STERIS plc (STE) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the STERIS Fiscal 2015 Fourth 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 like to now introduce today's host, Julie Winter, Director, Investor Relations. Ma'am, you may begin. Julie Winter - Director-Investor Relations & Head-Media Relations: Thank you, Yomi, and good morning, everyone. It's my pleasure to welcome you to STERIS' Fiscal 2015 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. 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, including adjusted earnings, free cash flow, backlog, debt to capital and days 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 filing, 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 UK Takeover Code, which places restrictions on what may be said by STERIS in this call. In particular, only information and opinions which are already in the public domain may be discussed. With those cautions, I will hand the call over to Mike. Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review our fourth quarter financial results. Following my remarks Walt will provide his commentary on our performance for the full fiscal year and discuss our outlook for fiscal year 2016. As usual, our comments this morning will focus on adjusted results. Please see the reconciliation table included with our press release for additional details. We are pleased to report another strong quarter despite the challenging comparisons with a very strong fourth quarter last year. Total revenue growth was 8% in the quarter. On a constant currency basis revenue growth was 10% with acquisitions contributing 9% and price and organic volume contributing an additional 1%. Gross margin as a percent of revenue for the quarter increased 100 basis points to 42.5%. Gross margin was positively impacted by product costs and foreign currency. EBIT margin was 17.8% of revenue, a decline versus the prior year but a substantial improvement sequentially as anticipated. The effective tax rate in the quarter was 29.9% compared with 33.8% last year. We did have several favorable discrete item adjustments in the fourth quarter, which lowered our effective tax rate below what we anticipated. We do not expect several of these discrete item adjustments to continue at this level of favorability in fiscal year 2016. Driven by growth and operating income and the lower effective tax rate, net income for the quarter increased 9% to $59.3 million or $0.98 per diluted share. Moving on to our segment results, Healthcare had a good quarter growing revenue 9%. Contributing to that growth, Healthcare service revenue grew 43% largely as a result of the acquisition of IMS. Healthcare consumable revenue increased 4% while capital equipment revenue declined 7%. As we said last quarter, we were anticipating the decline in capital equipment revenue in the quarter with strength in our surgical business and tougher comparisons in our infection prevention business. Our results for the quarter were in line with those expectations. Healthcare backlog at the end of the quarter was $97.7 million, a reduction of about 12% year-over-year. As we have discussed all year, we have successfully reduced our manufacturing lead times and we now fill orders on a timelier basis. For example, in products like lights and washers where we have in-source manufacturing, we have experienced double-digit declines in lead times over the past year. In addition to reductions in lead times, replacement orders represent a larger percentage of our total order pattern and pipeline and those tend to be filled quicker and reside in backlog for less time. Healthcare operating margins were 16.2% of revenue in the quarter, a decline of 150 basis points year-over-year due to an anticipated mix shift to lower margin instrument repair and increased research and development spending. While the decline was anticipated, I will say that we are pleased with the progress we are making to improve profitability in our acquired businesses. Life Sciences revenue grew 2% in the fourth quarter driven by continued strength in our consumable franchise with revenue growth of 5% and service revenue growth of 4%, offset by a 2% decline in capital equipment revenue. We continue to see weak demand trends in the research market, offset by pockets of activity in the pharma sector for capital equipment within Life Sciences. Backlog in Life Sciences ended the quarter at $45.5 million, in line with our historic levels and up slightly compared with the prior year. Life Sciences fourth quarter operating margin increased 330 basis points to 22.2% of revenue, which was driven by favorable product mix and disciplined operating and expense management. Isomedix had another good quarter with 5% revenue growth driven by demand from our core medical device customers. Isomedix operating margin was 28.4% of revenue, a slight decrease as compared to the prior year caused mainly by higher quality and regulatory expenses. In terms of the balance sheet, we ended the quarter with $167.7 million of cash and $623.3 million in long-term debt. Our DSO was at 64 days, a substantial improvement as compared to 71 days at the end of last year. Our free cash flow for fiscal 2015 was $161.6 million, an increase of $33.6 million compared with the prior year driven by increased net income and working capital improvements. Capital spending for the quarter was $28.5 million while depreciation and amortization was $22.1 million. On a separate note, during the quarter we successfully completed a five-year unsecured bank credit facility. Upon close of the Synergy Health acquisition, we will have immediate access to $1.25 billion of credit. With that, I will now turn the call over to Walt for his remarks. Walter M. Rosebrough - President, Chief Executive Officer & Director: Thanks, Mike. And I'd like to also welcome all of you to our fourth quarter and full year call. We are very pleased to have a strong finish to our year and solid growth prospects heading into the new fiscal year. Now I know you are all focused on the Synergy Health deal and let me assure you that we are too. But until the deal closes, hopefully in the June-July timeframe, we will report to you as the business stands today. We have set fiscal year 2016 targets for STERIS results on a standalone basis. I certainly do not want anyone to infer from that that we are not working to close the deal. And, of course, we will provide combined outlook for new STERIS after we come together. Having said that, let me cover a few highlights from a great year before reviewing our outlook. With revenue growth of 14%, we were able to drive 21% bottom-line growth, primarily due to increased revenue, margin expansion from operational improvements, FX cost favorability and a lower tax rate, all of which more than offset the impact of FX reduction on our international revenues. From an operational perspective, as we discussed at the start of the year, one of our most significant opportunities for improvement was IMS margins, which are lower than our corporate average. As we've suggested on prior calls, we exceeded our expectations for profitability improvement in that part of the business this year and are very pleased with the progress we have made integrating those companies. We've reached our planned operating income percentage targets by the end of FY 