Cantel Medical Corp. (CMD) CEO George Fotiades on Q4 2020 Results – Earnings Call Transcript

Cantel Medical Corp. (NYSE:CMD) Q4 2020 Earnings Conference Call September 17, 2020 8:30 AM ET

Company Participants

Matt Micowski – VP, IR and Financial Planning and Analysis

George Fotiades – President and CEO

Shaun Blakeman – SVP and CFO

Peter Clifford – EVP and COO

Seth Yellin – EVP, Strategy and Corporate Development

Conference Call Participants

Larry Keusch – Raymond James

Matthew Mishan – KeyBanc Capital Markets

Mitra Ramgopal – Sidoti & Company

Mike Matson – Needham & Company


Hello, everyone, and thank you for joining us today, for this Cantel Medical Fourth Quarter 2020 Earnings Call. As a reminder, all phone participants are in a listen-only mode, but after today’s prepared remarks, you will have the opportunity to ask questions and instructions on how to do so will be shared at that time.

And now, to get us started with opening remarks and introductions, I’m pleased to turn the floor to Vice President of FP&A and Investor Relations, Mr. Matt Micowski. Welcome, Matt.

Matt Micowski

Thank you, and good morning, everyone. On today’s call, we have Chuck Diker, Chairman of the Board; George Fotiades, Chief Executive Officer; Peter Clifford, President and Chief Operating Officer; Seth Yellin, Executive Vice President and Chief Growth Officer; Shaun Blakeman, Senior Vice President and Chief Financial Officer; and Brian Capone, Senior Vice President, Corporate Controller and Chief Accounting Officer.

Earlier this morning, the company issued a press release announcing the financial results for the fourth quarter of fiscal year 2020. In addition, we have posted a supplemental presentation to complement today’s call. This presentation, along with reconciliations of non-GAAP references, can be found on Cantel’s website in the Investor Relations section under Presentations.

Before we begin, 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 risk 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. Additional information concerning forward-looking statement is contained in our supplemental presentation and earnings release.

The company will also be making references on today’s call to non-GAAP financial measures. Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today’s earnings press release.

With that said, I’ll now turn the call over to George.

George Fotiades

Thank you, Matt. I will provide brief overview comments. Shaun, will cover the financial perspective and Peter will spend more time on the execution of our key initiatives.

Overall, I’m pleased with how we executed in the fourth quarter amidst the impact from COVID. Our strategy in infection prevention and control has never been more relevant. We achieved our goals with respect to management of operating expense. We continued to maintain safety protocols in all facilities and achieve uninterrupted performance.

We exceeded on cash management in the quarter. And in early September, we paid down $75 million on our revolver. We worked with customers to drive adoption of new protocols and facilitate a return to normal activities. And we continue to execute on the Hu-Friedy integration and the initiatives related to Cantel 2.0.

As we said in our release this morning, procedures in both medical and dental have steadily improved and are at about 80% to 85% of pre-COVID levels, and they are strengthening. Given the critical nature of the elective procedures we support, we expect a full recovery. We’re just not certain of the exact timing.

Therefore, as we indicated last quarter, we are not providing conventional financial guidance. However, we do want to give clarity on how we will execute on what we can control, operating expenses and profitability.

Specifically, we expect to gradually improve our EBITDAS margin from the first quarter to the fourth quarter, so that we exit the fiscal year at 19% plus, which is the same EBITDAS margin with which we entered the COVID impact earlier in calendar 2020. We will also continue to execute on cash management and pay down debt as practical. Finally, we will fund and execute several growth projects which Peter will cover in some detail.

Before turning it over to Shaun, I want to underscore a key takeaway about our future. While COVID has had a near-term impact on procedures and revenue, we are seeing how COVID is elevating, the importance and relevance of Cantel’s offering to customers, a factor that will be with us for the longer-term.

In our medical and dental businesses, we provide infection prevention products and solutions, education, training, and on the ground support that are instrumental to providers being able to deliver care in this fast developing new normal. We are gearing up to serve this demand, as you will hear more about.

So with that, Shaun.

Shaun Blakeman

Thanks, George, and good morning, everyone. I’m going to go through our key financial results with brief commentary. Following that, like last quarter, I’d like to provide additional context to the financial results during COVID.

I will begin with the year-over-year comparisons and given the volume impact, I will close with specific references to more relevant sequential comparisons to 3Q, ’20, as well as provide some insight into the first part of 2021. Of course, the standard reported financial details are available in the earnings deck for you to follow along, and we can cover any additional questions you may have during the Q&A.

