Cantel's CEO Discusses F2Q2014 Results - Earnings Call Transcript

Mar.11.14 | About: Cantel Medical (CMN)

Cantel Medical Corp. (NYSE:CMN)

F2Q2014 Results Earnings Conference Call

March 11, 2014 11:00 AM ET


Andy Krakauer - President and CEO

Chuck Diker - Chairman

Jorgen Hansen - Executive Vice President and COO

Craig Sheldon - Senior Vice President, Chief Financial Officer and Treasurer

Seth Yellin - Senior Vice President, Corporate Development


Tom Gunderson - Piper Jaffray

Mitra Ramgopal - Sidoti


Greetings. And welcome to the Cantel Medical Corp.'s Second Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Andy Krakauer, President and CEO of Cantel Medical. Thank you. You may begin.

Andy Krakauer

Okay. Well, thank you, Diego. And welcome to our second quarter fiscal year 2014 conference call. Before we start, I'd like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainties, including, without limitations, 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.

Okay, with that said, good morning again to everybody. With me on our call today are Chuck Diker, Chairman of the Board; Jorgen Hansen, Executive Vice President and Chief Operating Officer; Craig Sheldon, Senior Vice President, Chief Financial Officer and Treasurer; I think I’m going to call you Chief Financial Officer -- Chief Operating Officer, okay, Jorgen, am I said the wrong thing, and Seth Yellin, Senior Vice President of Corporate Development.

Cantel Medical achieved excellent financial performance in the second quarter of fiscal year 2014 with record sales and strong net income growth. We reported second quarter earnings of $0.27 per share, as compared to the prior year's adjusted second quarter earnings of $0.24 per share.

Sales increased 12% in the quarter, of which 10% was organic. Our adjusted net income increased by 12%, but would have been over 16%, if not for the incremental Medical Device Tax, which we had only in the month of January last year.

All three major segments, Water Purification and Filtration, Endoscopy and Healthcare Disposables performed well in the second quarter.

Our Water Purification and Filtration business has shown strong performance for the past two years. This quarter this segment performance was excellent and led the overall increase in profitability for Cantel.

These segment sales of $40.7 million grew by 26% over the same quarter last year, with organic growth of 18% for the quarter. The growth was primarily driven from continued strong shipments of Water Purification equipment, growth in our consumable product lines including filters and sterilant, as well as sales generated from our hemodialysis water acquisition.

Operating profit grew significantly faster than sales as compared to the same quarter last year. The profit increase was driven primarily by higher gross margins from greater shipments of equipment, the positive mix from sales of higher margin consumables, strong leverage of the newly acquired Siemens service business, as well as tight expense control.

The gross margin of our water segment increased by almost 3 percentage points, which despite being well below our corporate average is still a significant positive development given the higher capital sales percentage in the segment.

During the second quarter, we continue to see broad market acceptance of our heat-based disinfection central and portable water purification systems, and robust orders in general for new and upgraded dialysis clinics,

This automated heat-based systems provide for a higher standard of Water Purification then the older conventional technology equipment that replace and provide greater benefits to the dialysis customers and their patients.

Sales of these more advanced high value machines would carry higher average selling prices now account for about 60% of our shipments. We expect that the adoption rate for these newer and higher value technology platforms to grow further as customers continue to recognize the performance benefits and cost savings provided by these new products.

On a further positive note, Water Purification equipment orders approximated the very strong shipments, maintaining the record backlog equal to last quarter’s and which was a record again, which bodes well for strong results over the next few quarters.

Adding to our optimism about the future of our Water Purification business is the integration of the acquired Siemens dialysis water business announced on March 25, 2013. By the end of the second quarter, the business is delivering sales and profit contribution ahead of our expectations.

We are now be able to better utilize our large service network and have another installed base of machines to target for upgrading to our new heat-based technologies. In fact, we have now started to receive equipment orders from legacy Siemens customers for advanced technology equipment.

