Cantel Medical Corp.
Q4 2015 Earnings Call Transcript

Published: 29 Sep 2015

[Operator:]

Greetings, and welcome to the Cantel Medical Corp. Fourth Quarter 2015 Earnings Call Conference. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andy Krakauer, CEO of CMC. Thank you, Mr. Krakauer. You may begin.

[Andy Krakauer:]

Okay, thank you, Tim and welcome to our fourth quarter and full year 2015 conference call. Before we start, I would like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainties, including without limitation, the risks detailed in the company’s filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially from those projected. With that said, good morning to everyone. With me on our call today are Chuck Diker, Chairman of the Board; Jorgen Hansen, President and Chief Operating Officer; Peter Clifford, Executive Vice President and Chief Financial Officer; 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 fourth quarter of fiscal year 2015 with solid sales and net income growth. We reported fourth quarter U.S. GAAP earnings of $0.32 per share as compared to the prior year’s fourth quarter earnings of $0.26 per share. Sales increased 15% in the quarter to a record $151.3 million, with underlying organic growth of 10%. On a non-GAAP basis, adjusted net income increased by 19% over the same quarter last year to $16,060,000. Adjusted EPS for the quarter was a record $0.39 as compared to adjusted EPS in the prior year of $0.32. Let me make a few brief comments about the performance for the full fiscal year 2015 before moving to some fourth quarter commentary. Fiscal year 2015 was a very successful year for Cantel Medical as the company’s financial performance by every measurement significantly improved. Sales grew by 16% for the year, with overall organic growth of 9%, while adjusted gross margins expanded by 160 basis points, which resulted from higher volumes, focus on sales of higher margin products, and the benefits of our improved efficiencies and sourcing programs. Adjusted EPS for the full year increased from $1.24 to $1.44, which represented year-over-year net income growth of 17% in fiscal year 2015, which followed our stellar performances in the past few years. Adjusted EBITDAS for the year grew by 17% to nearly $114 million, and despite borrowing $47 million to fund one acquisition in each of our three major segments during the year, our net debt position actually declined for the full year by $2 million to about $47 million, demonstrating 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 2016 and beyond by successfully integrating our recent acquisitions and investing an additional $14 million in sales and marketing and an incremental $3 million into new product development for the year. These investments include activities in our newly acquired businesses. Much of these investments were to expand our international presence in major markets in Europe and Asia as well as to strengthen our United States sales teams in all our major business units. Most notably in the acquisition area, we had one year to successfully integrate the acquisition of PuriCore International Limited, now called Cantel Medical UK which we closed at the end of the fourth quarter of fiscal year 2014 and represents our important expansion into the UK endoscopy market. In the second quarter of fiscal year 2015, we acquired IMS in Italy, which is now our Cantel Italy Endoscopy business. Together, these businesses greatly enhanced the company’s global leadership position in endoscope reprocessing and related chemistries. We also added one acquisition in each of our other two major segments during the fiscal year. The overall effect of all these combined efforts means Cantel well positioned in infection prevention and control markets with solid underlying growth and provides the company with much greater potential than where we were even a year ago. I am pleased that we could make these important investments for the future, while simultaneously producing solid earnings growth for the year. Now, for the fourth quarter. I will briefly review the performance and highlights of our operating segments. 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 ninth consecutive quarter. In the quarter, we recorded endoscopy sales of $70 million, representing year-over-year total growth of 27% and strong underlying organic growth of 17%. The prior record for the last quarter was $63.7 million, so quite an improvement over last quarter, consecutive quarter. This quarter’s performance would have been a record even without including sales from our newly acquired businesses in the UK and Italy. Operating profit for this segment on an adjusted basis increased 27%, which was good performance given the investments in our newly acquired European businesses, enhancements to the U.S. sales teams, further international investments, most of which are allocated to this segment as well as accelerated R&D expenses. I am very optimistic that our Medivators endoscopy business will deliver continued sales growth and increased operating profits in fiscal year 2016 and beyond. This quarter, we saw nice increases in our already large installed base of endoscope reprocessing equipment, and this growth came from both the U.S. and international business. 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 organically by 18%. Our large and growing installed base of machines also provides great opportunities to expand our service and spare parts business, which grew 7% organically this quarter. Now, these increases exclude incremental revenue from our recently acquired UK and Italian businesses. Now, we expect to see further growth in these and other categories with these acquired businesses, and when combined with our core USA endoscopy business, we see these acquisitions providing Cantel the strong international platform and additional manufacturing capacity, including European-based chemistry production. On a further positive note, we were pleased to have announced on September 14 that Cantel acquired UK based Medical Innovations Group Holdings Limited. Medical Innovations is the leading global provider of endoscope storage and transport systems and further strengthens both our international presence