Welcome to the STERIS’ Fiscal 2015 Third Quarter Conference Call. All lines will remain in listen-only until the question-and-answer session. At that time, instructions will be given should you wish to participate. 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, Investor Relations. Thank you. You may begin.

Thank you, Jane, and good morning, everyone. It’s my pleasure to welcome you to STERIS’ fiscal 2015 third quarter 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. 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 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 including adjusted earnings, free cash flow, backlog, debt-to-capital and day sales outstanding, all of which are defined and reconciled as appropriate to reported results 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. One last reminder before we get started. Because of our pending offer for synergy, STERIS is bound by the U.K. takeover code which places restrictions on what maybe said by STERIS in this call. In particular, only information and opinions which are already in the public domains maybe discussed. 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 with you this morning to review our third quarter financial results. Following my remarks, Walt will provide his commentary on our performance and discuss our outlook for the full fiscal year. As usual, our comments this morning will focus on adjusted results. Please see the reconciliation table included in our press release for additional details. We are pleased to report another strong second quarter with total company revenue growth of 17%, driven by a 4% increase in organic volume and a 14% increase from the IMS and Eschmann acquisitions, offset somewhat by currency fluctuations which negatively impacted revenue by 1%. Pricing was neutral to revenue in the third quarter. Gross margin as a percent of revenue for the quarter increased 130 basis points to 41.7%. Gross margin was positively impacted by favorable product mix and foreign currency somewhat offset by higher material costs and inflation. The EBIT margin expanded 90 basis points to 16.3% of revenue. The improvement in EBIT margin was driven by higher organic volumes and improved gross margins, offset higher research and development expenses during the quarter. We still anticipate that R&D spending for the full fiscal year will be approximately 3% of total company revenue. The effective tax rate in the quarter was 34.1% compared with 39.9% last year. During the quarter, we had a favorable EPS impact of $0.02 from the enactment of the tax extenders. This benefit will not recur in the fourth quarter. Our full year effective tax rate is anticipated to be approximately 35.5%. Net income increased 37% to $47.7 million or $0.79 per diluted share compared with $34.9 million or $0.59 per diluted share in the third quarter last year. Moving on to our segment results, healthcare…

Thanks, Michael. Good morning everyone and thanks for joining us today. When we look at our progress so far this year, we have much to be happy about. SERIS people have focused on serving our customers while integrating one significant acquisition and working to close another one and have delivered improved performance with each subsequent quarter. As Mike has already discussed, we continued our progress in the third quarter with meaningful revenue growth and continued bottom line improvement. Since Mike has already covered the quarter, my comments are going to focus on our year-to-date performance and outlook. So far this year, we have grown total revenue 17% with 22% growth in healthcare, 2% in Life Science and 6% in Isomedix. We continue to hear more optimism from our hospital customers in terms of procedure volumes and capital spending for calendar year 2015. So we are encouraged about the short to intermediate-term. Our healthcare segment has experienced double digit revenue growth in consumables, reflecting continued success on our cleaning chemistry and growing the pro consumable franchise, as well as double digit growth from U.S. endoscopy. In addition, healthcare service revenue has also grown nicely due to the high single digit organic revenue growth and the acquisition of IMS. This increase is consistent with our hospital customers’ comments on procedure volumes. On the IMS front, we are making good progress on the integration of the five instrument repair businesses under the IMS brand. And we’re pleased with our performance today. Margins for the combined business contain to improve as we do more in-house under the combined umbrella of our larger network. And we are making significant progress toward our long-term margin goals. From a healthcare capital equipment perspective, our performance today is somewhat mixed, with solid growth in infection prevention capital equipment…

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

Thank you. [Operator Instructions] Our first question comes from Dave Turkaly with JMP Securities. Your line is open.

Hey, thanks a lot. Just quickly, I know - we’ve been waiting for a while for the deal to close. I was just curious, does any of your business - so do you think any of your fundamentals are being impacted at all by, say, the fact that the deal was coming to a close soon? What are specifically at your kind of core business and backlog in healthcare or even anything on your sales force? I’m just curious if you’ve seen any changes or any impact given that that transaction is hopefully coming to a close soon.

This is Walt. And I don’t think that we’re any significant impact there. Our field forces are largely separate. We don’t have significant geographic overlap at this time, don’t have a lot of product overlap. So generally speaking, I would say there’s no impact in all the work at this point at the senior executive level. So I don’t see much impact there.

And then in the healthcare, I think the capital part, I think you mentioned that you might have some new products kicking in in the fourth quarter. Could you maybe hit on a couple of those for us?

