Q3 2020 Cantel Medical Corp Earnings Call
Ladies and gentlemen, thank you for your patience leads coming on the line they'll be gather additional purchases.
Again, we do appreciate your patience. Please remain on the line in your comments I'll begin momentarily. Thank you.
[music].
Please standby we are thought to be gap.
Good morning, ladies and gentlemen, and welcome to your Cantel Medical third quarter 2020 earnings call.
Lines have been placed in listen only mode, and that's where we'll be open for questions. Following the presentation.
This time it isn't my pleasure to turned over to not makowsky. Please go ahead.
Thank you and good morning, everyone.
On today's call, we have Chuck Diker Chairman of the Board, Georgia tied East President and Chief Executive Officer.
Peter Clifford Executive Vice President and Chief operating Officer.
Seth Yellin executive Vice President and Chief growth Officer.
Like many senior Vice President and Chief Financial Officer, and Brian <unk>, Senior Vice President corporate controller, and Chief Accounting Officer.
Earlier this morning.
Company issued a press release announcing the financial results for the third quarter fiscal year 2020. In addition, we have posted a supplemental presentation to accomplish today's call.
This presentation, along with reconciliations of non-GAAP references can be found I cant tells website in the Investor Relations section under presentations.
Before we begin I'd like to remind everyone. This conference call may contain forward looking statements.
All forward looking statements involve risks and uncertainties, including without limitation the risks detailed in the company's filings and reports with the Securities and Exchange Commission.
Such statements are only predictions and actual results may differ materially from those projected.
Additional information concerning forward looking statements is contained in our supplemental presentation in earnings release.
The company will also be making references on todays call to non-GAAP financial measures reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today's earnings press release.
With that I'm pleased to introduce to you George societies, President and CEO.
Thank you, Matt and good morning, everyone.
Before discussing our performance I wish to join the chorus voices expressing gratitude to our customers.
Oh health care providers on the front line. So this covert 19 pandemic.
I also want to express in this forum my deepest appreciation to our employees worldwide.
This crisis has brought out the absolute best in Cantel.
Our associates have been there to make over 4 million masks weekly in all possible on island in Rochester, New York.
And to produce a central chemistry in our Minneapolis and police, Italy facilities.
We have manufactured approximately 500 portable dialysis water systems and received new orders for nearly 400 more units.
These portable units served the critical needs of patients.
Requiring more mobile dialysis outside of a clinic, which has been particularly high due to kobin.
We also have had hundreds of field service personnel, who quickly adapting to new procedures.
The safely inner facilities and serve customer requests.
There are three takeaways from my comments this morning.
First since the very beginning of the pandemic.
Intel has been proactive and managing our resources and expenditures.
While maintaining our core capabilities.
What's also important is we have remained agile to flex as we monitor our markets daily.
Second we have taken significant steps to strengthen our balance sheet and overall liquidity.
Giving us ample security into the future.
Third and very important.
As a leader in infection prevention, our business is uniquely positioned to quickly rebounded well the expected recovery of the elective procedures.
Our infection prevention focus will be more relevant and required by our customers then into pre coded environment.
Which is why we remain highly confident in our future.
In this third quarter two April Thirtyth that we are reporting today coated 19 impact is the last five weeks of performance.
Starting March 23rd most U.S. elective procedures in medical and dental locations shut down.
In response to C.D.C. 80, a state and local guidelines.
For our third quarter total revenues of 237 million or down 18% sequentially versus the previous non coal that impacted second quarter.
Looking specifically at the medical and dental segments for the last five weeks of our third quarter.
Revenues were approximately 60% and medical versus the prior non coal that second quarter.
While dental was off roughly 55% in total versus the same pretty cobiz comparison.
And down 17%, excluding the sales of personal protective equipment or P. P.
No.
But these are sequential comparisons as year over year are not especially relevant or useful I understand the business performance.
We have seen improvement may as elected procedures are beginning to open up in parts of the country.
And medical estimated to be audited may revenue rate was all 40% versus the pre cobot rate and then dental the estimated revenue rate may was up 45%.
We are encouraged by these early signs of improvement made relative to April.
