Mar 10, 2015
Executives
Dave Hable - President, Chief Executive Officer, Director Pam Boone - Chief Financial Officer, Executive Vice President, Treasurer, Secretary
Analysts
Chris Cooley - Stephens Charles Haff - Craig-Hallum Joe Munda - Sidoti & Company Raymond Myers - Alere Financial
Operator
Good evening, ladies and gentlemen and welcome to the second quarter of fiscal year 2015 earnings conference call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
Synergetics would like to remind listeners that certain comments made during the conference call maybe forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as believe, expect, anticipate, plan, potential, continue or similar expressions.
Such forward-looking statements include risks and uncertainties that are important facts that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These facts, risks and uncertainties are discussed in Synergetics' Annual Report on Form 10-K for the year ended July 31, 2014, filed October 14, 2014 and as updated from time to time in our filings with the Securities and Exchange Commission.
I would now like to turn the call over to Dave Hable, the company's Chief Executive Officer. Dave?
Dave Hable
Thank you operator and good evening everyone and welcome to our second quarter earnings call. With me on the call this evening is our CFO, Pam Boone.
Tonight's call will include a review of our second quarter and first half results and updates on our progress towards our key operational focus areas, specifically the commercialization of our VersaVIT 2.0 system, the closing of our East facility and the integration of our recent acquisition of Sterimedix. Following our prepared remarks, we will open the call for your questions.
Before diving into a review of the quarter, let me set the stage for the changes we have introduced in our earnings press release this afternoon. Following the acquisition of Sterimedix, we concluded that the way we have been presenting revenue no longer accurately reflects our operational structure or view of the business.
In an effort to best reflect the underlying fundamentals of the business performance of the combined company, we are now presenting revenue results in terms of the market served, ophthalmics, neurosurgery or other, rather than by the channel distribution presentation that we had used previously. For my commentary today, I will reference our second quarter performance based on our new presentation of revenue results as we believe this is the best representation of our underlying business performance going forward.
So that we are as transparent as possible with this change, we provided supplemental financial disclosure on the IR page of our website which will include our historical sales results under both presentations by distribution and by market. So with that as a backdrop, second quarter sales increased 20.5% year-over-year driven by 9% growth in our ophthalmic business, 36% growth in our neurosurgery business and 117% growth in other sales.
Partial period of contributions from our acquisition of Sterimedix bolstered our growth in the quarter, though excluding Sterimedix, our organic growth is more than 13% year-over-year. This represents an acceleration trend from the 7.2% growth we reported in the first quarter of fiscal year 2015 against the growth rates in the 6% to 7% range in the first half of 2014.
Organic growth was driven by the sales of the VersaVIT system and accessories in both our ophthalmic and strong volumes from our largest marketing partners, Codman and Stryker in our neurosurgery businesses. Within our ophthalmic ophthalmology business, the 9% growth was driven primarily by the acquisition of Sterimedix which generated approximate $1.1 million in sales this quarter.
Excluding this revenue, our ophthalmology business declined roughly 3% year-over-year on an organic basis. The trends in this business have not changed, VersaVIT's strong growth is notable but the franchise is not yet big enough to offset the headwinds in our base ophthalmic business, which declined in the mid-single digits in the second quarter.
Within our neurosurgery business, the 36% growth year-over-year was driven by a combination of strong underlying demand from our marketing partners, Codman and Stryker and the contributions from higher sales of disposables and capital equipment sales related to the building of safety stock on the part of these two partners. We estimate that the sales volume likely related to safety stock ordering to be approximate $1.1 million, split evenly between capital equipment and disposables.
Excluding this $1.1 million of opportunistic sales volume, our neurosurgery business increased 17% year-over-year driven by growth in the sales of generators, accessories, disposables and royalty for Codman and by growth in the sales in generators and disposables to Stryker. We continue to expect this business to fluctuate as our marketing partners ramp up, manage our inventory levels over time.
Finally, our other sales bucket reported growth of 117% year-over-year, driven primarily by sales of aesthetic cannulas from our acquisition of Sterimedix. Turning to a brief review of the rest of our financial results in the second quarter.
Our gross margins declined by 300 basis points year-over-year and were impacted by multiple items in the period that were largely non-operational in nature. Pam will detail these in a moment.
