STERIS Corporation F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

Jan.27.09 | About: Steris Corporation (STE)

STERIS Corporation (NYSE:STE)

F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

January 27, 20089, 10:00 am ET

Executives

Julie Winter – Manager, IR

Walter Rosebrough – President and CEO

Michael Tokich – SVP and CFO

Analysts

Joshua Zable – Natixis Bleichroeder

Greg Macosko – Lord Abbett

Daniel Owczarski – Avondale Partners

Greg Halter – Great Lakes Review

Operator

Welcome to the STERIS fiscal 2009 third quarter conference call. (Operator Instructions) I would now like to introduce today's host, Julie Winter, Manager, Investor Relations. Ma'am, you may begin.\

Julie Winter

Thank you, Valerie, and good morning everyone. It's my pleasure to welcome you to STERIS Corporation's Fiscal 2009 Third Quarter Conference Call. We appreciate you for taking the time to join us this morning.

If you haven't seen a copy of our earnings release, it was issued via PR Newswire this morning. Please visit our Investor Relations Web site at steris-ir.com.

Participating in the call this morning, are Walt Rosebrough, our President and CEO, and Mike Tokich, our Senior Vice President and Chief Financial Officer.

Now just a few words of caution before we begin: this webcast contains time sensitive information that is accurate only as of today, January 27, 2008. 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 statement. These 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 will refer to certain non-GAAP measures including free cash flow, backlog, debt-to-capital, and days sales outstanding, all of which you will find in our most recent 10-Q filings.

With those cautions, I'd like to hand the call over to Walt who will comment on the quarter. Walt?

Walt Rosebrough

Thanks Julie and good morning to all of you joining us. I’m going to start today with a high-level review of our observations and two year outlook. Then Mike will walk you through the results in more detail.

Our third quarter saw more revenue growth of 2%, led by growth in our healthcare business. Our constant currency growth was 4%, but was reduced by the recent strengthening of the U.S. dollar. We were able to leverage this modest top-line growth the deliver substantial year-over-year improvements in profitability.

Over the past couple of years, beginning with our transfer of manufacturing operations from Erie to Mexico, plus our cost-reduction efforts within North America, and the international restructuring announced this morning, we have implemented programs to reduce our cost structure by approximately $70 million. I want to emphasize that these reductions are generally in administrative expenses, lower production costs, or within products or markets that were not generating profitability.

We have continued to invest in product development and field sales and service forces to provide our customer superior products and services. Thanks to the great work of our people, we are ahead of schedule realizing these savings, which has helped generate the results we are reporting today.

Now I’ll spend just a few minutes reviewing each segment. Our healthcare segment grew 4%, driven primarily by new products.

For the first time this year, we are seeing a slowdown in spending from our healthcare customers, which is impacting our order growth rate. In particular, our infection prevention products have slowed somewhat as hospital budgets tighten; however we saw strong growth in our surgical business, driven by new products with continued strength in both LED lights and our integrated OR platform.

In total, our healthcare team has created another backlog record this quarter, with growth in both infection prevention and surgical products. Even to now, we are not seeing cancellation of orders or delays in shipments beyond the routine. So order cancellations are not materially impacting our business.

You may have seen our announcement last week that we have submitted a new product to the FDA for 510(k) clearance. Normally, we would not pre-announce a product before its release, but in this instance, we felt it important to let our customers understand the direction we are taking. We are pleased that our discussions with the agency have resulted in this submission for a new liquid chemical sterilization system and a path for it in resolving the warning letter related to System 1.

While the timing of regulatory clearance is uncertain, and our talks are continuing with the government, we look forward to reporting back to you with more details as we know them.

Moving to the life science segment, now led by Greg Blackmore, it saw substantial decline in capital equipment, which is partially timing. As we’ve told you in the past, as a result of large capital equipment orders, it tends to be lumpier than our other segments.

In addition, we made a strategic decision earlier in the year to focus on higher margin capital equipment products, which is impacting revenue growth negatively and our profits positively. Our margin improvement in this business is substantial as the life science team has done a nice job managing projects and reducing expenses to drive profitability improvement.

Finally, our isomedix segment reported another solid quarter. This is particularly true, given the sale of one of our facilities this year. Although flat in revenue for the quarter on a year-over-year basis, growth was 5% excluding the impact of the facility sale. As in the other two segments, our isomedix people manage cost to grow slowly than revenue so profit grew faster than revenue.

We are updating our guidance for fiscal 2009 given the results of this past quarter and the uncertainty we face in the upcoming months. As I told you last quarter, we have made operational changes to level our production and to reduce the historic heavy fourth quarter seasonality in our business, which in the second half of this year will have a negative impact on our comparisons, purely due to timing, even without any consideration of the current economic climate.

We now anticipate that revenue growth will be approximately 4% for the year, driven by mid-single digit growth in the healthcare segment, low single digits in isomedix, and a slight decline in life science. You will recall that life science had an extraordinary fourth quarter last year.

As far as the bottom line, we are quite comfortable with our recent earnings guidance of $1.65 to $1.80 per diluted share. In fact, we feel it should be toward the higher end of the range. That forecast assumes a modest increase in raw materials and currency exchange rates on a forward basis as of mid-December, 2008.