Sure. We always have new products coming by the way, always have incoming and we’re always introducing. We don’t spend a lot of time talking about all of them. But particularly on the surgical side, we have both the two or actually three principal products that are ceiling-based products. We have new lights that we’re introducing as we speak. We have new what we call Booms or equipment management systems which we are - when I say introducing, we’re shipping as we speak. And then we have also a new OR integration system that is I should say relatively new, the last couple of months. So you put all that together and we truly have a number of new systems hitting the field on the surgical side as we speak.

Okay. Thanks a lot.

Our next question comes from Matt Mishan with KeyBanc. Your line is open.

Hey, great. Thank you for taking my questions. I get how the fourth quarter is going to be a tough comp especially off of last year. What’s driving the decline in the full year sales guidance to ’15 from ’15 to ’17. And also, in your S-4, it indicated that you guys thought you could do a little bit over ’17 for the year.

Well, I would say, Matt - oh, good morning, Matt, sorry.

Good morning.

Yes, this is Walt. I would say, in general, at the highest level, it’s where we are year-to-date that’s driving that conclusion where we are just a little bit off. And we’re not looking for the big hockey stick that we saw at the end of last year in the particularly on the capital equipment side. As I’ve said, we are expecting a very strong surgical quarter. We had a super strong surgical for the last year. And we also had a super strong IPT capital last year. We’ll see I think a more normalized IPT and a very strong surgical, is what our current belief is.

Hey, Matt. This is Mike. One other additional piece too is FX is definitely a headwind for us. And we anticipate that being close to 1%, around 1% in the full year. And that is actually driving the ’15 to ’17 closer to ’15 also.

Okay, got it. And just a bigger picture type question. Could you guys talk a little bit about the puts and the takes and maybe the prospects for E-beam technology versus Gamma or ethylene oxide and how your customers are kind of looking at it for like new and existing products?

There’s a lot of detailed technical description there. But there are a number of ways to radiate. You kind of have to break sterilization of that type into two broad categories, gas and radiation. There are some products, it could be done both. But generally speaking, they’re naturally better either because of the design or because of the packaging they are naturally better with either gas or radiation. There’s a number of ways to do radiation. Clearly, the broadest and most accepted is Gamma, but there are opportunities for more different types of radiations, both E-beam and x-ray type radiations. And it’s not at all that those are, what do you want to call them, mutually replaceable. But there are some products that you can do in either. There are some products that look better in one versus the other. But clearly, Gamma is the dominant modality at this point in time.

Okay. Thank you very much.

Our next question comes from Erin Wilson with Bank of America Merrill Lynch. Your line is open.

Great. On the organic growth, I was a little delighted than I would have anticipated. How would you characterize just the current utilization environment as it relates to capital equipment purchasing and surgical procedure volumes?

Sure. Erin, good morning. I would say, they’re broken into two categories. Our organic growth on consumables has stayed strong and that is what is more tightly linked to procedural volumes in the short-term. And the longer-term capital is linked, but it’s linked based on combination of the near-term. If they’re making more money, they’re naturally more willing to invest capital also in terms of certainty, uncertainty. And so it’s linked, but it’s not as tight a link and it tends to be a lagging factor, not an immediate factor. And so first, that’s the beginning. And in healthcare, our tightly linked things are consumables and service are tracking as you would expect, maybe even a little better than you would expect. Then when you turn to capital, you may recall the last couple of years, we have been stronger than most of the other people on the capital equipment side. And partially, we think we did okay. But partially, it’s because of where we’re concentrated. And we’ve always said that in bad times, the OR and to a lesser extent, but to some extent, the CSD tends to continue to spend capital because it’s a revenue-generating part of the service if you will of a hospital, whereas maybe some of the other areas might not stay quite as strong. And I think we’ve seen that if you look across the other manufacturers and see who kind of got weaker early and who is now bouncing back more. You’re seeing the other areas outside I think be a little bit stronger. So they are linked and I do think we’re optimistic the things we’re seeing - I call it the forward indicators that we look at, bids and orders and that kind of stuff, we are feeling more and more optimistic. We’ve been pretty much saying that things are - we’ve been cautiously optimistic, stable to slightly increasing. I think we might be feeling even a little better now for the longer-term. But that takes time and there is lumpiness in between there. I’d say that’s a high level, Erin, that’s probably what we’re seeing.

Okay. That’s great color. And on deal timing, can you give us some greater clarity on what you’re anticipating? And does it mean that you’re expectations are sort of the status quo here from where they were before? And what are the types of conversations you are having with the FTC and is the FTC delimiting the ages [ph] here for as far as deal closing goes or are there other factors we should be thinking about?

