STERIS Q2 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
November 7, 2024
Skip to Questions & Answers
Operator

Good day, everybody, and welcome to the STERIS plc Second Quarter 2025 Earnings Call. [Operator Instructions]

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

Julie Winter
Investor Relations at STERIS

Thank you, Eric, and good morning, everyone. As usual, speaking on today's call will be Mike Tokich, our Senior Vice President and CFO; and Dan Carestio, 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. 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.

Mike Tokich
Senior Vice President & Chief Financial Officer 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 second quarter performance from continuing operations.

As you saw in the press release, we have continued the momentum from the start of the fiscal year. Total, as reported, revenue grew 7% in the second quarter. Constant currency organic revenue also grew 7% in the quarter, driven by volume, as well as 240 basis points of price. Gross margin for the quarter decreased 50 basis points compared with the prior year to 43.7%. Positive price and favorable material costs were offset by labor, inflation, and productivity. Reflecting the decline in gross margin, EBIT margin decreased 30 basis points to 22.2% of revenue compared with last year. The adjusted effective tax rate in the quarter was 22.7%. Net income from continuing operations in the quarter was $212.2 million, and adjusted earnings per share from continuing operations were $2.14, a 15% increase over last year. Capital expenditures for the first half of fiscal 2025 totaled $210 million, and depreciation and amortization totaled $228 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 half of fiscal 2025 was $344.5 million, right at the halfway mark of our full-year guidance of approximately $700 million.

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

Dan Carestio
President & Chief Executive Officer at STERIS

Thanks, Mike, and good morning, everyone. Thank you for joining us to hear more about our second quarter performance and our outlook for the rest of 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 U.S., as well as price and market share gains.

Healthcare capital equipment revenue declined 2% in the quarter due to the timing of shipments. Orders grew over 30% in the second quarter, which reflected in the $405 million healthcare backlog. We now anticipate that the healthcare capital equipment revenue will be flat to slightly down for fiscal 2025, mainly due to the timing of shipments during the fiscal year and the difficult fourth quarter comparisons. We remain confident in our expectations of a strong year for our healthcare segment and expect that the recurring revenue outperformance will more than make up for the lower capital equipment revenue. Margins have held up nicely in healthcare, with pricing, positive productivity, and lower material costs offsetting labor inflation.

Turning to AST, constant currency organic revenue grew 9%, with 6% growth in services and a significant quarter in the capital shipments. Supporting growth in services, global MedTech customers were stable, and we saw the first signs of increased bioprocessing demand.

We continue to anticipate bioprocessing revenue in the second half of our fiscal year will grow. EBIT margins in AST were impacted by labor and energy costs, which continue to increase for the segment. In addition, we recorded a longstanding loss on a capital equipment order in our Mevex business unit.

We would expect margins will improve from these levels in the second half of the year. Constant currency organic revenue growth for life sciences was 3% in the quarter, driven once again by strong growth in consumables. As expected, the divestiture of the CECS business on April 1st impacted our as-reported revenue. Margins benefited from favorable mix, pricing, and the divestiture.

Turning to our outlook for fiscal 2025, for the full year, we are reiterating our outlook from continuing operations, including 6% to 7% constant currency organic revenue growth and adjusted earnings per diluted share of $9.05 to $9.25. Our expectations for free cash flow are also unchanged at about $700 million, with about approximately $360 million in capital spending. For your modeling, we do have a few moving pieces we wanted to highlight.

From a segment perspective, life science revenue is now anticipated to be about flat for the year, with declines in capital equipment somewhat mitigated by the strength in consumables. Healthcare is now anticipated to grow mid-to-high single digits, with continued strength in recurring revenues. The outlook for AST continues to be high single-digit revenue growth for the year, but we know longer expect to exit the year at double-digit revenue growth.

All in, we expect constant currency organic revenue growth to be 6% to 7% for the full fiscal year. From a profit perspective, we now anticipate margins to be about flat for the year. All in, we are pleased with the first half of the fiscal year. The diversified nature of our segments continues to be a benefit to our total performance.

