STERIS plc (STE) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Steris Plc Fourth Quarter and Year-End Conference Call. (Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Julie Winter, Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie. Good morning, everybody. We appreciate you taking the time to join us to go over our fourth quarter results. As usual, on today's call, I have with me Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President, CFO and Treasurer.

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 these 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' securities filings. Many of these important factors are outside of STERIS' control. No assurances can be provided as to any result 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' 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' 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.

To measure constant currency organic revenue, the impact of changes in foreign currency exchange rates and acquisitions and divestitures that affect the comparability and trends in revenue are removed.

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 property, plant, equipment and intangibles.

Additional information regarding adjusted earnings per diluted share, segment operating income, constant currency organic revenue growth and free cash flow is available in today's release.

Also, we will be posting supplemental tables on our website this morning that provide the product-mix breakdown within our segments for your convenience.

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

Thanks, Julie, and good morning, everyone. I have a bit of a spring allergy, so a little bit of a froggy voice this morning. I hope I'm not too hard to hear.

As Mike will discuss shortly, we ended fiscal year 2017 strong and feel good about where we stand today and even better about where we're headed tomorrow. Fiscal 2017 was a transition year for STERIS as we took strategic actions to improve the business for the long term. We have completed the bulk of the Synergy Health integration efforts and have divested businesses that do not fit our go-forward strategy. We achieved 5% constant currency organic revenue growth in fiscal '17, a good showing in today's market. We had a particularly strong fourth quarter, ending the year on a high note.

The actions we have taken have delivered results beyond revenue growth, which are apparent in the expansion of both -- in both gross margins and operating income margins. Overall, operating margins improved by 130 basis points in the year, resulting in a record 18.2% of sales. We also achieved another double-digit increase in adjusted earnings per share for the full year to $3.76.

I will spend a few moments on the highlights of the year for each of our segments before getting into our outlook for fiscal 2018, starting with our largest segment.

Healthcare Products revenue grew 4% on a constant currency organic basis for the year. Consumables were strong, excluding the impact of divestitures, as we benefited from continued mid-single-digit growth in our instrument cleaning chemistries, double-digit growth in U.S. endoscopy and our V-PRO consumables. Equipment service revenue continued its history of consistent growth, particularly in installation of our OR integration offerings and an increase in preventative maintenance contracts.

Capital equipment shipments started a bit -- started the year a bit slow but ended very strong. For the full year, we saw particular strength in washers and steam sterilizers on the infection prevention side of our business and OR integration in our surgical business unit.

Healthcare Specialty Services grew constant-currency organic revenue 5% for the year with improving profitability in the fourth quarter. Our people in IMS have done a nice job winning new contracts during the year. And as we said last quarter, we expect that portion of our business to reach high single-digit operating margin run rates by the end of fiscal 2018. Combined with the divestitures of the lower-profitability businesses, our expectation is to bring the profitability of the entire segment to mid-single digits for the full year.

In Applied Sterilization Technologies, revenue grew 7% for the year on a constant currency organic basis, reflecting strong underlying demand from our core medical device customers. Of course, the fall in the euro and British pound offset much of this growth outside the United States on an as-reported basis.

As you all know, we have been making investments in AST to expand capacity at a number of facilities, and growth investments will continue in fiscal 2018. These are sound expansions with return on investment capital typically exceeding our cost of capital in a 3- to 4-year time frame. However, we do not expect to see the same level of margin expansion next year for the level of growth we anticipate due to the startup costs and higher level of depreciation on these new facilities. We do not expect profit dollars to fall as a result of these investments, they just will not expand as fast as they would for the level of growth we anticipate. We look forward to significant margin expansions in FY '19 and beyond as a result of these investments.

Life Science constant currency organic revenue increased 4%, led by high single-digit consumable revenue growth. We had strength in both barrier products and formulated chemistries with particular strength in Europe. Service revenue grew double digits for the year with growth in maintenance contracts and new service offerings.

Capital equipment revenue ended the year slightly below our expectations, but with strong orders in hand. We have a double-digit percentage increase in backlog to a record $53 million, which is a good start for next year.

