STERIS Q1 2024 Earnings Report

STERIS EPS Results

• Actual EPS: $2.00
• Consensus EPS: $1.86
• Beat/Miss: Beat by +$0.14
• One Year Ago EPS: $1.90

STERIS Revenue Results

• Actual Revenue: $1.28 billion
• Expected Revenue: $1.21 billion
• Beat/Miss: Beat by +$77.05 million
• YoY Revenue Growth: +11.10%

STERIS Announcement Details

• Quarter: Q1 2024
• Date: 8/1/2023
• Time: After Market Closes
• Conference Call Date: Wednesday, August 2, 2023
• Conference Call Time: 9:00AM ET

STERIS (NYSE:STE) (NYSE: STE) is a global provider of products and services designed to support infection prevention, sterilization, surgical procedures and other critical healthcare and life sciences activities. The company serves hospitals, ambulatory surgery centers, dental practices, pharmaceutical and biotechnology manufacturers, medical device companies, and research organizations.

Its offerings include sterilizers, washers, surgical tables and lights, operating-room equipment, endoscopy products, infection-prevention consumables, and related maintenance and technical services. STERIS also provides contract sterilization and laboratory testing services, as well as equipment and process solutions for pharmaceutical, biotechnology and medical device manufacturing.

Founded in 1987, STERIS has expanded through organic growth and acquisitions, including its 2015 combination with Synergy Health. The company is incorporated in Ireland and maintains a broad international presence, serving customers across North America, Europe, Asia-Pacific and other global markets.

STERIS Q1 2024 Earnings Call Transcript

Key Takeaways

• Strong Q1 financial results: Constant currency organic revenue rose 11%, adjusted EPS was $2.00, and free cash flow reached $214.5 million as net income was $198.2 million.
• Healthcare segment outperformance: Organic revenue grew 18% driven by double-digit gains across capital equipment, consumables, and service, with backlog near $500 million on robust project demand.
• AST headwinds with recovery expected: Applied Sterilization Technologies revenue grew 5% amid MedTech inventory destocking and bioprocessing slowdowns, but stronger growth is anticipated in the second half.
• Margin and cost pressures: Gross margin declined 30 bps to 44.8% and EBIT margin fell 50 bps to 22.4% due to labor and material inflation, lower productivity, and higher incentive compensation, despite strong cash conversion.
• BD acquisition and guidance update: The surgical instrumentation purchase from Becton Dickinson is expected to close earlier, prompting updated as-reported revenue, adjusted EPS, and free cash flow outlooks while maintaining a 6–7% organic growth target.

Presentation

[Operator]

Good day, welcome to the STERIS plc First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone, and to withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Miss Julie Winter, Vice President of Investor Relations. Please go ahead.

[Julie Winter, VP of Investor Relations at STERIS]

Thank you, Chuck, and good morning, everyone. As usual, speaking on our call today 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 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, VP of Investor Relations at STERIS]

STERIS's SEC filings are available through the company and on our website. 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 press release, as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the board of directors in their financial analysis and operational decision making. With those questions, I will hand the call over to Mike.

[Mike Tokich, SVP and CFO 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 first quarter performance. For the quarter, constant currency organic revenue increased 11%, driven by volume as well as 290 basis points of price. Gross margin for the quarter decreased 30 basis points compared with the prior year to 44.8%. Favorable price was more than offset by continued material and labor inflation, as well as lower productivity. EBIT margin decreased 50 basis points to 22.4% of revenue compared with the first quarter last year, which reflects the decline in gross margin, as well as the anticipated increase in year-over-year incentive compensation, which is recorded in corporate and other. The adjusted effective tax rate in the quarter was 22.6%.

