Steris Plc (STE) — Q4 2019 Earnings Call Transcript

Thank you, Mike, and good morning, everybody. As usual, in today's call, we have Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO. And I do have a few words of caution before I open for comments. 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' security filings. The company does not undertake to update or revise any forward-looking statements as a result of new information, or future events or development. STERIS' SEC filings are available through the company and on our website. In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, segment operating income, constant currency organic revenue growth, and free cash flow, will be used. Additional information regarding these measures, including definitions, is available in today's release, including reconciliations between GAAP to non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency, supplemental financial information used by management, and the Board of Directors in their financial analysis and operational decision-making. 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 the highlights of our fourth quarter performance. For the quarter, constant currency organic revenue growth was 9% driven by volume and 70 basis points of price. Gross margin for the quarter increased 190 basis points to 43.8%, and was impacted favorably by productivity, mix, price, and currency somewhat offset by higher labor costs and the impact of tariffs. EBIT margin for the quarter was 22.1% of revenue, an increase of 170 basis points from the fourth quarter last year. The adjusted effective tax rate of the quarter was 19.2%, somewhat lower than we had anticipated due to favorable discrete items along with the benefit of stock compensation expenses. Net income in the quarter grew 24% to $131.1 million and earnings increased to $1.53 per diluted share, benefiting from revenue growth, margin expansion, and a lower effective tax rate. In terms of the balance sheet, we ended March with $220.6 million of cash and $1.2 billion in total debt. During the fourth quarter, capital expenditures totaled $76.5 million, bringing our total spend for the full fiscal year to $189.7 million. Free cash flow for fiscal 2019 increased to $355.4 million, mainly due to improvements in cash from operations. With that, I will now turn the call over to Walt for his remarks.

Thank you, Michael, and good morning, everyone. We appreciate the time you all take to discuss our recent performance and our outlook for the new fiscal year. Our message today is simple. We had a strong FY 2019 on both the top and bottom line, and we have solid momentum heading into fiscal 2020. Underlying demand from our customers and success with new products contributed to 8% constant currency organic revenue growth for the full year, meaningfully above our expectations. Part of that demand was related to the one-time benefit of customers building inventory. As you probably know, many companies have supply chain concerns regarding Brexit. This resulted in some of our customers desiring safety stock ahead of the March 29 Brexit date. Our AST and Healthcare Specialty Services led the way this year in growth rates for fiscal 2019, each increasing revenue by 9% on a constant currency organic basis. First, our AST segment continues to benefit from our core Medical Device customer growth. Over the past three years, we have invested more than $100 million to expand our global network, which has allowed us to grow with our customers. We are making an even larger commitment this fiscal year as a result of expanding global demand. Our plan is to invest over $110 million to grow AST capacity at a number of facilities around the globe, primarily in radiation technologies. We remain committed to supporting our Medical Device customers worldwide with the technology-neutral sustainable set of sterilization offerings. We believe these investments will reap rewards for years and anticipate continued investment in capacity in the coming years. We generally expect these facilities to generate ROIC above our capital cost in a three to five-year timeframe. As you know, AST operating profits improved again this fiscal year, ending the full year at 40% EBIT margins. Moving onto the Healthcare Specialty Services business, we experienced a very strong year, particularly in North America. Our franchise and our rising business in North America both exceeded our expectations as customers see the benefit of sterile solutions. Profit dollars improved by 10%, and margins improved sequentially quarter by quarter as we leveraged the investments we made earlier. We continue to believe that this segment can achieve mid-teen margins over time. Our Healthcare Products segment also had a good year, increasing 7% on a constant currency organic revenue basis, with solid growth across consumables, service, and capital equipment. Revenue continued to benefit from product launches over the past 12 to 18 months, including our Celerity 20-minute biological indicator, Dipromax 2 and related chemistries, Endo, and new washers and sterilizers. We expect another year of robust new product sales in fiscal 2020, including the clean sweep ceiling systems and operating integration systems as well as our recently launched Dipro S2, which offers compact size and shorter cycle time compared with prior generations. Operating profit dollars for Healthcare Products grew double digits and margins improved by 120 basis points to over 24%. Finally, our Life Sciences segment grew annual revenue 5% on a constant currency organic basis versus last year's challenging comparisons. Consumable products led the way with a 7% increase over the prior year, with capital equipment and service growing low single digits. During the fourth quarter, we moved our product manufacturing to a new facility that will support our growth for many years. As a result of that move, some customers preordered inventory, driving product consumable growth somewhat above normal levels in Q4. This could likely impact our growth rate a bit in the first half of 2020. Life Sciences continued to improve the bottom line, with a 60 basis points improvement in EBIT margin for the year. All told, we ended fiscal 2019 with record adjusted earnings per diluted share of $4.89. Volume growth, improved margins, and a lower than anticipated effective tax rate contributed to that improvement. I'm looking ahead to fiscal 2020, the underlying fundamentals of our business remain strong. We anticipate constant currency organic revenue growth of 5% to 6%, with currency impact approximately neutral to our revenue guidance. Within that revenue outlook, we are absorbing our restructuring plan, which reduces organic revenue by about $20 million in fiscal 2020. Margin expansion will likely be within our typical range, reflecting the benefits of our restructuring, which are somewhat offset by continued investments in the business. We anticipate adjusted earnings per diluted share to be in the range of $5.28 to $5.43. For your modeling, we expect earnings to be split about 45% first half and 55% second half, which is consistent with prior years. We've planned an effective tax rate of 19% to 20% and interest expense to decline by $3 million to $4 million in fiscal 2020 due to lower debt levels. As usual, our share count is assumed to be neutral in our guidance, with share repurchases roughly offsetting management equity grants, and to be clear, this outlook assumes no Medical Device excise tax to be in effect in our fiscal fourth quarter. Capital spending is planned to be approximately $280 million in fiscal 2020, a meaningful increase from prior years. As already mentioned, the primary driver is AST expansions. In addition, we do plan to continue spending capital to grow our outsourced instrument reprocessing business in the HSS segment. As a result of expectations for strong operating performance, somewhat offset by nearly $100 million of increased capital spending, free cash flow is expected to be approximately $300 million for fiscal 2020. Fiscal 2019 was a great year for STERIS, with all our business segments meeting or exceeding our expectations. That does make for a challenging comparison in FY 2020, but we are confident in our ability to sustain revenue growth in line with our long-term targets and continue our path in increasing earnings in 2020 and beyond. We believe that STERIS is better positioned than ever before, and we appreciate your past and continued support of our company. We're happy to take any questions you may have. Julie, if you would open for Q&A.

