Q3 2019 Earnings Call
Year 2019 earnings call at this time, all participants are in a listen only mode a brief.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Matt Makowski VP of F. P N E and Investor Relations. Thank you you may begin.
Thank you Michelle and good morning, everyone on today's call, we have Chuck Yeager chairman of the board.
George <unk>, President and Chief Executive Officer.
Peter Clifford Executive Vice President and Chief operating Officer, Seth Yellin, Senior Vice President strategy Corporate development, 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 the financial results for the third quarter of fiscal year 2019.
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 <unk> website in 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 to non-GAAP financial measurements non-GAAP EBITDA non-GAAP income from operations non-GAAP gross profit non-GAAP diluted earnings per share and net debt.
Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today's earnings release with that I am pleased to introduce to you George <unk> President and CEO .
Thank you Matt good morning, all.
On the whole our third quarter came in as expected and was consistent with our earlier guidance.
The medical segment had a very strong quarter with 12, 2% organic revenue growth year on year.
The dental segment returned to positive organic revenue growth of three 4%.
Now this is a meaningful recovery from the first half of the year, which was impacted by inventory destocking.
And a shortage on a key chemistry.
Looking ahead to the fourth quarter, we estimate the dental business will grow sequentially quarter over quarter.
With flat performance year over year due to an unusually strong prior year.
Life Sciences ended the quarter more negative than we expected. However, our analysis indicates this past quarter should be near the low point as this business moves towards stabilizing.
We expect continued weakness in the fourth quarter of this year, but we are encouraged that we will return to modest growth in.
In the second half of next fiscal year.
Before we get into more specifics on the third quarter performance I want to spend a few minutes speaking to other developments during this past quarter.
It has been exactly three months to the day since I.
Became CEO a lot of stake in place first and foremost with the leadership team of Cantel.
In my public comments at the outset as well as internally.
I said I would work fast to ensure we could focus and alignment on what's most important.
And to do that we wanted to get the right people in the right jobs and I knew I could rely on existing cantel talent to get this done.
In our medical segment, Mike Spicer was appointed President.
Mike is a chief architect of our customer's success and endoscopy over the past several years.
Now brings outstanding leadership to the entire medical segment.
Outside the U S. We strengthened our commercial focus by moving from one international President to two to.
To separate the focus on Europe and APAC.
Neil Blewitt, who has successfully led our U K business is now president of Europe .
Michael Mcgrath, who has done an excellent job in Canada is now leading APAC in addition to Canada.
And in our corporate office, Jean Casner was promoted to Chief Human Resources Officer, and she has been instrumental in coordinating all aspects of these appointments.
And sitting around the table with me now are two more recent leadership appointments Peter.
Peter Clifford has assumed the role of Chief operating officer, and most of you on the call know Peter well, including his command of our business and the strong operational focus he brings to the company.
And with Peter's leadership, we plan to strengthen our operating model for cantel to drive more organic growth opportunities.
And operational excellence.
Also Peter's appointment gives me, even more time to devote to our new product effort M&A and organizational development.
Following Peter into the CFO role, we are welcoming back Shaun blakeman.
<unk> was most recently in a senior financial role at Medtronic.
And prior to that was the CFO of our medical segment.
Now while I previously said that all of our promotions are from.
From within conveniently ignoring Sean so joined Medtronic to keep my pledge intact and as we're happy to have him back.
And similar to Peter Shaun grew up with a strong operational focus and his finance career, which is a terrific complement to the great talent in our finance organization.
While this represents a whole lot of change you got to remember these executives are often within familiar to our people.
And well respected for their leadership and accomplishments. So this allows us to not Miss a step in terms of speed of transition.
Okay.
Beyond the scope of leadership changes there were some other important developments during the quarter.
We have completed an assessment of our key new product priorities.
As a result of this process, we are moving more resources to Reeboks as we've gained more confidence in the potential and timeliness of this technology.
We are also focusing on core product enhancements in our medical segment to drive future growth, including our equipment procedural products and chemistry product lines.
As we make further progress we will begin to talk more about these developments.
There are several initiatives in process around our cost structure.
In the U S dental business, we are consolidating our manufacturing sites and improving our supply chain capability by expanding our operations in Rochester, New York.
We have also taken steps to address cost in our life science business.
To align with revenue performance.
While all of these actions will ultimately contribute to margin performance.
It also frees up funds to support product development initiatives, which are key to our long term success.
We have made significant progress in our assessment of strategic alternatives and the medical water business.
We have a little more work to do and expect to be able to communicate more specifics in the next few weeks.