[Mike Tokich, SVP and CFO at STERIS]

Net income in the quarter was $198.2 million, and adjusted earnings were $2 per diluted share. Capital expenditures for the first quarter totaled $66.6 million, while depreciation and amortization totaled $137.9 million. Debt declined slightly in the first quarter and totaled just over $2.9 billion. Total debt to EBITDA was approximately 2.1x gross leverage. Free cash flow for the first quarter of 2024 was $214.5 million, as we were able to collect on our strong fourth quarter revenue. Inventory remains elevated as we continue to focus on reducing lead times and meeting customer demand. With that, I will turn the call over to Dan for his remarks.

[Dan Carestio, President and CEO at STERIS]

Thanks, Mike. Good morning, everyone. Thank you for making time to join us to hear more about our first quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, we had a strong start to our new fiscal year, exceeding our plans and the street's expectations. Looking at our segments, Healthcare, constant currency, organic revenue grew 18% in the quarter. We experienced double-digit growth across capital equipment, consumables, and service. This is driven primarily by procedure volumes in the U.S. continuing to rebound, as well as price and market share gains. In addition, the improving supply chain environment, coupled with our ability to reduce lead times, led to a very strong quarter of capital equipment shipments.

[Dan Carestio, President and CEO at STERIS]

Hospital capital spending remains robust, as evidenced by our Healthcare backlog, which totals almost $500 million at the end of the quarter, despite the strong shipments. Large projects continue to drive orders, representing 40% of first quarter orders. We are increasingly competent, confident in our expectations of a strong year for our Healthcare segment. Turning to AST, constant currency organic revenue grew 5%. Our performance in the quarter was impacted by two temporary situations: inventory destocking in some categories of medtech and the year-over-year market decline of bioprocessing customer demand. As we said last quarter, FY 2024 represents a bit of a reset, and we do not anticipate returning to year-over-year growth in bioprocessing in fiscal 2024.

[Dan Carestio, President and CEO at STERIS]

As for the medtech inventory destocking, we would not expect that to continue beyond the first half of the year, and we anticipate customer inventories at that time will align with the procedural growth we are all experiencing. As a result, our expectations are for stronger growth in the second half of the year for AST. Life Sciences revenue declined slightly in the quarter due to the timing of capital shipments, which more than offset the growth in service and consumables. Underlying demand for the business remains strong, as evidenced by our near record backlog. Our full year expectations for the Life Sciences segment continue to be mid-single-digit revenue growth, despite the lumpy first quarter start. Our Dental segment first quarter revenue declined 4% on a constant currency organic basis, as revenue was limited by customer destocking of inventory, in particular for infection control products.

[Dan Carestio, President and CEO at STERIS]

However, we did see patient volumes improve for the first time post-COVID. We are confident that we will achieve low single-digit revenue growth for the fiscal year in Dental. All in, we are pleased with the start to the year. Trends continue to shift in a positive direction, and our ability to execute and ship products has greatly improved. There are still pockets of uncertainty, whether that be supply chain, procedure volumes, or inventory management. As mentioned in our press release, we believe that the acquisition of the surgical instrumentation assets from Becton Dickinson will close much earlier than we originally anticipated. As a result, we have updated our outlook for as-reported revenue, adjusted earnings per share, and free cash flow. We are feeling increasingly optimistic about our constant currency organic performance for the year, yet we are still holding our outlook to 6%-7% growth.

[Dan Carestio, President and CEO at STERIS]

We acknowledge that this is a somewhat conservative approach, given our start to the year. That concludes our prepared remarks. Julie, would you please give the instructions, and we can begin Q&A?

[Julie Winter, VP of Investor Relations at STERIS]

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

[Operator]

Yes, ma'am. 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Matthew Mishan with KeyBanc. Please go ahead, sir.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Hey, good morning, and thank you for taking the questions, and a really nice quarter to start the year. Dan, I first wanted to start on the capital equipment. As you kind of think about how you had contemplated the phasing of your guidance, did you pull forward some capital into the first quarter with excess shipments? Also, how are you thinking about the order environment versus the shipments? I'm assuming it's not one for one, and you are thinking about bringing that backlog down in FY 2024.

