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STERIS Corporation (NYSE:STE)

Q4 2014 Earnings Conference Call

May 8, 2014 10:00 a.m. ET

Executives

Julie Winter - Director, Investor Relations

Walter Rosebrough - President and CEO

Michael Tokich - SVP and CFO

Analysts

Matthew Mishan - KeyBanc

Larry Keusch - Raymond James

Dave Turkaly - JMP Securities

Chris Cooley - Stephens

Erin Wilson - Bank of America/Merrill Lynch

Jason Rodgers - Great Lakes Review

Mitra Ramgopal - Sidoti

Operator

Welcome to the STERIS' Fiscal 2014 Fourth Quarter Conference Call. All lines will remain in listen-only until the question-and-answer session. At that time instructions will be given should you wish to participate. At the request of STERIS, today's call will be recorded for instant replay.

I would now like to introduce today's host, Julie Winter, Director of Investor Relations. Thank you. You may begin.

Julie Winter

Thank you, Jane, and good morning, everyone. It's my pleasure to welcome you to STERIS's fiscal 2014 fourth quarter and full conference call. Thank you for taking the time to join us today.

As usual, participating in the call this morning 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. Any redistribution, retransmission, or rebroadcast of this call without the expressed 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. 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'll refer to non-GAAP measures including adjusted earnings, free cash flow, backlog, debt-to-capital and days sales outstanding, all of which are defined and reconciled as appropriate in today's press release or our most recent 10-K filings, both of which can be found on our Web site at steris-ir.com.

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

Mike Tokich

Thank you, Julie, and good morning, everyone. It is my pleasure again to be with you this morning to review our fourth quarter financial results. Following my remarks, Walt will provide his commentary on the year including overview of our strategic initiatives along with our outlook for fiscal 2015.

As Julie already stated, our comments this morning will focus on adjusted results. Please see the reconciliation table included in our press release for additional details.

Let me now begin with a review of our fourth quarter income statement. Total revenue grew 9% during the fourth quarter driven by a 7% increase in organic volume, a 1.6% increase from acquisitions and a 30 basis point improvement in pricing. Foreign currency was neutral to revenue during the quarter.

Gross margin dollars increased 10% in the quarter, due mainly to the increase in revenue. Gross margin as a percentage of revenue for the quarter increased 30 basis points to 41.5%. We had positive impact from volume and price. This was somewhat offset by the continued organic expansion of our Spectrum instrument repair business into new territories throughout the United States, which takes time to bring the full margin.

The in-sourcing projects, we have been discussing with you this year were neutral to gross margin in the quarter as expected. The significant increase in volume improved EBIT meaningfully as a result of operating expense leverage to $86.5 million in the quarter. Our EBIT margin at 18.6% of revenue increased both sequentially and year-over-year during the quarter.

The effective tax rate in the quarter was 33.8% compared with 30.3% last year. Effective tax rate in the fourth quarter of last year was lower primarily as a result of discrete item adjustments, including the settlement of prior year tax audits and the recording of the Federal R&D tax credit.

Even with the higher tax rate, net income increased 30% to $54.2 million or $0.91 per diluted share compared with 41.5 million of $0.70 per diluted share last year.

Moving on to our segment results, Healthcare had a very good quarter, growing revenue 12% in total. Included in that growth are several smaller acquisitions that we made during the quarter, which Walt will cover in his remarks. Healthcare capital equipment revenue grew 13%, consumable revenue increased 5% and service revenue grew 16%.

Even with the strong shipment of capital equipment in the quarter, Healthcare backlog was still up 5% from the prior year levels to $110 million. Healthcare operating margins increased 410 basis points to 17.7% of revenue. The increase in operating income year-over-year was primarily driven by the increase in volume as well as operating expense leverage.

Life Sciences revenue declined 1% during the quarter. Strong performance in consumable revenue which grew 9% was more than offset by a 7% decline in service revenue and a 5% decline in capital equipment revenue. The decline in service revenue is primarily due to tough comparisons with a very strong fourth quarter last year.

