Welcome to the STERIS' fiscal 2013 fourth quarter conference call. [Operator Instructions] I'd now like to introduce today's host, Julie Winter, Director, Investor Relations. Thank you, you may begin.

Thank you, Jane, and good morning, everyone. It's my pleasure to welcome you to our fiscal 2013 fourth quarter and full year conference call. Thank you for taking the time to join us this morning. As usual, participating in the call are Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO. Now, just a few words of caution before we begin. This webcast contains time sensitive information that is accurate only as of today, May 7, 2013. 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 this discussion may contain forward-looking statements relating to the company, its performance or its industry, that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results. Actual results could differ materially from those in the forward-looking statements. The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results, expressed or implied, in this or other company statements will not be realized. Investors are further cautioned not to place undue reliance on any forward-looking statements. These statements involved risks and uncertainties, many of which are beyond the company's control. Additional information concerning factors that could cause actual results to differ materially is contained in today's earnings release. As a reminder, during the call we will refer to non-GAAP measures including adjusted earnings, free cash flow, backlog, debt-to-capital and days sales outstanding, all of which are defined and reconciled as appropriate in today's press release or our most recent 10-K filings, both of which can be found on our website at steris-ir.com. With those cautions, I will hand the call over to Mike.

Thank you, Julie, and good morning, everyone. Thank you for taking the time this morning to join us. As usual, I want to point out that we had several items impacting our reported results, all of which are excluded from our adjusted net income and adjusted diluted earnings per share. As you saw in our earnings announcement, during the quarter, we made a pretax adjustment of $3.1 million to our SYSTEM 1 Rebate Program and class action settlement. By making this adjustment, we have essentially finalized both of these programs as the remaining liability is immaterial. In addition, we have expenses related to our acquisitions impacting the P&L. During the quarter, we recorded pretax expenses of $5.2 million for intangible amortization and $650,000 for acquisition and integration expenses, which were somewhat offset by $2.5 million gain for the fair value adjustment of contingent consideration. Please see our earnings release for full reconciliation of as reported to adjusted earnings. Turning to our adjusted consolidated results, total revenue increased 14% during the fourth quarter, driven by an 11% increase from acquisitions, 5% organic volume and 1% pricing improvement, somewhat offset by a 3% decline in our U.S. SYSTEM 1 and 1E business. Currency fluctuations were revenue neutral during the quarter. Gross margin in the quarter increased to 120 basis points to 41.2%. The improvement in gross margin was positively impacted by the acquisitions and favorable product mix, but was negatively impacted by the medical device excise tax, which reduced gross margin by over $2 million or about 50 basis points. Adjusted EBIT for the quarter increased 9% to $65.4 million. Adjusted EBIT as a percent of revenue for the quarter was 15.3%, a decline of 70 basis points. The positive impact of acquisitions and product mix were more than offset by the…

Thanks, Michael, and good morning, everyone. We appreciate you taking the time to spend with us this morning. As you've already heard from Mike, we had a strong finish for fiscal 2013. I will focus my comments on highlights of the year and then turn to our outlook for fiscal '14, and then we'll open for Q&A. We entered this past year with anticipation and would be a pivot year for STERIS, with growth rates limited by our challenging comparisons due to the strong capital sales of SYSTEM 1E last year. STERIS people exceeded our expectations for the year, growing revenue 6%, completing 4 acquisitions, providing record earnings per share and making significant working capital improvements. Each business segment contributed to our topline growth. Healthcare revenue grew 6% in total or 4% organically, excluding the impact of SYSTEM 1. Healthcare organic growth stem from solid performance across the business with improvement continuing to come from our newer products, V-PRO maX, Vision washers, Prolystica cleaning chemistries and new integrated OR products. We are focused on introducing products that increase efficiencies for our customers, and in fact recently launched several new products. Those includes the iQ 3600 OR integration system, a new line of steam sterilizers, CS iQ, the AMSCO 2500 washer and innovative orthopedic surgical table, and an ultraviolet surface disinfection system. As with most companies, our European business in both Healthcare and Life Science segment was challenged during the year by difficult market conditions, particularly in Southern Europe. However, our European Healthcare team was able to offset revenue declines with cost savings, so we did not see profit degradation. We expect continued growth challenges in that region in the coming year, but remain cautiously optimistic for the longer run. The Life Science team had an outstanding year, exceeding our expectations…

Thank you, Walt and Mike for your comments. We're now ready to begin the Q&A session. Operator, would you please give the instructions and we'll get started.

