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spk04: Good morning, everyone, and welcome to the SARIS PLC Fiscal Second Quarter 2024 Conference Call. All participants will be in a 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 and then one on your touchtone telephones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Julie Winter, Vice President of Investor Relations. Ma'am, please go ahead.
spk01: Thank you, Jamie, and good morning, everyone. As usual, speaking on today's call will be Mike Tokich, our Senior Vice President and CFO, and Dan Crestio, our President and CEO. And 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 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. Staris' 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 questions, I will hand the call over to Mike.
spk03: Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our second quarter performance. For the quarter, constant currency organic revenue increased 8%, driven by volume, as well as 330 basis points of price. Gross margin for the quarter decreased 50 basis points compared with the prior year to 44.3%. Favorable price was more than offset by lower productivity and continued material and labor inflation. EBIT margin decreased 130 basis points to 22.5% of revenue compared with the second quarter last year, which reflects the decline in gross margin as well as the anticipated increase in year-over-year incentive compensation expense. The adjusted effective tax rate in the quarter was 23.7%. Net income in the quarter was $202.2 million, and adjusted earnings were $2.03 per diluted share. Capital expenditures for the first half of fiscal 2024 totaled $149.9 million, while depreciation and amortization totaled $290.2 million. We are adjusting our capital spending outlook for fiscal 2024 down from $375 million to $310 million. This change reflects the timing of projects for our AST business. This change will allow us to offset higher than planned inventory levels, keeping free cash flow outlook for fiscal 2024 at approximately $685 million. Debt increased to $3.4 billion in the second quarter, reflecting borrowings to fund the acquisition of the BD assets. Total debt to EBITDA at quarter end was approximately 2.3 times gross leverage. Free cash flow for the first half of fiscal 2024 was $284.7 million, as we benefited from lower capital spending and the decline in cash used for tax and compensation-related payments. Inventory remains elevated as we continue to focus on reducing lead times and meeting customer demand. With that, I'll turn the call over to Dan for his remarks.
spk05: Thanks, Mike, and good morning, everyone. Thank you for making the time to join us to hear more about our second quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, our second quarter continued the momentum we have experienced in our healthcare segment for the past few quarters. Overall, we are very pleased with our performance in the healthcare segment and is anticipated to outperform our original expectations for the fiscal year, offsetting the macro challenges impacting demand in our other segments. Looking at our segments, healthcare constant currency organic revenue grew 14% in the quarter. We experienced double-digit growth across capital equipment, consumables, and service again this quarter. This is driven primarily by procedure volume rebound in the U.S., as well as price and market share gains. As anticipated, our backlog has reduced as we are able to ship at a faster pace than new orders are coming in as we get back to normal lead times for our customers. During the first half, we saw a strength in replacement orders, representing 65% of our total orders in healthcare. We are increasingly confident in our expectations of a strong year for our healthcare segment. Growth will, however, decelerate in the second half as we face very challenging comparisons in the fourth quarter. Turning to AST, constant currency organic revenue declined 1%. While our services business grew 5%, our capital equipment business declined due to the timing of large shipments. In addition, our performance in the quarter continued to be impacted by two short-term situations, inventory destocking in the MedTech space and the year-over-year market decline of the bioprocessing customer demand. We do see very positive signs of recovery in the MedTech demand. We saw good growth in the U.S. during the quarter, reflecting the improving procedure environment and the burndown of customer inventory. We continue to see weakness, however, in the European markets, where procedure recovery is taking a bit longer to take hold. From a bioprocessing perspective, as we have said, FY24 represents a bit of a reset, and we do not anticipate returning to year-over-year growth in bioprocessing in fiscal 2024. As we head into the second half, our comps ease as it was the third quarter of fiscal 2023 when we first witnessed declines in bioprocessing. Based on these factors, our outlook continues to reflect very strong growth in the second half