STERIS plc (STE) 2016 Q3 法說會逐字稿

Welcome all to the needs to STERIS fiscal 2016 third-quarter conference call. (Operator Instructions). 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, Investor Relations. Ma'am, you may begin.

Thank you, Ron, and good morning, everyone. On today's call we have Walt Rosebrough, our President and CEO, and Michael Tokich, our Senior Vice President, CFO and Treasurer as usual.

I do have a few extra words of caution before we open for comments from management. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or rebroadcast of this call without the express written consent of STERIS is strictly prohibited.

Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements including without limitation those risk factors described in STERIS PLCs', STERIS Corporation's and Synergy's previous securities filings. Many of these important factors are outside of STERIS' control. No assurances can be provided as to any results or the timing of any outcome regarding matters described in this webcast or otherwise.

The Company does not undertake to update or revise any forward-looking statement as a result of new information or future events or developments. STERIS PLC and STERIS Corporation SEC filings are available through the Company and on our website.

Adjusted earnings per diluted share, segment operating income and free cash flow are non-GAAP measures that may be used from time to time during this call and should not be considered replacements for GAAP results. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency for supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making.

STERIS' adjusted earnings per diluted share and segment operating income exclude the amortization of intangible assets acquired in business combinations, acquisition-related transaction costs, integration costs related to acquisitions and certain other unusual or nonrecurring items.

We define free cash flow as cash flow from operating activities less purchases of property, plant, equipment and intangibles, net capital expenditures plus proceeds from the sale of property, plant, equipment and intangibles. Additional information regarding adjusted earnings per diluted share, segment operating income and free cash flow is available in today's release.

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

Thank you, Julie, and good morning, everyone. We are off to a good start as the new STERIS with a strong first two months of the combined company. We were together just a little over a month ago discussing the combination and our forecast for the balance of the year so this morning I would like to spend some time on our integration efforts with Synergy. After I am finished, Mike will review the solid financial performance for the quarter.

Our integration efforts are progressing well in the first 90 days. In particular, we have achieved a number of significant milestones. We have made the senior leadership changes to restructure the combined business. We have aligned the leadership for our global AST business and have rolled out the new brand name for that business to our customers, STERIS AST, replacing both Isomedix and Synergy AST.

We have combined our North American IMS and Synergy HSA salesforces and operation teams in the new STERIS HS business. We have begun to in-source our instrument cleaning and sterility assurance products into the Synergy HSS facilities.

We have finalized and introduced our new reporting segments and we have started the planning and begun some work to put our central back-office functions together. You will recall that we have set a target of $5 million in cost savings for this fiscal year 2016 which we are on track to achieve. This number is still anticipated to grow to about $40 million annualized run rate savings over the next two years and we have attained anticipated run rate tax benefits of these Synergy combination.

All of these efforts have required substantial time and attention from our people, both historic STERIS and Synergy, but we have continued to perform as anticipated in the base businesses of both companies. As we said on our December call, our people are focused on execution. We have much work ahead of us but we are off to a good start and remain confident about what our two companies can do together.

As you know, this is our first quarter reporting under our new segment format and we know that many of you are working on building new models. If you have not already, please see the table we included in our financials in the earnings release. This table provides historical revenue data for Synergy Health going back six quarters, broken out to align with our new reporting segments.

Given the complexities of the currencies involved, we have not converted their revenue to US dollars.

As we stated on the call in December, we will not have truly clean year-over-year comparisons until the fourth quarter of fiscal 2017.

As we look to finalize fiscal year 2016, we are reiterating the outlook provided on our December call which includes revenue growth of 21% to 22% and adjusted earnings per diluted share in the range of $3.48 to $3.55. We continue to expect a full-year adjusted effective tax rate of approximately 27.5%. Given our third-quarter performance, we are increasingly comfortable with our range for the year.

Free cash flow is anticipated to be $100 million reflecting about $100 million in acquisition and integration expenses. Mike will discuss our cash flow forecast further in his presentation.

