STERIS Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2023

There are 10 speakers on the call.

Operator

Good day, everyone, and welcome to the STERIS Plc Third Quarter 2023 Conference Call. All participants will be in a listen only mode.

Speaker 1

After

Operator

Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Julie Winter, Investor Relations. Ma'am, please go ahead.

Speaker 2

Thank you, Jamie, and good morning, everyone. As usual, speaking on our call today will be Mike Tuchet, our Senior Vice President and CFO and Dan Crestio, 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 expressed written consent of STERIS is strictly prohibited.

Speaker 2

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, with those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward looking statements 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.

Speaker 2

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 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.

Speaker 3

Thank you, Julie, and good morning, everyone. It's once again my pleasure to be with you this morning to review the highlights of our Q3 performance. For the quarter, constant currency organic revenue increased 7%, driven by volume as well as 300 basis points of price. As anticipated, the divestiture of the Renal Care business impacted our revenue comparisons to the prior year by about $47,000,000 which is detailed in the press release tables. This is the last quarter of a year over year impact for the Renal Care business as we divested it in January of last year.

Speaker 3

The integration of Cantel Medical continues to go well. We achieved approximately $10,000,000 of cost synergies in the 3rd quarter, bringing our year to date total to about $45,000,000 We are well on track to achieve our stated goal of approximately $50,000,000 in fiscal year 2023. As anticipated, gross margin for the quarter decreased 200 basis points compared with the prior year to 43.1 percent as pricing, Currency and the favorable impact from the divestiture of Renal Care were more than offset by lower productivity, unfavorable mix and to higher material and labor costs. Sequentially, the impact of material and labor costs have improved and totaled about $15,000,000 in the quarter compared to the prior year. This puts us at about $75,000,000 year to date with our outlook of $90,000,000 for the year remaining unchanged.

Speaker 3

EBIT margin declined 10 basis points to 23.9 percent of revenue compared with the Q3 last year, which reflects the gross margin pressures mentioned earlier, which were partially offset by lower SG and A expenses. The adjusted effective tax rate in the quarter was 23.4%, higher than the prior year due primarily to geographic mix and favorable discrete items, which occurred in last year's Q3. Net income in the quarter was 202 $4,000,000 and earnings were $2.02 per diluted share, reflecting the lower anticipated volume. Capital expenditures for the 1st 9 months totaled $290,500,000 while depreciation and amortization totaled $410,700,000 Year to date, our capital expenditure spending has been higher than anticipated, primarily due to timing of our investments within the AST segment. We still expect our full year capital expenditures to be approximately $330,000,000 Total debt increased slightly in the 3rd quarter to just over $3,000,000,000 reflecting borrowings to fund a few small acquisitions and share repurchases.

Speaker 3

Total debt to EBITDA is slightly over 2.3x gross leverage. Free cash flow in the 1st 9 months of the year was $263,000,000 Free cash flow was limited by higher than planned capital spending, mainly due to timing at higher levels of inventory. We can with continued pressure on working capital, in particular inventory and now accounts receivables, We now anticipate the free cash flow for the full year will be about $500,000,000 or a reduction of about $100,000,000 based on our last guidance. With that, I will turn the call over to Dan for his remarks. Thanks, Mike, and good morning, everyone.

Speaker 3

Thank you

Speaker 4

for taking the time to participate in our Q3 call. I will cover a few highlights from the quarter and then address our revised outlook for the fiscal year. Starting with Healthcare, the segment grew 10% on a constant currency organic basis in the quarter. This was driven by high teens growth in capital equipment. In particular, improved shipments in our IPT business were driven by operational and supply chain improvements in core washing and steam products.

Speaker 4

In addition, we saw double digit revenue growth in our surgical products. Our main supply chain issue continues to be with electronic components. We are working hard to resolve these issues. And as we have discussed, we are working with existing and new suppliers where possible to ensure the availability of parts in order to meet customer demand. The Healthcare Services business delivered double digit constant currency organic revenue growth driven by increased demand and improved pricing.

