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Cantel Medical Corp (NYSE:CMD)
Q4 2019 Earnings Call
Sep 23, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you all for joining us for today's Cantel Medical Fourth Quarter 2019 Earnings Call. As a reminder, all phone participants are in a listen-only mode. But after today's prepared remarks, you'll have a chance to ask questions. [Operator Instructions].

And now to get us started, I am pleased to turn the floor over to your host, Micowski. Please go ahead, sir.

Matthew Micowski -- Vice President, FP&A and Investor Relations

Thank you, and good morning, everyone. On today's call, we have Chuck Diker, Chairman of the Board; George Fotiades, President and Chief Executive Officer; Seth Yellin, Executive Vice President, Strategy and Corporate Development; Shaun Blakeman, Senior Vice President and Chief Financial Officer; and Brian Capone, Senior Vice President, Corporate Controller and Chief Accounting Officer.

Earlier this morning, the Company issued a press release announcing the financial results for the forth quarter of fiscal year 2019. In addition, we have posted a supplemental presentation to complement today's call. This presentation along with reconciliations of non-GAAP references can be found on Cantel's website in the Investor Relations section under Presentations.

Before we begin, 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 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. Additional information concerning forward-looking statements is contained in our supplemental presentation and earnings release.

The Company will also be making references on today's call to non-GAAP financial measurements, non-GAAP EBITDAS, non-GAAP income from operations, non-GAAP gross profit, non-GAAP diluted earnings per share and net debt. Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today's earnings release.

With that I'm pleased to introduce to you, George Fotiades, President and CEO.

George L. Fotiades -- President and Chief Executive Officer

Thank you, Matt. On the whole, we were pleased that our fourth quarter came in as expected and was consistent with the expectations we expressed during our previous call. The Medical segment had a strong quarter with 9.8% organic revenue growth year-on-year. The Dental segment had positive organic revenue growth of 0.8%, despite a record fourth quarter in the prior year and continues to show improved sequential performance. Life Sciences ended the quarter down as expected, impacted by softness in hemodialysis water. As we previously discussed, our analysis leads us to believe that we have hit the low point as this business continues to stabilize.

For the full year, the Company grew sales by 5.3% to a record $918 million, in line with our guidance. This was a positive result in the phase of significant challenges. The Medical segment had another record year with 11.5% organic growth, driven by consistent low-double-digit recurring revenue growth and strong demand for capital equipment. The Dental segment ended flat on an organic basis, driven by a return to growth in the third and fourth quarters following inventory destocking and a key chemistry shortage in the beginning of the year.

The Life Sciences segment was challenged throughout the year. However, as we have previously mentioned, we believe that we have hit the low point for this business, and we expect to see a return to growth in the back half of fiscal year 2020.

In the quarter, we announced the acquisition of Hu-Friedy, a premier global dental instrumentation and instrument management system manufacturer. This is a compelling opportunity for us to expand our position as a leading global provider of innovative infection prevention and reprocessing workflow solutions serving the medical and dental industry. We expect this transaction to close in the first quarter of fiscal year 2020 and be approximately 10% accretive to our fiscal year 2020 non-GAAP EPS.

In addition, we continue to make progress on the future strategy of our hemodialysis water business. Much has transpired over the past few months, and we are hopeful we will be able to announce a formal decision as to the future of this business as soon as it is practical to do so. In the meantime, we are making great progress in stabilizing this business.

So with that, I will hand it over to Shaun to discuss financial results.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Thanks, George, and good morning, everyone. Let's take a few moments to walk through the fourth quarter 2019 and full year 2019 financial results. On a consolidated basis, top line for the quarter, net sales increased 4.6% year-over-year in fourth quarter 2019 versus the prior year and 5.6% on a constant currency basis. Consolidated net sales walk elements for the quarter were organic growth of 3.4%; M&A of 2.2%; and FX of negative 1%. For the full year, net sales increased 5.3% year-over-year in fiscal year 2019 versus the prior year and 6.3% on a constant currency basis. Consolidated net sales walk elements for the year were organic growth of 3.9%; M&A contributing 2.4%; and FX of negative 1%.

