Cantel Medical Corp.
Q4 2014 Earnings Call Transcript

Published: 29 Sep 2014

[Operator:]

Greetings and welcome to the Cantel Medical Corp’s Fourth Quarter 2014 Conference Call. (Operator Instructions). It is now my pleasure to introduce your host Andy Krakauer, President and CEO of Cantel Medical Corp. Thank you, sir, you may begin.

[Andy Krakauer:]

Okay. Thank you, Christine and welcome to our fourth quarter and full fiscal year 2014 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 limitations, the risk 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, Executive Vice President and Chief Operating Officer, Craig Sheldon, Senior Vice President, Chief Financial Officer and Treasurer and Steven Anaya, Vice President and Controller. Cantel Medical achieved record financial performance in the fourth quarter of fiscal year 2014 with solid sales and net income growth. We reported fourth quarter earnings of $0.26 per share, which included $0.02 of charges for acquisitions and CFO retirement costs as compared to the prior year's fourth quarter earnings of $0.25 per share. So this quarter's adjusted EPS growth was 14% ahead of the same quarter last year. Sales increased 15% in the quarter of which 13% was organic. Let me make a few brief comments about the performance for the full fiscal year 2014 before moving to some fourth quarter commentary. Fiscal year 2014 was a very successful year for Cantel Medical as the Company's financial performance by every measure significantly improved. Sales grew by 15% for the year of which 11% was organic, while gross margins expanded by 40 basis points and would have been higher by 70 basis points excluding the effect of the incremental Medical Device Tax which we have for 12 months in fiscal year 2014 versus seven months in fiscal year 2013 which is an incremental 1.8 million, our total tax was about over 4 million now. Adjusted EPS for the full year increased from $0.94 to $1.07 which represented year-over-year growth of 14% in fiscal year 2014 which followed our stellar performance in fiscal year 2013 where EPS grew by 23%. EBITDAS for the year grew by 13.5% to $95.7 million. And finally, despite spending over $33 million on acquisitions during the year, our net debt position actually declined for the full year by $12 million to about $49 million which demonstrates our continued strong cash flow generation. Even more importantly, not only did we achieve excellent financial performance, but we positioned Cantel for continued growth in fiscal year 2015 and beyond by successfully integrating our recent acquisitions, investing in additional $10 million in sales and marketing and new product development activities, much of these investments were to expand our international presence in major markets in Europe and Asia as well as to strengthen our U.S. sales team in all of our major units. Most notably in the acquisition area we made an important expansion into the UK Endoscopy market with the acquisition of PuriCore International Limited at the end of the fourth quarter. This acquisition now called Cantel Medical UK Limited greatly enhances the Company's global leadership position in Endoscopy processing and related chemistries. The overall effect of these combined efforts leaves Cantel well positioned in the infection prevention and control markets with solid underlying growth and provides the company with much greater potential than we had even a year ago. I'm pleased that we can make these important investments for the future while simultaneously producing solid earnings growth for the year. Now I'll briefly review the major operating segments for the fourth quarter. All three major segments, Endoscopy, Water Purification and Filtration and Healthcare Disposables performed well in the fourth quarter. This quarter our Endoscopy business continued its strong performance as it has all fiscal year setting a new sales record for the fifth consecutive quarter. In this quarter we recorded sales of $55 million, which are up 23% from the prior year's quarter of which 20% was organic. The prior year quarter was a record which was last quarter, was 47.3 million, so nice growth; 2 million of this came from success in winning a large tender in Eastern Europe as well as some large stocking orders from a major distributor in Asia. Operating profit for this segment on a reported basis increased 17% but after adjusting for acquisition costs related to PuriCore in the quarter, operating profits grew by 25%. I'm optimistic that our Medivators Endoscopy business will deliver continued strong growth and increased operating profits in fiscal year 2015 and beyond. This quarter we saw nice increases in our large and growing installed base of