Steris Corporation F4Q08 (Qtr End 03/31/08) Earnings Call Transcript

May.13.08 | About: Steris Corporation (STE)

Steris Corporation (NYSE:STE)

F4Q08 (Qtr End 03/31/08) Earnings Call

May 7, 2008 10:00 am ET

Executives

Aidan Gormley - Senior Director, Corporate Communications and Investor

Walt Rosebrough - President and CEO

Mike Tokich - SVP and CFO

Analysts

Joshua Zable - Natixis

Daniel Owczarski - Avondale Partner

Mitra Ramgopal - Sidoti

Greg Halter - Great Lakes Review

Mike Hughes - Delaware Investments

Operator

Welcome to the Steris fiscal 2008 fourth quarter conference call. (Operator Instructions).

I'd now like to introduce today's host, Mr. Aidan Gormley. Sir you may begin.

Aidan Gormley

Thank you, Sarah. Good morning, everyone. It's my pleasure to welcome you to our fourth quarter and yearend conference call. Thanks for taking the time to join us this morning. Just for your reference, the announcement went out this morning via PR Newswire. And if you did not get a copy, you can get it at steris-ir.com.

Joining me this morning are Walt Rosebrough, our President and Chief Executive Officer; and Mike Tokich, Senior Vice President and Chief Financial Officer.

Just a few words of caution before we get started. I wanted to remind you that today's webcast contains time sensitive information accurate only as of today, May 7, 2008. Any redistribution, retransmission or rebroadcast of this call without the express written consent of Steris is strictly prohibited. I'd also like to remind you that our discussion may contain forward looking statements relating to the company, its performance or its industry, and those 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 announcement.

During the call we will reference certain non-GAAP measures. These non-GAAP measures can include things such as free cash flow, backlog, debt-to-capital, day sales outstanding, all of which you can find in our most recent 10-K filing along with the reconciliation to the corresponding GAAP number.

So with that introduction, I would like to hand the call over to Walt who will comment on the quarter and the year. Walt?

Walt Rosebrough

Thanks, Aidan, and good morning, everyone. I want to thank all of you who are with us today. I will very briefly reflect on the quarter and then comment on the year, then Mike Tokich will discuss the financials with you in more depth. I will return after that to discuss our outlook for fiscal 2009 and our general areas of focus going forward.

First of all, I am very pleased that we were able to deliver 26% earnings growth in the quarter over a very strong 2007 Q4 despite the inflationary pressures and weaker dollar. Our demand continues to be solid overall. But perhaps most important, we were able to generate strong shipments out of our new Monterrey facility. Although we expected them to improve, even we were pleasantly surprised that they were able to deliver a 40% increase in shipments compared to the third quarter.

This is just tremendous performance and it gives us great confidence that operations at the facility had now stabilized and we can put the ramp-up behind us. A lot of hard work went into that work and I thank our folks in Monterrey for their efforts and for their dedication. With that transition now complete we can meet customer demand on a sustained basis and will reap the full benefits we expected from the move going forward.

Now let me reflect on the year. Fiscal 2008 was in many ways a transition year for the company. It was transitional not only in terms of leadership changes with me joining, Tim Chapman assigned to head our Healthcare segment, John Voyzey to lead Life Science, and Mike Tokich stepping up as CFO, but also in the actions that were taken to drive sustainable future results. As we've discussed, a major undertaking of the year was completing the transfer of sterilizer manufacturing to a new and more efficient facility in Mexico, but we also introduced several new products and continue development work on a range of others.

In addition, we began the journey of reducing our operating cost as a percent of revenue, particularly though that are not directly attributable to developing, building, selling and servicing products. Although some of these cost reduction resulted in a one-time restructuring charge that Mike will discuss later, I have told our people that these are not one-time or temporary reductions. We've not gone on a one-time crash diet, but are changing our eating habits forever.

Overall, revenues increased 6% for the year to an all-time high of $1.27 billion. Healthcare grew 5%, Life Science 9%, and Isomedix 5%. Although we got a bit behind in earnings earlier in the year largely due to significant increases in raw materials and foreign exchange, as well as the slower than anticipated ramp up in Monterrey, we were able to come back strong in the fourth quarter to post record earnings per share for the year excluding charges.

Regarding the foreign exchange issue, we do have some natural hedge between the US and Europe because we manufacture some products in the US through export and sell products in Europe. But as we moved more of our production capacity outside of United States, a broad based weakening of the dollar versus other currencies does put pressure on our cost in dollars. In addition, the weaker dollar contributes to raw material cost increases.

