Q4 2019 Earnings Call
And to our audience standing by for today's Cantel Medical Conference call. At this time, we would mitigate additional participants and we hope to be getting underway in the next two to three minutes. We thank you all for your participation as well as your patience and we ask that you. Please continue to standby.
Good day, ladies and gentlemen, and thank you all for joining us for today's Cantel medical fourth quarter 2019 earnings call. As a reminder, all phone participants are in a listen only mode, but after todays prepared remarks, you will have a chance to ask questions I would return at that time and prompt the audience with instructions on how to do so also if you should reach if you need operator assistance during todays conference. Please press the star in zero on your telephone keypad and an operator will assist you and now to get US started I'm pleased to turn the floor over to your host Mike Mccown. Please go ahead Sir.
Thank you and good morning, everyone on today's call, we have Chuck Diker Chairman of the board George for diabetes, President and Chief Executive Officer, Seth Yellin Executive Vice President strategy, and corporate development, John Lakeland, 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 fourth 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 cancer cells 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'm pleased to introduce to you George fatalities, President and CEO .
Thank you Matt on the whole we were pleased that our fourth quarter came in as expected.
And was consistent with the expectations, we expressed during our previous call.
The medical segment had a strong quarter with 9.8% organic revenue growth year on year.
The dental segment had positive organic revenue growth of 8.8%. Despite a record fourth quarter in the prior year and continues to show improved sequential performance.
Life Sciences ended the quarter down as expected impacted by softness in hemo dialysis water.
As we previously discussed our analysis leads us to believe that we have hit the low point as this business continues to stabilize.
For the full year the company grew sales by 5.3% to a record $918 million in line with our guidance.
This was a positive result in the face of significant challenges.
The medical segment had another record year with 11.5% organic growth.
Driven by consistent low double digit recurring revenue growth.
And strong demand for capital equipment.
The dental segment ended flat on an organic basis, driven by a return to growth in the third and fourth quarters following inventory Destocking and a key chemistry shortage in the beginning of the year.
The life Sciences segment was challenged throughout the year.
However, as we previously mentioned, we believe that we have hit the low point for this business.
And we expect to see a return to growth in the back half of fiscal year 2020.
In the quarter, we announced the acquisition of few freed a premier global dental instrumentation and instrument management system manufacturer.
This is a compelling opportunity for us to expand our position as a leading global provider of innovative infection prevention and reprocessing workflows solutions, serving the medical and dental industry.
We expect this transaction to close in the first quarter of fiscal year, 2020, and be approximately 10% accretive to our fiscal year 2020 non-GAAP EPS.
In addition, we continue to make progress on the future strategy of our hemo dialysis water business.
Much has transpired over the past few months and we are hopeful we will be able to announce a formal decision as to the future of this business as soon as it is practical to do so in the meantime, we're making great progress in stabilizing this business.
So with that I will hand, it over to Sean to discuss financial results.
Thanks, George and good morning, everyone, let's take a few moments to walk through the fourth quarter 2019 full year 2018 financial results.
On a consolidated basis top line for the quarter net sales increased 4.6% year over year and fourth quarter 2019 versus the prior year and 5.6% on a constant currency basis.
Consolidated net sales walk elements for the quarter were organic growth of 3.4% M&A of 2.2% and FX of negative 1% for the full year net sales increased 5.3% year over year in fiscal year 2019 versus the prior year and 6.3% on a constant currency basis.
Consolidated net sales walk elements for the year were organic growth of 3.9% M&A contributing 2.4% and FX of negative 1%.
Gross margins for the quarter GAAP gross margins decreased 70 basis points to 46.2% versus 46.9% and for Q2 thousand 18, non-GAAP gross margins were flat year over year at 47.1%.
No when adjusted for the segment recast and dilution from BHP, we expanded our core 30 basis points operationally year over year.
Gross margins for the full year GAAP gross margin decreased by 90 basis points to 46.6% versus 47.5% in fiscal year 2018.
non-GAAP gross margin decreased by 90 basis points year over year again note when adjusted for the segment recast and dilution from BHP, we contracted our core 50 basis points operationally year over year.
GAAP operating expenses increased by $18.9 million or 24.6% in Q4 2019 compared to the prior year approximately $9 million of this increase which includes accelerated stock based compensation expense is driven by specific restructuring related actions taken during the quarter.