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

Thank you and congrats on a solid end to the fiscal year.

Thanks, Dave.

I just wanted to clarify something. You mentioned $110 million for investment. I think in the prepared remarks, you might have said that it was entirely for AST, but you also mentioned the Healthcare Specialty investments. So, if that's true, or if you want to, I don't know, break that out between them, I just wonder, how many new centers would that be, and it says global, are they primarily in the U.S., the AST buildout that you're doing? And are they new or are they just expanding existing?

We probably won't get into the exact details here, but it is multiple sites. It is split fairly well around the globe, so the U.S. makes up roughly half the business, and so the U.S. is roughly half of the expansion, but then the balance is around the globe. The earlier-on expansions are in the U.S., some European and other parts of the world are lagging a little bit. So, in terms of dollars this year, it's probably more heavily weighted to the U.S. side, but over dollars, over a longer period of time. And these projects don't end in three months; these are 12, 18, 24-month projects. And so the longer-term tails will be outside the U.S. but at a high level, we've got a lot of expanding and we're continuing to expand more. When you think about it, we’re growing high single digits or even mid-single digits, we have to build effectively four or five plants a year. Unfortunately, not all those are greenfield builds. Some of these are greenfield builds, but a number of them are adding a bit to an already existing plant, and that's obviously much cheaper. So, it's a combination of all those things that gets us $110 million. And the $110 million was specifically growth investment for AST. We also talked about roughly $100 million in total because we've had growth investment in AST last year. The $100 million is in total capital spend, and that does include spending for the HSS plant, but it is not plants, if you will. But that level of spending pales in comparison to the $110 million of AST.

Thank you for that information. You mentioned your targets for operating margin, and I noted that your healthcare segment performed very well, with operating margins reaching 24%, which is impressive. However, I believe it was actually 28% this quarter. I'm interested in where that figure is headed. Looking ahead, considering this is your largest segment and you've seen a significant increase in profitability year-over-year, do you have any long-term targets specific to that business? Thank you.