After these first few months of the Synergy combination and the performance of our base businesses and other recent acquisitions, I continue to be more excited than ever about the future of our Company.

With that, I will turn the call over to Mike to discuss our financial results for the quarter.

Thank you, Walt, and good morning, everyone. It is my pleasure to be with you this point to review our adjusted third-quarter financial results. Before I get into the numbers, let me remind you that all prior-year comparisons are to legacy STERIS. As Walt mentioned, we do not have pro forma data and as a result are not able to comment on our performance on a year-over-year comparative pro forma basis.

We are pleased to report another strong quarter with revenue growth of 31%. The increase in revenue was driven by the acquisition of Synergy Health and solid organic revenue growth. Constant currency organic revenue growth was 7% with 6% coming from volume and 1% from pricing. Foreign currency negatively impacted revenue by 1% or approximately $7.3 million.

Gross margin as a percent of revenue for the quarter decreased 240 basis points to 39.3%. We are not overly concerned with the gross margin percent as we are still working with Synergy to ensure that their costs are being recorded and mapped the same as ours. That said, Synergy was negative to gross margin in the quarter. In addition, we had a negative mix impact offsetting favorable currency and pricing.

As you know, we focus more on EBIT margin which increased 110 basis points to 17.4% of revenue. Revenue volume, favorable foreign currency impact and lower R&D expenses as a percentage of sales drove the 110 basis point improvement in EBIT margin. Foreign currency was favorable to EBIT by approximately $7.2 million in the quarter. Clearly once we anniversary the Synergy Health combination, our FX exposure on a year-over-year comparative basis will shift, causing our revenue to be more sensitive to fluctuations in currency than legacy STERIS but causing our bottom-line to be less sensitive to fluctuations in currency versus legacy STERIS.

The effective tax rate in the quarter was 21.9% as we experienced the immediate benefit of the synergy acquisition plus several favorable discrete item adjustments including the renewal of the tax extenders which was contemplated in our guidance and will not repeat at the same level in the fourth quarter.

Net income increased substantially to $76.2 million or $0.98 per diluted share with 77.7 million weighted average shares outstanding for the quarter.

Moving onto our segment results, our Healthcare Products segment revenue grew 10% in the quarter as we experienced solid organic revenue growth of 5% in addition to the acquisition of Synergy Health. Contributing to the revenue growth, consumable revenue increased 15%, capital equipment revenue increased 12%, and our maintenance and installation service revenue grew 3%. We continue as we have all year to experience strong growth in the United States offset by weakness internationally within this segment.

Healthcare Products backlog at the end of the quarter was $144.6 million, an increase of 5% year-over-year. Operating margins for Healthcare Products were 16.4% of revenue in the quarter, an increase of 150 basis points year-over-year due primarily to the increase in volume and favorable foreign currency.

Our Healthcare Specialty Services segment reported revenue for the quarter up $128.3 million reflecting the addition of Synergy Health along with 4% organic revenue growth. Healthcare Specialty Services operating income increased to $7.4 million in the quarter due primarily to the increased volume. As anticipated, the addition of Synergy helps hospital sterilization services and linen management businesses reduce the operating margins within this segment as compared to the prior year.

Life Sciences revenue grew 22% in the third quarter. Supporting that growth, consumable revenue grew 45% partly due to the acquisition of GEPCO and partly due to growth in organic consumable revenue. In addition, Life Sciences service revenue grew 13% while capital equipment revenue increased 8%. Life Sciences organic revenue grew 9% in the quarter.

Backlog in Life Sciences ended the quarter at $45.4 million, an increase of 4% compared with the prior year. Life Sciences third-quarter operating margin increased to 29.2% of revenue due to a favorable mix shift toward consumables and increase in volume and favorable foreign currency.

Applied Sterilization Technologies also had a good quarter with $90.2 million in revenue. The increase in revenue was driven by the addition of Synergy Health and increased demand from our core medical device customers. Applied Sterilization Technologies operating margin was 29.7% of revenue, an increase of 220 basis points as compared to the prior year due primarily to the increase in volume and the addition of Synergy Health.

