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.

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.

Operator:

Yes ma'am. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Patrick Wood with Morgan Stanley. Please go ahead.

Dan Carestio:

Hey Patrick, thanks. This is Dan. Yes, our expectation is that we can have very low single-digit growth on the capital side of the business in Healthcare. If you look at the last five months or the last four quarters, rather, I'm sorry, I misspoke there, we kind of shipped an extra quarter of capital during the fiscal 2024 because in 2023, we had the challenges with supply chain, which pushed out delivery. So, we had a huge Q1, which is abnormal for us. And then we finish strong as we typically do in Q4. So, there was a bit of a timing issue there that's affecting the comps going into next year. But nonetheless, we do expect that we can maintain the level and grow it a bit. We've had -- we've consistently had strong order books. And then the remaining growth is really the expectation on the momentum we've built in the services and then the consumables organizations for healthcare. And as we place more and more equipment, it drives more consumption of both sides of that business. And obviously, as we've seen some consistent recovery in procedural rates, those business are largely procedurally driven.

Dan Carestio:

Well, I mean, Patrick, it's hard to say. What I would say is that STERIS is incredibly well-positioned as a technology-neutral and location-neutral company in terms of how we help our customers. And whether that means that we sell them accelerators for their own in-house deployment or VHP for their own in-house deployment for terminal sterilization or whether they use us in a large-scale contract situation where we've consistently continued our expansion efforts as we expect the growth in the industry to continue long-term. So, I believe from our perspective, we have done everything possibly to support our customers from a capacity, from in-house perspective and also from a regulatory perspective in terms of how we operate, but also working with the regulatory agencies on things like master files and changing classifications for alternative methods like vapor hydrogen peroxide to lower those barriers in terms of regulatory.

Mike Tokich:

Sure. Thanks.

Brett Fishbin:

Hey guys. Thanks so much for taking the questions. I'm going to ask just one more on AST. I think it was really encouraging to see a little bit of progress in terms of growth in the service line this quarter. So, just curious if you could provide a little bit more color on where we stand in regards to the inventory overhang, specifically in Europe, given that was the reason that seemed to be lagging the most from an inventory standpoint?

Brett Fishbin:

All right. Super helpful. And then just one quick follow-up on the EPS guidance. Just curious if there was any impact to how you're thinking about either margins or EPS as a result of the incremental divestiture in Life Sciences? And if there's any financing considerations that we should be aware of for that deal?

Brett Fishbin:

All right. Thank you

Mike Matson:

Yes, thanks for taking my questions. Just a couple on the guidance. So first, can you remind us how much pricing you got for the full year for fiscal 2024? And then what have you assumed in the fiscal 2025 guidance for pricing?

Mike Matson:

Okay, got it. And then just in terms of M&A, with the dental divestiture, reducing your debt to some degree, should we expect near-term deals just given that additional capacity you're going to have?

Mike Matson:

Okay, got it. Thanks.

Unidentified Analyst:

This is Matt [ph] on for Jacob. I just want to follow-up on the guidance question asked earlier. Do you mind clarifying your first half, second half remarks, it seems like you may be guiding to like roughly 2% organic growth for the first half and maybe 10% plus for the second half, is that correct?

Unidentified Analyst:

I appreciate that. And then on gamma radiation, I know you caught up on some gamma loading last quarter, but in the medium term, I believe a few years ago, there was some concern in the bioprocessing industry about the shortage of capacity. Do you have any thoughts on the current state of gamma supply versus demand as bioprocessing demand comes back? And what could this mean for your X-ray capacity as well?

Unidentified Analyst:

Great. Thank you for taking my questions.

Operator:

[Operator Instructions] Our next question will come from Jason Bednar with Piper Sandler. Please go ahead.

Mike Tokich:

Yes, our comparisons are tough in both Q1 and obviously now with the strong finish in Q4, but I would agree that the first half would be a little bit lighter, both from a revenue standpoint and from a margin standpoint.

Dan Carestio:

Yes. At a high level, I would say, although we pushed out a lot of product last year because we had built up a huge backlog. The demand for our products remains high. And if you look at what our annual order intake looks like today versus four years ago, it's significantly higher. I think we had a bit of an anomaly last year, but we don't expect our general order rates to really slow down. We believe that we're well positioned with our portfolio. We're winning more than our share I believe, in terms of capital projects, in particular, on the IPT side of the business, and we would expect that to continue.

Julie Winter:

Jason, just to clarify, clearly, we're not saying we're going to grow at the same pace, but we are expecting to grow, right? So, down from the double-digit growth we've been doing to low single-digit growth is our expectation.

Operator:

And this concludes our question-and-answer session. I would like to turn the conference back over to Ms. Julie Winter for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Julie Winter:

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. 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.

Dan Carestio:

Thanks, Mike and good morning, everyone. Thank you for taking the time to join us to hear more about our third quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, our third quarter continued the momentum we have experienced in our Healthcare segment in the past few quarters and we also saw a nice improvement in Life Sciences. Overall, we are pleased with our performance. We continue to expect that our Healthcare segment will outperform our original expectations for the fiscal year, offsetting macro challenges impacting demand in our other segments. Looking at our segments; healthcare constant currency organic revenue grew 12% in the quarter. Supporting that performance, we had double-digit growth across capital equipment, consumables and service again this quarter. This is driven primarily by procedure volume rebound in the U.S. as well as price and market share gains. As anticipated, backlog continues to normalize as we are shipping at a faster pace than new orders are coming in. Remember, our goal is to get back to historic production lead times and continue to meet customer demand. Speaking of demand, capital equipment orders in the Healthcare segment grew double digits in the quarter. Turning to AST; constant currency organic revenue grew 4% which was below our expectations. While we have continued to see more normalized volumes in the U.S. for medtech, outside of the U.S. remains softer than anticipated. In addition, bioprocessing volumes continue to contract. Until we have more clarity, we are taking a more conservative approach to our expectations for the fourth quarter. Life Sciences grew 20% in the quarter on a constant currency organic basis. We had another strong quarter of capital shipments which grew 57% against relatively easy comparisons. Remember, in fiscal 2023, revenue for both capital equipment and consumables was shifted from the third quarter to the fourth quarter due to some supply chain constraints. Consumables grew 8% and service revenue increased 12%. As you're hearing from others in the space, short-term demand remains a bit murky and we continue to be optimistic about the long-term growth opportunities for this segment. Our Dental segment third quarter revenue declined 6% on a constant currency organic basis. Revenue is limited by reduced orders from a large customer due to a temporary disruption of their operations as a result of a cybersecurity incident they experienced during the quarter. Excluding that disruption, revenue would have been about flat in the quarter which reflects the decline in patient volumes. The lower volume, combined with the continued increases in material costs led to a decline in EBIT margin for the quarter. Turning to our outlook. Fiscal 2024 is shaping up to be another strong year for STERIS, albeit not exactly the way we had anticipated. In the last few years, if they've taught us anything, it's the value of our diversified portfolio. Time and time again, we have benefited as one of our segments outperforms to compensate for challenges elsewhere. We are updating our outlook for the year to increase revenue to reflect the continued outperformance of our Healthcare segment. For the year, we now expect total revenue to grow 10% to 11% on a constant currency organic basis -- I'm sorry and constant currency organic revenue growth of 7% to 8%, each up 100 basis points from our prior ranges. This assumes low single-digit constant currency organic revenue growth in the fourth quarter caused by the record-setting shipments in last year's fourth quarter. EBIT margins for the fiscal year will decline slightly from fiscal 2023, primarily reflecting the shift in operating income mix from AST to Healthcare. Adjusted earnings per diluted share are now anticipated to be in the range of $8.60 to $8.70 for fiscal 2024. We recognize this outlook includes some conservatism but believe it is warranted until we see the AST customer destocking abate and have additional clarity on bioprocessing volumes. That concludes our prepared remarks for the call. Julie, would you please give the instructions and we can begin the Q&A.

Operator:

[Operator Instructions] Our first question today comes from Patrick Wood from Morgan Stanley.

Dan Carestio:

Yes. I'll take the consumables. Mike, if you want to take the capital. Patrick, what I would say is the consumables is a function of really two things. One is obviously, patient demand in terms of procedures. And obviously, at least in the North American markets, demand is up across the board in terms of volumes flowing through hospitals. And then the other factor on that is just the sheer number of placements that we put out there over the last year in terms of maybe a little bit of share gain.

Patrick Wood:

Amazing. And then maybe just quickly on AST. I guess within bioprocessing, the companies there themselves struggle to forecast their own demand kind of famously. So I wouldn't want to necessarily put too much stock there. But the commentary seems generally more optimistic on the forward look, I would say, from some of the big players. Is that something that you think resonates with you as you move through the next few quarters, like things on the bioprocessing side get a little bit better? And then equally within AST, that -- how far through do you think we are in that inventory burn down given the procedure volumes have been so strong. I would have thought we don't have too long of that left. Is that fair?

Patrick Wood:

Having been treated in both the U.K. and the U.S., I'm glad I live here from healthcare perspective.

Brett Fishbin:

Just wanted to start off with a question on some of the margin dynamics. Understand the unfavorable revenue mix shift was the primary moving piece this quarter. But just wondering if you could give a bit more color on some of the previous key moving pieces around margins like productivity and cost inflation and how those have progressed into the back half?

Brett Fishbin:

All right. Great. And then just one other follow-up, a little bit of a longer-term question around AST. Just wondering if you could provide a bit of an update around your progress in adding more X-ray sterilization capacity as an alternative modality across your network. If I'm not mistaken, you have a couple of locations already up and running. And I think there are some additional ones that might come online in the next few years. So just any additional details would be great.

Julie Winter:

And then outside of the U.S., we have several projects underway.

Operator:

Our next question comes from Jacob Johnson from Stephens.

Dan Carestio:

A general comment, Mike, I'll let you add to it. We typically see some decline in Q3 and that's because of the holidays, right? So we're not -- there's not as many days of billing that goes on because customers have shutdowns often over the Thanksgiving week and over the Christmas holiday week between Christmas and New Year. So unless we're sitting on backlog in the factories, we tend to lose some time there. So as a result, it has an impact on margin. But that's a normal sequential trend that we see from Q2 to Q3. Unless there has been a few times in history where that has not -- we bucked that trend because bioprocessing volumes was through the roof or something. We had to run a burn-off backlog. But generally speaking, that's a normal thing you would expect. It's probably a bit exaggerated by the fact that we saw a much lower volume than anticipated in the European plants.

Jacob Johnson:

Got it. And then just maybe as a follow-up on the Life Sciences segment, obviously, strong performance. Dan, it seems like from your comments, some of that was just easy comps but you also kind of struck some maybe positive tone around the longer-term outlook there. I'm just curious kind of what you're seeing in terms of demand there as it relates to aseptic manufacturing clients because that's been in focus somewhat this week?

Operator:

Our next question comes from Michael Polark from Wolfe Research.

Mike Tokich:

Mike, your opening comment it's a bit too early for us to comment at this point in time. You answered your own question there a little bit. Obviously, we're in the middle of our planning process. We will, as we typically do, provide FY '25 guidance in May on our full year fourth quarter call. So that's where we stand right now.

Dan Carestio:

That's it. It's specific to Europe, too, because we've seen pretty decent recovery in our Asia Pacific plants. So this is a predominantly European demand issue that's just well, not necessarily demand, its ability to deliver health care issue that's taking longer to burn down inventories.

Dan Carestio:

That's the communication we get -- we've received from customers. We've had -- many say that they're burning down inventory as much as 40% from where their current levels were. That's a function of what happened during the pandemic and post pandemic and inventory in the supply chains and manufacturing and raw and everything got fairly bloated because of concerns around the surety of supply and that compounded with a reduction in procedure rates over and Europe is taking longer to burn it down.

Jason Bednar:

I'll start first, following up maybe on some of the prior questions on segment margins. I was going to take a stab at fiscal '25 but Mike already tried that. So I'll go a different route. It sounds on the margin side, like you're not too worried about the AST profit level. We saw third quarter is the seasonal low point. But is there anything structural keeping us from getting back to the upper 40% margin levels we saw in fiscal '22 and the first part of '23? Or are those just tough to match given the volume lift you were seeing at the time. And then similar question but on the other side, in Healthcare, how sustainable do you see segment margins in that segment? I think it hit a new high this quarter. Is the strength there simply a function of the consumables and equipment volumes you're seeing? Or is there any kind of uplift that's coming from the assets you acquired from BD.

Dan Carestio:

Yes. No, I don't see any fundamental changes really in Healthcare. It's that, once again, as long as our delivery rates stay up high, it should be fairly consistent, plus or minus a -- a bit different to one way or another from quarter-to-quarter.

Jason Bednar:

Okay. I don't want to lead either of you but it sounds like Mike, you're saying nothing structural from getting from tariffs getting back to the upper 40s in AST. And Dan, you're saying nothing structural that would keep you from maintaining the margin level you're at right now in Healthcare.

Jason Bednar:

Okay. All right, great. And then over on Dental, I'm sorry, I probably have asked this a few different times now in consecutive calls, you've been reviewing internally the future plans for the asset. This was a weak quarter, part of that out of your control, you had Henry Schein cybersecurity attack. But I guess maybe two questions on those items. Can you say first, whether near-term trends have normalized following that cybersecurity attack and the kind of the resolution we've seen with that business and that issue? And then can you talk about the conversations you're having regarding the future for this segment, do you have a time line on when you'll announce the formal decision here?

