Good day, everyone and welcome to the STERIS plc Third Quarter 2018 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Julie Winter, Senior Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie, and good morning, everybody. On today's call, as usual we have Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO. I also do have a few words of caution before we open for comments from management. 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. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, those risk factors described in STERIS' securities filings. Many of these important factors are outside of STERIS' control. No assurances can be provided as to any results or the timing of any outcome regarding matters described in this webcast or otherwise. The Company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the Company and on our website. Adjusted earnings per diluted share, segment operating income, constant currency organic growth, and free cash flow are all non-GAAP measures that may be used from time-to-time during this call and should not be considered replacements for GAAP results. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental all financial information used by management and the Board of Directors in their financial analysis and operational decision making. STERIS' adjusted earnings per diluted share and segment operating income exclude the amortization of intangible assets acquired in business combinations, acquisition-related transaction costs, integration costs related to acquisitions and certain other unusual or non-occurring items. To measure constant currency organic revenue, the impact of changes in currency exchange rates and acquisitions and divestitures that affect the comparability and trends in revenue are removed. We define free cash flow as cash flows from operating activities less purchases of property, plant, equipment and intangibles, plus proceeds from the sale of property, plant equipment and intangibles. Additional information regarding adjusted earnings per diluted share, segment operating income, constant currency organic revenue growth and free cash flow is available in today's release. With those cautions, I will hand the call over to Mike.

Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review our third quarter performance. For the quarter, constant currency organic revenue growth was 5.2%, driven by volume and 110 basis points of price. Gross margin as a percentage of revenue for the quarter increased 250 basis points to 42.6% of the improvement 170 basis points is due to the impact from the divested businesses with the remainder due to favorable product mix, price and productivity improvements somewhat offset by negative impact from currency. EBIT margin expanded 140 basis points to 20.8% of revenue for the quarter. We are very pleased with our continued ability to expand EBIT margin and leverage revenue growth in addition to the favorable impact from the divested businesses. The adjusted effective tax rate in the quarter was 22.6% which added approximately $0.05 to earnings per diluted share. Included in the third quarter effective tax rate is the impact of the U.S. Tax Cuts and Jobs Act enacted in December. The tax reforms primary change is a reduction in the U.S. federal statutory corporate tax rate from 35% to 21%. As a March fiscal year-end company, we benefit from a blended U.S. tax rate reduction from 35% to 31.5% in the current fiscal year because tax law changes must be accounted for in the period of enactments, we have recorded a benefit in our third quarter tax expense to account for the year-to-date affect of the blended tax rate which will not be repeated again in the fourth quarter. While our assessment of the effects of the tax reform is ongoing, we do expect the benefit we recorded in the third quarter to result in a tax rate of approximately 25% for the full fiscal year…

Thanks Mark, and good morning everyone. We are now three quarters of the way through our year and have delivered constant currency organic revenue growth at the high-end of our expectations growing 5% year-to-date and are on track for another year of record earnings. Looking across our portfolio, we have high single-digit or low double-digit revenue growth across the majority of our businesses driven by solid underlying market trends and new product and service offerings. In particular, our healthcare specialty service segment has outperformed our expectations across the board growing constant currency organic revenues 10% year-to-date. Life Sciences whose capital equipment business has now had two strong quarters in a row with continued strong backlog grew constant currency organic revenue 8% in the first nine months of the year. Our AST business continues to experience increased volume from our core medical device customers. In addition, I'm pleased to report that our facility in Puerto Rico which is now back to normal production and has been since December much faster than we anticipated. We originally thought that the hurricane in Puerto Rico could impact profit in our AST segment by as much as $3 million this year. Based on where we stand today, we now expect the impact to be just $1 million, all of which was incurred in the third quarter. In addition, we have recently launched our sustainable EO sterilization service offerings, which will assist customers in developing strategies to reduce the amount of ethylene oxide used during sterilization, at the same time achieving prescribed sterility assurance levels, that is good for our customers and good for the environment. Within healthcare products, we have a solid growth in organic revenue fueled in part by many new launches including our newest 20 minute biological indicators for low-temperature sterilization named Celerity.…

Thank you, Mike and Walt for your comments. Jamie, would you please give the instructions and we'll get started on Q&A.

[Operator Instructions] And our first question today comes from Isaac Ro from Goldman Sachs. Please go ahead with your question.

Couple for me. First off on the med device customer demand and we look across the industry this quarter, obviously pretty solid results for other companies, but seems like your business was a little bit better than otherwise would have been expected. Anything you can point to that might be one-time in nature or customer-specific that help drive the strength in that business?

