STERIS plc

Thank you, Jane, and good morning, everyone. It's my pleasure to welcome you to STERIS's Fiscal 2013 First Quarter Conference Call.

Thank you for taking the time to join us this morning. As usual, participating in the call are Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO.

Now just a few words of caution before we begin. This webcast contains time sensitive information that is accurate only as of today, August 2, 2012.

Any redistribution, retransmission or rebroadcast of this call without the express written consent of STERIS is strictly prohibited.

I would also like to remind you that this discussion may contain forward-looking statements relating to the company, its performance or its industry that are intended to qualify for protection under the Private Securities Litigation Reform Act of 1995. No assurance can be given as to any future financial results.

Actual results could differ materially from those in the forward-looking statements. The company does not undertake to update or revise these forward-looking statements, even if events make it clear that any projected results expressed or implied in this or other company statements will not be realized.

Investors are further cautioned not to place undue reliance on any forward-looking statements. Statements involve risks and uncertainties, many of which are beyond the company's control.

Additional information concerning factors that could cause actual results to differ materially is contained in today's earnings release. As a reminder, during the call, we may refer to non-GAAP measures such as adjusted earnings, free cash flow, backlog, debt-to-capital and day sales outstanding, all of which are defined and reconciled as appropriate in today's press release or most recent 10-K filing, both of which can be found at www.steris-ir.com.

With those cautions, I will hand the call over to Mike.

Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review our first quarter financial results.

Following my remarks, Walt will provide further perspective on the quarter as well as provide detail regarding our outlook for the full fiscal year.

Before I start reviewing our first quarter results, I'd like to point out that beginning this quarter and going forward, we have made a decision to report earnings per diluted share on both a U.S. GAAP basis as well as on an adjusted basis.

Our adjusted earnings per share calculation will exclude the amortization of purchased intangible assets, acquisition related transaction and integration costs, as well as certain other items.

We believe that the adjusted earnings measurement will provide additional meaningful information to assist investors and shareholders in understanding our financial results and in assessing our future performance. As Julie already indicated, included in our press release this morning is an adjusted earnings reconciliation table for both the first quarter and full year of both fiscal 2012 and fiscal 2013.

With that, I'll now start with the review of our first quarter results.

Total revenue grew 6% for the quarter, driven by a 5% increase in volume, a 1% increase from acquisitions, and a 1% improvement in pricing offset by a 1% negative impact from currency fluctuations. Gross margin in the quarter declined 100 basis points to 40.7%.

The decline in gross margin is primarily due to a 40% reduction in the combined S20/S40 sterilant volumes. On a positive note, if you were to exclude the negative impact from our U.S.

SYSTEM 1 and 1E business, the rest of our business actually expanded gross margin by more than 100 basis points.

EBIT for the quarter increased $1.4 million to $48.3 million. EBIT, as a percent of revenue, for the quarter was 14.3%, a slight decrease from last year caused by the decline in gross margin.

The effective tax rate for the quarter was 33.4% compared with 34.4% last year. Net income at $30.4 million or $0.52 per diluted share, compared with $28.7 million or $0.48 per diluted share last year.

On an adjusted earnings basis, earnings per diluted share were $0.53 compared with $.50 last year.

Moving on to our segment results. Healthcare revenue in the quarter grew 3%.

Capital equipment revenue grew 7% with growth occurring in both infection prevention and surgical products. Service revenues increased 3% with growth occurring in capital equipment installations and service contract revenue.

Consumable revenue decreased 5% as continued reductions in the combined S20/S40 sterilant volumes more than offset growth in other consumables. Excluding the S20/S40 sterilant volume decline, consumable revenue actually increased mid-single digits.

Healthcare backlog in the quarter was $99.4 million, a decline of 26%. Given where we are in the SYSTEM 1 transition process, our SYSTEM 1E backlog as anticipated has been substantially reduced.

Healthcare backlog excluding SYSTEM 1E declined 12% versus the prior year, but increased 7% sequentially.

Healthcare operating margin in the quarter was 9.9% of revenue. Several factors are impacting healthcare's operating margin including the reduction in the combined S20/S40 sterilant volumes, the timing of R&D spending along with higher expenses related to System 1E uptime reliability as compared to the prior year.