The remainder is from acquisition related costs with approximately $7 million from our recently announced acquisition of Q3 and $2.1 million from acquisitions closed to date.
GAAP operating expenses for the full year increased by $51.6 million or 17.7% in fiscal year 2019 compared to the prior year approximately $19 million of the increase which again included accelerated stock based compensation expense was driven by specific restructuring related actions taken during the year $16 million was attributable to acquisition related costs associated with our recently announced acquisition of hue freely and other closed acquisitions during the year. Additionally, higher intangible asset amortization expense depreciation expense associated with our ERP project and our new Medical segment headquarters building contributed to this increase.
The remaining $16 million was purposeful investment in support of our strategic plan initiatives.
Operating profit for the quarter GAAP operating profit decreased 51.3% year over year to 14.8 million non-GAAP operating profit increased 3.4% year over year to $38.5 million.
For the full year GAAP operating profit decreased 31.4% year over year to 83.5 billion non-GAAP operating profit decreased 6.2% year over year to $141.4 million.
The effective tax rate for the quarter on a GAAP basis was 26.8% as compared to a prior year rate of 41.8%.
This decrease was primarily driven by the establishment of a valuation allowance associated with pre acquisition net operating losses within our UK operations in the prior period, which was a 960 basis point headwind against the current quarter. Other drivers include jurisdictional mix and changes due to federal tax reform.
Our non-GAAP effective tax rate came in at 25.7% as compared to the prior year of 28.4%.
And for the full year, our GAAP effective tax rate came in at 26.9% as compared to the prior year rate of 22.5%.
And our non-GAAP effective tax rate came in at 24.9% as compared to the prior year rate of 28.3% again primary drivers were jurisdictional mix and changes due to federal tax reform.
EPS for the fourth quarter on a GAAP basis, EPS decreased 48.1% year over year to 21 cents.
non-GAAP EPS increased 3% year over year to 63 cents.
EPS for the full year on a GAAP basis decreased 39.6% year over year to one dollar and 32 cents.
non-GAAP EPS decreased 5.4% year over year to $2.37.
Adjusted EBITDA for the quarter fourth quarter adjusted EBITDA came in at $47.1 million up 6% year over year adjusted EBITDA for the full year was $174.8 million down 1.9% year over year.
Fourth quarter cash flow from operations came in at $18.4 million down 48.6% year over year.
Fiscal year 2019 cash flow from operations came in at $66.9 million down 46.8% year over year.
I'll now provide some insight into the segment results.
For our medical segment in the fourth quarter sales grew 8.2% year over year to $136.8 million.
Organic growth was 9.8% and GAAP operating profit increased to 5.2% to 23.3 million non-GAAP operating profit increased 11.3% to $30.1 million.
For the full year sales grew 10.5% year over year to 523.7 million organic growth was 11.5% in GAAP operating profit increased 13.3% to 98.4 million and non-GAAP operating profit increased 12% to 117.6 million providing strong leverage.
Our life Sciences segment for the quarter sales decreased 11.8% year over year to $49.3 million organic was negative 9.3%.
No our backlog did see compression of roughly $2.5 million during the fourth quarter, driven primarily by Reeboks with offsetting increases in medical water.
GAAP operating profit decreased 76.7% to 2.1 million non-GAAP operating profit decreased 30.1% to $6.6 million.
For the full year sales decreased 7.4% year over year to $201 million organic was negative 9.3%.
Note, our backlog decreased $10 million versus the prior year driven by the sale of high purity water for $6 million and Reebok compression of $4 million GAAP operating profit decreased 44.2% to 20.6 million and non-GAAP operating profit decreased 27.2% to $28.9 million.
For our dental segment for the fourth quarter sales grew 17.2% year over year to $45.4 million organic growth was 0.8%.
GAAP operating profit decreased 13.3% to $6.7 million and non-GAAP operating profit increased 9.6% to $10.1 million for the full year sales grew 8.2% year over year to 161.6 million organic growth was negative 0.2% GAAP operating profit decreased.
25.7% to 22.3 million and non-GAAP operating profit decreased 11.9% to 31.9 million.
For our dialysis segment for the quarter sales increased 2.8% year over year to $7.9 million.