Gross margins for the quarter. GAAP gross margins decreased 70 basis points to 46.2% versus 46.9% in 4Q 2018. Non-GAAP gross margins were flat year-over-year at 47.1%. Note, when adjusted for this segment recast and delusion from BHT, we expanded our core 30 basis point operationally year-over-year.

Gross margins for the full year. GAAP gross margin decreased by 90 basis points to 46.6% versus 47.5% in fiscal year 2018. Non-GAAP gross margin decreased by 90 basis points year-over-year. Again note, when adjusted for the segment recast and delusion from BHT, we contracted our core 50 basis points operationally year-over-year.

GAAP operating expenses increased by $18.9 million or 24.6% in Q4 2019 compared to the prior year. Approximately $9 million of this increase, which includes accelerated stock-based compensation expense, is driven by specific restructuring-related actions taken during the quarter. The remainder is from acquisition-related costs, with approximately $7 million from our recently announced acquisition of Hu-Friedy and $2.1 million from acquisitions closed to date.

GAAP operating expenses for the full year increased by $51.6 million or 17.7% in fiscal year 2019 compared to the prior year. Approximately $19 million of this increase, which again includes accelerated stock-based compensation expense, was driven by specific restructuring-related actions taken during the year; $16 million was attributable to acquisition-related costs associated with our recently announced acquisition of Hu-Friedy and other closed acquisitions during the year. Additionally, higher intangible asset amortization expense, depreciation expense associated with our ERP project and our new medical segment headquarters building contributed to this increase. The remaining $16 million was purposeful investment and support of our strategic plan initiatives.

Operating profit for the quarter. GAAP operating profit decreased 51.3% year-over-year to $14.8 million. Non-GAAP operating profit increased 3.4% year-over-year to $38.5 million. For the full year, GAAP operating profit decreased 31.4% year-over-year to $83.5 million. Non-GAAP operating profit decreased 6.2% year-over-year to $141.4 million.

The effective tax rate for the quarter on a GAAP basis was 26.8% as compared to a prior year rate of 41.8%. This decrease was primarily driven by the establishment of a valuation allowance associated with pre-acquisition net operating losses within our UK operations in the prior period, which was a 960 basis point headwind against the current quarter. Other drivers include jurisdictional mix and changes due to federal tax reform. Our non-GAAP effective tax rate at 25.7% as compared to the prior year of 28.4%.

And for the full year, our GAAP effective tax rate came in at 26.9% as compared to the prior year rate of 22.5% and our non GAAP effective tax rate came in at 24.9%, as compared to the prior year rate of 28.3%. Again, primary drivers were jurisdictional mix and changes due to federal tax reform.

EPS for the fourth quarter. On a GAAP basis, EPS decreased 48.1% year-over-year to $0.21. Non-GAAP EPS increased 3% year-over-year to $0.63. EPS for the full year on a GAAP basis decreased 39.6% year-over-year to $1.32. Non-GAAP EPS decreased 5.4% year-over-year to $2.37.

Adjusted EBITDAS for the quarter. Fourth quarter adjusted EBITDAS came in at $47.1 million, up 6% year-over-year. Adjusted EBITDAS for the full year was $174.8 million, down 1.9% year-over-year. Fourth quarter cash flow from operations came in at $18.4 million, down 48.6% year-over-year. Fiscal year 2019 cash flow from operations came in at $66.9 million, down 46.8% year-over-year.

I'll now provide some insight into the segment results. For our Medical segment, in the fourth quarter sales grew 8.2% year-over-year to $136.8 million. Organic growth was 9.8% and GAAP operating profit increased 5.2% to $23.3 million. Non-GAAP operating profit increased 11.3% to $30.1 million. For the full year, sales grew 10.5% year-over-year to $523.7 million. Organic growth was 11.5% and GAAP operating profit increased 13.3% to $98.4 million and non GAAP operating profit increased 12% to $117.6 million, providing strong leverage.