We've experienced a sequential decrease in expenses related to System 1E. But as you may recall, the expenses related to the System 1E uptime reliability increased sequentially on a quarterly basis last year, with Q1 being the low point.

Life Sciences revenue increased 14% in the quarter. Capital equipment revenue grew 36%, consumable revenue grew 4% and service revenue grew 3%.

The strong increase in capital equipment revenue continued to be driven by replacement orders from our pharmaceutical customers.

Backlog in Life Sciences was $47.4 million at the end of the quarter, increasing slightly as compared with last year. Life Sciences operating margin increased to 19.6%.

The operating margin expansion was a result of volume increases and improved operating efficiencies.

Revenue for Isomedix increased 10% in the quarter, we continue to experience solid demand for -- from our core medical device customers. In addition, our recent acquisition of Biotest added approximately 400 basis points of revenue growth to the Isomedix segment.

Isomedix operating margin increased to 33.8% of revenue as a result of increased revenue volumes. Although we are happy to see this level of operating margin, we do not believe that this rate is sustainable.

Terms of the balance sheet, we ended the quarter with $186.7 million of cash and $210 million long-term debt. Our free cash flow in the quarter was $45.7 million compared with negative $3.6 million in the prior year.

We continue to make good progress on improving our working capital position, both sequentially and year-over-year. The improvement in free cash flow is attributable to reductions in inventory levels, lower DSOs, and less cash required to fund compensation related obligations.

Our inventory levels, as anticipated, have been substantially reduced as compared to the prior year. Specifically, the reduction of over $28 million in SYSTEM 1E related inventory, driven by shipments of SYSTEM 1E units over the past 12 months.

In addition, our DSO at 64 days has improved versus the prior year. Our key activity in the quarter included the collection of approximately $6 million from Spanish government-owned hospitals.

Our accounts receivable balance at $246 million does not include $15 million of pending credits related to our SYSTEM 1 Rebate Program. If AR would be adjusted for those credits, our DSO will improve by another 4 days to 60 days.

Capital spending was $15.5 million in the quarter, while depreciation and amortization was $14.3 million.

With that, I'll now turn the call over to Walt for his remarks. Walt?

Thanks, Michael. Good morning, and thanks to everyone on the call.

We are pleased with the strong first quarter with growth across all 3 business segments and profit results ahead of our expectations. The general trends in our business remains solid with revenue growth in line with our expectations in Life Science and Isomedics, including contribution from the acquisition of Biotest.

Our healthcare segment excluding SYSTEM 1 and SYSTEM 1E, also delivered good growth, in particular from newer products, and we anticipate that will continue. As you know, shipments of S20 sterilant and support of SYSTEM 1 units in the U.S.

ends today. It has been a long, expensive and challenging road, but I'm proud of the way our people have worked to support our customers and assist them in making this transition.

In many ways, we are glad to put this chapter behind us. As you might imagine given the timing of our transition deadline, we shipped over 700 SYSTEM 1E units in the quarter.

Through the end of June, we have now shipped about 6,000 SYSTEM 1E units since the introduction of the product a couple of years ago, which is in line with our expectations.

We believe that we have shipped the majority of units that will be sold this fiscal year in the U.S. and we have nearly achieved our United States SYSTEM 1E unit volume projection for the year.

Even though that is good news, it does mean that we have somewhat tougher year-over-year comparisons the next few quarters, as we were actively shipping units all last year.

We are seeing S20 sterilant continue the expected decline in the United States, which will be flatlining after today. But the new S40 Sterilant has ramped up from quarter-to-quarter, so the net shipments of S20 and S40 is in line with our forecast.

As you know, we have given a range of ongoing sterilant sales in the U.S. versus our sales before the transition started, at about 30% to 40% of our historic volume.

It appears that our going forward sterilant revenue will be in the midpoint of that range. We have completed our software update for SYSTEM 1E in the field and as anticipated, has seen a significant decline in the number of service requests due to unit downtime.

Consequently, our SYSTEM 1E field costs are tracking to our forecast. As Mike indicated, the end result of all these activities is a nice reduction in our expenses compared with the fourth quarter levels and we are on our plan to reduce that cost even further.

We have officially launched our support tester for S1E and we will begin shipping during the second quarter. And our customers have also widely adopted the use of our chemical indicator.

These optional accessory products do not translate into big revenue dollars, but they are important to many of our customers and thus important to us.

