Cantel Medical Corp.
Q1 2021 Earnings Call Transcript

Published: 8 Dec 2020

[Operator:]

Good day ladies and gentlemen and welcome to your Cantel First Quarter 2021 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host Matt Micowski, Vice President of FP&A and Investor Relations. Sir, the floor is yours.

[Matt Micowski:]

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 first quarter of fiscal year 2021. 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 statements 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. Our performance in the first quarter demonstrated the unique nature and relevance of our infection, prevention and control offering and the strength of Cantel’s operating discipline. Most importantly we continued our steadfast focus on employee safety which has yielded uninterrupted service to customers. What's clear from the external data and our own results is that we are outperforming the recovery and procedures. We estimate based on independent third-party data that in our first quarter through October 31, US endoscopy procedures were down about 6% to 8% below a year ago. During the same time Cantel consumable and chemistry products were flat to up low single digits versus year ago depending on the category. Similarly, and down while US procedures appear to be down 15% to 20% year-over-year, our dental business was up nearly 2% organically reflecting similar outperformance versus the underlying market.

[Shaun Blakeman:]

Thanks, George, and good morning everyone. I'm going to go through our key financial results with brief commentary. Following that I'd like to provide additional details that give context to the financial results during COVID. 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 question-and-answer session. Net sales increased 15.5% year-over-year in the first quarter of 2021 versus prior year and 14.7% on a constant currency basis. M&A accounted for 16.5% of the increase and the FX impact of 0.8%. Both of which were offset by an organic decline of negative 1.8%. This significantly exceeded our Q1 expectations with procedural volumes and demand for infection prevention products in both medical and dental accelerating throughout the first quarter. The Medical segment decreased by negative 2.2% on an organic basis in the quarter. Capital equipment decreased 20% with recurring revenue increasing 2% in the period versus the prior year. It is important to note that while capital sales declined, we build robust backlog during the quarter, representing strong underlying demand. While underlying endoscopy procedures have returned faster than anticipated, our outperformance and our recurring revenue categories above procedural growth indicate market share gains we are seeing with our differentiated infection prevention offering. The dental segment grew 65.1% on a reported basis driven by the acquisition of Hu-Friedy and increased 1.8% on an organic basis primarily driven by the recovery of dental procedures combined with increased demand for infection prevention products in the dental market, inclusive of PPE and disinfecting chemistries. Overall, we believe these results reflect the power of the combined Hu-Friedy Group portfolio especially in an environment of increasing sensitivity to infection prevention protocols.

[Peter Clifford:]

Thanks, John. And good morning, everyone. I wanted to take the time to share some insight into what we've learned over the past 90 days. These observations have and will continue to impact the actions that we've taken near and long term to execute on our strategy. At the forefront of the changes that we see is that the healthcare providers have fundamentally changed their IP&C protocols in a permanent way. These new protocols are allowing procedure capacity to safely recover faster than anticipated in most geographies.

[George Fotiades:]

Thanks, Peter. Before we get into questions and answers, I have a short leadership change for your reference. Many of you have come to know Matt Micowski as the face of Investor Relations for Cantel. Over the past few years, Matt has done an extraordinary job managing both the FP&A function along with Investor Relations. In keeping with our guiding principles of continuous development for employees, Matt has accepted a segment CFO role within the company and has already begun the process of transitioning his responsibilities. Matt has been instrumental in the development of Investor Relations within Cantel and we would like to thank him for his contributions. With that, Investor Relations will be formally transitioning to Ryan Lada. Ryan was previously the CFO of our Medical segment and brings strong internal knowledge in the business and financial acumen to the role. We expect to continue to make introductions over the next few weeks. Please note to contact Ryan for your Investor Relations and queries going forward. Let me sum up by saying that the key takeaway for this past quarter is that we are delivering on execution. Execution and continued share gains for our infection prevention and control solutions and our markets and execution with respect to operating discipline and cash management. So, as procedures continue their recovery in 2021, we're confident in the sustainability of our stronger profitability performance. Okay. So, with that we’re now ready for questions.

