Cantel Medical Corp.
Q2 2016 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Greetings, and welcome to the Cantel Medical Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Andy Krakauer, CEO of Cantel Medical. Thank you, Mr. Krakauer, you may begin.

[Andrew Krakauer:]

Great, okay, thank you, Michele, and welcome to our second 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. Okay, so good morning, then 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; Seth Yellin, Senior Vice President Corporate Development and Steve Anaya, Senior Vice President and Chief Accounting Officer. Cantel Medical achieved record financial performance in the second quarter of fiscal year 2016 with solid sales and net income growth. We reported second quarter U.S. GAAP earnings of $0.37 per share, as compared to the prior year’s second quarter earnings of $0.27 per share. Sales increased 16.9% in the quarter to a record $158.3 million, with underlying organic growth just over 12%. On a non-GAAP basis, adjusted net income increased by 15.3% over the same quarter last year to $17,413,000. Adjusted EPS for the quarter was a record $0.42 as compared to adjusted EPS in the prior year of $0.36. I'll briefly review the second quarter performance and the highlights of some 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 11th consecutive quarter. For the first time in Cantel’s history, this segment has exceeded 50% of total company sales. In the quarter, we recorded Endoscopy sales of the $81.5 million representing total growth of 38.1% over the prior year with strong underlying organic growth of 26.5%. Adjusted operating profit for the segment showed nicely leverage in the quarter increasing by over 46% due to strong volumes in all product categories including reprocessing equipment, procedure room products, chemistries and service. In addition this quarter’s results include a full quarter of sales from our newly acquired Medical Innovations product lines which carry favorable margins. Despite significant investments in the quarter, including the full infrastructure of Medical Innovations, adjusted operating expenses excluding transaction-related cost were nicely leveraged increasing by 30% as our sales grew by 38% in this segment for the quarter. We are optimistic that our Endoscopy business will deliver continued sales growth and increased operating profits for remainder of fiscal year 2016 and beyond. This quarter, our procedure room product lines led the growth in the segment, demonstrating the effectiveness of our global selling strategies and customers are increasingly recognizing the superior infection prevention features of this expanding product category. This quarter we also saw a substantial increase 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 and detergents category grew by 13% worldwide. Our large and growing installed base of machines also provides great opportunities to expand our global Service and Spare Parts business, which grew 17% this quarter. We are pleased by our expanding international footprint in this segment which has been driven by our direct sales implementations and strategic acquisitions. Not only did we benefit throughprospects in a few minutes. We remain very confident in the strength and capability of the entire 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 US business performed well this quarter with a 36% year-over-year increase and is leading the growth in this segment. Our success 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 in the US 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. 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, Italy, Germany, France and China. In our Water Purification and Filtration segment, sales this quarter grew by 2% over the prior year to $43.3 million with organic growth of 1%. This was a reasonable performance given the modest declines in the equipment buyback like over the past two quarters and the fact that we had a very large one-off filter shipment for used in the clinical trial, in the quarter last year, that was almost over $700,000 that did not repeat. Operating profit declined 6.6% reflecting the relatively flat sales and our increasing investments mostly in selling expenses. Although half of these selling expenses came from our acquisition of PWS which we did not own for two months for the prior period. During the second 