STERIS plc

Good day, and welcome to SARIS PLC First Quarter Fiscal 2021 Conference Call and Webcast. 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 white on a touchstone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would like to turn the conference call over to Ms. Julie Winter, Investor Relations. Ms. Winter, the floor is yours, ma'am.

Thank you, Mike, and good morning, everyone. On today's call, we have Walt Rosebrough, our President and CEO, Mike Tokich, our Senior Vice President and CFO, and Dan Crestio, our Chief Operating Officer. I do have a few words of caution before we open for comments from management. 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 SARIS 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, segment 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, including reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call. with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. With those questions, I will hand the call over to Mike.

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 first quarter performance. For the quarter, constant currency organic revenue declined 3%. by a decline in volume offset by 70 basis points of favorable price. As a reminder, healthcare capital equipment revenue in the quarter reflects a one-time benefit of $15 million for a change in the timing of revenue recognition. You may recall that when we adopted the new revenue recognition accounting standard at the beginning of fiscal 2019, Our operating room integration capital equipment products required significant on-site system configuration during the installation process. As a result, we were required to defer all revenue until installation was complete. Since then, we have enhanced the design of our OR product line, which allows for full assembly and configuration of the equipment in our plant before shipment and simplifies the installation process. As a result, Revenue is recognized based on the shipping terms consistent with other capital equipment products. In addition, constant currency organic revenue for the quarter includes a total of about $10 million from prior year tuck-in acquisitions, primarily in health care, spread across capital equipment, consumables, and service. Excluding both of these items, total company constant currency organic revenue would have declined 8%. Gross margin for the quarter was about flat at 44.1% and was impacted favorably by mix and price, somewhat offset by lower productivity due to reduced volumes. EBIT margin for the quarter was 21.3% of revenue, an increase of 180 basis points from the first quarter last year, due in part to approximately a $5 million benefit from the change in the timing of revenue recognition, as I noted earlier, as well as lower travel expenses, compensation-related costs, and sales and marketing expenses. The adjusted effective tax rate in the quarter was 17.3% and includes the benefit of stock compensation deduction. Net income in the quarter grew 6% to $111.8 million and earnings increased to $1.31 per diluted share. Our balance sheet is a continued source of strength for the company. Considering our cash position of $255.6 million, access to available credit lines, and a leverage ratio below 1.5 times dativa da, we are well positioned from a liquidity standpoint. During the quarter, capital expenditures totaled $66.9 million, while depreciation amortization was $49 million. The increase in capital expenditures versus the prior year is related to expansion projects within the AST segment. Free cash flow for the quarter was $67.4 million, an increase over the first quarter of last year, primarily due to improvements in working capital and deferred tax payments under government programs. With that, I will turn the call over to Walt for his remarks.