Net sales decreased 2.5% year-over-year in the fourth quarter ’20 versus the prior year, and negative 2.7% on a constant currency basis. M&A accounted for 15.7%, which was offset by an organic decline of negative 18%. This exceeded our Q4 expectations with procedural volumes in both medical and dental recovering faster in June and July.

Overall, our Life Sciences and Dialysis segments have remained resilient during the pandemic, with Life Sciences growing 0.7% and Dialysis relatively flat as expected.

The dental segment grew 59% on a reported basis, driven by the acquisition of Hu-Friedy, but declined negative 20.6% on an organic basis, primarily due to the negative impact of COVID-related deferrals of routine dental procedures.

Finally, the medical segment decreased by negative 24.8% on an organic basis in the quarter, also driven by COVID-related procedural declines. Capital equipment decreased approximately 36%, with recurring revenue declining approximately 22% in the quarter versus the prior year.

Sequentially from Q3, recurring revenue in the fourth quarter actually increased approximately 4% as elective procedures returned in June and July.

Turning to consolidated margins, our GAAP gross margins contracted by negative 320 basis points to 43%, versus 46.2% in the fourth quarter 2019, while non-GAAP gross margins declined by 340 basis points year-over-year to 43.7%.

If you recall in the third quarter, I discussed that approximately $45 million of our cost of goods sold is fixed. So relative to our pre-COVID margin levels, the Q4 margin degradation from pre-COVID is almost solely attributable to unabsorbed fixed cost, accounting for approximately $9 million of margin.

Moving down to op profit, GAAP op profit decreased 51.2% year-over-year to $7.2 million. On a non-GAAP basis, op profit decreased 31% year-over-year to $26.5 million.

Regarding tax rates, the GAAP effective tax rate for the quarter was a benefit of 65.1% as compared to the prior year at 26.8%. The tax benefit noted in the quarter was driven by our GAAP loss before taxes and additional federal income tax loss carrybacks allowable under the CARES Act.

Non-GAAP effective tax rate came in at 29.6% compared to the prior year rate of 25.6%. This increase was impacted by geographic mix and an increase in valuation allowances for certain income tax positions.

As a result, GAAP earnings per share decreased 125.5% year-over-year to negative $0.05, while on a non-GAAP basis earnings per share decreased 62.6% year-over-year to $0.24. Finally, adjusted EBITDA came in at $37.9 million, down 19.6% year-over-year.

I will now move on to key cash flow and balance sheet items. Even with four to five month operating through the pandemic, cash flow has been a source of strength for Cantel. Cash flow from operations for the quarter came in at $44 million, an increase of 138.7% year-over-year, ending the year with $277.9 million in cash.

Working capital increased 62% sequentially to $466 million, driven by the increase in the cash on hand. Accounts receivables were relatively flat. Inventory declined approximately 10%, and accounts payable declined approximately 21% all on a sequential basis.

To put that in perspective for the year, we generated $26 million of positive cash flow from accounts receivables, $12 million from inventory management, and $5 million of additional flow from the rest of the balance sheet. By far, our best working capital management in the past five years.

We are very pleased that we were able to return operating cash flow to levels between 13% and 14% of sales for the year, despite the volume challenges during COVID.

Capital expense was $$7.6 million this quarter, an increase to keep key projects on track in light of our better than expected cash flows, and following a quarter were all but essential capital was suspended.

In addition, Cantel is back at more historical CapEx spend levels, ending the year at $34 million of total spend versus $95 million in 2019.

To conclude the quarterly financials, our gross debt ended the quarter at $1.1 billion, while net debt was $835.5 million. Our net debt to adjusted EBITDAS ratio was 4.73 times, which includes 10 months of Hu-Friedy results.

As a reminder, our credit facility amendment provides for a leverage ratio suspension period through October 2021, and requires us to maintain a minimum liquidity of $75 million.

We are encouraged that our cash flow was positive, even through our worst collections months, putting us in the position to maintain a balance sheet with ample cushion while paying down $75 million in outstanding revolver debt, following the end of the fourth quarter in September. We are targeting to pay down a total of at least $125 million in fiscal year 2021, including the $75 million paid down earlier this month.

Although, we feel the environment is still too uncertain to provide specific guidance for the full year, I’d like to provide some color on our approach for the next two quarters regarding revenue. First of all, we expect first quarter ’21 revenue to increase sequentially to approximately $250 million to $260 million, given that we see external procedures stabilizing in the 80% to 85% range for the entire quarter, versus a Q4 that included a May with procedures in the 60% range.

We expect the recovery to continue into our second quarter, though not at the same rate as we saw in Q4. However, it’s worth remembering that we have four fewer shipping days in our Q2, due to the winter holiday season. So even with sequential day rate improvements, I would not expect a drastically improved total revenue number from Q1 to Q2.

