Good morning. Welcome to the STERIS Fiscal 2014 First Quarter Conference Call. [Operator Instructions] I’d now like to introduce today’s host, Julie Winter, Director of Investor Relations. Ma’am, you may begin.

Thank you, Jill, and good morning, everyone. It’s my pleasure to welcome you to our fiscal 2014 first quarter conference call. Thank you for taking the time to join us. As usual, participating on the call this morning are Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO. Just a few words of caution before we begin. 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. 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 involve risks and uncertainties, many of which are beyond the company’s control. Additional information concerning factors that could cause actual results to differ materially is contained in today’s earnings release. As a reminder, during the call we may 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. It is again my pleasure to be here with you this morning to review our first quarter financial results. Following my remarks, as usual, Walt will provide further perspective on the quarter. My comments this morning will focus on our adjusted first quarter results. However, before I start reviewing our first quarter results, I would like to remind you that our adjusted net income this quarter excludes a $9 million tax benefit associated with a deduction for U.S. tax purposes related to our European restructuring effort. This deduction is based upon the IRS completing its fiscal 2012 tax year audit. Our adjusted net income also excludes just over $3 million in amortization of purchased intangible assets and acquisition-related transaction and integration costs. Please see the reconciliation table included within our press release for additional details. Let me now begin with a review of our first quarter income statement. Total company revenue grew 9% during the first quarter, driven by a 13% increase from acquisitions and a 1% improvement in pricing, offset by flat organic volume and a 4% decline from our SYSTEM 1 and 1E franchise. Foreign currency was neutral to revenue during the quarter. Gross margin in the quarter declined 80 basis points to 39.9%. The positive gross margin impact from our acquisitions of approximately 110 basis points was more than offset by an approximate 90 basis point decline from our investments in in-sourcing and the negative impact on gross margins from the decline in SYSTEM 1E revenue. In addition, we incurred approximately $2 million from the Medical Device Excise Tax and had unfavorable mix in our organic business during the quarter. EBIT for the quarter declined $3.1 million to $46.1 million. EBIT as a percent of revenue for the quarter was…

Thank you, Mike, and good morning, everyone. We appreciate you taking the time to join us this morning. Now that you have heard an overview of our results from Mike, I will spend my time focused on our profitability for the quarter and our thoughts on the rest of the year. First of all, we believe that our first quarter results are largely a matter of timing versus a change in underlying demand or sustainability of profitability. In particular, we continue to see generally stable market trends, good performance from the businesses we’ve recently acquired and solid Healthcare orders and backlog. These trends give us confidence in our ability to deliver revenue and earnings in line with our annual guidance. With that said, let me quickly cover a few highlights. Our overall revenue growth of 9% was driven primarily by strength in Isomedix and the businesses we acquired last year. While Life Science revenue declined slightly, they delivered another quarter of impressive margin expansion, and we believe Life Science will finish the year in line with our expectations. As we approach the anniversaries of the acquisitions we made last year, we are pleased with both the performance of the businesses and the progress we have made from an integration perspective. Of particular note, U.S. Endoscopy has continued its strong track record of growth with new products, specifically, products like the Raptor grasping device, the Infinity biliary sampling device, AquaShield CO2 and the Oracle EUS latex-free balloon, and we are leveraging our existing customer relationships to expand our specialty services businesses as well. As we told you at the beginning of the year, we anticipated that our earnings for fiscal ’14 would be more heavily weighted toward the back half of the year than usual. This was primarily due to the…

Thank you, Walt and Mike, for your comments. We are now ready to begin the Q&A. So Jill, would you please give the instructions and we’ll get started?

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

This is actually Konstantin for Larry. So I guess I just want -- Walt, I just wanted to understand. So clearly, it sounds like about 1/2 of the difference in the EPS miss relative to the street is just the street getting the gating wrong? But can you talk about the other, the essentially the other $0.06 difference? How much of it was really just kind of I guess really kind of a surprise essentially in the quarter, and can you just explain really in maybe more detail what drove it?

