AngioDynamics Inc (ANGO) 2016 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the AngioDynamics first-quarter FY16 conference call. As a reminder, today's conference is being recorded. And at this time, I'd like to turn the call over to Mr. Doug Sherk. Please go ahead, sir.

Thank you, operator, and welcome, everyone. Thank you for joining us for the AngioDynamics conference call this afternoon to review the financial results of the FY16 first-quarter results, which ended on August 31, 2015. News released across the wire this afternoon is available on the Company's website at www.angiodynamics.com. A replay of this call will be archived in the Company's website.

Before we get started, during the course of this conference call, the Company will make projections of forward-looking statements regarding future events, including statements about revenue and earnings for the FY16 second quarter and full year ending May 31, 2016. 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 the actual results or events to differ materially from those described in the forward-looking statements.

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

And with that, I would like to turn the call over to Joe DeVivo, President and Chief Executive Officer.

Thank you, Doug. Welcome, ladies and gentlemen, to our first-quarter FY16 conference call. Today we've reported the first of two quarters in 2016 during which we expect to report negative growth due to tough prior-year comparisons. As we guided during our call last quarter, currency exchange and the impact of withdrawal of the Morpheus PICC line would result in year-over-year revenue declines. At the same time, we expect it to generate growth from our four key growth drivers: AngioVac, NanoKnife, BioFlo and Microwave. Having just closed the first quarter, for the most part, our results are pretty much consistent with what we expected. Our first-quarter revenue was within the guidance that we provided in August, while our adjusted EPS at consensus, illustrating what I believe is improved operational execution.

I would like to start with our international business, where we saw revenues down 17% year over year. We expected a weak first quarter internationally, and our performance was driven by two factors. The first factor was the currency exchange that we talked about previously. From our overall revenue perspective, fluctuations in currency reduced our international revenues by about 6%. In addition, 60% of all international revenue is from our distribution partners. And all of that revenue trades in US dollars.

Our business partners have seen currency changes and an inflated dollar. As a result, some saw some very conservative buying in the first quarter. While we believe the capital equipment softness is temporary and came on the heels of a really strong fourth quarter, especially in capital equipment sales, we are working closely with our international distribution partners to review pricing on a market-by-market basis in order to enhance the competitiveness of our products. We are committed to maintaining our market share, and are looking at our expense structure and pricing strategies to accomplish this.

Also, this time last year, a kit-packing partner of ours in Asia was changing manufacturing locations, and placed a $1 million forward-inventory buy in order for them to allow time to move operations from one country to another. That $1 million in revenue, which was realized in the first quarter of FY15, was not realized again in the first quarter of 2016. This was an anomaly that falsely distorts the overall health of the international fluid management business in the first quarter.

If you look at the numbers as we've reported them, the top-line revenue growth for fluid management OUS is a negative 24%. Normalized for this one stocking order, OUS revenue would have been closer to negative 9%, and 3% worldwide. While that number is still soft, 4Q 2015 saw growth of 5%, which normalizes the six-month period to show interest just about flat, which we believe is a more accurate reflection of the business. We anticipate seeing the business normalize to expected levels through the balance of the fiscal year. The international performance was soft during the first quarter, but within our expectations. Better results are in store for the second half with the FX headwind. We have a number of new regulatory approvals, which should help growth. And our growth drivers continue to succeed.

So now let's turn to the three business segments. In our peripheral vascular business, AngioVac was strong for the second quarter in a row since the launch of our second-generation product. Worldwide revenues of $2.7 million in the first quarter represent 11% year-over-year growth in the US and 7% worldwide. That growth is echoed in the excitement surrounding our physician training courses, which are consistently at capacity and translating into excellent outcomes. Our practice enhancement programs are designed to help clinicians increase their local practices and the use of AngioVac. We've also begun enrollment in the Registry of AngioVac Procedures in Detail, nicknamed RAPID, through our collaboration with Dr. John Moriarty and UCLA, to document of the clinical success of the AngioVac product we are seeing every day. We expect the strong and steady growth of this product through the balance of the fiscal year.

As AngioVac continues to gain traction, it has provided us with a platform to rejuvenate another product line to expand AngioDynamics' presence in the Thrombus management market. To address a customer need, we filled out our offering for our market-leading Uni-Fuse Infusion catheter line. The Uni-Fuse is now the broadest and most comprehensive catheter-directed thrombolysis product on the market, and offers our customers increased flexibility for a wide array of clinical applications. The combination of Uni-Fuse as an everyday thrombolytics product, in conjunction with our novel AngioVac product, allows AngioDynamics and our sales force to deliver a more comprehensive Thrombus management solution to customers.