and our global position as the premier full service provider of infection prevention and control solutions in the GI endoscopy market, and Jorgen Hansen will elaborate on this important acquisition in a few minutes. On the product development front, we have recently launched several new and improved endoscopy disposable product lines, which will add to our positive sales momentum as we move into fiscal year 2016. Overall, our procedural product lines grew by 19% for this quarter. We have recently launched an important new pass-through endoscope reprocessor in the UK, the RapidAER and have success winning a number of tenders in the UK. New product development focus in this business remains high and spending will continue to increase as we are working on new products and product enhancements which will benefit us in future periods. Our Continental European version of the RapidAER along with two additional state-of-the-art endoscope reprocessors will be launched in European markets and other select international markets as well as in this current quarter. Now, I will speak more about these product launches in future 2016 conference calls. We remain very confident in the strength and capability of our entire Medivators United States endoscopy direct sales and service team and their ability to effectively launch and grow our expanding full circle portfolio of infection prevention and patient safety products, now including our newly acquired Medical Innovations product lines. The U.S. business performed exceptionally well in 2015 and clearly led to 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. And as I discussed last quarter, we had just completed a major reorganization of this team, which included adding a number of additional sales and marketing resources, some of which also support our global sales efforts. But now given the growth potential of the U.S. market and the addition of new and improved products, including for Medical Innovations, we have decided to expand the sales, service, training and marketing team further again in fiscal year 2016. We also expect additional investments to be made in several international markets to help accelerate growth of our endoscopy products and support our direct sales efforts in major markets such as the UK and Italy, Germany and China. Our Water Purification and Filtration business continued its long track record of strong performance as well. Sales this quarter of $44.1 million are up 8% over the same quarter last year. Organic growth was 5%. These increases were driven primarily by increased shipments of portable dialysis water purification equipment as well as consumables and service. Operating profit showed growth of 16% over the same quarter last year. This operating leverage was driven primarily by a 230 basis point adjusted gross margin improvement due to favorable mix and continued focus on operational efficiencies. Despite gross margins in this segment being well below our corporate average, this improvement is still a very positive development given the much higher percentage of sales from capital equipment in this segment compared to the other Cantel businesses. During the fourth quarter, we continued to see broad market acceptance of our heat-based disinfection, central and portable water purification systems. These automated systems provide a higher standard of water purification than the older conventional technology equipment they replace and provide great benefits to our dialysis customers and their patients. Sales of these more advanced higher-value machines which carry higher average selling prices, now consistently account for 80% or more incoming orders and shipments, as customers recognized the performance benefits and the cost savings provided by these products. Given the strong growth in construction of new clinics in the past 2 years, the cyclical nature of capital equipment sales and the leveling out of demand for these advanced systems and around 80% of new orders, we will see some quarters such as this one where orders were a bit behind our excellent shipments, so our backlog did decrease a few percent. However, the majority of the 6,300 dialysis clinics in the United States are still using older, manual chemically disinfective water purification equipment, which is an opportunity for Mar Cor in the future quarters. Additionally, we are accelerating product development in this product area which will benefit this business in future years. On a positive note, we have just signed a national supply agreement with the Veterans Administration Hospital System for service and supply of our central and portable systems. And while we have always been a supplier to the VA, this makes us a preferred provider which simplifies the ordering process to provide better cost to the VA while also growing our business for this important customer as well. And we are also honored to be able to help giving the top, best treatment for dialysis veterans. In our water segment’s important biosciences product area, which includes Cantel’s filters and chemistry products, sales grew over 10% this quarter compared to the same quarter last year. We had good growth for clean room sterilants and water systems disinfection chemistries. Again, sales growth in this category is the key driver of our margin improvement in this segment. We are optimistic about the future potential of this business and have some exciting future opportunities with our unique hollow fiber filters as well as our novel new 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. A number of these opportunities could be realized in the second half of fiscal year 2016. 