Q1 2021 Cantel Medical Corp Earnings Call
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Ladies and gentlemen, thank you for your patience you are holding for today's Cantel first quarter 2021 earnings call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments. Following the presentation. Today at this time, we are still gathering additional participants and we plan to begin momentarily. We appreciate your patience and ask that you. Please continue to hold.
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Good day, ladies and gentlemen, and welcome to your Cantel first quarter 2021 earnings call. All lines have been placed on on listen only mode and the floor will be open for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at.
At this time it is my pleasure to turn the floor over to your host Matt Makowsky, Vice President of S.P. on a and Investor relations Sir the floor is yours.
Good morning, everyone.
On todays call, we have Chuck Diker German on the board.
George for Tidy Chief Executive Officer.
Peter Clifford President and Chief operating Officer.
Seth Yellin executive Vice President and Chief growth Officer.
Sean Blakeman, Senior Vice President and Chief Financial Officer.
Brian Capone Senior Vice President corporate controller, and Chief Accounting Officer.
Earlier this morning, the company issued a press release announcing the financial results for the first quarter of fiscal year 2021.
In addition, we have posted a supplemental presentation to complement today's call.
This presentation, along with reconciliations of non-GAAP references can be found on cantel website in the Investor Relations section on your presentations.
Before we begin I would like to remind everyone that this conference call may contain forward looking statements.
All forward looking statements involve risks and uncertainties, including without limitation on the risks detailed in the company's filings and reports from Securities and Exchange Commission.
Such statements are only predictions and actual results may differ materially from those projected.
Additional information concerning forward looking statements contained in our supplemental presentation and earnings release.
The company will also be making references on today's call to non-GAAP financial measures reconciliations.
Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today's earnings press release with assets I'll now turn the call over to George.
Thank you Matt.
Our performance in the first quarter demonstrated the unique nature and relevance of our infection prevention and control offering.
On the strength.
Cantel is operating discipline.
Most importantly, we continued our steadfast focus on employee safety, which has yielded uninterrupted service to customers.
What's clear from the external data and our own results.
Is that we are outperforming the recovery and procedures.
We estimate based on independent third parties data that in our first quarter through October 30, Onest us endoscopy procedures were down about 6% to 8% below a year ago.
During the same time, cantel consumable and chemistry products were flat to up low single digits versus year ago, depending on the category.
Similarly, and dental well use procedures appear to be down 15% to 20% year over year.
Our dental business was up nearly 2% organically.
Reflecting similar outperformance versus the underlying margin.
We are experiencing more revenue per procedure as a result of our strength and PC.
The uptake in our new products.
And the adoption of heightened infection prevention protocols.
Utilizing more of our solutions.
Over the last eight months.
Have embedded a disciplined operating focus into the company.
At the time of the human free acquisitions, we knew we would eventually bring our dental business to a 25% EBITDA margin given from the traditional margin profile of the legacy here on Friday business.
Second the impact of synergies and third specific operating improvements on the legacy Crosstex business.
But.
On straight at this quarter. This has happened on an accelerated timetable, especially with a quicker recovery in procedures.
Here is a key take away. This operating discipline is in place across all of our businesses.
We are making progress on several other fronts.
Peter will talk about our early traction with Cantel 2.0 initiatives.
Our new product launches with scope, Buddy plus tubing sets and the defender cleaning adapter valves have generated momentum.
Q free launch day, new ergonomic scalar just as their manual scholars have seen new preference versus ultrasonic scaling is to minimize risk of aerosol production in the dental office.
Yesterday, we announced a collaboration with sensors technologies, the innovative leader in surgical instruments and asset management systems.
This will be a significant emphasis to enhancing and scaling up our track and trace and workload technology solutions Endoscopy suite with a premier partner.
Sean will speak to how our operating performance and disciplined working capital management is generating strong cash performance.
We have accelerated our debt repayments over the past few months.
Earlier this month, we paid down our revolver by an additional $50 million.
Bringing our total debt pay down to $125 million, thus far in fiscal 2021.
And we expect to continue to pursue this accelerated repayment path in 2021.
I know, we will be asked what elective procedure volumes on revenue performance looks like in our second quarter.
So far in November the first month of the quarter perform similar to October in terms of day rate revenue and medical and dental.
As we pointed out on our last call. The second quarter does have four fewer shipping days than the first quarter.
As for the rest of the quarter, it's wait and see we will see the same headlines.
We do know is that as we exit the winter months.
In calendar year 2021 unfolds.
We are expecting to gradually see a 100% recovery on procedures.
Particularly as vaccination programs gain traction.
We also know.
Regardless of exactly what level procedures or add that we continue to perform better than procedure levels, given our comprehensive offerings.
And the critical nature of the solutions, we bring to our customers.
Last quarter, we gave guidance on EBITDA margin exiting the year.
We said at least 19%.
We are updating this guidance to at least 22% EBITDA margin exiting our fourth quarter.
Now given Q1 EBITDA margin of just under 26%.
This guidance of at least 22% models on a return to normalized operating expense spending in the upcoming quarters.
