STERIS plc (STE) Earnings Call Transcript & Summary

All right. Good afternoon. I'm Mike Matson, Senior Medical Device Analyst with Needham & Company. Thanks for joining us for the 23rd Annual Needham Growth Conference. I have STERIS presenting now. From STERIS, we have Walter Rosebrough, CEO; and Julie Winter, VP of IR.

So we're going to go straight into the Q&A here. I'm going to start out like I have with some of the other companies that we've done fireside chats with: I wanted you to talk about bigger picture here in 2021 as we start to have the vaccines roll out across the U.S. and globally. How are you thinking about the recovery in your business as people increasingly get vaccinated and things start to kind of normalize?

Sure, Mike. First of all, I think most of us expected to see some resurgence of COVID here in the wintertime given indoor activity and not unlike the flu. So some of that was expected. I think most of us didn't expect to see the magnitude at this time if you look back 3 or 4 months. And certainly, this new strain that's in the U.K. and spreading, I think that's a bit of a surprise. So I think, largely, it will be around whether or not that strain is constrained by the vaccines. I think most people believe it will be. I don't see any reason to believe it won't. But I think that's going to play a big factor. As we move into the warmer months, first in the warmer climates and then in the warmer months, it should wane somewhat as a result of that. And then hopefully, by that point in time, that April, May, June time frame, the vaccines are having a real effect. And assuming that's the case, then I think we should be moving back toward normalcy in our space. I do think it's going to be -- it's a big difference today as well as probably the next several months. And that -- and probably underestimated is what a great job that the medical community has done in terms of knowing how to handle the disease now. It's still awful. It's still a great burden on the health care providers. And I'm now talking about the doctors and nurses who are dealing with it every day. So it's a great burden on them. But in terms of the solutions and the preventative actions that can be taken to keep people [ off fence ] and to do more and more work with the various techniques to improve the disease, a, there's a lot less deaths, be a lot less people going into the worse -- on a percentage basis, the worse cases. Unfortunately, on an absolute basis, it's still large. But I think that is a huge factor. And then the hospitals, I think, have learned so much because of that, have also learned that they don't need to empty out their procedures, and they've done a lot of work to move things to ambulatory surgery centers and -- theirs or others', and they've also done a lot of work to separate the COVID concern from the rest of the facilities. And I think that in combination is going to -- we're not going to see the dip that we saw last year at this time for the same level of problem. But we're going to see spot dips. We're seeing that obviously in the U.K. as we speak and in Southern California and a few other places but still not to the extent both nationally and in general. Whereas last year, people emptied out their hospitals in -- their surgery and procedural centers in anticipation of the COVID disease coming. Many of them then were empty on both ends. They didn't have COVID patients, and they didn't have surgery. So it's pretty devastating from a financial standpoint. From a -- I do have great concern for the health care workers because they are working very, very hard, and they've been working hard for a long time. So that's a concern. But from a -- I'll call it, from a financial health basis, I think things are going to be much better for hospitals this time around than last time.

Okay. And then one other question that we've been asking most of our companies. So you're in a little bit of a different fiscal calendar, but your next fiscal year will be '22. And so it looked like consensus last time I looked was around $3.4 billion. I know you're not giving guidance yet, but that sort of implies a 12% growth. That does include some benefit from Key Surgical. But do you -- what are your thoughts on that number? Do you think the Street is missing any headwinds or tailwinds in terms of the way things are being modeled?

Yes. Of course, not giving guidance and then commenting a great deal on that is giving guidance, so we're not going to give guidance. We're comfortable with what we've said about Key Surgical going forward. And I think the conversation I just had kind of sums it up. I think we're not going to see the dip that we saw last year at this time at the same level. That would be my expectation. And then hopefully, the recovery looks more like -- by the time we get into summer and fall, looks more like what it should have looked like had we not had COVID. So I think it's -- conceptually, I think it's correct, plus or minus, it's still anybody's guess is my idea. We have our own view on it, but -- and we'll talk about that view in a couple of months.

