Welcome to the STERIS Fiscal 2014 Fourth Quarter Conference Call. [Operator Instructions] At the request of STERIS, today’s call will be recorded for instant replay. I'd now like to introduce today's host, Julie Winter, Director of Investor Relations. Thank you. You may begin.

Thank you, Jane, and good morning, everyone. It's my pleasure to welcome you to STERIS's Fiscal 2014 Fourth Quarter and Full Year Conference Call. Thank you for taking the time to join us today. As usual, participating in the call this morning 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. 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 will refer to non-GAAP measures included -- 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 filing, 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 my pleasure again to be with you this morning to review our fourth quarter financial results. Following my remarks, Walt will provide his commentary on the year, including an overview of our strategic initiatives along with our outlook for fiscal 2015. As Julie already stated, our comments this morning will focus on adjusted results. Please see the reconciliation table included in our press release for additional details. Let me now begin with a review of our fourth quarter income statement. Total revenue grew 9% during the fourth quarter, driven by a 7% increase in organic volume, a 1.6% increase from acquisitions and a 30 basis point improvement in pricing. Foreign currency was neutral to revenue during the quarter. Gross margin dollars increased 10% in the quarter due mainly to the increase in revenue. Gross margin as a percentage of revenue for the quarter increased 30 basis points to 41.5%. We had positive impact from volume and price. This was somewhat offset by the continued organic expansion of our Spectrum instrument repair business into new territories throughout the United States, which takes time to bring to full margin. The in-sourcing projects we have been discussing with you this year were neutral to gross margin in the quarter, as expected. The significant increase in volume improved EBIT meaningfully as a result of operating expense leverage to $86.5 million in the quarter. Our EBIT margin at 18.6% of revenue increased both sequentially and year-over-year during the quarter. The effective tax rate in the quarter was 33.8% compared with 30.3% last year. The effective tax rate in the fourth quarter of last year was lower, primarily as a result of discrete item adjustments, including the settlement of prior year tax audits and the recording of…

Good morning, everyone. Thanks for joining us today. We are pleased to finish the year so strong and with another year of record earnings. We have made great strides toward our strategic objectives over the past couple of years and are excited about the direction we are heading. Our company has been reinvigorated by the investments we are making to grow organically and through acquisition, which enable us to provide even more value to our customers, our people and our shareholders. Our 10% top line growth for the year was primarily driven by North America for all 3 business segments, as well as nice growth in our EMEA business in Healthcare. We expanded operating margins by 50 basis points, despite the medical device excise tax and while investing in R&D and in-sourcing. Full year adjusted earnings per share were a record $2.48. Turning to the individual segments for a moment. Our Healthcare people grew revenue 12% for the year, with strength in the United States and in EMEA. In particular, capital equipment product families, including V-PRO sterilizers, instrument washers, OR integration systems and European products performed especially well during the year, contributing to a 6% increase in capital equipment revenue, excluding the SYSTEM 1E shipments in both years. Consumable revenue grew 17% and service revenue grew 23% for the year. Many of the investments we are making fall within our Healthcare segment. And as a result, Healthcare operating margin improvement was somewhat lower than might be expected in a year of double-digit revenue growth. The positive outcome of that, of course, is that Healthcare stands to benefit in the future from the investments we have made in in-sourcing, new products coming out of R&D and growth in synergies that we expect from our recent acquisitions. Life Science had another strong…

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

[Operator Instructions] Our first question comes from Matthew Mishan with KeyBanc.

I think just the first question is you have really robust sales growth for 2015, but the margins look a little flat. Can you talk about some of the differences between the sales growth and flattish margin assumptions?

Yes. Matt, I think in my comments I mentioned that some of the acquisitions that we are making, particularly the last 2, have lower margin percentages than our average margin percentage. So they are somewhat bringing that margin percentage down. Of course, they're adding dollars to the bottom line, but they're not adding the percentages to the bottom line. That's the bulk of the reason. We're also seeing a higher growth, obviously, in the Healthcare unit than, for example, in Isomedix. So once again, since the Healthcare unit is a lower-margin business in total and then the Isomedix business, by definition, again, that tends to, in total, bring the percentages down. But the dollars are growing nicely.

The second question, I think you saw a really good sales growth in international this quarter, big difference from the previous quarter. Can you talk a little bit about what changed quarter-over-quarter?

