STERIS plc (STE) 2017 Q1 法說會逐字稿

Welcome to the STERIS fiscal 2017 first-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 request 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. Ma'am, you may begin.

Thank you, Olive, and good morning everyone. Joining us on today's call as usual we have Walt Rosebrough, our President and CEO, and Mike Tokich, our Senior Vice President, CFO and Treasurer.

I have a few words of caution as usual 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 PLC's, STERIS Corporation 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 statements 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, constant currency, organic revenues 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 to supplemental financial information used by management and the Board of Directors and 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 flows from operating activities less purchases of property, plant, equipment and intangibles, net capital expenditures less 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 Mike.

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

Before I get into the numbers, let me remind you that all prior-year comparisons are to legacy STERIS unless otherwise noted.

We had a good start to our fiscal year with 6% constant currency organic revenue growth along with contributions from acquisitions. Our revenue growth was almost entirely driven by volume as price was just slightly favorable and foreign currency was unfavorable to revenue by 40 basis points.

Legacy Synergy revenue in constant currency grew low single digits during the quarter which is in line with our expectations. This number however is getting increasingly difficult to accurately estimate as we continue to move down the path of integrating our businesses.

Gross margin as a percentage of revenue for the quarter decreased 370 basis points to 38.2%. As expected, Synergy negatively impacted year-over-year gross margin by approximately 500 basis points.

As we have stated before, we found that Synergy used a different policy to classify cost between COGS and SG&A as compared to legacy STERIS. Offsetting that, we had favorability from foreign currency of 50 basis points, a 40 basis point increase from the suspension of the medical device excise tax and a 30 basis point improvement from pricing and productivity.

SG&A expense as a percentage of revenue in the quarter declined 480 basis points to 20% of revenue more than offsetting the change in gross margin as a percentage of revenue due mainly to Synergy Health.

EBIT margin at 15.9% of revenue represents a 200 basis point improvement as compared to the prior year quarter. EBIT margin benefited from the impact of the positive contributors to gross margin as well as lower SG&A and R&D expenses as a percentage of revenue. The effective tax rate was 24.5%, slightly below our anticipated full-year rate of 25% due to favorable discrete item adjustments. We continue to expect an effective tax rate of approximately 25% for the full year.

Net income in the quarter increased to $68.4 million while earnings per diluted share for the quarter increased 27% to $0.79.

Moving on to our segment results, our Healthcare Products segment revenue grew 8% in the quarter driven by 3% organic revenue growth and contributions from acquisitions. Consumable revenue increased 20% of which 9 percentage points was attributable to organic growth.

Capital equipment revenue in the quarter was flat. We are pleased with our order activity in healthcare capital equipment in the quarter and feel good about the year as backlog ended the quarter at $149 million, an increase of 24% year-over-year. Similar to last quarter, we are seeing an uptick in project orders which tend to have longer lead times than replacement orders.

Operating margins for Healthcare Products increased 110 basis points to 12.3% of revenue in the quarter. The increase is due primarily to higher volumes, favorable foreign currency, the suspension of the medical device excise tax somewhat offset by higher R&D expenses.

Our Healthcare Specialty Services segment reported revenue for the quarter of $157.9 million reflecting the addition of Synergy Health along with 5% organic revenue growth. Healthcare Specialty Services operating income decreased slightly in the quarter due primarily to the lower than anticipated performance in our IMS business which Walt will discuss in more detail in a moment.

Applied Sterilization Technologies had a good quarter with $116.6 million in revenue. The increase in revenue was driven by the addition of Synergy Health and solid organic revenue growth of 7% for the quarter. Applied Sterilization Technologies operating margin increased to 34% of revenue due primarily to the increase in volume and the addition of Synergy.

Life Sciences revenue grew 43% in the first quarter driven by 18% organic revenue growth and contributions from acquisitions. Capital equipment revenue was strong in the quarter although we had somewhat easy comparisons with the first quarter of last year and backlog in Life Sciences ended the quarter at $41.3 million.