And not only can we now market our new products to the acquired install base, but also an overwhelming number of the 6,000 dialysis clinics in United States are still using older, manually, chemically disinfected Water Purification equipment, which is an opportunity for Mar Cor in future quarters.

As I discussed last quarter, our Mar Cor team has taken over management of our $14 million Therapeutic Filtration and Chemistries businesses. We are now adding some sales, marketing and product development resources to pursue what we believe will be profitable growth opportunities in these businesses going forward.

Most of the potential benefits from these investments will start in fiscal year 2015 and we are optimistic that we have some exciting future opportunities with our unique hollow fiber filters, as well as our noble new REVOX technology sterilization service offering.

The REVOX sterilization system provides room temperature terminal sterilization especially suited for more advanced medical and drug delivery devices and biological that are sensitive to heat and chemical sterilization methods.

And further our REVOX system just received ISO registration which will enhance its commercial success. Overall, we remained very optimistic that we can continue the great momentum we have achieved over a number of quarters in the Water Purification and Filtration business.

Moving to our Endoscopy business, also we had an outstanding growth in this business for the third consecutive quarter. This quarter we have record sales of $44.6 million which were up 30% over the same quarter last year, all of which was organic growth.

Operating profit for this segment on a reported basis decreased by 13%, but after adjusting for prior year favorable acquisition related fair value adjustments, $1.9 million favorable in fiscal year 2013 versus nothing this year and the Medical Device Tax, operating profit growth was about 12%.

We are very optimistic that our Medivators Endoscopy business will deliver good sales growth and increase operating profits for the rest of fiscal year 2014 and beyond. This quarter, our large installed base of endoscope processing equipment continued to grow. These equipment placements drive sales of our higher-margin disinfectant chemistries, much of which is our proprietary Rapicide PA product.

This quarter our disinfectant and detergent chemistries grew by 27%. And further our growing installed base of machines also provides great opportunities to expand our service in spare parts business, which grew 20% this quarter.

On the product development front, we have recently launched several new or improved endoscopy disposable product lines, which we expect will generate positive sales momentum as we progress through fiscal year 2014 and into 2015. On a positive note, our disposable procedural product line sales increased 18% this quarter and were particularly strong in international markets.

We also remain very confident in the strength and capability of the entire Medivators United States direct sales and service team and their ability to effectively launch and grow our expanding product portfolio. Further, we are in the process of adding a number of additional sales and marketing resources for this team to support growth towards the end of the fiscal year 2014 and into 2015.

As we look into fiscal year -- into fiscal year 2015 and beyond, we see the potential for significant growth in our Endoscopy segment in international markets for all product categories. These large opportunities, why we are now making major investments in sales and marketing and new product development, that is focused on international markets. And we continue and we will continue throughout fiscal year 2014 and into ’15. International Endoscopy sales were 20% higher in the first half of fiscal year 2014. And of course, this business would greatly benefit from acquisitions.

Our Crosstex Healthcare Disposables business continues to be a solid performer as well. Second quarter sales in the segment of $24.7 million, grew 1.5% over the same quarter last year. So that’s consider to be a reasonable performance, given that the business was affected by weather and related doctor office closures and supply chain disruptions and patients not going to the doctors’ offices.

Additionally, there are also pull-forward sales in the same quarter last year, which created difficult comparisons on a year-over-year basis. Operating profit for this segment were 3% lower, primarily due to the relatively flat sales, the incremental impact of the Medical Device Tax and some substantial investments in sales and marketing, which will help us improve sales on later periods.

The acquisition of SPS in November 2012, greatly added to our sterility assurance product offering. We are very pleased that this business has performed to our high expectations for the first year as part of Cantel. We are also excited about the opportunities to leverage our combined SPS Crosstex product lines outside of demo market and into the physician office and hospital markets.

