STERIS Q2 2023 Earnings Results & Report

STERIS EPS Results

• Actual EPS: $1.99
• Consensus EPS: $2.00
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: $1.99
• EPS Beat Rate: 4 of last 8 quarters

STERIS Revenue Results

• Actual Revenue: $1.20 billion
• Expected Revenue: $1.22 billion
• Beat/Miss: Missed by -$21.52 million
• YoY Revenue Growth: +0.30%

STERIS (NYSE:STE) (NYSE: STE) provides products and services designed to support infection prevention, procedural care and the safe manufacture of healthcare and life sciences products. Its offerings include surgical equipment and operating-room solutions, sterilization and decontamination systems, endoscopy products, cleaning and disinfection technologies, and related consumable products.

The company also provides outsourced sterilization and laboratory services through its Applied Sterilization Technologies business. These services help medical-device manufacturers, pharmaceutical companies and other organizations sterilize products and maintain quality and regulatory compliance. STERIS serves hospitals, ambulatory surgery centers, healthcare providers, medical-device manufacturers, pharmaceutical companies and research institutions.

STERIS was established in 1987 and has expanded through organic development and acquisitions, including its combination with Synergy Health in 2015. The company is incorporated in Ireland and maintains a significant operational presence in the United States, while serving customers across North America, Europe, Asia-Pacific and other international markets. STERIS is led by President and Chief Executive Officer Dan Carestio.

STERIS Q2 2023 Earnings Call Transcript

Key Takeaways

• Steris reported 7% constant currency organic revenue growth in Q2, driven by volume gains and 2.9 basis points of pricing, and achieved $15 million in Cantel integration synergies bringing H1 synergies to $35 million on track for a $50 million goal.
• Despite a 140 bps decline in gross margin to 44.8% due to productivity pressures and higher material and labor costs, EBIT margin rose 50 bps to 23.8% thanks to realized cost synergies and disciplined SG&A management.
• Management recorded a $490.6 million non-cash goodwill impairment for the Dental segment amid rising interest rates and short-term headwinds, though the long-term growth outlook remains intact.
• Free cash flow of $138.2 million in H1 prompted a full-year FCF reduction to ~$600 million, down $75 million from prior guidance, driven by elevated capital spending and inventory levels, with an expected step-up in H2 collections.
• The company reaffirmed its full-year 10% constant currency organic revenue growth target, now forecasting 8% as-reported growth and maintaining adjusted EPS guidance of $8.40–$8.60 despite currency headwinds.

Presentation

[Operator]

Good morning, everyone, and welcome to the STERIS plc second quarter 2023 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Julie Winter, Investor Relations. Ma'am, please go ahead.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thank you, Jamie, and good morning, everyone. As usual, speaking on today's 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. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the express 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 our security 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.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

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 yesterday's release, also including 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, SVP and CFO at STERIS]

Thank you, Julie, and good morning. It is once again my pleasure to be with you this morning to review the highlights of our second quarter performance. For the quarter, constant currency organic revenue increased 7%, driven by volume as well as 290 basis points of price. As anticipated, the divestiture of the renal care business impacted our comparisons to the prior year by about $45 million, as detailed in the press release tables. Our year-over-year growth rates will be impacted by this divestiture for one more quarter. The integration of Cantel Medical continues to go well. We achieved approximately $15 million of cost synergies in the second quarter, bringing our first half total to about $35 million. We are on track to achieve our stated goal of approximately $50 million in fiscal year 2023.

[Mike Tokich, SVP and CFO at STERIS]

As anticipated, gross margin for the quarter decreased 100 basis points compared with the prior year to 44.8% as pricing currency and the favorable impact from the divestiture of renal care were more than offset by lower productivity and higher material and labor costs. Material and labor costs continue to be a headwind and totaled about $30 million in the quarter. Despite the decline in gross margin, EBIT margin increased 50 basis points to 23.8% of revenue compared with the second quarter of last year, which reflects the benefit of realized cost synergies from the Cantel integration, currency impact, and lower than anticipated SG&A expenses driven by disciplined cost management and reduced incentive compensation. The adjusted effective tax rate in the quarter was 22.8%.

