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Cantel Medical Corp (NYSE:CMD)
Q1 2020 Earnings Call
Dec 10, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Cantel Medical First Quarter 2020 Earnings Conference call. [Operator Instructions]

I would now like to turn the call over to the Vice President of FP&A and Investor Relations of Cantel Medical Corp., Mr. Matt Micowski, you may begin.

Matthew Micowski -- Vice President of Corporate 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 first quarter of fiscal year 2020. In addition, we have posted a supplemental presentation to complement today's call. This presentation along with the 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 EBITDA, 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. Overall, this was a good quarter for Cantel, much was accomplished and we are excited to have a number of important initiatives under way. The performance profile across the Company this past quarter has its individual segment stories. But taken as a whole we're pleased with the overall performance of the portfolio delivering solid mid-teens revenue growth and seeing modest gross margin expansion in the quarter.

Dental was the strongest performer growing 12% organically and 76.3% on a reported basis. You may recall that in the year-ago period in this segment it was depressed by inventory destocking and a chemistry shortage creating a favorable year-over-year comparison. That being said, this quarter, we saw very solid out the door performance driving revenue.

As you know, we closed the acquisition of Hu-Friedy on October 1st, the last month of the quarter. By only contributing one month to our consolidated results, Hu-Friedy performed as expected, and more importantly, the integration of Crosstex and Hu-Friedy is in full swing. The go-forward management team is in place and go to market coordination is under way.

It's been a terrific start. And we expect a very good second quarter on an organic basis. In the Life Sciences segment, revenue was down 1.1% organically and 5.2% on a reported basis because of the sale of the Canadian high purity water business in the base period. The hemodialysis water business while down actually performed better than expected. We do expect the second quarter to be modestly below a year ago, but still see the transition to stable performance in the second half of this fiscal year. With respect to our hemodialysis water business, we are finalizing our strategic review and are encouraged with the progress. We expect to report an outcome later in the second quarter.

The Medical segment grew organic revenue 5.7% in the quarter versus a year ago. This performance is less than what we are used to seeing in this business and this is the result of a few specific reasons which we expect to resolve in the back half of this year. First, we were counting on some new products to contribute to performance this quarter and their launch was delayed impacting our results. One important new product is our cleaning valve, which began shipping at the start of the second quarter and we are anticipating good market adoption of this important product.

The second factor is increased competitive activity in major health systems, notably in the disposable valves segment. Now I'm not referring to any new competitive products or technologies, but in the disposable categories that we pioneered and are the leader, but we've allowed competition to make inroads. We have successfully dealt with competition in the past and we need to up our game in new products, while leveraging our full circle of protection, value proposition with the right decision makers, both of which we are actively pursuing. There are three important initiatives that are now in process in our Medical segment to ensure continued growth of our overall portfolio.

First, we have launched a new key account director structure in our field sales organization to elevate our call point to the C-suite and major health systems. Our unique and differentiated selling proposition is the economic value and clinical benefit of our complete circle of protection in endoscopy. Nearly two-thirds of the value of what we offer is untapped potential.

The customer messaging and focus is most relevant to C-suite decision makers where we have not, then is visible as we will now be. Secondly, we have restructured our R&D effort in organization and are reallocating more focus to new consumable products to continuously refresh the offering, starting with the cleaning valve launch in this quarter. Our goal is to produce a steady cadence of new product introductions and product enhancements over the next 36 months.

Third, we are meaningfully stepping up our effort to broaden penetration of procedural products in under developed markets. Geographically in Europe and in high potential surgery centers in the US. Peter Clifford and I were over in Europe recently to review our efforts. We have added more support and the team is energized about the opportunity.

Likewise, we have initiated a new effort in the surgery center segment with a focused initiative. We know that surgery centers are more economically conscious and we have a compelling value story that we can more clearly articulate this important segment, in addition to the demonstrated clinical benefits of our consumable procedural products.

