STERIS plc

Good morning, and welcome to the SARIS first quarter of 2025 earnings call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, you may press star, then two. Also, please be aware that today's call is being recorded. I would like to now turn the call over to Julie Winter of Investor Relations. Please go ahead.

Thank you, Joe, and good morning, everyone. As usual, speaking on today's call will be Mike Tugich, our Senior Vice President and CFO, and Dan Crescio, 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 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's securities filing. 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 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 cautions, 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. Our discussions today will be focused on results from continuing operations. As you saw in the press release, we started the year strong with total revenue growth of 8% in the quarter, constant currency organic revenue growth of 6%, driven by volume, as well as 270 basis points of price. Gross margin for the quarter increased 30 basis points compared with the prior year, to 45.1%. Positive price and favorable material costs were somewhat offset by inflation. EBIT margin decreased 20 basis points to 22.3% of revenue compared with the first quarter last year. Increased compensation and higher insurance costs are impacting EBIT margins. The adjusted effective tax rate in the quarter was 21.3%, lower than the prior year due to favorable discrete item adjustments. Net income in the quarter was $201.7 million, and adjusted earnings per share was $2.03, a 10% increase over last year. Capital expenditures for the first quarter of fiscal 2025 totaled $108 million, and depreciation and amortization totaled $112.7. Capital expenditures were higher year over year, mainly due to timing. With the closing of the dental divestiture on May 31st, we were able to pay down debt reducing total debt to $2.3 billion. Total debt to EBITDA at quarter end was approximately 1.6 times gross leverage. Free cash flow for the first quarter was $195.7 million. Free cash flow was impacted by the timing of capital spending. Last week, we announced our 19th consecutive year of dividend increases. Our quarterly dividend increased 5 cents per share from 52 cents to 57 cents. With that, I will turn the call over to Dan.

Thanks, Mike, and good morning, everyone. Thank you for joining 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. Looking at our segments, healthcare constant currency organic revenue grew 5% in the quarter. Our outperformance in consumables and services continues to be driven by procedure volumes in the U.S., as well as price and market share gains. It is our expectation that recurring revenue will continue to grow above procedure volumes and relatively independent of our capital equipment shipments. Over half of our consumables and service revenue is not related to our capital equipment. As anticipated, our healthcare capital equipment revenue declined in the quarter against challenging comparisons. However, we still anticipate low single-digit revenue growth for healthcare capital equipment for the full fiscal year. We remain confident in our expectations of a strong year for our healthcare segment. Turning to AST, constant currency organic revenue grew 8%, the best performance we have seen in over a year. Supporting that growth, Europe MedTech grew nicely in the quarter, and bioprocessing was about flat year over year globally. We are pleased to see these two factors playing out as planned and continue to anticipate a return to growth in bioprocessing revenue in the second half of our fiscal year. Constant currency organic revenue growth for Life Sciences was 4% in the quarter, driven by strong growth in consumables. As expected, the divestiture of the CECS business on April 1st impacted our as-reported revenues. For the full year, we are reiterating our outlook, including 6% to 7% constant currency organic revenue growth in adjusted earnings per diluted share of $9.05 to $9.25. Our expectations for free cash flow also unchanged at about $700 million, with approximately $360 million in capital spending. All in, we are pleased with the start of the fiscal year. Trends continue to head in a positive direction for all of our segments, and we are confident in our ability to deliver on our full year guidance. That concludes the prepared remarks for the call. Julie, would you please give the instructions so that we can begin the Q&A?

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

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star then 2.

At this time, we will pause just momentarily to assemble our roster. And our first question of today will come from Brett Fishpin with KeyBank.

Please go ahead with your question.

Hey guys, good morning. Thanks so much for taking the questions. Just wanted to start off on healthcare capital equipment. I'll tweak my question a little bit since it sounds like you already kept kind of like the directional low single digit guidance for the year. I'm just curious how the first quarter compared versus maybe your internal expectations and then what drives the step up in trends through the year?

Yeah, I would say that it was right in line with our expectations. There's always orders that ship and slip one way or another. In terms of our general outlook for the year, it remains unchanged. And typically, with last year being the exception, Q1 is our slowest quarter in capital shipments. It's a new year in terms of sales and sales commissioning, and it generally is our lowest quarter. But tough comps to last year as we were still pushing through an enormous backlog as a result of some supply chain and manufacturing challenges that we were having in the comps.

And then just on the rest of the healthcare segment, it was really nice to see some of the double-digit growth trends continue in services and consumables more than offset, at least for our model, the missing capital equipment. I mean, you mentioned market share gains, healthy market activity. Is there anything else that you would call out just driving the continued trends that we've seen in either of those segments?

