STERIS plc (STE) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the STERIS plc Third 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 Ms. Julie Winter, Senior Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie, and good morning, everyone. On today's call, as usual, 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 express written consent of STERIS is strictly prohibited.

Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, those risk factors described in STERIS' 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 through 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 currency exchange rates and acquisitions and divestitures that affect the comparability and trends in revenue are removed. We define free cash flow as cash flow from operating activities less purchases of property, plant, equipment and intangibles, 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 Mike.

Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review our third quarter performance.

For the quarter, constant currency organic revenue growth was 5.2%, driven by volume and 110 basis points of price. Gross margin as a percentage of revenue for the quarter increased 250 basis points to 42.6%. Of the improvement, 170 basis points is due to the impact from the divested businesses with the remainder due to favorable product mix, price and productivity improvements, somewhat offset by negative impact from currency. EBIT margin expanded 140 basis points to 20.8% of revenue for the quarter. We are very pleased with our continued ability to expand EBIT margin and leverage revenue growth in addition to the favorable impact from the divested businesses.

The adjusted effective tax rate in the quarter was 22.6%, which added approximately $0.05 to earnings per diluted share. Included in the third quarter effective tax rate is the impact of the U.S. Tax Cuts and Jobs Act enacted in December. The tax reform's primary change is a reduction in the U.S. federal statutory corporate tax rate from 35% to 21%. As a March fiscal year-end company, we benefit from a blended U.S. tax rate reduction from 35% to 31.5% in the current fiscal year. Because tax law changes must be accounted for in the period of enactment, we have recorded a benefit in our third quarter tax expense to account for the year-to-date effect of the blended tax rate, which will not be repeated again in the fourth quarter. While our assessment of the effects of the tax reform is ongoing, we do expect the benefit we recorded in the third quarter to result in a tax rate of approximately 25% for the full fiscal year, which is at the low end of our prior expectations.

Net income in the quarter was $96.3 million or $1.12 per diluted share, benefiting from organic revenue growth, continued margin expansion and the lower effective tax rate. Segment growth has been detailed in the press release in both the tables and the copy. In terms of the balance sheet, we ended the quarter with $284 million of cash, $1.42 billion in total debt and a debt-to-EBITDA leverage ratio of approximately 2.25x.

Free cash flow for the first 9 months was $216.4 million, a 19% improvement from the same period in fiscal 2017, mainly due to higher earnings and lower requirements to fund operating assets and liabilities year-over-year.

During the third quarter, capital expenditures totaled $38.1 million while depreciation and amortization was $44.7 million. We now anticipate that free cash flow will be about $300 million and capital spending will be approximately $160 million for the fiscal year.

With the enactment of tax reform, we anticipate repatriating about $100 million of cash, which will be used in alignment with our capital allocation priorities. Our capital allocation priorities remain the same: maintaining and growing our dividend relative to our growth; investing in organic growth and our current businesses; targeting acquisitions and adjacent product and market areas; reducing our total company leverage; and finally, share repurchases if the other uses of cash are lower than our desires and do not offset dilution.

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

Thanks, Mike, and good morning, everyone. We're now 3 quarters of the way through our year and have delivered constant currency organic revenue growth at the high end of our expectations, growing 5% year-to-date and are on track for another year of record earnings.

Looking across our portfolio, we have high single-digit or low double-digit revenue growth across the majority of our businesses, driven by solid underlying market trends and new products and service offerings. In particular, our Healthcare Specialty Service segment has outperformed our expectations across the board, growing constant currency organic revenues 10% year-to-date.

Life Sciences, whose capital equipment business has now had 2 strong quarters in a row with continued strong backlog, grew constant currency organic revenue 8% in the first 9 months of the year.

Our AST business continues to experience increased volume from our core medical device Customers. In addition, I am pleased to report that our facility in Puerto Rico is now back to normal production and has been since December, much faster than we anticipated. We originally thought that the hurricane in Puerto Rico could impact profit in our AST segment by as much as $3 million this year. Based on where we stand today, we now expect the impact to be just $1 million, all of which was incurred in the third quarter.

In addition, we have recently launched our sustainable EO sterilization service offerings, which will assist Customers in developing strategies to reduce the amount of ethylene oxide used during sterilization, and at the same time achieving prescribed sterility assurance levels. That is good for our Customers and good for the environment.