[Dan Carestio, President and CEO at STERIS]

Yeah, that-- sure. Thanks. That's correct. What I would say is we, we over-delivered in terms of what we had anticipated from a manufacturing perspective in Q1. You know, the, we've, we've been bitten a bit on the supply chain issues over the past year, and so we're trying to do everything possible to manage to our customer demand, where they actually need the product now. And we did a better job in delivery. That pulled forward some revenue that might otherwise been in Q2. But, generally speaking, you know, our, our ability to produce and deliver, is getting better, and our lead times are coming down across all of our capital equipment portfolios.

[Dan Carestio, President and CEO at STERIS]

And in terms of the orders intake, yes, there, there is a point at which you will start to see declining backlog, obviously, as we get back to much more normalized delivery times, you know, with the only caveat being there are some of the large project stuff, Matt, that's got longer lead.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Okay. I, I have, I have two more on, on the task in both upfront. I didn't catch it, but is the phasing, 1H, 2H still 45, 55 from a revenue and EPS perspective? Secondly, just can you comment a little bit more around the, the, the drag from destocking, especially in some categories of medtech? It seems a little bit counterintuitive when you, when you think about the current environment.

[Dan Carestio, President and CEO at STERIS]

Yeah, we agree. First off, yes, the phasing remains as originally anticipated. In terms of the destocking that we're seeing in medtech, you know, we really started to see it in Asia Pacific, and particularly around some sterile PPE. Some of that was foreseeable given that, you know, the national stockpiles had been filled and, you know, all that demand sort of went back to normal levels. What we're a little surprised of is that we're seeing a pullback on our customers' level of inventory. Now, having said that, we shouldn't be surprised because we, like everybody else, have too much inventory right now.

[Dan Carestio, President and CEO at STERIS]

As confidence comes back in terms of your ability to produce and ability to get supplies and supply chain solidifies, the natural thing one would expect is to, to wring out some of that inventory down to levels that are matching demand. I don't think that process is gonna take too long. I think it's been going on for a period of months now. Then I think what you'll see is, you know, the inventory demand align with the procedure rates, which are clearly higher. Matt, I agree with you that the two seem in opposite directions in terms of what we're seeing in Healthcare, in particular in our Healthcare consumables business, and we know that our customers are seeing the same thing. I think they've just got to whittle down some inventory.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Thank you very much, Dan.

[Operator]

The next question will come from David Turkaly with JMP Securities. Please go ahead.

[David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities]

Great. Good morning.

[Dan Carestio, President and CEO at STERIS]

Morning.

[David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities]

Just looking at the Healthcare number and the capital one, that I'd like to press you a little bit there and say, you know, how are you reducing these lead times? You called out market share gains. I'm wondering if there's.

[David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities]

Are there any new products or anything you'd, you'd highlight in how you put up a number like that?

[Mike Tokich, SVP and CFO at STERIS]

Well, I, I mean, Dave, we're working off of a, a monster backlog that, you know, spilled into this fiscal year. We had some challenges producing. As we got parts in, you know, our teams were ready, and we were able to push up stuff down the line pretty quickly. We would expect that to continue in terms of our ability to deliver on that backlog. I wouldn't, I wouldn't highlight any single product or any small group of products in terms of new products or anything like that. It's just generally speaking, I think our portfolio is in a really good spot in terms of how it's positioned, not just on a competitive basis, on a product by product, but also as a total portfolio in terms of what we can offer.

[David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities]

Do we think of the market share gain, gains as sort of across the board, or is there anything, like, more specific there that you were kind of calling out in, in any, you know, arena?

[Mike Tokich, SVP and CFO at STERIS]

Not specifically. I, I, I would tend to say we're in a really good position in sterile processing right now in our Infection Prevention Technologies group. I think we're in a good position as well in, in other areas of Healthcare. IPT right now, I think is really doing, carrying a lot of, a lot of the load.