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 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 three years, and the cyclical nature of capital equipment sales and combined with the fact that now our orders are consistently at 80% in this year as well as last year, we will see some quarters such as this one where dialysis water purification equipment shipments were again a little behind compared to the prior year. However, commercial and industrial water purification equipment was actually ahead for the quarter. More importantly, the business had strong order intake this quarter and our overall backlog in this segment increased by more than 8% over the first quarter and about 5% over the same quarter and last year. This increase should help drive some growth starting in the fourth quarter. It is important to note that about half of the 6300 dialysis clinics in the United States are still using legacy, manual chemically disinfective water purification equipment which is an opportunity for this business in future quarters. Additionally, we are preparing for several new product launches in this product area, which will benefit the business in the mid-term. We are optimistic about the future potential of the filter and sterilant business and 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 in fiscal year 2017. 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 satisfactory quarter with sales of $26 million which was a 3.3% increase over the same quarter last year. Organic sales growth was flat, as increases in our stability assurance products were offset by some lower sales of facemasks caused by the lingering effect from the full ahead of shipments of facemasks and other products related to the Ebola outbreak last year. In this year’s quarter, international sales of healthcare disposable products which are priced in US dollars were hurt as local currencies weakened – were more than offset by the strength of our newly acquired DentaPure Waterline Disinfection products. Adjusted operating profit for this segment was leveraged nicely to a 12% increase resulting from a 200 basis point expansion in gross margins driven by operating efficiencies and positive mix. As we look forward, we remain confident about the growth potential of the Healthcare Disposables business driven by our increasing presence in the stability assurance market, our entrance into the high growth Dental unit Waterline Disinfection markets as well as from our new opportunities in hospital and alternate care markets and – however in this alternate care markets. In this market, our Rapicide OPA/28 high level disinfectant in the United State sales more than doubled versus the prior year. In addition, we see continued opportunity for growth from new product development activities, further international sales growth and from acquisitions. We were pleased to have announced this quarter the acquisition of NAMSA's Sterility Assurance Products unit, which Jorgen will also be speaking about in a few minutes. We have also added additional sales and marketing resources in this business to help drive growth in the future. We are very pleased to have just hired a highly experienced Senior Vice President of Marketing, Jacqueline Beltrani to further strengthen the team and its focus on strategic growth and we welcome Jackie to the Cantel family. In the dialysis segment, second quarter sales were 3% higher as opportunistic dialysate concentrate sales to a major customer, which is expected to moderate in the fiscal year 2017, were mostly offset by the expected decline in reuse sterilants in the United States. We expect this decline in reuse to likely accelerate in the United States. Operating profit increased 17% as the loss margin from the decline in reuse sterilants was more than offset by the higher shipments of lower margin concentrate and successful cost control initiatives. Relative to the rest of Cantel, this segment has become the much smaller part of our overall company, now representing 6% of total segments operating income. Over the long-term, we expect this segment to continue its gradual decline, although we continue to actively seek growth outside the United States. This business does remain important to the company and we work hard to continue to take care of our global customers. Now I will turn it over to our CFO, Peter Clifford to go over some financial details.

