STERIS plc

Good day and welcome to the Staris PLC Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please also note that this event is being recorded. I would now like to turn the conference over to Julie Winter, Investor Relations. Please go ahead.

Thank you, Matt, and good morning, everyone. Speaking on today's call, as usual, will be Mike Tuchich, our Senior Vice President and CFO, and Dan Crestio, our President and CEO. And I do have just 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 Staris 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 Staris' 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. SARIS'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 today's 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 third quarter performance. For the quarter, constant currency organic revenue increased 9%. Growth was driven by organic volume as well as 100 basis points of price. Acquisitions added $333 million to revenue, which is broken down by segment in the press release tables. To assist you with your modeling within the healthcare segment, of the approximately $210 million in acquired revenue, About 60% is consumable revenue from both Key and Cantel Medical. We passed the first year anniversary of the Key Surgical acquisition in mid-November, so this quarter, Key Surgical's revenue is split between organic and inorganic. Gross margin for the quarter increased 90 basis points compared with the prior year to 45.1%, as favorable productivity, pricing, and acquisitions were offset by higher material and labor costs. We continue to face increased material labor costs, which total about $10 million in the quarter. As we look at the fourth quarter of the fiscal year, we expect increased pressure on material labor of approximately $20 million, about twice as much as we anticipated just one quarter ago. For the full fiscal year, we anticipate absorbing approximately $45 million in unplanned material and labor costs, all while continuing to serve our customers and deliver a record year of performance. EBIT margin for the quarter was 24% of revenue, an increase of 40 basis points from the third quarter last year. RD expenses increased, and as anticipated, we are seeing operating expenses such as travel and sales and marketing costs return, somewhat limiting EBIT margin growth. The adjusted effective tax rate in the quarter was 21%, higher than last year, but in line with our expectations. We now expect the full year tax rate to be approximately 21.5%, reflecting year-to-date actuals and our expectations for the fourth quarter. Net income in the quarter increased to $213.3 million, and earnings per diluted share were $2.12. Our balance sheet continues to be a source of strength for the company. At the end of the quarter, cash totaled $359.1 million. We continue to focus on debt repayment as evidenced by our leverage ratio at the end of the third quarter below 2.6 times. Year-to-date capital expenditures totaled $214.5 million, while depreciation and amortization totaled $319.3 million. Pre-cash flow for the first nine months was $310. point three million dollars. As anticipated, this is the client from the prior year due to costs associated with acquisitions and integration of the Cantel Medical acquisition and higher capital spending year over year.