AngioDynamics Inc (ANGO) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics first quarter fiscal 2011 financial earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 7 of 2010.

And I would now like to turn the conference over to Doug Sherk. Please go ahead, sir.

Thank you, Britney. And thank you everyone for joining us today for the AngioDynamics conference call to review the results of the fiscal first quarter which ended on August 31, 2010.

The news release announcing the first quarter earnings crossed the wire this afternoon after the market closed and is available on the AngioDynamics website.

The call is being broadcast live on the web at www.angiodynamics.com and a replay of the call will also be archived on the AngioDynamics website.

Before we get started, during the course of this conference call the Company will make projections or forward-looking statements regarding future events including the statements about revenue and earnings for fiscal 2011.

We encourage you to review the Company's past and future filings with the SEC including without limitation the Company's Forms 10-Q and 10-K which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, today's presentation includes certain financial measures used to better understand our business that have not been prepared in accordance with the Generally Accepted Accounting Principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures has been provided in today's news release issued by the Company and is available on the website at www.AngioDynamics.com.

AngioDynamics uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends of the Company's business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP. On today's call, the Company has reported non-GAAP EBITDA and EBITDA per share and has reviewed these measures as an internal analysis and review of operational performance.

Finally, during the question and answer period today we would like to request each caller to limit themselves to two questions and encourage callers to re-queue to ask additional questions. We appreciate everyone's cooperation with this procedure.

And now I'd like to turn the call over to Jan Keltjens, President and Chief Executive Officer of AngioDynamics.

Thanks, Doug, and good afternoon, everyone. Thank you for joining us on our first quarter conference call. With me today as usual is Joe Gersuk, our Chief Financial Officer.

I'd like to begin our comments this afternoon with a review of the factors that contributed to our slower than desired growth rate during the first quarter and then I'll provide an update on the progress of the NanoKnife program. Joe will subsequently review the financial highlights for the quarter as well as our revised guidance.

And before we take your questions I will come back and review our strategy to achieve our long term goal to grow at a rate that is significantly faster than the broader market.

Well, let's get started.

Our first quarter revenue growth of 3% was lower than we would have liked. Our read on the marketplace is that procedure growth rates have slowed down in recent months, and to compound this our first quarter sales were impacted by the internal transition to a unified US vascular sales force.

We believe the confluence of factors have created a slowdown in procedure volume growth, namely the state of the economy and resulting increased unemployment, the exploration of extended COBRA coverage in the US and increased patient co-pay with many insurance plans.

As expected acute therapies were least affected, if at all. However, elective and sub-acute procedure growth slowed down by a few percentage points.

On top of this the price pressure in the market continued. However its impact on our results was relatively small this quarter.

At the start of Q1, we created a large unified US vascular sales force. This strategic move allows us to create a larger footprint, thus increasing coverage and penetration that will result in higher efficiency and effectiveness. This restructuring did create a transient negative impact on our sales on which Joe will provide some further details.

We remain confident about the long term growth prospects of our Company. We believe the procedure volume growth will accelerate over time and we are increasingly focused on high growth opportunities in oncology and vascular intervention.

Our R&D pipeline is strong and we're launching a significant number of new products. Our NanoKnife System continues to make solid clinical and commercial progress and our leadership team has been strengthened at multiple levels and we are making some early but promising progress in international expansion.

Due to these strategic drivers we again delivered a strong growth quarter from our interventional oncology business.

Overall, oncology sales increased 22% from a year ago and does include a $1.1 million in sales of the NanoKnife System. This is a further increase from previous quarter's $1 million sales number. We are encouraged by the sales momentum.

And in addition to our NanoKnife non-thermal ablation system, strong LC Bead sales contributed to oncology performance.

Our vascular business was most impacted by the effects mentioned earlier. Many peripheral vascular products had a tough quarter with the exception of the new micro-introducer kit which demonstrates ongoing strong growth.

Q1 is traditionally a soft sales quarter for our varicose vein products. However this quarter, with nearly flat growth, was significantly below prior quarters and we likely have lost some market share in this segment.

Our Access business had the most difficult quarter with revenue in all three product segments declining. The positive impact from new products like Centros and our Triple Lumen Smart PICC was relatively small due to the increasingly long selling cycle for these products involving administrative hospital procedures and evaluations.

Our international business delivered strong results with overall 17% growth over prior year Q1. All business segments in the international division contributed to this growth with the oncology ablation products in the Asia Pacific region being the leading growth driver.

Now turning to NanoKnife in more detail. We continue to make good progress at both the commercial and clinical level since we last updated you early July.

During the first quarter, four additional hospitals entered into a commercial agreement with the NanoKnife System. In total, 16 hospitals are now clinically active and physicians have treated an additional 92 new patients since July 1, 2010, bringing the total number of patients treated with NanoKnife to 322.