Operating expense in Q1 will see a sequential increase from the fourth quarter as we enter our new fiscal year, stabilizing in the $85 million to $90 million range. With volumes recovering, we are opting to gradually cut back on employee furloughs and salary reductions in place through August. I estimate that normalization of items, such as sales commissions, bonus accruals and the cessation of salaried furloughs results in approximately a $15 million increase in our operating expense, in Q1 relative to Q4.

However, we are also taking cost actions driven by removing the equivalent of 125 headcount and structural cost, which is expected to result in approximately $13 million of savings on an annualized basis. In Q1, that equates to a savings of approximately $2 million, and Q2 will ramp up an additional $1 million for $3 million in savings relative to Q4, 2020.

We believe these cost actions set us up well to react to volume changes as we progress through the year, and to improve sequentially each quarter. In the first quarter, with the net cost increase described above, we expect that our EBITDAS in Q1 will stay approximately flat from Q4, but will decline as a percentage of revenue. But we are committed to executing a return to a quality of earnings that more closely mirrors our pre-pandemic performance.

As George mentioned, we are targeting to navigate the path to 19% EBITDAS in Q4 2021, with a sequential recovery of volume in each quarter, but not requiring a return to 100% pre-COVID volumes.

I appreciate your patience listening through these additional details. And as a reminder, we will be filing our 10-K by next week.

I’ll now hand it over to Peter to provide a few operational updates.

Peter Clifford

Thanks, Shaun, and good morning, everyone. I wanted to first provide additional insight on our macro observations of activities on the ground, and then focus on actions we have taken for both the short and long-term to execute on our strategy.

As we are all aware, the impact of COVID on elective procedures through the spring and summer was significant. Using third-party claims data, customer insights, through our commercial teams, as well as various industry and other external surveys, we have been aggregating data points to provide us a perspective on the overall U.S. markets.

From the pre-COVID impacted levels seen in our fiscal second quarter, we estimate that Elective GI Endoscopy procedures in the U.S. fell to a low in mid-April just 27% of the Q2 baseline volumes. Since that time, volumes have steadily improved and we are seeing volumes at 80% to 85% of that second quarter pre-COVID baseline, in the U.S. medical and dental market.

By our estimates, for the procedures relevant to our end markets, we believe that hospitals are operating at over 90% of pre-COVID levels, ASCs are close to 85% of pre-COVID levels and dental practices are around 80% to 85% of the baseline. The month of August shows strengthening in these trends.

Internationally, it has been more challenging to find good data sources, and it varies by country and region, areas like Germany and the Netherlands where the virus is well-controlled seem to be nearly back to normal levels, while countries like the UK continued to be at the 80% to 85% range.

Without question, COVID has elevated infection prevention and control to the forefront of priorities for healthcare providers and dental practitioners. And we’re encouraged that this heightened focus on IP&C will continue over the long-term. We are seeing shifts in the underlying market with regard to better compliance to existing protocols, as well as the adoption of enhanced infection prevention protocols at all provider types.

A few examples, dental professionals are switching from the use of one or perhaps two facemask per day to switching out face masks with each patient encounter, which is the existing recommended protocol. Rapid conversion of single use nasal mask for nitric oxide delivery systems from reusable nasal mask. Use of face shields and aerosol producing dental procedures, shifting to single use tube sets switched out per patient from tube sets change daily, as well as a stronger rationale for the use of single use valves and single use products in general.

The return of patient volumes, coupled with the drive for better compliance with IP&C protocols should benefit Cantel over the long-term. With the increased and sustained demand for face mask and PPE, we have meaningfully invested in expanding our production capacity. For the last six months, we’ve been running at maximum capacity 24/7 on all eight of our mask machines, bringing our total mask production level to just over 16 million masks per month.

In the fourth quarter, we placed orders for an additional eight facemask machines to double our capacity. We anticipate bringing on the first two machines by the end of the first quarter, and another two machines online by the end of the second quarter, with the remaining four machines in the back-half of fiscal ’21.

Six of these machines will be located in North America, while two will be in our Italy production site supporting regional demand.

Despite the continued impact of COVID, we remain focused on executing on our key priorities in support of our Cantel 2.0 initiatives. Key among those priorities has been the reconfiguration of the U.S. sales and commercial organization, to support the Cantel 2.0 initiatives focused on ASCs, as well as enhanced focus on our hospital complete circle protection strategy.

Within the ASC space, we have created for the first time a dedicated ASC sales and marketing team. We are deepening our relationship with ASCs, as well as hospital-owned outpatient facilities.