A lot of the capital equipment answers are timing. And so just like we see in Life Science, our international businesses are relatively smaller than the North American business. So they do bounce around a little bit more timing-wise. I'll say that to begin. Well, we are seeing some pickup in the EMEA, Europe, Middle East, Africa markets. And so they had a very good quarter, but they also had a solid year. I think we've mentioned last time that we've seen more pressure in particularly Asia-Pacific markets and some of the Latin America markets, somewhat due to political issues and some due to currency issues, primarily.

Our next question comes from Larry Keusch with Raymond James.

So, Walt, you obviously have been active within the Spectrum instrument repair business. I guess, I had 2 questions there, and then just one follow-up. Again, now that you've got IMS, help us understand how you're thinking about growing that business organically versus inorganically. And maybe you can also share some thoughts around the endoscope repair segment of that because it sounds like you are getting your toe into that one and maybe just some thoughts around the market and the opportunity.

Sure. I'll step back a little bit and say the Spectrum family, if you will, was -- did have their toe and maybe half their foot into the endoscope repair business. So it was a real piece of that business, but it was more predominantly instrument repair business. And IMS and Life Science are the exact converse. That's one of the reasons we like the combination is they have a much larger piece of their business in the endoscope repair side of the business and bring a lot more capabilities than we had in the endoscope repair business. And conversely, they also did some instrument repair. Although it's a much smaller piece of their business, but we have more capabilities, if you will, than the IMS or Life Science business. So we're bringing the strengths of the 2 businesses together so that both can do both, if you will. And a lot of it is around capability. So we believe the capabilities that are housed in the Spectrum businesses that we started with in the instrument repair area are very good and will enhance the offerings of the other 2 companies. And conversely, we think that the scope repair, both capacity and capabilities, are stronger in the Life Science and IMS side. So we very much think that, that combination creates more opportunity, really, for our customers, and then that relates to the opportunity for us. We do think that business -- both businesses are nicely growing, certainly in the high single digits, probably in the low double digits. And so we think there is significant organic growth possibility in that business, as our customers, largely hospitals but -- and others that use endoscopes, as they work to lower their cost. We believe by doing a nice job in repair and some things that they don't do, naturally, that we can actually grow our business, at the same time, reduce their overall costs. And that's the real genesis behind that business and business model, and we feel very good having more capacity on both sides of the house. So -- and I do think -- I think your comment suggests what we also believe is -- we've done a lot through acquisition, and that's based in the last 1.5 years, 2 years. Clearly, the acquisition side will slow down dramatically, relatively speaking, and the organic side will need to pick up. And that's what our plan is.

Okay. Terrific. And then just quickly for Mike. If I have the numbers right, I think you're looking for free cash flow for fiscal '15 to be up about 6%. So obviously, less than net income growth. And again, I note that CapEx is up. But if you could just walk us through what are the drivers of the free cash flow generation for fiscal '15, and I suspect that the CapEx increases are in part due to the acquisition, but any thoughts would be great.

Yes. So our -- as you had mentioned, Larry, the CapEx is planned to increase, as we are anticipating some new projects from our Isomedix, continue that expansion. Obviously, the acquisitions are going to require some capital investment also. So that's a big portion of it. We're not going to be able to give -- so that's actually a negative from a working capital standpoint. We believe we will get some adjustments in receivables, as our receivables are considerably high at the end of the year. We believe we'll get back to a more normalized level in the first quarter of next year. But from an inventory standpoint, we believe we'll be anticipating to be about flat, so we're really not going to get any improvement. Although you would imagine, we will get improvement because we're not adding inventory, even though we're adding these acquisitions. So that is not getting us additional working capital improvement that one might expect with the acquisition. So between CapEx, AR and inventory are the 3 main drivers.

Our next question comes from Dave Turkaly with JMP Securities.

Just given the strength on the Healthcare side, I'd love to get your current thoughts on sort of yes, I guess, the capital equipment environment in general, anything on the ACA. I mean, it was a big number for you guys. So any more color on that front would be helpful.

My comments on that are going to be very much like my comments have been probably the better part of the 1.5 years, maybe even 2 years. That is as we look out -- or actually, if you look at our backlog and as we look out, we continue to see buying patterns in the range of flat to slightly up. So I would not call this a robust capital equipment environment, but I also wouldn't call it a bust capital equipment environment. I think most people are flat to generally up. Now a quarter ago, when we had this conversation, we did mention that we saw the first part of this year, particularly January, that a number of customers, even if you go back into December, I guess, a number of customers had put capital on hold. So even though they said their capital budget was going to be flat to slightly up, they were holding on to the money until they saw how things were kind of working out. I would say in general, we've seen more of our customers releasing those holds than not. So I would say we're kind of in a status quo flat to low-digit improvement type of opportunity set right now. But flattish would be the right term. But we -- again, we haven't -- it's not a bust nor do we see a boom.