[Operator:]

We'll take our first question today from Matthew Mishan with KeyBanc. Please go ahead.

[Matt Mishan:]

Good morning, everyone, and thank you very much for all the information and outstanding quarter as you kind of progressed through all of this. George first I just want to get a sense for how should we think about the transition to normalize spending in your business. I'm just trying to understand what's sustainable on the margin profile here and what is going to be changing over the next several quarters?

[Chuck Diker:]

Sure. I think Shaun and I can tag team this question. So look I think as we pointed out in the remarks. First and foremost the big change or transition that's occurred over the past several weeks months is in the dental business. We said at the outset before the pandemic with the Hu-Friedy acquisition that we felt we could get this combined business of Hu-Friedy cross techs to a 25% EBITDA margin that's obviously happened on an accelerated basis. Just to remind everybody the legacy Hu-Friedy business was around at 22% EBITDA margin, cross techs had been at 22% EBITDA margin although in fiscal year 2019 it was underperforming and that's obviously has -- has changed a meaningfully in the -- in this year. So, this combined business has gotten to 25% that but we made extraordinary progress on the synergies, obviously the faster recovery and procedures. So, look it's at 30 something percent EBITDA margin the first quarter. We're saying 25% over time. So, obviously the -- the -- the transition and that has to do with the fact that some operating expenses will come back. When you look at what we said about the overall EBITDA margin exiting the fourth quarter, I said 22% you know we're at EBITDAS that is we're at 26% in the first quarter. So, we've obviously carefully looked across the remaining quarters as -- as procedures recover, what becomes more a normalized operating expense. And look at one thing I can't make more clearer is that we have really spent an awful lot of time embedding a cost discipline and an operating discipline in the company. It's been certainly helped, but SAP we've almost looked at things on a zero-based budgeting basis to understand what it takes to run the business on a sustainable basis. So, we're very confident and how we have -- how we see the rest of the year unfolding you know provided the recovery and procedures yielding what I said is our goal at the end of the fourth quarter.

[Shaun Blakeman:]

Yeah. The only thing I would add is that you know to help out with the numbers to point back to kind of briefly what I said in the call that we think OpEx will stay relatively flat going into this quarter and then we're kind of pegging it at $90 million to $95 million a quarter depending on volume. So, again, that's kind of how we get back to 22% that George referenced.

[Matt Mishan:]

Okay. Thank you, Shaun. And then, I wanted to shift over to -- to capital. You know my sense on capital is if it's being underutilized, they tend to spend. And then I want to shift over to capital my sense on capital is if it's being underutilized, they tend to spend -- send less of it, it looks as if the procedures are going to be under a 100% for a period of time. What's driving that the backlog of capital in it? And I think what's interesting is you -- your focus moving to on the ASCs at this point are you kind of hitting these ASCs is at the exact right time as procedures or maybe moving out of the hospital?

[Shaun Blakeman:]

Yeah, I'll take that, Matt look first on the capital piece I think we've been assertive let's say in terms of looking at bundles where we can leverage both our cabinet opportunity along what they are so I think that's been quite successful in the last four or five months in both the US and international markets. And then on the ASC front look I think we are hitting it at exactly the right time. The VOC has been incredibly strong we jokingly call the first half of the year spring training as -- is really yeah the key changes and strategy deployment we put it in the fourth quarter we kind of said all along at the first half of the year was really refining what we deployed at the end of the year in the first half to start putting points on the board and in the second half and so far as I mentioned in my commentary we've had a lot of success with our EPP programs that's again the equipment placement programs where we bundled consumables to allow folks with maybe constrained capital budgets to bundle where we get advantageous economics but are able to help customers out again it might have some capital constraints to their budgets and as mentioned in the commentary we’ve through four months have got line of sight to really outpace already to the full year fiscal 2020 capital deployment in four months already so it’s a -- It’s off to a strong start. This is short answer.