We posted operating income of $1.2 million compared to an operating loss of close to $400,000 last year, which represents strong profitability improvement driven by continued focus on expense management. When excluding the exit cost and the acquisition cost in the period, or non-GAAP operating income increased $900,000 year-over-year to $2.1 million or 11.3% of sales.
This profitability performance represents an early snapshot in the inherent operating leverage we believe exists in our model in the future. With that, let me turn the call over to Pam for further discussion of our new revenue presentation, a detailed review of our financial results in the second quarter and our balance sheet condition at quarter-end and then I will return to discuss our progress on the commercialization of VersaVIT and a few other operational milestones this quarter.
Pam?
Pam Boone
Thanks Dave. Let me begin with a brief summary of the changes in the presentation of our revenue results which we announced in the earnings press release this afternoon.
As Dave mentioned, we underwent an evaluation of the presentation as we were working through the consolidation of Sterimedix' results this quarter. And we realized that the presentation of revenue results on a market basis was a better reflection of the underlying business trends as compared to the prior presentation, which was based on the channel of distribution.
In the interest of full transparency, we have provided a detailed historical summary of our revenue results over the last 10 fiscal quarters ending Q2 2015, which displays our previously reported results under the new presentation format. This should help populate your models and make for easy comparison of results.
Note, we plan on recording our revenue results as we have today in our earnings release, specifically we will show the revenue under the old presentation and as under the new presentation for the balance of fiscal year 2015 and we will begin reporting the new presentation format exclusively thereafter. My revenue and revenue growth commentary that follows will be limited to our new presentation format.
Turning to our second quarter results. Total sales increased 20.5% to $18.2 million, compared to $15.1 million in the prior-year period.
Excluding the impacts of foreign currency exchange in the period, total sales increased 22% year-over-year. As Dave mentioned, total sales included the contributions from our acquisition of Sterimedix, which totaled $1.1 million for the period of 52 days in which we owned the business in our second quarter ending January 31, 2015.
U.S. sales increased 15.6% to $12.9 million while international sales increased 31.0% on a reported basis to $5.3 million.
International sales increased approximate 36.8% on a constant currency basis in the second quarter. Excluding the contributions from Sterimedix and the impact of exchange rates in the period, international sales increased 8.5% year-over-year.
The mix of total sales by geography was roughly 71% U.S. and 29% oUS this quarter, compared to 73% and 27%, respectively in the second quarter of 2014.
The increase in the international sales percentage was due to Sterimedix, which will continue to drive this percent higher for the rest of fiscal 2015. The company sales by product category, disposables and capital equipment, reflects an 18% increase in sales of disposables year-over-year and a 44.9% increase in the sales of capital equipment.
Excluding the aforementioned impact of safety stock build in the period, our capital equipment sales increased 9.2%. Disposable sales accounted for approximately 85% of total sales this year compared to 87% of sales last year.
Now for a look at total company sales performance by our primary product markets, ophthalmic and neurosurgery. Total ophthalmic sales increased 8.9% to $10 million this quarter, compared to sales of $9.2 million last year.
U.S. ophthalmic sales decreased 5%, partially offsetting a 27.2% increase internationally.
U.S. ophthalmic sales were adversely impacted by decreased sales of capital equipment and disposables in our ophthalmic base business, partially offset by increased sales of procedural kits.
Our international ophthalmic sales performance was primarily driven by contributions from Sterimedix which offset a decrease in international ophthalmology direct and distributor sales of 4.3% in the period. Neurosurgery sales increased 36.4% year-over-year driven by strong sales of both disposable and generators to our marketing partners, Codman and Stryker, in the period.
We benefited from higher orders from our marketing partners related to safety stock build this quarter, which we estimate represented $1.1 million or 19 percentage points of growth year-over-year. We view this additional sales volume as opportunistic and more indicative of our strong relationships with our marketing partners rather than an indication of long-term sustainable growth going forward.
Now for a brief review of the rest of the P&L for the second quarter of fiscal year 2015. Gross profit for the second quarter was $9.6 million or 52.7% of sales compared with $8.4 million or 55.6% of sales in the year ago period.
