Cantel's (CMN) CEO Andy Krakauer on Q3 2014 Results - Earnings Call Transcript

Jun. 5.14 | About: Cantel Medical (CMN)

Cantel Medical Corp. (NYSE:CMN)

Q3 2014 Results Earnings Conference Call

June 5, 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, CFO and Treasurer

Seth Yellin - Senior Vice President, Corporate Development


Tom Gunderson - Piper Jaffray

Mitra Ramgopal - Sidoti


Greetings. And welcome to the Cantel Medical Corp. Third Quarter Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

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

Andy Krakauer

All right. Thank you, Rob. And welcome to our third quarter fiscal year 2014 conference call. Before we start, 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 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.

All right. With that, out of the way, good morning to everyone on our call. With me today here on our call 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; and Seth Yellin, Senior Vice President, Corporate Development.

Cantel Medical achieved excellent financial performance in the third quarter of fiscal year 2014, with record sales and strong net income growth. We reported third quarter earnings of $0.25 per share, inclusive of $0.01 of unfavorable acquisition-related charges as compared to the prior year's third quarter earnings of $0.22 per share.

Sales increased 14% in the quarter, of which 12% was organic. Our adjusted net income increased by about 18%. All three major segments, Water Purification and Filtration, Endoscopy and Healthcare Disposables performed well in the third quarter, with strong organic sales increases, as well as good operating profit growth when compared with the prior year.

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

Sales of $38.3 million grew by 16% over the same quarter last year, with organic growth of about 10% for the quarter. The growth was driven primarily from continued strong demand for our dialysis clinic, water purification equipment, growth in our consumable product lines including filters and sterilant, as well as growth in our service businesses both organic and from our Siemens dialysis water acquisition.

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

The gross margin of our Water Purification and Filtration segment increased by over 2 percentage points, which despite being well below our corporate average is still a significant positive development given the higher capital equipment sales percentage in the segment.

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

These automated systems provide for a higher standard of water purification than the older conventional technology equipment that replace and provide great benefits to our dialysis customers and their patients.

Sales of these more advanced higher value machines which carry higher average selling prices accounted for about 65% of our shipments in orders. We expect the adoption rate for these newer and higher value technology platforms to continue to grow as customers increasingly recognize the performance benefits and cost savings provided by these new products.

On a further positive note, water purification equipment orders were very strong particularly in April and for the quarter in total orders approximated the very strong shipments that were delivered, maintaining the record backlog equal to last quarter’s end and this bodes very well for continued strong results for the next few quarters.

Adding to our optimism about the future of the Water Purification business is the successful integration of the acquired Siemens dialysis water business announced on March 25, 2013. This probably the last time I single out this acquisition now it’s fully integrated.

This business is delivering incremental sales and profit contribution, and we are now much better able to utilize our large service network and we now have another installed base of machines to target for upgrading to our new heat-based technology. We have, in fact, started to receive equipment orders from the legacy Siemens customers for advanced technology products.

Not only now can we market our new technology to the acquired -- to this acquired installed base, but also an overwhelming number of the 6,000 dialysis clinics in the United States are still using the older, manual, chemically disinfected water purification equipment, which is an opportunity for Mar Cor as we go into the future.

As I mentioned last quarter, our Mar Cor team has taken over management of our 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 as we go forward.

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

On the Filtration side, we are pursuing several multi million dollar therapeutic applications where our filters are used in other products for treatment of acute alcoholic hepatitis and also in the liver therapy field.

I will report more on these opportunities as they develop in fiscal year 2015. So overall, we remain very optimistic that we can continue the great momentum we have achieved over a number of quarters in the Water Purification and Filtration business.

Our Endoscopy business also had an outstanding growth for the fourth consecutive quarter. This quarter, we had record sales of $47.3 million, which were up 19% over the same quarter last year, all of which was organic growth. Operating profits for the segment on a reported basis increased 17%. But after adjusting for acquisition-related charges, operating profit growth was 22%.

We are very optimistic that our Medivators Endoscopy business will deliver good sales growth and increase operating profit in the fourth quarter of fiscal year 2014 and beyond. This quarter, our large install base of Endoscopy processing equipment continued to grow with substantial increased sales in both United States and in Europe compared to the same quarter last year.