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

Julie Winter
Investor Relations at STERIS

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

Skip to Participants
Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question today comes from Jacob Johnson with Stephens. Please proceed with your question.

Jacob Johnson
Analyst at Stephens

Hey, good morning. Thanks for taking the questions. Maybe a couple on AST. First, just on the loss on the large equipment sale, can you frame up the magnitude of that loss, just how much of a headwind that was to margins in the segment given they were down sequentially? And then I'm curious, I think that was still included in your adjusted EPS. Was this something that was contemplated in the guidance for the year, or is this something kind of a bad -- proverbial bad guy that you're overcoming?

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

Jason, the impact to margins was about 200 basis points on that loss itself. And I mean, we had contemplated a loss, but not as large of a loss. So we were a little bit surprised by the amount. But it is a one-time event that will not reoccur. And it goes back to the original acquisition of Mevex back in, I think, 2020. We had taken quite a while to fulfill that order, and we had no ability to adjust the costing on that project.

Jacob Johnson
Analyst at Stephens

Got it. Thanks for that, Mike. And then, Dan, I heard you mention no longer exiting a year at double digits for AST, but then it seems like maybe some positive bioprocessing commentary there. You just talked about any kind of incremental headwinds you've seen in AST that could be offsetting bioprocessing, or maybe bioprocessing is not coming back as quick as you thought [Speech Overlap]

Dan Carestio
President & Chief Executive Officer at STERIS

We're actually very optimistic on bioprocessing being accretive to our growth, especially in the second half of the year. And, you know, I think at this point we're halfway through the year. And although the growth has been nice, it's not maybe where I'd hoped it would be from a MedTech perspective at this point. And although we see it continuing to improve based on run rate, I don't believe we're going to exit a double-digit multiple at this point. I think we're going to get there eventually. I'd hoped it would be by fourth quarter, and what we're seeing now is probably a little later than that.

Jacob Johnson
Analyst at Stephens

Got it. Thanks for that, Dan. I'll leave it there.

Operator

Thank you. Our next question will be from Brett Fishbin with KeyBanc. Please proceed with your question.

Brett Fishbin
Analyst at KeyBanc

Hey, guys. Thanks so much for taking the questions. Just one on the healthcare capital equipment updates. So, appreciate the update, moving from low single-digit growth expectation to flat to slightly down. I was really just hoping if you could parse that out a little bit, maybe between progress year-to-date versus where you thought you'd be coming into the quarter, and then maybe a little bit around the backlog moving pieces and why that stepped up this quarter. Thank you very much.

Dan Carestio
President & Chief Executive Officer at STERIS

Yeah, I mean, a little bit of detail. I mean, on the quarter specifically, it wasn't the best quarter for shipments. We ran into some weather-related delays and things like that with the hurricanes at the end of the quarter that did impact some shipments, especially in the Southeast.

Our backlog remains incredibly strong, and we keep stacking up really strong order months on top of each other, especially in the healthcare organization. The reality is that, with six months remaining to book and ship, we're talking about margins of 1% or 2% in one direction or the other. I wouldn't spend too much time on this in terms of -- and more importantly, we're more than offsetting it with the higher profit mix of consumables and services that's coming through.

Brett Fishbin
Analyst at KeyBanc

All right, cool. And then just as my follow-up on the operating margin expectation, is the change in language really just tied to the piece of, you know, call it sequential improvement at AST and the favorable revenue mix, or is there anything else that changed from the prior quarter? And then maybe as just a follow-up to that, how do we get confident or investors get confident in your ability to return to a level of operating margin expansion for next year? Thank you again.

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

Yeah, Brett, the impact is definitely related to AST. Obviously, with AST not performing at our expectations and exiting at double digits, we are not going to be able to drive that EBIT margin improvement. Other than that, I would say there's nothing else that we would point to that would stop us from obtaining our long-term goal of continuing to expand EBIT margin on an annual basis.