Thanks, Mike, and good morning, everyone. Our solid overall performance in the first quarter reflects the diversified nature of Steris' business across our medical device pharma, and healthcare customers. Collectively, our constant currency organic revenue declined just 3% while adjusted earnings increased compared to the same quarter last fiscal year. Given the circumstances, we are very pleased with those overall results. Healthcare, our biggest segment, most impacted by the reduction in deferrable procedure revenue, declined 10% with mixed performance across the segment. Healthcare consumables were down 28% for the quarter but we generally saw monthly sequential increases culminating in near prior year levels by the end of June. As we discussed last quarter, our endoscopy business continued to be one of the most impacted areas for Steris, but it is following the same trend as the rest of consumables. Service declined 10%, but also witnessed similar trends as consumable products, with June returning to prior year levels in our equipment service business. In healthcare capital equipment, which grew 6% in Q1, shipments continued from strong backlog entering the year, as well as the $15 million benefit in ORI that Mike mentioned earlier. I would add that this benefit in revenue also reduced healthcare backlog by the same $15 million as those shipments were recognized. Even with that reduction, we ended the quarter at $164 million of healthcare capital backlog down just $8 million compared to the first quarter of last year when the ORI change is taken into account, and up $9 million sequentially from Q4 with the same adjustment. As I've commented before, we would not be surprised to see healthcare capital equipment come under some pressure over the coming quarters, particularly replacement equipment, some of which can be delayed by our customers. Turning to AST, which serves medical device customers, that business's revenue was flat with the prior year. This was largely the result of continued elevated demand for PPE sterilization, offsetting a reduction in devices for deferrable procedures. Once again, we experienced increased procedural device processing on a sequential basis within the quarter. Life Sciences revenue grew 21% in Q1, as we continue to benefit from our pharma customers' expectations for growth in vaccines and biologics. Supporting that growth, Life Sciences consumables grew 34% versus last year, which is exceptional performance, driven in part by our customers' desire to build inventory. While we would not suggest this growth rate is sustainable, we do continue to see favorable growth trends for this business. Our margin and earnings improvement reflected our success in spending reduction, in particular, travel expenses and variable selling costs, which will generally come back as our businesses return to normal. In addition, as we discussed last quarter, we chose to avoid unpaid layoffs. Instead, we placed our underutilized people on short-term, fully paid furloughs, some of which were partially subsidized by governments around the world. We have tracked the costs related to that decision along with other COVID costs, about $9 million net of government subsidies, and are excluding these items from adjusted profit in the quarter. We believe that maintaining our trained and dedicated staff was the right thing to do and is helping us now support our customers as they ramp up health care procedures to normal levels. Our furloughs have been reduced substantially as businesses come back. On another note, we have continued to invest in R&D as originally planned, and we expect to do so going forward. As a result of these factors, we anticipate that our adjusted SG&A dollar spend will rise as business rebounds. Since we last spoke to you in May, we've witnessed a turnaround in deferrable procedure volumes in the United States and Europe. While the recovery is still region by region and some COVID hotspots are occurring, we have been pleasantly surprised at how quickly healthcare providers have been able to bring procedure volumes back. Many of our product lines are now running flat to slightly up as compared to the prior year. Although we may see some reductions due to COVID hotspots, we do not expect a return to the low levels of deferrable procedures experienced in April and May, as healthcare providers have improved their ability to combat the disease. We believe that Sterence's balanced business model will continue to be a benefit and remain optimistic that we are well positioned to respond to changes and uncertainties in the market. Now changing gears a bit from our financial performance, yesterday in our earnings release, we announced the addition of a new board member, Chris Holland. You may know Chris from his role as CFO at C.R. Bard prior to their acquisition by Becton Dickinson. Chris brings a great experience to our board, and we're happy to have the benefit of his insight and perspective. We also announced an increase in our quarterly dividend yesterday, bringing us to 40 cents per share per quarter and representing our 15th consecutive year of dividend increase. As Mike discussed, our balance sheet and cash flow remain strong, and we are pleased to be able to continue returning value directly to our shareholders through our dividend. As you know, Steris is an essential business supporting healthcare. We are very fortunate to be in the business we are in and to be in strong financial position. Our plans to be nimble and ready to support our customers as needed are already paying off. We believe that our approach to managing through the pandemic leaves us well positioned to capitalize on future opportunities. Before we open for questions, we express our respect and gratitude to the healthcare providers on the front lines of the pandemic around the world. These are unprecedented times, and the challenges facing caregivers have been unexpected and monumental, and they continue to do remarkable work to this day. We also thank the people of Starus, those working with our customers in the field, and those working behind the scenes in our factories, labs, offices, and from their own homes in this unusual time. Our team has done a great job of adjusting to this difficult situation while serving customers and their patients. Our confidence in our strategic positions and operating capabilities continues to grow. While there is more uncertainty in the near term given the COVID situation, both potential upside and downside, we stand ready to capture opportunities and mitigate risks. We continue to believe that the long-term future for Steris is bright. I will now turn the call back over to Julie to open Q&A.

Thank you, Mike and Walt, for your comments. Mike, if you would please give the instructions, we can get started with Q&A.