Consumable revenue grew 62% partly due to the acquisition of GEPCO and partly due to midteens organic revenue growth. Service revenue grew 20% due to low single-digit organic revenue growth plus the addition of new service offerings.

Life Sciences first-quarter operating margin increased to 30.1% of revenue due to a favorable mix shift towards consumables, an increase in volume and lower operating expenses as a percentage of revenue.

In terms of the balance sheet, we ended the quarter with $242.4 million of cash and approximately $1.55 billion in total debt. We continue to reduce our debt to EBITDA leverage which was about 2.6 times at quarter end.

Our DSO was 62 days at quarter end, an increase of five days as compared to last year. As we have said before, the increase is based on the fact that we include 100% of an acquisition's accounts receivable balance but only include the revenue since we have acquired them in our calculation. Our DSO would be materially the same taking the acquisition's relevant revenue into account.

Free cash flow for the first three months of $49.5 million, a substantial increase from the prior year and a solid start to the fiscal year. Included in free cash flow for the quarter is approximately $4 million of cash expenses related to the integration of acquisitions. Capital spending was $35.4 million in the quarter while depreciation and amortization was $53.8 million.

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

Thanks, Mike, and good morning, everyone. Michael has covered the quarter so I will focus on our recent transactions and our outlook for the year.

We have had a strong and busy start to the year executing on the strategies we have put in place while working to meet the needs of our customers. Let me recap a few highlights.

On the first of July, we completed the sale of our UK Linen business for approximately GBP50 million. For fiscal 2017, that business was expected to generate approximately $40 million in revenue for the balance of the year. We used some of the proceeds from that sale just a few weeks later when we paid about GBP27 million to buy Medisafe Holdings.

Medisafe is a UK manufacturer of washer disinfector equipment and it also markets related consumables and services. We paid about 2 times revenue for the business which carries operating margins in line with our Healthcare Products segment.

We were pleased to welcome Medisafe to STERIS as their products and services complement our global healthcare offering by providing washer, R&D and production in the UK.

Now of course both of these transactions occurred after the recent Brexit vote. Although we have exited UK Linens, we are not backing away from our plans to grow in the UK. We are watching the UK Brexit politics like everyone else but our initial belief is that the result of Brexit on our business in the near-term is likely to be primarily currency fluctuations.

We were obviously impacted by changes in the pound when translated to US dollars. As we have described in the past, the UK is about 10% of our revenue. Given the nature of the business that we have in the UK, most of the revenue and cost is UK in-country, so we have a natural cost hedge to help offset the impact of fluctuations in the British pound.

As a reminder, the Synergy combination itself was also a natural hedge to the legacy STERIS currency position in terms of overall Company profitability.

Our profitability now generally benefits from a strong euro and a strong British pound and a weak peso and a weak Canadian dollar when compared to the US dollar.

As a result of these two business development actions and reflecting updated foreign currency rates, we are adjusting our revenue outlook for fiscal 2017. Let me break down the pieces a bit as we do have a few moving parts.

Total Company revenue growth is now expected to be in the range of 22% to 23%. Compared with our original outlook, we are reducing our revenue growth expectations by 300 basis points to reflect the UK Linen and Medisafe transactions we have completed this fiscal year, anticipated changes in foreign currency and a reduction in revenue growth expectations for our IMS business. Since the UK Linen business divestiture, the Medisafe acquisition and the exchange-rate impacts are fairly straightforward, let me spend some time on IMS.

We had a second consecutive nice growth year in IMS in fiscal 2016 ending the year with double-digit organic revenue growth. We planned to continue to grow at a similar level in FY17. Our first quarter started slower than anticipated at IMS with mid single-digit organic revenue growth, and we are tempering our IMS expectations for the full-year as a result. As Mike mentioned, this also impacted IMS profitability somewhat in Q1 as our investments were aligned with a faster growth business plan.