Speaker 4

We also saw Sequential improvement in consumables. Consumables constant currency organic revenue grew low single digits compared with Q3 of last year. Supporting that growth, U. S. Procedure volumes improved in the quarter with recovery outside of the U.

Speaker 4

S. Still lagging. The underlying dynamics of our Healthcare segment remains very favorable. Hospital capital spending remains stable as evidenced by our healthcare backlog, which totaled over $500,000,000 at the end of the quarter. Orders for the quarter remain at approximately a sixty- 40 split for replacement in large projects, and we are not seeing any order cancellations at this time.

Speaker 4

Although we still have some delays, our capital shipments have improved dramatically from prior quarters. Approximately $30,000,000 in capital equipment shipments were delayed into the 4th quarter. Overall, our Q3 healthcare performance showed nice improvement. Opportunities remain from a supply chain perspective, which we anticipate will take some time to fully work through. Our expectations for the Q4 reflect a conservative outlook on how quickly we can recover from these challenges and difficult comparisons in AST and Life Sciences.

Speaker 4

Our AST segment grew 7% on a constant currency organic basis, despite a reduction in demand for bioprocessing disposables and delayed shipments from MavEx, our capital equipment business. On the bioprocessing side, our Q2 this year was a Peak level for biopharma within AST. We are hearing from customers that they are resetting their expectations due to a reduction in vaccine production. Importantly, we are not seeing declines in total revenue at this time, but rather a flattening of growth. Positively, we anticipate that our core medical device customers will benefit from improvement in procedures, which we expect will help AST continue to perform at historic levels.

Speaker 4

Regarding MavEx, a large e beam capital equipment order of approximately $10,000,000 was delayed into Q4 as our customer was not ready to receive the unit. Turning to Life Sciences, constant currency organic revenue was down about 1% for the quarter with declines in capital equipment and consumables somewhat offset by growth in service. The same factors impacting the bioprocessing demand in AST are also impacting our Life Sciences consumables volume. In addition, we have difficult comparison with strong consumables growth in the Q3 of last year. That said, we do anticipate that this is a matter of timing as cell and gene therapies continue to increase in demand, which should help offset the reduction in vaccine production.

Speaker 4

We remain confident in the long term growth drivers within the customer base for both AST and the Life Science segments. In addition, Life Sciences had and an unanticipated shipping challenge out of Europe that limited capital equipment growth in the quarter by about 10,000,000 Positively, backlog remains at near historic levels at over 100,000,000 Dental increased 1% on a constant currency organic revenue basis in the quarter. Procedure volumes remain at approximately 95 percent of pre COVID levels due to the broader economic pressures impacting consumer spending. Based on market data, STERIS is performing better than market and benefiting from pricing and modest share gains. As you heard from Mike, gross margins remained under pressure as anticipated.

Speaker 4

Despite the impact of lower gross margins and increased pressure from foreign currency, We held EBIT margins about flat in the quarter as SG and A was lower than planned, largely driven by lower incentive compensation. With added pressure on interest rates and taxes, our adjusted earnings per diluted share for the quarter came in at $2.02 As a result of our performance to date and our expectations for the Q4, we are revising our full year guidance. As reported, revenue is now anticipated to grow 6% compared with prior expectations of 8% growth. Based on foreign currency forward rates through March 31, 2023, currency is now anticipated to negatively impact revenue by approximately $110,000,000 this fiscal year, a decline from expectations of approximately $150,000,000 Constant currency organic revenue is now anticipated to grow approximately 7% compared with prior expectations of 10%. With 1 quarter left, this revision and outlook implies the challenges which limit our performance in the Q3 do continue.

Speaker 4

Reflecting on the lower revenue, adjusted earnings per diluted share are now anticipated to be in the range of $8 to $8.10 Our long term expectations for the business remain unchanged. We continue to be very strongly confident and believe that STERIS is capable in generating mid to high single digit constant currency organic revenue growth and double digit earnings growth into the future. With that, I will turn the call back over to Julie to open up for Q and A.

