Cantel Medical Corp. (NYSE:CMN)
Q4 2016 Results Earnings Conference Call
September 29, 2016 11:00 AM ET
Jorgen Hansen - President and CEO
Peter Clifford - EVP and CFO
Mike Matson - Needham & Company
Raymond Myers - Benchmark
Mitra Ramgopal - Sidoti
Greetings, and welcome to Cantel Fourth Quarter and Fiscal Year 2016 Earnings Call. At this time, all participants are in a listen-only mode. A 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 Jorgen Hansen, President and CEO of Cantel Medical. Thank you. You may now begin.
Thank you, Sherry. And welcome to our fourth quarter and full fiscal year 2016 conference call. 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.
Good morning everyone. With me on the call today are Chuck Diker, Chairman of the Board; Peter Clifford, EVP and Chief Financial Officer; Seth Yellin, EVP, Strategy and Corporate Development; and Steve Anaya, SVP and Chief Accounting Officer.
Before I begin, as announced on August 1, I have started my new role as CEO and member of the Board of Cantel. I would like thank Chuck Diker and the Board for this opportunity and I together with our excellent leadership team are fully committed to continue to pursue Cantel’s vision to be a global leader in infection prevention.
I would also like to thank Andy Krakauer for everything he has done for Cantel during his 12-year tenure serving as CEO since 2009. I wish him all the best in his future endeavors. And now, let’s move to our fourth quarter fiscal year 2016 results.
Cantel Medical achieved record financial performance in the fourth quarter of fiscal year 2016 with solid sales and net income growth. U.S. GAAP earnings were up 23% versus prior year to $0.39 per share versus prior year’s earnings of $0.32 per share. Sales increased by over 18% in the quarter to a record $179 million with strong underlying organic growth of 12.4%. Since launching our current strategic plan three years ago, we have double-digit organic growth in 10 out of 12 quarters and an average organic growth of 10.9%.
Non-GAAP net income increased by 26% over the same quarter last year to $20.2 million. Non-GAAP EPS for the quarter was at a record $0.48 as compared to the non-GAAP EPS in the prior year of $0.39. Let me now make a few comments about the performance for the full year 2016 before I move into the fourth quarter commentary.
Fiscal year 2016 was a very successful year for Cantel Medical as the Company’s financial performance by every key measurement significantly improved. Sales increased by 17.7% for the year while organic growth grew by 12.7% while non-GAAP gross margin expanded by a 150 basis points. This margin improvement was due to our focus on sales of higher margin products, higher volumes and the benefit of our improved operational efficiencies. Non-GAAP operating income grew by 20.8% for the year showing meaningful leverage. Non-GAAP EPS for the full year increased from a $1.44 to $1.75, which represented a year-on-year growth of 21.5%.
Adjusted EBITDA for the year grew 21.2% to nearly $138 million. Despite decline over 113 million on acquisitions as well as capital expenditures in the year, total net debt for the year grew by only $41 million to $87.6 million, reflecting the strong cash generation of our business. It is important to note that we delivered strong top and bottom line performance while still investing heavily in the business to drive future growth.
For the year, sales and marketing expenses increased over $18 million while G&A grew by $19.5 million to support ongoing growth of the business. Half of this increase was due to our newly acquired business and the other half was investment in our commercial resources and the supporting infrastructure to further expand our presence globally.
In fiscal year 2016, we acquired the UK-based Medical Innovations in our Endoscopy division as well as the sterility assurance products division of NAMSA in our Healthcare Disposables division. The Medical Innovations acquisition continued our expansion in the important UK endoscopy market while also adding key products to our expanding portfolio globally. The NAMSA sterility assurance strengthened our dental and medical sterility assurance business and provided us with presence in the important industrial segment. In addition, our latest acquisition of Accutron, which closed the first day of fiscal year 2017, marks an important new growth driver for healthcare disposables business.