Dave, I guess, we've talked about this a number of times kind of generically, and I don't feel different about that business than I do to others. There are puts and takes in that business; sometimes mix has an effect for roughly high margin business going a little faster than the other or vice versa, you have a mix effect. In general, we anticipate being more efficient with our resources over time and sharing some of that with our customers and keeping some of that for ourselves. So, on average, we would hope to grow our profits a little bit faster than our revenue by doing that, and we don't have a target per se or an endpoint per se, because we add things to it all along and that changes the mix. But in general, our people know that we think we should be more efficient every year and pass the efficiency to our customers.

Thanks a lot.

Good morning, Walt, Mike, Julie.

Good morning, Matt.

Hey, I have a quick question. Could you provide some details on the inventory build related to Brexit during the quarter? Where did you see the impact? Additionally, could you also share the same information regarding the preorders for the Life Sciences consumables?

Yes. We anticipated a question regarding orders. Part of the answer is that there are unknowns we are aware of, and we believed it was more beneficial to discuss rather than simply report. We estimate there was about $5 million in revenue or inventory buildup by customers. This is distributed across various sectors, with a significant portion in the Healthcare Products business, though we also noticed it in the life sciences sector due to pharmaceutical plants located on both sides of the Atlantic. Those concerned about securing goods from England or Europe have increased their inventories to mitigate risks. In cases where customers communicated this to us beforehand, we gained decent visibility. So, again, we estimate around $5 million with reasonable clarity. However, we are uncertain about the total situation. Supply chains can be complex. Hospitals increased their inventories, and other entities have bid on smaller quantities. If manufacturers are stockpiling in anticipation and require sterilization in advance, we typically lack visibility into that. Our best estimate falls in the range of $5 million to $10 million, but that is merely a guess for now. I don't believe it exceeds that significantly.

Our best guess is probably something in the range of $5 million to $10 million, but it is a guess at this point in time. I don't think it's significantly greater than that.

I'm sorry?

Does the $5 million to $10 million include the preorder for the barrier products?

That would be a great question; yes. That would include that preorder.

Okay, got it. And then the 5% to 6% organic revenue growth for next year, I'll give you credit; it's above where you've started off the last couple of years at 4% to 5%, but it's also below are you exiting around 8%. As you look at the segments, which area do you feel confident in growing above, which may be do you feel confident growing below? And then some of the puts and takes wrapped around the 5% to 6%?

Yes, Matt, I’m not sure we will discuss it in that manner. Our IMS businesses experienced solid performance over the last couple of years but that followed a significant setback we had a few years prior. Assuming no major changes with our customers, we feel optimistic that this business will exceed 5%. AST has been performing exceptionally well, even better than we anticipated. We’re uncertain how much of that is due to inventory buildup or actual growth, as well as factors that take time to fully analyze. Overall, we expect it to perform above average. The Life Science capital sector has grown significantly in recent years. As we noted in our last call, we expect that growth to stabilize, rather than continue at 20% to 30% annually, but it will remain at significantly higher levels than three years ago. We are comfortable with these levels, and I don’t see it as a fast-growing area at this time. At a high level, that should give you a good sense of the situation. Mike, do you have any additional comments?

Yes, Matt, one of the things that we are going to experience in FY 2020 is about a $20 million negative impact from our restructuring activities. So, those manufacturing facilities that we identified in the third quarter restructuring were going to lose about $20 million of revenue. So, that's going to be absorbed in that 5% to 6%.

Okay, that's fair. And then on the EPS growth you guys typically double-digit growth company, that's what you generally expect. But when you look at the range that's coming in at 8% to 11% for the year, why are you being cautious on the low end there?

We're on the backside of two really big years of EPS growth. If we do the numbers we have here, and we hit our targets, if we do the revenues we have in this space, we feel pretty comfortable the 8% to 11%, and this is all organic growth. When we say we're double-digit growers in EPS over long periods, we've included the inorganic component.

And just last question I want to sneak in. On the AST and the dynamics of the growth there in the $110 million expanded capacity, it seems pretty clear here you're outpacing your customer volumes in the quarter, also on that headwind. Does this growth have anything to do with customers reacting to a competitor issue?

I don't think there's any consequential change there. There's always been churn in the business. Sometimes we lose, sometimes we win, sometimes it's more public than other times. This is one of those times where things are a little bit public. But they have a significant network of their bauxite plants in North America, so the first movement from that plant, obviously, would go to their initial plans. We have picked up a little bit, but I wouldn't call it consequential.