Our Life Sciences segment, for the quarter, sales decreased 11.8% year-over-year to $49.3 million. Organic was negative 9.3%. Note, our backlog did see compression of roughly $2.5 million during the fourth quarter, driven primarily by REVOX with offsetting increases in medical water. GAAP operating profit decreased 76.7% to $2.1 million and non-GAAP operating profit decreased 30.1% to $6.6 million.

For the full year, sales decreased 7.4% year-over-year to $201 million. Organic was negative 9.3%. Note, our backlog decreased $10 million versus the prior year, driven by the sale of high purity water for $6 million and REVOX compression of $4 million. GAAP operating profit decreased 44.2% to $20.6 million and non-GAAP operating profit decreased 27.2% to $28.9 million.

For our Dental segment, for the fourth quarter, sales grew 17.2% year-over-year to $45 million. Organic growth was 0.8%. GAAP operating profit decreased 13.3% to $6.7 million and non-GAAP operating profit increased 9.6% to $10.1 million. For the full year, sales grew 8.2% year-over-year to $161.6 million. Organic growth was negative 0.2%. GAAP operating profit decreased 25.7% to $22.3 million and non-GAAP operating profit decreased 11.9% to $31.9 million.

For our Dialysis segment, for the quarter, sales increased 2.8% year-over-year to $7.9 million. GAAP operating profit decreased 24.7% and non-gap operating profit decreased 13.3%. For the full year, sales increased 0.8% year-over-year to $31.9 million. GAAP operating profit decreased 33.3% and non-GAAP operating profit decreased 31.1%.

Now, I would like to hit a few balance sheet and liquidity details. We ended the quarter with $44.5 million in cash and cash equivalents and $200.4 million in working capital. Gross debt, at the end of the quarter, was at $233 million. Net debt was $188.5 million, and our net debt-to-adjusted EBITDAS ratio is 1.08. Capital expenditures in the fourth quarter were $20.1 million.

As a reminder, we will be filing our 10-K later this month. I will now hand the call back to George for closing remarks.

George L. Fotiades -- President and Chief Executive Officer

I'd like to transition to the outlook for a fiscal year 2020, which we anticipate will be a return to strong growth overall for Cantel. We've included a page in our earnings presentation for you to follow along, which can be found on Slide 13.

For fiscal year 2020, including the impact of announced acquisitions to-date, we anticipate total reported revenue growth of 25% to 28%, with organic growth of 6% to 7% and FX headwind of 1% and previously announced acquisitions of 20% to 22%. The guidance assumes low-double-digit organic growth in the Medical segment and the legacy Dental segment growing at the upper end of our traditionally guided 4% to 6% range. Life Sciences is anticipated to show a modest decline on an organic basis and decline in the low-single digits on a reported basis, due to the sale of High Purity Water in the first quarter of last year. It is, however, a tale of two halves, where we expect the first half to show a decline due to unfavorable comps and modest growth to resume in the second half of the fiscal year.

We anticipate total fiscal year 2020 GAAP EPS of $2.41 to $2.46 and non-GAAP EPS of $2.78 to $2.83, with the acquisition of Hu-Friedy contributing approximately $0.25 on a GAAP and non-GAAP basis.

So in closing, I'd like to touch on our key priorities for fiscal year 2020. They are as follows. First, integrate Crosstex and Hu-Friedy and make progress on our synergy targets. Second, implement the outcome of our strategic evaluation of hemodialysis water. Third, continue to drive product mix and penetration of procedural products in our Medical segment, globally. Four, invest in a select number of high potential new products in our Medical portfolio. And finally, focus on driving important operational improvements in manufacturing, procurement and IT.

With that, thank you all for listening. I look forward to speaking with you on our first quarter earnings call in December. And we are now ready to take questions.

Questions and Answers:

Operator

Thank you, gentlemen. [Operator Instructions]. We'll go first to the line of Matthew Mishan with KeyBanc. Please go ahead. Your line is open.

Matthew Mishan -- KeyBanc -- Analyst

Great. Thank you for taking the questions. Hey, George, last quarter you indicated you'd have something to communicate over the next several weeks around the Medical dialysis business. And you also indicated you reached an agreement with one of your customers around -- with a three-year type agreement. Where are you at now with that business and you're seeking strategic alternatives and where you are at with the other customer?