Outside of the SYSTEM 1 franchise, healthcare had a good quarter and specifically for several of our newer products, [indiscernible] cleaning chemistries, the new IQ 3000 integrated OR, our value line of LED lighting, the 4085 surgical tables and VPRO MAX. We have recently received key endorsements for VPRO MAX from industry partners including Olympus for their endoscopes.

As you all know, we recently announced a proposed acquisition of U.S. Endoscopy, which should close this quarter.

Even though we will only have a partial year impact from the business, it is sizable enough for us to update our revenue outlook for FY '13. We now anticipate total company revenue growth to be in the range of 3% to 4% compared with our prior expectations of flat revenues for the year, largely a result of the acquisition.

Similarly, healthcare segment revenue is expected to grow low single-digits compared with previous expectations of a decline in revenue of low single-digits. The revenue outlook for Life Science and Isomedix are unchanged.

As Mike has already mentioned, going forward, we will provide you as GAAP earnings per share as well as adjusted earnings per share for the full fiscal year. On a U.S.

GAAP basis, we are maintaining our outlook for earnings per diluted share in the range of $2 to $2.20 for fiscal 2013, which now includes approximately $0.05 of dilution from the U.S. Endoscopy acquisition on a GAAP basis.

Adjusted earnings per diluted share are anticipated to be in the range of $2.15 to $2.35 including accretion of approximately $0.05 per share from the acquisition of U.S. Endoscopy.

This compares with adjusted earnings per share last year of $2.22 on the same basis. Give our success in Q1, we now anticipate more like a 45-55, first half-second half split in EPS.

For the full fiscal 2013, free cash flow is now anticipated to be approximately $130 million, excluding SYSTEM 1 Rebate Program and class action settlements or $90 million including these items. We have increased our estimate of free cash flow by $10 million to reflect our first quarter performance.

We are confident in our free cash flow generation and continue to believe that we have capacity to fund additional investments in order to grow the business. We expect longer-term annual free cash flow to be in the $125 million to $150 million.

Our capital allocation strategy is unchanged. We continue to increase our dividend over time.

In fact, our board just approved our seventh consecutive double-digit percentage increase in the dividend today. We will now pay $0.19 per share per quarter, which is about 2.5% yield based on our recent stock trading range.

And we are continuing our investments in our business including new product development, investment and capacity expansion, and our in-sourcing projects. By manufacturing more of our critical components, we believe we will improve quality, provide enhanced service to our customers and lower our costs.

We also plan to invest in adjacent businesses that we find appealing through acquisition.

We have not repurchased stock so far this fiscal year as our existing 10b5-1 plan had expired at the end of fiscal '12. And we wanted to avoid any appearance of impropriety since we had inside knowledge regarding the U.S.

Endoscopy acquisition.

However, we have approximately $118 million remaining on our existing authorization, and you should not be surprised if we're back in the market this year. We firmly believe that the results of all our efforts will continue to create value for our customers, our people and our shareholders in the years to come.

With that, I'll turn the call back over to Julie to begin the Q&A.

Thank you, Walt and Mike for your comments. We're now ready to begin the Q&A session.

So Jane, would you please give the instructions and we'll get started.

Could you help us out when we look at the Life Sciences business and specifically the capital line item, help us think about volume growth there, relative to pricing. And really what I'm just trying to get out there is, are you seeing -- are these larger transactions or are the aggregate volumes up significantly?

And I just have a follow-up.

Sure, Chris. I would characterize it not as larger individual transactions typically.

Typically the large projects -- if someone builds a new plan or refurbishes an entire plan something like that is the large transaction kind of volume. It's in fact just the opposite -- it has been now for couple of years.

We've seen the replacement business to kind of one off -- "I need this sterilizer or I need that hydrogen peroxide device". It's more of a replacement business, more one-off relatively speaking in the business, and it's not a function of pricing other than, as you know, a couple years ago.

We quit chasing very low priced, low profit business. So in that regard, by not chasing unprofitable business, I suppose pricing has come up and that's why our business size shrunk early on in that process, but since then it's been a steady feed of replacement type products and our newer products, like the hydrogen peroxide products I've mentioned earlier.

Okay, super. Obviously we, here just a few weeks back, we thought about U.S.

