STERIS plc (STE) 2017 Q2 法說會逐字稿

Welcome to the STERIS fiscal 2017 second-quarter conference call. All lines will remain in listen-only until the question-and-answer session. At that time, instructions will be given should you wish to participate. At the request of STERIS, today's call will be recorded for instant replay.

I'd like to introduce today's host, Julie Winter, Director of Investor Relations. Ma'am, you may begin.

Thank you Amber. Good morning everyone. Joining me 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

I do have a few 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 expressed 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's and Synergy's previous Securities filings. Many of these important factors are outside of STERIS's control. No assurances can be provided as to any results or the timing of any outcomes 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's SEC filings are available through the Company and on our website.

Adjusted earnings per diluted share, segment operating income, constant currency, organic growth 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 in their financial analysis and operational decision-making.

STERIS's 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, plus proceeds from the sale of plant, property, 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.

Thanks Julie, and good morning to all of you. Before Mike reviews the quarter, I thought I would provide some high-level commentary on our first half and outlook, as well as an update on our strategies.

We said last quarter that we have had a very busy start to the year, and that continued into the second quarter. We have executed on our strategies of divesting non-core assets and acquiring tuck-in businesses.

I'd like to spend some time on our actions this fiscal year to help put the total impact of our efforts in perspective. We completed the divestiture of our skincare product line at the end of August, which had annual revenues of less than $50 million. Also at the end of August, we divested two small lab businesses that were part of legacy Synergy AST. Total annual revenue from the lab businesses was less than $15 million.

On the acquisition front, early in the quarter, we purchased Medisafe, which we discussed in detail on our August call. Since then, we've also purchased three businesses in the instrument repair space, two of which are in the UK. The repair businesses are less than $10 million in total revenue.

The businesses we divested were outside our current strategic interest and generally lower in growth rate and lower return on invested capital in our hands. The businesses we are acquiring are in our strategic window and provide the opportunity for higher growth and higher ROIC.

We remain committed to our capital allocation priorities: maintaining our dividend relative to our growth, investing for organic growth in our current businesses, targeting acquisitions in adjacent product or market areas, reducing our total Company leverage, and finally, share repurchases to offset dilution. We have used the inflow of cash from our robust operations and divestitures I have already mentioned to acquire tuck-in businesses, pay down debt, and repurchase shares. While debt has been reduced by over $135 million since closing Synergy, we have also bought about $58 million in stock, all in Q2, acquiring just over 819,000 shares.

Today marks the one-year anniversary of our combination with Synergy Health. In many ways, it seems like we have been together for longer than 12 months. Our teams have integrated very well with similar corporate cultures and values helping the transaction. Our integration efforts within the operating businesses is nearly complete, and we are making good progress on the systems work and other efforts necessary to generate anticipated back-office efficiencies.

As we stand today, we now believe that we will exceed our cost savings targets for this fiscal year as we have been successful in accelerating some cost savings originally anticipated in fiscal 2018. Thus, we now expect about $20 million in cost savings this fiscal year and $15 million in fiscal 2018. As I have alluded to before, we now believe we will exceed the $40 million overall cost savings, which was the high end of our $30 million to $40 million target that we set at the time of the combination, but that will take some additional time.

Looking at our results for the first half of the fiscal year, we have had a good first half overall with 5% constant currency organic revenue growth. Our revenue in the second quarter was a bit lighter than we anticipated, but we are pleased with the trends in the first half.

Our Healthcare Products capital equipment shipments have been flat so far this year, but we continue to believe that the record-setting backlog we have accumulated will allow us to have strong shipments in the second half of the year. And our pipeline for capital orders appears to remain solid into the future. For the full year, we expect revenue growth in healthcare capital equipment.

Our HSS segment clearly has the most opportunity for profit improvement and has the most noise in its numbers, given acquisitions and divestitures. Looking at the total segment, we've seen a contraction in the legacy Synergy Linen and SterilMed businesses. In addition, the legacy Synergy outsource sterile processing business in Europe has had its growth masked by the decline of the British pound and euro.

In our IMS business, we have grown 4% organically in the first half and continue to expect mid-single-digit growth this fiscal year with a return to more normalized operating margins over the second half of the year.

Life Sciences and AST have both shown strong performance in the first half of the fiscal year driven by solid organic revenue growth and contributions from acquisitions.

