Cantel Medical Corp.
Q1 2016 Earnings Call Transcript

Published: 10 Dec 2015

[Operator:]

Greeting, and welcome to the Cantel Medical Corp First Quarter 2016 Conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Andrew Krakauer, CEO of Cantel Medical Corp. Thank you, you may begin.

[Andrew Krakauer:]

Great, thank you, Adam and welcome to our first quarter fiscal year 2016 conference call. Before we start, 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. With that said, good morning to everyone. With me on our call today are Chuck Diker, Chairman of the Board; Jorgen Hansen, President and Chief Operating Officer; Peter Clifford, Executive Vice President and Chief Financial Officer; and Steve Anaya, Senior Vice President and Chief Accounting Officer. Cantel Medical achieved record financial performance in the first quarter of fiscal year 2016 with solid sales and net income growth. We reported first quarter U.S. GAAP earnings of $0.34 per share as compared to the prior year’s first quarter earnings of $0.27 per share. Sales increased 12.4% in the quarter to a record $153.8 million, with underlying organic growth of approximately 8%. On a non-GAAP basis, adjusted net income increased by 21% over the same quarter last year to $17,120,000. Adjusted EPS for the quarter was a record $0.41 as compared to adjusted EPS in the prior year of $0.34. Now I'll briefly review the first quarter performance and highlights of our operating segments. This quarter our Endoscopy business continued its strong performance at it has for the past two fiscal years setting a new sales record for the 10th consecutive quarter. In the quarter we recorded Endoscopy sales of the $72 million representing year-over-year totaled growth of 28% and strong underlying organic growth of 18%. Operating profit for the segment on an adjusted basis was nicely leverage and increased by over 15% in the quarter driven by a 70 basis point gross margin improvement due to strong volumes and favorable mix of consumable products including procedural products in chemistries. In addition to this quarter we booked 6th weeks of sales from our newly acquired medical innovations product lines which carry favorable margins. Despite significant investments in the quarter adjusted operating expenses excluding transactional related cost were highly leveraged growing only 19% as compared to our sales growth of 28% for the quarter, so nice leverage there. I am optimistic that our Medivators Endoscopy business will deliver continued sales growth and increased operating profits for remainder of fiscal year 2016 and beyond. This quarter we saw increases in our already large worldwide installed base of endoscopy processing equipment. Equipment placements drive sales of our higher margin disinfectants, much of which is our proprietary Rapicide PA chemistry. This quarter, our disinfectants in cleaner’s category grew by 21% worldwide. Our large and growing installed base of machines also provides great opportunities to expand our global service and spare parts business, which grew 23% this quarter and then on a further positive note, our procedural product line grew by 40% as customers are increasingly recognizing the superior infection control and prevention features of this expanding product category. Total endoscopy growth of 28% included 10% year-on-year growth due to the contribution of our acquired UK and Italy based businesses which provide Cantel the strong international platform, additional manufacturing capacity, including European-based chemistry production. During the quarter we announced the acquisition of Medical Innovations and the launch of several new endoscope reprocessors, Jorgen will discuss these opportunities as well as the potential new endoscopy growth prospects in a couple of minutes. We remain very confident in the strength and capability of our entire Medivators United States endoscopy direct sales and service team. They have consistently demonstrated the ability to effectively launch and grow our expanding full circle portfolio of infection prevention and patient safety products. The United States business performed well this quarter and is leading the growth in this segment. Our growth in the United States is a testament to our strong dedicated team and our highly effective senior sales and service management group. Given the continued growth potential of this market and the addition of new and improved products including those for Medical Innovations, we are further expanding the sales, service, training and marketing teams in fiscal year 2016 in United States. Further additionally, we just recently hired a highly accomplished Vice President of Marketing, a gentlemen called Bill Haydon which is a real key hire for us and he is now leading our worldwide endoscopy marketing team. We also expect additional investments in several international markets to accelerate growth of our endoscopy products and support our direct sales efforts in major markets such as the UK, Italy, Germany and China. Moving to our Water Purification and Filtration business, which has also -- has continued to perform well. Sales this quarter up 44.7 million, up 5.5% over the same quarter last year and a bit higher sequentially. Organic growth was 2%. These increases were primarily driven from increased shipments of consumables products including filters and sterilants as well as commercial and industrial water purification equipment. Operating profit showed a growth of 2% over the same quarter last year. I consider this good performance given the increasing investment in selling and R&D expenses which were offset by 60 basis points expansion in gross margins and these higher gross margins were driven by mixed shift to higher margin consumables