One of the core strategies for driving our NanoKnife program is to create a strong foundation of clinical evidence. As we reported before, we continue to expect to submit IDE applications for both prostate and pancreas study to the FDA before the end of this fiscal year.

The HCC primary liver cancer trial in Europe is progressing well with patient enrollment continuing. A total of three patients have been treated under this protocol to date.

Following the conclusion of the European summer vacations, we now have four different Centros in three countries screening and enrolling patients. We continue to anticipate completing enrollment in this study before the end of the fiscal year.

To date the NanoKnife technology has been broadly studied by many research institutions and a significant number of in vitro pre-clinical and clinical studies supported by AngioDynamics.

This collective research effort is reflected in a total of 96 peer reviewed publications and scientific literature including studies of the technology, laboratory testing, pre-clinical animal testing and, as I mentioned clinical studies.

A total of four clinical studies have now been completed and three additional clinical studies are currently enrolling. Several studies are planned for the next year, in addition to the two aforementioned IDE trials. Three more studies are in an approval cycle with the investigators. In all, we are looking at a total of 12 studies.

One of these is a randomized single sample study on the use of NanoKnife in pancreatic cancer by the well known group of [Pasi Basi] at the University of Verona in Italy.

And in relation to this we would like to also report that the early clinical result on the first 10 plus pancreatic procedures, ablation procedures, performed in normal medical practice continues to be favorable. The first patient treated in December 2009 continues to do well.

Clinical data from four studies have been published including two chapters in textbooks and two peer review publications, and we do know that at least two additional manuscripts have been submitted for publication.

We are pleased to report the publication of the first in man study on the use of NanoKnife System in renal cell carcinoma from the group led by professors Pesch and Liehr from the University of Magdeburg in Germany which has been published in the August issue of the Journal of Cardiovascular Interventional Radiology.

We expect a number of clinical studies around the world to continue increase and thus create an increasingly strong body of clinical evidence underlying the safety and efficacy of the NanoKnife System for current as well as future expanded indications.

The single most important driver for the increasingly strong reputation and utilization of the NanoKnife System is the clinical experience of doctors using our system.

Based on the technical and pre-clinical information provided to them, the information they gather in various medical conferences, and last but not least, their personal experience with the system, they increasingly present this treatment option to their patients who in many cases have no alternative therapy available to them.

Based on results from completed and ongoing clinical studies and the anecdotal clinical feedback we hear from our customers, we continue to be bullish on the large potential of this great platform technology.

At this point I'd like to get the microphone to Joe who will review various highlights in more detail. Joe?

Thank you and good afternoon, ladies and gentlemen.

As Jan has discussed a combination of factors contributed to first quarter sales growth of 3%. Nonetheless, operating income was within $100,000 and cash flow from operations exceeded the prior year's result.

At the beginning of our first quarter, we began a program to recombine our Peripheral Vascular and Access sales forces into a single vascular sales group. For those who have been following AngioDynamics for some time, you'll recall that two years ago we went to a business unit operating structure and established separate sales forces for our Peripheral Vascular and our Access product group.

Having operated for the past two years with separate sales teams covering the US, we decided that we can operate more efficiently with a single sales force with representatives selling all of the PV and Access products in a smaller territory.

This will enable our sales reps to spend more time with customers and will not require the extensive travel as before. The near term challenge with a new approach is insuring that reps are fully trained in selling all of the Company's vascular products and then having them gain the experience necessary to achieve and sustain a high level of productivity.

We believe it typically takes at least six months to achieve optimum sales efficiency. While this restructuring of the sales organization is a disruption in the short run, we believe we are building a strategically stronger vascular sales capability and we expect it will lead to higher sales productivity levels in the second half of the fiscal year and beyond.

In the quarter we are reporting today, we believe much of the 4% decline in Vascular Product sales is attributable to the sales force transition with the balance attributable to the slowdown in procedure volumes that Jan mentioned.

Against this backdrop, we saw softness in sales across most Vascular Product categories including a slowing in the sale of capital equipment in the laser vein ablation business. However we did enjoy another quarter of double digit unit sales growth in disposables, although the unit sales growth was largely offset by lower ASPs on the disposable kits.

Turning to the Oncology business, the 22% sales growth was led by strong sales of LC Bead and NanoKnife System. NanoKnife sales were $1.1 million in the quarter as four additional hospitals entered the commercial program in this quarter.

Beyond the strength in Bead and NanoKnife sales, we are seeing the effect of the procedure slowdown in the sale of our other oncology products.

From a geographic perspective, 88% of first quarter sales were in the US and 12% or $6 million came from international market. International sales grew 17% from the prior year led by strong sales of oncology products in the Asia Pacific region.

Continuing down the income statement, gross profit totaled $30 million in the quarter or 58.3% of sales compared with 60.2% a year ago. Most of the 1.9 point margin decline from a year ago reflects the decline in average selling prices on vascular products and the balance is primarily attributable to sales mix.