Endoscopy [indiscernible] use of the balance sheet there, to kind of help accelerate organic growth of business going forward. Help me think about other product areas or other that are either internally developed that we should be looking forward to as the year progresses or maybe other areas where the company might be complementary, but not in the portfolio today.

Just so that we can kind of think about that that what could be in terms of both growth and profitability for the company as we go to the fiscal year and beyond. Thanks so much.

Sure, Chris. Not unlike our product development projects, we don't really talk about new products before we launch them and we also don't really talk about new acquisition areas before we launch them or do them, but the easiest way to think about it is that, I've mentioned many times is that, we are unlikely to take that leap where we have a product in a place that we don't know or a -- so we don't like new products in new places, new products in new markets.

We would generally like to see products that we are already involved with in new markets or where we're already have involvement, we bring products into place and thus the U.S. Endoscopy's a classic, as we are in that area with a different set of products.

We are not in the procedural component of that area. We think there is a nice fit there, that they will enhance us in the backroom, if you will and clearly it's in a new area in the front room, so that's the kind of thing if you just kind of look at our product set and say "what's right next door to it?"

That would be the classic place for us to go.

I'm wondering if you could comment on the performance over in Europe, specifically breaking down east and western parts and what you're seeing there relative to the market as well as how you did in the quarter?

Yes, you will -- the quarter kind of year-over-year, we did about the same, I mean, it's plus or minus I don't remember exactly, but plus 0.01 or 0.02 or minus 0.01 or 0.02, and I just don't remember off the top of my head. In revenue, we don't comment on profitability, but I will say that we've done a lot of restructuring in Europe the last couple of years and that restructuring is paying off.

So, our profitability has clearly improved over there. Relative to your question about kind of within or in what areas in Europe, we are seeing, I think probably what most people would expect Western Europe or particularly southern Western Europe is weaker relatively speaking, and Eastern Europe and the Middle East and parts of Northern Europe are stronger, relatively speaking, and so that's generally what we've seen, but we had a good -- solid quarter in Europe this last quarter.

We were very happy to see the payments out of Spain that Mike mentioned and we continue to see a pipeline in our European business. So, although we are watching them and are concerned about Europe is a general statement.

So far our business is nicely holding their own over there.

And do you have any other larger receivables that you're waiting on from -- similar to the Spanish situation?

The answer is as you know the countries of the world have their own natural rhythm of payments and Spain is a historic slow paying country as a general rule is just they got way worse. Italy is another country that is a relatively speaking slow payment country, but we are not seeing them getting -- they look like Italy has looked to us for the last 3, 4, 5, 6, 7 years.

So, it relatively speaking, they are slower pay than some other places. But we're not seeing at this point that Spain had clearly gotten long, but I would say as a general statement around the world.

We're not seeing anybody that's out of line with their normal payment practice.

Okay, that's excellent news. The Biotest, obviously you had it for the quarter, I just wonder how that's performing versus your expectations?

We like what we've seen. It's real early and there is always going to be something you don't plan for, I mean that's a rule of life, but so far we like what we see.

Okay. And just wondering if you will be providing the adjusted non-GAAP numbers on a quarterly basis, I know you gave the $2.22 and the $0.50 for the first quarter, but just wondering how the other 3 quarters of fiscal 2012 played out.

Yes, great. We could actually provide those, we did not provide those today but that's something actually we can have Julie put on our website so that we can have it disclosed for the second, third, fourth quarters.

We gave you the first quarter and the full year, but we can actually put the quarterly amounts out there in the next day or 2.

It basically looks like it's about $0.01 a share for the next 3 quarters, maybe one of them is $0.02 though, just doing the math?

That's approximately. I don't have it in front of me but, yes, that's exactly right.

All right. And one last one, given the pending acquisition of the company there right next door to you guys, I'm wondering what's going to happen to your $200 million in debt that you currently have, is that something that you can renegotiate or will that just be termed out and paid starting, I guess 2013 is the first tranche?

Yes. Greg, that $210 million is our private placement funding, actually we did 2 tranches -- 2 separate tranches over the last couple of years.

That we'll maintain and that will just be termed out over the next, I think the first payment is next year and then subsequently a couple of years out. So, we will just continue down that path.

Now what you will see upon the close of U.S. Endoscopy is, we will have a borrowing against our credit line, our facility line to help pay for that, but that will be the change in debt that you will see that $210 million remains and will be termed over the normal course of that agreement.