[Peter Clifford:]

Thanks Andy. As Andy indicated, sales increased 16.9% in Q2 versus last year. The quarter sales bridge for Q2 is as follows

[Andrew Krakauer:]

Okay, thank you, Peter. In summary, Cantel Medical’s second 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 Cantel. We showed very strong overall sales growth of 70%, as well as solid organic growth of 12%. Despite continuing significant investments in our businesses, we achieved adjusted net income growth to 15% 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 programs. One of the strengths of the company is that we are in a diverse infection prevention markets and in any quarter strength in one or more of our businesses can offset weaknesses in others. This quarter Endoscopy has again led our growth, but again, all three of our major segments have been in such a position in the prior quarters. Most importantly, all of our major businesses have good growth prospects and the recent additions of two businesses in the UK and one in Italy in Endoscopy, the DentaPure and now NAMSA's Sterility Assurance Product acquisition in Healthcare Disposables and one acquisition in the Water Purification and Filtration segment have added important contributors to future global growth. We anticipate that the biggest benefits of these acquisitions will be later in fiscal year 2016 and fiscal year 2017 after significant upgrades to 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 acquisitions and new products and growth opportunities, let me ask our President, Jorgen Hansen to cover a few topics.

[Jorgen Hansen:]

Thank you, Andy. This quarter marks the midpoint of our five-year strategic plan that we announced two-and-a-half years ago. At that time we stated our aspiration to double our sales and profits by financial year 2018. This records that we are ahead of our plan and continue to execute well on the three pillars of growth, market expansion, new products and strategic acquisitions, supported by a comprehensive continuous improvement program. We remain committed to our strategic plan and are in process of expanding our outlook for the next five years looking into financial year 2021. We anticipate to report back on this updated strategic plan at FY 2016 year end earnings call in late September. Now, let me briefly speak about the progress of the three pillars of growth. The first pillar of growth is market expansion. In our strategic plan, we committed to significant investments to pursue the more than $6 billion total available market in our three major segments, Endoscopy, Water Purification and Filtration, and Healthcare Disposables. The biggest area of investment over the planning period has been in sales and marketing where we have added more than 150 physicians over the last two-and-a-half years giving us a leadership position in the US and allowing us to go direct in the UK, Germany, Italy, Holland and China and now expanding into France and Hong Kong. In addition to this, we are adding more than 100 customer-facing clinical customer service and technical service teams members to meet the increased demand for our products and we continue to be committed to providing a best-in-class customer experience in all the markets concerned. The second pillar of growth is launching new products. Over the past ten quarters, we have had important product launches in all of our divisions. Most significantly, we have launched three new automated Endoscopy processor platforms and multiple procedural products in our Endo business. In our Healthcare Disposables division, we have introduced a new high-level disinfectant stability assurance and personal protection line extension as well as Dental Waterline Disinfection. Finally, we have expanded our offering within Medical Water Systems, hollow fiber filter solutions, and have launched a novel sterilization technology in our Water Purification and Filtration division. New product launches remain a key priority for growth and we continue to invest in new product programs in all of our businesses driven by our R&D teams in the US and Europe. The third pillar of growth is strategic acquisitions. Our acquisition programs remains strong and we have completed nine transactions adding approximately $100 million of acquired revenue to our businesses over the past two-and-a-half years. These acquisitions have yielded new talent, new products, and new geographic footprints, which combined have strengthened our competitive position globally. We have seen good performances from these deals. In September of 2015, we acquired Medical Innovations based in the UK to augment our focus on safety with processing, handling, transporting, flexible endoscopes. The integration is progressing as planned with sales at the higher end of our expectations and already we are seeing a number of positive synergies with the endoscopy portfolio in the US, UK and Continental Europe. Just after the second quarter close, we were pleased to announce the acquisition of NAMSA's Sterility Assurance Product division for $13.5 million in cash consideration, which we officially closed March 1. For the calendar year 2015, this business generated $5.7 million with good profitability. This acquisition reflects our continued focus on stability assurance as a key growth driver for our Healthcare Disposables segment and this product category now represents the largest product line in this division. The acquired business focuses primarily on the industrial segment in medical device and life science manufacturers representing a new end-market for Cantel. Importantly, with this acquisition, we have retained a small dedicated team of skilled employees focused on stability assurance. This team brings us a strong technical knowledge, key product development expertise and strong customer relationships which will be instrumental in growing both the acquired business, as well as our broader stability assurance product category. We welcome these new team members to the Cantel family and look forward to their important contribution to our organization. We feel confident in our growth trends and see great opportunities for our businesses to grow organically. In addition, we will continue our proven strategy of intensifying executing and integrating acquisitions worldwide and we are actively pursuing opportunities for acquisitions in all three of our major businesses, as well as the new Infection Prevention categories. Finally, let me provide an update on the FDA order recall of Custom Ultrasonics automated endoscopic processor announced on November 13, 2015 and which we discussed at our last earnings call. As a reminder, our best estimate is that there is approximately 1300 active Custom Ultrasonics processors in the market and the customers affected are actually starting to address this recall and obtaining for replacing their Custom Ultrasonics ARs. We have taken the necessary steps to ensure that we are prepared to assist out in healthcare providers as they comply with the Custom Ultrasonics recall and consent degree. Since we design manufacture all our products unlike some of our competitors, we responded very quickly by increasing capacity and ensuring that we are positioned ourselves to help these important providers that are in need of these immediate solutions. We have the broadest range of products and a strong sales and service team and this is an absolute differentiator for our endoscopy business and have positioned us as the leading supplier for large multi-system deals, which we have high confidence we will secure over the next six to 18 months. Now back to Andy.

