STERIS Q4 2023 Earnings Results & Report

STERIS EPS Results

• Actual EPS: $2.30
• Consensus EPS: $2.15
• Beat/Miss: Beat by +$0.15
• One Year Ago EPS: $2.04
• EPS Beat Rate: 5 of last 8 quarters

STERIS Revenue Results

• Actual Revenue: $1.38 billion
• Expected Revenue: $1.27 billion
• Beat/Miss: Beat by +$110.94 million
• YoY Revenue Growth: N/A

STERIS (NYSE:STE) (NYSE: STE) provides products and services designed to support infection prevention, procedural care and the safe manufacture of healthcare and life sciences products. Its offerings include surgical equipment and operating-room solutions, sterilization and decontamination systems, endoscopy products, cleaning and disinfection technologies, and related consumable products.

The company also provides outsourced sterilization and laboratory services through its Applied Sterilization Technologies business. These services help medical-device manufacturers, pharmaceutical companies and other organizations sterilize products and maintain quality and regulatory compliance. STERIS serves hospitals, ambulatory surgery centers, healthcare providers, medical-device manufacturers, pharmaceutical companies and research institutions.

STERIS was established in 1987 and has expanded through organic development and acquisitions, including its combination with Synergy Health in 2015. The company is incorporated in Ireland and maintains a significant operational presence in the United States, while serving customers across North America, Europe, Asia-Pacific and other international markets. STERIS is led by President and Chief Executive Officer Dan Carestio.

STERIS Q4 2023 Earnings Call Transcript

Key Takeaways

• In Q4 FY23, STERIS reported 16% constant currency organic revenue growth driven by volume and 30 bps of pricing, and ended the full year with 9% organic growth despite macro challenges.
• Gross margin fell 240 bps in Q4 to 43.1% (down 180 bps for the year) as price and currency gains were more than offset by an unfavorable mix and roughly $90 million in excess material and labor inflation.
• Cantel Medical integration exceeded targets, delivering $10 million of cost synergies in Q4 and over $55 million for the full year, with the integration now substantially complete.
• Free cash flow was $410 million in FY23—impacted by higher capex ($362 million) and working capital builds—but management expects about $700 million in FY24 as inventory and receivables normalize.
• For FY24, STERIS guides to 7–8% revenue growth (including ~200 bps pricing), flat EBIT margins, and adjusted EPS of $8.55–$8.75, with earnings skewed 45/55 toward the second half.

Presentation

[Operator]

Good morning. Welcome to the STERIS plc fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Julie Winter, Investor Relations. Please go ahead.

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

Thank you, Chad, good morning, everyone. As usual, speaking on our call this morning will be Michael Tokich, our Senior Vice President and CFO, and Daniel Carestio, our President and CEO. I do have a few words of caution before we open for comments. This broadcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the express 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's 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.

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

STERIS's 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 Michael.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

Thank you, Julie. Good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our fourth quarter performance. Following my review, Dan will comment on the full year fiscal 2023 and talk about our outlook for fiscal 2024. For the quarter, constant currency organic revenue increased 16%, driven by volume as well as 330 basis points of price. As anticipated, gross margin for the quarter decreased 240 basis points compared with the prior year to 43.1% as pricing and currency were more than offset by unfavorable mix at approximately $15 million in excess material and labor inflation. We incurred approximately $90 million in higher material and labor costs during fiscal 2023.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

We achieved approximately $10 million of cost synergies from the integration of Cantel Medical in the fourth quarter, bringing our full year total to just over $55 million. We are proud of the work our folks did to integrate Cantel Medical into STERIS, overachieving our projected total cost synergies ahead of schedule. We have substantially completed the integration process and going forward, we will no longer be tracking and reporting cost synergies from Cantel. EBIT margin increased 20 basis points to 23.8% of revenue compared with the fourth quarter last year. This reflects a reduction in SG&A as a percentage of revenue, somewhat offset by the gross margin pressures I mentioned earlier. The adjusted tax rate in the quarter was 23.6%.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

