Good morning, everyone and welcome to the STERIS plc First Quarter 2022 Conference Call. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Ms. Julie Winter, Vice President of Investor Relations. Ma’am, please go ahead..

Thank you, Jamie and good morning everyone. This morning, speaking on our call 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 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 expressed written consent of STERIS is strictly prohibited. Some of the statements made during this review are or maybe 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, 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 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. For the quarter, constant currency organic revenue increased 21%. Growth was driven by organic volume as well as 130 basis points of price.

Acquisitions in total added $141 million to revenue in the quarter, which is broken down by segment in the press release tables. To assist you with your modeling, I will share some color on the acquisition revenue contribution within the Healthcare segment.

Of the approximately $96 million in acquired revenue, about 70% is consumable revenue from both Key Surgical and Cantel Medical. About 20% of the balance is capital equipment revenue with the last 10% being service revenue.

We will not be breaking that down any further as it is already difficult to differentiate some product lines as we are integrating the businesses quickly and that challenge will only escalate as with each passing quarter.

Gross margin for the quarter increased 220 basis points compared with the prior year to 46.6% as favorable productivity, pricing and acquisitions were somewhat offset by negative foreign currency, inflation and mix. Looking at the rest of the year, we do expect additional headwinds from inflation on raw materials.

EBIT margin for the quarter was 22.9% of revenue, an increase of 130 basis points from the first quarter last year. As anticipated, we are starting to see some operating expenses such as travel and sales and marketing costs return, which limited EBIT margin growth.

The adjusted effective tax rate in the quarter was 20.8%, higher than last year, but in line with our expectations for the fiscal year. Net income in the quarter increased to $159.9 million and earnings were $1.76 per diluted share. Our balance sheet is a continued source of strength for the company.

Our leverage ratio at the end of the first quarter is lower than our expectations and is below 2.9x. We have less debt and higher EBITDA than we originally modeled. Cash at the end of the quarter totaled $535 million. Regarding the Cantel convertible notes, 100% of the holders have elected to convert their notes.

All conversions will be fully settled in cash during the second quarter of fiscal ‘22. As of June 30, the estimated total cash settlement value was approximately $366.5 million. During the first quarter, capital expenditures totaled $56.4 million, while depreciation and amortization was $83.6 million.

Capital spending in the first quarter was somewhat lower than planned due to weather-related delays for several of our AST construction projects. Free cash flow for the first quarter was $41.2 million. And as anticipated, this is a decline from the prior year due to cost associated with the Cantel Medical acquisition.

With that, I will turn the call over to Dan for his remarks..

Thanks, Mike and thanks again to everyone for taking the time to join us today. We had a strong start to our fiscal year. Revenue growth in Q1 exceeded our expectations as we saw faster recovery in customer demand than planned, in particular in our Healthcare and AST segments.

Due to strong volume growth, we were able to expand margins nicely during the quarter. Our integration teams have been hard at work and significant progress has been made integrating Cantel Medical. We are pleased with what we are seeing, but of course, we still have significant work to do.

Since the June 2nd close and acquisition, we have made a number of decisions that impact how we go to market with our customer-first mentality. For example, leveraging the talent and expertise of the Cantel sales organization, we have created a dedicated sales channel focused solely on endoscope reprocessing.

We added a new dental segment and mapped the Cantel businesses over to the four STERIS reporting segments. Executive alignment and leadership has been completely defined from both a field and back office perspective.

We have started to educate and implement STERIS lean practices within Cantel and we have made significant progress realigning our European Healthcare business as we bring STERIS, Key Surgical and Cantel together.

From a synergy perspective, we continue to expect a $25 million benefit for this fiscal year, as the majority of the savings are driven by the elimination of corporate cost and much of that integration is complete.

In terms of longer term synergies, we are increasingly confident of exceeding our $110 million cost target as we continue to see opportunities to improve. Shifting to our outlook, based on what we have seen in STERIS and across the broader industry, we believe there has been a significantly faster rebound in procedures than we anticipated.

This has created stronger demand for capital, consumables and services and has led us to raise – revise our guidance upward for the year. Starting with revenue, our constant currency organic growth outlook has been increased to 10% to 11% growth for fiscal 2022.

This improvement, combined with additional foreign currency benefit and higher expectations for Cantel’s Medical business, has increased our expectation for total reported revenue to $4.6 billion. Our organic growth is driven by revenue recovery across business, but in particular, from our Healthcare and AST segments.

Within the Healthcare segment, we have record capital backlog at the end of the first quarter with strength in both surgical and infection prevention. The record healthcare backlog is entirely organic as we have not yet added the Cantel Capital Equipment to our backlog.