2015. The majority of our progress operationally integrating the five companies that form the new IMS is nearly done. As you all know, our costs benefit from a strong dollar. So foreign exchange was positive to earnings on the revenue we generated by about $10 million. However, our international revenue faced headwinds due to the strong dollar and we anticipate that they will continue to do so on a year-over-year basis in fiscal 2016. And lastly, as you've already heard from Mike about the lower-than-anticipated effective tax rate in adjusted EPS, much of which we do not anticipate occurring again in fiscal 2016. Turning to segment performance, Healthcare revenue growth of 18% for the year reflects solid growth in our consumables, in our legacy service business, and of course the addition of IMS and Eschmann acquisitions. Capital equipment ended flat with the prior year. As we discussed last quarter, we have had stronger performance in our infection prevention capital equipment this year, and weaker growth in our surgical capital equipment, which we believe was largely the result of customers waiting for the release of our newer products. In particular, we saw our new generation of lights and booms begin to ship in the fourth quarter, after a bit of delay versus our expectations. We continue to see signs that things are improving modestly in terms of hospital capital spending, and remain optimistic about our ability to grow capital equipment revenue in Healthcare in fiscal 2016, even in the face of the FX headwinds in our international markets. We have new products throughout our portfolio to facilitate growth in Healthcare, including a new, smaller footprint V-PRO hydrogen peroxide sterilizer and accessories, new OR lights, new OR booms and the strongest release of new products in U.S. endoscopy history. Life Science revenue finished the year up 2% with growth in consumables and service, somewhat offset by a decline in capital equipment. Despite the modest revenue growth, Life Science once again generated meaningful profitability improvement both in dollars and as a percent of revenue as a result of strong mix and good expense control. We expect our Life Science business to continue to grow consumables as it has in the past, and continue to add meaningfully to our bottom line. We have new products in both capital equipment and consumables in Life Science and expect to continue to expand our service offerings. We expect revenue growth in capital, consumables and service in FY 2016. And we also look forward to continued margin expansion due to the mix and OpEx expense control, even as we invest in R&D and plant expansion in line with new products we are introducing. Isomedix revenue grew 6% for the year, driven by continued demand from our core medical device customers. As we've discussed for some time, our facilities are running at high levels of capacity and we will continue to invest in expansions where customer demand is available. Margins in Isomedix declined slightly for the year, as we have increased our spending on quality and regulatory over the past year. While we continue to believe that the current margin levels are reasonable for Isomedix over the longer term, we do have two headwinds in fiscal 2016 that will impact profitability. First, we anticipate another $1 million in spending on quality and regulatory as we see the full year impact of investments that have increased over the course of the last year. In addition, we expect to incur costs for the disposal of depleted cobalt-60. As you all know, we routinely load and dispose of depleted cobalt in our gamma plants. In the past, the removal of the depleted cobalt was at no cost as long as we replenished the cobalt with new source. Going forward, we expect to be charged for the disposal of depleted cobalt. We will begin to set up a liability which will impact FY 2016 negatively by approximately $3 million. Beyond FY 2016, we anticipate a recurring $1 million increased expense for the costs of the cobalt disposal or a net reduction of $2 million versus FY 2016. As we look ahead at the new fiscal year, we are excited about the opportunities we see. We anticipate that total revenues will grow 5% to 6% for the year, substantially all of which is organic. We also anticipate growing adjusted earnings within a range of $3.15 to $3.30. For your modeling purposes, we expect the first half, second half split of earnings to be in line with our last five year average experience of 43% first half, 57% second half. While we are no longer providing detailed guidance at the segment level, we anticipate revenue growth in all three segments for the year and are clearly looking for expansion of EBIT margins year-over-year for the whole company. As you saw in the release, our outlook for free cash flow reflects a modest decline year-over-year, which is simply a matter of the timing of capital expenditures. We spent somewhat less CapEx in FY 2015 than we had anticipated and therefore planning on an increase in our fiscal year 2016 capital expenditures. Most of the $20 million increase is for Isomedix expansions. We remain committed to our disciplined capital allocation priorities, maintaining and growing our dividend responsibly relative to our growth, investing for growth in our organic businesses, targeting acquisitions in adjacent product and market areas, reducing our total company leverage and finally share repurchases if the other uses of cash are lower than our desires and do not offset dilution. Our guidance for FY 2016 assumes no EPS dilution as well as no acquisitions. As we have said, we would anticipate providing an outlook scenario inclusive of the Synergy Health deal after the close of the transaction. It is a perfect segue to my last subject, Synergy Health. Under the UK Takeover Code, combined with U.S. SEC requirements, we are very limited in our ability to comment on the deal or to change or update prior statements and/or forecasts that we have given. As we said in our release last week, we are firmly committed to the completion of this transaction and have been working diligently toward that end. It is our clear goal to close this deal and move forward with the many exciting opportunities we have as a combined company. The strategic rationale for the deal is unchanged. The synergies we have outlined in our public filings still stand today. Although with our current expectations of timing, they will not align as neatly with our fiscal years as we had originally anticipated. As we wrap up another record year, we have much to be excited about, STERIS people have continued to focus on our customers to deliver results and we are anticipating another year of solid growth ahead. With the closing of the Synergy Health acquisition, we hope to catalyze growth in EPS as we share experiences and utilize each other's knowledge and skills. The end result will be an expansion of our global footprint and a business even better positioned as a global leader in infection prevention. We appreciate your time this morning and your continued support of STERIS. I will turn the call back over to Julie for Q&A. Julie Winter - Director-Investor Relations & Head-Media Relations: Thank you, Walt and Mike, for your comments. We're now ready to begin the Q&A session. So, Yomi, would you please give the instructions and we'll get started.

