Cantel Medical Corp.
Q3 2016 Earnings Call Transcript

Published: 8 Jun 2016

[Operator:]

Greetings, and welcome to the Cantel Medical Corp Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Andrew Krakauer, CEO of Cantel Medical Corp. Thank you. You may now begin.

[Andrew Krakauer:]

Okay. Well, thank you, Shea, and welcome to our third 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, with that said, good morning again 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; Seth Yellin, Senior Vice President Corporate Development and Steve Anaya, Senior Vice President and Chief Accounting Officer. Cantel Medical achieved outstanding financial performance in the third quarter of fiscal year 2016 with solid sales and net income growth. We reported third quarter U.S. GAAP earnings of $0.34 per share, as compared to the prior year's third quarter earnings of $0.30 per share. Sales increased 22.8% in the quarter to a record $173.7 million, with underlying organic growth of 17.6%. We did have $0.04 included in the GAAP earnings for CEO transition and non-amortization related acquisition cost. On a non-GAAP basis, adjusted net income increased by 24.1% over the same quarter last year to a record $18,243,000. Adjusted EPS grew by over 25% for the quarter to a record $0.44 compared to adjusted EPS in the prior year of $0.35. I'll briefly review the third quarter performance and highlights of our operating segments. This quarter, our Endoscopy business continued its strong performance at it has for the past three years, setting a new sales record for the 12th consecutive quarter. Sales in this fast growing segment represented 53% of total company sales. In the quarter, we recorded Endoscopy sales of $91.9 million representing total growth of 44.2% over the prior year with strong underlying organic growth of 33.1%. Adjusted operating profit for the segment increased in the quarter by over 42% due to strong volumes in all product categories including reprocessing equipment, procedure room products, chemistries and service. And despite significant investments in the quarter, including the fully acquired infrastructure cost of Medical Innovations recently acquired, substantial sales and marketing additions and significant incentive sales commissions prior to the strong performance, particularly in the United States, adjusted operating expenses were leveraged increasing by 40% as sales grew by 44% for the quarter. This quarter, our procedure room product lines led the growth in the segment, demonstrating the effectiveness of our global selling strategies as customers are increasingly recognizing the superior infection prevention features of this expanding product category. This quarter we also saw substantial increases in our already large worldwide installed base of endoscopic 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 22% worldwide. Our large and growing installed base of machines also provide great opportunities to expand our global Service and Spare Parts business, which grew 20% 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. We remain confident in the strength and capability of the entire United States endoscopy direct sales and service team. They've consistently demonstrated the ability to effectively launch and grow our expanding full circle portfolio of infection prevention and patient safety products and our United States performance is the main driver of this quarter's growth in this segment and in Cantel in total. 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 United States market and the addition of new and improved products, we're now further expanding the sales, service, training and marketing teams for fiscal year 2017. 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 U.K., Italy, Germany, France and China. Our Healthcare Disposables business had a very strong quarter with sales at a record $29.8 million, which was a 20.3% increase over the same quarter last year. Organic sales growth was 13.4% when compared with a relatively weak prior year comparison after a strong first half last fiscal year. This quarter’s performance was again a record on absolute dollar basis and showed some nice increases in two important product categories for this segment, Sterility Assurance and Dental Waterline Disinfection. Adjusted operating profit for this segment was leveraged to a 46.5% increase resulting from a 500 basis point expansion in gross margins, driven by positive mix, strong Sterility Assurance products including the newly acquired NAMSA sterility assurance product business and dental waterline disinfection products as well as operating efficiencies, especially when compared with the lower volumes during last year's quarter. As we look forward we remain confident about the growth potential of the Healthcare Disposables business, driven by our increasing presence in the Sterility Assurance market now including the NAMSA acquisition, our entrance into the high growth Dental unit Waterline Disinfection market as well as for new opportunities in hospital and alternate care markets and in this market sales of Rapicide OPA/28 high level disinfectant in the United States 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. In the Water Purification and Filtration segment, sales this quarter were basically flat compared to the prior year at $44.6 million although sequentially sales were 3% higher than the second quarter. This was a reasonable performance given the modest declines in the equipment backlog a few quarters ago. Operating profit declined 8% reflecting the relatively flat sales, increasing commercial investments and some one-time warranty costs. During the third 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 replaced and provide great benefits to our dialysis customers and their patients. Sales of these more advanced higher-value machines carry higher ASPs, now consistently accounting for roughly 80% or more of our incoming orders and shipments, as customers recognize the performance benefits and cost savings provided by these products. Now given the strong growth in construction of new clinics in the past three years, the cyclical nature of capital equipment sales in this market and the leveling out of demand for these system at around 80% of our orders, 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, although these declines were offset by sales of consumables products sold in the segment. Further our top five customers did show an increase of 6% versus the same period last year and then most importantly, this business had strong order intake for the second consecutive quarter and our overall backlog in this segment for both equipment and in total are at all time records. This increase in our backlog should help drive growth as we move into fiscal year 2017. It is also important to note that more than half of the 6,300 dialysis clinics in the United States are still using legacy manual clinically disinfected 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 midterm. 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. 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. In the Dialysis segment, third quarter sales were 6% higher as opportunistic dialysate concentrate sales to a major customer, which is expected to moderate in 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. Adjusted operating profit increased 10.8% as the lost margin from the decline in reuse sterilant sales 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 a much smaller part of our overall company, now representing less than 6% of total segment 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 customers globally. Now I'll turn the call over to our CFO, Peter Clifford who will go over some financial details.