GAAP operating profit decreased 24.7% non-GAAP operating profit decreased 13.3%.
For the full year sales increased 0.8% year over year to $31.9 million.
GAAP operating profit decreased 33.3% and non-GAAP operating profit decreased 31.1%.
Now I would like to hit a few balance sheet and liquidity details.
We ended the quarter with $44.5 million in cash and cash equivalents and $200.4 million in working capital.
Gross debt at the end of the quarter was at $233 million net debt was $188.5 million and our net debt to adjusted EBITDA ratio is 1.08.
Capital expenditures in the fourth quarter were $20.1 million.
As a reminder, we will be filing our 10-K later this week I will now hand, the call back to George for closing remarks.
I'd like to transition to the outlook for fiscal year, 2020, which we anticipate will be returned to strong growth overall Ford Pinto.
We've included a page in our earnings presentation for you to follow along which can be found on slide 13.
For fiscal year 2020, including the impact of announced acquisitions to date, we anticipate total reported revenue growth of 25% to 28% with organic growth of 6% to 7%.
An FX headwind of 1%.
And previously announced acquisitions of 20% to 22%.
The guidance assumes low double digit organic growth in the medical segment.
And the legacy dental segment growing at the upper end of our traditionally guided 4% to 6% range.
Life Sciences is anticipated to show a modest decline on an organic basis and decline in the low single digits on a reported basis.
Due to the sale of high purity water in the first quarter of last year.
It is however, a tale of two halves, where we expect the first half to show a decline due to unfavorable comps and modest growth to resume in the second half of the fiscal year.
We anticipate total fiscal year 2020, GAAP EPS of $2.41 to $2.46.
And non-GAAP EPS of $2.78 to $2.83.
With the acquisition of few freed contributing approximately 25 cents on a GAAP and non-GAAP basis.
So in closing.
I'd like to touch on our key priorities for fiscal year 2020. They are as follows first integrate crosstex and Q Freaky and make progress on our synergy targets.
Second and implement the outcome of our strategic evaluation of hemo dialysis water.
Third continue to drive product mix and penetration of procedural products in our medical segment globally.
Fourth.
Invest in a select number of high potential new products in our medical portfolio.
And finally focus on driving important operational improvements in manufacturing procurement and IP.
With that thank you all for listening I look forward to speaking with you on our first quarter earnings call in December .
And we are now ready to take questions.
Thank you gentlemen, and ladies and gentlemen, joining today over the phones. If you would like to ask a question now is the time. Please press star one on your telephone keypad pressing star in one will place your line into the queue and we will take questions. They received also a reminder, that if you're joining today on a speakerphone. Please return to your handset.
Thats twofold, one is to provide the most.
Favorable sound quality and the other is to ensure that your signal does reach our equipment. Once again, ladies and gentlemen that is star. One if you would like to ask a question well go first to the line of Matthew Mishan with Keybanc. Please go ahead. Your line is open.
Great. Thank you for taking the question.
Hey, George last quarter, you indicated you had so many communicate over the next several weeks around.
The medical dialysis business.
And you also indicated you've reached an agreement with one of your customers.
Around the analytics.
Three year type agreement, where.
Where are you at now with.
With.
With that business and Youre seeking strategic alternatives and where the customer.
Yes, okay. So.
As you pointed out we have an agreement with one of our customers with the other customer we.
Obviously continue to have a very strong relationship. We're we continue to expect to be supplying them for that.
For the foreseeable future as we continue to.
So thats proceeding as business as normal.
As we pointed out the first half of the year, we will be down versus year ago again, it's still sort of a continuation of the of the.
Primarily the in sourcing thats, just carrying over from on year over year, but that stabilizes in the second half of the year as the agreement kicks in we have more favorable comps and our relationships with the other customers.
Continues as they have in the past at assumes.
The forecast on de Novo clinics.
To be.
As they forecasted in their own earnings releases. So so thats we are of interest.
The businesses. So as we said as stabilized. So we we think we're in a in a very good position at least in terms of what the future looks like Weve. Obviously had I had mentioned on the last earnings call that we hope to be here with some decision around the the.
The future of this business and.
Whether or not we continue to be the best owner or someone else's, but in the meantime, we would continue to run this business with with vigor.