Oh, it is difficult to forecast the pace of restoration of elective procedures.
Which as we know also includes the added impact of rescheduling needed procedures deferred during this call that affect this period.
The pace is influenced by hard to predict factors, including patient comfort level to reenter the facilities.
As we discussed in a communication earlier in May we have implemented aggressive actions to manage variable expenses.
We have made broad use of employee furloughs and compensation reductions to reduce our costs, while retaining our experienced workforce.
This enables us to redeploy resources quickly.
In response to changes in demand.
Oh. This recent work that we've done evaluating and managing the cost structure.
Well make a smarter and more efficient with engaging resources as we bring cantel back to more normal operations.
As we reported earlier on May 12.
We have secured the necessary flexibility to navigate this environment with an amendment to our credit facility.
It provides for a suspension of many of the covenants such as overall leverage ratios and replacing them with minimum liquidity and profitability metrics until October 31st 2021.
This amendment provides us significant flexibility for the next 18 months.
Our cash position has also been fortified with the recent issuance of $168 million and convertible debt.
This ensures that ample cushion to exceed our new liquidity requirements at our credit covenants as well as to operate comfortably under conservative recovery scenarios.
So looking ahead, while it is challenging to predict the pace of recovery.
I can say with certainty.
We are uniquely positioned to come back as fast as our markets recover.
Three reasons why I believe those.
First in our dental and ask at the end markets. We are a primary go to resource for information and assistance and helping customers reopen facilities and a safe compliant and efficient manner in this new environment.
For example in the last two months, we have been doing webinars and training programs on the topic of coal bid and the workplace.
Which have engaged approximately 34000 medical and dental professionals.
We also employ several hundred field service and clinical personnel, who are working closely with customers preparing to operate with new co that related protocols.
As practices reopen they need to ensure their products and systems, our functional and calibrated after being idle for several weeks.
Second our strategy of the complete circle of protection for the reprocessing workload will be even more importantly, as we go forward and this coal that impacted oral.
We are already working with dental and G.I. personnel to help them understand how to deploy new protocols for a safe their practice.
Rotation intake.
To the use of PD to procedure room safety and finally, so room turnover and gradual improvement of work full productivity with our unique solutions.
Finally, we continue to make progress on our cantel 2.0 growth initiatives, which we first discussed at our last earnings call.
While progress has had to contend in the near term wouldn't pandemic related priorities.
We continue to move Cantel 2.0 forward with actions that will meaningfully benefit the recovery.
The combination of these three actions gives us great confidence and how cantel performed as we push ahead. These next few months.
So let me now turn the discussion over to Sean to review the key financial information.
Thanks, George and good morning, everyone.
I'm going to go through our key financial results with brief commentary.
However, following that I'd like to provide additional details I give context to the financial impact of April's volume decline.
I will begin with the year over year comparisons and given the Covidien pack I will close with specific references to more relevant sequential comparison to the second quarter 2020.
Of course standard reported financial details are available on the earnings deck for you to follow along and we can cover any additional questions. You may have during the Q anyway.
Net sales increased 3.7% year over year, and the third quarter 20 versus prior year and 4.2% on a constant currency basis, M&A accounted for 15.5%, which was offset by an organic decline at 11.3% with FX being negative there.
<unk>, 0.5%.
Overall, our life Sciences, and dialysis segment had been more resilient during the pandemic given the essential nature of renal dialysis.
Life Sciences sales grew 7.3% on inorganic basis, driven by higher demand for portable water systems as George mentioned previously and then the dialysis segment, we saw organic growth of 8.5%.
The dental segment grew 75.4% on a reported basis driven by the acquisition, if you free but declined negative 3.1% on an organic basis.
They are relatively low decline on an organic basis is due to a previously state will start to Q3, and then unprecedented demand for pp in this impact gets during the pandemic, which helped to partially offset the severe decline in elective procedures.
Overall, we believe it these are better than expected results in a very difficult market environment.
Finally, the medical segment decreased by negative 21.7% on inorganic basis.
And similarly to settle the last five weeks at the quarter were significantly impacted by coded related procedure deferrals.