[Andrew Krakauer:]

Alright, great. Thanks, Jorgen. As Jorgen has pointed out, we remain optimistic and confident that we can continue to grow Cantel through the numerous growth drivers. All the businesses have good potential and play in expanding markets many times their current size. We will continue to make needed investments not only in sales and marketing and in new product development, but also in our basic infrastructure as we rapidly grow our worldwide footprint. We are currently recruiting for or have just hired numerous physicians in finance, accounting, IT, human resources, manufacturing, regulatory and quality. And overall, including sales and marketing, as well as R&D, we added about 30 professionals in the second quarter and have planned to add between 40 and 50 more physicians in each of 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 been implementing cost and operating expense programs as to in part pay for the incremental investments. We have strong momentum leading positions in the growing multi-billion dollar infection prevention and control marketplace and exciting opportunities before us with new products and expanding worldwide markets. One of the biggest strengths as I have been pointing out at conferences and on prior conference calls is the strength of our senior management team starting with our President, Jorgen Hansen. We have hired a number of additional executives during the past year, that gives us the team that can now manage the company many times our current size and I think this bodes extremely well for Cantel’s future capability to achieve our plan that we are going to be talking about in a couple of months that get us to 2021. So now looking forward, we expect our performance in the next few quarters to approximate the strong results of the past few quarters, so roughly about the same as we continue to make these investments. Fiscal year 2016 will be a year of major investments to accelerate future growth worldwide, but we do expect, again to show some leverage from these investments as well and despite our continuing investments, we expect operating profit for the full 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 our entire organization takes great pride in our mission to provide the products, the services, and the guidance to mitigate infection risks, improved patient safety and outcomes, and ultimately save lives. And I thank all of our, over 1,850 loyal and hardworking global employees for their great efforts in this quarter and I am sure going forward. So with that Michele, we will now take some questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mitra Ramgopal with Sidoti. Please proceed with your question.

[Mitra Ramgopal:]

Yes, hi, good morning. First just a couple of housekeeping questions. I missed international sales if you can give us a sense how much of the business it was this quarter?

[Andrew Krakauer:]

Just allow one sec.

[Steve Anaya:]

It was 21.9% and part of that impact is the extremely strong capital sales in the US switched that number down where we would have expected it to be.

[Mitra Ramgopal:]

Okay, thanks. And if you have a rough idea about the revenue from the dialysis line?

[Peter Clifford:]

Dialysis as a percentage of sales is about 5%.

[Mitra Ramgopal:]

Oh, no, 5% is fine. That’s okay. Okay, thanks. Andy, I was wondering, it sounds like, you still are in the process of making a lot of investments and I know, as Jorgen mentioned early, you are two-and-a-half years into the five year plan. How far along are you – you think as it relates to your sales force and the technicians and just give us a sense in terms of the potential hiring you should be expecting going forward?

[Andrew Krakauer:]

Well, Jorgen answer that first.

[Jorgen Hansen:]

Okay.

[Andrew Krakauer:]

He and I just go through our very formal process of recruiting of the headcount for the third and the fourth.

[Jorgen Hansen:]

So, Mitra, obviously, as I mentioned, we’ve hired really strengthening our sales and marketing and service teams over the last 10 quarters and with this organic growth we have now particularly in our endo business, we continue to meet to expanding our service team, we continue to add sales people as the territories get smaller and smaller with the ongoing growth. We have added, as you know, a whole team in the UK. We are in the process of building a full team in Germany which is progressing really well. We have a – that’s probably going to be our biggest investment over the next couple of quarters we get our full team there. Germany is possibly the second largest market for us. So, we have a tremendous growth opportunity there. So, I would say that, we are looking at continuing our investment as long as we can deliver the results in terms of growth and profits obviously, because we have so much opportunity. We have $6 billion opportunity and are still only attacking just a little more than 10% of that. So, that will continue in the future.

[Andrew Krakauer:]

And just to add to that, when we look at it, the sales and marketing still probably make up roughly half, but with the acquisitions and the expansion and the legal entities that we are creating in France and Germany, et cetera, we have substantial accounting, IT, human resources, and we are hiring lots of people around the world. So about half of these increases that we are talking about are always infrastructures which is just what we are going to need to have in place if we are going to get this company grow $1 billion.