As you know, we have worked to be conservative in our forecast of revenue, exchange rates, and cost increases, given the wide variations we have seen in the past year or so. We have been fortunate up until this point that currency and material costs have gone our way the past several months, which have helped improve our earnings.

At the beginning of this fiscal year, we were also concerned about changes in healthcare spending given a change in administration in Washington and potential for uncertainty. So we operated our business conservatively, even in the face of what seemed to be a very strong market. I am pleased with the work the STERIS people have done to position us to continue profitable growth, even in this tougher environment.

Since the outlook going forward is less than certain, even for our fiscal year fourth quarter, and certainly for our next fiscal year, we will continue to run our business conservatively, operating for a non-growth environment, while working to grow our business in that environment.

We will continue our efforts to control costs and expect continued success doing so, but we will not sacrifice our future. We do not plan to disinvest in product development or customer facing people so we can make sure we provide our customers with quality products and services in the coming months and years.

I will now hand the call over to Mike Tokich who will review the numbers in more detail.

Michael Tokich

Thank you, Walt. Good morning everyone. It is my pleasure to be with you this morning to discuss our financial performance for the third quarter of fiscal 2009. Before I get into the details, there are a few moving parts in our numbers.

So for clarity, let me remind you that included in the third quarter of fiscal 2009 is a pretax charge of $12.3 million with 2.8 million of the charge reported as restructuring expenses and $9.5 million is recorded in cost of goods sold. The charge is primarily related to our international operations and consists of costs associated with several severance and related benefits, the rationalization of certain product lines, and the closure of sales offices.

These actions, which continue our focus on improving our cost structure, are anticipated to generate annualized savings of approximately $20 million. We anticipate these savings will be realized over the next couple of years, with approximately $4 million benefiting fiscal 2009, approximately $10 million benefiting fiscal 2010, and remainder benefiting fiscal 2011 and beyond.

Also during the quarter, we made changes to certain benefit policies, which resulted in a pretax income of $7.9 million. The change in policy related to our paid time off benefit, which is now earned throughout the calendar year rather than granted in a lump sum at the beginning of the calendar year.

The net impact of these two items resulted in a reduction of pretax income of $4.4 million. Discussion of the third quarter financial results will exclude both the charges in fiscal 2009 and 2008 as well as the adjustment for benefit changes in 2009.

Overall, third quarter revenue increased 2%. Organic growth for the quarter was 4% with 2% for volume and 2% for pricing. Foreign currency translation had a -2% impact.

Gross margin in the quarter was 41.8%, an increase of 150 basis points compared with the third quarter of last year. Pricing, productivity improvements, and favorable currency exchange rates were partially offset by increases in raw material costs.

Earnings before interest and taxes as a percentage of revenue in the third quarter was 15.7%, an increase of more than 450 basis points compared with the prior year period.

The increase in EBIT is driven by the improvements in gross margin, lower operating expense levels, and favorable currency exchange rates. As a reminder, due to our geographic locations, a strengthening of the U.S. dollar tends to reduce our revenue growth, but for the same level of revenue, provides a benefit to our operating income. In this quarter, that benefit was approximately $6 million.

Effective tax rate for the quarter was 33.5% compared with 33.1% in the prior year quarter. That income increased 38% and was $31.3 million or $0.53 per diluted share compared with net income of $22.6 million or $0.35 per diluted share in the third quarter of fiscal 2008.

Healthcare increased 4% in the quarter, driven by a 6% increase in capital equipment revenue and a 5% increase in service revenue. Capital equipment order backlog levels increased 25% to a record $134 million as compared to the same period last year.

The healthcare segment operating margin rate was 15.9% compared with 13.9% in the same quarter last year. The improvement in operating margin rate was driven by increased volumes and improved operating expense leverage.

Life science revenue declined 6% compared with the prior year. As solid growth in consumables and service of 7% and 5% was more than offset by the declines in capital equipment of 21%. The capital decline was driven by a continued slow-down in spending from our pharmaceutical customers as well as a business decision to improve the profitability of our capital equipment revenue.

Backlog levels for life sciences declined 14% to $50 million as compared with the same period last year. Life sciences operating margin rate was 15.7% compared with 4.2% in the same quarter last year. The improvement in operating margin rate was driven by higher gross margin attainment and lower operating expense levels.

Isomedix services revenue increased 0.3% in the quarter. Revenue growth was affected by the sale of one facility earlier in the year. Isomedix operating margin rate was 22.2% compared with 20.3% in the prior year period. The increase in margin rate reflects modest price increases combined with lower operating expenses.

Turning to the balance sheet, our DSO level at 59 days was flat as compared to the third quarter of last year. Total inventory at quarter-end was $148.1 million compared with $164.4 million in the prior year quarter. Inventory write downs associate with a third quarter charge for product rationalization decisions contributed $8 million to the decline in inventory.

Capital expenditures for the quarter were $8.8 million and depreciation and amortization was $14.3 million. During the quarter, the first installment of $40 million on our 2003 private placement matured and was repaid. Our long-term debt is now $210 million with our next scheduled maturity in 2013.