Sure. Yes, you are correct in your original assumption that -- actually, it’s a little over 1/2 that was a difference between where we were thinking we would be in the quarter and where the street was. And as you know, we don’t give quarterly guidance. So that’s not completely unexpected. We are usually closer than that together, but this time, we were a little further apart. But on the differences, I would say, almost by definition, all of the differences versus our plan, which is a little less than 1/2 of the $0.12, almost all of the differences are unexpected. That is, FX does what it does. We didn’t expect it. The tax rate, the IRS and we determine things at a time. And when they come -- we never know exactly when they are going to come. And so it was unexpected vis-à-vis the quarter. For the year, we think it levels out. And then the balance is really the shipments and mix, and that was unexpected when we set our plan, so -- but the flipside of that is our backlog grew $20 million, and that was unexpected too. So that’s why we have confidence that, that reverses.

Yes, okay. That makes sense. And then just on your commentary regarding that the consumables, I guess, the growth of the consumables was lower this quarter than you expected. Can you just -- maybe just provide more color on that? Is that just driven by lower healthcare utilization?

Yes. In any short-term period, that’s always a difficult question to answer, because the hospitals use things and then they choose to stock up and not stock up and all that. So we see some variation due to the way they choose to order. And that sometimes lags or leads their usage. So it’s a little difficult to answer, but we clearly -- as most people have said, the rates in hospitals slowed down a bit, actually particularly in the fourth quarter of last year, as I recall. We've seen it a little stronger than that. And so it could just be a temporal thing. Right now, we are not concerned about the overall direction of that business.

Our next question is from Erin Wilson with Bank of America Merrill Lynch.

Did you quantify the consumables organic growth, I mean, I guess x U.S. Endoscopy? And can you explain a little bit about, I guess, was it a less profitable mix there? And then can you also explain the capital equipment trends, fundamentally speaking, in the industry and why there was the, I guess, shipment mismatch?

Erin, it's Mike. We had minus 4% in our organic consumables business reflected within Healthcare. I don’t know, Walt, you want to...

There were 3 other questions. I got the first one and the last one. There are 2 other questions, I think. The last one, Erin, in terms of capital, we are seeing nothing different than we have been saying now for probably close to a year, 6 or 9 months anyway, close to a year. That is, we are not seeing extraordinary increases in capital spending in North America, nor we are seeing decreases. They are running at what I would call solid rates, steady state to slightly up. And that’s reflected in our order patterns over this last 6, 8, 12 months, and so it’s strictly a matter of when the timing of shipments. And what we have seen again, and this fluctuates a little bit, we have seen a little bit more increase in large projects as opposed to replacement work in that, and so those large projects are defined shipment dates usually out -- almost always out further than replacement work. So we just have some projects, some larger projects that are sitting out a quarter or 2 as compared to where we were a quarter ago, and that’s how the backlog tends to grow because the order patterns are up, and they are up sequentially, but they are not up nearly as much as the backlog reflects. And Erin, I am sorry. I missed the middle question, I think.

I was just talking about sort of the mixes, the consumables business?

Inside the consumables, there is not significant mix issue. It’s really the mix of consumables versus -- and really, if you look at it, we traded a little bit, the mix of consumables versus the mix of service. Our service business grew nicely, and it has a little lower profitability than our consumables business. And again, we don’t think either one of those is some change of trend. It’s just, in a quarter, those things happen.

Okay, got it. And on the U.S. Endoscopy deal, where do you stand as far as the cross-selling or potential synergies there? Are they starting to materialize?

The primary reason, of course, we bought U.S. Endoscopy was because it was an area that we wanted to get into and we wanted to have a channel into that business. And they gave us channel and product. We clearly have that, and so we are seeing that. We are seeing modest synergies, but those are the kinds of synergies we expected to see. The more important thing is we are continuing to see solid growth and solid product development cycles. And so they are doing very well vis-à-vis what our expectations were and what our plan is for them.

Our next question comes from Robert Goldman.

First, I just wanted to follow-up on an answer you just gave. Mike, you had mentioned the organic consumable sales were down 4%. Does organic...

Healthcare and, specifically, organic.

In Healthcare.

