STERIS Corporation (STE)

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STERIS Corporation (STE)

F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

January 27, 20089, 10:00 am ET

Executives

Julie Winter – Manager, IR

Walter Rosebrough – President and CEO

Michael Tokich – SVP and CFO

Analysts

Joshua Zable – Natixis Bleichroeder

Greg Macosko – Lord Abbett

Daniel Owczarski – Avondale Partners

Greg Halter – Great Lakes Review

Presentation

Operator

Welcome to the STERIS fiscal 2009 third quarter conference call. (Operator Instructions) I would now like to introduce today's host, Julie Winter, Manager, Investor Relations. Ma'am, you may begin.\

Julie Winter

Thank you, Valerie, and good morning everyone. It's my pleasure to welcome you to STERIS Corporation's Fiscal 2009 Third Quarter Conference Call. We appreciate you for taking the time to join us this morning.

If you haven't seen a copy of our earnings release, it was issued via PR Newswire this morning. Please visit our Investor Relations Web site at steris-ir.com.

Participating in the call this morning, are Walt Rosebrough, our President and CEO, and Mike Tokich, our Senior Vice President and Chief Financial Officer.

Now just a few words of caution before we begin: this webcast contains time sensitive information that is accurate only as of today, January 27, 2008. Any redistribution, retransmission or rebroadcast of this call without the express written consent of STERIS is strictly prohibited.

I would also like to remind you that this discussion may contain forward-looking statements relating to the company, its performance or its industry, that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results. Actual results could differ materially from those in the forward-looking statements.

The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results, expressed or implied, in this or other company statements will not be realized.

Investors are further cautioned not to place undue reliance on any forward-looking statement. These statements involve risks and uncertainties, many of which are beyond the company's control. Additional information concerning factors that could cause actual results to differ materially is contained in today's earnings release. As a reminder, during the call, we will refer to certain non-GAAP measures including free cash flow, backlog, debt-to-capital, and days sales outstanding, all of which you will find in our most recent 10-Q filings.

With those cautions, I'd like to hand the call over to Walt who will comment on the quarter. Walt?

Walt Rosebrough

Thanks Julie and good morning to all of you joining us. I’m going to start today with a high-level review of our observations and two year outlook. Then Mike will walk you through the results in more detail.

Our third quarter saw more revenue growth of 2%, led by growth in our healthcare business. Our constant currency growth was 4%, but was reduced by the recent strengthening of the U.S. dollar. We were able to leverage this modest top-line growth the deliver substantial year-over-year improvements in profitability.

Over the past couple of years, beginning with our transfer of manufacturing operations from Erie to Mexico, plus our cost-reduction efforts within North America, and the international restructuring announced this morning, we have implemented programs to reduce our cost structure by approximately $70 million. I want to emphasize that these reductions are generally in administrative expenses, lower production costs, or within products or markets that were not generating profitability.

We have continued to invest in product development and field sales and service forces to provide our customer superior products and services. Thanks to the great work of our people, we are ahead of schedule realizing these savings, which has helped generate the results we are reporting today.


Now I’ll spend just a few minutes reviewing each segment. Our healthcare segment grew 4%, driven primarily by new products.

For the first time this year, we are seeing a slowdown in spending from our healthcare customers, which is impacting our order growth rate. In particular, our infection prevention products have slowed somewhat as hospital budgets tighten; however we saw strong growth in our surgical business, driven by new products with continued strength in both LED lights and our integrated OR platform.

In total, our healthcare team has created another backlog record this quarter, with growth in both infection prevention and surgical products. Even to now, we are not seeing cancellation of orders or delays in shipments beyond the routine. So order cancellations are not materially impacting our business.

You may have seen our announcement last week that we have submitted a new product to the FDA for 510(k) clearance. Normally, we would not pre-announce a product before its release, but in this instance, we felt it important to let our customers understand the direction we are taking. We are pleased that our discussions with the agency have resulted in this submission for a new liquid chemical sterilization system and a path for it in resolving the warning letter related to System 1.

While the timing of regulatory clearance is uncertain, and our talks are continuing with the government, we look forward to reporting back to you with more details as we know them.

Moving to the life science segment, now led by Greg Blackmore, it saw substantial decline in capital equipment, which is partially timing. As we’ve told you in the past, as a result of large capital equipment orders, it tends to be lumpier than our other segments.

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