Backlog in Life Sciences ended the quarter at $44.4 million; a decline of 8%, but remains at a level consistent with historic backlog levels. Life Sciences' fourth quarter operating margin at 18.9% of revenue declined slightly on the lower volume.

Revenue for Isomedix increased 8% in the quarter to $49.4 million; expanded capacity contributed to revenue growth within the segment as well as increased demand from our core medical device customers. Isomedix's operating margin at 28.7% of revenue, an increase of 170 basis points compared to the prior year. Remember, this business has significant fixed cost. So, additional volumes benefits margin substantially.

In terms of the balance sheet, we ended the quarter with $152.8 million of cash and $493.5 million in long-term debt. We anticipate funding the IMS acquisition with borrowings under our credit facility. Immediately following the close of the acquisition we anticipate an increase in our debt-to-capital ratio from 32% to approximately 39%, and an increase in our debt-to-EBITDA ratio from 1.6 times to approximately 2.2 times well within our covenant maximum of 3.25 times. The current interest rate on our credit facility is approximately 1.5%.

Due to the timing of shipments in the quarter, our accounts receivable balance was $313.7 million, which has slightly impacted our DSO. Our DSO is currently at 71 days. We do however expect to get back to normal levels within the next quarter. Our free cash flow for fiscal 2014 was 128 million compared with 140.4 million in the prior year. The decline in free cash flow which was anticipated is primarily due to payments of our annual incentive compensation program which did not occur in the prior year, as well as the impact of strong working capital improvements in the prior year. Capital spending was $21.6 million in the quarter, while depreciation and amortization was 20 million.

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

Walter Rosebrough

Good morning, everyone. Thanks for joining us today. We're pleased to finish the year so strong, and with another year of record earnings. We've made great strives towards our strategic objectives over the past couple of years and are excited about the direction we're heading.

Our company has been reinvigorated by the investments we're making to grow organically and through acquisition, which enable us to provide even more value to our customers, our people and our shareholders.

Our 10% top line growth for the year was primarily driven by North America for all three business segments, as well as nice growth in our EMEA business in healthcare. We expanded operating margins by 50 basis points despite the medical device excise tax and we're investing in R&D and in-sourcing. Full year adjusted earnings per share were record $2.48.

Turning to the individual segments for a moment, our healthcare people grew revenue 12% for the year, the strength in the United States and in EMEA. In particular, capital equipment product families including V-PRO sterilizers, instrument washers, OR integration systems and European products performed especially during the year, contributing to a 6% increase in capital equipment revenue, excluding the system 1E shipments in both years.

Consumable revenue grew 17% and service revenue grew 23% for the year. Many of the investments we're making fall within our Healthcare segment, and as a result healthcare operating margin improvement was somewhat lower than might be expected in a year of double-digit revenue growth. The positive outcome of that of course is that healthcare stands to benefit in the future from the investments we've made in in-sourcing, new products coming out of R&D and growth and synergies that we expect from our recent acquisitions.

Life Science had another strong year of consumable growth, with formulated chemistries again leading the pack. That growth was offset by a 4% decline in capital equipment revenue and a 2% decline in service revenue resulting in overall growth of only 1% for the segment. Once again, Life Science has done a good job of managing product mix and expenses, and was able to generate the 100 plus basis point improvements in operating margins for the year, despite this modest growth.

Isomedix revenue grew 8% for the year, which was all organic and reflects the filling of the capacity we've added in the past couple of years, due primarily to continued demand from our core medical device customers. Reflecting the strong growth, margins expanded nicely in the segment to end the year at almost 30%. Our plans for fiscal 2015 include additional investments to expand capacity in this segment as volume has somewhat outstripped our expectations.

From a business development perspective, we had a bit of hiatus after our purchase of U.S. Endoscopy and Spectrum TRE over a year ago, but we picked up steam again in the past several months. We've added two businesses to our specialty service unit and also bought a company based in the U.K.

I'd like to spend a few moments on each. First, in the third quarter of fiscal 2014 we acquired the assets for the surgical repair, an instrument repair business based in Florida for about $6 million. In the fourth quarter we bought the assets of Life Systems, an endoscope repair business located near St. Louis, Missouri for approximately $25 million.

