Cantel Medical Corp.
Q4 2019 Earnings Call Transcript

Published: 24 Sep 2019

[Operator:]

Good day, ladies and gentlemen and thank you all for joining us for today’s Cantel Medical Fourth Quarter 2019 Earnings Call. As a reminder, all phone participants are in a listen-only mode, but after today’s prepared remarks, you will have a chance to ask questions. [Operator Instructions] And now to get it started, I am pleased to turn the floor over to your host, Matt Micowski. Please go ahead, sir.

[Matt 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; Seth Yellin, Executive Vice President Strategy and Corporative Development; Shaun Blakeman, Senior Vice President and Chief Financial Officer; and Brian Capone, Senior Vice President, Corporate Controller and Chief Accounting Officer.Earlier this morning, the company issued a press release announcing the financial results for the fourth quarter of fiscal year 2019. 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 measurements, non-GAAP EBITDAS, non-GAAP income from operations, non-GAAP gross profit, non-GAAP diluted earnings per share and net debt. Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today’s earnings release.With that, I am pleased to introduce to you, George Fotiades, President and CEO.

[George Fotiades:]

Thank you, Matt. On the whole, we were pleased that our fourth quarter came in as expected and was consistent with the expectations we expressed during our previous call. The Medical segment had a strong quarter with 9.8% organic revenue growth year-on-year. The Dental segment had positive organic revenue growth of 0.8% despite a record fourth quarter in the prior year and continues to show improved sequential performance. Life Sciences ended the quarter down as expected, impacted by softness in hemodialysis water. As we have previously discussed, our analysis leads us to believe that we have hit the low point as this business continues to stabilize.For the full year, the company grew sales by 5.3% to a record $918 million in line with our guidance. This was a positive result in the face of significant challenges. The medical segment had another record year with 11.5% organic growth driven by consistent low double-digit recurring revenue growth and strong demand for capital equipment. The dental segment ended flat on an organic basis driven by return to growth in the third and fourth quarters following inventory de-stocking and a key chemistry shortage in the beginning of the year. The life sciences segment was challenged throughout the year, however, as we have previously mentioned, we believe that we have hit the low point for this business and we expect to see a return to growth in the back half of fiscal year 2020.In the quarter, we announced the acquisition of Hu-Friedy, a premier global dental instrumentation and instrument management system manufacturer. This is a compelling opportunity for us to expand our position as a leading global provider of innovative infection prevention and reprocessing workflow solutions serving the medical and dental industry. We expect this transaction to close in the first quarter of fiscal year 2020 and be approximately 10% accretive to our fiscal year 2020 non-GAAP EPS. In addition, we continue to make progress on the future strategy of our Hemodialysis Water business. Much has transpired over the past few months, and we are hopeful we will be able to announce a formal decision as to the future of this business as soon as it is practical to do so. In the meantime, we are making great progress in stabilizing this business.So with that, I will hand it over to Shaun to discuss financial results.

[Shaun Blakeman:]