Capital equipment decreased negative 20%.
During revenue declining negative 22% in the period versus prior year.
As George mentioned, we're seen improvements in May sales rates and anticipate continued volume recovery over the next few months.
Turning to consolidated margins.
Our GAAP gross margins contracted by negative 420 basis points to 42.6% versus 46.8% third quarter 2019, while non-GAAP gross margins declined by negative 350 basis points year over year to 43.5%.
As a result of our slowdown in manufacturing and the subsequent short term under utilization, we incurred an accelerated recognition of nearly $3 million in costs that would normally be absorbed initially our inventory valuation.
In addition at procedure deferrals more acutely impacted consumables, which are generally our higher margin line. Our gross margin also reflects that mix pressure.
Again, I'll end the financial discussion with some additional color on our margins.
Moving down to op profit GAAP operating profit increased 51.5% year over year to 22.4 million, mainly driven by a favorable fair value adjustment of around $17 million associated with an earn out related to the acquisition if you freed.
On a non-GAAP basis, op profit decrease negative 38.6% year over year to $20 million.
Moving to tax rate.
The GAAP effective tax rate for the quarter was a benefit of negative 28% compared to the prior year rate of 33.6%.
This benefit was primarily driven by a net operating loss carry back and was partially offset by the unfavorable tax effect of the fair value adjustment related to an earn out liability.
Non-GAAP effective tax rate came in at 31.1% compared to the prior year rate of 23.6%.
This was primarily driven by the overall decrease of our US denominated non-GAAP earnings and the impact if you freed international operations.
As a result.
GAAP earnings per share increased 85% year over year to 37 cents.
Our non-GAAP earnings per share decreased negative, 70.9% year over year to 16 cents.
Finally, adjusted EBITDA came in at 31.7 million down negative 23.3% year over year.
I will now move on cash flow and balance sheet items.
Our cash flow from operations came in at $49.3 million, which is a significant improvement from our first half results. We ended the quarter with 115.8 million in cash and cash equivalents and 288.1 million in working capital.
Working capital increased 23% sequentially from the second quarter, primarily driven by the increase in cash from drawing down our outstanding revolver.
The change in accounts receivable and accounts payable largely offset each other in the quarter, while inventory remained relatively flat.
Capital expenditures were $5.1 million this quarter as the result of significant pullback of all non essential spent.
Moving to our debt profile gross debt ended the quarter at 976.9 million, while net debt was 861.1 billion.
Our net debt to adjusted EBITDAX ratio was 4.63, which includes seven months of Q3 results.
I would also like to provide an approximate unaudited update of our debt and cash position any in may given its stronger relevant in light of our convertible offering.
With those proceeds our cash balance of approximately 248 million.
Gross debt sitting at approximately 1.1 billion in our net debt sitting at approximately 850 million keeping in mind that we had to use 31.5 million into pay down our term loan.
I would like to conclude my remarks by providing more context into key aspects of our Q3 results to help provide transparency into our action and performance through the first week. So the koby pandemic.
In short, we reacted immediately and executing rigorous cost reduction and strict working capital management processes.
We carefully balance cutting variable costs down as much as possible in the short amount of time without sacrificing our ability to respond aggressively as you'd like to procedure volumes recover.
Overall, we're very pleased improving our ability to execute what we hope that the steepest decline in our volume.
And believe our performance is indicative of this balanced proactive approach that we will continue to execute through periods of reduced volumes.
Regarding our gross margin if I treat the second quarter 2020 of the baseline approximately $45 million of our cost structure is fixed.
We quickly took measures to control variable costs for the month of April we reduced variable manufacturing cost by 40% in total.
Which means on a revenue decline approximately 50% we were able to reduce 80% of variable manufacturing costs with the volume decline.
In April our gross margin was approximately 800 basis points lower than our second quarter 2020, non-GAAP rate, excluding the accelerated recognition of expense normally capitalized into inventory.
Additionally, with respect to operating expenses were able to quickly reduce SDMA cost by approximately 20% in April compared to the average monthly cost in the second quarter 2020.
A combination of furloughs salary reductions in the pullback on discretionary spend.