Net of tax benefits we paid approximately 22 million or around one-time sales for Life Systems, and utilized our credit facility to fund the deal. Given the size and nature of these businesses, the integration into our specialty services unit is well underway, and their results are included in the service component of our healthcare segment.

Outside of specialty services we also added Eschmann Holdings Limited, a privately held U.K. company during the fourth quarter. Eschmann designs and manufactures a range of surgical and infection prevention products and bring the strong direct channel in the U.K. with a recognized brand name as well as distribution around the globe. Eschmann will be integrated into our Healthcare segment. Utilizing cash held in the U.K., the purchase price in towns converted to about $40 million or approximately one-time sales. For the fourth quarter Eschmann contributed about 7 million in revenue for the Healthcare segment of which $5 million was capital equipment and the balance was services.

Finally, on the first day of our new fiscal year we announced the definitive agreement to purchase IMS for approximately $165 million plus $10 million for real estate. Reflecting the present value of the tax benefits, the purchase price reduces to approximately $140 million. IMS bring strength in endoscope repair as well as larger sales presence particularly in the southeastern United States. We anticipate closing the acquisition very soon, and as a result we have included IMS in our earnings outlook for fiscal year 2015.

Keep in mind that IMS profit margin percentages are somewhat below our current service businesses, which will impact our margin percentages for the year. Our anticipation is that we'll generate long-term cost synergies as well as growth in the business that will benefit margins in the fiscal year 2016 and beyond.

Internally, we continue to make progress in our in-sourcing projects and expect to generate about $4 million in cost savings in fiscal 2015 as a result, that is a turnaround of about 10 million as we invested nearly 6 million in fiscal '14. We continue to make meaningful progress and expect to generate additional savings into the foreseeable future.

In addition, we announced the target restructuring program in March that includes the closing of our Hopkins production facility as well as other actions. We anticipate approximately 10 million in annual cost savings as a result of these restructuring actions, which will be spread equally between fiscal '15 and '16.

It's important to note that these cost reduction initiatives are not completely additive to the bottom line. Efforts to improve our efficiency will help us achieve our long-term goal of growing the bottom line double-digit annual percentages single-digit annual percentages over the long-term. These efforts are some of the many ways we work to offset inflation in the business. We expect to continue our practice of generally raising prices lower than general inflation, thus passing some of our cost improvements through to our healthcare customers. That is one of the ways we intent to deliver growth and revenue and profit in line with our long-term aspirations.

Moving specifically to our outlook for fiscal 2015, we anticipate another year of double-digit top and bottom line growth fueled by solid organic growth and acquisitions. We expect revenue growth of 15% to 17% for the year with mid single-digit organic growth. To be clear, this organic growth excludes the impact of IMS and Eschmann. With margins slightly lower than our corporate average in both of those acquired businesses, we anticipate these deals will have a slightly negative impact on operating margin percentages, which we expect to improve as we generate synergies over time.

We anticipate adjusted earnings per share to be in the range of $2.78 to $2.91 for the year. We expect Eschmann and IMS acquisitions will contribute approximately $0.15 of that EPS for the full year. For your modeling purposes we believe what earnings timing through the year will be roughly the same as in fiscal year 2014. That would indicate approximately 40% of earnings will be generated in the first half of the year and 60% in the second half. This split is being driven by the timing of R&D spending, the timing of cost savings from our in-sourcing projects and the addition of IMS which will have significantly less impact in the first half of the fiscal year.

We are pleased with the way our people performed in fiscal year 2014, and we look forward to our prospects in fiscal '15 and beyond.

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

Julie Winter

Thank you, Walt and Mike for your comments. We are now ready to begin the Q&A session. So, Jane would you please give the instructions and we will get started.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) Our first question comes from Matthew Mishan with KeyBanc. Your line is open.

Matthew Mishan - KeyBanc

Hi, thank you very much, and thank you for taking my questions.

Michael Tokich

Good morning, Matt.

Walter Rosebrough

Good morning, Matt.