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 23%. Further, our growing install base of machines also provide great opportunities to expand our service and spare parts businesses, which grew 15% this quarter.

On the product development front, we have recently launched several new and improved Endoscopy disposable product lines, which we expect will generate positive sales momentum as we progress into fiscal year 2015. Our disposable procedural product line sales grew 17% this quarter, compared with the same quarter last year 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 affectively launch and grow our outstanding product portfolio. Further, we are in a process of adding a number of additional sales and service resources to this team to support growth in fiscal year 2015.

As we look into our next fiscal year and beyond, we see the potential for significant growth in our Endoscopy segment in international markets for all product categories. This large opportunity is why we are now making major investments in sales and marketing and new product development that is focused on international markets and we will continue to invest in the fourth quarter and beyond.

International Endoscopy sales, excluding U.S. and Canada were 29% higher in the first nine months of fiscal year 2014. Additionally, this business could benefit greatly from further acquisitions.

Now regarding international expansion and acquisitions in our Endoscopy business, we are pleased to announce yesterday that Cantel has reached an agreement to purchase PuriCore International Limited, a wholly owned subsidiary of PuriCore plc.

PuriCore International Limited is the leading United Kingdom provider of automated endoscopy processors, endoscope drying and storage cabinets and related chemistries and consumables, with sales of about $25 million at current exchange rates.

PuriCore has an excellent 120 person team, complementary products and a well-established base in the U.K. market. This acquisition will also add a new state of the art pass-through reprocessor platform to our industry-leading portfolio of Medivators automated endoscopy processors. And we believe that this product expansion will fuel our continued success and actually accelerate our success in the U.K. and in Europe.

This transaction will require approval of a simple majority of the voting shareholders of PuriCore plc as well as other customary closing conditions. As of the signing of the definitive agreement, shareholders representing more than 50% of the outstanding share capital of PuriCore plc have entered into agreements supporting the proposed transaction. And we anticipate the transaction will close on or about June 30, 2014 in a couple of weeks.

Upon closing, PuriCore International will be integrated into our Medivators business and its results will be reported as part of our Endoscopy operating segment. And we expect this acquisition will be slightly accretive in fiscal year 2015 and obviously more accretive as we get into ’16 and beyond.

Our Crosstex Healthcare Disposables business continued to be a solid performer with sales this quarter of $24.7 million, up 12.5% over the same quarter last year. Now roughly half of the growth is explained by unusually low sales last year caused by a major pull forward by a large customer. But this still points to a solid 5% to 6% organic growth in this quarter.

Operating profits for this segment were 7% higher reflecting the higher sales volumes offset by margin pressures caused by some increases in raw material cost, particularly resin and paper, and substantial investments in sales and marketing which will help improve sales in later periods.

We’re very optimistic about the continued growth of our sterilization accessories product line which show good growth this quarter and includes sterilization pouches as well as biological and chemical indicators. And over the last few years, with the acquisitions of ConFirm Monitoring, SPS Medical and then most recently Sterilator, we now have a very significant presence in this market -- in the U.S. market.

We’re also adding some dedicated and natural resources in Latin America, Europe and Asia and have started a number of product registrations in various countries which will contribute to growth in this product area as well as the entire Healthcare Disposables segment later in fiscal year 2015.

As we go forward, we remain optimistic about the growth of the Healthcare Disposables business despite a number of challenges. As I mentioned, we are focusing on growing our sterility assurance line, including substantial efforts to grow in hospital and alternate-care markets as well as in international markets.

Further, we have begun an extensive strategic restructuring of our U.S. sales and marketing approach to drive growth in the changing dental market. The restructuring includes additional resources, adding new products and taking several new approaches to various customer segments.

Again these strategies include short-term investments which should yield benefits in a few quarters from now. Regarding new products, 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 processing chemical and our first chemistry product that can also address the large market for manual soaking of instruments. The effort is being led by the Crosstex/SPS hospital distributor team with great assistance from our much larger Endoscopy sales team.