In 2008 we deliberately made additional investment and will continue to make investment in product development and in new product launch initiatives. Although these investments dampen near-time earnings, they are the lifeblood of a healthcare technology company. We must and will continue to develop proprietary products that encourage our customer to turn to Steris.

This past month we held our national sales meetings and our largest customer convention in North America the AORN. I have to tell you I was extremely pleased to see that both our sales force and our customers were excited about the new products we've launched. Classic indicators were the V-PRO sterilizer, LED lights, Vision Washer among others.

We continue to generate strong free cash flow at $91 million in fiscal 2008 compared with $50 million in 2007. This cash, along with some modest balance sheet leverage allowed us to repurchase 6.8 million shares for a total investment in our stock of $183 million for the year, nearly $200 million including dividends.

Mike Tokich will now discuss the numbers in more detail. Michael?

Mike Tokich

Thank you, Walt. Good morning, everyone. It's my pleasure to be with you this morning to discuss our financial performance for the final quarter of fiscal 2008. We had a very strong quarter to close out fiscal 2008, but before I get into the details, there are two moving parts in our numbers for the quarter.

So for clarity, let me remind you that included in the fourth quarter of fiscal 2008 are pre-tax restructuring charges totaling $16.5 million. $15.8 million relates to our previously announced expense reduction program and consists of cost associated with severance and related benefits, rationalization of certain product lines and the closure of sales offices. The remaining $700,000 relates to our transfer of manufacturing operations from Erie to Mexico.

Of the $16.5 million in restructuring charges, $12.4 million is recorded as restructuring expense and $4.1 million is recorded in cost of goods sold. Also, included in net income in the fourth quarter of fiscal 2007 is restructuring expenses of $1.1 million relating to our Erie to Mexico manufacturing transfer.

Now let me walk you through the income statement. Fourth quarter revenue increased 7%, reflecting growth in all three business segments. Organic growth for the quarter was 5% with 3% from volume and 2% from pricing. Foreign currency translation contributed 2%.

Gross margin in the quarter, excluding restructuring, was 41.4% and equal to the prior year. Although we have been successful in implementing price increases and are benefiting from labor savings resulting from our transfer of manufacturing operations from Erie to Mexico, we are still incurring cost increases relating to raw materials and freight, plus an unfavorable impact from foreign currency exchange rates.

Raw material cost increased $5 million in the quarter versus last year. As a percentage of revenue, operating expenses excluding restructuring were 25.8% in the fourth quarter compared with 26.3% in the prior year, a result of the expense controls we began several months ago.

The effective tax rate for the quarter was 36.2% compared with 41.4% in the prior year. The fiscal 2008 quarter was impacted by profitability from outside the United States, a favorable settlement of the 1999 through 2001 IRS audit and favorable discrete item adjustments.

Net income, excluding restructuring, was $36.4 million or $0.59 per diluted share, an increase of 26% as compared with net income of $30.5 million or $0.47 per diluted share in the fourth quarter of fiscal 2007.

Moving on to segment. As a result of organizational changes during the quarter, the company has changed its methodology for reporting segments. The company will now import four segments, Healthcare, Life Sciences, Isomedix and Corporate and other. The Corporate and other segment includes the defense and industrial business unit, businesses in the embryonic stages which were formerly part of Life Sciences, plus costs that are associated with being a publicly traded company, and certain other corporate costs.

The other corporate cost include executive office cost, Board of Directors compensation, shareholder services and investor relations, external audit fees and legacy cost of pension and post-retirement benefits from our Erie operation. Within our press release, the prior period results have been adjusted to reflect this new presentation.

For clarity, the $16.5 million pre-tax restructuring charge in the fourth quarter has been attributed to the segments in the following manner. $13.8 million attributed to Healthcare, $1.5 million directly to Life Sciences, $400,000 to Isomedix and, $800,000 to the Corporate and other segment. Please note that all my remaining comments on the segments will be based on the amounts that exclude the restructuring charges.

Healthcare revenue increased 5% in the quarter driven by service revenues growth of 8% and capital and consumable revenue growth of 5%. Demand trends continue to be strong as we are at a yearend record backlog level of $98 million, which is 54% above the prior year level. Healthcare segment operating margins rate was 18.3% compared with 18.5% in the same quarter last year.

The Healthcare segment was impacted by increases in costs relating to raw materials and freight, offset by benefits achieved from pricing and labor savings in Mexico. The segment also incurred higher operating expenses as we continue to invest in the development and marketing of new products. In addition, the segment incurred cost during the quarter associated with a software upgrade of its System One product line.