To be clear, we have a strong leading share of the AER market within the ASC space, but the opportunity for us to broaden the penetration of our full portfolio within the ASC market. We see great opportunity to drive this penetration by an enhanced focus on the overall value and efficiency, that our full portfolio brings to the ASC setting, in addition to the improved IP&C benefits.

In the acute care setting, we are seeing early success with our investment in key account directors and the expansion of our infection prevention clinicians, and demonstrating the overall value of our CCOP solution. We continue to invest in these CADs and IP clinicians to further enhance our engagement with the large healthcare systems and influence their overall reprocessing workflow protocols, which has resulted in broader adoption of our products solutions.

We have transitioned our hospital sales organization to a full bag, sales reps from product specialists, previously focused on solely capital or consumables. With this transition, we have enabled our commercial team to focus on the broad solution of our CCOP offering, while still selling to product users in key department heads.

In addition, we are experimenting with inside sales to assist the field reps in a model that we have had notable success within the UK. This builds a capability that ensures we have strong commercial presence, even when access may be limited. This has been a reconfiguration rather than a restructuring, allowing us to get better focus and broader capability, yet overall, this is cost neutral to the P&L.

Looking into Europe, we have made good progress on both the footprint consolidation as well as our commercial efforts. We are on track with our site consolidation, with the successful move of all AER production from the BHT operation in Germany to our Pomezia, Italy facility on August 1. This was an important project to simplify our Germany business, as well as continue to expand our manufacturing center of excellence in Italy.

In the fourth quarter, we closed our Dusseldorf sales office, moving all German activity to our existing Augsberg location, as we continue to streamline our processes to improve profit and accelerate growth.

In parallel, we have continued to execute on our commercial excellence training and deployment across Europe at an accelerated pace. And we expect this to translate into strong second-half ’21 commercial performance in EMEA.

Finally, we continue to make excellent progress on the integration of Hu-Friedy into our dental business. As mentioned earlier, the value proposition of infection prevention in the dentist office is unprecedented, and the addition of Hu-Friedy enhances this unique offering. There is more to come over the next few months, but in short, a new scaler, increased instrument management system setups, GreenLight 2.0 launch and an overall enhanced focus on education add to our confidence on the future for this business.

Despite the impact of COVID on our end markets, we’ve continued to focus and execute on our key strategic priorities, while carefully managing our expenses and key resources. I want to take this time to thank our global teams for their daily efforts to produce essential products and deliver critical services to our customers and stakeholders during these extraordinary times.

With that, we are now ready for questions.

Question-and-Answer Session


Gentlemen, thank you for your remarks. [Operator Instructions] We’ll hear first from Larry Keusch, at Raymond James.

Larry Keusch

Thanks. Good morning, everyone. I guess just a couple of questions and maybe the easiest one first. So just with the new mask manufacturing, you’re obviously doubling your capacity. What does that incremental capacity represent in a dollar amount? Just trying to think about, once you’re up at full speed, how we should be thinking about it?

And does it also imply that with all those machines on, you should be at full capacity by the end of this fiscal year?

Peter Clifford

Yes, Larry. To give us some color on capacity here, look, it’s going to probably take us a month or two with each deployment wave of the machines coming in to calibrate, get those up to full capacity. So I would think by the end of fiscal ’21, we should have at least six of the eight machines probably up and running at full capacity.

From a monetize perspective, look, I think the way we’re looking at the revenue opportunity is for this capacity obviously gives us an ability to be very opportunistic in markets right now that are looking for high quality manufacturer of PPE. And it also gives us an opportunity to use mask as an effective bundling anchor in the portfolio on the dental side of the business.

So, we feel very well-positioned to, again, grow that business pretty aggressively, whether we can cover eight machines 24/7 is something that we’ve got to determine as we get deeper into the year.

Larry Keusch

So maybe just on — thank you for that, Peter. Maybe just on that, just in case I missed it. So, if you had all those machines running full capacity, what would the incremental revenues be coming off of that?

Peter Clifford

Yes. I would say the size of the prize if we could get the full capacity is probably $3 million or $4 million a quarter.

Larry Keusch

Okay, perfect. Then secondly, I’m just trying to think through dental. And if I have my numbers right, I think it got worse both on a dollar and percentage basis in the 4Q versus the 3Q. So just trying to understand, obviously, you didn’t have April in your 4Q and things start to recover as you start to talk about. So again, I’m just trying to understand what else may be going on there that resulted in that.

