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Cantel Medical Corp. (NYSE:CMN)

F4Q08 Earnings Call

October 7, 2008 11:00 am ET

Executives

Andrew Krakauer – President

Charles Diker - Chairman

Craig Sheldon – Senior Vice President, Chief Financial Officer

Seth Segel - Senior Vice President Corporate Development and Strategy

Roy Malkin - President and CEO Minntech

Steve Anaya – Vice President and Corporate Controller

Analysts

Michael Gaugler- Brean Murray, Carret & Company

Shawn McMahon – Kennedy Capital

Mitra Ramgopal - Sidoti & Company

Operator

Welcome to the Cantel Medical Corp’s fourth quarter 2008 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Andy Krakauer, President of Cantel Medical Corp.

Andrew Krakauer

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 limitation the risks detailed in the filings and reports with the Securities and Exchange Commission. Such statements are only projections and actual results may differ materially from those projected.

With me today are Chuck Diker, Chairman of the Board; Craig Sheldon, Senior Vice President and Chief Financial Officer; Seth Segel, Senior Vice President Corporate Development and Strategy; Roy Malkin, President and CEO of our Minntech subsidiary and Steve Anaya, VP and Corporate Comptroller.

On Cantel’s third quarter call, about four months ago and my first as President of the company I stressed that I was very optimistic about the future of Cantel and its prospects to grow profitably. While results for our fourth quarter support my continued positive view of the company’s future, I am pleased to report that through the hard work of our loyal and dedicated employees and despite unprecedented cost increases affecting our businesses the company reported its best earnings in the past three years.

We reported fourth quarter earnings of $0.16 per share. This included $0.02 of costs related to the closure of our manufacturing operations in Holland as well as a $0.02 benefit related to a favorable adjustment from a recent reduction in tax rates. In a few minutes I’ll ask Craig to take us through some of the details of Cantel’s financial statements and taxes but first a brief overview of our fourth quarter results.

Our positive results come from good revenue growth excluding the dialysis segment where we experienced a decline of low margin dialysate concentrate shipments which we will talk about later, core growth was 10.5%. We have often discussed the benefit of Cantel’s broad range of infection prevention control businesses where weakness in one of the businesses during the quarter can be offset by strengths in others.

This quarter our favorable performance was secured by very strong earnings in our “all others” segment where sales increased by 9% but operating income increased by 74%. The two businesses included in this segment, namely specialty packaging and therapeutic filtration, are the company’s highest margin businesses.

In specialty packaging it was such a strong quarter with solid sales of our core packaging products. In therapeutic filtration there was a large sale of unique, hollow-fiber filters that is an integral part of a customer’s artificial kidney product which will soon be released in Asia. While the magnitude of this order may not be repeated every quarter this order was approximately $350,000. It is a good example of the many new applications for our unique fiber technology that we are co-developing with several biotech companies.

As you know we are heavily investing in sales, marketing and R&D in our endoscope reprocessing business and we are now starting to reap the benefits. In the fourth quarter we enjoyed a sales increase of 14% and this increase is due to gains in most product categories including equipment, U.S. service and disinfectants. Because of non-recurring costs related to the closure of our manufacturing operation in Holland and the cost to settle some remaining distribution issues in Europe, we recorded a small fourth quarter loss for the segment. Excluding these two items, operating income was $400,000 for the quarter versus a loss in the prior year. We expect to continue to see improvements in this business as we go through FY09.

Our direct U.S. hospital sales and service team continues to function well and is consistently increasing our direct share of Rapicide and other consumable sales. During the most recent Society of Gastroenterology Nurses and Associates (SGNA) conference, which is a key meeting for our endoscope reprocessing business we experienced a record number of leads and a very high level of interest in our new products. In addition, just prior to the conference the SGNA published Amended Professional Guidelines that now support the use of our Intercept branded cleaner and the incorporation of automated leak testing into the endoscope reprocessing process which bodes very well for our VeriScan leak detection system which was acquired in the Barometric acquisition about a year ago.