Operator

Thank you. Our next question comes from Patrick Wood with Morgan Stanley. Please proceed with your question.

Patrick Wood
Analyst at Morgan Stanley

Amazing. Thank you for taking the questions. I've just got two, please. I guess on the first one, I know it's quick, but have you heard from any of your customers around supply chain changes, tariffs coming in? Do you have any expectations for how that might move things around and if there could be an effect, positive or negative, for you guys?

Dan Carestio
President & Chief Executive Officer at STERIS

No, we haven't really, Patrick, and thanks for the question. But what we have seen, over the last few years as it relates to the AST business is a lot of reshoring and friendshoring, I would say. We've seen enormous growth in our Asia Pacific region, in particular in Malaysia, where we've got a number of new builds that have come online over the last couple of years with a lot of business that has located there as a, you know, it's more of a friendshoring operation in anticipation of some challenges that might or may not occur as it relates to China.

Patrick Wood
Analyst at Morgan Stanley

That's really helpful. And then I guess the only other one was, there's not a lot of public data on it, but the EO litigation side of things. Do we have any update on that on upcoming news flow or anything you can help give us a sort of sense for how that's playing out over the next few months?

Dan Carestio
President & Chief Executive Officer at STERIS

Yeah, what I would say is, we do have litigation related to the Waukegan, Illinois facility that we own for a little over three years, from 2005 to 2008 under the Isomedix name. And we have provided some significant disclosures in the queue, and I would point to those, and I think it's best that, we continue on our path of not discussing ongoing litigation until there's something more definitive to discuss. But I'll refer you to the queue and ask that you look there.

Patrick Wood
Analyst at Morgan Stanley

Totally get that. Thanks so much, guys.

Operator

Our next question comes from Michael Polark with Wolfe Research. Please proceed with your question.

Michael Polark
Analyst at Wolfe Research

Good morning. Thank you. I want to ask on healthcare consumables and services. There's obviously a lot of stuff, a lot of products and services in those two lines, and you mentioned share gains as a driver of the differentiated growth. Can you unpack that for us? What's going especially well? You know, is it in the sterile processing department? Is it a large consumables? Is it the repair stuff? Is it all of it? Where are you seeing differentiation in share?

Dan Carestio
President & Chief Executive Officer at STERIS

Yeah, it's all of that, to be honest with you. And, you know, we've shipped an awful lot of capital equipment over the last 18 months or so, and we've really positioned ourselves nicely as it relates to some of the large IDN GPO contracts on the consumable parts, especially in sterile processing. And I think it's just that and the fact that procedure volumes are particularly strong in the U.S. that's driving consumption, you know, of our consumables business as well as our services business, which is just having a gangbuster year as well.

Michael Polark
Analyst at Wolfe Research

Can I ask you the follow-up on the balance sheet? It's obviously under-levered, let's say, versus your history. So can you comment on the M&A pipeline? How does it look? Seller expectations? And if the M&A kind of opportunity set is not overly compelling at the moment, is there a chance STERIS becomes more assertive with share repurchase? Thank you so much.

Dan Carestio
President & Chief Executive Officer at STERIS

We cannot comment on the M&A pipeline. I mean, if we have news and when it's appropriate, we'll discuss that. Clearly, we're in a position where we have plenty, you know, financial powder, if you will, to move on something, and we definitely have the internal capacity from a management and integration capability. But the timing of our abilities and opportunities don't always sync up, so we'll see how that plays out.

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

But I would also add that from a deal standpoint, it is robust, but at the same point in time, most of what we're looking at is smaller tuck-in acquisitions, which is what we historically have done. And we did buy $100 million of shares back in the first half of the fiscal year, which is reflected in the balance sheet and the debt right now.

Michael Polark
Analyst at Wolfe Research

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Mike Matson with Needham & Company. Please proceed with your question.