and the never ending continued focus on lean manufacturing. During the first quarter, we continue to see broad market acceptance of our heat-based disinfection, central and portable water purification systems. These automated systems provide for a higher standard of water purification than the older conventional technology equipment they replace and provide great benefits to our dialysis customers and their patients. Sales of these more advanced higher-value machines which carry higher average selling prices, now consistently account for 80% or more of incoming orders and shipments, as customers recognize the performance benefits and cost savings provided by these products. Given the strong growth in construction of new clinics in the past 3 years, the cyclical nature of capital equipment sales in general and the leveling out of demand for these advanced systems at around 80% of our incoming orders, we will see some quarters such as this one where orders were a little behind shipments, 3% for centrals and 7% portable. So our backlog decreased to a couple of percent. However, the majority of the 6,300 dialysis clinics in the United States are still using legacy, manual chemically disinfected water purification equipment, which is a great opportunity for this business in future quarters. Additionally, we are accelerating product development in this product area which will benefit this business in future years. On a positive note, we continue to offset any slowdowns in capital equipment sales with strength in our water segment’s important biosciences products area, which includes Cantel’s filters and chemistry products where sales grew 16% this quarter compared to the same quarter last year. We had excellent growth in clean room sterilants and water systems disinfection chemistry as well as in our therapeutic filtration products. Again, sales growth in this category is the key driver of our margin improvement in this segment. We are optimistic about the future potential of this business as we have some exciting future opportunities with our unique hollow fiber filters as well as our novel REVOX sterilization service technology. We have added and are continuing to add sales, marketing and product development resources to pursue what we believe will be profitable growth opportunities in these businesses going forward. And a number of these opportunities could be realized towards the end of this fiscal year. Overall, we remain optimistic that we can continue the great momentum we have achieved over the past few years in the Water Purification and Filtration segment. Our Healthcare Disposables business had a good quarter with sales of $27.4 million, but reported sales declined 6.8% over the same quarter last year. The majority of the decline was a result of a though comparable to the prior year’s unusually strong quarter which was the highest in all of last year 2015. As we reported in last year's first quarter this business had unusually strong shipments of face marks and other products related to the Ebola outbreak and also had substantial pull ahead sales to distributors in advance of a price increase. And this year's quarter international sales were also -- which are sold in U.S. dollars we're also up a bit as they were hurt as the local currencies weakened and their customers are paying in U.S. dollars. But other than the comparison to last year we did show a growth overall as these losses internationally were offset by the strength of our newly acquired DentaPure Waterline Disinfection products, which exceeded our internal expectations. So despite the decline in sales operating profits for the segments were basically flat due to lower amortization and a 360 basis points expansion in gross margins from operating efficiency and positive mix. As we look forward I remain optimistic about the growth potential of the healthcare disposables business driven by our increasing presence in the stability assurance market where incidentally chemical indicator categories had record levels. Our interest into the high growth Denta unit Waterline Disinfection markets as well as from our new opportunities in hospital and alternate care markets and in these markets where we have -- we had sales of Rapicide OPA/28 high level disinfect in the United State sales that were double over the last year’s sales in this product. In addition we see a continuing opportunities for growth of new product development activities and further international expansion. We have also added additional sales and marketing resources in this business to help drive growth for the future. In the dialysis segment first quarter sales were 35% higher due to large opportunistic dialysate concentrate sales to a major customer. Which is expected to moderate in the second quarter of fiscal year 2016, the quarter we are in now. Partially offsetting this was a 20% decline in reuse sterilants in the United States. We expect the decline in reuse to likely accelerate in the United States. Operating profit increased 85% as the loss margin from the decline in reuse sterilants sales were more than offset by the highest shipments of lower margin concentrate. Now while we do appreciate the opportunistic business we have enjoyed for the past few quarters, relative for the rest of Cantel this again has become much smaller part of our overall company and over the long term we expect this segments to continue its gradual decline. Although occasionally having strong quarters such as this one. The business does remain important to us and we work hard to continue to take care of our customers and seeking growth particularly in international markets in many territories. Now let me turn it over to our CFO Peter Clifford to go over some financial details.