Endoscopy processing equipment and this growth came from both the U.S. and international business. And equipment placements drive sales of our higher margin disinfectants, much of which is our proprietary Rapicide PA Chemistry. This quarter our disinfectants and cleaners category grew by 25%. Our large and growing installed base of machines also provide great opportunities to expand our service and spare parts business which grew 15% this quarter. These increases exclude incremental PuriCore business, so these are organic. On the product development front, recently launched or will soon launch several new Endoscopy Disposable product lines which we expect will begin to generate positive sales momentum as we go forward in fiscal year 2015. Additionally with the PuriCore acquisition came an important all new automated pass-through Endoscopy Processor, the RapidAER which we’re now introducing to the UK market and look forward to launching shortly in other European markets. We are optimistic that this new state of the art machine will enhance our equipment chemistries and service business in Europe. We also remain very confident in the strength and capability of the entire Medivators United States direct sales and service team and their ability to effectively launch and grow our full product portfolio. We’ve have recently completed a major reorganization of our sales team which includes adding a number of additional sales and marketing resources on a global basis to support fiscal year 2015 growth. We expect our investments in several international markets to help accelerate the growth of our Endoscopy products. International sales of our Endoscopy products grew by 62% in the fourth quarter and were up 39% for the full fiscal year and this also excludes PuriCore acquisition. Moving on to water, our Water Purification and Filtration business continued the strong performance it has achieved for the past three years. This quarter, the segment's performance was excellent and led the overall growth and profitability for Cantel. Sales of 40.8 million grew by 14% over the same quarter last year with organic growth of 11% for the quarter. These increases were driven primarily from continued strong demand from our dialysis clinic, Water Purification equipment, from growth in our consumable product lines including filters and sterilants as well as from expansion of our service business both organically and from our Siemens Hemodialysis Water acquisition. Operating profit grew significantly faster than sales as compared to the same quarter last year. This operating leverage was driven primarily by higher gross margins from increased shipments of equipment, from the positive mix due to sales of higher margin consumables, nice leverage of the newly acquired Siemens service business as well as very tight expense control. The gross margins of our Water Purification and Filtration segment increased by 1.7 percentage points which despite still being well below our corporate average is still a significant positive development given the much higher percentage of sales from capital equipment in this segment compared to all the other Cantel businesses. During the fourth quarter, we continue to see broad market acceptance of our heat based disinfection central and portable water purification systems and robust orders in general for new and upgraded dialysis clinics. 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 accounted for about 65% of our central system equipment shipments and 70% of our portable equipment shipments. However, now 75% of incoming orders received are for these higher technology Water Purification systems as the adoption rate for these newer and higher value technology platforms continue to grow as customers increasingly recognize the performance benefits and cost savings provided by these new products. Further, an overwhelming number of the 6000 dialysis clinics in the United States are still using older, manual chemically disinfected Water Purification equipment which is a great opportunity for Mar Cor in the future. On a further positive note, Water Purification equipment orders were strong in the quarter and exceeded the high level of shipments delivered, so once again we ended the quarter with a record backlog which bodes well for continued solid results over the next few quarters. As I discussed last quarter, our Mar Cor team has taken over management of our Therapeutic Filtration and Chemistries businesses. We are now adding some sales, marketing and product development resources to pursue what we believe will be profitable growth opportunities in these businesses going forward. Potential benefits for these investments are really just starting. We’re optimistic