Our sterility assurance product lines, which include the SPS products, the ConFirm line of biological indicators acquired a few years ago and other products such as our leading line of sterilization pouches, provides us with a great opportunity to grow in this expanding category, which carry higher than average margins.

Adding to this opportunity, we are pleased to announce on January 8th of this year, the acquisition of Sterilator Company, Inc. Sterilator is a high-quality manufacturer of biological indicators and supplies for sterility assurance and was a key supplier to our SPS business. The Sterilator leadership will serve us and has a major role in new product development and R&D initiatives in sterility assurance and we welcome the Sterilator team to Cantel.

As we go forward, we remain optimistic about the growth of our Healthcare Disposables business, driven by our increasing presence in the sterility assurance market, for new opportunities in hospital and alternate-care markets, for new product development activities and for potential international sales growth.

We are making sales and marketing investments to grow the U.S. hospitals and alternate talent market in addition to our historically strong position in developed market. As we discussed last quarter, one of our big opportunities in this segment is the recent United States launch of Rapicide OPA-28, our third automated Endoscopy reprocessing chemical, but also our first chemistry product that can also address the large market for manual soaking of instruments which is beyond, just the GI suite, which is part of the reason why this effort has been led by the Crosstex/SPS alternate channel and hospital distributor team, instill to create assistance from our much larger Endoscopy team.

Early results in the United States are exceeding our expectations, and we are planning some international launches at upcoming quarters. We are pleased to have recently received approval to sell Rapicide OPA-28 in China, and customer evaluations have already started there. We are also making some substantial investments to grow our Healthcare Disposable product lines in general in international markets.

In the balance, this segment as expected, second quarter sales were 13% lower, primarily due to decline in all product categories in the United States. Operating profit decreased by 14% but operating margin was still high at 26%. Relative to the growth in the rest of Cantel, this segment has become a much smaller part of our overall company, representing now only 9% of our combined segment operating profit in the second quarter of fiscal year 2014 as compared to 11% in the same quarter last year.

Nonetheless, this business remains important to the company and we continue to work very hard to take care of our customers and also seeking growth outside the United States.

Okay. So with that summary, let me turn it over to our CFO, Craig Sheldon to go over some financial details.

Craig Sheldon

Okay, yeah. Thanks, Andy and good morning, everyone. I would like to turn our attention now to the earnings release, which was issued earlier this morning and we will start with the income statement.

As Andy indicated, sales increased 11.9% in the second quarter compared to last year’s second quarter to a record $119 million for the quarter. For the six months year to date, sales increased by 15.2% to $237 million. Organic growth for both the quarter and the six months was 10%, after removing the incremental impact of recent acquisitions. And as Andy mentioned, the topline growth was driven by all three of our largest segments, Endoscopy, Water Purification and Healthcare Disposables, partially offset by expected decline in Dialysis.

Just briefly on -- we've done five acquisitions in the past year, but two of real size and I just wanted to remind everyone that the SPS Medical acquisition which was acquired on November 1, 2012, that was the first day of the prior year second quarter. So this acquisition is reflected in all of the fiscal 2014 periods, but only in the fiscal 2013 second quarter as part of our Healthcare Disposables segment. So we didn’t get credit for that in the first quarter of the prior year.

SPS Medical contributes slightly over $5.5 million in sales per quarter. And the other acquisition with Siemens Water, which was closed in March 2013 ahead of July 30th, closing date for accounting purpose. So, we really didn’t get the benefit of that deal until the beginning of fiscal year ’14. So this acquisition was not reflected in any of the prior year comparable periods.

On the gross profit, GP percentage was 44.0% in the second quarter, significantly up from 42.4% in last year’s second quarter. And for the six months, GP percentage was 43.8% and that compares to 43.1% in the prior year six months period.

This improvements in GP percentage have occurred despite the negative impact of the new Medical Device Excise Tax which impacted all of the fiscal 2014 periods but only the month of January last year. As you may recall that excise tax became effective on January 1, 2013.