We will reduce the growth rate of IMS spending for the balance of the year, so we now expect to see an improvement in that unit's profitability compared with Q1 levels in the second half of the fiscal year. The combination of all these moving pieces results in an expectation of approximately 6% organic revenue growth for the year compared with our original 7% growth outlook.

To be clear for your modeling purposes, we have stripped the UK Linen business out of all relevant periods in our current estimate of organic growth.

Although we have reduced our revenue growth expectations, our adjusted EPS range is unchanged at $3.85 to $4.00 per diluted share. As we mentioned before, the addition of Synergy to legacy STERIS has somewhat increased revenue volatility to foreign exchange fluctuations in US dollar terms. However, the impact on profitability is more naturally hedged than it was before the combination. So the total impact of changes in foreign currency, the sale of the UK Linen business and the acquisition of Medisafe all combined is anticipated to create about $0.05 of dilution in adjusted EPS which can be absorbed in the EPS outlook range.

We currently anticipate that the previously discussed IMS earnings shortfall will be made up by improvements in the rest of the business, as we continue to see strength in our North American healthcare, our global AST and global life science businesses.

As we said last quarter, we continue to review our portfolio products and services to determine what to invest in going forward. We are working on a number of possible actions, including both disposal of non-core assets and tuck-in acquisitions, which may be completed this fiscal year. We will update you on our actions and the relevant impact to our outlook on quarterly earnings calls as appropriate. While this may create some minor short-term modeling and forecasting challenges, we are working to redeploy our capital in order to generate greater value over the longer term.

Our FY17 outlook for the remaining financial measures, free cash flow, the effective tax rate, capital expenditures and cost synergies from the combination with Synergy Health which continues to go nicely, remain unchanged for the fiscal year, as do our capital allocation priorities.

With that, I will turn the call over to Julie to begin Q&A.

Thank you, Walt and Mike, for your comments. Olive, will you please give the instructions and we will get started with Q&A?

(Operator Instructions). Larry Keusch, Raymond James.

Thank you. Good morning, everyone. So Walt, I was hoping we could start on IMS and maybe give us some help understanding what you are seeing out there that led to the lower performance starting out the year and then how are you thinking about -- again, more from a revenue perspective through the year? I understand obviously that you are going to readjust your costs to be more consistent but just any thoughts around that would be helpful.

Sure, Larry. We see this as a temporal issue, not any kind of a permanent issue if you will. We have a natural growth rate. The general growth rate of that business in total is roughly in line with healthcare. The question is how much business moves from hospitals doing it themselves or from the OEMs moving to third-party participants. And there we have seen double-digit numbers. We expect to continue to see double-digit kind of numbers.

But within that, there is always some churn, some going to us, from us, to us, from us. We actually ended last year stronger than we expected and so we had quite positive churn, and we probably got a little more optimistic than we should about that. So we have had some negative churn now in this current timeframe.

So it takes some time to work through that because we invested presuming we would hold all of that business and continue to take some. So we are a little bit behind our current forecast in that kind of business. It is not like capital where you get a big order and you lose a big order. It is an ongoing business.

So in the long-term we don't expect it to be any different than our previous thinking, it is just a short-term aberration in our view.

Okay, that is helpful. Two other ones. I guess one for you, Walt, and then for Mike. For you again, obviously saw that you increased the dividend that is again consistent with your focus on maintaining and actually growing the dividend. You also announced a $300 million share repurchase which is about 5% of the current market cap so nice size. And I recognize that will be tapped into overtime.

But could you just talk a little bit again about where you see sort of deleveraging and share repurchase priorities over the next couple of years?

Then the second question is just on the HSS margins which were 2%. Again, I assume a lot of that has to do with IMS but well below the kind of double-digit bogie that you always talk about and again wanted to take your temperature on what is driving the 2% which is down sequentially and what drives it up?

