Categories Earnings Call Transcripts, Health Care

Cantel Medical Corp. (NYSE: CMD) Q3 2020 Earnings Call Transcript

CMD Earnings Call - Final Transcript

Cantel Medical Corp. (CMD) Q3 2020 earnings call dated Jun. 04, 2020

Corporate 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

Seth Yellin — Executive Vice President and Chief Growth Officer

Peter Clifford — Executive Vice President and Chief Operating Officer

Analysts:

Larry Keusch — Raymond James — Analyst

Matthew Mishan — KeyBanc — Analyst

Mike Matson — Needham & Company — Analyst

Mitra Ramgopal — Sidoti — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to your Cantel Medical Third Quarter 2020 Earnings Call. [Operator Instructions] And the floor will be open for questions, following the presentation.

At this time, it is my pleasure to turn the floor over to Matt Micowski. Please go ahead.

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 and Chief Growth Officer; 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 third quarter of fiscal year 2020. In addition, we’ve 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, this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainties, including without limitation, the risks detailed in the Company’s filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially from those projected. 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. 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, and good morning everyone. Before discussing our performance, I wish to join the chorus of voices expressing gratitude to our customers and all health care providers on the front-lines of this COVID-19 pandemic. I also want to express in this forum, my deepest appreciation to our employees worldwide.

This crisis has brought out the absolute best in Cantel. Our associates have been there to make over 4 million masks weekly in Hauppauge, Long Island and Rochester, New York and have produced essential chemistry in our Minneapolis and Pomezia, Italy facilities. We have manufactured approximately 500 portable dialysis water systems and received new orders for nearly 400 more units. These portable units serve the critical needs of patients requiring more mobile dialysis outside of a clinic, which has been particularly heightened due to COVID.

We also had hundreds of field service personnel, who quickly adapted to new procedures to safely enter facilities and serve customer requests. There are three takeaways from my comments this morning. First, since the very beginning of the pandemic, Cantel has been proactive in managing our resources and expenditures, while maintaining our core capabilities and what’s also important is we have remained agile to flex as we monitor our markets daily.

Second, we have taken significant steps to strengthen our balance sheet and overall liquidity, giving us ample security into the future. Third and very important, as a leader in infection prevention, our business is uniquely positioned to quickly rebound with the expected recovery of elective procedures. Our infection prevention focus will be more relevant and required by our customers than in the pre-COVID environment, which is why we remain highly confident in our future.

In this third quarter, through April 30 that we are reporting today, COVID-19 impacted the last five weeks of performance. Starting March 23, most US elective procedures in Medical and Dental locations shutdown in response to CDC, ADA, state and local guidelines.

For our third quarter, total revenues of $237 million were down 18% sequentially versus the previous non-COVID impacted second quarter. Looking specifically at the Medical and Dental segments for the last five weeks of our third quarter, revenues were approximately off 60% in Medical versus the prior non-COVID second quarter, while Dental was off roughly 55% in total versus the same pre-COVID comparison, and down 70% excluding the sales of personal protective equipment or PPE. Note that these are sequential comparisons as year-over-year are not especially relevant or useful to understand the business performance.

We have seen improvement in May, as elected procedures are beginning to open up in parts of the country. In Medical, estimated to be audited May revenue rate was off 40% versus the pre-COVID rate, and in Dental, the estimated revenue rate in May was off 45%. We are encouraged by these early signs of improvement in May relative to April. Now it is difficult to forecast the pace of restoration of elective procedures, which as we know also includes the added impact of rescheduling, needed procedures deferred during this COVID affected period.

The pace is influenced by hard to predict factors including patient comfort level to re-enter facilities. As we discussed in a communication earlier in May, we have implemented aggressive actions to manage variable expenses. We have made broad use of employee furloughs and compensation reductions to reduce our costs, while retaining our experienced workforce. This enables us to redeploy resources quickly, in response to changes in demand. All this recent work that we have done evaluating and managing the cost structure will make a smarter and more efficient with engaging resources as we bring Cantel back to more normal operations.

As we reported earlier on May 12, we have secured the necessary flexibility to navigate this environment with an amendment to our credit facility. It provides for a suspension of many of the covenants, such as overall leverage ratios and replacing them with minimum liquidity and profitability metrics until October 31, 2021. This amendment provides us significant flexibility for the next 18 months.