Okay. Thank you very much.

Yes, good morning.

Good morning, Jason.

I wonder if you could talk about the tariff impacts this quarter, what your outlook is there as well as just in general price and raw material costs going forward.

Yes, Jason. For the full year in fiscal 2019, we experienced about $1 million in the combination of labor and tariffs. We are anticipating approximately the same amount in FY 2020 with no material cost in either FY 2019 or FY 2020.

And just a follow-up on the AST question, the EO facilities, is there any risk there as far as elevated admissions issue that your competitor faced potentially impacting you?

There is always the question of regulatory intervention in our businesses. As you know, we operate in the healthcare sector and are quite experienced at dealing with various regulatory agencies. A significant part of our operations involves sterilization, which inherently requires the use of products that eliminate biological entities. Since we are biological entities ourselves, there is a risk if we don't manage it properly. However, we have been handling this effectively for 40 years. We are confident that we meet the current requirements and generally exceed them, as many regions do not impose the same level of scrutiny found in the U.S. and Western Europe. We design our factories and sterilization facilities to comply with the highest standards for both worker safety and emissions. Therefore, we believe we are in a good position. We are continually seeking improvements and acknowledge that there is always some risk of regulatory influence. Nonetheless, we believe that no one is better positioned in the sterilization field than we are in understanding the potential implications of regulatory decisions. Additionally, it's important to note that about half of all devices needing sterilization—including everything from adhesive bandages to orthopedic implants and pacemakers—require gas sterilization, with ethylene oxide being the most preferred method. If we ceased using ethylene oxide worldwide, healthcare as we know it would come to a standstill in a matter of weeks. All stakeholders are aiming for the same goals: safety for our workers, safety for patients, and environmental safety. I am confident that we will discover the appropriate methods to address these concerns.

That's helpful. And if I could just squeeze one more in. The outsourcing project in HSS, I think the last estimate was about $10 million in revenue in fiscal 2020. Is that still the case?

Yes, we did a little better than that this year. We would hope to do at least that this coming year.

Thanks. Good morning everyone. To start with the AST expansion, it seems that this will be a multiyear process based on your comments, Walt. There appears to be significant opportunities available. To achieve the desired growth rates, expanding your capacity will be essential. Should we consider this as entering a multiyear phase of elevated capital expenditure?

Larry, that's an excellent point and your deduction is correct from our earlier comments, that it takes a couple of years to do this. This $100 million or so this year is not the end of the tail, so we'll see some elevated capital spending over the next several years. I see elevated revenue and profit to go with it, and that's the key point.

Correct. Okay, perfect. Just a couple of other quick ones. I couldn't help but notice that, on the backlog, you were, on a sequential basis, down about $30 million, and, excuse me, closer to, I think, $60 million in the total backlog and about 10 percentage points higher than you typically are. So, any thoughts behind, again, that reduction in backlog this year that seems a little bit larger than the last couple of years?

Yes, Larry, our ending backlog is somewhat similar to previous years, showing a slight growth. We consider it a normal ending backlog. As mentioned in Q3, we experienced some shipments that shifted from Q3 to Q4, much of which was already produced. We had an exceptional January and February this year, resulting in a decrease in backlog. However, looking ahead, our outlook on the pipeline remains consistent with our previous statements.

And Larry, this is Mike. I think I agree with you sequentially, but we've been building backlog for the first three quarters, and then we did flush a lot of that out. But if you look year-over-year, in Healthcare, we are still up 16%. So, again, to Walt's point, we are starting the year at what we think is a strong backlog, strong position.

Okay. That makes sense. Two last ones for you guys. Just given the comments around some, perhaps, accelerated order activity in the fiscal fourth quarter, how should we be thinking about the cadence for the 1Q? I know you talked about sort of the gating for the first half versus second half, but just any thoughts that you could provide on the 1Q. And I guess lastly, for you, Walt, just M&A, obviously, the balance sheet is in great shape; below two times leverage, asset valuations feel like they are still elevated. But any sort of commentary around the landscape out there would be great.

