. Positive -- positive price and productivity offset labor inflation. EBIT margin decreased 10 basis-points to 23.3% of revenue compared with last year's 3rd-quarter. Litigation expense associated with our ethylene oxide trial, which began in December, as well as increased healthcare benefit costs from higher utilization by employees of our healthcare benefits program accounted for over $10 million of additional expense year-over-year in the 3rd-quarter.

The adjusted effective tax-rate in the quarter was 24.5%. The year-over-year increase is attributable to unfavorable discrete items. Net income from continuing operations in the quarter was $229 million. Adjusted earnings per diluted share from continuing operations was $2.32, an 11% increase over last year. We are pleased with our ability to grow earnings double-digits all year with the help of lower interest expense following the divestiture of the Dental segment.

Capital expenditures for the first-nine months of fiscal 2025 totaled $299 million and depreciation and amortization totaled $354 million. Capital expenditures were higher year-over-year, mainly due to timing. We continued to pay-down debt during the quarter, ending with $2.2 billion in total debt. Total debt-to-EBITDA at quarter-end was approximately 1.5 times gross leverage. Free-cash flow for the first-nine months of fiscal 2025 was $588 million, well on-track to achieve our full-year guidance of approximately $700 million.

With that, I'll turn the call over to Dan for his remarks.

Daniel A. Carestio
President and CEO at STERIS

Thanks, Mike, and good morning, everyone. Thank you for joining us to hear more about our 3rd-quarter performance and our outlook for the fiscal year. As you heard from Mike, we had another strong quarter. Looking at our segments, Healthcare constant-currency organic revenue grew 7% in the quarter, led once again by strong recurring revenue streams. Our outperformance in consumables and services continues to be driven by procedure volumes in the US as well as price and market-share gains.

Healthcare capital equipment revenue declined 5% in the quarter due primarily to the timing of shipments. Orders grew over 10% in the 3rd-quarter, which is reflected in the $435 million healthcare backlog. While order growth remains robust, shipments were delayed by customer project delays. Margins improved nicely in healthcare with volume, pricing and positive productivity offsetting labor inflation.

Turning to AST. Constant-currency organic revenue grew 10% with 10% growth in services and a small decline in capital equipment shipments. Supporting growth in services, global medtech customers were stable and we saw growth in bioprocessing demand above our expectations. EBIT margins for AST were flat year-over-year and increased nicely sequentially. While the additional volume was helpful, we continue to be impacted by higher labor and energy costs.

Constant-currency organic revenue declined 1% for the Life Sciences Group in the quarter, driven once again by strong growth in consumables and services, offset by a decline in capital equipment revenue. As expected, the divestiture of the CECS business on April 1st impacted our as-reported revenue. Margins increased to 42.6%, a 390 basis-point improvement, benefiting from favorable mix, pricing and the divestiture of CECS.

Turning to our outlook for 2025. With 3/4 under our belt, we are tightening our ranges for revenue and earnings. As mentioned in the press release, the biggest change since last quarter is the unfavorable impact of currency rate changes impacting both revenue and profit. In addition, we were shy of our revenue expectations in the 3rd-quarter for healthcare capital equipment. As a result, our outlook for as-reported revenue from continuing operations is now approximately 6%. Constant-currency organic revenue growth is also expected to be approximately 6%. Reflecting approximately $0.10 of impact from negative currency, adjusted earnings per diluted share are now expected to be in the range of $9.05 to $9.15. Our expectations for free-cash flow are unchanged at about $700 million with approximately $360 million in capital spending.

Before I conclude, I would like to comment on the first ethylene oxide case to be tried against isomedics, which ended in a miss trial last month. As you heard from Mike, we have incurred significant expenses defending isometics. But we believe that when the evidence of safety practices and the scientific data-related to ethylene oxide exposure is fairly presented at trial, reasonable people will conclude that there is no connection between the unfortunate medical conditions of the claimants in isomedics operations. We believe the evidence presented during the four weeks of trial demonstrated that during the 44 months of isomedics ownership, his conduct complied with applicable law and was reasonable, transparent and protective of our people, our neighbors and the environment.

After the court granted the plaintiff' request for mistrial. We learned that the majority of the remaining jurors supported a verdict in favor at the time that deliberations were terminated. The court has scheduled this first trial for the first case for retrial in May of this year, and we will continue to vigorously defend in these cases. We have continued to invest in these facilities. We have created processes and procedures that meet or exceed the applicable environmental and regulatory standards.

