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Cantel Medical Corporation (NYSE:CMN)

F2Q08 Earnings Call

March 6, 2008 11:00 am ET

Executives

Charles M. Diker - Chairman of the Board

Andrew A. Krakauer – Executive Vice President, Chief Operating Officer

Craig A. Sheldon – Senior Vice President, Chief Financial Officer

Steven Anaya - Corporate Controller

Richard Moyer – Investor Relations, Cameron Associates

Analysts

Michael Gaugler- Brean Murray, Carret & Company

Mitra Ramgopal - Sidoti & Company

John Rogers - Ferris Baker Watts

Operator

Greetings ladies and gentlemen and welcome to the Cantel Medical Corp. second quarter 2008 conference call. At this time, all participants are on listen-only mode. A brief question and answer session will follow the formal presentation.

If anyone should require the operator assistance during the call, please press “Star 0” on your telephone keypad. As a reminder, the conference is being recorded.

It is now my pleasure to introduce your host, Mr. Richard Moyer, from Cameron Associates. Thank you sir, you may begin.

Richard Moyer

Thank you Ryan. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements. Forward-looking statements involve risks and uncertainties, including without limitation the risks detailed in the filings and reports with Securities and Exchange Commission. Such statements are only projections and actual results may differ materially from those projected.

Now I would like to turn the call to over to Scott Jones, President and CEO of Cantel Medical. Go ahead Scott.

Scott Jones

Thanks, Dick and good morning everyone. Welcome to our second quarter 2008 earnings conference call.

With me today are Charles Diker, Chairman, Andrew Krakauer, Chief Operating Officer, Craig Sheldon, Chief Financial Officer, Steven Anaya, VP and Corporate Controller of the company.

We’ll all be available for questions and answers after our formal remarks.

I think what you’ll see here today is a Cantel from an operating perspective is on very solid footing. Our legacy issues in terms of the clean up of the Dyped MDS Unit in Europe are behind us.

We’ve reported strong top line growths, strong growths in EBITDA margins across our segments. We’ve either held or improved our operating margins, we have very strong balance sheet and now more than ever we have a strong flow of new product introductions in our pipeline.

So, the common substance as it is that we have really injected a marketing and R&D character to the company and we’re making terrific progress there. As we look forward into the future, the question we asked ourselves is, “Where is the catalyst, How do we create fast growth in an otherwise moderately growing industry?”

And as we look at those questions strategically, there are three very clear elements in our mind. Number one is to create breakthrough product introductions that will change the way that infection prevention and control is done.

Number two is to leverage our very solid branding reputation across the market by creating product extensions and successfully watching those. And number three is to leverage our existing and our new products and move them into alternative markets.

In all three cases, we are very active and in our forthcoming basis we will be announcing some exciting news in the not-too-distant future. About a year ago, 12 months ago, we delineated five key strategic priorities for the company.

And I personally, I’m a believer of saying what you do and doing what you say. So, in order to be accountable for the execution against those priorities, our first list down then will go back, will run through our progress to date and then we’ll go through the financials.

By way of reminder, the five goals were as follows:

1. Build in our water and healthcare disposables divisions both by acquisition and internal growth to achieve more significant scale.

2. Improve our endoscope reprocessing segment and successfully warrants the premium care MDS product in the US and Canada.

3. Acquiring developed proprietary products to fill out their product lines and distribution channels.

4. Manage and grow our dialysis business profitably.

5. Invest them and advance our marketing sales and R&D initiatives to capitalize on our innovation, distribution networks and long-standing customer relationships.

So, I will give you a brief update on those and I think you will agree that we’ve made substantial progress.

Number 1. Repeating a build on the water and healthcare disposable divisions. As you well know, we’ve closed on five acquisitions in the last 12 months. The GE and DFI acquisitions alone added approximately 50% to the size and scale of our water business.

The GE business, since closing last April has grown at sequentially at 15%. So, water is clearly our largest and fastest growing business at this point. In the healthcare disposable segment, we closed on the Twist and Strong acquisitions. Those are proprietary hard growth products that are being very well received in the markets.

So, in term of objective1, we’re going to go ahead and check the box there, we feel as though we’ve done a good job at that.

Number 2. Improve our endoscope reprocessing segment and launch to premium tier product. As you all know, the MDS was cleared by the FDA and Health Canada earlier this year. The product has been introduced; it has been very well received, since it is a very high quality product. In terms of revenues, our Medivator sales force is really hitting stride in achieving good steady growth. Net profitability has improved significantly last year although it’s been slower going than we would have liked.