Now, let me turn to the quarterly performance and the highlights of our operating segments. This quarter, our Endoscopy business continued its strong performance as it has for the past three years, setting a new record for the 13 consecutive quarters. We recorded Endoscopy sales of $96.8 million, representing a total growth of 38% over prior year with strong underlying organic growth of 28.5%. Despite significant investments including the fully acquired infrastructure of Medical Innovations, substantial sales and marketing additions in the United States and our direct international markets, non-GAAP operating profit was nicely leveraged, increasing by 41.6% for the quarter. Our procedure room products line again led the growth in this segment, demonstrating the effectiveness of our global selling strategies as customers are increasingly recognizing the superior infection prevention features of this expanding product category.
We also saw meaningful increases in our worldwide installed base of endoscopy reprocessing equipment.
Equipment placements drove our higher margin disinfectants and detergents categories which grew by 20% worldwide. Our expanding installed base of machines also provided opportunities for our global service and spare parts business which grew 17.5% this quarter. We also are encouraged by the international growth in this segment of 39% driven by a direct sales team and strategic acquisitions. A key driver of our success -- a key driver is our significant investment in sales and commercial excellence programs. Our United States endoscopy team has consistently demonstrated their ability to effectively grow our expanding full service portfolio of infection prevention and patient safety products.
Given the continued growth potential in the U.S., we have recently completed expanding our sales, service, training and marketing teams to prepare for additional growth in fiscal year 2017. We also plan for additional investments to support our direct sales efforts in major international markets such as the UK, Italy, Germany, France and China.
Of note, earlier this week, we announced the acquisition of our endoscopy reprocessing distribution business in Canada, and we are optimistic about the future growth potential of this country.
In our Water Purification and Filtration segment, sales this quarter were up 2.1% to $45.1 million with 1% organic growth. Non-GAAP operating profit grew by a healthy 9.8% to $87.5 million [ph] for the quarter, driven by a 150 basis points improvement in gross margin. This was a reasonable performance given the modest decline in equipment backlog we experienced a few quarters ago.
Sales of our advanced heat-based equipment, which carry higher ASPs, now consistently account for more than 80% of incoming orders and customers recognize the performance benefits and cost savings provided by these products. Given the strong growth in construction of new clinics over the past few years and the cyclical nature of capital equipment sales, we will see some quarters such as this one where dialysis water purification equipment shipments have modest growth compared to prior year. Most importantly, this business had strong order intake for the third consecutive quarter and our overall backlog in the segment is at an all time high. We are confident that this increase in our backlog will help drive growth in fiscal year 2017.
This segment also includes our filter and sterilants business and we have some exciting future opportunities with our unique hollow fiber filters as well as our novel REVOX sterilization technology. We are continuing to add marketing and product development resources to pursue what we believe will be profitable growth opportunities in this business going forward.
Our Healthcare Disposables business had a effective quarter with sales of $29.4 million, up 6.4% over prior year, driven by the impact of acquisitions in the quarter. Non-GAAP operating profit for this quarter grew by 2.2% with 120 basis points increase in gross margins from sale of our higher margin branded dental into product line Waterline Disinfection products, as well as biological and chemical indicators. Gross margin flow through was offset by continued investments in sales and marketing supply of future growth and distribution.
Just after the quarter ended, we acquired Accutron, the leading manufacturer of nitrous oxide delivery systems and single-use nasal masks for conscious sedation dental procedures. This acquisition expands our product portfolio to include an additional high quality branded single-use disposable product line. In addition, this marks Cantel’s first entry into the dental equipment market, allowing us to increase our presence in the dental offices and offer a broader portfolio of equipment and infection prevention consumables.
We remain confident about the growth potential in Healthcare Disposables business, driven by our branded dental product line or presence in the Sterility Assurance market, our leadership of the high growth dental unit Waterline Disinfection market as well as our entry into dental equipment.
In the Dialysis segment, fourth quarter sales were down 18% to $7.8 million due to a decline in sterilant sales in the U.S and the loss of some unusually high dialysis concentrate sales we experienced over the last several quarters. As we have stated in recent calls, we are expecting this decline and reuse to accelerate in United Sates. Operating profit has declined 23% due to the contraction of this business. This segment has become a much smaller part of our overall Company, representing only 6.4% of combined segment operating profit in fiscal year 2016.
Nonetheless, Nonetheless this business remains important to the Company and we work hard to continue to take care of our customers while seeking growth globally.
Now, we’ll turn over to our CFO, Peter Clifford, to go over some financial details.