Thanks, George and good morning everyone. Let’s take a few moments to walk through the fourth quarter 2019 and full year 2019 financial results. On a consolidated basis, top line for the quarter net sales increased 4.6% year-over-year in fourth quarter 2019 versus the prior year and 5.6% on a constant currency basis. Consolidated net sales walk elements for the quarter were organic growth of 3.4%, M&A of 2.2% and FX of negative 1%. For the full year, net sales increased 5.3% year-over-year in fiscal year 2019 versus the prior year and 6.3% on a constant currency basis. Consolidated net sales walk elements for the year, were organic growth of 3.9%, M&A contributing 2.4% and FX of negative 1%.Gross margins for the quarter, GAAP gross margins decreased 70 basis points to 46.2% versus 46.9% in 4Q 2018. Non-GAAP gross margins were flat year-over-year at 47.1%. Note when adjusted for the segment recast and dilution from BHT, we expanded our core 30 basis points operationally year-over-year. Gross margins for the full year, GAAP gross margins decreased by 90 basis points to 46.6% versus 47.5% in fiscal year 2018. Non-GAAP gross margins decreased by 90 basis points year-over-year, again, note when adjusted for the segment recast in dilution from BHT, we contracted our core 50 basis points operationally year-over-year. GAAP operating expenses increased by $18.9 million or 24.6% in Q4 2019 compared to the prior year. Approximately $9 million of this increase, which includes accelerated stock-based compensation expense, is driven by specific restructuring-related actions taken during the quarter. The remainder is from acquisition-related costs with approximately $7 million from our recently announced acquisition of Hu-Friedy and $2.1 million from acquisitions close to date.GAAP operating expenses for the full year increased by $51.6 million or 17.7% in fiscal year 2019 compared to the prior year. Approximately $19 million of this increase, which, again, included accelerated stock-based compensation expense, was driven by specific restructuring-related actions taken during the year. $16 million was attributable to acquisition related cost associated with our recently announced acquisition of Hu-Friedy and other closed acquisitions during the year. Additionally, higher intangible asset amortization expense, depreciation expense associated with our ERP project, and our new medical segment headquarters building contributed to this increase. The remaining $16 million was purposeful investment in support of our strategic plan initiatives.Operating profit for the quarter, GAAP operating profit decreased to 51.3% year-over-year to $14.8 million, non-GAAP operating profit increased 3.4% year-over-year to $38.5 million. For the full year, GAAP operating profit decreased 31.4% year-over-year to $83.5 million, non-GAAP operating profit decreased 6.2% year-over-year to $141.4 million.The effective tax rate for the quarter on a GAAP basis was 26.8% as compared to a prior year rate of 41.8%. This decrease was primarily driven by the establishment of the valuation allowance associated with pre-acquisition net operating losses within our UK operations in the prior period, which was a 960 basis point headwind against the current quarter. Other drivers include jurisdictional mix and changes due to federal tax reform. Our non-GAAP effective tax rate came in at 25.7% as compared to the prior year of 28.4%. And for the full year, our GAAP effective tax rate came in at 26.9% as compared to the prior year rate of 22.5%. And our non-GAAP effective tax rate came in at 24.9% as compared to the prior year rate of 28.3%, again, primary drivers were jurisdictional mix and changes due to federal tax reform.EPS for the fourth quarter, on a GAAP basis, EPS decreased 48.1% year-over-year to $0.21. Non-GAAP EPS increased 3% year-over-year to $0.63. EPS for the full year on a GAAP basis decreased 39.6% year-over-year to $1.32. Non-GAAP EPS decreased 5.4% year-over-year to $2.37. Adjusted EBITDAS for the quarter, fourth quarter adjusted EBITDAS came in at $47.1 million, up 6% year-over-year. Adjusted EBITDAS for the full year was $174.8 million down 1.9% year-over-year. Fourth quarter cash flow from operations came in at $18.4 million, down 48.6% year-over-year. Fiscal year 2019 cash flow from operations came in at $66.9 million, down 46.8% year-over-year.I will now provide some insight into the segment results. For our medical segment, in the fourth quarter, sales grew 8.2% year-over-year to $136.8 million. Organic growth was 9.8% and GAAP operating profit increased 5.2% to $23.3 million. Non-GAAP operating profit increased 11.3% to $30.1 million. For the full year, sales grew 10.5% year-over-year to $523.7 million. Organic growth was 11.5%. And GAAP operating profit increased 13.3% to $98.4 million, and non-GAAP operating profit increased 12% to $117.6 million providing strong leverage.Our Life Sciences segment for the quarter, sales decreased 11.8% year-over-year to $49.3 million. Organic was negative 9.3%. Note, our backlog did see compression of roughly $2.5 million during the fourth quarter, driven primarily by REVOX with offsetting increases in Medical Water. GAAP operating profit decreased 76.7% to $2.1 million, and non-GAAP operating profit decreased 30.1% to $6.6 million. For the full year, sales decreased 7.4% year-over-year to $201 million. Organic was negative 9.3%. Note, our backlog decreased to $10 million versus the prior year, driven by the sale of high-purity water for $6 million and REVOX compression of $4 million. GAAP operating profit decreased 44.2% to $20.6 million, and non-GAAP operating profit decreased 27.2% to $28.9 million.For our Dental segment for the fourth quarter, sales grew 17.2% year-over-year to $45.4 million. Organic growth was 0.8%. GAAP operating profit decreased 13.3% to $6.7 million, and non-GAAP operating profit increased 9.6% to $10.1 million. For the full year, sales grew 8.2% year-over-year to $161.6 million. Organic growth was negative 0.2%. GAAP operating profit decreased 25.7% to $22.3 million, and non-GAAP operating profit decreased 11.9% to $31.9 million. For our Dialysis segment for the quarter, sales increased 2.8% year-over-year to $7.9 million. GAAP operating profit decreased 24.7%. Non-GAAP operating profit decreased 13.3%. For the full year, sales increased 0.8% year-over-year to $31.9 million. GAAP operating profit decreased 33.3%, and non-GAAP operating profit decreased 31.1%.Now I would like to hit a few balance sheet and liquidity details. We ended the quarter with $44.5 million in cash and cash equivalents and $200.4 million in working capital. Gross debt at the end of the quarter was at $233 million, net debt was $188.5 million, and our net debt to adjusted EBITDAS ratio is 1.08. Capital expenditures in the fourth quarter were $20.1 million. As a reminder, we will be filing our 10-K later this week.I will now hand the call back to George for closing remarks.