George L. Fotiades -- President and Chief Executive Officer

Yes, OK. So as you pointed out, we have an agreement with one of our customers. With the other customer, we obviously continue to have a very strong relationship, where we continue to expect to be supplying them for the foreseeable future as we've continued too. So that's proceeding this business as normal.

As we pointed out, in the first half of the year, we will be down versus year ago. Again, it's still a sort of a continuation of the -- primarily, the in-sourcing that's just carrying over -- on year-over-year. But that stabilizes in the second half of the year as the agreement kicks in. We have more favorable comps in our relationships with the other customers continues as they had in the past. It assumes the forecast on de novo clinics to be as they forecasted in their own earnings releases. So that's where we are.

With this -- the business, as we said, has stabilized. We think we're in a very good position, at least in terms of what the future looks like. We obviously, -- as I had mentioned on the last earnings call, we hope to be here with some decision around the future of this business and whether or not we continue to be the best owner or someone else is, but in the meantime, we would continue to run this business with vigor. We made great progress on that. We have a little bit more to do here. We didn't want to be premature just to make this call and pre-empt an important process. So that's why we have said that, "We're close, but not yet". But we expect to be so in a matter of weeks.

Matthew Mishan -- KeyBanc -- Analyst

And the other -- have you reached a contract with the other customer yet?

George L. Fotiades -- President and Chief Executive Officer

We don't really discuss publicly whether we are in contracts with other people. We did on the other one to be a little bit more forthcoming, because we had an in-sourcing issue that we needed to disclose. And the particular case with the other customer, that relationship continues as it always has. So there is really no news to report there. And baked into our future assumptions are -- that we're[Phonetic] continuing to supply them. We continue to be their most important supplier to date and there's no reason to believe that changes at any time in the planning horizon.

Matthew Mishan -- KeyBanc -- Analyst

Okay. And then can you talk to the accounts receivable and your inventory balances, and why they haven't started to normalize post the medical ERP?

George L. Fotiades -- President and Chief Executive Officer

Sure, yes. I mean, it's mostly related to just growing pains[Phonetic] with the SAP implementation, delaying our ability to realize some of the upside that we expect to see in working capital eventually. So, it did end the year higher than we would have liked. But going forward, we do have action plans in place to see -- the path forward on that, and we expect to see significant improvement in 2020.

Matthew Mishan -- KeyBanc -- Analyst

Okay, got it. And lastly, and I'll jump out, you sort of indicated that REVOX had an impact on your backlog. Can you kind of walk back through why that had an impact and what was the change?

Peter G. Clifford -- Executive Vice President and Chief Operating Officer

Yes, a change here, Matt. This is Peter. As we've used the last two quarters here to get closer to our customers in the markets that they serve. There's a few things that are crystallized for us. One being sort of the niche or the secret sauce. I think, our customers have told us kind of loudly first and primary need is for an on-premise machine to help with low volume and high value as well as combination of medical devices.

And why is this the niche? These are the products, candidly, that are still being done on site with ETO and/or the most painful to endure the long lead times of off-premise and in the outsource sterilization. So our strategy is evolved here. And our focus, as the market dynamics are in our favor, as you're aware there's a lot of noise and attacking of the technology around EO-based[Phonetic] technology solutions. The FDA and EPA are helping [Indecipherable] newer safer technologies and we expect this to help ours and other alternative technologies.

And so what does this mean from a commercialization perspective? We expect to relaunch our 417-liter chamber machine around Thanksgiving. We'll start to perform certification and registration work for our customers at that time and start taking POS[Phonetic] for the 417 to be delivered in late spring. We're targeting a launch of the 3000-liter chamber machine in late spring of 2020, with the first shipments expected in the late summer early fall 2020. Although we see a long-term need for large chamber machines, the high volume, lower value is likely to be the last to convert. And what you saw in the backlog here is we step back from our 12,000 liter PO that we had with one of our customers to focus on the niche that we really see that our customers are screaming loudly for and again, that's on-premise. Smaller footprint machines to help them with low volume, high value combination medical devices.