Our first question comes from Larry Keusch with Raymond James. You may begin. Lawrence S. Keusch - Raymond James & Associates, Inc.: Thank you. Good morning everyone. Walter M. Rosebrough - President, Chief Executive Officer & Director: Good morning, Larry. Lawrence S. Keusch - Raymond James & Associates, Inc.: Morning. I'm wondering, Walt, if you could come back to some of the comments regarding backlog? And I know that you've been very consistent in your articulating the ability to reduce those lead times. So could you help us think about, as we move forward now, are you at a point where you believe that you've done what you can to get those lead times down and this sort of is a base for backlog or how should we be thinking about that broadly? Walter M. Rosebrough - President, Chief Executive Officer & Director: Larry, there are two factors that affect backlog. One is, indeed, lead times, and so that is real clear and we've talked about that, we've been talking about that for a while. And the second, is what type of orders the customers are putting in. And so I'm going to separate my conversation into those two. The first, to answer your direct question is in certain of our products, we are probably closing in on what you would expect, but we have other products where we think we can make additional improvements. So I would say, we are not yet at the point of the end of the line, if you will, on our ability to reduce lead times. So it's a mix, and we will, I think continue to see our total ability to ship more quickly improve over the coming years. And it's a function really of a couple of things. First is the way we handle long lead time inventory, parts that are used for the products. And as we in-source, we control those lead times much better than we do when we don't in-source, or we control it with a lot less inventory. So we will continue down that path. So I don't see that ending for a decade. The second point, though and what's probably driving it even more than the inventory the last six months to a year, is we've talked about our relative percentage of what I would call replacement orders versus the orders that are for large projects. And if you go back to the disastrous malaise of 2008, 2009 type timeframe, what we saw is the big projects that had steel in the ground, they had to go ahead. And so the percentage of our shipments going from big projects which typically have long lead times, we typically have those orders months in advance, not days or weeks in advance. That number ran up, if you will, to probably close to 40% of our capital equipment revenue. It typically runs kind of 70-30: 70% replacement orders – you know, I just want a new table, I just want a new light, give me three of these versus a large building project. And so what we saw in that time period, we saw a significant increase in the amount of project orders. Then you may recall, we've talked about this, that we saw the actual number of projects declining, but the size of the projects rising such that it basically held even. But then we saw replacements coming back so the percentages went back to their more normal cause. In our current business and pipeline, we're seeing those numbers running up more into the high 70%s, maybe even close to 80%, is replacement business versus projects. So their projects are falling on a percentage basis – actually on a dollars basis, now the projects have fallen out in the future, but the replacement business pipeline has risen. And that's why we have comfort that we will be able to grow revenue this coming year because we see much more replacement pipeline than we were seeing, even though the project pipeline has fallen off. And by definition, if the replacement stuff tends to be, give it to me as fast as you can, so our lead time drives that business, whereas the project is I'm going to place your order now, and give it to you in six months when my building is done. And then they miss that date by two months and so it's an eight-month timeframe, not a six-month timeframe. So that's the totality of what's driving those numbers. And I would not expect our backlog to fall in dollars significantly going forward as the business grows, but it wouldn't surprise me if it's a little bit. But I wouldn't expect large decreases over time, but it really depends on those two factors. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay. That's extremely helpful. And then one other one, just to follow up. I mean obviously I know that you're extremely focused in on the closing of the acquisition of Synergy and recognize the constraints that you have on what you can talk about. But if you put Synergy aside, and maybe at a high level, help us think about strategically and financially what you guys are really focused in on for the coming year, I guess, in the if you will the core STERIS business? Walter M. Rosebrough - President, Chief Executive Officer & Director: Sure. Taking Synergy aside, the comments I made actually capture it. We've got a pretty strong organic growth profile sitting in front of us. We have a lot of product development sitting in front of us. We continue the completion of the work of in-sourcing some of the products or parts for products that we build as well as, you know we have a significant restructuring and, moving the products, the System 1 products that had its own dedicated plant into some other plant, so we can restructure that. So that is clearly, there's a lot of work going on in the operations of the business which are basically around increasing the quality we have, putting new products in place that our customers like and reducing the cost and bringing more control over it by in-sourcing manufacturing, and we continue to do that. Now it's not like we've announced a few big $10 million kind of projects. Now they look more like 100 points of light, not one big glowing sun. But you'll continue to see that. Some of that profitability we capture and some of that profitability we pass onto our customers both in terms of better quality and delivery as well as some more cost. There's a lot of cost pressure in this business right now that you know. So I would say, at a high level that's the work. I've talked a little bit in each of the segments about what they're doing, but at a high level that's probably the best conversation. And then on the business development side, just because we're working on Synergy, the universe doesn't stop other companies. So we continue to look at things. And in fact after we close the Synergy deal, we and they will have more opportunities, we think, because it expands our opportunity set. So we are clearly watching that. And of course that will somewhat depend – if you only do so much, that will somewhat depend on when everything closes. But we continue to look down that front. So I guess the closing comments I made about our disciplined investment strategy pretty much summarizes it, but kind of at a more definitive level that's what we're looking at. Lawrence S. Keusch - Raymond James & Associates, Inc.: Okay. Terrific. Appreciate the thoughts.

