Cantel Medical Corp.
Q3 2020 Earnings Call Transcript

Published: 4 Jun 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to your Cantel Medical Third Quarter 2020 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time, it is my pleasure to turn the floor over to Matt Micowski. Please go ahead.

[Matthew Micowski:]

Thank you. And good morning, everyone. On today's call, we have Chuck Diker, Chairman of the Board; George Fotiades, President and Chief Executive Officer; Peter Clifford, Executive Vice 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 third 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 risks 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, I'm pleased to introduce to you George Fotiades, President and CEO.

[George Fotiades:]

Thank you, Matt. And good morning, everyone. Before discussing our performance, I wish to join the chorus of voices expressing gratitude to our customers and all healthcare providers on the front lines of this COVID-19 pandemic. I also want to express in this forum my deepest appreciation to our employees worldwide. This crisis has brought out the absolute best in Cantel. Our associates have been there to make over 4 million masks weekly in Hauppaugue, Long Island and Rochester, New York and to produce essential chemistry in our Minneapolis and Pomezia, Italy facilities. We have manufactured approximately 500 portable dialysis water systems and received new orders for nearly 400 more units. These portable units serve the critical needs of patients, requiring more mobile dialysis outside of a clinic, which has been particularly heightened due to COVID. We also had hundreds of field service personnel who quickly adapted to new procedures to safely enter facilities and serve customer requests. There are three takeaways from my comments this morning. First, since the very beginning of the pandemic, Cantel has been proactive in managing our resources and expenditures while maintaining our core capabilities. What's also important is we have remained agile to flex as we monitor our markets daily. Second, we have taken significant steps to strengthen our balance sheet and overall liquidity, giving us ample security into the future. Third, and very important, as a leader in infection prevention, our business is uniquely positioned to quickly rebound with the expected recovery of elective procedures. Our infection prevention focus will be more relevant and required by our customers than in the pre-COVID environment, which is why we remain highly confident in our future. In this third quarter through April 30 that we are reporting today, COVID-19 impacted the last five weeks of performance. Starting March 23, most US elective procedures in Medical and Dental locations shut down in response to CDC, ADA, state and local guidelines. For our third quarter, total revenues of $237 million were down 18% sequentially versus the previous non-COVID impacted second quarter. Looking specifically at the Medical and Dental segments for the last five weeks of our third quarter, revenues were approximately off 60% in Medical versus the prior non-COVID second quarter, while Dental was off roughly 55% in total versus the same pre-COVID comparison and down 70% excluding the sales of personal protective equipment or PPE. Note that these are sequential comparisons as year-over-year are not especially relevant or useful to understand the business performance. We have seen improvement in May as elective procedures are beginning to open up in parts of the country. In Medical, estimated – to be audited – May revenue rate was off 40% versus the pre-COVID rate; and in Dental, the estimated revenue rate in May was off 45%. We are encouraged by these early signs of improvement in May relative to April, though it is difficult to forecast the pace of restoration of elective procedures which, as we know, also includes the added impact of rescheduling needed procedures deferred during this COVID affected period. The pace is influenced by hard-to-predict factors including patient comfort level to reenter facilities. As we discussed in a communication earlier in May, we have implemented aggressive actions to manage variable expenses. We have made broad use of employee furloughs and compensation reductions to reduce our costs while retaining our experienced workforce. This enables us to redeploy resources quickly in response to changes in demand. All this recent work that we have done evaluating and managing the cost structure will make us smarter and more efficient with engaging resources as we bring Cantel back to more normal operations. As we reported earlier on May 12, we have secured the necessary flexibility to navigate this environment with an amendment to our credit facility. It provides for a suspension of many of the covenants, such as overall leverage ratios and replacing them with minimum liquidity and profitability metrics until October 31, 2021. This amendment provides us significant flexibility for the next 18 months. Our cash position has also been fortified with the recent issuance of $168 million in convertible debt. This ensures an ample cushion to exceed our new liquidity requirements and our credit covenants, as well as to operate comfortably under conservative recovery scenarios. So, looking ahead, while it is challenging to predict the pace of recovery, I can say with certainty that we are uniquely positioned to come back fast as our markets recover. Three reasons why I believe this. First, in our dental and endoscopy end markets, we are a primary go-to resource for information and assistance in helping customers reopen facilities in a safe, compliant and efficient manner in this new environment. For example, in the last two months, we have been doing webinars and training programs on the topic of COVID and the workplace, which have engaged approximately 34,000, medical and dental professionals. We also employ several hundred field service and clinical personnel who are working closely with customers, preparing to operate with new COVID-related protocols. As practices reopen, they need to ensure their products and systems are functional and calibrated after being idle for several weeks. Second, our strategy of the complete circle of protection for the reprocessing workflow will be even more important as we go forward in this COVID impacted world. We are already working with dental and GI personnel to help them understand how to deploy new protocols for a safer practice, from patient intake to the use of PPE to procedure room safety, and finally, to room turnover and gradual improvement of workflow productivity with our unique solutions. Finally, we continue to make progress on our Cantel 2.0 growth initiatives, which we first discussed at our last earnings call. While progress has had to contend in the near term with pandemic-related priorities, we continue to move Cantel 2.0 forward with actions that will meaningfully benefit the recovery. The combination of these three actions gives us great confidence in how Cantel will perform as we push ahead these next few months. So, let me now turn the discussion over to Shaun to review the key financial information.