[Peter Clifford:]

Thanks Andy. As Andy indicated, sales increased 12.4% in Q1 versus last year’s Q1, with organic growth of 7.8%. Our Endoscopy segment posted record sales of organic growth of 18%. Top line growth was driven by our Endoscopy, Dialysis and the Water Segments. On November 3, 2014, we completed the acquisition of IMS, so this was reported in our operating results for Q2, Q3 and Q4 of fiscal 2015. IMS is included within our Endoscopy segment. At January 1, 2015, we completed the acquisition of Pure Water Solutions, a water services business which is included in our Water Purification segment. The results of this business are included from January 2015 forward. On February 23, 2015, we completed the acquisition of DentaPure, a waterline filter disinfector, Waterline Disinfection filter manufacturer which is included in our Healthcare Disposables segment for most of Q3 and all of Q4 of fiscal 2015. Finally on September 14, 2015, we completed the acquisition of Medical Innovations, a leading provider of endoscope storage and transport systems in the UK and internationally which is included in our Endoscopy segment roughly six weeks in 1Q of 2016. Collectively, the IMS, Pure Water, DentaPure and Medical Innovations acquisitions contributed incremental sales of approximately $8.8 million in Q1. Q1 GAAP gross profit margins expanded 210 basis points to 46.3 versus 44.2 last year. Our adjusted gross profit margins expanded 180 basis points with all three of our largest segments expanding adjusted gross profit margins year-over-year. Our Water Purification was up 60 basis points, Healthcare Disposables was up 360 basis points and Endoscopy was up 70 basis points while dialysis remain flat. The improvement in gross profit percentage is due primarily to volume leverage productivity associated with the higher organic sales volume in endoscopy and dialysis coupled with product mix favorability in all three major segments. Operating expenses increased by $6 million in Q1 compared to last year. Our investments in operating expenses continue to support our multi-year strategic plan and are concentrated in the following areas geographic expansion, sales and marketing investments in all three major business segments, new product development projects and operating expenses in our newly acquired businesses. Reported operating income increased by 24.8% for Q1. Operating income adjusted for non-GAAP measures increased by 19.5% for Q1 providing excellent operating leverage. Net interest for Q1 increased $216,000 compared to the prior year Q1 reflecting in the additional debt taking on with the Medical Innovations acquisition. The Q1 effective income tax rate came in modestly high at 38.1% due to non-deductible acquisition expenses related to Medical Innovations. Our balance sheet remained strong with significant borrowing capacity. Our banking relationships are incredibly strong and have been in place for over a decade. We ended the quarter with 31.1 million in cash and cash equivalents, a 127.4 million in working capital at a current ratio of 2.7 to 1. Gross debt ended the quarter at 147.5 million. This includes 83 million of borrowings this year to fund the Medical Innovations acquisition. Meanwhile, we continue to pay down significant levels of debt, 14 million during Q1. Our net debt was 116.4 million in Q1 2016. Our gross debt to equity is 0.35 at the end of the quarter and our gross debt to rolling 12 months adjusted EBITDAS is 1.24 while our net debt to adjusted EBITDAS is 0.98. Q1 adjusted EBITDAS came in at 32.4 million or 19.4% and a rolling 12 months adjusted EBITDAS came in at a 119.1 million which represents 18.5% growth. Our Q1 cash flow from operations came in at $15.1 million which represents a 19% growth year-over-year. Capital expenditures were at traditional levels of 3.2 million in Q1. So to alert everyone, we will be filing our 10-Q before the close of business today.