The 58.3% margin was a slight improvement from the two preceding quarters when we reported 58% gross margin. We are beginning to see some margin improvement from the material cost reduction and other programs that we have implemented and we expect margin improvement to continue through the balance of the fiscal year.

Operating expenses totaled $26.5 million in the first quarter and did not increase in the prior year expense level as we strive to minimize the impact of the sales shortfall by minimizing operating expenses.

The total operating expense impact for the NanoKnife program for the quarter was $2.5 million. Including the sales revenue and operating costs, the net loss impact to the NanoKnife program declined to $0.04 per share in the quarter compared with $0.06 per share a year ago.

Operating income was $3.5 million for the first quarter and within $94,000 of the prior year result. The operating margin was 6.8% compared with 7.1% a year ago.

EBITDA was $6.5 million or $0.26 per share in the quarter compared with $6.6 million or $0.27 a year ago.

After other income and taxes are taken into account, the result is $1.9 million in net income or $0.08 in diluted earnings per share compared with $0.09 per share a year ago.

As noted in the release, losses on an interest rate swap and foreign exchange reduced earnings by $0.01 per share.

The income tax provision was recorded at a 36% rate in the quarter compared to 38% a year ago. The rate reduction was primarily attributable to manufacturing tax credit.

Turning to the balance sheet and cash flow statement, we ended the quarter with cash and liquid investments of $102 million compared with $100 million at the beginning of the year.

We generated $1.7 million in cash flow from operations in the quarter compared to $1.1 million a year ago.

Finally, as indicated in the release we are updating guidance for fiscal 2011. We expect net sales in the range of $220 million to $225 million, which is 2% to 4% organic growth, gross margin in the range of 58% to 59%, GAAP operating income in the range of $20.5 million to $22 million, EBITDA in the range of $33 million to $34.5 million, and GAAP EPS of $0.47 to $0.50, inclusive of a $0.21 to $0.23 per share impact from the NanoKnife program, of which $0.04 is the non-cash intangible amortization cost.

Additionally we expect a tax rate of 36% and to achieve cash tax savings of $3 million in the fiscal year from the use of RITA NOL.

Note that our second fiscal quarter has 61 business days which is four fewer business days than our first fiscal quarter. We plan to report Q2 financial results on Tuesday, January 4 after the market closes.

Jan?

Thank you, Joe. I'd like to close by making some comments on the growth strategy.

Our goal is to grow significantly faster than the broader market. We remain confident that our focus on fast growing opportunities in oncology and venous intervention, along with share gains in Access systems, creates large and rapid growth opportunities for us.

Our R&D investment positions us to launch innovative products that allow us to develop significant and sustainable revenue opportunities, market share gains, as well as increase our gross margins.

In recent months, we continued to make progress on multiple fronts in executing our strategic plan.

As mentioned before, innovation is a key source of revenue growth. Thus far this fiscal year, we have already launched four new products. These include two new ports, the Smart Port Mini and low profile models that further expand our family of successful Smart Ports with our patented vortex technology.

We also began selling a 16 gauge non-coring high flow needle for the use with implantable ports as well as an important new 0.18-inch procedure kit, patient NeverTouch gold fiber technology for the VenaCure EVLT and the VNUS laser system.

In total, we expect approximately 10 product launches to come from our internal R&D organization for fiscal 2011. We are planning new products that further strengthen our NeverTouch platform as well as broaden our Smart PICC dialysis and Smart Port franchises. We also plan to launch an upgrade to our NanoKnife platform and continue to expand our radio frequency ablation product lineup.

In addition, we continue to make solid progress on longer term R&D programs that we anticipate will result in new product launches during fiscal 2012 and beyond that will support and accelerate long term growth for our Company.

To provide strong leadership for our R&D efforts, we recently announced that Scott Solano has joined us as Senior Vice President and Chief Technology Officer.

Scott has significant experience in our space and will lead all R&D activities in our Company. He served as Arterial Vascular CEO until the company's acquisition by MedTronic. With Scott's broad and deep experience in the industry and in large and complex R&D organizations, we are confident we can increase the productivity of our R&D organization substantially and launch an ever increasing stream of innovative and impactful products.

In addition, Scott Etlinger has joined AngioDynamics as Senior Vice President of Global Operation. Scott has gained significant operating experience with American Medical Systems over a seven year period during a time of rapid growth and international expansion. He will be executing strategies required to achieve our growth, international expansion and gross margin objectives.

These key appointments further strengthen our senior leadership team and add the required capabilities and leadership experience to succeed on our focus on profitable growth, innovation and execution.

Looking ahead, we remain very confident in the long term potential for AngioDynamics. We are increasingly strong in some very attractive markets and we have a strong focus on innovation and international expansion to drive our long term growth.