Net debt at quarter-end was $104.2 million representing a net debt to total capital ratio of 12.7%. Free cash flow in the first nine months of fiscal 2009 was $89.6 million compared with free cash flow of $60.5 million in the same period last year. The year-over-year improvement in cash flow largely reflects the increase in earnings, lower capital spending, and the sale of an isomedix facility, which added $9.5 million to free cash flow.

Since the beginning of this fiscal year, we have repurchased 2.4 million shares of common stock at an average price of $30.74. Approximately 204 million remains under our current share repurchase authorization.

This concludes my review of our third quarter results. I will now turn things back over to Julie to begin our Q&A portion of the call.

Julie Winter

Thank you Walt and Mike for your comments. We are now ready to begin the Q&A session, so Valerie would you please give the instructions and we’ll begin.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Mr. Zable from Natixis. Sir, you may ask your question.

Joshua Zable – Natixis Bleichroeder

Thanks very much. Hi guys, congratulations on a super quarter here especially in a tough environment and thanks for taking my call here.

Walt Rosebrough

Thanks Josh.

Joshua Zable – Natixis Bleichroeder

I have got a couple of questions. I’ll try to run through it. First of all, Mike, just some housekeeping here, I know you said foreign exchange hit you guys 2%. I’m not sure if you were just referring to the top line specifically or all together. So could you just explain because I thought a stronger U.S. dollar would help you guys on bottom line? Maybe I’m just mishearing it. And then maybe you could walk us through some of your assumptions for next year and how to think about how that can flow through.

Michael Tokich

Certainly Josh, from an FX impact on the third quarter itself, revenue was negatively impacted by 2% or approximately $7 million. Bottom line, however, was actually impacted positively by $6 million. So because of our geographic locations, the strengthening of the U.S. dollar will actually reduce revenue growth but provide a benefit to us on the bottom line for the quarter.

For the year, it is not as dramatic. We did see revenue impacted favorably by a million dollars or less than 1%. And then from the operating income standpoint year-to-date, we had favorable of about $3.5 million for the full year. So once again, revenue was impacted negatively but we do get a bigger bottom line impact on the operating income standpoint as the dollar strengthens.

Looking forward into the fourth quarter here, we’re anticipating - again, the three major currencies that we focus on are the Canadian dollar, the euro, and the peso - the euro will get slightly better, the Canadian dollar will be flat, and we’ll see a slight decrease in the peso based upon our mid-December foreign currency rates.

Joshua Zable – Natixis Bleichroeder

And that 7 million to 6 million kind of ratio, was that the right ratio to think about top and bottom line? If we want to watch the currency rates, how will that help you or hit.

Michael Tokich

It really depends on which currencies and how much volatility there is on those currencies. So I don’t think I can give you a “ratio” that would be useful because I would be wrong.

Walt Rosebrough

Josh, the euro affects us both ways, revenue and costs, but the peso and Canadian dollar tend to affect us (inaudible) on the cost side. So that’s the way to think about it.

Joshua Zable – Natixis Bleichroeder

Okay, very helpful guys. So a couple of questions here, Walt, while we’re doing the housekeeping, I know you said you want to make the year less seasonal. We’ve obviously seen a tick up here, Q1, Q2, Q3, not talking about the guidance at the end of the year, but even thinking about next year (inaudible) or just in general, should we see it that there’s still a ramp but there’s much less of a ramp or as we kind of think about going forward, should it really be flattened out across the quarters? I guess I’m just trying to see if $0.50 is the right baseline kind of number to think going forward or it’s really still a ramp a little bit.

Walt Rosebrough

Josh, first of all, we’re not forecasting next year yet. It’s a tough time to be forecasting anything. But let me answer your question generally and then we’ll come back. If we were going to grow 10%, I would expect that 10% growth to be much more ratable across the year than 0, 2%, 2%, 12%, that kind of thing. So in general, in a 10% growing year, we would hope to grow each quarter 10% from the previous year in more of a flat-line environment because that is the best, lowest cost way to operate our facilities. So that’s the way we would like it to be.

Now, unfortunately customers don’t always order things when we want to build then, so we obviously rely on customers and whether next year will be an increasing year in total demand or a decreasing year in total demand is still a question to be answered.

Joshua Zable – Natixis Bleichroeder

I guess what I’m trying to get at is as you’ve been there and all of you have implemented the programs and obviously done great things here, is the ramp in earnings more of a function of these programs and more of the focus on profitability being just nine months old as opposed to six months old or is there still an element of seasonality here in any way, shape, or form?

Walt Rosebrough

Josh, I don’t see a significant element of seasonality is the best way to answer the question.

Joshua Zable – Natixis Bleichroeder

Okay, and then just to the business here, you guys –

Walt Rosebrough

Josh, I take that back. I was thinking more about capital when I said that. In terms of consumables there should be a slight seasonality that mirrors the acute care seasonality, which tends to be a little bit stronger in the first quarter. Hospitals tend to kind of ramp up in terms of missions and use and all that stuff between late summer and March, taking a little bit of a break in December, and they tend to kind of ramp down between and that’s just their normal seasonality. So our supply should follow something close to that.

Joshua Zable – Natixis Bleichroeder

And that’s actually one of the questions I had. Considering how well you did in equipment in this environment, consumables weren’t stellar - they were obviously up just a little bit - but is that just a function of seasonality then?