[Mike Tokich, SVP and CFO at STERIS]

Net income in the quarter increased to $200 million and earnings were $1.99 per diluted share. You will notice that we reported a loss on a GAAP basis in the quarter. At the time of the Cantel acquisition, we determined the fair value of the dental segment based on projected cash flows discounted at rates reflecting market costs of capital and market EBITDA multiples. Macroeconomic conditions, including rising interest rates, inflationary pressures on material and labor costs, and uncertainty regarding the impact of such economic strains may have on patient and customer behavior in the short term triggered an interim assessment of goodwill in the quarter. Revised cash flow projections and a current market weighted average cost of capital resulted in an estimated fair value of the dental segment below its carrying value.

[Mike Tokich, SVP and CFO at STERIS]

Therefore, we recorded a $490.6 million non-cash impairment charge related to the goodwill associated with the dental segment. Our long-term outlook for the dental segment is unchanged, and we continue to see significant growth opportunities in the dental space for STERIS. Capital expenditures in the first half of the fiscal year totaled $198.7 million, while depreciation and amortization totaled $272.7 million. Year to date, our capital expenditures have been higher than anticipated, primarily driven by the timing of investments in the AST segment. We still expect our full-year capital expenditures to be approximately $330 million. Free cash flow for the first half of the year was $138.2 million.

[Mike Tokich, SVP and CFO at STERIS]

Free cash flow was limited by higher than planned capital spending, mainly due to timing and higher than planned levels of inventory. We do not anticipate the same level of spend in the second half of the fiscal year for either, which will contribute to a significant step-up in free cash flow. All in, we now anticipate the free cash flow for the full year will be about $600 million, or a reduction of $75 million from our original guidance. I will now turn the call over to Dan for his remarks.

[Dan Carestio, President and CEO at STERIS]

Thanks, Mike, and good morning everyone. Thank you for taking the time to join us to hear more about our second quarter performance and our outlook for the rest of the fiscal year. We continue to see strong demand for our products and services, and as you have heard from Mike, we had a solid quarter despite the ongoing macroeconomic challenges. I will review the highlights of the quarter and then shift my commentary to our outlook. Total company constant currency organic revenue growth was 7% in the quarter. Once again, foreign currency was more impactful than previously planned on our as-reported revenue, but we are pleased with our operational performance. From a segment perspective, healthcare constant currency organic revenue grew 7% in the quarter.

[Dan Carestio, President and CEO at STERIS]

As we discussed last quarter, by August, we had an improved visibility on supply chain challenges, and that we anticipated that we would start to see better component deliveries in the quarter. We received several key components and were able to step up our shipments in September. We continue to expect to see significant levels of capital shipments in the second half based on our backlog, the inventory of key components that we have or will continue to receive. Reflecting that scenario, capital equipment and service growth remained solid in the quarter as we continue to see good demand from our customers. Consumables were about flat on a constant currency organic basis. Our consumable growth is limited due to a lack of procedure growth on a year-over-year basis.

[Dan Carestio, President and CEO at STERIS]

We have said before, we do not expect a significant pickup in procedures in the coming months, but we are optimistic we will get back to 100% pre-pandemic levels over time. Hospital capital spending remains robust, as evidenced by our healthcare backlog, which totaled over $500 million at the end of the quarter. Orders for the quarter were approximately 60% for replacement products and 40% for large projects. Despite the uptick in shipments at the end of the quarter, we believe approximately $60 million in capital equipment shipments were delayed in our second quarter, further strengthening our confidence in the second half.

[Dan Carestio, President and CEO at STERIS]

Longer term, our portfolio of STERIS is essential to surgeries, either directly in the operating room or in the core support sterile processing department, and we believe this provides us some insulation to our revenue base from our customers' rising cost of capital. Moving on to AST. AST grew constant currency organic revenue 19% in the second quarter as we continue to benefit from underlying demand from our core customers. In the second quarter, Mevex improved significantly on both a year-over-year basis and sequentially, which pushed our growth rate into the high teens. As you have already witnessed, shipments can be lumpy with this segment of the business. Similar to life sciences, these are large pieces of capital equipment that are not booked as revenue until they are fully installed and tested.