[Peter Clifford:]

As Andy indicated, sales increased 22.8% in Q3 versus last year. The quarter sales bridge for Q3 is as follows; organic came in at 17.6%, acquisitions came in at 6.5%, dispositions was a negative 0.7%, and translational was a negative 0.6%. Year-to-date sales increase of 17.4% versus last year, the bridge is follows; the organic growth was 12.6%, acquisitions added another 6.5%, dispositions was a headwind of 1.1% and translation was also a headwind of 0.6%. Q3 gross profit margins expanded 130 basis points to 46.2% versus 44.9% last year. Margins expanded 130 basis points as well ex-acquisition accounting charges. Year-to-date gross profit margins expanded 140 basis points to 46.1% versus 44.6% last year. Margins expanded 120 basis points ex-acquisition accounting charges. The improvement in gross profit percent is due principally to mix favorability driven by acquisitions in the Healthcare Disposable segment as well as benefits from the medical device tax as well as volume leverage productivity in the plants. Note, our endoscopy capital sales were at lower than average gross margins, but will ultimately improve because our future chemistry sales at higher average gross margins. We continue to maintain our internal goal to gradually and steadily expand margin rates. Operating expenses increased by $14.7 million in Q3 and $26.3 million for the nine months compared to last year. Our investments and our operating expenses continue to support our multi-year track plan and continue to be concentrated in the following areas, geographic expansion, sales and marketing investments in all three business segments, new product development projects and operating expenses in our newly acquired businesses. For Q3 and the nine months, over half of the increase in operating expenses is due to organic investment. Reported operating income increased by 9.3% and 21.8% for the Q3 and the nine months respectively. Operating income adjusted for non-GAAP financial measures increased by 24.3% and 20.9% for Q3 and the nine months providing several 100 basis points leverage over sales growth. Net interest for Q3 increased $252,000 compared to the prior year Q3 and up $688,000 for the nine months. Our overall effective tax rate was 37.4% for Q3, the items impacting our effective tax rate for Q3 compared to the prior year of 33.1% or the net impact of our safety disposition, coupled with the prior year fair market value adjustments was a net of 370 basis points. Our year-to-date effective tax rate was 36.7%, which is close to our expectation for the remainder of the year. Our balance sheet remains very strong with significant capacity with over $118 million of unused credit facility as well as $100 million of untapped accordion line. Our banking relationships are incredibly strong and have been in place for over a decade. We ended the quarter with $25.5 million in cash and cash equivalents, $134.7 million in working capital on a current ratio 2.5

[Andrew Krakauer:]

All right. Thank you, Peter. In summary, Cantel Medical’s third quarter performance was very strong and most of our financial metrics were at record levels. This quarter's performance exemplifies why we are so optimistic about the future of the company. We showed very strong overall sales growth of nearly 23%, as well as remarkable organic growth of over 17%. Despite continuing significant investments in our businesses, we achieved adjusted net income growth of 24% for the quarter, as we continue to successfully focus on improving margins, accelerating the growth of business as we acquire, and driving operating leverage as a result of increased volumes and active cost improvement projects. One of the strength of our company is that we are in diverse infection prevention markets and in any quarter strength in one or more of our businesses can offset weaknesses in others. This quarter Endoscopy and Healthcare Disposables led our growth, but all three of our major segments have been in such a position in past quarters. More importantly, all of our major businesses have good growth prospects. Let me turn it over to Jorgen Hansen, our President and Chief Operating Officer to further discuss Cantel's strong performance in the third quarter, but more importantly of our growth perspectives and strategies as we move into fiscal year 2017 and beyond.