[David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities]

Welcome back. Thanks.

[Operator]

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

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

Yeah, thanks. Just had a couple questions on the Becton Dickinson deal. Can you maybe talk about the, the growth that that business has had in recent years? Then, I know you gave us kind of the EBIT or EBIT, EBIT margin, but what about the gross margin of that business? How does it compare to your kind of corporate gross margin?

[Mike Tokich, SVP and CFO at STERIS]

Yeah, I would say that, Mike, on the on the gross margin side, it's similar. The growth rates would be similar in our long-term view of Healthcare, mid to high single digits. As, as we bring that portfolio of products into our Healthcare segment, it's 100% Healthcare. I would say not much different from what we currently have, from a margin perspective, both gross margin and a little bit... It's actually a little bit higher on the EBIT margin standpoint. Unfortunately, we are going to incur, in the short run, higher interest expense.

[Mike Tokich, SVP and CFO at STERIS]

I think as, as I looked at some of the models that were out there, I don't think everybody appreciated that we are going to use our full revolving credit facility for the $540 million, which is equivalent to about $25 million in interest expense this year. I think there's a little bit of a slower ramp because of that interest expense, but once we clear some of that expense out, we'll be back to what I'll call normalized Healthcare margins.

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

Okay, thanks. That's helpful. I didn't hear you quantify the inflation impact. I know last fiscal year, you were kind of giving that every quarter. Just related to that, you also called out lower productivity in terms of your gross margin. I don't know if you can comment on either of those things or quantify them.

[Mike Tokich, SVP and CFO at STERIS]

Yeah, we originally anticipated this fiscal year that we would have about $30 million, and we've been using the term excess material labor inflation. We incurred $10 million of that $30 million in the first quarter.

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

Okay. The productivity, lower productivity that you called out, can you talk about that, or?

[Mike Tokich, SVP and CFO at STERIS]

Yeah, we really haven't quantified that, but we are we are having the same issue that we've had in the past, right? We are touching our products multiple times as we're waiting on the parts. That productivity should improve throughout the year, which will help not only our gross margin, but also get more of our EBIT margin back to flattish, which is where our original guidance was for FY 2024.

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

Okay, got it. That's just sort of a by-product of the supply chain challenge?

[Mike Tokich, SVP and CFO at STERIS]

Correct.

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

Okay. Thank you.

[Mike Tokich, SVP and CFO at STERIS]

You're welcome.

[Operator]

The next question will come from Jacob Johnson with Stephens Inc. Please go ahead.

[Analyst at Stephens]

Good morning. This is Mark on for Jacob. Just a couple quick questions from me. Despite a sequential revenue decline, dental margins increased sequentially. What is the outlook for margins in this segment?

[Mike Tokich, SVP and CFO at STERIS]

I'm sorry, what was the, the question?

[Analyst at Stephens]

Dental margins.

[Mike Tokich, SVP and CFO at STERIS]

Dental margins.

[Analyst at Stephens]

Where should they be long term?

[Mike Tokich, SVP and CFO at STERIS]

Yeah. Long term, we, we said they should get, they should rise to near the corporate average. You are seeing that, they are getting much more operationally efficient, which is really helping drive that EBIT margin improvement. There's still a way to go, but we are happy, more than happy, with the progress that they are making, within that, within that segment.

[Analyst at Stephens]

Thank you. Sorry, if you can't hear me, just let me know. I'll repeat the question. Healthcare operating margins, they're the highest it's been in some time and two solid quarters in a row. Are there any one-time benefits, or is this a good run rate going forward?

[Mike Tokich, SVP and CFO at STERIS]

Obviously, volume is, is the biggest driver at this point in time. you know, we, we, we've have seen our Healthcare segment operating margins continually to increase. I don't know if we're ready to say this is, this is the new high and, and building off of there, but, but we are very pleased where we are at. As we continue to put more volume through and as the mix, especially the mix on the consumable side, if that continues to remain throughout the year, obviously, there is still potential upside for those margins.