Gross margin in the second quarter of fiscal 2015 was negatively impacted by product mix shift to neurosurgical sales from ophthalmic sales, compared to last year, cost related to our final production at the King of Prussia facility, foreign currency exchange and inventory purchase price allocation related to our acquisition of Sterimedix. Total operating expenses were $8.4 million or 46.1% of sales this year compared to $8.8 million or 48.1% of sales last year.
We leveraged each individual expense line item in Q2, including a 2% reduction in G&A expenses despite the incremental cost related to our acquisition of Sterimedix of $204,000 in the period. Total operating expenses in the second quarter also included higher expenses related to the company's exit activities at its King of Prussia facility compared to the prior year.
Operating income was $1.2 million in the quarter, compared with an operating loss of $0.4 million in the second quarter of fiscal 2014. Reported net income was $1 million dollars or $0.04 per diluted share, compared to a net loss of $0.2 million or $0.01 per diluted share for the same period of fiscal 2014.
In terms of our non-GAAP financial performance this quarter, earnings before interest, taxes, depreciation and amortization, or EBITDA totaled $1.9 million this year compared to $117,000 in the second quarter of fiscal 2014. Our non-GAAP operating margin, net income and EPS results, excluded the impacts of our exit cost and acquisition related expenses in the period and each of these items showed notable improvement year-over-year, specifically our non-GAAP operating margin was 11.3% this year compared to 0.9% last year.
Non-GAAP net income was $1.6 million compared to $84,000 last year and non-GAAP EPS was $0.07 this year compared to breakeven last year. Turning to the balance sheet.
At quarter end, we had approximately $8.9 million in cash and $2.75 million in interest-bearing debt related to the Sterimedix acquisition. Our DSO ratio is 70 days, down from 82 days at the end of the fiscal year, due to timing of collections throughout the quarter.
DSO, excluding Sterimedix sales and accounts receivable were 66 days. Our inventory position was $16.5 million, basically flat compared to the second quarter of 2014 and this quarter's inventory balance includes roughly $1.3 million of Sterimedix inventory.
So our overall inventory declined year-over-year on an organic basis. Inventory days were 191 days compared to 213 days last year.
Cash flows provided by operating activities were $4.8 million for the six months ended January 31, 2015, compared to cash flows used by operating activities of $302,000 for the comparable fiscal 2014 period. The change in cash flow from operations was largely due to working capital efficiencies including increases in accounts payable and accrued expenses and decreases in inventory and accounts receivable.
Now I will turn the call back to Dave.
Dave Hable
Thanks Pam. I will now provide commentary on three items.
Number one, VersaVIT. Number two, our efforts to improve the cost structure of our business through reducing product costs and our facility consolidation.
Number three, the integration of Sterimedix. First on VersaVIT.
We had another quarter of solid performance for our low-cost vitrectomy machine and related accessories. We were especially pleased with the continued momentum we saw in the business in light of the self inflicted challenges in the form of upgrading roughly 80% of the installed base of 1.0 generation of the system to our next generation system of 2.0, as we call it.
Our second quarter performance in VersaVIT franchise gives us increasing confidence that market adoption of our platform and utilization of our systems are both increasing. We have now completed more than 14,000 vitrectomy procedures including evaluations with our VersaVIT systems to-date, which represent growth of roughly 115% year-over-year and 18% sequentially.
We have completed more than 5,300 procedures including evaluations on our next-generation VersaVIT system, the 2.0 since the market launch in third quarter of last year. We had 64 VersaVIT customers place orders for our VersaVIT disposables in the second quarter.
These accounts represent the group of customers that have converted to VersaVIT from a competitive system or have upgrade to 2.0 from our 1.0 generation system, have burned through their existing and/or demo inventory and are in a position to order disposables for daily usage. We continue to believe that this represents the strongest indication of market acceptance of our system.
So in summary, the VersaVIT franchise continues to perform well. We expect to complete our efforts to upgrade the installed base of machines by the end of the third quarter.
We are seeing strong adoption and utilization of our 2.0 system and we are seeing growth in a number of accounts that are reordering our disposables and accessories, specifically 64 accounts this quarter, compared to 41 last quarter. This franchise remains the strongest organic growth driver in our ophthalmic business.
Turning to an update on our efforts to improve the cost structure of our business. We continue to identify opportunities to make better use of our labor resources, incorporate lower cost components to our mix and reduce scrap which we expect will improve the overall margin profile of our business in the future.