No, not really. Again we do seem to be picking up a specifically the STE business where med device in general would drive that. We do seem to be picking up steam a little bit again I suspect we may be picking up a little share in that space.

And then maybe a follow up on the expense side obviously on the tax benefit here and you mentioned the one-time bonus payment to employees. Are there other elements to the tax reform that are going to lead you to reinvest more aggressively on longer-term projects innovation related things just kind of curious what else you're doing with the windfall here to try and fuel future growth for the business? Thank you.

Sure. We have been long-term in-sourcer, onshorer people may be before it was popular again for the last 10 years basically. And so that something is clearly a part of what we expect to do. We do like to make things, we like to design things, we like to make things, we like to sell things. So all of those things are a natural element of what we do as a result we've grown employment and we’ve been able to bring more money to the bottom line. But the Tax Act clearly incents us to do more of that. And so all things being equal there're projects - that if they were at the margin maybe not as attractive as we might have like they maybe more attractive. So clearly capital spending in the short run is more attractive than it was two years ago, and almost any I’ll it investment that gives a reasonable return in the U.S. is more attractive than it was a year ago. So, all things being equal we would expect to see some more investment in that space.

Our next question comes from Larry Keusch from Raymond James. Please go ahead with your question.

Just a couple of quick questions, maybe starting with AST. So that growth was obviously nice 2.5% on an organic basis. I guess Walt you indicated a disruption from the hurricane was less than anticipated. Is there anything else to read into that growth rate, I recognized the comp was a bit easier but was there any sort of perhaps on Puerto Rico, companies that were moving more aggressively to get volume through the facility given that they were coming up at speed as well?

I don't think so - you are correct you remember last year third quarter kind of all of our consumable or recurring businesses just had a slump around Christmas and at the time we really didn't understand it and to be honest we still don't really understand it. Our suspicion is it was just the way the holidays fell and people were taking off more time than normal and that seems to have come to fruition because we didn't see that in the third quarter. So that on a quarter-over-quarter that's clearly the case across the board for all of our consumables, but when you look at it for the year, we’re still having a wonderful consumable year across the board recurring revenue actually across the board. And I don't think there's any overwhelming change in the Puerto Rico issue that is, yes there were things that were not done and yes there is a little bit of catch up, but it turned out - it turns out that they were not down as long as any of us thought that is our customers were not. We got up in about a week and a half and we’re able to start processing and then they really have done a nice job and you have to give credit to the Puerto Rican people they have just because they’re still living in pretty tough conditions, but across the board for what they're doing in all the medical device companies. And then those the feed us of course in our plant as well, we’re just ecstatic at the work they are doing.

And then just two other quick ones. Just on HSS again really nice nearly 9% constant currency organic growth there, but the margin was down sequentially I believe 5.6% in the third quarter from 8ish in the 2Q. So again anything that that sort of changed during the mix there to be thinking about and maybe what's the right way to think about directionally where you think that margin can go over time?

We spoke a year ago this time, we're having a very different conversation as you remember. Year ago at this time, we said we over invested in way in front of revenue that -- or just in front of revenue we expected and then not only did we not get what was expected, we lost on it. So that really hurt you in a service business. In this case, we've held back just to make sure we once burned. You want to be a little more sure and now they’ve begun to reinvest for future growth, but we will be far more careful I'm sure and don't expect a significant reduction as we saw in the past. So you will see some variations quarter-to-quarter, but if you look at it longer-term, we don't expect or we do expect to be where we said we were going to okay.

And then last one, I know you're not you providing 2019 guidance at this point and thank you for the color on the tax rate. Just two things come to mind. Number one, is there anything that you can say as it relates to Northwell and timing there? And then also obviously there was a meaningful portion of the margin expansion this year was due to the divestiture of the assets. So it is it fair again to think about your typical 50 to 100 hundred basis point underlying margin expansion targets is the right way to think as we move forward past this period of the divestures.

So two questions I think in there and I'll try to hit them both. Northwell no real further comment than what we've already said as you know than has been reported not us but by others that the building is essentially done and we have said that we are spending capital in that space now. So we fully expect to start up next year sometime and yeah we're giving no more guidance on that now, but we will in the future. So at a high level that's that conversation. We also have seen again continued interest in other places to do similar type things. It will not affect next year in any significant way other than potential capital spending, but we have some things that are looking more like fire and smoke now. So we are seeing some early signs that that may come to fruition more than the past year, year and half. The last topic you raised was margin and generally speaking, I think you're on track. The bulk of the divestiture movement has occurred and so if you look year-over-year goes, quote, unquote, “our normal cost reductions” I will caution as always, we are in our planning cycles. We're thinking through what our strategic investments are going to be. And as you know, we don't always drop every dollar that we find into the bottom line. We invested for the future and we invested in our customers. And to us tax is just one cost. So there are a number of costs that we will be working down next year and some of which is the tax rate and we want to make judicious decisions about what to do with those things.

