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Cantel Medical Corp (NYSE:CMD)
Q2 2020 Earnings Call
Mar 5, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, hello and thank you all for joining this Cantel Medical's Second Quarter 2020 Earnings Conference Call. All lines are in a listen-only mode, but later you will have the opportunity to submit a live question over your telephone. Instructions will be given at that time. And now to get us started, I am pleased to turn the floor over to our host, Mr. Matt 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; Peter Clifford, Executive Vice President and Chief Operating Officer; Seth Yellin, Executive Vice President, Chief Growth Officer; Shaun Blakeman, Senior Vice President, 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 second quarter of fiscal year 2020. 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 measures. Reconciliations of these financial measures to the most directly comparable GAAP financial measurements are provided in today's earnings press release. We're going to do things a little bit differently today. Shaun is going to begin with financials and then we'll get into George's remarks. With that, I'm pleased to introduce to you, Shaun Blakeman, Senior Vice President and CFO.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Thanks, Matt and good morning everyone. Similar to the first quarter, I have simplified our prepared remarks focusing on the most significant financial results with added color on noteworthy drivers. The standard 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 28.5% year-over-year in the second quarter of 2020 versus the prior year and 28.7% on a constant currency basis, with M&A contributing 27.4% and organic growth of 1.3% and FX dilution of minus 0.2%. The Dental segment continues its strong performance year-to-date, growing at 2.9% on an organic basis in Q2, for a year-to-date 7.5% organic growth in line with our expectations. Hu-Friedy is outperforming expectations in its first full quarter with Cantel, growing approximately 7% on an organic basis and we are pleased with the trajectory in the first few months.

In Life Sciences, sales grew 1.6% on an organic basis and were flat on a year-to-date basis. The year-over-year decrease in our reported results was driven by the prior year divestiture of our high-purity water business in Canada. Overall, we believe this business has stabilized and will remain relatively flat for the remainder of this fiscal year as previously guided.

In the Dialysis segment, we saw an unusual decrease in revenue, specifically related to our ability to deliver product to our customers. Our liquid bicarbonate manufacturing line, which was in the process of being upgraded, had to be taken offline unexpectedly which impacted our ability to make and ship product for a few weeks. Operations have been restored and we are actively working to rebuild inventory levels with our customers. We expect to get roughly $0.5 million of revenue lost in the second quarter in the back half of the year as we catch up with our deliveries.

In the Medical segment, organic growth increased by 2.2% in the quarter, 4% on a year-to-date basis. While capital was relatively flat year-to-date, capital equipment decreased approximately 6% in the second quarter on a constant currency basis, contributing to softer capital performance with slower growth in U.S. drying cabinets and rationalization of AER platforms in Europe. While causing a short term revenue loss, we expect the rationalization will improve margins in the future.

Recurring revenue, which includes consumables, service, and chemistries grew approximately 4.5% in the quarter and 5.5% on a year-to-date basis. Sequentially, shipment rates for valves and kits were stable and we are pleased with the initial performance regarding our cleaning valve launch.

Turning to consolidated margins, our GAAP gross margins contracted by 420 basis points to 42.4% versus 46.6% in the second quarter of 2019, while non-GAAP gross margins expanded by 50 basis points year-over-year to 47.1%. As a reminder, our GAAP gross margins included the inventory step up amortization related to Hu-Friedy, driving the bulk of the year-over-year pressure. Operationally, Hu-Friedy was accretive to our margin profile, which helped offset some of the pressure in lower volume in Medical.

Moving down to our profit, GAAP operating profit decreased 71% year-over-year to $7.6 million, mainly driven by associated costs of the Hu-Friedy acquisition, which came in at approximately $24 million. Restructuring-related expenses were approximately $4 million for the quarter. On a non-GAAP basis, operating profit increased 33.3% year-over-year to $45.1 million.

Moving to tax rates, GAAP effective tax rate for the quarter was a benefit of 14.7% as compared to the prior year rate of 25.7%. This benefit was primarily driven by our pre-tax loss in the quarter, offset by period costs related to the Hu-Friedy acquisition. Non-GAAP effective tax rate came in at 25.9% as compared to the prior year rate of 25% as a result of the mix of our non-U.S. earnings and the impact of Hu-Friedy's international operations. As a result, GAAP earnings per share decreased 111.1% year-over-year to minus $0.05.

In addition to the commentary discussed earlier related to our GAAP operating profit dilution related to acquisition and restructuring charges, we also incurred higher interest expense as a result of increased borrowings related to the acquisition of Hu-Friedy. Non-GAAP earnings per share increased 7% year-over-year to $0.61, which includes approximately $0.03 of pressure due to year-over-year increases in SAP and other investment costs.