Net income in the quarter was $229.2 million, and earnings were $2.30 per diluted share. Capital expenditures for fiscal 2023 exceeded our plan and totaled $362 million, while depreciation and amortization totaled $553 million. Our capital expenditures spending was higher than anticipated, primarily driven by the timing of investments in our AST segment. Total debt remains just over $3 billion, reflecting borrowings to fund a few small acquisitions during the year and opportunistic share repurchases. We remained active buying back stock in the fourth quarter, and in total, repurchased 1.6 million shares in fiscal 2023 for a total spend of $295 million.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

As we anticipated last week, or as announced last week, our board has authorized a new repurchase program for up to $500 million in buybacks. For fiscal 2024, we would anticipate returning to our normal cadence of repurchasing shares only to offset dilution. Total debt to EBITDA at the end of the fiscal year is just under 2.3 x gross leverage. Free cash flow for fiscal 2023 was $410 million. Free cash flow was limited by higher than planned capital spending and pressure on working capital, in particular for inventory and receivables. I will turn the call over to Daniel for his remarks.

[Daniel Carestio, President and CEO at STERIS]

Thanks, Michael. Good morning, everyone. Thank you for taking the time to participate in our fourth quarter and full year call. I will cover a few of the highlights of the year. Then address our outlook for fiscal 2024. As you heard from Michael, we ended the year strong and grew revenue 9% on a constant currency organic basis in fiscal 2023. This is impressive performance, in particular, given the macro challenges we faced all year.

[Daniel Carestio, President and CEO at STERIS]

We are cautiously optimistic the supply chain challenges have eased in a meaningful way, and surgical procedure rates are improving. Our fourth quarter and full year results are reflective of that. At the business level, our Healthcare segment revenue ramped up throughout the year, culminating in 11% constant currency organic growth for the year, with very strong performance in the fourth quarter. Healthcare capital equipment grew 15% for the year on top of double-digit growth last year. The team did a great job working through the whip inventory and shipped $50 million more capital equipment in the fourth quarter than we did in the third. Having the components we needed to get those products out to our customers was essential, and it was a huge lift by our supply chain and manufacturing teams.

[Daniel Carestio, President and CEO at STERIS]

While we still have pockets that are challenging, we are feeling much better about the availability and access to components for our capital equipment heading into fiscal 2024. Our backlog continues to hover around $500 million despite the strong shipments during the quarter. $500 million is a very solid place to start the new fiscal year. Of note, our orders have shifted again towards large projects, which represented 50% of the capital equipment orders in the fourth quarter. Remember that large project orders tend to have longer lead times. Healthcare consumables also finished the year strong as we saw restocking of products as surgical procedures continued to increase sequentially. For the year, consumables revenue grew 5%, about in line with our long-term expectations. Revenue was a bit lumpier from a quarter-to-quarter perspective than we would normally anticipate.

[Daniel Carestio, President and CEO at STERIS]

Our healthcare service revenue finished strong, growing 8% for the year, with solid growth across all the business aspects. Our AST segment grew 12% on a constant currency organic basis for the year, despite a reduction in demand for single-use bioprocessing disposables. Healthcare procedures continue to rebound, the underlying demand for our products from core customers in med tech remain very strong. Mentioned last quarter, about 10% of the AST business is comprised of bioprocessing customers, which slowed for the first time during our third quarter. That trend continued into the fourth quarter, where once again, we saw a decline in revenue of about $5 million.

[Daniel Carestio, President and CEO at STERIS]

We believe the trough will come in the first half of our new fiscal year. While we would expect to return to sequential growth in the second half, we do not expect to return to year-over-year growth until fiscal 2025. Our customers in that space have made significant investments to expand their manufacturing capacity for the long-term growth. We have every belief that growth will return once we work through the short term destocking. Turning to life sciences. Constant currency organic revenue grew 5% for the year, with a strong finish in the fourth quarter, despite the reduction in bioprocessing and vaccine demand. As anticipated, the $10 million in capital equipment that we couldn't ship in the third quarter came through in the fourth, contributing to a record quarter of capital shipments.

[Daniel Carestio, President and CEO at STERIS]

Consumables also finished strong as we worked through supply chain challenges, including more normalized shipping to Asia Pacific, and we were able to make progress towards more normal delivery times. Service grew mid-single digits for the year, with solid performance and equipment maintenance and installation of new capital equipment. Backlog is holding just over $100 million. That is a great place to start the new fiscal year. Dental was about flat on a constant currency organic basis for the year. Procedure volumes remain at approximately 95% of pre-COVID levels due to the broader economic pressures impacting consumer spending. Based on market data, STERIS is performing better than market. Benefiting from pricing and modest share gains. Turning back to the P&L.