Our Medivators group clearly has the most comprehensive line of products available to the endoscope reprocessing marketplace. In addition, we are optimistic that our U.S. hospital sales and service infrastructure can be further leveraged by our existing and potential feeder businesses.

We also had our challenges in the quarter but they were not unexpected. Despite a sales increase of 6% in healthcare disposables we had a 12% decline in operating income in the segment. As in the third quarter margins were negatively affected by higher paper and plastic costs as well as distribution costs, all associated with higher oil prices. We also continue to make R&D investments and develop innovative new products.

On the positive side, we were certainly pleased to see good sales growth for the second consecutive quarter. This confirms we are benefiting from our sales and marketing investment. We also renewed a key contract with one of our major distributors in the quarter.

To offset our margin and operating profit issues we implemented a broad price increase in August and we are now benefiting from this as well as from a number of new product launches. We remain very positive about this business and the market for healthcare disposables in general.

Our water purification and filtration segment, which is now Cantel’s largest business, showed improved performance this quarter. Sales growth was positive at 12% and this is organic growth as the results of our acquired GE business are now in both periods. Operating income was 2% better than last year’s quarter.

Increased costs for materials and higher distribution costs did hurt performance. Additionally, beyond our core medical water franchise we continue to invest in our commercial and industrial business in a strategy to increase our share in the equipment market. We are still early in this effort. Lower commercial industrial sales continue to give us some overhead absorption issues at our Canadian operation. I remain committed to having the division management to work through various growth strategies and I expect better results in the near future.

To be clear I am very optimistic about the future of our water purification business and I’d like to point out a couple of favorable aspects of the segment. First, our operating income for the fiscal year 2008 grew 24% versus prior year. Second, we are continuing to grow our market leading position in medical dialysis water in the U.S.A. and on average we installed one central water purification system into a dialysis clinic every single day. In addition, our largest customer in this segment has recently entered all our consumables and parts into their online ordering system and asked their clinics to order these products from us. That bodes well for us in the future.

To address our raw material cost increases we are rolling out price increases across all product lines and they are under constant review for adjustment if needed. This is one place where we are benefiting from the investment and implementation of our new ERP system which gives us much greater visibility into our business performance.

In addition, we have several growth prospects in a number of product areas including higher margin sterilants where a major pharmaceutical company has standardized on our Actril product for surface disinfection and other companies are now working on validation of our products.

Further, our HX heat sanitizable reverse osmosis system continues to do well. We just received an order for four systems over $800,000 from one hospital with three units going into their Intensive Care Unit and one going into their dialysis clinic. We also sold over 20 dry fog systems in the fourth quarter. Dry fog is a unique means of disinfecting clean rooms or any room where complete, wall-to-wall surface disinfection is a priority.

Lastly, we are addressing cost and overhead issues throughout all water operations and we see several areas for expense reduction and productivity improvement as we go forward.

In our dialysis business sales have declined by 18%, almost entirely because of the loss of $2.6 million of low-margin dialysate concentrate sales. This was primarily due to irregular international business and highly competitive pricing in the United States where we will not sell at a loss.

Operating income declined by about 9% but operating margins increased to 14.9% versus 13.4% last year. The Minntech team is skillfully managing declines in concentrate through operating efficiencies and manufacturing adjustments as required.

On a very positive note we signed a multi-year contract renewal with a major customer, had record sales for the year of our Renatron Dialyzer Reprocessing equipment and sales [inaudible] were higher for the quarter as sales to our primary user are up by 8%. We will continue to pursue opportunities to grow our re-use business both in the United States and worldwide.

While we will most likely continue to see reductions in concentrate sales, we remain dedicated to maintaining the favorable margins and cash flow from this business.