that we’ve some exciting opportunities with our unique hollow fiber filters as well as our novel new REVOX Technology Sterilization service offering in the future. On the Filtration side, we’re pursuing several multimillion dollar therapeutic applications where our filters are used as a key component in other products for the treatment of acute alcoholic hepatitis as well as in other therapeutic applications and I will report on more on these opportunities as they become better defined. These filters are now part of this unit's BioScience products, we call it BSP area which also includes our growing worldwide shipments of our peracetic acid chemistries used to disinfect pharmaceutical cleanrooms. Our BSP sales this quarter were at a record level with good prospects for future growth. So overall I remain very optimistic that we can continue the great momentum we have achieved over the past years really now in Water Purification and Filtration. Our Crosstex Healthcare Disposables business continues to be a solid performer with sales this quarter of $25.3 million, up 6% over the same quarter last year. Operating profits for the segment were down 13% or about $600,000 due to margin pressures caused by increasing raw material costs, resin and paper. Substantial investments in sales and marketing including both new hiring and actually just the timing of some major ad campaigns as well as some acquisition costs related to the Sterilator acquisition that we did this year. We have initiated a price increase in September to help offset rising raw material and other costs. We were pleased to see the continued growth of our sterility assurance product lines which showed good double-digit growth this quarter and includes sterilization pouches as well as biological and chemical indicators. With the acquisition of ConFirm Monitoring, SPS Medical and most recently Sterilator, we now have a significant presence in this U.S. market and we continue to work on new product development in this area which will show benefits later in fiscal year 2015 and beyond. In this segment we have also now added dedicated international resources in Latin America and Asia and are recruiting a newly sourced in Europe and have started a number of product registrations in various countries including China which will contribute to growth not only in the sterilization assurance product lines but in other Healthcare Disposables segments later in fiscal year 2015. As we go forward we remain optimistic about the growth of the Healthcare Disposables business segment despite a number of challenges. As I just mentioned we’re focusing on growing sterility assurance business, including substantial efforts to grow in hospital and alternate-care markets as well as international markets. Further we’re well under way with an extensive strategic restructuring of our U.S. sales and marketing approach to drive growth in the changing dental market. This restructuring includes additional resources adding new products and taking several new approaches to various customer segments. Again, these strategies include short term investments which should yield benefits in a few quarters. Regarding new products, as we discussed last quarter, one of our big opportunities in this segment is the recent United States launch of Rapicide Opa/28, our third automated Endoscopy processing chemical and our first chemistry product that can also address the large market for manual soaking of instruments. The United States effort is being led by our Crosstex SPS hospital distributor team with great assistance from our much larger Endoscopy sales team. We have had good results in the U.S. and are planning some international launches in upcoming quarters. But we’re pleased to have received approval to sell Opa/28 in China and customer evaluations are ongoing while we're actively expanding our sales team. We also just received approval in Colombia. In the Dialysis segment, fourth quarter sales were 6.5% higher due to some opportunistic dialysate concentrate sales which are not expected to continue partially offset by an expected decline in reused sterile in the United States. Operating profit increased 2% due to the higher volumes. Relative to the growth in the rest of Cantel, this segment has become a much smaller part of our overall company representing only 8.7% of our combined segment operating profit in all of fiscal year 2014, compared to 11.5% of total operating profit in fiscal year ‘13. Nonetheless, the business remains very important to the company and we work hard to not only take care of our customers but seek growth in global markets. With that summary I'll now turn it over to our CFO, Craig, who will go over some financial details.