Peter Clifford

Yes. I think that, it’s like all of the business right, that even though April wasn’t in our Q4, you still had overall Q4 being COVID volume affected, whereas in Q3, you did have two months and arguably weren’t yet materially affected by COVID. So, I really don’t think there’s any more to it than that, really from our point of view. It’s just like volumes overall, were down more in Q4 than they were in Q3, even though the month of April itself was obviously the worst.

Larry Keusch

Okay, perfect. And then last one, I guess for you Shaun is, just as — and thank you for the color. As you think about ’21, I recognize that it’s challenging to put any real numbers out there, given the dynamics and some uncertainty around the fourth calendar quarter here.

But as I think about the commentary around the EBITDAS margin, again, just help me understand kind of how you’re thinking about sequential improvements to get to that? I think you’re saying the fourth quarter itself for the quarter should be 19% or better. And it does look like that’s a little bit below what the Street was anticipating. So kind of any color that you can provide as to what might be different from what the Street expectations, where it looks like that was what kind of over 20% on that fourth quarter EBITDAS? And what might be different as you guys are looking at your plan for the year? Thank you.

Shaun Blakeman

Well, to just kind of go back to what we talked about on the call, Larry, it doesn’t require that we get back to 100% of volume. So that’s not within our model or thinking in how we get to 19%. It really requires something north of 90% in medical and dental.

So we are anticipating a sequential recovery in volumes, but that is going to be a more modest slope, obviously, than we saw in Q4, which shouldn’t be surprising to anyone going from 80-85 to 90-95 is a much lower slope. And then continued to progress against our Cantel 2.0, initiatives as well, that we anticipate will continue to give us an advantage right, even as we deal with procedural volumes being something south of 100% for the near future.

And it’s combined with that, right where we’re committed to — again, going back to we think we’ve set our cost base very well right now to see how volumes go here in the first quarter in the second quarter. And we’re committed to react into any of the conditions that are thrown at us to get to that 19%.

So, we are thinking of — obviously the things won’t be back to the way they were in April in that scenario. But certainly, we are baking in an inherent conservatism if you will, that we’re not out of this. And, there’s potential for other shocks right, give or take in certain months as we continue to progress through this. We’re making now that all in as best we can, and we think that that’s right where we’re going to end up.

George Fotiades

And I was just going to say, I’d like just add to what Shaun said. Larry, I wouldn’t read too much in the difference between 19% plus and 20%. I’m not even sure we put out a number before, we spoke today about where we thought we’d end up at the end of the fourth quarter.

I will tell you, look, we’re going to be in the business of being on the more conservative side of things. We tell people that on the wildly optimistic side, because there’s no upside in being optimistic and missing expectation. So I think that’s one way to look at how Cantel is going to talk about the future, particularly in the current environment.

Larry Keusch

Okay. Thanks for that, George. That was really helpful. And last one on this and then I’ll drop. So, Shaun, should we be thinking about sort of sequential improvements in EBITDAS margin through the year? Or is it kind of flatter in the first-half and then you would get more of a pronounced step up? Just any thoughts as you kind of start the year out here, just so we make sure we’re thinking about this correctly.

Shaun Blakeman

Yes. So if you think about, again, Q4 to Q1, I said that I think will be relatively flat on a dollar basis. On a revenue basis, that’s obviously going to degrade the margin somewhat. And then given that revenue back with the four days shipping even with sequential increase in day rates, with revenue probably not being drastically improved from Q1 to Q2 because of that, I would expect the margin to be also right, not drastically improve from Q1 to Q2. So you would see the bump up to 19% more in Q3 and Q4.

Larry Keusch

Okay, perfect. Thanks, guys. I appreciate it.


Thank you, Larry. Our next question comes from Matthew Mishan at KeyBanc. Please go ahead, Matt.

Matthew Mishan

Thank you for taking the questions, guys, and good morning. With the large swings that you’re going to see in your markets, I’m just curious, how are you going to be able to track your progress on Cantel 2.0, and understand kind of what is working and what might not be? And what metrics should we be paying close attention to kind of gauge your performance?

Peter Clifford

Yes, Matt, this is Peter. Look, I think we are on the ASC strategy specifically. Obviously, we’re looking at revenue comps, we’re looking at new comp setups, and looking at audit or process reviews and studies that we’re doing with ASCs as a sort of key indicators to tell us how we’re progressing down that path.

On the hospital, CCOP play, we’ve been measuring here for a couple of quarters, an index that basically tells us the product basket execution in the hospital network system. So obviously, we’ve been looking at revenue by CAD territories versus non-CAD for over a year now. That’s obviously move the needle in terms of our investment as we saw growth categories much higher in CAD-supported territories than in territories where do we did not.

