Steris Plc (STE) — Q4 2016 Earnings Call Transcript

Thank you, Danica, and good morning, everyone. On today's call, as usual, we have Walt Rosebrough, our President and CEO, and Michael Tokich, our Senior Vice President, CFO, and Treasurer. I have just 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 express 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 Plc's, STERIS Corporation's, and Synergy's previous securities filings. Many of these important factors are outside of STERIS' control. No assurances can be provided as to any result 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 plc and STERIS Corporation SEC filings are available through the Company and on our website. Adjusted earnings per diluted share, segment operating income, and free cash flow are 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 nonrecurring items. We defined free cash flow as cash flow from operating activities less purchases of property, plant, equipment, and intangibles, net capital expenditures plus proceeds from the sale of property, plant, equipment, and intangibles. Additional information regarding adjusted earnings per diluted share, segment operating income, 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. It is my pleasure once again to be with you this morning to review our adjusted financial results. Before I get into the numbers, let me remind you that all prior-year comparisons are to legacy STERIS unless otherwise noted in both mine and Walt's remarks. We're pleased to report revenue growth of 38% for the quarter. The increase in revenue was driven by the acquisition of Synergy Health, Black Diamond Video, and GEPCO, in addition to solid organic revenue growth. Constant currency organic revenue growth was 5% and was entirely driven by volume as price was neutral during the quarter. Foreign currency negatively impacted revenue by 1%. I want to spend some time this morning addressing gross margin as we have received a number of questions since reporting third-quarter results. The addition of Synergy Health has caused overall STERIS gross margins to be lower than they were pre-deal. As we began to integrate Synergy, we found that they used a different policy to classify costs between cost of goods sold and SG&A as compared to legacy STERIS. We have applied the legacy STERIS four-walls approach which reports all costs directly and indirectly related to the delivery of products or services as cost of goods sold. This four-walls approach causes STERIS to include costs in our facilities that other companies may include in SG&A instead of cost of goods sold, for example, human resource personnel in a factory. As a result, some costs that Synergy would have previously reported as SG&A are now included in COGS and will be going forward. As integration continues, we may find that some additional costs need to be reassigned but believe we're generally consistent at these levels. Importantly, these expense classifications have no impact on the overall bottom line profitability of our business. Gross margin as a percent of revenue for the quarter decreased 320 basis points as compared to last year to 39.3%, which was about flat sequentially. Year-over-year, Synergy negatively impacted gross margin by 500 basis points in the fourth quarter. Offsetting that, we had 90 basis points improvement from currency, 50 basis points improvement from the suspension of the Medical Device Excise Tax, and 30 basis points of improvement from lower material costs. SG&A as a percentage of revenue in the quarter declined 350 basis points to 18.4% of revenue, more than offsetting the change in gross margin as a percentage of revenue due mainly to Synergy Health. Now let's focus on EBIT margin. EBIT margin in the quarter increased 100 basis points to 18.8% of revenue. Revenue volume, favorable foreign currency, the suspension of the Medical Device Excise Tax, and lower R&D expenses as a percentage of revenue drove the improvement in EBIT margin. While we delivered an operationally sound quarter, there was quite a bit of noise in our effective tax rate. The effective tax rate in the quarter was 34%. During the quarter, we had a greater than anticipated percentage of our income earned in higher tax rate jurisdictions like the U.S., which, as you know, has a higher effective tax rate compared to the rest of the world. In addition, the quarterly tax rate was negatively impacted by the timing of discrete item adjustments primarily relating to the acquisition of Synergy Health. Both of these items more than offset the tax benefit received from the combination with Synergy. One example of a discrete item which negatively impacted the fourth quarter would be the establishment of FIN 48 tax reserves specifically for Synergy. FIN 48 tax reserves are reserves established for tax positions which are less than certain. During the quarter, we had to establish several FIN 48 reserves related to the activity associated with certain tax positions for which Synergy had taken prior to and after the close of the combination. Synergy appropriately followed IFRS accounting guidelines but not U.S. GAAP. U.S. GAAP specifically requires the establishment of these reserves for certain tax positions. As we look forward, we fully expect to achieve an effective tax rate of approximately 25% for the full fiscal year. Like always, this rate is subject to unforeseen changes in mix and discrete item adjustments. Net income for the quarter increased to $77.9 million or $0.90 per diluted share with 86.2 million weighted average shares outstanding. Moving on to segment results, our healthcare products segment revenue grew 5% in the quarter contributing to the revenue growth. Consumable revenue increased 25%, of which half was attributable to organic revenue growth. Our maintenance and installation service revenue grew 6% in the quarter. Capital equipment revenue declined 6% in the quarter with flat performance in the U.S. and declines in most other regions. We believe the performance of capital equipment revenue is a matter of timing as backlog ended the quarter at $119.4 million, an increase of 22% year-over-year. We have also begun to see an uptick in project orders which tend to have longer lead times than replacement orders. Operating margins for healthcare products were 18.1% of revenue in the quarter, an increase of 30 basis points year-over-year due primarily to the increase in volume, favorable foreign currency, and the suspension of the Medical Device Excise Tax. Our healthcare specialty services segment reported revenue for the quarter of $157.9 million reflecting the addition of Synergy Health along with 10% organic revenue growth. Healthcare specialty services operating income increased to $6.5 million in the quarter due primarily to the increased volume. As anticipated, the addition of Synergy Health's hospital sterilization services and linen management businesses reduced the operating margins within this segment compared to the prior year.