[Shaun Blakeman:]

Thanks, George. And good morning, everyone. I'm going to go through our key financial results with brief commentary. However, following that, I'd like to provide additional details that give context to the financial impact of April's volume decline. I will begin with the year-over-year comparisons. And given the COVID impact, I will close with specific references to more relevant sequential comparisons to the second quarter 2020. 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 increased 3.7% year-over-year in the third quarter 2020 versus prior year and 4.2% on a constant currency basis. M&A accounted for 15.5% which was offset by an organic decline of 11.3%, with FX being negative 0.5%. Overall, our Life Sciences and Dialysis segments have been more resilient during the pandemic, given the essential nature of renal dialysis. Life Sciences sales grew 7.3% on an organic basis, driven by higher demand for portable water systems, as George mentioned previously, and in the Dialysis segment, we saw organic growth of 8.5%. The Dental segment grew 75.4% on a reported basis, driven by the acquisition of Hu-Friedy, but declined negative 3.1% on an organic basis. The relatively low decline on an organic basis is due to a previously stable start to Q3, and then unprecedented demand of PPE and disinfectants during the pandemic, which helped to partially offset the severe decline in elective procedures. Overall, we believe that these are better-than-expected results in a very difficult market environment. Finally, the Medical segment decreased by negative 21.7% on an organic basis, and similarly to Dental, the last five weeks of the quarter were significantly impacted by COVID-related procedure deferrals. Capital equipment decreased negative 20%, recurring revenue declining negative 22% in the period versus the prior year. As George mentioned, we are seeing improvements in May sales rates and anticipate continued volume recovery over the next few months. Turning to consolidated margins. Our GAAP gross margins contracted by negative 420 basis points to 42.6% versus 46.8% in the third quarter of 2019, while non-GAAP gross margins declined by negative 350 basis points year-over-year to 43.5%. As a result of our slowdown in manufacturing and the subsequent short-term underutilization, we incurred an accelerated recognition of nearly $3 million in costs that would normally be absorbed initially into our inventory valuation. In addition, as procedure deferrals more acutely impacted consumables, which are generally our higher margin lines, our gross margin also reflects that mix pressure. Again, I'll end the financial discussion with some additional color on our margins. Moving down to op profit, GAAP operating profit increased 51.5% year-over-year to $22.4 million, mainly driven by favorable fair value adjustment of around $17 million associated with an earn-out related to the acquisition of Hu-Friedy. On a non-GAAP basis, op profit decreased negative 38.6% year-over-year to $20 million. Moving to tax rates. The GAAP effective tax rate for the quarter was a benefit of negative 28% compared to the prior-year rate of 33.6%. This benefit was primarily driven by a net operating loss carryback and was partially offset by the unfavorable tax effect of the fair value adjustment related to an earn-out liability. Non-GAAP effective tax rate came in at 31.1% compared to the prior-year rate of 23.6%. This was primarily driven by the overall decrease of our US denominated non-GAAP earnings and the impact of Hu-Friedy's international operations. As a result, GAAP earnings per share increased 85% year-over-year to $0.37. Our non-GAAP earnings per share decreased negative 70.9% year-over-year to $0.16 cents. Finally, adjusted EBITDA came in at $31.7 million, down negative 23.3% year-over-year. I'll now move on to cash flow and balance sheet items. Our cash flow from operations came in at $49.3 million, which is a significant