We we've made great progress on that we have a little bit more to do here, we didnt want to be premature just to make this call.
And preempt an important process. So that's why.
As we have said that we are close but not yet.
But we expect to be so.
In a matter of weeks.
And the other have you reached a contract with the other customer yet.
We don't really discuss publically, where we earn contracts with other people. We did on the other one could be a little bit more forthcoming because we had.
And then sourcing issue that we needed to disclose on that particular case with the other customer that relationship continues as it always has.
So there's really no news to report to report there and.
Baked into our future future assumptions are continuing to supply them. We continue to be their most important supplier. Today. There is no reason to believe that changes at any time in the planning horizon.
Correct.
And then can you talk to the accounts receivable.
Inventory balances and why they havent started to normalize post the year.
Post the medical ERP.
Sure, Yes, I mean, it's mostly related to just growing pains with the Sep implementation delay in our ability to realize some of the upside that we expect to see in working capital. Eventually so we did end the year higher than we would have liked but going forward. We do have action plans in place and the right to the path forward on that and we expect to see significant improvement in 2020.
Okay got it.
Lastly, and ill jump out.
Do you view because that we've also had an impact on your backlog can you kind of walk back through.
Why that has an impact and what was the change.
Yes, the change or Matt. This is Peter as we've used the last two quarters here to get closer to our customers in the markets that they serve theres a few things that have crystallized for us.
One being sort of the nature of the secret sauce.
I think our customers have told us kind of loudly first and primary need is for an on premise machine itself with low volume and high value as well as combination medical devices and why is this the niche.
These are the products candidly that are still being done on site would veto and or the most painful to endure the long lead times of off premise and any outsourced sterilization. So our strategy is evolved here in our focus.
As the market dynamics are are in our favor as you're aware.
Theres a lot of.
Noise and attacking.
Of the technology around yield based technology solutions, the FDA and EPA or helping champion newer safer technologies and we expect this to help ours and other alternative technologies.
And so what does this mean from a commercialization perspective.
We expect the relaunch our 417 leader chamber machine around Thanksgiving.
We'll start to perform certification registration work for our customers at that time and start taking Pos for the for 17.
Got to be delivered in late spring.
We're targeting a launch of a 3000 liter chamber machine in late spring of 2024th the first shipments expected in the late summer early fall 2020, although we see a long term need for large chamber machines.
The high volume lower value is likely to be the last to convert and and what you saw in the backlog here is.
We step back from our 12000 liter PEO that we had with one of our customers to focus on the niche that we really see that our customers are are screaming loudly foreign again, that's on premise smaller footprint machines to help them with.
All volume high value combination medical devices.
Okay. Thank you.
And we'll move to our next question coming from the line of Larry Keusch with Raymond James. Please go ahead. Your line is open.
Thanks, Good morning, everyone.
So George I, just wanted to come back to medical water and some of the comments that you made and clearly I understand.
Stabilization that that you are seeing in the business and.
I think you are communicating.
Longer term positive outlook I guess my question there is.
Look we we heard Davita talk about actually.
Scaling down that capex investments by $2 million to $300 million and they've they've thrown out.
Denovo clinic build that lower.
Then they are currently obviously there are still uncertainties around the kidney care initiative and I think a lot of those details won't be available until November . So I guess I'm really just trying to understand what gives you confidence that this medical water business.
It is a is a growth driver in the future.
Yes, Larry I Wouldnt characterize it as a growth driver Lees.
Mean per se I first of all.
The data of that year.
Referencing with respect to the Denovo clinics, I mean that is clearly baked into our estimates because we're.
Getting this information from our customers.
We obviously bench market through what we read independently a much like you do in addition to what they say on their earnings calls.
So that that's part of the assumptions that we have behind our volume forecast for the future.
When we talk about rebound in the second half of the year, we keep in mind that the year ago period, we're talking about some fairly.
Deteriorated of Ido machine placements and so we're we're talking about a comparison to a year ago that had some very difficult comps and the performance. We're talking about is that.
I will return to being modestly positive so in the aggregate when you compare this historically, it's it continues to be a downward trend from where we once were from machine placement standpoint. So we're really talking about stability here and not that this is a growth driver for the business.
For the fiscal year. It is given the decline in the first half.