Operator:

[Operator Instructions] Our next question comes from Mike Matson from Needham & Company.

Mike Tokich:

Yes, Mike, our capital allocation methodology process has not really changed over the last decade plus. We did, if you remember last year in the fourth quarter, we did -- we were opportunistic in share repurchase. We bought about $225-ish million of shares. We have not purchased any in FY '24 to date. We've actually been focusing more on paying down debt since rates are higher. We feel there's value in paying down debt. So all of our excess cash has been going towards debt repayment which has driven our leverage ratio even with the BD acquisition, we're at 2.2x gross leverage. So that's been our focus.

Dan Carestio:

Yes, I think that to some extent, our ability to justify putting through price increases with customers has to be some basis of cost. And as costs can normalize in certain areas, there will be a market trend towards less price grab, I guess, what I would say.

Mike Tokich:

Mike, nothing material from Pillar Two, if and when it does get implemented.

David Turkaly:

Bouncing around a bit, you may have talked about this but I wanted to just ask quickly. Any update on that radiation sterilization master pilot program, like in terms of participation or anything we should assume. Anything you've learned or anything you think we could look at in terms of how that might impact things moving forward?

David Turkaly:

And then just quickly as a follow-up, when you look at like EO, if they're transferring from that, like -- is the margin profile much different via the different modes in AST that they might switch to?

Operator:

And our next question is a follow-up from Michael Polark from Wolfe Research.

Dan Carestio:

I love your theory and I hope it plays out that way.

Dan Carestio:

It does but we have to have the volume is the issue. So we needed to take the cobalt because we've gotten to a deficit position in many of those plants because it's been for some of them over a year since they last loaded. But it doesn't -- it should not have a material effect unless we get more volume than we anticipate. And if we do, we'll be able to run it because we'll have more capacity.

Julie Winter:

Thanks, Jamie and thanks, everybody, for taking the time to join us this morning. We look forward to catching up with many of you in the coming weeks.

Julie Winter:

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. 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 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.

Dan Carestio:

Thanks, Mike, and good morning, everyone. Thank you for making the time to join us to hear more about our second quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, our second quarter continued the momentum we have experienced in our Healthcare segment for the past few quarters. Overall, we are very pleased with our performance in the Healthcare segment and is anticipated to outperform our original expectations for the fiscal year, offsetting the macro challenges impacting demand in our other segments. Looking at our segments. Healthcare constant currency organic revenue grew 14% in the quarter. We experienced double-digit growth across capital equipment, consumables and service again this quarter. This is driven primarily by procedure volume rebound in the U.S. as well as price and market share gains. As anticipated, our backlog has reduced as we were able to ship at a faster pace than new orders are coming in as we get back to normal lead times for our customers. During the first half, we saw strength in replacement orders, representing 65% of our total orders in Healthcare. We are increasingly confident in our expectations of a strong year for our Healthcare segment. Growth will, however decelerate in the second half as we face very challenging comparisons in the fourth quarter. Turning to AST, constant currency organic revenue declined 1%. While our services business grew 5%, our capital equipment business declined due to the timing of large shipments. In addition, our performance in the quarter continued to be impacted by two short-term situations; inventory destocking in the Medtech space and the year-over-year market decline of the bioprocessing customer demand. We do see very positive signs of recovery in the Medtech demand. We saw good growth in the U.S. during the quarter, reflecting the improving procedure environment and the burn down of customer inventory. We continue to see weakness, however, in the European markets where procedure recovery is taking a bit longer to take hold. From a bioprocessing perspective, as we have said, FY '24 represents a bit of a reset, and we do not anticipate returning to year-over-year growth in bioprocessing in fiscal 2024. As we head into the second half, our comps ease as it was the third quarter of fiscal 2023 when we first witnessed declines in bioprocessing. Based on these factors, our outlook continues to reflect very strong growth in the second half of the fiscal year for our AST segment as compared to the first half. Life Sciences revenue grew 5% in the quarter on a constant currency organic basis as the delayed capital shipments from the first quarter were recognized contributing to 18% growth in capital equipment. Consumables grew 4% and service was flat. As you are hearing from many others in the space, the short-term demand remains a bit murky. We continue, however, to be very optimistic about the long-term trends driving demand for aseptic manufacturing in biopharma. Our Dental segment, second quarter revenue declined 6% on a constant currency organic basis as revenue was limited by customer destocking of inventory, in particular, for infection control products. Despite these challenges, we are impressed with the ability of the business to sequentially improve margins, delivering EBIT margins above total company in the quarter. All in, we are pleased with the first half of the fiscal year. U.S. procedure trends continue to shift in a positive direction, supply chain challenges have largely abated and our ability to execute and ship capital products to our delivery times has greatly improved. That said, there are still pockets of uncertainty, which remain outside of our Healthcare segment. We are maintaining our expectations of 6% to 7% constant currency organic revenue growth for fiscal 2024 as we expect a strong third quarter followed by a very tough fourth quarter comparisons, which will limit our total growth in the second half. In addition, from an earnings perspective, we now have an additional headwind from currency of about $0.05, which we are absorbing in our current outlook of $8.60 to $8.80. That concludes our prepared remarks for the call. Julie, would you please give the instructions and we can start the Q&A.

Operator:

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Johnson Jacob from Stephens. Please go ahead with your question.

Dan Carestio:

Yes. I mean I think we still expect to deliver a good year in Life Sciences. It's just there's still some continued destocking going on in the space. And you see this across, everybody that's reported that sells either tools or disposables into the biopharma and pharma industries, in general. It's been announced in the last month or so that Pfizer is doing a $3.5 billion cut. And other -- some other pharma companies are sort of following suite. So generally speaking, we see -- when we see that start to happen, there'll be a short-term pullback in the industry. But the long-term outlook for biopharma and aseptic manufacturing, which is really our sweet space is really positive, and we have a great portfolio and expect to do well. In terms of the AST business, as I mentioned, we've seen a positive trend in the U.S. I think the procedures have crossed over with sort of the excess inventory that was out there in the past quarter, and we're seeing very positive growth from our Medtech customers. In terms of Europe, it's taken a bit longer for that to happen. There's been a lot of strikes and there's been a lot of labor shortages in Europe and just have not mobilized healthcare delivery in many places the way the U.S. has to date. Eventually, that will abate and even if doesn't eventually, they're going to burn down the inventories and access that they have sitting around. And I would have expected that around the time that we saw it in the U.S., I think as I've mentioned in previous calls, we expected sometime in the Fall time period. That's still the case. That could burn into the winter, I guess. But generally speaking, it's a matter of weeks or a few months, not quarters at this point. And then I think we've covered bioprocessing at length. Last year, Q2 was our high point, and then we started seeing it slowing in Q3 and ultimately sort of bottomed out by Q1 of our fiscal year, give or take. So the comps get easier for us in the second half for that in terms of our performance, especially as we get into Q4 and then next fiscal year.

Dan Carestio:

Yes, no, I would say both, are just getting products out the door. We had a lot of stuff that was supposed to move out in the prior quarter in Life Sciences, in particular, that slipped till the end of the quarter and didn't get recognized until this quarter. So that's just purely a timing issue, and orders remain pretty strong. And we've just been able to get a lot more stuff out of our factories as we bring our lead times down pretty significantly. So we just had a great delivery quarter for capital and general cross-post businesses.

Dan Carestio:

Sure, thanks.

David Turkaly:

Hey, good morning. I just wanted to ask one follow-up on the AST side. It seems like we have some companies that are saying demand is super high. They're actually like experiencing bottlenecks to get devices sterilized, and you mentioned the timing of projects for AST. I'm just curious, is there a shift going on between some of the modalities there? Or what exactly the Medtech customer inventory that you're highlighting are you seeing?

Julie Winter:

And Dave, the shortages, I think, have been more tied to EO sterilization.

Julie Winter:

Where our softness has been on the radiation side.

David Turkaly:

That makes sense. And then maybe just a follow-up for Julie or the team that master filed the pilot program. I'm just curious as to what you think that means for you? Obviously, it's -- I think you said it's -- STERIS is first, but I don't know how to sort of analyze that or what you think that will mean for you moving forward?

David Turkaly:

Great. Thank you.

Michael Polark:

Hey, good morning. AST question for the back half. It obviously, the segment has the Mevex in it and you break it out, so that's helpful. Not a lot of Mevex in the front half. Can you help level set how much Mevex you expect in the back half?

Michael Polark:

Yes. Understood. No, that's helpful. And then on the AST services phasing, look, I hear all the destock comments, and it sounds like light at end of tunnel, especially in U.S. devices and bioprocess worst of it annualized in now. I'm looking at AST services in the front half, up 5% year-on-year. What's kind of a good either sequential growth rate or year-on-year growth rate to planned for in the back half?

Michael Polark:

In the AST services line?

Michael Polark:

Okay. Helpful. I appreciate that. And then the follow-up topic equipment, healthcare, it's not a metric you report, but we can do our own math, I calculate a book-to-bill, if you will for you, for healthcare equipment. It's -- it was like 1.0 last quarter. It was sub 0.9 this quarter. But -- my question is unlike the fresh order environment, and I want to set it up this way, like you have a big backlog, your -- you have been working real hard to convert the backlog and we're seeing conversion rates tick up, and that's pretty clear. I wonder about like your willingness to refill the backlog as fast? Like is there an element where are you just -- do you need to bid for new business as much at the moment right now as you otherwise would because of the backlog, and that's a dynamic. So I'm curious there and then just broadly on hospital capital spending, if you will, as we move into calendar '24, like similar seeing stresses and strains, no impact? And any thoughts on this would be great. Thanks.

Michael Polark:

Thank you.

Michael Matson:

Yes, thanks. I guess I'll start with the Dental business. It was down again. It looks like you're starting to lap some of the declines that you've been seeing. So -- is that, I guess, just what's the outlook there? Is it just really boil down to kind of the economic headwinds or something else, maybe?

Michael Matson:

Yes. Okay. And then it does look like you're obviously working on the backlog in the Healthcare business. But -- and I wanted to ask about just hospital staffing with regard to the -- getting the equipment installed. I know that, that's been an issue in the past, at least, with some companies. Have you seen that improving? Is that still a constraint on the ability to book the revenue there?

Michael Matson:

Okay. Got it. And then I know you may have addressed this in the prepared remarks, if I got on the call a little late. So I just wanted to ask about the gross margin. It did look like it was down a little bit sequentially. And you had a nice improvement, I guess, last quarter sequentially from the fourth quarter, but just any kind of commentary there would be helpful.

Michael Matson:

Yes. Got it.

Michael Matson:

Yes. Okay. Thank you.

Jason Bednar:

Hey, good morning. Thanks for taking the questions here. I want to start on, I think, the topic of the day here with AST, but maybe first on the CapEx side with AST. Just the decision to postpone some of those projects that's influencing the CapEx outlook for the year. I appreciate you wanting to protect free cash flow. But is there a risk at all here that you're foregoing future growth in AST, just been not adding capacity? And should we be thinking about this CapEx spend shifting out of fiscal '24 into '25 and just next year being an above normal year of CapEx spend?

Jason Bednar:

Okay. Dan, you're talking about the CapEx spend, not the equipment that you're recognizing as revenue, just to be clear?

Jason Bednar:

Okay. Okay. So it was like $65 million of spend that's shifting out of this year into next year?

Mike Tokich:

The bulk of that is AST. It's not 100% in AST, but the bulk of that $65 million is directly related to the AST segment.

Dan Carestio:

Yes, we think normal is somewhere around 350, but we're happy to keep it higher if we keep pulling in orders. It was artificially high in the past because of our ability to manufacture and deliver. And as we've sort of solve those issues from a supply chain perspective, it's now really coming down at an accelerated pace.

Jason Bednar:

Okay. All right. Thanks. And then last one for me. I don't think I heard it, but if I did, I apologize. Are you able to bifurcate what you're seeing with your U.S. AST services business and contrast that against what you're seeing in Europe? How much the growth rate delta are you seeing across those two markets? It seems like the opportunity for improvement here is more dependent on the European market improving. So just wondering what kind of visibility you have on procedures in that geography recovering and if you're seeing anything or hearing anything from your partners, that would be an encouraging leading indicator?

Jason Bednar:

Okay. All right. Thank you.

Julie Winter:

Thank you, everybody, for taking the time to join us. I know you have a busy week. We do look forward to seeing many of you out on the road over the next few weeks of several conferences.

Julie Winter:

Thank you, Chuck, and good morning, everyone. As usual, speaking on our call today 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 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 press 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.