of the fiscal year for our AST segment as compared to the first half. Life Sciences revenue grew 5% in the quarter on a constant currency organic basis as the delayed capital shipments from the first quarter were recognized, contributing to 18% growth in capital equipment. Consumables grew 4% and service was flat. As you are hearing from many others in the space, the short-term demand remains a bit murky. We continue, however, to be very optimistic about the long-term trends driving demand for aseptic manufacturing and biopharma. Our dental segment second quarter revenue declined 6% on a constant currency organic basis as revenue was limited by customer destocking of inventory, in particular for infection control products. Despite these challenges, we are impressed with the ability of the business to sequentially improve margins, delivering even margins above total company in the quarter. All in, we are pleased with the first half of the fiscal year. U.S. procedure trends continue to shift in a positive direction, supply chain challenges have largely abated, and our ability to execute and ship capital products to our customer delivery times has greatly improved. That said, there are still pockets of uncertainty which remain outside of our healthcare segment. We are maintaining our expectations of 6% to 7% constant currency organic revenue growth for fiscal 2024, as we expect a strong third quarter followed by a very tough fourth quarter comparisons, which will limit our total growth in the second half. In addition, from an earnings perspective, we now have an additional headwind from currency of about $0.05. which we are absorbing in our current outlook of $8.60 to $8.80. That concludes our prepared remarks for the call. Julie, would you please give the instructions and we can start the Q&A.
spk01: Thank you, Mike and Dan, for your comments. Jamie, can you please give the instructions for Q&A and we can get started.
spk04: Ladies and gentlemen, we'll now begin that question and answer session. To ask a question, you may press star and then one on your touchtone telephones. If you are using a speaker phone, we do ask you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. Our first question today comes from Johnson Jacob from Stevens. Please go ahead with your question.
spk06: Hey, good morning. Thanks for taking the questions. Maybe Dan or Mike following up on kind of the last comments in the 2024 outlook. It seems like some of the years playing out as expected and appreciate the comps, but it often seems like healthcare is going better than expected. Can you just talk about the other three segments and where things have changed the most? I think reading the tea leaves, Dan, maybe it seems like life sciences is the biggest delta since the beginning of the year, but just curious. kind of how those other three segments are playing out this year versus original expectations?
spk05: Yeah, I mean, I think we still expect to deliver a good year in life sciences. It's just there's still some continued destocking going on in the space. And you see this across, you know, everybody that's reported, you know, that sells either tools or disposables into the biopharma and pharma industries in general. You know, it's been announced in the last month or so that, you know, Pfizer is doing a $3.5 billion cut. and some other pharma companies are sort of following suit. So generally speaking, when we see that start to happen, there'll be a short-term pullback in the industry. But the long-term outlook for biopharma and aseptic manufacturing, which is really our sweet space, is really positive, and we have a great portfolio and expect to do well. In terms of the AST business, You know, as I mentioned, we've seen a positive trend in the U.S. You know, I think the procedures have crossed over with sort of the excess inventory that was out there in the past quarter, and we're seeing very positive growth from our MedTech customers. In terms of Europe, it's taken a bit longer for that to happen. You know, there's been a lot of strikes, and there's been a lot of labor shortages in Europe, and just have not mobilized, you know, health care delivery in many places the way the U.S. has to date. Eventually that will abate, and even if it doesn't, eventually they're going to burn down the inventories and excess that they have sitting around. And I would have expected that around the time that we saw it in the U.S. I think, as I mentioned in previous calls, we expect it sometime in the fall time period. That's still the case. That could burn into the winter, I guess. But generally speaking, it's a matter of weeks or a few months, not quarters at this point. And then I think we've covered bioprocessing at length. Last year, Q2 was our high point, and then we started seeing it slowing in Q3 and ultimately sort of bottomed out by Q1 of our fiscal year, give or take. So the comps get easier for us in the second half for that in terms of our performance, especially as we get into Q4 and then next fiscal year.