[Craig Sheldon:]

Okay. Thank you, Andy. Good morning everyone. And I would like to for a few moments turn our attention over to the earnings release which was distributed this morning. And I'll start by going through the income statement. As Andy indicated, the sales increased by 15.3% in the fourth quarter compared to last year's fourth quarter to a record $131.4 million. And for the full year, sales increased by 15% to a record 488.7 million. Organic growth for the quarter was 13% and for the full year organic growth was 11% and that's after removing the incremental impact of recent acquisitions. As Andy went through in quite a bit of detail, the top line growth was driven by our three largest segments being Endoscopy, Water Purification and Filtration and Healthcare Disposables. I just wanted to also review the three more significant recent acquisitions and the impact that they had on the income statement. And the first was back on November 1st, 2012, so that was the first day of last year's second fiscal quarter when we acquired SPS Medical. So this acquisition is reflected in the fiscal 2014 periods for the full year but in 2013 only reflected in the final nine months of that fiscal year, in other words, not in the first quarter and this is included in our Healthcare Disposables segment. SPS Medical contributes approximately $5.5 million of sales per quarter. Secondly, we acquired the Siemens water deal last year in the fourth quarter, had a July 30 closing date for accounting purposes. This acquisition is not reflected in last year's comparable period except for a very small piece in the month of July 2013 and the third acquisition was the recent acquisition of PuriCore on June 30th, 2014. So we only had that acquisition for one month in the current fiscal year. And during the one month PuriCore contributed approximately $1.6 million in sales and that acquisition is included in our Endoscopy segment. Also worth noting that our backlog is at a record high of over $62 million at the end of July which is a 33% increase over the last year and still a 25% organic increase in the backlog when you exclude the PuriCore acquisition. And also due to the flow of our business, typically our water segment has the vast majority of our backlog and it's roughly about 75% of the total backlog amount. Gross profit for the fourth quarter was 43.4%, compared to 43.1% last year in the fourth quarter and for the full year GP percentage was 43.6%, that's an increase compared to 43.2% in fiscal 2013. These improvements in gross profit percentage have occurred despite negative impact of the new Medical Device Tax which as Andy pointed out impacted the entire fiscal 2014 periods but only since January 1st of the prior fiscal year, so for the last seven months of fiscal 2013. This excise tax is running at just about $1 million per quarter on a pretax basis. At our current run-rate of qualifying domestic sales and that translates into about 80 basis points of gross profit margin. Aside from the impact of the Medical Device Tax, our GP was favorably impacted by improved volume and favorable sales mix in all three of our largest segments. Moving down to operating expenses, gross operating expenses increased by $6.5 million in the fourth quarter and $22.1 million for the full year compared to last year's periods. This is attributable principally to adding the infrastructure of six acquisitions over that time period including SPS Medical, Siemens, Jet Prep and PuriCore as well as acquisition costs related to these transactions and continued domestic and international investments in personnel and particularly in our sales and marketing teams, as wells as other sales and marketing initiatives all of which are very important part of our overall strategic growth plan. And to a lesser extent, we have also added costs in G&A, including compliance related costs as well as R&D to support new and existing products. Moving down to operating income, overall reporting a $1.5 million or 9% increase in operating income for the fourth quarter and for the full year, operating earnings were up by $7.7 million or 12%. And once again, these increases are despite having to deal with the adverse impact of the Medical Device Tax. So despite the impact of this tax