Q2 2021 Cantel Medical Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Cantel second quarter 2021 earnings call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Ryan lot of Sir the floor is yours.
Thank you and good morning, everyone on today's call, we have Chuck Yeager Chairman of the Board George <unk>, Chief Executive Officer.
Peter Clifford President and Chief operating Officer.
The Ellen Executive Vice President and Chief growth Officer.
Shaun Blakeman, Senior Vice President and Chief Financial Officer, and Brian Capone, Senior Vice President corporate controller, and Chief Accounting Officer.
Earlier this morning, the company issued a press release announcing and the financial results for the second quarter of the fiscal year 2020 one.
In addition, we have posted a supplemental presentation to complement today's call net.
The presentation, along with reconciliations of non-GAAP references can be found on cantel website, and the Investor Relations section under 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 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 and earnings release. The company will also be making references on today's call at the non-GAAP financial measures reconciliations of these financial measures to the most directly.
Parable GAAP financial measurements are provided in today's earnings press release with that said I will now turn the call over to George.
Good morning.
Our performance of the second quarter was strong and we saw sustained demand and heightened levels for our infection prevention and control solutions and.
Both our medical and dental segments.
Our financial results this quarter exceeded our expectations as strength in our recurring revenue categories and new products drove top line performance.
The volume leverage and continued operating discipline delivered strong earnings performance.
This outperformance was also made possible.
By the diligence and commitment of our employees.
Which has enabled continual service to our customers and ultimately their patients from the very beginning of the pandemic.
We thank our 3700 employees globally for their dedication to our Cantel mission.
Consistent with my comments last quarter, we again outperformed underlying elective procedure volume globally, and our second quarter.
And based on independent third party data, we estimate that and our second quarter through January 31.
U S endoscopy procedures were down 10% to 12% versus a year ago.
We saw procedure volumes and November and December consistent with earlier fall levels with a larger drop in volumes and January driven by the post holiday surge and Covid cases.
During the same time medical recurring revenue products.
<unk> is the most closely parallel endoscopy procedure volumes performed much better than procedures, and we were down two 8% versus a year ago.
And in fact sequentially from our first quarter with four fewer business days, we actually saw a modest uptick and our day rate for these products.
Similarly, and dental we estimate U S dental procedures were down 10% to 15% versus the prior year.
All of our dental business during the same period was up over 4% organically and the U S.
And the continued outperformance of our business compared to the underlying procedure volume trends indicates continued market adoption of our infection prevention solutions.
And demonstrates the strength and value of the critical products, we bring to our customers on a day.
Daily basis.
And the quarter, we continued to make progress on our cantel two point of growth initiatives.
And Europe commercial excellence remains a key initiative and we saw the European team deliver and outstanding performance.
And while we estimate that European endoscopy procedures were down 15% to 20% across the region year over year, we saw our recurring revenue products grew 5% organically versus year ago on on FX neutral basis.
Especially on our higher margin recurring revenue products.
We are extremely encouraged by the results and traction we are now seeing in this region.
And we're particularly excited with the performance of our new products, which includes scope Buddy plus the defend the cleaning adaptor and Hugh <unk> harmony ergonomic scalar.
Demand for these important products enabled the company to continue to gain share of wallet.
And what we referred to as the complete circle of protection.
In addition, our.
Our of surgery Center and key account director initiatives are showing strong momentum.
And we anticipate they will contribute the further growth and the back half of fiscal year 'twenty one.
Finally, our life Sciences business performed consistent with the ongoing objective of delivering stable operating profit and strong cash flows.
The bottom line is that we believe the combination of early progress on cantel, two <unk> initiatives and new products are helping us outperform underlying procedures.
They are enabling our customers to treat patients safely and efficiently by adopting cantel and infection prevention and control solutions at a time of heightened sensitivity.
Simply put we expect to see continued benefit from these initiatives over the back half of fiscal year, 'twenty, one leading us to emerge from the pandemic a stronger company.
And our second quarter, we again benefited from our focus on operational rigor and discipline on.
The daily management, and strategic Resourcing and expense control.
Coupled with favorable product mix and volume leverage enabled us to exceed our profit expectations for the quarter.
As you May recall last quarter, we provided updated guidance of exiting fiscal year 2021.
At a 22 plus percent EBITDA margin.