We have a profitable business model and are committed to enhancing profitability by improving operational excellence. We are making steady progress on executing our strategic plan and our strong cash flow generation and balance sheet provide flexibility and allow us to create additional growth opportunities.

I'd like to thank once again our global AngioDynamics team for their continued hard work and for the dedication and commitment to building our future and I would like to thank our shareholders and our Board of Directors for their ongoing support and confidence.

With that I will now turn the call over to the Operator to begin Q&A. Britney?

Thank you, sir. (Operator Instructions). Our first question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Good afternoon, and thanks for taking the questions, guys. Just a couple questions. Just trying to reconcile the guidance of 2% to 4% on the top line with the comment in the release of growing significantly faster than the market. What do you think the market for your products is growing at right now and then how do you intend to achieve this goal here?

Two comments there, Jayson. The comment about growing significantly faster than the market is a strategic objective, that is not guidance for this year. And it's going to take us a little while to get here.

I think what we said in previous guidance is, I think previous guidance -- I'm looking at Joe here while I speak -- was 6% to 9% growth where we said the market, the blended market growing at about 6%. And we essentially took a couple of points from that based on the way we read the market as such. But that's probably the way to look at that as such.

So the market you think is growing at 4%, the guidance is 2% to 4%?

We thought about going at 6% until we saw last quarter we took a couple of points from that. I don't think we have the hard knowledge to say whether the market will slow down by two points or three points. But it's probably in that order of magnitude.

And then you also mentioned the new products, and I think you mentioned a longer sales cycle. When should we expect an impact from some of these new products?

We are, frankly, seeing an impact but it's masked by some other effects that drag the whole thing down. One thing we noted, I'd say we launched some of these new products, I guess, in Q4 last year, before that had been a while since we launched a significant Access product.

And what we've noted in that period is that the whole selling cycle for selling a new Access system in particular for PICC dialysis (inaudible) into an account is much more involved and much more elaborate. Hospital administration is more involved than it used to be, you've got new technology evaluation committees, things are put up a bit.

And I think frankly also the discontinuity in the sales team organization created some discontinuity in that whole process.

So I think between those two elements, the more involving selling cycle for this kind of Access systems into hospitals, where the decision power has been taken away from physicians to a certain point and is more slated towards administration.

And then in some cases, there is some discontinuity in the reps serving those accounts just created a slowdown. We do believe that they will help and they do help. In particular the two new ports seem to be having some pretty good traction, but again I don't want to give too many leading statements here. But we do look at Access as a growth engine for us going forward.

Okay, thanks. Just last quickie, if I may. On the gross margin actually it looked pretty good in the quarter. The comment was you expect margin improvement throughout the year, so is this a starting point, the 58.3% going forward?

We think it is. We saw some good signs in the first quarter as we said in the comments, we've gotten some traction with the programs we started with regard to some manufacturing processes and some material cost improvements, and have more in the pipeline. So we're feeling good that we should be able to drive it northward from here.

Thank you.

Thank you. Our next question comes from the line of Jason Mills with Canaccord Genuity. Please go ahead.

Hi, Jan, Joe, thanks for taking the questions. Good afternoon. Jan, perhaps take us back a few years ago and remind us what the original rationale was to separate the PV and Access sales forces at that time, what you saw in the market at that time. And then what's changed and delineate maybe why now you expect to realize the better sales and productivity performances with the combined force to give us a little bit of historical perspective on how the rationale has changed.

It's a great question Jason and I'll fan this. Although I was not here of course for the splitting of the sales forces, that happened before my time, that was the situation.

Completely understand.

I think this splitting back, if you want to call it like that, is a bit of a sign of the times, as well.

My recollection from what I hear internally, at the time the sales forces were split there was a vision of ongoing strong organic growth that, although the initial sales force size was below a critical mass, critical sustainable mass, would quickly get to a level where you would have good coverage of the country and good penetration of the accounts.

And I think realistically, with the changing economic environment and looking at some projections of organic sales growth, looking at some other metrics, we believe that it would have taken us a long, long while to get those sales forces up to critical mass. And in the meantime, it was a rough life for the sales reps. They had a lot of travel, spending a lot of nights away from home, a lot of expenses coming along with that.

But the other impact also, and you probably heard this from other companies as well, it's getting more and more difficult to get Access to cath labs, get Access to doctors. We certainly were faced with a situation where, on the vascular side, two reps had to find ways to get time, a little bit of thin back, we actually started seeing some attrition in the sales forces, as well.

And we thought, and I thought in particular, that to set us up well for the future and create the necessary strength, there's more benefit in creating one strong sales force, in this case a vascular sales force, with 70, 80 sales reps. Most if not all reps spend pretty much every night at home now, T&E costs probably go down, and reps can spend more time in individual hospitals in the various core points, leverage the contacts they are building with the administration, with the various departments, and we believe that over time is going to be a more effective and more efficient approach.