The Medical Device Tax is running at slightly over 900,000 per quarter that’s a pretax number at our current rate of qualifying domestic sales. So by way of more specific example, our second quarter growth profit percentage would have been higher by approximately seven tenths of a percent if not for this excise tax and the earnings for the company would have been higher in the second quarter by about $0.01 per share, so clearly quite significant.

Aside from the impact of the Medical Device Tax, our GP percentage was very favorably impacted by favorable sales mix in all three of our larger segments. And Andy has discussed the bunch of those products in his remarks.

Moving down to operating expenses, gross operating expenses increased by $5.8 million in the second quarter and $11.3 million for the six months compared to the prior year periods. Attributable principally to adding the infrastructure of five acquisitions including SPS Medical, Siemens and Jet Prep as well as continued investments in personnel, particularly in our sales and marketing teams as well as other sales and marketing initiatives, all of which is an important partner of our strategic growth plan.

Operating income, we reported $1.3 million in the second quarter, that’s 8% increase versus last year’s second quarter. And again if you remove the effect of the Medical Device Tax, which once again was only in the month of January last year, operating earnings would have been up 11%. And for the six-month period, operating earnings as reported were up by 11% or 16%, if you remove the impact of the Medical Device Tax. So despite the impact of this tax and continued substantial strategic investments, we have still managed to keep operating income above 15% of sales.

Moving down to interest, net interest has decreased compared to the prior-year period as we had substantial debt repayments over the past year, partially offset by new borrowings for acquisitions or in some cases, we pay for acquisitions kind of cash and not have to borrow. Total interest expense this year has been running at only above $600,000 per quarter. That’s quite a low number, particularly when we’ve done so many acquisitions.

We continue to repay borrowings quickly with very strong cash flow and very low interest rates on the business with most of its profits generated in United States. This rate would have been slightly lower if not for the expiration of the Research and Experimentation Credit at the end of the calendar year 2013. This is certainly a disappointment to us and many other companies but it seem logical to us that this credit will be reinstated at some point.

So that’s where it’s moving the effective tax rate around over the years as our credit keeps expiring and being reintroduced at various odd times. So we certainly hope to get that back. In the future as we grow our international business, its part of our overall strategic plan, we certainly hope to lower our overall effective tax rate.

Having said that, revamping the U.S. Federal Tax code is under heavy discussion, in Washington and is really impossible to predict where these tax discussions will lead. So we hope to commence that as well.

A major reminder, a couple of other areas that we’ve reported last quarter, in October, our board approved the 22% increase in the semi-annual cash dividend to $0.045 per share of outstanding common stock, that’s $0.09 on an annual basis and that was paid at the end of January. And as previously reported last July, we completed a 3-for-2 Stock Split in July, therefore all earnings per share and share amounts reported in our earnings release in the upcoming 10-Q that relates to the priority of periods have been reinstated to reflect the impact of the stock split.

Let’s now shift over the balance sheet which remains very strong. We have $19.7 million in cash and cash equivalents at January 31st. This balance is lower than the prior quarter as we used our own cash to fund both the Jet Prep and the Sterilator acquisitions. We have just over $100 million in working capital at January 31st at a current ratio of 3.1 to 1. Our funded debt is at $74.5 million on January 31st.

The next item I want to talk about, we issued a release earlier in the week. Yesterday, as a matter of fact, regarding our new amended bank agreement which we completed on March 4. This was with our existing bank group which is led by Bank of America as the lead bank, Wells Fargo and PNC, which are three very strong banking partners. And I wanted just to review some of the key features of this new amended facility which was positive all the way through for the company. We’re very pleased to get this done.

Number one, we increased our overall borrowing capacity up to $250 million, previously we had capacity of $150 million. Two, we eliminated the term facility in its entirety, with the entire amended facility of $250 million is all revolver.