Sure. I guess I will break -- two basic questions, one is a capital allocation strategy and the other one is the profitability in that business segment.

On the capital allocation question, we don't feel any differently and we have moved [debt leverage] (corrected by company after the call) down nicely already. Mike mentioned we are down to 2.6. Someplace in the 2, 2.2, 2.3 range, around 2-ish if you will, is kind of what we think the sweet spot is and so we will be working our way down. And we continue to plan to work our way down so that still is the priority.

In terms of the rest of the capital allocation, we are going to invest in our current businesses. We will invest in the tuck-in type of acquisitions to add on to our businesses, and then stock buybacks is the third. I should mention that we had I think about $100 million left, about $80 million left in our previous authorization when we moved to Synergy PLC and in that process we needed to get a reauthorization from shareholders to do anything. So we actually had zero authorization going into this quarter.

So this is just, I will call for lack of better terms, a re-up of our normal type of authorization. We have done this over the last seven or eight years. This was the third $300 million authorization. So it is not a change in philosophy or change in thinking.

Generally speaking unless we see a dearth of acquisition type opportunities or tuck-in opportunities, we would expect to be purchasing shares only to offset dilution. That is our general thinking. That I think answers that one and that is really no change from what we have been talking about now since we announced the Synergy deal.

The second thing is, as you know, I don't like anything that is making single-digit ROS. There are differences in businesses. Our AST business has a much higher capital requirement so it has to make higher ROS to make appropriate ROIC, and that is in the long run we create value by growing things and having ROIC above our cost of capital. That is what we want to do, and to the extent we can get even higher ROC, the better.

So there are different ROS criteria for the businesses to get the appropriate ROIC. But clearly those are not where we would want them to be or would like them to be. We do expect them to see double digits. But part of that is we've got a combination of some businesses that are relatively low ROIC, like the linen business -- combined with ROS or ROIC for that matter like the linen businesses -- as well as businesses where we are investing because we believe in the long-term they will have good profitability because we have seen that model in the UK.

So it is a combination of those things. As you know, I don't put real targets on an endpoint profitability. But I definitely like to see double digits, and I don't see us feeling any differently about that than we did a year ago or two years ago or three years ago. But we do see investment opportunities here, and growth opportunities and we anticipate doing that.

Very good. Thank you very much.

Matt Mishan, KeyBank.

This is actually Aubrey on for Matt. Can you hear me okay? Great. Thanks for taking the questions.

First I was hoping maybe you could talk a little bit about what else is going on in the rest of the HSS segment outside of IMS? I know you still have the Netherlands and the UK based Linens business there as well as the outsourced Central Sterile Processing. Are there any changes in what you are seeing across those businesses?

No, and I think you may have meant the US linens business because the UK business we sold. We do both have the US and the Netherlands businesses. As we have mentioned in the past, those are relatively low margin businesses and so we haven't seen a significant change. They are still relatively low margin, low growth businesses and we haven't seen a change there.

In the HSS business again, that business is a profitable business in the UK and we are investing in other parts of the world to grow that business to duplicate the UK model. So again no change. We still have a lot of interest from customers who are talking to us about potential outsourcing in the US. But again, as we've said many, many times, it is going to take time for that to come to fruition, and we do see it as a nascent business. We don't anticipate any significant revenue or profitability in that business certainly in this year, and it is going to be a while before it becomes a material part of the total STERIS profitability map.

Okay. Got it. Just last one, if you would be able to just give a little bit more detail on how you are going to be offsetting that $0.05 headwind that you called out from a combination of Netherlands and sale, IMS, FX, etc., why you have confidence in reiterating your EPS guidance.

First of all, it is a range, not a number and so we have a $0.15 range there. And this is a $0.15 range and it is a $0.05 headwind. So that certainly is encompassed in that kind of range, and obviously we didn't have our point forecast of where we are at the bottom of that range -- on the bottom number of the range. So that is one answer.