That concludes our prepared remarks for the call. Julie, would you please give the instructions so we can begin the Q&A?

Julie Winter
Vice President, Investor Relations and Corporate Communications at STERIS

Thank you, Mike and Dan, for your comments. Chuck, can you please give the instructions for Q&A and we'll get started.

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Operator

Yes, ma'am. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speaker phone, please pick-up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then to.

And our first question of today will come from Jacob Johnson with Stephens. Please go-ahead.

Jacob Johnson
Analyst at Stephens

Hey, good morning. Thanks for taking the questions. I guess I'll start with the inevitable healthcare capital equipment question. Dan, you mentioned timing of orders in 3Q and you talked about the updated guidance. You also talked about strong order growth. Do you think this is this -- what you're seeing in healthcare capital equipment is just related to timing of orders? And is it kind of specific to 3Q or are you seeing any hesitancy from hospitals on kind of capex spend right now?

Daniel A. Carestio
President and CEO at STERIS

The spending is still great because we're seeing the new orders come in. What we're seeing is just delays. The customers are just not ready from what they prescribe to us as the original want date when they make the order. And then we're contacting customers a month or weeks in advance and they're saying, guys, we're not going to be ready to take it at the end-of-the month. I can't say definitively at this point that that's a trend because there's a couple of big orders that have moved the needle in the last quarter or two. But generally speaking, it's something that we're seeing that's occurring with our customers in terms of pushing out some of the timing of us shipping.

Jacob Johnson
Analyst at Stephens

Okay. That's helpful. And then maybe on the good guy side of things, you mentioned bioprocessing outpacing expectation at AST. I think we've seen that for some of the bioprocessing reports thus far this quarter. Just curious kind of what -- if you could unpack kind of the trends you're seeing in that bioprocessing end-market and what that could mean as we look out over next year for AST?

Daniel A. Carestio
President and CEO at STERIS

Well, I think in a general statement, last year, Q2, Q3 was kind of the trough that we saw in terms of demand through our facilities, which doesn't always necessarily correlate directly with the customers because it depends on where inventory is in the supply-chain and how much inventory sits at the end-customer, right, their customer. But what you've seen as they've reported their earnings and the comments we've heard is that there seems to be some optimism and some positive trend of intake and obviously, we're seeing that flow-through our AST facilities.

I'm optimistic to think that we've sort of worked through the inventory challenges and we've been consistent in our messaging saying this has been a relatively small but high-growth business for us for some time that we believe was taking a reset. And I believe that we're through that reset period and hope to have more normalized growth going-forward.

Jacob Johnson
Analyst at Stephens

I'm hopefully you're right on that as well. I'll jump back-in queue. Thanks for taking the questions.

Daniel A. Carestio
President and CEO at STERIS

Sure, thanks.

Operator

The next question will come from Brett Fishbin with KeyBanc. Please go-ahead.

Brett Fishbin
Analyst at KeyBanc

Hey, thanks very much for taking the questions. Just one on the guidance. I noticed in the press release that there was an indication that you're assuming no tariffs for the remainder of the fiscal year, which I think makes sense at this point based on what we know. Just thinking ahead to FY '26, could you help frame how you're viewing the potential risk in the scenario that tariffs are in fact reintroduced in regions such as Canada and Mexico? Thank you.

Michael J. Tokich
Senior VP & CFO at STERIS

Yeah, Brett, we -- like others, we've done thorough analysis, looked at it many different ways and the situation is so fluid at this point in time, we're not going to comment directionally as to what the impact could be. We're going to take more of a wait-and-see approach, but believe us, we are working hard behind the scenes to understand what the impact is and what our options are in order to help alleviate some of that impact. And if you remember, we do have a facility in Quebec, Canada and one facility in Monterey, Mexico. And in total, they're about just under 10% of our cost-of-goods-sold just to give you some frame of reference.

Brett Fishbin
Analyst at KeyBanc

All right. That's a helpful metric to keep in mind. Thank you. And then just a follow-up question on cost. I think you mentioned a step-up in legal expense as one of the drivers of the elevated or increased opex this quarter. So just wondering if you could touch on how we should be thinking about legal expense on a go-forward basis on and maybe also just the decision or accounting reason to not adjust if they're abnormal type of expenses? Thank you.