Daniel Carestio:

Thanks, Mike, and good morning, everyone. Thank you for making time to join us to hear more about our first quarter performance and our outlook for the rest of the fiscal year. As you heard from Mike, we had a strong start to our new fiscal year exceeding our plans and STERIS' expectations. Looking at our segments, Healthcare, constant currency organic revenue grew 18% in the quarter. We experienced double-digit growth across capital equipment, consumables and service. This is driven primarily by procedure volumes in the U.S. continuing to rebound as well as price and market share gains. In addition, the improving supply chain environment, coupled with our ability to reduce lead times, led to a very strong quarter of capital equipment shipments. Hospital capital spending remains robust as evidenced by our healthcare backlog, which totals almost $500 million at the end of the quarter despite the strong shipments. Large projects continue to drive orders representing 40% of first quarter orders. We are increasingly confident in our expectations of a strong year for our Healthcare segment. Turning to AST. Constant currency organic revenue grew 5%. Our performance in the quarter was impacted by 2 temporary situations, inventory destocking in some categories of med tech and the year-over-year market decline of bioprocessing customer demand. As we said last quarter, FY '24 represents a bit of a reset and we do not anticipate returning to year-over-year growth in bioprocessing in fiscal 2024. As for the med tech inventory destocking, we would not expect that to continue beyond the first half of the year, and we anticipate customer inventories at that time will align with the procedural growth we are all experiencing. As a result, our expectations are for stronger growth in the second half of the year for AST. Life Sciences revenue declined slightly in the quarter due to the timing of capital shipments which more than offset the growth in service and consumables. Underlying demand for the business remains strong as evidenced by our near-record backlog. Our full year expectations for the Life Sciences segment continue to be mid-single-digit revenue growth despite the lumpy first quarter start. Our Dental segment first quarter revenue declined 4% on a constant currency organic basis as revenue was limited by customer destocking of inventory, in particular, for infection control products. However, we did see patient volumes improve for the first time post-COVID. We are confident that we will achieve low single-digit revenue growth for the fiscal year in Dental. All in, we are pleased with the start to the year. Trends continue to shift in a positive direction and our ability to execute and ship products has greatly improved. There are still pockets of uncertainty, whether that be supply chain, procedure volumes or inventory management. As mentioned in our press release, we believe that the acquisition of the surgical instrumentation assets from Becton, Dickinson will close much earlier than we originally anticipated. As a result, we have updated our outlook for as reported revenue, adjusted earnings per share and free cash flow. We are feeling increasingly optimistic about our constant currency organic performance for the year, yet we are still holding our outlook to 6% to 7% growth. We acknowledge that this is a somewhat conservative approach given our start to the year. That concludes our prepared remarks. Julie, would you please give the instructions, and we can begin Q&A.

Operator:

[Operator Instructions]. And the first question will come from Matthew Mishan with KeyBanc.

Daniel Carestio:

Yes, sure. Thanks. That's correct. What I would say is we overdelivered in terms of what we had anticipated from a manufacturing perspective in Q1. We've been bidding a bit on the supply chain issues over the past year. And so we're trying to do everything possible to manage to our customer demand where they actually need the product now, and we did a better job on delivery. So that pulled forward some revenue that might otherwise been in Q2. But generally speaking, our ability to produce and deliver is getting better and our lead times are coming down across all of our capital equipment portfolios. And in terms of the orders intake, yes, there is a point at which you will start to see declining backlog, obviously, as we get back to much more normalized delivery times, with the only caveat being there, some of the large project stuff, Matt, that's got longer lead.

Daniel Carestio:

Yes. We agree. First off, yes, the phasing remains as originally anticipated. In terms of the destocking that we're seeing in med tech, we really started to see it in Asia Pacific, in particularly around some sterile PPE and some of that was foreseeable given that the national stockpiles have been filled and all that demand sort of went back to normal levels. What we're a little surprised of is that we're seeing a pullback on our customers' level of inventory. Now having said that, we shouldn't be surprised because be like everybody else, have too much inventory right now. So -- and as confidence comes back in terms of your ability to produce an ability to get supplies and supply chain solidifies, the natural thing one would expect is to wring out some of that inventory down to levels that are matching demand. I don't think that process is going to take too long. I think it's been going on for a period of months now. And then I think what you'll see is the inventory demand aligned with the procedure rates, which are clearly higher. So Matt, I agree with you that the 2 seem in opposite directions in terms of what we're seeing in Healthcare, in particular, our Healthcare Consumables business. And we know that our customers are seeing the same thing. I think they've just got to whittle down some inventory.

David Turkaly:

Just looking at the healthcare number into the capital one that I'd like to press you a little bit there and say, how are you reducing these lead times? And you called out market share gains. I'm wondering if there's -- are there any new products or there anything you'd highlight in how you put up a number...

David Turkaly:

And so we think of the market share gains is sort of across the board or is there anything like more specific there that you were kind of calling out in any arena?

Operator:

Your next question will come from Mike Matson with Needham & Company.

Michael Tokich:

Yes. I would say that, Mike, on the gross margin side, it's similar. The growth rates would be similar and our long-term view of Healthcare, mid- to high single digits, as we bring that portfolio of products into our Healthcare segment, it's 100% healthcare. So I would say not much different from what we currently have from a margin perspective, both gross margin and a little bit -- it's actually a little bit higher on the EBIT margin standpoint. Unfortunately, we are going to incur in the short run, higher interest expense, I think as I looked at some of the models that were out there, I don't think everybody appreciated that we are going to use our full revolving credit facility for the $540 million, which is equivalent to about $25 million in interest expense this year. So I think there's a little bit of a slower ramp because of that interest expense. But once we clear some of that expense out, we'll be back to, what I'll call, normalized Healthcare margins.

Michael Tokich:

Yes. So we originally anticipated this fiscal year that we would have about $30 million, and we've been using the term excess material labor inflation. We incurred $10 million of that $30 million in the first quarter.

Michael Tokich:

Yes, we really haven't quantified that, but we are having the same issue that we've had in the past, right? So we are touching our products multiple times as we're waiting on the parts. So that productivity should improve throughout the year, which will help not only our gross margin, but also get more of our EBIT margin back to flattish, which is where our original guidance was for FY '24.

Michael Tokich:

Correct.

Unidentified Analyst:

This is Mac on for Jacob. Just a couple of quick questions for me. Despite a sequential revenue decline, Dental margins increased sequentially. What is the outlook for margins in this segment?

Julie Winter:

Dental margin.

Julie Winter:

Or should they be long term?

Unidentified Analyst:

Sorry if you can't hear me, just let me know, I'll repeat the question. But Healthcare operating margins they're the highest it's been in some time, and 2 solid quarters in a row. Are there any onetime bits? Or is this a good run rate going forward?

Operator:

The next question will come from Patrick Wood with Morgan Stanley.

Daniel Carestio:

Yes. Thanks, Patrick. So what I would -- this is Dan, by the way. What I would say is the conversations with the customer, it's interesting because you read the stress that the Healthcare system, in particular, in the U.S., but everywhere else is under financially. I mean, the labor costs have gone up 20% in many places, and they operate on pretty thin margins to start with. So cash is a challenge. Now having said that, everybody agrees that procedure volumes are returning, recovering and growing and there's pent-up demand. And the STERIS equipment is seen more as a utility than it is a luxury because they can't get the capacity to get instruments through and surgeries process without sterile processing capacity. Without ORs, without the SPD equipment. So we've -- knock on wood, we've remained pretty robust in terms of our order intake. And generally speaking, the outlook is pretty strong for that to continue for some period of time. And yes, as we place those units, and have that real estate in the sterile processing department, the onus is on us to make sure that we get the chemistries and all the other accessories consumables that go along with the steam sterilizer or a washer or an AR, whatever that may be, but the pull-through in that is consistently pretty strong and we have a highly focused dedicated channel in Healthcare organization to focus on that.

Michael Polark:

I must say first, I counted 8 minutes of prepared remarks, including the disclaimer. So kudos there, that might be an all-time conference call record. My first question maybe a few parts to it is on AST. With the fresh call-out of med tech related destock, internally is your full year revenue expectation for ASP different than it was before?

Michael Polark:

So two follow-ups there on bioprocess and medtech. So on bioprocess, I think this is the third quarter you've called it out year-on-year. So it's definitely been in the run rate sequentially for at least 2 quarters. My question is June quarter versus March quarter, did it deteriorate incrementally? Or is it kind of consistent Q-over-Q in terms of overall order pattern from those customers?

Michael Polark:

Yes. And then on device customers, I heard the national stockpile call-out. I appreciate that. In kind of interventional medicine, let's say, the neuro and cardio and ortho. Any categories there that you see as kind of especially kind of noteworthy in terms of reducing inventory levels? Or would you call it broad-based ex the PPE stockpiling?

Michael Polark:

Okay. I hope that was a 3 parter, but I consider that my first topic. My second is more straightforward on BD transaction kind of very prudent entry price, so you're seemingly earning your return on the buy, which is nice to see. Over the mid- to longer term, do you anticipate revenue and/or cost synergies from this portfolio?

Operator:

[Operator Instructions]. Our next question will come from Jason Bednar with Piper Sandler.

Daniel Carestio:

Yes. In short, I would say we did a really nice delivery in terms of our Healthcare business this quarter. And we're -- we look at that business and we're very optimistic in terms of how they're going to perform over this year. In terms of Life Sciences and AST, there are some things that have to get worked out there. relative to timing of some of these events. We think we understand the market. We think with a high degree of confidence with all the data we have that we know how things are going to play out, but there's no 100% guarantee and there's no 100% accuracy on the crystal ball. So the short answer is we're taking a conservative approach. And if things continue to do great, we'll have a different conversation sometime in the future.

Daniel Carestio:

Yes, a couple of things. I would say I think that we have a little more exposure than some of our peers per se because of the amount of PPE and infection control that is almost half of the business, the STERIS Dental business. And that type of stuff got way overbought and overstocked and it needed to get burned down. And also the comparisons of how much was being used a few years ago versus now, it's a different time and a different world as it relates to that type of stuff. What I would say is on the instrument side, the Hu-Friedy brand stuff is doing really well in terms of growth, and we would expect that to continue. And we would expect to see innovation from a product perspective and also cost management from a manufacturing and delivery perspective. And the team in the Dental Group has done a really nice job managing the OpEx until we see the market recover as well and making sure that we're not overspending.

Matthew Mishan:

I just wanted to talk about like longer-term GI procedures. One of the larger hospital systems was saying that they're realizing pent-up demand, seeing a lot of strong growth for GI and endoscopy. And one of the factors they're starting to see is like a change in guidelines, reducing the age for, I think, colon cancer screening down to 45 and 50 and that's starting to play through. I was just hoping you could talk a little bit about your endoscopy business, some of the Cantel doctors and kind of how you're looking at that over the next year or 2?

Matthew Mishan:

And then a follow-up on the Corporate and Other, I believe you mentioned that it was an incentive comp and kind of a reset incentive comp that drive that. Is that type of year-over-year increase from a dollar perspective, something we should be modeling in over the next several quarters as well?

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Julie Winter for any closing remarks. Please go ahead.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Julie Winter:

Thank you, Chad, and good morning, everyone. As usual, speaking on our call this morning will be 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.

Daniel Carestio:

Thanks Mike and good morning, everyone. Thank you for taking the time to participate in our fourth quarter and full year call. I will cover a few of the highlights of the year and then the address our outlook for fiscal 2024. As you heard from Mike we ended the year strong and grew revenue 9% on a constant currency organic basis in fiscal 2023. This is impressive performance in particular given the macro challenges we faced all year. We are cautiously optimistic the supply chain challenges have eased in a meaningful way and surgical procedure rates are improving. Our fourth quarter and full year results are reflective of that. At the business level, our healthcare segment revenue ramped up throughout the year, culminating in 11% constant currency organic growth for the year, with very strong performance in the fourth quarter. Healthcare capital equipment grew 15% for the year on top of double-digit growth last year. The team did a great job working through the whip inventory and shipped $50 million more capital equipment in the fourth quarter than we did in third. Having the components we needed to get those products out to our customers was essential and it was a huge lift by our supply chain and manufacturing teams. While we still have pockets that are challenging, we are feeling much better about the availability and access to components for our capital equipment, heading into fiscal 2024. In addition, our backlog continues to hover around $500 million despite the strong shipment during the quarter. $500 million is a very solid place to start the new fiscal year. Of note, our orders are shifted again towards large projects, which represented 50% of the capital equipment orders in the fourth quarter. Remember that large project orders tend to have longer lead times. Healthcare consumers also finished the year strong as we saw restocking of products as surgical procedures continue to increase sequentially. For the year consumers revenue grew 5% about in line with our long-term expectations, although revenue was a bit lumpier from a quarter-to-quarter perspective than we would normally anticipate. Our healthcare service revenue finished strong, growing 8% for the year with solid growth across all the business aspects. Our AST segment grew 12% on a constant currency organic basis for the year, despite a reduction in demand for single use bioprocessing disposables. As healthcare procedures continue to rebound, the underlying demand for our products from core customers in medtech remain very strong. As mentioned last quarter, about 10% of the AST business is comprised of bioprocessing customers, which slowed for the first time during our third quarter. That trend continued into the fourth quarter where once again we saw a decline in revenue of about $5 million. We believe the trough will come in the first half of our new fiscal year, and while we would expect to return to sequential growth in the second half, we do not expect to return to year-over-year growth until fiscal 2025. Our customers in that space have made significant investments to expand their manufacturing capacity for the long term growth and we have every belief that that growth will return once we work through the short term destocking. Turning to life sciences, constant currency organic revenue grew 5% for the year, with a strong finish in the fourth quarter, despite the reduction in bioprocessing and vaccine demand. As anticipated, the $10 million in capital equipment that we couldn't ship in the third quarter came through in the fourth, contributing to a record quarter of capital shipments. Consumables also finished strong as we worked through supply chain challenges, including more normalized shipping to Asia Pacific, and we were able to make progress towards more normal delivery times. Service grew mid-single digits for the year, with solid performance and equipment maintenance and installation of new capital equipment. Backlog is holding just over $100 million, and that is a great place to start the new fiscal year. Dental was about flat on a constant currency organic basis for the year. Procedure volumes remain at approximately 95% 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. Turning back to the P&L, even with favorable pricing, gross margins were down 180 basis points for the year, as our cost increased at a rate faster than we could recoup. We did a nice job managing SG&A in the year and improved EBIT margin by 10 basis points in the face of the gross margin declines. Unfortunately, part of that was due to lower incentive compensation for our people, which we'll be working hard to get back in fiscal 2024. Interest and taxes were a bit of a headwind to bottom line growth, but we finished fiscal 2023 at $8.20 and adjusted earnings per diluted share, an increase of 4% from fiscal 2022. While that is certainly lower than our standard earnings performance, our five-year CAGR for adjusted EPS is still in impressive 15%. As I said in the beginning of the call, we feel optimistic heading into fiscal 2024. Our strong fourth quarter allowed us to level out our performance between fiscal years more than anticipated. We also saw nice signs of improvement, which began in the third quarter and continued to improve sequentially, leaving us optimistic that we have a few tailwinds in fiscal 2024. In particular, we anticipate continued recovery of healthcare procedures and easing of supply chain issues as well as foreign currency levelling out. For fiscal 2024, total revenue is anticipated to grow 7% to 8%, with about a 100 basis points in positive foreign currency impact. Constant currency organic revenue is expected to grow 6% to 7%. That includes about 200 basis points in favorable pricing. Gross margins are expected to improve modestly as some of the headwinds faced in fiscal 2023 abate. EBIT margins are anticipated to be about flat as we absorb approximately $40 million from incentive compensation year-over-year and cost increases above and beyond normal inflation for material in labor of about $30 million. Interest in taxes will be a bit of a headwind, some of which will be offset by a reduced share count, reflecting the additional purchases made during fiscal 2023. Factoring in all of those moving pieces, our outlook for adjusted earnings per diluted share for fiscal 2024 is $8.55 to $8.75. To assist you in your modelling, we do anticipate that our revenue and earnings will be weighted towards the second year -- the second half of the year. In the first half, we anticipate continued impact from a reduction in bioprocessing demand, resulting in difficult comparisons within AST that will impact our growth and profitability. For both revenue and EPS, we would expect the split to be 45 in the first half and 55 in the second half. As we look at our healthcare capital equipment, backlog remains strong and we believe in fiscal 2024 we will return to a normal cadence of shipments, which generally start lighter in the first quarter and then build throughout the year. Our plan assumes we get back to normal lead times by the end of the fiscal year, and while we do not provide quarterly guidance, I would note that the anticipated cadence of capital equipment revenue, combined with a significantly higher interest expense and tough comparisons in AST with bioprocessing will limit our Q1 earnings growth potential. That said, the tide is turning. We are feeling good about the direction where we are heading and the outlook we have provided for fiscal 2024. As we have said before, our continued long-term goal is to grow revenue mid-to-high single digits and leverage that growth to deliver double-digit growth and earnings. We strive to achieve this while also generating solid free cash flow, continuing to reduce our debt levels and grow our dividend. Before we open for Q&A, I do want to make a few comments on the draft rules issued by the EPA last month. As you all know, over the past few years, we have made significant investments consistent with our practice of continuous improvement within our facilities. Our sustainable EO program and total permanent enclosure investments, position us very well to comply with many of the draft requirements. We believe the EPA understands the weight of this regulation and its impact on the security of the vital US sterile device supply chain, and we are confident there will be a reasonable outcome for the final rules. Behind the scenes, we are partnering with our industry association in terms of our response to the agency. Thank you. And with that, I'll turn the call back over to Julie to open it up for Q&A. Julie?

Operator:

[Operator instructions] The first question will come from Matthew, mission from KeyBank. Please go ahead.

Daniel Carestio:

Yeah, the next biggest piece is labor costs have gone up across the board as the people we hired last year are more costly. So that's definitely going to hurt us a bit. We also are going to return more to somewhat pre-COVID levels than our spending, especially around travel. And then also FX is actually going to get negative to us in the operating expense, but by the time it gets to the bottom line, it'll be about neutral to us.

Michael Tokich:

Yes. Share count will just be -- just over $99 million, interest expense and other will be approximately about a $10 million to $15 million headwind in total. Most of that, as Dan alluded to in his comments, most of that interest expense headwind is going to hit us in the first half. Majority is actually hit us in the first quarter because that's when we started seeing rates significantly rise was in the second quarter and for sure in the second half.

Operator:

And the next question is from Dave Turkaly from JMP Securities. Please go ahead.

Daniel Carestio:

Yeah, Dave. So if you look at our total company, right, so we would say that on average, most of our businesses other than AST grow mid-to-high single digits. AST obviously, right around double digits, 10% grower this year, that is the case with healthcare potentially outpacing their normal growth. But Life Sciences would be in that same range, and then Dental would be single-digit growth in total.

Michael Tokich:

Yes. This year, we were under significant pressure from a free cash flow standpoint on both our receivables increased because just the timing of the revenue, a big bulk of our revenue is in Q4. So we were unable to collect. So that will push into FY '24. Our inventory, as we've been talking about all year, has been high. So we've got to take that down. So we're anticipating to take that down in FY '24. And then also in FY '23, capital expenditures were higher than we anticipated originally. So the combination of all three really put pressure on FY '23 free cash flow. As we look into '24, the big change where we're going to get a nice impact is going to be lower inventory our ability to collect those receivables and then just growing net income in total will get us to about $700 million in total free cash flow.

Mike Matson:

I wanted to ask one on the EPA requirements for ethylene oxide. The comments that you made were, I guess, kind of vague. I guess the way I would interpret them and correct me if this is wrong, is that you are expecting some sort of changes in the final rules. I don't know if you're willing to comment on what areas you think maybe need to be changed. I know [indiscernible] kind of called out the 18-month timing and some of the employee safety requirements in there. And if the final rule ended up looking like the proposed rule, can you comment on whether or not you would meet those standards and whether or not there'd be incremental costs to get there if you don't?

Mike Matson:

Okay. And then just on the Dental business, so it was down in '24, most down in most quarters at least. You said 95% of pre-COVID levels. But I would assume if you stayed at the 95% in fiscal '24, then you should be able to get back to flat or even maybe some modest growth there. Is that a reasonable assumption?

Mike Matson:

Okay. And then just in terms of the share repurchases, so you stepped in to buy back some stock in '23. You said going forward with the new authorization, you're not planning to do anything other than just offset dilution. But I guess, what drove the decision to buy back stock in '23 rather than prepay debt? Was it just opportunistic? I know the stock fell on some of the ethylene oxide concerns and whatnot.

Operator:

And the next question is from Jacob Johnson from Stephens.

Daniel Carestio:

Well, what I'll tell you is some of our practices, I mean we've had our employees in what I would categorize as hot zones wearing full PPE, SCBA, self-contain breathing apparatus for over 10 years in our facilities. So I think we're already ahead of most of industry in terms of safeguarding our employees. We've installed on all of our outbound warehouses, abatement systems to scrub any fugitive emissions that's coming off product post aeration process. Those are completely installed operational in the U.S. facilities. A number of other things in terms of just basic engineering design around our facilities where we have complete capture of everything in the chamber rooms as well as sealed drum storage rooms, which are also fully abated in the event of a leak and a number of different engineering controls that we have in place as it relates to the design of the facility. In addition to that, we've been working hard with our customers and also pushing industry very hard to reduce the initial concentrations that are used in cycles and we've been very effective in moving many of the higher concentration cycles that are touching 650, 700 milligrams per liter down closer to 300 milligrams per liter. So it's a much lower input in which much makes handling products, especially post processing, much safer.

Michael Tokich:

Yes. So our capital allocation priorities have been the same for more than a decade, increased dividends off the top invest ourselves, so continue to spend money from a capital expenditure standpoint, especially growing and investing in our AST expansions. Then M&A and then finally, repurchases typically just to offset dilution. So those four categories have remained. The other one that we -- from time to time, we'll put in there is focus on paying down debt as we're almost two years into the Cantel acquisition that is being a little bit less focused on as our debt levels now are in what we'll call very reasonable ranges at 2.3x levered. And as Mike -- as you heard Mike asked the question earlier about the opportunistic share repurchases, that -- that has not happened very often as a company. But again, we felt that it was advantageous to us to do some of that opportunistically in the third and fourth quarter of this fiscal year.

Michael Polark:

Two-part on AST. I want to understand the margin trend there kind of pushes and pulls as kind of a steady guide lower throughout the last fiscal. Where does it where does it bottom? And what's the good input for segment margin in fiscal '24? And then related in AST, you've been very clear about destock in bioprocess. I'm wondering what your feel for potentially a similar dynamic is in kind of your core medical device customer base. The world is kind of emerging from COVID procedures seem to be back. A lot of the interventional medical device companies are holding way more inventory than they used to. Is there any kind of risk a little bit of a destock cycle there for you or not, how are you thinking about that in fiscal '24?

Michael Polark:

Helpful. And then maybe just a request for a feel for hospital spending patterns on capital equipment kind of made comments about good mix of new large projects in your new orders. What's your crystal ball say about how new spend patterns show in fiscal '24?

Operator:

[Operator Instructions] The next question is from Jason Bednar from Piper Sandler.

Michael Tokich:

Yes, we should continue to do fairly well and increased margins in Healthcare. We anticipate that we will continue to get price within Healthcare. We also anticipate that some of the pressures surrounding inflation, material and labor cost ease. We should also be able to get some productivity increases in our Healthcare business just because we had to touch the products so many times last year with parts availability that should help us improve. So I would anticipate that the margin is Healthcare gets slightly better. EBIT margins in Healthcare get slightly better in FY '24 for those reasons.

Daniel Carestio:

Yes, we remain committed. We need to see it through in terms of recovery. We didn't anticipate last year the sliding into an economic recession that was going fork this progress made in terms of procedure recovery that we're seeing Dental and now it's become an economic issue. So I think we need to see that play out over this fiscal year and see how the business performs. There's still -- I would just reiterate, there's still a lot of opportunity for operational improvement, deliver improvement in the business, and that's something that STERIS as a long history as good operators of being able to really drive improvements with the business. It would be nice to see the volume resume. It makes -- it makes all those good things that we're doing much more visible in terms of bottom line performance when the volume comes back.

Michael Polark:

I was just looking at a lot of great data disclosed in terms of the reporting. I could explain sequentially the Healthcare consumables line, notable step-up there, clearly levered procedure and throughput. Healthcare services line stepped up notably sequentially, and I struggle a little bit kind of tying that to an end market development. So kind of what happened there Q-over-Q, it was a double-digit increase?

Operator:

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Julie Winter for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Julie Winter:

Thank you, Jamie, and good morning, everyone. As usual, speaking on our call today 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 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.

Daniel Carestio:

Thanks, Mike, and good morning, everyone. Thank you for taking the time to participate in our third quarter 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. 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. We also saw sequential improvement in consumables. Consumables constant currency organic revenue grew low-single digits, compared with third quarter of last year. Supporting that growth, U.S. procedure volumes improved in the quarter, with recovery outside of the U.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 million at the end of the quarter. Orders for the quarter remained at approximately a 60-40 split for replacement and large projects, and we are not seeing any order cancellations at this time. Although we still have some delays, our capital shipments have improved dramatically from prior quarters. Approximately $30 million in capital equipment shipments were delayed into the fourth quarter. Overall, our third quarter 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 fourth quarter reflect a conservative outlook on how quickly we can recover from these challenges and difficult comparisons in AST and Life Sciences. Our AST segment grew 7% on a constant currency organic basis despite a reduction in demand for bioprocessing disposables and delayed shipments from Mevex, our capital equipment business. On the bioprocessing side, our second quarter this year was a peak level for biopharma within AST. We are hearing from customers that they are resetting their expectations due to 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. Regarding Mevex, a large E-Beam capital equipment order of approximately $10 million 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 third quarter 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. We remain confident in the long-term growth drivers within the customer base for both AST and the Life Sciences segments. In addition, Life Sciences had an unanticipated shipping challenge out of Europe that limited capital equipment growth in the quarter by about $10 million. Positively, backlog remains at near historic levels at over $100 million. Dental increased 1% on a constant currency organic revenue basis in the quarter. Procedure volumes remain at approximately 95% 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. Despite the impact of lower gross margins and increased pressure from foreign currency, we hit -- we held EBIT margins about flat in the quarter, as SG&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 fourth quarter, 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 million this fiscal year, a decline from expectations of approximately $150 million. Constant currency organic revenue is now anticipated to grow approximately 7%, compared with prior expectations of 10%. With one quarter left, this revision in outlook implies the challenges, which limit our performance in the third quarter do continue. Reflecting on the lower revenue, adjusted earnings per diluted share are now anticipated to be in the range of $8.00 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&A.

Operator:

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

Daniel Carestio:

Yes, sure, Dave. That's correct.