Turning to our outlook for fiscal 2018. We expect another year of solid performance. This is our tenth year together as a team and we have successfully delivered on our long-term commitments for growth and adjusted earnings per share over that period despite substantial challenges and headwinds along the way. Our revenue has grown 8% compounded and our adjusted earnings per share 10%.

As I have said since I arrived at STERIS, I believe this is a business that can grow revenue mid to high single digits through a combination of organic growth and acquisitions, and leverage that growth to deliver double-digit bottom line expansion. Our management team has accomplished this goal the past 10 years, and I believe we will continue to do so the next 10.

We have macro forces that will continue to help drive growth in procedures and vaccines, the baby-boom population reaching peak health care spending ages in the U.S. and other industrialized countries and the growing middle class outside the industrialized world.

We are a recognized global leader in sterilization and decontamination with strength in hospitals and surgery centers, pharmaceutical manufacturing of biologics and vaccines and medical device sterilization. We also have focus on additional products and services for the procedural areas of surgery and endoscopy. In addition to revenue growth, we have plenty of opportunity to become a more efficient business using lean techniques in both our operations and our support functions.

Specific to fiscal 2018, we anticipate that as reported revenue will decline 2% to 3% reflecting lost revenue of approximately $160 million from the net impact of divestitures and acquisitions. Also factored into that outlook is a $15 million degradation to revenue from foreign currency movements.

Our outlook presumes that we will complete the last of our planned divestitures in the first quarter of fiscal 2018. This business represents about $40 million of the total $160 million of divested revenue for the year. We have not assumed any additional acquisitions/divestitures in our FY '18 outlook beyond those that have occurred or I've discussed. We continue to believe that there are acquisition opportunities before us, but the timing of deal completion is difficult to predict.

We believe our underlying revenue growth on a constant currency organic basis will be in the range of 4% to 5% for the year, with solid growth in all 4 segments driving that performance. With the benefit of cost synergies and the impact of divestitures, we expect another year of meaningful improvement in operating margins, largely stemming from improvement in gross margins.

As always, we plan to reinvest some of our savings. In particular, we anticipate double-digit growth in R&D spending in FY '18 and significant capital spending for expansion opportunities.

As we noted in our release, we anticipate adjusted earnings per diluted share for fiscal 2018 to be in the range of $3.96 to $4.09. As we have seen in prior years, we expect our earnings to be more heavily weighted to the second half of the year.

Fiscal 2018 earnings comparisons to fiscal 2017 will be a bit light in the first half compared to prior years as we have tougher comparisons on foreign exchange as well as the impact of lost profit dollars from divestitures. This is particularly true of the first quarter, where we have the larger headwind of lost profit from divestitures.

All in all, we expect 43% of our earnings to be in the first half of the fiscal year and 57% in the second half.

As we look ahead, we're excited about the opportunities before us. We have a great team in place, are positioned nicely for future growth, and have both breadth and depth in our core businesses with significant opportunities to grow. We will continue our mission to help our customers create a healthier and safer world.

I'll turn the call over to Mike to review the quarter before we open for Q&A. Michael?

Thank you, Walt, and good morning, everyone. It's once again my pleasure to be with you this morning to review our fourth quarter adjusted financial results. We ended the year strong with total constant currency organic revenue growth of 7% in the fourth quarter, driven by volume and 50 basis points of price. Gross margin as a percentage of revenue for the quarter increased 200 basis points to 41.3%. The improvement in gross margin was due to the impact of divested businesses, favorable foreign currency, cost synergies and pricing, partially offset by product mix.

EBIT margin at 20.3% of revenue for the quarter represents a 150 basis point improvement reflecting the positive contributors to gross margin, somewhat offset by an increase of 10% in R&D expenditures. We are very pleased with our continued ability to expand EBIT margins and leverage revenue growth.

The effective tax rate in the quarter was 25.5%, down substantially from the prior year and slightly lower than our expectations as we had favorable discrete item adjustments in the quarter. This puts our full year fiscal 2017 effective tax rate at 25.2%. We anticipate an effective tax rate in the range of 25% to 26% for the full fiscal year 2018.

Net income in the quarter increased 21.5% to $94.7 million or $1.11 per diluted share, benefiting from organic revenue growth, continued margin expansion and a lower effective tax rate.