We believe that the legacy issues are behind us and cleaned up of the respected Dyped in Europe. We’ve closed under our Verimetrix transaction and expanded our product line with the very attractive leak testing products. So, all and all the endoscope reprocessing segment is on solid footing and progressing nicely.

Number 3. Acquire and develop proprietary products. Again, the Twists, Strong Dental and Verimetrix are all really good examples of acquiring proprietary products that are unique in their space, as exciting or perhaps even more exciting.

As I’ve mentioned earlier, our pipeline of new products is stronger than ever and we are expecting a good strong flow of new products. Good examples of those products that we’ve introduced over the last few months, over the last year would be the A Checks model heat sanitizable water systems being really well-received in the marketplace. Our short checks sterilization pouches which is a new and novel products in the dental area and we are working on other breakthrough innovations which we will announce as soon as testing is complete in FDA submission is also complete.

Number 4. Maintaining growth of the dialysis business. As you know, in the last quarter of 2007, we achieved double-digit growth in dialysis. We’ve maintained 6% growth year to date to 2008. Our worldwide sales of Renetron Units have increased by 25% during the quarter and 7% in the first half of the year. So, we are moving along nicely in that segment.

The last objective which I think in the latter way, this is most exciting. Investment and advance our marketing sales and R&D initiatives. It’s also a good segue to this financial discussion. We’ve made very significant recent investments to support future growth in this area.

Our earnings per share this quarter are reflective of these investments for returns are yet to come. I would like to highlight that there is a difference in these investments versus the investments we had talked about to the last few quarters with regard to finishing up the Dyped MDS product.

These are purely up for the expansion of marketing and new product development. For future growth over the last six months across these segments, we’ve added approximately 15 new marketing and sales individuals to accelerate our growth.

Likewise, as you know, we’ve added a corporate market development function and frankly we have a robust set of leads that we’re tracking and we expect to announce a couple of key agreements in that very near future.

Let’s look at the last, the marketing in R&D area. We’ve implemented a consistent product management approach with a number of new products launch to date and we now have the most solid pipeline ever with specific launch date go to market plans and those reach out over 20008 and 2009.

Let’s move in to the financial overview. As I’ve mentioned earlier, we have continued strong core growth of 18% top line for the quarter to $60, 910,000 and 18% likewise for the half to $120,915,000.

Conservatively stated, this equates to organic growth of 6% for the quarter and 7% to the year and the reason I say conservatively stated is that by way of a reminder that GE have acquisition and subsequent growth are not in most numbers. And that is a 15% sequentially.

Likewise, our EBITDA for the second quarter is $8.2 million which is 15% increase over last year second quarter and $16.1 million for the first half which a 19% increase commensurate with sales growth.

Now, we reported $0.13 for the second quarter versus $0.14 on the corresponding quarter of ’07. That includes $0.02 in stock compensation versus $0.01 for the corresponding quarter of last year and about $0.01 in the unfavorable currency exchange that we’ve experienced over the last quarter.

The difference in our earnings per share is really reflective of our recent addition of these marketing sales resources as well as some incremental interest expenses, on fairly recent acquisitions which are just now turning accretive.

Our balance sheet remains strong at $2.1 at multiple debts EBITDA and we are very actively pursuing a number of acquisitions as always and we look forward to announcing those once they are closed.

Taking a look at a couple of other meaningful operating metrics in the second quarter. Selling expenses remained at 11% of revenues while revenues have grown by 18%. Again, this is completely reflective of the investments in incremental marketing in sales resources.

G&A as a percent of sales has decreased from 15.6%-14.7% exhibiting some operating leverage as we grow the business. Now, one of our bigger challenges is in the area of gross margins and not unlike the rest of America with today’s economy. We are facing into higher oil prices, transportation prices, raw materials and manufacturing expenses. In fact, in one of our divisions where we utilize plastic resins we ended up within the last 90 days, resin prices have increased by 30%.

So, you know, we take that into consideration and its part of our strategy and our tactic looking forward is how we go ahead in and negotiate harder to get better pricing on our raw materials as well as passing along those costs to the best of our ability to our customers. Craig will talk about that more in detail when he speaks.