Life Sciences had a very strong quarter with revenue increasing 20% compared with the prior year. Consumable revenue grew 15% while service revenue grew 6%. Capital revenue grew 31% driven largely by the shipment of a record backlog from the pervious quarters as a result of orders in the research market.

Backlog for Life Sciences in the quarter decreased 24% as a result of these shipments and it's down 5% from last year to $44.2 million. Life Sciences operating margin rate was 9.7% compared with 7.2% in the same quarter last year, largely reflecting the increase in shipment levels in the business.

Isomedix services revenue grew 3% driven by improved price and mix. Volumes were essentially flat relative to a strong fourth quarter in fiscal 2007. Isomedix reported a very strong operating margin rate of 21.1% compared with 17.6% in the prior year period. The increase in operating margin reflected improved pricing mix and lower operating expenses in the segment.

Turning to the balance sheet, our DSO level was 72 days compared with 77 days in the fourth quarter of last year. Total inventory at quarter end was $147.2 million compared with $132 million in the prior year quarter. The delta reflects increased raw material costs, new product inventory, high order backlog levels and foreign exchange rate changes.

Capital expenditures for the full year were $57 million and depreciation and amortization for the full year was $62.8 million. Net debt at quarter end was $128.1 million representing a net debt to total capital ratio of 15.3%.

Given our strong balance sheet and free cash flow position, the drop in stock price early in the quarter and our optimism regarding future performance, we stepped up our share repurchase activity. During the quarter, we repurchased 3.4 million shares of common stock at an average price of $25.43. For the year, we repurchased 6.8 million shares of common stock at an average price of $26.84 for a total investment of $183 million.

Net cash provided by operations for fiscal 2008 was $143 million compared with net cash provided by operation of $95.7 million in fiscal 2007. Free cash flow was $91.1 million for fiscal 2008 compared with free cash flow of $49.5 million last year. The year-over-year improvement in free cash flow was driven by changes of working capital, which includes a prior year payment of $27.6 million to the IRS for tax expenses previously incurred.

By all counts, Steris delivered a strong fourth quarter to close out the fiscal year. We believe the company is well positioned to deliver solid earnings performance in fiscal 2009.

This concludes my review. I will now turn the call back over to Walt for his comments on 2009. Walt?

Walt Rosebrough

Thanks, Michael. We enter fiscal 2009 in a better position than we began 2008. A number of management changes were behind us, we've begun the process of reducing operating expenses, Monterrey is fully operational, overall demand remains positive in our markets and our new product pipeline is beginning to bear fruits. Although we have much more work to do on operating expenses, we are well down the path in North America and we will follow a similar path in our international operations during 2009.

As a result, despite the fact that we anticipate raw material prices to continue to rise and the dollar to remain at historically weak levels, we are bullish that our cost reductions, which are in excess of $50 million when fully implemented including Monterrey, will allow us to invest in our sales channels to put more feet on the street, invest in product development to support our customers future needs, absorb the broad base decline in the dollar, and at the same time, affords a significant earnings improvements in 2009.

We are anticipating total revenue growth to be similar to fiscal 2008 in the 4% to 6% range. Healthcare and Isomedix will grow in the mid single digits, while Life Science is expected to grow in the low single digits, as we expect it to be another challenging year for our major pharmaceutical customers. And we hope these demand forecast prove to be conservative.

As you know, we enter the year with a strong backlog and order pattern, but we also understand that the politics of US healthcare could impact the demand late this calendar year or early next. And our major pharma customers are under significant pressure. We would rather plan conservatively and have potentially upside if things are better.

With these revenue forecast in mind, we anticipate earnings to be in the range of $1.50 to $1.65 per share representing between 8% and 19% over fiscal year 2008. We expect the timings of earnings to be weighted about 40-60, 40% in the front half and 60% in the back half of the year. This is somewhat less rear-end weighted than our traditional one-third, two-thirds mix. And a result of growth in revenue overtime, as well as investments made early in the year, particularly in our Isomedix unit which had significant expansion cost built into the first half of the year.

To sum up, we are anticipating a good year ahead for STERIS. This coming year, we will see the results of our cost improvement efforts and our stock repurchase program. Looking further out in intermediate term over the next couple of years, we will see the benefit of efforts to better utilize capital and working capital.

Market shares gain in our core markets resulting from investment in sales and service and from product developing already in place, an improvement in operations including quality cost and asset utilization.