Walt Rosebrough

I think it’s a function of seasonality and I think we’ve seen hospital admissions and days a little soft in the November, December, January time-frame.

Joshua Zable – Natixis Bleichroeder

And then on the equipment piece and then I’ll get to the back of the queue here, you guys made some comments. You obviously have very, very strong backlog on equipment, which is really, really impressive.

And you actually made a comment that the backlog grew in both surgical and infection control. And I thought I had read in the press release something to the tune of that infection control equipment sales weren't great but surgical were very good. And I'm assuming that had to do with new products.

And so I'm just wondering if you saw sort of a pause maybe in December like everyone else and maybe things picked up in January on both fronts or can you just kind of talk about the dynamics between the different equipment. And when you say surgical are you talking about the V-PRO or are you talking about sort of tables and lights?

Walt Rosebrough

Yes, surgical tables, lights, OR integration think the things that you would generally expect to see in a surgical suite as opposed to in the central supply area.

Joshua Zable – Natixis Bleichroeder

Okay.

Unidentified Company Representative

And V-PRO is typically in the central supply area. And so that's the way we break it. But the answer is the revenue was not as strong in Q3 for infection control and the orders roughly approximated the revenue, actually slightly greater that's why backlog grew.

So backlog did indeed grow, it did not grow as quickly as surgical which had both a very strong shipment quarter and a very strong earnings quarter or excuse me orders quarter.

Joshua Zable – Natixis Bleichroeder

Great, okay, well I'll let some other people ask some questions here. Thanks, guys, congrats.

Walt Rosebrough

Thanks, Josh.

Operator

Mr. Macosko from Lord Abbett you may ask your question.

Greg Macosko – Lord Abbett

Yes, thank you, could you talk a little bit about the 70 million in terms of the cost reduction? It sounds as if you've done sort of realized or have in place 20, what's the time frame on that 70 and give me some feeling for that?

Unidentified Company Representative

Well it's really that's kind of the last 18 to 24 months of work. Some of which much of which we have already seen. About 20 million of it relates to the Mexico to or Erie to Mexico movement and we will have captured that full 20 – I mean that's annualized but we will have hit that full run rate this year.

The second was the restructuring we did largely in North America last year. And again we said that we would get about 30 million in total between 15 and 20 this year. And as I mentioned we are ahead of schedule on that. And then the last 20 roughly is the 20 we just announced today, largely international and we will get four or five yet this year.

And then the balance over the next couple of years.

Greg Macosko – Lord Abbett

So the 70 million is in place in – by the end of this calendar year or something? Is that?

Unidentified Company Representative

Much of it in place, exactly.

Greg Macosko – Lord Abbett

Okay, all right, thank you very much.

Unidentified Company Representative

As we mentioned the last 20, 15 of it is not in place. That actual work may be done but we won't have seen much of the benefit yet this year.

Greg Macosko – Lord Abbett

But it will be all realized in – 2000 fiscal 11 is what I think, right?

Unidentified Company Representative

Yes.

Greg Macosko – Lord Abbett

Okay.

Unidentified Company Representative

And most by fiscal 10.

Greg Macosko – Lord Abbett

Okay, okay, good, thank you. And then with regard to the new liquid chemical sterilization 5/10 K that you mentioned. Is that focused on both on the surgical suite and non-surgical applications of sterilization in clinics and the like?

Unidentified Company Representative

Yes, let me answer the question two ways just to make sure I'm clear on the question. System 1 which is the product we currently have it commonly found in surgical suites, as well as, in more like in simple sterile.

But it because of the Just In Time system it tends to be at or near the surgical areas. So it is indeed found in surgical suites, just outside surgical suites, and in ambulatory surgery centers if that's the way you're asking the question.

Greg Macosko – Lord Abbett

Yes.

Unidentified Company Representative

And again without we're not going to talk too much about this product because we don’t know everything and it's not yet cleared. But in general you would expect it to be System 1 like if you will.

Greg Macosko – Lord Abbett

And is the idea for it to cover a broader range in the product area or broader applications within the hospital and clinic then?

Unidentified Company Representative

You know what I probably am not going to go any further than what I have done. But the System 1 itself does carry a reasonably broad range but it's mainly focused on endoscopy and like devices.

Greg Macosko – Lord Abbett

And then finally if you please the – with regard to the you mentioned the life sciences area and you know that capital equipment was down 21% or something. Was the idea that you basically discontinued some product lines because of their non-profitability? The profitability rose a great deal is that kind of where it came from because your bonds were down in capital equipment because you basically got rid of low margin product?

Unidentified Company Representative

We have discontinued some low margin product and as importantly a lot of that product is call it engineering spec as opposed to so more of a custom like product than a standard type product? And we've been moving towards standard type product because the cost relationship of doing some of that custom engineering just hasn't paid off.

So if we're not going to get paid for that custom engineering we're not going to do it. And so it's just a mixture of those two things.

Greg Macosko – Lord Abbett

And so when will the ramp down in this change in product line in capital equipment kind of be comparable year-over-year basis?

Unidentified Company Representative

I think we're probably pretty much there.