Daniel A. Carestio
President and CEO at STERIS

Yeah, they are all recorded in our corporate expenses. They are not in the segment themselves. So this quarter, we incurred about just under $6 million in year-over-year increase in expenses. And year-to-date, we are about just over $10 million. We anticipate probably another couple of million dollars, $5-ish million in the 4th-quarter from an expense standpoint as a headwind that we've included in our forecast. The next question will come from Michael Polark with Wolfe Research. Please go-ahead.

Michael Polark
Analyst at Wolfe Research

Hey, good morning. Question on AST, seeing the services accelerate to 10%, heard the bioprocess comments. Also heard medtech customers stable. What does stable mean? Just like revenue flat? Can you give us an update on where you think inventory management headwinds are with that cohort?

Daniel A. Carestio
President and CEO at STERIS

Yeah, this is Dan. Sorry, that was probably vague. It's not flat, but back to what we would expect as more normalized growth ranges in the low-single digits in terms of volume.

Michael Polark
Analyst at Wolfe Research

So just on AST kind of putting it all together, obviously, 10 plus is the target growth rate here. We're seeing it in the quarter. When we saw the seven a few quarters ago, okay, maybe that was a sign of the turn, we kind of faded a little bit. Can you just comment on your level of confidence that this feels like a solid kind of step-up or is it still that you know you're working to better understand what the situations really are and we could have a chop around here on growth in AST for the next few quarters still?

Daniel A. Carestio
President and CEO at STERIS

Yeah, I'm -- I don't think it's that far-out. I think what I would say is we're cautiously optimistic in the trend that we've seen in the last couple of quarters. I would caution you in that we have seen sort of a manufacturing bullwhip effect from customers from time-to-time. So I'm not ready to declare victory and move on quite yet as it relates to 1/4 of 10% growth, but we're -- we're enthusiastic to see the trend back-in the direction where we'd like it to be.

Michael Polark
Analyst at Wolfe Research

Yeah. And if I can ask one follow-up on healthcare Capital. I heard the comments timing of large shipment delays, timing of large products, projects get it. Is there any part of this that's Steris is just kind of managing after a three-year period of ebbs and flows with the supply-chain stuff, kind of managing the revenue level in that line down to a place where you can -- you can expect to grow it again in fiscal '26. Is there any element of that in the update today?

Daniel A. Carestio
President and CEO at STERIS

I think it's too early to say. We're in our planning process now for next fiscal year. And I know we're off-cycle from a lot of companies, but we're just working hard to get through the 4th-quarter deliver for the customers and we'll update you, obviously at the next earnings call.

Michael Polark
Analyst at Wolfe Research

Thank you.

Daniel A. Carestio
President and CEO at STERIS

Yeah.

Operator

The next question will come from Jason Bidner with Piper Sandler. Please go-ahead.

Jason Bednar
Analyst at Piper Sandler Companies

Hey, good morning. Thanks for taking the questions. Maybe first one just to start, margin performance was really strong in each of healthcare and LifeSci. I think a record for healthcare, at least the highest we've seen in our model. So congrats on all that. I did want to ask, just can you talk about maybe sustainability of these margins, especially in healthcare as we think through some of the moving parts of possible mix shifts, restructuring savings, different dynamics that could impact here over the next several quarters?

Michael J. Tokich
Senior VP & CFO at STERIS

Yes, Jason, this is Mike. Yeah, I mean if you look at healthcare and life sciences, both, they're both being impacted by favorable volume of -- and mix and price. And healthcare actually for the first time all year, we actually started seeing productivity improvements, which is great because we've been looking-forward to seeing that. I would say for the rest of this year, we probably are on-track. We're not going to comment as to FY '26 at this point in time, but we are definitely happy that we're seeing the leverage in healthcare. And don't forget, on that life sciences side, next year is going to be a lot harder because of that mix, favorable mix, capital equipment should come back. It's down 30 some percent year-over-year. So we're definitely getting a big benefit out-of-the higher consumables and service mix. But all-in all, we're very pleased with the margin improvement across-the-board for our segments.

Jason Bednar
Analyst at Piper Sandler Companies

All right. Congrats,. If I could shift over to the EO update, I know probably limited on what all we can talk about here, but we have the retrial set for May. Can you say, Dan, does the timing here of this trial, the retrial affect other cases that were in-line to be tried? I think there was another one that had been set for the spring. I just don't know if that ends up getting pushed out because of this retrial they have to be tried in a certain order. And then secondarily, can you comment on whether any additional cases have been added for you beyond what was disclosed last quarter?