Yes, Erin, our - I’ll start out with our general approach to comment on conversations with regulators. It’s our experience that having those conversations and having those conversations private and keeping them private so no one gives to read about them in the paper and misinterpret either because you misinterpreted us or they misinterpret you. But that we’re better off just saying that we’re in conversation with the appropriate agencies and we kind of leave it at that until there is a significant event. And when we have those, we announce them. Any regulatory agency that we are working with, that tends to be our approach. As it relates to this, clearly we had originally expected that we would get closed by March 31st, rough timeframe and we clearly are continuing to work toward getting close towards March 31st, rough timeframe. So we are not at all ready to come off that date. But with the FTC second request, which we do think that is now the gaiting factor of the various things one has to get done. When we look at our timing charts that that is moved to be the gaiting factor in our opinion. And we’re continuing to work with them. We have not given up on that schedule. And so we will continue to drive toward that until we find out that we can’t read them unless I should say unless, not until we find out that can’t read it. And our view is not that we’re talking about years of delay. We’re talking weeks and months, not - and hopefully days and weeks. But we’re not talking years. We’re talking days, weeks, months kind of delay from that March 31st timeframe.

Okay. That’s good to hear. Thanks so much.

Our next question comes from Larry Keusch with Raymond James. Your line is open.

Thank you, good morning. Hey, Walt or Mike, I just want to come back to the quarter and the guidance. So you beat the EPS by $0.06 relative to the street consensus. You maintained your guidance for the year. So I guess the question is, was the quarter sort of as you anticipated and the streets gaiting was perhaps off in a way they were looking for the quarters or is there some level of conservatism potentially in that fourth quarter that you’re baking in?

Larry, I’m not sure that all that might in afterwards too. But I’m not sure where the street had baked the tax extenders. In our mind, it was the fourth quarter. We didn’t think it would get done before the December 31 timeframe. We expected it right after the first of the year. So that clearly was a change in our expectation. And we did have a couple of positive things that rolled in. So we did beat our expectation a little bit. So it would be fair to characterize that last year or last quarter, excuse me, when we narrowed our guidance to the high-end of the range, we felt okay with it when we did. And today, we feel better about it than we did it because, A, we’re further down the path. We not only made what we expected, but we beat what we expected. But as you know, two orders that fall outside of March 31 can take care of that a penny or two pretty quick. So we are very comfortable. We were comfortable on where we were. We are very comfortable now where we are. And we like where we are and we’re optimistic about the quarter and optimistic about the future.

Okay. That’s helpful. And I guess, just one other one for you is you talked a little bit about the integration of what is going on within IMS. Maybe you could drill down a little bit more and help us understand what specific activities are going on there. And then also remind us kind of what the margin goals are for that business longer-term as you pull forward all the integration activities and kind of where we are currently with the margins for the business.

Larry, I’m going to break the IMS conversation into, I call it three buckets. The work that’s going on in integration. Actually, I had fourth. So the one I always forget, Mike gets mad at me, because it’s the one they have to do. The first three are more around the field and the operations, originally the ones that I think of most quickly. But on the field side, field and operations side, first of all, we had a number - each of these entities had a number of different labs and repair centers and those kind of things. And yet particularly as you recall, several of the businesses were more focused on instrument repair which tends to be a local repair and several of the entities were more focused on scope empowered instruments repair which tends to be a repair that the device gets shipped in and done in a little factory, let’s call it or a lab. And as a result, the entities were outsourcing the others pieces of work because they didn’t have capacity, whichever the one they didn’t do. So kind of the first big step and a step we knew would be very positive. Was we are now insourcing the vast majority of that work to ourselves if you will. So we crossed that insourcing. And I would say, that is it may not, it’s no complete, but it’s well down the path. And that is the piece that we knew would be for lack of term, Slam dunk. The second piece, of that we are working on is insight and you feel you have a question or a guesser. You have a situation where even though in total, we probably had the right number of people to service roughly what we’re doing, in one…

Perfect. Thanks very much.

Our next question comes from Chris Cooley with Stephens. Your line is open.

Good morning and thank you for taking the questions. Two if I may here. Mike, could you help us a little bit first with Isomedix and just kind of help us get back to kind of a normalized margin for the business in the quarter? I understand there was the added expenditure there from a regulatory perspective but you also had the maintenance downtime. So I’m just trying to get a feel for what you’re seeing there in profitability and also growth on a go-forward basis in that space. And I have a follow-up.