Greg Macosko – Lord Abbett

So in other words the fourth quarter of fiscal '09 is kind of an apples-to-apples comparison or close to it.

Unidentified Company Representative

Yes, I would guess even the third and fourth quarter of next year would be apples-to-apples. We've been working on this a while. I honestly don't know there – a lot of that is along (inaudible) time. And I've not done the math on that to determine how much of the old is still passing through and the new is coming on.

But I just haven't personally done it, I don’t know, Mike, if you've seen that but I would guess certainly next year it will happen.

Greg Macosko – Lord Abbett

Okay, so basically sort of the first half of fiscal 10 we'll still see some negative capital equipment revenue comparisons.

Unidentified Company Representative

All things being equal, yes.

Greg Macosko – Lord Abbett

Okay, I understand but, okay thank you.

Unidentified Company Representative

Yes, what you're searching for the answer I think is yes.

Operator

Mr. Owczarski from Avondale Partners you may ask your question.

Daniel Owczarski – Avondale Partners

Yes, thanks, good morning.

Unidentified Company Representative

Good morning.

Unidentified Company Representative

Good morning.

Daniel Owczarski – Avondale Partners

Can you talk a little bit about the progression during the quarter I mean we're hearing you know that December was especially tough for some equipment companies. But did you see a drastic reduction in orders at the end of the quarter versus you know compared to the beginning of the quarter?

Unidentified Company Representative

Yes, no. In short, no.

Unidentified Company Representative

Pretty short.

Daniel Owczarski – Avondale Partners

Okay, and then another topic that always comes up is new hospital construction. What are you seeing there? You know how does that impact you? Some of these projects that are being delayed you know at least on the breaking ground when would that start to impact your business?

Unidentified Company Representative

Yes, I mean you're reading and hearing the same thing as we're reading and hearing. There are places that are slowing down. But again that I mean a hospital construction period can depending on when you start it, the planning phase, the break ground phase, all that can take a couple, three years.

So you know that largely depends on what happens the next 12 months or so because there are clearly things still in the pipeline coming. The question is you know when do they start, when do they stop, and you know we don’t know the answer to that question, obviously.

Daniel Owczarksi – Avondale Partners

Okay, and then you started talking a little bit about the strength in the surgery business or the surgical products. You know is that can you talk a little bit more about what you're seeing there as far as is it new projects or new products driving that strength? Is it that integrated OR? Do you think you're taking share? I mean is it new customers that you're gaining?

Unidentified Company Representative

Yes, I mean I would characterize it more in terms of the success of the new products. The LED light has been very strong, the OR integration unit is strong. And, of course, OR integration we just entered the business a while back so I mean we're taking share by definition. We have some you know I wouldn’t characterize it such as a share gain it's just that we've entered that business.

So those two areas have been very strong for us in the OR. And that's, I think, the biggest driver.

Daniel Owczarski – Avondale Partners

Okay and then just switching to isomedics it looks like there is some nice growth there despite you know hospital admissions being down, elective surgeries being down, do you expect that to continue or would that react to you know some of this downturn?

Unidentified Company Representative

You know, Dan, the real question there is how much of a downturn are hospitals going to have and particularly various types of surgeries. It just so happens that our supply chain has continued to drive that product through.

So you know yes some of the products we do are, I think, more resistant than others to you know we're not doing a whole lot of facial plastic surgery devices. So some of the things we're doing are just more resistant I think. In the long run if hospitals or patients reduce their usage obviously we would reduce along with it.

Daniel Owczarski – Avondale Partners

Okay, and then this last question may be for Mike about the CapEx number. Is that down from the what you said on the last call? And are there projects that you're pushing off?

Mike Tokich

Yes it’s down from our last call, right now we’re anticipating approximately $40 million and like everybody else we are challenging our own operators to see if they can do without certain capitol equipment expenditures and well most of our equipment other than the life sciences or sorry isomedics we you know lower the cobalt which is the larger pieces which help with sterilization process.

Most other of that is just normal maintenance and we’ve been able to challenge the operators to delay some of their maintenance and repairs without impacting the business.

Daniel Owczarski – Avondale Partners

Okay, thank you.

Operator

Mr. Halter from Great Lakes Review you may ask your question.

Greg Halter – Great Lakes Review

Yes, good morning.

Julie Winter

Hi Greg.

Greg Halter – Great Lakes Representative

I know you had mentioned in the release about raw material costs being higher in the fourth quarter and just wondering if you could elaborate on that aspect of the business in particular which areas may be a challenge and then whether or not you expect to see any relief as time passes given general lower raw material costs?

Unidentified Company Representative

Yes I’d say there is two things there I'll contrast. First of all, a number of our materials are oil based derived and if you can forecast the price of oil these days you’re better than us, so you know we’ve had a little bit of a conservative forecast there probably.

There’s another set which are used in our chemistries and they’re still – the price has still not seen relief, let’s put it that way. Particularly potassium and melithium (ph) have not seen real relief. Where we have seen relief it’s already baked in is stainless steel, you remember last year we had very high stainless steel and stainless has come down significantly and we’ve seen the impact of that.

So you know the fourth quarter comment was really about those the oil based materials, as well as, the chemistry or the chemicals for chemistry.