[Matt Mishan:]

And then last question, I just want to go back to the CADs, I think you said they were -- the areas where you have the CADs, you’re driving 30% higher consumable growth. Just how -- how does -- how does those CADs drive that higher consumable growth? Is it just that high touch relationship and -- and then working with those large customers on -- on infection protocols more closely?

[Shaun Blakeman:]

Yeah. I think the key is back to that access that we talked about even during the shutdown periods we've maintained on that CAD clinician model pretty steady access. So we've been continually getting in front of IDN groups here over the last five or six months and as you said influencing and changing protocols at different parts during the GI suite and that’s been very effective. Again, as we've talked about the ability to sell tops down as a way to again simplify and ease the bottoms up going from those full bag reps now on the field, on the hospital side. So we had been measuring pretty fanatically here in the last year-and-a-half really the -- the areas where we're seeing growth, where we have CAD coverage, where we don't. And the data is always been compelling and hence why we've continued to increase that investment sequentially from fiscal 2020 to 2021 and going from 10 CADs to 14 CADs this year.

[Matt Mishan:]

Okay. So hopefully you guys are modeling spring training after the Yankees and not the Mets. Thanks guys.

[Operator:]

We'll take our next question from c with Raymond James. Please go ahead.

[Larry Keusch:]

Thanks. Good morning everyone. A couple of questions, I guess George starting, starting with you. Just trying to think through kind of the progress that you made, which has been significant in this quarter as, as you’ve rolled out this, your sort of new platforms and, and selling models et cetera. And clearly, you made the point that your revenue growth is ahead of their procedure recovery. I'm thinking kind of now post COVID, what's your latest thoughts on, on sort of how we just should think about the organic growth for this company with what you've achieved thus far? What's, what's the right way to kind of start to think about a more normalized organic growth range for the company?

[Shaun Blakeman:]

Yeah. I think this will sound familiar but I think our confidence level continues to increase. But if you look at the parts, medical, we, endoscopy, I think with the things we're gaining traction on Cantel 2.0 that we could be at 8-plus percent organic revenue growth. Dental, we think 6% growth. And of course, Life Sciences, we’ve sort of modeled it flat. I think again COVID has certainly provided a strong impetus to what we offer to, to the consumers and has sort of reinforced the importance of the complete bundles that we provide in both places. And we, we've talked about the question about what transpires in consumer or customer behavior post COVID. And I think the changes we're seeing are ones that will be, become embedded certainly at the hospital. But even in the ASCs and the dental offices, there will be an expectation on the part of patients that these will continue to be embedded protocols. And importantly, we're spending a lot of time trying to talk about the economy of practice in addition to the IPC efficiency of practice and that’s really the message that we’re -- we were always taking in the tunnel and we’re now taking into ASC so that for the ASCs that they continue to be able to regain where they were in terms of efficiency in practice or the you know their throughput. But now with the protocols that we help them put in place. So I don’t know we feel pretty positive about it. I think we you know we as Peter pointed out some of these Cantel 2.0 programs we're starting to refine the KPIs so that we can track this progress. It's still early days with respect to that. But what we're seeing so far is giving us a lot more confidence around where we're going to be coming out of it.

[Larry Keusch:]

Okay. That was great. Two other ones, I guess sort of same sort of question again either for Georgia or Sean on EBITDAS margins again as you start to think out particularly given your ability to accelerate that you free synergies again I'm sort of thinking past 2021 and sort of thinking about more 2022 or 2023 you know kind of where do you guys think those EBITDAS margins could head. And secondarily Sean you know what given the operating expense numbers that you've talked about for the 2Q and then as you move into 4Q that $10 million to $15 million that it moves higher from where we are today what's driving that that increase in operating expense? Thanks.