[Andrew Krakauer:]

Great. Okay, thank you, Peter. So in summary, Cantel Medical’s first quarter performance was very strong and our financial performance was at record levels. This quarter's performance exemplifies why we are so optimistic about the future of the Company. We showed excellent overall sales growth as well as solid organic growth. Despite continuing significant investments in our business we achieved adjusted net income growth to 21% for the quarter as we continue to successfully focus on improving margins, accelerating the growth of businesses we acquire and driving operating leverage as a result of increased volumes and active cost improvement projects. One of the strengths of Cantel is that we're in diverse infection prevention and control markets and in any quarter strength in one or more of our businesses can offset weakness in others. This quarter Endoscopy has led our growth but all three of our major segments have been in such a position in the past quarters. Most importantly, all of our major businesses have good growth prospects and the recent addition of two businesses in the UK and one in Italy in Endoscopy and one acquisition each in our Healthcare Disposables and Water Purification and Filtration segments have added important contributors to future global growth. We anticipate that the biggest benefits of these acquisitions will be later in fiscal year 2016 after significant upgrades in IT and finance, accounting infrastructure and further sales and marketing investments are completed as well as the successful launch of several new products. Now speaking about acquisition and new products and growth opportunities, let me ask Jorgen to cover a few topics here.

[Jorgen Hansen:]

Thank you, Andy. Our Five-year strategic plan is built around three growth drivers; new product, line expansion and M&A, all supported by continuous improvement. At our last call, we announced that we’re ahead of our strategic plan due to successful execution of significant investments in sales and marketing supported by M&A that has yielded new talents, new products and new geographic footprints, which combined have strengthened our competitive position globally. Today, I'd like to provide a brief update on our M&A integration and new product development activities as well as address some potential additional growth opportunities in the United States that have recently developed. Medical Innovations Group based in the United Kingdom was acquired September 14, 2015 and the integration is well underway. We merged our sales organizations in the UK giving us the strongest the endoscopy sales force in the UK market. Furthermore in the U.S., we have transferred the sale of the key products [indiscernible] from independent sales representatives to our 200 person U.S. endoscopy sales and service team. Thus far sales and earnings are exceeding our estimates. With regard to new products, we recently announced that we have launched three new automated endoscope reprocessors or AERs in international market the RapidAER, Advantage Plus Pass-Thru and the Medivator ISA. These thee reprocessors platforms will allows us to compete effectively in Europe and Asia-Pacific and provide best-in-class solutions for large hospitals facilities with high patient volumes, midsized facilities with the need for flexibility and fast turnaround time as well as the solution to [Indiscernible] fast cycle time and a small footprint, ideally suited for the important private and key ended [ph] market. All three of these AERs upgraded with the latest technical feature and have an ergonomic design we developed in collaboration with clinicians and utilized our proprietary signature chemistry Rapicide PA. Two of the machines are passed to design which are importantly lead in some of our international markets and our neutral product family. Sales have begun from all three AERs and we are confident that these additions will be an important part of our growing worldwide reprocessor base. We are committed to increasing our investment in new product development and we are developing important strategic products in each of our three key divisions. Furthermore we expect acceleration of our pipeline by leveraging our new international R&D footprint which will enable us to develop product portfolio tailored to the markets where we are investing. Finally let me address an important topic that was announced last month and has been a subject of analyst and shareholder questions. On November 13, 2015 the FDA issued a release ordering Custom Ultrasonics [ph] a competing automated endoscopic processor company to, “Recall all of its automated endoscopic processors from healthcare facilities due to the firm’s continued violation of federal law”. Our best estimate is that there are approximately 1,100 to 1,500 exit Custom Ultrasonic machines in the market. To prepare for this situation we are making the adjustments needed to respond to all healthcare providers that maybe impacted. Our aim is to ensure that they have continuity of service and have access to our market leading technology. It is important to note that because we manufacture our products rather than sourcing from the third parties as do some of our competitors, we’re in full control of production, quality, inventory management and all key aspects of the supply chain as well as chemical support and service. In summary we are prepared and uniquely positioned to serve and healthcare provider indeed and we believe that this product recall could provide a meaningful additional opportunity to accelerate our automated endoscopic processor business over the next six to 24 months. Though it's too early to say exactly how this event will impact the market or at what pace. Back to Andrew.