Early results in the United States continue to exceed our expectations, and we are planning some international launches at upcoming quarters. We were pleased to have recently received approval of, referred to our last quarter, of Rapicide OPA-28 in China, customer evaluations have already started and we are actively expanding the sales team to sell the product.

In the Dialysis segment, I have expected third quarter sales were 9% lower primarily due to a decline in reused sterilants in the United States. Operating profit decreased by 24% but operating margins were still high at over 20%.

Relative to the growth in the rest of Cantel, this segment has become a much smaller part of the overall company, representing only 7% of our combined segment operating profit in the third quarter of fiscal year 2014 compared to 11.5% in the same quarter of last year. Nonetheless, this business remains important to the company and we were required to continue to take care of our customers and seeking worldwide growth where we can.

So that said, I’ll turn it over now to Craig Sheldon, our CFO to go over some financial details.

Craig Sheldon

Okay. Thank you, Andy, and good morning, everyone. I'd like to turn now to the earnings release that was issued earlier this morning. And as usual, start with income statement.

As Andy indicated, sales were up 14.3% in the third quarter compared to last year's third quarter to a record $120 million. For the nine months year-to-date, sales increased 14.9% to $357.4 million. Organic growth for the quarter was 12% and for the nine-month period, it was 11% and that’s after removing the incremental impact of recent acquisitions.

As Andy also pointed out in depth, the top line growth was driven by our three largest segments, Endoscopy, Water Purification and Healthcare Disposables, partially offset by an expected decline in dialysis. I just wanted to review once again the two bigger acquisitions that we’ve done in the last couple of years and how they affected the earnings.

The first being SPS Medical which was acquired in November 1, 2012 that was the prior year, first day of last year’s second fiscal quarter. So this acquisition is reflected in all of the fiscal 2014 periods but in fiscal ‘13, it only reflected in the six-month period that ended April 30th, in other words, not in the first quarter of the prior fiscal year. And that’s included in our Healthcare Disposables segment.

SPS Medical contributes approximately $5.5 million in sales per quarter. The other acquisition which Andy alluded to is Siemens' Water which although is closed in March of the prior fiscal year, actually had a July 30 closing date for accounting purposes. So that was right near the end of our prior fiscal year. This acquisition is reflected fully in all the periods this year and is not reflected in last year’s comparable periods.

Gross profit held strong for the quarter at 43.7%, that’s up from 43.3% in last year’s third quarter. And from nine months period, GP percentage was again 43.7%, and that’s ahead of 43.2% in last year’s nine months period. These improvements in gross profit percentage have occurred despite the negative impact caused by the new Medical Device Excise Tax, which impacted the entire fiscal 2014 period, but only since January 1st of the prior fiscal year when the Tax was enacted.

The Medical Device Tax is running at slightly over $900,000 per quarter, that’s a pretax number at our current run rate of qualifying domestic sales. So just by way of example, in the third quarter of fiscal ’14, if we have not had the Medical Device Excise Tax, our gross profit would have been about 0.7% higher than currently, that’s a close to 44.5%.

Aside from the impact of the Medical Device Tax, our gross profit percentage was favorably impacted by improved volume and favorable sales in all three of our larger segments.

Gross operating expenses for the quarter increased by $4.3 million, and for the nine months increased by $15.6 million compared to last year. And this increase was principally attributable to adding the infrastructure of five acquisitions that we have completed during that period, including SPS Medical, Siemens, and Jet Prep, as well as continued investments in personnel, primarily in our sales and marketing team as well as other sales and marketing initiatives, all which is important part of our strategic growth plan. Andy will get into that in more depth in a few moments.

As Andy has pointed out, but I will repeat, our third quarter was unfavorably impacted by $0.01 per share due to acquisition-related items, which included acquisition liability, fair value adjustments, as well as professional fees associated with our acquisition program. Although these types of expenses will continue in the future as we continue to pursue and close acquisitions, we highlight these costs since they are not related to our core sales or operating income growth.

On the operating income line, we are reporting a $2.6 million or 18% increase compared to the last year’s quarter. And for the nine months, operating earnings were up by $6.3 million or 13% and would have been up by 16% without the impact of the Medical Device Tax. So despite the negative impact of the Medical Device Tax and the continued substantial strategic investments, we still manage to keep operating income above 14% of sales. Operating income growth has been very strong in each of our three major segments.