First is a quick question on the guidance, does it assume in the fourth quarter, any impact on the medical device tax?

No. We have continued, Mitra, as we did at the beginning of the year to exclude that activity and as we've said in the guidance that, that could have an impact of $0.02 to $0.04.

And just going back again to the strength you saw in the healthcare business, I mean I think the sentiment is that the economy might be slowing again, et cetera, but certainly you feel encouraged in terms of the flat revenue you're initially expecting now to low mid-single digits, is there anything in particular you're seeing that kind of leads to the increased confidence?

Mitra, what we saw if you kind of go back over the last 2 or 3 years, what we saw is the replacement kind of business in the operating room, really kind of fell off and big projects were included if you remember, a couple of years ago, we were saying our big project numbers had really grown and then they kind of shifted, they weren't growing so much. We're accessing less projects at bigger size.

And now what we're seeing is more replacement on a kind of percentage basis, we're seeing more though, buy 2 replacement tables and buy 2 replacement sterilizers as opposed to the big projects. So we've seen a shift back more towards, I don't know about normal levels but clearly we're shifting -- had shifted more back towards replacement.

And I suspect we have some pent-up demand there, people kind of slowed down their replacement cycle and now the replacements are coming back in the big projects, but then that happens over the course of time kind of shifting back and forth, so that would be the main thing that we've seen so far.

And again you're counting on, you intention [ph] the growth being volume driven as opposed to any meaningful pricing benefit?

Yes, we don't expect like a 10% price increase or anything, no.

And finally just a quick question on the cash, again clearly bumping up the dividend, potentially buying back shares, and keeping cash in terms of acquisitions. I guess it's fair to assume all 3 are in play or is there any particular area you're going to be more willing to deploy the cash?

We've said in rank order, we don't anticipate reducing our dividend in fact we anticipate increasing it overtime. The second component is we're going to invest in the businesses we already have.

So, as you've seen there's a number of -- this year particularly, this next 18 to 24 months we're making some significant investments in those businesses in the capital side. The third is if we see adjacent areas that we think we can grow and/or see synergies through acquisition and then the fourth is stock buyback.

And we feel the same way, we have -- we've been saying that now for, I don't know, 3, 4, or 5 years. The difference is 4 or 5 years ago we shutdown the acquisition machine.

We thought we had more opportunity working on our business. And a couple of years ago we said we're going to start looking and we think patiently and cautiously, but looking for things that make sense for us and things just take time.

We just happened to -- this just happened -- to fruition now, we can't control the timing of those kinds of things. So, that's -- but it's a same thought process, same approach and we continue down that same path.

And again I know you can't be specific on acquisitions, but given the current environment, are you seeing more opportunities out there or pretty much the same it's been the past few years?

Well, clearly on the private company side of the world, this little tax thing that everybody's worried about come January 1, clearly has an impact on private company type companies because if they can assure themselves the capital gain at current capital gains rates as opposed to God only knows what it's going to be next year. You're clearly seeing that.

Other than that I would say no significant change.

So just a few housekeeping questions, I believe you said that you sold a little over 700 SYSTEM 1E units in the quarter.

That's correct.

Okay. For the remainder of the fiscal year then, should we think about those core replacements as being level of what you guys use to sell prior to that whole transition period or are we still going to see some fairly bulky orders in the 50 to 100 or is it per quarter, actually think about the rest of the year.

Let me tell you that guidance that we have given, we said that we expected about 5,200 units in total, total, total, total, and we've said now we are at 6,000, that should give you a -- and we are not feeling differently. So, that should give you fairly good deal, that's U.S.

Our non-U.S. business should do what it has done.

So, there is some non U.S., obviously some non U.S. sales of various SYSTEM 1 devices, so -- but that gives you order of magnitude.

Okay. I think I've asked you this before, but can you remind us of how you think about kind of the on-going cost associated with the transition -- perhaps you can categorize those for us, and I know you're still thinking that fiscal '14 will be the first "clean" year where everything will be behind you in terms of cost?

I'm going to answer the first question, but the second question first that is yes, fiscal '14 will be the first year we have kind of the clean year. We will still have some back -- there will be comparative issues going on in terms of everything that's happened in '13.