[Analyst at Stephens]

Great. Thanks for taking my questions.

[Mike Tokich, SVP and CFO at STERIS]

Thank you.

[Operator]

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

[Patrick Wood, Managing Director and Equity Research Analyst at Morgan Stanley]

Amazing. Thank you. I'll keep it to two, and I'll just ask them both up front if that's easier. I guess the first one, you know, obviously, you know, everyone's talking about the big capital equipment number. I'm just curious, like, how the conversation with your customers has gone. Appreciate that some of this is working through the backlog and lead times on your end, but, you know, presumably, it seems like the customers are in pretty healthy place if they're willing to be investing on the you know, on the capital equipment side, to that degree. I guess the second one is essentially related to that, which is, you know, the, in some ways, the more important component of that capital equipment side is the follow-on consumables componentry for the, for the rest of the year.

[Patrick Wood, Managing Director and Equity Research Analyst at Morgan Stanley]

You know, is it fair to take a look at that strong conversion from the backlog and think about, you know, the consumable pull-through and the growth on that side, whether it's for the rest of this year or, or going into next year?

[Dan Carestio, President and CEO at STERIS]

Yes, thanks, Patrick. This is Dan, by the way. What I would say is, the conversations with the customer, it's, it's interesting because you read, the stress that the Healthcare system, in particular in the U.S., but, but everywhere else, is under financially. I mean, the labor costs have gone up 20% in many places, and, you know, they operate on pretty thin margins to start with, so, so cash is a challenge. Now, having, having said that, everybody agrees that procedure volumes are returning, recovering, and growing, and there's pent-up demand. The, the STERIS equipment is seen more as a utility than it is a luxury, because they can't get the capacity to get instruments through and surgeries processed without sterile processing capacity, without ORs, without, you know, the, the SPD equipment.

[Dan Carestio, President and CEO at STERIS]

We've, we, you know, knock on wood, we've, we've remained pretty robust in terms of our order intake, and, and generally speaking, the outlook is pretty strong for that to continue for, for some period of time. Yes, as we, as we place those units, and have that real estate, you know, in, in the sterile processing department, you know, the onus is on us to make sure that we get the chemistries and, and all the other accessories, consumables that go along with the steam sterilizer or washer or an AER, you know, whatever that may be. The pull-through on that is, is consistently pretty strong, and we have a, a highly focused, dedicated channel in the Healthcare organization to focus on that.

[Patrick Wood, Managing Director and Equity Research Analyst at Morgan Stanley]

Super helpful. Thank you.

[Operator]

The next question will come from Michael Polark with Wolfe. Please go ahead.

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

Hi, good morning. Thank you for taking the questions. I must say first, I, I counted eight minutes of prepared remarks, including the disclaimer, so kudos there. That might be an all-time conference call record. My, my first question, maybe a few parts to it, is on AST. You know, with the fresh call-out of medtech-related destock, internally, is your full year revenue expectation for AST different than it was before?

[Dan Carestio, President and CEO at STERIS]

No. I think what I would say is that it weighted more negative in the front half of the year than we anticipated. We expect to recover some of that in the second half. I mean, Mike, if, if, if not for bioprocessing and the destocking that we're seeing right now, you know, I could say confidently we'd be somewhere in the, I don't know, pick, pick a number between nine and 12 kind of range is what we would have expect. I think that those two issues sort themselves out by year-end, and I think that the Healthcare destocking probably sorts it out sooner than year-end.

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

Two, two follow-ups there on, on bioprocess and medtech. On, on bioprocess, you know, I think this is the third quarter you've called it out year-over-year, so it, it, it's definitely been in the run rate sequentially for at least two quarters. My question is, June quarter versus March quarter, did it, did it deteriorate incrementally, or is it kind of consistent Q over Q in terms of overall order pattern from those customers?