The slight growth in the second half it still ends up being.
Negative overall for the year in our life Sciences business. So.
Just to moderate the the commentary a bit stability does not mean growth driver, but it does mean that we have a much clearer understanding what the future looks like what the impact is to the aggregate performance of the company and.
And likewise know how to represent this business in terms of where we see the next three years going but we are very wired into what's happening in terms of build outs of home dialysis. Some of the things which are happening from a regulatory point of view.
We've learned our lesson historically than we can understand that we need to be appropriately conservative in our forecast going forward.
Okay. That's that's extremely helpful to two other ones for you.
Just on on medical.
Again, a nice performance just under 10% organic growth.
The business had tracked to closer to 12% in that in that first nine months.
And the comp was the same between third quarter and the fourth quarter.
So again im not im not harping on.
Close to 10% growth quarter for the business, but just wondering if there was anything to be pointing to.
On a on a on a deal that that resulted in some that deceleration from the third quarter.
No I think other than a little bit tougher fourth quarter comp on medical last year I don't think there is really anything significantly different and in the medical business.
In the us or internationally is fairly consistent.
And Peter on that on on capital equipment again, Kenya.
Give us some feel for it you know again, how that did third quarter to fourth quarter.
I know, we continued to do a bit better than our.
Profile.
Assumption around us capital growing approximately 5% international to ex that we were in line with those.
With those targets.
Okay, and then last question.
I just wanted to touch base on the EBITDA margin expansion that you guys talked about a year ago again at that point. It was two to 300 basis points of expansion and 23%, 24% margin exiting 2021, maybe just bring us up to speed kind of where you are you've implemented the S&P system around medical.
It's my sense that you've probably now paused on that for a period of time so.
Maybe just help us understand kind of the implementation plans and then how do we think about that that margin expansion.
Yes, So let me take that Larry some saves obviously with the SAP implementation first foremost we met the go live target.
February Onest.
Secondly, look we saw zero shipment disruptions those are the positives on the opportunities for improvements here over the next three or four months, we'll be focused on extracting what I'll call. The next level of capability from the system, what does that mean as an example.
Our previous.
Earpiece system, we piped our transactional data daily over to Salesforce, which are obviously our sales team uses daily.
We have yet to pipe that over so that will be something that's happening here over the next 90 to 120 days obviously its preferred to have that in place as you go live is it as our sales team is driven off of those analytics heavily.
A second example would just be we chose not to put in at AD hoc application and the initial go live and Thats. Another add on feature that we'll be putting in here over the next 90 to 120 days what does that mean, what does it do it really allows our users to do their own analysis without having are needing standard reports.
How and where is that manifested itself I think if you asked us about our inventory in a our balances that we're talking about now some of that is is just our.
Visibility needing to get better and with this AD app AD hoc AD hoc application that will be going in here over the next 90 days.
That should allow our users to sort of be able to fish for themselves analytically on a daily basis and that will be one of the keys for us kind of getting our a. AR balances as well as our inventory balances down and allow us to do a plan for a report on the inventory side and again attack are our largest customers from DSL perspective. So those are some of the next steps.
At least initially in the US again, I think we'll be focused on us for three or four more months to get the capability that we need to get out of the system that drive those synergies.
What would be next would be a pivot towards M&A APAC from a medical perspective so.
How I would characterize it is we still see a path to the lower end of that 23% on an exit rate and.
Ultimately.
I think there's opportunities.
To to accelerate that and Europe and APAC. So.
And is that is that exit rate.
Still 21 or given that.
Yes, again, it feels like you pause a little bit.
Yeah, I would put us at about two quarters behind but I still think for Q2 1, we've got a shot at that 23%.
Okay perfect. Thanks very much.
And as well, obviously, Larry Theres some accretion as we mentioned when we bring in Q3, that's ultimately that mix coming into the portfolio gives us 70 basis points, roughly lift and quality of earnings as well.
Okay perfect. Thank you.
And again, ladies and gentlemen that is star and one for question. We'll go next to Mike Madsen with set him company. Please go ahead, Sir your line is open.
Yes, thanks for taking my questions I guess I just wanted to start with the.
Outlook for investment or reinvestment in fiscal 20, I know there was quite a bit of reinvestment 19. So.