I will now turn this over to Shaun for a closer look at financial performance and developments and I will come back to discuss the outlook for the balance of the year.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Thanks, George, and good morning, everyone. In an effort to simplify the prepared remarks, I am paring down the financial commentary to the most significant financial results with added color on noteworthy drivers. The normal reported financial details are available in the earnings deck for you to follow along, and of course, we can cover any additional questions you may have during the Q&A.

Net sales increased 14% year-over-year in 1Q '20 versus 2019 and 14.7% on a constant currency basis with M&A contributing 9.9%; organic, 4.8%; and FX. a negative 0.7%. Our GAAP gross margins contracted by 170 basis points to 45% versus 46.7% last year, while non-GAAP gross margins expanded by 60 basis points year-over-year. Our GAAP gross margins include the Hu-Friedy inventory, step-up amortization driving the bulk of the year-over-year pressure. Hu-Friedy was accretive to our margin profile which, along with increased operations productivity in Dental and Life Sciences helped offset some mix pressure in Medical.

Moving down to op profit, GAAP op profit decreased 47.9% year-over-year to $14.4 million, mainly driven by associated cost of the Q3 acquisition, which came in at just under $12.5 million and restructuring-related expenses of approximately $3.4 million. On a non-GAAP basis, op profit increased 16.1% year-over-year to $42.5 million, while Hu-Friedy accretion contributed to this increase. It is important to note that actions taken in fiscal year '19 within the Life Sciences segment helped drive approximately 100 basis points of improvement in that business unit.

Moving to tax rates, GAAP effective tax rate for the quarter was 33.8% as compared to the prior year rate of 25%. This increase was primarily driven by higher excess tax expense associated with our stock-based compensation and to a lesser extent increased non-US earnings with the addition of Hu-Friedy. Non-GAAP effective tax rate came in at 25.9% as compared to the prior year rate of 25% with the increase primarily driven by changes in the valuation allowance associated with non-US denominated losses and again, due to increased non-US tax exposure with Hu-Friedy's international operations.

As a result, GAAP EPS decreased 70.3% year-over-year to $0.14. In addition to the commentary discussed earlier related to our GAAP op profit dilution, we incurred higher interest expense as a result of increased borrowings related to the acquisition of Hu-Friedy. On a non-GAAP basis, EPS increased 4.8% year-over-year to $0.65. Again, a solid result with the anticipated contraction of hemodialysis water from the first quarter of the prior year.

Finally, adjusted EBITDAS came in at $51.3 million, up 14.6% year-over-year. I will now move on to the key cash flow and balance sheet items. Cash flow from operations came in at $8.9 million. We ended the quarter with $49.3 million in cash and cash equivalents and $266.3 million in working capital. I would like to note that our reported working capital metrics this quarter will be skewed by the addition of Hu-Friedy's entire balance sheet, but only one month of contribution. Excluding Hu-Friedy, working capital is flat sequentially. There is still more work to do. However, we believe that we have stabilized post SAP working capital as an increasing use of cash this quarter and anticipate further improvements as the year progresses.

It is also worth noting that capex was $10.4 million reflecting the ramp down in SAP costs. Moving to our debt profile with the Hu-Friedy acquisition, our gross debt ended the quarter at $911.1 million, while net debt is $861.8 million. Our net debt to adjusted EBITDAS ratio is 4.73, similar to working capital, please note that the reported leverage ratio is skewed due to having only one month of Hu-Friedy contribution within the first quarter. As a reminder, we will be filing our 10-Q at the end of the day.

I will now hand the call back to George for closing remarks.

George L. Fotiades -- President and Chief Executive Officer

We continue to affirm our non-GAAP EPS guidance for the fiscal year of $2.78 to $2.83 which includes the impact from Hu-Friedy, while we don't give quarterly guidance, I will say that we expect a second quarter performance profile by segment like the first quarter with a meaningful step-up in performance in Medical in the second half of the year. Okay, we are ready to take questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Larry Keusch of Raymond James.