Since we begin this effort in 2012m we believe we have taken more than $3.5 million out of our cost basis including more than $400,000 in the first six months of our fiscal 2015 alone. Separately, as part of our efforts to streamline our operations, we announced plans to close or facility in King of Prussia, Pennsylvania in late 2013 and we began the process of consolidating our manufacturing operations here in O'Fallon, Missouri in early 2014.
We are happy to report that the facility was closed in February, the consolidation process has been completed and we have no further exit cost that will be impacting our financial results going forward. As a result of the facility closure and consolidation, we expect to see reduction in operating expenses of roughly $1.1 million on annualized basis beginning in fiscal 2016.
Also these efforts to reduce our cost structure allows us to be more competitive in the marketplace and will drive improving profitability and cash flows for the company in the future. Finally, I want to provide an update on our integration of Sterimedix.
Recall that we announced this acquisition along with our first quarter earnings on December 10, 2014, so our second quarter results included the contributions from our ownership for all of January and better part of December, which was a total 52 days to be exact. We are extremely pleased with the speed and efficiency in which we have integrated the business and the strong sales contributions to-date have bolstered our overall company financial performance.
I recently visited their operations in the U.K. and I came away with further conviction in their fit in our organization and that they have a sophisticated infrastructure for a company of their size and we look forward to leveraging some of their best practices to improve both the productivity and profitability of our oUS operations in the future.
As Pam mentioned, we had some gross margin headwinds related to purchase price accounting and product mix, but despite the below gross profit margin trend during this partial period of ownership, the asset was both possible, on an operating basis and on an after-tax basis as well. We continue to believe that this acquisition represents a solid example of how we are focused on leveraging the strong cash flow of our existing businesses and our strong balance sheet to supplement our growth by acquiring solidly profitable growing companies in the ophthalmic space.
We look forward to continue to identify new opportunities to supplement our growth in the future. So to wrap up, we are pleased with our second quarter performance with more than 20% topline growth and bottomline profitability in the period.
Our VersaVIT franchise continues to put up strong growth as we work towards a broader market adoption of our innovative low-cost ophthalmic system. We look forward to new products representing an increasing percentage of our ophthalmic mix in an effort to offset headwinds we are seeing in our base business.
On the OEM side, we have strong relationships with our two key marketing partners that feel strong demand for our disposable products and slower but still solid demand for our capital equipment products over time. We remain focused on driving organic growth, improving our margins and cash flow generation, which together will fuel our ability to acquire attractively priced acquisitions to further grow our ophthalmic business around the world and to improve shareholder returns going forward.
With that, I will open the call to your questions. Operator?
Operator
[Operator Instructions]. Our first question is going to come from Chris Cooley from Stephens.
Please go ahead with your question.
Chris Cooley
Thank you. Good afternoon.
Can you hear me okay?
Dave Hable
Yes, absolutely. Hi Chris.
Pam Boone
Hi Chris.
Chris Cooley
Hi, great. Congratulations on a wonderful quarter.
A couple of questions, if I may. I figure maybe start with VersaVIT and then maybe two quick ones on just the margin.
Can you help me reconcile a little bit, if I am doing the math here, it looks the bulk of your procedures performed during the course of the quarter were done on the 2.0 system, if I am doing the math right. So can you maybe just give us a little bit more color in terms of where you are in terms of that conversion of the existing installed base?
It almost appears that you are effectively done. I am just trying to get a little bit more clarity on that front.
And then just two quick follow-ups on the margin, if I may.
Dave Hable
Yes. On the question of conversion of 1.0 to 2.0, which are driving the procedures, we expect to be done completely at the end of the third quarter.
So it's a little lumpy internationally than domestically. We are almost done on the domestic.
International is going to take longer for a bunch of operational and logistical sort of reasons. But we are a striving.
We have been really focused on it from the first part of this calendar year and are making good progress. We expect to be done in the third quarter.
Chris Cooley
And then in the past, Dave, you have given us metrics on VersaVIT and as a percentage of cases, I think it was 60%-ish in the fourth quarter, about 75% in the first. How is that metric trending during -- or I should say, how did that metric trend during the second quarter?
Dave Hable
Percent of cases.
