Cantel Medical Corp.
Q4 2018 Earnings Call Transcript

Published: 27 Sep 2018

[Operator:]

Greetings, and welcome to the Cantel Medical Corp. Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Milicent Brooks, Director of Corporate Communications.

[Milicent Brooks:]

Thank you, Omar, and good morning, everyone. On today's call, we have Chuck Diker, Chairman of the Board; Jorgen Hansen, President and Chief Executive Officer; Peter Clifford, EVP and Chief Financial Officer; Seth Yellin, EVP, Strategy and Corporate Development; and Brian Capone, VP, Corporate Controller. Earlier this morning, the company issued a press release announcing the financial results for the fourth quarter of fiscal year 2018. In addition, we have posted a supplemental presentation to complement today's call. This presentation 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. The company will also be making references on today's call to the non-GAAP financial measurement, non-GAAP EBITDAS, non-GAAP operating income, 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 Jorgen B. Hansen, President and CEO.

[Jorgen Hansen:]

Thank you, Millicent, and welcome, everyone. I will start off with some brief opening comments, followed by Peter who will take us through our fourth quarter 2018 fiscal results. Finally, we will open up the call for Q&A. We're very pleased with our results this quarter. We grew reported net sales of 11.4%, with 7.5% organic growth. Our 3 major segments performed well, including exceptional performance by our HCD business, followed by demand of our branded growth product categories. For the full fiscal year, the business grew 13.2% to a record $872 million, which came in at the higher end of our guidance range. Our performance, which included 8.4% organic growth, was in line with our growth objectives laid out in our strategic plan for fiscal year 2018. This marks the end of our first 5-year strategic plan. We are pleased to report that we exceeded our long-term objectives of doubling sales and profit, which were committed -- was communicated in fiscal year 2013. This achievement gives us confidence in our ability to continue to meet our long-term goals. Now we'll turn the attention to some comments on each segment. Endoscopy sales grew 14.8% for the quarter, with organic growth of 8.1%. Capital sales increased significantly in our national markets, offsetting most of the decline we experienced in the U.S. due to difficult prior year comparable sales. Total recurring revenue was up 11.4%. For the full fiscal year, sales grew 18.8%, with solid organic growth of 10%. Recurring revenue was up 16.9%. Water Purification and Filtration recorded revenue growth of 6.2% for the quarter. Given the cyclical nature of this segment, order and capital, specifically in medical water, were lower this quarter sequentially as expected. This was driven by record installs earlier in the year and due to one of our key customers moving to a dual-source approach as we have previously noted. Strategically, we continue to focus this division well beyond medical water on the broader Life Science categories, such as sterilization, sterility assurance, filtration and clean rooms. In the current quarter, we accelerated our investments in our REVOX low-temp sterilization system. We remain excited about the future opportunities in this new emerging business segment. For the full fiscal year, sales in our Water Purification and Filtration division grew by 7.5%, with organic growth of 7.2%. Revenue in our Healthcare Disposables segments increased by 11.3%, with organic growth of 10.1%, which is approximately 3x the market growth, driven by demand for our branded growth portfolio, which grew 12.6%. This category is led by waterline disinfection, conscious sedation and mask franchises. For the full fiscal year, sales grew 7.4% with organic growth of 6.6%. Our strategic branded portfolio grew 10.1%. From a geographic perspective, our international operations continued the high growth story, with sales increasing 30.2% year-over-year, which includes the impact of acquisitions, international growth, organic growth of 14.7% with strong performance in Canada, Germany and China. U.S. sales increased 5.7% in total and 5.3% organically versus prior year. For the full fiscal year, our international operations grew 33.8%, with organic growth of 12.7% and U.S. sales grew 7.4%. With that, I will now hand over to Peter to discuss financial results.