Larry Keusch -- Raymond James -- Analyst

Thank you. Good morning, everyone. George, I wanted to start with the comments around Medical Water. And I guess two points there, I heard that, you obviously indicated that you anticipate reporting an outcome later in the 2Q on the strategic review for that -- for the Medical Water business unit. So I'm just trying to understand what exactly does that mean -- does that mean whether you've decided to keep it or decide to ultimately remove it. Will there be a press release associated with that. And I guess the second part of the question is, I'm just trying to understand why this is taking as long as it is, since you were prepared at one point to provide an answer at the time of the fourth quarter. So again just trying to understand what's going on. Thank you.

George L. Fotiades -- President and Chief Executive Officer

Okay. Sure, I'll go to the second question, first, why has it taken so long to do this. The principal reason for it, and then frankly a lot longer than I would have guessed, but this is I more came to understand the issue, the more -- I understood why, it took more time, and that's because water. We tend to think of it is almost synonymous with the Life Sciences segment. But it's actually three quarters of the segment, we really did not have a readily available way of pulling out all the numbers including the history and represented as an asset, that if one were contemplating sale and needed to provide all the attendant, historical P&Ls and balance sheet and the information you would really need to extract that. And then be able to have it validated by an outside accounting firm. So that really took a considerable amount of time to get done, a lot longer than I would have are expected at the outset, but that's really a --

Secondly, of all the options, than you articulated what those are, I mean we can sell the business, we could keep it. Obviously that takes time to organize and to evaluate the options, who the potential interested parties could be. And that's been -- obviously, it's a part of the process. So when the time comes to report out. I mean, the expectation is clearly we're reporting out definitively that it's part of the Cantel or it's not part of Cantel or it's some other form of external opportunity, but that's what the answer is, we expect to provide and will it be a press release. Certainly we because it's a material event. We will disclose it in some public fashion.

Larry Keusch -- Raymond James -- Analyst

Okay, perfect. That's helpful. I guess, there'll be plenty of questions on Medical. So I won't go there, but I just want to come back to the ERP implementation and just make sure I understand. So just where are we with addressing the challenges that you had, obviously heard the comment that working capital was flat sequentially when you exclude Hu-Friedy, but just want to really understand what's sitting out there if anything that's still left to be done here. And what does start to begin to drive that incremental improvement that you talked about and when should we expect that? Thanks.

George L. Fotiades -- President and Chief Executive Officer

Okay. All right. So I'll take that first and then Shaun will speak more specifically about how we're looking at working capital benefits. So for just to refresh everybody's memory. We started this back, that conversion in the United States in February 2019. The initial transition at least in terms of maintaining shipments and customer satisfaction exceptionally well when we've stumbled is really in the higher order functionality particularly decline that allows you to sort of manage inventory to more productive way and ultimately, some of the working capital benefits. We put some resource against that, but the best way I can answer that is, each day is better than -- tomorrow is better than today and today is better than yesterday,

I mean we're making good progress. I'll let Shaun talk about specifically what we're -- what we are looking at for the back half of the year in terms of working capital improvement. What I can say from a longer-term point of view, because this is just a pre-empt potential question, that will come [Phonetic] about how does this manifest itself ultimately in the improved operating performance of the company. You know, we talk about what we're trying to achieve is an EBITDA margin, the 23% that we've talked about. And I think the last time we spoke about it, we said, as we exit fiscal year 2021, we expect to be there at SAP, obviously as a contributor to that which we continue to feel that's going to transpire, given the rate of progress we're making. But with that, let me give it to Shaun to speak more near-term about what we expect to see from an improvement perspective.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

And so -- hi, Larry, this is Shaun. So the way I would think about working capital going forward again, to reiterate, I think in Q1 as we believe, we kind of hit the trough, so to speak of working capital accelerating source of cash, so we've been able to address that trend with the improvements we've been able to make in both the use and the reporting out of SAP.

And so I would expect, as we've mentioned in the -- actually the Q4 call, and we still believe that to be reasonable expectation that we will deleverage, if you will $20 million of that off the balance sheet from compared to the 2019 uses of cash. I would expect the most of that will probably happen in the second half of the year, because as the ball gets rolling little bit slower, but again I think we've hit that trough and you'll start to see modest improvement and then you'll see some more acceleration latter half of the year toward that $20 million.