And regarding cash and working capital I would like to specifically know how strongly we acted to aggressively preserve cash even with the sudden and steep decline in procedural volumes, we were able to hold inventory relatively flat.
Judiciously pushed out payments and maintained cash collections at minimal pressure from delayed payments.
We're very pleased we were able to manage working capital via net cash contributor to the April decline.
Well, we built up cash in April.
Estimate that our peak cash burn to be approximately 10 million to $15 million, along and I expect that Pete to occur around GBP, two our normal collection cycle and improve thereafter.
Of course, while this does not imply that future months, we'll execute exactly as April we feel it's an important engaged this supports our belief that we have ample liquidity to weather the instability abandonment.
I appreciate your patience listening to these additional details and as a reminder, we will be filing our 10-Q by next week.
Now I'll turn it back over to towards for concluding remarks.
Coming up will be a busy summer for cantel.
We will be focusing on these top priorities number one.
We will continue to remain disciplined with all internal workplace safety procedures and protocols to maintain the efficient and reliable delivery of our services and solutions.
This discipline will continue to extend to our vigorous stewardship of operating expenses and the balance sheet.
Second our medical and dental field sales service and clinical teams will continue to work daily with customers to assist the recovery in our markets by consulting on how to safely restart procedures under new protocols and with solutions for risk.
Storing and efficient workable.
Third we will continue to make headway on the critical cantel 2.0 initiatives.
For example, our efforts to provide more infection prevention solutions in surgery centers.
Spansion of our key account director organization.
And the Q freely group focus on expanding penetration of the instrument management system.
We are very energized by the opportunities embedded in cantel, 2.0, which are even more relevant in a post kobin environment.
We will have more details to share at our earnings call in September.
The impact of co bid will continue to be an uncertain factor on performance in the coming weeks.
That said.
We are deeply engaged in supporting our partners and optimistic about the recovery.
We're now ready for questions.
Thank you.
Our now open for question. If you would like a question. Please press Star then one on your telephone keypad at any time to join next year.
And if they're using it speakerphone. Please pick up your handset to provide the best quality.
Again, ladies and gentlemen, if you'd like to answer your question.
Then one on your telephone.
And we'll take our first question from Larry Cursed with Raymond James. Please go ahead.
Great. Thank you good morning, everyone.
George.
Yeah, obviously spoke to.
I can tell his position.
As we start to come out of.
The pizza that endemic and focus on getting procedures have been going again.
Can you expand a little bit on where you think really across medical and dental is where most focused.
Where there are aspects of those business that can become.
More durable in you.
As we had Adam.
The pandemic and there's more focus on in traction control intervention.
Yeah first good morning, Larry. Thank you for the question look I think.
There are probably several things that I can mention.
So from a chime in on this but.
First and foremost I think what we found as we've been helping people will deal with the disruption is just the importance of getting.
Continued to good training and discussion around how to comply with new regulations and protocols that they have to contend with.
And then I think being going beyond that is how to get back to.
Workflows throughput because obviously these new protocols will in the short term compromise.
What they used to ever throughput prior to that obviously can put pressure on on the on revenue in their margin. So we think.
For the things that we can provide inner circle of protection in both medical and dental.
There has to work for a particular, we'll be doing will be those kinds of things, which become durable to post coven environment.
So thank you know as we look at places like surgery centers in dental offices, which are similar.
And in many respects to the focus on throughput that there are a number of our solutions.
Particularly with whether its disposable products for the for the surgery center in what they can do to expedite the reprocessing work flow or the dental office with the instrument management system, while at the outset. It requires investment over time. It provides greatly enhance throughput to the office and so we think the answer it management system and.
Hello can benefit meaningfully.
And we also think look we talked about our key account director program in the importance that provides and talking to C. Suite executives, who are going to be far more tune in a post coven environment to the importance of infection prevention all areas of the hospital.
Talking about our complete solution will resonate much more than it has than it has in the past aided by the fact that we can provide.
Clinical support and assessments that are clinicians provide which we know can lead to.
Broader adoption of our of our offering.
I will talk to your second set of you wanted to add anything to that please go ahead.