All right. No, that's helpful. And then let's move on to the Healthcare business. So you completed the Key Surgical deal in November. Can you talk about the strategic rationale for the deal? And why was that the right time to do that deal?

Sure. We'll talk -- I'll do them in reverse order. As we say all the time, when we talk about M&A, we know the kind of targets we're interested in. We have almost always a target list. There's this minor detail: the seller has to want to sell. The details, details. And so we're working on things all the time. We don't have very much control of the timing. In this particular case, we were interested in Key -- I guess it was 5 years ago or between 4 and 6 years ago when the Water Street folks were fortunate enough to pick it up. And they did a very nice job snatching it out from under us. And so we made it clear to them fairly early in that process afterwards that we had significant interest. So they had come to us, too. They saw some opportunities for the 2 businesses. So they had some interest in some of the things we had. We weren't interested in selling. So we've kind of continued that conversation, not in any super active way but in general. And then we thought this year, given some of the tax uncertainties and it's been 4, 5 years, which is kind of like their cycle, that they may be more interested than not -- more interested in other times of doing a transaction. And we actually started working on it in the February, March time frame. And toward the end of March, we decided it best to keep our powder dry for a little while that we found that what was really going to happen. As you know, it has turned out not to have as much effect on us as it did on others. We're in the right procedural spaces, and our vaccines and biologics business is very strong, and our AST business is very strong. So once we saw that we were fine from a capital standpoint and thought that we would be cash-generating through the time period, we contacted them and said, "Hey, it's a good time to start back up. And with the uncertainty of what's going to happen, particularly maybe with, well, the tax implications on PE companies going forward, we thought they might be interested in doing something before December 31, and apparently, they were. So it's a combination of us being comfortable with our with our go-forward, if you will, in terms of cash flow and them being about the right time in their normal kind of exit time frame and, I think, a little uncertainty on taxes was probably the combination of those things that caused it at this time. But if it didn't happen in October, it'd probably happen in March or June of next year anyway. And then in terms of the strategic rationale, there's a number of pieces. We like things that fit for a number of reasons. First of all, its consumables business in endo and surgery, which are where we tend to spend our lives, and so that's a good point. They have a very nice footprint outside the U.S. Usually, we've been growing faster outside the U.S. than inside the U.S., but the things we have purchased in the intervening time, with the exception of Synergy, have generally been more U.S.-based. So our percentage footprint hasn't grown all that much even though we've grown faster outside the U.S. This was the opposite of that. So their footprint is larger outside the U.S. and particularly in Germany. So that was very attractive to us. And then lastly, their selling model. We tend to be a feet-on-the-street kind of sales model, and they have an inbound/outbound telephone version. And we think -- we do that as well, but we think theirs superior to ours, actually, in the way they've done it and the way they handle it. So we think there's a real opportunity for some of our products and some of the geographic regions to have them either teach our folks or have them actually do it, 1 of the 2. And then we think we can help them on the ground in some areas, too. So I think it's a combination of those things. This is virtually -- there's some operational and cost savings, particularly in the manufacturing space. But generally speaking, this is largely a revenue-enhancing program.

Okay. And then so I understand the pandemic hurt elective procedure volumes and, therefore, your sales of consumables. But do you think that there's any sort of longer-term benefits to the health care business from this sort of renewed focus on infection prevention that we're seeing as a result of what's happened here. I know that some of your peers have talked about that to some degree, companies like Cantel Medical?

Yes. I think probably a modest amount of -- hard to calculate, but I do think we've been saying for a good long time as well as many of the people in the infection control community that some of the bugs are outrunning the drugs these days. We used to have, in many respects, better infection prevention technique 30 and 40 years ago, before the brilliant use of antibiotics on a prophylactic basis and -- well, prophylactic or cure basis. But some of these bugs are getting out of control, right, C. diff, MRSA, those kind of bugs. And I think that has begun in the infection control community a move-back to some of the techniques that are stronger in terms of pure prevention of having the bugs passed. And then I think -- I mean, this disease certainly is going to heighten people's views on that. So I do think there's some positives to it. It's going to be hard, I think, to put a finger on it, a number on it, but I do think it will be positive for the general infection prevention community.