The excess cost will go away obviously but then the sale of the units will also go away, so there is some offsets there. So for comparison '13 to '14, we have to look at them kind of one at a time, but it is -- but we expect we'll be -- have a clean year in '14.

We still feel the same way. Mike, I don't know if you want to comment on, I'll call it the buckets, but I can tell you we are not feeling any differently about those than our original guidance.

Okay. And I guess lastly on the latest acquisition.

And I just had the chance here to think about where the structural synergies are going to be in terms of how much of the other organization will be brought into kind of the [indiscernible] hold or how much of R&D in sales in organizations will -- have been dependent, so to speak?

Yes, again I'll characterize it as I did before, the -- this is not a "huge cost reduction synergy acquisition". This is a "how do we grow faster in both businesses and not have -- and STERIS not have to invest in the new sales force acquisition", because they already have one.

And so, this is more of an upside revenue and growth synergy question than it is a "Oh gee, that we're going to cut half of the people out of the company". We're not going to do that.

Now will there be some modest cost reductions? Absolutely, they always are.

Will we apply the same kind of thought processes about cost we do in all of our businesses? We think we're fairly cost conscious and we will apply that same logic in this business and the best and easiest places to get real cost reduction is businesses are growing, because those cost reductions don't entail laying people off and closing factories and all that stuff.

They entail doing more with the same number of people. So that's -- we're more interested in those kind of synergies, if you will, than "Gee, is one accounts payable clerk going away?"

or something like that. Again, some of that type of thinking may -- some of that thing might happen, but we don't see that being the driving force.

We've heard from some of our other companies that we cover on the hospital area -- hospital spending and so forth, I just wondered what your thoughts are given that particular topic?

Are you talking about general spending or capital spending, Greg?

Probably both. Separately, if you could.

Yes, clearly on the consumable side, the consumables tend to track procedure volumes, and we've seen procedural volumes kind of bouncing around a little bit. They're clearly not growing the way they were 4 or 5 years ago, but procedure volumes haven't had a drastic decline on anything, so we're still kind of viewing that low single-digit growth rate as the kind of growth that we're seeing on unit basis.

And then on the capital side, you do have to differentiate different pieces of the market and although there is clearly, I mean there is clearly pressure on hospitals, everybody understands that, but they're spending like crazy in IT when they're not spending like crazy in something else, but most of the things that we are seeing, is that they're still saying they're kind of in their current spending levels, they're not planning on growing a lot. There are people that are reducing, there are people that are increasing, but kind of current spending levels are more what we're seeing and as we've mentioned on several occasions, the operating room tends to be a little more resilient than other areas of capital spending, and we saw that a couple of years ago.

Now of course, everybody went way down and we just went down less, we being the operating room itself, not necessarily us. And so, we still think it is a bit more resilient than other areas and as I mentioned we're seeing what could be some pent up demand on the replacement side.

So to date, we're seeing capital spending kind of holding its own. It's not like we're seeing a gold rush or anything, but we have not seen significant decline, our orders were actually quite strong this last quarter, and we still see pipeline.

So that's kind of where we are. We are cautiously watching it like everyone is in this business, but to date we haven't seen significant declines.

Okay, that's excellent. And one last one, I may have asked this when you did the acquisition call, but on capital spending thoughts for STERIS, I'm assuming the transaction is completed.

What would you estimate that in a range for fiscal 2013?

Greg, we're still anticipating approximately $85 million of capital expenditures for the year and that's even with the acquisition of U.S. Endoscopy, their capital requirements are minimum -- minimal, if anything.

We don't have to build buildings. We've -- like every manufacturer, you have to buy machines now and then, but it's not -- we don't see like we have to build new building or build a new factory, those kind of things.

And of that $85 million, how much of it would be just maintenance or for the Isomedix unit versus expansion.

Isomedix typically runs about $20 million to $25 million in total for cobalt and maintenance. I would consider cobalt part of their maintenance process.

Could you just help us think about Isomedix going forward just from a growth perspective, 11.5%. I'm sorry -- 9.5% there in the quarter on a reported basis, if we think about you've expanded capacity there over the course of the last fiscal year.

Should we think about the base Isomedix business now kind of being in that 5% to 7% range and then Biotest being incremental above that or just to kind of help us think about what's a more normalized growth rate for the Isomedix franchise going forward? Thanks.