In the second quarter, our gross margins were 35.3% versus 37.8% in last year’s second quarter and 36.9% in the first half of 2008. If we were to back GE out of those calculations, the gross margins would be 36.1% for the second quarter. And as I say, Craig will address this in more detail and suffice it to say, that we are implementing a number of initiatives to get that gross margins back to where it needs to be.

Let’s take a closer look at the segment level. We’ll start with water which is our largest segment. Revenues have grown 78% to $18,069,000 in the second quarter as 19% without GE and 69% growth to $34,022,000 for the half which equates to 11% growth without GE.

As mentioned, the sequential growth in the GE acquisition has been about 15% this close. Operating margins in the segments were 8.45% for the second quarter and 8.3% for the first half of the year. We achieved record sales in the medical side of business and the second quarter; the backlog is in an all-time high.

In the second quarter, we delivered and commissioned our first US purifier system and I’ll explain that. Earlier in the year, we delineated a new program that we have called the fast track program. The fast track program entails modularizing our products so that we can deliver products faster to customers, increase our inventory turns and thereby increase our cash flow. That’s been a very large success with our series 4400 product in the dialysis and medical area. We’ve now transferred that success over to the commercial and industrial area and that’s what our US purifier system is.

It’s a platform that delivers a modular US pharmaco PF purified water system which is targeted to the medical device, cosmetic and topical industries. So, we’re looking for the good results there.

Likewise, our portable RO system sales have increased very substantially since the second quarter of last year. The portable systems are a less expensive system that can be used virtually anywhere in the acute care or hospital setting and likewise as we begin to hear about home dialysis. This is a great product to meet the needs of the home dialysis environment should that trend heats up.

Next segment, dialysis. Revenues were comparable to last year’s second quarter at $14,692,000, an increase by 6% for the first half to $30,147,000. Worlwide Renetron units were up 25% for the quarter and 7% for the half. But they are offset by some declines in international concentrate sales by way of reminder, concentrate sales particularly international sales are episodic to get larger orders and they don’t come predictably or flow predictably.

The good news is that virtually all of our margin is really on the product side in the chemistry. So, having a drop box in dialysate is not such a big deal. Operating margins were held at 15% for the second quarter in the first half for the year. Those are comparable to last year’s operating margins.

Healthcare disposables. We achieved an increase in revenues of 2% to $13,985,000 for the quarter but due as you recall to distributor consolidation and one large one-time order in the 1st quarter. The first half calculations would give us the decline of 4% to $27,151,000. Operating margins were 14% for the second quarter and 13.5% for the first half of the year.

Again, comparable to last year’s operating margins. The effects of the consolidation of the dental distributors and of one-time depletion of inventories are behind us. We don’t foresee any other further consolidations in the industry but clearly there is no guarantee. We don’t have a crystal ball and we don’t know what will happen in the industry but certainly we are in good shape now vis-à-vis the consolidation that happened earlier in the year.

Last month, at the American Dental Association meeting, we introduced the short check sterilization pouch product line. And this is new proprietary product line for sterilization in both the dental and the physician’s offices.

Why is the product different? The product is the first and only sterilization pouch with internal and external multi parameters such as time, temperature and presence of stain. It is a truly a unique product and was very well received at the dental meeting.

Likewise, we introduced the comfort plus premium saliva ejector which is the first significant improvement in saliva ejectors in many years. It increases patient comfort with no loss in evacuation pressure.

Endoscope reprocessing. We have achieved 15% revenue growth in the second quarter to $10,799,000 and 23% for the first half to $21,944,000. Our Medivator’s direct hospital sales and service force really is at stride and we’re focusing heavily on the conversion of direct sales to the install base for our chemistries, consumables and service. Those of course are the higher margin products.

We significantly improved that penetration and in fact have doubled the sales of those key products in the last 12 months. Now, with the addition of the Verimetrix proprietary leak test system, we’ve expanded our product line, we’ve got more products in our basket, more solutions for endoscope reprocessing customers. And I think this is a great example how we build value in an existing segment.

This achievement profitability last quarter operating margins on the segment has been sustained at comparable rates versus the prior quarter and our expected to continue improving over the next 12 months.

In the other segments which is our last segment which consists of specialty packaging and therapeutic filtration. Revenues have declined slightly. Again, very small segment declines slightly by 5% in the second quarter to $3,365,000 but an increase by 4% over the first half to $6,851,000 and again, I use the term episodic which has episodic sales in these specialty packaging segment due to the nature of sales there. We did have a large order in the first, and last year's second quarter.