Larry Keusch -- Raymond James -- Analyst

Okay. Great. Thank you, guys. Appreciate it.

Operator

We'll go next to Matthew Mishan at KeyBanc.

Matthew Mishan -- KeyBanc -- Analyst

Great. Thank you for taking the questions and good morning, guys. Just as a follow-up to that, what is the expectation for free cash flow in 2020 and 2021 as you kind of restructure the business and build out the next stages of the ERP?

George L. Fotiades -- President and Chief Executive Officer

Well, I mean I would say that I expect it to be kind of close to a more normalized historical, which for us would be around 10% to 11% and the core basis 10% to 11% of our sales and then Q3 would add approximately 150 basis points to 200 basis points on top of that. So going forward on an annualized basis I'd expect to see somewhere between, let's say 12% as to 13% of free cash flow percentage of sales in '20 and '21 on a normalized annualized basis.

Matthew Mishan -- KeyBanc -- Analyst

And we believe -- I mean is it, normal -- is it normalized in 2020. I mean, what would you say would be the number would be in -- for 2020?

George L. Fotiades -- President and Chief Executive Officer

Let me -- I think if you go next question -- let me get back to you on the '20 number, because Q1 obviously had quite a bit on one-offs. So that's not an annualized number that I have for you. But let me get back to you on that.

Matthew Mishan -- KeyBanc -- Analyst

That's fair. And then I guess given the debt level how active is your M&A pipeline and the M&A strategy kind of moving forward here?

George L. Fotiades -- President and Chief Executive Officer

Well, obviously, the short term -- we continue to what we've made, obviously the acquisition of Hu-Friedy and we're not expecting to be doing anything in the very short term. If you look at Hu-Friedy as a model of how we look at acquisitions, this is an acquisition which took a while to cultivate and just state. So obviously, we're working on things now that are would be the proprietary nature -- and many of them -- relationships we've had in the past and we continue to cultivate them, but it continues to be an important part of how we view the growth picture for Cantel going forward, and so it's active.

Matthew Mishan -- KeyBanc -- Analyst

And then we'll move into Medical, I'm just trying to understand the actions you're taking, they seem very -- they seem like they're not necessarily in response to some of the competitive disruptions you're seeing, they seem like by strategic actions that you would have implemented anyway -- I mean, I'm just trying to understand like that -- what you're doing, if you would have been doing us any ways or this in response to kind of what you're kind of what you're seeing?

George L. Fotiades -- President and Chief Executive Officer

Yeah. I think there is bit of both that's going on. Look this -- what we've let's transpire this quarter obviously didn't just start at the day one of the quarter. I think starting last quarter, we saw the slowdown, particularly in the valve product and I think there is a recognition among us that we've been very mild centric as a organization and that's what's fueled a lot of our growth, particularly in the major health systems.

And I think we needed to -- while these are all good ideas we really needed to step them up. And I think when you look at new product cadence -- obviously, new product cadence ought to be part of the Arsenal on an ongoing basis. But to be honest we -- our new product performance over the last three years or so. It's not been what it should be particularly, I think we've allocated a lot to more transformational new product opportunities, and we -- that got out of balance, with the kinds of opportunity you ought to be doing in a more regular cadence like new valve products as an example or new consumables. So we needed to --to accelerate this reorganization and restructure to things, which could be, the kinds of things that a sales organization can take into health systems or to the ASCs and generate new news about.

So that's certainly one. The key account director. Obviously, we've had a fairly robust sales organization selling or bundling together capital equipment and consumables. But what's transpired here is the -- as we've been very mild centric, and we said, look, were our real distinctiveness is -- is the full circle protection. That sale and the discussion around assessing people's infection prevention and control processes at the health system is a C-suite discussion. We have not really had a focused C-suite organization. What's transpired, obviously as you all know, over the last three, four years as these health systems have gotten considerably larger. And so the need to be there to talk about our bundle relative to competition's bundle has become more apparent.