And then as a follow-up, I guess, if we look at this year, majority of even the growth in earnings came in this fourth quarter, which is a big number for you guys, as you kind of predicted. Are we thinking that '15 -- I know 60% in the back half, but in terms of earnings growth as well, I mean, fourth quarter as strong as this? I think it's something like 37% or close to 40% of the earnings power of the year came in the fourth quarter this year. I imagine that it may smooth out a little. Would that be fair?

We don't, as you know, don't give quarterly guidance. But our best estimate is kind of the pattern we have this year. I can assure you we would rather see that flattening back into the third quarter. So if we have our druthers or if we can make it happen, we'll be trying to flatten it. Because as you saw last of this past year, we kept our factories running steady by building inventory in Q3, so we could ship the appropriate products in Q4. We would much rather build it and ship it as soon as we can and build it and hold it until we need to ship it. So we'll be working toward that end. And to the extent possible, we would rather see it be flat. But the first quarter is going to be weak relative to totals, if you will, because the IMS acquisition is not in. The 2 things we've done early on, it's not what you would call integration cost. It's just the cost of learning and doing and changing and all that. I guess, it is an integration cost, but you don't get capture -- it doesn't capture that way. But it will capture as cost. So we're expecting a little lower earnings in those businesses, as we're sorting things out, and then improvements over the course of the year. As you say, we have a lot of earnings in Q4 this year. We would certainly prefer that not be the case next year.

Last quick one. You mentioned 2.2x debt-to-EBITDA post the close. What is the -- I mean, I guess, what is the capacity? Where can that go based on the covenants as they stand today?

Yes. Dave, the maximum covenant we have from a debt to EBITDA standpoint is 3.25x. So we still have some dry powder, if you will, a couple of hundred million of dry powder to continue, if need be, with the expansions.

And you said that the rate on that was 1.5% on the credit facility?

Yes, true. We're about -- our credit facility is about 1.5% from an interest rate standpoint.

Our next question comes from Chris Cooley with Stephens Inc.

Just a couple of quick ones, if I may, here towards the end of the call. Walt or Mike, could you just walk us through kind of, from an execution standpoint, what has to happen with these most recent acquisitions to get their margin profile back up in line with the Healthcare and kind of the timing of how we should think about realization of those activities? And then just as an offshoot to that, you guys have been extremely busy this fiscal year. And so when you think about the business and kind of the long-term targets here, what kind of operating margin structure do you now kind of foresee as obtainable when we think about kind of longer-term objectives?

Sure, Chris. I'll answer first the question on the how you get the margins up in the specialty service businesses, and there's a couple of factors. The first is we expect to see these businesses grow fairly robustly. And so it's not like we think we're going to go out and do massive layoffs to capture the gains. We think we can capture the bulk of the gains by letting -- by organizing the business more efficiently and letting the volume come to the people that are already there. So as a general statement, I would say that's the -- our general view is that we have a good group of people and we have plenty of them, generally speaking. We just need to organize in such a way that as the volume grows, we don't have to add people. Specifically in the field, particularly on the field service side of that, when you're growing and you have to add someone geographically or you add a unit to a geography you haven't been in, it is very inefficient at the beginning of the time you add it and then it gains efficiency over time. And so we're going to get 2 wins here, and that is first of all, we will get some automatic areas where we have people that are -- who we would have otherwise been starting up into a region possibly, and then -- and we already have people from the other company there. So we can cross-sell across the product lines that the 2 companies sell, without having to take on that first step of the geography process. So that's one. I'll call that one general way that we should get some efficiencies. The second general way is we have multiple laboratories around the country across the businesses, where we do a lot of this repair work. And we have been unable -- on both sides of the business, I mentioned that IMS is traditionally more scope repair and Spectrum is more instrument repair. Both businesses outsourced a portion of their opposite work to third parties, and so we will be able to bring in what the scope repair that we did some outsourcing in from the Spectrum side into the IMS business. And we'll be able to bring some of the instrument repair that was outsourced by IMS into the opposite side. And so we will capture those margins into our own businesses. And as we grow that volume -- it's not volume like a revenue volume, but it's volume of internal work volume. As we grow that, we expect to capture efficiency. Now that isn't going to happen tomorrow morning at 9:00. It will take time. But I would expect over the course of a couple of years, we will have that nicely captured. And, Chris, I think you had a follow-up question, and I've lost it.

