STERIS plc (STE) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Steris plc First Quarter 2018 Conference Call. (Operator Instructions) Please also note, 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, you may begin.

Thank you, Jamie, and good morning, everyone. As usual on today's call, we have Walt Rosebrough, our President and CEO; and Mike Tokich, our Senior Vice President and CFO.

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' 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' 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 all 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.

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

Thanks, Julie and good morning to all of you joining us for our first quarter call. I will leave the details of the quarterly financial results to Mike, but will say that we are pleased to start fiscal 2018 with a strong first quarter. We had constant currency organic revenue growth in all segments, and we improved profitability nicely compared with the prior year, a 180 basis point increase in operating profit margin.

We're particularly pleased with the progress that our Healthcare Specialty Services segment demonstrated in the quarter, growing revenue double digits on a constant currency organic basis and driving operating income improvement as a result. In fact, the North America IMS business is somewhat ahead of their profit plan so far this year. Collectively, our business grew adjusted earnings per diluted share 8% to $0.85 per share.

Given our performance in the first quarter, we are maintaining our outlook for the full fiscal year for constant currency organic revenue growth of 4% to 5% and adjusted earnings per diluted share in the range of $3.96 to $4.09 per share.

From a constant currency organic revenue perspective, we will have tough comparisons versus our very strong fourth quarter of FY '17, which is a bit of a headwind in our full year organic revenue growth forecast, but we remain comfortable with our plan. The most significant change in our as-reported revenue forecast since we discussed our outlook last quarter is the currency movements that had occurred. Looking at the 9-month forward rates as of the end of June, we now anticipate that revenue will benefit by approximately $10 million this fiscal year due to the forecasted increases in both the British pound and the euro as the $25 million favorable swing from our prior expectation of $15 million negative to as-reported revenue.

As we said since the Synergy combination, our combined business will probably have greater swings in as-reported revenue due to currency movements than traditional STERIS, but will likely be more balanced on profit. This has held true so far this year. We originally anticipated currency to be roughly neutral to profit this fiscal year, and that is still the case today, even with the substantial swing in as-reported revenue expectation.

Given our basket of currencies, we have somewhat of a natural hedge from a profit perspective if the major currencies generally move together versus the U.S. dollar. As a result, we no longer expect our as-reported revenue to decline 2% to 3% due to the divestitures as we originally thought, even though our constant currency organic revenue expectation has not changed. In addition, we have not yet completed our last planned divestiture and that business contributed about $10 million of revenue during the first quarter, although with minimal profit. Due primarily to these 2 factors, we now expect as-reported revenue to be down only 1% to 2% for the full fiscal year.

We continue to feel good about where we stand today and what the future holds, as we serve health care, Life Science and medical device Customers with procedural products as well as the broadest and deepest portfolio of sterilization, disinfection and decontamination products and services around the globe.

With that, I will turn the call over to Mike to discuss the detailed quarterly financial results 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 first quarter financial results. We started the year strong with total constant currency organic revenue growth of 6% in the quarter, driven by volume and 40 basis points of price.

Gross margin as a percentage of revenue for the quarter increased 410 basis points to 42.3%. The improvement in gross margin was due to favorable impact of divested lower margin businesses, improvements in operational efficiencies, including the realization of cost synergies, fluctuations in currency and pricing.

EBIT margin at 17.7% of revenue for the quarter represents a 180 basis point year-over-year improvement. We are very pleased with our continued ability to expand EBIT margins and leverage revenue growth. The effective tax rate in the quarter was down somewhat to 23.1% versus the prior year, as we had favorable discrete item adjustments in the quarter. We continue to expect the full year effective tax rate to be in the range of 25% to 26%.

Net income in the quarter was $73.2 million or $0.85 per diluted share, benefiting from organic revenue growth, continued margin expansion and a lower effective tax rate.

Before I get into the details of the segments, I want to point out that we have made a couple of organizational changes to better align with our Customers. These changes have resulted in several small business lines shifting between segments. First, we have eliminated our defense and industrial business unit, which has always had modest amounts of revenue, and shifted those revenues into the Healthcare Products and Life Sciences segment as appropriate.