Moving on to our segment results. Healthcare Products segment as reported revenue grew 5% in the quarter while constant currency organic revenue grew 7%. Capital led the way with a revenue increase of 12%, while service revenue grew 4%. This growth was offset by a 3% decline in consumable revenue caused by the divestiture of our skin care business which reduced revenue by $10 million in the quarter. Within capital equipment, we saw strength in our OR integration offering, steam sterilizers and washers during the quarter.

Backlog in Healthcare Products declined $10 million to $110 million in the quarter, reflecting fourth quarter strong capital equipment shipments. Healthcare Products operating income increased 24% and operating margins improved by 320 basis points to 21.2% of revenue in the quarter. The margin increase is due primarily to the increase in volume, improvement in gross margin and the impact of divestitures.

Revenue for Healthcare Specialty Services increased 8% on a constant currency organic basis with strength in IMS and the legacy Synergy CSD outsourcing business in Europe. Healthcare Specialty Services operating income for the fourth quarter increased sequentially by over 150% from $2.2 million to $5.7 million on a sequential sales decline of 6%. Recall that during the quarter, we divested our remaining linens business in the Netherlands.

Applied Sterilization Technologies grew revenue 10% on a constant currency organic basis, bolstered by a rebound in volume following the light December sales period. Applied Sterilization Technologies operating margin, at 33.9% of revenue, was down 90 basis points, primarily due to the impact of foreign currency movements. We expect this FX pressure on profitability to continue into the first half of fiscal 2018. Remember that the currency decline in the euro and British pound did not significantly impact our results in this segment until the third quarter of fiscal 2017.

Life Sciences as reported revenue for the quarter grew 1%. We continue to see good consumable revenue growth in the quarter of 5%, offset by lumpy capital equipment shipments, which were down 2% and a decline in service revenue of 1%. Constant currency organic revenue growth was 2% in the quarter. Our capital equipment orders in Life Sciences ended the quarter strong, growing backlog to a record $53 million. Life Sciences fourth quarter operating margin declined 170 basis points to 29.9%, due in part to increased R&D spending and unfavorable product mix within capital equipment revenue.

In terms of the balance sheet, we ended the quarter with $283 million of cash, $1.48 billion in total debt and a debt-to-EBITDA leverage ratio of just under 2.5x. Without additional acquisitions, we anticipate leverage by the end of fiscal year 2018 to be approximately 2x debt-to-EBITDA. As this happens, we will be approaching or passing our optimum level of leverage, and we will likely move away from our recent emphasis on lowering our leverage ratio and instead return our focus to our traditional capital allocation priorities: maintaining and growing the dividend, reinvesting in our businesses, funding acquisitions and share repurchases.

During the quarter, we took advantage of locking in low long-term favorable financing rates as we issued and sold approximately $300 million of fixed rate senior notes in a private placement. Substantially all of the proceeds were used to repay floating rate bank debt, thereby increasing our portion of fixed rate debt. The result was a shift from floating rate debt to somewhat higher-cost fixed rate debt, which will lead to an increase in net interest expense in the coming year. In total, our current expectations for interest expense is about $46 million in fiscal 2018.

Free cash flow for the year was $256 million, almost double compared to last year, primarily due to higher cash from operations, which was partially driven by a reduction in acquisition-related cash expenses. Included in free cash flow for fiscal 2017 is approximately $26 million of cash expenses related to acquisitions and divestitures. We anticipate a reduction of approximately $20 million in related cash expenses in fiscal 2018.

For the full fiscal year 2018, we anticipate capital expenditures to be approximately $180 million, reflecting continued facility expansions, integration of IT systems, new product development and general maintenance for existing facilities.

Total depreciation and amortization for fiscal 2018 is expected to be approximately $180 million, which includes about $65 million in amortization of acquired intangible assets.

For the full fiscal year 2017, we returned approximately $190 million to shareholders in the form of dividends and share buybacks. The balance of cash was utilized to repay debt and to acquire several small businesses.

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

Thank you, Walt and Mike, for your comments. Jamie, if you would please give the instructions, we can get started on Q&A.

(Operator Instructions) And our first question today comes from Larry Keusch from Raymond James.