Moving down to the interest line, net interest has continued to decrease compared with the prior year periods, a substantial debt repayments over the past year have been partially offset by new borrowings for acquisitions on a couple of basis. We pay cash for deals instead of borrowing the funds. Total interest expense is now running at only $550,000 per quarter, it’s quite a low number. We continue to repay borrowings very quickly with strong cash flow and variable interest rates.

In the tax area, our overall effective income tax rate is 36.8% on a year-to-date basis. So this is right in line with our expectations and reflective of a business with most its profits generated in the United States. This rate would have been slightly lower if not the expiration of the research and experimentation credit at the end of calendar year 2013, as we talked about that before. It’s very disappointing that credit has now been reinstated, but it seems very logical that at some point we will get reinstatement of that credit, and I am hopefully that it will be a retroactive reinstatement.

In the future as we grow our international business, we hope to lower our overall effective tax rate. However, revamping the U.S. federal tax code is under discussion as always in Washington, and of course it’s not possible to predict where these discussions will lead.

And just a quick items in the area of stock, we mentioned last quarter -- in October of -- last October, our Board approved a 22% increase in the semiannual cash dividend to $0.045 per outstanding share of common stock, that’s 9% annual rate and that dividend was paid at the end of January. And as previously reported, far back in last July where we had the 3-for-2 stock split, therefore all earnings per share and share amounts reported in our earnings release and in the upcoming 10-Q that relates to the prior year periods have been restated to reflect the stock split.

Let’s move onto the balance sheet which remains very strong. We have $24.5 million in cash and cash equivalents at April 30th, $101.8 million in working capital at the end of April and a current ratio of 3.1-to-1. Our funded debt is $64.5 million at April 30th. Although we’re actually now -- on Monday we will be down to $55 million as we’ve made some significant repayments subsequent to the end of the third quarter.

As a reminder, on March 4, so this is during our fiscal third quarter, we amended our existing credit facility with Bank of America, who is the lead bank, Wells Fargo and PNC, so very -- three very strong banking partners, I mean, three long time terrific banking partners. Key features of the new credit facility include increase in the overall borrowing capacity to $250 million, which is up previously from $150 million, eliminating the term facilities of the entire amended facility as all revolver.

We added an accordion feature for another $100 million in borrowing capacity. We lowered our interest spread. We’ve added multi-borrower and multi-currency capabilities to the facility. And we reset the maturity date to March of 2019, giving us another five years. So overall, the amended facility provides us with greater financial flexibility and enhanced access to capital. This new facility will fully support our overall strategic plan well into the future.

Meanwhile, we continue to pay down significant levels of debt. We paid down $10 million during the third quarter and $13.5 million during the first nine months of the fiscal year and that was despite paying over $8 million for two acquisitions. And as I mentioned a moment ago, we paid another $9.5 million just since the end of April. Our net debt was $40 million at April 30th, which is a reduction of almost $21 million since the end of the last fiscal year. Gross debt to equity is only 0.18 at April 30th and our gross debt to rolling 12 months EBITDAS is 0.69.

Cash flow EBITDAS is $23 million in the third quarter, which is 17.7% higher than the prior year’s third quarter. This is by the way is on the last page of the earnings release. For the nine months period EBITDAS is $71.6 million, which is 14% higher than last year. Our rolling 12 month EBITDAS is now around $93 million. Cash flow provided by operations was $19.2 million in the third quarter. And finally, capital expenditures was $3.5 million in the third quarter.

So finally just to alert everyone, we’ll be filing our 10-Q as usual before the close of business next Monday. So at this point, I would like to turn the call back over to Andy for some closing remarks.

Andy Krakauer

All right. Great. Thanks, Craig. So in summary, Cantel Medical’s third quarter performance was very strong. We continued the momentum of our excellent first half and achieved a new sales record and strong EPS growth. This quarter exemplifies why we are so optimistic about the future of the company. We showed excellent sales growth of 14%, and have achieved organic revenue growth of 10% or higher, remind you 12% this quarter for four consecutive quarters. Adjusted net income growth of 18% was achieved despite our major investments.

