STERIS plc (STE) 2021 Q2 法說會逐字稿

Good morning, everyone, and welcome to the STERIS Plc Second Quarter 2021 Conference Call.

(Operator Instructions)

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

Thank you, Jamie, and good morning, everyone. On today's call, we have Walt Rosebrough, our President and CEO; Mike Tokich, our Senior Vice President and CFO; and Dan Carestio, our Chief Operating Officer.

I 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, 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 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 on today's release 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.

Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our second quarter performance. For the quarter, constant currency organic revenue increased 2%, driven by 100 basis points of volume and 100 basis points of price. Constant currency organic revenue for the quarter includes a total of about $5 million from prior year tuck-in acquisitions, primarily in Healthcare spread across capital equipment, consumables and service.

Gross margin for the quarter was up 140 basis points to 45% and benefited from mix, price and productivity. EBIT margin for the quarter was 22.5% of revenue, an increase of 220 basis points from the second quarter last year due to higher gross margin attainment and lower operating expenses mainly for travel, sales and marketing and compensation due in part from business disruption from COVID-19. The adjusted tax rate in the quarter was 21.1% and includes the benefit of stock compensation offset by unfavorable discrete item adjustments. Net income in the quarter grew 13% to $127.3 million and earnings increased to $1.48 per diluted share as compared to $1.32 per diluted share in the prior year.

Our balance sheet is a continued source of strength for the company. Considering our cash position of $312 million, access to available credit lines and a low leverage ratio, we are well positioned from a liquidity standpoint. Even reflecting the anticipated additional leverage for the Key Surgical acquisition, our debt levels remained solidly in our comfort zone. During the second quarter, capital expenditures totaled $43.9 million, while depreciation and amortization was $54.4 million. Free cash flow for the first half was $185.6 million, an increase of $23.6 million over the first half of last year, primarily due to improvements in net income and working capital somewhat offset by higher capital expenditures.

With that, I will now turn the call over to Walt for his remarks.

Thanks, Mike, and good morning, all. I hope you all have voted or will later today. We are pleased to be with you to report such encouraging results for our second quarter, which reflect the resilience of our business and the good work done by STERIS associates.

In total, constant currency organic revenue grew 2% year-over-year and improved substantially on a sequential basis. We benefited from the continued recovery in procedure volumes during the quarter as well as continued strength in segments with exposure to COVID-19-related products and services.

Our release walks through the details, but I will touch on a few highlights of the quarter. Life Sciences grew 16% in the second quarter, continuing its strong performance, in particular, for consumables. While it's difficult to dissect the 31% consumables growth in the quarter, we believe the underlying growth rate remained in the lower teens and the balance of the growth is due to COVID-19 pre-buying in anticipation of vaccine production demand. As we've said all year, we do not anticipate maintaining these growth percentage levels in perpetuity. In particular, our fourth quarter has difficult comparisons as last year's fourth quarter was the beginning of the Life Science consumables significant COVID-19-related revenue uptick.

Rebounding from first quarter levels, our AST segment grew 9% year-over-year in the quarter, benefiting from continued demand for COVID-19 product sterilization as well as a significant recovery of procedure-related medical device sterilization volumes. As we've said in prior quarters, we continue to invest aggressively in capacity expansions at AST, reflecting our long-term expectations for the growth in this business.

As anticipated, our Healthcare segment continued to be impacted by some disruption in procedures in the quarter, declining 3% year-over-year but improving nicely on a sequential basis. Both consumables and service rebounded from first quarter levels, with consumables revenue growing 6% year-over-year while service revenue was flat.

Capital equipment shipments in the segment declined as we anticipated. Those shipments were down 14% versus the second quarter of last year. As you know, we break our capital business into either large projects or replacements. We were pleasantly surprised to see replacement orders rebounding sequentially in the quarter, reflecting a return to more normal procedure volumes. Capital equipment orders have grown sequentially through October from the low point in May and have returned to about last year's levels. Like most in our space, while we are pleased to see the sequential improvements in revenue from procedures to date, there is significant uncertainty in the coming months, as the COVID-19 pandemic appears to be escalating in many areas around the world.

We have seen recent procedure declines in parts of Europe. It is too soon to tell what we will experience going forward in Europe and in the U.S. in the next 6 months. That said, we are not planning a significant disruption of procedure volumes in the second half of our year. As a result, we are planning for sequential revenue growth in the second half to result in about flat year-over-year revenue, excluding any impact from the anticipated Key Surgical acquisition. While we are quite pleased with recent trends, the situation is fluid and difficult to predict. We still consider our Healthcare capital equipment portfolio to have the greatest downside risk in the near term. If procedures continue to improve and the pandemic subsides, we will expect some costs in our operation to start coming back to more normal levels in the second half of the year, which will limit our bottom line percentage growth somewhat.