Now let me just make a brief comment about the performance for the full year of fiscal year 2008. We reported earnings per share of $0.53 which was a $0.03 improvement from fiscal year 2007. The $0.53 for this year included $0.02 of non-recurring items that we mentioned previously, $0.03 related to the resignation of our former president and $0.02 related to the closure of our manufacturing operation in Holland. For a fair comparison we had $0.03 of non-recurring items in the fiscal year 2007 results. Therefore, taking these items into account we had an 11% net income increase from continuing operations which we believe was good performance given the economic challenges this year especially with the large increases in oil and other commodity prices.

As we look to the rest of this fiscal year we have goals and plans to further improve operating results and I’ll come back to this in my summary. That’s it for now for our five operating segments.

Now let me turn it over to Craig Sheldon, our CFO.

Craig Sheldon

I’d like to make a few brief comments on our financial statement. I think I’ll concentrate a little bit more on the balance sheet and cash flows today. I’ll start with the income statement. As Andy has just gone through the sales, for each segment the overall consolidated results as you can see from the press release showed a 2.8% increase in sales in the fourth quarter and 13.8% for the full year.

The gross profit for the fourth quarter was 35.2%, an improvement from 33.8% in last year’s fourth quarter due mainly to product mix and for the full year gross profit was 35.1%, down from 36.1% reported in fiscal year 2007. Again, as Andy mentioned the primary issue for the year with GP were the higher manufacturing and distribution costs at various businesses and we are taking action to address those issues.

I should also mention that in the fourth quarter we incurred $275,000 in restructuring costs related to our Netherlands operation that directly affected the gross margin.

Looking at operating expenses the year-over-year increase for the fourth quarter was 6% and for the full year operating expenses were up over 12%. These increases were fully expected. They were budgeted for this year and they were not a surprise in any manner. In large part the increases in operating expenses related to acquisitions. A few examples would be the infrastructure we took on with the acquisition of GE including adding some people. Also the amortization associated with intangible assets. With the GE acquisition as well as the acquisitions we did in fiscal year 2008 early year, including Strong and Verimetrix, added incremental amortization of about $830,000 which you will see in our G&A expenses.

Also to remind you as we reported in the third quarter we incurred $720,000 charge related to the termination of our former president and CEO. A few other areas we were hurt a little bit by foreign exchange, both for the fourth quarter and the full year due to the weak U.S. dollar. Principally against the Canadian dollar and the Euro. We also invested heavily throughout the year in advertising and marketing, principally in our healthcare disposables business.

Overall, we feel very comfortable that operating expenses were well controlled and as we move forward we will definitely better leverage these expenses against incremental sales.

Moving down the income statement I’ll talk for a moment about interest which is a very good story here. The increase in interest expense for the year, as we mentioned before, is solely reflective of the additional borrowings for acquisitions including again the ones I mentioned before, GE last year and a few acquisitions in the first quarter. In the fourth quarter the interest expense was down on a year-over-year basis. That is a trend that is very important to understand going forward.

The borrowing for GE were now fully in the results for last quarter and now this year and what we are starting to see in the fourth quarter and we’ll see this through the year next year is a combination of lower average outstanding borrowings as we continue to pay down, and I’ll get into that in a little more depth in a moment when I get to the balance sheet, and we are also benefiting from reduced interest rates on our outstanding borrowing. Let me explain that.

The vast majority of our debt is tied into Libor contracts. In fact, most of our debt is currently under 12-month Libor contracts. These contracts extend well into fiscal year 2009. We were very fortunate to get rates before the recent volatility in the Libor rates so basically we are sitting here at the end of the year with our interest expense protected through most of the fiscal year 2009 and again at these very low Libor rates. We are very pleased about that situation.

Overall, we are feeling very confident about our debt position, the borrowing outstanding as well as the interest expense.