Our performance this quarter demonstrates the earnings power of our businesses when volumes returned to normal levels.
The enhanced operating discipline, we have deployed couple.
Coupled with the strength of our suite of infection prevention and control solutions.
Recent traction in our cantel to final programs gives us confidence.
And our ability to sustain these operating levels and continued to build on them in the future.
So with that Sean.
Thanks, George and good morning, everyone.
Im going to go through our key financial results from brief commentary.
Following that I'd like to provide additional details that give context to the financial results during coated.
Of course, the standard reported financial details are available on the earnings that for you to follow on.
And we can cover any additional questions you may have during the question and answer session.
Net sales increased 15.5% year over year in the first quarter 21 versus prior year and 14.7% on a constant currency basis.
M&A accounted for 16.5% of the increase and the FX impact is 0.8% both of which were offset by an organic decline of negative 1.8%. This.
This significantly exceeded our Q1 expectations with procedural volume and demand for infection prevention products in both medical and dental accelerating throughout the first quarter.
The medical segment decreased by negative 2.2% on an organic basis in the quarter capital equipment decreased 20% with recurring revenue increasing 2% in the period versus the prior year.
It is important to note that while capital sales decline.
We built a robust backlog during the quarter representing strong underlying demand.
While under line endoscopy procedures have returned faster than anticipated.
Our outperformance in our recurring revenue categories above procedural growth indicated market share gains we are seeing with our differentiated infection prevention offering.
The dental segment grew 65.1% on a reported basis driven by the acquisition of few free and increased 1.8% on an organic basis, primarily driven by the recovery of dental procedures combined with increased demand for infection prevention products in the dental market.
Inclusive of BP and disinfectant Chemistries.
Overall, we believe these results reflect the power of the combined increased portfolio, especially in an environment of increasing sensitivity to infection prevention protocols.
Life Sciences declined 7.3% on an organic basis, primarily due to lower portable reverse osmosis machine sales.
This decrease was primarily driven by demand in the back half of fiscal year 2020 as customers requested these units during the height of the pandemic.
In the dialysis segment, we saw organic growth of 8.3%.
Turning to consolidated margin.
Our GAAP gross margin increased by 460 basis points to 49.6% versus 45% and our first Q2 thousand 20.
While non-GAAP gross margin increased by 280 basis points year over year to 50.1%.
The expansion was driven by the return on volumes combined with our more disciplined approach in managing manufacturing costs as well as favorable mix due to the higher sales of consumable products.
More importantly at these volume we believe we should sustain growth margin expansion going forward.
Moving down to our profit.
GAAP op profit increased 249.1% year over year to 50.4 million.
On a non-GAAP basis on profit increased 52% year over year to $64.5 million.
Our cost discipline around discretionary spend is ongoing and we will continue to take a cautious approach with opex given the uncertainty surrounding Kobe.
I expect opex to remain relatively flat sequentially and our second quarter on the lower end of the 85 million to 90 million guided previously and stabilizing around 90 million to 95 million run rate by Q4, depending on volume.
Moving on to tax rates, the GAAP effective tax rate for the quarter was 28.2% as compared to the prior year rate of 33.8%.
This decrease was driven by lower permanent items in the U.S. and favorable geographic income mix.
The non-GAAP effective tax rate came in at 25 per cent compared to the prior year rate of 25.9%.
Decrease was driven by geographic income mix.
As a result.
GAAP earnings per share increased 307.1% year over year to 57 cents.
Non-GAAP earnings per share increased 38.5% year over year to 90 cents.
Finally, adjusted EBITDA came in at $76.3 million.
48.6% year over year.
I will now move on to the key cash flow and balance sheet items.
Cash flow from operations for the quarter came in at $62 million, an increase of 594.3% year over year, and we ended the quarter $258 million in cash.
Working capital decreased 9% sequentially to $426.9 million price.
Primarily driven by a decline in cash on hand, which was used to repay some of our revolver.
Accounts receivable increased 7% inventory declined 2% and accounts payable increased 12% on.
All on a sequential basis.
In addition, capex was $5.5 million this quarter, which also decreased sequentially.
Gross debt ended the quarter at 1 billion $38.4 million, while net debt was 780.4 million.
Our net debt to adjusted EBITDA ratio was 3.93 times as a reminder, we were able to pay down $75 million on revolver in September.
A key element of our Cantel 2.0 initiative has been to drive operating and working capital improvements our heightened operating discipline, coupled with the full implementation of Sep in the us is driving greater insight into our operating metrics, enabling us to better manage our business.
We will continue to drive operating efficiency and expect to continue to pay down additional debt in fiscal year 2021.
During the last call, we mentioned our intent to pay down at least $125 million in the fiscal year give.
Given our stronger than expected performance and cash position through the first quarter, we were able to pay down an incremental $50 million of our revolver in November bringing our total debt pay down to $125 million completed four months into our fiscal year.
With our strong operating cash flow, we anticipate paying down an additional $55 million to $75 million of debt during the remainder of the fiscal year.