[Dan Carestio, President and CEO at STERIS]

It was flattish to the Q4. The reason why it sticks out a little more is it's the comp in Q1 and also in Q2 are the two highest, the two toughest comps for us.

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

Yep. Then on, on device customers, I heard the national stockpile call out. Appreciate that. In kind of interventional medicine, let's say the neuro and cardio and ortho, any categories there that you see as kind of especially kind of noteworthy in terms of reducing inventory levels, or would you call it broad-based ex the PPE stockpiling?

[Dan Carestio, President and CEO at STERIS]

I would say it's broad-based, and I would also say there's some that are still surging and building inventory. We see that in ortho and spine and, and pain management right now. That's not a, a huge amount of the volume flowing through our plants necessarily in the grand scheme of things.

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

Okay. I, I hope that was a three-parter, but I consider that my first topic. My second is more straightforward. On BD, transaction, you know, a, a kind of very prudent entry price, so you're seemingly earning your return on the buy, which is nice to see. Over the mid to longer term, do you anticipate revenue and/or cost synergies from this portfolio?

[Dan Carestio, President and CEO at STERIS]

I think mostly. I mean, there's some cost synergies, but they're, they're minimal, I mean, in terms of. It more has to do with scale and leverage on channels and things like that. I, I do think there's some sell-through synergies, the way that instruments, the BD instruments marry up with both our instrument repair business as well as instrument trace and tracking through the sterile processing department. You know, everything we do in terms of our washers and sterilizers in our Infection Prevention Technologies group is dealing with, you know, instructions for use for all types of different instruments. I think having the instruments available through STERIS, having the ability to supply, repair, and manage the life cycle, through washing and sterilization back to the OR, is, is a compelling story from a customer perspective.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Thank you.

[Operator]

Again, if you have a question, please press star one. Our next question will come from Jason Bednar with Piper Sandler. Please go ahead.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, good morning, everyone. Thanks for taking the questions. Wanted to start a little bit with the guidance rationale. You know, you, you beat consensus by almost $0.15. Really strong free cash flow quarter, revenue, obviously, as we've all talked about, year was really strong, but you elected not to make any updates to full year guidance. I, I know we're only one quarter into the fiscal year. It, it sounds like there's some, you know, maybe early year, fiscal year conservatism, but can you talk about the pushes and pulls that went into the decision to update, or I guess, in this case, not update core guidance the way you did?

[Dan Carestio, President and CEO at STERIS]

Yeah, I mean, in short, I, I would say we did a really nice delivery in terms of our Healthcare business this quarter. We look at that business, and we're very optimistic in terms of how they're gonna perform over this year. You know, in terms of Life Sciences and AST, there's some things that have to get worked out there, relative to timing of some of these events. We think we understand the market. We think with a high degree of confidence, with all the data we have, that we know how things are gonna play out, but there's no 100% guarantee, and there's no 100% accuracy on the crystal, crystal ball. The short answer is, is we're taking a conservative approach, and if things continue to do great, we'll have a different conversation sometime in the future.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Okay. All right. Makes sense. I, I wanted to come back to the dental business as well here, you know, the core growth's been flat to down for, I think, four consecutive quarters now. The commentary obviously getting, getting easier here going forward, but maybe looking backwards first, are, are there actions you're taking or you, you have taken in exiting unprofitable areas or shutting down certain SKUs? I, I really ask just 'cause the performance we've seen so far does seem like it's running a little bit below market. I'm trying to figure out if there's maybe some self-inflicted pain here, that has a positive ROI, or if you see any other factors that's contributing to the weakness for that segment, again, relative to maybe the market or your peers?

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Just as a, a follow-up here on a two-parter, you know, what contributes to the optimism of getting back, that business back to low single-digit growth, given where it's been trending here?