Finally, adjusted EBITDA came in at $55.8 million, up 31.6% year-over-year. I will now move on to the key cash flow and balance sheet items. Cash flow from operations came in at $34.6 million. We ended the quarter with $58.7 million in cash and cash equivalents and $233.8 million in working capital. Working capital decreased 12.2% sequentially, primarily driven by a decrease in inventory and a couple of one-time items related to Hu-Friedy. Excluding the one-time acquisition-related items, working capital decreased approximately 8%. Accounts receivable and inventory provided a benefit of approximately $10 million of positive operating cash flow, net of Hu-Friedy in the second quarter. We believe we have stabilized working capital post SAP, and it's promising to see modest steps back in the right direction.

It is also worth noting that capex was $10.4 million this quarter, in line with our historical rates pre SAP and the addition of Hu-Friedy.

Moving to our debt profile, gross debt ended the quarter at $925.3 million, while net debt ended at $866.5 million. Our net debt to adjusted EBITDAS ratio was 4.43 which includes four months of Hu-Friedy results. On a pro forma basis, net debt to adjusted EBITDAS was 3.8 times. As a reminder, we will be filing our 10-Q at the end of the week. I am now going to hand you over to George for his remarks.

George L. Fotiades -- President and Chief Executive Officer

Thanks, Shaun. I am going to start on slide 10 for those of you following along with the presentation. We believe today that Cantel's business strategy has evolved to be more compelling and relevant than ever. With the acquisition of Hu-Friedy and its novel instrument management system, we are uniquely positioned to provide solutions or complex reprocessing workflows to prevent healthcare-related infections in both the GI and dental suites. Three key supporting factors, first, we have a breadth of products and solutions that provide a complete circle of protection in both endoscopy and Dental. Second, in both businesses, we have recognized global brands, and finally in both businesses, we are leaders in providing clinical education and technical training to our relevant sites of care. We like our strategy, it has longevity and can drive above average long term growth. So, the focus is on excellence in execution. Let me now focus more specifically on our takeaways by segment.

Looking at slide 11, and the current state of the Medical segment, we have identified three key areas which lead to imperatives for driving significant future growth. These areas are, first, Ambulatory Surgery Centers or ASCs, second, delivering on our promise of our complete circle protection solution and larger hospital systems and, third, accelerating new product introductions.

Beginning with ASCs, we believe, over half of GI endoscopy procedures today are taking place in the ambulatory setting and growing. While Cantel has a large installed base of AERs and ASCs, it has not been a channel where Cantel and others have focused to sell the broader consumables portfolio. Today ASCs represent approximately 15% of our U.S. Medical sales. We know that the risks and challenges that these customers face everyday are similar to those faced by the acute providers, so the opportunity is meaningful. This market will require a different sales model and presentation of the Medivators value proposition. But we believe the potential is significant. In hospitals, we have had great success in demonstrating the value of our individual product, in particular our AER platforms and the single use disposable valves.

Today valve penetration in large health systems is significant with Cantel having the clear leadership position. However, on average, these customers utilize only one-third of the entirety of our portfolio. As we better understand the needs of large health systems and their demand to standardize processes across their facilities, we see a clear opportunity to demonstrate the value of our complete circle of protection to C-Suite leadership. This is an extremely attractive opportunity for Cantel, one that we are uniquely positioned to deliver to our customers and, we know, requires more presence with the C-suite level of health systems.

Finally, we need to restore the cadence of new product introductions to address unmet market needs and affirm our continued leadership in GI endoscopy. We must have the right balance between investing in lower risk faster product improvements and longer-term investments. A healthy procedural products pipeline is vital to maintain our growth in this category and we can do this quickly and efficiently with a focused new product development program.

Moving to the Dental segment on slide 12, the pace of integration and execution between Hu-Friedy and Crosstex is exceeding expectations, raising our confidence in the overall strategic fit of this combination and the ability to realize our cost synergies and opportunities. Recently, the company rolled out the new branding for the combined entity, which is now known as the HuFriedyGroup, bringing together all our Dental businesses under a single brand, which is an important milestone for this business.

In parallel with the rollout of the new entity, we have launched an integrated field organization, selling the combined portfolio of our respective businesses. I attended the Combined National Dental Sales meeting in Texas in early February, bringing together our commercial teams for the first time. The energy and excitement of the organization was palpable. While it is still early days in this integration, we are encouraged by what we have seen and commend the Dental leadership team for their execution.