Within Healthcare Products, we have solid growth in organic (recurring) revenue, fueled in part by many new launches, including our newest 20-minute biological indicators for low temperature sterilization, named Celerity. This growth in recurring revenue has been a strong factor in our growth in Healthcare for the last couple of years. Celerity is but 1 of about 30 new products we are releasing in our health care product segment this year.

Healthcare capital equipment has had somewhat lighter revenue than anticipated with shipments down year-over-year, but that is offset by a nice pick up in backlog on both a sequential and year-over-year basis and a pipeline of potential future business that is solid. As you know, capital equipment businesses can be lumpy, and we had strong shipments last year, especially in our fourth quarter. So we're not particularly concerned with Healthcare capital.

Moving on to the impact of tax reform in the U.S., Mike has already discussed the specific impact to STERIS in the third quarter and our expected outcome for fiscal 2018. While we will wait until our fourth quarter call to provide more specific details, our best estimate as of now is that STERIS will have an adjusted effective tax rate in the low 20 percentiles in fiscal 2019, down from the mid-20s this year. Let me be clear -- there are many complicated aspects to the new tax law, and we and our advisers will continue to evaluate the impact of those tax provisions on STERIS. And naturally, we'll be working to legally minimize our taxes.

As is the case with many companies, the U.S. corporate tax reform results in significant additional earnings for STERIS to use to strategically grow our business and return value to our Customers, our people and our shareholders. This will make us more competitive with our global competitors, many of whom manufacture outside of America. One of our first decisions on that front, that we announced in our press release this morning, is that we will be paying a one-time special bonus to all U.S. employees other than senior executives. The total bonus payout is expected to be about $7 million, which we plan to exclude from our fiscal 2018 adjusted earnings. This is just one example of our continuing investments in our people who are the foundation of our success.

Turning to our revised outlook for 2018, we are maintaining our outlook for 4% to 5% constant currency organic revenue growth for the full fiscal year. I would remind you that our fourth quarter last year was extraordinary, so we do have particularly difficult comparisons in Q4. Reflecting our expected operating performance at the high end of our previous guidance, plus the benefit of the lower effective tax rate, we now expect earnings per share to be in the range of $4.10 to $4.16, which is either 9% or 11% growth from prior year levels. We are very pleased with our overall performance so far this year and are on track for another solid year of growth and record performance and look forward to many more.

Thank you for joining us today and for your continued support of STERIS.

I will now turn the call back to Julie for Q&A.

Thank you, Mike and Walt, for your comments. Jamie, would you please give the instructions? And we'll get started on Q&A.

(Operator Instructions) And our first question today comes from Isaac Ro from Goldman Sachs.

A couple for me. First off on the med device kind of Customer demand. If we look across the industry this quarter, obviously pretty solid results for other companies, but seems like your business was a little bit better than otherwise would have been expected. Anything you can point to that might be onetime in nature or Customer specific that helped drive the strength in that business?

No, not really. Again, we do seem to be picking up -- specifically the AST business, where med device in general would drive that, we do seem to be picking up steam a little bit. Again, I suspect we may be picking up a little share in that space.

Okay, great. And then maybe a follow-up on the expense side. Obviously, you have the tax benefit here. And you mentioned the onetime bonus payment to employees. Are there other elements to the tax reform that are going to lead you to reinvest more aggressively on longer-term projects, innovation-related things? Just kind of curious what else you're doing with the windfall here to try and fuel future growth for the business.

Sure. We have been long-term in-sourcer, on-shorer people -- maybe before it was popular again -- for the last 10 years, basically. And so that's something is clearly a part of what we expect to do. We do like -- we like to make things. We like to design things. We like to make things. We like to sell things. So all of those things are a natural element of what we do. As a result, we've grown employment and we've been able to bring more money to the bottom line. But the Tax Act clearly incents us to do more of that. And so all things being equal, there are projects that if they were at the margin maybe not as attractive as we might have liked, they may be more attractive. So clearly, capital spending in the short run is more attractive than it was 2 years ago. And almost any, I'll call it, investment that gets a reasonable return in the U.S. is more attractive than it was a year ago. So all things being equal, we would expect to see some more investment in that space.

Our next question comes from Larry Keusch from Raymond James.