Thanks Jorgen. As Jorgen indicated, sales increased 18.3% in Q4 versus last year. The quarter sales bridge for Q4 is as follows. Organic growth came in at 12.4%, acquisitions came in at 6% and translation was a negative 0.1%. Full year sales increased 17.7% versus last year.
The sales bridge for the full year results is as follows. Organic came in at 12.7%, acquisitions came in at 6.3% and dispositions came in at a negative 0.8% and translational was a negative 0.5%. Q4 gross profit margins expanded 220 basis points to 47.7% versus 45.5% last year. The non-GAAP gross margins also expanded 220 basis points. Full year gross margin story expanded 160 basis points to 46.5% versus 44.6% last year. Non-GAAP gross margins expanded 150 basis points as well.
Q4 gross profit margins expanded in all four segments year-over-year. The principal drivers were favorable mix in endo and water driven by strong consumable sales, favorable mix in healthcare disposables due to accretive acquisitions as well as benefits from medical device tax and volume leverage productivity in our plans. We continue to maintain our internal goal to gradually and steadily expand gross margin rates.
Operating expenses increased by $12.9 million or 28% in Q4 and $39.2 million or 23% for the 12 months compared to last year. Our investments as always continue to support a multiyear strategic plan and continue to be concentrated in the following areas: Geographic expansion; sales and marketing investments in all three major business segments; new product development; and operating expenses in our newly acquired businesses. As Jorgen mentioned, for the 12 months, roughly half of the increase in operating expenses is due to organic investment.
Reported operating income increased by 16.6% and 20.4% for Q4 and the 12 months, respectively. Non-GAAP operating income increased by 20.5% and 20.8% for the Q4 and the 12 months, providing over 200 basis points of leverage over our sales growth. Net interest for Q4 increased 268,000 compared to the prior year Q4 and up 956,000 for the 12 months.
Overall, our effective income tax rate was 34.8%, down 370 basis points from the prior year 4Q ‘15 of 38.5. The items impacting our effective tax rate in Q4 compared to the prior year were new tax legislation, both domestically and abroad gave us 190 basis points; prior year headwind of non-deductible loss on the sale of Saf-T-Pak provided us with 80 basis points and changes and acquisition related expenses and normal year-end provision true-ups drove another 100 basis points. Our full year effective tax rate was 36.2%.
Our balance sheet remains very strong with significant capacity. We have over $134 million of unused credit facility as well as $100 million of untapped accordion line at July 31st. Our banking relationships remain incredibly strong and have been in place for over a decade. We ended the quarter with $28.4 million in cash and cash equivalents, $126.4 million in working capital at a current ratio of 2.3 to 1. Our gross debt ended the quarter at $116 million; this includes $96.5 million of borrowings this year to fund the Medical Innovations and NAMSA acquisitions. We continue to pay down significant levels of debt. We paid down $16 million during Q4 and $59 million during the full year 2016. Net debt is $87.6 million at Q4 2016. Our gross debt to equity is 0.255; our gross debt to rolling 12 months adjusted EBITDAs is 0.84, while our net debt to adjusted EBITDAS is 0.64. Q4 adjusted EBITDAS came in at $37.6 million or up 21.7% year-over-year and our rolling 12 month adjusted EBITDAS came in at a $137.9 million which represents 21.2% growth year-over-year.
Q4 cash flow from operations came in at $28.5 million, which represents growth of 10.8% year-over-year while our full year cash flow from operations came in at $80.3 million, up 35.9%. Capital expenditures were slightly elevated at $6.6 million in Q4 but more in line with future spend.
A special note, in 1Q 2017, we will early adopt new accounting guidance related to stock-based compensation that will require us to record excess tax benefits in the tax line of our income statement instead of an equity. As a result, we will have a favorable tax benefit when employee stock awards vest [ph] which is primarily in Q1 of Cantel. The magnitude of this benefit is dependent upon the Company stock price at the time of vesting. To alert everyone, we will be filing our 10-K before the close of business today. Thanks.