As we said all along, we manage this business for the long haul. Our actions during this pandemic reflect that approach, including our decision to avoid unpaid layoffs or furloughs related to COVID-19. We've worked hard to maintain jobs and compensation for our people, putting programs in place to take care of those who need extra support and providing paid furlough for those people in operations that were impacted by a decline in the business due to the pandemic. Total cost for COVID-19 programs and expenses were $4.5 million in our second fiscal quarter, about half of what we saw in Q1.

Similarly, our approach to investments has not changed. We continue to expand our AST footprint and to invest in R&D. We have introduced a full suite of surgical products this year, including new operating room lights, several new surgical tables and a next-generation ORI system. On the infection prevention side of our business, recently launched products include our new smaller footprint steam sterilizers and more rapid biological indicators, among others. We do not expect a consequential slowdown in our new product development efforts or in spending for R&D as a result of the pandemic.

Before we open to Q&A, I would like to again thank STERIS people for their commitment to our customers, who have continued to be the heroes on the front lines of this pandemic. While there is uncertainty in the near term given the COVID-19 situation, we like the positioning of our global portfolio during the pandemic as well as when we come out of it. We are working toward completing the previously announced acquisition of Key Surgical by calendar year-end and look forward to welcoming Key's people to the STERIS family. We stand ready to capture additional opportunity and continue to believe that the long-term future for STERIS is bright.

With that, I will turn the call over to Julie to open for Q&A.

Thank you, Mike and Walt, for your comments. Jamie, would you please give the instructions and we'll get started on Q&A.

(Operator Instructions)

And our first question today comes from Dave Turkaly from JMP Securities.

For Mike, maybe 100 basis points, you talked about in price. I know you may not want to get into super detail about that, but I think that's a little better than what you've seen of late. And I was wondering if you just might comment on where you're gaining that, and particularly in this environment.

Yes, Dave. Yes, 100 basis points. Typically, we are somewhere between 50 and 100 basis points. This quarter, obviously, we were at that 100 basis points level. And we are actually seeing price across all 3 of our segments in the second quarter. So I would not point out one individual one, but just across each of our segments.

Great. And then as a quick follow-up, you mentioned you called out some working capital improvements. I'm just curious if we should view some of those as permanent or is it sort of a onetime? Or how are you looking at some of those improvements? And how should we look at them moving forward?

Yes, Dave. I would say that from a working capital improvement standpoint, we've actually been successful in reducing our days sales outstanding pretty significantly this year, although that is a little bit of math, if you will, because as EBIT does drop, the days sales outstanding do increase or decrease year-over-year. And we have been offsetting inventory. Inventory is on the rise. We continue to have higher inventory levels because we are maintaining both surety of supply and we are level loading.

So I would say that DSOs, favorable a couple of days. We should be able to continue to drive that at least this -- the remainder of this fiscal year, I don't know about next fiscal year. And I would also say that inventory, our projection is inventory would still be elevated by the end of the fiscal year. So I would say those 2 will pretty much naturally offset, and we will continue to see. As long as we see net income growth, we will continue to see free cash flow generation.

In addition, our capital expenditures are also up, and we -- as we've spoken about many times, we do anticipate spending over $100 million in expansion capital growth for AST. So don't be surprised if you see year-over-year growth in CapEx by the end of the fiscal year. We were up $13 million in the first half, and we project to be more than that up for the full year.

And I would add another temporal one is government tax payments have been deferred related to the Pandemic Act. There's a mixed bag there. I would say, obviously, the government payments are temporal. Capital spending is more longer term. And I think, as Mike has said, the -- if you look a bit longer term, the inventory and receivables will probably reverse back to their more normal levels over time.

And our next question comes from Matthew Mishan from KeyBanc.

I didn't quite catch all of the guidance for the back half. Did you say you're going to be year-over-year flat for the full year on an organic growth basis? And what are you -- what does that -- what are you implying for the second half versus the first half?

I just -- I didn't catch it all. I just wanted to clarify.