I would remind everyone that the AST business will face an FX headwind in its year-to-year comparisons for the second half of the year as the combination anniversaries. That is because the Synergy AST business is largely denominated in euro and British pounds. However, the legacy Synergy AST business has performed very well on a constant currency basis.

Based on our first-half performance and expectations for a strong second half, we are maintaining our constant currency organic revenue growth outlook of 6% for the year. We are at 5% for the first half with no growth in hospital capital equipment sales, so we believe 6% for the year is achievable. And as we stated last quarter, to be clear, we have stripped out the divestitures from the prior year in calculating our organic revenue growth. We expect solid organic constant currency revenue growth from all four segments on this basis.

I would like to comment briefly on the impact of currency movements specifically related to the British pound. As we've stated in the past, we now have somewhat of a natural currency hedge in terms of overall Company profitability. Even with the significant devaluation of the pound so far this fiscal year, we are holding about neutral due to currency fluctuations on the bottom line based on our exposure to foreign currencies. In our case, the weakness in the peso and Canadian dollar has helped to reduce our costs enough to offset the negative impact from the pound and euro this fiscal year on earnings.

From a revenue perspective, the devaluation of the British pound and strengthen of the US dollar is negatively impacting revenue. In total, we anticipate an FX headwind of approximately $25 million in revenue for the full fiscal year as compared to our original guidance. Largely as a result of divestitures and the slowdown in growth outside of the US, we are updating our expectations for total Company revenue for the fiscal year, and now expect total Company revenue growth in the range of 19% to 20%.

We are maintaining our original full-year outlook for earnings per diluted share in the range of $3.85 to $4.00, despite the substantial decline in revenue from our original guidance. Compared to our original outlook, divestitures will reduce revenue by about $90 million in fiscal 2017 while trimming earnings per share nearly $0.10. $0.05 of that is from the UK Linen sale with the balance being a combination of our other divestitures. The businesses we acquired will add revenue of about $20 million in fiscal 2017 and add around $0.05 in EPS this fiscal year. For this year, the acceleration of cost synergies related to the Synergy combination will approximately offset the net negative the bottom line impact from the divestitures and acquisitions.

Our FY17 outlook for the remaining financial measures, free cash flow, the effective tax rate, and capital expenditures, also remain unchanged.

With that, I will turn the call over to Mike.

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

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

Our second-quarter total revenue grew 32%. Growth was driven by acquisitions plus 3% constant currency organic revenue growth. Organic revenue growth was almost entirely driven by volume as price was favorable by 20 basis points and currency was unfavorable by 60 basis points.

Gross margin as a percentage of revenue for the quarter decreased 410 basis points to 38.6%. As expected, Synergy negatively impacted year-over-year gross margin by approximately 430 basis points in the second quarter. Gross margin was favorably impacted by 40 basis points coming from the suspension of the Medical Device Excise Tax, 30 basis points due to foreign currency, and 20 basis points improvement from pricing and divestitures. Product mix negatively impacted gross margin by 70 basis points.

SG&A expense as a percentage of revenue in the quarter declined 440 basis points to 19.1% of revenue, more than offsetting the change in gross margin as a percentage of revenue due to the way we account for the operations of Synergy.

EBIT margin at 17.2% of revenue represents a 90 basis point improvement as compared to the prior year. We are very pleased with our ability to continue to leverage revenue growth to expand margins. EBIT margin benefited from the impact of the positive contributors to gross margin as well as lower SG&A expenses as a percentage of revenue. Foreign currency was about neutral to EBIT in the quarter.

The effective tax rate in the quarter was 24.1%, down slightly due primarily to favorable discrete item adjustments. Adjusted net income in the quarter increased 53% to $76.4 million, or $0.89 per diluted share.

Moving on to our segment results, our Healthcare Products segment revenue grew 5% in the quarter. Organic revenues were flat in the quarter mainly due to a decline in capital equipment shipments. Consumable revenue increased 15%, of which 7% was attributable to organic revenue growth. Our maintenance and installation service revenue grew 3% in the quarter.

We continue to believe that the performance in capital equipment revenue is a matter of timing as backlog ended the quarter at $152 million, an increase of 12% year-over-year. Similar to the last several quarters, we continue to experience an uptick in volume of project orders, which tend to have longer leadtimes than replacement orders.