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 solid quarter as well with sales of $27.6 million, up 9% over the same quarter last year. Organic sales growth was 5%. Operating profits for the segment increased by over 35% compared with a relatively weak quarter in the prior year. Most of the improvement was driven from higher gross margins driven by favorable mix of higher margin products, including increased sales on face masks and of our newly acquired DentaPure Waterline Disinfection products. High production volumes also benefited the gross margin expansion. As we go forward, I remain optimistic about the growth of the Healthcare Disposables business, driven by our increasing presence in the sterility assurance market, our entrance into the high growth dental unit waterline disinfection market, as well as for new opportunities in hospital and alternate care market. In addition, we see continued opportunity for growth for new product development activities and additional international sales growth. We have also added additional sales and marketing resources in this business to help drive growth for the future. In the Dialysis segment, fourth quarter sales were 9% higher due to some opportunistic dialysate concentrate sales to a large customer, which is expected to continue at least through the second quarter of fiscal year 2016. And this increase is partially offset by an 11% decline in reuse sterilant to the United States. We expect this decline in reuse to likely accelerate in the United States. Operating profit declined 3% as the lowest margin from the decline in sterilant sales was partially offset by the higher shipments of the lower margin concentrate sales. Relative to the growth for the rest of Cantel, this segment has become a much smaller part of our overall company, representing only 7% of our combined segment operating profit in fiscal year 2015 as compared to 9% in fiscal year 2014. Nonetheless, this business remains very important to the company and we work very hard to take care of our customers and also seeking growth in our international markets. 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 15.1% in Q4 versus last year’s Q4, with organic growth of 10.2%. For the 12 months, sales increased 15.6% overall and 9.2% organically. Top line growth was driven by our three largest segments Endoscopy, Water Purification and Healthcare Disposables. At June 30, 2014, we completed the acquisition of PuriCore which is included in our Endoscopy segment for the entirety of fiscal 2015 periods, but excluded in last year’s comparative period except for July, the last month of fiscal 2014. On November 3, 2014, we completed the acquisition of IMS, so this was reported in our operating results for Q2, Q3 and Q4 of fiscal 2015. IMS is also included within our Endoscopy segment. At January 1, 2015, we completed the acquisition of Pure Water Solutions, a water service business which is included in our Water Purification segment. The results of this business were included from January 2015 forward. On February 23, 2015, we completed the acquisition of DentaPure, a waterline disinfection filter manufacturer, which is included in our Healthcare Disposables segment for most of Q3 and all of Q4 of fiscal 2015. Finally on September 14, 2015, we completed the acquisition of Medical Innovations Group Holding LTD, a leading provider of endoscope storage and transport systems in the UK and international and therefore not in any of the results reported here today. Collectively, the PureCore, IMS, Pure Water, and DentaPure acquisitions contributed incremental sales of approximately $8.3 million in Q4 and $33.7 million in the 12 months. Q4 GAAP and adjusted gross profit margins expanded 210 basis points to 45.5% versus 43.4% last year. All three of our largest segments expanded gross profit margins year-over-year. Water was up 230 basis points. Healthcare Disposables was up 330 basis points and Endoscopy was up 80 basis points. For the year gross profit margins expanded 130 basis points to 44.9% versus 43.6% in the last year’s 12 months. Those margins expanded 160 basis points on an adjusted basis, led by Water up 250 basis points and Healthcare Disposables up 80 basis points. The improvement in gross profit percentage is primarily given to volume leverage productivity associated with higher organic sales volume in all three segments as well as product mix in all three major segments as Andy highlighted. Operating expenses increased by $7.2 million in Q4 and $30.3 million for the 12 months compared to last year. Our investments in operating expenses continue to support the multi-year strategic plans that are concentrated in the following areas geographic expansion, sales and marketing investments in all three major business segments, new product development projects and operating expenses in our newly acquired businesses. Reported operating income increased by 25.9% and 13.9% for Q4 ended 12 months respectively. Operating income adjusted for non-GAAP measures increased by 20.9% and 16.3% for Q4 and the 12 months providing excellent operating leverage. Net interest for Q4 increased $57,000 compared to the prior year Q4 and up $47,000 for the 12 months. The Q4 effective income tax rate came in modestly high at 38.5% due to non-deductible acquisition expenses related to Medical Innovations that remained at more traditional levels for the full year at 37.1%. Our balance sheet remained strong with significant borrowing capacity. Our banking relationships are incredibly strong and have been in place for over 14 years. We ended the quarter with $31.7 million in cash and cash equivalents, $117.7 million of working capital at a current ratio of 2.7 to 1. Our funded debt ended the quarter at $78.5 million. This includes $47 million of borrowings this year to fund IMS, Pure Water and DentaPure acquisitions. Meanwhile we continue to pay down significant levels of debt, $49 million during the year. We paid down $13 million during Q4, $14 million during 3Q, $10 million during Q2 to go along with $12 million during Q1. Net debt was $46.8 million at July 31, 2015, which is down $2 million since last year and despite funding three acquisitions. Gross debt to equity is 0.19 at July 31, 2015 and our gross debt to rolling 12 months adjusted EBITDAS is 0.69. Note post to Medical Innovations acquisition, our gross debt to adjusted EBITDAS is still very healthy at 1.28. And while on a net basis, our net debt to adjusted EBITDAS would be just over 1. Q4 adjusted EBITDAS came in at $30.9 million and $113.8 million for the rolling 12 months. Our full year cash flow from operations came in at $59.1 million and our capital expenditures were at traditional levels of $12.8 million for the fiscal year 2015. To alert everyone, we will be filing our 10-K before the close of business today.