Concurrently our M&A pipeline is as productive as it has ever been.
We have promising prospects in both the medical and dental markets that are strong strategic fits with our long term vision.
The focus is on larger opportunities that bring scale to support our expertise in infection prevention and reprocessing workflows.
Finally, we have decided to move away from providing five year guidance in terms of a set numerical target.
Instead, we will continue to provide transparency around annual guidance for the company as well as transparency on the key drivers that will allow this business to continue its strong growth story.
And we look forward to discussing updates to our strategic vision when we get to next quarter's earnings call.
Okay with that sense, Shaun joined US only a couple of weeks ago, Peter will discuss financial results one last time before.
<unk> transitions this responsibility to Sean Peter.
Thanks, George and good morning, everyone on a consolidated basis, our top line net sales increased five 2% year over year, and <unk> 19 versus the prior year and six 5% on a constant currency basis. The consolidated net sales walk elements work organic came in at two 7%.
M&A was three 8% and FX was a headwind of 130 basis points gross.
Gross margins for the quarter GAAP gross margins contracted by 140 basis points to 46, 8% versus 48 two in <unk>.
While non-GAAP gross margins contracted by 110 basis points year over year when adjusted for the recast of APAC service cost we contracted in our core 60 basis 60 basis points operationally year over year.
Note. The primary drivers of the dilution were our previously announced livable wage actions ERP project and remarks, the impact of these investments on our non-GAAP gross margins was a 90 basis points dilution.
Operating expenses for the quarter GAAP operating expenses increased by $14 5 million or 18, 6% and <unk> 19 compared to the prior year.
The impact of acquired cost from acquisitions was roughly $3 2 million or four 1% the impact from restructuring related actions was roughly $7 9 million or 10, 3%. This impact the balance was purposeful investment in line with our strategic plan initiatives.
Op profit for the quarter GAAP op profit decreased 45, 3% year over year to $14 8 million. There were a few items driving our GAAP dilution year over year key changes in senior leadership positions resulted in an increase in restructuring and related costs, coupled with higher depreciation amortization.
<unk> and acquisition related expenses continued investment remarks, and a livable wage actions taken in <unk>.
Our non-GAAP op profit decreased 10, 4% year over year to $32 6 million. The key drivers were continued reinvestment remarks, previously announced livable wage increase and the ERP project. The impact of these investments on our non-GAAP op profit was approximately 250 basis.
<unk> headwind.
Our effective tax rate for the quarter GAAP ETR for the quarter was 33, 6% as compared to the prior year rate of 26, 7%.
This change is primarily driven by the non deductibility of executive compensation related to restructuring activities in the quarter and the unfavorable impact of excess tax expense related to stock compensation as a result of a decrease in our share price on.
On a non-GAAP basis, our effective tax rate for the quarter came in at 23, 6% as compared to the prior year rate of 28, 3% key drivers were the impact of federal statutory rate change provided a benefit during the quarter, which was partially offset by the mix of income in our foreign operations.
EPS for the quarter GAAP EPS decreased 56, 4% year over year to 20.
In addition to the commentary discussed earlier related to our GAAP op profit dilution, we incurred higher interest expense as a result of increased borrowings and the current rate environment.
While our non-GAAP EPS decreased seven 5% year over year to 55.
The impact was previously discussed investments was approximately 11.
Adjusted EBITDA for the quarter <unk> adjusted Ebitdas came in at $41 4 million down 5% year over year cash flow from operations three key cash flow from ops came in at $21 1 million note to buffer against disruption to our customer base, we consciously increased inventory.
Early part of the quarter, which we expect to unwind over the next few quarters.
Now, let's provide some insight into the segment results for our medical segment for the quarter sales grew 10, 4% year over year to $130 7 million organic was 12, 2% our GAAP op profit increased 18, 5% to $24 3 million, while our non-GAAP .
<unk> profit increased 11, 2% to $29 3 million.
For our life Sciences segment for the quarter sales decreased 14% year over year to $46 5 million organic declined 17, 6%.
Lastly, our backlog increased for the quarter 3 million driven by medical water equipment.
GAAP op profit decreased 46.3.
3% to $4 8 million, while our non-GAAP op profit decreased 44, 3% to $5 6 million.
Note ex incremental <unk> investment non-GAAP op profit decreased 32% and as George previously mentioned, we have taken actions in the third quarter to align our cost structure with the new revenue environment and our water Division.
For our dental segment for the quarter sales increased 18, 5% year over year to 46, six for $43 6 million organic was three 4% for.