Yes.

Does organic mean you've stripped out U.S. Endoscopy from that calculation?

That is correct, yes. So it’s just -- it’s the rest of our Healthcare business less the acquisitions and less SYSTEM 1E impact.

Okay. Now I could understand timing issues on CapEx. I have got a more difficult time understanding why a 4% decline in the organic consumable business doesn’t represent some change in the marketplace or in your sales. Could you take us through that?

Bob, we do see variation. And for example, last year, if you look through the year, we had 3 quarters that looked kind of similar and 1 quarter that had an off-tick. And we've -- and then it went back up, and we've -- if you go back year-over-year, every year, we see that. We don’t see -- the reason I suggest it is we don’t see any fundamental cause for that. And sometimes there is timing. We go both through distributors and we go -- and hospitals make decisions about when they buy, so sometimes we see blips in timing. At this point in time, that’s our view.

Okay. On cash flow, there is the obvious ramp-up in capital expenditures. Two questions on that. One, could you just remind us again what the ramp up is for, and how you see that helping Steris? In other words, is it cost savings from whatever you are doing on the CapEx side? And then also, as we look past fiscal ’14, where does CapEx start to fall down to?

Yes, let’s talk 2 things. The first is, the most significant variation or difference quarter -- year-over-year in cash flow was the management incentive program, not capital spending, and that’s because we didn’t pay one the year before because, as you know, 2 years ago our performance wasn’t what we expected. So that’s the biggest variation when you're looking different -- differentials. Now in terms of capital spending, we have picked up our capital spending. You have to remember, there is multiple reasons for capital spending. The first is Isomedix, and as we have said, we have continued to grow our capacity in Isomedix. And capacity is a twofold equation. It is the physical facilities as well as the cobalt [ph] that we purchase. And we expect to see that continuing to grow modestly as we continue to grow the business, and so that we will continue to see in line with growth of the business. So that’s one section. The other significant area, as you mentioned, is that we are investing in our plans to do more insourcing of products that we are making, and that is -- there is twofold. One is, some of those are literally insourcing of a product itself that is someone else's that was manufacturing for us historically and now we are going to manufacture ourself, and the other is components of products. And we are doing both. And as we mentioned, we were spending about $20 million over the course of a couple of years, and we were getting significant annual savings for doing that. This year, the front end of that -- and it's not just capital costs, Bob, because you see that in increased depreciation, of course, but you also see the project expense that we are going through and the changeover from when you switched from a vendor from Part A to Part B. There's changeover costs. There's a number of things that we are incurring in those expenses. We’re incurring the bulk of those expenses in the first half of this year, and we experience good returns in the back half of the year from doing that and then -- but more importantly, out in the future years, we expect to see $8 million to $10 million of profit improvement as a result of that or cost reduction as a result of that. I think we've said about $8 million you should expect next year, and then the other couple of million dribble out the following year.

Great. And then just 2 other number things, if I can. First, again on CapEx, should we assume this $90 million rate for 2014 that you project, is that sort of where CapEx will be for the next several years?

Bob, that’s a tough call. Plus or minus $10 million or $15 million, I would say yes. Plus or minus $2 million, I don’t know.

Okay. And then the final question is, obviously, one way to avoid gaps between the analysts and your own internal projections on earnings is to give us a bit more, to the extent you can, guidance on the gating. Would you be comfortable to give us some sense of what the second half earnings might be as a percent of the total year or something like that to get us all a little better in line with what you guys are thinking?

Bob, at this point, doing half and half is equivalent of doing quarterly guidance for the next quarter, but I understand your view and, as I've said, we clearly -- historically, we’ve done, I think, a pretty good job of matching up. This quarter, we did not match up very well, and that’s our responsibility. I should have been clearer in my communication with you all. But on that, we've said in our statements that the bulk of what we missed in the first quarter we expect to make up in the second half. And that’s not something we would expect. Generally speaking, we are not going to pick it up in the second quarter. So that’s one guidepost I can give you, and the other is we gave a 42-58 split at the end of the year -- or last year -- or at the beginning of this year, excuse me. At the beginning of this year, we gave a 42-58 split because we knew we were going to be investing more into the first half and getting the benefit of that in the second half. We would be slightly under that today if we were reguiding. I don’t think we will give a number there because, again, that -- you get too many coordinates and I'm giving quarterly guidance, but we are not going to make that $5 million up this year, so plus or minus and so -- excuse me, we are not going to make the differential, which is slightly under $6 million, up in this coming half. As a result, this coming half is going to be lighter than the 42-58 that we gave you earlier.

