Welcome to the STERIS Fiscal 2013 Second Quarter Conference Call. [Operator Instructions] At the request of STERIS, today’s call will be recorded for instant replay. I would now like to introduce today’s host, Mike Tokich, Senior Vice President and CFO. Sir, you may begin.

Thank you, Melinda, and good morning, everyone. It is my pleasure to welcome you to STERIS’s Fiscal 2013 Second Quarter Conference Call. Thank you for taking the time to join us this morning. With me today is Walt Rosebrough, our President and CEO. Now just a few words of caution before we begin. This webcast contains time-sensitive information that is accurate only as of today, October 31, 2012. Any redistribution, retransmission or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited. I would also like to remind you that the discussion may contain forward-looking statements related to the company, its performance or its industry which are intended to qualify it for the 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 as events make it clear that any projected results expressed or implied in this or company statements will not be realized. Investors are further cautioned not to place undue reliance on any forward-looking statements. Statements involve risks and uncertainties, many of which are beyond the company’s control. Additional information concerning factors which could cause actual results to differ materially is contained in today’s earnings release. As a reminder, during the call we may refer to non-GAAP measures, such as adjusted earnings, free cash flow, backlog, debt-to-total capital, days sales outstanding, all of which are defined and reconciled, as appropriate, in today’s press release or our most recent 10-K filing, both of which can be found at steris-ir.com. As you saw this morning in our earnings announcements, during the quarter, we reversed a portion of our original SYSTEM 1…

Thanks, Michael, and good morning to everyone on the call. Thanks for joining us today, particularly those of you who are in or around New York. I will take some time to review our results from a high-level perspective and then will touch on our recent acquisitions before we open for Q&A. We are pleased with our first half performance, despite somewhat weaker than anticipated second quarter revenue. The lower revenue in Q2, we believe, is largely related to the timing of shipments. As we said last quarter, the general trends in our business remain solid although we have seen some softening in our international business, which is offset by continued strength in the United States. We continue to see strength in our Healthcare capital segment business in the United States, excluding the impact of SYSTEM 1E. This is reflected in our strong order pattern, which has grown backlog throughout the first half of the year, and October has seen a continuation of that trend. This strength was offset by softening in our international revenue, particularly capital equipment. We believe that both of those trends in Healthcare capital, strength in the United States and softer international sales will likely continue in the second half of our fiscal year. Our Healthcare consumables franchise reported 12% growth, driven by our recent acquisition of U.S. Endoscopy and other STERIS consumables, which more than offset the decline in SYSTEM 1 sterilant. More broadly, we are pleased with the progress we are making on integrating U.S. Endoscopy into the STERIS family. The business and the integration process is performing in line with our expectations. Let me just cover SYSTEM 1 and 1E briefly as well. As we anticipated, shipments of SYSTEM 1E units have slowed substantially following the end of the transition period. We shipped…

Thank you, Walt. Melinda, we are now ready to begin the Q&A portion of our session. Would you please give the instructions and we can get started.

[Operator Instructions] The first question comes from Erin Wilson, Bank of America Merrill Lynch.

How much did U.S. Endoscopy contribute in the quarter? Or what was that underlying organic Healthcare consumables growth?

In terms of revenue, it contributed about $10 million in the quarter. And Mike, I don’t know if you have that other number off the top of your head?

Yes, it -- without the impact of the SYSTEM 1 S20/S40 and without the impact of U.S. Endoscopy, we would have been in low single-digit growth for the other consumables.

All right. And then, I guess, can you elaborate more on that timing issue on the Life Sciences side? I guess that contributed to some of the weakness that was a little bit surprising.

Yes. Capital equipment’s lumpy in general and Life Science is a smaller business, and as a result - and they’re -- oftentimes, their orders can be in the small millions. So if -- one order that moves from 1 month to the next can make a significant difference in terms of year-over-year comparisons or growth rates. And we’ve seen that historically over long periods of time in the company, so we don’t expect that to change significantly. And this quarter we had a little bit of softness in that regard, but we don’t see it in general. And again, our backlog in Life Science is strong. So it’s not like we don’t have orders, it’s just the timing of the orders didn’t ship in this time period.

Erin, just to give you some perspective, we had 36% growth in capital equipment for Life Sciences in the first quarter.