Our cash position has also been fortified with the recent issuance of $168 million in convertible debt. This ensures an ample cushion to exceed our new liquidity requirements and our credit covenants, as well as to operate comfortably under conservative recovery scenarios. So looking ahead, while it is challenging to predict the pace of recovery, I can say with certainty that we are uniquely positioned to come back fast as our markets recover. Three reasons why I believe this.

First, in our Dental and Endoscopy end-markets, we are a primary go-to resource for information and assistance and helping customers reopen facilities in a safe, compliant and efficient manner in this new environment. For example, in the last two months, we have been doing webinars and training programs on the topic of COVID and the workplace, which have engaged approximately 34,000 medical and dental professionals. We also employed several hundred field service and clinical personnel, who are working closely with customers, preparing to operate with new COVID related protocols.

As practices reopen, they need to ensure their products and systems are functional and calibrated after being idle for several weeks. Second, our strategy of the complete circle of protection for the reprocessing workflow will be even more important, as we go forward in this COVID impacted world. We are already working with dental and GI personnel to help them understand, how to deploy new protocols for a safer practice, from patient intake to the use of PPE, to procedural safety and finally to room turnover, and gradual improvement of workflow productivity with our unique solutions.

Finally, we continue to make progress on our Cantel 2.0 growth initiatives, which we first discussed at our last earnings call. While progress has had to contend in the near-term with pandemic related priorities, we continue to move Cantel 2.0 forward with actions that will meaningfully benefit the recovery. The combination of these three actions, gives us great confidence and how Cantel will perform as we push ahead these next few months.

So let me now turn the discussion over to Shaun to review the key financial information.

Shaun Blakeman — Senior Vice President and Chief Financial Officer

Thanks, George. And good morning everyone. I’m going to go through our key financial results with brief commentary. However, following that I’d like to provide additional details that give context to the financial impact of April’s volume decline.

I will begin with the year-over-year comparisons, and given the COVID impact, I will close with specific references to more relevant sequential comparison to the second quarter of 2020. Of course, the standard reported financial details are available in the earnings deck for you to follow along, and we can cover any additional questions you may have during the Q&A.

Net sales increased 3.7% year-over-year in the third quarter ’20 versus prior year, and 4.2% on a constant currency basis. M&A accounted for 15.5%, which was offset by an organic decline of a 11.3%, with FX being negative 0.5%. Overall, our Life Sciences and Dialysis segments have been more resilient during the pandemic, given the essential nature of renal dialysis. Life Sciences sales grew 7.3% on an organic basis, driven by higher demand for portable water systems as George mentioned previously. And in the Dialysis segment, we saw organic growth of 8.5%.

The Dental segment grew 75.4% on a reported basis, driven by the acquisition of Hu-Friedy, but declined negative 3.1% on an organic basis. The relatively low decline on an organic basis is due to a previously stable start to Q3 and then unprecedented demand for PPE and disinfectants during the pandemic, which helped to partially offset the severe decline in elective procedures.

Overall, we believe that these are better than expected results in a very difficult market environment. Finally, the Medical segment decreased by negative 21.7% on an organic basis. And similarly to Dental, the last five weeks of the quarter were significantly impacted by COVID-related procedure deferrals. Capital equipment decreased negative 20%, and recurring revenue declining negative 22% in the period versus the prior year.

As George mentioned, we are seeing improvements in May sales rates and anticipate continued volume recovery over the next few months.

Turning to consolidated margins. Our GAAP gross margins contracted by negative 420 basis points to 42.6% versus 46.8% in the third quarter of 2019, while non-GAAP gross margins declined by negative 350 basis points year-over-year to 43.5%. As a result of our slowdown in manufacturing and the subsequent short-term underutilization, we incurred an accelerated recognition of nearly $3 million in costs that would normally be absorbed initially into our inventory valuation.

In addition, as procedure deferrals more acutely impacted consumables, which are generally our higher margin lines, our gross margin also reflects that mix pressure. Again I’ll end the financial discussion with some additional color on our margins.

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Moving down to op profit, GAAP operating profit increased 51.5% year-over-year to $22.4 million, mainly driven by a favorable fair value adjustment of around $17 million associated with an earn-out related to the acquisition of Hu-Friedy. On a non-GAAP basis, our profit decreased negative 38.6% year-over-year to $20 million.