Can I also remind you, Jason, that of course over the last I think now three or four quarters, we have seen subsequent steps in lowering our selling and marketing expenses as a percentage of revenue.

And I think even despite the low revenue line in Q1, I think there's even further leverage of a fewer base points on that line. And we think with this move we can shore that up, we can make it much more sustainable. And frankly also we moved some of the investments towards sales support people and structures and processes, more training, more marketing support, more programs behind them.

And again in all, we believe we're in a much better situation right now. And the final point I will add is that with this structure, as I said, 70, 80 reps on the ground in the US, in this segment. Now we launched new products, I think we can drive up revenue much faster and it becomes much more attractive to do some of those things.

That's very helpful, Jan. Thanks for the thorough answer and it was a good segue into a follow-up question on that.

Your operating expenses granted including some non-cash expenses, intangibles, amortization, et cetera, was over 51% in the quarter. It seems like your guidance implies that you think you can get that under 50% fairly quickly, perhaps as soon as this fiscal second quarter. Just make sure that I'm correct on that, first of all.

And then secondly, what are some of the specific drivers to that besides just combining the sales force which seems obvious as a driver? Is there anything else that helps you get the leverage?

We would indeed expect it to be under 50% for the full year, and wouldn't necessarily predict we're going to get there in Q2. But as we see the expenses rising, and there are some things, typically the first quarter can be a fairly expensive quarter for us under most circumstances with extensive sales training programs, and other things that we do in the summer.

So we would expect that the expenses will be going up at a slower rate than the revenues are going up, albeit those are projected to go up at a slow rate anyway. But we'll get some leverage, continued leverage out of the sales and marketing expenses as well as some out of G&A but continue to invest in the R&D programs, and in particular for NanoKnife, that all of that is well on track and no programs to reduce any of the commitments to NanoKnife technology.

Okay. I'll hop back in queue but I just want to clarify this last question here which is, it was, to get to the $0.47 to $0.50, it seems like unless there's a tax rate going down or we'll see non-operating expense go down, it looks like to get to those numbers, from my calculations, it has to be right around 40% for SG&A, intangibles, amortization combined, and then R&D at about 10%.

So again under 50% is in my model the only way you're getting to $0.47 to $0.50. Is there something I'm missing there?

No, certainly the tax rate isn't going to change, I don't think that will change. The non-operating income should reduce a bit. We don't expect the swap impact and the foreign exchange losses to continue.

Maybe the other thing that you haven't factored right there into your model is the improvements in gross margin and that certainly will drive part of the improvement in profitability that we're projecting.

I'll get back in queue, I'll maybe talk to you offline about the details, but thank you.

Thank you. Our next question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Thanks for taking the question. Joe, I had a question just on the cadence of the quarters. You made a comment that you'd see the vascular -- or I guess the impact --- the positive impact of the vascular sales reorganization really hitting in second half.

Does that imply that we've got a sluggish Q2 and then maybe some acceleration in second half? And then as a part of that question, Jan, do you feel like you maybe pulled some first half fiscal 2011 revenue into Q4 in anticipation of the sales force reorg?

I'll take the first one. Indeed we would expect slower growth in the second quarter, still positive growth in the top line, but we would expect that the impact on the transition with the vascular sales group to continue to be evident in the second quarter sales growth. And then the second half of the year substantially higher rates than the first half of the year.

And also note that the second quarter also has that four fewer business days, if you're looking at revenues relative to Q1. And then with regard to your second question with respect to, was that the fourth quarter you're talking about?

Yes, just Q4 last year, did your sales guys maybe pull some in anticipation of losing some accounts or switching some accounts, maybe you saw some revenue get pulled into Q4. You guys had a great Q4 from the first half of this year.

There's always a dimension of that, of course. It's the end of the year, people are eager to make it to the President's Club and all that good stuff, so we always see a strong Q4 with certainly an uptick in the last few weeks of that quarter.

As we saw in this year, to the extent we can analyze the data we have done that of course. There probably was a little bit of an uptick and a little bit of an effect like that. You can argue how material it was.

We think it was compounded this year a little bit by some reps knowing that they were going to different territories, and probably went all out. So there certainly was a bit of an extra uptick at the end of it, but, of course, in the course of the quarter we have eaten through that pretty well, and so again, I don't think it was the main driver.

The main driver, again, coming back to a slowdown in the market, and I think just the fact that the sales force was unified and had to go through a massive training effort.

I'd just chime in on that and say that there is an annual element to all of our sales commissions' programs so we will always have a very strong fourth quarter of the year. It will be our strongest quarter of the year and just seasonally so.

And as it turns out we did have an additional business day in our fourth quarter this year and that added a couple of percentage points of growth to the 14% that we reported in Q4.

On top of that, Brooks, so in addition to the extra selling day but also, as you may recall, at the end of Q4 in the conference call we made a comment that ethiodized oil was off the market in that quarter and therefore we got a bit of a one-time windfall in Q4 on the LC Bead sales.