In the longer run, beyond the two-year timeframe, additional investment and focus on our product development efforts will also pay off. As we look beyond 2009, we are confident that this business can generate stronger top line growth, certainly in a high single-digits and that profitability can grow faster than sales. Our focus will be implementation in our key markets.

That concludes my remarks for today. And at this time, I will hand it back to Aidan to introduce the Q&A.

Aidan Gormley

Thanks very much, Walt, thank you, Mike. We are ready to begin the Q&A session Sarah so, if you wouldn't mind just give the instruction once again and we can get started.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the Joshua Zable with Natixis. Your line is open.

Joshua Zable - Natixis

Hey guys, thank you very much for taking my questions and congrats on a great quarter here and a great outlook.

Walt Rosebrough

Thanks a lot, Josh.

Mike Tokich

Thanks Josh.

Joshua Zable - Natixis

I have a couple of quick question here, so let me get right to them. First, Walter I know you focused this past quarter on making sure the Monterrey stuff was going well, execution was happening. Can you just kind of tell us, I know you obviously talked about how far long you are, but just from here on until sort of everything is finished as far as execution goes what risks are out there?

I mean there is always risk, but may be just kind of give us sort of how confident you feel about this transition being completed having gone there and sort of now kind of fixed things up.

Walt Rosebrough

Talking specifically about Mexico?

Joshua Zable - Natixis

Yeah.

Walt Rosebrough

I am highly confident. Again, there is always risk in any operation but they are running as an operation should run, and in fact if anything we look forward to more improvements out of them.

Joshua Zable - Natixis

Great, okay, and just running down a line here, just in terms of the outlook just to be clear, obviously some headwinds in terms of materials and life science spending, I imagine, I know you addressed that and you also kind of mention potential for hospital spending slowing.

Can you just give us a little bit more color as far as your revenue guidance, what you are sort of factoring in, are you seeing any sort of slowdown today and sort of are you factoring it more in the later part of the year, is it sort of a general factor of your total overall guidance?

Walt Rosebrough

Sure. Two statements I guess. The first is on the Life science side, we have been discussing the fact that the pharma customers are pushing out projects overtime and have been out for probably six or eight months for better. And so that is a matter of fact and has influenced their order rates and again you see, they had a huge fourth quarter.

But that was largely shipping product that had been ordered year-over-year 18 months earlier kind of stuff. That probably over too much time with, certainly there had been order previously. We also saw a good return in the non-pharma piece of that business, so that went well.

We haven't seen cancellation of orders, so what we seen today is just some timing issues we believe. But we do expect their timing to continue. And so I would say that ratable throughout the year more than any prime back in.

On the healthcare side, we've continue to see strong order rates you see that in our backlog. And so in terms of that question, we are being cautious I think in particularly in the back half of the year; back of half our year, which is the end of this calendar year and first of next calendar due to the elections, and we have lot of balls in the fire the election going right now, nobody really knows what's going to happen and nobody really knows what actions will really be taken post the elections.

So we are being a bit cautious based on that. Uncertainty is the enemy of the capital spending and hospitals not really certainty. So I don't see it as a long-term issue, but we might get caught for a quarter or two or just little uncertainty out there and peoples slow down a bit. We had not seen yet today on our order rate.

Joshua Zable - Natixis

Okay, great. And then, just quickly on products obviously, Walter, I know you haven't been there too long. Can you just talk about any new products that are out there right now? If there are anything meaningful, sort of multipart question, and then sort of give us a update on the vapor based sterilization.

And then sort of also along those lines with the new sort of corporate and other lines referring to defense industrial and early stage businesses obviously vapor based, I assume is in there. Is there anything, sort of new that we should be aware of that’s particularly exciting that might be in that bucket?

Walt Rosebrough

I'm going to take three part question. First I'll talk about the products. I mentioned really the significant ones in the course of my conservation, but we really have seen some nice response to I call it the major product that are out there LED light which we have already seen significant orders on, and we think we are going to continue to see significant orders on from all the patterns we have seen.

The new V-Pro which is one of our new Hydrogen peroxide sterilizers we've had that basic technology in Life Sciences for a while, we've been marketing it to a lesser extent in Europe because of regulatory issues. We do not yet have final clearance for the SCBI which is the biological indicator that goes with that product.

So we cannot fully launch the product of the US yet, we are hopeful that we would be imminent and we are very high on that product line, it's an excellent product and our customers has given us very favorable response.