Operating margins were 22.5% for the second quarter and 19.8% for first half of the year. We've got strong sales in the prime margin training business in the second quarter. With now our last, Craig Sheldon to go through a more specific financial detail and we’ll come back to wrap up and we’ll take questions.

Craig Sheldon

Thank you Scott and good morning everyone. What I wanted to do is just spend a couple of minutes and go through the press release that you have in your hands that went out this morning. And I wanted to start it off by just quickly running through the impact to some of the acquisitions that we’ve done the last six months, six to nine months.

Starting with GE water, which as you well know, we acquired GE water on March 30, 2007. That was the end, near of the end of our 3rd quarter last year. So, the GE acquisition is fully end of in the results of operations both for the first quarter and the full six months of fiscal 2008 and that is not included in the comparable periods of last year.

And as Scott has indicated earlier, we have a very strong performance in growth from GE throughout this fiscal year. The Twist acquisition on our healthcare disposable segment, small acquisition that we did in July of 2007, again, here we find excellent results from Twist, since we acquired that company. Twist is also included both for the full quarter as well as the full six months of this year and it’s not included in the comparable periods from last year.

On addition, we did as you are aware of, three small acquisitions in our first quarter fiscal 2008. "DSI", small water business included in our water purification segment on August 1st, the "Strong Dental" acquisition which was closed in the late September and the "Verimetrix" acquisition which was a mid-September acquisition, all that was in our endoscope reprocessing segment.

All three of these acquisitions as Scott has alluded to represent a product line extensions. They’re fully included in the fiscal 2008 results from the days of respective acquisitions. So they’re all in there for the full quarter and the second quarter but only part of the six-month period and they are not included in last year’s comparable periods.

I mean, really all these other than GE water, again because they were small acquisitions although clearly adding, you know, incremental income to the company were not significant as far as the accretion at this point.

Looking at the income statement analysis, Scott mentioned sales in the quarter up by 18% compared to last year and for the six months, the increase was 18.4%. And the organic growth without GE is 6.4% for the quarter and 6.8% to the six months and also just to repeat what Scott said because this is important, we are not really taking credit in the organic growth for the fact that we have fairly significantly grown the GE business since we acquired that company. But it is GE products; we’ve considered that all as part of the acquisition growth.

So, all in all, pretty good performance on the top line. As the gross profit of the company is 35.3% in the second quarter. That compares to 37.8% in last year’s second quarter and it was down for the six months as well. Also 35.3% of the six months that compares to 36.9% in last year’s six months.

We’ve had a number of issues that have impacted gross profit percentage and I do want to spend a bit of it here is because it is a very important area for the company. Scott went through a couple of them but there are few more issues that we’ve had to deal with.

I wanted to start out with the GE business. We had mentioned this in the past that the GE business comes with margins somewhere in the area of 28.5% so right off the bat; we are bringing our fairly significant business into our company that has average margins lower than the prior average of the company.

So, right there at that would be somewhat of a drag on a gross profit percentage. And I would attribute approximately 1/3 of the decline in the gross profit percentage specifically to the mix that came in with the GE acquisition.

And I am going to come back to the GE acquisition in a second. Much more of other sale mix is concerned; we definitely have gotten hurt there as well. So, although the sales were very strong, we haven’t had the favorable sales mix so far this year.

I give you a few examples of that, the face mask sales have been down compared to the prior year. That was principally due to some rather significant orders for the flu preparation sales that we had gotten the last year.

And we haven't had a repeat of that thus far this year; the dialysate concentrate business particularly in the 1st quarter of this year was stronger than last year. And that is you know is a very low margin business. So, that’s brought the margins down. We’ve also just continued to have to battle some price pressure in our dialysis business on the sales scale on to large national change. So, although that business has been quite significant, the other pricing there has always been a challenge. So, we continue to work on that.

We go back to GE for a moment, in addition to the fact that we’ve brought a 28.5% margin business into the company. The transition of the GE business has been something that has occupied a lot of our time in the first six months of this year, as you probably are aware, we have mentioned this last quarter. We have now completed the transition. The GE business has moved into a new manufacturing facility on our pre-existing campus out in Minnesota, where we have our Minntech business. We spent an awful lot of time and effort and man hours this year so far getting that business set up.