Moving to tax rates. The GAAP effective tax rate for the quarter was a benefit of negative 28% compared to the prior year rate of 33.6%. This benefit was primarily driven by a net operating loss carryback and was partially offset by the unfavorable tax effect of the fair value adjustment related to an earn-out liability.

Non-GAAP effective tax rate came in at 31.1% compared to the prior year rate of 23.6%. This was primarily driven by the overall decrease of our US-denominated non-GAAP earnings and the impact of Hu-Friedy’s international operations. As a result, GAAP earnings per share increased 85% year-over-year to $0.37. Our non-GAAP earnings per share decreased negative 70.9% year-over-year to $0.16. Finally, adjusted EBITDA came in at $31.7 million down negative 23.3% year-over-year.

I will now move on to key cash flow and balance sheet items. Our cash flow from operations came in at $49.3 million, which is a significant improvement from our first half results. We ended the quarter with $115.8 million in cash and cash equivalents, and $288.1 million in working capital. Working capital increased 23% sequentially from the second quarter, primarily driven by the increase in cash from drawing down our outstanding revolver. The change in accounts receivable and accounts payable largely offset each other in the quarter, while inventory remained relatively flat.

Capital expenditures were $5.1 million this quarter, as a result of significant pullback of all non-essential spend. Moving to our debt profile, gross debt ended the quarter at $976.9 million, while net debt was $861.1 million. Our net debt to adjusted EBITDAS ratio was 4.63, which includes seven months of Q3 results.

I would also like to provide an approximate unaudited update of our debt and cash position ending in May, given its stronger relevance in light of our convertible offering. With those proceeds, our cash balance is approximately $248 million, with gross debt sitting at approximately $1.1 billion and our net debt sitting at approximately $850 million, keeping in mind that we had to use $31.5 million to pay down our term loan.

I would like to conclude my remarks by providing more context into key aspects of our Q3 results to help provide transparency into our actions and performance in the first weeks of the COVID pandemic. In short, we reacted immediately and executing rigorous cost reductions and strict working capital management processes. We carefully balanced cutting variable costs down as much as possible in a short amount of time, without sacrificing our ability to respond aggressively as the elective procedure volumes recover.

Overall, we are very pleased in proving out our ability to execute to what we hope is the steepest decline in our volumes and believe our performance is indicative of this balanced and proactive approach that we will continue to execute through periods of reduced volumes. Regarding our gross margin, if I treat the second quarter of 2020 as a baseline, approximately $45 million of our cost structure is fixed. We quickly took measures to control variable costs and for the month of April, we reduced variable manufacturing cost by 40% in total, which means, on a revenue decline of approximately 50%, we were able to reduce 80% of variable manufacturing costs with the volume decline.

In April, our gross margin was approximately 800 basis points lower than our second quarter 2020 non-GAAP rate, excluding the accelerated recognition of expense normally capitalized in the inventory. Additionally, with respect to operating expenses, we were able to quickly reduce SG&A costs by approximately 20% in April compared to the average monthly cost in the second quarter 2020, through a combination of furloughs, salary reductions and the pull back on discretionary spend. And regarding cash and working capital, I would like to specifically note how strongly we acted to aggressively preserve cash. Even with the sudden and steep decline in procedural volumes, we were able to hold the inventory relatively flat, judiciously pushed out payments, and maintained cash collections with minimal pressure from delayed payments.

We are very pleased that we were able to manage working capital to be a net cash contributor to the April decline. Although, we built up cash in April, I estimate that our peak cash burn to be approximately $10 million to $15 million a month. And I expect that peak to occur around June, due to our normal collection cycle and improve thereafter.

Of course, while this does not imply that future months will execute exactly as April, we feel it’s an important gauge that supports our belief that we have ample liquidity to weather the instability of the pandemic. I appreciate your patience listening through these additional details. And as a reminder, we will be filing our 10-Q by next week.

I will now turn it back over to George for concluding remarks.

George L. Fotiades — President and Chief Executive Officer

Coming up will be a busy summer for Cantel. We will be focusing on these top priorities. Number one, we will continue to remain disciplined with all internal workplace safety procedures and protocols to maintain the efficient and reliable delivery of our services and solutions. This discipline will continue to extend to our vigorous stewardship of operating expenses and the balance sheet.