Thank you, Peter. Now, let me speak to our longer term outlook for the business. At the beginning of fiscal year 2014, we presented the outlines of our five-year strategic plan which was to double sales and profits between financial year 2013 and financial year 2018. With the completion of fiscal year 2016 at the third year of this plan, we are pleased that we have exceeded both our revenue and net income targets. Consequently, it was the right time for us to reexamine our five-year strategic outlook and create a new plan that matched the next five-year to fiscal year 2021. With this plan, we have determined that Cantel is currently operating in global segments representing approximately $7 billion in total available market, growing in the mid single digits. This means that we have ample opportunity for continued growth. Consequently, the objective of this new five-year plan is to again double our sales and profits between fiscal year 2016 and fiscal year 2021 with the targeted sales of $1.3 billion and targeted non-GAAP net income of approximately a $150 million.
This outlook implies the compound annual growth rate of approximately 15% on revenue and earnings. Obviously, our growth in any one period may be greater or less than this 15% target rate, but we are confident in our ability to hit this overall objective for full five-year period. The drivers of growth are threefold, new product development; global market expansion and continued synergistic acquisitions.
New product development will be essential driver of sales performance over the five-year period and we anticipate that one half of our total organic growth over the same period will come from new products launched between 2015 and fiscal 2021.
Global market expansion is another critical area of growth and we’ll continue to invest in expanding our sales footprint and geographic reach. Over the five-year period, we’ll see international sales growing at nearly double our total sales growth rate, reflecting the opportunity in our international operations.
Finally, the continued identification and execution of strategic acquisitions will be a critical element of our growth strategy. And we are adding resources to ensure our ability to meet this objective.
Evolving our operating model service is the foundation to enable this ambitious strategy. The Cantel operating model consists of four major initiatives, team development, commercial excellence, infrastructure to support growth and scalability, and continuous improvement to deliver future operational leverage. With this program, we’ll focus on building an operating model that can help us grow over time -- help us for growth and over time enable leverage across our businesses.
Finally, this program aims effectively support the integration of future acquisitions. Taking together, our plan lays out the blueprint of continued growth and success of Cantel over the next five years. To achieve this plan and double our sales and profits again by fiscal 2021 will require significant investments in the near-term. Significant -- incremental investments we make in fiscal year 2017 and fiscal year 2018 to drive positive leverage in the back half of the plan period.
Our five-year plan is an exciting roadmap to continue growth of our business over the next several years. While this is not a forecast, it’s our goal and aspiration. We have confidence and conviction in the achievability of our plan despite strong competitive and demanding customers.
Fiscal year 2017 is the first year of our new strategic plan and we are moving ahead quickly to realize the full potential we see in the future. We anticipate continued positive sales momentum as we execute in our global markets. During the year, we’ll continue to develop and promote newly launched products and acquired products, increase penetration in the U.S., as well as invest in our direct teams globally. In addition, we’ll continue to make significant infrastructure investments to support our current growth of the business and lay the foundation to realize the full potential outlined in the five-year plan. These investments will come in from our new team members, IT platforms and competitive expansion necessary to continue supporting the growth of our business. Despite the substantial investments in the business, we expect operating profit for the full year of fiscal year 2017 to show meaningful growth over fiscal year 2016.
In addition, we’ll continue our proven strategy of identifying, executing and integrating acquisitions worldwide. This is a core competency of Cantel that has moved us into attractive markets and product categories with growth and strong margins where we continue to invest and accelerate the sales and profits of the acquired companies. The continued search for acquisition targets is a key role of our senior management team and we are actually pursuing interesting opportunities across the number of segments.
Before I close, I would like to extend a warm welcome to Dr. Ronnie Myers, who has been recently appointment as the member of Cantel’s Board of Directors. His deep experience in dentistry and infection prevention makes him a great addition to our Board and to the Company.
In summary, Cantel Medical’s fourth quarter performance was very strong and most of our financial metrics were at record levels. We remain committed to profitably grow the Company while serving our customers and benefiting our shareholders. Our entire organization is dedicated to our mission to provide products and services to mitigate infections, improve patient safety and outcomes and ultimately help save lives. I thank all of our 2,000 loyal and hard working employees for their efforts and achievements in fiscal year 2016.
Thank you for listening. I look forward to speaking with you on our first quarter fiscal year 2017 earnings call in early December. We will now take some questions.
[Operator Instructions] Our first question is from Mike Matson from Needham & Company.