Is any of that carrying into 20 or is there any incremental reinvestment that you would call out beyond kind of the normal.
Reinvestment that occurs.
The only thing that we see carrying over is the consolidation in the dental business. The Rochester is probably going to continue to add about $8 million to $10 million of investment in 2020, Capex capex right other than that the rest of it will be normal run the business type capex.
I think.
And I'd add on to that Mike I mean part of our fourth quarter actions as some of the the Rightsizing that we that we executed was really too.
Make sure that we're driving on that that philosophy of sometimes you got to rightsize your business to make further investments and so.
I think it was a prudent philosophy philosophy deployed to try and sell fund any investment that we need to make this year.
I guess, yes, I was talking more from like an opex perspective, though.
Yes, I mean other than the carryover cost of the depreciation of S&P, there really isn't any meaningful reinvestments as mentioned, we tried to take our fourth quarter action to basically fund any investment that we really needed above and beyond sort of the norm of tied to revenue growth.
Yes.
Okay I would the only thing I'd add is I said look theres been some reallocation.
Within our R&D budget to be sure we can fund.
Some of the opportunity we continue to see an reeboks in some of the things that we're looking at and medical new products, what we've sought to achieve that through.
Cost management.
As we're going through a more vigilant approach though.
Where we're allocating resources within the company. So while there is nothing that we're calling out in terms of additional.
Significantly additional opex important thing is that we continue to we continue to spend behind some important new product initiatives.
Okay. Thanks, and then just curious about the M&A outlook I know you just did that you have for your your cause that yet but.
Would that cause you to maybe put a pause on these smaller deals or more we continue.
Some of the smaller deals you've typically done year in year out here.
Oh, you look I think as a rule of.
I think I may have said it on an earlier earnings call or focus we've done a lot of small deals. They do require we have been very good.
They brought a lot of interesting new products in our dental business in particular that we that we like a lot.
But we did say from an M&A point of view, we wanted to look at things have provided meaningful scale.
This is where you have to be transformational, but if that if that fits so.
The important part of the strategy that'd be great Thats, what the Q freed those for the dental business.
Likewise, as we kind of look down the road not near I'm, not saying near term because we obviously have to work to integrate you freely. We also have to work too.
To de leverage as we have talked about when we did the queue pretty acquisition, what we're looking to accomplish.
We're looking we will continue to look very aggressively at opportunities in the medical space.
That can.
That will be infection prevention oriented that can.
They may build a work flow reprocessing, but obviously things, which will make a lot of sense for cantel. So we will actively continue to look because we know as we focus a lot on proprietary kinds of acquisitions. They require time you recall I said you freed from the day, we started talking to them to the day, we close will be about 12 months. So if we want to have something much like a hue freely in our medical space.
It's like planting trees. The best time was 20 years ago. The next best time to plant trees. Today. So that's that's certainly what we're doing whether we'll do anything on the small size.
I'd say as a rule not particularly I mean, if it was a no brainer sure, but otherwise I think we want to devote resources, the things, which can make a meaningful difference to our strategy and ultimately to our growth trend.
That's all I have thank you that's super helpful.
Thank you Mr. Mattson and our next question will come from the line of Mitra Ramgopal with Sidoti. Please go ahead. Your line is open.
Yes, hi, good morning, Thanks for taking the questions.
Just on the guidance.
I know you mentioned, new Fredy expect at about 10% growth.
The core non-GAAP EPS number I was just wondering if thats all on the revenue side are you all anticipating any cost synergies in year one.
Cost synergies and in your water modest there is $2 million to $3 million as sort of the view.
With most of the savings really tied to.
I'll call. It systems work that should come online about 18 months and.
After close.
Okay, No that's great and then.
Just wondering any thoughts you have in terms of the impact on the business as it relates to obviously the uncertainty is going on Brexit than now.
The trade war with China in terms of how it affects your.
International business and growth plans going forward.
Well as you know, even though our growth rates have been incredibly strong in China, our business in China is still sort of approximately $14 million of revenue. So although the tariffs. We believe are having a meaningful impact is still pretty small base for us to build off of Conversely, I think you are aware our UK business is pretty substantial it's our largest.
Revenue country within EMEA today, and it's probably close to $45 million to $50 million in revenue.
We continue to watch that.