And then finally look, I think there's always been this question about what's the penetration in the hospital market with respect to our consumables. Obviously each year that's increased and so this need to sort of expand into markets where we've been underpenetrated. We've talked about them in the past but in terms of really putting the kind of emphasis behind it that needs to take place now that's changed. So that's my -- that's the way I characterize it.

Matthew Mishan -- KeyBanc -- Analyst

So last two for me, then I'm going to jump out. I guess if you have been seeing this coming for a while why were you not more conservative with your guidance when you initially said you expect approximately 10% in medical to start the year? And then -- and I am out after this, what is a cleaning valve and why is it important for you guys? Thanks for taking questions.

George L. Fotiades -- President and Chief Executive Officer

Well, yeah look, I -- that first question I don't that's kind of like asking me if I knew three months ago or six months ago what I know today, will I do things differently the answer is probably yes. Look I think we saw it coming but with respect to the guidance I think we still believe it gets to where do we think medicals performance is over the longer term and we're not sort of changing our expectation around where it ought to be which we have talked about being at 10%. You know it will 8% one quarter and 11% the next quarter, sure.

I think the transition that we've made and look I'm sort of fessing up a little bit here, the metaphor may be we're like the Viking ship on the water. We've had a tailwind in our sales and you sort of trying to figure out how long the tailwind lasts and then we're in a situation where we need to row. And some of the things we're starting to do and you get to the same goal but you have to perform differently to get there. So I think that's a bit of the transition we needed to make in terms of execution. Now the cleaning valve, we will answer your question.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

The valve itself is in the reprocessing cycle for an endoscope. There are certain valves that are used in order to put the device into the reprocessor and ensure that you get the appropriate cycle to run through all the internal channels. Historically that valve has been what we call a cleaning adapter, really it has been something that's been a product that's been supplied by the OEM. It was an obvious category to have a single use disposable product that could be used in that cycle. It's been a GAAP in our portfolio and candidly I think we're pretty excited to be able to have that because it gives us more to talk about in the overall instrument reprocessing cycle of the suite and how we can help sort of drive efficiency in that practice. So I know there's a lot of enthusiasm in our team to have their hands on the new product.

Matthew Mishan -- KeyBanc -- Analyst

Thank you.

Operator

[Operator Instructions] Next to Mike Matson at Needham & Company.

Mike Matson -- Needham & Company -- Analyst

Hi, thanks for taking my questions. I just want to continue with some more questions on the medical business. So I guess you've had a competitor in that market, that's had a valve for a while. I guess they've launched a newer valve here. So is it just the case that the newer valve is better than their old valve, has their strategy or behavior changed somehow, or are they now doing a better job sort of bundling it with their other products, I guess what's changed, because in the past it seemed like there really wasn't a huge impact, is the market maybe just more penetrated now and there's just not as much -- it's more of a zero sum game or something?

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

Hi, Mike, this is Seth I'll take the first part. With respect to new product introductions we have not seen any new differentiated valves from any of our competitors in the marketplace. There are additional players in the field with valves that are the same and equivalent to what we've been offering. We don't see any meaningfully differentiated products that are out there that compare against ours in the features and benefits basis. I think really what we've seen is a different level of focus and approach to bundling that you spoke of in your question as the change in the marketplace and that's really some of the efforts that we are undertaking to respond competitively from a sales process perspective.

George L. Fotiades -- President and Chief Executive Officer

Yeah. So look I think just to add to Seth's comments there are couple of ways to think about it, because we've had this valve focus in order to make -- continue to be that -- we've led that market. We were obviously way ahead for a long period of time at a 100% market share. Competitors start to show up in 2016, 2017. It sort of took a while for them to get their penetration, their story across.

We've made the battlefield a valve battlefield as we -- which as penetration increase we continue to grow as a result. That battlefield we make it just that battlefield and they go into the health systems with their bundle. They can -- they'll start to leverage that bundle to get more valve penetration. So I think what we've learned is two things one, look if you want to kind of just continue to compete on the valve you got to innovate more which is what we're -- we've commenced to do with our cleaning valve and then some others that we have in queue.