Now moving to EVLT, venous ablation product, we reversed some negative trends last year during the first quarter of the US. As expected, procedures began to return to our customers through the summer months. And as patients overcame their insurance deductibles earlier in the calendar year, we generated worldwide EVLT growth of 4%, highlighted by 9% year-over-year growth in the United States. These results slightly offset the slow start we experienced in the beginning of the calendar year. This growth turnaround in EVLT was led by higher-than-normal growth in new laser sales, as well as the return of same-store sales procedural growth to our customers. And we believe that this positive momentum and procedural growth should continue.

Regarding fluid management in the US, we successfully launched a NAMIC sales organization, with a national business manager and specialist who are focused on re-energizing our domestic fluid management growth. The number of evaluations occurring with potential customers is triple that of historic levels, and we expect to see some very positive movement in our top-line fluid management revenue in the second half of the year.

AngioDynamics also released to market the NAMIC inflation device during the first quarter, which is designed to be used during angiographic procedures. We will be replacing third-party vendor inflation devices from our fluid management kits and marketing our NAMIC inflation device to all new customers. Early experience has proven the NAMIC inflation device to be a preferred item among clinicians and another successful launch from our internal resource development team. As one of the first new fluid management products from us in recent years, the NAMIC inflation device is a key strategy for growth that we believe will breath new life into this category for us. Combined with the new NAMIC sales organization, the NAMIC inflation device is building momentum for our fluid management business.

Now I'd like to provide an update on our vascular access business. Our worldwide vascular access business was down 7% year over year, led by an overall $1.7 million reduction in PICC revenues. Our plan in the first quarter was to begin to recover from the Morpheus recall that occurred in last year's third quarter. This has been a challenging time for our sales force as they manage their customers through a major product withdrawal, distracting them from reestablishing momentum for growth. As a result, the pace of new accounts has been less than we planned. Despite that, the team placed another 22 units in the US, 48 units since the launch in Q4, and grew BioFlo PICC sales 20%. We expect a somewhat smaller decline in overall PICC sales in the second quarter before posting from this product line in the third and fourth quarters.

Our research and development team also released to market our BioFlo Midline catheter, which is the first and only anti-thrombogenic midline on the market. This is a strategic entrant for us. It seems the Midline product is drawing not only from current PICC products, but also from the peripheral IV market, where hospitals are attempting to reduce unnecessary complications by choosing the right line for the right patient. In addition to the obvious anti-thrombogenic properties, the BioFlo Midline is special, because it is in essence a shorter-length PICC that is well-labeled as a midline. It terminates at the upper arm and does not enter the central venous system. Therefore, confirmatory chest radiographs are not required, allowing for immediate initiation of therapy, as well as cost savings.

Our early data suggests that the BioFlo Midline provides three main clinical advantages over competitive offerings. One, ease of insertion for the clinician compared to other competitive devices. Two, the ability to consistently and effectively draw blood over the duration of the patient's treatment regimen. And three, device longevity. The BioFlo Midline will allow clinicians to treat patients for their entire length of therapy, and we believe eliminate the need to place additional devices due to malfunction and/or occlusions, providing tremendous clinical value for patients and economic value for the healthcare system.

Dialysis catheters saw another strong performance with 9% growth, powered by an impressive worldwide uptake of the BioFlo technology. BioFlo Ports and BioFlo Dialysis continue to perform at above-market growth rates, and are helping increase product-line average selling prices. For PICCs, Ports, Dialysis and now Midlines, BioFlo is winning across the entire category. While there is clearly churn in the base business for non-BioFlo accounts as it declines naturally, we expect all BioFlo success will return the vascular access business to worldwide revenue growth beginning in the third quarter. For example, during the first quarter, overall Port revenue was down 2% on slower OUS revenues, but BioFlo Ports increased 38%.

Lastly for vascular access, I would like to give an update on our tip location efforts. As many of you know, we signed a deal with a third party as a stopgap, as we were designing a truly revolutionary system. We received clearance for the Celerity no chest x-ray EKG in January. We will file for Celerity with navigation within a month or two, with an expected launch by the end of the fiscal year.