Dave Turkaly:

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, the -- I think it even said growth in bioprocessing customers, but you explained that the vaccine was the main driver. But how does that sort of -- I guess, what is the lead time there? How does it sort of maybe sneak up -- probably not the right word, but on use of that, we didn't know this last quarter and now, we do?

Dave Turkaly:

Thank you.

Matthew Mishan:

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

Matthew Mishan:

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?

Michael Tokich:

And Matt, 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 million of capital deferral in Healthcare was $60 million last quarter. I mean, we are seeing progression there. So, that does give us, as we look out further, more confidence for next year.

Daniel Carestio:

It's remained very strong at this point, which I know is a bit in the face of everything you 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've got to have more sterilizers, they've got to have more washers, 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.

Operator:

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

Daniel Carestio:

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.

Daniel Carestio:

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 chains and 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.

Operator:

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

Daniel Carestio:

I mean, what I would -- yes, at some point, and we're not defining that point at this time. We expect sequential improvement in 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.

Daniel Carestio:

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.

Daniel Carestio:

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.

Operator:

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

Daniel Carestio:

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 when we did our planning in our guidance with 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. 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 shift.

Jason Bednar:

All right. Very helpful, and that's good to hear. Okay. Then maybe one on free cash flow. I mean, we saw the pretty sizable reduction. I know we're talking, I think, some round numbers here, $500 million versus $600 million. But that is a much bigger drop than what's implied just from the EPS cut. I think, Mike, you mentioned some comments there around inventory running higher, receivable collections running lower. Maybe could you bucket those two? And does that reverse as we start thinking towards free cash flow then for next year, does working capital work lower?

Jason Bednar:

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

Michael Polark:

Hi, good morning. Thank you. I want to follow up on bioprocess and AST and trying to put together some math, Dan, that you mentioned earlier in the Q&A. So, at one point, not long ago, it was contributing 1.5 points to 2 points of growth to the segment. I also heard that it's been growing high-double digits, which I would interpret as 15% to 20%. So, if I put those two data points together, bioprocess as a portion of total and AST is 10%. Is that a ballpark? The question is --

Michael Polark:

Okay. The follow-up also AST. The Mevex $10 million slippage, I know this is a recent acquisition. It's been lumpy quarter-to-quarter. I had $10 million 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 million slippage out of this quarter, which I would interpret as Mevex was at or near zero in the quarter. So, the question is, what is the revenue headwind from this equipment line in AST year-on-year?

Daniel Carestio:

Yes. Just to add to that, Mike, those systems for Mevex can be anywhere from $5 million or $6 million to $12 million, 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 customer as to when we can deliver.

Michael Tokich:

You're welcome.

Michael Tokich:

You there, Matt?

Daniel Carestio:

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 that would carry a lot of excess inventory of.

Daniel Carestio:

You can get into a really complex stratification of this. But in the end, it's not really any one particular piece that's driving it one way or another. So, I wouldn't say it's a mix issue. It's truly procedure-driven, certain procedures in terms of where we have a little more exposure with our endoscopy products, obviously, to endoscopy procedure rates. But generally speaking, it's all procedurally-driven demand.

Julie Winter:

Matt, you guys know we are heavy U.S., right, compared to a lot of other healthcare companies. We're 80% U.S. in what we do. So, the trends here have the biggest impact on our performance.

Daniel Carestio:

Yes. Well, keep in mind, all single-use technologies for bioprocessing only run in radiation, so not ethylene oxide, where there's real significant shortage. And really, the phenomena is, if we're running with a lot of product backlog, especially as we come up to the holiday seasons, in a typical year in AST, we would starve out our plants. So, we'd shut down a day or two and you 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 to flow in early January. In the case of the last couple of years, we've been sitting on so much backlog demand in bioprocessing that we ran at a number of our plants straight through the holidays, 24/7, 365. So, not doing that in this year's case; it's basically straight drop-through because of the high fixed cost model at AST.

Michael Tokich:

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 million in the quarter on share repurchases and then another $50 million to $75 million of cost for acquisitions. So, those are the two 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 pay off during the quarter a private placement note that was due, which was about $91 million. So, we actually just borrowed -- 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.

Michael Tokich:

About $160 million remains under the current authorization.

Michael Tokich:

You're welcome, Matt.

Michael Polark:

Hi, thank you. Just two. 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?

Michael Polark:

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

Michael Polark:

Okay. Thank you so much.

Julie Winter:

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.

Julie Winter :

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. 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 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 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 yesterday's release, also including reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intended 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.

Daniel Carestio :

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've 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. 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 we're 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. As 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. Longer term, our portfolio at 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, [MevX] 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. From a profit perspective, increased energy costs, both in the U.S. and internationally, are impacting margins for AST. All signs indicate 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 was 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. And 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. On the consumables side, we're 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 manage spending and experienced some relief on our supply chain costs. Turning to our full year outlook. 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. 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 to $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 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. 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. 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 reduced the amount of EO gas used per cycle. And 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.

Operator:

[Operator Instructions] And our first question today comes from Matthew Mishan from KeyBanc.

Michael Tokich :

Matt, the main driver is, as we continue to talk about is capital equipment shipments, in particular in our Healthcare segment. That is really going to 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. So it's all driven by our ability to ship capital equipment in Healthcare.

Daniel Carestio:

Matt, this is Dan. I would say we have a lot more confidence today than we had 3 months ago. 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. And I think that in terms of level of confidence from our suppliers that those shipments will continue to come in, in a more predictable fashion is pretty high.

Daniel Carestio:

We believe the Dental business is going to stay suppressed until procedures come back. And I think that's tough to predict when that's going to happen, given that these are highly elective. And currently with inflation and everything else, it's something that we believe is good. We've got it modeled to stay where we got it year-to-date, more or less.

Mike Matson :

So I want to 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. And since I assume a lot of the AST volume is medical devices that are getting used in procedures or maybe will get used in procedures eventually. How do you kind of explain that? 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 is still really strong?

Mike Matson :

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

Mike Matson :

Okay. Got it. And then 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 how much of your debt is variable rate? I don't know if you can give us any guidance on what to expect for the full fiscal year for interest expense, but --

Operator:

Our next question comes from Jacob Johnson from Stephens.

Daniel Carestio:

Yes. I mean as those -- I'm sorry, this is Dan. As -- those shipments can be lumpy, so can orders because they tend to be pretty high value. I'm confident that our backlog, if we can can hold that around $100 million, that is absolutely outstanding for the long-term success of the Life Science capital business. And so I'm happy where it is, and our order intake is strong as well as we look into the future. So I think we just got to get the stuff shipped out of our plants, and we'll be working on that diligently over the next 6 months.

Michael Tokich :

Yes, certainly. And as I did say at the end of that paragraph in my prepared remarks, 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 really – what’s driving the impairment, and we have to look at this at any time we have any indicating factors that goodwill will be – may be impaired the estimated fair value of that segment, maybe below its carrying value. And really what’s driving that is use of discounted cash flow model at 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.

Jason Bednar:

And great to hear the progress in the component source in the quarter. It sounds like that's really going to contribute to a nice step-up in growth here in the second half of the year. But I'm going to pack a few questions in here on this topic. 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. I just want to confirm that. And then finally, I can't imagine this is more aggressive shipping suddenly stops at the end of this fiscal year. So I guess, is it right to think of this equipment momentum continuing into fiscal '24 as well?

Jason Bednar:

Okay. Yes, fair enough. That's helpful. And then maybe a couple of clarification points. Mike, can you just confirm that the reaffirmed earnings guidance year-to-date contemplates additional rate increase, like it looks like we're going to be dealing with here over the coming months? And then secondly, just on the higher inventory levels that are causing free cash flow, the free cash flow guidance cut, does that continue -- do those inventory levels continue beyond fiscal '23? Do we get a reversal at any point? Just how do you see that playing out?

Operator:

Our next question comes from Michael Polark from Wolfe Research.

Michael Tokich :

Yes. In 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. So I would say that Q3 would be a little bit higher from a growth standpoint than Q4 would be if we're modeling this.

Julie Winter :

Caps do get much higher -- sorry, Mike, in the fourth quarter, we have 11% comps, constant currency organic -- Q4. So certainly, the comp issue as well in the fourth quarter.

Daniel Carestio:

Keep in mind, a lot of that backlog is in large project that could extend out into future fiscal periods. So it's -- 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 will impact it. I mean the good thing is, is that we have an awful lot of other business in healthcare that tends to buoy us on when capital slows and when capital is going great, it helps.

Daniel Carestio:

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

Dave Turkaly:

Maybe just I've been jumping around, so I apologize if somebody hit this, but you mentioned the price again and almost 300 bps. It's a lot different than a lot of the companies we cover. So 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?

Michael Tokich :

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

Julie Winter :

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.

Julie Winter:

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. We do have a few words of caution before we open for comments from management. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, re-transmission 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 today's release 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 to Mike.

Dan Carestio:

Thanks, Mike, and good morning, everyone. Thank you for taking the time to join us to hear more about our first quarter performance and our outlook for the rest of the year. As you heard from Mike, we had a solid start to our new fiscal year and continue to experience strong demand for our products and services. I will review the highlights of the quarter and then shift my commentary to our revised outlook. Healthcare constant currency organic revenue grew 4% in the quarter. Strong capital equipment and service growth was offset by an organic decline in consumables, which is largely attributable to the timing of orders against very strong comparisons in the prior year. Hospital capital spending remains very robust, as evidenced by our health care backlog, which totaled over $500 million at the end of the quarter and our orders for the quarter were 40% large project related. AST grew constant currency organic revenue 10% in the first quarter, as we continued to benefit from underlying demand from our core customers. Growth was somewhat limited by the timing of large capital shipments from our Mevex business unit which can often be lumpy. Life Sciences also delivered 10% constant currency organic revenue growth in the quarter, with strong capital equipment shipments and solid mid-single-digit growth in our consumables business. Our Dental segment grew low single digits constant currency year-over-year for the quarter, as revenue was limited by supply chain challenges. Turning to our revised outlook. From a macro perspective, we have several things impacting our business. As you have heard from many of our peers, currency has moved significantly and the forward rates continue to indicate headwinds on for STERIS in both revenue and profit for the remainder of the fiscal year. In addition, the supply chain environment has been limiting our ability to ship capital equipment. We believe approximately $35 million in capital equipment shipments were delayed in the first quarter. While procedure volumes continue to recover, particularly in the US, we are not seeing recovery as quickly as anticipated. The key variable for that recovery appears to be staffing availability at hospitals, which seems to be limiting their ability to catch up with pent-up demand for procedures. Reflecting these challenges, we are adjusting our revenue outlook for the year. As reported, revenue is now expected to grow 9% and constant currency organic revenue is anticipated to be 10%. As you recall, we grew 13% last year. So double-digit constant currency organic growth on top of that is a significant goal, but one we believe is achievable due to the momentum in our business and strong capital equipment backlog. While, we are not overly optimistic on supply chain improvements, we do see pockets of improvement there. The real key for us will be relief on parts, in particular, electronic components. In many cases, components are needed to convert our significant work in progress inventory to finish goods so that they can be shipped to customers. As a result of anticipated easing and supply chain constraints, we expect revenue growth rates to increase at a faster pace in the second half of the year as compared to the first half. Factoring in these elements, our current expectations for earnings are $8.40 to $8.60 for the full fiscal year, a $0.15 decline from the prior outlook, with most of that decline due to foreign currency fluctuations. For the year, currency is now expected to reduce as reported revenue by $100 million and adjusted EPS by approximately $0.10. The primary drivers of this are the weak euro and British pound. Overall, our business continues to perform very well in this environment. The challenging environment we're in is no different for other companies. Foreign currency fluctuations are limiting both top and bottom line. Supply chain disruptions are slowing our ability to ship capital equipment and higher interest rates may negatively impact interest expense. Despite these macro challenges, fiscal year 2023 is still expected to be another record year for STERIS. Our teams and portfolios continue to come together to better meet the needs of our customers, and the breadth of our offering allowing 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 customer. Thank you. That concludes our prepared remarks. I will hand the call over to Julie, to start the Q&A.

Operator:

Ladies and gentlemen, at this time we’ll begin the question-and-answer session [Operator Instructions] Our first question today comes from Mike Matson from Needham. Please go ahead with your question

Mike Tokich:

Yes. Obviously, what hurt us this quarter is, capital shipments due to supply chain constraints. Obviously, as you heard Dan talk about, we do believe there are some pockets of strength that are out there. So we believe that capital shipments should continue to get released. Lower surgical volumes, we continue to believe, we're about 95% of procedure value at free COVID. So those should continue to get better. And then, the other big headwind for us outside of just as reported revenue is FX, which both -- is hurting both top and bottom line for us. As far as the year standpoint, in May we talked about a EPS split of 45% first half, 55% second half. We believe we are still on track for that. And as you heard Dan, talk about revenue will grow and increase sequentially, going forward with more of that growth happening in the back half of the year.

Daniel Carestio:

Yes – Joseph, we don't see any pattern at all, in terms of, order cancellation. And we continue to see new orders come in at a significantly strong rate. A lot of these are projects, that take longer term, and we've been able to prioritize those projects as they're ready to come online, to make sure we can deliver for our customers. And then we're managing through the backlog, as oftentimes customers projects slip, and others tend to get pulled forward. So we're managing our production, to meet the demand of the customer and shift product where it needs to go, when the customer needs it. It's just challenging right now, because it's a bit hand to mouth at times, with some of the electrical components. But no order cancellations, that we've seen at this point.