The other change we made was to move the Sterilmed contract, which totals about $20 million of annual revenue from the Healthcare Specialty Services segment to the Applied Sterilization Technologies segment to be more in line with the Customers served. The net impact of this move will trim AST's revenue growth and reduce the segment's operating margin by about 100 basis points. As we said in the press release, we will recast prior year periods each quarter for comparability purposes.

Healthcare Products segment as-reported revenue grew 2% in the quarter. Growth was driven by a 7% increase in service revenue and a 2% improvement in capital equipment, following our record fourth quarter. This growth was slightly offset by a 1% decline in consumable revenue caused by the divestiture of our skin care business, which reduced revenue by about $10 million in the quarter as compared to the prior year. We will anniversary the skin care business divestiture during the second quarter.

Within capital equipment, we saw strength in our V-PRO product family and across our surgical products portfolio. Constant currency organic revenue in Healthcare Products grew 5% in the quarter. Backlog in Healthcare Products at $135 million improved sequentially by over $25 million. Healthcare Products operating income increased 17% and operating margins improved by 190 basis points to 14.6% of revenue. The margin increase is due to greater volumes and the improvement in gross margin.

Revenue for Healthcare Specialty Services increased 11% on a constant currency organic basis, with strength in both IMS North America and our CSD outsourcing business in Europe. Healthcare Specialty Services operating income for the first quarter more than doubled from $2.5 million in the prior year to $6 million, reflecting continuing improvement in the IMS North American business.

Applied Sterilization Technologies grew revenue 6% on a constant currency organic basis, driven by increased demand from our core medical device Customers. Operating margins, which now include the impact of the Sterilmed contract, were flat at 33.1% of revenue.

Life Sciences as-reported revenue for the quarter declined 1%. Service revenue increased 5% and consumable revenue grew 2%. Capital equipment shipments were down 12% in the quarter. While shipments of capital equipment were soft, our order levels were quite strong. We ended the quarter with a record backlog of $67 million.

In addition to lower capital equipment shipments, Life Sciences' consumable revenue growth was impacted by tough year-over-year comparison. Constant currency organic revenue growth in Life Sciences was 1% in the quarter.

Life Sciences' first quarter operating margin declined 280 basis points to 27% of revenue, due primarily to the decline in capital equipment revenue. In terms of the balance sheet, we ended the quarter with $295 million of cash, approximately $1.5 billion in total debt and a debt-to-EBITDA ratio of approximately 2.5x.

As you may recall, when we completed our most recent private placement offering in February, it was the first time we issued debt, denominated in currencies other than the U.S. dollar. As the British pound and the euro strengthened relative to the U.S. dollar, the value of our debt increases. As a result, our debt levels increased from the end of fiscal 2017. Without additional acquisitions, we continue to anticipate leverage by the end of fiscal 2018 to approach 2x debt to EBITDA using current foreign exchange rates.

Free cash flow for the quarter was $44.2 million, down slightly from the prior year, as the prior year benefited from the positive cash contributions from our divested businesses along with the proceeds from the sale of assets. During the first quarter, capital expenditures totaled $36.5 million while depreciation and amortization was $43.7 million.

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

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

(Operator Instructions) Our first question today comes from Dave Turkaly from JMP Securities.

Maybe just looking at the way the divisions turned out in the quarter and knowing you had some moving parts, I was wondering, from a constant currency organic growth, if you could just talk to how you expect sort of the rest of the year to come out for the 4 divisions? I imagine we're going to expect Life Sciences to increase as some of that backlog comes through, but any color on sort of mid-single, low single, what you're looking for, for the 4 segments?

Yes, Dave. This is Mike. For the most part, we will be in the mid-single digits as we get all of our individual segments. And in regards to Life Sciences, yes, we believe Life Sciences definitely will come back. They did have a soft quarter. But with a record backlog, we feel very comfortable that the capital equipment shipments will be there. As usual, AST is probably the leader of our organic constant currency growth, although they will be slightly impacted by the change of the Sterilmed contract now being accounted for in that business.