Our GAAP op profit decreased 32, 3% to $4 8 million, while our non-GAAP op profit decreased five 4% to $7 8 million, primarily driven by previously announced livable wage adjustments and material inflation for our dialysis segment for the quarter sales decreased three seven.
<unk> percent year over year to $7 7 million or GAAP op profit decreased 35%, while our non-GAAP op profit decreased 35% now.
Now I'd like to hit a few balance sheet and liquidity details.
Our balance sheet remains strong with significant capacity, we ended the quarter with $51 3 million in cash and cash equivalents.
$201 5 million in working capital our gross debt ended the quarter at $235 5 million. Our net debt is $184 2 million and our net debt to adjusted Ebitdas is one point a seven.
Capital expenditures were $13 3 million, which reflects the ramp down in SAP costs now that we have gone live in our two key sites in terms of guidance for the remainder of the year, we anticipate revenue growth at the lower end of our range at 5% with organic growth of three 5% and FX headwind of <unk>.
1%.
Announced acquisitions of 3% and dispositions at 50 basis point headwind, we estimate the medical business will continue to grow at approximately 10% in the dental business will be flat to the prior year.
While we previously guided the life Sciences segment to decrease in the mid single digits, we have experienced a larger than expected amount of deferrals for central water units in the third quarter due to this trend the business will decrease in the high single digits for the year. Finally, we anticipate total fiscal year 2019.
GAAP EPS of $1 61 to $1 63, and our non-GAAP EPS on the lower end of our previously guided range of $2 34 to $2 36.
Thank you for listening as a reminder, we will be filing our 10-Q at the end of the week.
Ready to take some questions.
Thank you we will now be conducting a question and answer session in the interest of time, we ask that you. Please limit yourself to one question one follow up.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like you will be a question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Our first question comes from the line of Larry <unk> with Raymond James. Please proceed with your question.
Okay, great. Thanks, good morning, everyone.
So I guess the.
First question is yes.
Obviously, it was a nice performance in the medical business for the quarter and really sort of continue the trends that we've seen in the prior three quarters.
But I guess the implied guidance would again suggest a deceleration in the fourth quarter. So just.
If I'm thinking about that correctly I'm trying to understand why.
Yes, it's going to be centered almost exclusively on life Sciences, Larry We would expect our dental business implied in the.
The year being flat.
Our fourth quarter and dental is by far our toughest comp year over year, but again, we would expect sequential growth in DAU from <unk> to <unk>, but likely.
Closer to flat year over year on an organic basis in the fourth quarter and we would view the medical profile in the fourth quarter similar to the first three quarters.
Okay perfect.
And I guess just to two other two other questions for you.
First on.
George You mentioned, obviously your you are.
Working on your view of the of the medical water business for the life science business broadly.
What steps are left to be done what are you still working through and.
Once you come to a conclusion.
How would you anticipate.
Making that aware to investors. So is that something that waits until the fourth quarter or is there. Some separate announcement that comes out of that then I had one other one.
Yes, I'll start with the end in mind here I think.
Our expectation is to be at our fourth quarter call with.
A clear sense of what we're doing and also to be able to factor that into the our.
Outlook for fiscal year 2020.
So that's the that's the answer but what's happening now is we are.
Our first and foremost.
Managing the business.
Two.
To get this thing back on track.
As Peter mentioned, we've done the right sizing aspect of it but at the same time, we are mindful of ensuring that we have a strong national base of sales and service because thats a key feature of the business.
The second thing we've done with <unk>.
Quite some granularity as we have been in discussions with our customers to develop.
Develop a far more robust demand forecast.
We've reached one multiyear agreement with one customer we are working on another this was what gives us.
More insight and confidence about where we think the bottom is in.
An expectation of.
Returning to modest growth as we get to the second half of the year.
At the same time, we obviously continue to evaluate and in the end of the day are we the best owner of the business long term.
But again this is a business with great long term demand characteristics that are short term.
A short term issue related to cyclicality and the in sourcing of customer.
I think we've gotten a much clearer picture in the last few weeks of what our what the future looks like from a volume standpoint going forward I think we're getting the cost structure in place.
And putting the position in a better place for the long term.
Again, just to repeat I think as we work our way through the next few weeks all of our expectations will be here three months from now talking about.
How this impacts fiscal year 2020.
Okay Perfect and then last one for me is just you mentioned a couple of times.
Continuing to invest in <unk> and I think again George in your prepared comments you indicated that.
<unk> gotten some greater confidence in that product that warrants more investment. So again, I guess same sort of question which is.