improvement from our first half results. We ended the quarter with $115.8 million in cash and cash equivalents and $288.1 million in working capital. Working capital increased 23% sequentially from the second quarter, primarily driven by the increase in cash from drawing down our outstanding revolver. The change in accounts receivable and accounts payable largely offset each other in the quarter, while inventory remained relatively flat. Capital expenditures were $5.1 million this quarter as a result of significant pullback of all non-essential spend. Moving to our debt profile, gross debt ended the quarter at $976.9 million, while net debt was $861.1 million. Our net debt to adjusted EBITDA's ratio was 4.63, which includes seven months of Hu-Friedy results. I would also like to provide an approximate unaudited update of our debt and cash position ending in May, given its stronger relevance in light of our convertible offering. With those proceeds, our cash balance is approximately $248 million, with gross debt sitting at approximately $1.1 billion and our net debt sitting at approximately $850 million, keeping in mind that we had to use $31.5 million to pay down our term loan. I would like to conclude my remarks by providing more context in the key aspects of our Q3 results to help provide transparency into our actions and performance through the first week of the COVID pandemic. In short, we reacted immediately in executing rigorous cost reductions and strict working capital management processes. We carefully balanced cutting variable costs down as much as possible in a short amount of time, without sacrificing our ability to respond aggressively as elective procedure volumes recover. Overall, we are very pleased in proving out our ability to execute through what we hope is the steepest decline in our volume, and believe our performance is indicative of a balanced, but proactive approach that we will continue to execute through periods of reduced volumes. Regarding our gross margin, if I treat the second quarter of 2020 as a baseline, approximately $45 million of our cost structure is fixed. We quickly took measures to control variable costs, and for the month of April, we reduced variable manufacturing costs by 40% in total, which means on a revenue decline of approximately 50%, we were able to reduce 80% of variable manufacturing costs with the volume decline. In April, our gross margin was approximately 800 basis points lower than our second quarter 2020 non-GAAP rate, excluding the accelerated recognition of expense normally capitalized in inventory. Additionally, with respect to operating expenses, we were able to quickly reduce SG&A costs by approximately 20% in April compared to the average monthly cost in the second quarter of 2020 through a combination of furloughs, salary reductions and the pullback on discretionary spend. And regarding cash and working capital, I would like to specifically note how strongly we acted to aggressively preserve cash. Even with the sudden and steep decline in procedural volumes, we were able to hold inventory relatively flat, judiciously pushed out payments, and maintained cash collections with minimal pressure from delayed payments. We're very pleased that we were able to manage working capital to be a net cash contributor to the April decline. Although we built up cash in April, I estimate that our peak cash burn could be approximately $10 million to $15 million a month. And I expect that peak to occur around June due to our normal collection cycle and improve thereafter. Of course, while this does not imply that future months will execute exactly as April, we feel it's an important gauge that supports our belief that we have ample liquidity to weather the instability of the pandemic. I appreciate your patience listening to these additional details. And as a reminder, we will be filing our 10-Q by next week. I'll now turn it back over to George for concluding remarks.