On slide 13, looking to our Life Sciences segment, recent actions we've taken in our hemodialysis water business, give us confidence to expect flat revenue performance in the near term and low single-digit growth over the longer term. We restructured the organization, refocused the new product development program and have multi-year supply agreements with our major customers. Finally, we have a number of opportunities for increased efficiency and overall operating improvement through clear, actionable initiatives. In our endoscopy business, there is a pathway to simplify our supply chain working capital requirements and overall business complexity by reducing our AER platforms by almost two-thirds over the next three years. In addition, we are turning the corner in our U.S. SAP implementation, so we can begin playing offense with its spectrum of functionality.

We've also made recent investments and rooftop consolidations and updated manufacturing lines that are anticipated to yield improved margins over the next 24 months. So as a result of this learning, we see a host of executable opportunities that will be critical growth drivers for our business over the next 36 months. We have mobilized the organization and our resources to execute these growth drivers in an initiative we call Cantel 2.0. Peter is going to speak to the details of Cantel 2.0, which entails these seven components that are summarized on slide 14; expand penetration of procedural products into ASCs; drive greater adoption of full circle of infection protection; expand penetration of procedural products into Europe; accelerate procedural products' new product pipeline; fast track the integration and go-to-market of HuFriedyGroup; deliver consistent performance in Life Sciences; and finally drive significant operating improvements and business simplification across Cantel. With that, Peter?

Peter Clifford -- Executive Vice President and Chief Operating Officer

Thanks, George. I'm going to begin with our Medical segment on slide number 15. There are four core drivers that will propel our growth in the future. The first is to expand penetration of endoscopy products in the ASCs. To do this, we have assigned an ASC of sales leader and are reallocating commercial resources. This team is creating programs tailored specifically to the ASC value proposition to address the total U.S. ASC TAM of approximately $750 million.

The second item is to drive greater adoption of Cantel's complete circle of protection in major healthcare system. To address this, we've added 10 key account directors and partnered them with our expanded clinical education and training specialists to drive greater influence within the C-Suite at the IDN level. We estimate the total U.S. hospital TAM of approximately $750 million, with nearly two-thirds of the market left unpenetrated.

As we have discussed previously, expanding penetration of procedural products in Europe is a third key growth driver for Medical. We have established a very strong presence in AERs and chemistry. However PRP is historically under-penetrated. We have signed two senior sales executives to Europe to provide sales training, dedicated commercial sales programs and overall management support to enable our European commercial teams to accelerate growth. We estimate the total EMEA procedural products opportunity to be approximately $400 million and we are still in the early days of this effort.

Finally, the fourth is to accelerate PRP product development capability and dramatically improve introduction cadence. We have reestablished our Houston operation as the center of excellence for new product development of procedural products. This expanded dedicated R&D team will focus exclusively on the PRP pipeline. We have seen early signs of progress with the launch of our cleaning valve adapter and the SCOPE BUDDY PLUS in the second quarter and we expect to launch two dozen new products over the next 36 months with nearly half of them in the PRP category.

Moving to Dental on slide 16, we are encouraged with our progress to date and look to continue to fast track the integration process and go-to-market strategy of our combined Dental business now known as the HuFriedyGroup. From a commercial execution perspective, we are focusing on accelerating instrument management system penetration and consumables capture rates, as well as drive penetration of the combined portfolio into the Dental and hygiene schools. On the integration front, we are encouraged by the progress to-date and we are looking to accelerate realization of cost synergies where possible. We estimate these actions will enable Cantel's Dental to realize an EBITDAS margin profile of approximately 24% in 18 months.

In Life Sciences, we're going to continue to focus our energy on delivering consistent cash generation and profitability. We estimate low single-digit growth through optimized pricing and the delivery of our next generation two Pass [Phonetic] machine. In addition, we are looking to streamline and simplify this business, where possible, to maximize profitability and consistency. We believe, with diligent focus on our cost structure, that the business will deliver mid-teens operating margins and cash flow of 12% to 15% of revenue.

On slide number 17, we have mapped out our areas that we believe will drive significant operating improvements and business simplification. In terms of working capital, we are targeting approximately $20 million to $25 million of incremental operating cash flow by the end of fiscal 2021. In addition, we are looking to undertake strategic product rationalization and continued rooftop consolidation to drive profitability and balance sheet efficiency. Putting this all together, we estimate our opportunity to get to 23% EBITDAS margin rate exiting fiscal year 2022. I will now hand it back to George.