Yes. Larry, the only area where we have kind of comfort on the timing of the orders, the inventory fuel of our customers is in the barrier products. We'll expect to see that because work its way out probably in a quarter or four or five months because that was clearly done as a result of our plant expansion, the plant — or the plant change. We have a beautiful plant for that facility now, and that will work its way up relatively quickly. So, that one we're comfortable is in there. And that sits in the guidance that we gave in terms of the 45-55. In terms of the 'Brexit numbers', that's a tougher one because, as you know, supposedly, we're Brexiting in October, but supposedly, we were Brexiting in March. I don't know if our customers will work their way down and then build up again in October if they don't have visibility or if they're going to just hold it until they get to October and when normal — that one is less clear to us. In our planning, we did not take that in any significant account; we took it across the year, if you will. So, in our planning, we're assuming it just works its way out over the full fiscal year as opposed to any one-time thing. As we get closer to October, we'll adjust that planning, obviously. So, that's — I think that responds to the first question. The second question is we do have — as I mentioned before, we have a pretty robust pipeline right now in BD opportunities. The issue is opportunities don't always turn into actualities, A, in the time frame you like; or B, sometimes, other people think things will work more than we do. Sometimes, owners decide to continue their own, and so we have the normal uncertainties. But we have a robust pipeline, and we clearly are not financially constrained in making any significant view of what we want to do.

Very good. Thank you very much.

Good morning everyone. Thanks for taking the questions and congratulations on a great last fiscal year. Just three quick ones for me, and maybe the first, a little bit of a net. I think the only thing I can kind of question in the fourth quarter was in Life Science capital. I know, Walt, you alluded to this in your prepared remarks. You had 21.5% growth last year, just phenomenal. But we've now declined two consecutive quarters on a year-over-year basis. Are there maybe alternative channels that you can start to address or categories that you might want to simulate here? Just trying to kind of re-level set expectations for Life Sciences capital. And I've got two quick follow-ups.

Chris, on Life Sciences capital, your point's well taken. The good news is if we look at our backlog, it's still sitting in that $60 million-range, and so that's where we like to have it. As you know, versus three years ago, we're way up in Life Science capital. So, this is not an area of concern we have. We do not believe this is a super-fast-growing area of our business, but it is a nicely profitable piece of the business, and the service that goes along with it is nice. It is almost, I think, on the slower growth side going forward. To your latter point, we're always looking at different opportunities in all of our businesses. The reason we break our business as we do is those managers — it doesn't make any difference to them if AST is growing or not. They need to grow their business, and they're looking for opportunities in that space.

Appreciate that. And then secondly, just on the free cash flow guidance for this year, it's essentially 10% of the top line, about a 3.5%, 4% free cash flow yield today, so very healthy. But just a little bit curious there. As you step up into what you alluded to as a multiyear expansion when we think about AST, how does this impact the other businesses that I’m assuming also require growth capital but maybe just can't candidly compete as well internally when you look at that operating margin contribution? Help us kind of square your comments about stepping up the CapEx level for what I'm assuming is essentially AST right now versus other investments that might benefit the growth of STERIS longer term via the other segments.

Yes, sure, Chris. I mean, first of all, our capital allocation philosophy hasn't changed. Our number one issue is we don't intend to cut the dividend. We generally plan to grow it roughly in line with the growth in profitability and cash flow, which tend to marry each other. The second thing is to invest in the businesses. If we were going to slow any capital spending down as a result of cash needs, it would be not on the current businesses we have. It would be on the M&A side, which is next in line. We do not, in any way, face capital crunch at this point in time. We like investing into businesses because we know them really well, and we tend to do what we think we're going to do in those as opposed to M&A, which we generally do where there's a little more risk. So, we are not, in any way, in a capital-constrained situation in our operating businesses. If anything, we are pushing them to find opportunities to invest more in their businesses. There's a thin line between investing and spending, and we want to — governments tend to call spending investment. We tend to call investments investments, and we expect to get a return on that spend. But there's no capital constraint in any of our businesses for growth capital per se. There is obviously a constraint on operating expenses and other expenses in the business as there should be, but if it can generate good returns, we're happy to invest it across the line in our businesses.

And Chris, just to dig a little deeper there. We maintain our maintenance CapEx at around $130 million, and that's been pretty stagnant for the last couple of years. So, we are not starving any of our segments by any means from a capital standpoint. So, that allows us to plan about $150 million in total CapEx growth for next year.

Understood. It's better to focus on investing rather than spending. Lastly, regarding Healthcare Specialty Services, you achieved an approximately 11% operating margin, specifically 14.6%, reflecting year-over-year growth in the double digits. In your prepared remarks, you mentioned a mid-teens margin. Is this level sustainable, or will we see fluctuations? Considering both the core business and outsourcing, can we expect consistent double-digit organic growth, with margins increasing sequentially? Or should we anticipate potential challenges? Thank you.