Our next question is from Jason Rodgers of Great Lakes Review.

I wonder if you could provide some detail on the insourcing spending, what the amount was this quarter and what do you expect it to be for the next few quarters?

Yes, right now, Jason, what we’ve just outlined before is that the combination of insourcing and 1E decline was about 90 basis points impact on gross margin. Obviously, we anticipate, as Walt said earlier, that will continue through the first half. So we’ll probably spend some of that again in Q2 and then, obviously, start generating savings throughout the remainder of the year, most likely the bulk of that in the fourth quarter also. So you can anticipate some additional spending next quarter and then some savings in third quarter, but most of the savings generated to become neutral for the year in the fourth quarter.

And then looking at the tax rate, what do you expect it to be for the remainder of the fiscal year?

Yes, we still think, even though we had some discrete item adjustments this quarter, which were unfavorable, we still think and anticipate the range in 34% to 35%, as is in our guidance.

And finally, did you mention that you expect FX to be neutral on your results in the second quarter?

On that, the way we handle FX in our forecast is we are not foreign exchange forecasters, so we literally take the forward rates at the end of the quarter and apply them to our forecasts. And if you do that, taking the forward rates as of the end of June, it actually does reverse and come slightly positive, so it turns from the negative that you saw in this quarter to slightly positive.

That’s slightly positive for the second quarter?

No, for the year.

No, for the full year.

So it’s positive -- it overcomes what we lost, again, if those rates stay the same. Now your forecast of U.S. dollar versus all of these currencies, if it's any better than the forward rates, use that one. We don’t try to do that.

Our next question is from Chris Cooley with Stephens Incorporated.

Could we start off -- I just want to go back to Healthcare, and specifically the operating margin there. Could you talk a little bit more about the product mix? I understand the Med Device Excise Tax, but that kind of increase in R&D spend, you talked about FX and insourcing all weighing on that, but I really want to drill down on mix, kind of what you saw in terms of the quarter versus maybe what we’ve seen historically and are there any changes off of that mix that you sold in during the quarter as we think about consumable sales going forward? And I've got a couple of follow-ups.

Chris, we saw mix -- as we mentioned, the consumables are a little off, and we think that's a temporal issue. And that -- so there wasn’t mix within consumables. So it’s not that issue, it's just the fact that there was less consumables, which [indiscernible]...

I’m sorry, I meant the mix on working capital.

Where there was a mix within products was in the capital side, and on the capital side, again, it just so happened that what we shift were our relatively lower-margin products and then -- and less of our higher-margin, more of our lower-margin. When we look at our backlog going forward, that goes back to our normal trend, so we don’t believe that this is a trend. It just is a one-off issue.

And I guess just as a follow-up to that, then, when we think about historical operating margin in -- for the Healthcare segment, last several years have been kind of the 14-ish, low 14s. You're starting off out of the gate a little bit low here. How do we think about profitability for the full year within Healthcare from an operating margin perspective?

Yes, Chris, we are still targeting a total company adjusted EBIT of about 15.5%, and that obviously means that Healthcare has to come back over the next couple of quarters. And we believe it will. Again, it's more timing, but most of that impact from where we are today has to come from Healthcare in order to get us there.

And I would add, Chris, all of these items that we talked about, being the investments in the insourcing, the investments that we are making in R&D, these are virtually all Healthcare-related, or certainly the preponderance of the money there is Healthcare-related. And as a result, the savings from those will be Healthcare-related. So, that’s why we believe that we will see the Healthcare profitability move back.