Just a couple of quick questions, maybe starting with AST. So that growth was obviously nice, 12.5% on an organic basis. I guess, Walt, you indicated the disruption from the hurricane was less than anticipated. Is there anything else to read into that growth rate? I recognize the comp was a bit easier. But was there any sort of perhaps, on Puerto Rico, companies that were moving more aggressively to get volume through the facility given that they were coming up to speed as well?

I don't think so. You're correct. You remember last year third quarter, kind of all of our consumable or recurring businesses just had a slump around Christmas. And at the time, we really didn't understand it. And to be honest with you, we still don't really understand it. Our suspicion is it was just the way the holidays fell, and people were taking off more time than normal. And that seems to have come to fruition because we didn't see that in the third quarter. So that -- on a quarter-over-quarter, that's clearly the case across the board for all of our consumables. But when you look at it for the year, we're still having a wonderful consumables year across the board -- recurring revenue, actually, across the board. And I don't think there's any overwhelming change in the Puerto Rico issue. That is, yes, there were things that were not done. And yes, there's a little bit of catch-up. But it turned out -- it turns out that they were not down as long as any of us thought. That is, our Customers were not. We got up in about 1.5 weeks and were able to start processing. And they really have done a nice job. You have to give credit to the Puerto Rican people, they have just -- because they're still living in pretty tough conditions. But across the board, for what they're doing in all the medical device companies and then those that feed us, of course, and our plant as well, we're just ecstatic at the work they're doing.

Okay. Terrific. And then just 2 other quick ones. Just on HSS, again, really nice nearly 9% constant currency organic growth there. But the margin was down sequentially, I believe, 5.6% in the third quarter from 8%-ish in the 2Q. So again, anything that sort of changed there in the mix there to be thinking about? And maybe what's the right way to think about directionally where you think that margin can go over time?

Sure. Larry, we spoke a year ago this time. We're having a very different conversation. As you remember, a year ago at this time, we said we overinvested way in front of revenue that -- or just in front of revenue we expected, and then not only did we not get what was expected, we lost some. And so that really hurt you in the service business. In this case, we've held back just to make sure -- we are once burned. You want to be a little more sure. And now they've begun to reinvest for the future growth. But we will be far more careful, I'm sure. And don't expect a significant reduction as we saw in the past. So you will see some variations quarter-to-quarter. But if you look at it kind of longer term, we don't expect -- or we do expect to be where we said we were going to be.

Okay. And then last one. I know you're not providing 2019 guidance at this point, and thank you for the color on the tax rate. Just 2 things come to mind. Number one, is there anything that you can say as it relates to Northwell and timing there? And then also, obviously, there was -- a meaningful portion of the margin expansion this year was due to the divestiture of the assets. So is it fair again to think about your typical 50 to 100 basis point underlying margin expansion target is the right way to think as we move forward past this period of the divestitures?

So 2 questions, I think, in there, and I'll try to hit them both. Northwell, no real further comment than what we've already said. As you know, has been reported not by us but by others that the building is essentially done, and we have said that we are spending capital on that space now. So we fully expect to start up next year sometime. And we're giving no more guidance on that now, but we will in the future. So at a high level that's that conversation. We also have seen, again, continued interest in other places to do similar-type things. It will not affect next year in any significant way other than potential capital spending. But we have some things that are looking more like fire than smoke now, so we are seeing some early signs that, that may come to fruition more than the past year, 1.5 years. The last topic you raised was margins. And generally speaking, I think you're on track. The bulk of the divestiture movement has occurred. And so if you look year-over-year, those kind of -- our "normal" cost reductions. I will caution, as always, we are in our planning cycles. We're thinking through what our strategic investments are going to be. And as you know, we don't always drop every dollar that we find on to the bottom line. We invest it for the future and we invest it in our Customers. So -- and to us, tax is just one cost. So there are a number of costs that we will be working down next year, and some of which is the tax rate. And we will make judicious decisions about what to do with those things.

Larry, just to be clear, when we say next year, we mean next fiscal year.

Oh, yes. Next fiscal year is always next year for us. Yes, exactly.

Over next question comes from Dave Turkaly from JMP Securities.

I guess, we see some of the benefit of sort of your balanced or diversified business today. But Walt, just to sort of make sure and check the box and hear your thoughts sort of on the Healthcare capital side. Again, any other color -- I mean, I know it's the second quarter where -- and I know it can be lumpy, but any color on major products or projects and sort of replacement capital, anything that you could give us just to clarify what you're seeing out there today?