The new Vision Washer is the nice product and it kind of does attract. In fact it's more efficient for the user because the timeframes it is more efficient for both the user and environment because its uses much less electricity and it also uses lower and better concentrations of soaps such that it's efficient for the environment. So we think that's going to be a very nice product for us going forward.

Joshua Zable - Natixis

Great.

Walt Rosebrough

Those are kind of big ones that have been launched and are out there today. I should to the classics indicators, excuse me I miss that one my mind the classics indicators are also getting very favorable response from our customers.

And I would tell you at the AORN which is the operating room show, that has both operating people and then the perioperative environment or the central supply where the sterilizers and washers are used. They had a line of people all they along around the classics indicator, so our people are feeling very good about that.

Now turning to Vapor, here I think you are specifically talking about hydrogen peroxide. Again, V-PRO line, it's doing well in early launch. We had some regulatory backup here in US, we have to be completed before we can really, before our customers can begin using it. So that will slow it down until we get that regulatory launch, but we are very comfortable with that one.

The other area, I think you might be talking, Josh, about the rooms sterilization that sterilization, the VaproSure, same basic technology, only for a full room as opposed to a sterilization space. That continues as we talked before, I think it will continue to be a slow concepts sale kind of a product. So it's relatively limited in market today, and I think it will be very slow going forward. And we and our customers are trying to figure out the best ways to put that in place.

So I think there will be a slow ramp up. I still think there is a good potential for it in the longer run.

Joshua Zable - Natixis

And is there anything else new in that sort of early stage product line then?

Walt Rosebrough

Well, there is nothing else we release or announced Josh, so there's nothing I can talk about. I will talk specifically to your question about D&I though. I think Mike discussed the accounting change there, and we just had really for two reasons.

The first is our shareholder have been asking us for more visibility to our earnings, so we are trying to provide that. And second reason is it's important to be clear what those business, defense and industrial are and are not.

They are very embryonic businesses. So they're not generating significant revenue and nor significant cost for that matter, but that the two area that we've talked, both the defense area and the industrial Tetra Pak area are the two areas that we are pursuing. But what we have done is reduced our focus or, I should say, focused on those things that are the most likely alternatives.

I think we would spread kind of things in those areas looking for things to apply our technologies in those areas and we have a very good potential relationship with Tetra Pak going on. And so we're just focusing on that on industrial side.

And let's get that one going and then we'll worry about doing something else later. And the same on the government side, we're focusing on just those areas where we've already done technologies and we know the government's interested and we're interested in what they're doing and we're focusing that research in only those areas where -- because we do contract research there, which is the bulk of revenue. That research is only on areas that we are interested in for furthering their and our joint interest as opposed to going more broadly.

So, we clearly have worked to focus those embryonic businesses into something where we can produce in next two, three years. And I think it will be the next two or three years not next two or three months. And then once we get those going, then we'll worry about other things. I think we were a little too broad.

Joshua Zable - Natixis

Great. And then just one final one, probably for Mike here, on the share repurchase, obviously you guys have been aggressive out there, which is great. We have a significant amount of cash left that's allocated towards this. Can you just talk to us -- there are different philosophies out there, some companies kind of get the buyback and then they just sort of just go with it and pretty much spend it.

Other people are sort of using more strategically in terms of just kind of picking and choosing their spots, having spent a significant amount of money obviously with the stock down in last quarter, obviously providing an opportunity but not with the stock up. Can you give us little bit color on how you guys think about that?

Mike Tokich

Yeah. I think it's the later. We are more strategic in our repurchases. And you have seen that we were opportunistic in the quarter with the stock price being a little bit lower. So as we look forward, we're going to continue to repurchase. And again it all depends on where the stock price is? How we are from a cash flow standpoint moving forward? But we're going to be more strategic and if we get the opportunity, once again to be opportunistic, we will step up and look to do that.

Joshua Zable - Natixis

Great. Well, thanks very much. Congrats, guys. I know it's your first sort of official outlook here. So good luck and also I know Julie is out there listening so congrats on the kiddies over there. Thanks, guys.

Mike Tokich

See you Josh.

Aidan Gormley

Thanks very much. Next question, please?

Operator

Daniel Owczarski with Avondale Partners, your line is open.

Daniel Owczarski - Avondale Partner

Yes. Thanks. Good morning and congratulations.

Aidan Gormley

Good morning, Dan.

Walt Rosebrough

Thank you, Daniel. I owe you guys a call. I apologize.