As I discussed last quarter, the worldwide market potential for our products continues to grow and has never been greater. Our strategic plan supports our aspirations to double sales and profits for the next five years. These are, of course, aspirations and not predictions. But we’re optimistic that we can achieve these goals with the right investments.

Our detailed market analysis have shown that we now compete in total addressable markets well in excess of $5 billion with great opportunities for growth in all of our major businesses. Further, we see expanded market potential that can be realized by executing on several new market and product strategies that we are currently developing. This potential and our clear growth drivers are reasons why we believe that 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 also investing in new products in all our major categories, disposables, chemistries and equipment, which we believe have large potential upsides two or three years from now. You 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 its medium and long-term strategic growth objectives.

Let me just explain briefly about our ongoing investments for 2014. Our great success in the past five years have come in great part from the substantial investments in sales and marketing and R&D. These investments were 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 growth of 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 Water Purification businesses to expand our position in some targeted markets and customer opportunities. These strategies have great potential in the medium and long-term but call for substantial upfront investments.

To achieve the objectives of our five-year strategic plan, we’ve added a number of sales and marketing positions in fiscal year 2013 and in the first nine month of 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 teams, but we're also adding needed infrastructure and support roles, such as finance and human resources in China and in Europe. We have also recently hired an experienced general manager to lead our efforts in Germany and he is now recruiting a direct sales and service team, a few of which are already hired.

In the nine months of fiscal year 2014, we added about 60 professional positions and have plans to add about 30 more positions globally in the fourth quarter of fiscal year 2014. The majority of these positions roughly 70% are in sales and marketing, and about 40% of those are dedicated to international markets. Overall, international sales are up over 20% year-to-date. So we are seeing some success already in the early investment days here.

To put these investments in perspective, our sales and marketing and R&D expenses increased $1.7 million in the third quarter and grew by $6.6 million in the first nine months of fiscal year 2014 as compared to last year. Along with some incremental administrative costs, this is equivalent of investing an incremental $0.03 of earnings per share just in the third quarter.

Despite the substantial investments in the business, we are committed to growing earnings when compared to the prior year. In addition to increase profits driven by the topline growth, we are implementing costs and operating expense efficiency programs due in part help pay for the incremental investments. The majority of the benefits of these cost reduction activities will start in fiscal year 2015.

So we feel very confident in our growth plans and we see great opportunities for our businesses to grow organically, but we also continue our success in identifying, executing and integrating acquisitions worldwide. This is a key core competency of Cantel that has brought us entrepreneurial management, new and higher margin products and additional growth in sales and profits from our proven strategy to invest and accelerate the growth of the acquired companies.

The continued search and identification of synergistic markets and potential acquisition target is a key role of our entire senior management team. Further, we have increased our focus on international targets, where we see many opportunities to acquire good strategic businesses such as the PuriCore business we discussed earlier.

We have very good opportunities that we are currently following up existing in all three of our major businesses. We expect performance in the fourth quarter of fiscal year 2014 to approximate our strong past few quarters, which have been basically $0.26 or $0.27 in the first three quarters.

Like this year, fiscal year 2015 will also be a year of major investments to accelerate future growth worldwide, but we expect to show some benefits from our investments as well including acquisitions.

Despite our continuing investments in sales and marketing and international initiatives, we expect operating profit for the full fiscal year 2015 show good growth over fiscal year 2014.

We have strong momentum, leading positions in the growing multibillion dollar infection prevention and control marketplace and some very exciting opportunities before us for new products and expanding worldwide markets.

We remained very committed to profitably growing the company, while serving our customers and benefiting our shareholders. Our entire organization takes great pride in our mission to provide these products and services, and guidance to mitigate infection risks and improve safety in patient outcomes and ultimately save lives. And I want to personally thank all of our 1,400 loyal and hardworking employees for their great efforts and achievements in the first nine months of fiscal year 2014.

And so, with that, I thank you all for listening. I look forward to speaking with you all again on our fourth quarter and full year fiscal year 2015 earnings call in late September. But for now, I’ll turn it over to Rob, who will take some questions for our team.