Although we still feel it's prudent to refrain from providing guidance for the full year I'd like to provide some color on the second quarter in terms of revenue. It's important to remember that we have four less shipping days in our second quarter due to the winter holiday season, which we would expect to impact the medical and dental business to the tune of approximately $3.8 million.
As per day.
In addition, due to normal seasonality tied to the Central School business you should assume there is a $5 million seasonal demand in our dental segment in the first quarter that will not repeat in the second quarter.
Finally, given the increase in covance spread across the globe. We anticipate the procedures will continue to stay in line with the past few months until the pandemic starts to become more controllable.
As a reminder, we will be filing our 10-Q by the end of this week I will now hand, it over to peer to provide a few operational update.
Thanks, John and good morning, everyone I want to take the time to share some insight into what we've learned over the past 90 days. These observations have.
And we will continue to impact the actions that we've taken near and long term to execute on our strategy.
At forefront of the changes that we see is that healthcare providers have fundamentally changed their IP and see protocols in a permanent way. These new protocols are allowing procedure capacity just safely recover faster than anticipated in most geographies our products services clinical expertise education into.
Brain are providing differentiated solutions to enhance patient safety and efficiency of practice for our customers the.
The procedures, we support often considered elective are critical to hospital assay and dental suite profitability and as we head into the winter season.
We anticipate that healthcare providers will protect and sustain these procedures differently than what was experienced this past spring the.
The demand from our Idmc solutions and stronger compliance to existing standards highlights the critical nature of Cantel solutions, which are on enabling us to outperform procedure volumes and gained share in our medical and dental segments.
Our assessment of procedures during one Q 21 place dental procedures in the range of 80% to 85% of pre co bid levels, while medical procedures were approximately 90% to 95% of pre cove at levels.
While this is positive news, we do expect patient safety concerns to be higher over the next several weeks regardless of any potential near term impact due to Covance. We are bullish on what we believe the market environment for our products and solutions will look like in the spring with or without a covert vaccine.
It is worth noting that through November our daily order intake rates have continued to outpace sales in both medical and dental.
This trend along with the operating enhancements that Weve made over the past nine months bolsters our confidence in the future. While there is much to do.
We know how to manage what is in our control, including our cost structure discretionary spending on.
Working capital debt service and taking care of our employees during challenging times moving to Cantel 2.0, and starting now with our us medical commercial initiatives and the assay space. We have launched what we term spring training for one age 21 on schedule critical activities that we have.
Focused on in one Q 21 that will continue through two Q 21, all assay sales reps will complete their basic and advanced training courses on selling the full bag by the end of Twoq to 21.
Driving targeted equipment placement program wins across this segment of the market. We are already seeing traction in the market related to these initiatives support our one Q 21 efforts into context through the four month, we have already matched our full year 20 pipeline and are outpacing placements.
Executing on infection prevention efficiency reviews on the AC clinics, which is key in establishing our brand and value proposition, while generating actionable VLCC insights and significant positive feedback from an underserved market refining our field sales tool kit by improving our value selling calculator.
Others, better design programs from promotions strengthening our clinical education materials, all aimed at crystallizing our value proposition. We are very encouraged by the early feedback from AMC practitioners regarding our ability to effectively capture the value from the solutions that we provide it.
In addition to the progress made nancy's we are concurrently accelerated our plans in the hospital setting with positive results from the key like highlights include.
Field reps of all completed their advanced full bag training courses to remind you. We recently configured our medical sales organization from product specialists to full bag reps to better sell the full cantel portfolio.
Our first use inside sales team is now fully operational and closed their first orders on October. This is an initiative that will take time to develop what we think is a must have given the access issues that continue to impact the provider landscape due to covance.
New capital programs have been incredibly successful doubling our normal backlog to $14 million at the end of on Q 21.
Our continued investment in a key accounts director or Cat program has given us a unique advantage given its IP MC educational nature, allowing our teams unprecedented access even as facilities of knockdown.
Give some perspective on the traction of the Cat program initiatives, we've seen faster than average growth in these accounts with approximately 30% higher organic consumable growth compared to accounts not partnered with a cat program.
Needless to say that our programs on the U.S. are in full swing and progressing nicely in Europe, we continue to gain traction in our commercial excellence initiatives in terms of our people nearly all of our reps have completed their full back training course work that has been deployed throughout the us team with a focus.
US on consumables.
This training will be bringing them in line with standards, we have set for our us team we've.
We've put new processes and programs in place, resulting an early wins this past quarter, where we outperformed procedures by double digits in terms of recurring revenue streams.
We anticipate that these results will continue to strengthen as our initiatives become standard work over the next couple of quarters.
In dental we have executed on numerous initiatives ahead of schedule that positively impacted the quarter out the door sales from distributors to customers remain robust in most categories up double digits with TB and back to practice kits, leading the way clinical education and training has been a unique style.
Energy for our dental segment, providing the IP and see guidance along with our core infection prevention portfolio to pull through incremental revenue as clinics get back to more normal operations.
In terms of core operations, we have made significant headway in preparation.