[George Fotiades:]

I would like to transition to the outlook for fiscal year 2020, which we anticipate will be return to strong growth overall for Cantel. We have included a page in our earnings presentation for you to follow along, which can be found on Slide 13. For fiscal year 2020, including the impact of announced acquisitions to date, we anticipate total reported revenue growth of 25% to 28% with organic growth of 6% to 7% and FX headwind of 1% and previously announced acquisitions of 20% to 22%. The guidance assumes low double-digit organic growth in the Medical segment and the legacy Dental segment growing at the upper end of our traditionally guided 4% to 6% range. Life Sciences is anticipated to show a modest decline on an organic basis and decline in the low single digits on a reported basis due to the sale of High Purity Water in the first quarter of last year. It is however a tale of two halves, where we expect the first half to show a decline due to unfavorable comps and modest growth to resume in the second half of the fiscal year.We anticipate total fiscal year 2020 GAAP EPS of $2.41 to $2.46, and non-GAAP EPS of $2.78 to $2.83 with the acquisition of Hu-Friedy contributing approximately $0.25 on a GAAP and non-GAAP basis. So in closing, I’d like to touch on our key priorities for fiscal year 2020. They are as follows

[Operator:]

Thank you, gentlemen. [Operator Instructions] We will go first to the line of Matthew Mishan with KeyBanc. Please go ahead. Your line is open.

[Matthew Mishan:]

Great. Thank you for taking the questions. Hey, George, last quarter, you indicated you had something to communicate over the next several weeks around the medical dialysis business and you also indicated that you have reached an agreement with one of your customers around a 3-year type agreement. Where are you at now with that business and you are seeking strategic alternatives and where you are with the other customer?

[George Fotiades:]

Yes, okay. So as you pointed out, we have an agreement with one of our customers. With the other customer, we obviously continue to have a very strong relationship, where we continue to expect to be supplying them for the foreseeable future as we’ve continued to. So that’s proceeding as business is normal. As we pointed out, the first half of the year, we will be down versus year ago, again, it’s still a, sort of, a continuation of the – primarily the in sourcing that’s just carrying over for – on year-on-year, but that stabilizes in the second half of the year as the agreement kicks in. We have more favorable comps and our relationships with the other customers continue as they have in the past. It assumes the forecast on de novo clinics to be as they’ve forecasted in their own earnings releases. So that’s – we are, I mean the business as we said has stabilized. We think we are in a very good position at least in terms of what the future looks like. We, obviously – I had mentioned on the last earnings call, we hope to be here with some decision around the future of this business and whether or not we continue to be the best owner or someone else is, but in the meantime, we will continue to run this business with vigor. We have made great progress on that. We have a little bit more to do here. We didn’t want to be premature just to make this call and preempt an important process. So that’s why we have said that we are closed but not yet, but we expect to be so in a matter of weeks.

[Matthew Mishan:]

The other – have you reached a contract with the other customer yet?

[George Fotiades:]

We don’t really discuss publicly where we are in contracts with other people. We did on the other one be it little bit forthcoming, because we had an in-sourcing issue that we needed to disclose in the particular case with the other customer that relationship continues as it always has. So there is really no news to report there. And baked into – our future assumptions are to continue to supply them. We continue to be their most important supplier to-date and there is no reason to believe that changes at anytime in the planning horizon.

[Matthew Mishan:]

Okay. And then can you talk through the accounts receivable and inventory balances and why they haven’t started to normalize post the medical ERP?