Just to be clear, when we say, next year, we mean…

Next fiscal year is always the next year for us, exactly.

Our next question comes from Dave Turkaly from JMP Securities. Please go ahead with your question.

I guess we see some of the benefit of so your balanced or diversified business today, but Walt, just to make sure and check the box and hear your thought on the healthcare capital side again, any other color, I know it's the second quarter where and I know it can be lumpy, but any color on major product, products or projects and replacement capital, anything that you could give us just to clarify what you're seeing out there today?

Sure. At a high level again, I would not characterize and now I am talking more about the pipeline, which I think is your question the hospital spending pipeline if you will. I wouldn't characterize it significantly different in North America than we have been characterizing it in the past. So we still see a solid pipeline in the future projects that we're seeing for the potential future for real projects that we expect to occur in the future still looks very similar that we've been talking about. It's solid to maybe slightly up. So that always makes us feel good, particularly given the level of uncertainty that's going on in healthcare reimbursement issues in the United States. In the rest of the world, actually the pipeline I would characterize and I think I did last time that the rest of the world seems to be picking up a little bit and particularly in certain areas. Europe has stayed strong for us, Middle East was pretty much a disaster for the last 18 months, but it is now picking up. So we look at EMEA as one unit that we see I think more strength there than we have seen in the past. Asia-Pacific was very strong last couple of years, it kind of flattened out this year but I think we see a better future there in terms of pipeline. And Latin America which has been really tough for us has seem to have bottomed out. So we have a bottom and maybe a little bit of pipeline there then we have in the past. So the rest of the world is actually looking stronger. I will add we talked about currency and the effects of currency a lot in terms of what hits the revenue, what it's a bottom line but that's I’ll call the accounting version of currency. When we have - when the dollar strengthens to other currencies it is a headwind for STERIS because we tend to build the North American most of those costs are U.S. based costs and so U.S. dollar based. Most of our competitors are not building in the U.S. and as a result most of their costs are other than dollar base, so when the dollar strengthens we have headwind selling both in the U.S. and outside the U.S. When the dollar weakens, we have a tailwind. So up until the last couple of months we've been pretty much running into headwinds the last couple of months things are changing. Now I do not try to forecast currency but because if I could that, I wouldn’t be working here, but in any event we do see some relief of the headwinds that we've been facing in terms of our currency for the last couple of months.

And then I guess just two quick follow up on the AST obviously. People have talked about how strong it was. As you look at that close to 10%, high single-digit growth may be gaining some share. Can you sustain a growth rate like that I mean my recollection was that some of these - your facilities run pretty hot and that there wouldn’t be maybe capacity for you to sustain sort of increases like that without sort of expanding. So just love to get your thoughts there on what that could look like even as we’re looking ahead to next fiscal year? Thanks.

No question, if you have 60 points roughly and if you wrote 10% a year roughly that means you have built six points a year roughly. Now a plant is not a plant, the U.S. plants tend to be more concentrated as a result, tend to be larger probably close to 2X larger and so that's one set of facts - it is very different to have to build a brand new Greenfield plant, as opposed to adding a couple of units inside a plant or adding on to a plant where we already have the ground, and we have a number of expansions which is what do our big piece of our capital spending. A number of expansions going on as we speak I think as many as 7 or 8 I done that off the top of my head but that type of expansion levels across the world. And we are in fact investing across the world in those expansions. And so we think that the growth is there and we will be able to meet it, it used to be if we go back in time the Isomedix days 10 years ago when we did eight plant expansion it was a big deal it caused profitability to fall pretty significantly because new plant takes a while to get filled and then make that money. We've worked hard to get that more on a routine basis. So we’re always expanding and I suspect we’ll always be expanding as long as medical devices keep growing which we don't see any end to that frankly. And so it's much less of a pain now when we - to the bottom line finance of the whole company STERIS in total and certainly AST when we’re doing that. So there are expansion dollars if you will reduction of profitability already in our current operations and we’ll always be as far I’m concerned.

Our next question comes from Matthew Mishan from KeyBanc. Please go ahead with your question.