Yes, Matt. We're not guiding, just to be clear. But we have to plan even independent of the fair amount of uncertainty that's going on. And so we're planning roughly flat year-over-year revenue. And it's -- that's, largely speaking, kind of all the same constant currency, not constant currency. There's essentially no -- in fact, I think no inorganic growth in the back half of the year. So that's an irrelevancy unless Key comes in place, and we're not talking about Key. But orders of magnitude, we're kind of thinking flattish, and it's our consumables business or recurring revenue business is continuing to grow with some, I'll call it, conservatism on what capital is going to do for the back half of the year.

Okay. Understood. And then the contribution, just for clarity purposes, the contribution from tuck-in M&A over the next several quarters, I'm assuming that wanes a little bit as those anniversary?

0.

Or what do you -- 0?

0. It's tiny this quarter. Mike?

About $5 million this quarter, Matt. And by the time we get to the third quarter, I believe, almost every one of those will anniversary. So it will be, if not 0, very, very close to 0. So we won't even speak to it.

All right. I think everyone is happy about that.

We're unhappy. We like to have more, but we've got a significant one coming, so that's fine.

All right. And then the Life Science receivables business. Maybe I'll ask if this is -- I'll ask it this way. What is the capacity you could -- you're about a $200 million business right now, plus or minus. What is the capacity you could produce if customers said, "Just give me everything you got. Are you kind of maxing it out at this point at plus 30%? Or could you actually kind of flex that up even further?

Yes. We're not capacity constrained at this point, Matt. And barring the ability to get the components, which I'm not aware of any, where we are struggling. So -- but you always have to pay attention to supply chain issues. But barring some supply chain issue that I'm unaware of, we could go up a great deal. You have to remember that most of our work in this space in IPT and Life Science are sharing factories. And so the capacity of those shared factories is greater. Now if everything goes up 50%, then that's a problem. But the capacity that we have in the combined Life Science AST facilities, I don't feel that we have a significant capacity issues.

All right. Excellent. And then I realize this last one, I realize it's a tough question given volatility and the overall breadth of your portfolio. But how much do you think you're outperforming your end markets with share gains? It just seems like you're just well above of where the market would be.

I don't know about quantity. And particularly in short terms, Matt, it's very difficult to have a feel for us versus everybody else, if you will. As everybody reports, it's helpful, but we have a lot of competitors that are not public. So it's still difficult to get that overall reach. But I think we are confident that we're getting more than our fair share of wallet in virtually all of our spots.

Our next question comes from Larry Keusch from Raymond James.

I guess first question here is one of the really interesting things about the STERIS portfolio is that you essentially have all these different businesses that can benefit and service hedges within. During the pandemic, they obviously supports the business that are impacted as well. So really, what I was just trying to understand for the quarter, is there any way to help quantify what you think the amount of tailwind was for revenue in the quarter? And conversely, what you think the amount of headwind was for the quarter?

Well, Larry, I guess, I mean, that's a tough question to answer. But I think the easiest way to quantify it overall is we're running flat, which is better than again, the segments that we tend to work in. All things being equal, about flat in revenue. And we did not anticipate pre COVID being flat. So we would have said we would plan on being up. Probably this year, we would have expected to be up high single to maybe even into the low double-digit numbers.

And as a result, I would argue that it were probably about 10% negative headwind versus tailwind, plus or minus a little bit. So orders of magnitude, that would be our best answer. And it's -- the places are obvious, right? In AST, where we're doing PPE and in Life Science, where we're gearing up for the vaccines. We're getting a nice tailwind but we're a procedural-based company in health care and procedures have gotten beat up. So that's been the opposite side of the equation.

Okay. Very good. Two other ones on Life Sciences. So Walt, I guess I'm just trying to, again, understand how we should think about the exposure there to vaccine production. So I'm wondering if you can talk a little bit about are you exposed more to one type of vaccine technology versus another? Are you exposed to very specific customers that if they make it through, that's a positive and if they don't, that perhaps doesn't impact -- positively impact you as much.

And I guess the other part of that question is, as you've seen the improvements in the business and the profits come through, how are you -- are you letting that drop to the bottom line? Are you investing that? Again, I'm just trying to think forward a little bit on this as to how you manage the margins as you come off the other side of this?

Larry, this is Dan Carestio. Maybe I can give you a little information on the market, in particular. With vaccines, that's really in STERIS' sweet spot in terms of our [portfolio]. Everything [assumed] is, by definition, aseptic manufacturing. So it's manufactured in a sterile environment and near sterile clean rooms, and the products that we sell and the services that we have are used to ensure that those environments can operate in an aseptic manner.