[Peter Clifford:]

Thanks, John, and good morning, everyone. Let's take a few moments to walk through the 4Q '18 and full year '18 financial results. On a consolidated basis, the top line for the quarter net sales increased 11.4% year-over-year in 4Q '18 versus the prior year and 10.9% on a constant currency basis. The consolidated net sales elements for the quarter were

[Jorgen Hansen:]

Thank you, Peter. Overall, we are very pleased with our performance this quarter and the full year and the positive trajectory of our business and our strong competitive position in the markets we serve. As demonstrated this fiscal year, we continued to perform in line with our 5-year strategic plan objective to double sales and profits by fiscal year 2021. This is being achieved through new product development, market expansion, strategic acquisition supported by the continuing evolution of the Cantel operating model. Let me provide a brief overview of the key results in fiscal 2018, the strategic drivers for fiscal year 2019 and why we are confident we can achieve our strategic objectives through fiscal year 2021. We launched 7 new products in fiscal year 2018, most notably are ADVANTAGE PLUS Pass-Thru AER in the U.S., DEFENDO FUJI valves globally, EON Portable RO and Syclone Amalgam Separator, our first entry into the dental wastewater management market. We are confident that our robust R&D pipeline and future product launches will continue to advance our leadership position in FY '19 and beyond. Overall, we increased our R&D investments across the company, especially in key technologies such as the REVOX sterilization platform. In line with previous guidance, we continue to invest in our commercial operations to drive market expansion globally. In fiscal year 2018, we focused on building our commercial capabilities, specifically in EMEA to support growth and enable further market expansion. In China, we achieved an important milestone. After a period of strategic investment, we are now breaking even in this incredibly important market. In the past year, we successfully completed 3 acquisitions, including the German BHT Group, Aexis Medical Workflow Solution business and as well as the SAFE-FLO Saliva Ejector line in our Dental category. In August of fiscal year 2019 (sic) [2018], we closed the acquisition of the Controlled Environment Services business from Stericycle. We are excited at the potential that this new adjacency creates for us in Life Sciences and Medical Markets. In addition, earlier this month, we entered into agreement to divest our high-purity water business based in Canada. This business with annual sales of approximately $8 million was noncore to our strategic direction and was dilutive to our overall margins and growth aspirations. As we have discussed over the past several quarters, we made significant investments in the Cantel operating model in order to maintain the rapid growth we achieved over the past years. This foundation will support our growth into the future and provide opportunities for operational levers in the back half of our strategic plan. Let me now transition into the outlook for fiscal year 2019 and our fiscal year 2021 strategic plan. For reference, please see the chart on Pages 14 to 17 in the earnings presentation. Our long-term guidance for the business remain unchanged, and we are recommitting to our strategic plan of $1.3 billion in revenue and $150 million in non- GAAP net income for fiscal year 2021. Overall, we are aiming to strengthen our leadership position through innovative infection prevention solutions, augmented by new technologies such as information analytics and transformational sterilization solutions. In parallel, we are modernizing the company by introducing technology and processes, including 1 global ERP platform that is critical in optimizing our operating margin over the next 2 to 3 years. In fiscal year 2019, we are making significant investments in new product development and are accelerating new product launches to drive core growth in the near term. In addition, we are increasing our investments in our REVOX sterilization platform, which has applications across all segments. In the Life Science segment, we are optimistic about the potential for REVOX sterilization to excess the over $1 billion industrial life science sterilization market. We believe that this technology has potential to be truly disruptive, and we are targeting mid-teens market share over the next 5 years. In addition, we are investing in low-temperature sterilization platform for the Medical segment, which we believe can be a transformation product in this $3 billion market. From a market expansion perspective, we see significant opportunities to drive growth globally. International, we expect to continue to grow in the low- to mid-teens through fiscal year 2021. We expect margin uplift as we drive our overall industry mix from larger capital today to a higher value chemistry and procedural product categories. Finally, we are optimistic that we will begin to see meaningful international growth in other divisions, particularly our Dental business in the near term. In the U.S., there's an immediate opportunity to drive further growth with both new and existing Endoscopy customers. Today, on average, our Endoscopy customers purchase approximately 25% of our full product portfolio, which represents an approximate $1 billion market opportunity -- market potential opportunity. We are actually driving new strategies to demonstrate the value of our proprietary complete circle of protection solutions to aggressively realize this exciting opportunity. Our recently acquired instrument reprocessing tracking technology solution is an important element of our strategy. We are excited about the potential of this offering and the value it brings to our customers, in what is a rapidly growing $600 million market. This business fills a core need within our customer base, with large growth potential and accretive margins. Our significant market share position in the U.S. and globally uniquely positions Cantel to drive market adoption. We estimate that the total potential value of software tracking solutions in just our current U.S. Endoscopy base will represent about $150 million potential of onetime sales that will generate significant recurring revenue stream. Our strategic plan for -- calls for approximately 500 basis points of M&A growth per year. And while our current fiscal year guidance only contemplates announced acquisition to date, based on our pipeline progress, we are cautiously optimistic that we will be able to achieve our strategic plan objectives. The timing uncertainty of acquisitions are not entirely predictable, but we are encouraged by the progress we have made to date. In our earnings call presentation, we have included charts to help model fiscal year 2019 guidance and the impact from key investments on EPS, which can be found on Pages 18 to 20 for your reference. For fiscal year 2019, including the impact of acquisitions to date, we anticipate total revenue growth of 6.5% to 7.5%, with organic growth of 6% to 7% and FX headwind of 0.5%, announced acquisitions of 1.5% and anticipated dispositions of 0.5%. The guidance assumes approximately flat growth in our Water segment. We anticipate total fiscal year 2019 GAAP EPS of $2.29 to $2.24 and non-GAAP EPS of $2.57 to $2.62 inclusive of announced acquisitions. As a reminder, any additional acquisition closed in the fiscal year 2019 would be incremental to this guidance. Since the beginning of our strategic plan, we have discussed the importance of investing in our operating model to support long-term growth and profitability. As anticipated, fiscal year 2019 will be a transitional year, where these investments are at peak levels. Our EPS guidance includes transformational infrastructure investments in our ERP system and a new location in Minneapolis, which together amount of $0.20 per share. Excluding these 2 critical investments, our core business would be a neutral leverage for fiscal year 2019. In addition, we are making a significant incremental investment in our REVOX sterilization platform, which is dilutive by approximately $0.04 sequentially. The investments we will make in 2019 in both our ERP systems and infrastructure optimization will allow us to continue to support our high-growth aspiration and enable significant margin improvement in the next several years. We target improving EBITDA by 200 to 300 basis points, driven by these efforts by the end of fiscal year 2021. While these estimates are forward-looking and should be seen as directional, we believe that fiscal year 2019 will be another milestone year for Cantel, with transformational investments that will allow us to reach our long-term strategic guidance of doubling sales and profits by 2021. Overall, we are very excited about the future of Cantel Medical, both in the near and long-term. I would like to thank our over 2,700 loyal and hard-working team members for their efforts and achievements this quarter and year. Our entire company takes great pride in our mission to provide solutions to mitigate infections, improve patient safety and outcomes and ultimately help save lives. Thank you for listening. I look forward to speaking with you at our first quarter earnings call in November. Omar, we are now ready to take questions.