Of our safety go live, which we expect to occur in the spring further simplifying the business as I wrap up that all I want to highlight a significant achievement. There was mentioned earlier on the call. We initially released a synergy target when we acquired you free Dean or clear that it was number we expected to be we're pleased.
Report that we have already exceeded our year three target by accelerating the execution of cost synergies between the legacy businesses. This execution has enabled us to exceed our two to three year target of approximately 25% plus EBITDA US ahead of schedule.
Moving over to R&D, we continue to make traction with our launch of both ASCO 40, plus and defend a cleaning adapter valve with both franchises gained share and attractive margin categories, specifically in scope body plus we penetrated 250 customer accounts in the first quarter driving approximately.
The $5 million in both capital on consumable revenue.
In DTA, we're targeting our largest what the scope customers first and have seen approximately 15% penetration during the first quarter.
Finally, I'd like to provide an update on our project to add mass capacity globally.
We have received our first two mass machines into our Rochester facility and should have them up and running during the month of December.
We are expecting to receive our next two machines into our Italian facility in December and have them certified at an up and running in February the last four machine should be in place by May to June timeframe in Rochester, as I mentioned on the last call due to government subsidies, we will be able to significantly.
We increase our mass capacity walk spending very little in terms of net capex.
I want to take this time to thank our global employees for their extraordinary efforts this quarter and what has been a challenging backdrop. We over 2400 team members, who go out into the field and come in every day to produce and support our key products and solutions to enable our customers to continue provide.
On care and a safe environment.
It is through this hard work and commitment in a difficult environment that we are able to achieve our mission and we are grateful for their contributions I am now going to hand back to George for closing remarks.
Thanks, Peter before we get into questions and answers I have a short leadership change for your reference.
Many of you have come to know, Matt Makowsky, as the face of Investor relations or cantel.
Over the past few years, Matt has done an extraordinary job managing both the ASP on a function along with Investor Relations.
In keeping with our GAAP.
Guiding principles of continuous development for our employees, Matt has accepted a segment CFO role within the company and is already begun the process of transitioning his responsibilities.
Matt has been instrumental in the development of Investor Relations within Cantel, and we would like to thank him for his contributions.
With that Investor relations will be formally transitioning to Ryan Lotto.
Brian was previously the CFO of our medical segment.
On brings strong internal knowledge on the business and financial acumen to the role.
We expect to continue to make introductions over the next few weeks.
Please note the contact Ryan for your Investor Relations inquiries going forward.
Let me sum up by saying that the key takeaway from this past quarter is that we are delivering on execution.
Execution and continued share gains for our infection prevention control solutions in our markets.
And execution with respect to operating discipline and cash management.
So.
As procedures continue their recovery in 2021.
We're confident in the sustainability of our stronger profitability performance.
Okay. So with that we're now ready for questions.
Thank you ladies and gentlemen, the floor is now open for questions.
You do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone, we said well posing your question. Please.
Handset to provide the best sound quality.
Ladies and gentlemen, if you do have a question or comments. Please press star one on your telephone keypad at this time, we'll take our first question today from Matthew Mishan with Keybanc. Please go ahead.
Good morning, everyone and thank you very much for all the information from.
And outstanding quarter.
On our progress through all of us.
George Let's take first I just wanted to get a sense for how should we think about the.
Transition to normalized spending you in your business Im just trying to understand what's sustainable on the margin profile here and what is going to be changing over the next several quarters.
Sure I think.
Sean and I can tag team. This question. So look I think as we pointed out on the remarks.
First and foremost the big.
Big changer transition thats occurred over the past several weeks and months was in the dental business.
We said at the outset before the pandemic with the new free acquisition that we felt we could get this from.
Buying business have you freed crosstex to a 25% EBITDA margin.
That's obviously happened on an accelerated basis just to remind everybody the.
Legacy do free business was around a 22% EBITDA margin Crosstex had been at a 22% EBITDA margin, although in fiscal year 19, It was underperforming and Thats, obviously is changed meaningfully in the.
This year.
So this combined business has gotten the 25% the movie made extraordinary progress on the synergies.
Obviously, the faster recovery and procedures. So look at Sept, 30, something percent EBITDA margin in the first quarter were saying, 25% over time, so obviously that the transition and that has to do affect us from operating expense will come back.
When you look at what we said about the overall.
EBITDA margin exiting the fourth quarter two.
22%.
EBITDA us that is we're a 26% on the first quarter. So we've obviously carefully looked across the remaining quarters as as procedures recover.
The comes on.
More normalized operating expense and look on one thing I I can't make.
Clear is that we have really spent an awful lot of time.
Embedding.
Cost discipline on operating discipline.
And the company, it's been certainly help on S&P, we've almost looked at things on a zero based budgeting basis.
Understand what it takes to run the business on a sustainable basis. So we're very confident in that.
How we assess how we see the rest of the year unfolding provided the recovery in procedures yields.
Moving what set as our goal at the end of the fourth quarter.
The only thing I would add is that to help out on the numbers of point back to kind of repeat what I said in the call day.
