Julie Winter - Director of Investor Relations Walter Rosebrough - Chief Executive Officer Michael Tokich - Senior Vice President, Chief Financial Officer and Treasurer.

Isaac Ro - Goldman Sachs Jason Rodgers - Great Lakes Review Lawrence Keusch - Raymond James & Associates, Inc. Matthew Mishan - KeyBanc Capital Markets, Inc. Chris Cooley - Stephens, Inc. Mitra Ramgopal - Sidoti & Company, LLC.

Good morning and welcome to the STERIS Plc Second Quarter 2018 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded.

I'd now like to turn the conference over to Julie Winter, Director of Investor Relations. Please go ahead..

Thank you, Chad, 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 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-recurring 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 Walt..

Thank you, Julie, and good morning, everyone and thanks for joining us. Our second quarter came in generally as accepted and we maintain our outlook for the year. Mike and I have brief prepared remarks regarding results of the year so far and our outlook for the full FY2018. We will then open for Q&A.

Looking at the first half of our fiscal year; we are pleased that our overall results are in line with their expectations. Turning just to the second quarter we grew revenue 4% on a constant currency basis and our profit and earnings were in line with forecast.

Of note, our Healthcare Specialty Services segment has now produced three consecutive quarters of higher than anticipated growth growing revenue 10% on a constant currency organic basis for both the quarter and the first half.

On the other hand we believe the lack of growth in healthcare product capital equipment shipments in Q2 was largely a matter of timing. In particular, we saw solid underlying orders during the quarter, but we had lower shipments about $5 million of which was strictly due to the Hurricanes in Texas and Florida.

These shipments are expected to occur in the second half of the fiscal year and are reflected in our $15 million sequential growth in backlog. I will add that we have no substantial operations in the specific areas impacted by Hurricanes, wildfires in Texas, Florida and California, but we do have sales and service people in those locations.

Fortunately neither they nor their immediate families were injured in these natural disasters and our people have worked admirably with their hospital and life science customers to accommodate their needs. For the full first half of the fiscal year we are at the top end of our annual revenue guidance at 5% constant currency organic revenue growth.

Our growth has been primarily volume with about 30 basis points in price so far this year slightly above our flat pricing expectation. Profitability has improved nicely as well with a 380 basis point improvement in gross margin and 190 basis point increase in EBIT margin.

First, I have adjusted earnings of $1.79 per share reflect 7% growth over the prior year. We feel good about where we stand at the halfway point of our fiscal year and our reiterating our outlook for constant currency organic revenue growth of 45% and adjusted earnings per diluted share in the range of $3.96 to $4.09 per share.

For the second half of the year we have tough comparisons in the fourth quarter as well as a headwind from the impact of storms in Puerto Rico where we do have an ASD facility. Annual revenue from that ASD facility is around $10 million in the normal operations. We have a great team in Puerto Rico and they and their U.S.

counterparts managed this natural disaster as well as we could help from substantial preparations before the Hurricane landed in concert with our medical device customers to their eagerness to jump in and help following the storm.

Thankfully all of our people and their immediate families were safe and we were able to account for everyone rather quickly. Naturally some of our people sustained considerable property damage and were left without many basic necessities and we are working with them on those issues.

However, they brought the plant back to full operational status in about two weeks from the relatively minor damage to our facility.

Although we have been fully operational for about a month now and have been processing products since that time we are dependent on our customers' ability to ship at their normal rates before our facility can operate near full capacity again.

Our best estimate right now is that negative impact of the Puerto Rico storms on profit in ASD will be about $3 million this fiscal year virtually all of which will be recognized in the second half. Turning back to the Company as a whole currency movement continues to benefit the topline on an as reported basis.

Given the six-month forward rates as the end of September we now anticipate that revenue will increase by approximately $35 million this fiscal year, primarily due to the strengthening of both the British pound in the euro versus the U.S. dollar.

We now expect as reported revenue to be approximately flat for the full fiscal year and the increase versus earlier expectations is largely due to currency. We continue to expect virtually no currency impact on profitability even with a substantial swing in as reported revenue described earlier.

This highlights the natural FX Hedge on profits built into our current business model. Despite the uncertainty in U.S. healthcare insurance programs the markets we serve generally continue to be stable.

The revenue stream that we have created in terms of product, customer and geographic mix help to balance our growth and feel our ability to grow revenue mid single-digits organically and leverage that growth and business development opportunities for faster bottom line improvement.

We are pleased with our current performance and believe we're well-positioned for the future. We appreciate your continued interest and support of STERIS and I will now turn the call over to Mike for a brief review of the second quarter before we open for Q&A..