Our next question comes from Mr. Chris Cooley with Stephens. You may begin.

Thank you and I appreciate you taking the questions here this morning. Let me follow up on Larry's lead question and I had one other. Walt, could you maybe just give us a little bit more color about the end market that you're seeing here in the States? Certainly appreciate how the backlog is changing and lead times are changing, but can you just talk to us about just maybe sentiment from your end market customers a little bit here in the U.S. is maybe that will help us better frame up kind of the capital, consumable breakout for fiscal 2016 for my modeling purposes. Then I have just one quick follow up. Walter M. Rosebrough - President, Chief Executive Officer & Director: Sure. And your points were well asked in terms of, I'll call it the consumable versus the capital side. So let me talk about consumable ongoing revenue type sources and then maybe on the capital side. First of all, the early part of this calendar year, the weather just created all kinds of havoc in the system, so January in a lot of places was pretty tough for hospitals and surgery centers and people that do our kind of work, and endoscopy centers. And so we clearly saw – and we see that – they saw in terms of cancellation of procedures and movement and then a lot of the hospitals got filled up with flu patients and so although they had a lot of patients in beds, they may have not had been doing as many procedures as they would have otherwise. So we kind of saw some of that early on in the year, weather dominated the eastern half of the country. And then the supply chain gets filled up because they're expecting more and it takes a little while for them to use up their inventory, and then they buy. So we saw a little bit of, I'll call it, disruption of what was otherwise a more normal steady process. I think we're through that. As best we can tell, we're through that and it looks to us like things are kind of "back to normal". Most of the facilities that I see, we see a number of people coming into STERIS to talk to us about projects they're doing or work they're doing. Most of the people I'm seeing are telling me they're busy and they're full. And so it seems like that we have seen some pickup there, here the last three months or so – or after we got through the kind of January, first half of February malaise. And it sort of seems that way across the board, this is not a detailed survey by the way, I'm talking about people that I'm talking to. It's a lot of people, but it's not a thousand. So that's kind of one side of it. So on the consumable side, it looks to us like steady growth. On the capital side, we are seeing, as I said, the pipeline in total is trending slightly upwards in our best estimate, and I'm talking single digit percentages now. But the mix has clearly mix shifted toward the replacement of individual devices or a few devices at a time as opposed to the large building projects that seems to have slowed down. Now if you look out even further, I'm talking to my architect friends and my architect friends are saying, I like to talk to them because they're busy two years before I'm busy, and they seem to be picking up as well, which is a good thing. But they also are seeing this mix of, it's a lot of smaller projects more than one big project kind of thing. But I think that may be a little bit of a longer term trend, at least for our side of the business. I can't speak to the capital outside of the ORCSD (29:50) kind of areas. I think, Chris that kind of wraps up North America. Now for our piece of the world, Europe seems to be kind of holding its own. That is it's not growing real fast, it's not dying. A lot of that – Europe for us includes the Middle East. The Middle East is stronger than the European continent. And so when you average that together, we're seeing some growth. We are seeing, have seen, and continue to see strength in Asia Pacific. We've been that way now for, I don't know, four to eight months kind of – excuse me, four to eight quarters kind of timeframe that we've seen our Asia Pacific business picking up relative to the others. And our Latin America business has been soft. Looking out in the future, we think we're seeing some pick up there, but it has been soft. And it's going to be soft for another quarter or so until we see that pick up coming through.