[Dan Carestio, President and CEO at STERIS]

From a profit perspective, increased energy costs, both in the U.S. and internationally, are impacting margins for AST. All signs indicate that this will continue at least through the winter. We continue to look for ways to recoup these costs as the contracts allow in the timing of our increases. Life Sciences revenue is flat on a constant currency organic basis compared with the prior year. Solid service revenue growth was offset by declines in both capital and consumables. We believe capital equipment shipments are just a matter of timing as about $10 million slipped into the third quarter versus our expectations. As a reminder, the business had a very strong shipment quarter in Q1. Also, our backlog continues to hover around 100 million. We are optimistic about the long-term demand for our capital equipment in this segment.

[Dan Carestio, President and CEO at STERIS]

On the consumable side, we were about flat from a constant currency organic revenue perspective. This is primarily due to inventory management by our customers, in particular in our barrier products line. Again, not concerned about the long-term underlying trends for the business as aseptic pharma production demand remains very strong. Our dental segment declined 3% on a constant currency organic revenue perspective. While procedure volumes for dental continue to hover around 95% of pre-COVID levels, year-over-year procedures have declined in the low single digit range. We believe this is due to the current macroeconomic conditions. Despite the decline in revenue, operating margins were over 25% as we managed spending and experienced some relief on our supply chain costs. Turning to our full-year outlook.

[Dan Carestio, President and CEO at STERIS]

Constant currency organic revenue growth expectations of 10% remain unchanged. However, based on the ongoing foreign currency challenges, we are revising our as-reported revenue. As-reported revenue is now expected to grow 8%, a reduction of 1% from the prior expectations due to continued foreign currency fluctuations. For the year, currency is now expected to reduce as-reported revenue by $150 million and adjusted EPS by approximately $0.15. The primary drivers of this continue to be the weak euro and British pound. Reflected in our revenue outlook is improved pricing. We are now expecting around 250 basis points for the year. Combined pricing and disciplined spending will contribute to higher than planned operating margins for the fiscal year. This will help offset the impacts from foreign currency and additional supply chain inflation.

[Dan Carestio, President and CEO at STERIS]

For the year, we now expect an incremental $90 million in extraordinary supply chain and labor cost inflation, an increase of $20 million over our prior expectations. Factoring in these elements, our expectations for earnings are unchanged at the $8.40-$8.60 range for the full fiscal year. However, with an additional 5% impact from foreign currency, we believe the high end of that range is less likely. Overall, our business concern continues to perform very well in this environment. Our teams and portfolios continue to come together to better meet the needs of our customers, and the breadth of our offering allows us to take advantage of several significant trends in the industry by leveraging our relationships to cross-sell within business segments and deliver value to our customers.

[Dan Carestio, President and CEO at STERIS]

Before we open for Q&A, I did want to address the challenges the industry is facing on ethylene oxide. As you all know, ethylene oxide is essential to the supply of sterile, single-use medical devices throughout the world. To date, the industry does not have an alternative to EO, and currently in the U.S., there is very limited capacity to manage the long-term growth expectations for the medical products industry's demand for ethylene oxide processing technology. At STERIS, we take our responsibility very seriously as a provider of these crucial services and have always been committed to strict regulatory compliance and quality standards for the safety of our people, our facilities, and the communities in which we operate. We are stewards of the long-term success of our business, which I believe is exemplified by our actions.

[Dan Carestio, President and CEO at STERIS]

We have regularly updated our processes and equipment used within our facilities to reflect the adoption of new technology and deploy the best practices possible. In addition, we have led the industry in developing sustainable EO cycles, which significantly reduce the amount of EO gas used per cycle. We have worked closely with the U.S. FDA to ease the regulatory transition for our customers so they can more easily adopt these cycles. This diligence is consistent with the way we have operated our contract sterilization business for many years. I am confident in how we have run and continue to run these facilities and the improvements we have made to our process within the AST segment. With that, I will turn it over to Julie to begin the Q&A.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thank you, Mike and Dan, for your comments. Jamie, can you give the instructions and we'll get started on Q&A.