Chris Cooley
With the utilization basically, yes, on those accounts.
Dave Hable
I got it. So what is the utilization rate for VersaVIT as a percent of someone's total procedures?
Chris Cooley
Right.
Dave Hable
Going from what had originally been as little as 20% in the 1.0 world to upwards of 60% and even more in some cases in the 2.0 world. Is that correct?
Chris Cooley
Yes.
Dave Hable
Yes. So we continue to really push that certainly above the historical rates.
It's a little muddled in the second quarter because we had the holiday lag, timing lag, in the scheme of things but the bottomline is that a majority of an accounts that's using VersaVIT 2.0 are done with VersaVIT.
Chris Cooley
Okay and then one last one from me and I will hop back in queue. On Sterimedix, I believe that at the time of the acquisition, that was about a 15%-ish, let's call it a mid-teens grower organically and you had corporate margins very similar to what you have, or had I should say, at Synergetics.
Now that you have got a chance to take a little bit closer look at the transaction, could you help us think about those two metrics, can they be enhanced? Is that how we should think about the business here, at least in the nearer term?
And then maybe just a little bit about your long-term views there of how the two combined can work better together? Thanks so much.
Dave Hable
Yes. So on Sterimedix, overall I said we were very pleased.
It contributed $1.1 million in sales in all of 52 days. The mix was a little different than we had forecasted.
They wound up doing, I think 16% growth in their full calendar year. So they actually beat the forecast a little in terms of what we did.
The mix change was a little more aesthetics than we thought we had, I think Chris in December, we had said that the we anticipate their aesthetics business coming in at 15% of the total and it actually came in a little closer to 20%. So that was the biggest driver in the gross margin scheme of the things, aesthetics being a little lower gross margin than the 80% of their business which is ophthalmology.
Chris Cooley
Understood. Thanks so much.
Dave Hable
Thank you.
Operator
Thank you, Chris. Our next question is going to come from Charles Haff from Craig-Hallum.
Please go ahead with your question.
Charles Haff
Hi. Thanks for taking my questions.
Nice quarter. Had a question for you regarding Sterimedix.
When you did that acquisition, one of the things you were hoping for was that you could sell some of the Sterimedix products through your Synergetics sales people in the U.S. and I am wondering if you made any progress on that front this quarter?
Dave Hable
Yes. So that lies in front us.
So no, it's not reflected in the numbers, first of all. So there was no impact in the 52 days of that to mention.
We have identified which of the products in their product line we can most easily drop into the bag of our sales reps, which are basically those that are vitreoretinal related. So the U.S., significant regions of the world, Latin America, Asia-Pacific are upsides to the scheme of things.
So Charles, what I want you to take away is that upside has, we figure out where those opportunities down to the specific product level, but they are not reflected in the 52 days in the second quarter.
Charles Haff
And how should we think about those revenue synergies in the back half of this fiscal year? Would you care to throw a number out there or give us any range?
Dave Hable
So the number I will throw out there is, we expect growth net of all the moving pieces in the neighborhood that we saw at the base of their calendar year which 16%. So 16% to 17% growth, even though we are shooting for more and that doesn't count those upsides in the U.S.
and other parts of the world I just talked about.
Charles Haff
It does not include the upside. Okay.
And how about for the upside in the U.S., how should we think about that for the back half of this fiscal year?
Dave Hable
Yes. [indiscernible] on that, after this pretty exhaustive what fits easily and what does not, we have got to put a pen to paper on that.
So let me get back to you on that specific number.
Charles Haff
Okay. Sounds good.
And then in terms of the OEM business, I understand you want to break ii out by neuro, but I wasn't quite prepared for that this quarter. So I am still thinking in the OEM language, but I think you said previously to expect mid to high single digits going forward for OEM, but continued volatility and obviously you had a very large number here with the 9.2% at the upper end of that.
Should we think that may be your expectations have been raised for the OEM or the neuro business from an organic perspective to more of the high single digits? Or are you still thinking mid to high single-digits going forward?
Dave Hable
So we are saying mid to high single digits. So as you may remember, we have visibility to their ongoing demand, their ongoing forecasted demand.
So hopefully you heard that if you strip away the 36% of that strong single-digit was realized of 70% in the quarter, if you look on a six-month basis that grows on neurosurgery OEM was 13% year-on-year. So mid to high single-digit may sound a little conservative.