In terms of the balance sheet, we ended the quarter with $231 million of cash and $1.6 billion in debt. As we had previously stated, now that we have completed the combination with Synergy, we have added debt repayment to our list of capital allocation priorities. Barring any further acquisitions, we expect to reduce our debt to EBITDA from its current 2.8 times to a level more consistent with STERIS' history during the next 18 to 24 months.

Our DSO is at 76 days at quarter end, an increase of 16 days compared to last year. This increase is largely due to the impact of incorporating Synergy Health and other acquisitions we made over the past year into our DSO calculation. Our calculation includes 100% of an acquisition's accounts receivable but revenue only since we have acquired them. There is no material change in our AR exposure.

Our free cash flow for the first nine months was $22.9 million, a decline from $109.3 million last year. This is an unusual year for free cash since we do not adjust this measure like we do EBIT. We are seeing declines primarily due to significant expenses related to the combination with Synergy and other acquisitions. In addition, free cash flow was reduced by an increased payout level for the Company's prior annual compensation program and a pension contribution made in connection with the settlement of a legacy pension obligation. The total of these items represents approximately $85 million of the year-over-year decline.

It appears there is some confusion as to our forecast for free cash flow for the fiscal year. There is no change in the underlying cash expectation for the year. Our December free cash flow forecast was incorrect and only included actual year-to-date acquisition and integration expenses which is why we are changing our forecasted free cash flow amount from $155 million to $100 million. However, if we were to look at free cash flow on an adjusted basis which we have chosen not to do, our adjusted free cash flow remains the same at approximately $200 million.

The adjustments are primarily related to cash expenses this year for acquisition and integration costs of Synergy Health including investment advisor fees, legal fees, tax advisory fees, make hold payments for the payoff of Synergy's private placement notes, excise tax gross-up payments and integration expenses. All of these costs are in line with what we had identified in the S4 as part of the cost to complete the combination with Synergy.

Capital spending was $42.2 million in the quarter while depreciation and amortization was $44.8 million.

With that I will now turn the call over to Julie to begin the Q&A portion of the call.

Thank you, Walt and Mike, for your comments. Ron, if you could please give the instructions for Q&A, we can open the lines for questions.

(Operator Instructions). Matthew Mishan, KeyBanc.

Thank you very much. Good morning, Walt, Mike, Julie. I just wanted to start off with -- you have maintained your sales and EPS guidance versus your December call. I was hoping you can go through some of the puts and the takes to that guidance. Obviously I think the quarter was a little bit better than I would have thought. And then you also have the impact of the pound which I think is a little bit worse than you guys had previously forecasted.

Matt, I would say the biggest change for us is the favorable tax rate. We were anticipating more of a normalized 25%-ish tax rate. We actually came in just under 22% so that is about a $0.03 or $0.04 change. And as we talked about, we did have the tax extenders in there. We also had some other favorable discrete item adjustments such as Section 199 deductions which we were not anticipating. So it is more I guess of a timing issue. Obviously third quarter came out higher than our expectations but for the full year, there is no change.

And Matt, I would say operationally as you know, we have been working to try to level our shipments throughout the course of the year and we have been increasingly successful at doing that and a couple million dollars going either side of a particular shipping date can make a $1 million or $2 million swing. So we are not suggesting a significant variation for the total year.

Okay. And then as I look at your new business segments and in particular the margins, I think the one major surprise for me was I think the strength in the Healthcare Products margin and maybe the lower margin in Healthcare Specialty Service. And I think the one piece that is moving from one to another is the IMS piece and it looks -- I think about a year or two ago you had been suggesting that that was going to be moving more toward Company average. It looks as if that was coming in a little bit below that. Was that maybe more of a drag to your healthcare margins over the last year and a half than maybe we had thought?