Yes, ma'am. Again, we will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to address your question, please press star then 2. Again, it is star then 1 to ask a question. At this time, we will just pause momentarily to assemble our roster. And the first question we have will come from Dave Turkley of J&P Securities. Please go ahead.

Great. Good morning. Well, maybe just to kick it off here, Dave, I'd love to get your thoughts, given the customer base that you have, on sort of what the state of the consumer is today, meaning like patients of the hospital, their attitudes towards surgery and going in. I know you mentioned that monthly your progression improved. I'd just love to get your high-level thoughts on do you anticipate that continues ahead, and have you noticed the difference yet? in terms of the hospitals opening up to the surgery, you said it did come back rather quickly.

Well, the answer is certainly yes. And I think the healthcare systems around the country and around the world have, you know, done a fantastic job of assuring patients that it is safe to go to their facilities for procedures. And They've done a number of things and done that in a number of ways. I don't know if you happen to have been into a hospital or surgery center recently. I have. And, you know, the precautions that they're taking are fantastic, both with their own staff and with the patients who are coming in. Visitors no longer come in, so they've taken care of that problem pretty straightforwardly. There are all kinds of methods that they've used, and again, we're talking to them all the time about this. First, my understanding from speaking with a number of them is that kind of the patient or potential patient's number one factor in making that decision is their physician. And so they've done great work in outreach using their physicians and their physician offices to give outreach to the patients, reassuring them that the hospital may be one of the safest places to be as opposed to, all kinds of other things that people are doing around the country, which is what's causing COVID to be spread. And I think the facts bear that up. They've done a great job with PPE. We know a number of physician groups who have extraordinarily low amounts of COVID in their own staffs, even though they are actively involved, heavily actively involved in COVID patients. So It's both the work they've done to make their places safe and the marketing, but it's marketing to let people know that it's safe to return. It's largely the physicians doing that, not the facilities so much. The other things they've done is They have moved more and more procedures into spaces that patients feel more comfortable, so into ambulatory surgery centers and other types of centers like that, as well as the standard operating room. So, I mean, really, it's pretty miraculous the work they've done the last two or three months to offset this significant gap. concern among potential patients. And of course, you know, the toughest areas were the places like New York City that were overrun early. And it's been, I think, somewhat easier in other spaces where we didn't see that level of burden on the hospitals.

Thank you for that. And a quick follow-up for Mike. The $15 million, is that the last we see of that? Or is that something, I know you mentioned it was from that 2019 change, but Does that happen again in the future, or is that done now?

No, Dave, that is a one-time adjustment that we had, so we are final at this point in time. You will not see that again.

Great. Thank you so much.

David, only to the extent that that business grows, the growth will come quicker just because the revenue is recognized quicker, but there's not a, if you will, a pull-forward-like effect.

Got it.

Thanks.

Next we have Chris Coley of Stevens Inc.

Thank you. Good morning. Appreciate you taking the questions and congratulations on a solid quarter there. Maybe if I could, let's take a little bit of a look at the margins for my first question on both life sciences and AST and appreciate the commentary, Walt, that you saw some stocking of consumables in particular in life sciences. You hit a record margin there in life sciences of 41.5%, which is really enviable. Help us think a little bit, though, about how that business may have shifted structurally, such that as we start to see some normalization there in consumable purchasing patterns, how we think about that operating margin. I guess similarly to that, a little bit of a taper in AST, which is to be expected with to shift more towards PPE in some instances. But is that something that we should think about lingering throughout the fiscal year and kind of slowly working its way back out, or is that something that would start to reverse itself maybe more so in the second half of the fiscal year? I just want to make sure we're thinking about the marketing contribution correctly. I've got one quick follow-up.