[Daniel Carestio, President and CEO at STERIS]

Even with favorable pricing, gross margins were down 180 basis points for the year as our cost increased at a rate faster than we could recoup. We did a nice job managing SG&A on the year and improved EBIT margin by 10 basis points in the face of the gross margin declines. Unfortunately, part of that was due to lower incentive compensation for our people, which we'll be working hard to get back in fiscal 2024. Interest and taxes were a bit of a headwind to bottom-line growth, but we finished fiscal 2023 at $8.20 in adjusted earnings per diluted share, an increase of 4% from fiscal 2022. While that is certainly lower than our standard earnings performance, our five-year CAGR for adjusted EPS is still an impressive 15%.

[Daniel Carestio, President and CEO at STERIS]

As I said in the beginning of the call, we feel optimistic heading into fiscal 2024. Our strong fourth quarter allowed us to level out our performance between fiscal years more than anticipated. We also saw nice signs of improvement, which began in the third quarter and then continued to improve sequentially, leaving us optimistic that we have a few tailwinds in fiscal 2024. In particular, we anticipate continued recovery of healthcare procedures and easing of supply chain issues, as well as foreign currency leveling out. For fiscal 2024, total revenue is anticipated to grow 7%-8% with about 100 basis points in positive foreign currency impact. Constant currency organic revenue is expected to grow 6%-7%. That includes about 200 basis points in favorable pricing.

[Daniel Carestio, President and CEO at STERIS]

Gross margins are expected to improve modestly as some of the headwinds faced in fiscal 2023 abate. EBIT margins are anticipated to be about flat as we absorb approximately $40 million from incentive compensation year-over-year and cost increases above and beyond normal inflation for material and labor of about $30 million. Interest in taxes will be a bit of a headwind, some of which will be offset by a reduced share count reflecting the additional purchases made during fiscal 2023. Factoring in all of those moving pieces, our outlook for adjusted earnings per diluted share for fiscal 2024 is $8.55-$8.75. To assist you in your modeling, we do anticipate that our revenue and earnings will be weighted towards the second half of the year.

[Daniel Carestio, President and CEO at STERIS]

In the first half, we anticipate continued impact from a reduction in bioprocessing demand, resulting in difficult comparisons within AST that will impact our growth and profitability. For both revenue and EPS, we would expect the split to be 45 in the first half and 55 in the second half. As we look at our healthcare capital equipment, backlog remains strong, and we believe in fiscal 2024, we will return to a normal cadence of shipments, which generally start lighter in the first quarter and then build throughout the year. Our plan assumes we get back to normal lead times by the end of the fiscal year. While we do not provide quarterly guidance, I would note that the anticipated cadence of capital equipment revenue, combined with the significantly higher interest expense and tough comparisons in AST with bioprocessing, will limit our Q1 earnings growth potential.

[Daniel Carestio, President and CEO at STERIS]

That said, the tide is turning. We are feeling good about the direction where we are heading and the outlook we have provided for fiscal 2024. As we have said before, our continued long-term goal is to grow revenue mid to high single digits and leverage that growth to deliver double-digit growth in earnings. We strive to achieve this while also generating solid free cash flow, continuing to reduce our debt levels and grow our dividend. Before we open for Q&A, I do want to make a few comments on the draft rules issued by the EPA last month. As you all know, over the past few years, we have made significant investments consistent with our practice of continuous improvement within our facilities. Our sustainable EO program and total permanent enclosure investments position us very well to comply with many of the draft requirements.

[Daniel Carestio, President and CEO at STERIS]

We believe the EPA understands the weight of this regulation and its impact on the security of the vital U.S. sterile device supply chain, and we are confident there will be a reasonable outcome for the final rules. Behind the scenes, we are partnering with our industry association in terms of our response to the agency. Thank you. With that, I'll turn the call back over to Julie to open it up for Q&A. Julie?

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

Thanks, Michael and Daniel, for your comments. Ted, if you could give the instructions for Q&A, we'll get started.