Greg Halter – Great Lakes Representative

Okay, that is very helpful and relative to the competitive environment I just wondered if you could provide any commentary on what you’re seeing with any new entrance or exiting entrance doing anything new or different?

Unidentified Company Representative

No I can’t say there’s any significant new thing out there.

Greg Halter – Great Lakes Representative

Okay and anything new to report on the DOJ investigation?

Unidentified Company Representative

Well same old same old we continue to work on this regulatory issue used and when we have something to report you’ll be the first to hear.

Greg Halter – Great Lakes Representative

Okay, I’ll be waiting by my phone. All right also in non-interest expense was I think $2 million or so over $2 million, it seems higher than maybe it should have been anything in there unusual?

Unidentified Company Representative

No, it’s suppose to have the impact of our $150 million private placement that we conducted and closed in August so this quarter is a little bit higher than the previous quarters because of that.

Greg Halter – Great Lakes Representative

Okay.

Unidentified Company Representative

So nothing more than that.

Greg Halter – Great Lakes Representative

All right and on your cash balance of $106 million or so, well what country or countries is that invested in and what is it invested in?

Mike Tokich

Mortgaged bonds, I didn’t even get a chuckle?

Walter Rosebrough

You go ahead Mike, sorry.

Mike Tokich

Most of that investment, the majority is invested in U.S. and the majority is you know Treasuries, T-bills of the like. You know very short term focused as everybody else is incurring very short interest small interest not much where we're gaining from that so it’s really just very secure from our standpoint and very you know 60, 30, 60, 90 days investments no further than that.

Greg Halter – Great Lakes Representative

So a great safety but not a whole lot of return currently.

Unidentified Company Representative

Exactly right, yes.

Greg Halter – Great Lakes Representative

Okay and what’s the average rate on your debt currently?

Unidentified Company Representative

It's around 6%.

Greg Halter – Great Lakes Representative

Okay and one last one, I know you bought stock in the quarter of a million shares, just wondered what your outlook is looking forward in regards to that program?

Unidentified Company Representative

You know we have about 200 million remaining in the authorization and we never forecast what we are or not going to do, we are opportunistic in that regard.

Greg Halter – Great Lakes Representative

I would presume with the stock under 30 that would be more opportunistic than not given that it’s less than what you paid before.

Unidentified Company Representative

That’s a good assumption but the counter assumption is cash is pretty keen right now and we’re balancing those two issues.

Greg Halter – Great Lakes Representative

Okay great thank you.

Operator

Mr. Zable from Natixis you may ask your question.

Joshua Zable - Natixis Bleichroeder

Hey guys thanks for taking my follow-up here. Just a couple of kind of housekeeping items again just on the P&L, it seems like you’ve kind of gotten your R&D expense stable, sort of on an absolute basis seems like it’s between 8 and 9 million. Is that sort of the right way to think about it or you know I know you guys have talked about new product development and things like that, is that just a function of you guys kind of just tightening the belt here given the environment and you know maybe next year or just going forward it may come up on an absolute basis?

Unidentified Company Representative

You know Josh we haven’t finalized our next year’s budget for R&D. You know we look at it on a project by project basis and you know what we have in the pipeline, what we want to do, what new things we’re going to look at and so it’s not really done on a dollar basis or percentage basis. It will vary somewhat.

It can be lumpy because of the timing of the projects things can come together but as a general statement you know if you think about that kind of on a percentage of revenue you're probably not too far out the ballpark.

Joshua Zable - Natixis Bleichroeder

Okay that’s helpful and then I know you got some more cost cutting coming here. Can you just kind of – is it all going to be SG&A or is it going to be you know COGS as well?

Unidentified Company Representative

Well definitely a mixture.

Joshua Zable - Natixis Bleichroeder

Definitely a mixture and then again on the SG&A line not to pin you guys here and I know you’re given guidance, I mean you guys continue to come down really as a percentage of sales, and I’m just trying to understand Sir, what’s the real way to think about it here? Is it really just thinking about sort of – have you kind of hit everything and now it’s whatever you do more or is there still room to come down on a percentage of sales?

Unidentified Company Representative

You know Josh I’ve tried to characterized our efforts here as we’re not on a crash diet and then go back to eating merrily, that we’re trying to change our eating habits. So I in no way view that we have finished improvements or efficiency in this business in any of the areas. So I fully expect we will continue now, of course, we’ve talked about things that we’ve already declared things that we know we’re doing the results of the latest round, for example, I think is 10 or 12 million in next year.

We still have some things floating through from previous work we’ve done so those things we have been clear on. We haven’t done our forecast for next year, but we certainly do not and particular in this environment, we think we would be remiss to not continue to look for every opportunity to reduce costs that doesn’t hurt our customers or our products.

Joshua Zable - Natixis Bleichroeder

Okay and then I guess sort of related to that given environment I know you said you know life sciences you guys have been talking about for awhile as far as you know not paying for revenues and I think that makes a ton of sense. But even on the health care side was there kind of a tightening of the belt this quarter just as a precautionary matter or is this just kind of you're doing business obviously conservatively I know you said that and you know you’ll keep to look cutting costs?