Speaker 2

Thanks, Dan and Mike for your comments. Jamie, if you'll give the instructions, we can open up for Q and A.

Operator

Ladies and gentlemen, at this time, we'll begin that question and answer session.

Speaker 1

In

Operator

Our first question today comes from Dave Turkaly from JMP Securities. Please go ahead with your question.

Speaker 5

Great. Thanks. Hey, I just wanted to confirm something here, Dan. So you called out 30,000,000 And delayed capital shipment in healthcare, I think, and then $10,000,000 from AST and then $10,000,000 I think from Life Science. So If I look at those and add them up and get to 50, I mean that seems to be about the mix might have been different, but about what You were shy of the street.

Speaker 5

Are we thinking about that correctly?

Speaker 4

Yes, you are Dave. That's correct.

Speaker 3

Dave, I would also add In there, the reduction in bioprocessing was another $10,000,000 roughly and that was split about evenly between AST and Life Sciences, Just so that we're all on the same page.

Speaker 5

No, I appreciate that. And I guess one for Dan too. I mean, obviously, The good news is this is not a common occurrence with you guys. But if we look at this, I think it even said growth in bioprocessing But you explained that the vaccine was the main driver, but how does that sort of, I guess, like what is the lead time there? How does it sort of Maybe sneak up, probably not the right word, but on use of it.

Speaker 5

We didn't know this last quarter and now we do.

Speaker 4

Yes. So let me give you a little background. So our customers are typically at least in AST where we took the biggest hit are typically the manufacturers of single use technologies that are sterile technologies that are used in aseptic manufacturing for vaccines and biopharmaceuticals. What we saw what we have seen for the last couple of years is high double digit growth on a year over year basis in that sector within AST. It's been one of our larger growers and depending on the quarter it's contributed anywhere from 1.5% to 2.5% growth on top of the normal growth that we've seen in AST.

Speaker 4

That peaked in Q2, which would be at the end of the summer, early fall, which would be logical going into high vaccine production sort of season. Our customers had built a lot of inventory and with the slowdown And either vaccine reluctancy or just vaccine production in general, they were stranded with a lot of inventory. And consequently, Our volumes in Q3 went down significantly. So we started to see it in the beginning of Q3. At that Point, there's nothing we could do to adjust, and we think this is something that will work its way through as the inventories burn down.

Speaker 4

And the underlying supporting growth for single use technologies and bioprocessing remains. It's Once we work through the tough comparison of the vaccine spike that was anticipated.

Speaker 6

Thank you.

Operator

And our next question comes from Matthew Mishan from KeyBanc. Please go ahead with your question.

Speaker 1

Hey, good morning, Dan, Mike, Julie. I just want to take a step back. Dan, could you just kind of frame for us what you think the normalized growth profile for Staris is over the next several years. I imagine you really don't think it's a 10%, 11% grower. And where you're coming in this year is probably more in line with kind of longer term how you look at the business.

Speaker 4

Yes. I mean, our stated objective is to grow high single digits on the top And low double digits on the bottom line. And we believe with a high degree of confidence that's something we can continue to do even in the current market conditions over the long haul.

Speaker 1

And then as you think about going out to next year versus that high single digits, what looks, I guess, better or worse as you think about next year.

Speaker 4

Well, Matt, we've got to get through Q4 at this point. And so we're not doing any guidance for next fiscal year. A few comments I would This is preliminary but encouraging and you've heard some of our other med tech peers mentioned that they're optimistic about procedural recovery in the second half of calendar year. We believe things started in Q3 to recover back to pre COVID levels in healthcare, particularly in the U. S.