Walt and/or Mike, maybe we could just start at a very high level, and given some of the distractions from 2017 with the divestitures and integrating Synergy and, of course, some of the challenges achieving some of the top line goals, can you talk a little bit about, philosophically, how you came into 2018 and kind of what do you view driving that top and bottom end of that organic constant currency range of 4% to 5%?

Larry, I would say, in terms of the approach. First of all, obviously, some of the businesses that we divested were disappointing to us. They were not in our strategic wheelhouse anyway, and they were doing not as well as we expected. So for both short and long-term reasons, it made sense to make those divestitures and let someone else do with them something probably better than we could. And so that clearly impacted our last year. In terms of, I would say, forecasts going forward, we forecast as we always do and have, is we do bottom-up forecasting in our business units. We also look at the top to see if it makes sense to us vis-a-vis what’s going on in the marketplace. And we look at those 2 things in concert and we put out the forecast we think is a reasonable forecast. We do, on the one hand, want to stretch our people and our operations to do the best we can. On the other hand, we obviously don't want to put forecasts out there we don't meet. If we look at in total, I think we've done a pretty decent job with that. Last year was obviously a disappointment.

Okay. And is there any -- are there any drivers for the top and bottom end of that 4% to 5% range?

The answer is, of course, yes. The kind of the classic questions around capital, both forms of capital, Life Science and Healthcare. Life Science tends to be a little bit lumpy. This year, we have more confidence going into the year in that we do see that pipeline and we have a very good backlog. So probably, we're a little more comfortable than normal on that side of the business. On the Healthcare side of the business, again, this question always comes up with the pipeline out there, how are things looking, particularly in the United States. So far, we have seen continuation of the trend we've been talking about for a year or 2, that is, it's not growing rapidly, but we continue to see a reasonable pipeline, up a few digits, if you will. And we have continued to see that. I would say we've seen kind of particular strength on the project side of the business, that is people who have made strategic decisions to put steel in the ground or to refurbish major parts of their facilities, are continuing that at the pace that we have been seeing. And we haven't seen significant changes on the replacement side of the house, as well. So it looks like a continuation in the future. As you all know, there are a lot of things up in the air right now in U.S. healthcare: the way it's going to be reimbursed, what happens with the Affordable Care Act. And so we're all watching that carefully, but we've not seen any indication from our hospital customers that they are pulling back in capital spending at this point. And in fact, you've seen a number of announcements by the for-profit side of the world about how they are going forward with strong capital spending.

Okay. And then just quickly on free cash flow. I think for '17, you had guided to $250 million. You obviously did a little bit better, $256 million. And included in that was about $50 million of spending related to the Synergy acquisition. So I was thinking that, that cash flow, given the growth in the business -- free cash flow, I should say, would have been $300 million or perhaps a bit better. You're guiding a little bit below that. Are there any sort of step-ups that we should be thinking about? Looks like CapEx is up a bit year-over-year.

Yes, Larry, you're right. CapEx is up a little bit year-over-year. And also, we are anticipating another about $20 million of cash expenses related to acquisitions and divestitures. So if you take our free cash flow, add the $20 million, we're just over that $300 million mark on a little bit of an increase in our CapEx.

Our next question comes from Joel Kaufman from Goldman Sachs.

Just following up on the organic growth guidance. Just maybe help us walk through the process again. Because when I frame down the top -- the -- frame the top-down views of the market you just provided and the portfolio today relative to the portfolio when you guys provided guidance on the fourth quarter call last year, one could argue that the weighted average market growth rate of your assets today is more attractive than it was 12 months ago. Just trying to understand what brought down the outlook relative to the 7% target you guys provided last year.

Well, we agree with you. The weighted average of current business is stronger than the weighted average of the business last year. I think it goes without saying we were obviously overaggressive in our forecasts last year. We didn't meet that forecast. And we did take that into account when we looked at these numbers. I would not call this an overly conservative forecast. I think it's a reasonable forecast, and we intend to hit it. But clearly, we were overoptimistic last year. But I agree with your standpoint that if we had the same portfolio that we had last year, we would be guiding even lower than we are today.