[Shaun Blakeman:]

I'll start with a simple question about operating expense. And that's primarily you know this can be driven incrementally. It's going to be a lot of it's just going to be discretionary spend. It's still pretty historically low levels around COVID. We don't anticipate all of that will come back but we do anticipate that some of it will come back as we're putting out in terms of kind of the informal guidance and a little bit of headcount would come in to play as well but that's really not a significant driver of the 21 number that's really more just anticipate discretionary spend coming back. But I would also point out Larry that's also like the lever for us as well in terms of being able to preserve margins going forward. Yes, George’s point we have quite a bit of confidence in our ability to operate even in good times and turbulence to maintain that. As far as going past 2021 I know this is one of our favorite topics, but yeah, I think it's even relevant answering it in terms of 2021 in particular around the gross margin expansion that we do have a lot of confidence even net of mix that at these volumes and normalize for those volumes that, we are driving meaningful margin expansion like our operating discipline and with the culture that we've been driving during the pandemic if we didn't let go to waste. So, I think it’s would be our target if you will informally to continue to try to look like that approximately 50 basis point expansion year-over-year going forward in our operating margins.

[Larry Keusch:]

Great.

[Shaun Blakeman:]

Yeah. I think we obviously we've not spent a lot of time talking about what happens two or three years from today yet, but although sort of understanding our growth rates. But look, we said 22% in the fourth quarter. And so, that's a good starting point for next fiscal year as we continue to make progress in Europe and build the business in Europe obviously that helps improve profitability. So, I would say beyond fiscal year 2021 -- as we get into fiscal year 2022 excuse me getting into fiscal year 2023 we should pick up another 100 basis points or so in that progress. So, I think look our goal is to ultimately get to 24% to 25%. And obviously this year with what's transpired in the Hu-Friedy -- the Hu-Friedy acquisition and the synergies and basically a reset and how we look at our operating expense. And also I should add to because this is an important point we've done a lot of things that we promised would transpire and you'll benefit like SAP implementation for example and some things we've done in rooftop consolidations that are paying benefit now as well they were obscured at the outset of the pandemic obviously with the revenues but I think those are other things that are starting to improve as well.

[Operator:]

We'll take our next question from Mike Matson with Needham & Company. Please go ahead sir.

[Mike Matson:]

Yeah. Hi. Good morning. Thanks for taking my questions. I guess I just wanted to ask about the ASC setting so can you maybe talk about the biggest opportunities there is it really around the procedural products and care minus what the penetration of the procedural products is in that setting?

[Chuck Diker:]

Yeah I'll help with that Mike so look just from a share or positioning there just to remind folks again we own about 50% of the AER installed base in ASCs and our best view on proxy for sort of let's call it the valve business on the ASC side as because we think that market is only penetrated by 15% so look I think as we’ve -- again it's early days three, four months in but I think we are really, really excited about we see opportunities across the board whether it’s on the capital side of AERs and further in our share position to making headway on penetrating the cabinet side of the business as well as a whole host of other products like products like SCOPE BUDDY PLUS with the 2% consumables on the back side as well as the valve business and -- and obviously we see opportunities for chemistry business as well on the ASC side, so.

[Mike Matson:]

Okay. Thanks. That's helpful. And then, the capacity expansion you're doing for, for masks, how confident are you that the demand will still be there by the time you get done with that given the timing around the vaccines being administered kind of hopefully by the middle of next year?

[Chuck Diker:]

I think our premise, there was, look, the capacity was nearly free, net of the subsidies from the government. So, that's the first point is, look, we don't have to pay a whole lot to get basically in a position to double our mass capacity. Well, you know, we used to have about $190 million to $200 million a year of mass capacity and that's roughly going to double over time. But certainly, look, we think there are protocols that have permanently changed as, or at least adherence to those protocols that aren't going to go back. And the best example again is, is on the dental side where look, the protocols have been there that, that hygienists and dentists should be changing their mask after every patient. And the reality is before COVID, that really wasn't always the case. You might have a practitioner that changed their mask at lunch and then again at the end of the day. And I think there's been far greater adherence to changing your mask after every patient. And I think that sticks so as an example I mean that that's a doubling or tripling of the requirements on the dental side as we see that being permanent. So, we do see opportunities to utilize that capacity on the dental side. And look, I think it also gives us an opportunity to be opportunistic in other markets where we might be able to bundle products together.

[Operator:]

We'll take our next question from Larry Solow with CJS Securities. Please go ahead.