That has brought a lot of cost into the company, a lot of over time that has to some extent been a drag on the margins in our water business. So, they’re not good from that perspective. We anticipated that that would happen and the good news there is that is a very correctable situation. That overtime will now disappear. We certainly don’t expect a repeat of that as we move into the second half of the year. We do view the transition as substantially completed at this point and we fully expect to see meaningful improvement on our gross profit percentage on our water business.

So that’s very good news and I do want to mention one more point on the GE 28.5% margins that that business, I had mentioned this last quarter. The operating expense structure for the GE business is very, very efficient. So, although it has hurt us on some of gross profit percentage line, it is definitely helped us on the operating expense area. And that’s something that’s really important to see that whole, the whole picture with GE.

The next item in terms of gross profit, Scott had mentioned the manufacturing cost issue that we’ve faced. We have seen this in many areas in our business from chemicals, resin to paper and many other areas as well, that is largely a factor of the economy. We have worked extremely hard to negotiate the best prices that we can get. There is an ongoing process. Wherever we can, we have passed price increases along to our customers which are been very helpful to absorb, you know, good chunk of those price increases.

But this is an ongoing battle that we’ll have and we will not stop working hard to contain these cost increases because it is clearly having an effect on our gross profit percentage. We’ve also seen increases in the cost of transportation largely related to the cost of oil. Here, we have done in my view, particularly a good job, particularly; I mean our Minntech business which is dialysis and endoscope reprocessing, of passing those cost increases along to our customers, to get them, to help absorbing some of those cost. But nonetheless, has been a factor on the margins as well.

But I guess on summary on the gross margins, it clearly has our full attention at this point. We have already taken corrective action where we can. As I’ve mentioned, it’s an ongoing process. We anticipate taking further corrective action down the road. We continue to look at where our customer prices, our position and what else can be absorbed along those fronts and as I’ve mentioned, in terms of the larger group, we fully expect improvement on those gross profit percentages as we streamline the business and complete this transition of the GE business.

Moving down to operating expenses, for the quarter and of course we’re going to see year-over-year increases here for quarter, 11.7%, and for the 6 months, the year-over-year increase is 13.9%. Fully expected, you know, we have done the five acquisitions in the passed nine months. So we have all the infrastructures of those acquisitions that we’ve had to absorb. With sales increasing over last year, we’ve naturally paid our higher commission to expense on those higher sales. And by the way, the infrastructure of the acquisition has included pretty substantial amount of intangible on asset amortization which is down in the G&A area in our income statement.

And when you see the 10Q that comes out next week, we will, for the first time on our cash flow statement be clearly breaking out the amortization versus the depreciation because the amortization continues to be a big number and I think it’s important for everybody to understand exactly how that is impacted the income statement.

We also had some severance expense associated with our Netherlands business. We mentioned this in the first quarter that we have had some there and have a little bit more to come in the second quarter and so that is now happened.

We have also had some impact on the foreign currency which on the bottom line basis has cost us a penny on the second quarter and we actually taken some measures to hedge and minimize that number would have been at least doubled that had we not had some hedging programs in place. But we’re looking at further action where we can hope to minimize the future impact of the currency.

But those are some of the bigger reasons for the gross or increase on the operating expenses. Now, when you look at those expenses as a percentage of sales, the picture looks pretty good. For the second quarter, operating expenses where 27.5% sales, that’s down from 29.1% in last year’s second quarter. For the six months period 27.7% of sales versus 28.8% sales last year, and again, that’s display all these additional amortization that we’ve had to absorb.

So, we’re pretty pleased with that picture. We feel that the operating expenses are well controlled. There are always areas where you can continue to assess and where you might be our cut back in expenses and we will continue this to work hard in that area but we do feel that we’ve leverage our sales pretty well.

But in terms of operating income, then these all translates in the growth on that line of 4.7% on the second quarter versus last year. An 11.62% gross, both are gross numbers versus the comparable periods of last year.

At the interest expense line is completely reflective of the borrowings that were necessary to do the acquisitions. We are very optimistic in this area as well. Both from the standpoint that we will continue to pay off debt as well as the fact that was the reductions and the interest rates and the way our interest expense is structured right now.

We are predominantly on livewire contracts that are staggered over various time periods over the course of the next six months or so in a very gradual but consistent way. The contracts that we have will be rolling off. They’ll be replaced with new contracts at significantly lower interest rates. So, we do look for a predominantly improvement in this expense as we move down the road.