Now, while we continue to market Celerity units over the next several years, today we are pleased to announce our internal research and development program for an intelligent PICC directional system called Firefly. Firefly's intelligent directional system will give customers simple, intelligent and easy-to-use commands based on real-time intelligent information, and visualization to make it even easier to place PICCs at the patient's bedside. Firefly's compete directional and visualization system will sell for a fraction of the current capital cost competitors are charging hospitals [have] a low [purpose heater] disposable cost, and will deliver the next generation of technology to clinicians around the world. We expect to launch Firefly's next-generation technology in a year or so internationally, and 6 to 12 months thereafter in the US. We are committed to the next level of excellence for PICC teams worldwide, and the combination of Firefly and BioFlo, AngioDynamics will provide the best option for PICC patients on the market.

So now I'd like to move to oncology. Overall, oncology business was down 9% in the quarter worldwide, following a huge capital fourth quarter, selling 12 NanoKnife systems in the fourth quarter of 2015. While capital purchases were down, especially as we noted internationally, we believe that we have opportunities on the horizon that will drive revenue growth for this business, which I will outline for you in a few moments. Utilization in the oncology segment in the US continued to grow, with NanoKnife disposables up 29% and Microwave procedures up 23%.

We are seeing continued positive worldwide interest in NanoKnife following the Annals of Surgery publication of the STAR registry in September that we discussed in detail last quarter. NanoKnife is now chronicled in more than 150 peer-reviewed publications worldwide. Its acceptance continues to grow, and results show meaningful benefits for patients.

This quarter we achieved several milestones in the effort to collect data for the use of NanoKnife for prostate patients. First, the CROES I study has yielded four very important clinical publications from data from this patient cohort, including manuscripts on the prostate NanoKnife technique, the correlation of NanoKnife effects and imaging, and electrode placement and cellular effects, and of quality-of-life paper. Second, the CROES II multi-center randomized study has begun to enroll patients. The randomized study will involve six centers throughout the world focusing on the efficacy and local regional ablation of the prostate for cancer patients. The goal of the study is to enroll 200 patients and follow each patient for six months on imaging.

Finally, the Clinical Research Office of the Endourological Society has begun its prostate NanoKnife patient registry, giving clinicians worldwide a centralized location to share their data when using NanoKnife for focal prostate lesions. The registry is now live, and several patients have already been enrolled. We understand the need for excellent clinical and economic data for these advancements in technology, and we are proud to be working with the scientific community on so many important fronts. We expect this data will continue to bring awareness to the incredible benefits that NanoKnife can offer patients worldwide.

So that's it for the business updates. But before I turn it over to Mark, I'd like to give you some perspectives of the first half of the year in comparison to our expectations for the second half. We told you that the recall and foreign currency fluctuations were going to be challenges for us in the first quarter. We saw the first quarter coming, and we managed our operating costs to deliver the expected profitability. Our team delivered a sound bottom line and a better cash quarter. We are managing the business today, and importantly, we are managing for growth in our future.

Our view is very bullish for the second half of 2016, and there are several key milestones which will drive growth soon. First among those milestones are several reimbursement initiatives. Worldwide, we are making great progress with NanoKnife. We're implementing aggressive efforts to gain reimbursement this year, and believe that we are doing the right things, building the evidence, getting the codes in place and working data coverage.

Today there is a compelling amount of clinical data related to the effectiveness of NanoKnife for locally advanced pancreatic cancer. We are working to get even more real-world evidence through registries with Pancreatic Cancer UK and the AHPBA. We are also in conversations with the National Institute of Clinical Excellence, NICE, and with CMS to establish coverage of NanoKnife for locally treated advanced pancreatic liver cancer. And we'll be aggressively pursuing reimbursement in Europe, Canada, Australia and all through the commercial payers next year.

There are also efforts to work with CMS in the USA to level the playing field between lasers and RF for use in venous ablation procedures at every site of care. Last year, CMS normalized reimbursement for inpatient reimbursement between lasers and RF devices. Once again, we believe that strong clinical data will drive reimbursement. A recent meta-analysis released by NICE suggested that EVLT should be considered as a preferred option for patients with varicose veins, due to positive clinical outcomes and cost-effectiveness. Strong clinical data such as this offer us confidence that reimbursement will be leveled for all sites of care in the future. If this occurs, we believe it'll be a positive catalyst for the business.

Another key catalyst for growth will be the important international registrations we believe we will earn in the second half of this fiscal year. If you recall, products manufactured out of our Queensbury facility had their certificates of foreign goods suspended due to an ongoing warning letter, which we believe we have remediated. Three months ago, we received those CFGs, and subsequently have been filing registrations for new products all over the world. We are anticipating significant product clearances in international, which are expected to lead to between $3 million and $5 million worth of orders within oncology. We have already received preliminary approval for NanoKnife generators in China, and expect final approval in the fourth quarter of this fiscal year.