Julie Winter:

Yes. And I would just add -- don't remember -- don't forget, we have Cantel in our backlog now. We didn't have Cantel, in the backlog last year. But definitely, as an uptick of about $60 million in the backlog number.

Mike Tokich:

Yes, we reached $70 million for the year. So, if you remember last year, we were not impacted -- we were impacted heavily -- more heavily in the second half of the year, than the first half of the year. So the $30 million, is the incremental piece. So $45 million last year of headwinds, and $70 million this year, is what we still believe.

Operator:

Our next question comes from Chris Cooley from Stephens. Please go ahead with your question.

Mike Tokich:

Yes, Chris, this is Mike. In regards to backlog, as we've talked about for some time, our -- we are getting nice order growth. But at the same point in time, our delays have probably more than doubled in what we typically would see for -- especially around Healthcare. And I'm talking more about the replacement cycles not the project cycle. So, typically, we would have told you that we get an order in from a replacement standpoint that order would be most likely filled within 90 to 120 days, so most likely in the quarter. That is probably doubled at this point in time. So, that gives you some type of indication as to the lead-times that we're expecting and we're talking to and telling our customers as we're taking the orders. I don't know Dan do you want to add anything?

Chris Cooley:

Appreciate the color on that. And then if I could just for my follow-up can we maybe shift gears to the AST franchise? And you cited a little bit higher than anticipated CapEx there in the quarter corporately. I'm just curious if you could give us some color there about the continued build-out of the company's capabilities both domestically and abroad in terms of X-ray and when we could start to see some of that come online commercially? And if in fact that -- or I should say as that does come online, how that measure may not affect the operating margin profile of the business? Thank you.

Mike Tokich:

But the goal this year as has been in the past couple of years about $100 million in total expansion CapEx for AST.

Operator:

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

Mike Tokich:

Matt it's a little bit of both. We haven't broken out exactly, but it is definitely -- both of those are impacting us on an organic standpoint.

Dan Carestio:

Yeah. Matt, this is Dan. Procedures here in the U.S. were slightly below where they were in the first quarter of last year, according to all of our data that we have at STERIS, but slightly. And so I don't think that had a material effect on the consumable consumption or shipments. The issue is really we had a pretty strong quarter last year, I think as there was some restocking going on in hospitals and some distributor orders. So I think it was just a matter of tough comps and timing. And I'm confident that will flush out in Q2.

Dan Carestio:

Yeah. So that related to some capital equipment shipments from our Mevex business unit. And those are typically E-beam Accelerators and Conveyance Equipment Control Systems. And the issue is we don't recognize revenue until those things get fully installed and get through an FAT process and then we recognize revenue. To the extent that we have some delays either on our end from a delivery perspective or more often is the case as the customer is delayed on whatever construction or infrastructure they have to have in place for us to finish the project. So as a result, our system can be a few million dollars or more even $5 million, $6 million potentially. And if that slips from recognition perspective from one quarter to the next is pretty material in terms of impacting growth rate. So, normally we had planned to ship close to $9 or so million. And we shipped considerably less than that. I think had we moved the equipment the way we had originally planned, our organic growth rate, constant currency organic growth rate for AST would have been the mid-teens comfortably where it's been in the past. But the equipment business is a little lumpy right now. And as you know building anything either, whether it's our customers or us construction things are not necessarily tied to a definitive schedule these days.

Dan Carestio:

It's small about $30-ish million, ballpark out of the eight or something, yes.

Dan Carestio:

Yeah.

Dan Carestio:

Yeah.

Michael Polark:

Hi. Good morning. Thank you for taking my questions. A follow-up on the adjustment to the organic growth outlook, I'm just curious, why one point was the right number? Why not two why not three? Why not maintain the prior one? Like, philosophically, how you got there? How you feel about the adjustment? Is there risk? Where are the risks from here, or do you feel like you have a very proper set of inputs now? Any color on that helpful. Thank you.

Michael Polark:

On the backlog, my perception has been generally the mix of that -- of healthcare equipment revenue ex-Cantel is 50:50 kind of OR SPD ballpark. As you look at what's sitting in the backlog that needs to be finished and shipped does it skew SPD or, or is it fairly balanced?

Mike Tokich:

And Cantel as well.

Mike Tokich:

That $60 million that we're talking about is 100% at SPD basis.

Mike Tokich:

I would say that our pricing -- 200 basis points of pricing for the year is still within our guidance. Every quarter could be a little bit different as typical, depending on the mix of the products and stuff like that. But the nice thing that we're getting, we actually are getting price segments for the first time in a long time. And obviously, as you guys know, we typically get less than 100 basis points of price. So, we've done a nice job of increasing the pricing power that we had to offset, as everybody knows the higher labor and material costs. And even then, we're not even offsetting it one for one, yes.

Dan Carestio:

No, we continue to look at and do even some small sort of bolt-on acquisitions and we'll continue to do that over the next year or so. In terms of anything significant in size, right now we've got plenty of work finishing the integration of Cantel and also working through getting products delivered to our customers. So even though we have the financial firepower to do that, we want to get the business running and like it should be and continues to do so, so that we can do potential other business development in the future. But for right now, we'll probably take a couple of quarters off.

Operator:

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

Dan Carestio:

Yes. Look it's complicated, is what I would say. And yes, there are unexplainable regional variances too. We saw a significant more of a decline in the Southeast than we did in the Midwest or Northeast or West Coast. Yes, I can't explain it to be honest with you, in particular that. What I would say is, the single biggest issue is staffing. And your question did COVID uptick in June impact that, in terms of cancellations or staff shortages probably -- that probably explains a little bit of a percent or so decline versus what we saw in Q1 last year. But I'm guessing at this point. I truly believe it's staffing. Every single hospital CEO that we speak to their single biggest challenge right now is staffing and not just nursing. It's in general facility staffing, it's the janitorial, it's the food service. It's -- there's a reason why you're looking at inpatient rates dropping significantly in outpatient rates going up significantly because the hospitals just don't have the staff to care for people that are in-patients.

Dan Carestio:

Yes. What I would say is Dental if not for the supply chain issues we had this quarter, would have had a really nice quarter in terms of growth. So we didn't lose that business that will just flow through in the coming quarters in terms of demand. And so I think that will sort itself out in terms of the overall financial performance on the bottom line, that is a process of continuous improvement, and it's something that we are going to work on every day, every month, every quarter, every year, but it's not there's no magic wand to do this correctly. So, we'll continue to do what we need to do to strip out waste and cost. Obviously, look at price where it makes sense, and continue to innovate with new products, so that we can bring high value to our customers.

Mike Tokich :

Yes, certainly. So we use the forward rates and we use them as of the end of June. The euro is at a $1 -- or $1.060, the pound is at $1.222. Those are both significantly lower than what we planned originally.

Mike Tokich :

Yes. You’re welcome.

Dave Turkaly:

Great. Thanks. Maybe just a quick follow-up. So if we're looking at your performance in Healthcare and then your guidance, I think, it was 4% this quarter. I mean, can you help us understand how you're able to grow, I guess, a lot faster if we're looking at flat to down procedures and maybe some improvement, but not totally back to where we were pre-COVID. Is a mid-single-digit range is that -- can you deliver that for that -- the largest business for you?

Dave Turkaly:

Got it. And then maybe just a quick follow-up on AST. Obviously, it's been -- it's delivered for you or you guys have executed well in terms of the growth profile. But -- how do you think of that looking out, maybe even versus your 10% for the company? I mean, is that a mid-teens grower on a consistent basis looking forward?

Dave Turkaly:

Thank you.

Chris Cooley:

Thanks. Good afternoon. Appreciate you taking the follow-up question. I guess I'll get more than two in like everybody else. The -- quick question on cash flow. You guys maintained cash flow guidance for the full year, but it sounds like, there's obviously upward pressure on both, net interest expense, probably a little bit higher working capital need. I just want to make sure I fully understand the puts and takes that you expect to see throughout the remainder of the year that gives you confidence in your ability to hit that cash flow target that you previously established. Thanks, so much.

Chris Cooley:

Thanks.

Julie Winter:

Great. Thanks, Jamie and thanks everybody for taking the time to join us this morning.

Julie Winter:

Thank you, Ted, 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, re-transmission 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 of these 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 of organic revenue growth, and free cash flow will be [Indiscernible]. Additional information regarding these measures, including definitions is available in today's release. Also, along with 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.

Daniel Carestio:

Thanks, Mike, and good morning, everyone. Thank you for making the time to join us to hear more about our fiscal 2022, performance and our outlook for fiscal year 2023. As I look back on the year of fiscal 2022, it was a remarkable year for STERIS. Not only did we navigate year two of a global pandemic, but we also completed the acquisition of Cantel, while integrating Key Surgical, and successfully transitioned leadership. All while growing faster than anticipated. I want to start by thanking the people of STERIS for all they have done and continue to do to support our customers and each other. Without all of you, we would not be where we are today. We started fiscal 2022, with an expectation of 8% to 9% constant currency organic revenue growth for the year. After increasing our outlook twice this year, we ended the year with 13% constant currency organic revenue growth, well above our increased outlook. This growth was driven by continued out-performance of our AST segment, double-digit growth in healthcare, and solid mid-single-digit growth in the Life Sciences. While Dental is not yet included in the constant currency organic revenue growth, the segment grew 4% year-over-year since the time of acquisition in June. From a profit perspective, we ended the year with operating margins up 100 basis points, despite absorbing about $45 million in unplanned supply chain and inflation costs related to labor. Helping to offset those costs, we were successful in overachieving our fiscal 2022, cost synergies targets for the Cantel acquisition, which added approximately $40 million to our fiscal 2022, results. Adjusted earnings per diluted share of $7.92 increased 28%, compared with fiscal 2021, and reflect a new record for STERIS. Turning to fiscal 2023, at a high level, we expect another very strong growth year for our business. Our outlook for total revenue calls for approximately 12% growth, which includes two additional months of the Cantel acquisition, offset by the impact of the Renal Care divestiture, as well as approximately $30 million in unfavorable foreign currency. Excluding all that, we anticipate constant currency organic revenue growth of approximately 11%. Importantly, this outlook assumes that the procedure volumes will normalize in the U.S. and that we do not experience any significant wave of disruption from COVID. Our constant currency, organic revenue outlook reflects volume growth and includes 200 basis points of favorable pricing. Pricing is essential to help offset the increased costs year-over-year. For FY2023, we expect an incremental $70 million in extraordinary supply chain and labor inflation costs, above the $45 million we occurred in FY2022. This is in addition to our normal low single-digit annual inflation amounts, always included in our outlook, which we will work to overcome every year. In addition to the anticipated headwinds from supply chain and inflation, our FY2023, operating expenses will be higher as we get back to spending on travel, sales, and marketing, and other expenses. R&D spending is also anticipated to be higher as we continue to develop and bring new products to our customers. Offsetting those headwinds, to some extent, will be cost synergies from the integration of Cantel, which is expected to be incremental by approximately $50 million from the FY2022 levels. By the end of FY2023, we will be approaching $100 million in total cost synergies achieved. Taking into consideration all of the puts and takes, we expect to show modest operating margin growth in FY2023. Our full-year earnings per diluted share outlook is anticipated to be in the range of $8.55 to $8.75, or 8% to 10% growth over FY2022. Given all the moving pieces, we are pleased with this bottom-line growth outlook. As usual, the range does provide us some conservatism on the low end. But given all the uncertainty that exists, we believe it is warranted. All-in-all fiscal 2023, is expected to be another record year for STERIS. Our teams and our 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 the business segments. I recently shared with our sales team in our first in-person global meeting in three years, that we honestly believe that STERIS is positioned better today to meet the needs of our customers than ever before in history. That concludes our prepared remarks for the call, and Julie, please give the instructions so we can begin the Q&A.

Operator:

Certainly. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And the first question will be from Chris Cooley from Stephens. Please go ahead.

Daniel Carestio:

Yes. Thanks, Chris, this is Dan. Thank you for the question. In short, we're seeing a fairly robust recovery in procedure volumes on a quarter-to-quarter basis as we move back into more normalized volume in terms of pre-COVID levels. We're not there yet, we still have quite a way to go. And I think that the real governor on the recovery of those rates is going to be staffing and the challenges that -- that's generally present in the healthcare industry today, in particular in the hospital segment. Having said that as those volumes return, that significantly benefits both our global healthcare business, as well as the AST business. And we've seen in the last couple of quarters recovery of more and more devices coming through AST in particular that are more highly elective, high-value type devices. So orthospine, things like that and of that nature. So as those procedures begin to recover and then start working off what's been a couple year backlog of pent-up demand, we're seeing higher growth opportunities than we've seen maybe in the past. In addition to that, were coming into the year with all-time record backlog from a Capital Equipment perspective. And as we hope to flush that through over the course of the year, that will obviously be a bit of a tailwind for us in terms of our revenue growth.