Daniel A. Carestio
President and CEO at STERIS

Yeah, sure. So you have it exactly right. The judge elected on the miss trial to push-out what was originally scheduled as the second case group to be pushed later into this summer sometime to be -- I don't remember the exact tentative date, but -- and pull the first case back to the retrying, which is the May case. So -- and no, we do not have any additional cases at this point.

Jason Bednar
Analyst at Piper Sandler Companies

All right. Thanks so much.

Operator

The next question will come from Patrick Wood with Morgan Stanley. Please go-ahead.

Patrick Wood
Analyst at Morgan Stanley

Hey guys, thank you so much and apologies for the crackly voice on my end. I guess two from me. One would be obviously under a slightly different political environment. Do you think there's any opportunity for the intensity of the legislative change around EO to loosen up a little bit or any change in how that might be implemented? How do you feel about the new administration and how that might change EO's use?

Daniel A. Carestio
President and CEO at STERIS

Well, I mean, the rules already out there, both in the ID and in the knee shaf. And we've been working hard to make sure that we'll comply with that within the deadline. And I think we're incredibly well-positioned to do that. Clearly, there's a shake-up going on in the EPA, but it's unlikely they're going to retract a rule that's already in-place at this point in my view.

Patrick Wood
Analyst at Morgan Stanley

Yeah, I forget as much. And then the second one bit random on the endoscopy side of the business. Just curious what you're seeing both in the demand for your scopes on the volume side, but then also on the reprocessing side, how things are going there? Thanks.

Daniel A. Carestio
President and CEO at STERIS

Yeah, in a general sense, I mean we've done -- we've continued to do really well, especially on the reprocessing side. We've placed a lot of capital and we have a lot of chemistry flowing through that capital that's that sort of the pull-through that we've got over the last, I don't know, good year now of high capital shipments relative to medivators products, the AERs.In terms of the endoscopy products, we're doing fine. We could be doing better, frankly. I think we're growing about at-market in that space.

Patrick Wood
Analyst at Morgan Stanley

If you -- one final one if you had to guess how much of your, like say consumables business was accounted for on the repricing side with endoscopy just as a proportion, do you have a rough idea of where that sits?

Daniel A. Carestio
President and CEO at STERIS

Well, I don't know, Patrick.

Julie Winter
Vice President, Investor Relations and Corporate Communications at STERIS

No, the only data point we give is that endoscopy in total is about $1 billion business.

Jacob Johnson
Analyst at Stephens

That includes our capital though. Everything, totally got it. Awesome.

Patrick Wood
Analyst at Morgan Stanley

Thank you so much.

Daniel A. Carestio
President and CEO at STERIS

Sure, thanks.

Operator

Again, if you would like to ask a question, please press star, then one. Our next question will come from Mike Matson with Needham and Company. Please go-ahead.

Mike Matson
Analyst at

Yeah. Thanks for taking my questions. Just want to ask one in terms of your conversations with your customers and both the hospitals and the life science area. Are you hearing any concerns about potential policy changes in the new administration, maybe they're putting spending on-hold until they kind of wait-and-see what happens with potential changes there.

Michael J. Tokich
Senior VP & CFO at STERIS

Yeah, no, we haven't seen. In fact, we had a really good orders quarter, both in healthcare and in-life science capital. After an abysmal year in terms of orders in-life sciences, we are cautiously optimistic that pharma is doing what they typically do in their normal cyclical buying patterns and getting back towards the investment. And in terms of our large healthcare system customers, we haven't seen any change in their direction. I know there's a lot of uncertainty about how they're going to get paid and all those different things from a patient and from a government perspective, but we haven't seen it impact us at all at this point.

You got to keep in mind, we talk about this frequently, our product -- the majority of our products, especially the equipment side is really a utility and it's really procedure driven. It's not -- most of what we sell is not reimbursed product, you know from a government perspective.

Daniel A. Carestio
President and CEO at STERIS

And Mike, just And Mike, just to give you a few numbers around that fact, we are up about 14% order growth in healthcare year-over-year, which is very strong for us. And if you look at our backlog, right, our backlog is roughly almost $85 million higher than what we anticipated in that $350 million range. So there's no concern there from our part on the order structure from the healthcare customers.

Mike Matson
Analyst at

Okay, got it. And then just wanted to get an update on ambulatory surgery centers. I think you talked about that being sort of a growth driver in the past. Is that still the case? And do you have any products or anything you've launched to kind of target that call point?