Yes, Chris, it really depends on the growth rates. Typically, in the outsourcing business, you do have to invest, and that investment can be both capital and expense investment. You've seen that before. I mean it's true, basically, in all service businesses. The outsourced can come in kind of big lumps, and if the lump comes along, it will look a lot like the AST business used to look for us 10 years ago. Ten years ago, every time we went to the AST plant, we saw a margin decline. Today, we have enough of them that it just doesn't push the margins. It does push them in that plant, that plant falls, but the other — so if we have a number of things that come along in the HSS business where we're making investments, we could see a temporary decline. We don't expect that to be a permanent situation, and we expect, over time, for those to grow. We've mentioned we do believe this is a mid-teens kind of business. We put that marker out there, where we're running 3%. We think that's a reasonable marker. If we get to mid-teens, then we’ll be thinking about 20%. But we’ll worry about that when we get there.

Understood. Congrats on a great year.

Thanks, Chris.

Yes, hi. Good morning. Just two questions. Walt, I was just wondering, given the expansion on the AST side in terms of going global, I was wondering if there are any other areas you think you might be looking to go beyond the U.S. even more, for example, maybe opportunities on the instrument reprocessing side.

Yes, we clearly want to look global in all of our businesses. Some businesses are more attuned to it, if you will. I mean you kind of walk through — the AST business is quite a global business. It's roughly 50-50, U.S. and OUS, and we expect that to continue. If anything, OUS may grow a bit faster. When it comes to the Life Science business, it is also largely a global business because our Life Science customers tend to be global entities, and so we do face them globally, if you will. We're organized globally. The sales force is organized globally, and so that is very much a global business. In the Healthcare space, it's not that it's U.S. It is country by country, in large cases, and so you have to organize around the countries. And it just so happens the U.S. is a big one, and that's the one we started. We still are quite a bit stronger in the U.S. than other places. Interestingly enough, our OUS business, if you look at it organically, has historically grown faster than the U.S. business. It's just we keep buying things that have the same footprint we do, which is heavily U.S. So, the inorganic side has grown faster in the U.S. than OUS, with the exception of Synergy, and Synergy did change our footprint a fair amount because we do outsourcing largely in the U.K. and also in Europe. So — but at a high level, yes, we're attuned in any market where that — if we use the market loosely, any country where they're accepting the type of services that we do and we're looking for ways to amend our products and services such that they're more acceptable outside the United States.

Okay. Thanks. No, that's great. And then just going back to margins. Again, we saw improvement across all the segments. I know, aside from incremental volume and pricing, et cetera, you highlighted, I think, expense management on the Life Sciences side and I think some improvement activity on the HSS side. I was just wondering if you can just provide a little more color on that in terms of — if we should be expecting more of the same in fiscal 2020.

Yes. I mean, generally speaking, we expect — there are certain areas we know we have opportunities to reduce expenses, and we go at those significantly in a way where we're targeting expense management. In general, we just expect as — there's variable costs and fixed costs. The variable costs, you have to take active management to cause them to be reduced. The fixed costs, you have to actively manage them not to grow. We do work at that, but like all things, there's some growth — fixed isn't really fixed. It's just where we kind of think about it, so we have to manage that. But in general, our expectation is when we're doing things, if we grow, we should become more efficient as we grow, so our costs, particularly the fixed costs, should grow less quickly than the variable costs, and that's kind of at a high level of how we manage.

Okay. Thanks again for taking the questions.

Yes, Mike, just one quick follow-up here. So, the guidance, as you indicated, for fiscal 2020 does not include any impact of the medical device tax potentially coming back in your last fiscal quarter. To the extent that it were to come back, again, that's sort of 2.3%, can you remind us sort of how it was running for you guys in the past just to help us calibrate some thoughts around that?

Yes, Larry, so as you said, we do not anticipate it coming back in our fourth quarter. What we had seen in the past is about $3 million negative impact on a quarterly basis. So, that will give you at least, from a modeling standpoint, what our thoughts are.

Perfect. Thank you very much.

You're welcome.

Thanks everybody for joining us and for your continued support of STERIS. We look forward to seeing many of you out on the road in the coming weeks.