Michael Tokich :

Yeah. Chris, this is Mike. I would say that the majority of what we're going to experience, at least in the SG&A side is more a return to normal. I would not say that we were under-invested by any means, and as Dan said in his prepared remarks, we've had our first sales meeting in three years. So, you can imagine the expense of that compared to the last two years that we didn't have that. So those are the types of increases we're talking about. Where you're going to see a little bit of a step-wise change though, is in R&D. R&D we anticipate growing by double-digits in fiscal 2023, so we continue to make investments in R&D to bring new products across all of our businesses. So that is, if you look at the two, a step-wise change that we are continuing to invest for the long term. Not that we were under-invested by any means. We just think there's a lot more opportunity that we can bring forth, especially with the acquisition of Cantel.

Michael Tokich :

Thanks Chris.

Operator:

The next question comes from Mike Matson with Needham & Company. Please go ahead.

Michael Tokich :

This is Mike talking to you. We have not made any comments. But to give you a little bit more color to help you with your modeling, we would suggest that from a first-half or second-half, we're about 45% percent first-half, 55% second-half, which is typical of how we operate. And to your point, I think I would say you are correct. We do have a little bit of a tougher comparison in Q1, but we're not going to give quarterly guidance at this point in time, and nor have we in several years.

Michael Tokich :

Yes. You're correct.

Daniel Carestio:

Yes, that is one clearly, this -- sorry, this is Dan. And there's an awful lot of growth going on in investment, both in Acute Care and in ASCs across the U.S. in particular. And we're starting to see the recovery in Europe. So, we've been really well-positioned with our portfolio products, in particular with SPD and also in -- from an OR perspective over the past few years. And we're nicely positioned to fill that need and that growth that we're seeing as it comes. Yeah. The other tailwind that we're getting is, as I mentioned before, is just general procedural recovery which drives our consumables, that drives our services, it drives our AST business. So that's generally beneficial for STERIS whenever we see procedure rates on the rebound. And then last but not least, there's no shortage of investment going on in Pharma in terms of aseptic manufacturing as it relates to biopharma and to some extent vaccine as well. So, we have an awful lot of backlogs in Life Sciences that's going to flush through this year as it relates to some of the expansions that -- in investments we've seen going on in the industry. And as those investments come online, that's a tailwind for us with our Consumables Business as they start to consume our chemistries and our packaging solutions.

Mike Matson:

Okay. Got it.

Mike Matson:

Okay. Got it. Thanks. And then just as far as the free cash flow guidance goes, I mean, I'm having a little trouble getting to the $1 billion of cash flow from operating activities in my model. I mean, I'm coming in higher than that, but I -- the only way I could get there is assuming your working capital was up a fair bit. I mean, is that a reasonable assumption and that maybe you’re stocking up on inventory things, but pre -buying stuff because of the supply chain issues, we've heard that from other companies.

Mike Matson:

Okay, got it. Thank you.

Operator:

The next question is from Matthew Mishan from KeyBanc. Please go ahead.

Michael Tokich :

Yeah, Matt, as we've been talking about the last couple of quarters, we have seen, roughly $30 million - ish that did not ship that would have been scheduled to ship on a normal course, if you will.

Michael Tokich :

Yeah, I would say Matt, we are still in the mid-to-high single-digit revenue growth on our long-term aspirations. Obviously, we've done better than that over the last several years, but in general, we would still stay with that forecast or that thinking from a long-term perspective.

Daniel Carestio:

Yeah, and we've seen those opinions as well. I think some of the differences is, the Capital Equipment that STERIS is selling is typically $20,000 to $100,000 pieces of equipment, these aren't million dollars, $2 million machines. And the other point I would make is, everything we sell basically, is procedural rate-driven. And it's in, it's almost like a utility at times for the hospitals, they have to have it in order for them to accommodate an increase in surgical procedures. Whether that's lights and tables or whether that's stuff in the SPD. So generally speaking, given the cost of our equipment and the utility of it in nature, we see continued strong investment. And how long it will last, I don't know. But we don't see it changing anytime in the near future.

Operator:

The next question is from Michael Polark with Wolfe Research. Please go ahead.

Michael Tokich :

Mike that was on EPS and welcome back Mike. Welcome back to covering us.

Daniel Carestio:

We have not done that Mike, and I think at this point in time, we will not. But I will tell you that for the most part, if you look at growth, Healthcare is going to be exceeding their normalized growth. I would say Life Sciences will be somewhere in, maybe a little bit better than the normalized growth. AST we'll be at its normalized growth. And then obviously, Dental, we still don't have a true comparison at that point in time, so.

Daniel Carestio:

Yeah. It's Dan, Mike. So yeah, we're happy with the business. I would say it is more affected recently, in particular with the surge of Omicron that we saw in the January -- or February time-frame. And unlike Healthcare where it had very little effect. Just the broad level of infections across the U.S. in particular, ended up postponing or delaying a lot of procedures in the Dental space. And if you want to fact-check that, call your dentist today and see if you can get in before July because there's a lot of pent-up demand in terms of lost time in the first couple of months anyways, at this calendar year. So, we like the business, we think there's a ton of operating opportunities in terms of driving efficiencies through [Indiscernible] and continuous improvement. That's going to take us some time to wring out and make the business a little more efficient in terms of how they serve their customers. But other than that, it's on a steady track of recovery in terms of demand, barring what we saw the first couple of months in the calendar year.

Michael Polark:

4%, that's like a pro forma -

Michael Polark:

- growth rate for the business? Okay.

Michael Polark:

And if I can do one more, the comments in R&D are interesting. Obviously, STERIS is not overly reliant on any single product, and so I don't wish to overstate the importance of any single product category with this question. But I have noticed that you have recently launched, relatively recently, I think this year or late last. The single-use Ureteroscope, and I saw as a topic that seems to come up from time-to-time. And I'd just be curious about your efforts there. And if this launches an appetizer to some more products and that single-use scope category overtime. Thank you so much for taking the questions.

Operator:

Thank you. And the next question will come from Dave Windley from Jefferies. Please go ahead.

Daniel Carestio:

I mean, I think in terms of procedure volume, that's pretty straightforward, as we're back now in the U.S. market anyway, somewhere around 95% pre-COVID. Depending on where you are, region-to-region, some hospitals may be operating at 100%, others are operating at 90%. And over time, I think as provided, the staffing can step back up in terms of meeting the full demand, we'll see that improve beyond what we saw pre-COVID, because there is a lot of pent-up demand. But there's also a lag now, in terms of intake with the hospitals getting people back into the system, where they're diagnosing disease and moving them towards surgery where necessary. That is slower to recover as well. So, it's going to take some time. In terms of overall rates and demand on the different businesses -- in terms of overall growth rate, I do believe we're taking a bit of share across the majority of the business here at STERIS. We've discussed that in the past and we've made very significant investments in our portfolio as it relates to Healthcare and Life Sciences over the years and also in significant capacity expansion investments in AST. And consequently, I think we're doing a little bit better than market in those spaces.

Daniel Carestio:

Yes. I would say that in general, as we are anticipating about $675 million in free cash flow, that our capital priorities have remained basically the same for the last decade, or more. We're off the top. We believe in increasing our dividends. We've done those 16 years in a row. Next would be, to continue to invest in ourselves and we're continuing to do that. We're anticipating about $335 million of CapEx, which is almost $50 million higher compared to the prior year. And a lot of that CapEx is going to be continued -- directed into our AST segment, as we continue to expand our facilities and our opportunities in that segment. Third would be looking towards M&A. We've done over 50 transactions in the last 10 years or so. Most of those are tuck-ins in nature, and I would imagine that most of those, in the future, as we continue down the M&A path, will be tuck-ins. And then finally, just from a share repurchase standpoint, just to offset dilution. And we have that built into our plan for this year, we did do about $25 million dollars of share repurchases in Q4. But we had a hiatus on share repurchases for the last 18 months or two years. So, from a prioritization standpoint, that is how we operate and how we have continued to operate over the last several years.

Julie Winter :

Dave. Just -- I think you've asked about that about a quarter of our debt is floating-rate debt.

Operator:

[Operator Instructions]. The next question is a follow-up from Chris Cooley from Stephens. Please go ahead.

Michael Tokich :

Dan, I'll take the Dental one and I'll give you the AST one; if that's okay?

Daniel Carestio:

On the margin profile of Dental Chris, you are correct we have seen a degradation in our EBIT margins in that business. In the first quarter that we had Dental, they were still not being impacted like the rest of the business from a materials and labor inflationary standpoint, that has changed dramatically in the back half of our fiscal year. So that is one large driver impact -- negative impact to Dental. And then as we talked about earlier, volumes with patients have definitely had a negative impact of on that business. So, I would say that in general, we would look to have Dental above our corporate average as we continue to streamline that and get more ingrained in the operations of that business, longer-term, but definitely volume. And then the inflation is definitely having a larger impact on that segment on its own.

Daniel Carestio:

Dan Chris on the AST question. We're in the process of a pretty significant build-out across our network and actually across multiple technologies, we have a few e-beam plants going in, we've got a couple of EEO expansions, in addition to the numerous x-ray facilities that are currently in one phase of build or another, which construction during the COVID environment and labor shortages has been nothing short of challenging for the last couple of years, but it's definitely looking up recently. In particular, in the US, there's three facilities that will come online over the next couple of years. The earliest will be late -- very late this fiscal year, most likely in Illinois. And then followed by either California or Chester, New York.

Operator:

Ladies and gentlemen. This concludes our question-and-answer session. I would like to turn the Conference back up to Julie Winter for any closing remarks.

Operator:

The Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Julie Winter:

Thank you, Matt. And good morning, everyone. Speaking on today's call as usual, be Mike Tokich, our Senior Vice President and CFO, and Dan Carestio, our President and CEO. And I do have just 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's securities filings. Company does not undertake to update or revise any forward-looking statements as a result of new information our future events or developments. There's this SEC filings are available through the company and on our website. An 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 today's release, 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.

Dan Carestio:

Thanks, Mike. And thanks again to everyone for taking the time to join us today. Fiscal 2022 is shaping up to be another record year for STERIS. Our year-to-date results have been strong despite headwinds related to supply chain and inflation that are impacting both revenue and profit. In particular, growth in our ASG segment remains very strong with 21% constant currency organic growth year-to-date. Healthcare has also rebounded nicely with 13% constant currency organic revenue growth in the first nine months and record backlog of $382 million at the end of the quarter. Life Science consumables have stabilized as anticipated months. The capital equipment backlog in Life Sciences has also continued to grow to a record $117 million. As our backlog in healthcare and Life Sciences suggests, the underlying demand for our products remains very strong. Dental revenue was about flat in the quarter impacted by a slower-than-expected recovery in patient volumes. We do anticipate that that revenue in the dental segment will begin to rebound in the fourth quarter. The integration of Cantel is progressing ahead of our expectations, as we indicated last quarter. We expect to exceed our cost synergy targets by about $10 million and we're now approximately 35 million in total cost synergies in fiscal 2022. Reflecting our strong performance to-date, we are increasing our constant currency, organic revenue outlook to the high end of our previous range and now anticipate approximately 11% growth for fiscal 2022. We are also increasing our earnings per diluted share outlook and now expect earnings to be in the range of $7.85 to $7.95, or $0.10 above the high-end of our prior outlook. We do have a few known headwinds in the fourth quarter. We completed the divestiture of our renal business, which will reduce both revenue by about $45 million and diluted EPS by about $0.05 in the quarter. In addition, we expect supply chain and inflation to be incrementally worse by about 10 million sequentially, as Mike discussed. We do anticipate that we can offset some or all of those headwinds with higher cost synergies from the Cantel integration and continued operational improvements. However, we're leaving some room on the downside of our earnings range to reflect the continued uncertainty. All said, we are very pleased with where we stand today in the underlying strength of our diversified business. I want to thank all of the associates at STERIS for their hard work and continued dedication to serving our customers. We look forward to updating you all with our progress in the future. I'll now turn the call back over to Julie to open up for Q&A.

Operator:

Thank you. We will now begin the question-and-answer session to ask a question [Operator Instruction]. At this time, we will pause momentarily to assemble our roster. Our first question will come from Matthew Mishan with Key Bank, please go ahead.

Dan Carestio :

Yes. I think the issue on the 5% is that the comps get tougher in terms of what we're looking at Q4 of last year. And we've also baked in what we believe is some slowdown that we saw in January and continuing into some of February in terms of procedures as it relates to Omicron, in particularly across the U.S. We believe we've got that appropriately factored into our expectations. In terms of the capital equipment we're -- at this point we're almost halfway through the quarter. And we have, in our model, forecasted that we're providing an assumption that there's going to be some hold-back of equipment that won't go, just due to timing. It's not an issue that we expect from an availability standpoint. It's more of an issue of some extent, our customer’s appetite to receive that equipment within the quarter. Nonetheless, that I think what we've stated before there was about somewhere around $20 million increase in backlog that we would have attributed to deferral or supply chain issues and things of that nature. I don't think Matt that will flush that out this quarter, and I think it would be unreasonable to expect that in the current environment, but we'll carry that backlog forward into the first quarter of next year.