[Operator:]

[Operator Instructions] Our first question comes from Mike Matson with Needham and Company. Please proceed with your question.

[David Saxon:]

Hi, good morning. This is David Saxon for Mike. So first, just wanted to touch on the longer term fiscal '21 targets. Kind of what and when is the inflection point in revenue growth rate acceleration? And then maybe can you quantify how much M&A plays into the revenue target? And then over the longer term, can you still drive 8% to 10% organic growth?

[Jorgen Hansen:]

Yes. So we feel confident that we can continue doubling sales and profits by 2021. Exactly how this is going to play between organic growth and M&A is ballpark in line with that we have said long-term. Obviously, M&A is unpredictable. We have a very, very solid pipeline. And actually, this year and the year before, we were, sort of, on the low end of our objective. And as stated, I think we can get back to the 500 or above basis points growth from an M&A outlook. So overall, we feel confident on the continued direction and -- both in terms of organic growth and M&A growth.

[David Saxon:]

Okay. And then the investments for fiscal '19. Are these more of a one year thing or will they last several years?

[Peter Clifford:]

Yes, the bulk of our SAP costs and facility costs are going to be in 2019. There'll be some modestly, I believe, into 2020 on the SAP side, but really in '20 is when we start to see a lot more of the synergy. So this is really more of a onetime headwind in '19.