Second, our Medical and Dental field sales, service and clinical teams will continue to work daily with customers to assist the recovery in our markets by consulting on how to safely restart procedures under new protocols and with solutions for restoring an efficient workflow. Third, we will continue to make headway on the critical Cantel 2.0 initiatives. For example, our efforts to provide more infection prevention solutions in surgery centers, the expansion of our key account director organization and the Hu-Friedy group focus on expanding penetration of the instrument management system.

We are very energized by the opportunities embedded in Cantel 2.0, which are even more relevant in a post-COVID environment. We will have more details to share at our earnings call in September. The impact of COVID will continue to be an uncertain factor on performance in the coming weeks. That said, we are deeply engaged in supporting our partners and optimistic about the recovery. We are now ready for questions.

Questions and Answers:

Operator

Thank you. The phones are now open for questions. [Operator Instructions] And we will take our first question from Larry Keusch with Raymond James. Please go ahead.

Larry Keusch — Raymond James — Analyst

Great, thank you. Good morning, everyone. George, you obviously spoke to where Cantel is positioned, as we start to come out of the peaks of the pandemic and the focus on getting procedures up and going again. Can you expand a little bit on where you think really across Medical and Dental is where most focused? Where there are aspects of those business that can become more durable in use, as we head out of the pandemic, and there is more focus on Infection Control and Prevention?

George L. Fotiades — President and Chief Executive Officer

Yeah. First, good morning, Larry. Thank you for the question. Look, I think there are probably several things that I can mention and Seth may chime-in on this. But first and foremost, I think what we found is we’ve been helping people deal with the disruption is just the importance of getting — continue to get training and discussion around how to comply with new regulations and protocols that they have to contend with. And then I think, going beyond that is how to get back to workflow throughput because obviously these new protocols will, in the short-term compromise what they used to have for throughput prior to that that obviously could put pressure on revenue and their margins.

So we think, some of the things that we can provide in our circle of protection in both Medical and Dental, how to organize the workflow in particular will be those kinds of things, which become durable in a post-COVID environment. I also think, as we look at places like surgery centers and dental offices, which are similar in many respects to the focus on throughput that there are a number of our solutions, particularly with — whether it’s disposable products for the surgery center and what they can do to expedite the reprocessing workflow or the dental office, with the instrument management system, while at the outset, it requires an investment over time, it provides greatly enhanced throughput to the office. And so we think, the instrument management system in general can benefit meaningfully.

And we also think — look we talked about our key account director program and the importance that that provides in talking to C-suite executives, who are going to be far more attuned in a post-COVID environment to the importance of infection prevention in all areas of the hospital that talking about our complete solution will resonate much more than it has in the past, aided by the fact that we can provide clinical support and assessments that our clinicians provide which we know can lead to broader adoption of our offering.

I will pause for a second. Seth, if you wanted to add anything to that. Please go ahead.

Seth Yellin — Executive Vice President and Chief Growth Officer

I think you captured all the major elements nicely. I’d say, we’ve seen very strong interest and accelerated interest in some of these solutions, such as the IMS with engagements with customers up 700% over prior equivalent periods, as people look to better solutions to help drive both safety and better infection prevention protocols in the press with the efficiency that comes with these solutions. So we think, there is a good match-up here of our capabilities with our customers’ needs that are further enhanced by COVID backdrop.

Larry Keusch — Raymond James — Analyst

Okay, thank you for all that. I’ll just ask two other quick ones here. First, could you just speak a little bit about between Medical and Dental, would you expect Dental to have a bit of a lag on the recovery of procedures versus Medical. Maybe talk a little bit about how you’re thinking about the capital equipment environment around Medical.

And then lastly, I recognize that you’re not providing guidance at this point, but you were kind enough to provide some clarity on kind of how you think May is shaking out. If you kind of take those May rates and sort of assume no improvement through the remainder of the fiscal quarter, the fourth quarter, it seemed like you come up with numbers that appear to be a bit higher than the Street consensus. So, I mean do you think that people have to sort of think about recalibrating a little bit on their fourth quarter outlooks. Thanks very much.

George L. Fotiades — President and Chief Executive Officer

Okay. Larry, I think we captured other several very good questions there that I see — if I can get it right. First of all, Medical, I’ll cover the Medical versus Dental progress, how we might see that. Pete you cover capital and Shaun will take the last part of the question.