[Shaun Blakeman:]

Sure. Yes, I mean it’s mostly related to just growing pains with the SAP implementation delaying our ability to realize some of the upside that we expect to see in working capital eventually. So, it did end the year higher than we would have liked, but going forward, we do have action plans in place to see we are at the path forward on that and we expect to see significant improvement in 2020.

[Matthew Mishan:]

Okay, got it. And lastly then I will jump out, you have sort of indicated that REVOX had an impact on your backlog, can you kind of walk back through why that had an impact and what was the change?

[Peter Clifford:]

Yes. The change, here, Matt, this is Peter. As we have used the last two quarters here to get closer to our customers and the markets that they serve, there is a few things that are crystallized for us, one being sort of the niche or the secret sauce. I think our customers have told us kind of loudly first and primary need is for an on-premise machine to help with low volume and high value as well as combination medical devices and why is this the niche, these are the products candidly that are still being done onsite with EtO and/or are the most painful to endure the long lead times of off-premise and the outsourced sterilization. So, our strategy has evolved here and our focus as the market dynamics are in our favor. As you are aware, there is a lot of noise in attacking of the technology around EO-based technology solutions. The FDA and EPA are helping champion newer, safer technologies and we expect this to help ours and other alternative technologies. And so what does this mean from a commercialization perspective? We expect to re-launch our 417-liter chamber machine around Thanksgiving. We will start to perform certification and registration work for our customers at that time and start taking [POs] [ph] for the 417 to be delivered in late spring. We are targeting the launch of the 3,000-liter chamber machine in late spring of 2020 where the first shipment is expected in the late summer, early fall 2020. Although we see a long-term need for large chamber machines, the high-volume, lower value is likely to be the last to convert. And what you saw in the backlog here is we stepped back from our 12,000 liter PO that we had with one of our customers to focus on the niche that we really see that our customers are screaming loudly for it. And again, that’s on-premise, smaller footprint machines to help them with low volume, high value combination medical devices.

[Matthew Mishan:]

Thank you.

[Operator:]

And we will move to our next question coming from the line of Larry Keusch with Raymond James. Please go ahead. Your line is open.

[Larry Keusch:]

Thanks. Good morning, everyone. So George, I just wanted to come back to medical water and some of the comments that you made. Clearly, I understand the stabilization that you are seeing in the business and I think you are communicating a longer term positive outlook. I guess my question there is look we heard DaVita talk about actually scaling down their CapEx investments by $200 million to $300 million and they have thrown out a de novo clinic build that’s lower than they are currently, obviously, there is still uncertainties around the kidney care initiative and I think a lot of those details won’t be available until November. So I guess I am really just trying to understand what gives you confidence that this Medical Water business is a growth driver in the future?

[George Fotiades:]

Yes. Larry, I wouldn’t characterize it as a growth driver at least I mean per se. First of all, the data that you are referencing with respect to de novo clinics, I mean, that is clearly baked into our estimates, because we are getting this information from our customers. We obviously benchmark after what we read independently much like you do in addition to what they say on their earnings calls. So that’s part of the assumption that we have behind our volume forecast for the future. When we talk about rebound in the second half of the year, we keep in mind that the year ago period we are talking about some fairly deteriorated machine placements. And so we are talking about a comparison to a year ago that had some very difficult comps and the performance we are talking about is return to being modestly positive. So in the aggregate, when you compare this historically, it continues to be a downward trend from where we once were from machine placement standpoint. So we are really talking about stability here and not that this is a growth driver for the business. For the fiscal year, given the decline in the first half, the slight growth in the second half, it still ends up being negative overall for the year in our life sciences business. So just to moderate the commentary a bit, stability does not mean growth driver, but it does mean that we have a much clearer understanding of what the future looks like, what the impact is to the aggregate performance of the company. And likewise know how to represent this business in terms of where we see the next 3 years going, but we are very wired into what’s happening in terms of build-outs of home dialysis, some of the things which are happening from a regulatory point of view. We learned our lesson historically and we kind of understand that we need to be appropriately conservative in our forecast going forward.

[Larry Keusch:]

Okay, that’s extremely helpful. Two other ones for you. Just on medical again a nice performance, just under 10% organic growth, the business had tracked to closer to 12%ish in that first 9 months and the comp was the same between the third quarter and the fourth quarter. So again, I am not harping on a close to 10% growth quarter for the business, but just wondering if there was anything to be pointing to on a – that resulted in some of that deceleration from the third quarter?