On the Europe side, we are tracking right now, since we’re really still in the midst of still doing some of the deployment of Comex [ph], the key indicators there are really by country, by rep, by regional sales manager, how we’re progressing in each module of commercial excellence from a deployment perspective.

Matthew Mishan

Okay. Peter, thank you very much for the detail around that question. And then moving to dental. It seems as if the dental offices are going to be running incremental costs, some of which is going to be a tailwind for you.

But I guess, what is the tradeoff for the dental offices? And if you look at the overall portfolio from Cantel and Hu-Friedy, is it a net benefit? Is it neutral or potentially headwind?

Seth Yellin

Matt, this is Seth. I think in the dental suite, obviously, if they’re looking for broad solutions to enable them to get back to an efficient practice flow, and to enable them to get back to the procedure volumes that they’re used to. I think on average, it probably is incremental for the Cantel, Hu-Friedy portfolio.

I think in particular, we’re able to provide product bundles to the customers that they’re looking for. That includes whether it’s PPE chemistries, other consumable products in addition to the reprocessing type of elements that we’ve historically sold. We see substantial incremental demand for those sorts of products.

And I think in particular, our IMS product offerings, which provides both the most efficient type of reprocessing system, as well as a more overall efficient workflow, is well suited to enable dental practices to respond well to the current environment, and get back to a higher overall volume in their practices.

Matthew Mishan

And then lastly around fee cash flow. First off, congratulations on the best gain level of free cash flow over the last several quarters, that’s been excellent. Can you talk about some of the puts and takes around free cash flow for this year?

And then how are you thinking about next steps and costs of the ERP implementation to other parts of the business?

Shaun Blakeman

Okay, I’ll start with cash flow for ’21. Just one thing I would keep in mind is that, we did successfully deleveraged balance sheet to the tune of almost $50 million here in the latter half of ’20. So as volumes continue to recover, AER is going to be a natural outflow in the first-half of the year. And I would also expect that we will have to have some modest inventory investment as we rightsize to the right mix and react to volumes coming up.

So, I would expect it in the first-half of this year, while we’ve been very successful and we’re certainly — we’re not going to degrade in our execution, there’s just naturally going to be a cash outflow if you will as we invest in working capital modestly here in the first-half, and probably claw back some of that benefit that we saw in the latter half.

Obviously, we have the sequential expenses right, that are going to come back as I discussed in Q1, that will also — if you think about launching off of Q4 they are also going to mitigate what we saw in Q4, as well as some continued restructuring costs and payouts and things that we’ll have.

So, there could be some mitigation, although, I think most of that will happen more in the latter half of the year, where we’ll start getting some of the benefit of our tax clawbacks as we get those returns filed and get the cash from those.

And I think our cash position in terms of total cash is going to stay pretty stable through Q1. And then you’ll see that operating cash ramp back up through the year to get back to that $40 million plus type numbers, as we get to the latter half of the second-half of ’21.

Peter Clifford

And I’d just to add some color Matt, on ERP quietly, here during COVID, we’ve been working very hard of note that we expect the legacy dental business to be brought up on the SAP platform of Hu-Friedy early in the spring. And we’ve done that pretty cost effectively, as you haven’t seen that spike up in CapEx, obviously.

And the results and I think we will use the remainder of ’21 to make sure we’ve laid out an appropriate plan for EMEA, but I think EMEA Medical will be the next platform that we move to SAP. And that’ll be a fiscal year ’22 action.

Shaun Blakeman

Yes. I mean you could expect that CapEx is not going to go off the rails more than like $8 million to $10 million a quarter type run-rate on average for ’21.

Matthew Mishan

Excellent. Thank you very much.


Thank you, Matt. Our next question will come from Mitra Ramgopal at the Sidoti.

Mitra Ramgopal

Yes. Hi, good morning. I was just first wondering, as we look out to this next year, how we should think about restructuring and acquisition related costs, et cetera, that’s largely behind us.

Peter Clifford

Yes. I mean, other than you’ll see some Q1 restructuring costs probably come throughout, you’ll see some restructuring costs come through. But, I think most of the large acquisition costs to your point, that’s behind us. I mean, again, you’ll still see some footprint type restructuring cost come through, as we continue with some of those actions in Europe in dental. But yes, the bulk of the Hu-Friedy acquisition cost to the extent that those are now just going to be embedded in an ongoing amortization depreciation those are behind us.

Mitra Ramgopal

Okay, thanks. And obviously, you’ve had two quarters now where COVID has obviously affected the operations. And I was just curious as you look to implement the 2.0 initiative, how has it really changed your outlook as it relates to accelerating or product introductions or even rationalizing the global AER portfolio? Maybe any new opportunities, et cetera, you’ve seen as a result of that? I know obviously, you’ve highlighted for example, face masks that was obviously a plus, but any other comments around that would be great.