Thank you, Walt, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our second quarter performance. For the quarter constant currency organic revenue growth was 4% driven by volume and 20 basis points of price.

Gross margin as a percentage of revenue for the quarter increased 360 basis points to 42.2% of which 260 basis points of the improvement is from the impact of divested businesses, with the remainder due to productivity improvements, favorable product mix and price.

EBIT margin at 19.2% of revenue for the quarter represents a 200 basis point improvement. Obviously 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 effective tax rate in the quarter was 26.7%, up from both the prior year and first quarter as expected. Both the prior year and first quarter had favorable discrete item adjustments. We continue to expect the full year fiscal effective tax rate to be in the range of 25% to 26%.

Net income in the quarter was $80.3 million dollars or $0.94 per diluted share benefiting from both organic revenue growth and continued margin expansion. Segment growth information has been detailed in the pressure the press release in both the tables and the copy.

In terms of the balance sheet we ended the quarter with $296 million of cash, $1.45 billion in total debt and a total debt to EBITDA leverage ratio of approximately 2.3 times. While the U.S. dollar equivalent value of our British pound sterling and euros are dominated private placement debt has increased due to the weakening of the U.S. dollar.

We have reduced our floating rate bank debt by $58 million since the end of the first quarter. As we said last quarter without additional acquisitions we continue to anticipate leverage by the end of the fiscal year to be approximately two times debt to EBITDA.

Free cash flow for the first six months was $144 million, a 21% improvement versus the first half of last year, primarily due to higher net income. During the second quarter capital expenditures told $38.9 million while depreciation and amortization totaled $45.5 million.

Our outlook for the full fiscal year free cash flow and capital expenditures are unchanged. Free cash flow is anticipated to be approximately $280 million and capital expenditures are anticipated to be approximately $180 million. With that, I will turn the call back over to Julie to open Q&A..

Thank you, Walt and Mike for your comments.

Chad, we are ready to open for Q&A, so please give me instructions and we will get started?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Isaac Ro with Goldman Sachs. Please go ahead..

Good morning, guys. Thank you. Wanted to start a little bit on the margin side, it looks like gross margin came in a little better than we expected.

Can you talk a little bit about mix versus price you might have had in effect on gross margin this quarter versus your baseline expectations?.

Yes. Isaac, gross margin was up 360 basis points to 42.2%, similar improvement in the first quarter, about 260 basis points of that was really due to the impact of the divested businesses. If you recall the divested businesses most of their costs were in cost of goods sold, so that's what we're seeing the biggest improvement.

And then in addition to that, we did have both productivity improvements in particular in our IMS North America business where that business continues to perform very well and we continue to see improvements in gross margin there.

We did have some favorable mix obviously with capital down a little bit consumables and service especially consumables help propel the margin several basis points. And then we did have pricing impact which was about 20 basis points on the topline and about 10 basis points in the gross margin..

Great. And then on the expense side, it looks like SG&A came in a little higher than we forecast, obviously you have the upside gross margin to fund that.

I'm interested in any potential areas of investment that you guys made that maybe came in ahead of plan because you have that extra profitability to work with, kind of curious where you're putting the marginal dollars? Thank you..

Yes. The bulk of the differential is foreign exchange, so our units that have OpEx in particularly the EU countries as well as Great Britain, it's an exchange rate issue. In terms of our run rate on a constant currency basis, it's very much what we expected..

Okay. Got it. Thanks guys..

The next question will come from Jason Rodgers with Great Lakes Review. Please go ahead..

Good morning. So very strong performance this quarter in IMS, you talked a little bit about productivity improvements given that the margins there are already in the high single-digits. I think you said that was your expectation by the end of fiscal 2018.

Where should we go from here? Should we expect the margins maybe to come down a little to the mid single-digits or what are you expecting in the second half for that segment? Thanks..

Sure. I would say a couple of things. First of all, clearly as we mentioned before, we had invested ahead of time and the revenue didn't come, so now we've allowed the revenue to come without additional investments. We will be going forward. We do need to go back into the game of investing at hopefully the appropriate time, so we can continue to grow.

So we may see a little bit of rocking around those numbers, but in general our end point numbers that we described are what we anticipate in the short intermediate term for that business. So we might be a little higher one-month than we're one quarter and little lower one-month or one-quarter based on the timing of investments.

But this is not like you have to build a plant and then start filling it. It's more modest incremental investment as a percentage of the total. So last year we just got it way wrong. We missed both directions growth and investment.

That's an unusual occurrence for us and we've been doing service for long time, so we don't expect that kind of a significant change again..