Speaker 4

Still lagging pretty significantly outside of the U. S. But assuming that holds and improves in the second half of the calendar year, since we're largely a procedure driven company, would be beneficial to us. And Matt,

Speaker 3

I would just also add, obviously, our backlog remains, at least at Healthcare, at record levels and within Life Sciences near record levels. And you have seen that we are getting through some of the supply chain constraints. We did ship more sequentially. That $30,000,000 of capital deferral in Healthcare was $60,000,000 last quarter. I mean, we are seeing So that does give us, as we look out further, more confidence for next year.

Speaker 1

Okay. And I guess just the last one, just on the order environment. I mean, your backlog did go up sequentially. It typically does on a seasonal basis. But as you're shipping out more from supply chain improving, And how should we think about the order environment and your ability to kind of replenish this?

Speaker 4

It's remained very strong at this point, Which I know is a bit in the face of everything we read about the financial performance of a lot of the hospital systems these days, but they seem to be still willing to significantly invest in the future capacity requirements, for procedures. And keep in mind, largely everything that we sell in terms of capital into hospital systems. It's almost like infrastructure. In order for them to perform at a higher rate of sort of volume, they got to have more sterilizers. They got to have more washers.

Speaker 4

They have to have more OR tables and lights. So I think our equipment is not it's not a luxury, it's a utility in many respects.

Speaker 1

I'll jump back in the queue. Thanks, guys.

Operator

Our next question comes from Jacob Johnson from Stephens.

Speaker 7

A couple on the bioprocessing market. First, Mike, if I heard you correctly, dollars 10,000,000 headwinds in 3Q. Is that the right way to think about 4Q? And then as I kind of listen to what your customers are talking about, They're seeing some near term headwinds from COVID and inventories, but they're kind of looking to the back half of this calendar year where things will normalize again. Is that maybe the right way to think about it for you all?

Speaker 7

Or is there some kind of a logic in terms of what they're seeing versus when the demand comes to you all?

Speaker 4

I think what you're going to see as it relates to bioprocessing is you're going to see pretty tough comps leading up to Q2 of this past year, The year that we're currently in. So I think as we burn those down and get back to what is the normalized growth rate for bioprocessing, which is still In the mid to higher double digits, but it's going to take some time to burn through the inventory and to burn through what was a spike in vaccine production demands.

Speaker 7

Okay. Thanks for that. And then my follow-up, which you may have answered, but I'll check is Just on the AST side of things, does the slowdown due to COVID impact any of your kind of capital allocation plans, especially as I think about X-ray capacity.

Speaker 4

No. I mean, it's we're obviously looking at our capital spending and adjusting the timing of When we build and add this the infrastructure into our capacity, the market and just the inconvenience of supply changing Construction has helped us defer capital a bit just because it's been a challenging time to build anything. But no, our plans remain largely unchanged, maybe Different prioritizations of what comes online first, but other than that, the projects are still in play and we're very confident about those.

Speaker 7

Got it. I'll leave it there. Thanks.

Operator

Our next question comes from Mike Matson from Needham and Company. Please go ahead with your question.

Speaker 8

Yes, good morning. Thanks for taking my questions. I want to ask one about the backlog in healthcare. I understand you don't want to give guidance for 24 yet, but just not without specifying a timeframe, I guess, it just seems like You kind of expected some above normal growth this year and given the backlog and that didn't happen mainly because of the supply chain, I guess. But Is there still potential for you to as you catch up on sort of that backlog to see above normal growth in the healthcare business at some point.

Speaker 4

Avi, what I would yes, at some point and we're not defining that point at this time. We expect sequential improvement And our capital shipments as we look to the quarter that we're in currently. And as we look into next fiscal year, we continue to believe things are improving and that would lead one to believe that we will deliver a disproportionate amount of capital in that backlog in the first half of the year. But we have not modeled that out and we have not done our planning yet on that.

Speaker 8

No, I understand. And then just as far as pricing, I mean, good to see that the 300 basis Points, again, without asking for a specific number for 24, but just I'm wondering About the sustainability of kind of that higher level of price increases, is that with your contracting and everything that's in place, Is that something that's got some legs to it that could continue for a while? Or is it more of like a 1 year bump and then kind of goes back to like normal levels?