And just one quick follow-up on AST. I mean, I know you had some new capacity online, but can you just remind us kind of where you stand today and if there are any other facilities that are coming online in the remainder fiscal '18?

Yes, Dave, there are a few facilities that are yet to open later this year. Actually, I think there's like 3 or 4 off top of my head that are yet to open. As you recall, we have spent quite a bit of money over the last year and into this year to open or expand about 6 or 7 new facilities. Bulk of those will be online by the end of this year with a couple coming into fiscal year 2018.

'19.

Or '19, sorry.

'19. And we do -- that's a mixture of kind of significant expansion, and I'll call it generalized expansion. When we're just adding the chamber some place, it's relatively inexpensive, relatively simple to do, but there are some of these that are pretty large expansions, yes. Those take a little bit longer.

Our next question comes from Larry Keusch from Raymond James.

Michael, Walt, I was wondering if we could just start with the free cash flow. So I think your guidance was $280 million, and you did this kind of low 40-ish million in the first quarter. So what helps ramp that up through the year to get to that $280 million?

Yes, Larry, it's a good question. And what you want to look back is on our historical basis. Our fourth quarter net income is 40-plus percent growth versus our first quarter, so that's really the main driver of the increase. And that -- historically, that's been the pattern that we've had. We started in -- much lower than we would have ended. So you can't just take first quarter multiplied by 4. You'll never get there.

Okay, got you. And...

The second component there, Larry, as we've talked many times, we build -- the production of revenue grows over the course of the year, and so it's not uncommon for us to build inventory ahead of anticipated shipments. So we're not trying to have our plants run 30% faster at the end of the year as opposed to maybe 10% or 15% faster. And so we do build some inventory over the course of the year, anticipating the year-end growth. So I would say, that's relatively minor compared to the point Mike made, but it is clearly a point.

Okay. And then just a couple of other quick ones. So just staying on the financial and then just 1 or 2 quick business line item issues. But on the gross margin, so obviously very strong, very nice to see. How do we think about that gross margin if -- whether there were any sort of one-timers there that really influence that level? Or is that kind of the right way to think about the run rate going forward now that you've divested the business? Is anything working on your operating efficiencies?

Yes, I would say the -- one of the large drivers of that 410 basis point improvement to 42.3% gross margin were the divestitures. That represented about 300 of that 410 basis point improvement. We did also get a bit of currency, and we did get a bit of price. And then we also did have some operational efficiencies, including -- we are still anticipating about $10 million of cost synergies this year from the Synergy Health transaction, and we are on track for that. So we've got a couple of million dollars of savings in this quarter also.

Larry, I would comment -- I mean, Mike laid out the components, but those components are all go-forward type components. So I don't see this being a onetime type of spike.

Okay, excellent. And then just lastly, if you could just comment again, you mentioned in your prepared statements, IMS North America. It sounds like it's a little bit of ahead of plan and profitability. So just any sort of commentary on how that business is performing, given some of the challenges last year relative to your expectations. And then on the Life Science side, the backlog obviously, I think, certainly explain the weakness in the capital side. It looks like it's a timing issue. But one thing that you ran into on the hospital front was sort of this mix of project versus sort of what I'll call routine capital orders. Is that dynamic similar in Life Science? Or can you -- you kind of get a better feel from when that backlog goes up that, you'll be able to convert that to revenue through the year?

Yes. Let me take the 2 questions. First, on HSS. And predominantly, IMS and North America, as you know, they had significant objectives this year to improve their profitability. Although we fully anticipated that would happen, and they have a good plan and a good approach and the fourth quarter was the beginning of that, and so we were pleased. We are even more pleased that they continue to execute that plan. So they still have a ways to go, and they're working down their plan. But at this moment, they're actually a bit ahead of their plan, both in terms of revenue and profit growth. We had a double-digit increase in revenue growth, and that's not our current expectation. We've been saying that we think the long term might be a little lower, and so they had a nice pop in revenue growth and then they've also converted that to profitability. So we're very pleased with that progress, but they still have work to do.