You know, we reiterate the fact that most of those products and services that are consumables are reoccurring in nature or procedural driven. And as we've seen, you know, the continued rise and sustained growth of procedures, in particular in the North American market, you know, we've been lifted in that area by market in general. But, you know, as you're well aware, we've punched above our weight for the last couple years in capital sales. So having those new placements out there, having that access from a sales perspective, has helped fuel our ability to take a little share as part of our total enterprise solution selling process where we're really working with the large IDNs and large healthcare systems to take the full value of Staris.

All right, got it. And last question from me, just touching on operating margin, I know 1Q is sometimes a little bit seasonally lower, but just given that it was down 20 BPC over a year, I'm curious if you could give a little bit more color I know you touched on a couple of the high-level drivers there. And then if you still expect to demonstrate a level of year-over-year operating margin expansion for the full year FY25, thank you very much.

Yes, certainly, Brett. Yeah, as I spoke with my comments, we definitely did have some increased compensation year-over-year in Q1, which negatively impacted our margins. And we did have significantly higher insurance costs in the quarter. Everybody looks at EBIT margin. If you look at EBIT dollars, EBIT dollars are up $20 million. Obviously, we're not getting the leverage that we anticipate, but it's Q1. We still anticipate that we will drive positive EBIT margin leverage for the full year as we talked about last quarter.

And our next question will come from Mike Mattson with Needham & Company.

Please go ahead.

Yeah, just following up on the commentary there around inflation. So, you know, it sounds like while the materials side, materials components, has kind of improved, the labor side is still seeing some pressure. Is that right? And... Do you expect that to get better this year? I mean, we've seen the unemployment rate starting to tick up, or is it still really kind of a battle out there to hire and retain employees?

Yeah, I would say this. I mean, the thing with the compensation labor is it tends to go in place months before you feel the effect of it. It's because it sort of rolls in aggregate. I don't believe it's going to continue to go up in any meaningful way. And clearly our ability to staff and turnover has come down quite a bit. So it feels like it's very much in control. It's just, it's catching up with the labor rates that have been put in place over the last six, nine months, 12 months as they roll into this new fiscal year.

Yeah, okay, got it. And then just in the, wanted to get an update on the life sciences business. You know, as a medical device analyst, it's an area that I don't know as much about or follow as closely. It looks like it's been a little slower recently. Just wondering what the outlook is there and what you're seeing in the market.

We've definitely seen some slowdown in demand for capital products, and that's a result of some of the decreased funding and some of the cutbacks that we've seen in general pharma and biopharma over the last six, nine months. There is some natural cyclicality to those purchases. However, having said that, we're showing strong growth in our services businesses and have and more importantly in our consumables business, which drives a disproportionate amount of the income through the life science segment. So we feel confident in our ability to continue to deliver in those aspects.

Okay, thank you. And our next question will come from Michael Pollack with Wolf Research.

Please go ahead.

Hi, good morning. Thank you for taking the question. I hate to harp on this, but the healthcare capital equipment guidance of low single-digit revenue growth this year, I still struggle to get there given where 1Q landed and what we see out of the backlog. I suspect over the last 90 days or so, you've heard this feedback. And I'm interested in your feedback to the feedback. Like, what are we all missing in our models? Why? And you could call me a bad analyst and bad modeler. That is fair. But I struggle to get there. So is it that you expect bookings to be a lot higher the rest of this year versus what we've been seeing in dollar terms? Any more color there, I'd appreciate it.

I don't think you're a bad analyst or a bad modeler by any means. The problem is the model got broken over the last 18 months in terms of how it normally has operated historically. And we ended up having a lot of backlog and a lot of large project orders What we have now, now that manufacturing and supply chain is back in control and back to normal lead time levels, is the ability to sell a lot more on the turn business, which is something we weren't really able to do over the last 18, 24 months where we were much more challenged. So we're confident in our ability, even with a lower backlog, to be able to turn product and get it installed in our customers by the end of the fiscal year.

Appreciate that. I'll follow up on AST. Obviously see kind of a continuation of the higher growth rate here. I've heard positive comments out of Europe. If you look forward to the rest of this fiscal year, are capacity expansions, and you've obviously been investing a lot of growth dollars here to expand your fleet and network, are capacity expansions expected to be a differentiated growth contributor here to AST over the next year or so, or would you say that bit is normal relative to the last few years?

I would say it's normal. It's a long-term play, and you can't really look at the expansions as same store versus new store because most of our expansions are on existing sites or adding new capacity to existing sites. So we see it as a continuation to facilitate the growth that we've had historically.

Thank you. And our next question will come from Jacob Johnson with Stevens. Please go ahead.

Good morning. This is Mack on for Jacob. Just following up on the life sciences side of the business. I think this is in part tied to injectable drug demand, and we are seeing a number of capacity additions in this end market. In the near term, I know there are some headwinds that you called out around capital spending, but are you seeing any green shoots from the injectable market at this point?