Walt most of your businesses are growing high single digits or low double-digits now I mean you had a really incredible quarter in almost everything with the exception of healthcare capital equipment. Could you give us a little bit of color on maybe the surgical side versus the infection prevention side - you said you not worried about it. Like why should we not be worried about it?

Well first of all, I'll break it in two questions, why we're not worried about it is if you look longer across the Board, it hasn't grown that fast but nor has capital spending grown that fast. So from a long-term perspective, we're not that concerned about it. At any given time in each of the units, we have product families or products that are doing really well and product families that are not doing as well and that's -- we have that currently. So for example, if you look the last couple years our ORI business has just been on fire. It was exactly stronger last year than this year on a growth rate issue and that just happened. A couple of big projects can change that very quickly. The same is true with our what we call the MS or equipment management systems. They're very strong growth last year, less strong this year. So it's a mix-and-match of products across the area. In the IPT business, washing has been particularly strong lately and steams the relation less strong lately. Hydrogen peroxide was extremely strong a couple of years ago, now it's just strong. So it mixes and matches and when we look across the Board and what we're doing, what we have done and what we are doing, we believe we're in a good position in our capital equipment businesses. And again, I mentioned the headwinds of a strong dollar and that's receding a bit right now and that's obviously positive for us in terms of relative particularly outside America, but even inside America since most of our competitors manufacture outside America, it changes the headwind, tailwind equation.

And then you mentioned 30 new products in that area. How much on average, what number of products do you tend to release in that area in any given year? Is there any difference in level of importance of a couple of them versus previous couple years?

Absolutely, there are significant differences of levels of importance and we have continued to pick up product launches in the healthcare products group in total and so we have continued to grow I guess just I would say 30 is a big number. But on the other hand we're not I wouldn't suspect the number is going to be a whole lot less next year either. So we have picked up our product development. We have a broader product line today. So each of those product lines needs to be refreshed on a routine basis. So I suspect we will see more and more. And when I said the 30, that's a mixture of capital and consumables, but it is across the Board in capital and consumables. We have a number of releases. I mentioned the biological indicator, that's a really nice change for us. We had a 24-hour biological indicator for hydrogen peroxide, which was the state-of-the-art. A few years back, we were the first also have one that went across our line as well as the J&J line, which was state-of-the-art. People have caught up with us and/or passed us and now we have a 20-minute biological indicator in that space, which is state-of-the-art. So that's just an example, but I could walk through 10 examples like that where either we're refreshing or bringing new products to market.

And last two for me, I just wanted to follow-up on the more fired than smoke commentary around healthcare specialty services and that offsite central still processing model. What regions are you - is that is a US-based comment coming off of Northwell or is that in various international regions and the size of the type of projects you're seeing. You sized Northwell before, are they similar type product sizes or smaller, bigger? And then for Mike, I'm not sure if you updated the FX guidance or not? I think last quarter you said, you thought it would be favorable by $35 million.

I'll answer the first couple of questions. First of all, I was specifically talking about North America, Europe which is worth the outsourced CSDs started really was -- Europe has been fire for a long time. The synergy operation that one of the principle reasons we was interested in synergy was the European outsourced operations and they are growing and it continues to, but that's not -- that's not a novel thing in Europe. So I wasn't thinking of although they have more opportunities as well, but in North America as you know, we said this was a long project to create a nascent market in this space. And Northwell was kind of the lone example for a long time and we do expect to get that up here in the next bid, but has been slow to get started. But we now have a couple of other places that are pretty interesting. I think we're closing in on doing a couple of other ones. So generally speaking, I'd expect it to be smaller than Northwell. Northwell is a very large local IDN and so has a number of hospitals that are geographically concentric. I would expect most situations to be smaller.

And then, Matt, regarding the FX outlook, so if we use the forward rates at the end of December, our forecast would be still to have revenue positively impacted by about $35 million from the original outlook. And then EBIT is still about neutral as both the Pound and the Euro have increased more than the Peso and the Canadian Dollar.

Matt, just to clarify on the year-over-year that translates to $20 million year-over-year on revenue. 35 million from the start of the year plan, 20 million year-over-year.

And both being neutral to EBIT.

Our next question comes from [indiscernible] from Stephens Incorporated. Please go ahead with your question.

On healthcare capital equipment, just building on Dave's question from earlier, it sounds like the end markets remain favorable in the U.S. and maybe a little bit more favorable internationally. You may also get some benefit from currency there. So should we think about the decline this quarter as a function of timing, and should we see some of this come back in the fourth quarter? I just want to make sure we're thinking about that right.