So guilty. But on the other hand, we have the benefit of visibility into what their business looks like.
Charles Haff
Okay and then one question for Pam. Pam, on CapEx for the full fiscal year, now that you have had 52 days with Sterimedix, how do you think about CapEx spending for fiscal 2015?
Pam Boone
I feel pretty good. They do have some CapEx ROI projects for us to look at, help get them up to full capacity.
Dave Hable
None of which have been approved, importantly.
Pam Boone
None of which have been approved, but have ROI implications that we are looking at for them. Otherwise I think it could raise it a $200,000 from our $1 million run rate.
I don't think it will change it a lot more than that, except for these ROI projects that we are contemplating.
Charles Haff
So maybe in the $1.2 million range for full-year 2015.
Pam Boone
Yes.
Charles Haff
Okay. Thank you.
Dave Hable
So what we are talking, Charles, is like a new package, a machine for packaging.
Charles Haff
Sure.
Dave Hable
So it's that level of stuff. It's not as crazy as building a building.
Pam Boone
Yes. Definitely.
Charles Haff
Okay. Great.
Thanks for the clarity.
Operator
Thank you, Charles. Our next question is going to come from Joe Munda from Sidoti & Company.
Please go ahead with your question.
Dave Hable
Hi Joe.
Joe Munda
Good afternoon, Pam and Dave. Thanks for taking the question.
Can you hear me okay?
Dave Hable
Absolutely.
Joe Munda
Dave, real quick. I guess, well for Pam, in regards to the King of Prussia closing, I am just trying to get a sense of what would have been the normalized gross margin?
Was there any impact from the moving pieces within King of Prussia? Any color there would be great.
Pam Boone
Sure. So we did, with this safety stocking orders that we took for them, we did continue to produce for Codman at that facility continuing through the end of this quarter and we did have some compressed margins on that.
Dave Hable
Significantly compressed.
Pam Boone
Significantly compressed. So when we looked at the margin of 52.7% in the second quarter, being down 300 basis points, we looked at three, if we quote non-operating stuff that was falling through there, one was a fairly large piece of FX, some foreign currency, two was the final production at East that we had some significantly compressed margins and third on the list was purchase price accounting at Sterimedix.
We had to write up some of their inventory. If we had been able to exclude those non-operating costs from our margins, our gross margins would have been up year-over-year.
Joe Munda
Okay. Any idea pro forma wise?
Are we talking like 57%?
Pam Boone
They would have been up from the 55.6%.
Joe Munda
Okay.
Dave Hable
So I feel like an accounting lesson coming.
Joe Munda
Dave, as far as VersaVIT, there is a lot of moving pieces here, base business down, VersaVIT doing well. Can you give us a clearer picture of where you see the business going?
Going forward, obviously VersaVIT seems to be the growth initiative here. But can you give us some sense of what you are seeing on the base business side?
Going forward, I am assuming still pressure, but how do you plan to navigate around these waters and continue growth?
Dave Hable
Yes. So on the base ophthalmology business, so think of that as, was hoping it would be roughly 50% of our business going forward.
So you could put 50% of the ophthalmology business in the growth category, Sterimedix, VersaVIT, organic, non-organic and 50% in base business. So dealing with the base business first.
So the pressure we see, keep in mind, it's mid-single digits as we described. A quarter ago it was 0.7%.
It was 5.8%, but if you, I guess on a worldwide basis, if we take out the currency impacted, it was actually 3%. So the bottomline is not falling off the cliff.
So dealing with the base business, two elements, select additions to the product line that offer meaningful enhancements and will supplement the, I won't say growth, but will deal with whatever erosion of competitive activity comes up. For instance, we introduced in the summer of last year a next generation laser probe with a different style to do exactly that.
We have a couple other focused targeted projects in the pipeline to keep that erosion rate at mid-single digits. And the other element of the base business equation is sales management and sales blocking and tackling, identifying accounts where we can get the business back if we lost it or maintain it if we need to and just focusing on those very specific.
Those specifics, you can actually drill down to the individual sales rep and say, okay, I am going to preserve the business in the XYZ account. So the whose objective is to moderate the competitive pressures, remember these are small market segments that are increasingly mature, they are under some price pressure.