and continued substantial strategic investments, we’ve still managed to keep operating income above 13% of sales in the fourth quarter and above 14% of sales for the full year. So it's very, very clear that our ever-increasing sales volume is really contributing to operating leverage in many areas of the business. Operating income growth was very strong in Endoscopy and Water for the fourth quarter and for the full year each of our three major segments showed excellent growth for the full year. Net interest expenses decreased compared to the prior year periods as substantial debt repayments over the past year have been partially offset by new borrowings for acquisitions or alternatively in some cases paying cash for acquisitions, thus preventing the ability to pay down even more debt. Total interest expense is now running at only about $500,000 per quarter. So we continue to repay borrowings quickly with strong cash flow and very low interest rates. I also mentioned that future interest rates which are already very low are well protected due to our strategic use of 12 month LIBOR contracts on a portion of our outstanding debt as well as very rapid repayments. On the income tax line, overall the effective rate is 36.9% for fiscal 2014, which is right in line with our expectations and it's reflective of a business that has most of its profits generated in the United States. This rate as I pointed out before would have been slightly lower if not for the expiration of the research and experimentation credit at the end of calendar year 2013. We continue to hope and believe that that our credit will be reinstated retroactively at some point, hopefully in the near future. So in the future as we grow our international business, we certainly hope to lower our overall effective tax rate, by the way of as example, the UK has a tax rate of 20%. So any future profits from our recent PuriCore acquisition will be at this 20% rate. Also, as Andy has discussed, we continue to invest significantly throughout the world where corporate tax rates are much lower. Some examples would be China and many places in Europe such as the UK. So beyond that, we'll see what happens in terms of revamping the Federal Tax code which seems to constantly be under discussion in Washington. Moving on to the balance sheet, it remains very strong with $31.8 million in cash and cash equivalents at July 31st, $97.4 million of working capital and a current ratio of 2.5 to 1. Funded debt was $80.5 million at the end of July. In terms of the banking relationships, I won't go through all the detail of our March amendment to our banking facility. We've gone over that detail before and you can see all the detail in our 10-K and previous 10-Q filings. Just suffice it to say that we’ve unbelievably strong banking relationships with Bank of America, Wells Fargo and PNC Bank and these relationships have been in place for about 13 years, but really a great strategic partnership for the future. Meanwhile, we continue to pay down very significant levels of debt. We paid down another $12 million during the fourth quarter and for the full year we paid down $42.5 million of debt. Subsequent to year-end, we paid down $5.5 million so that would be reported in the 10-K but I can also report that tomorrow we're scheduled to pay down another $4 million. So after that happens, the outstanding debt will be down to $71 million. Net debt is $48.7 million at July 31st, that’s a reduction of over $12 million since last year-end, despite paying $33 million for acquisitions. Gross debt to equity is 0.22 at July 31st and our gross debt to rolling 12 month EBITDAS is 0.84. EBITDAS was $24.1 million in the fourth quarter, that's 12% higher than the prior year fourth quarter and for the full year, EBITDAS is $95.7 million that's 13.5% higher than last year. Cash flow provided by operations was $23.5 million in the fourth quarter and $64.3 million for the full year and lastly, capital expenditures, $5.6 million in the fourth quarter and $13.5 million for the full year. So just in closing, just to alert everyone, today is the 10-K filing date and we will be filing that document before the close of business today. So with that, I will turn the call back over to Andy for some closing remarks. Andy?

