STERIS plc (NYSE:STE) Q4 2024 Earnings Call Transcript

STERIS plc (NYSE:STE) Q4 2024 Earnings Call Transcript May 9, 2024

STERIS plc  isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the STERIS plc Fourth Quarter 2024 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Julie Winter of Investor Relations. Please go ahead.

Julie Winter: Thank you, Jack, and good morning, everyone. As usual, on today's call, we will have Mike Tokich, our Senior Vice President and CFO; and Dan Carestio, 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 expressed written consent of STERIS 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 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 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 cautions, I will hand the call over to Mike.

Mike Tokich: 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 performance. As you saw in the press release, we finished the year strong with total revenue growth of 10% in the fourth quarter and constant currency organic revenue growth of 6%. Adjusted earnings per diluted share for the fourth quarter were $2.58. For the full year, we exceeded expectations with 12% total revenue growth and constant currency organic revenue growth of 9%. Adjusted earnings per diluted share totaled $8.83 exceeding our outlook. With the announcement of the divestiture of the Dental segment, we are required to report results from continuing operations starting now.

As a result, the rest of our comments today will be focused on results from continuing operations. Contained within the numerous press release tables, you will find an eight-quarter recast -- results from continuing and discontinued operations to help with year-over-year comparisons. Turning to continuing operations, fourth quarter constant currency organic revenue grew 7%, driven by volume as well as 240 basis points of price. This is impressive when compared to the strong fourth quarter last year. Once again, our Healthcare segment exceeded expectations. During the quarter, Healthcare shipped a record $332 million in capital equipment. Gross margin for the quarter declined 80 basis points with the prior -- compared to the prior year to 42.6%.

Positive price and productivity were more than offset by negative segment mix and increased materials and labor costs. EBIT margin decreased 30 basis points to 23.7% of revenue compared with the fourth quarter last year. The operating income mix shift between Healthcare and AST once again impacted our margins. The adjusted effective tax rate in the quarter was 21.4%, lower than we anticipated due to several favorable discrete item adjustments. Net income from continuing operations in the quarter was $240.5 million and adjusted earnings per share from continuing operations were $2.41. Capital expenditures for fiscal 2024 totaled $360 million, while depreciation and amortization totaled $565 million. Total debt sits at $3.2 billion and our total debt-to-EBITDA at quarter end was approximately 2.1 times gross leverage.

Free cash flow for fiscal 2024 was $620 million as we benefited from higher generation from cash from operations, including less use of cash for working capital requirements. With that, I will turn the call over to Dan for his remarks.

Dan Carestio: Thanks Mike and good morning everyone. Thank you for making the time to join us today. Mike already covered the fourth quarter, so I will focus on our fiscal 2024 segment performance and our outlook for fiscal 2025 for continuing operations. Fiscal 2024 turned out to be a strong year for STERIS. As you've heard from us previously, Healthcare has consistently outperformed all year ending fiscal 2024 with 13% constant currency organic revenue growth, the third consecutive year of double-digit growth for this segment. The single biggest driver was the work done by our operations teams to reduce lead times, and as a result, return our backlog back-to-normal levels. I am pleased to report that as of the fourth quarter, our lead-times are back to pre-pandemic levels for the first time in two years.

As a result, Healthcare backlog is also now hovering around what we believe to be the new normal at just over $350 million. Service and consumables each had strong organic revenue growth for the fiscal year as we continue to benefit from the breadth of our offering and the size and quality of our service teams. AST grew 3% constant currency organic for the year, which is unusually light, but ended up with improving service revenue growth, for example, in the fourth quarter, service revenue grew 7%, which is a mixture of double-digit revenue growth in the U.S. and low single-digit revenue growth in EMEA. While it is early days, bioprocessing demand seems to have stabilized and did not unfavorably impact our performance in the quarter. This is a positive step forward.

We do not expect to return to meaningful bioprocessing growth until the second half of fiscal 2025, aligned with the comments that you have been hearing from our public company customers. Life Sciences ended fiscal 2024 in line with our long-term expectations at 6% constant currency organic revenue growth. The path may have swerved a bit more than we're used to, but a solid year for the segment overall. In particular, double-digit revenue growth in service for the year is an impressive achievement as we continue to win new contracts and see improved parts sales. Considering some of the macro challenging facing the pharma sector, we are pleased with the Life Sciences segment results. Turning to our updated outlook. Fiscal 2025 will be another strong year for STERIS.

As-reported revenue from continuing operations is expected to increase 6.5% to 7.5% for fiscal 2025. This includes the additional four months of the BD acquisition, a full year impact from the divestiture of our Controlled Environmental Services business within the Life Sciences segment, and neutral foreign currency. Constant currency organic revenue growth from continuing operations is expected to be 6% to 7%. For your modeling, our expectation that the segment level for constant currency organic revenue growth is that AST grows high single-digits for the year with growth accelerating in the second half. Healthcare is anticipated to grow mid-single-digits and Life Sciences expected to grow low single-digits. As a reminder, our first quarter of fiscal 2024 was particularly strong with high teens growth in Healthcare.

EBIT margins are expected to improve for the year as some headwinds from fiscal 2024 abate. As a result, adjusted earnings per diluted share coming from continuing operations are anticipated to increase 10% to 13% at a range of $9.05 to $9.25. This outlook assumes that the divestiture of the Dental segment closes in the first quarter, and the proceeds are primarily used to repay variable rate debt. Our earnings split for revenue is anticipated to be 45% in the first half and 55% in the second half. Before we conclude, I do want to make a few remarks on the strategic plan we have been executing during fiscal 2024. After significant review, we decided we needed to improve focus on our core customers in healthcare, pharma, and MedTech as well as areas where we can achieve sustainable and profitable growth.

As a result, we made a decision to divest two businesses during the year, most notably the Dental segment. In addition, today, we announced a targeted restructuring plan, which includes restructuring of the Healthcare Surgical Capital business in Europe as well as other actions, including impairment of an internally developed high-capacity X-ray accelerator, product rationalizations, and facility consolidations. Combined, these actions allow us to focus on our core business and deliver on the long-term commitments we have made to our investors. We are confident that with these changes, we have the right portfolio, sales channels, and network of facilities to deliver to our customers over the years to come. That concludes our prepared remarks for the call.

Julie, will you please give the instructions, so we can begin the Q&A.

Julie Winter: Thank you, Mike and Dan, for your comments. Chuck, if you'll give the instructions, we can open for Q&A.

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