Speaker 4

I think that largely is determined by what happens or continues to happen with inflationary pressures. To the extent that we need to push through pricing and it makes sense to do so in order to protect our margins and still remain competitive in the marketplace. That's something that we'll do and we have always done consistently at STERIS.

Speaker 8

Okay, got it. And then my final question is just on the AST business. Just given what's happened with your primary competitor there with all the EO litigation and everything. I wanted to see if you've seen any sort I'm not asking about the litigation specifically, but just Have you seen any kind of movement away from them or any impact on your business because of what's happened with them?

Speaker 4

No, I wouldn't say so. I mean the current situation in the industry is the capacity is pretty tight especially as it relates to ethylene oxide Here in the U. S. So, we have strong partners across medtech, and we're always striving to take a little more share of wallet wherever we can do that.

Speaker 8

Okay. Got it. Thank you.

Operator

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

Speaker 9

Hey, good morning. Thanks for taking our questions. First one, I'll follow-up on Matt Michonne's question earlier, but maybe take a different stab at this. I wanted to come back to some questions around guidance, a lot of things that are understandably outside your control. We've seen that here this year, but guidance is in your control and this is the 2nd time in 3 quarters where we've seen guidance lowered.

Speaker 9

So since we're sitting just a few months away from fiscal 2024 guidance, I guess what learnings can you say that you've taken from this year that can help inform how you set your outlook for fiscal 2024. And then I know a few others have asked, but I guess Just any early puts and takes we should be considering as we work through our models for next year, particularly on the equipment side?

Speaker 4

Yes, Jason. I'll make one comment and then I'll let Mike add a few comments as well. I think we came into the year and we are Our guidance was an awfully large backlog and just and we're under the impression because we had navigated COVID incredibly well at that point relative to Supply chain and we really got we got tripped up pretty bad in Q1 and it exposed some vulnerabilities in our supply chains across our manufacturing network. What I can tell you is we're a lot more resilient now and we have a much better eye and a much better strategic focus on managing those supply chains and having much more resiliency. And I believe that will carry forward into next year.

Speaker 4

Now having said that, just because you roll into the year with a large backlog, I think we need to be a little more cautiously optimistic and a little more metered in our expectations of how quickly that will ship.

Speaker 3

Yes, I think surgical procedure volume was the other thing that we anticipated was going to be much higher this year and obviously everybody knows how that is playing out. Although From a favorability standpoint, we have seen some improvement in Q3 in the U. S. In particular. But again, there is just so many moving pieces here.

Speaker 3

And to Dan's point, I think, conservatism at the end of the day is the norm for us. And we have put out a outlook for the Q4 that we believe is conservative in nature, based upon the facts that we continue to work with throughout the year.

Speaker 9

All right. Very helpful. That's good to hear. Okay. Then maybe one on free cash I mean, we saw the pretty sizable reduction and we're talking, I think, some round numbers here, dollars 500,000,000 versus 600,000,000 but that is a much bigger drop than what's implied just from the EPS cut.

Speaker 9

And I think Mike you mentioned some comments there around inventory running higher, receivable collections running lower. Maybe could you bucket those 2, and does that reverse as we start thinking towards free cash flow then for next year's working capital work lower.

Speaker 3

Yes. I would say that if we go back to the beginning of the year, we anticipated about $675,000,000 in free cash flow and obviously We're down to $500,000,000 And I would bucket though that inventory and receivables 2 thirds, 1 third. Inventory is remaining elevated. Obviously, as we have not been able to ship at the rates we anticipated, we are carrying more inventory. As we've talked many times, the last couple of quarters, we continue to fill our manufacturing slots.

Speaker 3

So we're building, building, building, waiting for that golden screw. But that golden screw doesn't come. That product remains in inventory until we ship it. So inventory has continued to be elevated. And then on the receivable side, it's not our inability to collect, it's just the timing of collections.