Thanks, Michael, and good morning, everyone. Fiscal 2016 was an extraordinary year for STERIS and we're pleased to be with you discussing another record performance as a result of the collective contributions of our people. Even in the face of currency and market headwinds outside the United States, our business grew both organically and through strategic acquisitions to deliver 21% growth in revenue and record adjusted earnings per share of $3.39. Topping the year's achievements was the landmark completion of the Synergy Health combination in addition to closing two other strategic acquisitions, General Econopak and Black Diamond. At the same time, we grew organically as a result of our continued investment in product development and in manufacturing and service operations that enable us to bring improved products and services to our customers and the people whose health and safety they improve. Full-year 2016 organic revenue growth for legacy STERIS was 5%, 6% in constant currency with growth in all four segments. In particular, our IMS business, which is the legacy STERIS component of our new HSS segment, delivered double-digit growth even as they settled into new combined sales territories. We also saw solid mid-single-digit organic growth in our life science and AST segments, which I will discuss in more detail shortly. Our healthcare products segment organic revenue grew 3% for the year, with strong growth in the United States offsetting weakness outside the U.S. Synergy Health was a meaningful contributor to our overall growth in FY '16. On a constant currency basis, Synergy revenue grew 4% for the full year and adjusted operating profit grew 9%. Of course, the impact of currency has had a negative impact on a U.S. dollar basis, which made the U.S. dollar reported revenue decline in low single digits and profit about flat for the year. As is always the case, some parts of the business are doing better than others. We're particularly pleased with the strength of the AST portion of the Company and believe the HSS business in the UK and Europe has a good opportunity for continued growth and profitability. As we have said all along, the U.S. HSS business, which is a long-term growth opportunity for STERIS, is a nascent business and will take time and investment to develop. While we continue to engage in conversations with customers about potential outsourcing opportunities, we believe there is substantial lead time before significant contracts will materially impact our business. The Northwell joint venture continues to experience project delays which have pushed back the anticipated opening. As a result, Northwell has not generated any significant revenue during the year, and we have not included any revenue from Northwell in our fiscal 2017 outlook. We have a continuing strategic review of the company's businesses consistent with our ongoing review and determine the level of resources we will allocate to each of the businesses. Naturally, we will discuss that with you further at the appropriate times.

This is in for Larry. I have a couple of quick questions. First, regarding the EPS guidance, could you explain some of the key factors as we transition from fiscal 2016 to fiscal 2017? I believe the main areas to focus on are cost synergies that you have mentioned, the accretion from BDV and GEPCO that you talked about previously, and the additional sales from Synergy. Can you help clarify those different aspects? That's my first question.