That's a great answer. Really do appreciate that. And just my quick follow-up either for yourself or for Mike, or both. When you think about the guidance and certainly understand kind of the transition that we're in right now with the Synergy merger pending. But when we look at just the core STERIS topline guidance for fiscal 2016, not to be glass is half empty, but help us think a little bit of why that number isn't higher as you alluded to in your prepared remarks, you have a strong new product cadence on the capital side. Does seem to appear that some of these in-market trends are at least neutral to favorable. Help us maybe understand a little bit more about why that topline aspect of the P&L guide isn't just a little bit more robust? And I'll get back in queue. Thanks so much. Walter M. Rosebrough - President, Chief Executive Officer & Director: Sure, Chris. I think we've said for a pretty long time that we expect the market in general to be growing in the low-to-mid single-digits, 4%, 5%. And we would expect organically to grow a little faster than that 5%, 6%, 6%, 7%, pick a number. And so I think our forecast is reflective of that. This is essentially organic growth. And so I think our forecast is reflective of that. Also the headwind of the international revenue next year is going to be in the $25 million range, so that clearly is not helping out. And so if you add that back in, you get another point or so. And the next thing you know it looks like fairly robust growth. And so I think it is good solid growth estimate. If currency takes a different twist, it would change that revenue profile. But I think that's pretty much it.

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

Hey, Walt, Mike, Julie. Thank you, guys, for taking my questions and good morning. Walter M. Rosebrough - President, Chief Executive Officer & Director: Morning, Matt. Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: Morning.

And just to follow up on Chris' question on the guidance. So currency looks as if it's about 100 basis points to 150 basis points. What about on the acquisition front, I'm just trying to get a sense of what you guys look at, is that 5% to 6% constant currency and organic, just trying to get a sense for what that is? I believe there's a little bit of IMS in there. Were there any other small bolt-on acquisitions in the quarter as well – or throughout the course of the year? Walter M. Rosebrough - President, Chief Executive Officer & Director: Yeah, I mean that 5% to 6% growth is including the effect of currency. So it would have been up another point or two, I don't know the exact number. But up another point or two if it were in a constant currency range. And then that's one of the things that people forget. That's just the way accountants look at it mathematically. But when your cost go up 20%, that constant currency stuff is on the business you actually get. When your costs go up 20% versus a currency, you lose business too. So it's actually a stronger headwind than when you do the accounting – than the accounting shows, because there's business you just don't get. And some of that is because you lose to local companies and some of that is because the customers wait until they can afford to spend the money, so put that piece out there. In terms of acquisitions, there's a few weeks, four to five weeks, I think of IMS. So that's a small amount, probably half-a-point or something like that. And there's a dribble, maybe, of tiny, tiny deals. But they're deals mainly in the IMS area and they're deals we consider them organic because they're small enough it's literally the same as if we went out and bought three trucks and hired 10 people. They are that size a deal. So whether we go out and hire 10 people and buy three trucks, or we do an asset buy of a very small company, to us looks like the same thing, so we consider that organic. And it would be trivial in your numbers.

Okay. Perfect. And then last quarter you talked about smoothing out your Healthcare capital equipment sales. How successful were you with that and what do you think the impact of some of that smoothing was on the quarter? Walter M. Rosebrough - President, Chief Executive Officer & Director: Well, last year we didn't do a very good job of that and that's why – we did a better job the previous year. But we have a ways to go there and it would be far better if our capital equipment sales were a function purely of customer demand, not a function of our plan years. And that's an objective that many, many companies are working on, as are we, and we're going to try to get better at it because it's better for our factories to run in a more even mode. Now what we have done, we can handle some of that with inventory. So we build inventory over the course of the third quarter and into the early fourth and we ship some. But still, we'd be better for it. We are going to be working on that again this year. That's why you see the profitability splits that you see are more front end weighted than last year and – than the year before, but they are not as front end weighted – they are not as even as I would like. If you're a growing business, you expect the first half to be smaller than the second half. Ours is a little too heavy on the second half, and it's largely that capital, year-end capital shipments.