Peter Clifford

Yes. Mitra, I think the biggest thing that we’ve learned across the business is just changing the cadence right, that you can fall onto a cadence that’s running your business on a weekly or monthly and quarterly basis. And I think the best opportunity for us that we’ve seen collectively from an execution standpoint is getting back to running the business on a daily basis.

As far as things that we had started to lay out pre-COVID, I think actually the opportunity for us with some of those activities required extra pairs of hands to get work done. And I think the excess capacity that was created with the downtime in certain parts of the business allowed us to move smart people to those can Cantel 2.0 initiatives to move faster at a quality pace.

Mitra Ramgopal

Okay. No, that’s great. And again, just on the M&A front, I’ve heard mixed things from different companies. Obviously, it’s difficult to get some deals done in this kind of environment. But the same token, you are seeing some opportunities as a result of pressures and a number of maybe potential competitors et cetera, are facing. I was just curious you come up about a year now for Hu-Friedy. And I know the focus is to also delever the balance sheet somewhat. Just any thoughts around maybe being active again on the M&A front?

George Fotiades

Yes. Look, I think for the time being, we’re very focused on these Cantel 2.0 opportunities, which are significant. And as Peter said, we’ve been using this time wisely to push those ahead. So we have obviously work still ahead of us to focus on that. And I think that’s where we can get the greatest deployment of our — at least our people resource is there.

Secondly, look, we — obviously COVID if it’s had some impact, it’s certainly been on how quickly we could pay down debt. You all know we had — we took out the issuance on the convertible debt. And the good news is our cash management has improved meaningfully, so we’ll be paying down debt as we go through the year. But that’s going to continue to be our primary focus is, is to get that down before we start looking more assertively to things on the outside.

We obviously stay active and we look and we continue to follow things, because as you know, the way we do acquisitions in the past are usually of a proprietary nature. And those are based on building relationships with companies that ultimately want to become part of Cantel. So that part we continue to do. But in terms of actually pulling the trigger on anything, that’ll be a few months off as we work on getting our capital structure where we want it to be.

Mitra Ramgopal

Okay. No, that’s great, thanks. And then finally, again, just to be clear. George, I know you’ve talked about the EBITDAS margin, et cetera, by yearend should be improving off of what we saw this past year. But I’m just interested in some of the assumptions on that in terms of I think you’ve mentioned as the business picks up, you’ll obviously be bringing people back, and there obviously are going to be some cost savings like will be more of a permanent nature, et cetera.

But in terms of just some of the costs that were sort of you didn’t have to incur travel and a lot of non-essential CapEx, et cetera. How much of that really should we see as going away in a more permanent nature?

George Fotiades

Shaun, I’ll let you answer that question. I guess, look, what — as we sort of said at a high level, what we can control are these operating expenses. And if there’s one thing that’s transpired over the last six months to eight months, is the discipline that we have developed and put in place to manage these things in a very precise way, certainly been helped by how SAPs functionality is improved.

But, we really have put together, I think, a pretty robust playbook. So this operating expense number, look, it’s not a precise science because you have to put things in place in order to satisfy the improvement in volumes. But at the same time, we know the levers we can continue to control to hold off on OpEx until we really understand where revenue is going.

But, Shaun, if you want to add a little more color, please go ahead.

Shaun Blakeman

Yes, I mean, that is the key that we have the playbook, right, to react as necessary. And we’re landing at that $85 million to $90 million in the first-half here, because that’s right what we’re targeting to get to that 19%, based on our anticipation of the recovery, which again, medical and dental will be north of 90% in latter half of the year is kind of how we view the world and how we get to 19%.

So to your point, right, Q4, obviously the base includes very, very, very strict expense control on any type of expense around travel and other discretionary expense. And so, we do show that coming back very, very slowly with tight controls on it, and we’ll continue to react if necessary, given volumes. But the raw numbers, again, to reiterate are roughly you have $15 million of headwind, sequentially from Q4 coming back.

And then on a full quarter basis, you should get just little over $3 million of benefit back off of that from the round of restructuring that we just took.

Mitra Ramgopal

Okay. Thanks again for taking the questions.


Gentlemen, our next question will come from the line of Mike Matson at Needham and Company.

Mike Matson

Yes, thanks. So, I just had a few questions on the Cantel 2.0 program. So, you’ve mentioned in the slides and I think on the call that you’ve taken the — you’ve create a kind of a sales force within medical the U.S. business that create sales capital and procedural items.