Mike Matson
Analyst at Needham & Company LLC

Yeah, thanks for taking my question. So I heard the commentary around labor and energy costs continuing to be pressuring the margins to some degree. Just given kind of the general cooling and inflation we've seen, is there just -- is this just sort of lagging kind of some of the other, I guess, costs or is there something else going on here that's causing those to be higher?

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

I would say, Mike, the labor obviously is the lagging piece, and we should anniversary that sometime during the fiscal year. Unfortunately, the energy costs are really something that are out of our control. And I think there is also a bit of a timing issue, too, because as we incur those energy costs, we cannot pass those on immediately. So there is definitely a little bit of a lag there, too.

Mike Matson
Analyst at Needham & Company LLC

Yeah, okay. And then bioprocessing, I just was wondering if you could give us a sense of how much of AST that is. I think the last time I looked or last time I heard you guys say something, it was 10% of AST, so about 2% of your total revenue. Is that -- is that still accurate, or?

Dan Carestio
President & Chief Executive Officer at STERIS

It's based on the reductions that we saw, over the last year and a half to sort of the new set point, it's less than that. I mean, it's in the 6% to 8% of the AST revenue ballpark or something like that, and projected to grow nicely off of that new level.

Mike Matson
Analyst at Needham & Company LLC

Okay. All right, got it. Thanks.

Dan Carestio
President & Chief Executive Officer at STERIS

Yep, sure thing.

Operator

Thank you. Our next question is a follow-up from Michael Polark with Wolfe Research. Please proceed with your question.

Michael Polark
Analyst at Wolfe Research

Thank you for taking the follow-up. I want to ask on AST MedTech customer trends. Dan, I think you mentioned it's not quite where you thought it could or should be. Do you think this is just the inventory management stuff, or is there something else going on that -- that you've picked up? Thank you.

Dan Carestio
President & Chief Executive Officer at STERIS

I think it's two things. I do definitely think it's inventory management. You know, just like STERIS has done a nice job of bringing down our inventory this year, I think a lot of our MedTech customers are taking the same opportunity.

And then sometimes, what I've seen is the classic bullwhip effect. You know, we saw pretty strong growth in AST in for end of Q4, early Q1, and then we saw a slowdown where they had maybe overproduced a bit and are keeping tighter controls on inventory. Overall, what I would say is procedure rates is what drives that business. And right now, the procedure rates versus the AST growth are not matched up, and I think that as those converge, we'll see better growth out of AST. I mean, all that 6%, it's not that disappointing. Let's not be overcritical here. It's just we hold that business to a very high standard.

Michael Polark
Analyst at Wolfe Research

Understood. Since I'm here, I'll ask one more. On life sciences, the margin has been perking up. You commented on it. Is it simply lower equipment as a portion of that segment, so it's a mixed thing, or are you taking other kind of self-help actions to defend profit? Thank you.

Dan Carestio
President & Chief Executive Officer at STERIS

It's all mixed. That consumable business is growing incredibly nicely, and that is the higher margin business there. And that is more than offsetting the decline in capital from a profit perspective, but from a percentage perspective, it's driving it up.

Michael Polark
Analyst at Wolfe Research

Thanks for taking the follow-up.

Dan Carestio
President & Chief Executive Officer at STERIS

Sure thing.

Operator

Our next question comes from Jason Bednar with Piper Sandler. Please proceed with your question.

Jason Bednar
Analyst at Piper Sandler Companies

Hey, good morning, everyone. Thanks for taking the questions and apologies up front here for asking anything that was already covered. Just juggling a few calls here this morning.

Want to start on EO, and again, apologies if you can't answer these, but I'll try anyways. Can you specify whether what you've disclosed in the 10-Q this morning, whether you're a co-defendant or sole defendant in those cases where you are defending against? Why not settle these cases out of court? Just maybe looking for not necessarily your entire legal strategy, but there is risk in going to trial, of course. And then can you help us with what kind of insurance you might have against this situation?

Dan Carestio
President & Chief Executive Officer at STERIS

Yeah, other than M&A strategy, the other thing we absolutely don't talk about is legal strategy. So I'll refer you to the comments that are in the queue and just say that we'll save that on our comments around ongoing litigation at this time.