[Operator]

Ladies and gentlemen, at this time, we will begin that question-and-answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Matthew Mishan from KeyBanc. Please go ahead with your question.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Good morning, and thank you for taking the questions. Just first, how should we think about the second half acceleration in organic growth? Kinda what are the key drivers around that?

[Mike Tokich, SVP and CFO at STERIS]

Matt, the main driver is, as we continue to talk about, capital equipment shipments, in particular in our healthcare segment. That is really gonna be the factor that drives us from about 7% constant currency organic revenue growth to 13% constant currency organic revenue growth around there to achieve our 10% for the full year. It's all driven by our ability to ship capital equipment in healthcare.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Have you secured the components necessary so that you do have the confidence that you will be shipping those?

[Dan Carestio, President and CEO at STERIS]

Hi, Matt, this is Dan. I would say we have a lot more confidence today than we had three months ago. You know, there's no guarantees as it relates to the current environment with supply chain, but we do have a lot now that's in stock, and we are aggressively shipping as we can finish off machines. I think that in terms of level of confidence from our suppliers that those shipments will continue to come in in a more predictable, you know, fashion is pretty high.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

Then lastly, does it require an inflection in dental? Or is it possible that you're still gonna get the 10% with dental, like, remaining flat to down?

[Dan Carestio, President and CEO at STERIS]

We believe the dental business is gonna stay suppressed until procedures come back. You know, I think that's tough to predict when that's gonna happen, given that these are highly elective. Currently with inflation and everything else, it's something that we believe is gonna. We've got it modeled to stay where we've had it year to date, more or less.

[Matthew Mishan, Director and Equity Research Analyst at KeyBanc]

All right. Thanks, Dan. Thanks, Mike.

[Operator]

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

[Mike Matson, Senior Equity Research Analyst at Needham & Co]

Yeah, thanks. I wanna ask about the, there's kind of a big difference in the growth between the AST business and then the consumables on the healthcare side. You know, since I'd assume a lot of the AST volume is medical devices that are getting used in procedures, or maybe will get used in procedures eventually, you know, how do you kind of explain that if you do you believe that we're still below pre-COVID levels in terms of procedures which kind of hurt your consumable growth in healthcare, but AST was still really strong?

[Dan Carestio, President and CEO at STERIS]

Yeah, I mean, there are three components of revenue, right? I mean, there's price, there's share, and then there's just volume growth. What I would say is, generally speaking for medical products, you know, we've seen some recovery in terms of higher end, higher value, whether that's neuro or whether that's spine or whether that's ortho, we have seen some recovery in those procedures. General surgery, we haven't seen any difference. In fact, it's still hovering at those pre-COVID levels, not back to those pre-COVID levels. That's largely a function of staffing in the healthcare network. You know, the other side of that is, you know, we're doing everything we can to recoup price as costs go up in that business. We have a long history of being able to successfully do that with our customers.

[Dan Carestio, President and CEO at STERIS]

The other component is share. Maybe we've picked up a little bit of share over the last couple years, and there's a long tail on that, you know, in terms of annualizing those run rates. Keep in mind too, there is a significant portion of our business that's not pure medical products. There is some level that is bioprocess type disposables, and that part of the market continues to grow at a pretty high rate, and we've been benefiting from that.

[Mike Matson, Senior Equity Research Analyst at Needham & Co]

Okay, got it. In terms of the EO regulations, I guess, do you have any sense for the timing on when those are to be revealed? You know, how do you feel in terms of where you're at with your EO practices? I mean, do you think there's a potential that you would have to make any changes? I mean, it seems like you've, you know, really put into place some pretty rigorous processes to reduce emissions. But you know, I don't know if there's any way to go beyond what you've already done there, but.

[Dan Carestio, President and CEO at STERIS]

What I would say is this, you know, I think we expect to see a rule draft sometime in the first calendar quarter out for public viewing. I mean, I've said that before, but I think it actually may happen this time. I do expect to see something out in public domain sometime in the first calendar quarter of the year. Now having said that, you know, what I would say is that, you know, we have consistently invested and found ways to improve our processes, and I would say generally above and beyond the regulatory requirements that are out there.