Okay. And then Healthcare, I think the business is about 30% capital. Maybe -- I don't know if that was before or after Key, but it's still a sizable part of the business. I know it's become less kind of important to you, but -- as it's become a smaller part of the business. Can you just give us an update on what you're seeing with regard to hospital capital spending? I mean, I think I had thought and maybe other people have thought earlier on in 2020 that we would see a pretty big impact. But it does seem like the financial assistance that was provided by the government combined with a pretty sharp V-shape recovery in the procedures kind of minimized the collateral damage there. But...

Yes. Mike, I think as a general rule, you're right on target. The -- I would say, capital in Healthcare abhors uncertainty and loves change. And so COVID throws a -- put a pretty big uncertainty [ curve ] into the system. So we clearly saw early on that the strategic projects that, I'm building a new tower, those kind of I'm renovating a whole new place, those projects, they generally stay on track. You may not start new ones as quickly, but once you have steel on the ground, you're going to finish the project. And so we saw that continue. Fortunately, we had a very good backlog of that kind of business facing us at the time that COVID struck. What tends to go away in these kind of times is the replacement business. Oh gee, I know the surgeon wants a new light, but he can wait 6 months or she can wait a year or 2. So those tend to slow down under these periods of uncertainty. If it stays long enough, then the big projects slow down, too. And so as we've said, the strategic projects didn't really change their trajectory at all. And -- but we did see a reduction in replacement. Fortunately, we entered the year with very good backlog. So we had -- we were able to continue to run our plants. But it did shrink capital early on in the process. As we mentioned in our last call in October, first of all, the sense was -- I don't member the exact start month, but June, July, we kind of hit the bottom, and it's been sequentially growing through the October period. I can't comment, obviously, after October. But through the October period, it had been growing sequentially and was back to pretty much normal stages. So we feel good about that. We do think much of the uncertainty -- as you say, some of the uncertainty wasn't -- isn't going to help, but the capital injection obviously really helped. I think they now feel more strongly that they will be able to run procedures and COVID at the same time as long as it doesn't get too far out of control. So that really helps because what killed them was not being able to do procedures in that space. So I think the outlook, through October anyway, was much more positive. And our pipeline in October was strong, so not orders that we had yet but orders that we knew were coming that hadn't yet been booked. So we feel pretty good about that. And I've been actually surprised at the strength and resilience in that space.

Okay. And then one big trend that seems to be happening or continuing to happen in the hospital space or health care space is just more and more procedures shifting to the outpatient setting. And the ASC setting as well in particular. So what does that trend mean for your business, for your Healthcare business? Is it positive, negative, neutral? How would you see that impacting you?

Yes. We -- as I started this conversation, we abhor vacuum, but we love change. And you just described one of the changes. We've seen maybe now in my career 3 or 4, I'll call it, significant upticks in ASCs, largely driven by reimbursement issues. This one is being driven -- it was being driven somewhat by reimbursement issues but also patient convenience and patient-perceived safety. I don't think an ASC is necessarily any safer than most hospital surgeries now. But people sometimes may perceive that it is safer. It's certainly more convenient than many hospitals, but -- the main hospital. So ambulatory surgery, both those as part of a health care system or hospital system and those that are freestanding, are growing. The reimbursement, of course, is growing. We're starting to see implants of various types being done. We have seen a number and even more there, and I'm talking about hips now, done outpatient. And that is a huge change for them. Most surgery centers weren't built for that, I'll call it, heavy level of surgery. And so actually, that's a real plus, not only in the surgical suite itself. So the operating tables, lights, so things that go with that generally need to be beefed up for that more -- higher concentration of surgery, more in-depth surgery. And also, most of whom are not built for the kind of sterilization that is going to be required particularly for orthopedic implants, which are probably the largest number of sets of any kind of surgery. So either they're going to either have to beef up at the facility or the hospitals that they are members with are working with have to beef up to do that. Or it's also, we think, an opportunity for our outsourced reprocessing. So we see that as -- that change as typical. It's also -- there's growth that goes with it and change. We see that as nothing but upside.