[David Saxon:]

Great. Thank you.

[Operator:]

[Operator Instructions]

[Peter Clifford:]

Just to provide some context on sort of growth. I think with the implied guidance right of Water approximately flat, 2 or 3 divisions are really in line with our aspirations. And obviously, as we continue to make investments in some of the longer term strategic initiatives that we outlined in the appendix of the deck, obviously that only makes us feel better about 2020 in those other divisions.

[Operator:]

Our next question comes from Larry Keusch, Raymond James. Please proceed with your question.

[Larry Keusch:]

Thank you. Good morning, everyone. Jorgen, I was wondering if I could start with you. First question. So as you answer the prior question around the long-range plan and sort of the components of the growth, you sort of said, look, 8% to 10% is sort of still what you're looking for there. But I want to push you a little bit on that because certainly you're going to be well below that organically in '19. So what -- how do we really think about that 8% to 10% range in the LRP? I just want to make sure we're calibrating correctly.

[Jorgen Hansen:]

Yes. So obviously, as our guidance are laying out, we expect that for this year we will be below the 8% to 10% on organic growth basically due to the cyclical nature of our Water business. If you go back 2 years, we had a flat year in Water. What happens some times in the Medical Water segment is that the de novo builds gets a little bit hit and then we would have a year of very low growth and some years even negative growth in that part of the Water business. And we believe '19, based on the outlook we have in our backlog, would be such a year. It has typically lasted 4 to maybe 6 quarters where it has been a little flat and then it has been picking up again. We're coming out of a strong year in '18, and we believe that -- as we said that in '19 we'll be at those levels. As we move into '20, we do expect that we will start to get back into the 8% to 10% growth range, predominantly driven by some of the initiatives that Peter just mentioned in all our businesses and also the fact that our Water business is more transitioning into more of a life science focus. So it's not just Medical Water, but we have a host of other products, including Filtration, Chemistries and now just adding Environmental Services that fits really well into the capabilities of this division. So again overall, with a little bit of a transition in the year '19, we believe that going back into '20 we will be back into our normal long-term range, both in terms of organic growth and acquired growth.

[Larry Keusch:]

Okay, very good. That was helpful. And then as we look at the 6% to 7% growth organic for fiscal '19, you obviously mentioned that Water is flat. I don't know if our math is correct, but we were, sort of, thinking that, that probably implies Endoscopy is in the 7% to 9%-ish range. So, a, want to see if we were thinking about that correctly. And then as you think about Endoscopy sort of what are the thoughts around U.S. capital? I think you had been articulating that was sort of a temporary situation. Want to take your temperature on that. And how should we be thinking about consumables and valves specifically?

[Jorgen Hansen:]

Let me start and, Peter, if you want to join in, that's fine also. So starting with capital, as we've indicated in this quarter and the last couple of quarters, we are coming out of a period of very, very high sales due to events happening in the market, including competitive recalls. And we believe that '19 will be a -- basically sort of rebase year for us in (inaudible) of getting back to our more normal levels of capital growth. So remember, when you look at our current results, we actually are having a little bit of decline in U.S. capital sales, which is a good news as we are growing really fast in our international markets, so overall we are doing well. So if you look forward, we expect our U.S. capital to stabilize and grow sort of low- to mid-single digits. And then the rest of the Endoscopy business really will be driven by our core focus, which is our procedural product franchise. We have a tremendous opportunity in the U.S. and outside the U.S. Particularly in the U.S., we have recommitted or reinvested, again, into our U.S. commercial team to provide even further capabilities to help drive the adoption of our single-use infection prevention products, which we're very confident will yield results in '19 and '20 and beyond. And then we continue to drive penetration of procedural products and chemistries OUS and, obviously, there we have a lot more run rate in terms of driving some of our key technologies, including our valve franchise. So I would say overall, our Endo business is very, very healthy. We are coming out of a period, where our U.S. capital sales were actually declining and will now be stabilizing, and that's why we on the next 4 to 8 quarters really are getting back into sort of a normal range from our Endoscopy business. And in terms of our Healthcare Disposables business, as you could see, we had a really strong quarter, which I would say is unusually strong. This is not a business we think about as a double-digit business, for sure. But we have been able to grow this business sort of 6% to 8% organic now for a long period of time. And with the continued addition of new technologies we acquired a couple of companies and products this year that we have high confidence in, including Amalgam Separators, which is a very interesting fast-growing segment, we feel really good about the long-term outlook for our Healthcare Disposables or Dental business as we're starting to call this segment.