As it relates to the Life Science, I've been hesitant to call a new era in the capital business in Life Science for a long time because, as you know, you need to go way back, 10 years ago, 12 years ago. That was a pretty robust business that kind of disappeared as big pharma consolidated and closed plants and did those things. But it was -- we did a significant drop in revenue. We hit the bottom probably 7, 8 years ago, and we've just been holding steady at those levels, bounces a little bit, but it has - been holding steady at those levels. But we are seeing both project orders or just significant orders and pipeline of orders that does appear to be different. We mentioned that last time. It does appear to be different than that historic trend. So we hate to be projecting too far out in the future. But for the next 6, 12 months, I would say that we clearly are seeing strength in that business. That's partially -- there's more orders in the business that we serve, the biopharma and vaccine business, and those businesses are strong. And it seems like a lot of their consolidation may be over, and they're now reinvesting in their plants more than they had in the last 4, 5 years. But it's also the products that our guys have put in place. We have a number of new products in washing, in steam and in hydrogen peroxide that have all done -- well, let's just say, have been received nicely in the field. So those 2 things in concert, there's a bit of a drift up that we think in the market and a bit of a drift up because of our new products. Having said that, the business doesn't look exactly like our health care business. There is less of what I'll call the routine business, and it's more project-oriented. Even on an individual basis, some of these sterilizers, instead of being $30,000, they might be $0.5 million. Some of these sterilizers are the size of rooms, not the size of an oven in your kitchen. And as a result, it does tend to be lumpier. Projects do have a habit of getting delayed by Customers. So there is always more risk in any given quarter or even in any given year. If the orders are sitting in the third and fourth quarter, they can move out. And so there is more risk on that. They are -- it is exceedingly rare for them to disappear because these are typically specialized products, specialized orders. So they're on the line. Once the order's in the house, they're on the line to make good on the order. So they -- it is rare for them to disappear. It is not rare for them to slide. We're comfortable with where our forecast is right now. We -- if everybody stayed on their projection, if our Customers -- on their projection, we would exceed our forecast. Our experience is they don't do their projection, so we think our forecast is where it should be.

Our next question comes from Matthew Mishan from KeyBanc.

Can you start with the AST capacity expansions? And what that may mean for kind of revenue growth for that segment in FY '18 and FY '19? And is that capacity filled and accounted for already? Or is that something that you're going to -- once it's opened, then you're going to go ahead and find Customers for it?

Yes, good question. Because there are a number of expansions here, you cannot answer it. Most of your questions are one or the other. The answer is -- almost every part of your question, the answer is yes. There are a number -- particularly larger expansions. It is rare for us to do significant expansions without having a customer onboard that we know is going to take at least take a baseload of that expansion, and that is typical in these cases. There are times when we just -- if we're in a concentrated area, for example, in Northeast United States where we will kind of do it "on spec", but that is relatively rare. And again, we have -- we know the Customers are there. We're working with them. We may not have a guarantee. But generally speaking, for larger expansions, we have -- if not a guarantee, sometimes we actually have take-or-pay guarantee, we have long-term contracts. There are a number of things we do to make sure that we're not expanding in the face of uncertainty. Having said that, there's also just generalized expansion. In no cases in the expansion is it completely sold because we don't ever want to be in a position where our plants are completely sold out. We are always trying to build capacity ahead of them being completely full because that doesn't leave us or our Customers any turnaround capacity. We want to make sure we have that. So we do try to avoid that issue that we -- as we build, and we will try to get it in the right places. And then I think the final answer is, we're talking mid- to upper-mid kind of growth rates in that space, and so, by definition, you have to expand something like that level all the time. We have 60 plants [now], so they're not all the same size, but just think through the map. You've grown 7%, that's 4 plants a year on average. They're not all plants, they may be 3 new chambers in 8 plants. But it is -- as a general rule, we will almost always be expanding that amount because we do tend to run toward capacity in those 75%, 80% level. So we're always going to be needing to build ahead to provide that capacity.