Okay. Hi, this is Dan Carestio, actually, and on the life science question, you know, I think the increased margin that you saw in the first quarter was heavily based on the fact that we had a mix of very high consumable revenue stream. Some significant portion of that is stockpiling by our customers just for assurity of supply, and some portion of it is actually also increased demand from those customers. With all the investment being doled out right now in vaccine production, that is an area that is really in Seris Life Sciences' sweet spot for our portfolio because it requires aseptic manufacturing. And to the extent that that is sustained, we believe we'll see some sustained benefit for our consumables business in particular. To the extent that pharma starts making significant expansion investments in in either CMOs or their factories, then we may see some benefit in our capital equipment side of the business in the future. But in the interim and short term, we see it as purely a consumable play at this time.

And Chris, I guess I would add, I don't think anyone's thinking vaccines are going to slow down the next year or two. Probably not. So if anything, we feel bullish in general in the space. 34%, you know, year over year. We're not planning on that for very long, but we're bullish in the space. And on AST, you called it dead on, you know, PPE is – is a high volume relatively speaking lower margin product than many of the consumables that are related to surgeries that have been deferred and so that is largely a mix issue and and I would expect it to slowly reverse as the as the as the surgical-type devices come back. Now, I don't know that we're going to see PPE slack off a great deal, so, you know, it may not move back to the original numbers, but orders of magnitude, I would expect some of it to come back due to mix.

I really appreciate the call, and then just finally for me, you know, Walt, in my 15-plus years here, the leverage ratio being below 1.5 times, I mean, toggling across here. It's been a really long time since I've seen.

Maybe 10.

Yeah. And I understand and greatly appreciate that you've always ran the business very conservatively, not leveraging up here, and especially not in a challenged time. But this is a relative historic low level for debt to EBITDA. Just curious where you see opportunities from an M&A perspective from an opportunity to invest back in business to either enhance the margin profile long-term or drive growth. But I'm assuming rather than just accruing cash on the balance sheet, even after the 8% increase in the dividend here this quarter, there's got to be opportunities to deploy cash. So just how do we think about the capital structure? Thanks so much.

Sure, Chris. You know, we've spoken about that and have been very, very consistent over the years. decade or so you talked about in terms of how we intend to spend our capital. You know, we do intend to provide dividends. We think that's a good discipline of management to grow dividends somewhat in line with the profit and cash flow of the business. We absolutely intend to continue to investing in the businesses we already have, and you're clearly seeing that. As Mike mentioned, we actually spent more capital this quarter than we did a quarter ago last year. We have significant investments moving forward in the AST space for growth, which we absolutely believe is coming, and also in the hospital outsourced processing business. We are intending and have and intend to spend significant capital. And we're spending capital every place. Those two are just orders of magnitude kind of larger than some of the others at this moment in time. And that's, in our view, because of the long-term opportunity in those spaces. But in general, I'd rather spend money in the businesses I already run to make them either more efficient or new products than running around looking for new things. After that, we want to run around and look for new things. And we did have, you know, a number of things on our plate when this little COVID happened. issue hit us in and so we pulled back uh on that due to the near-term uncertainty in the space uh we are feeling um more comfortable that our own cash situation is in good shape and that uh that we can kind of go back to the um the search and hunt uh But, you know, those things, timing of those are never known. So I wouldn't suggest something's going to happen tomorrow morning, but it would be surprising if over the next year or two we don't see things that are worth investing in and that add to our portfolio. either in our space or right next door to our space. We don't like stepping out, you know, wildly into things we don't understand. So at a high level, that hasn't changed. It's just we took a little pause. And, you know, it seems like when it rains at 4, you remember last year we did 6 or 7. They were relatively small. A couple years before we did some relatively large ones. You know, we don't control the timing on those things. Usually the seller has more control of timing than we do. but we certainly continue to see a pipeline of things and tend to be active, and we are far more comfortable today than we were 90 days ago in making those kind of decisions.

Thank you.

And next we have Mike Matchett of Natum & Company.

Hi, thanks for taking my questions. I guess I'd Just wanted to start with what you're hearing from hospitals about the outlook for capital equipment spending. You know, the hospitals have obviously been hit by the elective deferrals, but there's also been a huge infusion of cash from the government. So just any thoughts there would be helpful.