[Larry Solow:]

Great. Good morning, guys. Thanks for you know certainly a lot of information. Could you just clarify, so on the clearly you know -- you've beat sort of every line item between you know a little bit higher sales on your preannouncement and then you know certainly much greater gross margin expansion. And it sounds like your targets and your EBITDA exiting the year at 22% versus 19%, is most of that adjustment you know related to your confidence and -- and sort of achieving these -- these higher gross margin levels and then the operating margin and expense level there's some room there and you know maybe there is -- if you don't bring back all those expenses you know you'll potentially have some more upside? Is that a fair way to look at it?

[Chuck Diker:]

Yeah. I would say the -- it is overall I'd say the you know major changes are you know previously we had kind of anticipated that procedural recovery would be somewhere between you know 90% to 95% by the end of the year. And so, we're more bullish. That's going to be you know at a 100% by the end of the year. So, that's driving some of that confidence and the expansion that we you know referenced. And yes, absolutely that you know we're -- we're getting more confident in our ability to you know produce the fruits that we knew that we were planting you know with all the operational initiatives that we had in place. And -- and again, I think you -- you know reiterated like I've seen a spot on that you know there is room in that you know client that I've referenced in the operating expense models so that again you know if volumes fluctuate of any you know and you know off of anything that we forecast right, we do have room to pull those levers to maintain margin.

[Shaun Blakeman:]

Yeah. I don't have anything to add like suppose you know that’s -- we've used the word at least 22% strength to our confidence.

[Larry Solow:]

Yeah, no, absolutely. And how do you gauge or balance your significant outperformance in revenue or rebound in recovery and revenue versus sort of obviously a nice recovery in procedures but not quite the level that you have revenues recovered. Is there some catch-up or like these returned to work, it's and maybe perhaps now that that providers plan on using extra PPE and stuff, are they perhaps buying even extra inventory and stuff? How do you sort of gauge that catch-up or is there maybe not as much as I'm thinking there is?

[Peter Clifford:]

Yeah. Larry this is Peter. One of the things obviously with the dental side is we have a lot of data on out of the door by product category and obviously…

[Larry Solow:]

Right.

[Peter Clifford:]

Compared to that to our purchases from our channel partners. And we've looked at both on, I'll call it, a calendar year-to-date 2020 and also just during our first quarter of fiscal 2021 the amount of inventory change has been negligible. So, the reality is, and that's a good news story for us that there isn't any, there isn’t some big restocking going on there then what our channel partners are buying as what's going out the door. And on the medical side as well, I mean, the nuance that you have to remember especially on the consumable side is a lot of these hospitals and a lot of the VACs don't hold a lot of inventory because they don't have a lot of space to hold inventory. So, you're talking about a change where maybe somebody is holding a couple of days that may be holding a week, week and a half. So, the reality is we just don't see that behavior happening within our core markets. And look, I think at the end of the day, we're seeing that dollar per procedure increases as people again are just paying more attention to the protocols and the importance behind it.

[Larry Solow:]

Right. And you mentioned you know I know Europe expansion improve in -- Europe it is part of Cantel 2.0, I mean are you seeing any differences today in the recovery forget the COVID and since which it seems to be worse in the US but just in terms of the customer behavior and whatnot in the United States versus the rest of the world are there any differences as we sort of begin to rebound?

[Chuck Diker:]

No I mean it's been broad-based in the sense of I -- meaning we've seen examples in every geography where there are certain practitioners that are adhering or in some cases creating new standards and again the example is we've seen pockets in Germany we've seen pockets in the United States and Australia with an -- as an example where we sell 24-hour tube sets and we've seen some clients actually switch that to a single-use tube sets as an example with just the heightened focus on the infection prevention around COVID.

[Larry Solow:]

Okay. Just I guess perhaps the last question or so maybe a little color on the -- you announced this deal with CANEXIS on the Trace & Tracker just to review this as sort of on an early-stage thing that eventually will contribute meaningful revenue but sort of a slow ground or how should we sort of look at that?