That product is back in the market and not all of those sales stick with us. We still were very strong in LC Beads, but we didn't retain all of that. So that 14%, as we indicated at the time, already was a little inflated and you probably should discount it by a few points for those one-time effects.

Jan, do you feel now that you have the right selling organization in place for PICCs and ports given your comments on more involved hospital purchasing departments, maybe less involvement of the doctors which has traditionally been your favorite call point? And specifically focusing on that product set what starts to turn that around for you from a selling perspective?

First of all, yes, I do believe we got the right sales structure, sales organization. We changed a few more things in the sales force. We're trying to upgrade the level of the sales force, make the composition points more attractive, more sophisticated commission programs, but in all, yes I do believe we got the right structure.

Once you build a formidable sales force, which I think we now have, 70, 80 people is really sustainable, it starts getting you very competitive in that space. As I sometimes say, it also means you've created a monster, and now the name of the game is going to be to feed the monster. And it's all about innovation and make sure that you got the right kind of products in the bag that allows them to show up with confidence and spring in their step, full products, et cetera, all that good stuff.

And I think we have now created a situation at least where the sales force can absolutely handle that. I think it also gives us a structure where we can leverage corporate accounts better. We actually have a very experienced group of regional managers that now can exert their experience onto that sales force.

And so yes, in all, I think we've made a step forward here.

Okay, great. I'll jump back in line. Thank you.

Thank you. Our next question comes from the line of Tom Kouchoukos with Stifel Nicolaus. Please go ahead.

Hi, good afternoon, guys. Thanks for taking my questions. Just to follow-up, Jan, I think earlier, when you went through some of the details of the sales force, you'd mentioned there was some attrition that was going on under the old structure.

Do you feel like from a sentiment perspective maybe these guys feel like they have the right mix of products now, and are you seeing attrition maybe fall towards a more normalized rate that we see in the medical device industry?

Let's put it this way. There's guarded optimism here. We certainly saw Q3, maybe beginning of Q4 last year, attrition beyond the level that we think is healthy. I think part of that was, in the vascular sales force as an example, people have very few products in the bag, some innovation getting delayed, and voting with their feet.

And I think what we have done now is created a much more attractive bag of products for our sales force. Frankly, given them a clean shot at making better income points, allowed them a better lifestyle, if you like, less aggressive travel and more time in the area, and being able to spend time at home.

I think on top of that we, of course, also aligned the leadership team in the sales force, we were able to promote from internally some very strong people. I think that helps.

And I think what also helps is I think the sales force now starts seeing a stream of products coming to them out of the internal R&D organization. I want to remind you, Tom, that last year we launched about 11 new products big and small. This year we're slated to do at least the same thing again.

If you take out the oncology products, we talk a lot about vascular here, it still means that every quarter they got at least one or two new products, big and small, there's enough going on to keep them very busy, keep them excited, keep them interested and frankly also grant them access to the stakeholders and hospitals.

So yes, I do believe we have improved the circumstances but, again, I reserve judgment and there's certainly something that is managed very tightly and that we stay very close to.

Okay, great. Thank you. And then maybe following up on the oncology side, clearly Q4 I think you had some very strong growth on the [Ecudol] being out of the market, but still here in Q1, you had pretty nice growth. I think if you strip out NanoKnife you're still at a mid teens growth rate for your core oncology business.

I know you don't provide guidance by line item but is that the kind of growth that you would expect to see going through the year or is there any reason we would see that slowdown for any reason?

I think what you see in the quarter, and again we don't want to claim victory at all, but I think we just saw a very strong international oncology quarter, as well. I think in particular in Asia Pacific, our core ablation products, both our Bead knife as well as the RF ablation product lines have been performing very well.

And I just got back actually from the international system meeting which was held in Spain and we had some distributer meetings, and I think I said before in this (inaudible) as well, for interventional oncology, in particular for liver cancer, where most of the products are being used, Asia Pacific is the name of the game. We've been traditionally very weak over there, as well.

So this was a very encouraging quarter. I think there was some one-time impacts in there in terms of a big equipment order but these are also future leading indicators of future sales so we believe that's going to continue to help.

And I would say yes, I'd like to believe we can stay in that range.

Great. And then if I could follow-up with one last one on Joe's side. In terms of cash flow guidance, what are your CapEx expectations for the year? And then also could you give us maybe a frame of where you see cash from operations or free cash flow shaking out for the full year?

Yes. The capital expenditures run on the order of about $5 million to $6 million a year, would sort of be the normal run rate of capital expenditures.

And as a general rule, the cash flow from operations should be fairly close to the EBITDA figure, plus or minus a little bit depending on working capital and inventory matters and so forth.

But that's the kind of range of numbers we typically look for in terms of cash flow from operations, and then that about $5.5 million to $6 million of capital expenditures beyond that for free cash flow, if that's what you're thinking about.