Three, we have an accordion feature, which can add another $100 million in borrowing capacity with the consent of the lenders. Four, we lowered our overall interest grid which was quite low before and is now even lower. Five, is we added for first time multi-borrower and multi-currency capabilities. So that really gives us a lot of flexibility to borrow in any major currency depending upon where we would like to do acquisitions in the future.

And number six, we reset the maturity date to March 2019, giving us another five years. So overall the amended facility provides us with greater financial flexibility and enhanced access to capital. And this new facility will greatly support our overall strategic plan. So we’re really pleased to get this done. The timing was great.

And I just wanted to take this opportunity to really thank our three banking partners who we’re doing business with for a long time. We have a great relationship and they are certainly very flexible in making amendments to the future of our company. So, thanks to three banks.

Meanwhile we continue to pay down significant levels of debt every quarter. We paid down $13 million in the first quarter and another $7.5 million during the second quarter and we also paid out over $8 million out of our cash balance during the second quarter for the Jet Prep and Sterilator acquisitions.

Our net debt is $54.8 million at the end of January, which is a reduction of $6.1 million since the prior year end. Gross debt to equity is only 0.22 at January 31st and our gross debt to rolling 12 months EBITDA is [0.8] (ph). We had $24.4 million of EBITDA for the second quarter, which was up by 9.7% compared to the prior year quarter. And for the six months, we had EBITDA of $48.6 million, that’s 12.3% higher than last year’s six months period. On a rolling 12 months basis our EBITDA is $89.7 million.

Cash flow provided by operations during the second quarter was $10.8 million and our capital expenditures in the second quarter were $2.2 million. So those are the highlights of the earnings release. To alert everyone we will be filing our 10-Q on its normal schedule which will be before the close of business tomorrow.

So at this point, I would like to turn the call back over to Andy for some closing remarks. Andy?

Andy Krakauer

Okay. Well, thanks, Craig. So in summary, Cantel Medical second quarter performance was very strong. We continued the momentum of our excellent first quarter and achieved a new sales record, with earnings per share equaling the first quarter’s record performance. This quarter exemplifies why we are so optimistic about the future of the company. We showed excellent sales growth of 12%, but more importantly have achieved an organic revenue growth of 10% for three consecutive quarters.

And if not for the Medical Device Tax, adjusted net income would have been approximately -- a growth would have been approximately 16% despite major investments that we have been making, and this was all helped by a 1.6 percentage point improvement in our overall corporate gross margin. We continue to demonstrate consistent growth with execution of our strategy of investing in new products development, increased sales and marketing activities, and improving acquisition program.

And despite significant investments in the future growth drivers, we improved operating profits primarily by driving sales growth. Additionally, we focus on increasing gross margins, accelerating the growth of businesses we acquired, and driving overall operating leverage as a result of our active programs to find efficiencies and generally are benefiting from higher production volumes.

This potential and our clear growth drivers are reasons why we believe Cantel has never been better positioned for meaningful sustainable growth over the medium to long-term horizon. We are focusing on substantial sales and marketing investments to promote newly launched products, to meaningfully grow international sales and to increase penetration in our existing markets. We are investing in future new products; Disposables products, Chemistries products and new Equipment as well and we believe have large potential upside two or three years from now. We should expect to see us continue to invest heavily in these categories with acceleration in expenditures in the next few quarters, as these investments are required to build the foundation to enable Cantel to achieve our medium and long-term strategic goals.

Let me expand briefly about our ongoing investments in fiscal year 2014. Our great success in the past five years have come from the substantial investment in sales and marketing and R&D. And these investments are based on well-defined objectives and the identification of strategic opportunities. We have identified large opportunities for further sales growth by adding new products, especially broadening the product portfolio in our Endoscopy business. And we have a goal to greatly accelerate the growth in all product categories in international markets. Some of this international strategy includes going direct in certain countries and generally increasing focused sales and marketing support in major markets.