You know, and I've probably said this a hundred times since I've been at Staris, but the health care capital spending loves change and hates uncertainty. And so, you know, we've been in a little bit more uncertain time the last little bit, but we're also seeing changes. So it's not at all clear exactly how that's going to work out over the next year or two. As I said, this move, we already saw that the greatest impact growth rate in our capital spending for health care was moving to ambulatory surgery type of facilities, whether they'd be a part of a hospital system or not. And so that, I would not be surprised if that accelerates, given what I said about trying to move patients to places that they feel more comfortable. A, it's closer to their homes, and B, it's There's just less traffic, if you will, and so I would not be surprised to see that spending accelerate. We have felt for some time that both particularly in surgery centers, as you see them take on more and more extensive surgeries, they cannot have the same type of capital equipment. They need stronger infrastructure to do that, so I would expect to see that mix move up in ambulatory surgery. And again, they can't do implants with the sterilization capacity they currently have, so we think that's an opportunity both for capital spending and for ORC. So we do see the intermediate to longer term positively in that space, and And for every surgery that moves out of the hospital, they put in two more complex surgeries. You know, one heart and lung transplant does not equal one artificial knee. And so even though the numbers may stay constant, the intensity continues to rise. So in the long term, we see it growing with hospital or health care revenue, generally speaking, as it has for the last 30 some odd years. In the very short term, there are a number of places, just like we did, put on capital freezes. But I think as they see – as they get visibility to their cash flow, they will begin spending again more in their normal fashion. And then the good news for us is we had a very good backlog going in, which we rarely see cancellations. And then lastly, the – uh the the big projects uh are rarely uh stopped or slowed down they may just throw down a little bit just for labor but they're rarely stopped or slowed down any consequential way once you put steel on the ground you need to fill the uh fill the facility so those will i think will continue as they would have but the pipeline's a bit softer right now than uh what we saw 90 days ago, let's say, or before COVID got serious in the U.S., but for roughly 45 to 60 days, you know, we had no ability for our salespeople to access facilities, they shut down everything but patient care. And so, you know, we're now back in the field, working with facilities on their needs. So I think it's early yet to predict the exact strength or lack of strength in capital equipment. But I think the intermediate to long term looks pretty good.

Okay, thanks. And then, just as far as ASP goes, that sounds like you're in the PPE has been driving a lot of sterilization demand. You expect that to continue to remain strong. At the same time, devices, the elective procedures seem to be recovering. So I'd imagine the volume of device sterilization is going to be going up. So is that the right way to think about it? And then do you feel like you've got adequate capacity to meet all that demand if those things are both seeing high volumes? Thanks.

In short, yes, is the answer to your first question. Is that the way we see it? That's almost exactly how we see it at the moment. The second question in terms of capacity, there's a reason we're spending several hundred million dollars over the next few years building capacity in AST. It's because we believe the demand will be there to utilize that capacity. And we always try to stay ahead of it to the extent we can. So we do think that there will be capacity requirements going forward, and we're building to meet that demand.

Great. Thank you.

The next question we have will come from Larry Cush of Raymond James.

Oh, thanks. Good morning, everyone. Good morning, Walt. Walt, I wanted to touch on just a couple quick things here. First on healthcare, just curious how you're thinking about surgical procedure volumes, you know, let's call it in the second half of the year. I know that things have obviously improved through June, and probably there's been at least some stabilization in July. But, you know, just trying to understand, do you think surgical procedure volumes actually can grow in the fourth quarter this year, or do you think they kind of run at levels that are actually down year over year? And I guess as part of that question, do you kind of view the fiscal fourth quarter, you know, sort of total – Growth here the lowest that you would expect for the year and then I two other ones quickly I'll try to answer the question.