[Andy Krakauer:]

Okay. Thanks, Craig. In summary, Cantel Medical's fourth quarter performance was very strong. We continue the positive momentum we had all throughout fiscal year 2014 and achieved a new sales record and strong EPS growth. Fiscal year 2014 performance exemplifies why we’re so optimistic about the future of Cantel. We showed excellent sales growth of 15% in the fourth quarter and have achieved organic revenue growth of 10% or higher, 13% this quarter for five consecutive quarters and despite our major investments adjusted net income growth of 14% was achieved in both the fourth quarters as well as the full fiscal year 2014. As I discussed last quarter, the worldwide market potential for our products continues to grow and has never been greater. Our strategic plan supports our aspirations to double sales and profits from fiscal year ’14 to fiscal year ’18. These are our aspirations and our predictions, but we’re optimistic that we can achieve these goals. We are in fact slightly ahead of our five year plan after completing year one of the plan fiscal year ‘14. Our detailed market analysis have shown that we now compete in total addressable markets well in excess of $5.5 billion, with great opportunities for growth in all of our major businesses. Further, we see expanded market potential that can be realized by executing on several new market and product strategies that we’re now developing. We are currently working on key R&D projects that while greatly increasing our R&D spending in fiscal year 2015 could increase our addressable market opportunity to $9 billion by the end of fiscal year ‘18. This potential and our clear growth drivers are reasons why we believe that Cantel has never been better positioned for strong sustainable growth over the medium to long term horizon. We are focusing on significant sales and marketing investments to promote newly launched products to substantially grow international sales and to increase penetration in existing markets. We’re also investing in future new products, disposables, chemistries and equipment, which we believe have large potential upsides. You should expect to see us continue to invest heavily in these categories with acceleration in expenditures in the next few quarters, as these investments are required to build the foundation to enable Cantel to achieve our medium and long term strategic growth objectives. Let me expand briefly about our ongoing investments for fiscal year 2015. Our success in the past five years has come in great part from substantial investments in sales and marketing and R&D. These investments are based on well-defined objectives and the identification of strategic opportunities. We have identified large opportunities for further sales growth by adding new products especially broadening the product portfolio in the Endoscopy business, and we have a goal to greatly accelerate growth of all product categories in international markets. Some of this international strategy includes going direct in certain countries such as the UK, Germany and China and generally focusing sales and marketing support in all major markets. We are also adding positions to strengthen our Healthcare Disposables and Water Purification segments to expand our position in some targeted markets and customer opportunities. Again, these strategies have great potential in the medium and long term but call for substantial upfront investments. To achieve the objectives of our five year strategic plan we did add a number of sales and marketing positions in fiscal year 2014 and we have a detailed plan for recruiting new positions over the next few quarters. Not only are we increasing our sales and marketing team but we’ve recently or now are adding needed infrastructure such as support roles such as finance and HR among others in China and in Europe. And again, we continue to expand our direct presence already under way now in the UK, Germany and China. In fiscal year 2014 we added about 75 professional positions and have added about 15 additional positions in the past two months, really sort of left over from what we call fiscal year ’14 budget. We still plan to add an additional 50 positions globally in fiscal year 2014. Again, the majority of these positions are sales and marketing and about 40% overall are in international markets. Again, overall these international markets are up about 26% in fiscal year 2014. To put these investments in perspective, our sales and marketing and R&D expenses increased over $3 million in the fourth quarter from the prior year's fourth quarter and grew by $10 million in fiscal year 2014 as compared to fiscal year 2013. Along with some incremental admin costs, this is equivalent of investing about $0.05 of earnings just in the fourth quarter and about 15% in fiscal year 2014. Yet despite these substantial investments in the business, we’re committed to growing earnings when compared to the prior year and committed to achieving our five year strategic plan goals which accelerate earnings growth starting in year three. In addition to increased profits driven by top line growth we’re implementing costs and operating efficiency programs to in-part help pay for the incremental investments. While the benefits of these programs are starting now, the majority of the savings will come in the second half of fiscal year 2015. That's why we feel confident in our growth plans and see great opportunities for our business to grow organically. But we will also continue our proven and very strategic identification and execution and integration of acquisitions worldwide. This is a core competency of the company that has brought us entrepreneurial management, new and higher margin products and additional growth in sales and profits from our proven strategy to invest and accelerate the growth of these acquired companies. The continued search and identification of synergistic markets and potential acquisition targets is a key role of our senior management team and opportunities for acquisitions do exist in all of our markets and we’re actively pursuing them. Looking forward we expect our performance in the first half of fiscal year 2015 to approximate the strong results of the past few quarters and then start to benefit from our strategic investments in the second half of fiscal year 2015 and beyond. Like this year, fiscal year 2015 will be a year of major investments to accelerate future growth worldwide and we do expect to show benefits from these investments as well. Despite our continuing investments in these initiatives, we expect operating profit for the full fiscal year 2015 to show meaningful growth over fiscal year 2014. 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 are committed to profitably growing the company while serving our customers and benefiting our shareholders. Our entire organization takes great pride in our mission to provide product, services and the guidance to mitigate infection risk, improve safety and patient outcomes and ultimately save lives and I'd like to thank all of, our now over 1500 loyal and hardworking employees for their great efforts and achievements in fiscal year 2014 and (Technical Difficulty). So thank you for listening. I look forward to speaking with you all in the first quarter of fiscal year 2015 in early December and with that Christine, we'll take some questions.

[Operator:]

(Operator Instructions). Thank you. (Operator Instructions). Our first question comes from the line of Thom Gunderson with Piper Jaffray. Please proceed with your question.

[Thom Gunderson:]

Just a couple of clarifications, Andy, in the prepared remarks you talked about reorg on the sales side for the Endoscopy division, is that just a continuation kind of thing or was there something a little bit more substantial in the most recent quarter?