Every time one of the guys introduces a new product that affects us to some degree. So the idea is to just to keep it at mid single digits, which we are.
And I want to make sure everybody understands the base business is not falling off a cliff. So on the organic growth side of new product category, we talked about VersaVIT, but that's headline product in the new product category.
We are making steady progress there. I want to call out the 64 customer who reordered this quarter, up from 41%.
So we are getting customers is the bottomline. They are using VersaVIT on a much higher percentage of their, as Chris asked earlier, total procedures and as hopefully Sterimedix will underline we are selectively picking those properties that we think can enhance our sales growth on the ophthalmology side and not be a distraction or a dilution of our efforts on the organic side, which again for 52 days Sterimedix has demonstrated has that potential.
So we are going to [indiscernible] about what we do.
Joe Munda
Okay. That's helpful.
I have just one more. Dave, I don't know if you saw, I mean Alcon's fourth quarter numbers, Novartis down 2% on the vitreoretinal side of the business, do you think you guys are a beneficiary?
Are you seeing any, I don't know what the word is, customers switching from Alcon to you guys? Is there any we read through there?
Alcon down 2% year-over-year. It's the first time in a long time they have seen that and it seems like VersaVIT is been doing pretty well for you guys.
Are you seeing any read through there?
Dave Hable
The short answer is yes. I don't want to declare victory on that whole dynamical, but I know you know the story of pharmaceutical owned competitors being less focused on that reflecting at an increasing rate in sales turnover, account focus and their ability to invest in new products.
And I think we will be the beneficiary of that at an increasing rate. So again I don't want to declare victory on that whole dynamic, but the holes will become more apparent as time goes on.
Joe Munda
Okay. Thank you.
Dave Hable
Thank you, Joe.
Operator
Thank you, Charles. [Operator Instructions].
Our next question is going to come from Raymond Myers from Alere Financial. Please go ahead.
Dave Hable
Hi Ray.
Raymond Myers
Thank you. Hi Dave and Pam.
And Congratulations on the performance. It was great.
Can we talk about the currency impact that you might anticipate with the Euro now, as of today breaking below$1.07?
Dave Hable
Yes. Pam?
Pam Boone
Sure. So I guess you have noticed the change that we are doing in constant currency so that we can keep track of this.
We did have a pretty substantial change with that. If you look at our international business, it was down on the old methodology but would have been up in constant currency.
I don't see that alleviating with the exception that may be more of the mix is now in Pound Sterling which hasn't taken quite as much hit as the Euro has. So I think that's a little bit of it and then --
Dave Hable
So the net impact in this quarter on the Euro was?
Pam Boone
A little over $200,000.
Dave Hable
Versus in the first quarter?
Pam Boone
A little under $100,000.
Raymond Myers
And based on the current exchange rate, what do you expect in the third quarter and fourth quarter? That it would roughly double than what it was in Q2?
Pam Boone
It would be big because the percent change wasn't that large between the two periods. So you have to look at what the percentage change was.
Raymond Myers
Okay. Are there any new significant products in R&D?
Dave Hable
First of all, we have over 20 projects going on in R&D, all which are in the new product category. Not significant to the sense of VersaVIT but significant in the sense of things we never talk about which are the Chandeliers next-generation light source.
We think they are significant in the scheme of things, Ray, but they wouldn't have the marquee value of VersaVIT, for instance.
Raymond Myers
Okay. So there is no VersaVIT 3 or something of that significance?
Dave Hable
I wouldn't sat that but yes. VersaVIT 3 is -- no, don't take that away.
Raymond Myers
Okay. This $1.1 million of safety stock, was that something because you were closing the KoP facility and your OEM customers just thought it was wise to have some safety stock because of that change?
Dave Hable
Basically yes and there was one, confusingly there was one product, keep in mind, the KoP facility did the boxes there. There was one box of non-ROHS, which means non-toxic material version that we decided to make in the King of Prussia in February which related to a one-time cost.
So yes, it was related to the shutdown, even though there was a lifetime variable associated with one product there.
Raymond Myers
So how should we think of the absorption of that extra inventory? Would that be in the current quarter?
Or spread out over many quarters?
Pam Boone
Yes. It would be spread out over longer periods because of that one specific product that has a longer life for them to sell.