Healthcare Products operating income increased 24% while operating margins improved by 250 basis points to 16.4% of revenue in the quarter. The margin increase is due primarily to operational efficiencies, favorable foreign currency, and the suspension of the Medical Device Excise Tax.

Our Healthcare Specialty Services segment reported revenue for the quarter of $142.8 million, reflecting the addition of Synergy along with 4% organic growth revenue. Healthcare Specialty Services operating margin decreased in the quarter due primarily to lower than anticipated performance in our IMS business and the addition of Synergy Health Sterilization Services and Linen Management businesses. IMS margins have improved sequentially, but the results are somewhat masked by the divestiture of the UK Linen Services businesses.

Applied Sterilization Technologies had a good quarter with $115.6 million of revenue. The increase in revenue was driven in part by 3% organic revenue growth, plus the addition of Synergy Health, which on a constant currency basis grew low double digits in the quarter. Applied Sterilization Technologies' operating margin increased to 35.3% of revenue, due primarily to the increase in organic volume, the addition of Synergy Health, and cost savings from the combination with Synergy.

Life Sciences also had a good quarter as revenue grew 15% in the second quarter driven by 6% organic revenue growth and contributions from acquisitions. Consumable revenue grew 16%, partly due to the acquisition of GEPCO, as well as solid high single-digit revenue growth.

Service revenue grew 20% with low single-digit organic revenue growth plus the addition of new service offerings. Capital equipment revenue grew 6% in the second quarter. And backlog in Life Sciences ended the quarter at $41 million.

Life Sciences' second-quarter operating margin, at 27.9% of revenue, down slightly from the prior year, primarily due to unfavorable product mix within capital equipment and lower service parts volume.

In terms of the balance sheet, we ended the quarter with $254.4 million of cash and approximately $1.5 billion in total debt. We continue to reduce our debt to EBITDA leverage, which at quarter end was just over 2.5 times.

Since acquiring Synergy Health, our total outstanding debt has been reduced by over $135 million, putting us slightly ahead of our original debt reduction expectations. Our DSO is at 60 days at quarter end, an increase of two days as compared to the prior year. The increase, as we have stated before, is based on the fact that we include 100% of an acquisitions Accounts Receivable balance, but only include revenue since we've acquired them in the calculation. Our DSO would be materially the same taking the acquisitions' relevant revenue into account.

Free cash flow for the first six months was $108.9 million, a substantial increase from last year, primarily due to higher net income and a reduction in acquisition related expenses. Included in free cash flow for the quarter is approximately $4 million of cash expenses related to the integration of acquisitions.

Capital spending was $38.5 million in the quarter while depreciation and amortization was $50.1 million.

With that, I will now turn the call back over to Julie to open up Q&A.

Thank you, Walt and Mike, for your comments. Amber, would you please give the instructions and we will open the lines for Q&A.

(Operator Instructions). Larry Keusch, Raymond James.

Thank you. Good morning everyone. So, Walt, maybe starting with you, I have two questions. I guess, coming back to the Healthcare Products capital equipment and the trends that you've seen thus far in the year, maybe you could expand a little bit on why you have sort of seen this flattish sales profile in the business in terms of the revenue recognition. And then what gives you really the confidence that the second half will accelerate? Because I assume that is important in terms of taking you from the roughly 5% organic growth in the legacy business that you've seen in the first half to achieving that 6% for the year.

Sure, Larry. I would say there's a couple of things. First, as we've mentioned, our project business, which tends to be slower turn business from the time it is ordered until the time it is shipped, that project business has grown as a percent of our total order book, if you will, or backlog and order book. And as a result, you would expect the backlog to expand some as that occurs, and in fact it has.

Secondly, there were some in the second quarter, as is often the case in the capital equipment business, there were a few orders that we would have thought we might have gotten out in the quarter, and they just slipped into the next quarter. So there's a little bit -- there's always a little bit of temporal movement, and we had a bit of temporal movement this quarter. But the bulk of it I would say is the growing amount of project business versus the other.

Now, typically the projects, although we know about them for a year and a half to two years ahead of time, typically project orders ship in the six- to nine-month window. So we see that window -- we started growing here. You remember we started talking about this maybe a couple of quarters ago, so we are starting to see those projects ship, and we will accelerate those project shipments over the next six months. So, we have pretty good visibility of that going forward the next six months. We are also -- and that's largely the North American side of the business, which is what we generally talk about because it's the bulk of our business dominated by the US, of course.