Given our execution, so far we're even more confident and our ability to achieve this guidance.
This EBITDA guidance already factors and a return to more normalized operating expense and the remainder of the fiscal year 2021.
Looking at our third quarter, which began February one.
So far our of medical and dental segments continued to perform well.
As I pointed out earlier, we saw some procedural softness in January versus November and December.
And which continued in early February as several large U S health systems suspended elective procedures with the increase and COVID-19 rates after the new year.
These systems have mostly return to elective procedures and with that order rates have followed.
With the sustained rollout of the vaccine, we expect to see improvement and the procedure volumes and likely a return to 100% exiting our fiscal year.
Regardless of the underlying market dynamics, we remain confident and our ability to outperform underlying procedure volumes.
We also believe the need for enhanced infection prevention solutions will continue long into the future.
Driven by now embedded clinical point of care protocols enhanced compliance with regulatory requirements and professional association guidelines.
We previously announced on January 12, 2021, net cantel and stares had entered into a definitive agreement to merge these two great companies.
Since that time, we have been making steady progress on addressing the necessary steps to consummate the transaction.
The merger agreement was submitted in January and stairs filed a registration statement on March 2nd which included a preliminary version of the proxy.
Shaun will speak to you fully on our financials on a moment, but it is worth noting that given our continued strong performance and cash generation, we have again the accelerated our debt repayment.
Earlier this month, we paid down our revolver by an additional $50 million, bringing our total debt pay down to $175 million, so far and fiscal 2021.
This met the higher and of our revised guidance for $155 million to $175 million and total debt pay down and all of fiscal 2021.
Shawn provided on our first quarter earnings call.
We will continue to evaluate opportunities to further improve our balance sheet and the back half of fiscal 2021.
So with that I'll turn it over to Sean.
Thanks, George and good morning, everyone.
I'm going to go through our key financial results with brief commentary.
Knowing that I would like to provide additional detailed that give context to the financial results during COVID-19 of course.
<unk> the 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&A.
Net sales increased one 9% year over year, and the second quarter 'twenty, one versus prior year and one 1% on a constant currency basis the.
FX impact was <unk>, 8% and organic growth was one 1%.
This significantly exceeded our Q2 expectations as we continued to see elevated demand for our infection prevention products and both medical and dental.
The medical segment increased by <unk>, 1% on an organic basis and the quarter on a constant currency basis capital equipment decreased 5% with recurring revenue, increasing 1% and the period versus the prior year. It is important to note the wild capital sales were down versus the prior year, we still.
<unk> maintained a robust backlog throughout the quarter, representing continued strong underlying demand.
And ill endoscopy procedures have stabilized near our first quarter levels. We are pleased that we continued to outperform the market and our recurring revenue categories.
The dental segment grew four 3% on an organic basis, primarily driven by modest improvement in underlying dental procedures combined with continued demand for infection prevention products and the dental market inclusive of PPE and disinfectant Chemistries.
Life Sciences declined negative, 8% on an organic basis, primarily due to lower portable reverse osmosis machine sales.
And the first quarter. This decrease was primarily driven by a strong increase in demand and the latter half of fiscal 2020 per our portables as customers requested these units during the height of the pandemic.
Sequentially from our first quarter of fiscal 2021, we show a growth of positive one 4%.
And the dialysis segment, we saw organic growth of 35, 6%, primarily driven by favorable comps due to prior year production delays.
Turning to the consolidated margins.
Our GAAP gross margin increased by 640 basis points to 48, 8% versus 42, 4% and the second quarter 2020.
While non-GAAP gross margins increased by 190 basis points year over year to 49%.
The expansion was driven by increased volumes combined with continued discipline and managing manufacturing costs.
Favorable mix contributed due to higher sales of consumable products.
With these volume levels and continued operating discipline. We believe we will continue to operate at and expanded margin profile over the prior year.
GAAP op profit increased 316, 4% year over year to $31 6 million.
On a non-GAAP basis profit increased 30% year over year to $58 6 million.
Our cost discipline around discretionary spend is ongoing and we will continue to take a cautious approach with opex given the ongoing uncertainty surrounding COVID-19.
We still expect opex to modestly increase each quarter and stabilizing around 90% to $95 million run rate by Q4, depending on volumes.