We think opex will stay relatively flat going into this quarter, and then kind of pegging it at $90 million to $95 million per quarter by Q4, depending on on volume. So again thats kind of how we get back to 22% that George referenced.
Okay. Thank you Sean.
And then I wanted to shift over to capital.
My sense on capital is if it's being underutilized they tend to spend spend less and then it looks as if the procedures are going to be under.
Under a 100 per cent for a period of time, what's driving the backlog of capital on it.
I think what's interesting is you your focus moving too on the CS at this point are you kind of hitting these ASP as to the exact price time as procedures or maybe moving out of the hospital.
Yes ill take that Matt.
First on the capital piece.
I think we've been.
A sort of let's say in terms of looking at bundles, where we can leverage both our cabinet opportunity along with a ours. So I think thats been quite successful last four or five months.
At both the USA in international markets.
And then on the AMC front look I think we are hitting at exactly the right time you'll.
C has been incredibly strong we jokingly call. The first half of the year spring training. This as really the key changes in strategy deployment, we put in in the fourth quarter.
I've said all along at the first half of the year was really on refining what we deployed at the end of the year in the first half to start putting points on the board in the second half and so far as I mentioned in my commentary we've had a lot of success.
With our EVP programs, that's again the equipment placement programs, where we bundle consumables to allow folks with may be constrained capital budgets.
To to bundle, where we get advantageous economics, but are able to help customers out again, it might have some capital constraints to their budgets and as mentioned.
And the commentary Weve three or four months have got line of sight to really outpace already the full year free.
Fiscal 20.
Capital deployment and in four months already so it's it's off to a strong start as is the short answer.
And then last question I just wanted to go back to the cash I think you said they were the areas where you have the cash you're driving 30% higher consumable growth.
How how how does the cash drive that higher consumable growth is it just that high touch relationship and and then working with those large customers on on.
Infection protocols more closely.
Yes, I think the key is back to that access that we talked about even during the shutdown periods. We've maintained on that CAD clinician model for each day access so we've been continually getting in front of.
And groups here over the last five or six months.
And as you said influencing and changing protocols.
On parts during the G suite and Thats been very effective again, as we've talked about the ability to sell tops down.
As a way to again.
Simplify and ease the bottoms up going from those full bag reps now on the field on the hospital side. So.
We had been measuring pretty fanatically here in the last year and a half really that the areas, where we're seeing growth, where we have had coverage where we and the data is always been compelling and hence why we've continued to increase that investment sequentially from fiscal quantity into 21 and going from 10.
On cash the 14 this year.
Okay. Hopefully you guys are modeling strength training after the reason that the net.
[laughter].
Thanks.
Next question.
Take our next question from Leerink Hughes with Raymond James. Please go ahead.
Thanks, Good morning, everyone.
Couple of questions I guess, George starting starting with you.
Just trying to think through.
Kind of the progress you made which has been.
Significant in this quarter is as you've rolled out this stuart your sort of new platforms, and selling models et cetera, and clearly you made the point that.
Your your revenue growth was ahead of their procedure recovery.
I'm thinking kind of now post Cove Ed.
What's your latest thoughts on on sort of how we just should think about the organic growth for this company with what you've achieved thus far with what's the right way.
On to start to think about a more normalized organic growth range for the company.
Yes, I think.
This will sound familiar but I think our confidence level.
Continues to to increase but.
If you look at the parts medical we end.
Endoscopy I think was things were.
Gaining traction on Cantel 2.0 that we could be at a plus percent.
Organic revenue growth.
Dental we think 6%.
Growth and of course life Sciences, we sort of model that flat.
I think.
Again.
Coal that is certainly provided.
Yes.
Strong impetus to what we offer to to the consumers and is sort of reinforce the importance of.
The complete bundles that we provide in both places and we we've talked about the question about what transpires in consumer or customer behavior post Govan.
I think.
The changes we are seeing are ones that will be become embedded certainly at the hospital, but even in the disease and the dental offices, there will be an expectation on the part of the patients. If these will continue to be embedded protocols and importantly, we're spending a lot of time trying to talk about the economy of practice in addition to the.
The ITC efficiency of practice and Thats really the message that were we were always taking into dental and we're now taking into the AOCI.
So that for the for the season.
They continue to be able to regain or where they were.
In terms of efficiency of practice or the.
Their throughput, but now with the protocols that we helped them put in place. So we.
We feel pretty positive about it I think we we as Peter pointed out some of these cantel 2.0 programs were starting to refine the Cape size. So that we can track. This progress its still early days with respect to that but what we're seeing so far is giving us a lot more confidence around where we're going to be coming out of it.
Okay.
It was great to two other ones.
I guess sort of same same sort of question.
Again, either for for George or per Sean.
On on EBITDA margins again, as you start to think out, particularly given your ability to accelerate the free synergies.
Again, im sort of thinking past 21, and sort of thinking about more 22, or 23 kind of where it where do you guys think those EBITDA margins could head.
And secondarily Sean.
You know what given the operating expense numbers that you've talked about for that for the TQ and then as you move into Fourq, you that $10 million to $15 million that it moves higher from where we are today, what's what's driving that that increase and in operating expense. Thanks.