Just long-term margins.

Yes. We've talk about that a lot. And my view is I'd like to see those swing over 15% and creeping toward 20%. And occasionally, we get over the top of that, but that's tough. But I certainly like it to get to -- in that 15% range, and we've got -- we have a ways to go now because we're taking on some business that we think is growth business and it's great opportunity. But it will shrink our margin percentages on the Healthcare side, which, in total shrinks it somewhat. But we think we can grow those back and get back to those kind of numbers.

That's great. If I could squeeze maybe 2 other quick one and maybe for Mike. You mentioned there should be some incremental investment in Isomedix. Could you kind of help us think about timing of those investments so we can just think about the cash outflows and then also kind of stage -- how's that staged in our own minds kind of when that capacity could come online to drive incremental growth in the out year?

Yes, certainly. Obviously, with our increased capital expenditures, we anticipate spending some of that cash to actually start expanding some facilities. As we've talked about in the past, it usually takes about 18 months or so to get a facility online. So if we start middle of this year, we probably will not have any impact from an opportunity standpoint to add more capacity through Isomedix until fiscal '17. But the cash outlay will be between now and the end of this fiscal year when the bulk of it at least will be spent.

And, Chris, I would add, and I've commented on this before that we have multiple ways of adding capacity. You either -- you add Cobalt or you add different vessels inside current facilities or you add on to facilities or you grow new facilities. All those are ways we do it, and we're constantly doing all of those things. Occasionally, you see kind of a onetime blip because we have to go out and do a brand-new facility. That's the ones that put more pressure on earnings in the short run and they're very nice in the long run. So and -- but we're doing all those all the time. We're looking at all the different ways we can to do that, and we expect to continue that going forward.

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

Great. I saw there was an early termination notice on FTC this morning on the teaser [ph] as it relates to the IMS transaction. Is this an earlier close than you were anticipating in your guidance assumptions?

So we had in our guidance, we expect it to be closing very soon, as I mentioned earlier today, and we continue to expect to close very soon.

Okay. So no meaningful change to your guidance there?

No meaningful change.

Okay. And then on Isomedix, do you anticipate any changes to contract terms or ordering patterns with the potential SteriGenics-Nordion transaction? And how would you just characterize your relationship there and your relationship with Reviz [ph] as well? Are these contracts generally structured?

Yes. As we've mentioned a number of times the contracts we have with suppliers are long-term contracts, and so we typically will have 2 or 3 years contracts. So I'll call it for lack of a better term, the supply of Cobalt that we have coming in is contracted out for 2- or 3-year period, and it includes relative volumes and relative prices. So we generally do not expect to see disruptions in contracts -- or in our supply chain in the short to mid-term period. Over the longer term, of course, with SteriGenics potentially purchasing the Nordion business -- of course, that's all public. And as you know, publicly, they have said that they're going to need to go through the appropriate regulatory channels, I suspect, in both the U.S. and in Canada. And we'll just have to see how that works out going through channels. And clearly, we're evaluating every possible avenue for our supply chain as we always do out -- particularly out in the long run.

Okay, great. And an update on your international business with the recent U.K. acquisition, do you plan on building more of these services to have presence in overseas or in the U.K.? And broadly speaking kind of what are your longer-term opportunities there?

Well, clearly, Eschmann was a move to grow our business in the U.K. It's a very well-known company, good presence, good brand name in the U.K., good direct sales force. I should maybe have been clearer. The Eschmann business looks a lot more like our surgical and IPT business, that is, it's largely capital and then has a service component. And that service component relates to the equipment that we sell. So they do both surgical equipment and some IPT equipment, and then they have service that goes along with that. We do see that as an opportunity. As you know, about 75% of our business is in the United States. We've actually grown -- if you look at the organic side of the business, we've grown organically much faster outside the U.S. than inside the U.S. But we've -- the business we've purchased have tended to be U.S. businesses. So we've offset our organic international growth rate with acquisitions in the U.S., and that 75% has held roughly similar. We are clearly -- we have been and continue to look outside the U.S. for businesses that fit our pattern and fit what we do. And so we do see that as an opportunity.