And then just turning to the AST business. Obviously, the growth there has been fairly strong, coming in a little bit ahead of what I would say is sort of the contributors across the med device volumes were. So can you maybe just help us understand what's driving the growth there? Is it a market share dynamic? Is it a pricing dynamic?

Sure. First of all, we do get modest price increases in that business over time, and those are long-term contractual increases. So we do get modest price increases, that's a small portion. But the other side of that is, indeed, a combination of market growth. And you have to remember, on the device side, devices, particularly implantable devices, have been under some significant price pressure the last several years. And in that space, we count volume is what drives our business, not so much the price -- the end-user price of the business, we're an ever -- an infinitesimal piece of their cost. So we tend to ride with volume, not with their end market prices. And I do think, over time, that we have picked up some share predominantly from some of the smaller players in the marketplace.

And then just last one on capital allocation. I appreciate the comments that as you guys approach the optimal leverage targets, you guys are going to be thinking about getting back to a more traditional pattern of capital allocation. Is anything changed in terms of your priorities between share repurchase and smaller tuck-ins relative to what it would have been prior to the Synergy Health acquisition?

No. I would say not at all. Those are our rank-order priorities. They were before the deal and they continued to be, post.

And our next question comes from Matt Mishan from KeyBanc.

Could you guys give us a sense of the trajectory you're expecting this year and maybe into the next year for, like, revenue growth and operating margins for -- specifically the Healthcare Specialty Services segment, it seems like that's been a laggard over the course of '17, but you saw some really nice improvement last quarter. And I think, especially on the outsourced central sterile processing side, you're starting to see some pretty good volumes there.

I would say there's a couple of -- there's different components of that. And clearly, the euro/pound impacted our European business, on an including currency basis. On a constant currency basis, we do see growth in that business, the traditional European business. The -- what we have historically called the IMS business, where the instrument repair portion of that business, which is largely in North America, has seen some nice growth. And you know this past year, we lost a pretty significant chunk of business from a couple of customers. And as a result, our growth rate was not as high as we expected. But even with that loss, we still had reasonable growth rates for the year, mid-single-digit growth rates. We are toning down our view of that a little bit. We -- when we did the acquisition, we were saying high single to low double digits. We think that market has matured some in this past several years, and so probably more in the mid-single to maybe a little north of mid-single. But in that range of mid-single digits as opposed to the -- what we have historically said in terms of our outlook.

And I would also add, Matt, that from a probability standpoint, the divestitures have put a lot of pressure on that segment. And you have seen, with the removal of all of our linen businesses, you are starting to see that uptick of profit in the right direction.

Okay. And in the outsourced central sterile processing, since you closed on Synergy Health, have you guys opened or signed any new contracts on outsourcing centers either here or in the U.K.? And then what does the pipeline look for that moving forward?

The answer to the question is we have signed outsourcing contracts both in the U.S. and the U.K. Those contracts in the U.S. have tended to be -- or have all been, I should say, inside the existing facility as opposed to building a center and doing what the -- kind of the traditional European outsource. We have also signed additional contracts both in the U.K. and in Europe. And so we have brought contracts on board. Some of those were, as I've just described, inside the facility. Some of those were re-upping historic contracts. And some were, we anticipate, building some facilities or putting facilities in place or refurbishing facilities, it is going to require capital. The other one that we've obviously talked about a fair amount is Northwell. And we continue to expect that to go, but we intend -- we expect that to happen next year, not this fiscal year in any significant revenue way. We do have capital in our forecast for new facilities: A, we have capital for the Northwell facility and we have capital for some other facilities. But we would not expect any material revenue at this point for this current year.

Okay. And then last question for Mike. I think the segment margins were all pretty strong in the quarter, but in the other line you saw, I get a -- a little bit of a spike there. Can you elaborate on what drove, like, the $7 million in costs in the other line?

Yes. Part of that was -- remember, we don't allocate all of our costs across to all of the businesses. We withhold a portion of not only defense industrial business but also other costs related to legacy pension, postretirement, board expenses, Walt and my expenses. So it was just a timing issue on that. For the year, we've seen a slight increase in our expenses for some of those items, especially with Synergy Health on the pension side, which we are holding at the corporate level.