Daily Weekly and monthly is as sort of the two year long Brexit story unfolds, but right now we don't see any disruptions or any tariff issues.
In the near term.
Okay. Thanks.
And then just on the spending when it's on do you see any aside at all.
Released who Freddie do you see any incremental investments you have to make with that transaction or is it a case of.
Just benefiting immediately in terms of sales force and cross selling opportunities.
Hi, This is Seth.
Largest speaking I think that the the operating expense structure. The business. We're inheriting is one that is going to continue there are some areas, where we'll do a little bit of backfill that's largely offset by some of the synergies that peak spoke up so we don't see any area of real material reinvestment into into the core of that business.
Okay. Thanks.
And then back on R&D obviously.
You saw a little of a bump up in fiscal 19 as you look out to 20 and 21 just wondering if.
That's kind of the.
Good percentage to be using.
Going forward.
Yes, I'd say, it's going to stay pretty stable as a percentage of revenue.
Okay. Thanks, and then just fine if you could remind us how big the dialysis.
Lot of businesses for you.
So approximately $150 million in revenue those from us.
Okay, and then finally, just on the balance sheet, obviously with two pretty clearly.
Levering up the balance sheet, a little just if you could remind us in terms of your.
Affects ability going forward in terms of any.
Plant so.
Hey, don't get that or you feel comfortable with that level.
Well Weve signaled when we announced the acquisition right. We do plan on using even just the accretive free cash flow from Q3 to get this back to the mid twos by the end of 21.
And then obviously any capital that were.
Hemo dialysis to happen for example would be deployed to de leveraging the balance sheet.
Finally, as possible to get us back down to the mid twos.
Okay. Thanks, again for taking the questions.
Thank you.
And gentlemen, we do have next coming up we do have a follow up coming from Matthew with Keybanc. Please go ahead.
Hey, guys. Thanks for taking the follow up.
As I look at the the EPS guidance the basic EPS guidance for next year, it's a little bit lower than where the street that when we're on that can you go to walk through.
Year over year kind of.
Some of the investments you're making or.
Or good drivers of.
Lower npls in the street and for next year on the base side.
I'd say the biggest piece again to reiterate is you did 10 to 11 cents headwind that we're seeing as life Sciences continues to struggle I'm, sorry on a year over year basis in the first half of the year for our guidance other than that right I mean, you're still seeing close to 10% growth on the EPS.
Alright so.
Oh, sorry.
Yes, there is look if there is.
Life Sciences, the 10 cents in the first half and we would that carries through to the year basically so we would be.
Where we are like on a range of 7% to 9% on EPS in the core that we've given you will be 11 to 13 if.
If the life Sciences were just flat I mean, there's some modest things that are there.
And the Opex expenses like additional depreciation from the new building in Minneapolis.
As Peter pointed out.
CP, which maybe some of you had a little bit of benefit in the early part of fiscal year 2020 that.
You know that that's not happening on that same pace I mean, those are some modest influences, but the biggest driver would be the.
Impact from from.
From the life science headwind.
Okay, Great and what is just exactly what is what is the life Sciences headwind I mean is it.
Hey.
Is it a restructuring expense or is it I mean, it's just it's a lower revenues.
Good.
Yes.
If you look at it Matt our third and fourth quarter of.
For our first and second half of of first to second quarter and 19.
Yes on average probably at 52, and a half million dollar kind of revenue number for the first half of the year for each quarter and as Weve can articulate it look we think that.
The next couple of quarters here are sort of in that $47 million range similar to our third and fourth quarter. So you are looking at a comp forward down.
You know likely $5 million plus in revenue.
Sure. The first two quarters, and then starting to get back to some modest growth.
And the third and fourth quarter, but we've got very significant.
Comps in the first two quarters of 20.
As we still had backlog that we were burning down the start the fiscal 19 year.
Okay got it thank you guys.
And ladies and gentlemen, we do thank you for your participation and for your questions. Today I will now turn it back to our leadership team for any additional or closing remarks.
Again want to thank you all for being on the call. This morning, and we obviously look forward to updating you on our next quarterly earnings call.
Ladies and gentlemen, this does conclude today's meeting and we do thank you all for your participation. You may now disconnect your lines and we do hope that you enjoy the rest of your day.