Another area where we expect more improvement is in income taxes. As you may recall, we have really battled with some higher tax rates over the past couple of years which is almost entirely related to the fact that we were losing money in our Netherlands operation and unfortunately cannot record income tax benefits against those losses.

We expected that those losses will continue to come down. In fact, they have. I am pleased to report for the second quarter that our tax rate is now 40.4%. Our effective tax rate and our pre-tax income that brings our year to date effective tax rate down to 41.6% both figures much lower than last year, I’m sorry, let me repeat those numbers. For the quarter, the effective tax rate 40.4% of for the six months, 41.6%, both numbers below the prior year numbers.

Yeah, I still feel we have room for improvement there. I feel the normalized effective tax rate on the company should be closer to 39%. We know that because we know what all the statutory rates are in the various jurisdictions and by far the largest businesses in the US where we have rates below 40%. So, we will continue to work on those taxes and I am very optimistic that we can bring that down below 40% as we move toward the end of the year.

So, that’s that pretty much is the picture on the tax area, the earnings per share than as you can see was $0.13 versus $0.14 last year and for the year-to-date period at $0.25 the same as it was in the prior year six months.

Taking a quick look at the balance sheet, it remains very strong. We have $14.2 million in cash equivalence on our balance sheet at the end of January, $51.6 million in the working capital at the end of January compared to 40.8 million at the end of July. So, that’s going up quite a bit.

As the current ratio has shown considerable improvement, 2.6 to one versus 2.1 to one of the end of July of funded debt, alright is now at 66.8 billion, of course going up in the first quarter is we did these three additional acquisitions. But it is down from $17.5 million in the end of October. We brought that down closed to $4 million in the second quarter alone.

Debt equity ratio remains in very good shape at .41. We continue to have an incredibly strong relationship with our three bank syndicates that we’ve been with in the same three banks for all large national players. We’ve had this relationship now for many years and I consider this to be as strongest as ever were.

Shareholder’s equity has increased with now at a $163.8 million at the end of January. That’s up from a $155.1 million at the end of July. But we will continue as we move to the second half of our year.

Continue our focus on optimizing our business performance both from the existing businesses as well as getting more incremental value from the acquisitions and in the other areas that Scott mentioned, and definitely looking to continue to reduce this debt level as we move through the balance of the year.

The EBITDA jut the repeat the numbers quickly that Scott had mentioned earlier. For the second quarter, EBITDA is $8.2 million up substantially from the $7.1 million in last year’s second quarter and for the year-to-date period, $16.1 million compared to $13.5 million in last year’s six-month period.

The accounts receivable is sitting at about 51 days. So, that’s comparable to where it has been in the past. The inventory turnover is $4.8, that’s approximately where it was in the past. The inventory balance is a little bit higher right now but that is due to plants strategic buy-ins of products in three of our segments before price increases. Se, we’re definitely keeping our eye on our inventory levels.

So, that’s a quick look at the press release. At this point, Ryan well. I turn the call back over to you.

Scott Jones

Yeah, Craig, thank you. I’m going to really abbreviate my comments because we’ve gone fairly long. I think, the bottom line is we got our tie on the bone. We have got a lot of moving pieces. We’re making progress across the board.

Surely, our top priority is to get this progress at the top line and the margin line all the way down the EPS so that we can turnout to continuous EPS growth. So, we feel as though these investments we’re making now were, as I’ve said earlier, let’s focus on mediation and completely focus on high growth opportunities for the future and we look forward to announcing some of those before too long. So with that, Ryan, operator, would you please turn over for, turn the call over for questions.

Question-and-Answer Session

Operator

Yes. Thank you ladies and gentlemen. At this time, we’ll be conducting a question and answer session.

(Operator Instructions)

Our first question comes from the line of Michael Gaugler with Brean Murray, Carret & Company

Michael Gaugler - Brean Murray, Carret & Company

Good morning everyone!

Scott Jones, Craig Sheldon

Good morning Mike! Good morning!

Michael Gaugler - Brean Murray, Carret & Company

I wanted to follow up on some of Craig’s comments regarding interest expense. I was wondering when we could expect to potentially see interest expense decline and if you have a quarter that would be terrific.

Craig Sheldon

Before 1:00 am, on the gross hour basis, you will not, clearly not see that in the 3rd quarter because when you look back at the timing of the five acquisitions, the first of the five with GE, which was the big one. And we didn’t borrow for that year until March 30th.