[Andy Krakauer:]

Okay. Thank you, Peter. In summary, Cantel Medical’s fourth quarter performance was very strong. We continued the positive momentum we had all throughout fiscal year 2015 and achieved strong sales and earnings growth which were at record levels. Fiscal year 2015 performance exemplifies why we are so optimistic about the future of the company. We showed excellent sales growth of 15% in the fourth quarter and have achieved organic revenue growth of 10% or higher, including 10% this quarter for eight of the past nine consecutive quarters. Despite continuing to make significant growth investments, we achieved adjusted net income growth of 19% for the fourth quarter and 17% for the full fiscal year 2015. And we continue to successfully focus on improving margins, accelerating the growth of the businesses we acquire and driving operating leverage as a result of increased volumes and active cost improvement projects. Most importantly, all of our major businesses have good growth prospects and the recent addition of two businesses now in the UK and one in Italy in Endoscopy and one acquisition each in our Healthcare Disposables and Water Purification and Filtration segments have added important contributors to future global growth. The biggest benefits of these acquisitions will be achieved later in fiscal year 2016 after significant upgrades to IT and finance accounting infrastructure, as well as further sales and marketing investments are completed as well as the successful launch of several new products that will take hold in a couple of quarters. The worldwide market potential for our products continues to grow as we discussed for the past two years our strategic plan supports our aspirations to double sales and profits in the next five years. We have just completed year two of this plan and continue to be ahead of our internal projections. These are our aspirations and not predictions. But we are optimistic that we can achieve these goals. Our detailed market analyses have shown that we now compete in total addressable markets well in excess of $6 billion. We are looking at programs and potential acquisitions to grow this even further. This opportunity and our clear growth drivers are reasons why we believe Cantel Medical has never been better positioned for a meaningful, sustainable growth over the medium to long-term horizon. We are focusing on substantial sales and marketing investments to promote newly launched and acquired products to meaningfully grow international sales and to increase penetration in our existing and growing U.S. markets. We continue to invest in our direct teams in the United States, in Germany and China and now in the UK, Italy and France, where we have made multiple strategic acquisitions. These include significant upfront investments. We are also investing in future new products, disposables, chemistries and equipment, which we believe have large potential upside as we are in the development process of a number of key new products, product platforms and upgrades, including in our newly acquired portfolios in the UK and Italy. You should expect to see us continue invest heavily in new categories over 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. Now to achieve the goals of our 5-year strategic plan, which includes maximizing the growth of acquired businesses, we also added a number of sales and marketing positions in 2015. And as mentioned, we will continue to throughout fiscal year 2016. While most of these investments relate to Endoscopy and International, we are also building – we are also adding positions to strengthen our Healthcare Disposables and Water Purification and Filtration businesses, mostly in North America. Not only are we adding to our sales and marketing teams, but we are also adding needed infrastructure and support roles as I mentioned earlier such as finance, HR, IT and just general management globally. In the fourth quarter of fiscal year 2015, we added about 20 additional professional positions. These are not from the acquired businesses. These are incremental and are planning to add approximately 40 to 50 more positions in the first half of fiscal year 2016. 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 efficiencies programs due in part to pay for these incremental investments. We also have strong momentum leading positions in the growing multibillion dollar infection prevention and control marketplace and some very exciting opportunities before us with new product and expanding worldwide markets. Let me just hand over this now to Jorgen Hansen, our President and Chief Operating Officer to discuss a bit about our international strategy and our newest acquisition in the UK.