And the $3 million hit from the hurricanes, is an AST operating income, would you expect the majority of that to be realized in the third quarter or is it maybe more evenly spread in the second half?.

It will be stronger in the third quarter than the fourth - we would expect our customers as they bring their plants, most of them are bringing their plants up; they're doing volume as just they're doing relatively more limited volume.

A large part of that is because of energy issues or people issues in some cases, but generally speaking it's energy issues.

Almost all of our customers have generation capability, but they don't always have enough generation that is generator capability to run all their machines and do all the things they need to do and then there are some people issues as well.

So as they - they should be coming up and getting more close to full volumes, so as we approach the end of the quarter, we think we'll see much more at full volumes. So it will be more heavily seen in the third quarter..

And then finally, I wondered if you can comment on hospital spending globally, if you're seeing any material change by region. And what was the performance on organic basis in the international segment for the quarter that is it? Thank you..

Yes, sir. From an international standpoint, looking at both the quarter and the year, we continue to see good growth in both Europe and APAC, slightly slower growth although we are growing in Latin America and North America.

Although for the quarter, obviously with healthcare capital equipment being down a little bit, North America was more under pressure just based on the timing. And I would add to that Europe, which we call EMEA. Europe itself has been now for quite some time, steady to nice slightly growing if you will.

The Middle East has been very difficult, but it seems like we should the bottom of that trough and there is some life in the Middle East again. So although it's not the levels it was three years ago. It is picking back up for us..

The next question will come from Larry Keusch with Raymond James. Please go ahead..

Yes, hi good morning.

Walt or Mike, so I just want to be clear on the hurricane impact on the possible capital side, so you obviously said $5 million, what's the right way to think about the organic constant currency growth then for the quarter, if you kind of adjust for those shipments that you didn't get and I know volume plays a very large part in the equation here particularly on the capital side.

So anyway that to sort of think about one in EPS impact from that delay shipment was?.

Sure, Larry, You've asked a multiple questions, so I'll try to kind of break them out. Those orders were again largely Florida and Texas for the capital equipment orders and it was hospitals that obviously were under pressure from the storm and they did not want to take new capital into their facilities or haven't' shipped during that timeframe.

So it was around $5 million. Orders of magnitude, that's probably about a $2 million to $2.5 million impact on bottom line profitability in the quarter.

We would expect to see that reverse and I think Larry that we would expect that to reverse kind of the exact same way, that we talked about AST that is - I would expect to see more of in the third quarter because most of the hospitals were not severely damaged. They just couldn't take equipment during that timeframe.

And so the bulk of that should reverse in Q3 and there will be some of the drags into Q4 would be my guess.

So - and in terms of relative growth or growth numbers, the hurricane itself is about $5 million, which is roughly small one, 1%-ish for the total business, of course as you get down to smaller pieces of the business, it's a larger percentage 2% or 3% for health care capital probably.

But orders of magnitude, it did not have a huge impact on revenue growth for the total company. Now the other side is, we did see more orders than shipments and so our backlog picked up $15 million, only $5 million of which is the storm.

So we have $10 million more in backlog sequentially than we did before that is purely a matter of - I'll call it normal time differentials across quarters. That just happens in the capital business, but the $5 million is purely due to the storm..

So 5% sort of were again a constant currency, is that the right way to kind of think of again on sort of a normalized basis [indiscernible] $5 million on comp?.

Yes, orders of magnitude, you're not too far off, because those 4% roughly for the total business is about a point, so without doing the exact math that's close..

Okay, perfect. And then two other questions, maybe talk a little bit what's going on in Life Sciences that backlog continues to do well. And then Walt, I guess just a bigger picture question around the endoscopy markets.

I know you're obviously are competitor in a variety of different places there, but that market continues to be growing very nicely and just want to get your thoughts on perhaps additional opportunities to expand into endoscopy broadly..

Sure, Larry and I'll separate again two questions. The Life Science business in total is doing very nicely as you've observed, not only of the consumable side of the business, which has been a long-term good grower for us is continuing to grow in the mid to high single-digit range.

But the capital business has clearly begun to come back and we're just seeing order rates and as a result backlog that we haven't seen in a decade or more. In our pipeline appears to be about the same as what our current run rates are.

So we're anticipating it's hard to forecast more than a year or two out but are going in view is that that this level of orders and shipments in life science and will continue probably 12 months to 18 months at least. So we're feeling quite good about that.

A piece of that is the market this business supports biologics and vaccines and that's a nicely growing market it had spent a fair amount of time consolidating the last few years that is pharma in general and we think that consolidation phase for at least our pieces of the business is largely finished.