[Dan Carestio, President and CEO at STERIS]

You know, if I look back in our history, a couple notable examples of those type of improvements would be where we've proactively invested in our abatement technology, you know, and this is over decades, not in the last 18 months, you know, including upgrading our flares with wet scrubbers, and using catalytic oxidizers and developing also, you know, in the last few years, we've installed full abatement systems in our outbound warehouses in the U.S. AST locations for capturing any potential fugitive emissions.

[Dan Carestio, President and CEO at STERIS]

You know, within and around all of our EO chambers, we have significant safety measures and enhancements in place, including locks that don't allow the chamber door to be open until the prescribed amount of EO is, you know, met in terms of the chamber to ensure the safety of our people and maximum capture of ethylene oxide. Also a significant thing around the STERIS AST, in particular the U.S. locations, is any of those sterilizers that have or had back vents have always, and I repeat, always been tied into the emission control systems, for maximum destruction of any potential gas coming out of the facility.

[Mike Matson, Senior Equity Research Analyst at Needham & Co]

Okay, got it. Just one on interest expense. It was a little higher than, or I guess I should say other expense, but I think it's mostly interest, so it was a bit higher than what we expected. Is that because interest rates have gone up and, you know, how much of your debt is variable rate and what, you know, I don't know if you can give us any guidance on what to expect for the full fiscal year for interest expense, but.

[Dan Carestio, President and CEO at STERIS]

Yeah, Mike, it's definitely the rates have gone up. We're all in about 3.6% total, which is definitely higher than where we have been. Unfortunately, our projections are that rates will continue to rise. Currently, we sit at just over $3 billion of total debt, and it's about 70-30 fixed versus floating is our percentage.

[Mike Matson, Senior Equity Research Analyst at Needham & Co]

Okay, got it. Thank you.

[Dan Carestio, President and CEO at STERIS]

You're welcome.

[Operator]

Our next question comes from Jacob Johnson from Stephens. Please go ahead with your question.

[Jacob Johnson, Equity Research Analyst at Stephens]

Hey, good morning. Thanks for taking the questions. Just on the life sciences segment, it looks like the backlog growth decelerated some this quarter, kind of flattish growth, volume's down. Can you just talk about demand trends from that end market? It sounds like maybe some of this was related to the timing of shipping orders, but any thoughts on that end market?

[Dan Carestio, President and CEO at STERIS]

Yeah. I'm sorry, this is Dan. As those shipments can be lumpy, so can orders because they tend to be pretty high in value. I'm confident that, you know, our backlog, if we can hold that around $100 million, that is absolutely outstanding for the long-term success of the life science capital business. I'm happy where it is and our order intake is strong as well, you know, as we look into the future. I think we just gotta get the stuff shipped out of our plants and we'll be working on that diligently over the next six months.

[Jacob Johnson, Equity Research Analyst at Stephens]

Got it. Thanks for that, Dan. Just circling back on the dental impairment, I think some of it's related to near-term performance, but I suspect some of it might be related to rising interest rates. Can you just talk about those dynamics? I think you mentioned in your comments no real change to your long-term outlook for that business, but I figure I'd ask about that as well.

[Mike Tokich, SVP and CFO at STERIS]

Yeah, certainly. Yeah, as I did say at the end of that paragraph in my prepared remarks, yeah, we believe that long-term outlook for dental segment is unchanged, and that we continue to see significant growth opportunities in that space. What's really driving that is what's driving the impairment, and we have to look at this at any time we have any indicating factors that goodwill may be impaired. The estimated fair value of that segment may be below its carrying value.

[Mike Tokich, SVP and CFO at STERIS]

Really, what's driving that is you use a discounted cash flow model, and interest rates, in particular, the rising interest rates, in addition to the inflationary pressures we're seeing on labor and material costs, are really the two key factors that are driving us to impair all of the goodwill associated with the dental segment.

[Jacob Johnson, Equity Research Analyst at Stephens]

Got it. Thanks for that, and thanks for taking the question.

[Mike Tokich, SVP and CFO at STERIS]

You're welcome.