Moving down to the income taxes, as you can see from the press release we are very well effective rate in the fourth quarter of 29.4% and for the year 37.2%. Let me explain the fourth quarter. Andy mentioned the $0.02 favorable tax adjustment. What that related to was a reduction that we experienced in the fourth quarter on our New 29.4% and for the year 37.2%. Let me explain the fourth quarter. Andy mentioned the $0.02 favorable tax adjustment. What that related to was a reduction that we experienced in the fourth quarter on our New York state tax rate. It came in two areas and that is very meaningful to us because Crosstex, which is our healthcare disposables business, is located in the state of New York. This gets a little bit complicated but we have significant deferred income tax liabilities on our balance sheet and because of the reduction on the state rate we were required by GAAP to re-date all those deferred tax liabilities now reflecting the lower rate and by virtue of doing that we obtained the tax benefit in the fourth quarter and that is the $0.02 adjustment you see.

I think more importantly for the full year our effective rate was 37.2%. Despite that favorable tax adjustment in the fourth quarter the rate for the year came very close to what I would call a normal statutory rate and that is because of the fact earlier in the year we got hurt with some very unfavorable tax rates caused principally by losses in our Netherlands business.

Now going forward I would expect a tax rate in fiscal 2009 to be in the area of 38%. That will be a normal statutory rate for us but again I would caution as with most companies changes in future tax rates in any jurisdiction can definitely have an impact on our tax rate not only as it relates to current income but as it relates to deferred income tax liabilities on our balance sheet. The jurisdictions that affect us the most are of course U.S. Federal, New York state and Canada and Minnesota as being the four with the biggest impact.

Moving on to the balance sheet just on an overall basis as you can see our overall balance sheet continues to be very, very strong. I will go through a few examples of that strength. At July 31 we had $18.3 million in cash and cash equivalents, $45.6 million in working capital at the end of the year up from $40.8 million at July 31 of the prior year. Current ratio of 2.2 to 1, our funded debt at the end of July was $78.3 million. That compares to $57 million at July of last year. However what is really important here is at the end of October after we billed all the acquisitions our debt position was $75 million so really the relevant comparison is the reduction from that $70.5 million down to $58.3 million, so a significant reduction in borrowings.

Our debt to equity ratio is a very healthy 0.35 to one. Debt to EBITDA is 1.8. Our net debt position at the end of July is $40 million and again that is 10% lower as compared to the end of the third quarter and that is on top of a 15% reduction in our debt during the third quarter so when you combine that over the past six months the calculation comes out to be a 24% reduction in our net debt position from $52.6 million down to the $40 million we had in July. That is very significant.

As always we continue to maintain a very strong relationship with our three-bank syndicate which includes Bank of America, Wells Fargo and PNC and we have been in contact with all these banks recently and the relationship is as strong as ever. As I indicated before we have locked into very low borrowing rates on our debt for fiscal 2009.

Our cash flow is equally as strong as you can see from the press release. We have very strong EBITDA figures both for the quarter and the full year. Our EBITDA is 3.7 times our net income so that is reflective of very strong cash generating capabilities of the company. We believe that is a very important metric given the significant amount of amortization in our income statement related to prior acquisitions.

Our cash flow provided by operations was $18.6 million during fiscal 2008. Therefore, virtually every measurement of cash flow you can look at demonstrates very strong cash generation capabilities.

That is a very quick look at our financial statements. I would alert everybody our 10K will be filed on its normal schedule next week either on Monday evening or at the latest on Tuesday.

At this point, Andy, I will turn the call back over to you.

Andrew Krakauer

Just a couple of comments. On May 13 of this year the board approved a stock buyback of up to 500,000 shares. We discussed that on the last call. There has been and continues to be a strong belief among the board and management that at the low prices our company shares have been trading at the market is undervaluing our shares.

As of today we have purchased 97,200 shares at an average price of $9.42. We have been in a blackout period for a few weeks and our blackout will be lifted tomorrow.

I believe it is important to acknowledge some uncertainties with the current economic environment. Obviously it is a pretty fluid situation. The economy is a wildcard that all of us in business have to deal with but I don’t just look at what is going on as only negative potential. The recent decline in oil prices and other commodities and a certainly significant decline in oil in the 80’s today per barrel, could give us a good opportunity to lower some of those raw material and distribution costs both from our fleet as well as at Crosstex where in particular I’ve already had some conversations with Gary Steinberg, the CEO there, already looking for reductions in our costs for raw materials.