[George Fotiades:]

Coming up will be a busy summer for Cantel. We will be focusing on these top priorities. Number one, we will continue to remain disciplined with all internal workplace safety procedures and protocols to maintain the efficient and reliable delivery of our services and solutions. This discipline will continue to extend to our vigorous stewardship of operating expenses and the balance sheet. Second, our Medical and Dental field sales, service and clinical teams will continue to work daily with customers to assist the recovery in our markets by consulting on how to safely restart procedures under new protocols and with solutions for restoring and efficient workflow. Third, we will continue to make headway on the critical Cantel 2.0 initiatives. For example, our efforts to provide more infection prevention solutions in surgery centers, the expansion of our key account director organization and the Hu-Friedy Group focus on expanding penetration of the instrument management system. We are very energized by the opportunities embedded in Cantel 2.0, which are even more relevant in a post-COVID environment. We will have more details to share at our earnings call in September. The impact of COVID will continue to be an uncertain factor on performance in the coming weeks. That said, we are deeply engaged in supporting our partners and optimistic about the recovery. We are now ready for questions.

[Operator:]

Thank you. [Operator Instructions]. And we'll take our first question from Lawrence Keusch with Raymond James. Please go ahead.

[Lawrence Keusch:]

Great. Thank you. Good morning, everyone. George, you obviously spoke to where Cantel is positioned as we start to come out of the peaks of the pandemic and the focus on getting procedures up and going again. Can you expand a little bit on where you think really – across Medical and Dental is where I'm most focused, where there are aspects of those business that can become more durable in use as we head out of the pandemic and there's more focus on in infection control and prevention?

[George Fotiades:]

Yeah. First, good morning, Larry. Thank you for the question. Look, I think there are probably several things that I could mention, and Seth may chime on this. But first and foremost, I think what we've found is we've been helping people deal with the disruption is just the importance of getting – continue to get training and discussion around how to comply with new regulations and protocols that they have to contend with. And then, I think going beyond that is how to get back to workflow throughput because, obviously, these new protocols will, in the short term, compromise what they used to have for throughput prior to that. That, obviously, can put pressure on revenue and their margins. So, we think some of the things that we can provide in our circle of protection in both Medical and Dental, how to organize the workflow, in particular, will be those kinds of things which become durable in a post-COVID environment. I also think, as we look at places like surgery centers and dental offices which are similar in many respects to the focus on throughput that there are a number of our solutions, particularly whether it's disposable products for the surgery center and what they can do to expedite the reprocessing workflow or the dental office with the instrument management system, while at the outset it requires investment over time, it provides greatly enhanced throughput to the office. And so, we think the instrument management system in dental can benefit meaningfully. Look, we talked about our key account director program and the importance that that provides in talking to C suite executives who are going to be far more attuned in a post-COVID environment to the importance of infection prevention, all areas of the hospital, that talking about our complete solution will resonate much more than it has in the past, aided by the fact that we can provide clinical support and assessments that our clinicians provide which we know can lead to a broader adoption of our offering. I'll pause for a second. Seth, if you wanted to add anything to that, please go ahead.

[Seth Yellin:]

I think you captured all the major elements nicely. I'd say, we've seen very strong interest and accelerated interest in some of the solutions, such as the IMS, with engagements with customers up 700% over prior equivalent periods as people look to better solutions to help drive both safety and better infection prevention protocols in their practice with the efficiency that comes with these solutions. So, we think there's a good match up here of our capabilities with our customers' needs that are further enhanced by the COVID backdrop.

[Lawrence Keusch:]

Okay, thank you for all that. I'll just ask two other quick ones here. First, could you just speak a little bit about – between Medical and Dental, would you expect Dental to have a bit of a lag on the recovery of procedures versus Medical? Maybe talk a little bit about how you're thinking about the capital equipment environment around Medical. And then, lastly, I recognize that you're not providing guidance at this point. But you were kind enough to provide some clarity on kind of how you think May is shaking out. If you kind of take those May rates and sort of assume no improvement through the remainder of the fiscal quarter, the fourth quarter, it seemed like you'd come up with numbers that appear to be a bit higher than the Street consensus. So, do you think that people have to sort of think about recalibrating a little bit on their fourth quarter outlooks? Thanks very much.

[George Fotiades:]

Okay, Larry. I think we captured all of those. There are several very good questions. I'll see if I can get it right. First of all, Medical, I'll cover the medical versus Dental progress, how we might see that. Pete, you cover capital. And Shaun will take the last part of the question. Look, I think we have spent a lot of time trying to see how that might unfold going forward. Obviously, can be impacted by different parts of the country coming on at different points in time. Likewise, we know that there's been certainly a lot of independent research done that's asked the question in dental offices about how they see things unfolding. There's the impact of, let's say, medical insurance on people in the current unemployment rate and how that might impact things. So, there are a lot of these factors which may contribute to the pace of recovery. I guess I would say we think probably Dental could be on the slower end of coming back versus Medical. I don't know if that's like a month behind or two months behind or not. I think some of that has been verified a bit on the outside that it may be more susceptible to the impact of insurance. It could be because it's maybe less urgent a need, let's say, versus a colonoscopy or an endoscopy, which as we know is generally a deferred procedure that ultimately needs to get done and people may feel a need to get that done as quickly as a surgery center or hospital reopens. So, I guess, what we've sort of modeled is that Dental may take a little bit more time. But obviously, we monitor this thing month to month just to be sure we can calibrate on our model and make adjustments accordingly. Let's go to the capital equipment question and how we see that unfolding. I'll let Pete answer that.