Last quarter. We had a really strong quarter last quarter, a weak quarter this quarter. It comes and it goes a little bit.

So it, yes, it tends to be lumpy, I guess. All right. And then, I guess, just one last one, I know we’re severely impacted here in the New York City area from the hurricane and the broader storm here, but, I guess, what’s your exposure into any of the impacted areas? And I mean, could this be a net positive, a net negative? How do you view it broadly speaking?

As a general statement, I would say we’re not expecting a material difference one way or another. And we don’t know yet enough about our hospital customers’ needs to know if there’s anything significant going on there. We may see, depending on -- - CSSDs tend to be in the basement and, as you guys know, the basements tend to be where the water is. So we just don’t know enough yet to know on that but I wouldn’t expect a material uptick or downtick. The area where we are watching carefully is our Isomedix facilities. We do have 4 facilities in the Northeast, all of those we shut down. We shut down the power before the power went out in order to manage it. And 3 of the 4 are still out for power, one is back up. And as they get power, we’re prepared to come back up. We have everything in place, but until the power gets turned back on, we can’t run the facilities obviously. So they’ve been down a couple of days. A few days is not a big deal. We probably won’t do quite as well in October. In fact, I would say we won’t do as well in October, but it has a habit of picking back up in November, December. I would expect, unless this stays longer than people are thinking, I would expect that we pick it back up in the quarter; if not, we may -- I would certainly expect we pick it back up in the year. And again in terms of our customers, since the geographic sites of Isomedix tend to be aligned with the geographic sites of our customers, their plants are probably down too. So we haven’t seen a disruption in terms of the customer. We’re both down and so we tend to work hand and glove. We don’t see that being a big impact, at least at this point.

All right. All right. Yes, 1 out of 4 is a lot better than what we’re getting here in New York City, so all right.

Yes. And actually, we have 18 or 19 plants around the country, so it’s not like 3 out of 4 are down. 3 out of 18 are down.

The next question is from Chris Cooley with Stephens.

I appreciate your taking the questions. I apologize if you covered this earlier, hopping between a couple different calls this morning. Mike, maybe could you just parse out what the organic growth rate was for U.S. Endoscopy and kind of what your -- in the current quarter I realize it was maybe a -- basically a month’s contribution there? But kind of help me think about on a go-forward basis, that underlying Healthcare consumables versus the contribution from U.S. Endoscopy. And then I just have a quick follow-up. Hello? [Technical Difficulty]

Chris, sorry about that. I’m sure you were in the middle of a brilliant question, but I was trying to turn the volume up so I could hear you and I cut you off, I apologize.

I’ll try and ask the question better this time, not to be put in the box there. I have -- I just apologized, I’ve hopped between a couple different calls this morning, but I was hoping maybe you could parse out. I know you mentioned that U.S. Endoscopy contributed approximately $10 million in the quarter, but could you just talk about the organic growth trends that you’re seeing in that business, albeit on a effectively 1 month run rate and then how we should think about that going forward? And then I just had a quick follow-up after that.

Yes. Chris, we did mention that they’re in-line with our forecasts and we are looking at double-digit increases and that’s where we are. So I wouldn’t -- we don’t feel any differently today, 6 weeks into it than we did back when we did the deal.

Okay, okay, perfect. And then just following back up on Isomedix. Can you just remind us in terms of where you are in terms of the capacity build out, in terms of when those different plant expansions or new builds are expected to come online? And clearly that’s a gating factor for your growth there, so just help us think about kind of where you are versus the end of the last quarter in that business. And that’s all I have.

Yes, Chris. As I mentioned last time, we’re trying to get in -- I think it was last time when we talked about this, we’re trying to be in a mode where we kind of always have some capacity expansion going on, so we don’t see a kind of lumpiness in our capacity expansion. We do have a couple of expansions that we’re working on as we speak. I don’t know that -- we’re not in a significant different space at this point in time than we were a quarter ago, but we do have some expansion going on. And you won’t see that typically, you don’t see that in a big lump because even when a plant goes online, it takes time to fill the plant. What you typically see is some cost increase ahead of the revenue increase. But if we’re growing in the other plants, it tends to equal that out. So at this point, we don’t see any significant variation either direction.

The next question is from Greg Halter, Great Lakes Review.