And then the second piece is we've done some nice progress on work particularly in the hydrogen peroxide area where we're in our capital equipment where that is a growth area for us. So it's a combination of the market growing more rapidly and us having a nicely set of products to put into that market in the space.

So the life science guys have done the nice job of that. As relates endoscopy we do view the endoscopy market as a growth market and growth opportunity US Endoscopy has now which we purchased five plus years ago has been growing in near double-digits almost every year in the topline and therefore above and certainly double-digits on the bottom line.

So that has been a growth opportunity we continue to look for ways to expand we've done a number of smaller acquisitions in that space to add into what the US Endoscopy people care. And then we also view that as an opportunity in our Healthcare Products segment both on the consumables and on the capital side. So we continue to invest in that space..

Okay. And then lastly just on ASD. I guess Sterilmed was moved into that piece I believe.

Can you just help us think about the impact of that on the growth there?.

Yes, Larry, as we as we talked last quarter we believe that for the full-year we will have about 100 basis points which is basically every quarter 100 basis points both top and bottom line impact because that business as we've talked about is actually declining in both top and bottom line year-over-year.

So about 100 basis points is the number - fair number to use..

Okay..

If you think of ASD is pure ASD absence Sterilmed would be about 100 basis points stronger..

Top and bottom..

Right. Okay. Perfect. Thanks guys..

The next question will be from Matthew Mishan with KeyBanc. Please go ahead..

Good morning, Matt..

Hey, good morning and thank you for taking the questions.

How are doing?.

Great..

Could you maybe go a little bit more detail on the Healthcare Specialty Services and talk about the trends you're seeing in North America IMS versus the offsite central processing model and the UK and Europe? And are they both growing like equivalently are they both growing double-digits or is one growing faster than the other?.

I would step back and say that in general the IMS business in North America is the driver for that double-digit growth rate. And so now I'm talking more - longer term the last 12 months not the last three.

The European business in HSS or the outsources did have some nice growth in Q2 some of that was currency, but some of that is also called natural growth in the European business.

And we are also as we talked about moving instant repair into the European model and that is causing us to experience some nice growth and we're reversing in working to do the opposite in the U.S. move more of the outsourcing business in HSS.

We think those are both are significant growth opportunities for the future, but they're both still relatively nascent businesses right now..

Okay.

I can help me explain the sequential margin improvement in the Healthcare Specialty Services now - if it's a tremendous amount of improvement year-over-year but a lot of that it did it investors but you saw a big improvement from 1Q to 2Q and a big jump there? What drove that?.

Well, I mean again as we've talked it's largely a matter of allowing our revenue growth to catch up to the costs that we had put in place.

So at a high level that's it and it's been obviously both sequential over the last two or three quarters as well as the comparison year-over-year, you are correct, the comparison year-over-year, the removal of the laundry business has clearly helped that, but on a sequential basis, it's also improved..

Some of that Matt is also volume. We grew $3 million in total sequentially so….

And didn't raise our cost..

Right, exactly..

We grew into our cost basis..

And then switching to - what is the acquisition pipeline look like for you guys right now? Your leverage is down significantly, and is there an opportunity to start adding to the various platforms?.

Well, absolutely we believe that we past the bulk of the synergy integration. That doesn't mean we don't have - we still have IT type systems and back office type systems we are working on, but the bulk of that integration is complete, so we do not feel any concerns about adding other businesses.

And as you mature our leverage ratio, we've brought it down as we suggested we would, so we are actively looking at things. We never discuss specific pipeline issues, but we are looking at a number of opportunities. We just wish they would come in the timing that we would like them as opposed to the timing that they occur..

And then last question just on the last divestiture that I don't think is closed yet.

What impact did that have on the guidance and what's the latest update on that?.

Yes. As we mentioned last time, the purchaser has had difficulty with financing and some other issues, and so that has not closed. It's not material really to the business in any way. There's no profit impact either past or forward of consequence.

The revenue impact is in the $10 million-ish number per quarter roughly speaking and we have not anticipated that in our guidance going forward. So we've anticipated no. In fact, there's no growth, so since our revenue guidance as far as on growth, we're not anticipating any growth, the numbers really to be there or not.

It's not clear to us that deal will close. And so the longer the time takes, the longer it is, but it's really not a material conversation for us..

All right. Thank you very much Walter, Mike and Julie..

The next question will be from Chris Cooley with Stephens. Please go ahead..

Good morning. Thanks for taking the questions..

Good morning..

Just a couple for me at this point in the call.

Could you just clarify for us Walt on the growth in the pipeline on healthcare capital? Should we think about that as traditional replacement capital just in terms of our flow through versus more than new project type build, and maybe if you would expand upon that a little bit? Just if you are seeing any kind of a changes in the capital environment.