Yes, Chris, on the Isomedix piece, the one thing that we continue to experience and we’ve talked about all year is we were going to have higher quality and regulatory expenses which, I think as Walt talked about, will anniversary at the end of this fiscal year. In total, that’s several million dollars - $2 million to $3 million in total. You could just divide that roughly equally on a quarterly basis and that’s part of the impact. The other part of the impact, obviously, is the shutdown of that maintenance which probably caused us a point or two on the revenue side. I mean, we continue to believe mid single-digits is the revenue growth for the full fiscal year. So we weren’t too far off. And then from a margin standpoint, we anticipate, as we have, the high 20s - 28%, 29% margin would be our normalized margin. We come above that and sometimes as volume increases as we hit significant drop-through. And then you can see when revenue does tail off a little bit, our expenses continue to come through. So I would say normalized, we’re in the upper 20s - 28%, 29%. And that’s something that we continue to use as our guidance for Isomedix both internally and externally.

Super. And I apologize, I had to go back and forth there. And you may have addressed this on Larry’s prior question, but when we just look at healthcare service growth, obviously very strong with the IMS acquisition there in the quarter of 38%. But when we just look at what we’ve seen from some of the providers as well as other capital players and your own backlog that grew nicely there during the quarter, those trends all would seem to afford an acceleration or at least a sustain of growth like we’re seeing right now in healthcare services. Just from a broader macro perspective, is that the way we should be thinking about this or are there other puts and takes that you think kind of gape in the growth of healthcare service on a go-forward basis? Thanks much.

Sure, Chris. And the healthcare services is a more complex topic right now. So you have to break it up into the IMS piece which you’ve already addressed. Obviously right now, that’s all new business, so it’s all growth. But going forward, we do see that still being a very strong grower, a high single-digit, low double-digit kind of grower. And we do expect that as long as the hospital trends remain in the same path, we expect to see that growth. On the what I call our traditional service serving our products, if you will, it’s a bifurcated answer. That is, when capital shipments rise, we get an immediate benefit from installation service rising. So that travels pretty much with capital equipment, more on the IPT side than on the surgical side. And then the second piece of that equation is, on the other hand, when they replace new equipment, if you had a real surge in equipment replacement, we typically are under warranty for a year. And so the service actually falls in that specific account. Now as long as it’s stable on a percentage basis, that’s largely irrelevant. But if you have a big surge, then you will see some drop-off for 12 months or so of service that is now free as opposed to - or under warranty as opposed to service going forward. But that’s a relatively brief phenomena and you go back to the service. Now to the other extent, if people really start holding their equipment, then it starts breaking down more and so we actually see more service. So you kind of have to look at that as a lifecycle. And I don’t see us right now any place in an odd part of the lifecycle. So again, to the extent capital keeps kind of trudging along at the same rate of growth of healthcare and you don’t see a big spike or decline, I would see service growing in the kind of the rate of healthcare growth as you’ve stated.

Super. And may I ask, please, one other quick one in here and then I’ll get back in queue?

All right, Chris.

Thanks so much. Just for clarity there, I want to make sure I heard this correctly. In terms of the second review from the FTC, do you still have deliverables to the agency or does synergy still have deliverables to the agency or is the ball now fully back in the FTC score? I’m just trying to think about it from a clock standpoint. Thanks.

Yes. Deliverables is a big word in terms of - even when the clock is running, then the deliverables - you still have ongoing conversations. They may ask for more things and even though it may not necessarily be required. Our experiences working with the agency is a good approach. But to answer your question, I think for what you are specifically asking is we do not have a new time clock at this point with a - I’ll call it a closed second filing completed with the agency. So I think that’s what you’re pointing to.

That’s great. Thanks so much.

Our next question comes from Jason Rodgers with Great Lakes Review. Your line is open.

Good morning. You mentioned during the call about working to better level load your capital equipment shipment. Does that imply that some business could shift into the Q1 of next year?