Okay, great. Thank you, guys.

Thank you. Our next question comes from the line of Robert Goldman with CL King & Associates. Please go ahead.

Okay, thank you. Good afternoon. Just one more financial question, sort of coming at the first quarter growth in a somewhat different way.

If you strip out NanoKnife, based on the numbers you gave, the Q1 earnings per share were down about 20%, but based on your guidance as well, the rest of the year would be sort of flattish versus the prior year, which means there's a significant turnaround in fortunes in the rest of the year versus the first quarter.

One of the leverage points seems to be the better utilization of this combined sales force but could you just, in case I missed it, just detail a couple of the other key leverage points to get that swing?

You're right. Part of it is the sales force and improved efficiency there. The other one though is in gross margin. We do expect the gross margin to improve each quarter through the balance of the year.

And then we don't expect the swap, the interest rate swap impact -- the negative impact there and the foreign exchange down in non-operating income or expense to repeat as well. So I think all of those will play a role in the improving earnings expectation.

And the gross margin improvement again, Joe, is that simply a function of more volume through the plant or something else?

No. I think really it's more some programs that we have going on to reduce material costs with some vendor programs we have going, as well as some improvement processes in our manufacturing and some vertical integration programs that we have going to bring some products in house. So it's a combination of all of those factors more so than dramatically increased factory utilization or throughput through the factory.

Maybe Bob, in addition to that as well, on the sales side we actually did increase prices at the beginning of last month and there's not going to be 100% stickiness and certainly not like it used to be but all these things chip in a little bit.

Maybe a final comment I want to make, I'm not sure you look at the actual EPS number. Of course at these low numbers in the quarter, $0.08, $0.09, every rounding of course swings that percentage around quite a bit so I think if you look at the operating income line you get a better feeling for the actual trend there.

Okay, thank you.

Thank you. (Operator Instructions). Our next question is a follow-up question from the line of Jason Mills with Canaccord Genuity. Please go ahead.

Thanks for taking the follow-up, guys. I just wanted to make sure, Jan, I understood what was going on in the oncology business. Asia-Pac, you seemed to have a very good quarter there.

Is it sustainable? I'm sorry if I missed it, your comments about that but just maybe a little color because it sounded like a bright point in the quarter.

Well --- and it was a bright point in the quarter but there's an old saying in my home country, that means spotting one sparrow doesn't mean it's spring yet. But we'll take it.

And I think the fundamentals are very strong. We just hired our first associate based in Asia Pacific, able to provide more support to the local market.

As I mentioned I had the benefit of spending two days or so with our various distributors and I certainly spent time with folks in Taiwan, Korea, the Chinese team, et cetera. And this is wide space for us. We have traditionally not been strong in those areas.

I think there's a lot of excitement around the long term potential of NanoKnife but also an understanding that to get there we first have to build a business around our more traditional core products, and that's what the team is doing.

So I wouldn't say every single quarter will be like this and on a relative small scale one big order can swing those numbers around. It was a good quarter in Q1. Q2 may not be like that but we do believe that we fundamentally have tremendous opportunities in Asia Pacific, and frankly in the entire international space but in particular in Asia Pacific.

I know you don't like to break out great detail the revenue figures beyond what you already do, but what are we talking about in terms of the current size of that Asia-Pac oncology business, just relative to total Company's doing $220 million in revenue?

It's small, and it's coming off of a small base. The entire international business was only 12% of the Company's revenue stream, so we've got the benefit of growing off a small base.

But there are certainly a lot of good signs of the business there from Asia Pacific and the economies there are strong. There's tremendous interest in healthcare spending in China and other places and you don't see the issues that you might see in Western Europe with governments trying to hold down medical care spending. So, it's a good environment.

Joe, can OUS be a fifth of the business within the next couple years?

That's certainly our goal. We would never say and be so specific as to say within a couple of years. But we brought in Stephen McGill who was well experienced in growing international businesses, had a very long successful record at American Medical Systems in growing their international business. And we're looking for him to do the same sort of magic he did there.

So we have a strong commitment and a desire to invest in growing that international business as quickly as we can.

Great. Last question for me and I'll hop back in queue. What do you think, Jan, in terms of your M&A strategy going forward? At our conference not too long ago you talked about having an appetite.

I'm wondering if this fiscal year if you care to give us anymore color as to whether or not we may see something this fiscal year?

I'm not going to give you that color in too much detail. The appetite is there. I think we're ready for it in many ways. We have the organizational capabilities not only with Ly0nda Wallace joining us now four, five months ago, developing a pipeline there but also with Scott and Scott on the R&D side on the operations side.

I think we have now the capabilities to handle that kind of stuff and integrate it well, and that's something we want to do better than we did in the past.

So I think the appetite is there and always looking for the right things. But I also, my mission here internally is that's a bonus I'd say. That's something that gets us beyond the baseline growth. On a day-to-day basis we're focused very much on driving the core business.