No, Matt, I would say two points on that I guess. It is hard for me to know what you thought. But in terms of I will call it over time what has happened there are two kind of significant moving parts. There is a lot of little ones but two significant ones. There's about a $50 million business that moved from Synergy's HSS business over to our Health Products business, the Products business. That did not materially change the overall affect so if anything, it would have averaged it down a little bit. And so we just had a very strong and continued strong period if you will on the Healthcare Products piece of the business. Both the surgical and the IPT business had good solid capital shipments which of course then covers more overhead and they also had good margins in the consumable side of the business.

So that was, that is purely, any differential you see there is purely better performance on an operating basis than you would have seen it with or without the combination of Synergy Health.

On the question of the HS business which includes obviously the Synergy's historic hospital systems business and the IMS business, IMS has moved quite favorably over the course of the last two years just as we have described again 1 percentage point -- 100 basis points here or there, quarter to quarter the last couple of quarters going up or going down, that is not out of the question. But generally speaking, IMS has moved just as we had expected it to.

There are a couple of things that are different than you might have expected both Synergy when they reported their earnings for their segments did not include as much of the overhead in the businesses. We include much more of the overhead in our cost of goods sold. We have kind of a four walls view of the world and anything that sits inside the four walls of those facilities gets captured in COGS whereas other people might put it in corporate expense or some other place in OpEx.

So there that is -- at the bottom line it makes absolutely no difference so it is not a concern to us. It didn't surprise us any of those things. But compared to what if you are looking at their external reporting and our discussions of our internal reporting, it would not be surprising for you to be a bit surprised I guess is a good way to say it.

The second piece of that is clearly Synergy was and we are investing in that business. We have significant new start-ups going on in North America and we are investing in other places in that business and so since we do anticipate that business being a growing business going forward, we are investing in it and so that also depresses the earnings a bit.

As you know from a lot of conversations with me over the course of time, if something is not making double digits, I'm kind of unhappy and if something is making over 20, I start getting nervous kind of things and so in between that range depending on what the capital it takes and all those things, we want to get a good ROIC out of all of our businesses. But there are times when you are investing in the business when it makes sense to do that. So at a high level that would be the conversation there.

Okay, that makes a ton of sense and if I can just squeeze one follow-up question in on that one regarding the North Shore Supercenter, could you just remind us of the scale and the timing of that contract and the ramp there? And are there costs associated with that contract ahead of the actual realization of sales?

Yes, Matt, two things. First of all, orders of magnitude I think were public with a number of roughly 25 million a year when you get into full run rate in that facility revenue. We have not yet started so the number right now is zero. And as Adrian mentioned in our last meeting, we are looking to get that started sometime in this calendar year 2016.

There have been -- New York is fairly well-known for a tough place to do construction and there are commonly delays and we have seen those delays but nothing different than what Adrian talked about six weeks ago.

In terms of costs, we are incurring costs as it relates to that as we speak and so that is one of the investments that we are making.

Okay, thank you very much.

Dave Turkaly, JMP Securities.

Thank you. Just to go back to the comments on the gross margin side if I could for a second, I mean obviously you've got a lot of moving parts. We know you have more OUS mix now but do we think kind of maybe 39, 40 is a better estimate of what you are going to look like combined on a go forward basis or how should we think about that?

Dave, this is Mike. At this point I would say it is too early to tell. We are still working on it. We have only had two months of mapping data coming over from Synergy. So we will provide more indication of guidance. Once we have our full-year plan, we will have a better idea of what gross margin if there is a change to that. But obviously there is fluctuation between gross margin and SG&A but again focus on EBITDA margin. Again we don't care where we get the benefit from EBIT margin is really what our bottom-line focuses.

Got you there. Secondly, 1% pricing gain is fairly rare but I would be curious to know where you are seeing that and I guess sort of if there is an update on the overall environment out there on the healthcare side if that is where it is coming from? Any thoughts on that moving forward? Thank you.

You know, we had pricing pretty much across the board. It is not like it was one spot that overwhelmed the others. That order of magnitude, anyplace we can zero and 1 is not a shocking number. That is kind of if you look over long periods of time on a comparable product basis in healthcare, that tends to be a comparable product basis and you get most of your pricing in new products and that doesn't show up quote unquote in pricing, that shows up in volume. So on the Healthcare side.