At the same time we obviously need to be prepared to react to a possible slowdown caused by economic issues particularly in [mark] to the capital equipment. All of our divisions have contingency programs in place to try to maintain profitability through any kind of economic conditions. Again, this is where Cantel’s broad range of infection prevention and control businesses is a benefit in this uncertainty. Also the fact that 70% of our sales are from consumables and services and are positive as we go into this current economic climate.

In summary, we had a very strong fourth quarter and a positive fiscal year 2008. We have a lot to do to keep improving results. I continue to remain very optimistic as we finish our first quarter here and throughout the rest of fiscal year 2009. I have just a couple of quick points I’d like to point out, part of the reason why I am so optimistic.

One, we have a number of major initiatives through the company related to new product development. Two, we have a major effort ongoing with our alternative channel strategy to sell products into new markets such as the pandemic flu preparedness business. Three, we are focusing our resources on expanding sales of some of our higher margin products. Four, I expect continuous improvement with our U.S. direct sales and service efforts and just generally in the endoscope reprocessing segment. Five, we are taking action to reduce overhead and other costs throughout the company in all the divisions. Six, we have begun a focused effort to look for more synergies between our different business units and there are some. Seven, we will benefit from recent reductions in interest rates as Craig pointed out and a reduction in our outstanding borrowings.

So let me close by saying we have a strong balance sheet and strong cash generation. We continue to look for synergistic acquisitions and we have good borrowing capacity. No doubt there will be changes from many areas and the economy now may be adding to those, but overall I believe there is a very positive outlook for Cantel and I can assure you we have a dedicated, motivated and cohesive team here throughout management and the 850 employees at Cantel.

By the way, just for your information if you want more information on the company we have now posted our most recent presentation that describes the whole aspect of our company and the financials for the full year will be updated this week so you can go onto the website and see all the final details of the numbers and a lot more details about our company. Of course you can always call us here.

Thank you for listening. I look forward to speaking to you all again on our first quarter call which will be in December.

Now I’d be happy to open it up to some questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Michael Gaugler- Brean Murray, Carret & Company.

Michael Gaugler- Brean Murray, Carret & Company

Andy let’s start with the dialysis business for a moment. When I think back to some of the previous calls and discussions the question that comes to mind is has market pricing become irrational here?

Andrew Krakauer

I have to give you my opinion. My opinion is that one of our main competitors continues to lose money and has lost money every quarter for the last few years, so I think there is some truth to that. Nevertheless, that is the market pricing.

Michael Gaugler- Brean Murray, Carret & Company

This is probably a question you’ll have to dance around a little bit, but I think it is worth asking. With that being the case, does it make sense to consolidate the suppliers or exit the business?

Andrew Krakauer

Well, I think the point is we will stay in the business where rational and profitable and make adjustments to our manufacturing facilities as required. There is no reason to make any rash moves. We decided now almost a year and a half ago or more that we just won’t sell at a loss, but while we have a profitable business particularly, as I said, we can ship within a few hundred miles of our Minnesota facility as one example, or if we can continue to find some profitable international business we will continue to serve it.

Michael Gaugler- Brean Murray, Carret & Company

Next I wanted to jump over to the healthcare disposable segment for a moment. Obviously margins eased a bit last quarter. With your current price increases that are underway do you see these margins going back to where they have been historically which has been the mid double-digits?

Andrew Krakauer

Well, I do see all things staying as I hope and we will get back to the margins as we have had in the past year – the prior year ago. Obviously a lot of wildcards in there including the effect of new products and again what happens to the raw material costs. The answer is yes. We should certainly see improvement from the last six months.