Jason, if I could go back to your question about Asia Pacific, the only nuance I want to put in there, we look at the benchmark of what other companies do in terms of percentage of total revenue coming from international.

But we are starting in a different world and I think we are focused very much on driving our core franchises, our flagship franchise is a better word to say it, in international. That's oncology, VNUS intervention, that's where we see our near term opportunities.

And oncology, first of all, it is not a level playing field today, of course. We do not have the Beads in international business. But if you allow for --- if you compensate for a level playing field, a business like an oncology business, in my experience, I think you should be very ambitious and strive for maybe 50% or more of revenue over time coming from outside US. But that means you have approval in Japan, you have approval in China, et cetera, et cetera.

In the varicose vein business, that is less likely. So I think you have to blend it for the different business components as such but either scenario is going to be substantially higher than it is today.

Great, thank you.

Thank you. Our next question is a follow-up question from the line of Robert Goldman with CL King. Please go ahead.

Okay, thank you again. Question on NanoKnife. I think it was mentioned in your commentary that there's 16 hospitals clinically active in using the NanoKnife.

But I thought that over the years there were greater than 30 of the generators placed, at least in the models I've been keeping, I've got about 39. Why are 23 not using it? Was that an old version where you had the -- a software issue or can you just give us some sense of why those not using it are not using it?

I don't recall that number, Bob, to be very honest, it was before my time. But what probably is in those numbers as well is all kinds of generators we put out for pre-clinical work in academic centers. I'll give an example. The University of UCLA is doing substantial work and some other major centers have done some major work, pre-clinical work, that was done.

I think the other one that might be confusing a little bit, I think right before it came on board there was a statement that we were going to place -- and I'm looking at the people that have been around awhile -- 25 units in the field in clinical setting supported by us, and those people would do clinical research for us.

That program was stopped at some point, I think maybe in the mid teens or so. And actually some of those were reverted and we took them back and rolling it out in a more sustainable fashion. So I don't think we ever made it up to that number.

Now to the best of my recollection, there may be, don't hold me to this, maybe two or three centers that have done procedures at some point in time and not doing it anymore. One clear example is the original work done under the wings of Oncobionics which was done in the center or where the physician left that center and the program was discontinued, so some very normal circumstances as well.

I would also say what we list on our website, though, are 16 specific hospitals, and all of those are commercial sites that are under contract with us and doing clinical procedures. And they have either bought a generator outright at the front end or entered into a purchase arrangement with us over time under which they've made a commitment to purchase probes.

So there may be a little bit of an accounting issue in the numbers that we're trying to reconcile between the figure you quoted and the 16 that we list on our website as commercial sites.

Thank you, Joe, thank you, Jan.

Our next question comes from the line of [Ronald Sadlowski], private investor.

Hello, and thank you for taking my question. I had two questions.

One, are there any protocols under development for the use of the NanoKnife in treating the Benign Prostatic Hyperplasia or BPH and-- or uterine fibroids? And the second question is, is it possible to post on the website the physicians in areas where these protocols are being utilized and where physicians could refer patients to? Thank you.

Yes. Ronald, I believe it was, thank you very much for the question. Great questions, by the way.

On BPH, had been suggested before. Theoretically interesting option but we're not developing in that direction. So right now when it comes to prostate we're focused on prostate cancer not necessarily on BPH.

Uterine fibroids, no development ongoing. And theoretically NanoKnife is less suited for that because one of the big benefits of NanoKnife is that it will keep vessels open --- blood vessels open. And the one thing you want to do with uterine fibroids, you want to actually close them off. You want to embolize them because that is creating the hemorrhaging and creating the symptoms.

And then the final question, escaped me there for a second. Ronald, can you help me?

Yes. Is it possible to post on the AngioDynamics website the people who are utilizing the NanoKnife in protocols and what the protocols are and how patients could be referred to these institutions?

Great question, but we live in a harsh and cruel world, and that would be construed as off label promotion. And we are not allowed to do that so we have to limit ourselves to just listing the name of the hospitals.

We cannot say, and some hospitals actually don't want to be listed, so at some point, Bob, maybe that list doesn't correlate one-to-one actually to the actual users that we have, so we can only list the majority of the hospital names.

Beyond that I would have to refer you to the Googles and the old fashioned research that might give you the right locations there. I know a lot of our centers, a lot of our customers have been doing local PR but we cannot relay that at our level.

Very good. Thank you very much.

Thank you. This concludes our question and answer session for today's call. I would like to turn the conference back to management for any closing remarks at this time.

Thank you, Britney. I'll keep it very simple. I want to thank everybody for participating today and we look forward to keeping you abreast of our progress and we'll talk with you again in early January 2011. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the AngioDynamics first quarter fiscal 2011 financial earnings conference call. Thank you for your participation. You may now disconnect.