On the Life Science side, we do tend to see modest pricing, Life Science, we do tend to see modest price increases in line with inflation and of course right now inflation is 0.5% or whatever it is. So those kind of numbers are fairly routine.

Thank you.

Chris Cooley, Stephens.

Thank you. I appreciate you taking the questions. Again, congrats on the quarter and I realize there are number of moving parts this quarter with the integration. Let me just maybe start on the cash flow make sure we are all on the same page and correct there.

The reduction in the printed guide, the $25 million there, there is an additional $85 million -- I'm looking back at my notes correctly here that you spent on expenses and the pension obligation. And then you had I believe at the last quarter's call or the update call about $45 million to $50 million in planned expenditures I think that now look closer to $100 million. So I just want to make sure that I understand what the incremental $50 million was that gets you on an adjusted basis back up to $200 million. I understand that the underlying business hasn't experienced any degradation there in its margin or profitability and the outlook is the same. Just as we do these one-time add banks just wanted to make sure we have the buckets correct.

Yes, Chris, there are two factors here. One as we are looking, the $85 million is looking year-over-year decline so there are basically three large pieces there. One is the Synergy Health acquisition costs plus other acquisition costs. In addition to that we did have increased payout levels of our annual compensation and then we did have a pension funding. So the total of those are about $85 million if you look year-over-year.

If you just look at our forecast which is just basically a stagnant number, our free cash flow forecast as I stated earlier, the breakout was incorrect. We still anticipate about $200 million all in free cash flow but then the buckets on how we account for those either from an acquisition or integration standpoint, we blew that split if you will last quarter and now we have the split correctly. That $155 million goes from $155 million to $100 million and the difference really is just additional costs that we knew about, we just did not properly identify those in last call.

Understood. I appreciate that additional color.

On that, if you go back to -- this was not a differential from what our original thinking was on Synergy. So I don't want anyone to think that it is a change in our general thinking about the Synergy acquisition costs. The S4 was roughly $75 million. I have forgotten the exact number, $74 point something million and we ended up we will spend up out $85 million. $15 million of that $10 million difference or more than all the difference is the FTC litigation costs. So we did spend about $15 million more in litigation cost than we thought. Obviously we weren't expecting to litigate for a year.

And then we had some savings actually in the rest of it so we ended up being about $10 million over. If you look at our anticipated integration and acquisition and integration costs combined, right now we are thinking it would be roughly $10 million over.

Money well spent, Walt, on the litigation side there. Just one other final one for me. If you look at the Life Sciences segment, a little bit stronger than what we would have expected. Understood the consumables portion but on the capital side was a little surprised by that. Can you just walk us through maybe what you are seeing right now on the Life Sciences front more from maybe kind of a 30,000 foot perspective? Thank you so much.

Sure, Chris. I don't think we are seeing any significant different view of the Life Science Capital business than we have seen before that is order patterns have been fairly consistent and our backlogs are fairly consistent. It is just when you look at any given quarter, any given month since it tends -- it is a small business that comes in relatively large chunks -- it tends to be a little bit lumpier than the rest of our business. So we did have -- we've got a couple of nice quarters now in Life Science capital and we have been anticipating that.

We were weak six months or so ago. People were asking us why we were weak in Life Sciences. It is basically just the business is fairly steady and we have seen a pickup in our hydrogen peroxide product lines and so we do see that favorably and that is a good profitable product for us. So that is part of the operating profit, operating margin improvement both the volume coming through the plants as well as the mix to that kind of product line. But other than that, we see the same.

The other thing that comes through obviously in total in Life Sciences, the GEPCO acquisition we did and that is working just as we expected it to which we expected good performance and they are performing nicely. So that is pretty much as anticipated as well but it is a nice pick up.

Chris, just on a year-to-date basis through the third quarter, Life Sciences capital is up 4%. So as Walt said, we know this is a lumpy business but 4% for the year is good.