Daniel Owczarski - Avondale Partner

I wanted to start with Monterrey. I mean can you talk about what seemed to go right? I mean what was the magic bullet in the quarter and why such a dramatic improvement in the productivity?

Walt Rosebrough

Well, it's not so much -- it's what went right and what had historically gone wrong in combination. We just got a bit of the track in the third quarter. And we had some excess turnover, and every operation or anything like this, there is an inflection point. It's well, the kind of the time when things have to all come together and when they don't. And we kind of the end of the third quarter was kind of our inflection point.

As you may recall, that we built a lot of inventory out of Erie early in the year in anticipation of Monterrey ramping up. So lot of our shipments of those products were really out vary either in terms of complete units or in terms of subcomponents, the fabricated components.

And the third quarter is really when we had to turn the corner on not just assembly, which we had already done but on fabrication. We have run into some fabrication difficulties and again we had some -- a brief period of human resource difficulty and we kind of get through both of those at the same time.

Again, having said that, even we were surprised at what a great job those guys did at coming back. We expected them as we said at the end of the third quarter, we expect them to able to produce at our annualize run rate. They more produced at our historic high run rates of Q4. So they did a heck of a job. And one of the things, everything kind of came together, the team together, we got the machines running and it's all working. So it's just one of those things, very difficult to forecast at the inflection point.

Daniel Owczarski - Avondale Partner

Okay. And then as a follow-up to that you mentioned the turnover. I mean is that stabilized? Is there still a room for improvement and what can you do as far as work of retention down there?

Walt Rosebrough

Well, there is always room for improvement in turnover. That's a general belief of mine, no matter what. They do have a higher turnover rate then is a typical. But that area has a higher turnover rate than the typical U.S. rate. We're running at about the typical rates and we want and hope to improve that. And we're doing work to make that happen.

Daniel Owczarski - Avondale Partner

Anything specific retention wise that you can do?

Walt Rosebrough

Yeah. But I think I'd rather not have that conversation at this point.

Daniel Owczarski - Avondale Partner

And then, you mentioned also in your final comments about investment in sales and marketing. Can you give us anymore insight there, what's your planning?

Walt Rosebrough

Sure. I mean, first of all, product launches aren't free. So there is a -- you do the product development and people think about that, but product launches cost money. And in fact, our sales meeting this last, I guess two weeks ago now, we had all of our sales people together and they literally had four days of training. We had enough new products out there that it was train, train, train, train. It wasn't a (inaudible) meeting, it was train, train meeting and that cost money.

The second and as we do more product, we would expect to see more of that. Second, we have expanded the number of sales people in our North American operation and just in terms of numbers of feet on street and we've focused them -- split, if you will, between the capital size and consumable side. So we're expecting improvements in our sales force out of both those moves.

Daniel Owczarski - Avondale Partner

And then just last question, maybe, Mike, could you give us an idea where the CapEx dollars are going to go this coming year. It sounded like some capacity expansion is there, I'm assuming some amount of routine replacement or any idea where those dollars are going?

Mike Tokich

Yeah. We're anticipating approximately $65 million to be spent. Majority of that is going to be within our Isomedix facility as they have normal replacement of Cobalt and they have continuation of an expansion of one of their facilities. And then we are going to have, as we have a new products coming on board, we have tooling that has to go into our manufacturing facilities. And then just normal maintenance that will occur, building maintenance or machinery maintenance that will occur on an ongoing basis.

Daniel Owczarski - Avondale Partner

Okay. Thank you.

Walt Rosebrough

Thank you.

Aidan Gormley

Next question, please.

Operator

Mitra Ramgopal with Sidoti, your line is open.

Mitra Ramgopal - Sidoti

Yes, hi. Good morning, guys. Just a few questions. I noticed you did mention that production output increased 40% sequentially and you ended the year at record backlog. Any issues in terms of production constraints?

Walt Rosebrough

No. Not at all. The backlog is up because orders are up, which of course is a good thing. But in terms of customer lead times we're bringing those down actually. So, you should expect to see that continuing to come down over the following quarter, just as we described. If anything were ahead what we thought we would in terms of meeting customer demand right now.

Mitra Ramgopal - Sidoti

Okay. And on the life sciences business, I know you entered the quarter with record backlog and you mentioned it declined 5% heading into the new year, any concerns there or--?

Walt Rosebrough

I just want to clarify to make sure, we had record backlog earlier in the year. We've reduced that backlog. And now it's down about 5% versus the previous year. So, it's not a record at the end of this year. And I don't know if we misspoke or you may have or…

Mitra Ramgopal - Sidoti

Right. In the quarter, yeah.