The second answer is we do see strength in the North American operation in general in healthcare, and in the global operations in both life science and AST. So we have some very strong positive feelings about that. The rest of the globe for healthcare is a little tough, and so we are just mixing and matching all those components, and at this point in time in the year, we did not see it appropriate to change the range.

Got it. Thanks.

David Turkaly, JMP Securities.

Thanks. I know you mentioned on the Healthcare Products side, the projects again and obviously we see the increase in the backlog. I am just curious, do you expect that trend to continue throughout the year and if so, any color on why you think that is the case now?

The short answer is we are seeing real strength and we are not alone in that. The other guys in the capital business in North America are seeing real strength there in both orders and generally speaking in backlog. And we also have visibility in the pipeline as we mentioned several times. Usually three to six months of pretty clear visibility in the pipeline, and our pipeline looks the same as our orders. It is just strong in North America right now. But that can always change, but at this point in time, we are seeing real strength and it has been double-digit kind of strength now for six or nine months or so. And it looks like the same kind of strength out in the future. So out in the future meaning six months out or nine months out. So it is a combination of replacement orders are staying strong and projects are increasing and you put those together and you get some nice increases.

And then on the life science side, I know you mentioned some easy comps but midteens organic growth I guess just any color on sort of what your expectations are there and what is driving that mid teens organic growth? I know in the past there were some times where that was a little slower but I guess what are you seeing that can give you comfort that that can continue?

I'm going to separate the capital piece from the rest of the consumables and service parts. On the capital side, that business has now been steady for five years maybe and our backlog has bounced between $40 million and $45 million roughly for five years. So I don't see any material long-term change there. Mix has changed and our willingness to accept no profit business has changed and so the profitability from that business has changed significantly for the good.

Now when we look at the consumable side, there are a couple of pieces that make that up. First of all, our chemistry business has just been quite strong and we have a nice set of chemistries and we've mentioned that we have also added some chemistries to our portfolio and so those are just picking up speed. So it is a pure organic growing business. We do think we are targeted at good spots. We are targeted at vaccines and biologics which are nice growing pieces of the pharmaceutical business. So we are just targeted in the right spots and we have some nice products. We have had good organic growth and we see that continuing.

Then the acquisition of our barrier products which was the company called GEPCO, which is also consumable products in life science, have also been strong. They had good growth, but we also have the ability -- they were essentially a US company -- and so we have a global footprint in the sales force, so we have the ability to move those products to global customers outside the United States.

It is a real opportunity for us to grow. So we have just seen very nice positive movement in life science, and we continue to expect that on the consumable side of the business.

Thank you very much.

Jason Rodgers, Great Lakes Review.

Just wanted to follow up on the Life Science question. Did notice you were facing some tougher comps in the next few quarters here. Do you expect the growth rate to slow a little due to that or do you think some of the positive factors you mentioned will more than offset the comp?

On the consumable side, I think the comps are fine and the growth rates are fine. On the capital side, we had some really nice shipments I want to say in the mid-part of last year, and so we will clearly not see these kind of growth rates going forward.

I think to say the capital business is flat to slightly increasing is the right kind of general way to think about it for the year and for longer term. It is a 40% growth for this quarter but that was just because of easy comps and a strong quarter, not a long-term change.

The linen business that was sold, what was the expected operating profit for fiscal 2017 of that business?

We really haven't disclosed that, Jason. I mean we've disclosed the size of the business and been clear that the margins were better than segment average -- kind of high single digits and left it at that.

And looking at your healthcare product revenue, what percent of that is outside the US and how do the margins compare?

Well, Healthcare Products it is more dominant in the US. I don't know the number off the top of my head but it is small, say in the 15% to 20% kind of range. Mike is looking for it as we speak.

But part of that is because there is a piece of that business that came from Synergy. I just don't happen to -- and it is predominantly OUS. I don't happen to have that number in my head. But the margins OUS are somewhat different because we go through distributors. So we generally do not get the "quote-unquote" sales margin or distributor margin. But we do get the design and manufacturing margin. So that is the predominant difference.