Thank you so much.

Jason Rodgers, Great Lakes Review.

Just a question, Walt, it is always good to get your thoughts on the hospital spending outlook both in the US and overseas as well as the UK, areas you might be excited about as well as areas of concern.

Sure. I will start with North America since that is the one that gets the most attention I suppose. And we have clearly seen again if you go back, we had a couple of years where we basically said it was flat and then maybe a year or so ago we said things looked like they are picking up and last quarter we said they might be picking up a little better than we thought even or a little more favorable and I think that has continued. So we are seeing nice trends. We are not seeing 20% improvements in I will call it long-term outlook but clearly our order rates have been quite strong last quarter quite strong. This quarter we had a good shipment quarter and yet we still increased the backlog. So and kind of looking out forward, it still looks pretty similar.

In terms of mix, which we are often asked about, I will call it the replacement business versus the large order business or project business that we have, we kind of saw it move back to kind of the normal levels kind of 70/30, 70% being replacement but we did have some exceptionally, some good strong orders in the month of December that are more project related so our projects were up a bit. And I don't know the weighted average over the last six months but it had been running pretty much normally and we picked up a little bit in the month of December. So we will see how that looks.

Looking out forward, our outlook or our pipeline looks pretty normal for us but also continues to stay at the levels that we have been seeing the last little bit so it continues to stay strong.

We do think we are doing nicely in terms of holding our fair share of the business but we also see the other people in our business, the capital business, reporting strong revenues and strong outlook so we know this is somewhat -- we think we are doing a nice job but we think the markets also picked up.

Outside the US, we consider EMEA, Europe and we have been weak there, Mainland Europe if you will or Europe as we normally think of it, is not strong but it has not been terrible for us. EMEA has been very -- or the Middle East I should say has been very difficult for us and pretty much everybody I think. And I think we see that continuing for a while given both the economic uncertainty with oil and then the uncertainty related to some of the geopolitical issues, we are not seeing a strong market down in that part of the world which is significant.

For us Asia-Pacific has picked up, we are less China centric than some other folks so although what China does does affect that area, Asia-Pacific has come back a bit. So we have seen some back to our normal levels. We were soft in Asia-Pacific.

And then Latin America conversely has been weak and we see some continued weakness there. Again, those economies that are based on either minerals or oil are pretty tough and so Brazil, Venezuela and a number of the countries in Latin America we are seeing some weakness. At a high level I think that is pretty much it.

All right, that was helpful. And just a question on R&D came in at the low 2% as a percent of sales. Is that about the level we should expect going forward or is that something you still have to finalize with your plan?

We want to work on that but I would say a couple of things. You may remember last quarter you were asking us about R&D being above normal amounts which hurt our operating income and so as we have said before, sometimes R&D comes in lumps and as you are doing a project, your building prototypes whatever, you can see $1 million or $2 million run through pretty quickly.

So some of that is just temporal but the other thing we have to consider is we are increasingly a service business and so we have that recurring revenue so when you apply our R&D spend to our total revenue, it looks much different than our R&D spend to the specific revenue the R&D is applied towards. So as you might expect, the businesses like US endoscopy that have a high concentration of new products and are very medical device oriented and product development dependent, their R&D spending is much more like what you would see in the other device sectors, in the high single digits, sometimes in the low double-digit kind of numbers depending on what we have going on. Whereas on the service side, it is effectively zero.

so at least at this time that is how we do it. We actually do R&D in service but it is service R&D. We don't capture it in that bucket and that is something actually I do want to think through some and we may be able -- we want to think through how we do that. We may be able to give some guidance on that going forward, we will see. But to the extent we do not capture it on our books as R&D, it just shows as expense.

Okay. Finally, where should we expect CapEx to end fiscal 2016 at and any early thoughts on fiscal 2017?

Yes, we have forecasted $135 million for the combined company for CapEx for fiscal year 2016. And then we will provide guidance in 2017 when we have our conference call in April or May.

Thanks a lot.