[Dan Carestio, President and CEO at STERIS]

Yeah, a couple things. I would say, I think that we have a little more exposure than some of our, our peers per se, because of the amount of PPE and infection control that is almost half of the business, you know, the STERIS Dental business. Also, the comparisons of how much was being used, you know, a few years ago versus now is. It's a different time and a different world as it relates to that type of stuff. What I would say is on the instrument side, you know, the Hu-Friedy brand stuff is doing really well in terms of growth, and we would expect that to continue.

[Dan Carestio, President and CEO at STERIS]

We would expect to see, you know, innovation from a product perspective and also cost management, you know, from a manufacturing and, and delivery perspective. And, and the, the team in their dental group has done a really nice job managing the OpEx until we see the market recover as well and making sure that we're not overspending.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

All right. Thanks so much.

[Operator]

The next question will come from Matthew Mishan with KeyBanc. Please go ahead.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Hey, great. Thanks for taking the follow-up. I just wanted to talk about, like, longer term GI procedures. One of the larger hospital systems was saying that they're realizing pent-up demand, seeing a lot of strong growth for GI, and then endoscopy, and one of the factors they're starting to see is, like, a change in guidelines, you know, reducing the age for, I think, colon cancer screening down to 45 from 50, and that's starting to play through. I, I was just hoping you could talk a little bit about, about your endoscopy business, you know, some of the Cantel factors, and, and kinda how you're looking at that over, over the next year to two.

[Dan Carestio, President and CEO at STERIS]

Yeah. What I would say is that the, you know, the drivers in terms of the 45 age recommendation has helped. I mean, it does open up for a lot more screening. The sort of the governor on that for the past, I, I don't know, up till about a quarter ago or six months ago, was really Healthcare staffing and their ability to get colonoscopy scheduled. I know that I personally tried to schedule one in December, and they told me the soonest I could get in was the end of February. I, I think a lot of that's been sorted.

[Dan Carestio, President and CEO at STERIS]

It, it does have an impact, and that is reflected in particular, in both our capital equipment with all the AERs that we sell, but it also is a major contributor to why we had such strong delivery in Healthcare consumables, in the, in the first quarter.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

To follow up on the, on the corporate, another... I believe you mentioned that it was in incentive comp and a type of a reset in incentive comp that helped drive that. Is that type of year-over-year increase from a dollar perspective, something we should be, you know, modeling in over the next several quarters as well?

[Dan Carestio, President and CEO at STERIS]

Yeah, Matt, if you recall, we, we called out last quarter that we will have a $40 million hole, if you will, that we have to fill, from an incentive comp expense year-over-year. That is a big driver of that increase in corporate expense. A couple of the other drivers in there, we also opened a new distribution center in Indianapolis, Indiana, so that is also an additive cost. One of the other things that we're seeing, is our usage of our employee Healthcare benefits is on the rise, so we're also incurring slightly more expense there. Those are the three main components that we saw in the first quarter, but for sure, you know, that $40 million we called out last quarter.

[Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets]

Thanks, Mike.

[Dan Carestio, President and CEO at STERIS]

You're welcome, Matt.

[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, VP of Investor Relations at STERIS]

Thank you, everybody, for taking the time to join us this morning, and we look forward to seeing many of you out on the road this fall.

[Operator]

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

Participants

Executives

• Dan Carestio, President and CEO
• Julie Winter, VP of Investor Relations
• Mike Tokich, SVP and CFO

Analysts

• David Turkaly, Managing Director and Senior Equity Research Analyst at Citizens JMP Securities
• Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler
• Matthew Mishan, VP & Senior Equity Research Analyst at KeyBanc Capital Markets
• Michael Polark, Senior Equity Research Analyst at Wolfe Research
• Mike Matson, Managing Director and Senior Equity Research Analyst at Needham & Company
• Patrick Wood, Managing Director and Equity Research Analyst at Morgan Stanley
• Analyst at Stephens