Consumables also had a strong start to the year as we have relatively easy comparisons and experienced some restocking by our customers. AST is also expected to remain strong as our core medical device customers are benefiting from the rebound procedures and rebuilding some inventory.

In addition, we continue to see strong demand for COVID-related products and vaccines as well as bioprocess manufacturing disposables. Given the strength of AST, our segment allocation will shift from what we shared last quarter.

AST is now expected to be approximately 18% of total company revenue, while Dental will be about 8% on of total company revenue for the full fiscal year. We are increasing our adjusted earnings per diluted share expectations to a range of $7.60 to $7.85 based on higher volume growth and improved margins.

We are mindful that there is still considerable uncertainty around procedure volumes as we see COVID variance continuing to spread continued inflationary pressure and we also have an expectation that we will pick up some increases in OpEx in the second half of the year.

Reflecting on the stronger projected earnings growth, free cash flow expectations have been increased by $20 million. Fiscal 2022 is shaping up to be another record year for STERIS. We look forward to continue to update all of you on our progress. I will now turn the call back over to Julie to open up for Q&A.

Julie?.

Thank you, Mike and Dan, for your comments.

Jamie, would you please give the instructions and we will get started on Q&A?.

[Operator Instructions] Our first question today comes from Matthew Mishan from KeyBanc. Please go ahead with your question..

Hey, good morning, guys. And thank you very much for taking the questions. Dan, first, can you just talk to the trends you’re seeing in the AST business? I mean it wasn’t a particularly easy comp this quarter and it seems like you’ve been able to sustain low double digit or even low teens growth rate in that business for a little bit.

How should we be thinking about that going forward?.

I mean what we’re seeing now is obviously driven by a rebound in procedures, especially the highly elective procedures which are generally the higher value type products that we process. So that’s where we’re seeing a lot of the improvement now.

In the past, Matt, we saw the benefit of PPE and some of the COVID-related products when we saw declines in normal procedural type products.

Going forward, assuming that things are resuming at normal levels of procedural occurrences and we don’t get slipped up significantly by another COVID variant in terms of procedural slowdown, we’re highly confident that we will continue to grow. And we believe that the COVID-related products are here to stay for the foreseeable future anyways.

And then clearly, the work that we’re doing with bioprocessing disposables is long-term sustainable growth for us. So all in all, I think we’re reaping the benefits of a lot of investments we put in place over the last few years in terms of capacity expansion and able to fill those as customers’ demand continues to tick up..

And then two questions on the model, first, the corporate cost line came in at a higher number, around like $75 million. Is that the normalized rate moving forward for that line? And then secondly, I think you previously gave a first half, second half phasing for EPS.

Is that still intact or has that changed?.

Good morning, Matt, it’s Mike. In regards to the phasing, the percentages, we came out with 45-55 split for the year on our last call. It’s moved 1% or 2%. So it’s not material in our view. So we have not updated that.

But it’s moving a little bit more towards, obviously, the second half, but again, 100 basis part or 200 basis points, nothing material from our standpoint. Corporate costs, obviously, we have seen travel and we have seen some return of additional costs.

So I would say $75 million may be a little high, but think about obviously a larger increase as we go on. And usually, the first quarter is a little bit higher for us as we are providing for bonuses for the year at the start. Obviously, there are some commissions also in there.

But I would say, relatively, you’re definitely going to see an increase in the operating expenses. If everything is assumed without, as Dan talked about, without seeing any additional variance, we have seen travel pickup for our field and for our corporate staff..

Okay, excellent. And then last, just a bigger picture question.

Dan, as you’re coming out of this, what’s the right way to look at the long-term growth CAGR for STERIS?.

I mean, Matt, it’s difficult right now is what I would say, coming out of a post-COVID year in the sort of phasing where we’re still in COVID, but we’re not. So our overarching goals at STERIS is to deliver in the high single digits and the low double digits on bottom consistently as a company.

I think we probably are getting a little lift this past quarter from a faster procedural recovery than we anticipated, but that’s our forward-looking statement that we’ve had consistently in terms of our objectives for growth..

Alright. Thank you very much..

Our next question comes from Mike Matson from Needham & Company. Please go ahead with your question..

Yes. Good morning. Thanks for taking my questions. I wanted to ask about the – I guess, I will start with the dental business.

So, just curious how that – how you are viewing that business? I don’t know if you can tell us sort of a pro forma growth or not, but what do you think of the business now that you own it, given it’s a new market for you? And then I noticed that you kind of raised the AST portion of the mix and lowered the portion of the dental mix.

So, is that dental underperforming or is AST just outperforming?.

Yes. It’s not dental underperforming. They are right on target in terms of what our expectations were in our deal model. AST just is running a little hot right now is what I would say..

And Mike, to give you some context, Dental, I mean, we just had it for 28 days. But it is – as Dan said, it is performing in line with our expectations. And if you look year-over-year, they have about a 30% revenue growth.