And then moving over to the Healthcare Products backlog. It's the second straight quarter that, that was down. Is that at all concerning for you that year-over-year, it's been down? And then your general thoughts on what your Customers are indicating around hospital capital spending [rent]?

Sure. Well, just like our Life Science backlog being really up, we love backlog to be really up. So it is -- on a year-over-year basis, we are down a little bit. But if you look at it sequentially, we've been gaining since the huge fourth quarter. Basically, we shipped a lot in the fourth quarter last year. And we do see it kind of quarterly, we see it monthly. We've been growing sequentially with orders. So it's not overly concerning to us, no. Would we like to have $30 million more? Of course, always. No matter where we are, we would like to have $30 million more. So we're comfortable with the backlog we have. I would characterize it -- I think we've seen enough of the other capital equipment makers, talking specifically about North America now. I would characterize the market as stable, not growing double digits. It's not shrinking, it may be growing a few percentage points, low single digits probably at capital right now, but certainly stable. And I view stable, given the level of uncertainty right now in health care, I view stable as positive. We're just not seeing -- we're not seeing a result of the uncertainty, that's really out there for health care providers.

Okay, got it. That's helpful. And the final divestiture, that just doesn't seem you want to close. Is that -- have you still included a $30 million impact for the second, third and fourth quarters in that? Or have you removed it? And so why is it -- and what is the delay in the closing of that business?

We have not included ongoing revenue in our forecast. That's the first answer. And the second answer is, this is about the buyer's financing, it's not about the business. And so it's timing and all those things around their financing. And like all deals, sometimes they have it, sometimes they don't. We still expect this one to happen, but it could not. If it doesn't, that's not a crisis. We just have to report different numbers. This business isn't hurting us, it just doesn't fit what we're doing. So that's kind of the issue. We are still hopeful that we will get this thing closed in the next little bit, but it is around their financing.

Our next question comes from Joel Kaufman from Goldman Sachs.

First, I just wanted to start on the pricing, positive this quarter. Just wondering to what extent that was a function of mix, better performance of consumable to recurring revenue relative to capital equipment? And then maybe what's assumed in the outlook for the remainder of the year on pricing?

Yes. We -- as I said earlier, we did get about 40 basis points of pricing, and that was basically a little bit here and a little bit there. It really wasn't any one segment driving the majority of that price. As we stated at -- in April or May, when we had our last call, we were assuming 0 price in the forecast or the outlook for the year. We are still assuming no additional price in our current outlook.

And another piece, mix, we do not count mix in price. So there is no mix in price, our mix is -- the way we put mix cross-product is in the volume.

Helpful. And then maybe shifting -- so staying with the Healthcare Products side of the business. Any comment on the competitive dynamics that are happening there? It seems, from what I can tell, you guys are growing above market, maybe mid- to high single digits on the recurring side of the business. Just trying to understand if you guys are picking up any market share.

In the short run, that's always very difficult to measure, I mean, you're talking 0.5 percentage point. We don't have good enough visibility, I'd say in the short run to answer that question. We are comfortable with our position in the capital equipment business and in the consumable business in health care, particularly in North America. And we've actually seeing some turn in our OUS business as well. We mentioned last time, it seems like a couple of the areas that had been sliding have been bottomed or turning around, but we do see that. So again, I wouldn't characterize it as any significant change in market share, but we're comfortable with where we are.

And then, Mike, I may have missed this on the call, but could you just help bridge the walk from the updated FX assumption, raising the reported revenue guidance for the year and then maintaining the EPS range? Just how that flows through on the profitability side?