Okay. And then I know that STERIS as a company doesn't talk a lot about the pipeline and new products, but I was just curious if there were anything you would call out in the health care business and in terms of new products that could be drivers over the next year or 2?

Yes, you're right. We tend not -- we like to introduce them when we introduce them, and so we tend not to talk about things coming. I will say, probably the biggest in all of our major product areas now, we have, I'll call it, a routine product change cycle virtually across the board, which means we're introducing 10s or 20s of products pretty much across the entire array of our products. And so that's actually a bigger deal, in my mind, than any single product that we have coming. We have a number of ones. An example of this is we have a new hydroperoxide smaller unit, which is really a nice unit that's just come out. We expect a lot of that. We have our, what we call, SAP, sterility assurance products. So the biological indicators, we have a very nice line of fast-acting biological indicators that have come out recently. It really is a nice product for us. We have a new series of steam sterilizers, which are -- the nice thing about it is we've always been more America-centric in terms of the regulatory and style of that. This is a global universal so we can go across the globe more with those steam sterilizers. So we think that's a nice product. Those are examples. But virtually every point in our line in the surgical area, we have new tables, new lights and new ORI systems, that are -- have been recently introduced as well as some adjunct products that are more infrastructure, ceilings and walls, that on -- a prefab basis that we think do a nice job. So we just have a number of things kind of across the portfolio.

So you feel like you just have a good kind of cadence of product refreshes and new product launches going that can sustain...

New, refresh and adds. And adds, some are by acquisition and some by our own work, organically.

Okay. I did have one question submitted by a viewer. I'll go and -- go to that just because it is in the health care area. So there's -- they say they'd be interested in hearing your thoughts on permanent changes in Healthcare and hospitals due -- as a result of the COVID pandemic.

Is it permanent changes? Is that the question?

Yes, permanent changes in, I guess, the Healthcare business and/or in the hospital setting?

Yes. I don't know that there will be -- it's going to be an interesting thing to see. I mean I remember when HIV came out and particularly before we knew how transmissible it was, whether the bug was strong [ enough on its own in the ] environment. There were a number of changes that were made in the short-term, and almost none of them carried on past the long term. We went -- you almost have to go back to universal precautions. Early on, we do think specific to a bug because we don't know how -- we have to isolate it and work on it, and then we go to universal precautions. I think the same thing will happen here. There are people doing things to separate medical COVID patients from everybody else and -- to try to control the transmission, and then you have to have stronger PPE around that. That may last, but I would not be surprised to see more universal precautions. I do think the biggest thing will be, as you said, as long as we don't have a vaccine, the restriction on people coming in and out a hospital is -- anything coming in and out of a hospital is going to be stronger. If you go back again, I talked about how we had maybe some stronger techniques. If you go back to the 60s, your kids didn't come in when you had a baby, and you got these little virus carriers child, as we all know. I have children and grandchildren, and every time I see them, I find a way to get sick. So those kind of things are just going to be, I think, more restrictive until we have vaccines. And we may see more of that kind of restriction coming back and then the techniques that we use to keep things clean and sterile. And I do think we slip back a little bit. The -- again, the antibiotics are just -- is fabulous, what our drug industry has done in terms of both prophylactic and post-disease antibiotics. But we got bugs outrunning them. So we're going to, I think, be more careful going forward.

Okay. So I want to move to the Life Sciences business. So this is a business that you've actually seen a benefit from, from COVID-19. And can you just talk about what's happened there and talk about your expectations for the durability of the kind of pandemic benefit you've had in this business?