Unidentified Company Representative

Yes, Josh, without question two answers, the first answer is yes we continue to work conservatively, you know we continue to look for ways to find ways to get things done at a less expensive path. So we’re going to continue – I mean I try to think of it less in terms of cost cutting, more in terms of improving efficiencies and so we’re always looking for a more efficient ways to do things.

But secondly you know it’s pretty obvious things were changing out there the last quarter or so and so we took several actions to make sure our costs not only didn’t grow but shrunk and that’s why you’re seeing a combination of both those things. They will pull through the balance of this year and continue into next.

Joshua Zable - Natixis Bleichroeder

Okay and then just one last one here guys sorry, just in terms of the sales on the health care business you know again be strong with the new products on the surgical side, can you A just sort of give out a kind of timeline just remind me in terms of both V-Pro and the new surgical suite products when you sort of anniversary them when they were launched?

And B can you just help me understand sort of how these orders came about. Obviously not one by one but were these you know built outs that you were completing it’s pretty impressive given the environment out there that you guys are selling anything let alone you know lights and surgical suites.

And I’m trying to understand you know sort of even the hospital's mentality of sort of where they’re prioritizing and kind of how your sales came to fruition. If you can give me just a little color I know that’s kind of a wide question but just a little bit more color there.

Unidentified Company Representative

Let me break into three general comments I think, Josh. The first is we have seen a significant increase in our business in large projects and you know there just are still significant projects in the pipeline and there have been and are and we’ve done a nice job of gathering some of those projects up.

Largely as a result of these new products and so coming back the LED light was early this year. Kind of time frames when it really started hitting its stride. So kind of the back half of the year or maybe even back two-thirds of the year is the LED light.

The integration, OR integration really kind of just getting going I mean it's been – we had it in the market for a while but it really just in the back half of the year I would say kind of right on shipment basis not on order basis.

The V-PRO is really just this quarter hitting any significant numbers. And we would hope to see that continue to improve. We’ve just announced a new washer or just released a new washer in the market place. It’s just now starting so (inaudible) list is probably six months or so that we’ve had good you know good real volume.

So I mean that’s, I think, a big part of the explanation to why we’ve been able to continue to do well – the products are really just hitting their stride. Now it doesn’t make a difference what products you have if people quit buying everything but you know when hospitals aren’t stopping buying everything. They’re just reducing and actually not all of them are reducing. So from what they’re saying out there.

And now coming to the second part of the question and I mentioned this in our last call, relatively speaking you know it’s all relative. But relatively speaking the OR Suite is where hospitals generate revenue and income and so you know all things being equal I think the OR Suite is kind of a nice place to be in capital equipment, relatively speaking.

And we’re seeing that, we thought that I’ll call it theoretically but that seems to be playing out at least for our business as we speak and then, of course, we have some new products in that area which helps it even more.

Joshua Zable - Natixis Bleichroeder

And then one other thing. I know you said you guys did not see really much change over the progression of the quarter. Obviously I know somebody else alluded to the fact that you know December was pretty rough across the board and that’s you know coinciding with both the economy and the holidays.

Just anecdotally I mean have you guys seen any change in behavior. I know you didn’t see too much of a difference over the course of last quarter but here we are in January. I’m sort of hearing things are improving. Can you give us any color of what you’re seeing or since seeing that you didn’t really see much change over the quarter you haven’t seen much change in January?

Unidentified Company Representative

Well I mean as we said we clearly thought in the quarter we clearly saw softening. I mean our growth rates slowed quite clearly. I don’t know that we temporally saw a whole lot during the quarter and certainly the month December I would say we didn’t see you know that much significance.

I mean October, November, December clearly were slower growth rates than the prior quarter and I don’t know that January is looking a whole lot different you know as a matter of general principle. But again you have to remember you know some of our business is consumables and consumables ride pretty much with a little lag but ride pretty much with hospital admissions, if you will, and so if you kind of watch hospital admissions you have some feel for that.

On the capital side it could be lumpy so I can think you know two weeks ago I could think the world’s coming to an end and then I get four big orders and I think everything’s glory. I tend to be careful about looking week to week during a month and trying to make a forecast out of it.

Joshua Zable - Natixis Bleichroeder

That’s very fair. Thanks so much for taking all my questions guys and really congrats on a superb quarter here.

Unidentified Company Representative

Thanks, Josh.

Operator

Mr. Ramgopal from Sidoti, you may ask your question.

Mitra Ramgopal - Sidoti

Yes, hi. Good morning guys, just a couple of questions. Just to understand the guidance with regards to the operating margin of 12.5% for the year, is that going on the $.048 quarter or if you exclude the restructuring et cetera if it's $0.03?

Unidentified Company Representative

It's actually going off the as reported the $0.48 quarter.

Mitra Ramgopal - Sidoti

Okay. And with regards to restructuring charges and et cetera it is fair to assume that we'll probably see a few more of those until you know you're complete with the program.

Unidentified Company Representative

Oh well there is some that is built in. You will see, we've reported the amounts. It was not all reflected in the third quarter so the answer to that is yes.

Unidentified Company Representative

Yes, for this particular plan if you will for the restructuring and the end of third quarter plan, we will see that continue with the minor expenses coming over the next couple of quarters associated with this action.