Larry Keusch, Raymond James.

Terrific. Good morning, everyone. So I got a lot of questions coming into the quarter from investors relative to FX and it is not surprising that there is this increased international exposure for you guys and the volatility of rates.

It might make sense just to again sort of provide some color on where your FX exposure is in terms of currencies and perhaps give us some thoughts on how you are thinking about FX and to the balance of the year?

Yes certainly, Larry. This is Mike. One of the issues that we definitely have is what we are comparing to. So our year-over-year comparison as we anniversary the Synergy Health acquisition, our comparisons will get a little bit different and they will shift and as I said earlier, that will cause our revenue to be more sensitive to fluctuations in currency than we are compared to legacy STERIS but also cause our bottom-line to be less sensitive to fluctuations in currency versus legacy STERIS.

So once we get to that point we will have a shift. That shift has already started. It is just we don't have a comparison to measure against.

If you look at it on an actual basis, Larry, our exposure clearly relates to the UK pound because as we translate the pound base because our second largest operating base and revenue base is in the UK and so any fluctuations to the pound will have an effect on us. And then the other places where we do businesses outside the US and the UK -- of course since we report in dollars doesn't have an effect -- outside the UK, the euro, would be a very strong component because we have a good size revenue base there.

And then everything else tends to be more from a manufacturing side of the equation, the cost side. So we have the Canadian dollar, the Mexican peso are significant in that. So those four currencies make up the bulk of our differential. But as Mike said it depends on what you are comparing to.

We have that exposure and actually this has moderated our income exposures. We are doing forecasting going forward. When we do our forecasts, say okay, now what is the impact of a change in currencies going forward? We are more naturally hedged now than we were and so we used to have fairly significant exposure if you will and then we were reverse of what most companies are, we tended to be positive if the dollar strengthened and negative if the dollar shrank. But that is going to moderate on the bottom line which is the one we care the most about obviously.

Larry, just to help you out even further, if you look at our forecast, what we have included in our forecast is based upon forward-looking rates as of December 31, 2015. What we have baked into our forecast is we have -- in the full-year the FX currency rates impact on revenue for the full year. Year-over-year compared to legacy STERIS will be about $28 million negative to the top line but about $20 million positive to EBIT and that is where the full fiscal year 2016 compared to the full fiscal year 2015 for legacy STERIS. Hopefully that helps.

That helps. Just one quick question on that. So am I understanding this correctly that in your -- in the plan that you basically have at this point you are using December 31, 2015 rates?

That is correct, Larry.

Okay, perfect. And then the second question just sort of bigger picture question I guess Walt, for you and I know you have been thinking a lot about this over the last year plus. But now that you have combined Isomedix and the Synergy Contract Sterilization business, what is the growth strategy for AST and can you weave in there a little bit of -- where do you want to go as it relates to gamma versus e-beam versus ETO and maybe just an update on any cobalt pricing and supply?

Sure. I will step back a little bit I guess and say you have to remember what the basis of this business is and the basis of this business is the medical device industry, specifically those who have devices that touch the bloodstream so they have to be sterile. And what we will be doing is locating facilities and growing capacity where we believe the device industry is growing and going. We were historically if you will unhedged for those businesses that were moving outside the United States and decided to sterilize where they manufacture. Manufacturers have two choices. They can manufacture one place, send it to the US and distribution facility and sterilize near the distribution facilities or they can manufacture OUS and sterilize near the manufacturing point and the reverse is true for things that are built in the US and shipped to other places. So we will locate in or around these centers of manufacturing and/or centers of distribution around the world.

We now have a much better footprint to follow them wherever they go. So that is number one.

Number two, in terms of technologies as you point out there are two basic technologies, gas and radiation. We are not overwhelmingly one way or the other on gas versus sterilization. It depends on the technologies the manufacturers need based on their design and their packaging requirements. Although we tend to be a bit heavier on the radiation side than we are on the gas side of the equation. So we are stronger on the radiation side.