And in addition to what we're selling into vaccine from Life Sciences, we've also seen a significant uptick in demand in AST in terms of bioprocess precursor. These are bags or liners or tubing sets and things like that used in aseptic manufacturing, specifically for vaccines.

And I wouldn't say that any one company or another in terms of the customers we serve is more -- has a higher demand or a lesser demand based on their methods. They're all basically very similar methods in vaccine production, and all require an aseptic environment.

And Larry, I guess we're broadly enough across. Obviously, if all of our best customers happen to be the lucky ones, we're better. And if there's a couple that are not our best customers, are the hot ones, that will be a little worse. But I think we're pretty confident that the pre-buys that we're seeing are a function of the people who are likely candidates. So we're pretty comfortable that we will see an ongoing effect. And I think in the short to intermediate term, it's unlikely it's going to shrink. It's just that can't keep growing 30% a year forever.

Okay. And on the margin question around are you investing against the improved profitability there? How are you doing that?

Yes. Great question. Part of the margin expansion is strictly a function of mix. And so some of that's, I'll call it, just natural. But -- and secondly, as most companies, I think we were not at all clear how ugly this thing was going to get when it started. And so we shut down hiring in certain places. We kept spending in the R&D functions. And I call it the long-term future, we kept spending. But on the short to intermediate term things, we kind of took a step back. And we'll pick some of that back up as we see the, I'll call it, the long-term look going forward.

We're increasingly comfortable, as you might expect. But there's still a lot of uncertainty out there, and we're watching it. Normally, we watch quarter-to-quarter, we watch week-to-week right now. And there are so many things going on, some of which can be very positive and some of which could be not so positive. And so we're just being careful. So we'll lag the spending piece probably a little bit for a while, and then we'll catch up at the appropriate time.

Got it. And then last one for me. AST margins just continue to be very impressive and continue to move higher. How do we think about -- are these kind of -- do you think this is kind of peakish margins here? Are you -- as some of this incremental volume comes in, whether it be around Life Sciences or other sterilization needed for the pandemic, is that coming in at a higher price and that's influencing the margins higher? Just again, trying to think about how we should really think about that longer-term margin in that business.

Sure. The AST business, as you know, and we're very happy with the margins in that business, obviously, but that's ROS. And when you're plowing $100 million or so every time you turn around to grow capacity, the ROIC is not extraordinary. It's good. I mean we're not complaining about the ROIC in that space. It's a very good investment. But we're putting a lot of money to make that money in place to make that money. So I would not characterize it as over the top in terms of when you look at ROIC, so we think there's room for improvement as those new facilities mature. It's -- if you look back and you were with us quite some time ago, when every time we added a plant, we had to knock off 50 to 100 basis points because each plant affected the overall ROS.

Today, we have over 50 plants, so 1 plant doesn't make that much difference. But if you look plant by plant, those newer plants are not making the kind of money on an ROIC basis -- well, on ROS or ROIC basis that the than the older plants are. So it's a function of those things.

And our next question comes from Chris Cooley from Stephens, Inc.

Well, maybe if we could start with a big picture one here this morning, kind of following on what Larry was getting at there. You structurally have a lift with your Life Science and AST franchises seeing accelerating growth. You've taken some costs out of the model. Clearly, there's planned investment going forward. But should we also see over the next 18 months as the business starts to normalize hopefully from COVID? Should we see a natural lift as well in cash flow in the business versus historical levels? Or how do we think about cash flow generation, not so much for the back half of this fiscal year, but more so on kind of a go-forward basis? Should we see a natural lift there? Are there uses of cash that will start to pick up there? And then I've just got a couple of follow-ups.

Yes. Chris, I would say both in cost and as a result in cash. There's a lot of, I'll call it, sales and marketing expense that's not going on in the world right now. And it has a limited detrimental effect because none of our competitors are spending that money either. But when we return to the more real world, I suspect strongly that we and our competitors are going to put boots on the street more and travel more and do a number of things more that we cannot do. So that will have some normalization effect on earnings and cash will follow naturally with that. So I think that's point one.

Point two though, your points well taken as we grow in profitability and we have mixed more toward some of those higher profit areas, then that profitability will flow through in cash completely. And then the only question is, how much we're spending either in acquisition or for organic growth in order to -- the use of that cash? And we fully intend to spend as much as we can for those 2 things because that's what the future cash flow generations are. But if you pull out the investment side of it, yes, the cash will grow. Again, we would hope to be able to spend as much of that as possible to grow in the future in a reasonable way organically and through acquisition.