Moving to tax rate GAAP effective tax rate for the quarter with the provision of 25, 2% as compared to the prior year benefit of 14, 7%.
The current year provision is driven by our geographic mix of income and partially offset by the unfavorable impact associated with our stock based compensation expense.
The prior year income tax benefit was primarily driven by our pre tax loss of that quarter and was offset by period costs related to the <unk> acquisition.
The non-GAAP effective tax rate came in at 25% as compared to the prior year rate of 25, 9%. This decrease was driven by geographic income mix.
As a result, our GAAP EPS increased year over year to 27.
Non-GAAP EPS increased 29, 5% year over year to 79.
And finally, adjusted EBITDA came in at $71 million.
Up 27, 3% year over year.
Cash flow from operations for the quarter came in at $47 7 million and increase of 152, 1% year over year, and we ended the quarter with $243 1 million and cash.
Working capital decreased 5% sequentially to $403 5 million.
Primarily driven by a small decline and cash on hand from repaying our revolver.
Accounts receivable was flat inventory increased 4% and accounts payable increased 16% on a sequential basis.
In addition, capex was $11 $5 million this quarter and increased from Q1 to what should be a more normal run rate for our capex.
With our $50 million of debt pay down early in the quarter gross debt ended the quarter at $988 4 million, while net debt was $745 3 million.
Our net debt to adjusted EBITDA ratio was three nine times.
We continue to drive operating and working capital improvements during the last quarter call. We updated our guidance the pay down $155 million to $175 million and fiscal year 2021.
Given our continued strong performance and cash position through the second quarter, we opted to pay down another $50 million of our revolver and March bringing our total debt pay down to $175 million year to date and meeting the high end of our revised fiscal year 2021 guidance and our first eight months.
We expect the similar operating cash flow profile through the remainder of our fiscal year 2021.
With some potential variability driven by the timing of tax payments and expected refunds from the cares Act. However, I also expect some increased outflows and the latter half of this year due to acquisition earn outs and merger related expenses.
Although we are not going to provide formal guidance I do want to provide some color on our Q3 expectations.
We expect Q3 revenue to remain relatively flat to modestly up sequentially to a somewhat stronger than expected Q2.
Early February started off a bit soft following the post holiday surge and Covid cases, but that was short lived as we exited February we saw a return to stronger order rates and expect to see ongoing improvements through Q3.
And aggregate. However, we are still keen and expect the same picture, we laid out last quarter on a year to date basis.
The procedure recovery trajectory, continuing through our Q3, and reaching 100% and Q4.
As previously guided and we continue to expect to see of modest ramp up and operating expense for the rest of the fiscal year.
As previously stated we will continue to maintain strict operating discipline and prepare for any unexpected fluctuations and procedure recovery due to COVID-19 we.
And we feel confident that we will meet or exceed our Q4 exit guidance of 22% plus EBITDA.
As a reminder.
We'll be filing our 10-Q by the end of this week I'll now hand, it back over to George for closing remarks.
Thanks, Sean.
Let me sum up by saying that the key takeaway for this past quarter is that we are continuing to execute both commercially and operationally.
This execution, coupled with increase underlying procedures and our initiatives will position us to continue to outperform the market and deliver continued financial performance.
Before we get into the Q&A I did want to highlight the for the purposes of this call. We will only be taking questions regarding <unk> financial performance that we are reporting on today.
And we will not be taking questions concerning the announced transaction was stairs.
As mentioned previously the stairs has recently filed a form S. Four registration statement and that filing contains considerable and information about the transaction and we would refer you to this filing for information regarding the transaction.
With that we're now happy to answer any questions about our earnings release or performance.
Thank you ladies and gentlemen, this does conclude.
Ladies and gentlemen, the floor is now open for questions and you have.
Have any questions or comments. Please press star one on your phone at this time, we ask that will pose. Your question you. Please pickup your handset listening on speakerphone can provide opt on sound quality and once again, if you have any questions or comments. Please press star one on your phone now.
Our first question today is coming from Matt Michelle on your line is live.
Hey, good morning, and thank you for taking the questions and you guys are clearly the mailing anything in here.
Yes.
So two questions the.
First of all I have is the procedures that will put us in January and February.
The tick back up Youre seeing now the quick pick up was that because of those those were rescheduled procedures.