The answer to your question is both directions. We do two things to better level load. Our favorite thing is if we shift the amount - the exact amount every quarter were the same except for the natural growth rate. So if you’re growing 5% a year, everything would be nirvana if we could figure out a way to grow 5% a quarter every quarter for the rest of our lives or whatever that number is. That doesn’t seem to be possible either from - there’s some lumpiness because of our customer side then there is some lumpiness that’s generated by our salespeople’s own targets and goals and all those things. And so we are working to try to level that out more. And you are correct. You can level both directions. And to the extent that’s possible and still meet customer expectation demand, it does level out. Mike’s pointed that out earlier and we have now for a year, so we worked hard to get to where we have quicker shipping time possibilities. And that helps us to level because part of the reason we have lumpiness is that you have three customers with three big projects and they’re all due in pick a month. And then three weeks before they’re supposed to be due, they call you up and say - our project is running five weeks behind, would you mind holding the stuff. So then I’ve got a factory full of finished goods waiting for a five-week from now delivery and I can’t move it to another customer. The more we can be building exactly what that customer is going to take and check in with them two weeks before and delivering in two weeks, the better we are able to shift that business around. And then lastly, we do, as we have this year, built inventory in anticipation of when we know we have several large orders as opposed to waiting and building five minutes before so we have to run our factories at overtime for a couple of months, that we try to build some of that ahead. So we build some things in anticipation. So it’s a mixture of all those things that come together. But we could see things pushing both directions as long as the customers are willing to do that. And they often have. It depends on the type of order. Project type things, it is very common for them to slip their timeframe. If you’ve ever built a house, it is just like that. Building a hospital is building a house on steroids. It’s a very complex project. And you’re building a house and ordering equipment and it is not uncommon or I would say - a better way to say it, it is more common than not that the timeframe slips. We build that into our thinking but you never know. Everyone’s a little different. Hopefully I’ve answered that clearly.

Yes, thanks. And then just looking at the international markets, I wonder if you could detail the performance there. And the comments you had said earlier about increasing optimism for your customers, does that imply internationally as much as it does in the U.S.?

That varies by region, I would say. And we’ve continued to be strong in our EMEA business kind of counter trend a little bit. And so we have been a bit stronger than we would expect in EMEA. And our current looking is that, particularly our Middle East business continues to be strong on however you want to look at it, on a dollar rate or on a growth basis. So the EMEA business has continued to be strong. The commentary on the other two major regions is exactly the same as we’ve been saying for a couple of periods now. Latin America has been weak relative to its history. And part of that is the general economy and part of that is where we happened to be weak versus strong by country. And for example, we were very strong at Venezuela and Venezuela is a very difficult market right now. So our Latin America business is off. And it seems to be bottoming as opposed to growing but it seems to be better than maybe the last six months or year. But it’s still, relatively speaking, weak and our Asia Pacific market is, relatively speaking, strong. And the outlook tends to also be strong. So it varies by region but I think that’s a good characterization of three regions outside the U.S.

Yes, thank you. And just finally, it looks like you purchased some shares back in the quarter. I’m just wondering if you had the number of shares that were purchased. Thank you.

Yes, we did not purchase any shares. What we did is we actually purchased some options or restricted shares that have vested. And what we do is we try and perform that execution internally for our employees. So it appears as if we are buying them, which we really are. But it’s not under our share repurchase authorization program that has been authorized by the board. I think there are still about $87 million outstanding under that authorization.

Got it, thank you.

[Operator Instructions] We have a question from Mitra Ramgopal with Sidoti. Your line is open.

Yes, good morning. Just a couple of questions. Walt, I was wondering on the surgical repair business, clearly it’s been a couple of years since you’ve entered it and it having - continue to gain fair. Do you feel the need to make more acquisitions in that space or are you pretty much comfortable with what you have right now?

I would say we have moved from a strategic acquisition mode to an opportunistic acquisition mode. That is, we feel like we have in place what we need to fully do a very nice job for customers nationwide at this point. But there are a lot of players in this marketplace. And to the extent it makes sense for an owner and us to get together, we may do that.

And from a big picture standpoint, just how you entered surgical repair, is there something similar that you could potentially do as you look out longer term?

Synergy.

Okay. Yes, that’s true.

And for the next 6 to 12 months, we’re busy. We’re not finished with the integration of IMS which is not a trivial piece of work. The guys are doing a great job. It’s not a trivial piece of work. And when we close on the Synergy acquisition, we will have significant work there, too. So it’s not that we will not do deals. We will do deals. And for the next little bit, I would expect them to be smaller relative to tuck-in deals, all things being equal. If there’s something that is just so strategic that we can’t pass and we can’t push it off, then we might consider it. But all things being equal, for the next little bit, we’ll be working to operationalize what we have already done. And then we will continue looking and continue thinking that at this point, there’s nothing I would point to in the horizon.

Oh, thanks. And I don’t know if you can give us a quick update in terms of when you look back at the U.S. and after the acquisition where we stand with that today and what kind of growth you’re getting from that business.

We love the deal. It’s doing exactly what he had hoped, that is - I don’t know, exactly on plan. It’s either above or below. If anything, I would bet above what our thinking was. It’s really done a nice job. They continue with double-digit growth. The bulk of what we expected from that business was to continue product development and bring out innovative new products. They’ve continued to do that. They’re just working magnificently well. And we are exceedingly happy with the deal.

Okay. Thanks again.

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

Great. Everyone, thanks for joining us today and we’ll talk to you again next quarter.