George L. Fotiades -- President and Chief Executive Officer

Okay. So moving to slide 18, the first thing I want to point out is that we anticipate the Medical segment to modestly improve its revenue growth in the second half of this fiscal year. Next, we believe that the actions included in Cantel 2.0 will enable the company to return to historic growth rates in the second half of fiscal year 2021. In the second half of 2021, specifically, we estimate Medical to be 8 plus percent, Dental in the 5% to 7% range and Life Sciences to be low-single digits.

Looking at slide 19, after taking a hard look at the remainder of the current year, we are updating our guidance to better reflect the current environment. We anticipate total fiscal year 2020 GAAP EPS of $1.16 to $1.19 and non-GAAP EPS of $2.58 to $2.61. In this guidance, we have projected some impact from coronavirus in China and is still evaluating the potential future impact on procedures. With that, we are ready to take questions.

Questions and Answers:

Operator

Gentlemen, thank you for your remarks this morning. [Operator Instructions] We'll go ahead and take our first question from Larry Keusch at Raymond James. Please go ahead, your line is open, sir.

Larry Keusch -- Raymond James -- Analyst

Okay, thanks. Good morning, everyone. Just a couple of questions here, maybe just starting with the quarter itself. You referenced that capital equipment decreased 6%. Could you just talk a little bit about what drove that dynamic within the capital equipment side?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yes, sure, Larry. This is Shaun. Most of the softness was contained to U.S. cabinets on a year-over-year basis, as well as our AER rationalization, particularly in Germany in EMEA region and again kind of the color there is, at the beginning of the year, our thought process was, we'd be going from five machines something more like three and then when we got into the analysis of the actual costs, that really became -- the realization was that it we'd come to go down to one machine. And so that's been a little bit more of a bump in Q2 than we had anticipated at the beginning of the year. But as far as our external competition in these regions, we perceive that to be largely unchanged right now.

Larry Keusch -- Raymond James -- Analyst

So just to be clear on the drying cabinets, so you just looking at this is, you had somewhat of an abnormally high 1Q and obviously you pulled some shipments into that quarter, but you're not seeing anything from a competitive dynamic out there or a change in utilization of these types of products.

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I'll take that one. Our first quarter was relatively strong. Second quarter activity was solid in terms of quotations, closure was shorter than expected. We are expecting a stronger back half of the year on cabinets. As far as competition, no new entrants. I think we've got some opportunities to package our cabinets a bit better and we've got some activities in place with various bundling programs that we're looking at in the back half of the year.

Larry Keusch -- Raymond James -- Analyst

Okay, perfect. I'll just ask two more and then jump off. I guess the two questions are, when you talked about the ASC TAM of that $750 million, I just wanted to get some clarity. Is that being built up from the total ASCs out there in the United States or is that being built up around ASCs that look a lot more and act like acute care settings? If it is the former, and as the total, how should we think about the TAM when you kind of consider today ASCs that already look like acute care settings?

And then the second question is, just on the EBITDAS margin target of 23%, that's been pushed out a year and just again want to really understand the drivers of that push out. Thank you.

Seth Yellin -- Executive Vice President and Chief Growth Officer

Hey, Larry, this is Seth. I'll take the first question on ASCs. So the ASC market sizing, that's really done bottoms up from a procedural volume perspective, looking at what is our understanding of the procedural volumes that take place in the ASC setting and applying to that a value associated with the entirety of our portfolio adjusted for what we think is the right price points in that setting that may be different from the acute care setting.

I think the second question you have around the sub-segmentation within ASCs is a good one. Our best understanding right now is about one-third, one-third, one-third is the split of the ASCs between hospital-owned sort of the corporate consolidators and then the independents and obviously I think the opportunity set is slightly different within that. We continue to be refining our analysis of that in our strategy to target each of those sub-segments. Obviously, the most, we think, attractive of the categories is the first two which are the IDN or hospital-owned ASCs and the corporate-owned ASCs which are the ones, we believe, would have the largest penetration opportunity within that segment. But our work continues there, but our analysis of the market sizing there is really a bottoms up assessment based on procedural volumes that take place in that setting.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

And as far as the EBITDAS question, Larry, look, it is basically one year out and reflects really our progression with SAP and the fact that we're candidly, just getting back to about pre go-live operational efficiency and performance here in the third quarter. As we mentioned in the remarks, we feel like we're starting to turn the corner, couple of soundbites on SAP. Just from our last call, in between now and then, we've replaced our prior SAP partner with a smaller local boutique partner saving about $0.005 [Phonetic] a quarter while raising service levels. We filled out, finished our internal SAP with stronger talent over the last four months. Most of our functions, I would say, stabilized. Most are back to pre go-live performance. We've done a lot over the last four months to get the, I'll call it, to run the business reporting in place in most Tier 1 areas now.