So, even in the 3rd quarter, we have a full quarter of interest expense for GE compared to only one month in the prior year. Then as we move into the 4th quarter, the GE interest expense will be in there for both quarters but its still won’t reflect the borrowings for the other four acquisitions.

So, that will take a while to kind of work its way through. So, that’s the answer in the question on the gross dollar basis. As far as the rates are concerned, I know you can’t see that, just looking at the press release, but rest assured the underlying borrowings already reflect some of the impact of the interest rate decreases by far does not reflect the full impact.

As we, I would see by the end of July, the end of our fiscal year, almost all of our…,in fact by end of June, almost all of our borrowings by that time will have rolled over and can do that which will be at significantly lower interest rates. So, that’s very good news as we move forward. And since that is already happening in March and that will happen in the gradual 3919 for the balance of the year. I hope that answers your question Mike.

Michael Gaugler - Brean Murray, Carret & Company

It does. And then back on the endoscope reprocessing segment. And you guys give sales and didn’t really give any indication on margin. Can we assume that was basically a break even?

Craig Sheldon

Actually, it’s between 2% and 3% consistent with last quarter. And it’s same as last quarter.

Michael Gaugler - Brean Murray, Carret & Company

Alright.

Craig Shedon

And that’s net of, frankly that’s net of, you know the tail end of the clean up. It has got a little severance in there, a little bit of warranty adjustment. So, I think we indicated last quarter that there would be, you know, we would have the tail end of that legacy class.

So, net of those were comparable for the prior quarter.

Michael Gaugler - Brean Murray, Carret & Company

Are you looking for increasing profitability in that segment now on the sales forward basis?

Craig Sheldon

Yes, you bet. Well, we are looking forward to increased profitability. I couldn’t tell you Michael, you know, whether that’s going to be linear or non-linear over, you know, over the quarters but certainly, you know, we have a lot of optimism as far as it’s getting back to a very typical, typical margins in that segment as we go forward.

Michael Gaugler - Brean Murray, Carret & Company

And then one final question. You have alluded to some acquisition opportunities. As you look across the business segments, where do the most promising opportunities lie at the moment?

Craig Sheldon

Well, certainly, you know, we love the water segment and, you know, I would think that that would be a priority one. We are very committed to the healthcare disposable segment and continue to look at ways that we can take those products into the acute care setting both through acquisitions as well as the alternate channel program.

Those are the two primaries but, you know, if we see, you know, obviously synergistic acquisitions in other segments, we will evaluate those on a one off basis but primarily those two segments.

Michael Gaugler - Brean Murray, Carret & Company

All right, thanks gentlemen.

Craig Sheldon

Thanks Mike.

Operator

Once again, if you have a question, please press “Star 1” on your touchtone phone.

Our next question comes from the line of Mitra Ramgopal of Sidoti & Company.

Mitra Ramgopal - Sidoti & Company

Yes. Hi, good morning guys!

Craig Sheldon

Good morning Mitra !

Mitra Ramgopal - Sidoti & Company

I believe you said the organic growth in the quarter was about 6% and I think the first half is 7%?

Craig Sheldon

Yes.

Mitra

Where do you see that going over the remainder of the year and as you look out to fiscal ’09?

Craig Sheldon

Well, you know there are a number of off-setting components to that. You know, we’re ratably climbing in our Medivator’s sales. So, that’s, you know, that’s done the nice job for us. We’ve got terrific growth in water. You know, we see a return to some growth in healthcare disposables.

Our underlying markets, you know, if you were to blend all the underlying markets, you probably see 5%-6%. So, we’d like to continue outpacing our markets and, you know, once we introduce some of these real novel product editions, you know, we’d like to see that take off beyond that.

Mitra Ramgopal - Sidoti & Company

Now, do you see that sort of getting back to maybe a double-digit organic growth or you’re going to be even more progressing sort of increase price to do acquisition with the, generate them this on top line.

Craig Sheldon

Well, it’s a good question and again, embedded in that question is what’s happening with the economy, you know, we are largely recession proof. You know, most of healthcare is but that doesn’t mean that we won’t be impacted down the line if the economy gets worst.

So, if you take the economy out of the question, you know, we’d like to see high single digits maybe than low double digit growth but again, it’s hard to take the economy out of the equation.