But I would also add that our international business seems to be picking up. Although, again, we are not seeing the shipment side of it, we are beginning to see I think the bottoming out in much of Latin America, particularly Brazil. Our Asian business has picked up in terms of orders, and we are seeing pipeline in those places. Outside of the Middle East, actually, everything seems to be picking up some. We are not sure if that will hit this year, but it should -- it puts reinforcement that we are not shrinking in addition. And as a result, we feel even more confident about the total shipments.

Okay, perfect. And then the second question, just on the topic of IMS, it sounded like it was again a bit softer than you had anticipated for the 2Q here. So maybe talk a little bit about what you are seeing there, how you're thinking about some of those contracts that you indicated were delayed. Have you lost any business? And then if you could weave in there, I couldn't help but be interested in the comment about the acquisitions in the UK of an instrument reprocessing type business and how that bolts on to the outsource business for Synergy, because that would seem like a big opportunity over time.

I'll separate the two questions. First, on IMS, as you know, we missed the first quarter significantly compared to what we thought we would see. The second quarter improved, so we missed it a little bit. And so we are improving. We are seeing both sequential growth and year-over-year growth. although we were hoping for high single digits by now from our original forecast, we were expecting high single digits, we are now seeing mid single digits. So we are a bit behind where our original expectation was but they are moving toward their expectation. And their current view is the run rate going out will be not unlike what they originally anticipated. So at a high level, that's the IMS story.

The second question, you asked about instrument repair. We do believe instrument repair is a significant strategic piece of our business, which is why we have invested in it and continue to invest in it. We do believe it will be nicely profitable in the mid- to long-term. And there's clearly, in our view, a fit between that and the Synergy outsourcing business. So, in many respects, one is a stepping stone to the other depending on where you are. For Synergy, this is a stepping stone into insourcing. For us, we had the insourced parts and it will help us step to the Synergy business. So we definitely do consider this a part of the puzzle.

Okay. Terrific. Thank you very much.

Jason Rodgers, Great Lakes Review.

Yes, just a follow-up on IMS. I'm wondering if you are planning any further divestitures in that business, and if you could quantify the investments that are currently being made in IMS.

We don't anticipate any divestitures on that side. Obviously, the investments that we are making, we did two acquisitions, relatively small acquisitions, spending about $20-ish million in total for those acquisitions.

But I think what we are alluding to is the investments in the people and the service techs that we are making as we continue to expand this business, especially throughout the US and obviously (technical difficulty) we have -- definitely see an opportunity longer-term over in that area. So that's what we are talking about.

And I would add we don't discuss forward acquisitions or divestitures in general, and as a result, we would not get into any specifics on any acquisitions or divestitures in the business.

And looking at Life Science, it had decent operating income growth year-over-year of 9%. Why was that not higher given consumables were up in the high single digits organically?

In our capital equipment, we had some unfavorable margin mix that put some pressure on the bottom line, although the top line did well. That lower margin capital equipment kept the margins a little bit slightly lower than they were year-over-year. In addition to that, we had some -- last year we saw some stronger parts volume for the Life Sciences capital equipment, and that was a bit weaker this year, which, again, put a little bit of pressure on margins. But all in all, consumables doing very well, service still doing well and I would say the segment in general is doing very well.

I would add we have mixed up a little bit in service too, and service doesn't carry quite the margins that the consumable side of the business does. It's kind of a blend between the capital side and the consumable side, so it's more in the middle.

Okay. And then, finally, I wonder if you could walk us through the timeline of the upcoming IT system implementations for Synergy.

I think, as we've talked about, the first step in that changing the platform for Synergy and combining to one global system was for us to get off of the Oracle 11i platform for the legacy STERIS side and go on to the Oracle R12 platform, which, from the legacy STERIS side, we have successfully completed in this second quarter. So we have taken the first step. Now what we have to do is go out and work with the acquisitions, specifically Synergy, to map out how we're going to take them from their current IFS financial system onto the new Oracle R12 system. We still believe that is probably about an 18-month project from start to finish, and we are just starting to embark on that project.

Thank you.