[Peter Clifford:]

Yeah. Larry, as you're aware, on the Dental side, we have very little capital exposure. On the Medical side, I think O-US we will see very little softness as it relates to capital. Within the US, we are anticipating some softness for the next couple of quarters on [indiscernible 0

[Shaun Blakeman:]

Larry, hi. This is Shaun. And regarding the question on kind of the Q4 outlook, yeah, I do think it's logical, so I'd reiterate it. Obviously, with Q4 being exposed to COVID most acutely in its entirety, I think it's logical that Q4 is going to be less than Q3 in terms of revenue. But I do agree with your assessment that if you were to extrapolate what we're seeing in May and assume that we're going to last for the whole summer that you would need to bring those estimates up a little bit to match that reality if that's what you believe is going to happen for the entire quarter.

[Lawrence Keusch:]

Great. Thank you very much, guys.

[George Fotiades:]

Yeah. I'd just add on one last point, Larry. I think one indicator that's pretty positive on the Dental side is all the feedback we have and the POs that we've gotten, especially here in May, really points that the school season for the dental schools looks to be fairly uninterrupted as we think about August and September. The mood in what we see in PO activity has been very positive here in May.

[Lawrence Keusch:]

Great, thank you very much.

[Operator:]

And our next question will come from Matthew Mishan with KeyBanc.

[Matthew Mishan:]

Great. Good morning. And thank you for the questions. It's been a long three months since your last call. I guess, guys, what I'm hearing is that your relationship and value proposition with customers are enhanced coming out of this crisis. I can fully understand that with dental practices. They are more fragmented, entrepreneurial type businesses. But can you help me better understand that with the hospital customers where you were experiencing some competitive disruptions in medical?

[George Fotiades:]

Competitive disruptions, so he's talking about the bowel business. Look, again, my comment about competitors, let's just talk about that without having to name competitors, we have competitors on one or two parts of our complete circle of protection, but not on the complete circle of protection where we have a suite of solutions, as you know. So, in the case we're talking to the hospital, the one company who knows the entire endoscopy process from beginning to end is Cantel. We are the ones with clinicians that serve the GI suite, with service technicians who service the GI suite, particularly as it's laid idle for, in some cases, up to eight weeks' time where they need people to come back in and recalibrate that which they are doing. So, there's really only one company that can provide that service from beginning to end that they're turning to. Also, when you consider our installed base, which there's really no other competitor that comes close to that, when you need to deal with the AER situation, restoring chemistry, et cetera, again, we're the most obvious go-to resource. So, I think that's sort of a built-in fact, reality that really is why we've become the go-to resource for hospitals.

[Peter Clifford:]

Yeah, I'd just add on and stress that point, Matt, at the install base and the fact that at a time right now where access is somewhat limited, we'd probably have the greatest access of anybody that plays on our space. And as folks have to restart up their suites, there's a lot of complicated startup procedures that our customers on the hospital side are looking for guidance on, and again, having sort of unprecedented access compared to our competitors. And I think this opens up a door wider on the ASC side where they're less sophisticated. And again, I think this is one of the natural synergies between actually our Dental business and our Medical businesses. The dental suites in the ASCs tend to behave similarly in the fact that compliance is important, but throughput and efficiency of practice is huge. So, I think we're positioned better, again, than anybody with our clinicians to be able to help people not only start back up safely on the ASC side, but actually drive throughput.

[Matthew Mishan:]

Very interesting. For Hu-Friedy, you talked about the instrument management system and engagement being up like 700%. How are some of the dental practices thinking about the upfront investment of that versus potential disruption in bringing that online as you're trying to startup the practices again? What does the tightening of that look like for some of Dental customers? How are they thinking about that?

[Seth Yellin:]

I think the IMS system is a great example of the type of comprehensive solutions we can deliver to the dental suite, right, that it combines a workflow process with the instrumentation, with the associated consumables. And candidly, there's a whole host of different ways that the practices can configure to utilize these products, be it full implementation to partial implementation. I think what's particularly interesting, though, around the level of engagement we've seen is a true spike in interest in understanding new solutions to help drive what is a clear problem in dental practices, which is the efficient reprocessing of instrumentation to drive a safer environment and maintain efficiency. So, as George highlighted, the pace of recovery in the dental market and budgetary constraints remain, some unknowns here, but I would say that despite that disruption, there remains a very heightened level of interest and scrutiny around our broad solutions. So, I think we're encouraged how that specifically translates in the immediate timeframe versus the longer timeframe to product sales is to be seen, but we've seen broad interest accelerate in our IMS solution, as well as a whole host of different solutions that we bring in the dental suite, including our green light compliance program and other types of educational and training tools to enable those practices to operate more efficiently and more safely.