Michael J. Tokich
Senior VP & CFO at STERIS

Yeah. No, we still see it that way. There's clearly migration going on out of large acute-care into satellite and smaller facilities, and that's a trend that's been going on for quite some time. We do have a portfolio that is specifically geared for that on the equipment side, both in our surgical products as well as our SPD sterile processing equipment and we do have dedicated channel in that space as well. So we're putting resources and people and R&D investment into it. And I'm confident that we're going to be well-positioned in that space.

Mike Matson
Analyst at

Okay, got it. Thank you.

Operator

So the next question is a follow-up from Michael Polark with Wolfe Research. Please go-ahead.

Michael Polark
Analyst at Wolfe Research

Appreciate it. Two more if I may. On healthcare services, I have a suspicion about how you're going to answer this, but can you just unpack, I mean, the growth drivers there, really good performance teens. Again, I believe it's all organic, has been so for a while. Is this sustainable? What's a good base-case here on growth profile as we roll into next year?

Michael J. Tokich
Senior VP & CFO at STERIS

Yeah. It's complicated is what I would say. But in a good way. I think we -- a lot of that is a significant portion of our services business is our traditional equipment services, right? And we've placed a lot of equipment over the last couple of years. And as the equipment comes off of warranty, we have a very-high contract rate in terms of making sure that we get those folks under our contracts. And where they don't get under contracts, we have a great partnership program with the biomeds at the healthcare facilities to ensure that they're buying our parts and using us for consultation on service repair.

Daniel A. Carestio
President and CEO at STERIS

In terms of our general repair business for the scopes and things like that, that's been a really strong piece of business for us. You know, maybe it even gets stronger, people delay capital purchases on scopes and need more repair, not sure, hard to say. But generally speaking, we don't see those trends reverting. The only thing I would say is that as inflation continues to come down, our ability to get the level of price to cover our costs that we've seen over the last year and a half or so in the services business will probably come down a bit as well.

Michael Polark
Analyst at Wolfe Research

Helpful. Life sciences, maybe tying in the bioprocess take from AST. I know they're typically different kind of customer cohorts, but how do you assess the prospects for life sciences to return to organic growth over the next year or so, what are you seeing from those customers?

Daniel A. Carestio
President and CEO at STERIS

Well, what I would say is life sciences in a whole this year -- as a whole this year is not that impressive, but it's because of the capital slowdown that we've seen there. The engine of that business is really our consumables business and we're seeing significant growth in that space and actually a few quarters ahead of what we've seen in the bioprocessing customers of AST, where there's a lot more destocking going on. So we're optimistic on the growth trends that we're seeing there and our position in the aseptic manufacturing environment of pharma.

Michael Polark
Analyst at Wolfe Research

Thanks for taking the follow-ups.

Daniel A. Carestio
President and CEO at STERIS

Yeah, sure. Thanks. The next question will come from Dave with Citizens. Please go-ahead.

David Turkaly
Analyst at Citizens Jmp

Hey, good morning. Simon, jumping around a little. I know you don't want to give guidance, so this may not fly, but I'll give it a shot. So, Mike, you mentioned 14% order growth. You mentioned the backlog, you know, the level and just looking at the trends and obviously realizing that healthcare has gotten a lot bigger, but in the overall business, it seems like there's a shift kind of towards that even towards the mid to higher single-digit. I'm just thinking out loud here that seems like something we've seen for a while now and maybe that's a new normal. I don't know if you have any comment on that.

Michael J. Tokich
Senior VP & CFO at STERIS

No, we're very happy, Dave, where we are and where we have been with healthcare. Obviously, a nice try on trying to get us to talk about '26, but we will wait to talk about '26 until May. But again, we're very pleased where we're at. The only thing we're a little displeased with is just the timing of the shipments, right, because we're taking the orders. It's taking us a little bit longer, as Dan talked about, to get those orders out-the-door. But at the end-of-the day, as long as it is in backlog, our cancellation rate is nil and has been nil. So we are confident that those orders get-out and we'll talk more about the timing of when those shipments happen in next quarter.

David Turkaly
Analyst at Citizens Jmp

Great. Thank you.

Operator

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.

Julie Winter
Vice President, Investor Relations and Corporate Communications at STERIS

Thanks everybody for taking the time to join us. We will be on the road a bit in both virtual and in-person conferences over the next few months and look-forward to catching-up with everyone.

Operator

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

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