Q1 2025 Earnings Summary
- Strong performance in the Healthcare segment's consumables and services, driven by rising procedure volumes, price increases, and market share gains, with recurring revenue expected to grow above procedure volumes and relatively independent of capital equipment shipments.
- Growth opportunities in the Life Sciences segment, particularly in injectable drug manufacturing, where STERIS's aseptic manufacturing solutions are in demand, driving strong growth in consumables and services despite a slowdown in capital equipment.
- Operational efficiencies in manufacturing and supply chain have improved, returning to normal lead times and enabling STERIS to sell more "on the turn" business, increasing confidence in meeting capital equipment guidance despite a lower backlog.
- Slowdown in demand for capital products in the Life Sciences segment due to decreased funding and cutbacks in pharma and biopharma over the last 6-9 months, which may negatively impact revenues.
- Operating margins decreased 20 basis points year over year due to increased compensation and higher insurance costs, and the company is "not getting the leverage that we anticipate". Margins may remain under pressure.
- Analysts express skepticism about the company's Healthcare capital equipment revenue growth guidance of low single-digit growth, given lower backlog and challenging comparisons, suggesting potential over-optimism in forecasts.
-
Healthcare Capital Equipment Guidance
Q: How confident are you in achieving low single-digit growth?
A: Management acknowledged that the model had been disrupted over the past 18 months, but they are confident in achieving low single-digit growth in Healthcare capital equipment. By returning to normal lead times and focusing on turn business, they believe they can meet their guidance. -
Operating Margin Outlook
Q: Can you explain the margin decline and expectations?
A: Operating margins were down 20 basis points year-over-year due to increased compensation and higher insurance costs. However, EBIT dollars increased by $20 million, and management remains confident in driving positive EBIT margin leverage for the full year. -
Life Sciences Business Outlook
Q: What's the outlook for Life Sciences amid capital slowdown?
A: There has been a slowdown in demand for capital products due to decreased funding in pharma and biopharma. However, strong growth in services and consumables, particularly in injectables, is offsetting these headwinds. -
Labor Inflation Impact
Q: How is labor inflation affecting costs?
A: Compensation increases implemented over the past 6-12 months are now impacting costs. Management does not expect significant further increases and notes that turnover has decreased, indicating improved control over labor expenses. -
Restructuring Plan Details
Q: Can you provide an update on the restructuring plan?
A: The company announced a $100 million restructuring plan involving the closure of a manufacturing facility. A $25 million benefit is expected this year, with the majority of benefits realized in fiscal year 2026. -
AST Capacity Expansions
Q: Will capacity expansions drive AST growth?
A: Capacity expansions are part of normal operations and a long-term strategy to support growth. They facilitate continued demand but are not expected to significantly boost growth in the near term. -
Supply Chain Initiatives
Q: How are supply chain initiatives progressing?
A: The shift to larger suppliers is a long-term effort focused on ensuring supply reliability. While margin improvements are a goal, the primary focus is on securing consistent supply. -
Capital Deployment Priorities
Q: Any change in M&A or capital priorities?
A: Investment priorities remain unchanged. The company is well-positioned financially and will act on opportunities as they present themselves. -
Interest Expense and Tax Rate
Q: What is the outlook for interest expense and tax rate?
A: Favorable discrete items lowered the tax rate to 21% in Q1, but the full-year rate is expected to be 23%. Interest expense benefited from the faster use of proceeds from the dental sale, with full-year interest projected at $100 million. -
BD Acquisition Integration
Q: How is the BD acquisition being integrated?
A: The BD acquisition is classified primarily under consumables in the Healthcare segment, with 90% in consumables and 10% in capital equipment. It has a similar margin profile to the core business.
Research analysts covering STERIS.