[Jorgen Hansen:]

Thank you, Andrew. The foundation for our growth has been the successful implementation of our five-year strategic plan on top of sales and profits by financial year 2018 through market expansion, new products and strategic acquisition, supported by a rigorous continuous improvement program. We are ahead of our plan now nearly three years after we introduced it to our investors and as reported last quarter, we're well underway in a strategic [signing exercise figures] to financial year 2021. We plan to report on these aspirations during our yearend and in fourth quarter call in late September. Our strong growth trajectory has contributed to a few key factors. Investments in sales and marketing including sales leadership and commercial excellence, multiple new product launches, execution and integration of strategic acquisitions and to some degree, favorable market conditions in the U.S. First the dominant reason for our strong share performance is the very significant investments in sales and marketing, with more than 250 physicians added over the last two and half years. These investments have greatly strengthened our competitive positions in the U.S. and key international markets. The majority of this investment has been in our Endoscopy segment and we now -- we have seen the benefits -- we've seen the results that Andy pointed out with sales growing organic of 33% in the third quarter and 27% year-to-date. The market approach that has driven the recent success is our full set of infection prevention strategy. With this strategy, we've often customized programs that aim at transforming the way endoscopy procedures are managed with comprehensive infection prevention solutions that help eradicate the risk of infections and improve the patient outcomes. To enable partnering with our customers on infection prevention programs, we have invested significantly in sales training and we're driving a formalized commercialized excellence program throughout our sales organizations. The results reinforces our leadership position in the U.S. Also we're well underway towards readership positions in our eight key international markets U.K. Germany, France, Italy, Penelope, China, Singapore and Hong Kong, by implementing this strategy and commercial excellence approach globally. While excellent sales execution has been the key driver of growth this year, we are also seeing strong sales of new products launched in the last 12 months. Our three new automated Endoscopy processor platforms that have been very well received, as an example we now have major installations of the new advantage plus pass-through AER in both Europe and Asia and we're taking share with our RapidAER machine in the U.K. All these AER platforms -- all these AER platforms also generate proprietary chemistry sales. We're seeing fast growth with our DentaPure [line] disinfection products in our Healthcare Disposables Business, yielding significant growth opportunity in this underpenetrated global market. In our Water Purification business, we recently launched the global and new innovative solutions for our transporting portable reverse osmosis machine. We also continue to see increased interest in our sterilization technology REVOX. Finally, we've recently received a CE Mark on a new adenoma detection device [Amplify]. This device fits under chip of a flexible endoscope and aids endoscopies in seeing potential follow-ups that may have previously been obscured by anatomical structures. We filed a 510-K submission with the FDA to market Amplify in the United States. Meanwhile we're preparing for the launch of the product in select non-U.S. direct markets. Our third growth driver is strategic acquisitions. In September 2005 we acquired Medical Innovations based in the U.K. to enhance our portfolio of products targeting in the safe reprocessing, handling and transporting of flexible endoscopes. The integration is progressing as planned with sales at the higher end of our expectations and positive synergies with our endoscopy portfolios in the United States, U.K. and Continental Europe. In March 2015, we acquired Sterility Assurance Product Division of NAMSA. This business is focused on developing unique high quality sterile assurance products, primarily for use by life science manufacturers. We continue to see good growth opportunities for cross-selling for this new customer base with our other Cantel products and services. The integration of this transaction is progressing well and the performance of the business is exceeding our expectation. Overall we feel confident in our growth trends and see great opportunities for our businesses to grow organically. In addition, we will continue our prudent strategy of identifying, executing and integrating acquisitions worldwide. We're actually pursuing opportunities for acquisitions in all three of our major businesses as well as in new infection and prevention categories. Finally, let me provide an update on the FDA ordered recall of customer of Custom Ultrasonics Automated Endoscopic Processor announced on November 13, 2015, which we discussed at our last earnings call. As a reminder, our best estimate is that there is about 1300 Custom Ultrasonics new processors in the market at the time of the FDA announcement and the customer affected are actively starting to address this recall and we believe most are planning for replacing their Custom Ultrasonics ARs. The FDA recently provides the earlier position on this recall and are now allowing the Custom Ultrasonics machines to remain in the field while the company addresses a number of concerns that the FDA has previously outlined. However the FDA constantly indicates that the Custom Ultrasonic machine we're processing edema scopes which we believe create a significant problem of those healthcare facilities that perform other procedures or ERCPs which we do -- require the use other flexible to edema scopes. Due to this, we expect that the replacement will continue possibly at a somewhat slower pace. As mentioned on the previous call, we've taken proactive steps to ensure hospitals and providers that are impacted with immediate access to our state-of-the-art technology and complete endoscopy solutions. While our recent sales growth has been positively impacted by this event so far the recall is only responsible for small amount of our own overall sales growth this quarter. We remain committed to providing best-in-class support to the industry customers in light of this difficult situation. Now back to Andy.