Matthew Mishan -- KeyBanc -- Analyst

Okay. Thank you.

Operator

And we'll move to our next question coming from the line of Larry Keusch with Raymond James.

Please go ahead. Your line is open.

Larry Keusch -- Raymond -- Analyst

Thanks. Good morning, everyone. So, George, I just want to come back to medical water and some of the comments that you made. Clearly, I understand the stabilization that you are seeing in the business. And I think, you're communicating a longer-term positive outlook. I guess, my question there is -- look, we heard DaVita talk about actually scaling down their capex investments by $200 million to $300 million and they've thrown out a de novo clinic bill that's lower than they are currently. Obviously, there are still uncertainties around the kidney care initiative. And I think a lot of details won't be available until November. So I guess, I'm really just trying to understand what gives you confidence that this medical water business is a growth driver in the future?

George L. Fotiades -- President and Chief Executive Officer

Larry, I wouldn't characterize it as a growth driver, at least -- I mean, per se, I -- first of all, the data that you're referencing with respect to the de novo clinics, I mean, that is clearly baked into [Technical Issues] because we're getting this information from our customers. We obviously bench market through what we read independently, much like you do, in addition to what they say on their earnings calls. So that's part of the assumptions that we have behind our volume forecasts for the future.

When we talk about rebound in the second half of the year, we keep in mind of the year-ago period, we're talking about some fairly deteriorated machine placements, and so we're talking about a comparison to a year ago that had some very difficult comps. And the performance we're talking about is returned to being modestly positive. So in the aggregate, when you compare this historically, it continues to be a downward trend from where we once were from machine placement standpoint. So we're really talking about stability here and not that this is a growth driver for the business.

For the fiscal year, it is -- given the decline in the first half, the slight growth in the second half, it still ends up being negative overall for the year in our Life Sciences business. So just to moderate the commentary a bit, stability does not mean growth driver, but it does mean that we have a much clearer understanding what the future looks like, what the impact is to the aggregate performance of the Company and likewise we know how to represent this business in terms of where we see the next three years going. But we are very wired into what's happening in terms of build outs of home dialysis, some of the things which are happening from a regulatory point of view. We've learned our lesson historically than -- we can understand that we need to be appropriately conservative in our forecast going forward.

Larry Keusch -- Raymond -- Analyst

Okay. That's extremely helpful. Two other ones for you. Just on Medical, again a nice performance, just under 10% organic growth. The business had tracked to closer to 12%-ish in that first nine months, and the comp was the same between that third quarter and the fourth quarter. So, again, I'm not harping on close to 10% growth quarter for the business. But just wondering, if there is anything to be pointing to on a -- that resulted in some of that deceleration from the third quarter?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

No, I think other than a little bit tougher fourth quarter comp on medical last year, I don't think there is really anything significantly different. And the Medical business, in the US or internationally, is fairly consistent.

Larry Keusch -- Raymond -- Analyst

And Peter, on that -- on capital equipment, again, can you give us some feel for -- again, how that did third quarter to fourth quarter?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

I know we continued to do a bit better than our profile assumption around US capital growing approximately 5%, international 2x that. We were in line with those targets.

Larry Keusch -- Raymond -- Analyst

Okay. And then last question. I just wanted to touch base on the EBITDAS margin expansion that you guys talked about a year ago. Again at that point, it was 200 basis points to 300 basis points of expansion and 23% to 24% margin exiting 2021. Maybe just bring us up to speed kind of where you are? You've implemented the SAP system around Medical. It's my sense that you've probably now paused on that for a period of time. So maybe just help us understand kind of the implementation plans and then how do we think about that margin expansion?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes. So let me take that, Larry. So, since, obviously, with the SAP implementation, first and foremost we met the go-live target on February 1st. Secondly, look, we saw zero shipment disruptions. Those were the positives. And the opportunities for improvement here over the next three months to four months will be focused on extracting what I'll call the next level of capability from the system. What does that mean? As an example, with our previous ERP system, we piped our transactional data daily over to sales force, which are obviously our sales team uses daily. We have yet to pipe that over. So that'll be something that's happening here over the next 90 days to 120 days. Obviously, it's preferred to have that in place as you go live, as it -- as our sales team is driven off of those analytics heavily. A second example would just be, we chose not to put in an ad hoc application in the initial go live, and that's another add-on feature that we'll be putting in here over the next 90 days to 120 days.