Mitra Ramgopal - Sidoti

Okay. And again you know one of the things that I – you’ve been talking in this meeting to the good numbers we're seeing and new products. And again you probably can't get specific but as, you know, looking the pipeline of products you have in development et cetera, is it fair to assume that, you know, we should continue to see, you know, a pretty good rollouts of like what we saw with (inaudible) et cetera just products of sustained growth?

Unidentified Company Representative

We don't expect the products to stop. You have to go – we don't give forecasts on new products. We release them but again the division one we just talked about its just now in the marketplace as an example and we do not expect our development to stop here.

Mitra Ramgopal - Sidoti

Okay. Thanks again.

Operator

(Operator instructions). Mr. Macosko from Lord Abbett you may ask your question.

Greg Macosko - Lord Abbett

Yes. Thanks. Thank you. Yes. Just with regard to the previous question on new products roughly speaking, is there –do you have a goal with kind of how many to introduce over a year or a quarter or anything like that. As we look out over the next year, can we expect X number of introductions?

Unidentified Company Representative

Well we know what we're going to do for the next 12 months and we – roughly what we're going to do for the next 12 months. We don't give numbers on that. So…

Greg Macosko - Lord Abbett

But would you expect to be kind of at the same rate we've been experiencing? Is that a fair statement?

Unidentified Company Representative

You know actually – first of all, I don't know the math there exactly and secondly, I don’t think we'll want to be giving that forecast anyway.

Greg Macosko - Lord Abbett

Okay. Back to the debt, just so I understand that, you said you had 150 million in private placement in August and you paid some off. Have you paid it all off and what was that?

Unidentified Company Representative

We had our first private placement back in 2003. And we had the first amount on that private placement which was $40 million which came to maturity and was repaid. So now we have $60 million associated with the 2003 private placement and then we did another private placement in August of 2008 for $150 million.

Greg Macosko - Lord Abbett

Okay.

Unidentified Company Representative

So they're two separate charges.

Greg Macosko - Lord Abbett

And the $60 million is due when?

Unidentified Company Representative

We don't have another payment until 2013.

Greg Macosko - Lord Abbett

On that 60?

Unidentified Company Representative

On that first – on both of the private placements combined.

Greg Macosko - Lord Abbett

Okay. Okay. Good. Okay. And with regard to – you said there was a significant increase in large project business. I'm assuming that’s hospital, surgery centers, surgery suites et cetera being designed and put in. And that, I would assume, has been in your backlog perhaps for a longer, over a longer period than some of the other projects. If we out in the backlog in the healthcare area and the equipment area, how much further out can we look in terms of those large projects? Are there many more of them left in the backlog?

Unidentified Company Representative

There are. The phenomenon I've described of these large projects has been throughout this year and in our current backlog it would be a similar phenomenon.

Greg Macosko - Lord Abbett

So you expect this to go on for a little while?

Unidentified Company Representative

You know that will be interesting to watch I mean again the hospitals, they have certain projects you know if you’ve already put the steel up and you're you know building out the rooms unless you really crash them down, you want to fill them. So we do expect to see it. The question is order of magnitude.

Greg Macosko - Lord Abbett

With regard to the change in benefit policy, am I right in interpreting that this was basically a way of recognizing it and that if we look over on a year-to-year basis that it really doesn't change very much.

Unidentified Company Representative

That's a very good statement. First of all you know we didn't do this for finance class accounting reasons. We did it for operational reasons and it does a number of things. It gives our people more flexibility to take pay versus time. It rewards those who come to work. It reduces unplanned absenteeism which really helps increase our productivity in our factories.

It does a number of things like that, as well as, streamlining administration. And so as we were doing that we looked at the positives for our people and for the business and as we were doing that we accrue this pay-time off over the course of the year.

So you know over the next 30 years we'll see that $7 million probably come to place. But it you know it is just a how one accounts for it question. So you've asked the question very well.

Greg Marcosko – Lord Abbett

Thank you and then with regard to I think it's isomedics of all your businesses am I right in saying that would have the most commercial or non-medical part of your sales?

Unidentified Company Representative

Well in a way yes because they have some but its diminimus. You know everything else is kind of 100% life science or healthcare related but I don’t know the exact percentage but we're taking in the 90% plus range that is healthcare devices type of thing. So we would consider it a life science company, as well. People are sterilizing orthopedic implants and band-aids and things like that so it is health.

Greg Marcosko – Lord Abbett

Okay but so with regard to your sales in general this sterilization that is exposed to non-healthcare is pretty small?

Unidentified Company Representative

Trivial.

Greg Marcosko – Lord Abbett

Trivial, okay that's a better way – you can even –

Unidentified Company Representative

It was trivial. We will not notice.

Greg Marcosko – Lord Abbett

Okay. And all right very good. I appreciate that, thank you.

Unidentified Company Representative

Great, thanks.

Operator

I show no other questions at this time. I'll turn the call back for any closing remarks.

Julie Winter

This concludes STERIS's Fiscal 2009 conference call. A replay of this call will be available from noon Eastern time today until 5:00 p.m. Eastern time on February 9th. You can access the replay on our Website or by calling 1-800-756-3940 in the United States and Canada and 1-402-998-0796 internationally.

Thank you for joining us this morning and for your interest in STERIS.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!