[Jorgen Hansen:]

Thank you, Andy. A cornerstone in our 5-year strategic plan that Andy discussed earlier is to build a global leadership presence in infection prevention and control, with 30% of sales outside the United States by 2018 basically growing our international markets twice as fast as the U.S. With the acquisition of Medical Innovations, we are now approaching this target with 25% of sales expected to come from international markets in financial year ‘16. The acquisition of Medical Innovations is our third transaction in Europe in the last 15 months. The transaction has provided us with a new product platform, direct commercial teams, as well as equipment and chemistry manufacturing in Europe. The Medical Innovations acquisition hit on several of our strategic priorities. Medical Innovations brings us a new product line of products that complements our circle of IP&C products in the gastrointestinal department. The market leading phenoscope system, with its unique endoscopy storage and transportation system expands our infection prevention and control offering and value to both existing and new customers. We anticipate that we will further expand the Medical Innovations product line sales in our key markets, most notably in the U.S., where current sales of these products remain at an early stage of market penetration. And we expect to meaningfully accelerate this business with the benefit of our industry leading U.S. sales and service team. With the acquisition of PuriCore in June 2014 and its assessment integration, we have now become the number one supplier of new endoscope reprocessors in the UK. We also have good success with our procedural product lines. However, Medical Innovations has penetrated more than 80% of the UK hospital accounts, about double that of our legacy business. Therefore, we expect that our full line of endoscopy products will benefit from Medical Innovations strong market positions and penetration, plus solidifying our leadership position in GI and accelerating total sales. The intersection also gives us a direct team in France as well as more critical mass and growth potential in other key markets. Finally, we see potential upside from the novel scope storage technology that enables storage of scopes for extended periods up to 100 days, which is addressing an increasing market need for safety storing and transporting scopes. We are excited about having Medical Innovations as part of our team, the company’s leaders, David Mason and Paul Stoner, will remain in the business assuming key roles in Cantel Medical UK. We are furthermore confident that we are on track to build a global market leader position as we continue to launch several new lines of products, including three new endoscope reprocessors over the next several months and invest strategically in sales and marketing, our key markets including Germany and China and continue to look for continued acquisitions that can further accelerate our market positions. Thank you, Andy.

[Andy Krakauer:]