Sure. At a high level, again, I would not characterize -- and now I'm talking more about the pipeline, which I think is your question, the hospital spending pipeline, if you will. I wouldn't characterize it significantly different in North America than we have been characterizing it in the past. So we still see a solid pipeline in the future projects that we're seeing for the potential future -- or for real projects that we expect to occur in the future still looks very similar to what we've been talking about. It's solid to maybe slightly up. So that always makes us feel good, particularly given the level of uncertainty that's going on in health care reimbursement issues in the United States. In the rest of the world, actually the pipeline, I would characterize, and I think I did last time, the rest of world seems to be picking up a little bit and particularly certain areas. Europe has stayed strong for us. Middle East was pretty much a disaster over the last 18 months. But it is now picking up. So we -- and we look at EMEA as one unit. We see, I think, more strength there than we have seen in the past. Asia Pacific was very strong the last couple of years. It kind of flattened out this year, but I think we see a better future there in terms of pipeline. And Latin America, which has been really tough for us, has seemed to have bottomed out. So we have a bottom and maybe a little better pipeline there than what we have in the past. So the rest of the world is actually looking stronger. I will add, we talked about currency and the effects of currency a lot in terms of when it hits the revenue and when it hits the bottom line. But that's, I'll call it, the accounting version of currency. When we have a -- when the dollar strengthens to other currencies. It is a headwind for STERIS because we tend to build in North America, and most of those costs are U.S.-based costs. And so they're U.S.-dollar based. Most of our competitors are not building in the U.S. And as a result, most of their costs are other than dollar based. So when the dollar strengthens, we have headwinds selling both in the U.S. and outside the U.S. When the dollar weakens, we have a tailwind. So up until the last couple of months, we've been pretty much running into headwinds. The last couple of months, things are changing. Now I do not try to forecast currency. But -- because if I can do that, I wouldn't be working here. But in any event, we do see some relief of the headwinds that we've been facing in terms of currency for the last couple of months.

Great. And then, I guess, just a quick follow-up on AST, obviously. People have talked about how strong it was. As you look at that close to 10%, high single-digit growth, maybe gaining some share, can you sustain a growth rate like that? I mean, my recollection was that some of these -- your facilities run pretty hot, and that there wouldn't be may be capacity for you to sustain sort of increases like that without sort of expanding. So just love to get your thoughts there on what that could look like even as we're looking ahead to next fiscal year.

Sure. I mean, no question, if you have 60 plants roughly and if you grow 10% a year roughly, that means you have to build 6 plants a year roughly. Now a plant is not a plant. The U.S. plants tend to be more concentrated and as result tend to be larger, probably closer to 2x larger. And so that's one set of facts. It is very different to have to build a brand-new greenfield plant as opposed to adding a couple of units inside a plant, or adding onto a plant where we already have the ground. And we have a number of expansions, which is a big piece of our capital spending. A number of expansions going on as we speak. I think as many as 7 or 8, I'm doing that off the top of my head, but that type of expansion levels across the world. And we are, in fact, investing across the world in those expansions. And so we think that the growth is there. And we will be -- it used to be -- if you go back in time, the Isomedix days 10 years ago, when we did a plant expansion, it was a big deal. It caused profitability to fall pretty significantly because a new plant takes a while to get filled and then make that money. We've worked hard to get that more on a routine basis. So we're always expanding, and I suspect we'll always be expanding as long as medical devices keep growing, and which we don't see any end to that, frankly. And so it's much less of a pain now when we -- to the bottom line finance of the whole company, STERIS in total and certainly AST when we're doing that. So there are expansion dollars, if you will, a reduction of profitability already in our current operations. And there will always be, as far as I'm concerned.

Over next question comes from Matthew Mishan from KeyBanc.

Walt, your -- most of your businesses are growing high single digits or even low double digits now. I mean, you had a really incredible quarter in almost everything with the exception of Healthcare capital equipment. Could you give us a little bit of color on maybe the surgical side versus the infection prevention side? And you said you're not worried about it, but why should we not be worried about it?

