Cantel Medical Corp.
Q2 2021 Earnings Call Transcript

Published: 9 Mar 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Cantel Second Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ryan Lada. Sir, the floor is yours.

[Ryan Lada:]

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.

[George Fotiades:]

Good morning. Our performance in the second quarter was strong and we saw sustained demand at heightened levels for our infection prevention and control solutions in both our Medical and Dental segments. Our financial results this quarter exceeded our expectations as strength in our recurring revenue categories and new products drove top-line performance while volume leverage and continued operating discipline delivered strong earnings performance. This outperformance was also made possible by the diligence and commitment of our employees, which has enabled continual service to our customers and ultimately their patients from the very beginning of the pandemic. We thank our 3700 employees globally for their dedication to our Cantel mission. Consistent with my comments last quarter, we again outperformed underlying elective procedure volume globally in our second quarter. Based on independent third-party data, we estimate that in our second quarter through January 31, U.S. endoscopy procedures were down 10% to 12% versus a year ago. We saw procedure volumes in November and December consistent with earlier fall levels with a larger drop in volumes in January driven by the post-holiday surge in COVID cases. During the same time, Medical recurring revenue products categories that most closely parallel endoscopy procedure volumes performed much better than procedures and we were down 2.8% versus a year ago.

[Shaun Blakeman:]

Thanks, George, and good morning everyone. I am 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 Q&A.

[George Fotiades:]

Thanks, Shaun. Let me sum up by saying that the key takeaway for this past quarter is that we are continuing to execute both commercially and operationally. This execution, coupled with increased underlying procedures and our initiatives will position us to continue to outperform the market and deliver continued financial performance. Before we get into the Q&A, I did want to highlight that for the purposes of this call, we will only be taking questions regarding Cantel’s financial performance that we are reporting on today and will not be taking questions concerning the announced transaction with STERIS. As mentioned previously, STERIS has recently filed a Form S4 registration statement and that filing contains considerable information about the transaction and we would refer you to this filing for information regarding the transaction. With that, we are now happy to answer any questions about our earnings release or performance.

[Operator:]

Our first question today is coming from Matt Mishan. Your line is live.

[Matt Mishan:]

Hey. Good morning, and thank you for taking the questions and you guys are clearly not mailing anything in here. So, two questions. The first one I have is, the procedures that were put off in January and February, is the tick back up you are seeing and now the quick pick up, was that because those were rescheduled procedures that were just put off and there was a backlog of people to get to, as like a catch-up? And then, ask my second one, the capital equipment backlog that - that’s been built up, I was curious if that’s new demand from your initiatives or catch-up from the previous year?

[Shaun Blakeman:]

Yes, Matt, let me take the capital question here. Look, we’ve been pretty aggressive here for the last six to nine months in terms of some programs targeting capital. So our win rate on the capital has been north of our traditional hit rate. And we expect to see much of that backlog ship in the back half of this year. So, as you know, our first half of the year, we saw modest headwinds from the prior year, we would expect capital growth to be positive in the back half of 2021.

[George Fotiades:]

Matt, with the storage, with respect to the procedures question, you have to look at – it’s hard for us to know in the data that we collected with people who were having scheduled starting of that particular data whether it’s carryover. The thing we know about colonoscopy is that people – this is not like a mist cleaning or Dental appointment. People need to get the colonoscopy done. So there is clearly catching up that’s happening in addition to new ones are being scheduled. But what we track, now we are able to track, let’s say in the aggregate, well let’s understand the differences occurring between IDNs and surgery centers. But it’s difficult to press the track whether – we are not asking people individually whether they are rescheduled or brand new. We obviously know lot of reschedules are going on as people try to catch-up with the – what they may have had basically been asked by their gastroenterologist to get it done or some other way that they have it previously scheduled. But where we can serve them between whether it’s new or rescheduled.

[Matt Mishan:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question today is coming from Larry Keusch. Your line is live.

[Larry Keusch:]

Thank you. Good morning, everyone. I had a couple of questions here. First, I guess, George, for you, as was indicated on the call, you anticipate procedures being back at a 100% and you articulated the fourth quarter. I guess, I am just curious, COVID still remains fairly dynamic. The vaccine rollouts, variance second, maybe a fourth surge. So, what kind of gives you confidence that if you back at a 100% because your fourth quarter ends in July. So that’s not too many more months from here. So just what are your thoughts there?

[George Fotiades:]

I think what we said, Larry, if my memory serves right, that we exit the fourth quarter. So we are talking about July 31 or heading into August. I mean, we don’t have any guarantee. I mean, we are obviously – we know there is going to be a high correlation with vaccinations obviously and those continue to gain traction and that’s improvement. Obviously, we’ve seen improvement even amidst COVID from the low levels to where we are at today. So we are tracking at 90. At one point we were 50 and we are at 90 today and call it that and vaccinations are only perhaps barely a 20% of the population. So, I think, the vaccinations get the 50%, 60%, 70%, we think the 90% will continue to push towards a 100%. Exactly what they – their pulse, we obviously don’t have that kind of precision. But I think we are feeling pretty confident given where they are at today and where the vaccination levels are at that the correlation audit continue to drive these things closer to 100% as vaccination percentages increase.

[Shaun Blakeman:]

And just to add on, Larry, in February, we were looking at Dental bookings and the data coming out of the back half of February is really probably the strongest that we’ve heard about or seen in the industry as folks are starting the filing both more of the hygienist deployments. So we are expecting April and May and June and July to be pretty stronger, or at least probably to peak that we’ve seen in the last six to nine months.