spk06: Got it. Thanks for all that. I guess my follow-up, just on backlog, both healthcare and life sciences down sequentially, is it fair to say healthcare is more about kind of execution and you catching up on lead times and maybe life sciences a little bit at the macro or anything else you'd share on that?
spk05: Yeah, no, I would say both are just getting products out the door. We had a lot of stuff that was supposed to move out in the prior quarter in life sciences in particular that slid until the end of the quarter and didn't get recognized until this quarter. So that's just purely a timing issue, and the orders remain pretty strong. And we've just been able to get a lot more stuff out of our factories as we bring our lead times down pretty significantly. So we just had a great delivery quarter from capital and general cross-post businesses.
spk07: Got it. Thanks for taking the questions.
spk04: Yep, sure thing. Our next question comes from Dave Tricalli from JMP Securities. Please go ahead with your question.
spk00: Hey, good morning. I just wanted to ask one follow-up on the AST side. It seems like we have some companies that are saying demand is super high. They're actually experiencing bottlenecks to get devices sterilized. And you mentioned the timing of projects for AST. And I'm just curious, is there a shift going on between some of the modalities there? What exactly... the MedTech customer inventory that you're highlighting are you seeing?
spk05: Like I said, we have seen demand come back really strong in the U.S. market in the past quarter, back to what I would consider sort of normalized growth rates versus what we saw for the past two or three quarters. It's taken a bit longer for that recovery to happen outside of the U.S. The plants are busy in North America. you know, and they're not as busy, I guess is what I would say, outside of the U.S. We expect that to change in the next quarter or so.
spk01: And, Dave, the shortages, I think, have been more tied to EO sterilization.
spk05: Yeah, very.
spk01: Where our softness has been on the radiation side. Yeah.
spk00: That makes sense. And then maybe just to follow up for Julie or the team, you know, that master file, the pilot program – I'm just curious as to what you think that means for you. Obviously, I think you said it's Steris' first, but I don't know how to sort of analyze that or what you think that'll mean for you moving forward.
spk05: Yeah, so what it does is it really gives our customers the ability to significantly improve and build much more resilient supply chains. Specifically, it allows them to switch supply between different modes of sterilization, whether that's EO to X-ray or gamma to X-ray or even E-beam to gamma or even to switch within our network of either our facilities or technologies without having to do a massive refile from a regulatory perspective. So products that are under 510K would not have to do a refile effectively. They would enter under our master file program And then when they had their next normal sort of course of audits from the agency, they would check their records just to make sure everything was in place. But it lowers a significant regulatory hurdle, I would say, that allows customers to build in much more resiliency and also switch between technologies.
spk00: Great. Thank you.
spk04: Sure thing. Our next question comes from Michael Polark from Wolf Research. Please go ahead with your question.
spk07: Hey, good morning. AST question for the back half. Obviously, the segment has the MEVX in it, and you break it out, so that's helpful. Not a lot of MEVX in the front half. Can you help level set how much MEVX you expect in the back half?
spk02: In the second half, it'll be less than...
spk03: Less than $15 million of total revenue for the first half, which was about $3 million. Again, not material, but unfortunately, year over year, the percentages are large, but the dollars are not.
spk07: Yep. Understood. No, it's helpful. And then on the AST services phasing, look, I hear all the destock comments, and it sounds like light at night. end of tunnel, especially in U.S. devices and bioprocess, worst of it, annualized in now. I'm looking at AST services in the front half up 5% year-on-year. What's kind of a good either sequential growth rate or year-on-year growth rate to plan for in the back half?
spk03: In the second half, we expect low double-digit growth rates getting back to more normalized
spk07: In the AST services line.
spk03: The AST services line, exactly.