Matthew Mishan - KeyBanc

Good morning. I think the first question is you have a really robust sales growth for 2015, but the margins look a little flat. Can you talk about some of the differences between the sales growth and flattish margin assumptions?

Walter Rosebrough

Yeah. Matt, I think in my comments I mentioned that some of the acquisitions that we are making particularly the last two have lower margin percentages than our average margin percentage. So they're somewhat bringing that margin percentage down, of course they are adding dollars to the bottom line, but they are not adding the percentages to the bottom line. That's the bulk of the region.

We are also seeing higher growth obviously in the healthcare unit than for example in Isomedix. So, once again since the healthcare unit is lower margin business in total and then the Isomedix business by definition again that tends to in total bring the percentages down, but the dollars are growing nicely.

Matthew Mishan - KeyBanc

The second question, I think you saw a really good sales growth in international this quarter, a big difference from the previous quarter. Can you talk a little bit about what changed quarter-over-quarter?

Walter Rosebrough

A lot of the capital equipment answers our timing. And so just like we see in Life Science are international businesses are relatively smaller than the North American business. So they do bounce around a little bit more, timing wise. I will say that to begin, well, we are seeing some pickup in the EMEA, Europe, Middle East, Africa markets. And so they had a very good quarter, but they also had a solid year. I think we mentioned last time that we see more pressure in particularly the Asia-Pacific markets and some of the Latin America markets somewhat due to political issues and some due to currency issues primarily.

Matthew Mishan - KeyBanc

Okay. Thank you, and a great quarter.

Walter Rosebrough

Thank you.

Operator

Our next question comes from Larry Keusch with Raymond James. Your line is open.

Larry Keusch - Raymond James

Hi, good morning everyone. So Walt, you have obviously been active within the Spectrum Instrument Repair business, I guess I had two questions there and just one follow-up. Again, now that you have got IMS, help us understand how you are thinking about growing that business organically versus inorganically? And maybe you can also share some thoughts around the Endoscope Repair segment of that, because it sounds like you are getting your toe into that one and maybe just some thoughts around the market and the opportunity?

Walter Rosebrough

Sure. I'll step back a little bit and say the Spectrum family, if you will, was did have their toe and maybe half of their foot into the endoscope repair business. So it was a real piece of that business, but it was more predominantly instrument repair business. And IMS and life science are the exact converse, which is one of the reasons we like the combination is they have a much larger piece of their business in the endoscope repair side of the business and bring lot more capabilities than we had in the endoscope repair business. And conversely they also did some instrument repair although it's a much smaller piece of their business. But we have more capabilities if you will than the IMS of life science business. So we are bringing the strengths of the two businesses together so that both can do both if you will, and a lot of it is around capabilities. So we believe the capabilities that are housed in the spectrum businesses that we started with in the instrument repair area are very good and move, enhance the offering of the other two companies. And conversely we think that the scope repair both capacity and capabilities are stronger in the life science and IMS side.

So we very much think that that combination creates more opportunity really for our customers and then that relates to opportunity for us. We do think that business, both businesses are nicely growing certainly in the high single-digits probably in the low double-digits. And so we think there is significant organic growth possibility in that business as our customers largely hospitals and others who use endoscopes as they work to lower their cost, we believe by doing a nice job in repair and some things that they don't do naturally that we can actually grow our business and at the same time reduced our overall cost. And that's the real genesis behind that business and business model. And we feel very good having more capacity on both sides of the house.

I do think -- I think your comment suggest that what we also believe is we have done a lot through acquisition and that's faced the less year and a half, two years. Clearly the acquisition side will slow down dramatically relatively speaking in the organic side we will need to pick up. And that's what our plan is.

Larry Keusch - Raymond James

Okay, terrific. And then just quickly for Mike. If I have numbers right, I think you are looking for free cash flow for fiscal '15 to be up about 6%, so obviously less than net income growth. And again I note that CapEx is up, but if you could just walk us through what are the drivers of the free cash flow generation for fiscal '15 and I suspect that (indiscernible) acquisitions, but any thoughts will be great.