[Andrew Krakauer:]

Alright thanks Jorgen. Our detailed market analyses have shown that we now compete in total addressable markets well in excess of $6 billion and we are looking at programs and potential acquisitions to grow this further. This opportunity and our clear growth drivers are reasons why we believe Cantel Medical has never been better positioned for a meaningful, sustainable growth over the medium to long-term horizon. We are focusing on substantial sales and marketing investments to promote newly launched and acquired products to meaningfully grow international sales and to increase penetration in our existing and growing U.S. markets. We continue to invest in our direct teams in the U.S., Germany and China organically and in the UK, Italy and France, where we have made multiple strategic acquisitions. These efforts appear to be working as in this quarter international sales grew 34% of which 18% was organic. We are also investing in future new products, disposables, chemistries and equipment, which we believe have large potential upsides as we are in the development process and now launch phase of a number of key new products, product platforms and upgrades, including our newly acquired portfolios in the UK and Italy as Jorgen has just pointed out. You should expect to see us continue invest heavily in new categories over the next few quarters, as these investments are required to build a foundation to enable Cantel to achieve our medium and long-term strategic growth goals. Not only are we adding to our product development and sales and marketing teams, but we are also adding needed infrastructure and support roles such as finance, HR, IT and general management globally. In the first quarter of 2016, we added about 20 professional physicians in these areas and have plans to add between 40 and 60 more positions over the next two quarters. Despite these substantial investments in the business, we expect to deliver solid growth in annual earnings this year. Besides increased profits driven by sales growth, we have implemented cost and operating efficiency programs to in part help pay for these incremental investments. We have strong momentum leading positions in the growing multibillion dollar infection prevention and control market and exciting opportunities before us with new products and expanding worldwide markets. We feel confident in our growth plans and see great opportunities for our businesses to grow organically. But we will also continue our proven strategy of identifying, executing and integrating acquisitions worldwide. This is a core competency of Cantel that has brought us entrepreneurial management, new and higher margin products and additional growth in sales and profits from our proven strategy to invest in and accelerate the growth of our acquired companies. The continued search and identification of synergistic markets and potential acquisition targets is the key role of our senior management team. Opportunities for acquisitions exists in all three of our major businesses and we are actively pursuing them. We are also looking at the potential of expanding into new infection prevention and control platforms as well. So looking forward, we expect our performance in the next few quarters to approximate the strong results of the past few quarters including this quarter. Fiscal year 2016 will be a year of major investments to accelerate future growth, but we do expect to show some leverage from our investments as well and despite our continued investments in sales and marketing and international initiatives, we expect operating profit for the full fiscal year 2016 to show meaningful growth over fiscal year 2015. We remain committed to profitably growing the company while serving our customers and benefiting our shareholders. And again our entire organization takes great pride in our mission to provide the products, the services, and guidance to mitigate infection risks, improve patient safety and outcomes, and ultimately save lives. And I thank all of our now over 1,900 loyal and hardworking global employees for their great efforts and achievements in this quarter. And with that said Adam, we will now take some questions.