We don't get in that level of detail on the specific components. But you are absolutely correct that I will call it the big buckets and it is largely driven by both the revenue and profitability we bring over with the acquisition. So we have a significant increase in profitability as a result of bringing Synergy over for a full year, instead of half year. GEPCO also, we have not a full year in last year's earnings, so we bring across those buckets. The synergies from Synergy or the increased profitability due to Synergy on the cost side alone we do expect another roughly $15 million of earnings as a result of those cost reductions. And I think those are probably the biggest pieces other than the natural growth in the business which we have said we have about 7% organic growth then we typically and will this year grow our profitability more than our organic growth rates as a result of that growth. Having said that, there are some places that we're clearly investing; we're investing more in R&D. That largely is offset by the Medical Device Excise Tax this year. We're clearly growing some nascent businesses so we're investing in those businesses. And then you have to take into account last year we did not have a full-year impact of the total share count that we had this year and of course, we have a greater interest rate as a result of bringing those businesses on. I think if we think through those buckets that way, that is the big chunks.

And then just turning to the healthcare products segment, capital did come in a little bit lighter than we would have anticipated; so I guess number one, how would you characterize the current utilization environment as it relates to capital purchasing in surgical volumes? Number two, could you help us break apart the comments around the impact of level loading of shipments and then perhaps some areas where you have seen international weakness? Thank you.

Good questions and I think there are two or three questions embedded. I will try to answer them one at a time. Generally speaking, capital came in about where we expected it to for the year and it was offset, if you will, the U.S. business came in quite strong and double-digit and maybe even pretty strong double-digit increases across those areas. And then of course with the acquisition of Black Diamond, even more. So we like our capital business in the U.S. Globally, capital has shrunk for us and almost everybody that is in the business and you guys look at the other people as well. So we have a difficult year globally both as a result of the economic, the general economies which push the governments and which push their spending on healthcare as well as the currency, the dollar strengthening vis-a-vis almost every major currency. And then we had particular weak spots, and one that comes to mind is the Middle East, which has struggled mightily just as a result of the collapse of oil pricing, as well as them having to fund more based activity. As a result, they have less funding for healthcare-based activity. So that at a high level, that is pretty much it. What is different, and we think it is better, an improvement, is we were able this year to much better match our production planning and shipping activities such that our business was more level loaded if you will across the year. Now you saw some of that; we did with inventory so we increased our inventory over the course of the year anticipating some significant shipments in the third and fourth quarter. We did see those in the third and fourth quarter but we did not have nearly the, quote unquote, spike in the fourth quarter that we have had sometimes, and we like not having that spike that allows our operations to run more effectively and efficiently. We're hopeful we can continue down that path keeping it at least at the level we did this year and maybe even better. So you didn't see a fourth quarter spike and that is also reflected in the backlog. If you would look at our backlog, you will see that our backlog is greater at the end of this year than it was at the end of last year, significantly greater; I think something on the order of $20 million. And that is a function of two things: one, us level loading that and not shipping as much of the backlog during the fourth quarter and having more in the second and third. And the second is we have seen an increase in our major project work and that tends to fluctuate. We talk about that all of the time; it kind of fluctuates up and down. Right now we have more project work as a percent of the total and project work has longer lead times than does routine replacement and so that tends to lengthen the backlog. I think I have answered most of that in terms of most of the questions you've asked and that one good question. And in that, the last component is our outlook and we still see a significant positive outlook in the U.S. I wouldn't call it high growth rates, but on the other hand, it is not shrinking and in fact, we have had now several months in a row, maybe now even several quarters in a row where we have seen increased activity in the field so the pipeline looks good and our orders have reflected that. And that again is why you saw the increased backlog at the end of the year. So we feel comfortable with the go-forward look in the U.S. Outside the U.S., it is a much more difficult environment and we do not believe we have seen significant change. There are difficulties in much of the economies in Latin America; all the mineral-based or oil-based economies are having difficulty and the Middle East is difficult. We have actually seen improvement in our business in mainland Europe, so there has been some improvement there for us. And then Asia-Pacific seems to be coming back some but again they face struggles in those economies that are dominated by either oil or by minerals.