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Look, I think we have spent a lot of time trying to see how that might unfold going forward obviously could be impacted by different parts of the country coming on at different points in time. Likewise, we know, that there has been certainly a lot of independent research done that’s asked the question in dental offices about how they see things unfolding. There is the impact of let’s say in — at Medical insurance, on people and the current unemployment rate and how that might impact things. So there are a lot of these factors, which may contribute to the pace of recovery. I guess, I would say, we think probably Dental could be on the slower end of coming back versus Medical, I don’t know, if that’s like a month behind or two months behind or not.

And I think, some of that has been verified a bit on the outside that it may be more susceptible to the impact of insurance, it could be because it’s may be less urgent need, let’s say versus a colonoscopy or an endoscopy which as we know is generally a deferred procedure that ultimately needs to get done and people may feel a need to get that done as quickly as a surgery center or a hospital reopen. So I guess what we sort of modeled is that Dental may take a little bit more time. But obviously we monitor this thing month-on-month, just to make sure we can calibrate and on our model and make adjustments accordingly.

Let’s go to the capital equipment question and how we see that unfolding, I’ll let Pete answer that.

Peter Clifford — Executive Vice President and Chief Operating Officer

Yeah, Larry, as you’re aware on the downside, we have very little capital exposure on the Medical side. I think OUS we will see very little softness, as it relates to capital. Within the US, we are anticipating some softness for the next couple of quarters on AER purchases to combat that. As you’re aware we’ve been working pretty diligently on the ASC strategy. One of the things that we did launch at the beginning of the third quarter, aligned to that new ASC strategy was bringing on a third-party leasing program. So I think, the timing of that obviously is very impactful and now relative to or relatable to the hospital strategy as we lean in the next couple of quarters. So we think, we have a path to combat some of that softness.

And then on the Life Sciences side, it’s a tale of two things, generally speaking with the COVID impact, our portables business which is still capital has been very busy. We’ve been moving ahead, I would say, on schedule with de novo, central clinic builds. We’ve seen a little bit of a slowdown on the retros and repairs, on the centrals and existing clinicians as access was moderated in April and May. But we expect that to actually return in the back half of the summer.

Shaun Blakeman — Senior Vice President and Chief Financial Officer

Yeah, Larry, this is Shaun. And in regarding to the question on kind of the Q4 outlook. Yeah, I mean I do think, it’s a logical side, reiterate this obviously with the Q4 being exposed to COVID most acute within its entirety, I think, it’s logical that Q4 is going to be less than Q3 in terms of revenue. But I do agree with your assessment that if you were to extrapolate what we’re seeing in May and assume that was going to last for the whole summer that you would need to bring those estimates up a little bit to match that reality if that’s what you believe is going to happen for the entire quarter.

Larry Keusch — Raymond James — Analyst

Great, thank you very much guys.

Shaun Blakeman — Senior Vice President and Chief Financial Officer

Yeah, I’d just add one last point, Larry. I think one indicator that’s pretty positive on the Dental side is all the feedback we have and the POs that we’ve gotten especially here in May really points that the school season for the dental schools looks to be fairly uninterrupted as we think about August and September, the mood and what we see in PO activity has been very positive here in May.

Larry Keusch — Raymond James — Analyst

Great, thank you very much.

Operator

And our next question will come from Matthew Mishan with KeyBanc.

Matthew Mishan — KeyBanc — Analyst

Great. Good morning and thank you for taking the questions. It’s been a long three months since your last call. I guess, guys what I’m hearing is that your relationship and value proposition with customers are enhanced coming out of this crisis. I can fully understand that with dental practices. They are more fragmented entrepreneurial type businesses, but can you help me better understand that with the hospital customers and where you are experiencing some competitive disruptions in Medical?

George L. Fotiades — President and Chief Executive Officer

Competitive disruptions. So you are talking about the valve business. Look, again my comment about competitive, let’s just talk about that without having to name competitors. We have competitors on one or two parts of our complete circle of protection, but not on the complete circle of protection, where we have a suite of solutions as you know. So in the case we’re talking to the hospital, the one company who is — who knows the entire endoscopy process from beginning to end is Cantel.

We are the ones with clinicians that serve the GI suite, who are — with service technicians, who service the GI suite particularly its lead idle for, in some cases up to eight weeks’ time, where they need people to come back and then re-calibrate that which they are doing. So there is really only one company that can provide that service from beginning to end that they’re turning to.