[Andrew Krakauer:]

All right, thanks Jorgen. As Jorgen has pointed out, we remain optimistic and confident that we can continue to grow Cantel through numerous growth drivers. All the businesses have good potential and play in expanding markets many times their current side. We will continue to make needed investments, not only in sales and marketing as Jorgen pointed out and new product development, but also in our basic infrastructure as we rapidly control our worldwide footprint. We're currently recruiting for to just hire numerous positions in finance, accounting, IT, HR, manufacturing, regulatory and quality. Overall including sales and marketing and R&D we've added over 30 professionals in the third quarter with only 10 of those were in sales and are planning to add roughly 50 to 60 more positions in each of the next two quarters. So rapidly hiring to get to growth we need over the next three to five years. Despite these substantial investments in the business, we expect to deliver solid growth in annual earnings this year and next year. Besides increased profits driven by sales growth, we have been implementing cost and operating expense efficiency programs due in part paid for these incremental investments. We've strong momentum leading physicians in the growing multibillion dollar infection prevention marketplace and exciting opportunities before us with new products in expanding worldwide markets. Looking forward, we expect our performance in the next few quarters to approximate the last two quarters as we make these continued investments. Fiscal year 2016 will continue to be a year of major investments to accelerate the future growth worldwide and again we do expect to show some leverage from our investments as well. And again, despite these investments, our operating profit for the full year will obviously show meaningful growth over '15 as we have for the first three quarters. 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 guidance to mitigate infection risks, improve patient safety and outcome and ultimately save lives. And again, I thank all of our 1900 loyal and hard working global employees for their great efforts and achievements in this great quarter. On a personal note, as we announced on March 17, I’ll be stepping down as CEO and from the Board of Cantel and handing the leadership of the company to our President and COO, Jorgen Hansen, at the end of this fiscal year. Jorgen will become CEO and join the Board on August 1. This has been a well-planned leadership succession process and I’m very excited to turn Cantel over to Jorgen and extraordinary management team. We’re well prepared to lead the company to become a multibillion dollar in sales enterprise and I will remain a shareholder and advisor for years to come. It has been an honor leading this great company and I thank our Board of Directors, our Executive Team and all the employees of Cantel for their great assistance and efforts to make Cantel one of the best performing public companies for the 11 years I served as COO or CEO. I also want to thank our shareholders and investors for their confidence and support in Cantel over the years and I assure them the company will continue to prosper under Jorgen’s leadership. Last I want to thank our long-serving Chairman, Chuck Diker for his support in Cantel as we work closely together to grow Cantel for many years now. Chuck led Cantel for becoming a dedicated infection prevention and control company. That was long before I joined the company 11 years ago. So let me turn it over to our Chairman, Chuck Diker just to give a few comments.