Speaker 3

We have about just under a 60 day DSO so that we have collection. So originally, we anticipated shipping earlier for more product in the 3rd quarter That has shifted to the Q4, which pushes collections into the Q1. So free cash flow isn't lost. It's just more of a timing issue.

Speaker 9

Okay. All right. Makes sense. I'll hop back in queue. Thanks so much.

Operator

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

Speaker 6

Good morning. Thank you. I want to follow-up on bioprocess and AST and try and put together some math, Dan, that you mentioned earlier in the Q and A. So At one point not long ago, it was contributing 1.5 to 2 points of growth to the segment. I also heard that it's been growing high double digits, which I would interpret it 15% to 20%.

Speaker 6

So if I put those two data points together, bioprocesses a portion of Total in AST is 10%. Is that a ballpark? The question is

Speaker 4

Yes, ballpark, maybe slightly less, but you're in the range.

Speaker 1

Okay.

Speaker 6

Follow-up also AST, the Mebec, dollars 10,000,000 slippage, I know this is a recent acquisition. It's been lumpy quarter to quarter. I had $10,000,000 of revenue from this, in the year ago quarter, And now you're calling while you were annualizing it in the numbers and now you're calling out a $10,000,000 slippage out of this quarter, which I would interpret as Mavic was at or near 0 in the quarter. So the question is what is the revenue headwind from this equipment line in AST year on year?

Speaker 3

Yes. Your math is about right. And in total, we're somewhere between $25,000,000 $30,000,000 for the full year for Mevix. But yes, you're exactly right, Mike. It was near 0.

Speaker 3

So that full $10,000,000 is flipped from 1 quarter, Q3 to Q4. And again, It's the timing, it is lumpy unfortunately. I know that AST has in the past been much more predictable for us, but Mevex has hurt us twice now with shipping issues. But if you add the MavEx shipping issues, you take the biopharma processing, you're back to Somewhere in the low teens growth for AST. So the trajectory hasn't changed dramatically, but it's the timing that is The concern I think from everybody's standpoint.

Speaker 4

Yes. Just to add to that, Mike, the systems from MavEx can be anywhere from $5,000,000 or $6,000,000 to $12,000,000 and they're large build systems with lots of conveyance and complicated electronics and control systems. And We rely on our customers to have the infrastructure in place before we can come install. And sometimes there's change in scope and sometimes there's just delays in construction. So it's as much as we try to stay on top of it and help project manage, ultimately it's in the hands of our customers to when we can deliver.

Speaker 6

Those 2 for me. I would hop back in queue and ask a few more, but I guess maybe I'll do that and come back in. So thank you.

Speaker 3

You're welcome.

Operator

And our next question is a follow-up from Matthew Mishan from KeyBanc. Please go ahead with your question.

Speaker 3

You there, Matt?

Speaker 1

Yes. Sorry about that. I guess we're going to be doing some follow ups on this call. Just first on the consumables, the low single digit growth you saw, kind of It's been lagging or like flat to low single digit, maybe even a little bit of declining in a couple of quarters ago. What's your sense of hospital inventory of your consumables?

Speaker 1

Is it pure volumes or has there been some destocking that's gone along as well?

Speaker 4

I think it's purely procedural volume driven. They don't hold a lot of this because it's heavy, it's bulky, it takes up a lot of space. So it's not something they would carry a lot of excess inventory

Speaker 1

of. Okay. And is it across the board from CoreStarz, Cantel, Key Surgical or is there a little bit of mix change in pieces of the business that may be lagging versus others?

Speaker 4

You can get into really complex stratification of this, but in the end it's not really any one Particular piece is driving it one way or another. I wouldn't say it's a mix issue. It's purely procedure driven. Certain procedures in terms where we have a little more exposure with our With our endoscopy products, obviously, it's endoscopy procedure rates. But generally speaking, it's all procedural driven demand.

Speaker 1

Okay.

