Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Steris PLC (STE, Financial) reported an 8% total revenue growth in the first quarter, with a 6% constant currency organic revenue growth driven by volume and price.
- Gross margin increased by 30 basis points to 45.1%, indicating improved profitability.
- Net income for the quarter was $201.7 million, with adjusted earnings per share increasing by 10% to $2.03.
- The company successfully reduced its total debt to $2.3 billion, achieving a debt to EBITDA ratio of approximately 1.6x.
- Steris PLC (STE) announced its 19th consecutive year of dividend increases, raising the quarterly dividend from $0.52 to $0.57 per share.
Negative Points
- EBIT margin decreased by 20 basis points to 22.3% of revenue, impacted by increased compensation and higher insurance costs.
- Healthcare capital equipment revenue declined in the quarter due to challenging comparisons, although low single-digit growth is still anticipated for the full fiscal year.
- The life sciences segment experienced a slowdown in demand for capital products due to decreased funding and cutbacks in general pharma and biopharma.
- Free cash flow for the first quarter was $195.7 million, impacted by the timing of capital spending.
- The adjusted effective tax rate was 21.3%, lower than the prior year due to favorable discrete item adjustments, which may not be sustainable.
Q & A Highlights
Q: How did the first quarter compare to internal expectations for healthcare capital equipment, and what drives the step-up in trends through the year?
A: Dan Carestio, President, CEO, & Director: The first quarter was in line with expectations. Typically, Q1 is the lowest quarter for capital shipments due to new sales and commissioning cycles. Despite tough comparisons to last year, the general outlook for the year remains unchanged.
Q: What is driving the continued double-digit growth trends in services and consumables within the healthcare segment?
A: Dan Carestio, President, CEO, & Director: The growth is driven by recurring, procedure-driven products and services. The rise in procedure volumes, particularly in North America, and market share gains from new capital sales placements have contributed to this growth.
Q: Can you provide more color on the operating margin, given it was down 20 basis points year-over-year in Q1?
A: Mike Tokich, SVP & CFO: Increased compensation and higher insurance costs negatively impacted margins. Despite this, EBIT dollars were up $20 million. We still anticipate positive EBIT margin leverage for the full year.
Q: Is the labor side of inflation still seeing pressure, and do you expect it to improve this year?
A: Dan Carestio, President, CEO, & Director: Compensation and labor rates have stabilized, and turnover has decreased. The impact of previous labor rate increases is still being felt, but no significant further increases are expected.
Q: What is the outlook for the life sciences business, given the recent slowdown in demand for capital products?
A: Dan Carestio, President, CEO, & Director: Despite a slowdown in capital product demand due to decreased funding in pharma and biopharma, strong growth in services and consumables is driving the life sciences segment. We remain confident in our ability to deliver in these areas.
Q: How do you expect healthcare capital equipment guidance of low single-digit revenue growth to be achieved given the current backlog?
A: Dan Carestio, President, CEO, & Director: The ability to sell more on the turn business, now that manufacturing and supply chain are back to normal lead times, will help achieve the guidance. The model has been broken over the last 18 months, but we are confident in our ability to meet the targets.
Q: Are capacity expansions expected to be a differentiated growth contributor to AST over the next year?
A: Dan Carestio, President, CEO, & Director: Capacity expansions are a long-term play and are normal relative to the last few years. They facilitate growth and are often additions to existing sites.
Q: Are you seeing any green shoots from the injectable drug market, and how is the supply chain initiative progressing?
A: Dan Carestio, President, CEO, & Director: The injectable market is providing a tailwind, particularly in aseptic manufacturing. The supply chain initiative is a long-term play focused on ensuring supply surety and improving scale and value in manufacturing operations.
Q: What are your assumptions for order growth and healthcare backlog for the year?
A: Mike Tokich, SVP & CFO: We assume mid single-digit order growth and a backlog around $350 million, though it could be lower. The focus is on turn business, which is not easily visible in models.
Q: Can you provide more details on the discrete items and tax rate for the quarter?
A: Mike Tokich, SVP & CFO: Favorable discrete item adjustments lowered the tax rate to 21% for the quarter, but the full-year guidance remains at 23%. The interest line benefited from the quick use of proceeds from the dental sale, but these are minor impacts on the full-year outlook.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