Michael Tokich:

Yeah, Matt, this is Mike. So yeah, we do we did anticipate that we are going to get more cost synergies and you are exactly right, those are going to show up first in the corporate side, as we have taken the opportunity to reduce the redundancy of the corporate costs, reduce the redundancy of the CEO, CFO. So that's where you're actually seeing those cost synergy savings. And as Dan spoke earlier, we anticipate overachieving those cost synergies in this fiscal year by about $10 million. Some of that has already been reflected through the third quarter. There will be a couple of single-digit million dollars that will still come through in the fourth quarter. But all in all that is very favorable to us. The other thing that we're seeing, and I think we're like everybody else as our operating expenses have been bouncing around, especially around travel. We were anticipating more travel in the third quarter, which didn't happen. So you're seeing that a little bit lower operating expenses in total.

Michael Tokich:

Yes for the most part, I mean, the all the variance that I would see being out there is we are starting our fourth-quarter is the New Year from a calendar year from a benefit standpoint. So you will see some benefits costs that are normally higher, but year-over-year, those should be equal. And the other thing is at the end of the day, where does the management bonus occurring if there is an over achievement, obviously, you will see that also reflected in the fourth quarter.

Michael Tokich:

You're welcome man.

Chris Cooley :

Good morning, everyone and congrats on a great quarter. And what looks to be a great setup going into next fiscal year. I know it's a little bit early for fiscal -- the next fiscal year guide, but just maybe with broad strokes as we look at the business following on Matt it's an initial question. Capital in particular in healthcare, really has stepped up over the last several years and you do have a record backlog that you just alluded to won't pull-through all the way here in the fiscal 4Q. Could you just help us think about kind of the end markets there? Do we see a step-up in the kind of baseline growth rate for healthcare capital going forward? Is that a function of replacement? More efficiencies, or is this something that we should really think about normalizing kind of reverting back to those historic levels of growth on the healthcare capital side as we get out sometime in mid-year by -- at least by mid-year next fiscal year? And I've got a quick follow-up.

Chris Cooley :

Thank you appreciate that color. And then just kind of shifting gears to the Life Science segment. I continue to be impressed with the operating margin contribution that we see there as well as with AST. Can you just speak about, thematically, where you're seeing both of these portfolios product mix shifting towards? And really what I'm getting at here, do we is this a stair-step where we're kind of flattening out here in these record levels for a little bit. But as the mix continues to shift, you have a chance for another step-up in margin, or do we need to think about the operating margin contribution from here really becoming more a function of volume through the plant expansion at the AST side. As we just think about it dramatically going forward. Thanks so much.

Chris Cooley :

Understood. Will congrats again on a great quarter. Thank you.

Operator:

[Operator Instructions] our next question will come from Mike Matson with Needham and Company. Please go ahead.

Michael Tokich:

Mike, this is Mike. The majority of the revenue was falling under the healthcare side. So if you're going to adjust the model going forward, there was there was a small piece that was at the Life Sciences business, but nothing really material. And then as far as I've seen a couple of different numbers is it $0.03 is it $0.05. Some of this is IR math if you will. But part of the issue is we are anticipating paying down debt in the fourth quarter with the proceeds. We did not get a 190 million a portion of that was. Held back in escrow. We did not pay down debt on 12 it took us a while to clear the maturities that we have as a 30-day maturities that we waited to pay down debt. So there's some moving pieces here. Again, our best guess is it's around $0.05, so I wouldn't dramatically change for next year if it's $0.04 or $ [Indiscernible], who knows, but again, more IR Matthew [Indiscernible] than anything more directionally, didn't give you an indication.

Mike Matson :

Okay. Got it. And then, just the really strong AST growth. I think it's in the past, you had had some kind of COVID benefit in there from PPE and things like that. I mean, was that a factor at all this quarter for this really just demand for your kind of normal medical device customers?

Mike Matson :

Okay. Then just finally given the strong backlog, great to see that, increase in backlog. I'm wondering to what degree is that a function of the really strong orders that you're getting, clearly, is there some role for the supply chain issues there, maybe limiting your ability? Could you meet this -- fulfill those orders more quickly if these supply chain issues weren't happening right now?

Mike Matson :

Yeah okay. Got it. Thank you.

David Turkaly :

Hey, good morning. Can you hear me right?

David Turkaly :

A bit of a spot, but Mike, I think you said leverage is at 2.6 and obviously the last [Indiscernible] you did have been very [Indiscernible]. So I just wanted to get a comment on maybe your appetite year and where that leverage could go or what's your capacity right now to do deals like that?

Operator:

Our next question is a follow-up from Matthew Mishan with Key Bank. Please go ahead.

Dan Carestio :

I would say Matt, I would still use [Indiscernible] math and round up to 4.6.

Dan Carestio :

Know this, this will be the actual amount we anticipate based upon the inventory turns at our various capitalization that we're talking about.

Dan Carestio :

This is this Dan is too early to say we have definitely seen spot prices for certain materials come down precipitously. And we've seen other ones where we have vendors not even willing to quote us cost three months out based on uncertainty on there. And so our hope is that we see it come down over the next three to six months. But I think we're going to be living with some of these supply chain challenges for a while.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to A - Julie Winter for any closing remarks.

Operator:

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Julie Winter:

Thank you, Grant (ph), and good morning, everyone. As usual, speaking on today's call will be Mike Tokich, our Senior Vice President and CFO, as well as 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 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 as 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 today's 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 [Indiscernible] thinking. With those cautions, I will hand the call over to Mike.

Dan Carestio:

Thanks, Mike. And thanks again to everyone for taking the time to join us today. Our fiscal 2022 is shaping up to be another record year for STERIS. Our first-half turned out to be stronger than we anticipated, with constant currency organic growth across the business. In particular, growth in our ASG segment remains strong with 23% constant currency organic growth year-to-date despite some tough comparisons in the second quarter of last year. Healthcare has also rebounded nicely with 17% constant currency organic growth in the first half and record backlog of $311 million at the end of the quarter for the legacy STERIS products. Life sciences consumables have stabilized contributing 3% constant currency organic growth in the first half, and our capital equipment business backlog has grown to a record 98 million. Lastly, our newest segment, Dental, reported 10% growth for the quarter in line with our expectations. Underlying our performance procedure volumes in the U.S. have held steady as hospitals have learned how to manage through the pandemic. While we continue to see pockets of the world that are more limited in procedure volume due to COVID outbreaks, overall, we believe procedure volume is moving closer to pre -pandemic levels. We are cautiously optimistic about the coming months as COVID cases appear to have peaked and are now once again receding. Despite the more difficult comparisons, we expect revenue to stay strong in our second half as we continue to benefit from these trends. We also continue to make progress on the integration of Cantel in the quarter. The majority of our staffing changes have been made, aligning STERIS to better serve customers, positioning us for growth going forward, and contributing to cost synergies. We're also making swift progress implementing Lean and we're very pleased with how receptive our new colleagues are to our passion for continuous improvement. All said, we would expect to exceed our synergy cost targets for the year and also in total. Looking at the full year, while we are increasingly confident in our ability to achieve the -- our improved outlook provided last quarter, we're not increasing guidance further at this time. While we overachieved earnings in the second quarter, we have a fewer offsets that will likely impact the back half of the year. On the revenue side, our comparisons do get a bit more challenging. And we do expect some headwinds from FX, in particular, from the euro and the pound. In addition, while our teams have done outstanding work to mitigate the supply chain challenges so far this year, it is difficult to predict the unknown implications the current environment may have on the second half of the fiscal year. All said, we are pleased with where we stand today in the underlying strength of our diversified business and remain optimistic that if it were not for supply chain and inflation uncertainties, we would be at the high end or above our adjusted EPS guidance range for the full year. We look forward to continuing to update all of you on our progress. Thank you, and I will now turn the call back over to Julie to open up for Q&A. Julie.

Operator:

Sure thing. We will begin the question-and-answer session. [Operator Instructions] Our first question comes from Matthew Mishan with KeyBanc. Please go ahead.

Dan Carestio :

Yes. Sure, Matt. What I would say is to date, other than the cost escalation of money of our precursor materials, we've been able to navigate the supply side of it and make sure that we have been able to keep up and meet customer demand. And we had a little bit excess precursor inventory coming into the year as well, as some safety. In the current environment with the uncertainty around delivery time of these materials, it may -- it could potentially result in extended lead times for deliveries. We don't see a scenario where a stock out would happen or anything like that, but the ability to deliver on what now is over $400 million in backlog in the next six months just from an -- if we miss production slots, it's going to be hard to get them back, if we miss them because of supply shortages. So, I believe our teams will continue to do the outstanding work that we've been doing thus far. But there are challenges.

Dan Carestio :

Yeah, it is a high-growth area for that business. Currently, it's not a significant portion of the total business. And the vast majority of what we do, say over 80%, is what I would categorize as traditional medical type product. But nonetheless, it's growing very fast and we have a very good position with the companies and our customers that are accelerating growth and making a lot of investment for their capacity.

Mike Tokich :

Yeah, Matt. So, we experienced about $5 million of material labor costs in Q1. That doubled in Q2 and what we anticipate for the second half is $20 million or more for that combined third and fourth quarter. How that lays out by quarter, it's anyone's guess at this point in time. You read a lot in the papers about supply chain is potentially alleviating, although we have not seen that yet. Obviously, it's impacting us more than we had just thought 1 quarter ago when we revised guidance, so we wanted to make sure that we -- you guys understood exactly what we're anticipating to be the impact as we move forward for the rest of the fiscal year.

Mike Tokich :

You're welcome.

Dave Turkaly :

Good morning. That material and labor, the $10 million, is that split pretty evenly? And I guess the question I'd like to hit as well is, if it's $10 million in the next two quarters? You beat the Street significantly this quarter, so I'm just curious as to why we might not see that happen again, maybe even along with the synergy comment you made looking at the back half of the year.

Dave Turkaly :

Got it, thank you for that. And then you mentioned exceeding the cost synergy. I'd love you to put a parameter around that. I don't know if there's a percent or any kind of number you could give. And also have you identified -- are there any revenue synergies because I think we hadn't spoken about those in the past. Thanks a lot.

Dave Turkaly :

Thank you.

Chris Cooley :

Good morning and thank you for taking the questions and congrats on another solid quarter. Maybe just two quick ones for me. I was hoping you could address profitability and maybe the composition of the backlog. Specifically, when you look at operating profitability, you are hitting record levels both at AST and also at life sciences. Looking back through my model, I can't find if it's been like this before. I guess in addition to the growth, I would like to better understand what's enabling you to reach these incredibly high levels of operating profitability? and then how sustainable they are? When I think about both the AST and the Life Science segments, is that a revenue mixes specific? Is that something that's structurally that's changed? I just want to better understand that, and then I'll follow back up on my backlog question.

Mike Tokich :

And then Chris on the Life Science s side, echoing Dan 's comment regarding the operating expenses, same in Life Science s. We anticipated higher operating expenses throughout the year and obviously, the COVID impact has slowed some of the travel, and marketing, and sales expenses. Although we are starting to see those come back, but that is one factor that is definitely adding to the increased operating profit. And the other one you alluded to already, Chris, is mix. We continue to see very good growth out of the consumables business. And with the addition of Cantel, the consumables business, although it was only up a percent organically it is up almost 11% if you include the Cantel acquisition. We are seeing, as I think you understand, and consumables are higher margins -- tend to be higher margins for us, so that is also helping drive the improved profitability margin

Dan Carestio :

Sure, this is Dan. What I would say on the healthcare backlog, it's really strong across all product segments at this point, whether that's surgical or IPT. And then in terms of project versus short-term work, a year ago, we were almost exclusively long-term projects and builds and things like that, and we've seen a significant recovery in the replacement business in the last six, seven months, I would say, to where it's kind of back to pre - COVID levels in terms of replacement type spending. We've got a -- our backlog is still not maybe what it would have looked like proportionately 2 years ago before the pandemic, but the last 6 months or so, order intake definitely is. In terms of the Life Science capital, there's a lot of money being spent expanding production in terms of biologics, vaccines, and gene therapies. All of these different type of applications that require aseptic manufacturing environments, and as we've discussed before, that's really STERIS's sweet spot. We tend to benefit on the consumables side of that, we tend to benefit in AST on the disposable side going into those manufacturing environments, and then we also tend to benefit on the Capital Equipment side for GMP type equipment for sterilization into those type of environments as well. The other thing I would mention is we have seen, since the beginning of our fiscal year, recovery in research type spending, which was really slow during the pandemic. Much of that is state or federal funded public institutional spending. And that dried up pretty bad last year and we have seen a replacement business and what we would categorize more as lab or research come back, at least on an order input to what it would look like pre -- close to what it would look like pre -pandemic

Dan Carestio :

Thank you.

Mike Matson :

Good morning. Thanks for taking my questions. I guess I'll start with the Dental business. I heard the 10% growth, so that's good to hear, but maybe talk about what you're seeing in that business. I think prior -- when Cantel was still separate, they were talking about seeing increased demand for infection prevention products because of the pandemic. Is that sustainable? And I think Cantel talked about this being a high single-digit growth business over time. Do you agree with that?

Mike Matson :

Okay. No, that's fine. And then you're one of a handful of med-tech companies that has positive pricing. Is there any ability to maybe raise the prices a little more to offset some of the inflationary pressures, or even free surcharges or anything like that?

Mike Matson :

Okay, thanks. And if I could just squeeze one more in on hospital capital spending. We've seen very -- it seems to be very strong capital spending in '21, much better than I would've expected. What are you hearing about calendar '22? Does it look like it's going to continue to be strong into '22 as well?