Our pricing outside the US is typically a little bit higher because of transportation and the cost of goods, distribution costs. I will call it the end customer's price is typically higher because of those things. But we don't get the distribution margin and we often don't get the service that goes along with it like the installation. Some of the service distributors tend to do that. So at a high level that is the case on capital. On consumables they are roughly similar.

About 70% of our Healthcare Products revenues come outside the US.

All right, that is helpful.

Inside the US.

Sorry, the other way. Inside the US. Yes.

That is what I thought. Finally any material change outside the US generally from hospitals, any improvements or deterioration in any regions of note?

All you have to do is ask what countries are experiencing fiscal difficulty because most countries outside the US are, for lack of better terms, are largely national healthcare programs. So it is government budgets. So all of the countries that are mineral-based or oil-based, all is a big word, but generally speaking those that are mineral-based or oil-based are having difficulty in their government budgets -- and as a result are having difficulty in their healthcare budgets.

So kind of off the top of my head in Latin America, Venezuela is just really, really challenged. Brazil is quite challenged. Moving to the Middle East, a big part of the Middle East which was a very strong healthcare business has slowed down significantly and Saudi Arabia in particular which was a very good healthcare business has the dual challenge of the weaker oil prices as well as having to fund some war issues at the same time. So Saudi is particularly challenged. But much of the Middle East, the oil-based economies are challenged.

We have seen actually a bit of a pickup in Asia, not China per se although we have actually done nicely in China. It is a small business for us but not so much China but the areas outside -- so Southeast Asia has clearly been picking up for us. But it is still challenged. And Australia again, a mineral-based economy, has been challenged the last 12 or 18 months.

Thanks a lot.

(Operator Instructions). Chris Cooley, Stephens.

Good morning, thanks for taking the questions. Can we start, Mike, just going back and looking at AST profit here in the quarter? A little bit stronger than what we were modeling there. In fact, 400 basis point stronger. I just want to get a better understanding, is that as you are starting to get greater utilization of the increase that you have done in capacity primarily in the US, margins are improving. Are you seeing any kind of cut to your raw material or I should say cobalt 60 costs or is it just maybe mix? I am just trying to get a little bit better understanding of what is driving that level of profitability? Then I have a couple of quick follow-ups.

Certainly, Chris. So the 34% operating margin that you mentioned with AST, I mean a lot of that is -- and we have talked about this before -- is we have a high fixed cost base and we did see exceptional volume increases this quarter so that volume once we cover the fixed cost is extremely profitable for us and that is the major driver.

On top of that, the integration with Synergy Health is actually moving along very nicely so we will probably get a little bit of a benefit there as we integrate our businesses. But I would say first and foremost it is the volume piece that is driving the large increase.

I would mention, Chris, we are bringing a number of plants online and when we are bringing plants online, it means the ones that are currently running are full. So we are running capacity-like numbers in a lot of places and that is a good time to be making some money. We would expect some averaging of that over time.

We are trying to have them not come all at once so we don't have this nice build up and then a cliff, nice build up and a cliff. We tried to even them out over periods of time but there is some, if you look at a plant by plant basis, it does look like that. We are now getting to be good enough size, and we have 60 facilities roughly, and so we are getting to be a large enough size that one or two facilities doesn't crush us. But you notice them when they come on board.

Understood. And if I could just revisit healthcare capital, the growth in the backlog there again very briefly. Historically I think that has been about a 75% to 80% replacement, 20% to 25% new project build type business. Could you just give us maybe a little bit more color there and I apologize if I missed it at the outset in terms of that mix here the last several quarters? Because I know in your prepared remarks you have mentioned greater growth in new project build. I'm just trying to think about what that incremental growth is longer-term potentially for both consumables and service as you pull that through the backlog?