Well, the answer is, yes. I think about it as timing when you look it – I'll call it long term timing and in the third quarter specifically. The fourth quarter, I would say, yes, except for if you talk year-over-over. If you talk quarter-over-quarter, yes. If you talk year-over-year, last year, we had an extraordinary capital shipment quarter. So year-over-year, I would not expect a radically different view based on timing. In fact, if anything is going to be tougher in terms of timing. But quarter-over-quarter, yes.

And then Walt, as you said earlier on - Live Times has put up some great numbers recently, Capital Equipment was up 33%, organic growth is up 14%. Can you maybe just elaborate on some of the drivers behind that growth and how sustainable that is as we move forward?

First of all, our Life Science folks have positioned themselves very nicely. On the consumable side we're pretty much focused on vaccines and biologics which are good places to be. We also think there is still significant upside in terms of what I’ll call penetration into that space. And so they've had a long history now of high single digit, sometimes double digit growth in that space, and we don't see that abating. On the capital side, those of you who followed us a long time know that we've had an eight-year drought if you will in Capital Equipment in Life Science. And it's all again focused in pharmaceutical plants or largely in pharmaceutical plants. But we've had a long drought. And the last year or so, we've clearly seen projects picking up, and that's Peso. What you saw early on was backlog growth. You know, we went from 30 million-ish. We felt happy if we were 40 million-ish backlog and now we're looking at 60 million-ish backlog. So pretty significant growth in backlog. And of course, it wasn't shipping, it wasn't shipping, it wasn't shipping because Life Science projects tend to be longer in nature, they are highly engineered commonly. So it may take six months to a year from the time we get an order till we deliver the order. Well, it's starting to ship now, started shipping two quarters ago. It's now shipped to the third quarter, and we don't really see an end to that at this point in time. So we've seen just strong - we've strong shipping and strong pipeline. So, we're quite confident. Now, some of that is obviously market. The pharmaceutical guys are putting money back into those spaces. I wouldn't be surprised to see more in the U.S. for the same tax reasons that we talked about. But another piece of it is our guys have done a really nice job of working on the hydrogen peroxide products in that space. In that space we have not unlike in healthcare. We have steam, we have washing, and we have hydrogen peroxide sterilization and the hydrogen peroxide is really, we've really strengthened that product line and has been a real good factor of our growth in that space.

[Operator Instructions] Our next question comes from David Stratton from Great Lakes Review. Please go ahead with your question.

Regarding your CapEx guidance, it seems to have down by around $20 million from last quarter and I was wondering if you could bridge that gap especially in light of the tax windfall that everyone is receiving. What has caused your CapEx guidance to go down?

Dave, maybe timing of projects, some of these large projects that we have both largely in AST we forecast at the beginning of the year and we try and estimate the timing of that coming online and a couple of those just have had delays that have been normal delays. Nothing out of the ordinary, but those will push into next fiscal year. So that in total is about $20 million. You'll see the natural offset in free cash flow as free cash flow now goes for 280 to 300. But it's mainly due to timing.

[Operator Instructions] Our next question comes from Mitra Ramgopal from Sidoti. Please go ahead with your question.

Two questions. First Walter, as we look at your potential margin improvement, I was wondering if you're still expecting some cost synergies from the synergy health acquisition or is that pretty much done after fiscal '18?

We are expecting about $10 million this fiscal year and $10 million into next fiscal year and then we will have captured over $40 million in total, but there is still a little bit left out there.

And regarding acquisitions, I know you've mentioned you're bringing on a number of new products in healthcare products and I was wondering if you're now more inclined to look at potential transactions that will actually expand the $10 billion addressable end market or just look to consolidate more within existing areas?

Our first and favorite type of acquisition is something that adds product or service to customers who are already serving in the space who are already serving and so that would be the first. So I'll call it for lack of better terms end customer, end market or whatever you want to call it. That's our first choice, but we're always looking at extensions to do as well. So it could be a different product or service. It's more likely to be with the customer who are already serving hopefully in the same space, we're serving them, but if not, right next door we're serving them. So we do like adjacent or tangential whatever terms you like acquisitions, a lot so better than the other kind. But we look at both all the time. We evaluate if we can bring something to them and/or they can bring something to us and we're really happy if the answer is yes to both questions.

And ladies and gentlemen, at this time, I am showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you, everybody for joining us this morning. We hope to see many of you as we get out on the road in the coming month.

And ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.