Relative to your commentary about the capital spending, approximately $95 million, when you indicate in the release several major projects, can you talk about any of those that might be larger than others? And then also relative to the CapEx, how much of that is a maintenance of the $95 million?

Well first of all, as a -- I’m going to step back, you mentioned talking about the -- we have several projects going on that will take significant capital spending. One, for example, is the fabrication center that we announced probably a year ago. It’s -- we’ve been working on that one a while now. And then we’ve also announced some increase in fabrication in our Montgomery facility. So those types of capital spending, they’re not expansion per se in terms of expanding product lines, but we’re in-sourcing some of the production of our fabrication and so it’s an expansion in that regard. And so that’s the 2 kind of significant manufacturing ones that we have announced. We actually have a couple more that we’re working on and that are in the future. And Mike, I don’t know if you want to talk about the, if you include Cobalt, our Cobalt purchase for Isomedix, which we consider kind of like routine maintenance, it’s a routine part of the cost structure of that business, where would you put that number?

Yes. In total, Isomedix will probably be around $30-ish million with the expansion with the Cobalt and their normal maintenance. Your question about total, just routine maintenance is probably in the $20 million, $25 million normal. This $95 million is extremely high for us. And as Walt talked about, we do have several different projects, the in-sourcing, the Isomedix expansions, that we are including in this year. So I would say that over time, we’ll get back to more of a normalized level, but maintenance alone is probably about $25 million in total.

And some of those -- couple of those projects take -- they don’t end in this fiscal year, they carry over into the next fiscal year. So we do see still some of that spending, but in terms of the expansion capacity.

And that $25 million normal does not include the Cobalt piece or Isomedix, correct?

That is correct. Yes, to me that would be -- that is -- again, timing is everything on that. As we load the plants, the timing of when we load the plants, we could spend anywhere from $15 million to $25 million alone on Cobalt on an annualized basis.

Okay. And that fabrication center, that’s the one in Mentor correct, the first one you mentioned?

That is correct. That is correct.

And I noticed that the corporate expense was up about 17% year-over-year to $3.1 million, just wondered if you could comment on what may have caused that?

Yes. Virtually all of our OpEx expense is the addition of U.S. Endoscopy. If you took U.S. Endoscopy out, OpEx is flat to slightly down as I recall.

And the expenses, the acquisition-related expenses.

They’re in that number as well?

Yes.

Okay. And you made a comment about the medical device tax of I think it was $0.02 to $0.04, I presume that’s just for 1 quarter so that would annualize out to $0.08 to $0.16 at this time of what you’re thinking? And I know the IRS has yet to define the guidelines on what’s in there.

You have that correct. And you’ll note, we have continued to exclude that in this fiscal year because it is only one quarter and because we’re kind of uncertain on what it’s going to be. So we just leave it out there and give you order of magnitude how much it will be. But the following year, if -- presuming it’s promulgated and the law sticks, it would be -- the numbers you’ve described are good numbers.

Okay. And what’s your current weighted rate on the debt? And how much is fixed versus variable?

Right now of the -- as of end of September 30, $210 million is fixed and that is our private placement and that is just south of 6% in total and then the remaining piece, $224 million is on our credit facility, which is around 1.5-ish percent, maybe a little bit less than 1.5%.

Okay. And one final one, obviously with the couple acquisitions here, just wondering what your appetite is for future acquisitions?

As I mentioned in my comments, we still have clearly, that capacity. If anything, we would have rather companies be spread out a little bit more but we don’t get to control the timing. And as I mentioned before, they’re private companies and there’s a, I think, a significant interest this year. If you’re a private company, maybe you get this deal done before the next tax season or next year’s taxes, I should say. So I think that -- well, we know that’s affected of the timing of these. We would rather spread them out a little bit because it is real work and we would be probably less likely to do something in Healthcare than the other 2 units because the Healthcare guys are absorbing 2 as we speak, or really 3, but 2 significant approaches. So that’s kind of where we stand, but we have -- we don’t feel constrained from doing other acquisitions going forward.

The next question is from Jose Haresco from JMP Securities.

Just wanted to touch base again on what happened in the Life Sciences segment. So can we assume that this is mostly a European issue, number one? And would you characterize this as a big fundamental change in demand or is this an issue of people -- the demand’s there, but people are taking longer to pay and therefore if you didn’t recognize it in fiscal 2Q, you’ll see it in fiscal 3Q? Or should we just think about kind of the long-term trajectory of Europe a little bit differently? Or is it both?