And then as a follow-on, those comp growth continuing I think particularly on the Life Sciences capital better than what we have modeled here during the quarter.

Just curious if you are seeing an uptick in terms of utilizations where newer technologies like disposable columns as we see growth in biologics and then [indiscernible] relative to that? Thanks so much..

Sure. Chris, just to make it clear, we understood the Life Sciences questions, but the first question, it was unclear to me whether you are talking or asking about our capital spending or the markets capital spending..

On markets..

Yes. So the short answer to that is we have not seen a significant change in that space now for a long time, several years. That is it is not growing rapidly. It's also not shrinking, so it's been kind of flat to modest single digits uptick if you will.

And there are differences that it has floated back and forth between what I call major projects and replacement. The last I'd say couple quarters, it's beginning to look at our normal rates if you will 60% to 70% replacement, 30%, 35% of new capital if you will or large projects. So the nature of the projects have started looking more similar.

A couple things have changed though that we're seeing more and more particularly in the operating room area which also affects CSDs.

We are seeing more Ambulatory Surgery Centers being built both by freestanding Ambulatory Surgery Center units if you will, some are for profit, some not for profit and we're seeing more of those being built by hospitals as outposts if you will for their major hospital says that more and more surgeries are being brought to that level because we can get people out quicker.

So for example, we're seeing a lot more orthopedics being done in either overnight surgery or even day surgery. So we're seeing more of that being built out in the suburbs if you will as opposed to inside the major center downtown. So a bit of a shift there, the last 12 to 18 months, but in total it has not affected the spend greatly.

In Life Science, there is no question. In Life Science that the new technology that we have brought forward in hydrogen peroxide sterilization for their facilities has been a strong driver for both of them to do more and has helped us grow the business.

It's just - that technology is a particularly good technology for that space and we've capitalized on it. As it relates to disposables, it's unclear depending on how fast those markets grow.

How that affects us, but on the one hand if we will do less clean in place kind of work, if disposable small disposables are used, on the other hand we sterilize those disposable units of AST. So we may see a shifting of revenue from one to the other. But with the growth rates are experiencing, we still review that as a growing market..

Thank you and I can squeeze one more in if we have time?.

Sure, Chris..

Just curious if you're seeing any additional opportunities, I'm assuming predominately outside the - would have to be outside of the United States with your outsourced initiatives there.

Can you bring on incremental capacity from private hospitals? Are you starting to see that and if so, is that something that could either further enhance the AST margin or should we think about that is more of a sustainable growth driver to keep us in the kind of the high single digits, when we think about that franchise longer term? Thanks again and congratulations on a good quarter..

Thanks, Chris. Yes, we do see there are a couple of countries that we're looking at that we may put in the HSS model of outsourced CSDs and that that would bring up the growth rate because we're relatively significant in UK, which is our principal country.

We have facilities in both Netherlands and Italy and those are both we think opportunities with couple other countries that I will go into at this time. But we are looking at a couple other countries in that space. The real growth opportunities in the U.S. market though and that's where we're focusing most of our efforts..

[Operator Instructions] The next question will be from Mitra Ramgopal with Sidoti. Please go ahead..

Yes, good morning. Just a couple questions, Walt, I was wondering given your pretty much finished with the plan divestitures as you exit fiscal 2018.

Do you feel comfortable that the businesses you have right now, are the ones you want to be in?.

That's unfortunately conversation divestitures are a lot like conversations about acquisitions, the less you talk about a before and the better, so - but if you look broadly across what we're doing our four major segments? We think all those segments have good opportunities and we think all of those segments have - across most of those segments, there's a tie to one or more of the other businesses within another segment or completely across segment.

So we think we do have a very nice portfolio in terms of sterilization and in procedural areas that are commonly in the same spaces as those sterile units. So in my mind there's not a significant divestiture in the short and medium-term anyway..

Okay, thanks. And again now, when we look at the strength you're seeing in terms of the backlog and the large projects that are you're bringing on.

Is it more a case of increasing the sell through to existing customers or are you also seeing a lot of new customers coming onboard now?.

It is a combination. It is principally sell through to existing customers, but we do see entrance in that space, the vaccine biologic space is “an exciting space” in Pharma right now and there are some new biologics is being developed by folks out there, so we see both. But the principal numbers are with the people that are already in the space..

Okay, thanks again for taking questions..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Winter, for any concluding remarks..

Thank you, everybody, for joining us today. We look forward to seeing some of you on the road in the coming months and chat with you soon..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..