Sure. I would tell you there's 2 sides of the equation. Most of it is long term. Biologics are a very good place to be in general. We have a lot of reasons to do vaccines, and the biologics are just fantastic that they're developing. So it has been a growing space for us for a long time. Obviously, this pandemic, which is a vaccine, we are hopefully able to route it with vaccines, is going to increase the amount of vaccine that we see. I also think -- I think most people think that the flu vaccine is going to be taken seriously right now than it has been maybe in the past because -- particularly since you can't tell if you'd be on the flu the coronavirus issue until later in the process. So I think more people have been serious about the flu vaccine. And that increase that increases there. There are other vaccines that are coming out in the market for other diseases. The third world clearly needs more vaccines, and we're doing more to get vaccinations out into the third world, which is the piece of it. And then COVID, the indications are that the antibodies from having COVID or the vaccines are not permanent protection, so probably more like flu, whether it's every year, every 2 years, every 3 years, we don't know. But there's going to be a lot of people that want to take that as long as we have to COVID on the planet. So that's going to be, we think, a pretty significant upward spike. Early on, as people were preparing to produce, they bought -- as you would expect, they bought supply in front of production. The vaccine makers of the world with the drug companies in general are very sensitive to supply disruption as they should be. Their factories are churning out a lot of drugs and a lot of money every day. So a shutdown of those factories is a nontrivial event. So they are very cautious. They tend to have put supply of critical things in or around their plant. They put -- they have us keep critical supply either at our place or someplace in a distribution center someplace near them, and they want to make sure we have plenty. So early on, we saw a buildup. What we don't know is if that buildup is going to stay permanent and then we just take the growth from there or whether they're going to shrink it a bit over time. Either one of those would be a likely occurrence for some time. But that one big spike of growth, that's not going to repeat. But we expect to see vaccines growing and biologics for -- growing for a long time and for the purpose of investors for the foreseeable future, in my view.

So this was really more of -- driven by the consumable components as opposed to the capital components then.

Yes. Yes, it was in the short run. And we were already very strong in capital equipment in this space. We did get some, but -- some capital as a result of this, but it takes longer. Our kind of capital -- as opposed to a sterilizer that goes in a hospital -- that they would use in a pharma plant, a sterilizer in a hospital might be $60,000 or $100,000 depending on how big it is and the type. The sterilizer in a pharmaceutical facility might be $1.5 million. It's just -- it's custom built, typically. It's far more -- it's a lot bigger. It's far more complex. And so it takes longer to do it. So if there's any plus out of the -- out of COVID for that, it's starting now, not starting 6 or 9 months ago.

You're saying as capital -- to the degree that they would need capital equipment for vaccine -- additional volume for vaccines would be -- you'd be seeing that demand now.

Yes, we'd be -- yes, exactly. The order -- it's a special-order product pretty much. And so we may have had some and we may have advanced some, but in general, I would say that most of it, if there is more to come as a result of the vaccine issues, it will be future, not past.

Okay. All right. And then moving on to the AST business, Applied Sterilization Technologies. So this business has probably seen -- seems to have seen more of a mixed impact, where you've had some positives and some negatives from the pandemic. So maybe you could just talk about kind of what you've seen there and kind of what you expect going forward in terms of the mix of conventional medical devices versus PPE and so forth.

Sure. And you're exactly correct. You can kind of split it maybe into 3 groups. One is a very large group, which is the procedural devices themselves, the devices that relate to procedures. And then those clearly fell off as did procedures, not early on because -- since none of us knew exactly what was going to happen. Most of the manufacturers continued to make because they weren't sure what the hospitals would need. So they built some inventory. And then probably after the first -- maybe June, July kind of time frame, they started backing off because they had more than was required. And so it backed off for a while. And that's pretty much -- particularly the more elective the procedure or the more deferrable the procedure, the more likely for that decline. At the same time, PPE was going crazy, as you might expect. I mean I've heard numbers in terms of large hospital groups going from needing $10 million a year of XYZ PPE and now needing to $0.75 billion to $1 billion a year. I mean -- so we're not talking about small numbers. And that just went crazy. Now most PPE does not have to be sterilized. So that does not affect us. It affects the PPE makers, obviously. But sort of things done in surgical areas or in areas where people are compromised or, obviously, COVID patients themselves, then it's far more likely that there's -- that sterile PPE is required, so gowns, gloves, particularly. And in that space, that just went crazy for us. And so that's going on. And then there's some things that are kind of routine, and they haven't really changed much. So but on balance, it's down -- I would say, that averages out to down a little. We tend -- the physical volume of the PPE is higher, but it's -- on a value basis, it's not as high. So on a per-pound run, if you will, the value is not as high. So we traded down a little bit, but still, it's been -- as you can see from our performance, we never really fell off very much in AST, and the last few months that we've reported have been actually slightly ahead of the previous year.