We are also adding positions to strengthen our Healthcare Disposables and our Water Purification and Filtration businesses. These strategies have great potential in the medium and long term but call for substantial upfront investments. To achieve the objectives of our 5-year plan, we have added a number of sales and marketing positions already in fiscal year 2013 and the first half of this year fiscal year 2014 and have a detailed plan for recruiting new positions over the next few quarters. Not only are we increasing our sales and marketing team, but we're also adding needed infrastructure and support roles, such as finance and HR in China. We have also for example just hired an experienced general manager to meet our efforts in Germany and he is now recruiting for four direct sales positions.

In the first half of fiscal year 2014, we added about 45 such positions and have plans to add up between 40 and 50 more positions over the rest of fiscal year 2014. The majority of these positions are in sales and marketing and about 40% are dedicated to international markets.

And just a comment about international sales. For the first half of fiscal year ’14, these sales were up 22% and we are looking to see if we can grow that further. To put these investments in perspective, our sales and marketing and R&D expenses increased $2.7 million in the second quarter and grew by $5 million in the first half of fiscal year 2014 as compared to last year. This is equivalent of investing an incremental $0.04 of earnings per share just in the second quarter. These are the kinds of investments that we will be making going forward.

But despite these substantial investments, we expect to grow earnings every quarter when compared to the prior year in addition to increased profits driven by the top line growth. We are implementing cost and operating expense efficiencies in part to help pay for these incremental assessments. The majority of these benefits will be seen in fiscal year 2015.

So we feel confident in our growth plans and we see great opportunities for all our major businesses to grow organically, but we also continue our success in identifying, executing and integrating acquisitions worldwide. This is a core competency of Cantel that has brought us entrepreneurial management, new and higher margin products and additional growth in sales and profit from a proven strategy to invest and then accelerate the growth of the company that we acquired. The continued search and identification of synergistic markets and potential acquisition target is the key role of our senior management team and we’ve added resources to this activity.

Further we have increased our focus on international markets where we see many opportunities to acquire good strategic businesses. We expect the second half of the fiscal year 2014 performance to approximate our strong first half performance. Fiscal year 2014 will be a year of major investments to accelerate future growth worldwide. We’re up to a great start and we have strong momentum. We have leading positions in our growing multibillion dollar infection prevention and control market and lots of great opportunities before us for new products and expanding worldwide potential.

We are committed to profitably growing the company while serving our customers and benefiting our shareholders and our entire organization takes great pride in our mission to provide product services and guidance to mitigate inspection risk and approved safety and patients comes that ultimately save lives.

So I would like again to thank all of our now over 1,500 loyal and hardworking employees for their great efforts so far here in the first half of 2014.

With that said, thanks for listening. We look forward to speaking with on our third quarter fiscal year 2014 earnings call, which will be in early June. And with that, Diego, we will now open for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Tom Gunderson with Piper Jaffray. Please state your question.

Tom Gunderson - Piper Jaffray

Hi. Good morning, guys. So Andy and crew, that was an excellent summary and report and look forward -- so excellent that it crossed off about six of my questions that I was going to ask, so good job there. One that’s left is kind of a detail question, but it gets into I think some investor confusion overall on healthcare in China and how you start and then grow that business?

You mentioned before that infection prevention and infection control is the big part of what you plan to do in China. And you I think in the prepared remarks said something about new approval for Rapicide. I’m just curious, do you have a large enough portfolio with products in China, now that it’s a matter of marketing, execution and distribution or do you need more approvals or a little bit above?

Andy Krakauer

I am going to hand this over to Jorgen Hansen, the father kind of strategy.

Jorgen Hansen

Thanks, Tom. Well, I guess, the answer is quite simply a little bit of both. Our focus in the last five years in China has been building our few reprocessing business in the Chinese market and we’re actually the market leader in that space already. So we basically have been selling one product or one line of product. Going forward Andy mentioned, we have now gotten our chemistry OPA/28 register in China and that’s going to be major focus for us. It’s going to be product that can be used slightly in hospitals for manual cleaning and it’s going to give you a much larger base.

