STERIS(STE) - 2021 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Constant currency organic revenue increased by 1.4%, driven by 130 basis points of favorable price and 10 basis points of organic volume growth [7] - Gross margin improved by 110 basis points to 44.2%, benefiting from productivity, price, and acquisitions [7] - EBIT margin increased by 250 basis points to 23.6% of revenue, primarily due to higher gross margin and lower operating expenses [7] - Net income grew by 20% to $149.2 million, with earnings per diluted share increasing to $1.73 from $1.45 in the prior year [8] - Free cash flow for the first nine months was strong at $337.7 million, an increase of almost $100 million over the same period last year [8] Business Line Data and Key Metrics Changes - Constant currency organic revenue in the third quarter grew by 1%, driven by double-digit growth in the AST segment, offset by flat to slightly down revenue in life sciences and healthcare [12] - Life sciences revenue was flat, with mid-single-digit growth in consumables and services, but a decline in capital equipment shipments [13] - Healthcare benefited from the addition of Key Surgical, contributing approximately $15 million to healthcare consumable revenue [14] Market Data and Key Metrics Changes - The healthcare capital equipment segment achieved a record order month, resulting in a backlog greater than pre-pandemic levels [11] - Demand for COVID-related single-use products and components used in vaccine manufacturing positively impacted the AST segment [12] Company Strategy and Development Direction - The company is focused on evaluating opportunities to permanently reduce expenses learned during the pandemic [15] - Integration efforts for Key Surgical are ongoing, with high expectations for future performance [14] - The company is preparing for the acquisition of Cantel Medical, with confidence in the integration process [17] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about the fourth quarter and the start of the new fiscal year, noting that risks appear to have declined [15] - The company anticipates a return to normalcy in capital equipment shipments, with expectations for sustained high demand for consumables [16] - Management emphasized the importance of capturing additional opportunities and expressed confidence in the company's future [23] Other Important Information - Walter Rosebrough announced plans to step down as CEO at the end of July, with Dan Carestio set to succeed him [18] - The company has a strong balance sheet, with a leverage ratio below 2 times and a cash position of $253 million [8] Q&A Session Summary Question: Timeline for leadership transition and strategic deals - Walter Rosebrough explained that the timing for his transition is optimal as the company is well-positioned for future success [27] Question: Performance of Key Surgical - Walter noted that the integration of Key Surgical is on track, with performance exceeding initial expectations [28] Question: Succession planning and integration of Cantel - Dan Carestio confirmed that he and Mike Tokich have led the diligence efforts for the Cantel acquisition and are confident in the integration process [37] Question: Sustainability of AST margins - Dan Carestio indicated that while there are benefits from COVID-related demand, core medical device customers are still experiencing suppressed demand [41] Question: Free cash flow expectations - Michael Tokich cautioned that while free cash flow has improved, future acquisitions may require significant cash expenditures [53] Question: Impact of accounting changes on backlog - Dan Carestio clarified that an accounting change earlier in the year affected revenue recognition, impacting the backlog comparison [64] Question: Capital orders and pent-up demand - Dan Carestio acknowledged that there is some pent-up demand from deferred projects during the pandemic [73] Question: COVID-19 incremental costs in adjusted EPS - Michael Tokich explained that costs related to furloughed employees and enhanced cleaning protocols are captured as COVID incremental costs [76]