STERIS plc (STE) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Healthcare Segment Performance: The Healthcare segment continued its momentum with a 14% growth in constant currency organic revenue, driven by procedure volume rebound in the U.S., price, and market share gains.
• Strong Capital Equipment, Consumables, and Service Growth: Experienced double-digit growth across capital equipment, consumables, and service in the Healthcare segment.
• Positive Signs of Recovery in Medtech Demand: Noted good growth in the U.S. during the quarter, reflecting improving procedure environment and the burn down of customer inventory.
• Life Sciences Revenue Growth: Life Sciences revenue grew 5% on a constant currency organic basis, with capital equipment contributing to 18% growth.
• Improved Delivery and Execution: The company has improved its ability to execute and ship capital products, greatly improving delivery times.

Pessimistic Highlights

• Gross and EBIT Margin Decline: Gross margin decreased by 50 basis points to 44.3%, and EBIT margin decreased by 130 basis points to 22.5% due to lower productivity and continued material and labor inflation.
• AST Segment Challenges: AST constant currency organic revenue declined by 1%, impacted by inventory destocking in the Medtech space and year-over-year market decline of bioprocessing customer demand.
• Dental Segment Decline: Dental segment revenue declined by 6% on a constant currency organic basis, limited by customer destocking of inventory.
• Elevated Inventory Levels: Inventory remains elevated as the company continues to focus on reducing lead times and meeting customer demand.
• Economic Headwinds Impacting Dental Business: Economic downturn affecting discretionary spending, impacting the Dental business.

Company Outlook

• Healthcare Segment Expected to Outperform: Anticipated to outperform original expectations for the fiscal year, offsetting macro challenges in other segments.
• 6% to 7% Constant Currency Organic Revenue Growth: Maintaining expectations for fiscal 2024, with a strong third quarter followed by tough fourth quarter comparisons.
• Earnings Headwind from Currency: An additional earnings headwind from currency of about $0.05, absorbed in the current outlook of $8.60 to $8.80.

Q & A Highlights

• Q: Can you discuss the performance of the other three segments versus original expectations? (Jacob Johnson, from Stephens)

  A: Life Sciences still expected to deliver a good year despite continued destocking. AST has seen positive trends in the U.S. but delays in Europe. Bioprocessing is not anticipated to return to year-over-year growth in fiscal 2024. (Dan Carestio)

• Q: On backlog for Healthcare and Life Sciences, is healthcare more about execution and catching up on lead times? (Jacob Johnson, from Stephens)

  A: Yes, both are about getting products out the door, with orders remaining strong and a significant increase in replacement business. (Dan Carestio)

• Q: Could you elaborate on the AST side, particularly regarding demand and bottlenecks in device sterilization? (David Turkaly, from JMP Securities)

  A: Demand has come back strong in the U.S., but Europe is slower. The shortages mentioned are more tied to EO sterilization, while our softness has been on the radiation side. (Dan Carestio, Julie Winter)

• Q: Regarding the master filed pilot program, what does it mean for STERIS? (David Turkaly, from JMP Securities)

  A: It allows customers to switch between different modes of sterilization without massive regulatory hurdles, improving supply chain resilience. (Dan Carestio)

• Q: Can you provide guidance on AST services growth rates for the back half? (Michael Polark, from Wolfe Research)

  A: Expecting low double-digit growth rates in the AST services line in the second half. (Mike Tokich)

• Q: How much of the CapEx spend is shifting out of this year into next year for AST? (Jason Bednar, from Piper Sandler)

  A: The bulk of the $65 million shift in CapEx spend is directly related to the AST segment, not intentionally slowed but delayed by natural building and permitting processes. (Dan Carestio, Mike Tokich)