Okay I'll start with this simple.
Question about operating expense and that's primarily going to be driven incrementally it's going to be a lot of this is going to be discretionary spend is still a free historically low levels around coated.
Moving to the pay all of that will come back, but we do anticipate that some of that will come back as were putting down in terms of kind of in formal guidance and yes in a little bit of head count.
It would come into play as well, but that's really not a significant driver of the on the 21 numbers. It's really more just anticipate discretionary spend coming back, but I would also point out Larry that Thats also like the lever for us as well in terms of being able to preserve margin going forward.
At this point, we have quite a bit of confidence in our ability to operate even in good times and turbulence to maintain that.
As far as going past 21.
This is one of our favorite topics, but.
I think it's even relevant answering it in terms of 21 in particular on the gross margin expansion that we do have a lot of confidence even net of mix that at these volumes and normalize for those volumes that we are driving meaningful margin expansion with our operating discipline into the culture that we've been driving during the pandemic that we didn't let go to waste so.
I think it would be our target if you will in formally to continue to try to look at kind of like that proximately 50 basis point expansion year over year going forward in our operating margins.
Yes, I think.
Obviously it.
We have not spent a lot of time in starting about what happens two or three years from today, yet but sort.
Sort of understanding or growth rates, but.
Look we said, 22% in the fourth quarter.
As I.
So thats a good starting point for next fiscal year as we continue to make progress in Europe.
And build the business in Europe, obviously that helps improve profitability.
So I would I would say beyond fiscal year 21, as we get in fiscal year 2002, excuse me going into fiscal year 2003, we should pick up.
In another 100 basis points or so net progress on I think look our goal.
Is to ultimately get the 24% to 25%.
And.
Obviously this year with what's transpired in the Q3, the few free acquisition synergies and basically a reset and how we look at our our operating expense and also.
I should add to this is an important point, we've done a lot of things that we promised would transpire and yield benefit like Sep implementation for example.
Some things we've done a rooftop consolidation that are are paying benefits now as well they were obscured.
At the outset of the pandemic, obviously the revenues, but I think those are other things are starting to improve as well.
Okay very good thanks, guys appreciate it.
You're welcome.
We'll take our next question from Mike Matson with Needham and company. Please go ahead Sir.
Yeah. Good morning, Thanks for taking my questions.
I guess I just wanted to ask about the SC setting. So can you maybe talk about the biggest opportunities. There is it really around the procedural products and can you remind us what the penetration of the procedural products is in that setting.
Yes, I'll help with that Mike So look just from a.
Share positioning there to serve mine folks again, we own about 50% of the our installed base today as Ses and our best view on on on proxy for sort of let's call. It the valve business on the agency side, because we think that margin is only penetrated about 15% so well guide.
I think as we.
Yes, again, it's early days three four months and.
But I think we are really really excited about we see opportunities across the board whether it's on the capital side of me ours, and furthering our share position to making headway on on penetrating the cabinet.
Side of the business as well as a whole host of other products like SCO 40, plus with the 2% consumables on the back side as well as the valve business and that obviously, we see opportunities for our chemistry business as well on the assay side. So.
Okay. Thanks, Thats helpful and then.
Excess capacity expansion, you're doing for from math.
How confident are you that the demand will still be there by the time you get on with that given the timing or on the vaccines.
Being administered kind of hopefully by middle of next year.
Yes.
I think our premise there was log.
That capacity was nearly free.
Net of the subsidies from the government. So that's the first point is look we didn't have to pay a whole lot to get basically in a position to double our mass capacity, which we used to have about a 190 to 200 million a year of mass capacity on us roughly on a double overtime.
But certainly look we think their protocols that have permanently changed as we sit here is to those protocols that are going to go back.
And the Best example, again as as on the dental side were look the protocols have been there that high jet us in debt I should be changing their mask. After every patient and the reality is before to cope with that really wasn't always the case you might have a practitioner that changed their mascot launch and then again at the end of the day and I think.
Theres been far greater adherence to changing your mask. After every patient and I think that sticks. So as an example, I mean that that's a doubling or tripling of the debt.
Requirements on the dental side as we see that being permanent so we do see opportunities to utilize that capacity on the dental side and look I think it also gives us an opportunity to be opportunistic and other markets, where we might be able to bundle products together.
Okay, great. Thank you.
We'll take our next question from Larry Solow with CJS Securities. Please go ahead.
Great Good morning, guys.
Thanks for certainly a lot of information could you clarify so on the cash.
Really you beat sort of every line item between and a little bit higher sales on your pre announcement and then certainly much greater growth.
Gross margin expansion.
It sounds like your targets on you EBITDA exiting the year at 22 versus 19% is most of that adjustment related to your confidence and sort of achieving these higher gross margin levels and the operating margin and expense level. There is some wiggle room, there and on maybe there is if you don't bring back all this expense.
As you will touch.
I actually have some more upside is on a fair way to look at it.
Yes, I would say the day. It is overall I'd say that the major changes are previously we had kind of anticipated debt procedural recovery would be somewhere between 90% to 95% by the end of the year and so we're more bullish that's going to be.