Well, first of all, I'll break it to 2 questions. Why we're not worried about it is if you kind of look longer across the board, it hasn't grown that fast but nor has capital spending grown that fast. So from a long-term perspective, we're not that concerned about it. At any given time, in each of the units, we have product families or products that are doing really well and product families that are not doing as well, and that's -- we have that currently. So for example, if you look the last couple of years, our ORI business has just been on fire. It was actually stronger last year than this year on a growth rate kind of issue. And that just happened. A couple of big projects can change that very quickly. The same is true with our -- what we call EMS, or equipment management systems. They have very strong growth last year, less strong this year. So it's a mix and match of products across the area. For -- in the IPT business, washing has been particularly strong lately; and steam sterilization, less strong lately. Hydrogen peroxide was extremely strong a couple of years ago. Now it's still strong. So it mixes and matches. And when we look across the board in what we're doing -- what we have done and what we are doing, we believe we're in a good position in our capital equipment businesses. And again, I mentioned the headwinds of a strong dollar, and that's receding a bit right now. And that's obviously positive for us in terms of relative -- particularly outside America but even inside America. Since most of our competitors manufacture outside America, it changes the headwind-tailwind equation.

And then you mentioned 30 new products in that area. How much -- on average, what are you -- what number of products do you intend to release in that area in any given year? Is there any difference in level of importance of a couple of them versus previous couple of years?

Yes. Absolutely, there are significant differences to level of importance. And we have continued to pick up product launches in the Healthcare Products group in total. And so we have to continue to grow. I guess, I would say, 30 is a big number. And -- but on the other hand, we're not -- I wouldn't suspect that number is going to be a whole lot less next year either. So we have picked up our product development. We have a broader product line today. So each of those product lines needs to be refreshed on a routine basis. So I suspect we will see more and more. And when I said the 30, that's a mixture of capital and consumables. So it's -- but it is across the board in capital and consumables. We have a number of releases. I mentioned the biological indicator. That's really a nice change for us. We had a 24-hour biological indicator for hydrogen peroxide, which was a state-of-the-art a few years back. We were the first to also have one that went across our line as well as the J&J line, which was state-of-the-art. People have caught up with us and/or passed us. And now we have a 20-minute biological indicator in that space, which is state-of-the-art. So that's just an example, but I could walk through 10 examples like that where either we're refreshing or bringing new products to market.

And last 2 for me. I just wanted to follow up on the "more fire than smoke" commentary around Healthcare Specialty Services and that all sites [central to] processing model. What regions are you -- is that a U.S.-based comment coming off of Northwell? Or is that in various international regions? And the size or the type of projects you're seeing, I mean, you sized Northwell before. Are they similar-type project sizes or smaller, bigger? And then for Mike, I'm not sure if you updated the FX guidance or not. I think last quarter you said you thought it would be favorable by $35 million.

I'll answer the first couple of questions. First of all, I was specifically talking about North America. Europe, which is where the outsourced CSDs started, really was -- the Europe has been fire for a long time. The Synergy operation, that was one of the principal reasons we were interested in Synergy was the European outsource operations. And they are growing and continue to, but that's not -- I'll call it, that's not a novel thing in Europe. I wasn't thinking of them, although they have more opportunities as well. But in North America, as you know, we said this was a long project to create a nascent market in this space. And Northwell was kind of the lone example for a long time. And we do expect to get that up here in the next bit, but has been slow to get started. But we now have a couple of other places that are pretty interested. I think we're closing in on doing a couple of other ones. So -- and then generally speaking, I would expect them to be smaller than Northwell. Northwell is a very large local IDN. And so it has a number of hospitals that are geographically concentric. I would expect most situations to be smaller.

And then, Matt, regarding the FX outlook. So if we use the forward rates at the end of December, our forecast would be still to have revenue positively impacted by about $35 million from the original outlook, and that EBIT is still about neutral as both the pound and the euro have increased more than the peso and the Canadian dollar.

Matt, just to clarify on the year-over-year, that translates to $20 million year-over-year on revenue. $35 million from the start of the year plan, $20 million year-over-year.

And both being neutral to EBIT.

Our next question comes from Blevin Brown from Stephens, Inc.

On Healthcare capital equipment, just building on Dave's questions from earlier, it sounds like the end markets remain favorable in the U.S. and maybe a little bit more favorable internationally. You may also get some benefit from currency there. So should we think about the decline this quarter as a function of timing? And should we see some of this come back in the fourth quarter? I just want to make sure we're thinking about that right.