I think you catch all the major elements nicely I'd say, we've seen very strong interest and accelerated interest in some of these solutions such as the IMF.
With engagements with customers up 700% over prior equivalent period as people look to better solutions to help drive both both safety and better infection prevention Clinicals and the price with the efficiency that comes with.
The solution. So we think theres a good match up here of our capabilities with their customers needs that are in further enhanced by the co good backdrop.
Okay.
Thank you for all that I'll just ask two other.
Quick ones here.
First.
Could you could you just speak a little bit about.
Medical and dental.
Would you expect dental to have a bit of a lag on on the recovery of procedures versus versus medical.
Maybe talk a little bit about how you're thinking about the capital equipment.
Environment around.
Around medical and then lastly, I recognize that you're not.
Providing guidance at this point, but you were kind enough to.
Provide some clarity on kind of how you think may is shaking out.
If you kind of take those may rates and sort of.
Assumed no improvement through the remainder of the fiscal quarter the fourth quarter.
You know it seemed like you come up with number is that that appear to be a bit higher than than the street consensus. So.
I mean do you think do you think that.
People have to sort of think about recalibrating, a little bit on their fourth quarter outlook.
Thanks very much.
Okay, Larry we I think we.
Recaptured others. Several very good questions that are actually if I could get it right first of all medical I'll cover the medical versus dental progress, how we might see that Pete you cover capital and Sean will take the last part of the question.
Look I think.
You've spent a lot of time trying to see how that might unfold going forward.
Obviously could be impacted by different parts of the country coming on at different points in time.
Likewise.
We know that there's been certainly a lot of independent research and Tom That's asked the question dental offices about how they see things unfolding theres the impact of let's say in medical insurance on people and the in the current unemployment rate and how that might impact thing. So there are a lot of these factors, which may contribute to the pace of.
Recovery.
I guess I would say, we think probably dental could be on the slower in the coming back versus medical I don't know thats like a month find or two months behind or not and.
Some of that is been verified a bit on the outside that it may be more susceptible to.
To the the impact of insurance it could be because it's maybe less urgent need lets say versus a calling us could be or in endoscopy, which is we know is generally a deferred procedure that ultimately needs to get done.
People may feel a need to get it done as quickly as a surgery center or hospital reopened so I guess, what weve sort of modeled.
Is that dental may take a little bit more time.
But obviously, we monitor this thing month to month has to be sure we can calibrate and.
On our model and make adjustments accordingly.
Let's go to the capital equipment question, how we see that unfolding olympiads for that yeah, Larry as you're aware on the downside we had very little capital exposure on the medical side. I think you asked we will see very little softness as it relates to capital within the U.S., we are anticipating some softness.
For the next couple of quarters on on not a our purchases.
To come back down as you're aware, we've been working pretty diligently on the AC strategy one of the things that we did launch at the beginning in the third quarter aligned to that New agency strategy was bringing on a third party leasing program. So I think the timing of that obviously is very impactful and now.
Relative to are related both to want to the hospital strategy as we lean in the next couple of quarters. So we think we have a path to combat some of that softness.
And then on life Sciences side, it's a tale of two things generally speaking with the coping impact our portables business, which is still capital has been very busy.
We've been moving ahead I would say on schedule with de Novo central clinics builds we've seen a little bit of slowdown on the retro session and repairs on the central skin existing combinations as access that was moderated in April and May, but we expect that to actually return.
In the back half of the summit.
Yes, Hi, this is Sean and regarding the question on kind of the Q4 outlook.
I do think it's logical side will reiterate that obviously with the Q4 being exposed to Kobe most acutely in its entirety I think it's logical that Q4 going to be less than Q3 in terms of revenue, but I do agree with your.
Estimate that if you were to extrapolate what were seen in May and assumed that would go after the whole summer that you need to bring those estimates up a little bit to match that reality has what do you believe is going to happen for the entire.
Great. Thank you very much guys.
Yes, I just add one last point, Larry I think one indicator that pretty positive on the downside is all law. The feedback we have in the PEO is that we've gotten especially here in may.
Really points that the school season for the dental schools looks to be fairly uninterrupted as we think about August and September.