100% by the end of the year, so thats driving some of that confidence on the expansion that we referenced and yes, absolutely that we're getting more confident in our ability to.
Produce the fruit that we knew that we were planting.
With all the operational initiatives that we had in place and and again I think you need a rated but thats spot on that there is room in that to climb that I referenced in the operating expense model. So that again volume fluctuate from half of any.
On anything that we forecast right, we do have room to pull those levers to maintain margin.
Yes, I don't have any data example, thats, we use the word at least 22%.
So just to give a sense of our confidence.
Yes, absolutely and then how do you how do you gauge or balance use significant outperformance in revenue or a rebound and recovery in revenue versus sort of obviously, a nice recovery in procedures, but not quite to the level that your revenues recovered on is there is some catch up or.
Like these return to work.
Maybe perhaps now that debt providers plan on using extra pp and stuff are they perhaps buying EBIT extra inventory and stuff, how do you sort of gauge that catch up.
Or is there maybe not as much as on the thinking there was.
Larry This is Peter.
On one of things obviously with the dental side is we have a lot of data on out the door by product category and obviously from right pair that.
Two our purchases from our channel partners.
We've looked at bolt on on I'll call. It a calendar year to date 20, and also just during our force first quarter of fiscal 21.
Non inventory change has been negligible. So the reality is and Thats a good news story for us that there isn't any errors in some big restocking going on.
Our channel partners are buying as what's going out the door.
And on the medical side as well I mean, the nuance that you have to remember, especially on the consumable side.
There's a lot of these hospitals on a lot of the seized on hold a lot of inventory.
Because they don't have a lot of space to hold inventory.
So you're talking about a change or maybe somebody is holding a couple of days that may be holding a week week and a half so we.
We just don't see that behavior happening within our core markets and.
Look I think at the end of the day.
We're seeing that dollar per procedure increase as people again or just paying more attention to the protocols in the importance behind it.
Right and you mentioned I know Europe.
Sure on proven Europe as part of Cantel 2.0.
Are you seeing any differences today in the recovery.
Forget the COVID-19ien since which seems to be worse in the U.S., but just in terms of.
Customer behavior and whatnot in United States versus the rest of the world are there any differences as we sort of begin to rebound.
No I mean, it's been broad based in a sense of I mean, we've seen examples in every geography, where there are certain.
Practitioners.
There are hearing.
Or in some cases, creating new standards.
On the example is we've seen.
Pockets in Germany, we're seeing pockets in the United States and Australia.
With that as an example, where we sell 24 hour tubes assets and we've seen some clients actually switch that to a single use two sets as an example, which.
With just a heightened focus on on infection prevention are on coated.
Okay.
Perhaps the last question is maybe a little color on the ounces steel census on that on the trace tracker.
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So we view this on sort of.
On an early stage thing that up now eventually will contribute meaningful revenue, but now sort of a.
Slow grant or how should we sort of look at that.
Hi, Hi, there the debt.
We are really encouraged with the partnership that we announced a census, we've always viewed track and trace on solution as an important.
Element to our overall complete circle of protection that ties together the overall nature of the portfolio.
And were very encouraged by the ability to leverage the strength of our partner to help accelerate this this offering into the market.
Obviously these are these are.
Substantial.
Investing in hospital systems, each make though theyre not quick sale be quick win but we have a healthy pipeline and we're encouraged by the interest that we've seen from our customer level.
Demand for this sort of solution and we look to roll this out with to develop product in the coming quarters and we anticipate this will be growth driver for us in fiscal 2002 beyond.
Great. Okay, Great. Just lastly, I'd be remiss, if I didn't just give a shout out to Matt on the help me out a lot ramping up so good luck in your new role.
That said I'm all set thanks guys.
Yes, that's not going to influence is paid so [laughter]. Thank you.
We'll take our next question from Mitchell from couple with Sidoti. Please go ahead.
Yes, hi, good morning, Thanks for taking the questions.
Just first wanted to start on who free obviously, you're well ahead in terms of your targets on the cost synergy side I was just curious as it relates to.
On cross selling front, if you're generating incremental revenue there that you anticipated or if you're already ahead on that front also.
Yes, I mean share. This is Peter yes, I mean look the debt back to practice ill.
Procedural cash on the dental side that we've been bundling a fair amount of you free with Crosstex as as those dental offices reopen so thats been a pretty big win.
But.
Candidly that growth drivers are still the same the IMF set ups are progressing although last new build facilities at obviously slowed with covance, but those on compliance bundles. The harmony scalar. We just launched in the month of October So weve had minimal sales on October but we're excited about what that brings in rest of the year.
Obviously, the surface disinfectants, along with PPS been huge and then we can team continue to lean into greenlight as a key sterility assurance vehicle to move the whole business forward.
Okay, No that's great. Thanks.
As it relates to the face mask issue with et cetera. I was wondering if you have any restrictions given the federal subsidies in terms of being able to sell more outside of the U.S.
No.
Theres.