Hi, thanks for taking my questions. I guess I just wanted to start with operating margins. I know that you’ve kind of been indicating that you are planning a lot of reinvestment, so to agree that you get gross margin leverage that you’re going to plough that back into the business. But, we did see operating margins up by about 50 basis points I think in fiscal ‘16, over the prior year. So, is that a one-off or should we expect to see some modest operating leverage in the next few years?
I think as Jorgen mentioned on the strat [ph] plan profile, I think in first half or early part of the strat plan, there probably won’t be much leverage, there won’t be -- as we get to the back half, the investments we make in IT and some of the operating efficiencies in year one and year two should put us in an environment where there is modest leverage in the back half of the strat plan period?
Okay, thanks. And then, I’m just wondering if you could give us the -- I apologize if you already said this, but the growth rates for the U.S. and O U.S. both on a reported and organic basis?
I can at least say quickly, our mix of inside versus the outside the U.S. for the fourth quarter, our sales mix was 23.1% outside the U.S. and on a full year basis it was 22.5%. Give me a second here on the organic outside of the U.S. I have that number.
While we find that, just continue the questions.
Just wondering what your thoughts are. We saw Boston Scientific acquire EndoChoice earlier this week. I know they did compete with you somewhat in the procedural product area. So, do you think that that makes them maybe a more viable competitor now that they are in the hands of much bigger company and bigger sales force?
Well, I think just to put in perspective, Mike, we do compete with EndoChoice but it’s a relatively small part of their business. EndoChoice’s main focus has been to sell their -- or drive their scope business and then they’ve had a consumable range of products that includes therapeutic products and some infection prevention products. So, we do anticipate that there will be -- these products will be promoted by Boston Scientific obviously but again, it’s a relatively small part of our business and the focus for this product is a little different than ours that is infection prevention focus where the EndoChoice, Boston Scientific is more sort of therapeutic business.
Okay. And then, I have one final question just on the medical device tax suspension. How much did that help your gross profit this year versus the prior year? Gross margin, I guess is the better way to put it, not dollars; I am looking for percentage.
It was about a $0.01 a quarter.
Okay. [Multiple Speakers]
The international organic, Mike, was about 12.4% for the quarter and it was about 12.5% for the full year on the international; these were outside the U.S.
[Operator Instructions] And our next question is from Raymond Myers from Benchmark.
Great. Thank you for taking the questions. Jorgen, let me start with a big picture question and then narrow it down. I think one question people have is looking at your results this year, so much of the growth has been focused in the strong improvement in endoscopy. What people question is, will we get growth from the other business segments also? And second, how large is the opportunity in endoscopy; how long can you continue to grow at these elevated [ph] rates?
Thanks. That’s a great question, Raymond. So, we do have some growth opportunities in all three of our verticals. And our acquisition of Accutron that we just completed August 1 is an example of the potential that we see in our healthcare disposable business to drive growth, both in our dental and medical and industrial segments within healthcare disposables.
In our water business, as mentioned in my call, we do have a very strong position on the capital equipment side and we are investing in driving that but also have really good opportunities on other products sterilants, filters and sterilization technologies that we see -- that we’re confident about in the future. In terms of potential for endoscopy, that is our largest total available market. We believe that market has total available market size of about $4.5 billion globally. So, we still have 10 times to go, if you will. And in many ways, we have a strong position in U.S. in capital equipment. We still have a lot of growth procedure room products. And if you look internationally, we have growth opportunities both on equipment side and also on the procedure room side. So, still a lot to do on endoscopy for many years to come.
Great. And next, let me move to some of your elevated spending, you alluded to a little bit in your Q&A there with your investments for the early part of the five-year plan. But I noticed that the second half of fiscal 2016, your R&D expense has been trending higher. And I am curious is that part of this investment for the strategic plan or is it strategic plan in addition to this? And then finally, what return should we expect from all this R&D investment?
So, as I mentioned when I talked about the strategy that when we look over the next five years, about half of our organic growth will come from new products. So, it’s a key area of investment for us. And in the back half of last year, we did start to add additional resources in R&D including new strong leadership of our -- across Company R&D activities and we have kicked off several important R&D projects that’s going to create growth in the years to come. So, we will continue to invest in R&D, have added some resources, have some additional resources that will be added in ‘17, but I wouldn’t say, it’s a radical departure for the spending level that we have today; it’s about that level we’re coming out of years, so we’ve got to continue into the next year with some reasonable increases.