Also when you consider our installed base, which — there is really no other competitor that comes close to that, when you need to deal with the AER situation, restoring chemistry, etc, again, we are the most obvious go-to resource. So I think that’s sort of a built-in fact reality that really is why we’ve become the go-to resource for hospitals.

Peter Clifford — Executive Vice President and Chief Operating Officer

Yeah. I’d just add, I would stress that point, Matt, the installed base and the fact that at a time right now where access is somewhat limited. We probably have the greatest access of anybody that plays in our space, and as folks have to restart up their suites. There is a lot of complicated start up procedures that our customers on the hospital side are looking for guidance up. And again having sort of unprecedented access compared to our competitors, and I think, this opens up the door wide around the ASC side, where they are less sophisticated.

And again I think this is one of the natural synergies between actually our Dental business and our Medical businesses. The dental suites and the ASCs tend to behave similarly and in fact that compliance is important, but throughput and efficiency of practice is huge. So I think we’re positioned better again than anybody with our clinicians to be able to help people not only start back-up safely on the ASC side but actually drive throughput.

Matthew Mishan — KeyBanc — Analyst

Okay. Very interesting. For Hu-Friedy, you talked about the instrument management system and engagement being up like 700%. How are some of the dental practices taking about the upfront investment of that versus potential disruption in bringing that online as you are trying to start up your practices again. I mean, what is the tightening of that looks like for some of the dental customers, how are they thinking about that?

Seth Yellin — Executive Vice President and Chief Growth Officer

I think that the IMS system is a great example of the type of comprehensive solutions we can deliver to the dental suite, right. That it combines a workflow process with the instrumentation with the associated consumables. And candidly, there is a whole host of different ways that the practices can configure to utilize these products, be it full implementation to partial implementation.

I think, what’s particularly interesting though around the level of engagement we’ve seen is a true spike in interest in understanding new solutions to help drive what is a clear problem in dental practices, which is the efficient reprocessing of instrumentation to drive a safer environment and maintain efficiency. So I mean, as George highlighted, the pace of recovery in the dental market and budgetary constraints remain some unknowns here. But I would say that despite that disruption that remains a very heightened level of interest and scrutiny around our broad solutions.

So I think we’re encouraged how that specifically translates in the immediate timeframe versus the longer-time frame to product sales it to be seen, but we’ve seen broad interest accelerate in our IMS solution, as well as a whole host of different solutions that we bring in the dental suite, including our Greenlight Conscience Program and other types of educational and training tools to enable those practices to operate more efficiently and more safely.

Matthew Mishan — KeyBanc — Analyst

And my last question is a broader one. As you look at your capabilities in infection prevention, are you mainly focused here on supporting your existing customer bases in Dental and Medical? Or have you looked at opportunities around infection prevention helping companies do better with sterilization around manufacturing facilities, bringing retail facilities, bringing certain areas of a — of the economy back online.

George L. Fotiades — President and Chief Executive Officer

Yeah, I think, as an example in our Life Sciences division, obviously we’ve had a lot of opportunities come to the surface just more broadly on sort of bio decontamination and surface disinfection, opportunities around our dry fogging equipment and chemistry is an example. Obviously, I think, it’s pretty clear that with our PPE and historically, a very Dental focused business that those products have been going well beyond Dental and obviously into the broader health care sectors. I think, some of that will continue obviously in the future.

And then obviously what we still think, there is an opportunity down the road with REVOX to do sterilization techniques. There’s a lot in the news about trying to reprocess N-95 masks, and a lot of folks are struggling to do that. And we think that that would be an application, as an example, in the future that we could do quite well with.

Matthew Mishan — KeyBanc — Analyst

Thank you very much.

Operator

And our next question comes from Mike Matson with Needham & Company. Please go ahead.

Mike Matson — Needham & Company — Analyst

Yeah, good morning. Thanks for taking my questions. I guess just want to start with a couple on margins. So first, with all the cost reduction efforts that you’ve taken to address the revenue declines here, are any of these going to be permanent and have an ongoing effect beyond kind of the short-term period or are these really all short-term measures?