Dave Turkaly, JMP Securities.

Thanks. On the AST side, obviously I think you mentioned you sold two small labs, but it's still very profitable. I was wondering if you might just talk about where you see that, the margin of that business, going for you ahead.

First of all, AST has been a real positive, and I would say the legacy Synergy portion even more positive on balance. So, we feel very good about that business.

The lab businesses we sold were consumer lab businesses that had come with previous acquisitions. And although they were nice little businesses in their own right, they didn't fit anything that we do in any part of our business, so it just made sense to exit those.

The margins, we concentrate a lot more on growing profit dollars and ROIC than we do on margins. Margin is a path to get there, without question. And we do have high margin in that business, but we have a lot of capital invested in that business too. So the ROIC, although is now quite attractive, it is not over the top. So we do think we have some margin expansion capability as we bring on more products, and as we -- more plants, I should say, which gives us greater capacity, and as the full integration of the AST businesses comes to fruition. So, we do have some opportunities there.

I always caution people, when we save money, we often take some to the bottom line and we often pass some on to our customers in the forms of better pricing, so we maintain or grow our market share. So I would not take everything to the bottom line, but we do think that there's opportunity there.

And then just quickly over to the repo side, can you remind us what you still have authorized and, if you have it, sort of what the price was in the quarter for the stock you bought back? Thank you.

Yes. So, for the quarter, we spent about $58 million of our $300 million authorization, which the Board and the shareholders granted to us back in the July time frame. That was about 819,000 shares for that $58 million in repurchase, or about $71 per share on average.

Thank you.

I would add that that's consistent with our view of stock buybacks to offset dilution, and very consistent in that format.

Chris Cooley, Stephens.

Good morning. Thank you for taking the questions. Walt, if we could maybe just start bigger picture, you've obviously had a good first half. You've anniversary the acquisition of Synergy. And you alluded in your prepared comments that you were a little bit ahead of schedule, both in terms of realization of cost synergies as well as in paying down related debt, pruning the portfolio a little bit. Kind of in light of what we are seeing here in this lovely third-quarter earnings season in healthcare, could you maybe just talk a little bit more broadly about what you see through the back half of your fiscal year, but kind of into the early part of the calendar year 2017 just in terms of anything from an operating trend standpoint, and then how that basically trues-up to your original expectations when you think about the guidance that you provided here for the type of growth in cash flow that we could see from the business.

And then I just have one quick nuts and bolts follow-up for Mike.

Sure. It is typical of us to have a second half that is stronger than our first half. So, we don't see anything radically out of line to our normal I'll call it seasonality or pattern. A, when you're growing, the second half should be stronger than the first half. And B, there has been historic seasonality in the way we manage the business, which causes the second half to be in some way stronger than you might even expect. And we don't see that any different.

We do -- because capital, we are a little behind actually where we thought we would be. It's all gone into backlog, so we are perfectly happy with that. Orders are staying consistent.

And our pipeline in front of us, we look at -- pipeline to us is the backlog plus the projects that we are working on, projects and business that we are working on. And we still see a solid pipeline of business. And I mentioned we are actually seeing, we think, the bottoming out of some places where we had historically been strong. Venezuela is still tough, but the rest of Latin America seems to be picking up, and so we are beginning to see some pipeline of orders there.

Asia, we are actually up year-over-year and ahead of our expectations, mainly in the southeastern parts of Asia, but China is also picking up as well for us. So we are feeling more comfortable there looking out beyond a quarter, if you will.

And Europe has held for us during this time. And we think, absent the currency issues, we think the European business, both on the capital side as well as, importantly, on the Synergy side, the AST business is strengthening. We are putting capacity in on the face of that strengthening.

So we are generally seeing positive volumes across our business in most every segment and as a result are feeling more and more comfortable. Now, governments change and they change what they do and all those good things, so you never know for sure, but I think that's far enough out into the future that, for the time period you're talking about, we don't see that being a significant issue.

Understood. And then Mike, if you could help us a little bit more. I greatly appreciate the color you guys provided when you think about the adds from the divestitures offset by the acquisition and the cost saving -- or acquisitions, excuse me, and cost savings. Could you help us think a little bit more about currency as we all get more comfortable with the dependent for the greater exposure of the pound just in terms of translation and how we should think about that going forward? I just want to make sure that, when we kind of make these adjustments going forward, we get the reported topline range correct. Could you maybe help us a little bit more there with the dependencies, or I should say the reliance on the various currencies?