Jason Bednar
Analyst at Piper Sandler Companies

Okay. I mean, I guess, Dan, the insurance piece isn't part of legal strategy and the defendant versus code versus sole is more factual. I mean, any comment on either of those?

Dan Carestio
President & Chief Executive Officer at STERIS

I have no comment, no.

Jason Bednar
Analyst at Piper Sandler Companies

Okay. Okay, fair enough. In AST, the outlook sounds like maybe a hair or lower today. Is that exclusively bioprocessing related? Are there any adjustments that you're seeing or moderation, I should probably better say, on pricing in that category?

Dan Carestio
President & Chief Executive Officer at STERIS

No, it's just -- honestly, it's just the volumes that we've seen year to date and the trend. You know, if we were up a point and a half higher year to date, we'd be telling you no change in the AST outlook for the whole end of the year. But based on run rate, we've adjusted that to take a much more conservative approach.

Jason Bednar
Analyst at Piper Sandler Companies

Okay. And does that influence at all the, I guess, your confidence in seeing improved margins within that segment, adjusting, of course, for the equipment loss here, that was kind of an idiosyncratic drag. But looking forward, does the delayed timing and getting back to double digit growth in AST affect how you think about incremental margins in that segment?

Dan Carestio
President & Chief Executive Officer at STERIS

No, adjusting out the one-time loss on the capital from Mevex, we would expect margins to be strong in the second half of the year, in AST in particular.

Jason Bednar
Analyst at Piper Sandler Companies

Okay. All right. Thank you. Yeah, sure thing.

Operator

Our next question comes from Mike Matson there's a follow-up of Needham & Company. Please proceed with your question.

Mike Matson
Analyst at Needham & Company LLC

Yeah, thanks. Just one quick one here. So with the margins now expect -- op margins now expect to be flat, you're still reiterating the EPS guidance. So, I mean, is it just still kind of fall within that range, maybe the lower end or something? Or is there something else going on in the P&L to offset that?

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

Yeah, Mike, it does fall within the range, but we are seeing an impact or a favorable impact on interest expense. We now expect interest for the full year to be about $90 million.

Mike Matson
Analyst at Needham & Company LLC

Okay. Got it. Thanks.

Mike Tokich
Senior Vice President & Chief Financial Officer at STERIS

Yep.

Operator

Thank you. Our next question comes from Jacob Johnson with Stephens. Please proceed with your question.

Jacob Johnson
Analyst at Stephens

Hey, thanks. Since everybody else did a follow-up, I figured I'd join them. Just on the life sciences business, the strong consumable demand, can you flesh out kind of what you're seeing in that business, what's driving that demand? And just curious, I think there's a lot of debate around kind of what's going on with pharma demand that's maybe at a higher level. Kind of what are you seeing from those customers right now?

Dan Carestio
President & Chief Executive Officer at STERIS

Yeah, I would say keep in mind we've got somewhat easy comps last year. There was a lot of destocking going on in our consumables business, in particular in the barrier product space, as well as the chemistry space. And so, against those relatively easy comps, we've seen very strong recovery from our core customers that are back in full production.

Jacob Johnson
Analyst at Stephens

Got it. Thanks for taking the follow-up.

Dan Carestio
President & Chief Executive Officer at STERIS

Thank you.

Operator

Thank you. This will conclude our question-and-answer session. I would now like to turn the conference back over to Julie Winter for any closing remarks.

Julie Winter
Investor Relations at STERIS

Thanks, everybody, for taking the time to join us today. We'll be at a few conferences here this fall and look forward to catching up with many of you then.

Dan Carestio
President & Chief Executive Officer at STERIS

Safer world.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Julie Winter
    Investor Relations
  • Mike Tokich
    Senior Vice President & Chief Financial Officer
  • Dan Carestio
    President & Chief Executive Officer
Analysts

Alpha Street Logo