[Operator Instructions] Our first question comes from Lawrence Keusch with Raymond James.

This is Konstantin in for Larry. I guess, if you can just start off on the topline growth. Walt, can you maybe just describe some of the factors that really drove outperformance this quarter. And then just can you maybe provide additional commentary in terms of your organic 4% to 5% growth. And maybe just commentary on the state of the U.S. capital equipment market, during this earning season we clearly heard some mixed messages, and it seems like you guys are actually continuing to have some positive momentum.

I'll try to break, I think you had 3 questions there. I'll try to answer them sequentially. First, regarding the growth in Q4. As we mentioned in Q3, we were actually little soft in growth in Q3, and mentioned that the capital, as you know from history, can be a little bit lumpy. And particularly on the Healthcare side, we had very, very strong backlog ending Q3. So we were quite confident, we would have a solid Q4. And in turn we did have good orders in Q4 as well. And so we exceeded our expectations a little bit largely on the capital side, largely in Healthcare. But we also had very strong shipments in Life Science. So it was more the capital side of the business, both in Healthcare specifically and Life Science, where we did better than we expected. That would be the high level and it's reflected in our patterns. We ended up for the year, we actually grew backlog in Healthcare a few million dollars. So basically we shipped what the orders we took for the year, which is what you want to do. So we're very pleased with that. I forgot the second question, Julie, if you might give me an update. FY '14 organic is pretty well spread across the business. I suppose I can't think of any particular where it's a big spike in growth. So it's pretty well spread across the business. As you might expect the acquisition, first of all, we – of course the acquisitions you get a full year impact. We're still overcoming about $12 million or $13 million worth of S1E mostly in the first quarter, so there is kind of a mix and match there. But then the second piece is just the generalized growth. We are…

And then just last question from me. Do you think longer-term out clearly you're doing insourcing and that should help margin. But can you maybe talk about longer-term opportunity in terms of just consolidating your manufacturing footprint or are there opportunities that can be significant driver of operating margin expansion?

Well, we have talked about the insourcing piece, and in fact that's really what we're doing with the footprint. As we get leaner, we have space available and we have people available to do more work, and there is 2 ways to solve that problem. One is to grow, which we anticipate doing. But the other one is to bring more of the work in-house, and we clearly are doing that. We think we can better quality, better cost and better visibility or I'll call it supply chain visibility, reliability for delivery for our customers. So we're doing all the above. So I would say as a general statement, working to continue to make the business more lean is a way that we can improve our cost position. So that's a general statement. The second is, as we're developing products, it's our desire, if you will, we're trying to develop those products. We wanted all products that can create more value for our customers, as we create more value, we should be able to get some price for that. We are in a particularly price sensitive point in time in this industry. So it's not like we're going to see 10% per year price increases while you stretch the imagination. But if you can get a point or 2 of price by creating more value for customers, that's a good deal for both of us. And that's what our intention would be. And then, lastly, we do want to continue to watch our overhead cost and spread those overhead cost over larger amounts of business. So just as you've described, it could be plant consolidations, but those more likely occur where we see acquisitions and where there is overlap of facilities or something like that. So that is a possibility going forward and that's something we will always be looking at.

Our next question comes from Jose Haresco, JMP Securities.

Couple of questions here, so I guess I was just starting to think about next year's guidance for the Healthcare division. Could you parse out the difference between your outlook on capital versus consumables in that business. You also had a very strong Healthcare capital equipment performance this quarter, but as you mentioned they had a really great backlog too. So is it that sustainable or should we dampen that a little bit and wind that in a range of organic 4% to 5% for the capital?

If you look at our projections for 2014 for Healthcare, we are looking at low-double digit revenue growth in total and I will bifurcate that to about mid-single digits for our organic growth, about high-single digits from the acquisitions and then more specifically on the capital it would be in the low-single digits that we'll be anticipating. So we continue to see capital growth, although in the low-single digits for fiscal 2014.

The growth in your acquisitions, it's kind of funny, because most of the hospital [ph] companies in a lot of med-taxes have reported really bad or just unfavorable or not positive trends in patient volumes as we start to look out at the backend of the year. Your numbers in your guidance suggests the opposite, so what's going well in U.S. Endoscopy that seems to be plucking that trend? And I guess, in consumables in general, because it's kind of the trend here with regards to what that business needs to be telling us?