spk07: Okay. Helpful. I appreciate that. And then the follow-up topic, equipment, healthcare, you know, it's not a metric you report, but we can do our own math. I calculate a book to bill, if you will, for you for healthcare equipment. It's It was like 1.0 last quarter. It was sub 0.9 this quarter. My question is on the fresh order environment, and I want to set it up this way. You have a big backlog. You have been working real hard to convert the backlog, and we're seeing conversion rates tick up, and that's pretty clear. I wonder about, like, your willingness to refill the backlog as fast. Like, is there an element where you just, you know, do you need to bid for new business as much in the moment right now as you otherwise would because of the backlog? And that's a dynamic. So I'm curious there. And then just broadly on hospital capital spending, if you will, as we move into calendar 24, like, similar seeing stresses and strains, no impact. And any thoughts on this would be great. Thanks.
spk05: Yeah, just a couple. That's a lot. Just a couple comments. And I would say, you know, our orders remain strong. And I mean, there's so much activity out in the field in terms of our portfolio right now. And, you know, one of the positive signs I saw was this significant increase in the replacement business in the last quarter or so versus the prior few periods. And that tells me that A, our customers have confidence in our field, also has confidence we can deliver in a relatively short period of time with normal lead times, and B, they're willing to spend money on a lot of pent-up maintenance capex that hospital systems have. I've talked about this before, and that is that although the healthcare providers are not necessarily killing it financially right now, They definitely are on a path to profitability, and many of them are in a good cash flow situation, whereas there was a lot more concern a year ago. And the reality of it is as well is that our capital equipment is not – they're not luxury products. These are capacity enablers. You can't do procedures without lights and tables. You can't do procedures without adequate capacity in the sterile processing department. And that's really what we do. It's not all that sexy, but it's a requirement.
spk04: Thank you. And our next question comes from Mike Mattson from Needham & Company. Please go ahead with your question.
spk08: Yeah, thanks. I guess I'll start with the dental business. You know, it was down again. It looks like you're starting to lap some of the declines that you've been seeing. So, you know, is that, I guess, just what's the outlet there? Is it just really boiled down to kind of the economic headwinds or something else maybe?
spk05: Yeah, I mean, short term, we expect it to be about flat this fiscal year, and we would attribute that entirely to the economic downturn and the ability of people to spend cash right now on elective-type dental-type procedures, and it's just generally impacting the entire industry, and others have spoken on that topic prior to us, I'm sure, in the last couple weeks. Long term, we think it's a solid mid-single-digit grower. But some of these challenges facing discretionary spending, you know, in particular in the U.S. economy, have got to get sorted out in order for it to get back to those type numbers.
spk08: Yeah, okay. And then, you know, it does look like you're obviously working down the backlog in the health care business, but – and, you know, once – I wanted to ask about just hospital staffing with regard to the, you know, getting the equipment installed. I know that that's been an issue in the past, at least with some companies. You know, have you seen that, you know, improving? Is that still a constraint on the, you know, ability to, you know, book the revenue there?
spk05: No, we've seen that. I mean, there's more coordination today than there used to be maybe in terms of getting stuff received at the docks and, you know, getting shipments married up so we can do install. But, you know, keep in mind, we've got well over a thousand techs in the U S that do this work for us. You know, they're, they're full-time stairs employees that are, that are ready to go to help shepherd the process to get our stuff into the doors and also, uh, get it installed properly.
spk08: Okay. Got it. Um, and then, um, I know you may have addressed this in the prepared remarks, but I got on call a little late. So I just wanted to ask about the gross margin. It did look like it was down a little bit, uh, sequentially. Um, and, uh, You know, you had a nice improvement, I guess, last quarter sequentially from the fourth quarter. But, you know, just any kind of commentary there would be helpful.
spk03: Yeah, Mike, we had mentioned in the prepared remarks that, you know, even though gross margin was down 50 basis points, we did have favorable price, but unfortunately that was more than offset by lower productivity and continued material and labor inflation. So, you know, the productivity – As we are moving stuff through the facility, we are not as efficient as we typically would be, so that negative productivity is hurting us in the short run.
spk08: Yeah, got it.