[Mitra Ramgopal:]

Okay. So, thanks. And I know, you also talked about investing in product development et cetera, how should we think of R&D? I guess, as we look out to, say, 2017 et cetera, relative to what we saw in maybe back in fiscal 2015?

[Jorgen Hansen:]

Well, we are having lots of opportunities in the R&D side and as Peter mentioned in his piece, some of the benefits on the medical device tax, we are falling straight into R&D programs. So, my expectation is for 2017 that we will continue to increase investments in R&D. We’ve had multiple ideas and projects that we are working on. So, that’s something that we will continue to look at.

[Mitra Ramgopal:]

Okay, thanks. And then coming back on the endoscopy business, I know you have a sense in terms of the strong growth you saw, how much of it might have been due to your competitors’ issues with the FDA?

[Jorgen Hansen:]

We have not seen a very strong impact on the recall yet, but it’s certainly something that we expect for the coming quarters to impact on that and customers are quoting new equipment as we are planning new installations with them. It is a quite time-consuming task for many of our customers and that’s why that’s been taken a little while. The growth that you see today is really a direct impact of the tremendous efforts from our senior leadership teams who built a very, very strong sales and service team in the US, in the UK and now in Germany and China and other markets, but, the US sales are really driven by the investments and the leadership and the products that we already have, and we are strengthening our competitive position through that for sure.

[Mitra Ramgopal:]

Thanks. Very helpful. And again, when you look at the growth you are seeing there, is it essentially volume-driven or you still have a lot of pricing leverage?

[Jorgen Hansen:]

It’s volume. We are selling more ARs. We are selling more chemistry. We are selling more service contracts. We are selling a significant amount of procedural products and that will be in a leading category driven by some changes in the regulatory guidelines on infection prevention. So we have really good run rate in that business and it has been really leading growth for us.

[Mitra Ramgopal:]

Thanks, and then just a final question. As you look towards your goal in terms of as you mentioned, the five year plan on doubling the size of the company, given the strong organic growth you are seeing, is that’s kind of eased the pressure on the acquisition side in terms of being more aggressive, especially regarding maybe the potential size of some of the deals?

[Andrew Krakauer:]

Do you want to answer that, Seth?

[Seth Yellin:]

Sure, I mean,

[Steve Anaya:]

We know that’s pressure on Seth, let me put that.

[Seth Yellin:]

But, I think we are very happy where we are with regard to achieving our target and exceeding our targets in the strategic plan. But I think the acquisition pipeline and our appetite for acquisitions remains as strong as ever and we will continue to focus on making smart strategic acquisitions in product categories and the market segments that are synergistic with our businesses and we will continue to drive our future growth. So, I think we are pretty happy where we are. I think we’ll remain disciplined and we will continue to execute on transactions as they come available and as they meet with our strategic requirements.

[Jorgen Hansen:]

If you look at it, Mitra, we are – the last several quarters, where we’ve been at 10% organic growth or thereabout has been a little higher than our historic performance and that’s really a result of these very large investments in sales, marketing, service and so on and product development. So, we are encouraged about that, but we still need to – we still have a lot of opportunities on the M&A side. We can also have quarters that are not as strong as this one where we have a very, very strong endo performance. So, we are constantly filling the pipeline and want to remain focused on M&A combined with the strong organic growth that we are working hard to continue.

[Mitra Ramgopal:]

Okay. Thanks again for taking the questions.

[Andrew Krakauer:]

Alright, Mitra. Thanks.

[Operator:]

Our next question comes from the line of Tom Gunderson with Piper Jaffray. Please proceed with your question.

[Tom Gunderson:]

Hi everybody.

[Andrew Krakauer:]

Hey, Tom.