The mood and what we see an IPO activity has been very positive here in may.
Great. Thank you very much.
Our next question will come from Matthew Michelle with Keybanc.
Great. Good morning, Thank you for taking the questions.
For the last three months since your last call.
I guess guys what what I'm hearing is that is that your relationship in value proposition with customers our hands.
Coming out of this crisis I can fully understand that with dental practices more fragmented entrepreneurial type businesses.
But can you help me better understand that.
The hospital customers, where you were experiencing some puts and some competitive disruptions in medical.
Competitive disruption so you talked about.
Not the valve business.
Look I again, my comment about competitive, let's just talk about that.
Without having to name competitors.
We have competitors are one or two parts of our complete circle protection, but not on the complete circle of protection, where we have suite of solutions as you know.
So indicates we're talking to the hospital the one the company.
Who knows the entire.
Skippy process from beginning to end is cantel.
We are the ones with clinicians that serve the G suite.
Who work with service technicians, who service the G suite, particularly as it's laid out idle for.
In some cases up to eight weeks time, where they need people to come back into recalibrate that which they are doing well. So there's really only one company.
That can provide that service from beginning to end that they're turning to also when you consider our installed base.
Which have.
Theres really no other competitor there comes close to that when you need to deal with the our situation restoring chemistry et cetera.
Again, where the where the most obvious go to resource so I I think thats sort of a built in.
As a.
Built in fact.
Reality that really is why we've become the go to resource for hospitals.
I just add on I would stress that point, Matt the installed base and the fact.
Time right now were access is somewhat limited.
We probably have the greatest access of anybody that plays in our space and as folks have to restart up there suites.
As a lot of complicated startup procedures that our customers on the hospital side are looking for guidance.
And again, and having sort of unprecedented access compared to where competitors.
I think this opens up a door wide around the see side, where they are less sophisticated and again I think this is one of the natural synergies between actually our dental business and our medical businesses, the dental suites and the AC tend to behave similarly in the fact that compliance is important but throughput and efficiency at Pratt.
This is huge so I think we're positioned better again that anybody with our clinicians to be able to help people not only start back up safely on the side, but actually drive throughput.
Very interesting.
For Q3, you talked about the.
That's right management system.
And engagement being up like 700% however.
Dental practices thinking about.
Hi investment.
That versus potential disruption in bringing that online.
That you're trying to start ups or practices I got I mean, what is that what are the tightening of that looks like for quite some of dental customers, how they're thinking about that.
I think of the IMF system. Integrate example of the type of a comprehensive solutions, we can deliver to the dental sweet right that it a combined in workflow process with the instrumentation with the associated consumables and candidly theirs.
A whole host in different ways that the practice and can configure to utilize these products be at full implementation to parcel implementation I think what's particularly interesting though around the level of engagement we've seen is.
A true spike in interest in understanding new solutions to help drive what does it clear problem in dental practices, which is the efficient.
Reprocessing of instrumentation to drive.
Paper environment and maintain efficiency, so I mean, as George highlighted the pace of recovering the dental market and budgetary constraints remains some unknowns here, but I would say that despite.
That disruption there remains a very excess heightened level of interest and scrutiny around our broad solutions.
So I think we're encouraged how that translates in the immediate timeframe versus the longer timeframe to product sales it to be seen but we've seen broad interest accelerated in our I met solution as well as a whole host a different solutions that we bring in the dental suite, including our Greenlight compliance program and other types of educational and.
And training tools to enable those practices to to operate more efficiently and more safely.
And my question.
Right.
The broader one as you look.
Ladies and inspection provincial.
You are mainly focused here on supporting your your existing customer bases in dental and medical.
Have you looked at opportunities around the action prevention, hoping helping.
Company.
You know do better with sterilization around fashion. So the thing we.
Bring bringing.
Hi, certain areas.
The company back online.
Yeah, I think as an example in our life Sciences Division, obviously, we've we've had a lot opportunities come to the surface just more broadly on on sort of bio decontamination and surface disinfection.