Michael Gaugler- Brean Murray, Carret & Company

You spent some time kind of pressing comments about the economy and the potential effects going forward. We are pretty far into the existing quarter here. As you look across the various operating divisions would you say business conditions on a consolidated basis have strengthened, remained relatively flat or declined?

Andrew Krakauer

I would say our business has been okay. Pretty much as expected.

Operator

The next question comes from Shawn McMahon – Kennedy Capital.

Shawn McMahon – Kennedy Capital

I was hoping you could talk maybe a little bit more about the price increases. Can you give an average for each of the divisions?

Andrew Krakauer

Suffice it to say it varies a lot by product. I think on average it may not be for any particular product line but overall why don’t you think in terms of 4-5% price increases just generally.

Shawn McMahon – Kennedy Capital

Those were instituted in August?

Andrew Krakauer

Some of them have been implemented already in the fourth quarter and some are continuing to be implemented in the water business. The healthcare disposables one was implemented in mid-August.

Shawn McMahon – Kennedy Capital

On the cost cutting initiative you talked about can you maybe give a little bit more color there?

Andrew Krakauer

We have had some reductions in people costs including here at headquarters the elimination of one of the positions of COO, our president, with me taking on both roles. In each of our divisions there have been some in programs and some in people costs. I don’t think I’d like to go beyond discussing that over the phone.

Shawn McMahon – Kennedy Capital

Can you give me a sense how much raw materials are a part of your cost of goods sold?

Andrew Krakauer

It varies quite a bit by businesses.

Shawn McMahon – Kennedy Capital

Just like the aggregate.

Andrew Krakauer

If they are in the majority maybe 65-70%.

Shawn McMahon – Kennedy Capital

Is that mainly stainless steel? Is there a majority there?

Andrew Krakauer

Chemicals, paper, poly. Obviously we do have steel in some of our products but it is those other costs that have really been hurting us.

Shawn McMahon – Kennedy Capital

Lastly, Andy if you could maybe talk about what you kind of hope to get from endo. Where do you expect those margins to maybe trend over the next 12-24 months?

Andrew Krakauer

I’m expecting slow and steady improvement. But I don’t think I want to go beyond that. Slow and steady improvement.

Operator

The next question comes from Mitra Ramgopal - Sidoti & Company.

Mitra Ramgopal - Sidoti & Company

I think you had mentioned on the expense side you had a one-time $0.02 related to executive transitions, etc. I’m just wondering if on the top line if there are any one-time sales there?

Andrew Krakauer

What I alluded to in the press release as did all quarters, this quarter had some what I consider unusually large…it is not a one-time. I can’t really describe our air filtration success as a large $350,000 sale that will not be repeated next quarter but we are always looking for those kinds of sales. But I consider that a somewhat of a one-off that you just don’t say is going to happen every quarter. Also while our dry fog business we had $600,000 to $700,000 in dry fog equipment sales in the fourth quarter that comes from really tracking a large order for several months. Overall, that probably represents ¾ of our dry fog sales for the year. So it was probably an unusually high amount for a given quarter so as you start thinking about quarter-to-quarter I guess those two probably come to mind as the clearest of you just can’t multiply that every quarter.

Mitra Ramgopal - Sidoti & Company

Also, you saw nice improvement in the gross margin areas. Is it fair to assume looking out over the next 12-24 months you should through price increases, etc. see steady improvement and progression after the fourth quarter?

Andrew Krakauer

Again, it depends on the mix but we certainly hope so. It certainly is the goal.

Mitra Ramgopal - Sidoti & Company

I know you mentioned one of the things that could help earnings next year would be lower interest expense. Is that assuming you are not actively looking for acquisitions that might require levering up the balance sheet further?

Craig Sheldon

Clearly those comments were geared towards the current level borrowings. When you do acquisitions…we don’t budget for acquisitions. We are always looking for them but you don’t know enough about them to budget for them. So, with our current business environment that is what those comments were intended to mean.

Andrew Krakauer

If we do acquisitions, which we are obviously looking, the benefit on that existing debt is real.