Makes sense. I just -- 2 quick follow-ups, if I may, and then I will get back in queue. When you provided guidance at the fiscal year end coming into this year, you talked about organic growth contributing 4% to 5% from a volume standpoint on the year for the full year. In the first quarter, clearly, we had flat was -- I am just trying to gauge your expectations versus where we are on the street. For the quarter, were you anticipating more of an organic contribution to growth in the most recent quarter?

Two -- I am going to answer it. I think you separated -- I'm going to separate 2 questions, I think, Chris. The first is, for the year, we don’t feel any differently today than we felt 90 days ago in terms of organic growth. And for the quarter, it was indeed unexpected that the quarter in Healthcare came in a bit lighter than our expectation, which we -- actually, we talked about that when we were talking about versus expectations. So we were a little light versus our expectations.

Understood. And then just last question and I’ll get back in queue.

And then almost all of that is contained in the backlog. That’s where the -- that’s one of the reasons the backlog grew. Our orders didn’t change versus our expectations...

Just the backlog?

Our shipments did.

Makes perfect sense. And then just lastly, on leverage. I believe -- you talked about last year as a pivot year, this year kind of coming back around and focusing on growth. You weren’t really anticipating a lot of leverage to the operating line this year as we started the year. Any change in that view after you've looked at the 1Q and kind of what you are seeing going forward, or still kind of a relatively neutral operating leverage kind of viewpoint as we think about this year before?

Yes, Chris, I would say that we -- our anticipation is the same. It was at 50 or 60 basis points, we would have no change in that. Again, Q1 is one quarter. We still have the bulk of the year ahead of us. So I think we would still maintain that 50 to 60 basis point improvement from an EBIT margin standpoint.

[Operator Instructions] Our next question is from Mitra Ramgopal.

Just a couple of questions. First, on the acquisition front, you’re clearly seeing some nice growth there. I was wondering, as you look at margins, however, if there is room in terms of any cost savings or synergies that have not yet been realized that might be apparent later in the year?

The bulk of those, there is -- there will be reduction in expense in those because of the money we’re spending to do the integration, but we adjust that out. So when you look at adjusted earnings, we don’t see tremendous changes in operating margins for that reason. We've pretty much done what we’re going to do. Now over time, like all of our businesses, we look for ways to improve. So they will be looking for ways to improve, just as they have in the past and we will in the future, but I don’t see a step function for that reason.

Okay. And again, I believe, as you mentioned, the 3 acquisitions have pretty much have been largely integrated. I don't know if you could comment on a potential pipeline for future acquisitions, and if it relates to the 8% to 10% guidance revenue growth, if that’s assuming any transactions?

The first answer to your question is we do have a robust pipeline. Going forward, we’re looking at a number of things, as we’ve talked about before. First of all, we’re not going to comment on what -- obviously, prior to the time when we would make an announcement. But secondly, the timing of those is often far more dependent on the seller than the buyer, so we don’t have a lot of control of timing. So that’s the answer to your first question. And actually, we are excited about the things we’re looking at. In the end, it comes down to price and how we feel and how they feel. But we like what we are seeing in the marketplace. The second question is -- or answer to your second question is we did not include anything for acquisitions other than those that we’ve already announced in our forecast or plans.

And then as a quick follow-up, as it relates to the capital spending environment, I believe you said things have been pretty stable in the U.S. Any comments in terms of what you’re seeing outside of the U.S.?

Sure. Outside the U.S., I would break it into roughly 2 camps. Latin America and Europe, we are seeing maybe a little bit of sunshine. Those have been -- particularly Europe has been very difficult. I would say that it's certainly not robust, but it seems like there is a little bit of thawing in Europe. In Latin America, we've had good solid performance there for a long time and we think we’ll continue to see that good solid performance, although it’s not the -- I'll call it maybe the market itself is not the robust growth that it has been. And in Asia-Pacific, we are clearly seeing more pressure as you see those economies slowdown.

I show no other questions at this time. I’ll turn the call back for any closing remarks.

Thanks, everybody, for joining us this morning. This concludes our conference call, and we’ll chat with you again next quarter.

Thank you for participating. You may now disconnect.