What have you learned recently that gives you confidence in that product to make additional investments and again, what's sort of the timeline that we should be thinking about.
Kind of a real commercial launch where we can start to see some revenue softness.
Yes.
So first of all what we're doing from an investment point of view is really.
Re prior prioritizing our spend and new products. So we're moving.
<unk>.
One place to the Reeboks.
Incrementally won't be additional but it will be from <unk> point of view.
Confidence is really sort of relates to what continues to evolve externally with respect to <unk>.
<unk> in particular.
Clearly, we've got a number of customers that are quite anxious and apprehensive about what's the current situation.
And trying to understand what alternatives are there for the future and what kind of timing with these will be materialized. So I think thats more what.
Drives more confidence in this and obviously, we continue to make strides.
<unk> is developing.
Particularly the machine design, that's where our focus is to optimize what the commercial opportunity is and as well as what the market is asking for.
Terms of in terms of their requirements.
From a timing point of view this is a situation where we.
We would like to be.
<unk>.
Under promise and over deliver but I think we're operating under the assumption that.
Two years from that this is 24 months at the outside maybe we do it in 18 months.
Sort of what the horizon looks like.
Okay.
Great. Thanks, very much I appreciate the thoughts.
Thank you.
Our next question comes from the line of Matthew Ms. Han with Keybanc capital markets. Please proceed with your question.
Great. Thanks for taking the questions George Peter.
Hey, Matt how are you this morning.
Okay. Thank you I guess I'll start off with.
The life Sciences business. It does seem like you are pretty far along in that process here.
How should we be thinking about.
How separate that businesses from Medicare.
Medical or dental.
And how clean of a <unk>.
Carve out that could potentially be would there be costs that could be reallocated would be would be reallocated dis synergies associated with it or would that would it be.
Pretty isolated to to the op income from that from that segment.
Yes.
All three of our divisions are generally pretty distinct in their cost structures. There is some modest shared cost that would get reallocated, but it's not substantial as a general rule.
Where we do have overlap.
Cross all three of our businesses is really around our chemistry manufacturing.
But outside of that most of the <unk>.
Cost structure is distinct and tied to the individual divisions.
Okay.
And then can you talk about the strategic priorities for the dental business longer term.
I guess youre consolidating the manufacturing at this point, but what are you missing in the portfolio that could enable enable you guys to make a full service infection prevention player similar to how you look at endoscopy.
And then is there a lot of integration work that needs to be done given given its been built through various acquisitions over time.
Yes, I'll answer part of it I'll, let Seth answer as well because these obviously spent a lot of time on this.
Look.
From a.
From a revenue growth point of view.
We have a number of very good assets in this business that we've acquired over the last three to four years.
I think about in line water treatment biological indicators.
Our accutron.
<unk>.
So a real focus we have now is around.
Building these individual assets more aggressively than we have in the past we've done a great job with them, but I think there's more opportunity.
To develop.
Products in this space.
Being able to take these internationally, which is what omnia affords us the opportunity to do I was just there a couple of weeks ago. It's a great operation We've got really good management.
And Theres a lot of enthusiasm for taking some of these cross <unk> products into Europe . So I think we've got.
A lot of upside within our current portfolio.
And as far as the cost structure is concerned obviously, we're taking a fairly meaningful step today with.
<unk>.
Both our manufacturing platform, but also our supply chain with our distribution center, which will be upgraded considerably with the move to Rochester. So.
This will allow us to continue.
<unk>.
Try to protect our margins.
Margins.
And as well as to potentially enhance them as we go forward.
Seth if you want to comment at all about the portfolio itself I think long term.
We see the opportunity to really develop a cohesive complete circle of protection strategy in the dental suite similar to what we've developed in our medical offering.
Where we can offer to our customers the ability to really understand and manage complex.
Processing workflows in the dental suite to maximize efficiency and drive improved outcomes and a safe working environments for both patients and caregivers.
We've been very successful with such strategy in the medical space see a lot of opportunity to continue to enhance that potential in the dental space right. Now we have great specific offerings that provide.
Great unique product elements, but I think to create a closed loop complete circle is really our aspirational goal there and.
We're working actively to develop that strategy and bringing to fruition.
Okay and last question for me.
On the <unk>.
Single use procedural products.
In medical.
What's the opportunity there.
<unk>.
To bring those products to international markets and what's been what's been holding that back over the last couple of years.
Yes.
When you think of the procedure set in Europe .
We think in the U S is sort of mid <unk> is kind.
The number of procedures happen as a potential and in Europe , it would be sort of in the low twenties and the reality is.