Okay. And then one thing I've wondered about is some of the -- some of your customers or most of your larger customers probably have some in-house capabilities to do their own sterilization. So there's a mix of insourced and outsourced sterilization. So how do they kind of decide which route they're going to go? And do you see things moving one way or the other over time? Is there more insourcing or more outsourcing? Or is it relatively stable?

Sure. You're absolutely correct. You have to have and enough product to be able to afford to put up the sterilization centers and the capability. And it's not just enough product because even those large companies that do some of their own sterilization, they rarely do all of it. And so where they have a concentration of product or a large amount of product in one geographic space, then they're more likely to do it and if it requires the same technology. The trick about this, the medical device sterilization business, is you have to, a, be in the right place, geographical place, because the cost of transportation is often as much or more than the cost of sterilization. Secondly, you have to have the general know-how, how to do this. It's not just something you pick up and do. There's a lot of science involved. And then thirdly, you have to have the right technology for the type of things you're sterilizing, be it gas or radiation and then what type of radiation. And so putting that construct together, it's a lot easier to form a factory full of the right technology if you're working with multiple manufacturers. Again, there are some places, some entities that [ couldn't -- don't have enough to do it ] themselves. And so that's the function. And then there's -- always within different companies, there's different philosophies about insourcing versus outsourcing, whether they want to move to somebody who's an expert at this or want to build the expertise themselves. We haven't seen, I would call it, a radical difference in that over the last 10 years. But I would say that business has grown with the growth of medical devices, and the investment in new or expanded facilities in the OEM space has been very small. And so it's not like we're taking more and more "away" from the OEMs. It is -- they're not investing for capacity, and they're full and, therefore, push more of it out to us. So -- and it's small percentages, but it's real. And so -- and I sort of expect that to be a continuation, personally. These things are done, though, in very long-term contracts, usually 3 to 5 years. So it's not like it's going to shift tomorrow morning at 9 o'clock. But I do think we're seeing more of the growth moving into our -- the outsourced world than staying inside at this point in time.

Okay. I know that in Europe, some of the orthopedic and spine companies and maybe even some of the other types of implantable devices, there's this push towards sterile packaged implants? I mean, is that something that would be a positive bit of tailwind for your business? Or is it just too small to really matter? I mean let's say the U.S. started to go that way as well versus these big trades. I mean maybe it would be a negative for the hospital side and a positive for the AST business or something like that. Or...

Yes. I suspect -- for single-use devices, obviously, doing what we do in AST makes the most sense because it's high volume. If you're trying to sterilize reusable devices, it's pretty tricky because you are -- it's really medical waste until it gets back. And one of the keys to sterilization is knowing what the bioburden is on the device. So if you're trying to repackage and do multiple use and sterilize it again, it is even trickier than doing what they do in hospitals and what they do -- and what we do outside of hospitals. But you're right. Since we are present across -- in hospitals, we actually run the reprocessing centers for a number of hospitals in the world. And we do it in AST. We're pretty indifferent to where it's done. We use, I think, virtually every basic technology and sterilization. We're -- so we're technology neutral. That's one of the things we think is a huge advantage for us because we can tell a customer we don't care how you do it. But we want to get you in the best place to do it for you and your logistics and your products and design and packaging. So whatever you want, we'll find you a way to do it and find you a place to do it. So we're pretty much indifferent. I don't think it will have a big effect either way for us.

Okay. And then I wanted to see if you could just touch on the -- these issues with ethylene oxide that have happened with some of your competitors and peers. I know I've spoken with you about it, and there are some good reasons why you're not really worried about similar issues at STERIS. But for folks that aren't as familiar with the story, if they start reading up on you guys and doing some Google searches, they may see some things that could scare them about this business. So just maybe refresh us on what happened and kind of why you're not worried about that becoming an issue for STERIS.

To say that I'm worry free about anything is probably an overstatement.