On Life Science, I’ll start. I mean, let me step back to the questions I’m trying to answer. I think you asked 3 pieces. First of all, it had nothing to do with Europe or not significantly in any way to do with Europe. It was a kind of across the board in terms of the shipments. It was international but lot of our business is international, so I wouldn’t read anything into that. It certainly has nothing to do with payment. The Life Science orders, we book them when the customer takes receipt, not when they take payment. Our payments are good. So it has nothing to do with payment or any lack of payment. It’s just a matter of 1 or 2 orders in Life Science. If they do ship or if the customer does take receipt, they -- it makes a big difference in terms of their total numbers because their numbers are relatively small. In this particular instance, we happen to have one order that has been -- we ship these from all around the world to all around the world. And we had one particular order where it was shipped quite some time before the end of the quarter. But the ports were backed up so the project is sitting on a boat outside the port, and since the shipment terms are upon receipt at port, we couldn’t book it. So we built it, it was out, everything’s done, everybody wants it to -- a transaction, but we can’t control the ports. So that is the kind of example, it’s just an example of one. But it’s just the timing of significant order that’s all, nothing more or less to be read into it.

Okay. Kind of staying on the same topic of capital equipment here in the U.S. As you guys think about calendar '13 and perhaps even calendar '14, what are your thoughts or what are clients telling you about CapEx spending cycles in general and the budgets they’re in?

Yes, I haven’t had a whole lot of conversation about calendar '14. I think most people are thinking about is the remainder of calendar '12 and calendar '13. Most of what we see is, and I’m going to use this term loosely, kind of business as usual kind of spending. We have seen, I think, people a little more reticent, if you will. So we’re seeing more people saying, "Hey I’ll spend about the same next year as this year as opposed to a little more." But in general, I think it’s kind of the same or up a little bit is kind of the general thinking. And as we’ve said before, clearly they’re spending significant amounts of capital in the IT area. Clearly they’re spending significant amounts of capital in physician practice and physician office kind of areas. And that does have a bit of a crowding effect, but we’ve been watching that now for a year or 2. We do continue to think that the operating room tends to get a little more preference compared to some of the other capital and so we feel that maybe we’ve not dipped as much as some other areas. And we don’t see that changing significantly at this point in time. But we are cautious, as you know, many people have reported softening in both kinds, both recurring revenue as well as capital equipment. So we’re watching it carefully. But at this point in time, we have not seen that in either our backlog or our order patterns in the -- now speaking about the U.S.

The next question is from Mitra Ramgopal with Sidoti.

2 questions. First, Walter, I was wondering if you could sort of give us your impressions in terms of the SYSTEM 1E unit placements, as to where it is today versus your expectations when the product was first introduced. And is any sort of softness there really due to anything product specific or anything else?

Well, I have to kind of bifurcate our expectations into 2 buckets. One is SYSTEM 1E, had we had a biological indicator at early launch, which we expected we would get one in early launch; and then once we realized that would not happen. And clearly -- and that’s really the 2 areas. We thought before we launched that if we had a biological indicator and a chemical indicator and the SYSTEM 1E simultaneously or posted simultaneously, we would do 10,000 to 12,000 units. When it became apparent we would not, and we literally had to launch the products without a biological indicator or now what is called a sports idles test strip, a different type of -- an indicator with a different clearance, when we realized that, we cut our expectations roughly in half to about 6,000 units and that’s where we ended up. So ballpark here is had we known at the time we would not have that indicator, I suspect -- in fact, if anything, had we known at the time, we probably would have forecast less. We were pleased vis-à-vis, but we thought it might be without a biological indicator if you could go back 18 months or 24 months. But by the time we kind of got around to that, we’d seen customers willing to buy without that indicator, so we’re essentially on our expectations.

And again that issue is pretty much behind you now in that there is no way U.S...

The units are out there, we’re done, I -- we don’t see -- as I said I think several times, we don’t see a radical increase in unit placements going forward nor do we see a radical reduction of placements going forward. And things right now are tracking about as we would expect.