Minimalist handcuffs on that we just need to keep that capital actually in the United States is pretty much the domain requirement on the machines that on the four machines that we got assistance from the U.S. government on.
It's a similar profile on the two machines that we got in Italy, we need to maintain the capital there, but we can manufacture and export.
As much product as we need to.
Okay now that's great.
An average release I believe you mentioned you know we should we expect on some incremental headcount coming on as you go to business.
Do you stand on the sales force front, especially given to push.
Recent question to ask season just.
Building up the business going forward.
Yes, I mean, even during the shutdown here, we protected the investment on the sales side, especially on a medical piece so.
We are staffed now I think as we've mentioned in the opening remarks.
We're down basically there's one open position on the inside sales, but we've got that up and running in the first quarter that team got their first orders in the month of October.
We are fully staffed on the resi side in the in the eight markets that we targeted.
We've made really strong progress on getting everybody that was put into a pullback roll train sort of graduating from getting their masters in selling both capital and procedural products here. So we feel really good that we're positioned.
As we hit the back half of the year that we've got not only highly motivated sales team.
But no open positions and everybody again trained.
And ready to roll.
Okay, Thanks and.
Then finally on life Sciences, a little late on US looking for what's your best sense in terms of when you expect that to sort of flatten out.
Look it's fairly flat sequentially from 40 to one queue and I would look at the next two quarters and probably say revenues going to look pretty close to the first quarter in terms of sort of trading sideways from a revenue perspective, we've seen the backlog kind of stabilize and level off.
This is usually the slowest time of the year in November and December from an order intake perspective on Centrals as you can imagine there's not lots of folks want to go do newbuilds in the middle of the winter. So for US usually the order intake machine starts to accelerate late January and Thats kind of how we see the market is.
Orders that we've taken in February and March because of the lead time are not going to share.
And so on the late spring or early summer and so that's probably how I would think about sort of the revenue trajectory.
Okay, Thanks, and if I could just one housekeeping question I believe.
On the interest expense line I think there was a.
Hi, Tim those included in there.
Non cash interest expense I was just wondering what that amount was if you had it.
Total us and I think that what $1.8 million or so and it's related to the accounting for the convertible is a non cash items that are to your point.
Okay. Okay perfect. Thanks, again for taking the questions.
We'll take our next question from Michael Cherny with Bank of America. Please go ahead.
Thanks, So much one just quick clarification, Sean you mentioned you expected gross margin expansion to continue just want to know that off of the one Q levels or is this based off of last year expect year over year gross margin expansion. It would be in reference is the best quarter again would be our second quarter, a 20 looking at assets.
The whole with.
With you free and fully so it would be reference to that I mean, obviously Q1 itself there is a little bit of mix. So.
In terms of the capital versus consumables mix that will alter going forward, but relative to those volumes and mix. We do expect margin expansion year over year like we refer to.
The school year, 22nd quarter, because it was the last three quarters.
Quarter.
At that rate to be clear was like 47 47.1. So again you want to think about in general we'd be targeting around 50 basis point expansion on top of that maybe a little bit better that would be a good way to think about it.
Okay. That's very helpful clarification, and then I guess maybe to pull on the mass question in the pp dynamic infection prevention your growth in the dental markets.
Debt just continue to think about reform renting their workflows you gave some color around how much they're going to switch out masks. How much are they coming to you in terms of having that strategic discussion to make sure that they're appropriately source, especially at a time, where there is there are some other mask manufacturers that have high levels of quality, but you're also fighting a battle of.
Third party black market, whatever you want to call it challenges and how early whether it's with Mascus on that with TB can you get into those conversations to make it more strategic type sales versus some of the rush demand that you are likely still seeing across the market.
Yes, Thats a good question Michael I mean look we are having those conversations with the larger channel partners. You can think of it as almost getting into a position where ultimately have dedicated machines and capacity that folks are definitely thinking about how they source strategically differently.
Than they used to most much of the last five to 10 years has been just get the cheapest product and obviously, there's been a sea change on that in terms of people wanting to make sure that they've got.
Multiple sources and ideally multiple sources with capacity in North America.
And not getting caught again from an exposure perspective, where the entire supply chain.
They are buying from was in APAC. So we do think there are opportunities to bundle long term and add on long term relationships and commitments on non on mass and face yield specifically.
And if I could just one more follow ups and I apologize if I missed this but.
Or can you give us a sense of dynamics within that area of pricing that you've seen across your customer base.
Yes, I mean, ultimately we only change our pricing once a year. So there isn't that the channel partners, obviously are able to change their pricing real time.
The net so the market, which I'm sure that they've done.
If we've gotten any real benefit.
I think I would I would categorize. It is is we have to push our branded mass very heavily obviously the pricing at the margin profiles a bit higher on the branded versus private label. So from our perspective. Our main benefit is really insisting on are pushing more forcefully here the branded product.
Got it thanks, so much.
Yes.
And this concludes our question and answer session George will turn the floor back to you know for final remarks.
All right. Thank you very much free for listening and participating today and we look forward to speaking with you on our second quarter call. Thanks.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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