Our next portion comes from Chris Cooley from Stephens.

Mike, maybe just if you'd go back on the backlog in Life Sciences. I was a little bit intrigued by that growth, hitting that record level of $53 million. Could you just talk about what you're seeing as a backdrop there, maybe from a big picture standpoint? Historically, that's been kind of a weaker spot. I realize it's lumpy, but again, just kind of a little surprised to see that perk up and would like to get a little color there. And then I've got a follow-up.

Certainly. As you know, Chris, majority of our customers in that are the pharmaceutical facilities and the research institutions. And we have continued to see very good growth coming out of the pharma side as they get back to, I'll call it, a more normalized growth trajectory. So a large portion of our orders are coming from the pharmaceutical side. And as we continue to talk about, obviously, Life Sciences tends to be a lot more lumpy from the capital equipment shipments. And when you don't ship that, it automatically falls into backlog. Their products are a lot more highly customized and a lot larger in volume. So really, a lot of it is just timing. We saw capital shipments down, but we are experiencing very good order growth rates, in particular, on the pharma side.

And, Chris, I would add. We have introduced a number of new products in that space in the last year or so, both on the steam sterilization side and on the hydrogen peroxide sterilization side. And particularly hydrogen peroxide, I think, is gaining ground in that space. So I believe that that's a part of the impetus to the growth. So there is -- the pharma market seems -- our piece of the pharma market, the vaccines, the biologics, tend to be strong and a lot of the consolidation seems to be kind of past us, if you will, in terms of plant consolidation, the point that Mike made. But we've also had some nice products to go into that space.

That's super. And then maybe if I could just go back to kind of a prior round of questioning. When you think about the buildup for this year's guide, candidly, the top line organic growth rate looks pretty much as we had expected. But I would appreciate just some color on what you're expecting in terms of maybe domestic and global volumes. Because I think that's really what I think what investors, in general, are trying to just kind of build back up here. What do you think we'll see? Will we see a steady-state type environment in terms of normal surgical procedure volume? Are you anticipating any moderation in growth? Just want to think about how we build that up through the calendar year -- I'm sorry, fiscal year.

Yes, Chris, I would say at a high level, as you know, the international volumes, the last year or 18 months have been weak relative to the U.S. volumes. And we do expect -- we have seen in the Pacific rim, an increase in our business, and we do expect that to continue in our forecast. Latin America has been weak. We are -- we believe we're seeing a bottoming out of that. So we may be seeing a bottom and maybe a bit of an uptick. In Europe, we've actually held nicely over this period. But the Middle East -- which we put the Europe and the Middle East together. The Middle East has been down radically, is the only right term. And so the European business has not been able to offset the Middle Eastern portion of that business. We -- in our forecasts here, we do expect growth in the European business, too. So we are expecting to see better growth in the o U.S. business than we have seen the last year or so. Now I'm talking about the health care hospital side of the business, not Life Science and AST because they've experienced nice growth globally all during that period.

Our next question comes from David Stratton from Great Lakes Review.

When we look at the Healthcare Specialty Services, the improved profitability, when you break that out from the divestiture, what's the underlying profitability there and kind of the trend ongoing?

Well, we don't get into the detail of the numbers at that level, but clearly, our profitability fell in that space as we lost some business and we had invested in front of gaining what we thought was more business. And so what is going on is the costs that we've invested are catching up -- as we grow the revenue, the revenue is catching up to the cost. And that's the principle improvement. We do think if we can grow the revenue as we anticipate, this current year, that we will see the profitability ending the year as we've described. So that -- that's really the issue. We do not expect significant cost growth relative to the revenue growth we anticipate.

Okay. And then on the Life Sciences side, you framed the decline in capital equipment sales as lumpy. And then how does that translate into services? Is that also lumpy? Or what kind of led that decline?

Services is not as lumpy as capital. It tends to be more stable, but there are a couple of components of service in the Life Sciences space, as well as the Healthcare space, that are. We do a large amount of installation service, and so obviously, when we sell equipment, we get that installation. So if we're often off on the sale of the equipment, maybe in the same quarter or maybe in the next quarter, the timing differs depending on when the project was shipped and installed. But it is lumpy along with the capital business. We also have a fair amount of business, particularly in the water stills that we sell in Europe where they basically are refurbishing a water still, and so they will get significant -- and these are pretty significant orders. They'll get orders for parts that runs through our service business. It's really a refurb, if you will, of that equipment. And so our parts sometimes are lumpy because of that.