[Seth Yellin:]

Hi. Hi, Larry this is Seth we're really encouraged with the partnership that we announced with CANEXIS. We've always viewed Track & Trace solution as an important additional element to our overall complete circle of protection That ties together the overall nature of the portfolio. And we're very encouraged by the ability to leverage the strength of our partner to help accelerate this offering in to the market. Obviously, these are substantial investments at hospital system is going to make. So, they're not quick sales and quick win.

[Larry Solow:]

All right.

[Seth Yellin:]

But we have a healthy pipeline and we're encouraged by the interest that we've seen from our customer level, demand for this sort of solution and we look to roll this out with the develop product in the coming quarters and we anticipate this will be a growth driver for us in fiscal 2022 and beyond.

[Larry Solow:]

Great. Okay. Great. Just lastly, I'd be remiss if I didn't just give a shout out to Matt, he helped me out a lot ramping up. So, good luck in your new role. And that's it. I'm all set. Thanks guys.

[Seth Yellin:]

And that's not going to influence this page though.

[Operator:]

We'll take our next question from Mitra Ramgopal with Sidoti. Please go ahead.

[Mitra Ramgopal:]

Yes. Good morning. Thanks for taking the questions. The first one to start on Hu-Friedy obviously you're well ahead in terms of your targets on the costs synergy side. I was just curious as it relates to on cross selling front, if you're generating incremental revenue there that you anticipated or if you're already ahead on that front also?

[Peter Clifford:]

Yeah, Mitra. This is Peter. Yeah, I mean look the back to practice procedural kits on the dental side that we've been bundling a fair amount of Hu-Friedy with prospects as those dental offices reopen. So that's got a pretty big win. But yeah, candidly the growth drivers are still the same. Yeah. The IMS setups are progressing although was new build facilities have obviously slowed with COVID. But those are compliance bundles the Harmony scalar we just launched in the month of October. So we've got minimal sales in October what we're excited about what that brings the rest of the year. Obviously, that surface disinfectants along about what that brings in the rest of the year. Obviously, the surface disinfectants along with PPE has been huge and then we continue to lean into green light as a key store issuance vehicle to move the whole business forward.

[Mitra Ramgopal:]

Okay. No. That’s great. Thanks. And as it relates to the facemask, face shields et cetera, just wondering if you have any restrictions given the federal subsidies in terms of being able to sell more outside of the US?

[Peter Clifford:]

No. There is, there's minimal handcuffs on that. We just need to keep the capital. Actually, in the United States, it’s pretty much the main requirement on the machines that on the foreign machines that we got assistance from the US government on. And it's a similar profile on the two machines that we got in Italy. We need to maintain the capital there, but we can manufacture and export as much product as we need to.

[Mitra Ramgopal:]

Okay. That's great. And as it really say, I believe you mentioned we should be expecting some incremental headcount coming on as you go to business. Where do you stand on the sales force front especially given the increasing push into ASCs and just building up the business going forward?

[Chuck Diker:]

Yeah. I mean even during the shutdown here, we protected the investment on the sales side especially on the medical piece so we are staff now. I think as we've mentioned in the opening remarks, we're down. Basically, there's one open position on the inside sales. But we've got that up and running in the first quarter. That team got their first orders in the month of October. We're fully staffed on the ASC side in the eight markets that we targeted. And we've made really strong progress in getting everybody that was put into a full background trained sort of graduating, from getting their masters and selling both capital and procedural products here. So, if you really get there, we’re positioned as we hit the back half of the year, we've got not only a highly motivated sales team, but no open positions. And everybody again trained and ready to roll.

[Mitra Ramgopal:]

Okay. Thanks. And then finally on Life Sciences, a little later than I was looking for. What is your best sense in terms of when you expect that to sort of flatten out?