Chris, Mike is looking for the number but while he does, consumables are not really impacted by that. They are sometimes because we go through distribution and sometimes our distributors stock up a little more, stock a little less, or the hospitals don't quite catch their seasonality correct. But that tends to be minor fluctuations.

On the capital side, the 75/25 is roughly a good rule but we have clearly -- it goes in cycles and we had been to where replacement was the stronger piece a couple of years ago. Projects have been picking up and they are continuing to pick up.

So again, Mike is doing some math right now. I will let him report it but it has clearly picked up the last six months or eight months or so. The outlook is also that way, there is more project kind of business out there.

Chris, we have gone from roughly 70/30 replacement versus projects and we are more looking like closer to now 60/40 so we have made a pretty substantial switch with the replacement versus the projects.

Okay, that is helpful. Just lastly, cash flow was strong, approximately $50 million here in the quarter. Can you just remind us if there's anything different in terms of the seasonality when we think about historically the way we saw corporate cash flow build through the course of the year now that this is going to be our first full year with Synergy? Thanks.

I would say from a cash flow standpoint, the seasonality will be tracking to income and for the most part, legacy STERIS has typically been more second-half weighted, legacy Synergy has been pretty much even throughout the year. So I don't think it would be that much of a directional change from what we have seen historically.

AST is generally -- all things being equal, there is growth across, but all things being equal, AST tends to be stronger in the first half and Synergy was more AST oriented. And the rest of STERIS has tended to be a little more back half particularly the capital side. So it kind of mixes and matches.

I would still expect it to be generally speaking for seasonality a little stronger in the back half, A, just due to growth in general and B, because the back half tends to be a little more weighted particularly on the capital side.

Understood. Thanks so much.

Larry Keusch, Raymond James.

Just one more for you guys. Walt and Mike, you have sort of alluded to some of this through your comments but could you talk a little bit about just how the integration of Synergy is going as you put those two businesses together? And then there was a little bit of confusion in last quarter's conference call as it related to the outlook for the cost synergies. I noticed that you indicated that you are looking for and still expecting the $15 million for this year but again help us think about the $40 million that you kind of initially targeted?

First, I would say there are basically three projects in this integration and each of the two major businesses that are integrated. The HSS, IMS business is one, and the AST business from both sides or formerly Isomedix and AST business the other. The businesses integration for all intents and purposes is almost complete. That is the organization structures and people and all those things. Those integration teams are down to just a few items with the exception of the classic IT, where we are trying to get on common systems and all that stuff, which is much more like the central office integration functions.

But in terms of what I will call the business sales force, those kinds of things, we are coming into the home stretch if not in the home stretch and it has gone nicely, just full stop nicely.

The longer-term issues relate to systems, getting on common systems. Both getting all the back office people -- whether that is human resources, IT, finance -- those systems take longer to integrate. And so I will call it the long-tailed systems and that project team is still heavily working on their part of the integration not the least of which is things like legal structure type things. Because we had -- I've forgotten exactly -- but 60 0or 70 legal entities in our business and they had 60 or 70 legal entities in their business. We would like to get to 60 or 70 legal entities and that just takes time with lawyers and accountants and those kind of things. It saves us money in the long run because we don't have to do 140 statutory reports, we do 60 or 70. So those kinds of things are taking the time, and that was always expected.

Now to come down to the bottom line side of it, we hit our $5 million that we expected last year. We are very comfortable with our $15 million forecast for this year and we are very comfortable with our $40 million or more now total forecast over the longer period of time.

And whether $2 million or $3 million of it slides into 2019 instead of 2018, my own view is we will probably hit 2018 and have a little extra that we can maybe slide into 2019. But at a high level, any way you would look at it, we are quite comfortable with the numbers that we have in place.

Okay, terrific. Thanks very much. Appreciate it.

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

Thank you, Olive, and thank you everybody for joining us this morning. We will talk to you again soon.

Thank you for participating. You may now disconnect.