Well, the answer is yes, I think about it as timing when you look at -- I'll call it long-term timing and in the third quarter specifically. The fourth quarter, I would say, yes, except for if you talk year-over-year. If you talk quarter-over-quarter, yes. If you talk year-over-year, last year, we had an extraordinary capital shipment quarter. So year-over-year, I would not expect a radically different view based on timing. In fact, if anything, it's going to be tougher in terms of timing. But quarter-over-quarter, yes.

Yes. Got you. Understood. And then, Walt, as you said earlier on -- Life Sciences put up some great numbers recently. Capital equipment was up 33%. Organic growth was up 14%. Can you maybe just elaborate on some of the drivers behind that growth and how sustainable that is as we move forward?

Sure. First of all, our Life Science folks have positioned themselves very nicely on the consumable side. We're pretty much focused on vaccines and biologics, which are good places to be. We also think there is still significant upside in terms of, I'll call it, penetration into that space. And so they've had a long history now of high single-digit, sometimes double-digit growth in that space. And we don't see that abating. On the capital side, for those of you who have followed us a long time know that we've had, I don't know, an 8-year drought, if you will, in capital equipment in Life Science. And it's all, again, focused in pharmaceutical plants or largely in pharmaceutical plants, but we had a long drought. And the last year or so, we've clearly seen projects picking up in that space. So what you saw early on was backlog growth. We went from $30 million-ish. We felt happy if were $40 million-ish in backlog. And now we're looking at $60 million-ish backlog. So pretty significant growth in backlog. And of course, it wasn't shipping, it wasn't shipping, it wasn't shipping because Life Sciences projects tend to be longer in nature. They're highly engineered commonly. And so it may take 6 months to a year from the time we get an order till we deliver the order. Well, it's starting to ship now. It started shipping 2 quarters ago. It's now shipped in the third quarter, and we don't really see an end to that at this point in time. So we've seen just strong -- we have strong shipping and strong pipeline. So we're quite confident. Now some of that is obviously market. The pharmaceutical guys are putting money back into those spaces. I wouldn't be surprised to see more in the U.S. for the same tax reasons that we talked about. But another piece of it is our guys have done a really nice job of working on the hydrogen peroxide products in that space. In that space we have not -- just like in healthcare, we have steam, we have washing and we have hydrogen peroxide sterilization. And the hydrogen peroxide is really -- we've really strengthened that product line and has been a real good factor of our growth in that space.

(Operator Instructions) Our next question comes from David Stratton from Great Lakes Review.

Regarding your CapEx guidance, it seems to have gone down by around $20 million from last quarter. And I was wondering if you could kind of bridge that gap, especially in light of the tax windfalls that everyone is receiving. What has caused your CapEx guidance to go down?

Yes. Dave, mainly timing of projects. Some of these large projects that we have, both -- largely in AST, we forecast at the beginning of the year and we try and estimate the timing of that coming online. And a couple of those just have had delays that have been normal delays, nothing out of the ordinary. But those will push into next fiscal year. So that in total is about $20 million. You'll see the natural offset in free cash flow as free cash flow now goes from $280 million to $300 million. But it's mainly due to timing.

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

Yes, 2 questions. First, Walt, as we look at areas for potential margin improvement, I was wondering if you're still expecting some cost synergies from the Synergy Health acquisition. Or is that pretty much done after fiscal '18?

Yes. Mitra, it's Mike. We are expecting about $10 million this fiscal year and $10 million into next fiscal year. And then we will have captured over $40 million in total, but there's still a little bit left out there.

Okay. No, that's great. And regarding acquisitions, I know you've mentioned you are bringing on a number of new products in Healthcare Products. And I was wondering if you're now more inclined to look at potential transactions that will actually expand the $10 billion addressable end market or just look to consolidate more within existing areas.

Our first and favorite type of acquisition is something that adds a product or service to Customers we're already serving in the space we're already serving them. And so that would be the first. So I'll call it for lack of better terms, end Customer, end market or whatever you want to call it. That's our first choice. But we're always looking at extensions to that as well. So it could be a different product or service. It's more likely to be with the Customer we're already serving, hopefully in the same space we're serving them; but if not, right next door to where we're serving them. So we do like adjacent or tangential, whatever terms you like, acquisitions a lot better than any other kind. So -- but we do look at -- we look at both all the time. We evaluate if we can bring something to them and/or they can bring something to us, and we're really happy if the answer is yes to both questions.

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

Thank you, everybody, for joining us this morning. We hope to see many of you as we get out on the road in the coming months.

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