[Operator]

Certainly. We will now begin our question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Matthew Mishan from KeyBanc. Please go ahead.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Hey, good morning. Thank you for taking the questions. Hey, Daniel, could you talk, or Michael, can you talk a little bit more about the implied operating margin assumption of kind of flat, kinda year-over-year, outside of incentive comp? Is there, you know, what are the other major moving pieces there?

[Daniel Carestio, President and CEO at STERIS]

Yeah. The next biggest piece is labor costs have gone up across the board as, you know, the people we hired last year are more costly. That's definitely going to hurt us a bit. We also are gonna return more to somewhat pre-COVID levels in our spending, especially around travel. Also FX is actually gonna be a negative to us in the operating expense, but by the time it gets to the bottom line, it'll be about neutral to us.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Okay. Then I'm having a little bit of problems modeling flat based upon some of the assumptions below the line. Can you know, more explicitly call out the assumption for share count and for interest expense, in 2024?

[Michael Tokich, SVP CFO and Treasurer at STERIS]

Yes. Share count will just be just over 99 million. Interest expense and other will be approximately about a $10 million-$15 million headwind in total. Most of that, as Daniel alluded to in his comments, most of that interest expense headwind is gonna hit us in the first half. Majority is gonna actually hit us in the first quarter, 'cause that's when we started seeing rates significantly rise was in the second quarter and for sure in the second half.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Okay. I'll jump back in the queue. Thank you.

[Daniel Carestio, President and CEO at STERIS]

You're welcome, Matthew.

[Operator]

The next question is from David Turkaly from JMP Securities. Please go ahead.

[David Turkaly, Research Analyst at JMP Securities]

Great. Good morning, guys, and congrats on a strong wrap to the fiscal year. I was wondering maybe if we could get some thoughts, given how this quarter even played out, divisionally in terms of how you're getting to the numbers in terms of the growth for fiscal 2024. I'm sure healthcare is not growing 20%, but Even if we're looking at sort of ranking them, sounds like AST may be some tough comps, so maybe it's healthcare, life science, AST. Any color around sort of secular growth rates or what you think for those businesses, you know, to start this year?

[Daniel Carestio, President and CEO at STERIS]

Yeah, David. If you look at our total company, right, we would, we would say that on average, you know, most of our businesses other than AST grow mid to high single digits. AST obviously, you know, right around double digits, 10% grower. This year, that is the case with healthcare potentially outpacing, their normal growth. Life sciences would be in that same range, and then dental would be single digit growth in total.

[David Turkaly, Research Analyst at JMP Securities]

Got it. I wanted to just ask a follow-up on free cash flow. We had a bunch of companies report, so I've been jumping back and forth, but I think you guided to $700 million this year, and I think the comp was $409. I'd just love to get your thoughts, Michael, on what exactly is happening there.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

This year, we were under significant pressure from a free cash flow standpoint. Both our receivables increased because just the timing of the revenue. You know, a big bulk of our revenue was in Q4, so we were unable to collect. That will push into FY 2024. Our inventory, as we've been talking about all year, has been high, so we've gotta take that down. We're anticipating to take that down in FY 2024. Also in FY 2023, capital expenditures were higher than we anticipated originally. The combination of all three really put pressure on FY 2023 free cash flow.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

As we look into 2024, the big change, where we're gonna get a nice impact is gonna be lower inventory, our ability to collect those receivables, and then just growing net income in total, will get us to about $700 million in total free cash flow.

[David Turkaly, Research Analyst at JMP Securities]

Great. Thank you.

[Daniel Carestio, President and CEO at STERIS]

You're welcome, David.

[Operator]

The next question will be from Mike Matson from Needham & Company. Please go ahead.

[Mike Matson, Senior Equity Research Analyst and Managing Director at Needham & Company]

Yeah, thanks. I wanted to ask one on the EPA requirements for ethylene oxide. The comments that you made were, I guess, kind of vague. I guess the way I would interpret them, and correct me if this is wrong, is that you are expecting some sort of changes in the final rule. You know, I don't know if you're willing to comment on, you know, what areas you think maybe need to be changed. I know AdvaMed kinda called out the 18-month timing and some of the employee safety requirements in there. You know, if the final rule ended up looking like the proposed rule, you know, can you comment on, you know, whether or not you would meet those standards and whether or not there'd be incremental costs to get there if you don't?