And secondly, we have to revert to the fact that what is it that we have as a distinct competitive advantage that can't be replicated by either the major -- two major competitors and that is the complete circle and the clinical story that we take in and education and training that we provide. And that story -- you can't necessarily take it to the same call point that we've historically been at, that we needed to take it to a higher level in order to get people to embrace a broader message. And that's where we started that in the summer in earnest to build that out and of course it's beginning to continue to flush it out now. So I think that's the way to think about how we -- what's transpired from a competitive view.

And some of it's taken a while to gestate, because look, contracts come up every three years, these things aren't happening. It's not like people are switching every day. So there's a period of time that this takes to emerge in some of the major health systems where you've had a situation that you've been complacent with and all of a sudden you find out that if it's just on the valve story the bundle can get you. So we've learned that, we know this is why we're pushing the focus now on the total bundle and why we need to take the call point to a higher level.

Mike Matson -- Needham & Company -- Analyst

Okay. Sounds very helpful, thanks. And then just within the medical business, any new products you could talk about outside of the procedural products area?

George L. Fotiades -- President and Chief Executive Officer

Well, I'm just trying to think once we will talk about that aren't present some sort of a competitive issue. We have a product called the Scope Buddy Plus which is used in the manual cleaning process to enhance compliance and facilitate that which we -- that's one of the products I referred to that we were anticipating having a fuller impact in the first quarter and that was delayed. So that's certainly one that we see a lot of promise for particularly getting the second quarter. We have another -- it's not really a new product but it's certainly part of a longer-term product that we've had on sterilization and endoscopy which we're launching in Australia which has a different requirements for the sterility benchmark that they require in the machine. And we had anticipated that being a first-half phenomenon that's a second half phenomenon that provides a sterilization claim within our AERs and that's again another new effort that ultimately we're going to school on for broader application around the world depending upon the requirements for each individual market.

Mike Matson -- Needham & Company -- Analyst

Okay. Thanks and then just on the Dental business. I mean the 12% organic growth was really strong. So is that just -- with the distributors having gone through some destocking, is it restocking of some of their inventory or is the tracings actually indicated that there was double-digit demand out the door there?

George L. Fotiades -- President and Chief Executive Officer

Yeah. I think -- look we pointed out and you may recall in the year-ago period we had a chemistry shortage on OPA and we talked about destocking that. So clearly there is a benefit to having a weaker year-ago period. That said the out-the-door performance which was I would call it mid-to-high single-digit depending upon the category. So I said 12% wouldn't be an ongoing organic performance but maybe 4 points or 5 points of that has to do with people that are sort of having to deal with the year-ago scenario.

And if you look at a two-year stack it may be sort of a strong performance, but obviously more at the higher end of the mid single-digit. But it was across the board and virtually all the categories of dental, sterility assurance, chemistries, water treatment, our Accutron business. So again a good profile overall.

Mike Matson -- Needham & Company -- Analyst

All right. Thanks a lot.

Operator

We'll go next to Mitra Ramgopal at Sidoti.

Mitra Ramgopal -- Sidoti -- Analyst

Yes. Hi, good morning. Thanks for taking the questions. First on the Dental business, I just wanted to get a sense as it relates to the Crosstex's integration clearly Hu-Friedy is the biggest acquisition you've done and it's only been two months since closing it, but I was just curious in terms of your initial take in terms of what you're seeing right now as it relates to the integration, if it's going better than expected?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yeah. Hi, Mitra, I think the integration itself with Hu-Friedy is going really well and we feel very confident in achieving the synergy targets we set out. As George said we've defined a new leadership team and organization structure. Our preliminary focus for the integration efforts is really on the commercial front where we're harmonizing the commercial structure, the product offerings, the marketing strategy. So we can really deliver the complete circle protection to our customers in the dental market as we have discussed.