Okay. And secondly on acquisitions, you’ve done about 3 sizable transactions over the past 7 months. I was wondering if it’s more a question of things coming together at this point in time or is it sort of a way of trying to offset some of the declines as a result of SYSTEM 1?

No. In short, the first part of your answer is correct, it just came together. Again, I’ve mentioned to many of you that when I came in about 5 years ago, I thought we had plenty of internal work to do working our organic business, and so we really focused on that the first couple of years. We pretty much shut down the pipeline for business development, only leaving it open for non-U.S. acquisitions while we did some work internally. We got through that work in couple of years ago now, probably 2.5 years ago, we beefed up our BD group again and said turn them loose to start looking for things that fit what we were doing. And it takes time to have that process work and we’re methodical. There we saw some things that might have been interesting but we didn’t want to pay the prices. We saw some things that might have been interesting, we changed -- we decided not to move forward with it. And it just so happened a couple that we were very interested in, these -- the 2 generic areas in the endoscopy area and in the specialty service area were our top 2 targets in our Healthcare business. And we just got lucky that the companies that we were interested in became available for sale. They’re private companies, we didn’t control the timing. We’d have loved to have done both of them a year ago. I’d rather done only one of them 1.5 years ago and one of them 6 months ago. But we don’t control the timing, it just worked out and that’s the way it worked out. So it has nothing to do with the SYSTEM 1 issues.

Okay. And again, the guidance does not include any unannounced acquisitions, I take it?

That is correct, Mitra, yes.

[Operator Instructions] Our next question is from Bob Goldman, C.L. King.

I’m dealing with a few logistical things on my end, so if these questions were asked and answered I apologize and just tell me and I’ll read the transcript. But going back to capital equipment, Walt, I think you said that you expected for the second half of the year some maintenance of the trend we saw in the quarter, which was relative strength in Healthcare capital equipment and relative weakness in the international capital equipment. In international, based on an answer to a question that you provided, it sounded like you’re thinking it’s more of a timing issue with Life Science.

Yes.

On the other hand, you did say you thought the second half would continue, I forget your exact words, but I thought weak with Life Science capital equipment. Could you just reconcile that for me? And then I’ve got a follow-up on Healthcare.

Yes, Bob, I may not have been as clear as I could have. Let me separate first and talk about Healthcare and then talk about Life Science. In Healthcare is where we saw what you’ve correctly described as relative strength in the U.S. and relative weakness in international and that is our go-forward expectation. Life Science, we had a weak quarter, we had a solid first half, we had a weak quarter, but we still have to do more in the second half and we expect to do that. So Life Science, we expect strength kind of across the board in the go-forward 6 months.

Okay. And then the follow-up on Healthcare, in this relative strength in the U.S., it sounded like an answer to another question that operating room products might have been strong. Outside of that, what were some of the other products that showed some good strength and which ones do you expect to continue showing relative strength in the second half of the year?

Well, Bob, and I probably should be more careful with my language, when I say operating room I’m really talking about the entire perioperative loop, which includes CSSD and that effectively is all of our capital products. So we happen to -- all of our capital products are in that space of OR and CSSD or central sterile. So I was characterizing -- I was talking about, again, I think it’s pretty clear that in hospitals or in healthcare systems, the IT spending is very strong, the physician and physician -- acquisition of physician practice and things like that are strong. And then in the balance, if you think of the rest of their spending, it seems like the OR is holding -- OR and CSSD combined are holding up a little better, if you will, than the balance. That was my only comment. We’re not certain of that because we don’t see all the other spending, but it appears that way to us. And if you look at -- there are some people that are looking at this and they seem to corroborate that conversation.

And if I can, finally on that and I don’t know to what level of granularity you’re comfortable with, but I might have thought for instance the V-PRO would be continuing to pick up share and contributed to strength. But are there a few products like that, that you’re able to cite that are particularly strong right now?

Yes, you’re correct. If you look across our product lines, I can almost say generically speaking our newer products are doing better than our older products, if you will. And V-PRO is clearly one of those, the OR integration products clearly continue in that path. On the capital side, Life's continue to be strong. So it’s more across the board, but our newer products do continue to strengthen and V-PRO is clearly one of those.

I’m showing no further questions on the phone lines.

Great. Thank you, Melinda. And thank you, everybody, for joining us today. We will talk to you again next quarter.

Thank you. This does conclude the conference. You may disconnect at this time.