What does that mean or what does it do? It really allows our users to do their own analysis without having or needing standard reports. How and where is that manifested itself? I think if you asked us about our inventory and AR balances that we're talking about now, some of that is just our visibility needing to get better and with this ad hoc application that we'll be going in here over the next 90 days. That should allow our users to sort of be able to fish for themselves analytically on a daily basis. And that'll be one of the keys for us kind of getting our AR balances as well as our inventory balances down and allow us to do a plan for every part on the inventory side. And again, attack our largest customer from a DSO perspective. So those are some of the next steps.

At least initially in the US, again, I think we would be focused on the US for three months to four more months to get that capability that we need to get out of the system that drive those synergies. What would be next would be a pivot toward EMEA and APAC from a medical perspective. So, how I would characterize it is we still see a path to the lower end of 23% on an exit rate. And ultimately, I think there's opportunities to accelerate that in Europe and APAC so...

Larry Keusch -- Raymond -- Analyst

And is that exit rate still 21% or given that...

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes.

Larry Keusch -- Raymond -- Analyst

Again, it feels like you paused a little bit.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes, I would put us at about two quarters behind, but I still think 4Q21, we've got a shot at that 23%.

Larry Keusch -- Raymond -- Analyst

Okay, perfect. Thanks very much.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

And as well, obviously, Larry, there's some accretion, as we mentioned, when we bring in Hu-Friedy that's ultimately that mix coming into the portfolio gives us a 70 basis points roughly lift in quality of earnings as well.

Larry Keusch -- Raymond -- Analyst

Okay, perfect. Thank you.

Operator

[Operator Instructions]. We'll go next to Mike Matson with Needham[Phonetic] Company. Please go ahead, sir. Your line is open.

Mike Matson -- Needham & Company -- Analyst

Yes. Thanks for taking my questions. I guess, I just wanted to start with the outlook for investment or reinvestment in fiscal 20. I know there was quite a bit of reinvestment in 19. So is any of that carrying into 2020? Or is there any incremental reinvestment that you would call out beyond other normal reinvestment that occurs?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Look, the only thing that we see carrying over is the consolidation in the Dental business. The Rochester is probably going to continue to add about $8 million to $10 million of investment in 2020.

Mike Matson -- Needham & Company -- Analyst

Capex?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Capex, right. Other than that, the rest of it would be normal, run the business type capex.

George L. Fotiades -- President and Chief Executive Officer

[Technical Issues]

Peter G. Clifford -- Executive Vice President and Chief Operating Officer

And I'd add onto that, Mike. I mean, part of our fourth quarter actions are some of the right sizing that we executed was really to make sure that we are driving on that philosophy of sometimes you've got to right size your business to make further investments. And so I think it was a prudent philosophy deployed to try and self-fund any investment that we needed to make this year.

Mike Matson -- Needham & Company -- Analyst

I guess, yes, I was talking more from like an opex perspective, though.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes. I mean, other than the carry over cost of the depreciation of SAP there really isn't any meaningful reinvestments. As mentioned, we tried to take our fourth quarter action to basically fund any investment that we really needed above and beyond sort of the norm of -- tied to revenue growth.

Mike Matson -- Needham & Company -- Analyst

Okay.

George L. Fotiades -- President and Chief Executive Officer

I would -- the thing I'd add, as I said, look, there's been some reallocation within our R&D budget to be sure we can fund some of the opportunity we continue to see in REVOX and some of the things that we're looking at in medical new products. What we saw to achieve that through cost management elsewhere and through a more vigilant approach, though, we're reallocating resources within the Company. So while there's nothing that we're calling out in terms of additional -- significantly additional opex, important thing is that we continue to spend behind some important new product initiatives.