Raymond Myers
Okay. Good.
And regarding the Sterimedix business, you have had it for a short amount of time. Could you describe whether it is contributing on par with your forecast?
And also could you determine what EBITDA contribution is coming from Sterimedix?
Pam Boone
So for the 52 days, it's not necessarily reflective of their full-plan given that it was a short amount of time. So yes, it performed to forecast.
It will be better during a longer period of time that's not Christmas. And it performed, as Dave said, at operating basis and an after-tax basis, it preformed.
It did not quite cover the acquisition related costs. So it was slightly non-accretive to the quarter.
And as we said last time, we expect it to be accretive by year-end.
Raymond Myers
But if we excluded the one-time acquisition costs, it was accretive from purchase? Is that right?
Pam Boone
That's correct. Including the purchase price accounting that got pushed down to them.
Raymond Myers
Excellent. My last question is about the VersaVIT 2.0.
Dave, are you seeing any change in the sales cycle for selling the VersaVIT, now that the 2.0 has been introduced? And is there a change in the disposables purchasing pattern?
Dave Hable
So, yes to both things. So the time required to do valuations collapsed significantly.
It was a little muddled by this holiday factor, a lot of procedures weren't done. But we were as high as 15 weeks, I think, at one point and we have seen evaluations as low as five weeks.
I have hopefully always said that's going to be variable as time goes on as the sample population of people that are using it gets larger that will be more diluted. So that was one of the variable.
And then the mix of disposables versus equipment, I am looking at Pam, but I think the percent of disposables has gone up as evidenced by 64 people that reordered which is disposable .These are packs that they are buying, the consumables associated with it. So the mix of the VersaVIT sales packs to equipment is going up.
Raymond Myers
Okay. Thank you.
Dave Hable
Thanks, Ray.
Operator
Thank you, Raymond. Our next question is going to come from Chris Cooley from Stephens.
Please go ahead with your question.
Chris Cooley
Thank you. I appreciate you let me squeeze a quick follow-up in here.
Pam, I was hoping you could help us, since we have changed the categories and had a little bit of a change here to as well from a manufacturing perspective. How do we think about gross margin?
I know you don't give formal guidance there, but as we transition here in the second half of the year, can you maybe just give us a little bit more clarity around that item? And then I had one other quick follow-up.
Thanks so much.
Pam Boone
So if you look at the four things we talked about was with FX. Obviously that's going to have some impact going forward.
The purchase price accounting, we took about 60% of the purchase price hit in the second quarter, we have about 40% more to go in the third quarter and then that will be gone by the end of the fourth quarter. The final production at East, it was fine also, that one is over.
And then it probably won't be nearly as strong a mix shift to the Euro [indiscernible] on the go forward without the safety stock build. So I think that most of these, we call them non-operational but are kind of one time, besides the FX and the purchase price accounting, which will continue until we get to the bottom of the Euro thing.
Chris Cooley
Understood, but did you ever quantify what the purchase price it was in an absolute basis? I get the percentages but just trying to think to the dollars that actually go through on a GAAP basis?
[indiscernible].
Pam Boone
We told you Sterimedix was about $1.3 million, the write up within the 10%-ish range because they carry a lot less finished inventory than we do. So that will give you a full feel.
Chris Cooley
Got it. Fair enough.
And maybe just one other quick one in terms of a follow-up there to Ray's prior lien of questioning. On the VersaVIT, that's a material step up in terms of number of accounts that were reordering or ordering disposables during the course of the quarter.
Did the order quality size of the disposables change? Or you see any changes there?
I know you just addressed capital versus disposables, but a little bit curious, are you seeing more frequent ordering of smaller qualities? Are you seeing -- I am just trying to get a feel for how that's changed and why that increased to a little over 50%-ish there sequentially?
Dave Hable
Yes. Those are mostly due to new customers, new people coming on board.
We have to dive into the detail to give you the exact order size, but Chris I would ask you take away that those were mostly new customers in the scheme of things.
Chris Cooley
Okay. Thanks so much and again congratulations on a wonderful quarter.
Dave Hable
Thanks, Chris.
Operator
Thank you, Chris. And at this time, we have no additional questions.
Operator
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating.
You may now disconnect.