On the European front we're defining the commercial operating model there. We've started defining the back-office strategy which includes harmonizing our IT systems, the customer service and supply chain, and R&D is actively working on prioritizing the new products funnel. So all-in-all I mean we're little over two months in. It's going well. I think there's a lot of positive energy in that organization and clear vision as to what the potential is of this combination. And I think we feel very confident in our ability to realize the $10 million plus in synergies by year three as targets that are achievable.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. No that's great. And again deconsolidation in Europe, it's pretty much isolated. There is not much or anything of that nature to do in the US, is that fair?

George L. Fotiades -- President and Chief Executive Officer

Just to clarify, which consolidation are you talking about?

Mitra Ramgopal -- Sidoti -- Analyst

I think you referenced the electro mechanical manufacturing in Europe that's...

George L. Fotiades -- President and Chief Executive Officer

Yeah, I am sorry. Yes, of course.

Mitra Ramgopal -- Sidoti -- Analyst

Yes.

George L. Fotiades -- President and Chief Executive Officer

Yes. We initiated that. That happened in this past quarter. It's basically completed now. And so the benefits from that will start to accrue going forward.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. And then just switching back onto medical side, I know just trying to get an update on REVOX. I know that was supposed to be pretty significant long-term growth catalyst for the company and I was just trying to get a sense in terms of where you stand there, how you see that contributing over the next couple of years?

George L. Fotiades -- President and Chief Executive Officer

Yeah, Mitra. I think we continue to be very encouraged with REVOX. I think there's a lot of energy and focus in the market for alternative solutions to the existing sterilization technologies that exist. I think that our understanding of the science behind vaporized parasitic acid has really given us a great deal of confidence in the potential for this technology and for this market. Again we view this as a niche opportunity in terms of focusing on in-line applications for low volume, higher-value type product categories with complex sterilization requirements. And there is a lot of interest and inquiry from potential customers around that opportunity. So we continue to pursue this. We look forward to working with customers and beginning to see a development of this product in later in 2020. And I think our focus on this as a longer-term growth driver remains as strong as ever.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, no that's fair. And then also on medical I know the growth we saw here was largely driven by the capital increase in the US. And I'm just curious in terms of the environment you're seeing in Europe and Asia-Pacific especially in light of some of the uncertainties we are seeing out there?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yeah. I think we continue to be very bullish on the opportunity outside the US. I think in China we continue to make steady progress. Australia likewise has been a very good market for us. Little soft in the first half because of this delay with the new product opportunity but we've got an opportunity to take the initiative down there with liquid sterilization. Europe, look we have obviously a very good position from a capital point of view.

Each market is a little bit different. There's still opportunity to improve penetration on capital side. But as I've articulated I think we're -- where the opportunity does exist on procedural products frankly Europe has been more diligent around infection prevention and control. They are the ones that sort of pioneered or insisted upon the dirty-clean arrangement on AER pass-through machines.

So we always felt that this opportunity on procedural products was -- should be meaningful. And look we've learned that they need to be convinced and persuaded about the opportunity. They are a little more value conscious and it's not too different from the surgery centers in United States. You have to talk about a value story and the time-saving aspect to it and be more creative around how you present the opportunity to them than you did for the major health systems in the United States.

We took whatever top US salespeople who sort of helps us in our sales training and particular in our health systems and with procedural products and moved them to Europe has now been there three months. And so we are going market-by-market and the analysis the opportunities is giving them -- teaching them skill-sets and data analytics to deal with the higher target, higher opportunity accounts and to perfect the sale. And I think we should see some good benefit of that starting in the second half in particular.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks again for taking the questions.

Operator

And with no other questions holding I'll turn the conference back to management for any additional or closing comments.

George L. Fotiades -- President and Chief Executive Officer

Perfect, good. Thank you. First of all thank you for the questions and again for being on our call. We look forward to reporting back to you on our second quarter call and wishing everybody happy holidays as well. Thank you.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Matthew Micowski -- Vice President of Corporate FP&A and Investor Relations

George L. Fotiades -- President and Chief Executive Officer

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

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

Larry Keusch -- Raymond James -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Mike Matson -- Needham & Company -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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