One, you have to separate the types of consumables that are being used and you have to remember almost all of ours are linked to procedures, for example, patient days. And so I can't separate those 2 things for you. I'm not familiar with everybody else's forecasts as you are. But clearly we are more procedural-linked, than we are, we call it, inpatient day length. So if hospitals for example shorten their length of stay, but do more procedures, our consumables are more linked to those procedures, so that would be the first comment. The second comment again is underlying volume of procedures. We don't see that falling-off in total in significant ways over the course of the year, and so that our growth is linked to that. And specifically on U.S. Endoscopy a lot of those procedures, there are procedures interventions, but there are also a little diagnostic procedures in that arena. And we support a lot of those diagnostic procedures And we have a number of new products. So, U.S. Endoscopy growth is largely a function of brand-new to market products that are going from zero to something. And so that zero to something creates growth, and more growth, if you will, then the procedures in total. So that's the long and short story, if you will, of U.S. Endoscopy. I think I have covered what you've asked.

And just the housekeeping, do you think 42% of the earnings would be in first half?

Yes, we did. Jose, I wouldn't call it 42.000 though, we're not that good.

As I think, Mike, you said you told me a long time ago for fiscal '14 would be the first kind of a clean year right, where all the SYSTEM 1 is kind of behind us from an operating perspective. So given that you're projecting the end of year 15.5% EBIT margin, where do we go from there? I mean, recognizing, not going to hold you anything, you already say about the years beyond that, but given that you're insourcing a lot of these components to improve your gross margin, you obviously have anniversary-ed these costs on the acquisitions. I think where does that margin ultimately go?

Jose, I think we've talked about that before, we're always working to increase our margins. We're not always particularly successful in it, but we're always working to do that. I don't think that we're at a peak of margin percentage possibility. This year we're eating more the device tax, so presuming that at least stays flat for us and that we don't see increases in that range. We're working to increase our margins, but we're not planning on kind of step function change, 15.5% to 17%. I would like to see this going from 15.5% to 15.8% to 16.1% to pick a number at the end. I do think again in orders of magnitude, these kind of businesses ranges in the 15% to 20% range, I think it's reasonable if you get over 20%, I think you'll probably set up for being greedy and somebody will break you. You're setting price umbrella for lots of competition. And under 15% you should be working to get over. So we're happy to get back in that 15% range, above the 15% range, but we don't see ourselves stopping that. But we are not looking for step function change. We're looking for margin improvement.

Something related to that, now you've been incredibly disciplined about your dividend increases every year. With cash flow improving, is it even fair to conjecture that overtime you might increase that rate of growth or is that something that's not part of your discipline?

We are incredibly disciplined about our dividend policy.

Our next question comes from Erin Wilson, Bank of America Merrill Lynch.

Just follow-up on insourcing, are the efforts there following behind your expectation or has anything, I guess, materially changed on that front with your strategy there? And it sounds like you don't have anything incorporated into your guidance in the way of cost savings this year or in fiscal '14, but are the cost associated with that implementation incorporated to the guidance.

Yes, Erin. I mean, I'll answer the general question. And hopefully I will pick up the new answers in yours. But first of all, we think the insourcing prices were moving nicely along. And we characterize them as 2 big projects, which it is kind of the way we think about it, but inside each of those big projects are many, many, many small projects. So as you might expect some of them are ahead and some of them are behind, but on balance, we're feeling good about where we are in that process. So that's the answer to your first question. Second question is, indeed we are not expecting any material savings or cost this year. Relatively speaking, due to those projects and what that is that we are achieving savings in the lead projects, which is the Mentor fabrication facility. We're achieving savings there. And we'll continue to grow those savings over the course of the year. But at the same time, we're kicking off other projects that have front-in-costs. And so what's happening is if you look at the year end total, we think we're going to about breakeven. And so next year we will see the full impact of the Mentor fabrication facility and begin to see the impact of the Montgomery facility, which has the other load of those projects. So that's why we're saying this year we think it's about breakeven, next year in $8 million to $10 million. So really next year $8 million is the rough estimate over the longer period. As you get down to '16, '17 we expect that to grow into roughly $10 million of savings.

And then on capital deployment kind of what's your capacity for incremental acquisitions at this point. And where is your focus there? You had mentioned that dividend, I guess, but particularly as it relates to acquisitions in international?