Great. And when you talk about this, quote significant investments in fiscal year ‘17 and ‘18 to achieve your five year plans, can you give us better color on what areas should we expect the increased investments and how much will that impact the operating margins and start with 2017?
So, a bigger chunk of the investments for 2017 actually has already occurred since we invested in the business quite significantly in the fourth quarter. One of the biggest chunks of discrete investment was adding another 15 sales people in the U.S., which is a pretty significant increase of that sales team. So, going forward, that’s a very important part of the investment. We have also completed our sales team in Germany, which is another major investment. So, a lot of this spend actually, for ‘17 is really flow through of activities that we have already completed in ‘16.
So, as I said, we are not going to be -- I’m not going to be able to answer precisely what that will mean. But, we are coming out of ‘16 with strong growth. We are feeling good about the top-line. We have -- with the kind of growth we have, we need to continue to add resources appropriately to support the growth of the business, and we’ll spending on some of our R&D activities to ensure we also have good growth in ‘18 and ‘19 and so on. So, I think that’s what I can say about that.
Okay, great. And final question is your gross margin was quite strong in the fourth quarter. Can you describe how you achieved such a high level and give us some sense of what kind of margins should we expect for next year?
As I called out, we had favorable mix really in both the water business and in endoscopy on legacy products when you think about on endoscopy, our procedure products category is having an extremely strong year and leading the way from a growth perspective. And that is accretive product line profile from a margin standpoint, from the business average from endoscopy. And on the water side, the fourth quarter we experienced really meaningful uptick in the consumables, which again is the more accretive part of the water business, and then as well the recent acquisitions that we made in healthcare disposables. One of our criteria for the M&A pieces is only businesses that have accretive gross margins for corporate average and we’ve been following that path on the healthcare disposable business with the DentaPure acquisition, with NAMSA, Sterilator and some of the other assets that we’ve required over the last two years in those businesses, continue to outperform the growth rate of the sector in general.
Okay, great. Thank you.
We always aspire to continue to see improvement. I don’t think we’re at entitlement, but the goal is always slow and steady improvement on a gross margin rate.
Our next question is from Mitra Ramgopal with Sidoti.
Yes. Hi. Good morning. Thanks for taking the questions. First, Jorgen, just from a big picture standpoint as you look out over the five year plan, how much do you expect the current mix to change as we look at endoscopy continue to be the fastest growing piece of the business and now it’s just over half of your total revenue; where should we expect that, I think as you look out over the next few years?
That’s a great question, Mitra. We are very confident about the continued organic growth of our Endoscopy business and actually all our three verticals. But, how the mix actually is going to pan out depends quite a bit on how we execute on M&A. We see great M&A opportunities in each of our segments and that can change the trajectory quite a bit in terms of mix. So, I would say that we feel really good about our endoscopy business, what we can do there. It’s within our control to continue to execute well and add resources necessary to build that market and meanwhile we will do the same with three other verticals and look for ways to grow those businesses but also add categories with great margin profiles that can strengthen the two other verticals. And possibly as we mentioned before, we would also be looking at possibly expanding into new verticals at this time period which obviously is little harder to talk about since we don’t know exactly what that is.
Alright, okay. Thanks. And, as you talked about still having to do quite a bit of investments as you look to expand sales and distribution; I think if there is a way you can give us how far along are you in this process and essentially from a couple of years ago?
Yes. So, when we announced our previous strategic plan, we sort of had the same outlook and we have been investing in the business but we actually managed over the plan period to drive the reasonable leverage, even in the investment year. So, I would say in some quarters, you will see a pickup of some resources as they flow through, for example when we hire sales people, obviously we pay them the first day. However, it can take three to six months, sometimes longer for them to return the investment.
So, you might see quarters where we have a little bit of deleverage too as we get our teams up to full speed, particularly when we hire people in our capital business, the savings cycles are pretty long. But overall, we do believe that over a five-year period we can get nice double digit organic growth -- I am sorry, nice double digit growth from an EPS perspective as said during the presentation.