spk01: AST volume declines sequentially don't help margin either.
spk08: Yeah, okay, thank you.
spk04: Once again, if you would like to ask a question, please press star and 1. Our next question comes from Jason Bednar from Piper Sandler. Please go ahead with your question.
spk07: Hey, good morning. Thanks for taking the questions here. I want to start on, I think, the topic of the day here at AST, but maybe first on the CapEx side with AST, just the decision to postpone some of those projects that's influencing the CapEx outlook for the year. Appreciate that. wanting to protect free cash flow. But is there a risk at all here that you're foregoing future growth in AST, just in not adding capacity? And should we be thinking about this CapEx spend shifting out of fiscal 24 into 25 and just next year being an above normal year of CapEx spend?
spk05: Yeah, Jason, this is Dan. Thank you for the question. Just to be very clear, we're not delaying these shipments. They were delayed just by natural building and just current environment of getting things installed and everything else and permitting processes and everything else. We have not intentionally slowed those in any way. They've just naturally slowed. And yes, the answer is we would expect those now to bleed over into next fiscal year from a CapEx perspective. We haven't pulled any projects specifically.
spk07: Okay, Dan, you're talking about the CapEx spend, not the equipment that you're recognizing as revenue, just to be clear.
spk05: Correct. Yes, I'm talking about capex spend.
spk07: Okay. Okay. So it was like $65 million of spend that's shifting out of this year into next year?
spk03: The bulk of that is AST. It's not 100% AST, but the bulk of that $65 million is directly related to the AST segment.
spk07: Got it. Okay. All right. Thank you. And then we've had some questions here on backlog. It sits down $100 million from peak levels. I know we were running... well above normal for a long period of time. What do you see as the baseline? Where do you think backlog settles in a normal environment? How much more backlog work down do you think we need to see before we're kind of at that, again, that normal level?
spk05: We think normal somewhere around 350, but we're happy to keep it higher if we keep pulling in orders. It was artificially high in the past because of our ability to manufacture and deliver, you know, and as we've sort of solves those issues from a supply chain perspective. It's now really coming down at an accelerated pace.
spk02: Although I would say that our lead times continue to be longer than we would like them to be. Okay.
spk07: All right. Thanks. Last question from me. I don't think I heard it, but if I did, I apologize. Are you able to bifurcate what you're seeing with your USAST services business and contrast that against what you're seeing in Europe. How much of a growth rate delta are you seeing across those two markets? It seems like the opportunity for improvement here is more dependent on the European market improving. So just wondering what kind of visibility you have on procedures in that geography recovering. And if you're seeing anything or hearing anything from your partners, that would be an encouraging leading indicator.
spk05: We do look at it. We have a lot of data points, obviously, being in the hospitals and also dealing directly with all of our customers and their insights of what's going on in the market. And there's a lot of public information from NHS and the other public health commissions in Europe. What I would say is it's got to get better. And even if the procedure rates don't improve, at some point the inventory burndown crosses over and we get back to normal stocking from our customer perspective. And You know, everybody got really bloated on inventory over the last couple years, and everybody now is trying to bring it down. And we've heard some customers say as much as 40% or 50%. And that takes considerable time. Like I said, we've crossed over that line in the U.S., and we believe that we'll get to that point in the coming weeks or months, definitely not quarters, I would say, you know, relative to the European destocking as it relates to MedTech. And the other driver we talked about is as we get into the back half of the year, the comps on bioprocessing, the single-use disposables, become a little easier against us. That's been a real headwind for the first two quarters of the year.
spk09: Okay. All right. Thank you.
spk04: And, ladies and gentlemen, at this point, in showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.
spk01: Thank you everybody for taking the time to join us. I know you have a busy week. We do look forward to seeing many of you out on the road over the next few weeks at several conferences.
spk04: Ladies and gentlemen, with that we'll conclude today's conference call and presentation. Thank you for joining. You may now disconnect your lines.
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