Michael Tokich

As you had mentioned Larry, the CapEx is planned to increase as we are anticipating some new projects from our Isomedix continue that expansion. Obviously the acquisitions are going to require some capital investment also, so that's a big portion of it. We are not going to be able to get, so that's actually a negative from a working capital standpoint. We believe we will get some adjustments in receivables as our receivables are considerably high at the end of the year. We believe we will get back to a more normalized level in the first quarter of next year, but from an inventory standpoint, we believe we will be just stating to be about flat. So we are really not going to get any improvement. Although you would imagine we will get improvement because we are not adding inventory even though we are adding these acquisitions. So that is not getting us to additional working capital improvement that one might expect with the acquisition. So between CapEx, AR and inventory are three main drivers.

Larry Keusch - Raymond James

Okay, great. Thanks very much.

Operator

Our next question comes from Dave Turkaly with JMP Securities. You may ask your question.

Dave Turkaly - JMP Securities

Thanks. Given the strength on the healthcare side, I would love to get your current thoughts on. So, yeah, I guess the capital equipment environment in general, anything on the ACA, I mean it was a big number for you guys. So any more color on that front would be helpful.

Walter Rosebrough

My comments on that are going to be very much like my comments have been probably the better part of a year and a half maybe even two years. That is, as we look out -- Actually, as we look at our backlog and as we look out, we continue to see buying patterns in the range of flat to slightly up. So I would not call this a robust capital equipment environment, but I also wouldn't call it a robust capital equipment environment. I think most people are flat to generally up. A quarter ago when we had this conversation we did mention that we saw the first part of this year particularly in January that a number of customers even to the backend of December I guess, a number of customers had put capital on hold. So even though they said their capital budget was going to be flat to slightly up, they were holding on to the money until they saw how things we kind of working out. I would say in general we have seen more of our customers releasing those holds, they are not so. I would say we are kind of in a status quo flat low digit improvement type of opportunity set right now, but flattish would be the right term, but again, we haven't -- it's not robust, nor do we see a boom.

Dave Turkaly - JMP Securities

And then as a follow-up -- thanks for the color on the EPS progression. I guess if you look at this year kind of majority of even the growth and earnings came in this fourth quarter, which is a big number for you guys as you kind of predicted. Are we thinking that 15 -- I know 60% in the back half, but in terms of earnings growth as well, I mean fourth quarter as strong as this? I think something like 37% or close to 40% of the earnings dollar of the year came in the fourth quarter this year. I imagine that may smooth out a little. Would that be fair?

Walter Rosebrough

We don't, as you know, don't give quarterly guidance, but our best estimate is kind of the pattern we have this year. I can assure you we would rather see that flattening back into the third quarter. So if we have our druthers or if we can make it happen, we will be trying to flatten it, because you saw last -- this past year we kept our factories running steady by building inventory in Q3, so we can ship the appropriate products in Q4. We would much rather build it and ship it as soon as we can, and build it and hold it until we need to ship it.

So we will be working toward that end, and to the extent possible we would rather say it would be flat. But the first quarters given the week relative to totals if you will because the IMS acquisitions is not in the two things we have done there. Early on it's not what you would call integration cost, it's just the cost of learning and doing and changing and all that. I guess it is an integration cost, but you don't get captured, it doesn't capture that way, but it will capture those costs. So we are expecting a little lower earnings in those businesses as we are sorting things out and then improvement over the course of the year. As you say we had a lot of our earnings in Q4 this year, we would certainly prefer that not be the case next year.

Dave Turkaly - JMP Securities

Last quick one, you mentioned two times that the EBITDA post the close. What is the capacity? Where can that go based on the covenants as they stand today?

Michael Tokich

Yeah, Dave, the maximum covenant we have from a net EBITDA standpoint is 3.25 times. So we still have some dry powder, if you will a couple of 100 million of dry powder to continue if need be with the expansions.

Dave Turkaly - JMP Securities

Can you say that the rate on that was 1.50% on the credit facility?

Michael Tokich

Yeah. Our credit facility is a 1.50% from an interest rate standpoint.