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George L. Fotiades — President and Chief Executive Officer

I would start by saying that you know, like for the foreseeable future this is a discipline we’re going to be executing to, right, especially in terms of the variable cost on the manufacturing side. And you know, I think that our viewpoint right now is we really want to get a good look at how May, June and July kind of play-out, that is something that we look at day-by-day, week-by-week basis to kind of understand what we think you know the post-summer environment is going to look like before, we would make any calls on what we — how we might move forward and proceed beyond that point.

But I would anticipate that, like for the summer right, we’ll keep these disciplines in place and right now, the focus has been on trying to understand what the other side looks like and maintain that infrastructure to make sure we can come out and attack it.

Shaun Blakeman — Senior Vice President and Chief Financial Officer

I just add on, Mike, that look, I think one of the strange benefits of the pandemic is look is — it’s brought a new cadence to running the business daily. And I think everybody is acutely aware how we spend discretionary dollars and I’d expect that as we come out of this, there is certainly areas like T&E and production supplies that we will find a new level that’s below the pre kind of COVID environment. So again, there has been some positive strangely to running the business on a daily basis here.

Mike Matson — Needham & Company — Analyst

Okay, that’s helpful. And then just on the gross margin, it sounds like it was down, I guess about 8 points in the April timeframe. And so, yeah, I guess, looking into the third — sorry, the fourth quarter, is that kind of where we should be I know, you’re not giving guidance, but I mean, should we assume it’s kind of at that level I mean, kind of 8 points down year-over-year, or is that a reasonable assumption?

Shaun Blakeman — Senior Vice President and Chief Financial Officer

Yeah, I mean I provided — and that was actually a sequential comment from kind of the previous — kind of 2Q stable quarters which we largely believe are non-COVID. So I mean, I would — to the extent that I think Q4 and its entirety, right, is going to be, have less volume. I would expect it to be similar. I would still look at somewhere between 800 basis points to 1,000 basis points is probably a safe way to look at it, but to the point — to your point that was asked earlier to the extent that volumes if they are stronger than we expect right, obviously there’ll be some mitigation on that.

Mike Matson — Needham & Company — Analyst

And then —

Shaun Blakeman — Senior Vice President and Chief Financial Officer

[Speech Overlap] 8% also excludes the — that 8% also — sorry, 800 basis point comment does exclude the accelerated recognition of expense that normally would capitalize due to under-utilization of the plant. So that is a fairly clean look at what the trough looks like for us.

Mike Matson — Needham & Company — Analyst

Okay. And then just on the —

Shaun Blakeman — Senior Vice President and Chief Financial Officer

[Speech Overlap] how you might think of that Mike is our overhead is about 20% of revenue and about half of that is fixed.

Mike Matson — Needham & Company — Analyst

Okay. And then just on the SG&A commentary about it being down 20% in April, so similar question there I guess, I mean, do we assume it’s down 20% for the fourth quarter or?

Shaun Blakeman — Senior Vice President and Chief Financial Officer

Yes, roughly, I do expect to play-out the same way for the quarter.

Mike Matson — Needham & Company — Analyst

Okay, great, thanks.

Operator

[Operator Instructions] And we’ll move next to Mitra Ramgopal with Sidoti. Please go ahead.

Mitra Ramgopal — Sidoti — Analyst

Yes, hi, good morning. Thanks for taking the questions. First, just wanted to follow-up on the Life Science business. I think, George you talked about the unprecedented demand for the portable RO units and I’m just wondering, as it relates to your capacity to meet that demand, if you have to make additional investments and how you see that playing out longer term, if you see this is a maybe more — not necessarily a temporary shift in terms of dialysis?

George L. Fotiades — President and Chief Executive Officer

Yes. We have been able to meet that demand, we have been able to flex by moving to more shifts, accelerating the supply chain as well. I mean it’s largely an assembly challenge, which the team in Minneapolis has been able to accomplish. And at this point, while obviously it’s been a big difference from the prior demand scenario, they’ve been able to make it work by improving throughput and moving to three shifts as well, seven days a week to get it accomplished. So we were completely confident in the ability to meet the demand.

Peter Clifford — Executive Vice President and Chief Operating Officer

Yeah, and I think Mitra as you’re aware, look the Life Sciences business and the assembly or manufacturing of the centrals and portables is on the same campus, just across the street from our Medical business. So as we’ve actually had softness on the AER lines obviously, that we’ve talked about, a lot of those people are skilled or have a similar skill-set and we’ve moved a lot of those people from our AER lines temporarily over to the portable business to react faster.