[ Fair point. ]

We take all kind of issues seriously. And sterilization, I mean, by definition, what we do for a living is killer -- kill biological entities, right, we hope, for the little ones that hurt humans. So we are very, very careful about that. And one of the reasons -- you are correct. One of the reasons that we feel -- one of the reasons we think we're in good shape is we have an extraordinary safety culture in our business, not just in the sterilization facilities in our plants, with our field. We have extraordinary safety record. And -- but that goes through -- part of that is because of the sterilization. We need to be safe and super safe. And so we have great processes in place. As it relates to ethylene oxide, we know that we meet every regulatory requirement in the world. We do -- we work very hard to do it the same way every place in the world. So just because there's a lower standard in some places outside the United States or some places outside Western Europe, we want to go the STERIS standard, not to the -- necessarily, the local standard. And we know that our standards are above what is required and, we think, above what is necessary. So we think that puts us in good stead. We care very much about our people. I mean, obviously, if there's an issue outside of the place that's doing it, you would think there may be a bigger issue inside of the place doing it. We haven't had issues. And we think that there. So we think the science is on our side on this issue, and we think that we're very good at practicing the science on this issue. So that's what gives us [ the feeling there ]. One of the reasons, I think, that we haven't been involved at this point is, when the EPA listed some communities that may have more ethylene oxide gas than they feel may be the right amount, which they're -- I think, as they've done additional work, they found out so did forests in the middle of nowhere because ethylene oxide is a naturally occurring chemistry. You and I are creating it as we speak right now. I think all mammals -- I'm not sure all animals. I think all mammals do. And so it's not a foreign substance that just happens out of chemistry plants, if you will. And we control ours very, very tightly. So we're comfortable that the amounts that we have are solid. And we continue to improve in our process. It's one of the things we did when we first saw years ago now the early thinking behind some of what had occurred. We started working with the people who asked us to sterilize and said, look, we know that we can sterilize some of your products in way less gas if we change some processes and do some things differently. And we set a target to be -- to use 50% of the gas for the same number of amount -- for the same amount being sterilized. The best way to not have a problem with emissions is to use less gas because then you start from a good spot. And then we've done a number of things over the decades -- not just years, a number of things over the decades to make sure there's less and less gas escaping from our facilities. And we're talking minuscule amounts over the course of a year. So we're just very comfortable with the way we handle it.

Okay. I think we're almost out of time. I just want to try to fit one in on -- one financial question in. So...

I mean, do you care about money? [ I'm sure you do. ]

Yes. We don't -- we probably have a minute or 2 left to answer that. So just on -- you've had good operating margin improvement, but it's mostly been driven by gross margin improvement. So can you just comment quickly on what's driven that? What's driven the gross margin improvement, mix, acquisitions, cost reduction, pricing, et cetera, all those things or maybe a few of them, more than others? And then what about operating expense leverage? Is there an opportunity there to drive that as well in future periods?

Well, in the most recent time, mix has clearly been a factor because, as you know, AST and the pharma business are high-margin products. And so the mix clearly has been a piece. We have gotten a little bit of price as well. But we continuously work on our costs. We're tuning our production systems. We're a lean company. We're very serious about it. Now [ in fact, that order ] gives us quality, a better delivery to our customers and then cost. Cost is a piece of it. And so that is a component. We also put more of our costs in gross margin than some others. Anything inside of the 4 walls of a factory, we consider cost of goods sold. So we're a little -- maybe a little heavier there than others in terms of what's in there. And in the end, we don't really care where it comes from. We want the bottom line. The operating profit is what we care about. And we have seen, of course, in COVID, a reduction in travel cost and all that. That's -- some of that's temporary. Some of that will probably change the way we've done things. So I think we have opportunity there. But in general, as we have grown revenue and acquired businesses, we found ways to get leverage kind of across the P&L. And we anticipate continuing to do that.

Okay. Great. Well, thanks for joining us. And hopefully, you had some good meetings today.

We did.

And hopefully, you can come to our next event at some point. Thank you.

Pleasure to be with you. We hope we're in person next time.

All right. Yes. So don't we all.

Thanks, Mike.