Very strong performance in life sciences and especially with the margins, and just wondering how we should think about that segment going forward given the margins are well above your longer-term target of 20%?

As I have expressed on many occasions, I don't have really what I would call a margin target per se. I generally speaking do not like seeing things that are under 15% and over 20%, I start thinking about whether or not we're investing appropriately or working appropriately. But we don't have a cap on margin and we don't have a minimum. Our job is to try to improve them and create the margins we can create. We have tremendous value creation capabilities in the life science space and those margins are reflecting that. They are also reflecting a mix shift, another mix shift which we have been shifting over the years significantly which is why the margins have improved to the consumable business. And then of course, GEPCO is an entirely consumable business so we saw another step function up in that mix shift. So I would not characterize that we're trying to move our margins down to 20%. So we will continue to do the best we can on the production side, the operations side, and develop new products that are good for our customers and charge the appropriate prices for that and as a result create value for them which creates value for us. We do, I mentioned earlier on our cost reductions and on product development, we do always try to pass some portion of that back to our customers because we think that is the appropriate thing to do for the long term. So it is not like every dollar we save we put in our pockets; every dollar we save we either put back into R&D, put it into price, get value creation in price for ourselves or value creation and price reduction for our customers. It is a combination of those things.

And was there anything one-time in nature that drove that mid-teens organic growth rate in life sciences?

The only thing I would mention is that with the GEPCO acquisition, we need to consider that in the overall picture. There is both an organic and inorganic component to this. The inorganic part contributed significantly, but we also experienced strong growth overall. Historically, we have had challenges with capital, yet this quarter we saw normal growth, and I use that term loosely because there was solid growth in both services and consumables. Additionally, we observed growth in capital, which is not always the case. Obviously that is an area of opportunity for us in terms of margin improvement. And since I have already told you I don't like things necessarily under 15 and I start thinking about them over 20, we will be working to improve those margins. But that is a mixed business; there is laundry in that or the historic linen business and synergies in there. There is historic business that was purchased in the U.S. and there is a nascent business we're trying to grow in the U.S. So it is a mixed bag. We do anticipate improving those margins over the course of time but part of that is we want to make sure we don't under-invest in the growth parts of that business. So it is a mixed bag. I will call it ongoing businesses have objectives to improve their margins; some of which is volume, some of which is growth, cost improvement that comes along with growth, but we're also making investments in those businesses as we go forward.

Let's just start off with you did a 5% underlying constant currency growth for core STERIS but what was the pro forma constant currency growth including Synergy Health? And then you also said that Synergy Health is plus 4% on a constant currency basis for the full-year. What was it in the quarter?

We're not going to get into that much detail in Synergy. We gave the year because in total we had a lot of pressure in the fourth quarter to provide a number and we felt that giving the year was probably the best perspective that we could get. So I would say the quarter would be no more or less than the year so it would be similar in that regard.

And pro forma is a difficult term because, as you know, in the last five months we have been mixing and matching STERIS and Synergy, and it is difficult enough for us to determine what is Old Synergy and Old STERIS. That we changed our bonus program in the last three months of the year because we don't feel like we can make those determinations cleanly enough, and when there is a cost reduction as a result of Synergy, is that Old Synergy or Old STERIS? When there is revenue growth as a result of us working together, is that Old Synergy or Old STERIS? The answer is we don't know. But orders of magnitude, as best we can give you, we have given you the STERIS legacy business and orders of magnitude, we have given you the Synergy legacy business growth rates, total sizes in growth rates, and the number for next year, legacy Synergy, although there are two reasons there is a range there. One is there is always a range in forecasting and the other is it is getting harder and harder for us to tell what is Synergy and what is STERIS, which is a good thing; that is the power of putting the businesses together.