Question-and-Answer Session


Thank you. (Operator Instructions) Thank you. Our first question comes from the line of Tom Gunderson of Piper Jaffray. Please proceed with your question.

Tom Gunderson - Piper Jaffray

Hi. Good morning guys. Nice review. I think what I’ll do Andy on this set of questions is just focus as I can on PuriCore. The revenues that you gave in ‘13 in the press release were lower than the revenues in ‘12. And the revenues in the first quarter of this year were down 12% organically. Is there an explanation for that and do you think you can -- that will take some work to turn that around?

Seth Yellin

Hi Tom. This is Seth Yellin here.

Tom Gunderson - Piper Jaffray


Seth Yellin

I think PuriCore certainly has had some flatness in the business and a little bit of a decline in the current period. And it really has to do with the timing of the new product launch that they are about to undertake. And we think there is a lot of opportunity and a lot of growth trajectory for this business, the current status of the operation notwithstanding. We think it’s a very good business, the business we’re very excited about and a product portfolio that we think we will have a lot of success in growing and seeing -- driving a lot of good operating performance in the upcoming quarters and years ahead.

Andy Krakauer

Tom, they are really two -- it's really two issues. So the main one is that they are currently launching a new product which has delayed sales, while -- will end up being us, hoping to launch that product over the next couple of months and already taking orders for that product. That orders are not shipment, so just bear in mind that. And as far as some of the numbers, our numbers also relate to the current exchange rates and their published numbers are the exchange rates as they were over the whole year to help clarify some of that potential differences.

Tom Gunderson - Piper Jaffray

Got it. Thanks. So basically Andy, this is a -- they announced new product maybe too soon and people said sounds good, we’ll wait for that.

Jorgen Hansen

Well, Tom, you said, the UK market -- this is Jorgen, UK market is really driven by fairly large tenders and a cycle of a couple of times a year, but it is really looking for new equipment. And PuriCore has been strategically waiting for this new product that they believe is very competitive and thus if you could stay postponing sales a little bit. I think the good news is that we’re going to now -- hopefully here in a couple of weeks to be the owners of the company. We are going to be able to support these new products and we’re very confident that we can do even better jobs than the company originally expected. So all-in-all, it’s bit of a delay of launch of this new product.

Tom Gunderson - Piper Jaffray

Got it. Thanks. And then still on PuriCore, can you remind me how you sell in the UK today and how many of those 120 are direct sales guys, if any?

Andy Krakauer

We don’t have any direct presence in the UK today, Tom. So this is a first time we will have our old team on the ground. We certainly have distributors that we have good relationship with and work with for years. So this will be first direct presence there. It’s going to help us really feel not only the Medivators product lines, but also all our product lines over time. Of the 120 people, a very large team of that is service people that service the large install base that PuriCore has in market. In addition to that, there is a smaller direct sales team. These are six to seven people. And then there is some inside sales and service group as well. And then remaining headcounts or remaining team is the back office functions, manufacturing, budget and everything else.

Tom Gunderson - Piper Jaffray

So not to be too obvious here, but is the -- once you get the new product out there and that’s something rolling is the idea that you could expand the direct sales force and add in the rest of the divisions products over time?

Andy Krakauer

Over time I think that would be something that we will be looking at and the company has already just launched this product looking at adding people and that’s something that we would support obviously.

Tom Gunderson - Piper Jaffray

Got it. And then in the news in healthcare of AstraZeneca, has talked about for its tax benefits and Smith & Nephew for its tax benefit. Is there -- you guys have a pretty high tax rate. Is there a tax benefit to having a U.K. acquisition here?

Craig Sheldon

Yeah. This is Craig. I will address that question. Yes, we do have a high tax rate and that’s because we are in the United States and hopefully, even that business will come down in the future if our Congress can get moving here. But the U.K. rate is considerably low. It’s in the low 20s. In addition to that, we have some NOLs that we will be getting with this acquisition. So from a cash perspective, we will get a benefit there as well so. There is no question. This is the first big step for us in expanding and such that will lower our overall consolidated effective tax rate.