We've put a lot of great deal on effort launching and training around sort of ad hoc reporting capability with the SAP. How do you see that? How does that manifest itself? I would say in this quarter, if you look at the operating cash, or the cash statement, this is the first time we got basically about $10 million worth of working capital flow when you think of accounts receivable and inventory, we got about $10 million worth of flow in the second quarter. And I would honestly, as I think our teams would attribute that to having much better visibility and understanding and being able to get that data to help drive results and impacts.

And then just last piece is that some things that are coming to us here in this quarter, there is a particularly important aid system that will be valuable to our logistics folks who are not yet back to pre SAP go-live performance and we will be putting in a module called Chip [Phonetic] ERP here in the third quarter and we would expect that would start to get us some efficiency and productivity in 4Q and obviously carry over to 2021.

Larry Keusch -- Raymond James -- Analyst

Okay.

George L. Fotiades -- President and Chief Executive Officer

I'll just add one thing that -- as well to that. We've done a number of things where we've spent the money and deployed the capital and are yet to get the benefits from these, which we expect to materialize now as we move into the second half of next year. We consolidated rooftops in our Dental business. We've consolidated rooftops in our electromechanical assembly in Europe. We put in new filling lines in Minneapolis and our Italian facility and all of these were -- are margin improvement opportunities, but the benefits of those have not materialized on our first half and will going forward over the next 18 months. So I think those are contributors as well.

Larry Keusch -- Raymond James -- Analyst

Okay, terrific. Thank you for the answers.

Operator

Next, we'll hear from the line of Matt Mishan at KeyBanc. Please go ahead, your line is open.

Matthew Mishan -- KeyBanc -- Analyst

Great and thank you for taking the questions. I think, first, I apologize if I missed that. But can you talk about your operations in Italy and kind of what you're expecting as far as downtime?

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, so our largest manufacturing facility is located just outside of Rome. It's close to FCO and it's in a city called Pomezia and that is where we do most of our electrical mechanical assembly of AER's for a couple of the models that we sell primarily in Europe and as well where we do the bulk of our chemistry manufacturing. There is some chemistry that's exported from the U.S. for the EMEA market. But most of it is supplied out of our Pomezia facility and that is where we are moving the bulk of our BHT manufacturing here over the next couple of months.

Matthew Mishan -- KeyBanc -- Analyst

Are you...

Peter Clifford -- Executive Vice President and Chief Operating Officer

As it relates to the coronavirus, we are looking at how we potentially move some of our finished goods inventory to our Dutch-based warehouse to create buffers in case things get worse in Italy.

Matthew Mishan -- KeyBanc -- Analyst

Is that facility still open or you're experiencing downtime there?

Peter Clifford -- Executive Vice President and Chief Operating Officer

It is. We have not seen downtime. On our Dental side of our business, we've got small sales offices in the North up in Milan. And as I understand it, we've been allowing people who basically work from at home and obviously since it's a sales office primarily, it's not certainly disruptive to have sales and marketing folks working from at home.

Matthew Mishan -- KeyBanc -- Analyst

Okay. And then the EPS revision to guidance, how much of that is new investment in Cantel 2.0 and how much is kind of change in kind of revenue expectations?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

None of it's really related to any incremental investment in 2.0. As Peter mentioned, anything we're doing in Cantel 2.0 for the most part is an allocation or reallocation of resources, excuse me, whether we're talking about the sales organization or we're talking about R&D. So there is nothing really incremental there. The EPS reduction and choices to the revenue change in our Medical business and some allowance for the potential impact of coronavirus are largely in our China operations.

Peter Clifford -- Executive Vice President and Chief Operating Officer

I'd just add, look, if you looked at our full-year profile ex Hu-Friedy, our operating expense on the core business is going to be relatively flat and that's while we're offsetting headwinds from the SAP depreciation, merit increases, benefits inflation. So the reality is the company has never managed operating expenses quite like it has in the last 12 months and most of our investments as we think about Cantel 2.0, there's going to be a meaningful lean to redeploy and not necessarily, incrementally add a lot.

Matthew Mishan -- KeyBanc -- Analyst

All right. And then just moving on to Medical, why is 8% the right level of growth for Medical? I mean is it for both the reprocessing side and the procedural products side or is there -- or is one expected to grow much faster than the other?