I think that is fair. Maybe I will try to ask it in a different way. It looks like AST was exceptional in the quarter and then it also looks like IMS, as part of your HSS Group now, is doing really well. Is something going on with the other pieces of HSS, the linens business, the hospital sterilization services that is maybe driving some lower growth? Can you talk a little bit about that?

I believe you accurately captured the overall direction we've outlined for our business. Regarding the HSS sector, I want to differentiate between HSS Europe, primarily UK-based with some European elements, and the HSS business in the U.S. The European HSS segment is a strong and well-established business with substantial growth and profit potential. However, we’re facing some timing challenges, and currency fluctuations are not in our favor since much of it is based in the UK, where a strong pound has impacted our reported results. Nevertheless, we see growth opportunities in both segments, which mainly involve routine work. In the U.S., following acquisitions, we find some aspects of those businesses performing well, while others are not meeting our desired returns, and we are focused on enhancing those. Additionally, there's a developing sector within our business that we are investing in, which is typical for a startup, where we are currently putting in more than we’re getting back. When considering all these elements, it reflects a clear picture of our businesses, and we expect profitability improvements and revenue growth as we move further into the future. As for the linen businesses in this segment, they present a mixed situation. Historically, there have been times when either the UK or Netherlands business has excelled while the other has struggled. Recently, the UK business performed well, whereas the Netherlands faced challenges due to overcapacity, prompting us to streamline our costs and management strategies. Overall, it’s a tough environment at the moment.

And just a follow-up to that and then I will have one more on tax and then I will jump off. We heard a couple of companies talk about delays in the UK specifically around their National Health Services and some funding there. Did you seeing any of that in the quarter, is there anything UK-specific around that business that may be impacting growth in the near term?

We didn't see any significant change in our business model or businesses, if you will, in the UK in the Synergy space and because that tends to be a turn business, if you will, it is a consumable kind of a business; you don't tend to have as much fluctuation in that as you might some other things. Now we have seen some delays in timing in terms of working on new projects and signing up projects as there have been changes in NHS, so there has been that kind of a delay. But that does not really affect us on a routine basis so in the quarter we didn't see anything significant.

And then just lastly on the tax rate, can you provide some additional detail or quantify a little bit how you get to 34 from 25? Was this a surprise for you and what gives you confidence that you are going to be able to do the 25% in FY '17 especially with the U.S. remaining very strong and the international being kind of weak?

Matt, as it turns out we were somewhat optimistic in our forecast as we had anticipated that the favorability in the tax rate that we were experiencing through the third quarter would continue and obviously, you know that it did not. In addition, we had the geographic mix and the negative impact of discrete item adjustments or the timing of the discrete item adjustments, which we had underestimated their impact on the rate for the quarter. Part of those discrete items, as I gave you an example earlier about the FIN 48, I mean that was just a natural process we were going through in integrating Synergy as we were doing balance sheet, detailed balance sheet reviews. And obviously with them being on IFRS and now transitioning to U.S. GAAP, there were some variances in the tax rate reserves that we needed to record and needed to record when we had discovered those. So we really didn't have any opportunity to move those out. It was really to recognize those and put the reserves on when they were discovered. I can tell you that since November 2, we have obtained the tax benefits from the combination with Synergy and these items that we talked about, the discrete items specifically and also the geographic mix having a full-year of Synergy and understanding their tax positions going into the full-year; we're as confident as ever that the 25% rate will be withstood in fiscal year 2017.

I believe we will experience some variability in our tax rate throughout the year because of how taxes are recognized, leading to potential differences from quarter to quarter. This is partly due to our ability to forecast sales more accurately for entire geographic regions or countries over a year compared to a quarter, and we struggle even more with monthly forecasts. The complexity increases as our recurring business tends to be more stable, while our capital business can fluctuate significantly. When we're building product, it's relatively easy to adjust; for example, if we have fewer shipments for the UK, we can redirect those to the U.S. or the other way around. Although this impacts our overall operating profit, it affects our tax rates from quarter to quarter or month to month. However, on an annual basis, we can manage this much better without having to deal with phasing and timing, as we encountered last year.