I'm a little confused by the last piece of it. But yeah, the short answer is I do think Procedure volume still has room to grow from where it is You know if you if you if you think about it, you know, we're approaching last year's levels of You know, I would say most of the places that I've talked to, the facilities are saying they're running, you know, 85 or 95 percent kind of numbers of last year. But, you know, typically we see 3, 4, 5 percent growth. You know, and the same AIST business, what we've described is, you know, it's basically did last year, but that's not normal for us, right? We would expect to see 5%, 6%, 7% growth. So my answer to that is there's probably some catch-up from the last quarter or so that is going to occur, and then there's also catch-up of the growth that would have occurred Now, how quickly that all happens, I think, is a wild card. But in general, if you take a more 18- to 24-month view, my view is that the normal growth we would have seen will occur and we're likely to see some catch-up on top of it.

Okay, perfect. And then just to make it and state the question clearly enough, I was just, again, trying to understand if you think – you know, this fiscal fourth quarter, as you think about the dynamics across the business, you know, kind of marks the low for the fiscal year for you guys as you look at that growth year over year. And then I guess I'll just ask my other quick questions. You know, UK certainly seems to be lagging quite a bit from the rebound in surgical procedure volumes over there. So again, just sort of wondering what you're seeing in your outsource business and instrument repair business? And I guess one for Mike. Again, I know you mentioned this on the call when Walt was chatting his prepared comments, but what exactly was being excluded from gross profit associated with COVID costs? Thanks very much.

Sure, Larry. Again, if we were comfortable understanding relative growth rates, quarters to quarters, we've been giving guidance. And so, you know, timing is probably the toughest thing to call right now as opposed to, you know, I'll call it general trend. And so I think we've laid out our views of the general trends, but timing, we're not nearly so comfortable on that question. So I don't know that we would have a strong feeling that, you know, second quarter, third quarter, fourth quarter is going to be our best or worst year-over-year performance. You're absolutely correct about the U.K. At this moment, it tends to be the lagging entity in Europe. The converse is true of the rest of Europe. The rest of Europe has been ahead of the U.S. in bringing back procedures and our procedures. And our businesses, both ASD and ORCs, are showing that. So the continental Europe, for lack of better terms, has been stronger, coming back quicker, I should say. And the U.K. has been the slowest. entity in our space. As you know, the UK is a relatively small piece of our business, but it is real. And we have seen the ORCs are coming back from their very low levels that they were in earlier in the year. But they're not as far back as the ORCs in the United States on average. So at a high level, that's the answer to that question.

Great. And then, Larry, from your question regarding what is being adjusted out for the COVID-19 costs, as Walt talked about, the majority of that $9 million is related to the opportunity we took to furlough some of our underutilized folks. And we also received some of the benefit from the CARES Act in particular, also from some of the other government benefits in the U.K. and in Italy that were paying a portion of of our furloughed employees at that point. And as we did in the fourth quarter, we also had some meeting cancellation costs. We did not hold our annual meeting this year, so we had some cancellation costs associated with that. We had some PPE specifically for our employees, and we had some above and beyond enhanced cleaning protocols that we've also put into that incremental cost. So the total net cost of all that is $8.7 million in the quarter compared to about $800,000 in the fourth quarter of last year. Okay.

And I think orders of magnitude, Larry, without getting into numbers, the non-furlough piece probably is pretty similar last quarter and this quarter in orders of magnitude. And the bulk of that money is the furloughed people. And they're largely back to work at this point.

So just to finish that thought, as you look into the next quarter, we should assume that any excluded costs from gross profit should go down, I would think.

Our expectation is that revenue will rise and costs will rise with it as we bring people back to do that work.

We will continue to have certain costs. We will have certain costs. Cleaning protocols, but not to this extent, if you will.

Okay, great. Thank you.

Again, as a reminder, if you'd like to participate in today's Q&A, please press star, then 1 on a touch-tone phone. Again, that is star, then 1 to ask a question. Next, we have Matthew Michon of KeyBank.