[Tom Gunderson:]

The – getting a little feedback, sure hang on one sec. The – it’s interesting and I am sure reassuring for you guys that just when one of your competitors has a major problem out in the market that you are launching new and improved reprocessors into the market. Part of that’s good planning, part of that’s locked. But you could slide into that upgrade and replacement cycle with some wind at your back, but I am intrigued by your comment in the last session that we haven’t seen much of that tailwind. What kind of – you said six to 18 months that you expect to see it or next several quarters on another statement, what kind of cadence do you expect on that? Do you expect that to be – is there a big quarter coming two to three quarters out or is it just steady over the next three or four quarters? What would you expect from this, because and the reason I ask it this way is, people on Wall Street see this news and they know that if they were in charge, they would call you up tomorrow and say, get in your new machines, this one is dangerous. But that’s not the way it seems to be going.

[Jorgen Hansen:]

No, it’s a very good question, Tom and I think there is a couple of nuances just to care by there. Even before this recall was effected by the FDA, we were changing out Custom Ultrasonics machines at a pretty significant rate, probably 150 to 200 machines a year. So, this has been going on for a long time and what has happened with this recall is that we anticipate that that will increase somewhat. But it takes a long time, some of the customers have lost installations which will take several quarters to prepare for. They might need to rebuild their GI suite. So, yes, we have – we are confident that we will get at least our share of the opportunity, but it will take several quarters for us to realize that and it’s not all incremental we are, even before this recall we were already converting a lot of customers and their cost.

[Andrew Krakauer:]

And there is no question that some of the customers are trying to delay, they are talking to the FDA and they are trying to delay. They know they will ultimately do it, but it’s a big change, it’s could be a lot of expense and definitely construction. So, I think there is still negotiations are going on, although I don’t – maybe it’s really in a negotiation mode, but it is negotiation on how fast they have to make these changes and it’s still revolving. We will definitely know a lot, I said this last quarter, but for sure, we’ll know a lot more next quarter and we will be – I think, much clear next quarter.

[Tom Gunderson:]

Got it. Well, it’s certainly encouraging that that tailwind is yet to come on the strength we have seen and it also sounds, Andy, it’s like from Jorgen’s answer, in response to my specifics of why aren’t they doing it right away is it sounds like some of the smart guys did it already and did in just under last two years. The – on international, ask this every time, so, I hope you are expecting it, but, we read in the papers the world economy, particularly in China, almost daily, and with few exceptions it’s mostly negative news, but that’s at a macroscopic level. I am just wondering , are you getting any pushback in any part of the world or any segments of the business that would maybe tie into the economy whereas that mostly execution of a sales plan that you continue to do?

[Jorgen Hansen:]

Yes, let me start, Tom, maybe start with the China. As I am sure you are aware China is still an investment market for us and a small part of our business. But we have really not seen any change in our customers’ willingness to invest in – particularly in the endo business. So, we see good performance there, what we have seen is that some of the cost pressures are subsiding a little bit meaning salary inflation, office rent, some of these things are not growing to the rate that we’ve seen in the past. So, it’s actually, on the short-term has helped us a little bit on the cost structure. And so far, we’ve seen good development in China. And from a European perspective, we have seen a little bit of delay in the UK on the order pattern. It’s not uncommon. I don’t really want to attribute that to any macroeconomic factor, it’s just in its edge sometimes dragged their feet a little bit and that has delayed some of our sales and capital equipment in the UK. We are feeling good about the market. We are, by far now the market leader in new installations in the UK and remember two years ago, we were a non-entity in the UK and similar with there, Germany is just sort of on the gauss. We have really not seen anything that is meaningful to our business other than it’s in our control to execute well and launched a new AR platforms and new products into the European market.

[Tom Gunderson:]

Thanks. And then, Andy, two questions, a tiny one and a big one. The tiny one is, I am always perplexed when you said in the script that facemasks were up and comps et cetera. With the Ebola virus and I am always trying to predict that and as you know difficult, but I’ll ask anyhow, is there anything going on with the Zika virus that we should see coming forward. Is that a big enough problem worldwide, in the North America that it would have an impact or is it just another news item?

[Andrew Krakauer:]

I would say that, we’ve seen no effect from the Zika virus and I believe a lot of it is coming from travel to certain parts of the world and maybe even to actual contact, but nothing is coming at the respiratory.

[Seth Yellin:]

But everyone think it’s control like that.

[Andrew Krakauer:]

So, I think the answer is, it has had no effect at the moment and I don’t anticipate as well.