And I'm just as sorry to all of the people behind me, but can you quantify what the impact of the discrete tax adjustments were, like what the dollar amount was so people can back those out? Then I'm done.

The problem with that, Matt, is we have discrete item adjustments almost every quarter and we're not going to get into that level of detail. I mean they are not always negative. In Q2 this year we had a large positive discrete item adjustment which favorably impacted the tax rate. We're not going to book keep those; we're going to book keep the total adjusted tax rate on an external basis only.

Walt and Mike, could you maybe help us out? When we think about the capital component in healthcare products during the quarter, you saw a 6% decline. Could you maybe help us characterize the differences that you see in not only the size of the average order quantity but also in the lead time when you see this shift from basically a replacement to a new build or a major product? And help us think about how that played into the fourth quarter and also maybe then bracket that with international softness and just or maybe weakness in general. Just want to make sure we fully understand what we saw in the fourth quarter and then how that plays through here in the first part of 2017. Then I've got a couple of follow-ups as well.

Sure. First of all, Chris, hopefully I tried to at least answer a portion of that question. We saw our backlog increase roughly $20 million in the quarter year-over-year quarter so that gives you an order of magnitude of the change. So obviously our orders grew $20 million more than our shipments for the year, so for a yearly change that gives you that view. Secondly, as Mike mentioned or Mike or I both I think mentioned, we have seen somewhat of a shift and this shift happens, it is not an infrequent happening, it happens all the time between major projects, things where we're selling $0.5 million or bigger projects at a time versus individual orders. I would not say that those orders independently have changed size significantly. That is the project orders are staying roughly the same size and the replacement orders are staying roughly the same size. It is just we have seen a shift to more of those project orders. And Mike, I think you may have the details on that.

We have observed this shift for the second consecutive quarter, which is clearly one of the reasons behind the increase in backlog, in addition to the level loading. Currently, we are on a trajectory of about two quarters, and we noted this change as it hasn't occurred for probably the last year.

And then a follow-on on the international things, we're actually seeing some improvement in the pipeline in international but we think it is a little early to call it success so we're being cautious there. But at least it seems that we have hit the bottom in international in general and now so we're seeing some positive things in the pipeline but we're not ready to declare victory there yet. We do have some increases in our international business in our plan but they are modest in scope.

On the guidance for fiscal 2017, I think you stated you expect Synergy to contribute between $640 million to $650 million or low single-digit growth in the fiscal year. Can you maybe just walk us through what is behind that low single-digit growth when we think about Synergy? It seems just a little bit softer than what historically we have seen from that business and just want to make sure I understand how much is a function of the merger and then how much maybe softer international in-market demand. Just walk us through kind of why we should think about low single-digit growth for the coming year?

There is definitely a currency effect, but it's not a significant factor. We're experiencing growth rates in the AST business that are in the high single digits for both the Synergy and STERIS sides, applicable to both the U.S. and international markets. We anticipate this growth to continue long-term, which is why we are investing in expanding our capacity in these areas. However, in the linen business, we're seeing growth in the UK but a decline in the Netherlands, which is not insignificant. In the HSS sector, there is growth in the UK and international markets, but we've noticed a slight slowdown, which we believe is unrelated to integration issues; it seems to be the nature of the current market. We expect to see that growth rate rebound to more traditional levels over time. In the U.S., we will need to differentiate between businesses that aren't as profitable as we'd like and those that exceed expectations. As we've done in life sciences, we might opt to reduce some areas to improve profitability, allowing us to invest in growth opportunities on the U.S. side. Overall, I don't anticipate any major disruptions due to integration as we move forward. The 15 months spent determining whether we would merge resulted in us operating two separate plans, which may have caused some slowdowns in the AST and HSS operations due to the need to manage both scenarios. While we may have lost some momentum during that time, it doesn't seem significant and won't be a major concern going forward.