[Peter Clifford:]

No. I think other than a little bit tougher fourth quarter comp on medical last year, I don’t think there is really anything significantly different in the medical business in the U.S. or internationally. It’s fairly consistent.

[Larry Keusch:]

And Peter on that, on capital equipment, again, can you give us some feel for again how that did third quarter to fourth quarter?

[Peter Clifford:]

I know we continued to do a bit better than our profile assumption around U.S. capital growing approximately 5%, international 2x that we were in line with those targets.

[Larry Keusch:]

Okay. And then last question, I just wanted to touch base on the EBITDAS margin expansion that you guys talked about a year ago. Again at that point, it was 200 to 300 basis points of expansion and 23% to 24% margin exiting 2021, maybe just bring us up to speed kind of where you are? You have implemented the SAP system around medical, it’s my sense that you probably now paused on that for a period of time. So maybe just help us understand kind of the implementation plans and then how do we think about that margin expansion?

[Peter Clifford:]

Yes. So let me take that, Larry. So it’s obviously with the SAP implementation, first and foremost, we met the go live target at February 1. Secondly, what we saw zero shipment disruptions, those were the positives. On the opportunities for improvements here over the next 3 to 4 months we will be focused on extracting what I call the next level of capability from the system. What does that mean? As an example, our previous ERP system, we piped our transactional data daily over to sales force which are – obviously, our sales team uses daily. We have yet to pipe that over. So that will be something that’s happening here over the next 90 to 120 days. Obviously, it’s preferred to have that place as you go live as our sales team has driven off of those analytics heavily. A second example would just be we chose not to put in an ad-hoc application in the initial go-live and that’s another add-on feature that we will be putting in here over the next 90 to 120 days. What does that mean? What does it do? It really allows our users to do their own analysis without having or needing standard reports. How and where has that manifested itself, I think if you asked us about our inventory and AR balances that we are talking about now, some of that is just our visibility needing to get better and with this ad-hoc application that we will be going in here over the next 90 days, that should allow our users to sort of be able to fish for themselves analytically on a daily basis. And that will be one of the keys for us kind of getting RAR balances as well as our inventory balances down and allow us to do a plan for every part on the inventory side and again attack our largest customers from a DSO perspective. So those are some of the next steps at least initially in the U.S. Again, I think we will be focused on the U.S. for 3 or 4 more months to get the capability that we need to get out of the system to drive those synergies. What would be next? It would be a pivot towards EMEA and APAC from a medical perspective. So how I would characterize it is we still see a path to the lower end of that 23% on an exit rate and ultimately I think there is opportunities to accelerate that in Europe and APAC so...

[Larry Keusch:]

And is that exit rate still 21 or given that...

[Peter Clifford:]

Yes.

[Larry Keusch:]

Again, it feels like you paused a little bit.

[Peter Clifford:]

Yes. I would put us at about two quarters behind, but I still think 4Q ‘21, we have got a shot at that 23%.

[Larry Keusch:]

Okay, perfect. Thanks very much.

[Peter Clifford:]

And as well obviously, Larry, there is some accretion as we mentioned. When we bring in Q3 that’s – ultimately that mix come in into the portfolio gives us 70 basis points roughly less than quality of earnings as well.

[Larry Keusch:]

Okay, perfect. Thank you.

[Operator:]

Thank you. [Operator Instructions] We will go next to Mike Mattson with Needham & Company. Please go ahead sir. Your line is open.

[Mike Mattson:]

Yes, thanks for taking my questions. I guess I just wanted to start with the outlook for investment or reinvestment in fiscal ‘20. I know there was quite a bit of reinvestment in ‘19. So is any of that carrying into ‘20 or is there any incremental reinvestment that you can call out beyond kind of normal reinvestment that occurs?

[Shaun Blakeman:]

The only thing that we see carrying over is the consolidation in the dental business to Rochester. It’s probably going to continue to add about $8 million to $10 million of investment in 2020.

[George Fotiades:]

CapEx.

[Shaun Blakeman:]

CapEx, right. Other than that, the rest of it will be normal, run the business type CapEx.