[Andy Krakauer:]

Well actually, I may have exaggerated a little bit by calling it reorg. What it was is a completion of our strategy to expand management from six to eight territories and really get the benefit of the procedural products and the equipment products in a really the tightest cohesive way that we have ever had since we have bought the Byrne Medical business three years ago. So it's a much larger team, much more go-to-market with the full strength of our portfolio and expanded portfolio. But from my point of view, this year is the first year that all of that restructuring and additional heads and additional management including a number of changes in management have been put into place.

[Thom Gunderson:]

And then the backlogs on the heat based water capital equipment. For the last couple quarters, maybe longer, you've talked about record backlogs. Does increasing backlogs to record levels start to put pressure on manufacturing or is that handleable?

[Andy Krakauer:]

Well, it is very easy for us to manage. We don't work two shifts or certainly three shifts. We have multiple plants. Some of the backlog this quarter which I didn't mention actually came from the commercial industrial side which is in our operation in Canada and where most of the dialysis equipment is made in Minnesota. So we’re very happy with the opportunity to grow the backlog. And again, when we get these orders its well in advance of when our customers want the equipment. So it's easily planned manufacturing. So we can get more efficient with them.

[Thom Gunderson:]

And you may have said this, I missed it. What was the U.S., O-US split for the quarter or the year?

[Jorgen Hansen:]

16% O-US sales. Is the question sales?

[Thom Gunderson:]

Yes.

[Jorgen Hansen:]

The sales was about 16%.

[Thom Gunderson:]

Okay. I'm sorry, you're saying 60% of your revenue?

[Andy Krakauer:]

16. One, six, international.

[Thom Gunderson:]

International. Thank you. And that includes Canada or not?

[Jorgen Hansen:]

Includes Canada. But obviously as our UK acquisition rolls in this year, that's going to go up by about 5 percentage points or something.

[Andy Krakauer:]

But just to be fully accurate, for those that go back and look at the conference call script, every time I gave a statistics for international I should have said -- my international excluded Canada but the number that you just heard from Jorgen includes Canada.

[Thom Gunderson:]

And then a couple more and I'm done as long as we've got Jorgen there. Can you give us an update on infrastructure and how you see in China or Asia, and how you see fiscal year 2015 playing out? Is it continuing to build infrastructure? Is it fueling new product approvals, combo of both? Just a little more color, if you would.

[Jorgen Hansen:]

Yes, sure, Thom. A couple of milestones this year in China. Andy mentioned one of them, namely the launch of Rapicide OPA into the Chinese market and we have set up a direct sales team that are going to drive these products. In fact, we kicked this off just a couple of weeks back. In addition, we actually just last week got our most advanced AER portfolio approved in China. So our top sellers are DSD, Edge and our Advantage Plus machines are now registered and available in the Chinese market and that's going to be a focus for this year for the sales team to drive these products. And then later towards ‘15, we will have a number of our procedural products available as well. So a big year in terms of launching new products in China and what we're doing is building up a sales team that are able to handle these launches. We've already added infrastructure in terms of finance, HR and are now strengthening the sales leadership positions as well. So we feel we're really ready to have a big year in China with lots of growth and some last thing I want to mention is that the challenge in China, the opportunity in China is really to educate and help educate the customers about how you manage infection prevention and control in sort of a best practice position and that's really where lots of our efforts are going this year and that's where our sales team is going to go out and make a big difference in the Chinese market.

[Thom Gunderson:]

And then maybe just to finish up, since it impacted the income statement this quarter, can you give us an update on the CFO search?

[Andy Krakauer:]

Yes, sure. So we have been seeing a lot of very high qualified candidates. We’re being extremely careful in our choices and we're still in the interview process. Craig is here and as you can see working hard at least until January and is committed to stay a few months longer if needed. I believe we will fill the position before January. And so I would say we're seeing a lot of very good candidates.

[Operator:]

(Operator Instructions). Our question is from Harry Lang, a Private Investor. Please proceed with your question.