[Chuck Diker:]

Thank you, Andy. I want to thank you Andy for eight years of dedicated leadership of Cantel and for the outstanding success we have had during that period. Andy became President in 2008 and CEO in 2009 and during that period, sales have increased at an annual rate of 14% and earnings per share have compounded at 19%. The succession plan when Jorgen Hansen will become CEO on August 1, has been in process for well over three years as Andy has stated. I and the Board of Directors have overseen the plan and as Chairman and a major shareholder, I feel very confident that under Jorgen’s leadership, Cantel will continue its growth of sales and profits into the foreseeable future. Jorgen has been Chief Operating Officer of Cantel for over three and half years and has been very influential in our strategic plans and operating performance. Andy and Jorgen have assembled an outstanding team of executives of which I’m very proud. I look forward to the future success under Jorgen and in the continuation of building a world-class infection control and prevention company. I also look forward to working closely with Jorgen as I did with Andy during this tenure. So that’s it, Andy. That’s what I wanted to say and I turn it over back over to you.

[Andrew Krakauer:]

All right. Thanks Chuck. I appreciate the comments. Okay Shea, we will now take some questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mitra Ramgopal from Sidoti & Company.

[Mitra Ramgopal:]

Yes, hi. Good morning. First I just wanted to start on the endoscopy business, clearly a tremendous quarter and when we look at the 33% organic growth, I was just trying to get a sense how much you benefited from maybe Custom Ultrasonics versus overall just getting it to new geographies, introducing reprocessors and just overall the investments you’ve been making?

[Peter Clifford:]

Yeah. When we look at the third quarter and the 33.1% organic growth, our gut tells us about 5% of that came from Custom Ultrasonics, our organic ex Custom Ultrasonics was still a really robust 28.1%.

[Mitra Ramgopal:]

Okay. Thanks. And when we look at the mix between domestic and international, do you have a sense of the breakdown there?

[Andrew Krakauer:]

Within Endoscopy specifically or just for the corporation?

[Mitra Ramgopal:]

Both if you have it.

[Andrew Krakauer:]

The mix for the corporation we were at 77.7% within the U.S. So again we're still tracking to kind of hit that 25% by year-end run rate. The one nuance that’s been different is the especially strong capital sales in the U.S. is probably traded a 100 basis points headwind to that 25%.

[Peter Clifford:]

Which is a great problem.

[Andrew Krakauer:]

Exactly. Within Endoscopy, I can pull that while you’re going through the rest of your questions.

[Mitra Ramgopal:]

Okay. Sure. Yeah that’s okay. So I guess giving what you're seeing out of Custom Ultrasonics and I know you had 5% organic growth this quarter. Is there something obviously you’re still in the early stages we should expect that be a multi-quarter tailwind for you?

[Jorgen Hansen:]

Yeah. We do believe that we're going to see an impact of the Custom Ultrasonics recall over the next I’d say three to four maybe five quarters. We have as we mentioned before, been converting Custom Ultrasonics' accounts for quite a few years now. Custom Ultrasonics has not been able to sell a new machine for more than three years. And so even before this recall happened, part of our growth came from those conversions. So this is a bit of an acceleration. We expect to continue maybe at a little slower pace based on the new indications from the FDA that some customers might have a wait and see attitude towards, but yes, so that there will be our position in that.

[Mitra Ramgopal:]

Okay. Thanks. And then on the Healthcare Disposable side, I know you benefit a little from NAMSA and I just wanted to get a sense as to how much that was because I’m guessing it seemed like it was about $0.5 million of revenue or am I missing something there?

[Andrew Krakauer:]

NAMSA, please give me one second. Just to answer your previous question, it's about 70% U.S. sales for Endoscopy for the quarter. So obviously 30% outside the U.S.

[Mitra Ramgopal:]

Okay. Thanks.

[Jorgen Hansen:]

Organic growth in Healthcare Disposables was 20.3% and 13.4% sorry -- 13.4% was organic and 20.3% in total. So the difference is basically NAMSA.

[Mitra Ramgopal:]

Right. So just sorry…

[Andrew Krakauer:]

About $1.7 million was the M&A impact in dollars for Healthcare Disposables for the quarter and it was predominantly the NAMSA piece, a very small deal that we announced and then it would have been a very, very small amount that appear the early part of the quarter.

[Mitra Ramgopal:]

Okay. So no real surprises there, okay.

[Andrew Krakauer:]

No, no. Maybe a little stronger than we had forecasted.

[Peter Clifford:]

Yeah, it was very sound start for NAMSA.