Yes, certainly. So if you look at FX, we look at our forecasted rates. We are forecasting that all 4 of our major currencies, the Canadian dollars, the euro, the peso and the pound, will strengthen compared to the U.S. dollar. And if you -- as you step back, we like a strong euro and a strong GBP because that's really where we have our revenue and our expenses associated with that revenue. So as we get more strength in those 2 currencies, obviously, we get a pickup in revenue and a slight pickup in profitability. At the same point in time, the peso and the Canadian dollar is where we have our manufacturing facilities. So that's really where we have our costs. So as those currencies strengthen, our cost increase. So we get a nice increase in potential revenue from the euro and the pound, but we get a potential decrease in profitability as the Canadian dollar and the peso all rise. And fortunately or unfortunately, all 4 are going in the same direction, which leads us to our analysis.

One way to think about it is there is a shift due to the currency. The businesses that are service businesses in Europe and Britain will increase their profitability with the strengthening euro and pound. And the health care and Life Science businesses that have manufacturing largely in the capital equipment businesses because the other businesses are U.S.-based. But the, I should say, the IPT capital equipment business and the Life Science business are built in Canada and Mexico, have the opposite effect. And it just so happens, they're roughly similar effects. So if those 4 currencies move in lockstep with the dollar, let's say, 5% up or 5% down in lockstep, there tends to be no profit impact. So we have a natural hedge, which we view as a positive.

Our next question comes from Chris Cooley from Stephens.

Maybe just a couple of quick house-cleaning (sic) [housekeeping] for me at this juncture. Could you maybe characterize, either Walt or Mike, just the Healthcare backlog, that $25 million that you saw increase sequentially. Could you break that out between new projects or new-build versus replacement? I just want to make sure we don't get over our skis, if there's any kind of change in that like we saw roughly a year ago. And then similarly, could you -- maybe if I missed this, I'm juggling a couple of calls this morning, but did you also reaffirm the cash flow guidance for the full fiscal year? And I have just one other follow-up.

Yes, Chris, this is Mike. We did reaffirm the cash flow -- free cash flow guidance that we gave last time. I think that was $280 million, is our outlook. As far as backlog, we've actually -- if you remember last year at this point in time, we did flip flop in health care, and we actually saw a more project business, which caused our backlog to stay longer and our shipments to occur later in the year. This year, we're actually seeing the opposite. We're back more to our historic 70% project -- sorry, 70% replacement and 30% project business. So it's actually flipped. And actually, we saw that changing probably late in the third quarter and into the fourth quarter. So that's where we are right now, Chris.

Super. And then maybe, Walt, could you maybe just walk us through what you're seeing as both the kind of the tailwinds and the headwinds here that would put you either at the lower or the upper bound of guidance? I appreciate that it's a great start to the fiscal year, but still very early days. But just kind of curious what you're watching most intently when you're thinking about both into the range there?

Sure, Chris. Clearly, health care reform is top on our list of things to watch. It has been now for, I don't know, 1.5 years maybe. And so I've already commented that we have not seen, what I would call, a significant effect to the uncertainty of health care reform as it relates to capital spending. Now capital spending loves change. It doesn't like uncertainty very much. So we are watching that, that's what we've already commented. I think other people like us who do capital equipment are seeing and saying the same thing that it's a stable environment. It doesn't seem like there's a lot of reaction to uncertainty. People are more business as usual in terms of capital spending in U.S. hospitals. But that is something, clearly, we'll be wanting to watch. On the consumable side, you may recall, we had a little bit of a scare in the December time frame last year. It just shrunk, surprisingly to us in all 3 of the market segments. That has clearly come back, and I think in almost every case, if not all cases, not only does it come back, but we'd made up what the apparent loss was. So we're keeping an eye on that. We still don't quite understand that. So come toward the end of this year -- we think it's probably, it was holiday effect, just the way the holidays happen to turn and we had a few Customers that did supply chain closings and things like that. So we'll be watching that again, but we have no indication or no reason to believe to be different for normal pattern. The international business does seem to be bottoming and coming back in some of the places where we've had some real turns in the last couple of years. Latin America seems to be picking back up for us at least and the Middle East, which had been absolutely dry, we're beginning to see some volume in that space again. Europe has remained pretty consistent for us anyway, so that's -- that remained the same. And the Pacific Rim has actually picked up significantly for us. So I'm talking about health care. So kind of in general -- and when world economies pick up, which as you guys know that is happening, it puts pressure on the governments to not control health care spending. And so to the extent the world economy has picked up, that's a positive for us. And even though we've talked about the dollar, how it sits versus the other currencies, again, these are the accounting FX we've described. But when the dollar strengthens, it makes it harder to sell U.S.-built product in other places. And when currency is strengthened versus the U.S. dollar, it makes to be easier. So I think that's part of the reason we've seen some pickup in the OUS part of STERIS business. So those are the things we're watching. Right now, I would call that stable to positive.