Mike Matson -- Needham & Company -- Analyst

Okay, thanks. And then, just curious about the M&A outlook, I know you just said that you freely or your -- you haven't closed that yet. But would that cause you to maybe put a pause on new smaller deals? And what we continue to [Technical Issues] some of the smaller deals you've typically done year in and year out?

George L. Fotiades -- President and Chief Executive Officer

Look, I think, as a rule -- I think, I may have said it on an earlier earnings call. Our focus -- we've done a lot of small deals and they do require -- they've been very good. They brought a lot of interesting new products in our dental business, in particular that we like a lot. But we did say from an M&A point of view, we wanted to look at things that provided meaningful scale, not necessarily have to be transformational. But if that fits a important part of the strategy that would be great. That's what the Hu-Friedy does for the Dental business.

Likewise, as we kind of look down the road, not near -- not saying near term, because we, obviously, have to work to integrate Hu-Friedy. We also have to work to deleverage, as we have talked about, when we did the Hu-Friedy acquisition, what we're looking to accomplish -- we're looking and will continue to look very aggressively at opportunities in the medical space that can -- that will be infection prevention oriented, that can -- that may build a workflow reprocessing, but obviously things which make a lot of sense for Cantel. So we will actively continue to look, because we know as we focus a lot on proprietary kinds of acquisitions, they require time.

When you recall, I said Hu-Friedy from the day we started talking to them to the day we closed will be about 12 months. So if we want to have something much like a Hu-Friedy in our medical space, it's like planting trees. The best time was 20 years ago, the next best time to plant trees today. So that's certainly what we're doing.

Whether we'll do anything on the small size, I'd say as a rule, not particularly. I mean, if it was a no-brainer, sure. But otherwise, I think we want to devote resources to things, which can make a meaningful difference to our strategy and ultimately to our growth trend.

Mike Matson -- Needham & Company -- Analyst

That's all I have. Thank you. That was super helpful.

Operator

Thank you, Mr. Matson. And our next question will come from the line of Mitra Ramgopal with Sidoti. Please go ahead. Your line is open.

Mitra Ramgopal -- Sidoti -- Analyst

Yes. Hi. Good morning. Thanks for taking the questions. First, just on the guidance, I know you mentioned Hu-Friedy, you expect to add about 10% growth to the core non-GAAP EPS number. I was just wondering if that's all on the revenue side or are you anticipating any cost synergies in year one?

George L. Fotiades -- President and Chief Executive Officer

Cost synergies in year one are modest. There is $2 million to $3 million, sort of, the view. What most of the savings really tied [Indecipherable] systems work, that should come online about 18 months in after close.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. That's great. And then just wondering, any thoughts you have in terms of the impact on the business as it relates to obviously the uncertainties on Brexit and now the trade war with China in terms of how it affects your international business and growth plans going forward?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Well, as you know, even though our growth rates have been incredibly strong in China, our business in China is still short of approximately $14 million of revenue. So although the tariffs, we believe are having a meaningful impact, it's still a pretty small base for us to build off of conversely. I think you're aware our UK business is pretty substantial. It's our largest revenue country within EMEA today, and it's probably close to $45 million to $50 million in revenue. We'll continue to watch that daily, weekly and monthly as sort of the two-year long Brexit story unfolds. But right now, we don't see any disruptions or any tariff issues in the near term.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks. And then just on the spending, when it's on the SG&A side, as it relates to Hu-Friedy, do you see any incremental investments you have to make with that transaction? Or is it a case of, just benefiting immediately in terms of sales force and cross-selling opportunities?

Seth Yellin -- Executive Vice President, Strategy and Corporate Development

This is Seth. Largely speaking, I think that the operating expense structure of the business we're inheriting is one that is going to continue. There are some areas, where we'll do a little bit of backfill that's largely offset by some of the synergies that Pete spoke up. So we don't see any area of real material reinvestment into that -- into the core of that business.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks. And then back on R&D, obviously you saw a little of a bump up in fiscal 2019. As we look out the 2020 and 2021, just wondering if that's kind of a good percentage to be using going forward?