[Harry Lang:]

I'm one of those stockholders that go all the way back to Renal days, if you can remember that. The original company that led to Mintec and on to Cantel. My question concerns desalination. At one point with renal Mintec we talked about the possibility of using the Mintec Filtration to deal with desalination on a commercial basis and really solve some of the fresh water problems in the world. Have we still continued with that technology at all? Or is that pretty much off the table?

[Andy Krakauer:]

We have decided now a number of years ago that our Water Purification activity is going to be with basically city water, potable water, that desalination has become a very large and unbelievably competitive and if you read reports from some of the largest water companies very low margin equipment. And so I would say two things, our hollow fiber filters are never borne out to be able to be the way you desalinate. There are way more efficient ways to do desalination. But it is not a strategic emphasis for the company at all.

[Operator:]

Our next question comes from the line of Mitra Ramgopal with Sidoti. Please proceed with your question.

[Mitra Ramgopal:]

Just wanted to follow up first on the earlier question regarding international. I know you said it's right now it's about 16% of total revenue. But based on the five year plan and the investments you're making in China and elsewhere, how do you see that number can go to potentially at the end of the five year plan?

[Jorgen Hansen:]

Our target for the five year plan is to get international sales to up around the 30% mark. And I think we feel very good that that's absolutely doable through the initiatives we’ve going direct in certain markets and also through M&A. With the acquisition now in the UK, we would add a big step in the right direction and get into the lower 20s in terms of total sales. And so we feel we’re on the right path to get to the 30% milestone.

[Andy Krakauer:]

And part of that is also the go direct strategy which we talked about. I mean we have now -- with the acquisition of PuriCore we've now made the final move to move all the rest of the product lines to a direct operation and as you know we're already doing that in Germany and China. There will be other markets where we’re targeting to go direct as well.

[Mitra Ramgopal:]

And I know you talked earlier about going international. It obviously expands the end markets, could help with the tax rate, etcetera. What about the gross margins and if you could comment maybe in terms of potential pricing in China, Europe relative to say what you're seeing in the U.S.?

[Jorgen Hansen:]

Of course, Mitra. That varies by market, but I would say overall the gross margins are in the ballpark of what we see in the U.S., and even some areas, a little bit on the higher side. So also a good opportunity there from a margin expansion perspective.

[Mitra Ramgopal:]

And again, Andy, I know earlier you mentioned that the investments are moving a little ahead of expectation. I don't know if you could give us a sense of what we should expect for CapEx now for fiscal ’15 versus last year?

[Jorgen Hansen:]

For capital expenditures, we certainly have made major investments this year. I think we've got to $13.5 million in capital which is way above our normal 5 million, because we've being investing heavily in a combination of some of that is offices in Asia. A lot of it is production equipment, particularly in Endoscopy and in other areas. So I don't think we'll be heading above that next year. I think that's a reasonable forecast.

[Mitra Ramgopal:]

And again, as it relates to acquisitions, clearly you have the ability in terms of the balance sheet and the cash you're generating and the debt facilities to do a lot more transactions. Are you tempted to be even more aggressive as it relates to size or pretty much similar to what you have seen in the past?

[Andy Krakauer:]

Well, I think I can best answer that by saying that we have not been unaggressive based on size. We would love to get -- find bigger deals because we’ve the capability of doing it. It's really been more of finding them. So I guess the answer is we’re definitely open to larger deals like Byrne or larger. We just have to find the right companies at the right prices and we're definitely looking.

[Mitra Ramgopal:]

Again, the key is to continue to build off of the three core platforms as opposed to adding a fourth?

[Andy Krakauer:]

Well, look, it depends on how you look at it. There are some business that we're looking at that could greatly expand us in the hospital that are very adjacent, that we may end up going a fourth leg but all related to infection control, patient safety, medical, hospital, but some of the segments might be considered a fourth and we're certainly open to it.

[Operator:]

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

[Andy Krakauer:]

Okay. Well, again, thanks everybody for listening and we will be speaking to you again in December for the first quarter of fiscal year 2015 call. Thanks.

[Operator:]

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