[Larry Keusch:]

So just to be clear, is it the right way to think about a U.S. capital and Endoscopy flat for 2019? Or do you actually think you might be able to see some growth there? And then on the recurring revenue side, are we still looking for double-digit growth? It was up nearly 17% in the fourth quarter.

[Peter Clifford:]

Yes. Larry, the way I would think about or how I'd state the U.S. capital is I really would segment into 2 pieces. The biggest piece is still AERs, and there we think we will be flat, but we've got a pretty large penetration opportunity on cabinets and the transport system. So in our view, we kind of said that the blend will be below the 5% that we usually aspire to in the U.S., but the actual profile would be probably flat AERs and pretty nice growth on our cabinets and transportation systems.

[Larry Keusch:]

And the recurring revenue...

[Peter Clifford:]

And then I would think that -- recurring revenue, again, should be sort of in that low double-digit.

[Larry Keusch:]

Okay. Last one from me, just REVOX. Obviously, you're investing more in this. You've talked about opportunity there. Again, how do we think about the timing where this revenue becomes more visible? And how confident are you that this is -- as you put it in your disruptive technology that can really have some revenue momentum behind it?

[Seth Yellin:]

Larry, it's Seth here. I think on the REVOX sterilization platform, we're highly optimistic about the potential of this technology in industrial sterilization for medical devices, and we're certainly investing to make this platform successful. We've had a few placements to date, and we're anticipating some additional placements in the latter half of '19 for some of our key customers. This is, for sure, a long cycle type of product in industry. The existing technologies are well established, and there is substantial investment that's been made by contract sterilization providers and manufacturers in this space, and it will take significant time to change existing device labeling to switch out current manufactured products. So our focus really is on new product development and working with manufacturers to ensure that we're on label at the outset, which certainly takes time. So we're very optimistic about the potential of this platform. But we recognize it is going to take time to get broad adoption of the technology. We anticipate to get some placements and recurring revenue from our placements in the latter half of '19 and really starting in '20. But the big potential is going to accelerate in the back half of '21 and beyond as we start to penetrate this space.

[Operator:]

[Operator Instructions] Our next question comes from Mitra Ramgopal, Sidoti & Company.

[Mitra Ramgopal:]

Just, first of all, I wanted to follow-up on the -- just wanted to follow up first on the guidance, the 6.5% to 7% top line. Getting a sense if that's going to be all volume-driven or do you expect to get some pricing?

[Jorgen Hansen:]

I would say overall it's definitely volume-driven. We don't have any meaningful pricing baked into that. I would say though that we believe overall we have quick pricing opportunities across our company as we keep maturing. And as we implement better technology into the company, we will be able to manage that actually better than we did. But at this point, we've been conservative and have not included any upside from pricing or downside for that matter.

[Mitra Ramgopal:]

Okay, that's great. And are you seeing any inflationary pressures in terms of raw material costs, et cetera, and being able to pass those along without any real push back?

[Peter Clifford:]

Yes. I mean, in current state, our procurement teams are working with their supply chain partners. And we are not currently seeing any meaningful inflation. If we're seeing any pressure right now, it's modest in the metals markets. Obviously, it's pretty fluid as everything has changed nearly weekly here. So our teams moderating that weekly. And the other one that's out there, they're really trying to get data on as we are hearing grumblings of import duties on medical devices going into China. And we're really trying to get the data as to the coding and classifications of matter, and so we're doing the work and the research now. Obviously, it will have an impact on our China business. But as Jorgen stated, China still is a small piece of the business for us, so we would think that the impact would be modest, at least right now based upon what we can see.