Yes. As we have continued to look at it, and Walt addressed I though very nicely the impact of our currency. So just to review, as a total consolidated company, we like a strong euro and a strong pound. That definitely helps us in both a revenue and profit standpoint. We also like a weak peso and weak Canadian dollar; that also helps us. Again, that's in general.

So, just as it so happens, this past quarter and actually even for the first half of the year, we have seen a weakened pound and a stronger peso, which, for us, those currency baskets offset very nicely. And it does hurt our revenue, and for the full year, we are anticipating a $25 million headwind versus our original guidance. So that's the full-year impact of revenue. The bulk of that is, as you can imagine, is the pound.

But then on, the opposite side, we are anticipating about neutral impact on the bottom line, and the offset of the reduction in income from the pound is being offset or almost more than offset by the reduction of the peso from a cost standpoint. So, I think we are very nicely balanced here. And if you look at the forward rates, which we do use, looking at the next six months, I think that will still hold true. I think you're going to see those two currencies move against each other and help protect us from a bottom-line standpoint.

And I think Mike was thinking about profit when he said strengthening of the peso. The peso has absolutely fallen, which strengthens our profit. It is not a stronger peso, it's a weaker peso which leads to stronger profitability.

Got it. If I may, can I squeeze one more quick one in here and then I'll get back in queue? When you look at the growth we've seen in particular in healthcare capital backlog, could you maybe help us just a little bit -- characterize a little bit better -- I know you touched on this earlier with Larry's question, but when we think about the switch that we've seen really kind of fundamentally over the last three to project versus replacement capital, help us kind of get a better understanding there of the visibility that you have into that pull-through. And what gives you that added degree of confidence that you will see that acceleration here in the back half? And congratulations on a good quarter.

Sure, Chris. The orders that are project orders do have more timing risk, almost by definition, because they are putting it into a building project typically, and construction delays and all those things are fairly routine. When we look at our -- we've been doing this a long time, and so we don't presume that they will ship when they think they're going to ship. We know they have a date, but we presume certain lags in those dates. And we have gotten pretty accustomed to different markets having different lag times. So, we do have some reasonable visibility. And clearly, when we are looking at milestones quarters and years, we are more sensitive to those delays than other times. So we do try to measure that, monitor it, and also to land the plane in the right time for our customers and us. And oftentimes, we have the ability to pull, if Project A gets behind, from a vast amount of our product line, we can substitute this washer for Project A to that washer to Project B or this operating table from Project A to that Project B, or to a quick turn order. So we do have ability to manage somewhat within that, but in the last week or two or three of a quarter, depending on what a hospital says, we don't ship things they don't need or want. So depending on what they say, we can have some minor disruptions, and that risk is higher in projects.

So there's a little more risk for any given month or any given quarter, but that risk is well within our normal limits of handling it.

Just one added comment there is as we look at I call it the backlog aging comparison, we look at how many quarters, full year out of quarters, we have actually, if you look at this year versus last year, we actually have a little bit more favorability in the shipments of that backlog this half, the second half of this year versus second half of last year. So that also gives us comfort.

What we look at is, of our backlog, how much is supposed to ship in X period -- in this case, Michael is talking about the second six months of this year -- versus a percentage of our backlog that should have shipped in the second percentage of last year, and we have a higher percentage sitting there that we don't expect to ship in the following years with (multiple speakers).

Correct.

And that is one of the other measures we gauge.

Understood. I appreciate the color. Thanks so much.

Matt Mishan, KeyBanc.

Good morning everyone. Thanks for taking my questions. I just want to make sure I fully understand your constant currency organic growth guidance and really the 2H ramp from the first half. If I'm not mistaken, the organic growth guidance is now going to be including five months of Synergy Health. That's going to be organic Synergy Health from November through the end of March. Could you just kind of walk through the various moving pieces of why you think you're going to move from like a 5% in the first half to 7%?

The biggest impact is the capital equipment in the product space, the Healthcare Products space, where we are flat and we don't expect to be flat for the year. We don't forecast that externally specifically, but we expect solid growth for the full year. So that's the single biggest impact.