Hey, Walt, Mike, Julie. Thanks for taking the questions. Just a follow-up on vaccine production. Assuming that we're going to get to full production of vaccines sometime in 2021, what are your customers indicating their needs might be from you? And any chance you could put some context or quantify what the opportunity might be?

At a high level, what we do for, for lack of better terms, COVID vaccines are the same as what we do for other vaccines. So the consumables that we would use would be very similar. at a high level. And in terms of quantities, it is way too early for us to make any judgments on that because we don't know who is and isn't going to be making, which drugs are and are not going to be the most effective. And there's two types, right? The prevention side of the equation and the helping the patients recover side of the equation, and both are under clinical trials right now. It's just – it's unusual for people to begin spending money on production before they know the answer to that question. So we have a number of people that are spending money for potential production that, you know, that may or may not end up manufacturing the drug. So, you know, that's the – That's the tough thing to call, and, you know, some of those people would be our customers, some of those people would not. So it's, I think at this point, early to call, but having said that, our general expectation is that we will see a rise out of that production.

Okay. I'm assuming this is a more fragmented area than healthcare for you, where you have very high market share. You have a lot of different competitors here. Is there a particular vaccine or biologic customer or technology that would have an outsized impact for you that we should be potentially watching?

Yeah, I don't know that it's more fragmented. In fact, maybe less fragmented if you step back and call hospitals or, you know, healthcare systems. There's a lot more health care systems in the country or in the world than there are vaccine producers. So I wouldn't say that. And I don't think there's any one specific technology that we would say it would be a step-out change for us versus all kind of general growth in vaccines. You know, the other side of this equation that's going to be interesting is, you know, other vaccines, right? I think people are going to get far more sensitive to taking flu vaccines than they used to be because, you know, you don't know whether you have flu or COVID until you've been tested, right? And so, and you certainly don't want both and all those things. So, the question is what's going to happen to vaccines in general. I think right now vaccines are going to be on the uptake.

And then on the capital equipment, I mean, If I remember correctly, the lead times on those machines are longer and they're more specialized. You know, when do you think those customers are going to have to put in those orders, you know, to ramp up, you know, more quickly for that kind of equipment?

Yeah. Currently, this is Dan Carestio. Currently, our lead times on GMP equipment, depending on the product, can extend, you know, from, from 30 days to seven, eight months, depending on how customized it may or may not be. And, you know, pharma customers are continually investing in capacity to stay ahead of it to the extent that they can. And so, you know, our backlog will flow through over the next few quarters, and our intake of orders remains strong. Sort of the capacity-limiting aspect It's not necessarily going to be capital equipment in the short term, though, as it relates to vaccine. It's going to be more production-level equipment for production of vaccine as opposed to the sterilization and decontamination equipment.

Okay. Understood. And last question. As you think about the ASCs being a positive driver for your capital over the last couple years, I think most people would understand that on the surgical equipment side. How do the AACs manage their sterilization needs and is that a net positive for you when you see a procedure move from the hospital to an AAC?

In general, the answer is yes, it's a net positive. Again, if you go back to the original general statement I make, capital loves change and abhors uncertainty. Moving from north to south, cities to suburbs, suburbs to cities, hospitals to ASCs, and ASCs to hospitals generally creates capital spend, increased capital spend because You don't tear a sterilizer out of a wall and then stick it in a brand-new facility, typically. Less true of tables, but it's very true of lights and all that. Tables you can move, but, you know, if you're two-thirds of the way through with the life, you know, maybe you go ahead and put new tables in this new facility. So generally speaking, any kind of change or movement from one place to another creates capital spend in the spaces that we operate in.

Thank you all. So, no further questions at this time. We will go ahead and conclude our question and answer session. I want to turn the conference call back over to Ms. Julie Winter for the closing remarks. Ma'am?

Thanks, everybody, for taking the time out of your morning to be with us today. We look forward to chatting with all of you soon.

And we thank you, ma'am, for your time also today and also to the rest of the management team. Again, the conference call is now ended. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a great day.