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I think with capital being 20% of the portfolio and that not being necessarily procedure driven, the reprocessing side is always going to be a little bit below whatever the blended growth rate is, obviously implying that procedural, just because of penetration opportunities, is always going to tend to be the vehicle or the part of portfolio that's going to grow faster than the average.

Matthew Mishan -- KeyBanc -- Analyst

Okay. So it's the procedural side. And then just last question on the procedural side and then I'll jump out. Have you -- as you've seen the the competitive dynamics change in that area, I mean, is this a matter of you guys just winning less than you were before or have you actually -- or have you lost any of your material contracts in that area?

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I'll take that. Look, I think it's a combination of two things. We've had a few key account losses, but I would argue the bigger challenge that we've kind of faced is, look, we've had a fantastic run on the valve franchise in the hospital and we have penetrated that market pretty deeply. There is still some headroom to grow within hospitals, but the headroom is shrunk and if procedures continue to move from hospitals to ASCs, it's harder for us to get growth offsetting the penetration that is tougher to come by.

Matthew Mishan -- KeyBanc -- Analyst

Okay, understood. Thank you very much.

Operator

Thank you. Next we'll hear from Mike Matson at Needham & Company. Please go ahead, your line is open, sir.

Mike Matson -- Needham & Company -- Analyst

Thanks. Just with regard to the updated guidance, you mentioned that you did include some impact from the coronavirus. So can you quantify how much are baked in for revenue and EPS for that and is that really just limited to the impact you're expecting to supply and/or demand in China?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Yeah, hi, this is Shaun. So on the EPS side, it's about $0.03 that we baked into the second half for procedural downfall in China. About $4 million on the top-line would be the impact we baked in, and again, more around the procedures than it is around supply chain. Supply chain side, we feel like we're pretty well covered for a few months and certainly on the Medical side, there's not a lot of exposure there anyways.

George L. Fotiades -- President and Chief Executive Officer

But meaning, we're not assuming any other pressure around the globe that, that number is really -- given that China has sort of turned off procedures in the hospitals, we don't know how long that's going to last, the pressure we put in is the Chinese market, specifically.

Mike Matson -- Needham & Company -- Analyst

Okay, thanks. And then -- so I understand argument about the ASCs and the size of the market opportunity there, but I guess, can you give us some specifics on what you're planning to do to try to improve the value proposition in that setting. I mean, I don't know if you're willing to talk about that for competitive reasons, but is it discounting? Is it bundling? Is there some kind of segmentation you can do, where you can come out with products tailored specifically to that setting somehow and price somewhat at lower point?

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

Well, look, I mean, as we've talked about before, look, we're not invisible on ASCs today. I mean we do about $60 million worth of revenue annually in ASCs. Now, it's obviously a bit more slanted toward AER's and obviously the chemistry that pulls through there. But we really feel like, with our CAD structure that's now in place and having the C-Suite contacts with these larger IDNs, that in many cases are accelerating their consolidation and acquisition of ASCs, that the time is right, that we can influence the protocols more forcefully in the ASCs. Now on our own math we're looking to validate it externally. We're not assuming that it's the same full bag or same portfolio of products that we would sell as an opportunity into the hospital, it's a subset of that. But we do feel like there are many procedural products that have a place in the ASCs. And as we have built and have a track record of changing and transforming in penetrating the hospital market, because we have the best sales team in the industry, we think we can do that as well on the ASCs.

Seth Yellin -- Executive Vice President and Chief Growth Officer

And if I could just add to that, I think the value prop that we have to demonstrate in ASCs is a slightly different method that focuses as much on infection prevention, as well as on efficiency and return on investment and throughput that are going to be key critical factors for those ASC customers. And that's really how we're going to be tailoring our message to demonstrate the overall value of adoption of our portfolio.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

And, Mike, I think, it makes sense as we look at the opportunity in ASC, again, I would almost argue synergistically, I think there's things that we can from our Dental business that I think that Dental suite in a lot of ways behaves almost more similar to the ASCs than the ASE due to the hospital. So I think there is going to be some good cross-pollination between sort of how the Dental folks are approaching some of those efficiency practice issues as well as the safety issues on the IP&C side.

Mike Matson -- Needham & Company -- Analyst

Okay, thanks. That makes sense. And then just this reduction in the AER platform is by two-third, it seems pretty dramatic. And I mean it sounds like you're already calling out sort of an impact from that on your revenue growth in Medical even in the second quarter. So just how do we think about the impact on growth going forward at least until that's done and then are there going to be restructuring costs, inventory writedowns, etc, associated with that? I mean, that would, I would assume, be excluded from your adjusted numbers, but it could still have a cash expenditure.