[Daniel Carestio, President and CEO at STERIS]

I think there's still a lot that's gotta get worked out in the final definition of the rule. My speculation is it probably gets extended in terms of comment period at this point. I would tell you that from a MedSurg perspective, we're really confident where we sit in terms of our ability to meet as written and what could possibly be modified. As it relates to FIFRA, I think we have a little more gas over that as we or no one in the industry right now are capable of meeting some of the stated exposure level standards. I think that's gotta get sorted out, and I think it will through the process.

[Mike Matson, Senior Equity Research Analyst and Managing Director at Needham & Company]

Okay. Thank you. Just on the dental business, it was down in most quarters at least. You know, you said 95% of pre-COVID levels, but I would assume if even if it stayed at the 95 in fiscal 2024, then you should be able to get back to flat or even maybe some modest growth there. Is that a reasonable assumption?

[Daniel Carestio, President and CEO at STERIS]

That's correct. Yeah, assuming that it sustains at that level and some of the, you know, modest level of pricing adjustments we've been able to put through to that business, we believe that we can grow the revenue in a low single digits range.

[Mike Matson, Senior Equity Research Analyst and Managing Director at Needham & Company]

Okay, thanks. Then just in terms of the share repurchase, you stepped in to buy back some stock in 23. You said going forward with the new authorization, you're not planning to do anything other than just offset dilution. I guess what drove the decision to, you know, buy back stock in 23 rather than prepay debt? Was it just opportunistic? I know the stock, you know, fell on some of the ethylene oxide concerns and whatnot.

[Daniel Carestio, President and CEO at STERIS]

Yeah. It was just exactly that, Mike. It was just opportunistic based on where the share price moved down, largely on the some of the EO litigation issues and things that the industry are facing. We saw it as a good opportunity to invest in our STERIS stock.

[Mike Matson, Senior Equity Research Analyst and Managing Director at Needham & Company]

Okay. Got it. Thank you.

[Daniel Carestio, President and CEO at STERIS]

Yep.

[Operator]

The next question is from Jacob Johnson from Stephens. Please go ahead.

[Jacob Johnson, Equity Research Analyst at Stephens Inc.]

Good morning. Just a couple quick ones from me. To follow up on the EPA question earlier, can you comment on some of the initiatives that you already have put in place? Do you think these give you a competitive advantage as compared to some of your competitors who will have to install those in the future?

[Daniel Carestio, President and CEO at STERIS]

Well, what I'll tell you is, some of our practices, I mean, we've had our employees in what I would categorize as hot zones, wearing full PPE, SCBA, self-contained breathing apparatus, for over 10 years in our facilities. I think we're already ahead of most of industry in terms of safeguarding our employees. You know, we've installed on all of our outbound warehouses, abatement systems to scrub any fugitive emissions that's coming off product post aeration process. Those are completely installed, operational in the U.S. facilities.

[Daniel Carestio, President and CEO at STERIS]

A number of other things in terms of just basic engineering design around our facilities where we have complete capture of everything in the chamber rooms, as well as sealed drum storage rooms, which are also fully abated in the event of a leak, and a number of different engineering controls that we have in place, as it relates to the design of the facility. In addition to that, you know, we've been working hard with our customers and also pushing industry very hard to reduce the initial concentrations that are used in cycles. We've been very effective in moving many of the higher concentration cycles that are, you know, touching 650, 700 milligrams per liter down closer to 300 milligrams per liter.

[Daniel Carestio, President and CEO at STERIS]

It's a much lower input in, which it makes handling product, especially post-processing, much safer.

[Jacob Johnson, Equity Research Analyst at Stephens Inc.]

Thanks for the color. Can you touch a little bit on your capital allocation priorities in terms of the buyback that you previously announced and also M&A for the year?

[Daniel Carestio, President and CEO at STERIS]

Our capital allocation priorities have been the same for more than a decade. Increase dividends off the top, invest in ourselves, continue to spend money from a capital expenditure standpoint, especially growing and investing in our AST expansions, then M&A and then finally repurchases, typically just to offset dilution. Those four categories have remained. The other one that we from time to time will put in there is, you know, focus on paying down debt, you know, as we're almost two years into the Cantel acquisition that is being, you know, but little bit less focused on, as our debt levels now are in what we'll call very reasonable ranges at 2.3x levered.