Okay. And then just last one for me and then I'll jump back in queue. I think you mentioned that the costs for disposal of cobalt-60 were going to be increasing this year. Is that a regulatory cost that's going up or is that something that's coming from Nordion? And has there been any update on potentially being able to dual source cobalt? Walter M. Rosebrough - President, Chief Executive Officer & Director: That's actually a function, not of our Nordion cobalt where we have long-term contracts, but from our other supplier. And as a result, since we at this point cannot be assured that we will be purchasing from them, we have to take care of the disposal, since as I mentioned in my discussion before, the disposal if you will was part of the purchase price in our thinking. As long as we bought the next load, they disposed of the last one. Since we are no longer can be assured that they will be here to do that, then we need to set up a reserve. Because we can get it disposed either by them or by Nordion or someone else. And so that's the cause for that reserve. How that ends up, I think we're being appropriately conservative in doing that. How that all ends up, if we're a little bit luckier we will be able to take care of that. But it's not at all the Nordion issue. It is the other supplier.

Okay. Thank you.

Our next question comes from Dave Turkaly with JMP Securities. You may begin.

Thanks. I think you mentioned that FX was positive to EPS in fiscal 2015 by $10 million. I was wondering do you have an estimate of what that will be to EPS in fiscal 2016. Walter M. Rosebrough - President, Chief Executive Officer & Director: Orders of magnitude, about the same. And again, I have to reiterate that's the way it looks when you do all the math, but the additional business we would have received around the world, we would have made money on it. It just doesn't show up in the calculations. So if you look at the straight math on the business that we will achieve, or we expect to achieve, it would be about $10 million.

And I know that your standalone guidance might not be the most important thing here, but kind of at the midpoint it looks like 8% earnings growth. I know you guys historically look for double digit, given that you have that FX kind of tailwind. I guess what do you think could help you either get to that 10% for the year or what is new this year outside of no deals in the guidance that kind of would keep you a little more subdued? Walter M. Rosebrough - President, Chief Executive Officer & Director: Yeah. In the middle of our guidance, as you say, is right around the 8% range. And that would be our kind of normal long-term expectation, because we do expect a portion of that double digit growth to come from acquisitions, and so at a high level that's kind of what we've said, mid-single-digits in revenue growth, get a point or two out of profitability improvement on that expanding revenue and then you've got to get a point or two out of acquisitions – out of business development. So at a high level, it's pretty much all on our long-term expectations. As you might expect, we don't like to hit the bottom of our range and we don't like to hit the middle of our range. We like to hit the top of our range. We get paid a lot more if we hit the top of our range, so we like to get there. And if we are unable to do deals in this timeframe, we'll be pushing hard to get up to the top of the range, but I think the range is a reasonable estimate of what our future looks like. I think it is consistent with our long-term expectations.

Great. Could you remind us too of the interest rate on the $1.25 billion, if that's set? Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: Yes, Dave, we have entered into agreement with about 14 banks for the new credit facility and that variable rate is about 1.5% on the $1.25 billion.

Great, and last one for me, and I may get shot down here. But you highlighted two scenarios in your M&A transaction, the filing. I was just curious if you could even say did you contemplate currency at all in terms of synergies? The estimates, the range you have there in terms of their future outlook? Walter M. Rosebrough - President, Chief Executive Officer & Director: We contemplated currency as it was at that time.

You couldn't tell us what those rates were could you? Would you be able to? Walter M. Rosebrough - President, Chief Executive Officer & Director: I believe that's disclosed in the S-4.

Okay. Walter M. Rosebrough - President, Chief Executive Officer & Director: And I believe it's $1.61. Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: $1.61 to be exact is the rates that we used in our analysis.

Perfect. Thank you so much. Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: You're welcome. Walter M. Rosebrough - President, Chief Executive Officer & Director: You bet.

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

Hi. Good morning. Hello, everybody. You mentioned earlier incremental invested capital associated with Isomedix. Can you elaborate on that? Is that just related to cobalt disposal or is there a facility expansion? And would that bump the CapEx spend? Would that change with the closing of the Synergy deal? Walter M. Rosebrough - President, Chief Executive Officer & Director: I'm going to answer – I guess there's three questions in there. First question is that CapEx, there is routine CapEx for cobalt spending and that is not out of the ordinary in our plan. The bump-up is all associated with expansion of facilities. And so it is truly an expansion of facilities. Now when you expand facilities, if you're expanding gamma facilities, you know there's some cobalt buy, so you have to mix all that together. But in general, that is an expansion of facilities, not an expansion of cobalt. We have expanded our cobalt – our gamma facilities over the past year or two, so there is more routine buy because of those expansions. But the significant over-spending relative to the last year or two is expansion of facilities. Yes, I've now forgotten the second half of the question, Erin. I'm sorry.