Opportunities around our dry fogging equate in chemistry as an example, obviously I think it's pretty clear that with our PDP and historically, a very focused business that those products have been going well beyond dental and obviously into.
The broader healthcare sectors I think some of that will continue obviously in the future.
And then obviously, what we still think Theres an opportunity down the road with three box.
Do you know sterilization techniques side, there's a lot in the news about trying to re process and 95 mass someone folks struggling to do that things that would be an application as an example in the future.
That we could do price quite wallets.
Thanks very much.
And our next question comes from Mike Matson Needham and company. Please go ahead.
Yeah. Good morning, Thanks for taking my questions I guess just want to start a couple on margins.
First with all the cost reduction efforts since you've taken.
To address the.
Revenue declines here are any of these going to be permanent and have an ongoing.
Beyond kind of this short term period or are these really all short term measures.
I would start by saying that you know like for the foreseeable future. This is a disciplined we're going to be executing to write especially in terms of the variable cost on on the manufacturing side and I think that our viewpoint right. Now is we really want to get a good look at how May June and July kind of play out we that's something we look at analyst day by day.
Yeah week by week basis to kind of understand what we think the post summer environment is going to look like before that we would make any call Don on what we how we might move forward and proceeds beyond that point.
But I would anticipate that life for the summer right. We'll keep these disciplines in place and right now the focus is done on trying to understand what the other side looks like and maintain that infrastructure to make sure. We can come out in attack it.
Yeah, I just add on Mike that look I think one of the strange benefits of both pandemic is look is it's brought a new canes to running the business daily and I think everybody is acutely aware of how we spend discretionary.
Dollarss and I would expect that as we come out of this theres certainly areas like teeny inch production supplies.
We will find a new level, that's below the pre kind of cool bid environment. So again, there's there's been some positive strangely too so running the business on a on a daily basis here.
Okay. That's helpful. And then just on the gross margin it sounds like it was down I guess about eight points in the Oh.
April timeframe, and so yes, I guess looking into the third sorry, the fourth quarter is that kind of where you should be I know, you're not giving guidance, but I mean should we assume it's kind of at that level I mean.
Kind of eight points down year over year at a reasonable assumption.
Yes, I mean, I provided and that was actually at the sequential comment from kind of like previous that got QQ stable quarters, which we largely believes the non culture.
So I mean, I would add to the extent that I think Q4 in its entirety right is going to be have less volume.
We expect it to be similar.
We still look at some point 800 to 1000 basis point is probably a safe way to look at it but to the point to point was asked earlier to the extent that volumes. If there is stronger than we expect right, obviously there'd be some mitigation on that.
And then I'll pause that 8% also excludes the.
The 8% also sorry, 800 basis point comment does exclude the accelerated recognition of expense that normally would capitalize due to under utilization in the plant. So that is a fairly clean look at what the trough looks like for us.
Okay. Thanks.
I think of that.
Got it how you might think of that Mike is our overhead is about 20% or revenue and about half of that fixed.
Okay, and then just on on the M&A commentary about it being down 20% in April. So similar question. There I guess I mean can we assume it's down 20% for the fourth quarter.
Roughly I saw I think play on the same way, yes, yes, roughly I do expect to play out at the same way for the quarter.
Okay, great. Thanks.
And as a reminder, ladies and gentlemen, if he would like to ask a question.
Star one of your telephone keypad at any time to join thank you.
And we'll move next to Mitra Ramgopal with Sidoti. Please go ahead.
Yes, hi, good morning, Thanks for taking the questions.
First just wanted to follow up on the our life Science business I'm I think twice you you talked about the.
I put it into demand outside of portable early you would add said I'm just wondering as it relates to your capacity to meet that demand. If you have to make additional investments and how you see that playing out longer term. If you see this is a maybe a more <unk> not necessarily a temporary shift.
In terms of data.
Yeah, we have been able to to meet that demand.
Oh, we have been able to flex by moving to more ships.
Accelerating the supply chain as well and it's largely.
And Assembly challenge, which the team in Minneapolis has been able to accomplish and at this point.
While obviously, it's it's a.
It's been a.
Big difference from the prior.
Demand scenario, they've been able to to make it work by.