Okay. Well, thanks Jorgen. We feel confident in our growth plans and see great opportunities for our businesses to grow organically. But we will also continue our proven strategy of identifying, executing and integrating acquisitions worldwide. This is a core competency of Cantel that has brought us entrepreneurial management, new and higher margin products and additional growth in sales and profits from our proven strategy to invest in and accelerate the growth of our acquired companies. The continued search and identification of synergistic markets and potential acquisition targets is the key role of our senior management team. Opportunities for acquisitions exist in all three of our major businesses, which we are actively pursuing. We are also looking at expanding into potential new infection prevention and control platforms as well. As Cantel aspires to continue its global growth, it has become clear to Jorgen and I that we needed to recruit experienced management at the most senior level to lead our Endoscopy segment and our international growth. During the fourth quarter, we were pleased to have appointed Dave Hemink as President of Medivators Endoscopy. Dave has previously worked for Bard and Boston Scientific at the President level. We are also pleased to have appointed David Rosen as Cantel’s President Asia-Pacific and Emerging Markets. David most recently was President of getting this Asia-Pacific infection control business based in Hong Kong. We also promoted an internal executive, Michael Spicer, who as our Senior Vice President, Sales and Service for Medivators Endoscopy has successfully led the rapid growth of our United States Endoscopy business over the past two years. Michael who has held senior commercial positions at Smith & Nephew and Boston Scientific will now have an expanded role as Cantel’s President, America’s Sales and Global Service. We are extremely fortunate to be able to attract such top industry talent for the company. Looking forward, we expect our performance in the first half of fiscal year 2016 to approximate the strong results of the past few quarters and then start to further benefit from our investments in the second half of fiscal year 2016 and beyond. Just as this year, fiscal year 2016 will be a year of major investments to accelerate future growth worldwide, but we do expect to show some leverage from our investments as well. Despite our continued investments in all these initiatives, we expect operating profit for the full fiscal year 2016 to show meaningful growth over fiscal year 2015. We remain committed to profitably growing the company while serving our customers and benefiting our shareholders. Our entire organization takes great pride in our mission to provide the products, services, and guidance to mitigate infection risks, improve patient safety and outcomes, and ultimately save lives. And I thank all of our – now over 1,900 loyal and hardworking employees for their great efforts and achievements in fiscal year 2015. With that Tim, we will take some questions.

[Operator:]

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mitra Ramgopal at Sidoti & Company. Pardon my pronunciation. Please proceed with your question.

[Mitra Ramgopal:]

Hi, good morning. Andy first I just wanted to start with the organic growth, as you have mentioned, you have put up about 10% for the past couple of years, in light of the opportunities you are seeing the new products you are introducing, etcetera, do you see the organic growth as really being more sustainable or probably getting up into the low mid-teens?

[Andy Krakauer:]

So, I think it would be excellent performance if we can stay on average, close to that 10%. That would be a tremendous performance.

[Mitra Ramgopal:]

Okay. And when we look at the gross margin this last quarter, obviously I think this would be a record for you, I just was wondering if you could give us a sense, was there anything particular in the quarter that might have skewed it a little or as you go forward that’s the good number to build off of?

[Andy Krakauer:]

I think the team has done a tremendous job taking advantage of driving the commercial mix, and when you think about the Healthcare Disposables side, the last several acquisitions whether it would be Sterilator and DentaPure, some of the biological indicator stuff, as long as it’s been accretive to the portfolio and our team has just done a great job of on-boarding those businesses and we would expect that to continue.

[Jorgen Hansen:]

I mean as we – I mean we are hoping to continue to have the faster growing parts of our business being our high-margin chemistries, and our newly acquired products in all the businesses, but if we can keep pushing out a lot of capital equipment at slightly lower margins, we will be happy to take that as well.

[Mitra Ramgopal:]

Okay, sure. And just to be clear, Andy I believe you had mentioned, as you look out to fiscal ’16, you are planning on spending I believe about $14 million incremental in terms of sales and marketing and $3 million R&D, did I get that correctly?

[Andy Krakauer:]

No, that is the incremental amount we did in ‘15 over ‘14.

[Mitra Ramgopal:]

Okay, sorry. And so when you look at the ‘16 now in light of the continuing hires, kind of can you give us a little sense on how we should look at that, also on the R&D side in terms of the level of spending we have seen in the past year, and how much of that will continue or maybe some of it tailing off?

[Andy Krakauer:]

Well, it’s a good question. Well, I expect R&D to – R&D is not one of our biggest numbers of sales and marketing, I think R&D to accelerate for sure over the pace of this year. So I see R&D increasing. Sales and marketing, some of that, I don’t have the numbers right on top of my head, because some of those numbers are skewed depending on the acquisitions because a lot of those costs come from the acquisitions, but I would expect to see sales and marketing growing at least at a level that sales were growing. It maybe a little bit more.