So obviously, doing very nicely as they are seeing the dental market and the procedures on the dental customers coming back nicely as we have seen on the healthcare side..

Okay. Thanks. And then the gross margin was quite a bit above what we have been modeling. So, I was just wondering if you could comment on that.

Do you expect it to kind of stay at this 46.5% level going forward?.

Yes, Mike, I would say that it’s probably a high watermark for us right now. We had a lot of things from a favorable standpoint happen during the quarter, and those are going to be hard to repeat. And I think one of the things that we want to make sure we come across with is we continue to expect higher inflation as we go out and hire material costs.

So, that will put some – definitely put some pressure on those margins. So, I would say it’s a little bit lower than that. 46.6% is probably, again, a high watermark for us..

Okay, understand.

And then you mentioned inflation, but I want to ask just about kind of component availability, semiconductors, things like that? I mean, are you seeing any issues there that could constrain your ability to meet demand at all?.

We are seeing issues, but nothing that’s constraining in terms of our ability to deliver for customers. There are certain instances where maybe we are paying a little more than what we paid historically. But generally speaking, we have been managing through it pretty well at this point..

Okay, great. Thank you..

[Operator Instructions] Our next question comes from Michael Polark from Baird. Please go ahead with your question..

Hi. Good morning. Thanks. For starters, curious on the development of the equipment backlog, healthcare and life sciences, I continue to be impressed by the resilience and strength in that line for you and some other companies that I follow.

So, is this simply reopening procedure recovery in company and customers are replacing end of service equipment and adding capacity or is there something else going on, on the capital side that you think is contributing to the ongoing strength there in some of those numbers?.

Yes. As you know, our biggest concern probably this time last year when we spoke was what was going to happen with capital spending. And it actually recovered much quicker than we thought. And we were building backlog all through the second half of the year.

What we are seeing now is just – there seems to be a lot of spending, both in healthcare, and we are seeing some of the replacement business in the research market and the healthcare also coming back at this point. So, the hospital systems just seem a little more bullish in terms of long-term growth expectations.

And so we are well positioned to accommodate those expansions, both in SPD and also in the surgical suites..

Are there any new products that you have – that you are rolling out that are kind of helping there or regular way type of – yes, any color on that?.

I would rather say we have a steady diet of sort of iterative new products that we continue to roll out.

Our R&D teams have done a really great job over the last 4 years or 5 years in making sure that we are able to be well positioned with new features, new benefits on core products around washing and steam and hydrogen peroxide and now with Medivators around AERs as well.

So, there is nothing that’s revolutionary in terms of new type applications, but like I said, a steady diet of iterative new product development that’s coming to market..

The comment on weather-related delays to some of your capital projects in AST, can you just provide a little more color what type of weather and where? And then is a slippage of a quarter meaningful in the grand scheme? I think these capacity expansions or new facilities tend to be multiyear build cycles.

So, just – is this something that normalizes over the course of the back half of the year is really the question?.

It does. What I would say is it’s been during COVID, and it’s – this is universally applied across the globe. It is very difficult to build major projects.

Buildings, let alone complex engineered structures and, getting resources, getting the skilled labor across borders to be in the right place at the right time, weather delays are all factors that can slowdown the process.

Having said that, our teams are – we are building a number of facilities right now, and our teams are working aggressively to compensate. But we are optimistic that although a little later than anticipated or originally planned, we are in a pretty good spot in terms of our ability to bring them up successfully and in the right time..

The last one, probably for Mike, the leverage metric, you quoted, Mike, 2.9x, is that pro forma for Cantel kind of on a 12-month basis? Just what’s the numerator-denominator in light of the acquisition to get to that number?.

Yes, certainly. So, it does include Cantel. And so one of the – as part of the calculation, we do have the ability to include the prior 12 months of Cantel’s EBITDA. And obviously, Cantel performed much better over the last two quarters than we anticipated in our model. So, that’s one factor of why leverage is lower.

The other factor is Cantel actually was able to pay-down their debt much more quickly, and it was lower than we anticipated at close. And in addition to that, they actually had a higher cash balance than we anticipated. So, that also was a factor in allowing us to continue to pay-down, but more importantly, borrow less debt as the transaction closed.

So, those are the two main factors..

Yes. Alright, thank you very much..

You’re welcome..

And ladies and gentlemen, with that, we will end today’s question-and-answer session. I would like to turn the floor back over to the management team for any closing remarks..

Thanks, everybody, for taking the time to join us this morning. I know many of you are on vacation. I appreciate you dialing in, and we look forward to catching up with you in the coming weeks..

Ladies and gentlemen, that will conclude today’s conference call. We do thank you for attending. You may now disconnect your lines..