We are. It's definitely a bit of a tailwind that's offsetting some of the headwinds in the space, I guess is what we'd say. And the fortunate thing about the injectables, that's obviously in our sweet spot of aseptic manufacturing and definitely feeds well into our chemistries and critical environments products as well as barrier product solutions. And it's from, fortunately, some of the majors as it relates to major manufacturing customers of which we do business with many of them.

You previously announced some supply chain initiatives. I think you're working on moving to some larger suppliers. How is that going? Do you expect any margin impact and looking forward?

Yes, but it's a long-term play. It's going to take time to ring that out and to vet those suppliers and get everything in place. Yes, the long-term play is to over time costs and also, you know, getting better scale and value out of our manufacturing operations. But really the most important thing is assurity of supply. If there's one thing we learned, you know, a year and a half, two years ago, was making sure that we were with the right suppliers.

Thank you. I appreciate it, Kelly. And again, if you have a question, you may press star then one to join the queue.

Our next question will come from Jason Bednar with Piper Sandler. Please go ahead.

Hey, morning everyone. Apologies up front here. I'm going to come back to this healthcare equipment topic. I know you don't provide exact numbers on orders, but I think all of us back into your order book based on the revenue and the backlog figures that you do provide. So I guess I'm wondering if we can go one step further beyond the healthcare equipment revenue guidance. of low single digits. Can you remind us or help us with what your assumptions might be for order growth this year? And are you anticipating health care backlog to move higher or lower from where we are at the end of the first quarter?

Yeah, I would say that in our assumptions, the order growth would be mid single digits and we would have backlog somewhere in that $350 million range, but it could be lower than that easily. That is just a target that we have. But the big thing that we really need to do, as Dan spoke earlier about, is really have the opportunity to get and tackle the turn business, that we did not have the ability to do that with our lead times coming down significantly. That's really the driver, and that's something that you guys really can't see, what we're doing and how we're doing it. And as Dan said, the model has been broken, and obviously we're doing everything we possibly can to get back to more sustainable model that we were used to and when capital equipment wasn't such a large conversation in the past, right?

Okay. That's helpful, Mike. And then just maybe a couple of follow-up modeling questions for you. And sorry if I missed it. I think you said there were some discrete items in that interest other line. That was just a notable delta versus our model. Were these factored into the original guide and any other detail you can provide there? And then the 21% tax rate in the period, is that the right level we should be thinking about on a go-forward basis, or were there one-timers that pushed that rate lower than you expected in the first quarter?

Yeah, on the tax rate, there were some favorable discrete item adjustments that were one-timers that definitely pushed the rate lower. I think our full-year guidance still calls for 23% full-year rate. I would stick with that at this point in time. And we did pick up a little bit of benefit on the interest line year over year as we were able to use the proceeds from the dental sale much more quickly than we anticipated. So we got a little bit of favorable benefit. But again, those are pennies here and there. It doesn't really change our full year outlook.

Okay. Helpful. Thank you.

You're welcome.

And our next question will come from Dave Kirkland with JMP Securities. Please go ahead. Hey, good morning. Can you hear me?

Yep. Thanks. Just when we look at the BD ad that you guys did, you know, does that fit primarily in consumables in the healthcare business, like from a mixed standpoint? And I think you said it was similar margin to your core, but I just wanted to reconfirm that.

Yes, on both. It is classified as consumables in our healthcare mix.

90%, Dave, is on consumables and the last 10 is containers that are in the capital bucket.

Thank you for that. And then I think you have a restructuring plan underway, and I don't recall exactly the size or the timing, but any detail on that?

Yeah, we had announced last quarter that we had a $100 million restructuring plan for The bulk of that was for a closure of one of our manufacturing facilities. That will continue to occur throughout this year. We've got about a $25 million benefit coming from that, but the bulk of that benefit will happen in fiscal year 26, not in 25. Great.

And last one, and I saw the increase in the dividend, obviously. 19 years is a pretty good track record, but... As you look at M&A and share repo, I guess some other capital priorities, anything change on that front given what we're seeing out there and maybe even the valuation of some of the smaller peers in the space?

No. Our investment priorities remain the same. We don't really talk about forward-looking M&A, but we have a history of being active and Obviously, we're in a good position in terms of debt, and if opportunities present themselves over the coming years, we will obviously do what we normally do.

Thank you. Yep.

And our next question is a follow-up from Michael Pollard with Wolf Research. Please go ahead.

Just one more, please, for the model. The interest in other line, heard the discrete items called out in the quarter. What is a good number with your pro forma balance sheet now for that line on a quarterly basis for the rest of this year?

On a quarterly basis, I don't have that in front of me, but for a full year basis, we're still looking at about $100 million in total. Okay.

Okay, we can take that offline. I appreciate it. Thank you.

I just don't have it in front of me, Mike.

Yep.

Thanks. And with that, that will conclude our question and answer session. I'd like to turn the conference back over to Julie Winter for any closing remarks.

Thanks, everybody, for taking the time to join us this morning. Look forward to catching up with many of you in the coming days.

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