[Jorgen Hansen:]

Let’s take a minute, as we mentioned the Medical Innovations acquisition, we see a lot of opportunity in U.S. and other markets, and some of that will require that we invest in sales and marketing, which is up to me…

[Andy Krakauer:]

Right. It starts upfront, but then it starts to pay dividend in six months, we have got six to nine months, but that’s what we have been doing and it’s been a successful model.

[Mitra Ramgopal:]

Great, that’s very helpful. Jorgen, I was just wondering if you can also comment back a little on the Medical Innovations Group, I believe when you did the acquisition, you mentioned that they are doing revenue of about $28 million, I am just wondering if maybe you can give us a little sense of historically how that business has done or what’s your expectations in terms of potential growth rates, for example?

[Jorgen Hansen:]

Yes, I can start and maybe Seth can chip in as well. I mean it’s been a very fast-growing business. We had tremendous results from the UK, which is the – by far largest market. And as I mentioned, they are in 80% or actually 83% of hospital accounts are buying their portfolio of products, which is very impressive. So that gives us benefits in the UK, and they have also managed with limited investments to do a nice job in the U.S. While it’s still early days, we are now taking that product into our U.S. sales and service team and obviously expect that we can drive that sales to new high levels, so it’s a very nice business, it’s good margin products, a very innovative team, and then there is a couple of technologies, I mentioned, SureStore, which is a piece of equipment that can ensure that you can store scopes for longer periods of time, which have only been launched in a few markets and it’s something that we are of course looking at introducing in more markets in the next quarters. In the US, it is going to be a little longer, we have to go through FDA approval, but there are some good things in the pipeline as well with that business.

[Mitra Ramgopal:]

Great. And if you look at the acquisitions, I believe you mentioned you have done about three in the past year in Europe. Any thoughts regarding Asia in terms of acquisitions or is the focus more likely to continue to be in Europe.

[Andy Krakauer:]

We are continuing to look at our acquisition pipeline on a global basis. We have multiple acquisitions in varying stages of progress in U.S. and in Europe and some identified targets in Asian markets. I think as we said before, we are certainly investing organically in our Asian markets, and to-date have not really been aggressive in looking at acquisition targets in that region, but for the right asset and the right business at the right price for something that aligns well with our strategic objective, we would certainly evaluate such an opportunity very seriously.

[Mitra Ramgopal:]

Okay. Thanks for taking the questions.

[Andy Krakauer:]

Alright. Thanks.

[Operator:]

Our next question comes from the line of Thomas Gunderson at Piper Jaffray. Mr. Gunderson, please proceed with your question.

[Kyle Bauser:]

Hi, good morning. This is actually Kyle on for Tom. Maybe I will start with the Endoscopy segment, Jorgen which again saw a very strong growth, both in sales and it’s been a driver of operating leverage, particularly with respect to the high-margin chemistries and single shot AERs. So if we would look at install base of Cantel’s AERs, roughly what percent of the space are single shots AERs. And was there a growth are you seeing in new placements of these systems compared to the reusable systems?

[Andy Krakauer:]

Well, that’s a great question, Kyle. I will speak to the last question first. I mean, our growth is definitely in the single shot chemistry equipment that’s – that has the best clinical benefit for the customer and that is the – these are the products that we are promoting. In general, I would say it’s incredibly uncommon that we would sell a reusable chemistry piece of equipment into the hospital segments. There might be clinicians or small clinics that will still benefit from some of our very compact reprocessors, but that’s becoming more and more an exception. In terms of installed base, it’s a little hard to say we have some idea. I mean our large install base is in the U.S. where we have about 6,000 plus machines installed. And still a fair bit of that are reusable chemistry, but as we keep growing with pretty good numbers and putting in equipment, that install base is step-by-step changing over to single shot chemistries. Similar story with Europe, we have been a little bit behind the curveball, because Europe is dominated by what’s called pass-through equipment, but that’s exactly what we are launching now and we anticipate that in the future also that will really drive the single-shot chemistry business as well.

[Peter Clifford:]

And if I could that all of our equipment that we do sell in Europe now is single-shot as all of our equipment at existing and all the new.

[Kyle Bauser:]

Okay, great.