(Operator Instructions) And our next question comes from Mitra Ramgopal from Sidoti.

Just a couple of questions. Walt, you mentioned about increased R&D, and I was just wondering if you could give us a sense as to some of the areas you feel you need to expand upon.

Well, the short answer is we think there are some opportunities for R&D. The couple of different issues, as our U.S. endoscopy business grows and our ORI businesses grows, those businesses are more R&D-intensive than some of the others. So that -- those 2 businesses, as they grow as an overall percentage, rise -- raise our overall level of R&D. The second area is when we're doing R&D projects, the end of a project has a number of expenses, like prototypes and market testing and all those things, where you get a spike in R&D. And we do have a number of projects that we expect to enter that phase this year. And so we will see some spike there, too.

Okay. And then back to Synergy. I know it's about a 1.5 years now since you completed the acquisition. If you had to sort of look back and grade it in terms of how it's progressed versus your expectations regarding things like the divestitures, the expected cost synergies, et cetera, what would you say?

Well, just walking through the high-level. The cost reduction as a result of cost synergies, if you will, are on track and, if anything, are better than we expected in total. The -- I'll call it, the strategy in market position, which is the principal reason we did it, both on the AST and the HSS side, we feel very good about that. I've been -- I guess I would say on the AST side, I am more positive than I was going into it. On the HSS side, we always knew that there was going to be some -- that would be a long-term revenue increase, and we still think that's a long-term revenue increase, but it is going to take time. It's a nascent business in U.S. So I don't feel better or worse about that. Clearly, some of the -- I'll call them ancillary businesses, the businesses that neither -- Synergy had always described that they would be exiting the laundry business if they could in an appropriate way, for example. But the, I'll call it the ancillary businesses, that came along with the Synergy acquisition, they were not performing as well as what we had hoped, and that's why we accelerated the disposition because we felt it made sense to, again, to put that in someone's hands who thinks it's strategic and will do a nice job with it. And those -- that's not an area we wanted to expend resources. And when we got into it and saw the work that we would have to do in some respects, I'll call it, for lack of a better terms, the regulatory and finance work that we would need to do to handle Sarbanes-Oxley and to handle some of the regulatory issues that we have in the U.S. that are not present in Europe, that we felt it was wise to accelerate those as opposed to spending the money to turn them into those kind of compliances and then spin them out. So we accelerated that. That -- it was a little disappointing, but not strategic in any way.

Very helpful. And finally, you mentioned how Europe continues to be a bright spot. I assume Brexit will be a nonissue for you there as you see it.

Well, you've got to ask Theresa May that question.

That's a wild card.

I would definitely not characterize Brexit as a nonissue. I will say there's -- the plus and minus for us. In terms of trade, the preponderance, particularly the Synergy business, is local service business. So there's not a trade barrier kind of issue there because it tends to be done inside of the individual countries. So that -- from that standpoint, Brexit is largely a nonissue. Now the historic STERIS business, we do have facilities in France and facilities in the U.K., and we trade across boundaries, not just between the U.S. and France, and Finland, for that matter. But we trade across the world from those facilities. So how trade is handled between the U.K. and everybody else is not trivial to us. We care. It's not a huge piece of our business. Most of our manufacturing is in the U.S. So at a high level, kind of those are the answers. The real issue for us, probably bigger than anything, is currency fluctuation. And currency fluctuation is relevant to us, particularly since, in those service businesses, both the cost and revenues are in currency, if you will. And as a result, the profits fluctuate directly with the currency when we translate it back to U.S. dollar. So that is relevant to us. Again, if you have a basket of currencies and they all move in concert with the U.S. dollar, we tend to be fairly -- it changes our revenues, but it doesn't affect our profitability that much. But if any particular currency moves, it can have an impact.

And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thanks, everybody, for joining us today. This does conclude our Fourth Quarter Call. And we look forward to talking to you again in August.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.