I guess would that bump to the CapEx change if you close the Synergy deal? Walter M. Rosebrough - President, Chief Executive Officer & Director: Yes. Clearly, what we will spend in those facilities is completely independent of the Synergy deal. They are virtually non-existent in North America. So what we are spending in North America is independent of that. But we would expect CapEx to rise if we do the Synergy deal because they have the same issues that we do. They have routine spending in gamma and then they are expanding outside the United States on a routine basis. So it would be similar and I think it's easy to go back and look at their – we haven't forecast that per se, but if you go back and look at their CapEx and look at the S-4, I think you would find relevant information there. Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: And, Erin, just one point of clarification. The disposal cost of the depleted cobalt does not go into capital expenditures. It's actually a period expense. So that will be recognized through cost of goods sold as an expense.

Okay. Great. That's really helpful. And what's driving the faster improvement in IMS margins? Is it just quicker consolidation of what's left on integration front, and how would this business fit into the broader global platform next year? Walter M. Rosebrough - President, Chief Executive Officer & Director: Yes, Erin. I would say there are two factors. And I'm going to separate the financial result from the operational piece a little bit. That is a big piece of the financial result, as we've discussed before, was we – that is the various companies of IMS – were outsourcing to other people things that they didn't do well. Most of these companies were either very good at surgical instrument repair or very good at scope repair, rarely both. And so what happened is the guys that were good at instrument repair tended to sub out their scope repair and vice versa. The beauty is we bought a couple companies that were good at one and a couple companies good at other, so we in-sourced their outsourcing to each other. And that happened, we expected it to be pretty quick, it happened really quick. And so there was enough capacity in the labs and we were able to beef up the labs. We really got that impact very fast. And then the second piece is the more difficult, long-term work, which is overlapping territories and do we have enough people? Again, as a service business, you need to have geographic density, if you will, to be at an optimum level of profitability. And again, all these companies were regional light (46:29) companies, and so they were all trying to expand outside their regions when we put them together. Places one was expanding, the other already was and so we got much better regional density. That has taken longer. And then the whole back office, IT and getting all the regions aligned. Sometimes we had three people where we needed two when we put them together; sometimes we had two people where we needed three. Getting them all in the right geographies, that has taken longer, and we're effectively through that as we speak, actually. We're kind of finishing that up now. But the financial result is less impactful than this outsourcing. So we were able to get there quicker than we thought and we're hitting the targets that we expected. And so we think we're in good shape. Now this coming year we actually will continue to improve, but we'll also begin some more investing for growth in the business. So we're not expecting a significant differential this year because we do expect to continue to grow that business. We expect to be a high-single digit, low-double digit grower and we'll have to invest to do that.

Okay, great. Thanks so much.

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

Good morning. Julie Winter - Director-Investor Relations & Head-Media Relations: Good morning.

Just looking at the Healthcare segment, the operating income talked in the release about an increase in R&D expense. What was that percentage increase on a year-over-year basis and how should we look at that going forward? Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: Yes, Jason, what we typically look at, and I don't have that percentage right off the top of my head, but what we anticipate is about 3% of revenue being spent on R&D and I don't think that changes in 2016 and beyond at this point in time.

Okay. And just looking at the numbers here, on the... Walter M. Rosebrough - President, Chief Executive Officer & Director: But it is growing faster than revenue, so if it was 2.8%, it's now 3.1%. It's that kind of effect because, again, it's relatively small numbers, but it is growing faster. My recollection is it's growing in the mid- to high-single digits.

All right. That's helpful. The foreign revenues in the quarter, what was the performance year-over-year on a constant currency basis? Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: For the quarter, if I look at where we grew internationally, North America we saw about 14% top line growth, but the rest of the world we saw negative growth, Europe about 16%, APAC about 8% and then, as Walt mentioned earlier, we continue to struggle a little bit in Latin America. That was down about 30% for the quarter.

All right. And then in reference to the savings you expect in fiscal 2016 from in-sourcing and restructuring? I think you had said previously $4 million to $6 million on the in-sourcing and $5 million on the restructuring. Is that still about the same? Walter M. Rosebrough - President, Chief Executive Officer & Director: Yes. We're exactly right on target there.

All right. And finally, the Healthcare segment, would you happen to have an organic figure for the quarter? Michael J. Tokich - Chief Financial Officer, Treasurer & Senior VP: Organically, Healthcare was down mid-single digits or low-single digits, sorry, low-single digits organic. And it was really driven by the capital being down 7%.

Thanks very much. Walter M. Rosebrough - President, Chief Executive Officer & Director: You're welcome.