[Daniel Carestio, President and CEO at STERIS]

As you heard Mike ask the question earlier about, the opportunistic share repurchases, that has not happened very often, as a company. Again, we felt that it was, advantageous to us, to do some of that opportunistically in the third and fourth quarter of this fiscal year.

[Jacob Johnson, Equity Research Analyst at Stephens Inc.]

Thank you for the color.

[Operator]

Our next question is from Michael Polark from Wolfe Research. Please go ahead.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Good morning. Thank you for taking the questions. Two-parter on AST. Wanna understand the margin trend there. Kind of pushes and pulls, as kind of a steady glide lower throughout the last fiscal. Where does it bottom, and what's a good input for segment margin in fiscal 2024? Related in AST, you know, you've been very clear about destock in bioprocess. I'm wondering what your feel for potentially a similar dynamic is in kind of your core medical device customer base. You know, the world's kind of emerging from COVID. Procedures seem to be back. A lot of the interventional, you know, medical device companies are holding way more inventory than they used to.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Is there any kind of risk of a, you know, a little bit of a destock cycle there for you or, or not? How are you thinking about that in fiscal 2024?

[Daniel Carestio, President and CEO at STERIS]

Yeah. I'll address the latter first in terms of recovery in MedSurg. You know, I don't think so. You know, really what we're seeing in terms of our MedSurg customers is they're really rebuilding the inventories that they have, and they're still, in many cases, hand to mouth in terms of being able to deliver for hospitals right now. It's not, it's not as if they're flush with inventory across the system. I would assume we'll see some continuing build of inventory of anticipation of surgeries continuing at the rate that they're at, as well as, you know, there's a lot of pent-up demand that's got to be worked off over the next coming months or year or so.

[Daniel Carestio, President and CEO at STERIS]

I don't think there's a lot of risk in terms of any type of inventory pullback from a MedSurg perspective. I think it's pretty robust. In terms of the other question around the AST margins, I mean, the short answer is, there were inflationary pressures in particular on energy and labor. You know, the labor's baked in, you know, is what I would say, and we can leverage that over scale as we get volume coming through. It tends to help a bit. Energy, you know, my crystal ball doesn't work when it comes to electricity pricing in Europe anymore. It is what it is. It's high right now. It was high this winter.

[Daniel Carestio, President and CEO at STERIS]

In theory, it should come down some over the coming months or year. You know, your guess is as good as mine on that.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Helpful. Maybe just request for a feel for hospital spending patterns on, you know, capital equipment? You made comments about good mix of new large projects in your new orders. What's your crystal ball say about how, you know, new spend patterns show in fiscal 2024?

[Daniel Carestio, President and CEO at STERIS]

It's interesting, and we're pleasantly surprised every month when we see the orders coming in strongly, you know, very strong as we did in Q4. Our backlogs, you know, sitting at $500 million in healthcare, which is, you know, either at or near all-time record highs, basically. You gotta think of it this way. Most of what we sell in terms of capital is necessary to facilitate volume of procedures and recovery of volume of procedures through the hospital.

[Daniel Carestio, President and CEO at STERIS]

I mean, the sterile processing department equipment we sell in terms of washers and sterilizers and sinks and everything like that. You gotta think of it more like a utility, and it's not a nice to have, it's something you need to have in order to accomplish the growth for patients in terms of procedure volumes. We've been somewhat immune to the financial woes of the healthcare sector, I would say, in terms of hospital spending. You know, I believe that'll continue in terms of the long term. I think over time, you know, and I don't know if that's six months or a year from now, you're probably gonna see some de-escalation in terms of just infrastructure build-out that we're seeing right now.

[Daniel Carestio, President and CEO at STERIS]

one would also think that as things tighten a bit in terms of capital, it would generally has the impact of slowing down the replacement business a bit, which we tend to pick up then on the service side. As of right now, we seem to be doing pretty well in terms of order intake.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Appreciate that. Thank you.

[Operator]

Again, if you have a question, please press star then one. The next question is from Jason Bednar from Piper Sandler. Please go ahead.