We have a question from Jason Rodgers with Great Lakes Review.

Looking at your guidance, I wonder if you could provide an estimate for the Healthcare segment growth for fiscal '14 excluding acquisitions.

For '15, Jason?

'15, sorry.

Yes. I believe Walt mentioned in his comments mid-single-digit organic growth is expected excluding Eschmann and IMS.

Okay. And you mentioned new products as a component to growth. Wondered if you could expand on any new products that you feel are noteworthy that either have just been introduced or you're planning to shortly.

Yes. As you know, we don't comment on things that we're going to introduce. We've had really nice work, and I mentioned some of them, on the capital side. We've had nice growth and continue to see nice growth in our washer line. We basically redone the washer line. We basically redone the washer line in the last 12 months, and so that's been a nice business. We have, again, a relatively new line in our operating room integration business, and they've had very nice growth the last 12 months, and we expect to see that continuing. The -- on the surgical side, you may recall that we introduced an orthopedic product, an orthopedic table during last year. And as is always the case with capital equipment, it kind of take some time to pick up and get people to understand what's out there. So we are now seeing some good growth in that business. So that's I think on the capital side -- or the one I should say, the European product lines, both the EMS systems and their lights and tables have grow nicely. So we've had a good set of good run in those product areas. On the consumable side, again our ICC business continues to grow. The Prolystica general family of businesses continue to grow nicely. The US Endoscopy, which comes in on the consumable side of our business, they have continued what we would hope they would do, which is continue their pattern of developing new products and growing about 50% of their growth the last -- these last 12 months has been from products introduced in the last couple of years. And we expect that to continue going forward. So they have a number of new products that are coming into the market. So it's generally across the board, and there's a little bit of rotation. You can't do everything all -- you can't do each product all the time, but we generally kind of rotate through the products and make sure that we're keeping them fresh and keep new products in front of our customers. So we continue to expect to do that. I failed to mention V-PRO in the consumables, that go with V-PRO. That's also been a very strong growth for us, so we expect to see that continue.

[Operator Instructions] We have a question from Mitra Ramgopal with Sidoti.

Just quick questions. Walt, I believe you mentioned the pace of acquisitions will be slowing down. And I'm just wondering if the question of you have so much on your plate, you need to integrate right now or are there just fewer opportunities out there.

I was speaking specifically about acquisitions in the specialty service space. And that is -- we felt that we needed a certain set of capabilities to be able to have a good -- very good spot to provide great value to our customers. And we feel that we've gathered that sort of capabilities now. So it's not to say that we wouldn't do opportunistic acquisitions in that space. If they came up, we would. But in terms of feeling like we needed to do some other significant component to have a good package, we don't really feel that way. So that -- I was really directing my comments there. Now we do have some significant integration work to be done obviously, but it's largely in that specialty service space. Eschmann is a relatively small business. It will fit nicely into our capital business in Healthcare. So I don't see that being a large integration problem. The real integration is occurring in the specialty services space. So we would feel that we have capacity to do other acquisitions outside of that space. I think we're going to let those guys sort that work out. They've got a lot of work to do. We'll let them sort that out. In the next little bit, we'll be looking predominantly in other areas.

And then just as a quick follow-up there. Given the Eschmann acquisition, the potential you're seeing on the international front, if you had to take sort of a longer-term look, how do you see the mix of business changing in terms of international versus U.S. from where it is today?

We've been saying forever that we expected the international business to grow faster than the U.S. business. We still feel the same way, particularly -- and I would characterize it as we expect to see the non-industrial world, if you will, business grow faster than the historic industrial world business, Healthcare in general. And we have been and would continue to follow that trend. But as opportunities come up where we're already strong, the U.S. and now even more so in Europe, we clearly would really take those opportunities. Because even though those markets will not grow as rapidly as the OUS business, I'll call it, even though they won't grow as rapidly, they're still growing business, they're a very solid business. And we want to maintain our significant presence and be able to create value for the customers in that business. So some of it we'll be opportunistic based on what is available and some of it we'll be directionally for the direction. And we clearly are working to grow that business and organically have been growing the OUS business faster since we bought things that tend to be in the U.S.

There are no further questions at this time. I'll turn the call back for closing remarks.

Thanks, everybody, for joining us, and have a great day.

[indiscernible] You may now disconnect.