Over the next 12 months, we had about five or six products that’s going to be going through the registration in the Chinese market. And as these products becomes available, we’re going to continue to add our sales infrastructure there, really focusing, mostly on Asia Hospital premiers on the east coast side, Shanghai, Beijing, Guangzhou.

So we have a comprehensive Chinese strategy other than mix milestones is the set of our legal entity in China, which is going to allow us to really control our sales organization and our customer relationship (indiscernible) do today. So that answers your question, yes, drive our current products to a lot of degree and continues to launch new product into the market.

Tom Gunderson - Piper Jaffray

Thank you for that. And then my second, probably last question is I was going through a hundred different news stories this morning and one of them caught my eye and that was on getting one of your infection prevention control competitors and some other difficulties that they were having in the market this year internally. And I just wonder you’ve had very good performance and I’m guessing that a large if not all of that is due to your own execution. Are you getting any bit of a push from competition, maybe not been able to keep up with you? Similar -- I’m sorry, that was a little distorted. Maybe similar to the advantage you had when STERIS had its problems two or three years ago?

Andy Krakauer

Well, obviously I don’t want to make comments about Getinge but Getinge is in a lot of businesses that we’re not in. Their infection business is kind of 20% to 30% of their total business. So it could be a lot of things going on that part of infection control at Getinge. But I think as far as, if your question is how are we doing versus our competition? We feel that we are doing as well or better than we ever have. We are the leader in all of our major categories.

We have the only truly direct sales team to the GI suite, leading -- market share leaders, branded leaders. We know that we have certainly a plenty of competitors and they’re out there performing. But let just say, we have not seen any significant effect from our competition, I need to say that, I mean, the numbers speak for themselves. And we’re trying to stay ahead of them by investing faster in sales marketing and new products and continuing to improve those sales and marketing teams and that's how we try to stay at it.

Tom Gunderson - Piper Jaffray

Got it. Thanks. That's really what I was getting to on the roundabout way as to how you are doing against competition. And then, I said that was the last, but just a quick one. You gave me numbers on -- number of people internationally that you have out of the total? Can you give me an update on that?

Andy Krakauer

Well, of the increases, numbers are pretty close of these professionals that’s what we're talking about, of the 45 or so, that were hired in the first half and the 45 or so, that we’re expecting higher in the second half, the numbers are almost right on, roughly 40% of those are international.

Tom Gunderson - Piper Jaffray

Got it. And then specifically on Asia, I think you said a couple of years ago, you had 19 and then 30 and somewhere around 45 or 50, and I just want to get a sense, you are still on track and the growth is still expanding in Asia as well?

Andy Krakauer

Yes. But the majority of these international sales, international growth is still in Asia.

Tom Gunderson - Piper Jaffray


Andy Krakauer

And that should be a lot more than 50, if we are successful over the next year or two and we should have more than that just in China.

Tom Gunderson - Piper Jaffray

Got it. That's what I want to hear. Thanks Andy. Thanks, Craig.

Andy Krakauer



Thank you. Our next question comes from Mitra Ramgopal from Sidoti. Please state your question.

Mitra Ramgopal - Sidoti

Yes. Hi, good morning. First, Andy, again, we have seen tremendous organic growth over the last few quarters. And I was just wondering, how much of it you would say is coming from the investments you've been making in sales, marketing and new products shipping introduced et cetera as opposed to maybe the overall market expanding and greater end market opportunity is being available?

Andy Krakauer

Well, that’s -- I guess, I just, I have to think about that one. But I would say overwhelmingly the -- we are seeing the benefits, clearly seeing the benefit from adding the sales and marketing researches that we're adding in all markets. The ability just to prepare the materials and have feet on the ground and I should say, a higher level of standard for all the people that are in the network, hiring in the company as we expand network in terms of experiences and there is no doubt that we would not be growing at the rate we're growing without this incremental ends.