That was just put off and they were there was a backlog of people to get to.
The catch up and then I'll ask my second one and the capital equipment backlog. That's been built up I'm, just curious if thats new demand.
From your initiatives or catch up from the previous year.
Yes.
Yes, Matt let me take the capital question here.
We've been pretty aggressive here for the last six to nine months in terms of some programs targeting capital.
Our win rate on on now.
The capital has been north of our.
<unk> hit rate and we expect to see much of that backlog ship.
<unk> and the back half of this year. So as you know our first half of the year we saw.
Modest headwinds from the prior year, we would expect capital growth to be positive and the back half of 'twenty one.
Matt.
The storage with respect of the procedures question, you ask and look at it.
And it's hard for us to know and the data that we collect of its people who are.
Having scheduled starting of that particular data whether it's carryover. The thing we know about colonoscopy is the people.
This is not like of mist cleaning or of dental appointment and people need to get the colonoscopy done. So there's clearly catching up that's happening and addition to new ones that are being scheduled.
What we track and now we're able to attract let's say on the aggregate well is understand the difference that's occurring between IBM.
And and surgery centers, but it's difficult to those price of the track, whether we're not asking people individually, whether they're a reschedule of brand new but we obviously know a lot of reschedule that are going on as people try to catch up with them with the.
With the.
What they may have had basically.
Asked by the of Gastroenterology.
And yesterday neurologist and get it done or some other way that they have the habit.
Previously scheduled, but we can't discern between whether it's new or reschedule.
Alright, Thank you very much.
Thank you. Our next question today is coming from Larry Youre.
Your line is live.
Thank you good morning, everyone.
Had a couple of questions here first I guess George for you.
And so as indicated on the call you anticipate procedures being back at 100%.
And you articulated and the fourth quarter.
I guess I'm just curious.
Covid still remains.
Early dynamic.
And the vaccine rollout.
Maryann.
And secondly, maybe.
And maybe a fourth Serge.
So.
And what kind of gives you confidence that you'll be back at 100% because of your fourth quarter ends in July. So that's that's not too many more months from from here. So just your thoughts.
Thoughts there.
And I think I think what we said Larry.
And if my memory serves and write the we exit the fourth quarter. So we're talking about July 31 heading of the August.
We don't have any guarantee I mean, obviously.
We know theres going to be a high correlation with.
Vaccinations, obviously and as those continue to gain traction thats the improvement.
Obviously, we've seen improvement even amidst COVID-19 from the low levels through where we're at today. So we're tracking and 90 of one point, we were 50 and we're at 90 today and.
All of that and vaccinations are only perhaps barely of 20% of the population so.
I think the.
And the vaccination is get the 50 60, 70%, we think the 90% will continue to push towards 100, exactly what day that pause.
And we obviously don't have that kind of precision, but I think we're feeling pretty confident given where they're at today and where the vaccination levels are at that the correlation audit of continue to drive these things closer to 100% as vaccination percentages increase and just to add on Larry.
In February and we were looking at dental bookings and the data coming out of the back half of February is really probably the strongest.
And that we've heard of bought are seen and the industry as folks are starting to finally book.
More of the hygienist. The appointment so we're expecting April and May and June and July to be pretty stronger and or at least probably the peak debt, we've seen and the last six to nine months.
Yes.
That's super helpful to other ones and I'll just.
Ask them upfront.
How do we think about.
The changes and infection control and prevention protocols that have been put in place both and.
Gi suites, particularly and afcs and dentist offices.
When do those sort of start to lap.
And do you lose.
Some of the benefit of those enhanced protocols. So that's question one kind of Windows anniversary and then secondly, the dent.
Dental operating margin if I got this right declined sequentially.
From 36% to 26, 3%, that's obviously still north of that 25% bogey that you had.
But what drove that sequential decline and how do we think about the ability to now and maintain the stability of debt dental operating margin above that 25% range.
This is Seth with regard to the the lapping of the IPC procedures I mean, I think the way to think about it is last spring, we certainly saw the slowdown and shutdown of elective procedures and during that time until sort of mid summer.
Practices were largely.
Either shuttered or on very low volumes and they were educating themselves and revising protocols and kind of emerged and the mid mid summer timeframe late summer timeframe starting to utilize.
Enhanced IP and key protocols and and.