Walt Rosebrough

I may have misunderstood you. But in any event, at the end of the year and end of the fourth quarter, we were about 5% down compared to previous year. In terms of concern, naturally we would like our backlog to be even or up a little bit versus a previous year. We are seeing basically what we've describes, some slowness in timing in the order patterns of the pharma guys and continuing good order on the other side of Life Science. And that's why we forecast a lower growth rate in the previous year.

Mitra Ramgopal - Sidoti

Okay. And again, you thrown up tremendous free cash flow and you've been using it to buyback stock. Any thoughts or anything on the acquisition front that could be -- cash could be used towards?

Walt Rosebrough

Sure. We will continue to look at opportunities that are adjacent to our current primary products and markets. And to the extent that there is something that fits into that, we would consider. Having said that, our primary work, I think is to do a great job in those core markets. And so we will keep cash in reserves. And we still we have a significant cash reserve between cash and debt for opportunistic purchases that make sense. But we also think we have room to buy back stock.

Mitra Ramgopal - Sidoti

Okay. And on price increases, again, I think about you've been able to implement increases to help offset raw material cost et cetera. Do you feel that you still have that ability do it in fiscal '09?

Walt Rosebrough

In general, we do raise prices to work to offset those material cost increases. We have two issues with that. First is, we are often bidding out in the future. So you have to bid the anticipation of cost increases. So what hurts us is unanticipated material cost increases. That's number one.

And of course, what helps us is unanticipated cost decrease. So that's one issue. And the second issue is, in general, we have not included things like surcharges or whatever on our products. The hospitals want those as a bid, if you will. Here's a price and we're in a competitive pricing mode at the time. So, as all of us are incurring cost decreases, we are able to pass on price increases, but not if all of us aren't.

And the second issue is in general in this industry, where one gets improvement on price relative to cost, in general that's when you develop new products. And so typically the path to price cost differential is new products, not straight price increases.

Mitra Ramgopal - Sidoti

Okay. Thanks. And finally, again, with regard to the guidance you issued, are you assuming any uptick in hospital construction or spending given, as you said, the uncertain political outlook?

Walt Rosebrough

Again, we are anticipating 4% to 6% growth for the year in that in total, and obviously, hospitals were in that range, but a little higher because of the lower growth in Life Science. But kind of the long and short out of it is, we're not looking for any major increase or expansion in building nor are we looking for any major decline in building expansion. I think at this point that's reasonable.

Again it really boils down to -- my experiences boogeyman on capital spending for hospitals is not so much what's real, it's uncertainty. Once the people who are in charge of hospitals understand what their new deal is, they are very good at working to improve their positions and get in good shape. So, its typically an uncertainty question for two months or three months or six months or year, and we just don't know what's going to happen in the political environment, so we're being little cautious there.

Mitra Ramgopal - Sidoti

Okay. Thanks again, guys.

Walt Rosebrough

Thank you. Next question please.

Operator

(Operator Instructions). Greg Halter with the Great Lakes Review, your line is open.

Greg Halter - Great Lakes Review

Good morning.

Walt Rosebrough

Good morning, Greg.

Greg Halter - Great Lakes Review

I believe in the past you've spoken about an expansion for the Isomedix business in Minneapolis. I am just wondering if you could comment on how that is progressing, as well as any others you may be working on as well?

Walt Rosebrough

I don't happen to recall if we discuss that particular one. In general our expansions are going well. We do have a significant expansion going this year. We've not spoken publicly about that location. We have a number of smaller expansions going on, and it's just a typical part of our process. But all things are going well and they continue to fill kind of all their vessels.

They're doing a nice job. Easiest way to say it is we work hard not to expand without knowing what customers are going to bringing into those facilities. So we tend to try to tie up a few long-term contracts within an expansion and then we have to fill the balance of the vessels. That's their tradition and they've continued down that path.

Greg Halter - Great Lakes Review

Okay. Given all the concern over E. coli and food products and so forth, any new initiatives or impetus in that particular area for the Isomedix facilities?

Walt Rosebrough

That really -- although there's all kinds of concern out there, that has really not materialized in any significant way, so far. So the answer to that at this point is no.

Greg Halter - Great Lakes Review

Okay. And you had mentioned I believe that raw material cost were about $5 million higher than at this time last year. Is that the type of increase you expect on year-over-year basis going forward or will it be even more severe than that?

Mike Tokich

On a year-over-year basis, it will be more severe than that. It will be two to three times that.