George L. Fotiades -- President and Chief Executive Officer

Yes, I'd say, it's going to stay pretty stable as a percentage of revenue.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks. And then just finally, if you can remind us how big the hemodialysis water business is for you?

George L. Fotiades -- President and Chief Executive Officer

It's approximately $150 million in revenue, plus or minus.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. And then finally, just on the balance sheet. Obviously, with Hu-Friedy you clearly are levering up the balance sheet a little. Just I mean, if you could remind us in terms of your flexibility going forward, in terms of any plans to pay down the debt or do you feel comfortable with that level?

George L. Fotiades -- President and Chief Executive Officer

Well, as we've signaled when we announced the acquisition, right, we do plan on using even just the accretive free cash flow from Q3 to get this back to the mid-2s by the end of 2021. And then obviously, any capital that were hemodialysis to happen, for example, would be deployed to deleveraging the balance sheet as quickly as possible to get us back down to the mid-2s.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks again for taking the questions.

George L. Fotiades -- President and Chief Executive Officer

Thank you.

Operator

And gentlemen, we do have -- next coming up, we do have a follow-up coming from Matthew with KeyBanc. Please go ahead.

Matthew Mishan -- KeyBanc -- Analyst

Hey, guys. Thank you for taking the follow up. As I look at the EPS guidance -- the base EPS guidance for next year, it's a little bit lower than [Indecipherable] when we're on that. Can you kind of walk through year-over-year kind of some of the investments you're making or the drivers of the lower EPS in the street then for next year on the base side?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

I'd say, the biggest piece, again to reiterate, is the 10% to 11% headwind that we're seeing as Life Sciences continues to struggle -- sorry, on a year over year basis in the first half of the year. For our guidance other than that, right, I mean, we're still seeing close to 10% growth on the EPS.

Matthew Mishan -- KeyBanc -- Analyst

Okay. So [Speech Overlap]

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

There is -- look, there is -- Life Sciences is $0.10 in the first half, and which, that carries through to the year basically. So we would be -- we're like on a range of 7% to 9% on EPS, and the core that we've given you would be 11% of 13% if Life Sciences were just flat. I mean, there is some modest things that are there in the opex expenses, like additional depreciation from the new building in Minneapolis. As Peter pointed out, the SAP, which maybe some of you had a little bit of benefit in the early part of fiscal year 2020, that's not happening on that same pace. I mean, those are some modest influences, but the biggest driver would be the impact form the Life Sciences headwind.

Matthew Mishan -- KeyBanc -- Analyst

Okay. And what is just -- exactly what is the Life Sciences headwind? I mean, is it restructuring expense or is it just -- is it lower revenues? What is it?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes, I mean, if you look at it Matt, our third and fourth quarter of -- our first and second half of -- first or second quarter of 2019, on average probably a $52.5 million kind of revenue number for the first half of the year for each quarter. And as we've kind of articulated, look we think that the next couple of quarters here are sort of in that $47 million range similar to our third and fourth quarter. So you're looking at a comp that were down likely $5 million plus in revenue -- for the first two quarters, and then starting to get back to some modest growth in the third and fourth quarter. But we've got very significant comps in the first two quarters of 2020 as we had still had backlog that we were burning down to start the fiscal 2019 year.

Matthew Mishan -- KeyBanc -- Analyst

Okay. Got it. Thank you, guys.

Operator

And ladies and gentlemen, we do thank you for your participation and for your questions today. I will now turn it back to our leadership team for any additional or closing remarks.

George L. Fotiades -- President and Chief Executive Officer

Again, I want to thank you all for being on the call this morning. And we, obviously, look forward to updating you on our next quarterly earnings call.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Matthew Micowski -- Vice President, FP&A and Investor Relations

George L. Fotiades -- President and Chief Executive Officer

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Peter G. Clifford -- Executive Vice President and Chief Operating Officer

Seth Yellin -- Executive Vice President, Strategy and Corporate Development

Matthew Mishan -- KeyBanc -- Analyst

Larry Keusch -- Raymond -- Analyst

Mike Matson -- Needham & Company -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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