[Larry Keusch:]

Okay. That’s super helpful. Two other ones. I’ll just ask them upfront. How do we think about the changes in infection control and prevention protocols that have been put in place both in GI suites, particularly in ASCs and in dental offices. When do those sort of start to lap? And you’ll lose some of the benefit of those enhanced protocols? So that’s question one kind of when those anniversary? And then, secondly, the Dental operating margin, if I got this right, declined sequentially from 30.6% to 26.3% that’s obviously still north of that 25% bogie that you had. But what drove that sequential decline and how do we think about the ability to now maintain this stability that Dental operating margin above that 25% rate?

[Seth Yellin:]

Hi Larry, this is Seth. With regard to the lapping of the IP in procedures, I mean, I think the way to think about it is, last spring we certainly saw the slowdown and shutdown of elective procedures and during that time until sort of mid-summer practices were largely either shuttered or on very low volumes and they were educating themselves and revising protocols and kind of emerged in the mid-summer timeframe, late summer timeframe starting to utilize enhanced IP&C protocols and processes. That said, I think that the volume growth that you’ll see on top of that, because those remained at very low levels of overall volumes will continue to increase. So, I don’t know if it’s necessarily will be a headwind in the immediate planning period. But certainly we saw adoption of higher standards of IP&C in sort of the late summer early fall timeframe despite the low volume levels that were occurring.

[Shaun Blakeman:]

And regarding Dental margins, Larry, this is Shaun, listen, we had always said, we see that 25% plus type business as we alluded to in the Q1 call. Q1 was really the time an unusual pause that in terms of all the things that we had going for us in the expenses that were held back due to COVID-related as well as kicking off the year. And again, as we kind of alluded to and not surprisingly, we do expect a steady increase of an operating expense, as well as some mix shifts, right, that would be driving that margin down a little bit sequentially from the high point that we saw in Q1. So, our viewpoint is like, listen, still very, very healthy margins we are seeing out of there. It’s really just a combination of some expenses coming back into Q2 sequentially and a little bit of mix shift that can go realize the way in each quarter and quite frankly, to Peter’s point, right, as you see, a lot of – kind of like the core hygiene that’s ramp back up maybe relative to some of the other stuff that was going on in Dental, that’s going to continue to drive the higher margin portion of our portfolio, as well. So, we are still been at the very healthy business and sustainable of 25% plus.

[Larry Keusch:]

Okay. Great. Thanks guys. Appreciated.

[Operator:]

Our final question for today is coming from Mike Matson. Your line is live.

[Mike Matson:]

Morning. Thanks for taking my questions. Wanted to ask about the difference that you are seeing between your sales growth and the actual procedure growth. So, in Dental, Medical, it looks like procedures were down 10% plus based on the third-party data that you quoted. You were flat to up in both of those businesses. So, what’s driving that differential? Is it just increased utilization of infection prevention products? And is that something – is that differential sustainable? In other words, the volume growth, procedure volume growth picks back up, do you think you can continue to outpace the procedure volume by a similar amount?

[Shaun Blakeman:]

Yes. Mike, there is a couple of pieces there. As it relates to the Medical business, as an example, where we are executing beyond sort of the tailwind of IP&C compliance as you are aware which started to really make some right hand turns on our EMEA business as an example over the last nine months and really driving commercial excellence into that region. And if you take a step back, we view Europe this past quarter is probably closer to that 85% to 90% and that business was basically flat to up a couple of points and at the end of the day, our consumable business, as well as our chemistry in this current quarter was nearly double-digits. So, we expect to just start putting points on the board and then be in the back half of 2021. I am not surprised that we started to see some of that hit in 2Q, as well as our ASC story is gaining traction, we feel like we are positioned really well to dodder and put points on the board in the second half of the year as we committed to earlier. So that’s a little bit of. Soundbites on the Medical piece and on the Dental side obviously, the IP&C story there is really resonating as well as it was launched via Ergo design Harmony Scaler at the right time hitting the market which has obviously given us some tailwind, as well.

[Mike Matson:]

Okay. Thanks. And I did want to also ask about ASCs. So, I was just wondering if you could give us an update on the progress there, the new sales force and also, do you have a feel for the overall portion of the endoscopy procedures that you are targeting that are done in ASCs on top of hospitals?

[Shaun Blakeman:]

Yes. We are still refining what that product portfolio is that’s best fitted there. We are getting lots of positive feedback from this space. It continues to influence our value proposition. So we are also are developing – we are highly confident that we can start to differentiate growth there in the back half of this year. We’ve seen a strong start to capital bookings that was part of the story in the first half of the year with the backlog build is our more aggressive stance and direct committed sales force that’s in the channel right now. So having some success immediately on capital and we are continuing to refine that consumable and chemistry story as well.

[Mike Matson:]

Okay. Great. Thank you.

[Operator:]

Thank you. That’s all the time we have for Q&A today. Do you have any closing comments you’d like to finish with?

[George Fotiades:]

Yes. First to thank everybody for being on the call today. Obviously, we are very pleased with our results and we continue to believe that Cantel with our unique portfolio of products in infection prevention control is going to continue to outperform procedures and I think as well, we expect there to be longevity to our story as these things become part of the natural protocol in dental offices and endoscopy suites as well. So, with that, we thank you for being on the call.

[Operator:]

Thank you ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.