[Operator:]

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Kyle Bauser from Piper Jaffray. Please go ahead with your question.

[Kyle Bauser:]

Jorgen, could you talk and sort of update or thoughts on interactions you've had with the FDA following their panel in May regarding endoscope cleaning, I know last quarter you've mentioned you have been working very closely with then and began implementing new information systems in hospital to help with the cleaning process, but any other update there?

[Jorgen Hansen:]

Well, thanks Kyle, as we talked about last time, we interact with the FDA on a very regular basis and as a result of the issues with ERCP or duodenoscope, FDA has been talking to all automated endoscope reprocessor manufacturers including us and our feeling and our outcome so far is that we have very strong documentation and very talented regulatory team, so we are feeling that we are in a very good position going forward. As a comment to what's going on in the market, there is obviously lots of request from our customers working with us on finding the best possible infection prevention solutions for GI suite and that impacts our AER sales, it also impacts our procedure sales and we mentioned that our procedure product sales is up 40% and that is really driven by clinicians wanting to take risk out of their procedures and making sure that anywhere where they can eliminate the risk of infection they do it.

[Kyle Bauser:]

And thank you for the update on your thoughts surrounding the Custom Ultrasonics' recall, I realized it's early but so far have you seen some AER placements resulting from this?

[Jorgen Hansen:]

No, I think it's a bit too early, we have, over the last couple of years we have replaced quite a few Custom Ultrasonics machines with no relations to this, latest recall, many of the machines that are in the market about a fairly old and Custom has unfortunately had issues for a long time. So we have been replacing machines for last couple of years, but we haven't seen any peak yet. The key point is that we anticipate that this will happen and we're getting ready for an anticipated pickup in those replacements in the next 6 to 24 months as I mentioned.

[Andrew Krakauer:]

Kyle, this is Andy. I think on the conference call in three months we'll certainly have a much better picture and we’ll of course the predominate.

[Peter Clifford:]

And just to comment there as well as Kyle that, if they have given clear instructions to Custom Ultrasonics, but there are some decisions to be clarified on how fast they expect the healthcare providers to change all these machines because even if they wanted to they can't do it very quickly. There is just simply not capacity in the market. So we anticipate there will some kind of direction in that in the couple of months and we'll take it from there.

[Kyle Bauser:]

It looks like the foreign exchange impacted sales about half a percent, Peter, could you provide an update on your assumptions for the quarter -- impacted sales for fiscal 16?

[Peter Clifford:]

Yes, you're right, it's 50 basis points basically the currency impact for 1Q and as we look out across I think the pound rate is fairly flat now, so we kind of look out at the current rate versus the back half of last year. Obviously we think we'll have a little bit more of an impact in the second quarter as it relates to the euro, that will be our first real comp for the Italy business, it’s the second quarter and there was a higher euro rate in 2Q last year than if the rates stay where they are at, we would expect a little bit more headwind on FX in 2Q and then part of 3Q and then fourth quarter’s more of a comp from where the rate now today.

[Kyle Bauser:]

So sort of expecting roughly 160 million in U.S. sales for the year?

[Peter Clifford:]

Yes, as we said on the last call, we'll do plus or minus 160 million outside, a 100 million of that has got exposure to foreign currency. The other 60 million is transacted in USD. And again, on that 100 million roughly 50 million is British pound exposed and about 35 million is euro based and then rest is scattered across the Canadian dollar, the Malaysian ringgit, the Singapore dollar and little bit RMB.

[Kyle Bauser:]

Thank you and then lastly, is 25% of total sales coming from international market still sort of your internal goal for the year?

[Peter Clifford:]

Yes, we were just close to 23% in 1Q and we would expect that would probably modestly accelerate to get to the 25%.

[Jorgen Hansen:]

[Multiple speakers] medical Innovations, we already had six weeks, [indiscernible].

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Cliff Greenberg from Baron Capital. Please go ahead with your question.