Now, certainly a lot of these expenditures are things that will benefit us in the future. But we've been making really consistently investing, really for multiple years. But starting I'd say, fairly, heavily in the second half of '13. And all I can tell you is that, we -- our guys still feel that they completely over worked, we have way more to do and opportunities in front of us and people to do it.

So at this point, we have not, we're not close to reaching any sort of, I would say economy of scale. It's just the opposite. We can continue to maintain good growth and hopefully accelerated in the future years with new products, those of course investments, those are not affecting our 10% growth right now, the new products that we're currently working on. Certainly, the new products that we launch in the last two years are making good investments.

So it’s a mix thing, but the answer is, if we weren’t making these investments our sales would be falling off and certainly, what you'd be looking at in three or four years from now would be completely different.

Mitra Ramgopal - Sidoti

Great. No, no. That's very helpful. Thanks. Shifting gears, just international, I know you've talked about investment and gain in terms of the sales force and had some acquisition, et cetera? I know if you could give us a rough sense in terms of when we look at the U.S. market versus international, especially as it relates to Asia and also even Europe, what are kind of the potential size of markets we are looking at here?

Jorgen Hansen

Yeah. This is Jorgen Hansen, Mitra. We believe that at this moment with the current penetration we have our products at U.S. and Europe, Asia approximately 50-50 in terms of value. So we have a total market potential of about $5 billion, about half of that is in the U.S., half of that is outside the U.S.

In terms of growth, obviously, we do see a lot of growth potential in Asia and that's why majority of our international investment are taking place there. That doesn’t exclude for having thoughts and very good opportunities in Europe as well the European markets are well-developed and that's also an area of where we have selected investments like, Andy mentioned, Germany is a key market for us in the future and so, about 50-50 a lot of growth opportunities in Asia, as well as in Europe.

Mitra Ramgopal - Sidoti

Thanks. And again, if you look at acquisition opportunities, clearly you have a lot available now in terms of new revolver. I don’t know how much you can share but in terms of being aggressive on that front? Is that something where you're going to have to headwinds of just try to the country specific and trying to figure out the local market that set before you sort of take the plunge?

Chuck Diker

Well, I think, we have, Mitra, this is Chuck. Mitra, we'll happy to be able to refinance our existing credit facility to give us a lot of capacity, gives a lot of more flexibility, give us the ability to borrowing multi-currencies that it's just an enabling for us to be able to execute on our strategy.

With regard to the acquisitions that we're evaluating we have a large number of deals we're in various stages of evaluating right now in a variety of different countries. And I think we are optimistic that we're going to be able to execute on one or more of this in the very near-term and I don't think, we certainly, are not going to go anywhere near the limit of our credit facility, but we want to be able to have to happy there to act on anything that comes available today or in the future, but we're very optimistic about our acquisition pipeline overall.

Andy Krakauer

And just to add part of the -- one of the questions you asking is, we don't need any more time to understand the number of the markets and acquisition targets that we're looking at. It doesn’t mean that there are not new opportunities like we’ve discuss getting our investment banker and looking Germany, where we don't know a lot of companies. But we have a clearly robust with the company and market that we know very well and that we're looking at pursuing. And then there the opportunities are ones that we don't know, which are also putting things into place to identify.

Mitra Ramgopal - Sidoti

Thanks again. Very helpful.

Andy Krakauer

Okay. Thanks, Mitra.


There are no further questions at this time. I'll turn it back over to management. Thank you.

Andy Krakauer

Okay. Well, again, thanks again for listening. We'll be back to you in June with our third quarter fiscal year 2014 earnings call. Thanks.


Thanks. This concludes today's call. All parties can disconnect.

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