Maybe I can squeeze one last one here. Just following on the thought process. Are you seeing stability as well in commodities pricing, in particular Cobalt 60? Just trying to think about the inputs there to gross margin.

Yes. Let me break that into 2 comments. Everything, but Cobalt 60. And since you raised Cobalt 60, I'll come back to that. The everything but Cobalt 60, we're seeing fluctuations, but the fluctuations are relatively minor. And as you know, we have a number of oil-based products, so with -- our chemistries are commonly oil-based. And our service, we got a lot of vehicles with our service. So we are sensitive to the oil. And as you know oil is bouncing a little bit, but it's staying, relatively speaking, in good shape. We have seen some other commodities move up a little bit, stainless steel. But again, nothing of significance. And we do hedge nickel, which is a big -- the biggest component of steel -- a stainless steel price variation, typically. The last thing you mentioned was Cobalt 60. And Cobalt 60, we have a -- for all of our supply out of North America, we have long-term contracts that have prices built into them. So we do not see an unexpected increase in Cobalt 60 for a number of years anyway. And then OUS, we've not seen any significant price increase.

Our next question comes from Jason Rodgers from Great Lakes Review.

Yes, just one question. The question on the M&A outlook. What you're seeing the most opportunities out of your segments and if future acquisitions in IMS are a possibility as well?

Yes. I'd say a couple of things there. As is always, if you look at the number of deals we have done in the last 6, 7, 8 years, the preponderance of those have been small private businesses and I don't see that changing. I think the preponderance will likely continue to be tuck-in type businesses. As you know, there has been a great deal of consolidation of the -- in the medical device space. And when there's a great deal of consolidation, there's often some components that don't fit quite as well as others. And so that would be, in my opinion, a fertile area and then the balance is public companies. But as you know, pricing is a little heady right now in the public company space, and that's something we would want to be careful about as we look at those of things. So at a high level, that's I think where we are.

(Operator Instructions) Our next question is a follow-up from Larry Keusch from Raymond James.

Mike, just one additional question. So in your thoughts around your debt-to-EBITDA leverage ratio and your comments about potentially moving down to 2x leverage by the end of the year, if there weren't any deals done. If you get there, let's say you're at 2x leverage or maybe even a little bit below by the end of the year, does your -- do your capital allocation priorities change? Or would you think differently about capital allocation?

Yes, definitely, Larry. As we approach the 2x leverage, we would definitely rethink our priorities, right? If you remember, we added debt repayment back when we acquired Synergy, when we hit 2.9x leverage and we wanted to make sure we focused on -- and signal to everybody that the repayment of debt was a priority for us. As we get lower and lower, we are internally looking at other alternatives, and we would definitely have to change our mindset if we were to continue to include that or not as a priority.

Okay. And I guess, just the last follow-on to that is, as you look at your M&A pipeline, how does that sort of fit today versus what is considered typical for you guys?

I wish I could tell you what typical pipeline looks like, Larry. It seems like they come in clusters and go in clusters, though I think -- so the answer is I think that's typical and I think that's what we're seeing. We see a number of the things, and then we don't see things then we see a number of things. And even the ones we see, they're not always as actionable as you would like and we don't control the timing. So I don't think there's a radical change in our thinking on pipeline, but we don't have much control of the timing.

And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

Thank you, Jamie, and thanks, everybody, for joining us this morning. We look forward to seeing many of you as we get back out on the road in the coming months.

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