Sure, Chris. We've said, generally speaking, that market is the mid-single digits kind of market.

We're always hoping to pick up a point or 2 a share. Sometimes you do, sometimes you don't, but we're always shooting for it.

So, the kind of numbers you're describing are in the right range anyway. I should add, as you correctly mentioned, we did bring a lot of capacity on the last couple of years.

We are continuing to bring capacity on and we've discussed that before, but we have another growth in capacity in the Northeast coming online, either next quarter or the quarter after. But we think probably this coming quarter and then we have some more capacity coming on in the Southwest next -- a year from now kind of timeframe.

So, we continue to bring capacity online and that's why Mike mentioned about the earnings, when you bring capacity online it's a good thing for the long-run, but the short-run you do see a little bit dip and that's part of the deal.

Understood. And may be just a follow-up to that, when you think about Biotest, is that the right run rate to think about for them what we saw this quarter or I'm just trying to think about how to model that going forward?

Thanks so much.

I think this quarter is a reasonable estimate.

I'm a bit late in jumping on the call, so I apologize and if any of these questions were asked, just tell me, Walt, then I'll refer myself to the transcript. But I do have a couple.

The Life Science sales was exceptionally stronger than I've been looking for. I suspect you've already covered, but want to ask was there anything unique to the quarter that would suggest you don't get similarly strong growth throughout the year or are we at the point in the cycle where we shouldn't be expecting similarly strong growth through the year?

Bob, our best look at that is our guidance for the year and I would refer you to that. We did have a strong quarter at capital as you, particularly in Life Science can be a little lumpy and we had a nice lump in this quarter.

Our guidance for the year is, we feel comfortable with that guidance.

I'm just trying frankly to fair it out if it's conservative guidance or you've got enough sort of -- look in to the pipeline, you just know that the lumps aren't there.

That's a great question, Bob. We would never have overly conservative guidance.

Okay. Let me ask a few other pieces of that.

We feel good about our guidance in Life Science, that's the best answer, and they do have, as you can see, they have a nice backlog, and it is lumpy though and some of that backlog is out there a way. So, I think our guidance is the best -- kind of the best place to be in Life Science right now.

Okay. And a couple other things.

In your earnings guidance, you've not included the medical device excise tax, although you did suggest what the impact could be. Curious why you have not included that in the guidance.

Is there an assumption that you can offset that tax with cost reduction or price increases or what's the rationale?

Bob, the rationale was particularly when we were looking at it originally when we did this guidance was there was a fair amount of uncertainty about what was going to happen to the tax. I still think there is uncertainty about what is going to happen to the tax.

And so we're going to let the political system do its thing and sort it out. So, it's not a presumption that we can somehow offset that entire tax in 5 minutes, that would be an incorrect presumption, either by prices or by cost reductions.

So it's not the presumption, and since it only impacts a quarter of our business in this fiscal year. We chose to leave it out, let the politicians have their say, and then we will act accordingly, and that's why we left it out explicitly, but also gave you explicitly a reasonable range of what impact that could have.

And so if you want to prognosticate the politicians better than us. We want to allow you to do that.

Okay. And then a couple of other things.

Obviously, I saw your annual guidance, did you suggest any sort of a gating quarter-by-quarter for the year or could you give us any guidance on that?

We did say -- obviously we're a little strong in the first quarter and we did talk about the fact in my comments, I mentioned that we're expecting more of a 45-55 split as opposed to our original guidance was a 40-60.

Okay and then my final question is on the cash flow. I'm trying to think through what the proper free cash flow base is for 2013, as I think beyond 2013, is it $90 million or is it $130 million?

Again, that's in my script, Bob. But we're thinking our -- not so much '13, but let's say '13, '14, '15 kind of numbers in the $130 million to $150 million range.

$130 million to $150 million, you'd say?

Yes, Bob, the difference...

I think I said $125 million, Bob, but so $125 million to $150 million, $130 million is in there somewhere. I'm being slapped, Bob.

Bob, I just want to add one thing. The difference between the $90 million and $130 million is the payments associated with the rebate program and class action, so the $90 million includes it, the $130 million excludes it.

Yes. And we're not looking to do another one of those, Bob.

Yes.

Great, thanks, Jane. Thanks, everybody, for joining us and we'll talk to you again next quarter.