[Operator]

Our next question comes from Jason Bednar from Piper Sandler. Please go ahead with your question.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Hey, good morning. Thanks for taking the questions here. Great to hear the progress on the component source in the quarter. Sounds like that's really gonna contribute to the nice step up in growth here in the second half of the year. I'm gonna pack a few questions in here on this topic. You know, Dan, can you say whether those capital equipment delays late in the quarter that you referenced are you catching up on those real time? Is there anything we should consider with respect to your capacity to deliver against that backlog? Because, again, that is a pretty big step up in growth, so just wanna confirm that.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Finally, I can't imagine this is, you know, this more aggressive shipping suddenly stops at the end of this fiscal year. I guess is it right to think of this equipment momentum continuing into fiscal 2024 as well?

[Dan Carestio, President and CEO at STERIS]

Okay. Yeah, sure. Thanks, Jason. You know, in terms of your question around capacity, what I would say is this, we've been building machines without components now for the whole fiscal year, basically. Because the demand is high, we can't lose a manufacturing slot. You know, we have a number of machines that at the end of the quarter were finished awaiting a $7 part before we could ship it to our customers. It's not literally, but almost literally, yeah. We continue to manufacture every slot that we have and then finish out equipment as those components show up, you know, on our docks, if you will.

[Dan Carestio, President and CEO at STERIS]

I think we're in pretty good shape, but we've also, you know, historically have shown our ability to flex manufacturing pretty considerably in terms of you look at historical performance of STERIS, you know, we typically have a bigger back half than front half in terms of capital shipments. Our teams are able to do that, and they have a long history of doing that. In terms of momentum going into the next year, you know, I think that's something that is hard to look at right now, and it's not something we're discussing in terms of our future outlook in terms of what's gonna happen in the. I mean, we've got six months left to deliver on that's critically important for STERIS and our customers right now.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

Okay. Yeah, fair enough. That's helpful. Then maybe a couple clarification points. You know, Mike, can you just confirm that the reaffirmed earnings guidance here today contemplates additional rate increases like it looks like we're gonna be dealing with here over the coming months? Second point, you know, just on the higher inventory levels that are you know causing the free cash flow guidance cut, do those inventory levels continue beyond fiscal 2023? Do we get a reversal at any point? Just how do you see that playing out? Thank you.

[Mike Tokich, SVP and CFO at STERIS]

Yeah, definitely on the inventory levels, we've continued to hold higher inventory levels all this year, projected the rest of this fiscal year, even last fiscal year. Hard for me to sit there and pinpoint exactly when we will turn that spigot off. Once we do, obviously, we will see a nice benefit to working capital. I don't know if that's gonna be in 2024 or beyond, or timing is just too hard to predict at this point in time. We're just happy to get the inventory components in to ship the equipment for the customer. More to come on that. Yes, we did bake in continued increased interest rates in our forecast. That is already contemplated.

[Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler]

All right, very good. Thanks so much.

[Mike Tokich, SVP and CFO at STERIS]

You're welcome, Jason.

[Operator]

Our next question comes from Michael Polark from Wolfe Research. Please go ahead with your question.

[Michael Polark, Senior Research Analyst at Wolfe Research]

Good morning. I wanna ask about the back half and then 2024 on equipment and then maybe one or two follow-ups. On the back half, just as we consider our models, 13% real revenue growth for the total company year-over-year. But December quarter lower than that, March quarter higher. Any flavor you can provide on phasing? Because you know, clearly the toggle in this spreadsheet is the healthcare equipment revenue, and it's some pretty big numbers and it's obviously difficult to predict quarter to quarter. So I think it'd be helpful just to level set, like, how you expect this to unfold the next six months between December versus March quarters.

[Mike Tokich, SVP and CFO at STERIS]

Yeah, I mean, just looking at it, obviously, in order for us to meet our intended free cash flow, we need to ship capital equipment earlier so we can collect. I would say that Q3 would be a little bit higher from a growth standpoint than Q4 would be if we're modeling this.

[Dan Carestio, President and CEO at STERIS]

Yeah. I would also say, you know, to use your words, it is difficult to predict. You know, in terms of revenue recognition at the end of the quarter, you know, it's a different world today in terms of getting things accepted and received around the holiday season than maybe it was in the past with labor shortages. You know, we believe we're gonna deliver on the year and I think, you know, trying to be extremely precise from Q3 to Q4 is a little tough right now.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Counts do get much higher.