Dave Turkaly - JMP Securities

I am going to try to get that alone myself. Thanks, congrats.

Walter Rosebrough

All good things coming to an end.

Operator

Our next question comes from Chris Cooley with Stephens Incorporated. You may ask your question.

Chris Cooley – Stephens

Hi, good morning. Congratulations on a great quarter. Just a couple of quick ones if I may here towards the end of the call, Walt or Mike, could you just walk us through kind of on the execution standpoint what has to happen with these most recent acquisitions to get their margin profile backup in line with healthcare and then kind of timing, how we should think about realization of those activities? And then just as offshoot to that, you guys have been extremely busy this fiscal year, and so when you think about the business kind of the long-term targets here, what kind of operating margin structure do you now kind of foresee as obtainable when we think about longer term objectives? Thanks so much.

Walter Rosebrough

Sure, Chris. I'll answer first the question on the how you get the margins up and the specialty service businesses. There is a couple of factors, the first is we expect to see these businesses grow fairly robustly. And so it's not like we think we are going to go out and do massive layoffs to capture the gains. We think we can capture the bulk of the gains by letting –- by organizing the business more efficiently and letting the volume come to the people that are already there. So it's a general statement. I would say our general view is that we have a good group of people and we have plenty of them generally speaking, we just need to organize in such a way that as the volume grows we don't have to add people. Specifically in the field, particularly on the field service side of that when you are growing and you have to add someone geographically or you had a unit to a geography you haven't been in, it is very inefficient at the beginning of the time you add it and it gains efficiency over time.

So we are going to get two wins here and that is first of all we will get some automatic areas where we have people that are would have been otherwise been starting up into a region possibly, and we already have people from the other company there. So we can cross sell across the product lines that the two companies sell without having to take on that first step into the geography process. So that's one -- I will call that one general way that we should get some efficiencies.

The second general way is we have multiple laboratories around the country across the businesses where we do a lot of these repair work. And we have been unable on both sides of the business. I mentioned that IMS is traditionally more scope repair and Spectrum is more instrument repair. Both businesses outsource a portion of their opposite work to third-parties. And so we will be able to bring in what the scope repair that we did some outsourcing and on the Spectrum side into the IMS business and we will be able to bring some of the instrument repair that was outsourced by IMS into the opposite side. And so we will capture those margins into our own businesses. And as we grow that volume it's not volume like a revenue volume, but its volume of internal work volume, as we grow that we expect to capture efficiency. Now, that is going to happen tomorrow morning at 9 'O Clock. It will take time, but I would expect over the course of a couple of year we will have that nicely captured.

Chris Cooley – Stephens

That's really helpful. Thank you.

Walter Rosebrough

And Chris, I think that the follow-up question and I have lost it.

Chris Cooley – Stephens

Interest long-term margins, capital.

Walter Rosebrough

We have talked about that a lot. My view is I would like to see those; it's over 15% and creeping towards 20. And occasionally we get over the top of that, but that's tough. I certainly like it to get to the -- in that 15% range, and we have got -- we have ways to go now because we are taking on some business that we think is growth business and its great opportunity. But it will shrink our margin percentages on healthcare side which in total strengths it somewhat. But we think we can grow those back and get back to those kinds of numbers.

Chris Cooley – Stephens

That's great. If I could squeeze maybe a quick one in maybe for Mike, you mentioned it took you some incremental investment in Isomedix. Could you kind of help us think about timing of those investments, so we can just think about the cash outflows and then also kind of stage, cause a stage in our own minds kind of when that capacity could come online to drive incremental growth in the out-year? Thanks so much.

Mike Tokich

Yeah, certainly. Obviously with our increased capital expenditures we anticipate spending some of that cash to actually start expanding some facilities. As we talked about in the past it usually takes about 18 months or so to get a facility online. So if we start in the middle of this year we probably will not have any impact from an opportunity standpoint to add more capacity through Isomedix until fiscal '17, but the cash outlay will be not between now and the end of this fiscal year, the bulk of it at least will be spent.