[George Fotiades:]

And I would add on to that, Mike, I mean part of our fourth quarter actions as some of the rightsizing that we executed was really to make sure that we are driving home that philosophy of sometimes you got to right-size your business to make further investments. And so I think it was a prudent philosophy deployed to try and sell fund, any investment that we needed to make this year?

[Mike Mattson:]

I guess, yes, I was talking more from like a OpEx perspective though.

[Peter Clifford:]

Yes. I mean other than the carryover cost of the depreciation of SAP there really isn’t any meaningful reinvestments. As mentioned, we try to take our fourth quarter action to basically fund any investment that we really needed above and beyond sort of the norm of – tied to revenue growth.

[George Fotiades:]

I would add is I said look there has been some reallocation within our R&D budget to be sure we can fund some of the opportunity we continue to see in the REVOX and some of the things that we are looking at in medical new products, but we sought to achieve that through cost management elsewhere and through a more vigilant approach of we are allocating resources within the company. So while there is nothing that we are calling out in terms of additional – significantly additional OpEx, important thing is that we continue to spend behind some important new product initiatives.

[Mike Mattson:]

Okay, thanks. And then just curious about the M&A outlook, I know you just did the Hu-Friedy, you haven’t even closed that yet, but would that cause you to maybe put a pause on smaller deals or will we continue to see some of the smaller deals being typically done year-in, year-out?

[George Fotiades:]

I think as a rule, I think I may have said it on an earlier earnings call. Our focus – we have done a lot of small deals. They do require – they have been very good. They have bought a lot of interesting new products in our dental business in particular that we like a lot, but we did say from an M&A point of view, we wanted to look at things that provided meaningful scale, not necessarily have to be transformational, but if that fits a important part of the strategy that’d be great. That’s what Hu-Friedy does for the dental business. Likewise, as we kind of look down the road, not saying near term because we obviously have to work to integrate Hu-Friedy, we also have to work to de-leverage as we have talked about when we did the Hu-Friedy acquisition what we’re looking to accomplish. We are looking – we will continue to look very aggressively at opportunities in the Medical space that can – that will be infection-prevention oriented that can – they may build our workflow reprocessing but obviously, things which make a lot of sense for Cantel. So we will actively continue to look because we know as we focus a lot on proprietary kinds of acquisitions, they require time. You’ll recall, I said, Hu-Friedy, from the day we started talking to them to the day we closed will be about 12 months. So if we want to have something much like a Hu-Friedy in our Medical space, well, it’s like planting trees. The best time was 20 years ago the next best time to plant trees is today. So that’s certainly what we’re doing. Whether we will do anything on the small size, I would say as a rule not particularly, I mean if it was a no-brainer, sure. But otherwise, I think, we want to devote resources to things which can make a meaningful difference to our strategy and ultimately to our growth trend.

[Mike Mattson:]

That’s all I have. Thank you. That’s super helpful.

[Operator:]

Thank you, Mr. Mattson. And our next question will come from the line of Mitra Ramgopal with Sidoti. Please go ahead. Your line is open.

[Mitra Ramgopal:]

Yes, hi. Good morning. Thanks for taking the questions. Just on the guidance, I know you mentioned Hu-Friedy expect to add about 10% growth to the core non-GAAP EPS number. Just wondering if that’s all on the revenue side or are you anticipating any cost synergies in the year one?

[Peter Clifford:]

Cost synergies in year one are modest. There is $2 million to $3 million is sort of the view with most of the savings really tied to, I will call it systems work. It should come online about 18 months in after close.

[Mitra Ramgopal:]

Okay. That’s great. And then just wondering any thoughts you have in terms of the impact on the business as it relates to obviously the uncertainty is still on Brexit and now the trade war with China in terms of how it affects your international business and growth plans going forward?

[Peter Clifford:]

Well, as you know, even though our growth rates have been incredibly strong in China, our business in China is still short of approximately $14 million in revenue. So although the tariffs, we believe are having a meaningful impact, it’s still pretty small base for us to build off of. Conversely, I think you are aware our UK business is pretty substantial. It’s our largest revenue country within EMEA today and it’s probably close to $45 million to $50 million in revenue. We continue to watch that daily, weekly and monthly as sort of the 2-year long Brexit story unfolds. But right now, we don’t see any disruptions or any tariff issues in the near-term.