[Cliff Greenberg:]

Could you explain a little more fully the Medical Innovations acquisition, what are their products, how would you hope to be able to grow their business subsequent to owning them and characterize your acquisition pipeline in context to that acquisition, are there biggish deals like this one was or are you looking at the smaller acquisition?

[Jorgen Hansen:]

Yes, thanks Cliff. This is Jorgen Hansen. Let me start by addressing the first question on Medical Innovations. Medical Innovations, we acquired because they have a scope transportation system that fits perfectly in with what we talked about at the central [ph] circle of products used in endoscopy. So this is a company that has seen tremendous growth and build a very strong position in the UK and are probably in 83% of the hospitals there using this very simple logical system. The products have also been launched into the US. As I mentioned the product is called CleanaScope and have built a very good position there but obviously will also be in most of this facilities in the U.S. We are now anticipating to really roll this out across the business. So it's a product acquisition predominantly, but it also has provided us a very strong position from the sales capability side in the UK. We now have combined our sales teams and we have the leading sales force there which can help sell all our Legacy Cantel products in the endoscopy space.

[Cliff Greenberg:]

Obviously [indiscernible] finish on that or continue on that. If it's a $25 million to $30 million business seemingly in just the UK, what could it be if you take control and can you get distribution in the states immediately or does that take time? Can that be in the states and is it appropriate for some of your other European or other markets that you are selling products too?

[Jorgen Hansen:]

When we took -- bought the company the sales in the U.S. were still relatively on primary stage. Just had a couple of people and then some independent reps and have just had the few hundred accounts and we sell to thousands of accounts in the U.S. so obviously our plan over the next couple of years is to get to the same level of market penetration as we have seen in the UK. So we’re excited about that piece, the product has also been introduced in some key markets in Europe. We have with this acquisition gotten a small team in France, where they have a little bit of sales. In Germany there is a little bit of sales. So this will be an integrated part of our business and as we mentioned earlier or Andy mentioned it fits really nicely in with the consumable line of products that we have had tremendous success with over the last several quarters.

[Cliff Greenberg:]

Great, thanks. The other part of the question?

[Andrew Krakauer:]

As far as -- I'll give you the answer to that Cliff. So as far as acquisitions go we are looking at -- we are actively looking at acquisitions in all three of the major segments and they are of sizes that are smaller and larger than medical innovations. And obviously, which ones come to fruition and get through due diligence and get a price that we can agree on and is obviously something that -- what we do and we will just have to keep working on it, but there is a quite active pipeline and the ball size is now -- again our preference would be to do acquisitions of more size like medical innovations or even larger. But we will still look at smaller deals if they are strategic.

[Operator:]

Thank you. Our next question comes from the line of Mitra Ramgopal from Sidoti. Please go ahead with your question.

[Mitra Ramgopal:]

First, Andy, when we look at the gross margin this quarter I think it's an all-time high you just have tremendous improvements over the last several quarters. How should we sort of look at the gross margin going forward? Can you [multiple speakers] significantly off a bit or is it a lot more difficult?

[Andrew Krakauer:]

Mitra, I -- obviously you can't see this, but I'm sort of smiling because that's the question you ask me every quarter and every quarter we keep improving and you probably asked me this every quarter for the last 10 quarters. And I give you almost the same answer each time which is, we are focusing on higher margin products and in general we’re looking for acquisitions that increase our corporate margin and when we look out for as prediction weak again and we look at it by business segment, so sometimes the lower margin segments might be growing faster and which may not make the corporate look better, but we look at it by business. And the answer is we continue to strive for slow steady improvement in every business and that comes as we drive more high-margin disposables and other high-margin products. And this quarter -- and then some quarters you get a little lucky with lower gasoline prices and exactly the right mix or some of the slowdown in international, in healthcare disposables which is not good news good news, happened to be lower margin products. So Healthcare Disposables look the margin is going up but some of it is just because some of our lower margin business has gone away. But I think the net result is we do not believe we’re capped out as these margins and we’re going to strive to continue to improve margins slow and steady.

