Analyst Conference Call Summary

Cantel Medical

conference date: October 13, 2011 @ 8:00 AM Pacific Time
for quarter ending: July 31, 2011 (Q4, fourth quarter fiscal 2011)

Forward-looking statements

Overview: Record revenues in quarter, but EPS dipped sequentially and flat y/y due to acquisition-related expense.

Basic data (GAAP):

Revenue was $86.0 million, up 4% sequentially from $82.6 million, and 23% from $69.8 million in the year-earlier quarter.

Net income was $4.7 million, down 6% sequentially from $5.0 million, but up 2% from $4.6 million year-earlier.

EPS (earnings per share) were $0.27, down 7% sequentially from $0.29, but flat from $0.27 year-earlier.


Does not give guidance, but expects revenue growth in 2012.

Conference Highlights:

Record revenue. EPS impacted by negative $0.02 from acquisition-related expenses (about $0.6 million). In past these expenses would have been capitalized as goodwill, but now they are expensed when they occur.

Full fiscal year net income was $20.4 million or $1.18 per diluted share.

Q4 EBITDA was $10.3 million.

Water Purification segment growth was helped by Gambro acquisition (of their U.S. assets). Addressing new (for Cantel) large markets. Consumables business continues to grow.

Healthcare Disposable segment also benefited from acquisitions, up 16%. Core growth was 10%, while ConFirm acquisition contributed 6% (under $0.9 million). Expanded sales team has been having a good impact. Will have expanded offerings in new year.

Dialysis segment revenues declined. This is now the smallest segment.

Endoscope Reprocessing sales increased 53% y/y in the quarter. Shipments of new Advantage Plus and DSD Edge systems drove growth. Consumables and services also showed solid growth. Sales to VA remain strong. Byrne Medical was acquired on August 1 and was the largest acquisition in Cantel's history, which will result in substantial acquisition costs in this quarter (fiscal Q1). In 2012 equipment sales growth is likely to return to more normal levels, but consumables and services revenues will be greater per new machine.

Optimistic about expanding sales and profits in fiscal 2011. Expects the three acquired businesses, Byrne Medical, Gambro's, and ConFirm Monitoring, to grow based on working with larger sales teams.

Cash balance ended at $18.4 million. Cash provided by operating activities was $10.7 million. Debt was $24 million. Byrne acquisition is a Q1 event which will add $98 million in debt. $6 million in debt was paid down in the quarter.

Believes despite Byrne-related debt "Cantel remains in an excellent position to fund acquisitions and other investment activities." Has a new $150 million credit facility. Interest rate is 2.5% above LIBOR. Low interest rate environment makes acquisition borrowing attractive.

In the quarter raw material costs were elevated due to the high cost of oil.

Cost of sales was $54.1 million, leaving gross profit of $31.9 million. Operating expenses of $24.9 million included $12.2 million for selling, $10.8 million general and administrative, and $1.9 million for research and development. Net interest expense was $0.2 million. Income taxes were $2.1 million.

Income tax saw some benefit from domestic production credit and R&D credit renewal. Future tax rates are difficult to predict.


Will G&A continue to scale with revenue? $1.2 million acquisition expenses in 2011 were included in G&A expense. Taking those out, we had relatively flat admin expense compared to the prior year. G&A was just 12.6% of revenue even including acquisition expenses. In fiscal 2012 we should see earnings growth as new acquisitions start contributing to earnings.

Our R&D projects are centered around chemistry for infection control, but are not expected to contribute in 2012. Has launched a few products from prior research, but they involve heavy marketing expenses to start up, so no earnings contribution expected before 2013.

VA upgrade cycle, can you quantify it? The unusual activity will be essentially over at the end of fiscal Q1 2012. The VA upgrade and Steris FDA problems will be over then.

Headcount? 1,100 world wide.

Acquisition valuations? We want to be prepared to absorb any opportunity. We have a robust pipeline available. The only question is as to pacing so as not to disrupt our organization.

Revenue by segment? For full year, Endoscopy $102.5 million, water purification $93.1, healthcare disposables $70.2 million, dialysis $38.5 million, other $17.8 million.

Margins? We are planning to reduce costs in a number of ways as we integrate the new businesses. Margins may also improve from price increases. One high-value endoscopy machine was sold at a low margin, but that will pay off in later services and sales of disposables. Expect slow steady improvement after high acquisition costs in Q1.

Our strategy is to generate cash, use cash and debts to acquisitions that will generate more cash, and pay off debt as quickly as possible.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2011 William P. Meyers