Mitra Ramgopal - Sidoti & Company

How much do you have available on your revolver again?

Craig Sheldon

The revolving credit facility is a $50 million facility and we have $28.3 million available roughly. In that ballpark. We are continually repaying that down but that is about what the lay of the land looks like.

Mitra Ramgopal - Sidoti & Company

Finally, just coming back to the SG&A side with regards to marketing and sales force, etc. are you pretty much where you need to be or do you anticipate increased spending on that front?

Andrew Krakauer

I think probably the important point is that we don’t see any significant large increases in sales and marketing and this is a year that we need to get some more leverage out of the investments we made last year. So I think those ratios should be improving.

Operator

The last question comes from Shawn McMahon – Kennedy Capital.

Shawn McMahon – Kennedy Capital

Just a follow-up on kind of the SG&A and as I look out next year and think about the leverage in the model, obviously you are going to have inflation in there but with your cost cutting you are going to implement here in the near-term that would I guess make that line neutral hopefully for 2009?

Craig Sheldon

Let me answer that first, and Andy if you want to jump in with some other thoughts there. When we very carefully analyzed why the SG&A expenses went up this year. I mentioned in my comments nothing other than perhaps the foreign currency, we lost a few hundred thousand dollars there, and nothing was a surprise. We knew what was coming. Just right off the top there are a couple of big-ticket items which we know for sure won’t be there next year. Specifically, $720,000 charge related to the resignation of our former president. That would be one item. Another big-ticket item would be the restructuring of our Netherlands operation and moving all that manufacturing to the U.S. That is going to be a significant savings going into next year. If you look no further, those two right off the bat I think would be very significant. Hopefully we don’t get the foreign currency effect this year but that I’m not too worried about because it hurt us in the operating expenses but the currency may not hurt you on the sales line as it comes all the way through the income statement.

Andrew Krakauer

I think to balance that it is not always about cost cutting. We will be, where strategically appropriate, looking to add dollars in other areas and one that I pointed out was in marketing and advertising in our healthcare disposables business. I don’t think we are looking to slow that down because we are looking to grow that business. Overall, I’m pretty confident we’ll have much, much better leverage next year. I hope that answers the question.

Shawn McMahon – Kennedy Capital

I guess, to approach it another way, is it kind of neutral here when you think about 2008 to 2009? Or you’ll have some cuts but you’ll also have a couple you are adding so…I guess that’s what I’m trying to get a sense of. Is it 3% up next year because of inflation or is it yes we have some cuts but those dollars we save are going to be moved to new areas and so you should be thinking about not maybe flattish but slightly up with inflation?

Andrew Krakauer

I don’t think we are prepared to get quite down to that level of detail. Certainly by business segment this could vary significantly. There will be some business segments where we will clearly have a net reduction in operating expenses and others that we will probably have an increase. Overall, I think the more important point is leverage versus sales. That is clearly going to be an improvement.

Shawn McMahon – Kennedy Capital

I guess that’s what I’m trying to get at. 5% price increase with better cost of goods sold, or your costs coming down here show or could show quite a bit of leverage here next year and what should we be expecting here of that 5% plus organic growth? How much are you going to reinvest back in the business versus how much are you going to let kind of fall to the bottom line?

Andrew Krakauer

First of all, I also don’t want to have a misinterpretation of something. Not all of our businesses have the pricing flexibility as water and healthcare disposables. So it would not be fair to say our entire, all of our sales are going to be moving up by 4-5% price increase. Then of course there is also how much price realization we get. I guess, I think the best thing I can say is we are not going to put out guidance. We expect to see some leverage overall and some reasonable improvement in profitability but there are a lot of moving pieces. All I can tell you is that our goal is to have some pretty good growth in profits and we’ll see if we can pull it off.

Operator

There are no further questions at this time.

Andrew Krakauer

Again, thanks everybody for listening. We look forward to speaking with you all in three months.

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