We probably had penetrated the U S market procedures at about 35% ish.
In terms of number of procedures using a single use valve as an example.
The penetration is much deeper on the hospital side less so on the Asc's.
We think that opportunity still exists in Europe , I think are our opportunity and challenge has been really influencing the regulatory bodies and the third party thought leaders at the same pace right. Obviously in the U S you're dealing with less governing bodies. So it although not.
AZ to move there, you're moving less regulatory bodies and on the European side. If you want to have an impact in each local market, you're usually have an influence somebody in that local market from a third.
Party or regulatory bodies governance perspective, so that.
That is where we are pivoting more resources now here. This summer is to help drive that top side sale.
We've spent the last two years really refining our bottom up sale of getting the right folks in the field trained.
And in the right parts structures and now we're pivoting more to to try to help itself.
Alright, Thank you very much George.
Thank you. Our next question comes from the line of Mike Matson with Needham <unk> Company. Please proceed with your question.
Good morning, Thanks for taking my questions.
Just wanted to ask about the dental business could see the growth improve there.
Are you still seeing kind of mid single digit growth out the door at the distributor customers from your tracings.
Yes.
<unk> sales from our distributors remains robust.
Again, we will see sequential growth from <unk> to <unk>.
The only soundbite there earlier.
In the prior year.
Our fourth quarter, we had near double digit organic growth in <unk>. So.
Even though we feel good about the order rates and the fact that again it'll grow sequentially.
It may look in lighter year over year, just due to the.
The prior year comp on a two year stack basis, I think the fourth quarter will look exactly like our traditional view of the business sort of in that mid single digits.
Okay, and then can you just remind us what you've factored into the guidance for 2019 for tariffs.
Chinese tariffs potentially increasing or expanding.
Whats the outlook for 'twenty and then.
It doesn't look like you have any plants in Mexico, but I don't know if youre sourcing any supplies of raw materials from Mexico.
That would be affected by the tariffs.
Yes, so two parts of that so look we have been impacted in China earlier. This year, we kind of said look if anything it probably accelerated some revenue.
From some of our customers in China that wanted to buy ahead of the tariffs so I think.
We had a very strong organic growth in the first half candidly the third quarter was still very strong as well.
But we are seeing it.
There is more pressure on the bids and the businesses that we're trying to chase in China. It May drive us to look at other supply chain options in 2020 , one as far as Mexico, and the recent 5% tariff there.
We're scrambling currently to monetize that or quantify it but our best indication is.
See any real fundamental changes in the underlying business as it relates to maybe organic growth no longer being a double digit 10% plus or more maybe mid single digit any color on that would be great.
[laughter].
Oh I.
I actually feel more.
More confident about the the growth rates.
We looked by segment medical.
I think we've talked about the drivers in the past, but when you think about what can support and will support.
The 10% plus.
The growth of procedural product penetration the growth and selling our full bag.
The growth internationally, whether we're talking about China growth and procedural products in Europe .
What we're doing in terms of new product emphasis that has been rejuvenated with the appointment of Mike.
Mike Spicer in tandem with working with Daniel Khalili, our <unk>, our Chief Technology Officer.
I continue to feel very confident about that.
And dental we obviously went through this year, which was a challenging year in the first half and we believe we're getting back on track to mid single digit.
There's nothing.
As we look it out the door sales I mean, the market continues to perform as we as we expected.
We talked earlier on the call about some of the things we can do from a growth initiative point of view that we're pushing out on I've mentioned omnia again internationally, but some other things on some of our individual business lines that we recently acquired I think continue to represent opportunities.
And.
The challenge is we've talked about is in the life science business, but again I think we can get this business.
Water business.
Again, we look at long term I think the characteristics of the entire life science business or mid single digit.
But again, there's work to do in the short term to address that.
The.
The other consideration that obviously that doesn't have predictability other than that over the long term, we've been predictable with respect to acquisitions being a component of our business model.
It continues to be I said as active as it's ever been feel.
Feel very good about some of the things that are in the pipeline as to when they happen again that's.
There are different stages, and it's difficult to predict or talk about but again.
I feel love they said what I've learned in the past 90 days is to be even more bullish about our opportunities recognizing we've got some challenges deal with short term, it's mentioned in the hemodialysis business.
Okay now that's very helpful. Thanks for the car.
Since you mentioned acquisitions, maybe at set capacity also address this.
As it relates to the pipeline I know, it's always very robust, but I was just curious if you're seeing any changes as it relates to maybe more.
Competition and have any app changes potentially evaluation that you're looking at.
Thanks mate.
I think from a value perspective.