[Chuck Diker:]

Look, it's fairly flat sequentially from 4Q to 1Q and I would look at the next two quarters and probably say revenue is going to look pretty close to the first quarter in terms of sort of trading sideways, from a revenue perspective we've seen the backlog kind of stabilize and level off. This is usually the slowest time of the year, November and December from an order intake perspective on Centrals. As you can imagine there's not lots of folks wanting to go do new builds in the middle of the winter. So for us usually the order intake machine starts to accelerate late January. And that's kind of how we see the market is orders that we take in February and March because of the lead time we're not going to shut until the late spring or early summer. And so that's probably how we think about sort of the revenue trajectory.

[Mitra Ramgopal:]

Okay. Thanks. And then finally just one housekeeping question. I believe on the interest expense line I think there was an item that was included in there, some non-cash interest expense. I was just wondering what that amount was if you had it.

[Chuck Diker:]

Little less than I think about what $1.8 million or so and escalated to the accounting for the convertibles. It's a non-cash item to give to your point.

[Mitra Ramgopal:]

Okay. Okay. Perfect. Thanks again for taking the questions.

[Operator:]

We'll take our next question from Michael Cherny with Bank of America. Please go ahead.

[Michael Cherny:]

Thanks so much. One just quick clarification Shaun, you mentioned your expected gross margin expansion to continue. Just wanted to know is that off of the 1Q levels or is this based off of last year and expecting year-over-year gross margin expansion?

[Chuck Diker:]

It will be in reference and the best quarter again would be our second quarter of 2020 looking at a set of the whole with Hu-Friedy employees, so it would be reference to that, I mean, obviously Q1 itself there is a little bit of mix so you know in terms of the capital versus consumables mix that you know will alter going forward. But you know relative to those volumes and mix we do expect the margin expansion year-over-year.

[Peter Clifford:]

Mike we refer to since our fiscal year 2020 second quarter because it was the last pre-COVID…

[Michael Cherny:]

That rate to be clear it was like 47…

[Chuck Diker:]

Yeah, it was 47.1. So you know again if you want to think about in general we'd be targeting around 50 basis points expansion on top of that maybe a little bit better that would be a good way to think about it.

[Michael Cherny:]

Okay. That's a very helpful clarification. And then I guess maybe the pull on the mass question and the PPE dynamic, infection prevention you're doing in the dental markets as dentists continue to think about reformatting their workflows. You gave some color around how much they can switch out masks. How much are they coming to you in terms of having that strategic discussion to make sure that they're appropriately sourced especially at a time where you know there is -- there are some other mask manufacturers that have high levels of quality but you're also fighting a battle of third party black market whatever you want to call it challenges and how early whether it's mask or some other PPE. Can you get into those conversations to make it more strategic type sales versus some of the rest demand that you're likely still seeing across the market?

[Chuck Diker:]

Yeah, that's a good question Michael. I mean look we are having those conversations with the larger channel partners. You can think of it as almost getting into a position where ultimately have dedicated machines And capacity that that -- that folks are definitely thinking about how they saw strategically differently than they used to much -- much in the last five to 10 years has been just get the cheapest product and obviously there’s been a sea change on that in terms of people want to make sure that they’ve got multiple sources and ideally multiple sources what capacity in North America and not getting caught again from an exposure perspective where the entire supply chain that they are buying from was in APAC. So know we do think there are opportunities to bundle long-term and enter long-term relationships and commitments on mask and face shields specifically.

[Michael Cherny:]

If I could just one more follow-up that I apologize but I missed this before. Can you give us a sense of dynamics within that area of pricing that you've seen across your customer base?

[Chuck Diker:]

Yeah. I mean ultimately we only changed our pricing once a year so there isn't that the channel partners obviously are able to change their pricing real time to the -- to the market which I'm sure that they've done. If we've gotten any real benefit I think I would -- I would categorize it is as we have pushed our branded mask very heavily. Obviously the pricing and the margin profile is a bit higher on the branded versus private label. So from our perspective, our main benefit is really insisting or pushing more forcefully here the branded product.

[Operator:]

And this concludes our question-and-answer session. George, we’ll turn the floor back to you now for final remarks.

[George Fotiades:]

All right. Thank you very much for listening and participating today. And we look forward to speaking with you on our second quarter call. Thanks.

[Operator:]

Ladies and gentlemen this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.