As I said earlier, we feel pretty disciplined about our dividend policy. We don't have any expectation of moving off that. And then after that our next place to put money is in our businesses, both what you would have historically call the core businesses, but now also into U.S. Endoscopy Spectrum, because we didn't buy those businesses to sit on them, we bought them to grow on. And so we will continue to place money towards those, business in their primary businesses, which is why you're seeing the increase in R&D. The next piece is acquisitions. We feel very comfortable that we have significant dry powder to do continued acquisitions. And we will be looking in the same spaces of our current businesses as well as in adjacent spaces. And we are not limiting our look to the United States. So we clearly are looking outside the U.S. in that arena. We now have the bulk of our integration activities behind us in U.S. Endoscopy, I'd say essentially behind us in U.S. Endoscopy. We're well down the path on the Spectrum integrations. So we're feeling quite comfortable there. So we feel, not only do we have the financial capacity, but we feel that we have the management capacity to continue down that path.

And any geographies you're focused at all?

We probably just would rather not say, I guess, there. Naturally, if there's trade-offs, the "growing markets" are of great interest to us. So as you know the markets in Asia Pacific, Latin America, that are more rapidly growing than others. And so they have interest in that regard, but where we have our base businesses in North America and Europe are also areas that we would consider. So we're not ruling out, if you will, specific geographies, but we are looking for different things in different places.

Our next question comes from Jason Rodgers, Great Lakes Review.

Looking at your guidance, I was wondering what you are looking for as far as performance in international market as well as commodity costs?

Jason, I will address the commodity cost. Basically, we're looking at modest or I'll call it inflationary increases in raw material costs. Nothing out of line, nothing unique we're seeing this year versus the prior years. And on international, I could say, generally speaking we're expecting faster growth outside the United States with the exception of Europe and Europe is flat-to-down in our expectations.

Our next question comes from Mitra Ramgopal from Sidoti.

Just couple of quick questions. First I'm just wondering on the acquisition front, given the success you are having with your U.S. Endoscopy and Spectrum, how much are you expecting in terms of maybe an EPS contribution with the fiscal '14 guidance?

We're not guiding, we're treating those businesses as product lines as we do all our product lines and we don't break the guidance into that group. So they are grouped into the businesses. But in terms of, if you looked at our statements when we did the acquisitions, we're not materially different from those feelings at the time.

And again, given the success you are having with those, has it changed your inclination in terms of being more aggressive in terms of pursuing acquisitions and do you have anything built into the guidance?

We have no acquisitions built into the guidance. And I would say as we said last year, we've been looking to do things for the last 2 or 3 years. And sometimes, the people we want to acquire, it's not their time and so we work on their time more than our time, but we continue to pursue. I would say there is no difference in level of intensity. In the last couple of years, if you recall 4 or 5 years ago, we pretty much got out of business. We felt we had more opportunity to work inside our own business, but for the last 2 or 3 years, we have been working on it. We will continue to work down on that path, but we don't control the timing on those deals.

Then just a final quick question on, there is a big picture. I know the medical device taxes obviously hitting you above $0.10 this year, but as you look forward to 2014 and beyond in terms of the overall healthcare environment, are you more bullish in terms of where you are today?

I wouldn't say more or less bullish. The good news is, I am going to separate the underlying demand first and then the capital consumable sides of the business. First in underlying demand, we have been saying and I think everyone has been saying and understands that the underlying demand is very strong. We are entering the period where the baby boomers are reaching peak healthcare use time between the age of late 50s and 70s. And so that pig is going to the python and I am one of the piglets, by the way, I am a mid-baby boomer. And I just had a hip replacement. So I am a classic person in that. And I think you're going to see more and more of that in the next decade. So the underlying demand is exceedingly strong. The question is what the government and other third-party payers and individuals do to reduce the cost of that underlying demand and how they utilize that demand and that is less clear. On the capital side, the more uncertainty there is, over a short period, it tends to disrupt capital over long periods. Change is almost always good for capital, because if you change things, you have to rejig or something and that is usually good for capital. So in the current timeframe, I suppose if you were to say vis-à-vis prior the election, when we didn't know if we would be continuing down the path of Accountable Care Act or not, I believe we're more bullish in the short term, because there is less uncertainty. The hospitals at least know what they are moving towards. If that changes over the next year or 2, then that will change in the short run. But in the long-run, the underlying demand, we think is very strong.

I am showing no other questions at this time. I'll now turn the call back for any closing remarks.

Thanks everybody for joining us and have a great day.

Thank you for participating. You may now disconnect.