When you look at synergy pieces at a high level, we've kind of talked about it, we know that SterilMed is not growing, in fact the opposite. We know that some of the linen businesses are not growing, in fact the opposite. The flipside of that is, when you look at the -- in constant currency, which is what we're talking about, when we look at the HSS business in Europe, it's doing nicely in terms of growth and profitability, except for the fact that we have this currency issue going on. And when you look at the AST business, it is doing better than nicely except for the currency issues going on. So when you put that all together, at a high level, that's the Synergy story, but really the bigger story in terms of the change in percentage first half to second half is the Healthcare Products story, not the Synergy story.

Okay, got it. And then Walt, a bigger picture question, can you talk about your C-level conversations on expanding kind of outsource central sterile processing in the US?

No different than we've talked before. It's a great question. And we have had a number of places that we are talking to about this potential. These are -- this is concept selling, not selling a widget in five minutes, that kind of sale. So we've had a number of conversations. We have some things that are quite attractive out in the future. But as I've said from the very beginning, this is a nascent business in the US. We're going to see one and then see another one and then I think things will pick up. But this is not going to be something that has a material impact this year.

Okay. And then I'm not sure if I missed it or not. I had a couple of calls this morning. Can you talk about what's driving the weakness at SterilMed?

Well, yes, I can. We do not control the revenue cycle of SterilMed. In effect it's not quite the same thing. We are re-processor but you can think of us as a contract manufacturer. So it is just the input we have from J&J, who is the parent of that company, or from their SterilMed division, they have not had strong growth in this current year so far.

Is that something you expect to change going forward, or is that like an ongoing trend that's been impacting you for the last six months, nine months, year, or is there any change in that?

We don't forecast other people's businesses, so I would be hesitant to make that forecast, but we are not counting on a significant increase at this point in time in our forecast.

All right. And then if I can squeeze one more in. Walt, who is going to win tonight, the Indians or the Cubs?

As long as you don't count it against my forecast of the business, independent of which way, but there is an ever-so-strong leaning toward the Indians around here. I don't quite understand why that would be. There is an ever-so-strong leaning toward the Indians. In fact, two of the four people in front of you, if you could see us, not hear us, are wearing Indians shirts as we speak.

Good luck tonight and go Tribe.

(Operator Instructions). Mitra Ramgopal, Sidoti & Company.

Good morning. I just wanted to double check. The revised guidance in terms of the revenue, that's not assuming any potential divestitures or acquisitions going forward, at least for the rest of the year? Is that correct?

Generally speaking, that's correct.

Okay.

That is typical of us. We typically would not include acquisitions that we are working on that may not occur, and we typically would not include divestitures we are working on that may not occur.

Okay, thanks. And back on the Life Sciences business, the backlog we are seeing, at least for the first half of this year versus what we've seen the last couple of years, is there something -- some of it I know could be just timing, but is it more industry issues as you see it?

Yes, I would say it's more timing. If we get into -- we cross the $40 million mark, that actually gives us comfort there. But we will see that go $5 million to $7 million flip back and forth. But yes, it's mostly timing.

Okay. And on the manufacturing and sourcing initiatives, I don't know if you have an update. Is that pretty much behind you right now, or still being implemented?

The items that we discussed with you historically are complete, or virtually complete. So we have captured the benefit of those. But we are always looking for opportunities to improve our production methods and to improve what we physically control. So, I would not expect that -- I would say it differently, I would expect us to continue to insource things in our local production. But when we discuss -- and it's a routine piece of work for us, actually. But when we discussed it with you earlier, it was largely because we were spending, I don't remember, $30 million, roughly, to build the capital, to put the capital in place to be able to do that. Now, that capital is not fully utilized just for the things that we put in place. So, it gives us the opportunity to do more insourcing as we go forward.

But if there is a significant emphasis that it's going to be a material piece of the business in a short period of time, we would bring it to your attention just as we did a couple of years ago. But when it's just an ongoing piece of what we do, it's just a part of our capturing of efficiencies and quality. But I fully anticipate we will continue that for the next -- for the foreseeable future, anyway.

Okay, understood. Again, thanks for taking the questions and good luck tonight.

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

Thank you Amber, and thank you, all of you, for joining us. We all will be rooting for the Indians, hope you will be as well, and we will talk to you soon.

Thank you for participating. You may now disconnect.