[Mitra Ramgopal:]

Okay, thanks. And then just on the spending whether it’s on the SG&A side as it relates to Hu-Friedy, do you see any incremental investments you have to make with that transaction or is it a case of just benefiting immediately in terms of sales force and cross-selling opportunities?

[Seth Yellin:]

This is Seth. Largely speaking, I think that the operating expense structure of the business we are inheriting is one that is going to continue. There are some areas where we will do a little bit of back-bill that’s largely offset by some of the synergies that Pete spoke of. So we don’t see any area of real material reinvestment into that – into the core of that business.

[Mitra Ramgopal:]

Okay, thanks. And then back on R&D obviously you saw little of a bump up in fiscal ‘19 as you look out to ‘20 and ‘21, just wondering if that’s the kind of a good percentage to be using going forward?

[Peter Clifford:]

Yes. I would say it’s going to stay pretty stable as a percentage of revenue.

[Mitra Ramgopal:]

Okay, thanks. And then just finally if you can remind us how big the Hemodialysis Water business is for you?

[Peter Clifford:]

It’s approximately $150 million in revenue plus or minus.

[Mitra Ramgopal:]

Okay. And then finally, just on the balance sheet, obviously, with Hu-Friedy, you have clearly levering up the balance sheet a little, just if you could remind us in terms of your flexibility going forward in terms of any plans to pay down the debt or you feel comfortable with that level?

[Shaun Blakeman:]

As we have signaled when we announced the acquisition, right, we do plan on using even just the accretive free cash flow from Hu-Friedy gets us back to the mid-2s by the end of ‘21. And then obviously, any capital that were – hemodialysis to happen for example would be deployed to de-leveraging the balance sheet as quickly as possible to get us back down to the mid 2s.

[Mitra Ramgopal:]

Okay. Thanks again for taking the questions.

[Operator:]

Thank you. And gentlemen, we do have – next coming up, we do have a follow-up coming from Matthew with KeyBanc. Please go ahead.

[Matthew Mishan:]

Hi, guys. Thank you for taking the follow-up. As I look at the EPS guidance, the base EPS guidance for next year, it’s a little bit lower than where The Street is at, I mean, we are on that. Can you kind of walk through year-over-year kind of some of the investments you are making or the drivers of the lower EPS in The Street than for next year on the base side?

[Shaun Blakeman:]

I would say the biggest piece again to reiterate is the $0.10 to $0.11 headwind that we are seeing as Life Sciences continues to struggle on a year-over-year basis in the first half of the year per our guidance. Other than that, right, I mean, you are still seeing close to 10% growth on the EPS.

[Matthew Mishan:]

Okay. So it’s all on Life Sciences?

[George Fotiades:]

There is – look – there is, Life Science is the $0.10 in the first half, I mean that carries through to the year basically. So, we would be, where we are like on a range of 7% to 9% on EPS in the quarter that we have given you, we would be 11% to 13% if Life Sciences were just flat. I mean there is some modest things that are there in the OpEx expenses like additional depreciation from the new building in Minneapolis. As Peter pointed out, the SAP, which maybe some of you had a little bit of benefit in the early part of fiscal year 2020 that’s not happening on that same pace. I mean, those are some modest influences, but the biggest driver would be the impact from the life science headwind.

[Matthew Mishan:]

Okay. And what is – just exactly what is the life sciences headwind, I mean is it a restructuring spend or is it just lower revenues, what is it?

[Shaun Blakeman:]

Yes. I mean if you look at it, Matt, our third and fourth quarter of – or our first and second half of – first and second quarter of ‘19 you had on average probably a $52.5 million kind of revenue number for the first half of the year for each quarter. And as we have kind of articulated look, we think that the next couple of quarters here are sort of in that $47 million range similar to our third and fourth quarter. So you are looking at a comp where we are down likely $5 million plus in revenue to the first two quarters and then starting to get back to some modest growth in the third and fourth quarter. But we have got very significant comps in the first two quarters of ‘20 as we still had backlog that we were burning down to start the fiscal ‘19 year.

[Matthew Mishan:]

Okay, got it. Thank you guys.

[Operator:]

And ladies and gentlemen, we do thank you for your participation and for your questions today. I will now turn it back to our leadership team for any additional or closing remarks.

[George Fotiades:]

Again, I want to thank you all for being on the call this morning and we obviously look forward to updating you on our next quarterly earnings call.

[Operator:]

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