Just one more if I may, then I will get back into the queue. When we look at the guidance for fiscal 2017 in the aggregate, definitely some strong topline implications there; 7% organic growth, cash flow of 250 inclusive of the incremental spend also very encouraging. You are roughly 5-ish plus months into the merger now. Could you just give us maybe a quick state of the union as to how you see the opportunity with Synergy Health? What is there that you thought was there at the time of the proposed merger and maybe what incrementally have you discovered from both maybe a growth and a cost standpoint now that you have had a chance to get a little bit more aggressively into the merger itself? Thank you.

I will break this down into three areas: first, the cost synergies; second, the major segments of the business; and third, any differences in our perspectives. Regarding cost synergies, they often end up being different than we initially expect, but we still believe the $40 million target is attainable. I even think that might be conservative if we are given more time, but we stand by the $40 million goal. While the timing may not be perfect, we are confident in achieving the $20 million from this year and last year, and we don’t have concerns on that front. If some of the targets for next year were to slip slightly, it wouldn't surprise us. We are realizing that a lot of the central office tasks are IT related, and there are limits to how much IT work can be done simultaneously. Therefore, delays could occur in 2018 or 2019, but we don't anticipate significant numbers there, so we remain untroubled. Overall, we expect to meet the $40 million, and I believe we may exceed that. Now, addressing the major aspects of integration: the first is the central office tasks which are relatively straightforward and behind us. The longer-term central office projects are more IT focused and require time; we anticipated that these would extend into 2018 and mainly planned for them during that period. There is a lot of work involved, and we are committed to finishing it. Regarding the main business segments, I believe the AST segment has been the easier integration since it involves a U.S. business and a non-U.S. business; the teams are familiar, having had a long history of non-competitive collaboration. We also have a seasoned leader, Dan Carestio, who has been with us for around 15 to 16 years. This segment seems to be progressing well, and I see potential for greater upside than we expected. On the HSS side, there are known issues with the laundry operations in the Netherlands, which Richard Steeves has highlighted for the past couple of years. We recognize that there are challenges there and improvements are necessary. In the U.S. market, opinions on progress vary. I have always maintained that it is an emerging business that will require time to significantly affect our overall performance, but I continue to believe it presents a valuable long-term opportunity. I don’t sense any major changes in that outlook. If I had to wager, I'd say the AST business could begin performing better than we initially thought and might do even better long-term. The HSS business should perform as we estimated, but the progress will take longer than expected. Overall, the impacts should remain within the same range. Lastly, regarding currency fluctuations, we have faced challenges. When we structured the deal about 18 months to two years ago, currency changes were significant. Fortunately, part of the deal was set in pounds, giving us some protection against these shifts, but it has undeniably affected our operating results. In summary, for a significant integration, we are on track with expectations.

Most of my questions have been answered but I just have two quick ones. Mike, I know you talked about maybe deleveraging the balance sheet a little. I just wanted to get a sense in terms of the priorities for cash load if it is debt reduction, and is it safe to roll out potential acquisitions?

Yes, I would say that our priorities for cash remain the same as Walt talked about earlier; dividends, reinvesting in our organic business, M&A if the opportunity does exist or does come forth right. Obviously we have had a little hiatus on doing any type of M&A activity but the pipeline is still strong and we're probably getting a little more active as we have Synergy under our belt now for the last five months. And then debt repayment, as we have talked about, we have added that into our prioritization and again as I spoke earlier, we're at about 2.7 times debt to EBITDA and barring any other large M&A opportunities or acquisitions, we would think that over the next 18 to 24 months we would get that back down to more of a STERIS historic level. And then obviously since we have included no dilution and assumed no dilution in our FY '17 plan, if nothing else we would try and recoup some of that dilution by potentially repurchasing some shares.

Quickly on the CapEx, your $190 million now for fiscal 2017, I don't if you have a sense as to what we should expect going forward in terms of a more normalized CapEx?

I would say that our combined depreciation and amortization is around $145 million, $150 million. Obviously, we have a significant amount of investments this year. Those investments, as you know and you have followed us for quite some time, we tend to over-invest one year, under-invest the next. So I would say again for modeling purposes, I would still use that $150 million-ish as a good guide in total.

Great. Thanks everybody for joining us. Have a great day and go Cavs.