[Andy Krakauer:]

As well as on the margin piece, our procedural product growth has been fantastic and that’s technically accretive to the profile as well.

[Peter Clifford:]

Right, not just chemistry.

[Kyle Bauser:]

Alright. So, is there any sort of color you could provide on margins just with the chemistries business in endoscopy?

[Peter Clifford:]

I mean, we expect the mix to sort of continue to play out as it has where we are hanging on and protecting the CapEx sales and continue to defend the chemistry and grow the procedural products piece.

[Kyle Bauser:]

Okay.

[Andy Krakauer:]

That makes a lot of steady improvement, that’s what we have been saying now for many years and that’s what we are going to continue to strive for.

[Kyle Bauser:]

Okay. And following up in the FDA panel meeting in May regarding endoscope cleaning, Andy, can you update us on any thoughts you have today or potential policy changes you anticipate seeing in the future, so, for example, stricter pre-cleaning guidelines or perhaps having to collect additional data showing the safety of endoscope reprocessing?

[Andy Krakauer:]

Yes, let me try to cover that one, Kyle. We have been working very closely with the FDA over the last several quarters here, particularly after the incident at the UCLA in Los Angeles. And I would say overall, we are in a very good place. We have great documentation for our equipment and our ability to actually address cleaning even after the difficult ERCP folks. In terms of changes and in terms of areas of anticipation or FDA implementing new rules, we know that manual cleaning is a big area of focus and it’s something that we actually are working with the FDA in advising, making sure that these processes are done correctly. And basically ensuring that the manufacture – the scope manufacturers are used follow up to the point. We have had good success of now implementing systems in hospitals and information management systems that actively will recognize if any steps have been skipped. And we believe we have a unique system now that, unlike any other information systems, will actually notify the head nurse, actually notified the management of the endoscopy suite if there is any steps that are skipped. And those are some of the areas that we work with to help resolve this difficult issue.

[Kyle Bauser:]

Great. Good color. Thank you. And then lastly, within the Endoscopy and Water Purification segments, what percent of sales, I know in Water Purification it’s more capital equipment, but what percent of sales or what’s the mix for capital equipment to disposables in each of these segments?

[Andy Krakauer:]

Well, we don’t have the exact number at the end of the year, but roughly the water business is roughly 60%. And given all the disposables that we now sell in endoscopy, equipment is roughly 25%.

[Kyle Bauser:]

Okay, great. Thanks. That’s it from me.

[Andy Krakauer:]

Okay.

[Operator:]

We have another question from the line of Mitra Ramgopal.

[Mitra Ramgopal:]

Hi. Just wanted a quick question for Peter regarding the tax rate, in light of the fact that you expect to be doing more business outside of the U.S. now, how should we view the tax rate going forward?

[Peter Clifford:]

I think the 37% is probably a good way to play this for next year. We expect as we move more business overseas and the business begins to scale, more profits shift outside the U.S. that we would start to see some benefits of that in the lower effective tax rate, but I think the 36% to 37% is probably a good target for next year.

[Mitra Ramgopal:]

Okay. And also on the subject of FX, if you have to say look at the last quarter, was there any meaningful impact in terms of FX for you?

[Peter Clifford:]

Significant. I mean, if you want to get to clarity around sort of the international piece for next year, we expect international sales will roughly be around $160 million. And about $95 million of that actually has currency exposure. So said another way, $65 million is transacted in USD with no currency impact. And our largest exposure out of that $95 million is about $50 million is the British pound and about $30 million is the euro and then the rest is the smaller amounts spread across like the Canadian dollar and the Singapore dollar.

[Mitra Ramgopal:]

Okay, perfect.

[Peter Clifford:]

That’s including Medical Innovations in that.

[Mitra Ramgopal:]

Okay. Thanks a lot for the color.

[Operator:]

There are no further questions in the audio portion of this conference. I would now like to turn the conference over to management for closing remarks.

[Andy Krakauer:]

Okay, great. Thanks, Tim. Alright, listen so thanks everybody for listening. We will look forward to speaking with everyone again on our first quarter of fiscal year 2016 earnings call in early December. Thanks.

[Operator:]

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.