I think in the past, did you have a separate sales force for each of those categories? And is there any risk of any disruption from having a sales force now selling both, maybe some things that they’re not as familiar with?

And then can you comment on the size of the ASC team? I know you’re probably not going to give any numbers. But maybe just relative to the hospital team, how big is that currently?

Peter Clifford

Yes. Mike, this is Peter. In terms of — again, I’m not going to give you a size, so I’ll just tell you that, the focus for the ASC and that dedicated team full bag reps, we’ve targeted the largest eight natural ASC regions in the U.S., and that’s where we’re starting, and with the ambition to hopefully, eventually cover the top 10 metro ASC regions.

So, again, in the past, the strategy was really what we called our pod structure concept was a single capital rep with a large territory, sharing that territory with multiple account reps, obviously benefits of expertise of the product knowledge. But it left us an opportunity to further sell the full bag or the solution sale. So that is the key change on the hospital side is, we’ve migrated to full bag reps dedicated solely to the hospital, partnering with the CADs and the clinicians to drive that CCO piece sale to achieve better pocket share in the hospital customers, that we have really strong relationships with today.

So on a total headcount basis of feet on the street, it’s relatively flat. It might be modestly up a couple of heads, but the mix is different. And in terms of risk, we were pretty proactive here in the late third quarter and the fourth quarter, anticipating that the structure was going to change. And we were executing many training sessions with our sales teams in the U.S. to get people far more familiar with the full bag.

So that training had already started before the reconfiguration in June. And obviously it continues here and in July and August and September. In terms of talent, what we kept our best reps as one of the key takeaways from the reconfiguration in June. It’s — in the entire year fiscal ’20, we probably saw about 20% of our reps turnover.

So at the end of the day, we feel very strongly that we had the best team in the industry from a sales perspective, and we kept the lion’s share, bulk of that team and really spent the time required to retrain people to be successful here in ’21.

Mike Matson

Okay, thanks. And then I know you had talked about prior to COVID, trying to improve the new product cadence. I think there were at least two things that you launched, and medical one was I think a cleaning valve, and then you have the new Scope Buddy Plus. So I know that those investors maybe aren’t as focused on new products just given everything that’s happened with COVID.

But I was just curious if you could comment on any traction you’re seeing with those products? And any other new products that you’re willing to talk about, medical or dental, for that matter. Thanks.

Peter Clifford

Yes, in many ways due to COVID, right, the coming out of this gives us almost the second window to relaunch both Scope Buddy Plus and the cleaning adapter came really late in 1Q in the start of 2Q, so on fairness, the results were extremely positive. But like most things, the third quarter and fourth quarter were non-traditional. So again, I think it offers us an opportunity in the first-half of ’21 to be very aggressive in our programs, as we push these products out, as they hold huge potential over the next two to three years on the medical side.

And then the other one that we are really, really excited about is Hu-Friedy has just launched a new ergonomics scaler in the last 60 days. And obviously at time right now, where dental practitioners are keenly aware and concerned about aerosol in the suite, which is driving a reality of folks either eliminating or dramatically reducing the amount of power scaling that’s happening. So you’ve got a lot of hygienists that have been used to using manual scaling as a supplement to power that are now going to 100% to manual scaling.

And so, again, there’s folks that are not used to that volume, and we think this product is going to be a home run coming at the perfect time into the marketplace, given, again, the post-COVID world.

Mike Matson

Great. Okay, thanks.


And thank you for your questions. Ladies and gentlemen, that was the final question from our audience today. I will turn it back to the Cantel leadership team for any additional or closing remarks. George?

George Fotiades

Good. Thank you. It is literally been six months since COVID was declared a pandemic back in the middle of March, and we’re all very well aware of how this has impacted the world and individual businesses.

What I can tell you today, sitting here on September 17, is that it has been a transformational time for Cantel. As we sit here today, our mission that we’ve talked about for years has never been more relevant, as I said. And we have really geared up to work in our end markets as the leaders, in both of these markets to serve customers. And this is going to, as I said, pay us dividends long-term.

Secondly, is we’ve really stepped up our game on how to execute and manage our operations. It was driven by necessity, but now we see it developing into a competency such that even with the kind of uncertainty that still remains on that topline, where we are putting forth that we want to be at the 19% plus by the fourth quarter. And, depending on where revenues go could be even better. But again, at least gives our shareholders an understanding and having some confidence on our ability to execute.

So with that, we look forward to speaking to you on our Q1 results in a few months’ time. And thank you for participating in today’s call.


Ladies and gentlemen, this does conclude today’s update. We thank you all for your participation. You may now disconnect your lines. And we hope that you enjoy the rest of your day.

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