Walter Rosebrough

And Chris, I would add, and I commented on this before that we have multiple ways of adding capacity. You either -- you add cobalt or you add different vessels inside current facilities or you add on to facilities or you grow new facilities. All those are ways for doing it. We are constantly doing all of those things. Occasionally you see kind of a one time blip, because we have to go out and do a brand new facility. That's the ones that put more pressure on earnings in the short run and they are very nice in the long run. But we are doing all those all the time, we are looking at all the different ways we can to do that, and we expect to continue that going forward.

Operator

Our next question comes from Erin Wilson with Bank of America/Merrill Lynch. You may ask your question.

Erin Wilson - Bank of America/Merrill Lynch

Great. Thanks for taking my questions. I saw there was an early termination notice from IPC this morning on the (indiscernible) as it relates to the IMS transaction. Is this an earlier close that you are anticipating your guidance assumption?

Walter Rosebrough

Well, we had in our guidance, we expected to be closing very soon as I mentioned earlier today, and we continue to expect to close very soon.

Erin Wilson - Bank of America/Merrill Lynch

Okay. So, no meaningful change here?

Walter Rosebrough

No meaningful change.

Erin Wilson - Bank of America/Merrill Lynch

Okay. And then on Isomedix do you anticipate any changes to contract terms or ordering patterns with the potential of Sterigenics, sodium transaction, and how would you just characterize your relationship there and your relationship with [robust as well](ph). Are these contracts generally structured?

Walter Rosebrough

Yeah. As we mentioned a number of times, the contracts we have with suppliers are long-term contracts, and so we typically will have two or three years' contracts. So our -- I will call it for lack of better terms the supply of cobalt that we have coming in is contracted sout for a two or three year periods which includes relative volumes and relative prices. So we generally do not expect to see disruptions in contracts -- in our supply chain in the short to mid-term period.

Over the longer term, of course with Sterigenics potentially purchasing the Nordion business, and of course that's all public, and as you know publicly they have said that they are going to need to go through the appropriate regulatory channels. I suspect in both the U.S. and in Canada, and we will just have to see how that works out going to channels. And clearly we are evaluating every possible avenue for our supply channels we always do particularly out in the long run.

Erin Wilson - Bank of America/Merrill Lynch

Okay, great. An update on your international business with the recent U.K. acquisition, do you plan on building more of these services, their presence in overseas or in the U.K. and broadly speaking kind of what are your longer term opportunities there?

Walter Rosebrough

Clearly, Eschmann was a move to grow our business in the U.K. It's a very well known company, good presence, good brand name in the U.K., good direct sales force. I should may have been clearer, the Eschmann business looks a lot more like our surgical and IPT business, that is, it's largely capital and then has a service component, and that service component relates to the equipment that we sell. So they do both surgical equipment and some IPT equipment and then they have service that goes along with that. We do see that as an opportunity, as you know about 75% of our business is in the United States.

We've actually grown, if you look at the organic side of the business, we've grown organically much faster outside the U.S. and inside the U.S., but we have -- the business we purchased have tended to be U.S. businesses. So we'll offset our organic international growth rate with acquisitions in the U.S. and that 75% held roughly similar. We're clearly -- we have been and continue to look outside the U.S. or businesses that fit our pattern and fit what we do. So we do see that as an opportunity.

Erin Wilson - Bank of America/Merrill Lynch

Okay, great. Thanks.

Operator

We have a question from Jason Rodgers with Great Lakes Review. Your line is open.

Jason Rodgers – Great Lakes Review

Hi, good morning. Looking at your guidance, I wonder if you could provide a estimate for the Healthcare segment growth for fiscal '14 excluding acquisitions?

Julie Winter

For '15, Jason?

Jason Rodgers – Great Lakes Review

Fifteen, sorry.

Julie Winter

Yeah, I believe Walt mentioned in his comments mid single-digit organic growth is expected excluding Eschmann and [IMS] (ph).

Jason Rodgers – Great Lakes Review

Okay. And you mentioned new product component to growth, I wondered if you could expand on any new products that you feel are noteworthy that's either have just been introduced or you're planning to do shortly?