[Matthew Mishan:]

And last question is a broader one. As you look at your capabilities in infection prevention, are you mainly focused here on supporting your existing customer bases in Dental and Medical or have you looked at opportunities around inspection prevention, helping companies do better with sterilization around [indiscernible 0

[George Fotiades:]

I think as an example, in our Life Sciences division, obviously, we've had a lot of opportunities come to the surface just more broadly on sort of bio decontamination and surface disinfection opportunities around our dry fogging equipment in chemistry as an example. Obviously, I think it's pretty clear that with our PPE and historically very dental focused business that those products have been going well beyond dental and, obviously, into the broader healthcare sector. I think some of that will continue obviously in the future. And then obviously, what we still think there's an opportunity down the road with [indiscernible 0

[Matthew Mishan:]

Thank you very much.

[Operator:]

And our next question comes from Michael Matson with Needham & Company. Please go ahead.

[Michael Matson:]

Yeah. Good morning. Thanks for taking my questions. I guess just want to start with a couple on margins. So, first, with all the cost reduction efforts that you've taken to address the revenue declines here, are any of these going to be permanent and have an ongoing effect beyond kind of this short-term period? Or are these really all short-term measures?

[Shaun Blakeman:]

I would start by saying that – like for the foreseeable future, this is a discipline we're going to be executing to, right, especially in terms of the variable cost on the manufacturing side. And I think that our viewpoint right now is we really want to get a good look at how May, June and July kind of play out. That's something that we look at it on a day by day, week by week basis to kind of understand what we think the post summer environment is going to look like before we would make any calls on how we might move forward and proceed beyond that point. But I would anticipate that for the summer, right, we'll keep these disciplines in place. And right now, the focus has been on trying to understand what the other side looks like and maintain that infrastructure to make sure we can come out and attack it.

[George Fotiades:]

Yeah, I'd just add on, Mike. Look, I think one of the strange benefits of the pandemic is it's brought a new cadence to running the business daily. And I think everybody is acutely aware of how we spend discretionary dollars. And I would expect that as we come out of this. There's certainly areas like T&E and production supplies that we will find a new level that's below the pre kind of COVID environment. So, again, there's been some positives strangely to running the business on a daily basis here.

[Michael Matson:]

Okay, that's helpful. And then, just on the gross margin, it sounds like it was down, I guess, about 8 points in the April timeframe. And so, I guess, looking into the fourth quarter, is that kind of where we should be? I know you're not giving guidance, but should we assume it's kind of at that level, kind of 8 points down year-over-year? Is that a reasonable assumption?

[Shaun Blakeman:]

That was actually a sequential comment from kind of like a previous kind of 2Q stable quarter, which we largely believe were non-COVID. So, to the extent that I think Q4 in its entirety is going to be – have less volume, I would expect it to be similar. I would still look at somewhere between 800 to 1000 basis points is probably a safe way to look at it. But to the point that was asked earlier, to the extent that volumes – if they're stronger than we expect, obviously, there'll be some mitigation on that. [Multiple Speakers] 8% also excludes – the 800 basis point comment does exclude the accelerated recognition of expense that normally we would capitalize due to underutilization at the plant. So, that is a fairly clean look at what the trough looks like for us.

[Michael Matson:]

Okay.

[George Fotiades:]

How you might think of that, Mike, is our overhead is about 20% of revenue and about half of that is fixed.

[Michael Matson:]

Okay. And then, just on the SG&A commentary about it being down 20% in April, so similar question there, I guess. Can we assume it's down 20% for the fourth quarter?

[Shaun Blakeman:]

Roughly, I'd say it will play out the same way. Yeah, roughly, I do expect it to play out the same way for the quarter.

[Michael Matson:]

Okay, great. Thanks.

[Operator:]

[Operator Instructions]. And we'll move next to Mitra Ramgopal with Sidoti. Please go ahead.

[Mitra Ramgopal:]

Yes. Hi. Good morning. Thanks for taking the questions. First, just wanted to follow-up on the Life Science business. I think, George, you talked about the unprecedented demand for the portable [indiscernible 0

[George Fotiades:]

Yeah. We have been able to meet that demand. We have been able to flex by moving to more shifts, accelerating the supply chain as well. It's largely an assembly challenge which the team in Minneapolis has been able to accomplish. And at this point, while obviously it's been a big difference from the prior demand scenario, they've been able to make it work by improving throughput and moving to three shifts as well seven days a week to get it accomplished. So, we're completely confident in the ability to meet the demand.