I appreciate that color. And then maybe just 2 quick follow-ups for me. The first, could you just remind us when the last time was that you had resolidified your raw materials contracts, more specifically for Cobalt 60 on that front? A lot of discussion about that here as of late, as I'm sure you're aware. And just want to revisit when those were last revisited and kind of the terms of those agreements. And then one other quick follow-up.

Chris, appreciate the question. We do not get into the details of our vendor contracts, just like we don't get in the details of our customer contracts. Suffice it to say that we have visibility for a reasonable time. We tend to do both of those on a long-term basis, particularly in the AST business. And kind of everybody, the suppliers, the vendors and the customers recognize that everyone's in a better spot if we all know what we can and cannot provide and what people are going to do and not do. So those tend to be intermediate to longer-term contracts. And that's the case across the board.

Understood. Appreciate that. And then lastly and then I'll get back in queue. I just want to make sure I'm squaring my assumptions correctly. So your -- and your essentially flat directional planning for the full fiscal year ex Key Surgical. You are not assuming, I guess, any incremental headwinds from COVID-19 in the back half of the year or you are still assuming some incremental headwinds, maybe whether it's from procedure softness as you cited parts of Europe now already experiencing that or maybe it's purchasing patterns. I know in prior conversations on these calls, we've talked about hospitals carrying a little bit higher consumable inventory on-site than what they had in the past. Just wanted to make sure I fully understand what you're baking in when you're talking about getting to flat year-over-year for the fiscal year ex Key Surgical appreciating that there's a tough fourth quarter comp.

Yes. Chris, again, I'm telling you we were planning, and that plan could change next week or next month. So -- and that's why we're not giving guidance. There are so many uncertainties right now, both positive and negative, that we think it's uncharacteristically difficult time to forecast. But having said that, in general, we're not anticipating a huge reduction in procedures like we saw in April, May, June or into March, April, May. We're not anticipating that level of reduction, which was pretty catastrophic. But we will -- we do expect temporal changes kind of spot changes around. That's kind of built into our thinking. We -- again, we do expect -- and part of that is, one offsets the other a bit. If we have a little more of that, we have a little more PPE process. We have a little less. We have a little less PPE and a little more of the procedural devices.

So we're balancing those issues and our best view of that is that we come out about flat. Having said that, it is -- we still, given the history that we've seen to date, which is about the best thing we have to work off of and how nice a job the facilities have done with the treatment protocols of COVID-19. I think that's kind of grossly misunderstood and underappreciated. The facilities around the globe and the physicians and nurses around the globe have really improved their knowledge of how to deal with this disease. So even as it heats up some, they're a lot better positioned to take care of patients. And as a result, have done things to be able to continue to operate their procedural spaces. It would only be, in my view, unless it goes a lot worse than anticipated, it would only be patients deciding due to concern of COVID that would reduce the -- procedure is a great deal. So we just have to wait that one out.

But in general, we are expecting some spot issues around the globe, but not an overwhelming reduction like we saw before. We're expecting to see some additional PPE in processing as a result. And clearly, we're anticipating good growth or good volume in the Life Science business for vaccine production. So at a high level, I'd say that's pretty much it. We are being a bit cautious in our view of capital. Even though orders have come back quite a bit better than we expected, being flattish recently is better than our anticipation. But capital can bounce a little bit, so we're being a little cautious on our thinking about capital.

Our next question comes from Mike Matson from Needham & Company.

I just want to ask about gross margins. I mean they were up a fair bit year-over-year, and it sounds like some of that was driven by mix. So is that something that's sustainable? Is that something that could potentially go the other way if your growth rates kind of revert back to more normalized rates in the different businesses?

Yes. I would say the single biggest thing on the quarter is that you saw that Healthcare capital was down and kind of everything else was up. And so that is a mix effect. So as Healthcare capital comes back over a longer period, you'd expect that mix down. On the other hand, if it comes back and everything is still growing, and we do see AST and Life Science growing faster in general than most of the health care space, it's still a positive impact, kind of long-term temporal impact on margins, in my view.

Okay. And then just wanted to follow-up on Larry's question about the Life Science business and the potential impact of the vaccine. So how do we think about that business as the vaccines start to be launched? I mean does that mean that the demand for your consumables would then decline because there's been kind of destocking orders? Or would it remain strong as the vaccines are rolled out?