Our next question comes from Mitra Ramgopal with Sidoti. Your line is now open. Mitra Ramgopal - Sidoti & Co. LLC: Yes, hi. Good morning. Walt, you did mention that you expect a number of new products to come on stream this year, and sounded particularly excited about the Endoscopy line. I was just wondering if you expect these new products from a competitive standpoint to be fairly meaningful or is it more rounding out the existing offering? Walter M. Rosebrough - President, Chief Executive Officer & Director: U.S. Endoscopy, the way they work is trying to find new problems that haven't been solved and develop niche products for those new problems or maybe old problems with new solutions. And so most of the product that they have is a very targeted product, so it's not so much I'll call it a market share play. There is a problem out there and we can fix it, and if we do that, we can make some money doing so. So I would characterize their product portfolio that way. Having said that, there are groups of procedures that to the extent you have four or five or six products focused toward the care and cleaning of the device, and four or five or six products toward finding and retrieving polyps, for example, or finding and retrieving other things. And so they do cluster them that way and they are filling out those clusters. So to the extent that's what – I don't think of it as much as a head-to-head competition on any particular products, generally. It's generally more of a how can we fill out a portfolio of things for a certain set of procedures, and they are doing a very nice job of doing that. Mitra Ramgopal - Sidoti & Co. LLC: Thanks. And you've pretty much baked that into the guidance for fiscal 2016, or is that more a longer-term play? Walter M. Rosebrough - President, Chief Executive Officer & Director: Well, it is both. That is if you look at the class – we kind of look at classes of products. We have four, five, six, seven a year come out. And indeed the FY 2016 portion is factored into 2016, but really 2016 is being impacted more by the 2014 class and the 2015 class. There will be some impact from the 2016 class but we will see even more impact in 2017 and beyond. Mitra Ramgopal - Sidoti & Co. LLC: Okay, thanks. And then just a quick question on acquisitions. Ex-Synergy, as you look at potential opportunities in the marketplace, the one thing I've been hearing is valuations have become a little more frothy, so to speak. I was wondering if you're seeing the same thing in the areas you're looking at? Walter M. Rosebrough - President, Chief Executive Officer & Director: Well, market valuations in general are high, higher than they were – I don't know if it's high or low – but they are higher than they were a couple years ago for sure. Interest rates are lower. And when you put those two things together, you get what you get. And so I do think we see some high valuations. We work to be careful to pay only what we think we need to to get the thing done and we work to make sure that we don't have alternative ways of making more money, including buying our own shares back. So, we try to be very careful with that and we are an ROIC-driven company. We pay attention for return on capital, not just the earnings growth. But we are seeing some more steam, of course. And again, as long as you see these relatively low interest rates, I think you may see some of that. Mitra Ramgopal - Sidoti & Co. LLC: Okay. Thanks again for taking the questions. Walter M. Rosebrough - President, Chief Executive Officer & Director: You bet.

You have a follow-up question from Ms. Erin Wilson with Bank of America. You may begin.

Great. Thanks. Just going back to U.S. Endoscopy, for 2016, what's incorporated into your guidance there and I know you don't break it out, but just anecdotally has anything changed in the trajectory at all there? Walter M. Rosebrough - President, Chief Executive Officer & Director: Erin, anecdotally, we had a five-year plan for U.S. Endoscopy and they have been hitting or beating that plan year after year. If they hit what we have incorporated into our guidance, they will have hit their five-year plan in four years.

Okay, great. And this is maybe a broader one, but how does the recent superbug outbreak in California influence you at all? Walter M. Rosebrough - President, Chief Executive Officer & Director: Well, there's a number of superbugs, but I think you're talking about the scope bug in California that's gotten a lot of press.

Right. Walter M. Rosebrough - President, Chief Executive Officer & Director: It's not 100% clear how that's going to affect all of us. First of all it is a very, very tiny piece of the work we do. This is specific to a particular bug and a particular set of scopes called duodenoscopes, some people call them duodenoscopes and so if you look at our piece of that action, it is teeny tiny. Or look at that in total in terms of any kind of broad percentage, it's tiny. It is in our business teeny tiny. Now if you're one of those patients, it's not tiny. It's (55:43) important. And we are working with the scope manufacturers. We're clearly in discussion with the various societies that help determine how we do this, and we clearly would be working with the agency to the extent that they are doing anything. So, we will be involved in this and we think we are a contributor. I will say that none of these reported issues have been on our devices. So at this point in time, we've not seen any direct impact. I think that it's a more indirect impact of how we will look at doing a better job with those devices as a collective group in the future.

Okay, great. Thanks so much.

I'm showing no other questions at this time. I'll turn the call back for closing remarks. Julie Winter - Director-Investor Relations & Head-Media Relations: Great. Everybody, this concludes our call. Thanks again for joining us and we'll talk to you next quarter.