[Tom Gunderson:]

Got it, thanks. And then the bigger question, Andy, we’ve talked about this before and you mentioned it in towards the end of your prepared comments, but I am just wondering the balance, the yin and yang of investing for future growth and leveraging earnings to the bottom-line. Does it feel going forward, pretty much steady as it goes a little bit of leverage but not excessive or on the other hand, do you see so many opportunities that maybe deleverage a little bit, because you want to reinvest more into different products and areas of the world?

[Andrew Krakauer:]

Well, I have to say, it is the opportunity that we look at far exceed what we can possibly invest in. And so we do pick and choose and particularly as we go into new markets, and we are making decisions on major R&D programs. I like where we are where if we are still able to get a double-digit growth in earnings, that we can continue to – these investments they are large and they look like extremely large investments, but, as – and even the people that we are adding, it seem like lots of people, but, when we start looking at as percents, now we have 1850 employees and frankly with – lot of our new manufacturing resources come in as temps, we have hardly 2100 employees. So, we are growing at more than 10%. So, you’d expect to see a few hundred people coming on. So, I can tell you that we are – we ask this question on a regular basis. We have a formal process as I mentioned, Jorgen and I go through on approval of heads. We have a prioritization system. We look all over the world, we look by business and I would say that we have tended to go slightly more aggressive than less aggressive is because the opportunities to get there now we think will really pay back in three years and we still are really a three year focused as long as we can continue to show growth while we are investing. And a lot of these investments are the reasons why our sales are where they are. There is no question about it. And we haven’t begun to see all the benefits for some of the investments that we are making. And so, when I look down the road, I’d expect to start – I think we should start leveraging some of these investments that we’ve made in some of these direct sales teams and et cetera and while we those benefits start coming in, we are going to look at the next things that need invest to. And the last thing, I’ll leave with this, anybody else wants to comment, I’ll leave it on the comment. We are in the process – we are just beginning the process of our budget – of our annual budget and the first year of annual budget ties into our strategic plan and we are looking at a plan to get the 2021. The reason why we’ve stayed so steadfast in our investments 2.5 years into our five year plan, is because we knew where we were heading and we always stayed two to three years focused, not five or ten years, but two to three years focused. And, we will be reviewing the budget and the strategic plan with our Board of Directors in June and we will have a nice debate again exactly on the questions that you are asking. And I would suspect the management would like to probably be roughly what we are doing now, which is no one can say we are not investing in the future, because we are. And – but we are delivering at the same time. And so, I would think it’s still going to be that kind of balance, but they will be clearly on a discussion looking at the opportunities that are ahead, it could be affected by potential acquisitions or not and then the discussion with management and the Board. But, these are good questions. We definitely think about them a lot and I would say more of what we are doing, probably not less and probably not more.

[Jorgen Hansen:]

Yes, just to add one or two comments to that, what Andy just said, if you look at our endoscopy business that obviously is driving really well right now. If you go two-and-a-half years back, that business had very low growth and did not have any – it had negative leverage from an earnings perspective, about two years. We – despite that, we created a plan, invested in R&D, we hired the sales people and we had our two other divisions paying the bills for a couple of years until we got this machine moving and that’s now the leader of growth, particularly the US market is driving that growth. And, we surely expect that the investments we made in Europe will start to help that picture as well in the next several quarters. But we got a lot more work to do. We have not invested as aggressively in our two other divisions. We have new infection prevention areas that we are looking at both organically and from an M&A perspective. So, just trying the opportunities and as long as we can justify the longer perspectives and communicate clearly around it, I am confident that we will continue to invest in the future mindfully and strategically.

[Tom Gunderson:]

Got it, thanks. That’s it for me guys.

[Jorgen Hansen:]

All right. Thanks, Tom.

[Operator:]

There are no further questions as this time. I would like to turn the floor back over to management for closing comments.

[Andrew Krakauer:]

All right, again, thanks, so, listen, thanks everybody for listening. We look forward to speaking with you again on our third quarter fiscal year 2016 earnings call in early June. Thanks a lot.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.