[Jason Bednar, Managing Director at Piper Sandler]

Hey, good morning, guys. Thanks for taking the questions here. A bit of a related follow-up there on Polark's question, asking on segment margin, but I'll focus on the place where margins have actually gone the opposite direction. You know, healthcare margins improved sequentially now I think five quarters in a row. Can you talk about your comfort level on the year-end or full year margin levels in that segment as we look forward to fiscal 2024, again, in the context of your overall guide as well?

[Michael Tokich, SVP CFO and Treasurer at STERIS]

Yeah, we should continue to do fairly well and increase margins in healthcare. You know, we anticipate that we will continue to get price within healthcare. We also anticipate that some of the pressures surrounding inflation, material and labor costs ease. We should also be able to get some productivity increases in our healthcare business, just because we had to touch the products so many times last year, with parts availability, that should help us improve. I would anticipate that the margins in healthcare get slightly better, EBIT margins in healthcare get slightly better in FY 2024 for those reasons.

[Jason Bednar, Managing Director at Piper Sandler]

Okay. Thanks, Michael. That's helpful. Maybe another follow-up, but bigger picture on dental. You've had that asset now for a couple of years. I know you've gotten this question in the past, but maybe just to revisit it, can you update us on your thoughts regarding that category, mostly your commitment to that end market. On one hand, it's a good category for roll-ups. It's fragmented. There's a lot of private companies out there that aren't run in a super efficient way. That's an opportunity, but it's also a drag on growth and margins for the overall franchise. It's tough to forecast, I think, strong mid-single-digit growth for that market even longer term.

[Jason Bednar, Managing Director at Piper Sandler]

maybe you disagree there, but again, just love your updated view on, just as we head into year three, you know, STERIS' commitment and participating in that dental market.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

Yeah, we remain committed. I, you know, we need to see it through in terms of recovery. You know, we didn't anticipate last year the sliding into an economic recession that was gonna thwart the progress made in terms of procedural recovery that we were seeing dental and now it's become an economic issue. I think we need to see that play out over this fiscal year and see how the business performs. I would reiterate, there's still a lot of opportunity for operational improvement and delivery improvement in the business, and that's something that STERIS has a long history as good operators of being able to really drive improvements with the business. It'd be nice to see the volume resume.

[Michael Tokich, SVP CFO and Treasurer at STERIS]

It makes, you know, it makes all those good things that we're doing, much more visible in terms of, bottom line performance when the volume comes back.

[Jason Bednar, Managing Director at Piper Sandler]

All right. Helpful. Thank you.

[Operator]

Thank you. Our next question is a follow-up from Michael Polark from Wolfe Research. Please go ahead.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Thank you for taking the follow-up. I was just looking at, you know, a lot of great data disclosed in terms of the reporting. You know, I could explain sequentially the healthcare consumables line, notable step up there, clearly levered to procedure and throughput. The healthcare services line stepped up notably sequentially, and I struggle a little bit kind of tying that to, you know, an end market development. Kind of what happened there Q-over-Q? It was a double-digit increase.

[Daniel Carestio, President and CEO at STERIS]

Yeah, Michael, a big portion of that was we actually had parts availability, so we're actually able to get parts into our customers' hands and, you know, fix some of their products. That is a main driver of that. Plus, we shipped some capital equipment. Obviously, in third quarter, we're able to install that in the fourth quarter, so we generated revenue there. Those are the two main drivers of that business for Q4 improvement.

[Michael Polark, Senior Equity Research Analyst at Wolfe Research]

Thank you.

[Daniel Carestio, President and CEO at STERIS]

You're welcome.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Julie Winter for any closing remarks.

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

Thanks, everybody, for taking the time to join us, and we look forward to seeing many of you on the road this summer.

[Operator]

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

Participants

Executives

• Daniel Carestio, President and CEO
• Julie Winter, Vice President of Investor Relations and Corporate Communications
• Michael Tokich, SVP CFO and Treasurer

Analysts

• David Turkaly, Research Analyst at JMP Securities
• Jacob Johnson, Equity Research Analyst at Stephens Inc.
• Jason Bednar, Managing Director at Piper Sandler
• Matthew Mishan, Director and Equity Research Analyst at KeyBanc
• Michael Polark, Senior Equity Research Analyst at Wolfe Research
• Mike Matson, Senior Equity Research Analyst and Managing Director at Needham & Company