Walter Rosebrough

As you know, we don't comment on things that we're going to introduce. We've had really nice work; I had mentioned some of them on a capital side. We've had nice growth, and continue to see nice growth in our washer line. We've basically redone the washer line in the last 12 months. And so that's been a nice business. We have again a relatively new line in our operating room integration business, and they've had very nice growth for the last 12 months, and we expect to see that continuing.

On the surgical side, as you may recall that we introduced a orthopedic product, orthopedic table during last year, and as always in the case of capital equipment it kind of takes some time to pick up and get people understand what's out there. So we are announcing some good growth in that business. So that's -- I think on a capital side -- I should say the European product lines, both their EMS systems and their lights and tables have grown nicely. So we had a good set of -- good run in those product areas.

On the consumable side, again our ICC business continues to grow; the Prolystica general family of business continues to grow nicely. The U.S. Endoscopy which comes in on the consumable side of our business, they have continued what we would hope they would do, which is continue their pattern of dropping in products and growing about 50% of their growth in the last -- this last 12 months has been from products we've introduced in the last couple of years, and we expect that to continue going forward. So they have a number of new products that are coming into the market. So it's generally across the board, and there is a little bit of rotation, you can't do everything -- you can do each product all the time, but we generally kind of rotate through the products and make sure that we're keeping them fresh and keep new products in front of our customers. So, we continue to expect to do that. I failed to mention V-PRO and the consumables would go with V-PRO. That's also been a very strong growth force. So we expect to see that continue.

Operator

(Operator Instructions) We have a question from Mitra Ramgopal with Sidoti. Your line is open.

Mitra Ramgopal - Sidoti

Yes, hi. Just a few quick questions, Walt I believe you mentioned the pace of acquisitions will be slowing down, but I'm just wondering it's a question of, you have so much on your plate that you need to integrate right now or are they just your opportunities out there?

Walter Rosebrough

I was speaking specifically about acquisitions in the specialty service space, and that is we felt that we needed certain sort of capabilities to be able to have a very good spot to provide great value to our customers, and we feel that we've gathered that sort of capabilities now. So, it's not to say that we wouldn't do opportunistic acquisitions in that space, if they came up we would. But in terms of feeling like we needed to do some other significant component to have a good package, we don't really feel that way. So I was really directing my comments there.

We do have some significant integration work to be done obviously, but it's largely in that specialty service space. Eschmann is a relatively small business. It will fit nicely into our capital business and healthcare. I don't see that being a large integration problem. The real integration is (indiscernible) in the specialty services space. So we would feel that we have capacity to do other acquisitions outside of that space. I think we're going to let those guys sort that work out. They got a lot of work to do, then we will let them sort that out the next a little bit. We'll be looking predominantly in other areas.

Mitra Ramgopal - Sidoti

Well, thanks for bringing that up. And then this is a quick follow-up here, given the Eschmann acquisition, potentially you're seeing on the international front, if you had to take sort of a longer term look, how do you see the mix of business change in terms of international versus U.S. from where it is today?

Walter Rosebrough

We've been saying forever that we expect the international business to grow faster than the U.S. business. We still feel the same way, particularly I would characterize it as we expect to see the non-industrial world, if you will, business grow faster than the historic industrial world business, healthcare in general. And we have been and we'd continue to follow that trend. But as opportunities come up where we're already strong in the U.S. and now even more so in Europe we clearly would take those opportunities, because even though those markets will not grow as rapidly as the OUS business, I'll call it, even though they don't grow rapidly, they're still growing business, they're very solid business, and we want to maintain our significant presence and be able to create big value for the customers in that business.

So, some of it will be opportunistic based on what is available, and some of it will be directionally -- towards the direction. We clearly are working to grow that business, and organically we've been growing the OUS business faster as we brought things that tend to be in the U.S.

Mitra Ramgopal - Sidoti

Okay. Thanks, again.

Operator

There are no further questions at this time. I'll turn the call back for closing remarks.

Julie Winter

Thanks everybody for joining us, and have a great day.

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Source: STERIS' (STE) CEO Walter Rosebrough on Q4 2014 Results - Earnings Call Transcript
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