Greg Halter - Great Lakes Review

For how many quarters?

Mike Tokich

For the full year.

Greg Halter - Great Lakes Review

Okay.

Mike Tokich

We would spread that two to three times over the full year impact.

Greg Halter - Great Lakes Review

Okay.

Walt Rosebrough

I think all of us are kind of in a situation where there's a lot of moving parts in material cost right now. Oil is bouncing around. Steel has clearly been bouncing hard lately. Stainless steel which is one of the big components we had problems last year is actually softened a little bit. Nickel is not as tough as it -- this time going forward is not as tough as it was. We're watching a lot of variables at the same time.

Greg Halter - Great Lakes Review

Okay.

Walt Rosebrough

It's along with, I think everybody in the business right now.

Greg Halter - Great Lakes Review

So those new products really are key in terms of the price increases if you will?

Walt Rosebrough

Product is always important.

Greg Halter - Great Lakes Review

Any new information on the DOJ investigation?

Walt Rosebrough

There is nothing new to report.

Greg Halter - Great Lakes Review

Okay. And two last house keeping ones questions. Do you have any short-term debt on the balance sheet?

Walt Rosebrough

Yes, we have $700,000 of short-term debt and that's been consistent for last two years at least.

Greg Halter - Great Lakes Review

All right. And finally what was the total for the consumable service recurring revenues as an entire company for the quarter and the year I guess?

Walt Rosebrough

You're talking about number or percentages?

Greg Halter - Great Lakes Review

Numbers or percentages either way?

Walt Rosebrough

Total recurring was approximately 7% for the year.

Greg Halter - Great Lakes Review

7 or 70?

Walt Rosebrough

7.

Greg Halter - Great Lakes Review

Okay.

Walt Rosebrough

70 would be tremendous, 7 is where we're at. I think capital business is recurring too. We all have different view on that.

Greg Halter - Great Lakes Review

Yeah, the number we used on recurring revenues for fiscal '07 was $688 million which includes the consumables, the service and whatever else you may have in there?

Walt Rosebrough

Yeah, well the total recurring for fiscal '08 was 737 Greg.

Greg Halter - Great Lakes Review

Okay. Great, thank you.

Operator

Mike Hughes with Delaware Investments, your line is open.

Mike Hughes - Delaware Investments

Good morning, couple of questions. Just a point of further clarification on the order backlog, you touched on this earlier. But up 54% year-over-year, last quarter you were benefited in a big way by the issues in Mexico. Are you saying that that backlog at this point doesn't include kind of some delays in shipping because Mexico is kind of at the level production it needs to be at or is that still up 54% of still being benefited from the issue that you had last quarter too?

Walt Rosebrough

No, I mean clearly we were behind relative to our normal shipping pattern last quarter. We are working out of that. But we're not completely out of that. But I guess what I'm saying is we are not losing ground in Mexico any longer, in fact we're gaining ground. We have strong orders across our business and across our plan. So although that increase in backlog is not Mexico, again we just had very strong capital orders in the hospital side the last six months. So good piece of backlog is not related to Mexico.

Mike Hughes - Delaware Investments

Okay. And then the earnings guidance 150 to 165 there was a lot of variability, more so than even at operating leverage involved with that the 4% to 6% revenue range. So what would it take to hit the high end and conversely built a low end?

Walt Rosebrough

I would say at the high end if the dollar strengthens instead of weakens which has a lot of play on both our FX and our material cost. If we capture all of the costs, we have a range that we're working in some of the cost reduction we're doing. We know we'll get them it's just a matter of when we get them. So it's the rapidity with which we capture those cost and than where the revenues come out particularly in the back half of the year. That's I guess would my big three and the low end it's the reverse scenario.

Mike Hughes - Delaware Investments

Okay. And the 150 to 165 does that include any non-recurring cost related to restructuring that you can't back out?

Mike Tokich

No there are no restructuring costs included in that $50 to $65.

Mike Hughes - Delaware Investments

Okay, great. Thank you very much

Walt Rosebrough

Thanks, Mike. Next question please.

Operator

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

Aidan Gormley

Okay. Well thanks very much everyone. That concludes our fiscal 2008 fourth quarter call. I just wanted to remind you that a replay will be available from noon eastern time today until 5:00 eastern on May 21, 2008. You can tune into our website or call 1-800-756-3940 in the United States and Canada or 1-402-998-0796 internationally.

Thanks very much for joining us and have a great day.

Operator

Thank you for participating. You may now disconnect.

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