[Mitra Ramgopal:]

Okay. Thanks. And switching quick on the water segment, I know you mentioned it was a little flat this quarter, but you're seeing nice increase in orders and backlog now with all-time record levels. I don't know, if you could share some color in terms of where the increase is coming from?

[Andrew Krakauer:]

I’ll answer the question. We had a record order intake in our basic business of water purification equipment in the dialysis industry.

[Mitra Ramgopal:]

So I guess pretty broad based. No big customer necessarily?

[Andrew Krakauer:]

No. It's across our customer base.

[Mitra Ramgopal:]

Okay. And when we look at the gross margin, obviously it looks like you should end fiscal '16 north of 46%. It seems like would you say that's pretty sustainable level going forward and you can build off of that?

[Andrew Krakauer:]

We don't give guidance on that, but I think the tailwind that we have coming to us that we’ve called out is with the especially strong capital sales in the second and the third quarter, within endoscopy with the lead time of the installs we should really start seeing more of the chemistry benefit in late 4Q and certainly in the 1Q for sure next year.

[Peter Clifford:]

It’s the same guidance that we do give which is every business has a goal individually to improve their margin every year and we do that by acquiring - almost all the business we acquire, have higher margins on average than our corporate gross margin we’re pushing procedural products and chemistry, which will certainly follow some of the large capital sales, which are a little bit below. But if it takes a little while to move up because we keep selling capital, those are the problems that we’re always happy to do. But in general, slow and steady improvements just as we said all these years and I expect that to continue.

[Mitra Ramgopal:]

Okay. Thanks. And then on the investment side I know that will be an ongoing initiative over the next few years, but I believe you've pretty much completed the sales team in the U.K. and you're pretty close to completing in Germany. I was wondering if you're almost there and what would be the next focus, if it’s France, China, in particular?

[Jorgen Hansen:]

Yeah, it's a good question Mitra. I would say, I would agree that we agree that U.K. we have pretty much completed our sales team there. Germany, we had pretty much completed the approval of the sales teams, but we are still in the process of getting the different sales team members on Board. As I’m sure you know it takes a little longer to hire people in Europe. So we actually are not fully staffed yet. So we still will see some impact in Germany next year. In addition to that, we are in the process of staffing our French team. We do have some feet on the ground there, but there will still be more heads coming into that and then we'll continue to invest in China. China will continue to be an investment case also looking forward all tied with some improvement expected in '17. So those are the three main areas of investment in terms of sales. And as Andy indicated, we're actually stepping up investments in the U.S. sales team as well, we would with kind of growth we're undertaken, we have an opportunity to further strengthen our commercial position there. So that would be a major investment rolling into next year.

[Peter Clifford:]

More than all the international ones probably put together.

[Jorgen Hansen:]

Yes.

[Peter Clifford:]

Just to put in perspective.

[Mitra Ramgopal:]

Okay. Thanks. And then finally, on acquisitions I know you always are looking at a number of opportunities and Andy obviously, I was just wondering if you could give me a general comment in terms of valuations in which you’re seeing if it's changed much over the past 12 months?

[Seth Yellin:]

Hi Mitra, thanks. This is Seth. Acquisitions generally A; we’re very happy with where our pipeline stands right now and see ample opportunities across all segments and even in some other categories outside of our existing verticals. And on the valuation front, obviously there is a wide range in the nature of the business and the type of seller. Processes are competitive. Our average IT multiple paid for the last three years of deals has been just under nine times EBITDA. We’re going to remain disciplined in our acquisition strategy and are very focused on maintaining return metrics that we have firmly in place. So we'll be disciplined on the acquisition front. We see a lot of opportunity at the multiple levels that we've continued to be able to execute at and we'll continue to go ahead with our acquisition strategy in years ahead.

[Mitra Ramgopal:]

Okay. Thanks again for taking the questions.

[Andrew Krakauer:]

All right. Thanks Mitra.

[Operator:]

Thank you. [Operator Instructions] We have no further questions at this time. We'll turn the call back over to our speakers for closing comments.

[Andrew Krakauer:]

Okay. Great, thank you Shea. So again thanks everybody for listening. Jorgen and Peter look forward to speaking to you on our fourth quarter and yearend fiscal year 2016 earnings call that will be the last day or two in September. Thanks a lot.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.