George L. Fotiades -- President and Chief Executive Officer

Look, I'll answer it just at a high level. Later, Peter or Seth can talk a little bit more about restructuring. I mean one of the things to keep in mind is, we acquired PuriCore in the U.K., we acquired BHT in Germany, all which come within our platforms including the legacy ones, which we've had. So we really hadn't done any restructuring work of any kind. And part of our focus going forward is, there are these kinds of opportunities, which we needed to get to, that short term may have some impact like it is in Germany today at least for the short term, but have a significant opportunity to improve margin and this is -- quite honestly, this is something that perhaps we could have done sooner, but we're laser-like focused on it now. And obviously as a contributor to why we think we can get the 23% EBITDA margins and beyond longer term.

Mike Matson -- Needham & Company -- Analyst

Okay.

Peter Clifford -- Executive Vice President and Chief Operating Officer

I would just say, it's very difficult for us as we have sort of reconfigured our R&D team in trying to get more throughput out of that organization and defense of that group. They've been charged historically. We're trying to sustain an onerous and overly complex legacy at AER base. So in order for us to execute better and get more out of the funnel, this is one of the keys to driving more throughput is getting more time spent on new products and less on sustained. And obviously with a far more rationalized platform, there is a lot more efficiencies, whether it'd be leverage on sourcing agreements to just better plant efficiency to better velocity on inventory with a more rational product offering.

Mike Matson -- Needham & Company -- Analyst

Okay, thanks a lot.

Operator

[Operator Instructions] Next we'll hear from Sidoti and the line of Mitra Ramgopal. Go ahead please.

Mitra Ramgopal -- Sidoti -- Analyst

Yes, hi, good morning. I just wanted to follow-up first on the AER question. How comfortable are you that with the lost revenue from the simplification of the AER platform that you will be able to more than offset it as you look to penetrate more on the ASC side?

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I think at the end of the day, with a more simplified global footprint of AERs, one for the hospital, one for, I'll call it, the offsite ASC/practices center, we feel like it would enable us to actually pick up share not lose share. So there might be some short-term disruption. But long term, I think it's a growth driver for us again, if we can get to a simpler footprint that meets global requirements versus having today, as George mentioned, basically a PuriCore machine, which is our rapid AER, our IC machine or chain with the IMS acquisition, a large product line of various products out of BHT along with our own Medivators legacy product base.

George L. Fotiades -- President and Chief Executive Officer

And I think the other thing that Peter mentioned before -- what Peter mentioned before was a key point, which is the opportunity to focus the next generation R&D development on our platforms is much more facilitated from both of resource, I mean $1 resource and the people resource, the more we simplify these platforms. And there are obviously some meaningful opportunities for next generation AER update, a software, cyber security, all these things which become terribly vital going forward and much better managed, if we can get this -- if we get these platforms still in place that's much more focused.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. No, that's great. And then as you look for a way, still for margin expansion, obviously you've highlighted you're focusing on the cost structure in the Life Sciences business, you expect to get some nice synergy captures associated with Hu-Friedy. I was just wondering on the Medical, obviously the AER simplification should help you on that front. And I'm just wondering also if you have any other initiatives in terms of improving margins there, especially given you are going to be rolling out some new products and maybe adding to sales etc, that might offset any potential cost savings. I was just wondering if there is any net additions, we might be expecting.

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I think what will be different even specifically in the back half of this year is, look, we've -- it's taken some time, but we've built up sort of our sourcing capability within the company and it's one of the areas when we think about upside to the back half of the year and how are we offsetting some of the volume pressure that's come into the picture. A good piece of that is going to be accelerating sourcing savings on our AER side of the business as well as even on the chemistry side. So we've got some good activities there and I think that those will carry over into '21 as well.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks for that. And finally from me, obviously, acquisitions have always been a big part of the story, you clearly have a lot on your plate now with the 2.0 initiative and I'm just wondering how we should think about that if we should probably expect a pause on that front. But I know you're always evaluating opportunities.

George L. Fotiades -- President and Chief Executive Officer

Well, you helped to answer part of the question. We're always evaluating opportunities, but this is one of the reasons why we appointed Seth on this role of Chief Growth Officer. We've got a lot of opportunities internally. I mean, Seth, I'll let you talk about some of the things you're -- that you can't talk about publicly, that you're focusing on.