Mitra Ramgopal - Sidoti & Company

And I guess, you know, as you’ve missed buy back acquisitions over the past six, nine months, you really haven’t seen it impacting the bottom line that’s far first half of ‘08. Is it prudent to be actively looking to make acquisitions or just kind of focus on what you have and try to just get margins improved and just take care of, you know, the base business…

Craig Sheldon

Yeah, actually Mitra, you know, we have a good track record for integrating acquisitions. The GE, one that we, you know, talked about often is a great example of that. The three proprietary products that we have integrated, two in dental and one in endoscope is doing quite well. It’s just a matter of, you know, when we do acquisitions, we certainly charge it accretion. You know we always have accretion on day one.

So, you know, If I were to, give you the short answer to that question, we are absolutely bullish of that doing acquisitions. It’s been our history and we’ve proven that. I think we’re pretty good at it.

Mitra Ramgopal - Sidoti & Company

And the other reason I mentioned it is, you know, as you look at the first half, we annualized that you are actually a little at best flat. Maybe, you know, only modest from fiscal ‘07 and so with, you know, half of dozen acquisitions almost, you know, it’s not being at that.

Craig Sheldon

Well, but I wouldn’t attribute that really to the acquisitions. You know, as we’ve said, we’re fortunately beyond the re mediation stage with the Dyped piece in particular. But we have made very substantial investments in top line growths for the future but as I mentioned 15 resources in marketing and sales and we know that that will translate into growth.

So, you know, it may, from the outside in, it may look like we just keep pouring money in and not getting a return. This is a, you know, I would suggest a very different profile of investment and you know, we feel very, very optimistic about the return on these investments. And when the right acquisitions come along, I feel like we need to grab those. You can’t always, you know, as you know, you can’t always control the timing and when the right assets are going to come along so…

So, hopefully that answers your questions?

Mitra Ramgopal - Sidoti & Company

Sure. Thanks again guys.

Operator

(Operator Instructions) We have a question from John Rogers - Ferris Baker Watts.

.

John Rogers - Ferris Baker Watts

You mentioned high amortization cost from acquisition and then you also had some increasing commodity cost. Can you quantify that?

Richard Meyers

Craig, do you want to address that?

Craig Sheldon

Yeah, I think the amortization that will be in the Q. We could hold you off until we’ve filed it. Oh we put that in the release, okay. We do not have that in the release. So, if you go to the 3rd piece in the release. So, with that new reconciliation we put in there for EBITDA, you can see the amortization is broken out on that page.

For the year-to-date was about $2.8 million versus $2.3 million in last year’s six months.

John Rogers - Ferris Baker Watts

How much of that is ongoing and how much of that is amortization of customer list or things that something that’s going to be more temporary? It’s going to roll off after a year.

Craig Sheldon

Yeah. All of that, a 100% of that is amortization the way we do in tangible assets.

John Rogers - Ferris Baker Watts

Uh-huh.

Craig Sheldon

Although there are always some pieces rolling off, substantially, that amortization is going to be there for some time into the future because most of that came in for the acquisitions of, you know, Crosstex three years ago. You know, although that might seem like a long time ago from an amortization perspective.

We still have a good life left on those aspects. So, the amortization will continue to be there.

John Rogers - Ferris Baker Watts

And then, as far as commodity cost, how much did that affect you in aggregate?

Craig Sheldon

Are you saying JT? Are you saying raw material cost?

John Rogers - Ferris Baker Watts

Raw material cost.

Craig Sheldon

You know, I’m not certain that I can put my finger on that right at this moment. As I’ve mentioned, you know, at any segment is different, first of all. And as I’ve mentioned, we had about to 30% increase in some of our resins. We had increased in paper but certainly not to that extent. Some increase in transportation and other manufacturing cost. But you know, we could probably thin that down if we try but I don’t have that rate at the present.

John Rogers - Ferris Baker Watts

Okay. Thanks.

Craig Sheldon

Operator, any other calls?

Operator

Seeing, as there are no further questions, do you have any concluding remarks?

Scott Jones

Yes, I mean, we appreciate your support. You know, we are very enthusiastic about the future. We remain confident in our ability to flush out the legacy expenses and really turn this most recent investment into continuous top line and the bottom line growth.

So, with that, thank you very much for your attention and we’ll talk to you soon.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you all to your participation.

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Source: Cantel Medical Corp. F2Q08 (Qtr End 1/31/08) Earnings Call Transcript
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