In terms of cobalt and e-beam and potentially other forms of radiation, clearly in terms of that we will be watching that and working with the manufacturers to see what their design requirements are and how they want to process. But it is clear that we have now a much larger footprint in the e-beam side of the business and that was purposeful. We have grown our footprint in e-beam. As you know, now we have two new factories that are coming up here in the next few months in the US that have significant e-beam capacity so we are growing our e-beam capacity. Synergy also has e-beam capacity around the world so STERIS in total now is again much more hedged to cobalt, e-Beam than we were before whereas STERIS was historically almost completely cobalt.

In terms of cobalt supply and pricing as you know, we have intermediate to long-term contracts depending on what you think the long-term is. Not 30-year contracts but not one-year contracts, for our cobalt supply. We at this point although we have effectively two potential sources of supply in the world, we are not concerned about our source of supply at this point.

Great. Thanks very much. Appreciate it.

Mit Ramgopal, Sidoti.

Good morning. First I was just wondering if you can help us a little in terms of as you look at cross-selling opportunities now that you are combined with Synergy, are you seeing heightened customer interest and do you need to invest more for example in your sales force or are you pretty comfortable with where the levels are right now?

I guess I've got ask a question. Are you talking mainly about the ST side or mainly about the healthcare side?

Actually both, thanks.

I should have just answered one and gone with it. Just kidding. On the ST side, it is -- we were very strong as was Synergy with the multinationals in this space. It does give them more opportunity to think about working with us in a more seamless fashion. So they are happy with that. We pretty much cover North American and they pretty much covered Europe and Asia so we don't see a requirement for expansion of salesforce based on that. We think we are well covered. If anything there might be some modest synergies there but not big numbers, you would never notice either direction.

On the Healthcare side of the business, it is somewhat similar in that Synergy was clearly stronger in the UK market and other places in Europe and they had developed and were developing a sales force in the United States. We clearly have seen as I mentioned we also as you may recall, IMS had a portion of its business that was also into the sterilization outsourcing of CSDs and so we have been able to put those two groups together as I mentioned and we have seen a reduction in those costs. We will see an ongoing reduction in those costs and we believe we will be able to do that. We will be adding in that space but we will be able to do it more efficiently working as one unit than we would have as two. So we do think there are efficiencies there.

Thanks. Quickly, Walt, you said when you look at the cost savings you expect $5 million by the end of fiscal 2016 getting up to about $40 million annualized in a couple of years. If you could remind us where most of those savings or where you expect to get most of it from?

Sure. I will go back to the S4 and there might be some minor variations but we had a couple of million dollars as I recall buried in the AST business, a little bit more, $4 million, $5 million in HSS business as we now call it or Health Service business as we now call it of cost synergies. The balance was in for lack of better terms, corporate and back office. Corporate is a pretty big piece, a CFO, CEO and a couple of senior type executives go a long way on those kind of numbers and then the balance is back office. The back office will take longer than the others so it has a longer runway. But that is generally where it is.

Now if I were a betting man, if I look at our history in doing these things, we always have surprises both ways. Where we I think if anything were probably conservative, would be in the businesses themselves. If I were a betting man I would bet the businesses outperform. And sometimes the way we split it in the S4 if we don't know exactly which business it goes into, we leave it in corporate so if I were a betting man, we will see more inside the businesses when we report them out over time either because we didn't know exactly where to put it or because they outperform the numbers that would be our experience from past times.

And then if I were a betting man, the back office ones are always the hardest to get. We will get them, not hardest difficult, hardest in time because oftentimes we have to change information systems, we have to do things to lean out the processes before we get the benefits of that and so if I were a betting person on balance, we will get whatever we thought we were going to get there but if it were going to be faster or slower I would bet on slower. In total, I'm very comfortable with what we have out in place.

That's great. Thanks for taking the questions.

(Operator Instructions). Speakers, I show no other questions at this time. I will turn the call back for any closing remarks.

Thanks everybody for joining us today and for your continued support in STERIS and we will talk to you next quarter.

Thank you for participating. You may now disconnect.