Speaker 2

I mean, you guys know we're heavy U. S, right? Compared to a lot of other healthcare companies, we're 80% U. S. From what we do.

Speaker 2

So the

Speaker 1

And then back to AST, I mean, does this open some capacity for AST with some slower growth in bioprocessing, I guess. And my sense would be, you could fill that fairly quickly, because it's like the shortage through the industry.

Speaker 4

Yes. Well, keep in mind, all single use technologies for bioprocessing only run-in radiation. So not ethylene oxide where there's a real significant shortage. And really the phenomena is if we're running with a lot of product backlogged, especially as we come up to the holiday seasons. In a typical year in AST, we would starve out our plants, so we shut down a day or 2 and either do it the Christmas week or you end up starving out because it takes customers a longer time to start up production because they've shut down factories before you see their supply chain start flow in early January.

Speaker 4

In the case of the last couple of years, we've been sitting on so much backlog demand in bioprocessing Saying that we ran at a number of our plants straight through the holidays 20 fourseven, 365. So not doing that, In this year's case, it's basically straight drop through because of

Speaker 3

the high fixed cost model at AST.

Speaker 1

Okay. And then Mike, if I'm looking at the balance sheet, right, it looks like the debt you've generated cash flow through the course of this year, even with the working capital builds. I guess, why has the debt balance gone up and why not take some of that down to lower interest expense?

Speaker 3

Yes. So the debt balance went up primarily For two reasons. One, we did some minor acquisitions, some tuck ins that we paid cash for during the quarter and then we continued to fulfill our dilution offset for share repurchases. And then we also were opportunistic during the quarter On the share repurchase side, just due to the overhang that we were facing with the EO situation. So in total, we spent about $88,000,000 in the quarter on share repurchases and then another $50,000,000 to $75,000,000 of Cost force acquisitions.

Speaker 3

So those are the 2 main drivers that changed our profile of debt. We still are within the leverage ratio that we are very comfortable in. We're just over 2.3 times. We did We're just over 2.3 times. We did pay off during the quarter, private placement note That was due, it was about $91,000,000 So we actually just borrowed.

Speaker 3

It was fixed versus floating. So our interest rate ticked up just a tiny bit. Our average interest rate is just under 4% as we sit here today.

Speaker 1

And then how much is left on your authorization for share repurchase?

Speaker 3

About $160,000,000 remains under the current authorization. Okay.

Speaker 1

Thank you very much.

Speaker 3

You're welcome, Matt.

Operator

And our next question is also

Speaker 4

a follow-up from Michael Pollard from Wolfe Research. Please go ahead with your follow ups.

Speaker 6

Hey, thank you. Just 2. In Healthcare Capital, given the supply chain strains, are you fully competing for new orders or has the supply chain Challenges impacted your kind of your ability to bid for new business?

Speaker 4

We're still Fully competing. And you got to think of it this way, these are generally significant portion of our business in long term projects. And then the other portion is replacement. That's largely replacement of equipment that we already have placed in the marketplace. So if we have a longer term In terms of delivery for replacement unit, we tend to be able to work with the customer and manage that through our service arrangements and service contracts until We can replace that with a new system.

Speaker 6

Makes sense. And the last one, the few small acquisitions in the quarter, anything To flag there what in what business segments and any revenue that we even if minor, any revenue that we should consider for our Bridgework, over the next year or so. Thank you.

Speaker 2

You called those out in the queue last night, Mike, with some healthcare and AST, really small deals in some cases, buying out a former distributor, for example, where there's really no change in revenue to the company, but we're choosing to go direct to markets opportunistically.

Speaker 6

Okay. Thank you so much.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session.

Speaker 4

I'd like to turn

Operator

the floor back over to Julie Winter for any closing remarks.

Speaker 2

Thanks everybody for taking the time to join us this morning. If anyone would still like to chat, please let me know and I'll be happy to do my best to accommodate you. Take care.

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Earnings Conference Call
STERIS Q3 2023
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