Mitra Ramgopal — Sidoti — Analyst

Okay. That’s great. And then just to be clear, obviously a number of companies are affected in different ways as a result of the pandemic. But if I recall like none of your facilities are really affected in any way in terms of the closures or disruptions etc. The declines you’ve seen is really just a reflection of all of the end-market as you talked about the elective procedures, etc. Is that fair?

George L. Fotiades — President and Chief Executive Officer

Yeah, I mean, plant capacity has been relatively unimpacted. I mean at the end of the day, there has been some disruption in Italy and in the US as we’ve had certain cases come into the manufacturing facilities. But as a general rule, we’ve been able to run at the required levels to meet demand.

Mitra Ramgopal — Sidoti — Analyst

Okay. And coming back to the 2.0 initiative you unveiled, obviously that’s much more of a long-term plan, but I’m just wondering, as it relates to the environment we’re in, how much has that kind of maybe a slowdown some of the things you’re planning to do maybe as it relates to product introductions or anything else?

Peter Clifford — Executive Vice President and Chief Operating Officer

So, go ahead, George.

George L. Fotiades — President and Chief Executive Officer

I could say that — look, I think certainly, as I mentioned in my script, my comments, there has to be lot of short-term focus to move some of these priorities dealing with the pandemic, but I will say, that Pete and the team have continued to make a lot of progress on all the initiatives and some faster than others — and COVID certainly represents an opportunity to move on some of these faster in terms of the benefit they can provide in a post-COVID environment. But, so I said, more to come on that but Pete why don’t you give a little bit of color?

Peter Clifford — Executive Vice President and Chief Operating Officer

Yeah, I would just say, look we used the opportunity that was created by some of our sales folks, not having traditional access during April and May, as an example to accelerate commercial excellence training in Europe. It gave us a lot of time to finish and be prepared to launch our ASC strategy here in the fourth quarter. So I think we did a really nice job of continuing to not move slower, but move faster on that again, partly because of the time that was freed up with sales guys not having access as much in April and May, that we really redeployed that bandwidth to further some of the strategies and execution.

Mitra Ramgopal — Sidoti — Analyst

Okay, thanks for that. And then on the focus on cash conservation, obviously you’ve implemented a number of initiatives furloughing etc, suspending the dividend. How should we think about capital allocation going forward? Is it — I’m assuming acquisitions etc, certainly not a focus right now but in terms of maybe reducing debt versus stock buybacks, anything along those lines in terms of how you’re thinking about that?

Shaun Blakeman — Senior Vice President and Chief Financial Officer

I’d say the number one focus without doubt over the foreseeable horizon is paying down debt.

Peter Clifford — Executive Vice President and Chief Operating Officer

I think, I’d just add on — I think, one thing Mitra not to be lost in the performance on the working capital side is our teams have worked pretty hard over the last six to nine months to refine and improve business processes with our SAP launch, it was a bit bumpy last year and the reality is this test that we saw with the pandemic, really I think, the team delivered incredibly well and the reality is we wouldn’t have been able to do that if we had made the progress with SAP over the last six months to put ourselves in a position where we have the capability and process — the expedite in the way that we did and to accelerate the collections in the ways that we did and the control disbursements at a critical time.

So again, I prefer not to get tested it in that way, but the pandemic really gave us a boost that the efforts on the SAP side have really had been fruitful.

George L. Fotiades — President and Chief Executive Officer

Very good point.

Mitra Ramgopal — Sidoti — Analyst

Okay. Thanks again for taking the questions.

Operator

And that does conclude our question-and-answer session for today. I’ll turn the call back over to management for any closing remarks they may have.

George L. Fotiades — President and Chief Executive Officer

Yeah, just a couple of remarks in closing. First of all, as I said at the outset, an incredibly, an extraordinary challenging quarter, one of the most significant challenging, certainly in my career. I will tell you that again, how proud I am about the Cantel employees and it has brought out the absolute best in Cantel, not just in managing this pandemic. But what I see in our ability to move forward past this pandemic and the — what we can do as a company for our customers.

So that’s why we are optimistic about our future. And look forward to talking to you particularly about Cantel 2.0 initiatives at our next earnings call. With that, I wish everybody a great summer and thank you for being on the call.

Operator

[Operator Closing Remarks]

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