[Peter Clifford:]

Yeah. And I think, Mitra, as you're aware, look, the Life Sciences business and the assembly or manufacturing of the centrals and portables is on the same campus just across the street from our Medical business. So, as we've actually had softness on the AER lines, obviously, that we've talked about, a lot of those people are skilled or have a similar skill set, and we've moved a lot of those people from our AER lines temporarily over to the portable business to react faster.

[Mitra Ramgopal:]

Okay. No, that's great. And then, just to be clear, obviously, a number of companies are affected in different ways as a result of the pandemic. But if I recall, none of your facilities are really affected in any way in terms of closures or disruptions, et cetera. The declines you've seen is really just a reflection of more the end market, as you talked about, the elective procedures, et cetera. Is that fair?

[George Fotiades:]

Yeah. Plant capacity has been relatively unimpacted. At the end of the day, there's been some disruption in Italy and in the US as we've had certain pieces come into the manufacturing facilities, but as a general rule, we've been able to run at the required levels to meet demand.

[Mitra Ramgopal:]

Okay. And coming back to the 2.0 initiative you unveiled, obviously, that's much more of a long-term plan, but I'm just wondering, as it relates to the environment we're in, how much has that kind of maybe slowed down? Some of the things you were planning to do, maybe as it relates to product introductions or anything else.

[George Fotiades:]

Like I say, look, I think, certainly, as I mentioned in my script, my comments, there had to be a lot of short-term focus to move some of these priorities dealing with the pandemic. But I will say that Pete and the team have continued to make a lot of progress on all the initiatives, and some faster than others. And COVID certainly represents an opportunity to move on some of these faster in terms of the benefits they can provide in a post-COVID environment. So, I said more to come on that. But, Pete, why don't you give a little bit of color?

[Peter Clifford:]

Yeah, I would just say, look, we used the opportunity that was created by some of our sales folks not having traditional access during April and May as an example to accelerate commercial excellence training in Europe. It gave us a lot of time to finish and be prepared to launch our ASC strategy here in the fourth quarter. So, I think we did a really nice job of continuing to not move slower, but move faster on that. Again, partly because of the time that was freed up with sales guys not having access as much in April and May that we really redeployed that bandwidth to further some of the strategies and execution.

[Mitra Ramgopal:]

Okay. No, thanks for that. And then, on the focus on cash conservation, obviously, you've implemented a number of initiatives, the furloughing, et cetera, suspending the dividend, how should we think about capital allocation going forward? I'm assuming acquisitions, et cetera, certainly not a focus right now. But in terms of maybe reducing debt or stock buybacks and anything along those lines in terms of how you're thinking about that.

[George Fotiades:]

I'd say the number one focus without doubt over the foreseeable horizon is paying down debt.

[Shaun Blakeman:]

I'd just add on. I think one thing, Mitra, not to be lost in the performance on the working capital side is our teams have worked pretty hard over the last six to nine months to refine and improve business processes with our SAP launch that was a bit bumpy last year and the reality is this test that we saw with the pandemic, really, I think the team delivered incredibly well. And the reality is, we wouldn't have been able to do that if we hadn't made the progress with SAP over the last six months to put ourselves in a position where we have the capability and process to de-expedite in the ways that we did and to accelerate the collections in the ways that we did and to control disbursements at a critical time. So, again, I prefer not to get tested in that way, but the pandemic really gave us a boost that the efforts on the SAP side really have been fruitful.

[George Fotiades:]

Very good point. Okay. Thanks again for taking the questions.

[Operator:]

And that does conclude our question-and-answer session for today. I'll turn the call back over to management for any closing remarks they may have.

[George Fotiades:]

Yeah. Just a couple of remarks in closing. First of all, as I said at the outset, an incredibly and extraordinary challenging quarter, one of the most significant challenging, certainly, in my career. I will tell you that, again, how proud I am about the Cantel employees and it has brought out the absolute best in Cantel, not just in managing this pandemic, but what I see in our ability to move forward past this pandemic and what we can do as a company for our customers. So, that's why we are optimistic about our future. And look forward to talking to you, particularly about Cantel 2.0 initiatives, at our next earnings call. With that, I wish everybody a great summer and thank you for being on the call.

[Operator:]

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a wonderful day.