Yes. We don't have perfect visibility to that. If we did, we'd probably be giving strong differential guidance than what we're giving. But that's a tough call. My experience is in this space that the vaccine or I would call the pharma folks who are running these facilities are the most conservative of our customers when it comes to supply chain. So my suspicion is they're going to hold a fair amount of inventory for a long time until they know that they are in good shape and have -- know what they're running, know how much they're going to have to build and know what their requirements are going to be. So I don't think in the short term, there's going to be a huge reduction.

As we work through this, if indeed they're overstocked, they will slow it down. And if they're not, they won't. But generally speaking, they tend to be kind of conservative on supply chain, appropriately conservative. Those factories, you shut one of those things down, you're shutting down millions of dollars a day, not millions of dollars a year. So they're pretty careful about their supply chains.

But again, we do not have perfect visibility just like we don't have perfect visibility to who's going to be building when. But I should also mention another effect of this has been our capital and -- I've talked about capital in Healthcare being at risk. Our capital in Life Sciences is at all-time records, all-time record backlog, all-time record shipments. I mean everything you want to look at. So the capital equipment in Life Science is quite strong, and we don't see that subsiding in the short to intermediate term.

Okay. That was very helpful. And then just on the -- I heard your commentary around the orders improving since they kind of bottomed in May, but it does look like the Healthcare backlog was down kind of double digits year-over-year. So is that just more of a lagging indicator or something? Is that why that's not showing a kind of better year-over-year change?

Yes. It is. You may recall that in the first quarter, we had accounting change that resulted in roughly $15 million of ORI being recognized in the first quarter. That number for this quarter is probably more in the $10 million to $12 million range. But -- so if you look at this based on a similar approach, you would see that the backlog is roughly the same, plus or minus a little bit. But -- so it's down, but it's not down double digits. And so that's it in the short run. But capital has been under pressure, more pressure than many of the consumables. And we just have to see -- just -- it's nice to see that the replacement business seems to be returning, which is roughly 60% of capital orders. So we will see the next several months. It's been sequentially moving in the right direction, and we hope it continues that way.

(Operator Instructions)

Our next question comes from Michael Polark from Baird.

Just a couple here. Curious on PPE and AST. Walt, do you have a view -- did volume from that category in total flat sequentially versus the June quarter up, down? I'm just curious how that piece is trending.

Yes. This is Dan. I think it's been more governed by supply than it has been demand at this point. And as the suppliers have ramped up on the raw material, we're seeing similar levels that we saw in Q1, maybe a slight uptick. We do believe there'll be sustained increased demand at some level for PPE on to the future as the requirements for those products for certain procedures have changed even with or without the pandemic.

As you fill back up and PPE stays at these kind of elevated new norm levels, let's assume and electives recover and presumably, your global network is quite tight, hence a significant amount of CapEx going into AST. Are there other issues that arise where preference is discussed between where you make decisions about who gets access to the facilities and when? Or is there enough capacity such that those frictions don't arise? I'm just curious how that -- in a world over the next handful of quarters as we learn to live with this, selectives recover, PPE stays elevated. Is there a risk that your capacity gets very tight?

Well, one, there's a reason why we're building a number of plants right now across the globe in North America, Europe and Asia. We have more builds going on in AST than ever in my lifetime right now because we see long-term increased demand. In terms of customer capacity constraints at a given site, it does happen from time to time. And we work with our customers across that, validate our multiple methods of sterilization so that for some period of time, it may not be optimal for their supply chain, but we can get the products sterilized into the market.

I would say Mr. Carestio always tells me that it's like Jell-o. There's always room for Jell-o, so there's always room for one more customer.

And I'm sure you're not, yes, running facilities at every hour of the day? Or is that...

No, we are. Except for essentially Christmas Day in the Western world, we run 24/7.

Got it. The other topic was SG&A. I just -- I know you're not putting a fine point on the back half. But in the context of an ex Key Surgical revenue expectation of flat year-on-year, how would you frame SG&A dollars for fiscal '21 in the context of that revenue outlook? Reasonable to expect those dollars are flat? Is there quite a bit of so such that the ratio is similar year-on-year for the full year? Or what do you expect variance one way or the other?

Yes. Mike, for the first half, obviously, we saw a lot of favorability there. In the second half, we would say there's going to be favorability, but nearly not as much. And then obviously, for the full year, we would expect to see a decline in total. And then obviously, as we look to the future, we will give guidance, hopefully, at that point in time when we know more. But definitely, definitely anticipate that we would be spending more operating expenses in the second half of the year versus the first half.

And ladies and gentlemen, with that, we'll conclude today's conference -- today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thanks, everybody, for taking the time to join us this morning. Stay healthy.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.