[Jorgen Hansen:]

And probably I mean compared to last year we have more businesses that are direct now and that has a little bit of an impact as well obviously.

[Andrew Krakauer:]

That’s true.

[Jorgen Hansen:]

But we still have that significant part of our business that are not direct, so lot of movement there for the next several years.

[Mitra Ramgopal:]

That's great has been just a tremendous job over in every quarter and it's good to hear that there is still a lot of room going forward. Jorgen, I wondering if you could just help me a little, you've talked about the launch of the new -- the three endoscopy processers and what you're seeing in terms of Asia-Pacific and Europe, if you can just help out in terms of who are you competing with or taking share from as you continue to drive business in these markets?

[Jorgen Hansen:]

Sure, Mitra. So the big competitive set in Europe and Asia is quite different than what we experienced in the U.S. There are many more players on the capital side and until recently -- until we introduced these platforms, we were actually not very competitive in several key markets, including north Europe and including the clinical -- or the clinics as well. So with these new platforms, we can now start to compete, our main competitor that we see everywhere also in the U.S. is Olympus. They sell the scopes and they bundle their machines with that. But in Europe we see companies like Geisinger has a strong position in several markets which is included particularly in UK, we see companies like Soluscope has a very strong base in France. And then we see a couple of other regional players like Wassenburg is a Dutch. But we really feel that with our portfolio we have something to address and exceed our customer expectations on all these different segments. In Asia, the market is a little bit different story. Australia is very much similar to the UK with similar players including Geisinger and Soluscope. China we're mostly competing with local manufacturers and in Singapore and other sort of high-end markets it also looks more like Europe. So we now with these different platforms are able compete even both in the most advanced markets and also markets that has less dollars to invest in capital. The general idea is capital is important, but -- and very important obviously because we’re always focused on getting selling capital that use our signature chemistry and then plus looking at the complete solution with our consumable products. That's our strategy in the U.S. and its working well and that’s what we're doing in Europe and Asia as well.

[Mitra Ramgopal:]

So thanks that’s very helpful. And I just want to touch Middle East, talk about your new products being part of the strategy going forward as you look at your investments in R&D, are there any particular products or areas you think you need to be focused on or again obviously you can acquire some of this through acquisition but I was just wondering from an internal standpoint, if there was anything you felt you needed to bring to the market?

[Jorgen Hansen:]

Obviously, we have a very substantial product portfolio, so just sort of lifecycle management and bringing out the improvements is a fairly big part of our R&D spend. But as Andy mentioned and we talked about earlier, we're also looking for thing that can potentially expand our market to other areas, other products with infection prevention that can fit our commercial teams or can fit the need that our customers have. So we’re constantly looking at these kinds of opportunities, but as I'm sure you can understand, I’m not going to --.

[Andrew Krakauer:]

Of course we can't tell you what they are.

[Jorgen Hansen:]

[Multiple speakers] we're working about every day on building the pipeline.

[Mitra Ramgopal:]

Okay, thanks again for the color. And finally, Peter, a quick question on the tax rate, just trying to a get a sense of how we should think of that for the remainder of the year?

[Peter Clifford:]

I think it’s going to start to ramp down a bit from the 38.1 that we saw, I mean that's one of the advantages of Medical Innovations that it is a margin rich business in a domicile that's obviously much lower than the U.S. and they’ve got some other tax features of Patent Box and some other things that should give us a little bit of tailwind, so I would expect us to back in sort of 37.5 range for the balance of the year.

[Operator:]

Thank you. Ladies and gentlemen, there are no further questions as this time. I would like to turn the floor back over to management for closing comments.

[Andrew Krakauer:]

Okay great. Well, listen, thanks everybody for listening. We look forward to speaking with you all on our second quarter fiscal year 2016 earnings call which will be in early March. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.