Seth Yellin -- Executive Vice President and Chief Growth Officer

Yeah, I think we're going to continue always to look at external opportunities. I think there may be good reason to think we're going to have a pause for a number of quarters wile we are dealing with integration and focusing on a lot of the internal initiatives. But I think, as outlined here in Cantel 2.0, we see a lot of organic growth opportunities on initiatives that are executable in the markets we serve today and with our existing business platforms. So you know a lot of my attention or focus is in ensuring we have the right resources alignment internally and it's focused on the execution plan to get us back to a position of growth that we expect for the long term. So I think that there is plenty for us to work on and acquisitions will continue to play a role in the future, but I think for the -- over the short term, it's a matter of internal execution and focus on integration as well.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, that's great. Thanks again for taking the questions.

Operator

Thank you. Next, we'll take a -- we're happy to take a follow-up from Larry Keusch at Raymond James. Please go ahead.

Larry Keusch -- Raymond James -- Analyst

Thanks. Just two quick ones here. On Hu-Friedy, you had been targeting 10% EPS accretion for 2020. I just wanted to see where we stand with that, if that's still the right way to think about it. And then I guess the second question is, as you've guided to the second half '21 growth targets, how do we think about sort of bridging ourselves from where we are and what's implied in the second half of 2020? What does that say to the first half of '21? I just want to make sure we're sort of thinking about just sort of an improvement in growth appropriately.

George L. Fotiades -- President and Chief Executive Officer

They're all pointing at me to answer that because we were taking bets when someone might ask that, Larry. Look, I -- we aren't really sitting here in a position to give specific guidance for 2021. But look, we feel pretty confident. This is going to be a ramp going forward. And obviously, to kind of consider the base period as well being what it's been in Medical for the first half. But I think these programs, they're not step change, these are ramp-ups. So we look at the -- take the launch of the new products like SCOPE BUDDY and the cleaning valve, the focus on the ASCs, the focus on Europe PRP penetration. I mean these are all things that we view as ramp-up toward the goal.

The only thing that may produce spurts of opportunity will be new products that come along out of the -- out of increased focus on procedural products. But those won't -- other than cleaning valve and SCOPE BUDDY and the valve sets for SCOPE BUDDY, we're not going to have new products that are going to happen in the next six months. So those will be a little bit longer term. So I think you can view this as a ramp. So we're talking about being 5% in Medical in the second half around that or being 8 plus percent somewhere in the first half. It's in the middle somewhere.

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

As far as Hu-Friedy, Larry, you can think about it in our embedded guidance as $0.20 of that's Hu-Friedy when you adjust for interest and tax effect.

Larry Keusch -- Raymond James -- Analyst

Okay, great. All right. That's -- well, actually, while I have you, just one last one, just any update on Revox again. I think you had been sort of suggesting that you'd be in a position to begin to take orders in the fall of the next calendar year.

Peter Clifford -- Executive Vice President and Chief Operating Officer

Yeah, I think that's the right way to still think about it. I mean, our key scientific milestone is really past here in December. I feel really good about that. I think the next nine months leading up to the fall for the winter and taking orders would really be two milestones or two phases, one in -- or both in parallel, one will be blocking in, I'll call it, the commercialized design of a product, so finish and drawings, getting builds on materials mapped out, vendor base established, assembly instructions and as sort of one parallel path, the other being really engaging with customers right now. And this has already started, where we're doing the material compatibility testing in parallel to position ourselves for the fall that hopefully we will work with enough customers and enough products to be positioned to start taking orders from people after sort of or around Thanksgiving is sort of the view.

Larry Keusch -- Raymond James -- Analyst

Okay, perfect. Thank you.

Operator

And ladies and gentlemen, we thank you all for your participation as well as submitting your questions today. At this time we have no further signals from the group. I'd like to turn it back to our leadership team for any additional or closing remarks.

George L. Fotiades -- President and Chief Executive Officer

Yeah. Thank you. Hopefully, what you can see is we're very mobilized around the Cantel 2.0 initiative. Yes, many of these things, we have been focused on for the past few months. But we organized this under Cantel 2.0 to mobilize the internal organization behind this, which they are and also externally to be able to speak to the company's progress by referring to Cantel 2.0 and talk about the progress we're making on each of these initiatives, which we will plan to do on next quarter's call and we look forward to that. So thank you again for being on the call today.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

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

Shaun Blakeman -- Senior Vice President and Chief Financial Officer

George L. Fotiades -- President and Chief Executive Officer

Peter Clifford -- Executive Vice President and Chief Operating Officer

Seth Yellin -- Executive Vice President and Chief Growth Officer

Larry Keusch -- Raymond James -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Mike Matson -- Needham & Company -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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