[Michael Polark, Senior Research Analyst at Wolfe Research]

Can you just-

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Oh, sorry, Mike. In the fourth quarter we have 11% constant currency organic less for Q4. Certainly there's a currency issue as well in fourth quarter.

[Michael Polark, Senior Research Analyst at Wolfe Research]

Yeah. You talked me up versus my initial stab sequentially, so, okay, I will consider. Appreciate that comment. I guess look, I understand you're not gonna comment on fiscal 2024, but these equipment revenue numbers are potentially very large in fiscal 2023. I guess, you know, we have to take a stab at publishing a fiscal 2024 framework and it just seems kinda reasonable to think total company equipment revenue might, you know, kind of be down in fiscal 2024 on a very significant comp as you unlock the backlog. Is that, you know, is that an unreasonable thought?

[Dan Carestio, President and CEO at STERIS]

Keep in mind, a lot of that backlog is in large projects that could extend out into, you know, future fiscal periods. The short answer is we don't know right now. I mean, if order rates stay high like they have been, then there's no reason why we shouldn't continue to do incredibly well on capital. If they slow down, then that'll impact it. I mean, the good thing is that we have an awful lot of other business in healthcare that tends to buoy us up when capital slows and when capital is going great, it helps.

[Michael Polark, Senior Research Analyst at Wolfe Research]

If I could add one more. On life sciences consumables, the kind of inventory management that you called out at production facilities. I mean, what inning do you feel like we're in? Did that just kind of start in biopharma? Are we halfway through the game? Any flavor for how long that's been kinda happening would be helpful. Thank you so much.

[Dan Carestio, President and CEO at STERIS]

I think it's been happening now for a couple quarters, and I think that we'll see it reverse trend in the back half of the year.

[Operator]

Once again, if you would like to ask a question, please press star and then one. Our next question comes from Dave Turkaly from JMP Securities. Please go ahead with your question.

[Dave Turkaly, Research Analyst at JMP Securities]

I'll get that name right. Good morning. Maybe just why we've been jumping around, so I apologize if somebody missed this, but yeah, you mentioned the price again and you know, almost 300 basis points is a lot different than a lot of the companies we cover. I was wondering if you might be willing to give us a little color either on divisions or geographies or products or like where it's mainly coming from or any of the drivers there, and do you think that's sort of sustainable? Thank you.

[Dan Carestio, President and CEO at STERIS]

You know, I think it's sustainable in the sense that we have an obligation, you know, as we have sustained higher costs to pass that on, wherever we can and wherever our customers can accept it. That's something that I don't think is going to change assuming we continue on this rate of relatively high inflation and especially when there's certain components of inflation that are unique to STERIS in terms of, having more meaningful impacts on costs, whether that's electricity or steel or electronics or things like that. I think that those trends will continue as long as they need to. In terms of breakdown of price by segments, we don't really weigh into that.

[Dan Carestio, President and CEO at STERIS]

I mean, clearly, you know, healthcare hospital systems is tougher than somewhere we have contracts, but as those contracts roll from a GPO perspective, then we'll be incorporating appropriate new pricing levels.

[Mike Tokich, SVP and CFO at STERIS]

Yeah. The one thing I can say, Dave, is that we are getting price across all of our segments.

[Dave Turkaly, Research Analyst at JMP Securities]

Thank you.

[Operator]

Ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to Julie Winter for any closing remarks.

[Julie Winter, VP of Investor Relations and Corporate Communications at STERIS]

Thanks, everybody, for taking the time to join us. We will be on the road quite a bit over the next few weeks, and we look forward to seeing many of you in person.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Participants

Executives

• Dan Carestio, President and CEO
• Julie Winter, VP of Investor Relations and Corporate Communications
• Mike Tokich, SVP and CFO

Analysts

• Dave Turkaly, Research Analyst at JMP Securities
• Jacob Johnson, Equity Research Analyst at Stephens
• Jason Bednar, Managing Director and Senior Research Analyst at Piper Sandler
• Matthew Mishan, Director and Equity Research Analyst at KeyBanc
• Michael Polark, Senior Research Analyst at Wolfe Research
• Mike Matson, Senior Equity Research Analyst at Needham & Co