[Mitra Ramgopal:]

Okay, thanks. Actually that was leading to my next question in China. I know, obviously, there's a lot of noise regarding tariffs, et cetera. I was wondering if you are seeing any disruption, or is it just too early there right now?

[Jorgen Hansen:]

No. We haven't seen too much there. I mean, obviously, just on, I believe, Tuesday morning, China reservation on the tariffs were affected. So we're trying to understand the actual coding and what it means for us and -- so we will just have to see. So far, I would say we don't -- we haven't seen any -- we haven't had an impact so far, and our China business is growing rapidly, and we are very happy with the progression we have there, and we really haven't seen too much disruption at all from sort of customs or anything else. But obviously, something we need to watch carefully, and we'll make sure we are managing all inventories and shipments conservatively to make sure we are not running of anything there.

[Mitra Ramgopal:]

Okay. And I was just wondering if we could get an update on the dental water management business. That's obviously a new area you've gotten into. I know you think there's some really nice opportunities longer term. If you can give us your initial take on how it's been going.

[Seth Yellin:]

Yes. So the amalgam separator market is an interesting space in the dental field. There are new regulations that were put into place, I believe, in July of last year that really would mandate the implementation of amalgam separators for all dental practices in the U.S., I believe, by July of -- maybe it's January actually, sorry, of 2020. So there is a meaningful adoption curve that's occurring right now prior to this EPA rule. Only approximately 11 states had mandatory regulations and beyond that there were certain municipalities that also had mandatory regulations. But now this is a broad EPA mandate forcing all dental practices to have this solution in their practice by 2020. So we're very excited about our offering in this space. The Syclone system is a well-designed and elegant solution, and one that we are very actively promoting and working with our distributor partners to adopt broadly, and this fits incredibly well into our overall Dental waterline franchise, as we were thinking about solutions to the use of water in the dental practice as it enters the dental suite and to -- using the suite and as it exits the suite. It's an important overall strategy for us and one that there is a clear focus by the dental community, and we are optimistic about the solution we'll provide into the market.

[Mitra Ramgopal:]

Thanks. And then just final question. Peter, if you can just update us in terms of where we stand as it relates to availability of capital for acquisitions? And as you look at capital allocation, is it still acquisitions for us, maybe debt reduction sac and dividends, there are stock buyback forward.

[Peter Clifford:]

Yes. As mentioned, we've got about $200 million of gross debt, so it will leave us with about $400 million of available line on the revolver. Obviously, we've got an accordion feature as well. So we've got more than enough capital to fulfill the needs of the business. I think the order is still as articulated that I think M&A is still the number one priority, followed by internal projects with strong ROICs sort of followed by debt repayment and then the dividend.

[Operator:]

Our next question comes from Larry Keusch, Raymond James.

[Larry Keusch:]

Just a couple here. Just on the ERP system. Peter, could you talk a little bit about -- I know you've got the kind of Phase I sort of timing. Could you get into a little bit sort of what's entailed in the different phases? And relative to the savings that, again, you've targeted on that run rate basis as you head into 2021, what's the right way to think about sort of the gating of that over the next couple of years?

[Peter Clifford:]

Yes. So as we've articulated previously, we're sort of doing this platform by platform. So as most of you are aware, our mission in Phase 1 is to bring our U.S. Endoscopy business up and live on SAP. Phase 2, think of it as just the next milestone of which platforms. And I think our thinking 1.5 years was probably Europe second and either HCD or Water next in Phase 3, and I think the reality is the team, I think, will hit a pause button after we're done to reassess really from return perspective, which one gives us the largest bang for our buck in terms of the investments, so -- but Phase 2 will either be Europe or likely our Water business and Phase 3 will be whichever one of those we probably don't pick in Phase 2 will go to Phase 3. And then Phase 4 is really probably our Healthcare Disposables business followed by any of our smaller internationals that aren't covered in Phase 2 or Phase 3.