Tom Gunderson - Piper Jaffray

Got it. Go ahead.

Andy Krakauer

Okay. No, internally, we are doing a fairly extensive review of how best to organize ourselves in Europe and in Asia, anticipation of growing businesses and growing profits, to take advantage of the fact that there are in fact lower tax rates in those parts of the world. So it’s a very relevant question that we are right smack in the middle of looking at right now.

Tom Gunderson - Piper Jaffray

Thanks, Andy. That’s it for me, guys. Thank you.

Andy Krakauer

Thanks, Tom.


(Operator Instructions) The next question is from Mitra Ramgopal, Sidoti. Please proceed with your question.

Mitra Ramgopal - Sidoti

Yeah. Hi. Good morning. Just a couple of questions. First, Andy, based on the investments you are making in the expansions, especially on the international front. In the past, the business I think you have characterized it organic growth, maybe mid high single digits and looking at the last few quarters, it’s at a steady 10% a better. Is that kind of the new rate we should be looking at?

Andy Krakauer

Well, I will tell you what our internal goals are. And our internal goals are to grow at 10% or greater, given the investments that we are making. So you would need to grow, if you are going to double sales in five years, you would need to grow at a rate quite a bit above that and that includes acquisitions of course. So, I guess, the bottom line is that we are striving for 10% organic growth, although never committing to it. But a lot of it depends on the continuation of the investments that we’re making in these sales and marketing and go direct structures like in China and in Germany.

So you would hope -- the same thing I told you, in fact last quarter and you asked, I think almost the same question, which is with the investments that we’re making, we need to strive for 10% or more. That’s what pays for these expenses and allows it to still get some profit growth. So, yes, internal goal, absolutely.

Mitra Ramgopal - Sidoti

Okay. Thanks. And that’s brings me to the next question regarding the investments. Clearly as you said, you will be spending fiscal ’13 and through fiscal ’14 and how far long are we in that process? I know you will continue to invest sales and marketing, new products, et cetera, but what should we anticipate maybe a potential, sort of a slowdown on that front?

Jorgen Hansen

Well, this is John. We still have a lot of work to do and maybe as you recall, we mentioned that at some of our previous calls that to achieve our five-year strategic plan, this financial year and financial year ’15, as we ended the year where we are investing in sales and marketing and product development. So we didn’t have a ways to go, obviously, we are -- with that have increased expectations to topline growth as well as that’s what Andy said, it’s going to pay for this.

So, we still have work to do. We are direct now in Germany with this acquisition. We’ll have a team we can deleverage in U.K., which is another key market for us and other key market is China, that’s going to be a big focus for us in ’15 to utilize the opportunities in that market. And we need to exploit the fact that we are going to get several new product lines registered into the Chinese market. So, still a lot of work to do to go for these opportunities. The good news is there is lots of opportunities to go forward. We are certainly working hard everyday to achieve this.

Mitra Ramgopal - Sidoti

Right. Thanks again. And final question, again, in terms of the growth opportunities with the acquisitions, clearly the pipeline is very strong and given the increased emphasis on international. Should we sort of be looking for more acquisitions such as the year will go?

Seth Yellin

Hi Mitra. It’s Seth here. I think, we -- you should expect to see a decent mix of acquisitions both with international opportunities, as well as U.S. International is a key focus of ours for sure, but there are a lot of opportunities we say before us in the U.S. market and those are ones that we feel very confident about being able to execute on successfully -- integrate successfully and that are very exciting. So I think it should be a balanced approach and I think you should continue to see a good mix of acquisitions geographically and from a segment perspective as well.

Mitra Ramgopal - Sidoti

Okay. Thanks again for taking the questions.

Andy Krakauer

Sure Mitra.


Thank you. At this time, I will turn the floor back to Mr. Andy Krakauer for closing comments.

Andy Krakauer

Okay. Well, again, everybody. Again, I look forward to speaking to you in late September, not for the full year, fiscal year 2015, as I said, a few minutes ago, but obviously, for the full year fiscal year 2014, as well as our fourth quarter. All right. Thanks everybody for listening. Good-bye.


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