Okay, thanks. And again, you talked about international being a huge opportunity for you. As you look at the different markets, Europe, Asia now I think even with the Vantage acquisition now in Canada, any market in particular you really feel strongly about. And as you try to gain share there, is it really you competing against huge mom and pop operators or potentially have the markets pretty much to yourselves?
Yes. I mean, the competitive set in the key markets we compete are quite different, the only common denominator is that we compete with Olympus most everywhere worldwide. For this plan, the markets that we’re really looking to see good growth promise obviously hitting good returns from our investments in the UK where we bought two companies over the last two years. We have invested significantly in building our organic sales platform in Germany, and Germany should be a very meaningful market for us five years from now. And then, we’ll continue to invest in other key markets where we are through our investments or acquisitions are going for the market leadership position sort of pretty quickly which we now have in the UK and Italy; we just set our team now in France as well. Canada is another great example, it’s a great market, high standards in terms of infection prevention and the team we’re setting up there now will cover not just our endoscopy business but will cover all three of our verticals and become a real Cantel Medical from Canada perspective. So, a lot of good growth opportunities in good markets with good pricing and good medical standards in the five-year plan.
Thanks. And then finally and I know you talked about new products being one of the initiatives in terms of the growth you’re looking for. I don’t know, are you betting on any one or two products or is it more question of offering a broad portfolio that you feel comfortable about?
We are really -- one of our strengths is that we do stay really close to our customers and understand what they need for the future. And we have not been sort of a one product company. We’ve been making sure that we advance infection prevention in all three verticals, we’re looking for new technologies, and sometimes we develop these and sometimes we acquire these. And if you take for example the dental and waterline business that we acquired now about 18 months ago, it’s a great example of products that we have put into our portfolio, has high growth potential, great margins and solving critical need in the dental office and could turn into a meaningful franchise over the years.
Meanwhile, most of our R&D activities are towards both capital equipment in endoscopy and our water business and then of course to continue to exceed our procedure room business. We just launched a couple of new products here over the last few quarters to continue to build on that franchise. So, the meaningful addition to our pipeline and we’ll always aim to stay ahead of the competition in terms of technology.
Okay, thanks. And quickly, Peter, I apologize if you mentioned this earlier, but I was wondering if we exclude the tax adjustment related to the accounting changes, what should we look for in terms of normalized tax rates for fiscal 2017?
Yes, I think it’ll be in a 36%, as we think about the strat plan in year one and year two, we’re continuing to go direct in some of these international markets. And one of the outcomes of that is typically in year one and year two, we may not make money from a statutory perspective. But it gives us a tax asset that we need later on but in year one, year two tends to be a headwind in the tax rate but obviously as we get to year three, year four, year five, those markets scale on turn, we should be able to use those NOLs to drive some acceleration of improvement in the effective tax rate in the out years of strat plan.
[Operator Instructions] We now have a follow-up question from Mike Matson from Needham & Company.
Thanks for letting me back on. These should be fairly quick. I know last quarter I think you said Custom Ultrasonics I recall kind of contributed about 5% to your endoscopy growth. I was wondering if you have the number this quarter. And then of the 15% growth that you’re targeting in your five-year plan, how much of that do you expect to be from organic growth?
Yes. So, I’ll take those. On Q4, the one-time CU lift was about a 114 units. So, to
monetize that, it was just over $4 million or about 6.1% growth. So, you can think about the endo organic at 28.5, ex-CU, it was 22.4, so very strong still. And then on a full year basis, just under about $10 million on about 259 units, which is about 3.1% growth year-over-year. So, again full year endo was 27.1% organic, so ex-CU still would have been 23.3%. And then, if you thought about the recipe, as we think about the strat plan, again aspirationally, we’d like to think that we can see a path to 8% to 10% organic and try and add 500 basis points acquisitively each year. Every year is going to play out a little bit differently. But from a generic kind of review, the full five-year period, that’s probably the best insight we could give.
Okay. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Jorgen Hansen for closing remarks.
Thank you, Sherry. Thank you everybody for calling in. I look forward to speak with you all at our first quarter financial 2017 call in December. Thank you.
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