[Jorgen Hansen:]

Just maybe to say it differently, Larry, what we really are focused on here is to make sure that we face this so we get the most opportunity the fastest, and you know this is a big project and a big investment to transform the company into a true effective operations. And we definitely have the biggest opportunity in U.S. Endo. It's also the biggest investment, the most cumbersome. That's really why we're building our system and that's what we're getting ready to now go-live here in end of the year. And after that, we will decide exactly how to move forward. But again, not these -- the subsequent phase is not nearly as involved and as the one we are now in the middle of now.

[Peter Clifford:]

And then to give some cover really, Larry, is from a CapEx perspective. I think it will help as we outline sort of $80 million roughly for next year, you should think about the SAP project really being about $20 million to $25 million of that amount. And then, obviously, as we've articulated the new facility that we have acquired here in the first quarter, with the leasehold improvements, it's probably about $30 million are kind of normal run rate to run the business, now it's about $20 million. And the only other meaningful investment next year is a new chemistry line in Minneapolis.

[Larry Keusch:]

Okay. And given the fact that you're kind of going first with the Endoscopy business, does that imply that you should see savings from the ERP system beginning in fiscal 2020 and then ramp up to that exiting right that you talk about in 2021?

[Peter Clifford:]

Yes, we should start to see steady improvement in 2020. To your point, a lot of what we think we can get both from a working capital as well as just pricing opportunities as well as driving incremental material deflation, a lot of that is disproportionately tied to Endoscopy.

[Larry Keusch:]

Okay. And then 2 last ones from me, just quick. On the $0.20 of, again, investment for this year and 2019, I know you said the majority of that was associated with the ERP system and then a smaller portion with the facility. Does that imply that, again, that $0.20 or a large portion of that $0.20 we get back in 2020? In other words, is that just true -- is that truly just a onetime or that hits the EPS this year and then that spending goes away for next year and it comes back?

[Peter Clifford:]

It starts to mature the run rate in '20, as I think in the top left on chart '20 we lay out sort of depreciation one fully in as about $6 million kind of annual cost, and then about $4 million tied to, I'll call it just, operating expenses, such as hosting and maintenance. But again, most of our savings are really going to start to come in probably late in 1Q or early 2Q '20. Ultimately, the challenge with going live at the midpoint of the year is for most businesses, it's going to take 90 to 120 days to sort of get back to normal operations after go-live, which means we really don't have a whole lot of opportunity. Again, a lot started in '19, but most of it really starts to drive in '20 and then, obviously, meaningfully accelerate in '21.

[Larry Keusch:]

Okay, got it. And then last one. Just coming back to the sort of long-term outlook. Again, you sort of framed it as 8% to 10% organic. I get that that's aspirational and those are the objectives. But just, again, given some of the moving pieces and sort of the '19 view, is it a better way to sort of think about that as really kind of more in the midpoint of that range to the lower half of that range sort of 8% to 9%, or do you really think 10% is really something that's doable here?

[Peter Clifford:]

I think to clarify the question earlier about sort of the outlook for next year, I would, as articulated, say, we've historically thought about the HCD business as sort of 4% to 6% grower and Endo as a low double-digit and based upon Water being flat, we've historically never really predicted our Dialysis business to grow. We've usually assumed sort of flat. But with those numbers, again, I feel pretty comfortable that our view for '19 in those 2 other divisions, which happen to be important pieces for the future, are kind of in line with our aspirations. So I think our long-term nuance to the business is the recovery out of the cycle in our Water business and ultimately what happens with the long-term decision making of our customer related to the insourcing channels that we've had.

[Jorgen Hansen:]

I think that's a big deal, Larry, and also to just sort of repeat, we feel very, very confident on our 2 out of 3 divisions. We have a little bit of a cyclical pause and some strategic shift in our Water business that we are sorting through this year. Whether that's going to spill into '20, it's really too early to say. We'll have to cross monitor our backlog. We have really good outlook. There are not going to be any surprises on that. And I think the key takeaway is that we are working very hard to differentiate ourselves in our Water business and that's also why we are deciding in the future to call Life Science because it's much more than Water, and some of those products are -- have great growth potential and are definitely margin accretive as well. So we're very excited about that, and this kind of cyclical pause gives us even more the burning platform to make that shift.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.