And processes that said I think that the volume growth that youll see on top of that because of those remain at very low levels of overall volumes will continue to increase so I don't know if it's necessarily will be a headwind.
In the immediate planning period.
But certainly we saw adoption of higher standards of P&C in sort of the late summer early fall time frame. Despite the low volume levels that were occurring.
And regarding the dental margins Larry This is Sean.
We had always said, we see that net 25% plus type business and as we alluded to in the Q1 call Q1 was really just kind of an unusual positive in terms of all the things that we had going for us and the expenses that were held back due to COVID-19.
Covid related as well as of.
Taking off of the year and again as we've kind of alluded to and.
Not surprisingly, we do expect of steady increase and operating expense as well as some mix shift right that would be driving that margin down a little bit sequentially from the high point that we saw on Q1 so.
And our viewpoint is like this and still very very healthy margins, we're seeing out of there. It's really just the combination of some expenses coming back in the Q2 sequentially and a little bit of mix shift that can go either way and each quarter and quite frankly to Peter's point right. As you see a lot of kind of like the core hygiene.
Ramp back up.
And maybe relative to some of the other stuff that was going out of dental that's going to continue to drive to higher margin portion of our portfolio as well. So we still get out of the very healthy business and sustainable of 25% plus.
Okay, great. Thanks, guys I appreciate it.
Thanks.
Once again, ladies and gentlemen, if you have any questions or comments. Please press star one now.
Our final question for today is coming from Mike Mattson Your line of life.
Good morning, Thanks for taking my questions.
Wanted to ask about the the difference that you're seeing between your sales growth and the actual procedure growth, so and dental and medical it looks like procedures were down 10% plus based on the third party data that you quoted.
And you're flat to up and both of those businesses. So what's driving that differential is that just increase the utilization of infection prevention products and.
Is that something is that differential sustainable and other words of the vault.
The growth procedure volume growth picks back up and do you think you can continue to outpace the procedure volume by some of our MAU.
Yes, Mike there is a couple of pieces there and.
As it relates to the medical business is an example of where we're executing beyond sort of the tailwind of of.
IP and see compliance as Youre aware, we started too.
Really makes them right and turns on our EMEA business as an example over the last nine months and really driving commercial excellence into that region and.
And if you take a step back.
View Europe. This past quarter is probably closer to that 85% to 90% and that business was basically flat to up a couple of points and and at the end of the day, our consumable business as well as our chemistry and.
And this current quarter.
With nearly double digit so we expect it to start putting points on the board on EMEA and the back half of 'twenty one.
I'm not surprised that we started to see some of that hit and <unk>.
As well as our ASC story is gaining traction we feel like we're positioned really well to deliver on put points on the board and the second half of the year as we had committed to earlier, so that's a little bit of.
Soundbites on the medical piece and on on the dental side, obviously, the P&C story, there is really resonating.
As well as.
And we've watched the ergo designed harmony scalar at the right time, hitting the market, which is obviously, giving us a tailwind as well.
Okay, Thanks and.
And.
And I did want all of SaaS about ASC. So I was just wondering if you could give us and update on progress there and the sales force and.
Also do you have a feel for the overall portion of the.
Das can be procedures that you're targeting that are that are done in E&C the post the.
Hospital.
Yes, Mike we're still refining what that product portfolio is and its best fitted there.
We're getting lots of positive feedback from the space. It continues.
The influence our value proposition tools that we're developing.
Highly confident that we can start to deliver some differentiated growth there and the back half of this year.
We've seen a strong start to capital bookings that was part of the story and the first half of the year on the backlog build is.
And our more aggressive stance and and.
And direct <unk>.
Committed sales force that's in the channel right now is having success success immediately on capital and we're continuing to refine that consumable on chemistry story as well.
Okay, great. Thank you.
Thank you that's all the time, we have for Q&A today do you have any closing comments you'd like to finish with.
Yes.
First of all the thank everybody for being on the call. Today, obviously, we're very pleased with the results and.
We continue to believe that the.
And can tell with our unique portfolio of products and infection prevention and control is going to continue to outperform procedures and I think as well we expect there to be.
The longevity to our story as these things become.
Part of the natural protocol, and dental offices, and endoscopy suites as well so with that.
Thank you for being on the call.
Okay.
Okay.
And.
Okay.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.