By improving throughput.
And you know moving to three ships as well seven days a week to get an accomplished so we.
Completely confident the ability to meet the demand.
And I think nature as you're aware.
The life Sciences business, and the assembly or manufacturing Central's and portables is on the same campus just across the street from our medical business. So as we've actually had softness on the airlines, obviously that we've talked about a lot of those people are skills.
Or have a similar skill set we moved a lot of those people.
Our E R winds temporarily over to the portable business too to react faster.
Okay. That's great and then just to be clear obviously, a number of companies are affected in different ways as result of the pandemic, but.
If I recall that none of your facilities are really affected in any way in terms of closure or is there.
Yeah disruptions et cetera. The declines you have seen is really just a.
Reflection of 40 end market as you talked about the elective procedures et cetera is that fair.
Yeah, I mean plant capacity has been relatively on impacted I mean at the end the day, there's been some disruption and Italy and in the U.S. as we've had certain cases have come into the manufacturing facilities, but as a general rule.
We've been able to want to run at the required levels to meet demand.
Okay and coming back to a 22 initiative you unveiled obviously that's much more of a long term up pan but I'm just wondering as it relates to environment, there and how much has that kind of maybe asked slow down.
Some of the things you're planning to do maybe as it relates to product introductions or anything else.
Oh go ahead.
Like I say that I look I think certainly as I mentioned in my script my comments.
There has to be a lot of short term focused move.
Some of these priorities dealing with the pandemic.
I will say that Pete and the team have.
Continued to make a lot of progress on the on on.
All the initiatives and some faster than others.
And in Cobot, certainly represents an opportunity to move on some of these faster in terms of the benefit they can provide.
In the postcode environment, but.
So I said more to come on S&P, why don't you give a little bit of color. Yeah. I would just say look we use the opportunity that was created by some of our sales folks not having traditional access during April and May as an example to accelerate commercial excellence train in Europe.
He gave us a lot of time to finish and be prepared to launch our AMC strategy here in the fourth quarter. So I think we did a really nice job continuing the not move slower but moved faster on that again.
Partly because of the time that was freed up.
With with sales guys not having access as much in April and made it we really redeployed that bandwidth to the further some of the strategies and execution.
Okay. Thanks for that.
And then on the.
Focus on cash conservation, obviously youve.
Implemented a number of initiatives at Florida, weighing et cetera, suspending the dividend how should we think about capital allocation going forward, because it's I'm, assuming you know acquisitions et cetera, certainly not.
I'll focus right now, but in terms of maybe.
I do think death or stock buybacks and anything along those lines.
You're thinking about that.
Say that the number one focus without doubt over the foreseeable horizon is paying down debt.
I just add on it I think one thing meet your not to be lost in the performance on the working capital side as our teams have worked pretty hard over the last six nine months to refine and improved business processes with our safety launched it was a bit bumpy last year ends. The reality is this task that we saw what the pants.
Right.
Really I think the team delivered.
Incredibly well and the reality is we wouldn't have been able to do that if we had made progress with S&P over the last six months to put ourselves in a position, where we had the capability and process the de expedite and the ways that we did and accelerate the collections in the ways that we did and the control disbursements.
Critical time, so again I prefer not to get tested it in that way, but the pandemic really gave us.
Boosted the efforts on Asap side, it really had been fruitful.
Very good point.
Okay. Thanks, again for taking the questions.
And that does conclude our question and answers at them for equity I'll turn the call back over to management for any closing remarks.
Oh, Yeah, just a couple remarks in closing up first of all as I said at the outset or an incredibly an extraordinary challenging quarter one of the most significant challenging certainly in my career.
We'll tell you the again, how proud I am about the cantel employees and it has brought up the absolute best in cantel not just in managing this pandemic, but what I see and our ability to move forward pass this pandemic and the the what we can do as a company.
For our customers. So that's why we.
We are optimistic about our future and look forward to talk you do particularly about cantel 2.0 initiatives.
At our next earnings call.
That I wish everybody a great summer thank you for being on the call.
That concludes today's teleconference. We appreciate your participation.
Your lines at this time and have a wonderful also.
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