Now, I would like to hand it over to Mark Frost, who will review the financial performance for the Company in the quarter. Mark?

Thank you, Joe, and good afternoon, ladies and gentlemen. As we expected and discussed with you in our last two calls, our business in the first quarter was impacted by two headwinds: foreign exchange FX and a strategic decision to discontinue the Morpheus PICC line. These headwinds impacted our growth by approximately 3% in the first quarter, and we anticipate in our planning process that we will have the same impact in the second quarter of FY16. However, we continue to expect improvement in the performance in the second half. Given that Joe has discussed the revenue picture in depth, I'll limit my comments to a few revenue points, and then provide more detail on our P&L and balance sheet and cash flow.

Total revenue in the quarter was down 4% from the prior fiscal year. However, excluding the impact of FX, the Morpheus discontinuance and the planned wind-down of our supply agreement, underlying net sales were 1% down from the prior fiscal year. Continuing down the quarter's income statement, gross profit totalled $43.2 million, or 51.6%. Our Operating Excellence program contributed a 70-basis point improvement, as planned. Our improvement was offset by FX at 60 basis points, [semino] provisions at 50 basis points, and negative mix of also 50 basis points. We improved 70 basis points sequentially from the fourth quarter, but ended down 90 basis points year over year.

Turning to expenses, operating expenses totaled $42.1 million, including $2.1 million of acquisition integration and restructuring items, of which $1.3 million was related to litigation and $0.5 million for the Operational Excellence program. Sales and marketing costs increased $0.5 million, reflecting our investment in our US sales force, offset in part by an FX benefit. G&A costs were flat, while R&D decreased $0.5 million, primarily because of product development timing. Our GAAP earnings result was a loss of $0.02 per share versus income of $0.01 in the FY15 first quarter. Adjusted earnings per share EPS, excluding amortization, was $0.11 per share versus $0.16 per share from the prior-year FY15 quarter. We lost $0.01 because of FX, and the remaining drop was caused by lower revenue volume.

EBITDA was $8.2 million, or $0.22 a share versus $9.8 million, or $0.28 a share in the prior year's first quarter. Adjusted EBITDA was $11.9 million, or $0.33 a share versus $14.3 million, or $0.40 a share. Our cash flow was in line with our expectations, generating operating cash flow of $4.7 million in the quarter and free cash of $4 million, an improvement over the prior year. As anticipated, our inventory increased, based on our manufacturing consolidation timing. We are approaching our final stages, and expect to shut down most of the lines by the end of the second quarter. The inventory safety stock will then start to be utilized, but with a larger runoff in the second half. Our cash balance increased by $1.9 million to $22 million, and we paid down $1.3 million of debt, bringing the debt balance to $136.4 million outstanding.

Now, I'll turn to a discussion of our guidance for the second quarter and FY16. Overall, our financial objective for FY16 remains the same: deliver leverage from the top line at three to four times rate, as we demonstrated in the first half of 2015, but with much stronger cash flow. As we have mentioned in the past and at the start of today's discussion, our performance will be different for that two halves of the fiscal year, due to the headwinds from FX and the Morpheus discontinuance. We are reiterating our revenue range of $364 million to $370 million, which would represent 2% to 4% growth for the year. Adjusting for the headwinds, this would've been 4% to 6%, as each headwind reduces annual growth by about 1%. Our first-half comparison will range from 2% to 4% down, as we are absorbing a 3% revenue reduction each quarter from our headwinds, as well as a slow start for international, has further skewed the halves. Our second half is now expected to grow at 7% to 9%.

Now, supporting our confidence in this revenue ramp for the second half is the final clearance of CFGs relating to NanoKnife from the 2011 warning letter that we discussed were issued this past summer. As a result, we are expecting significant product clearances in international, which are anticipated to lead to [$3 million to $5 million] of orders within oncology. As we discussed on the fourth-quarter call, Celerity navigation and our Microwave second-generation product are also expected to launch in the second half of the fiscal year, which will further support revenue growth, as well as the launch of our NAMIC inflation device. In addition, the strength of the BioFlo Midline launch and improved customer penetration from our GPO contract wins should drive stronger VA growth in the second half. Reimbursement for August, which Joe discussed earlier, will be an upside, depending on their timing.

The revenue timing will flow through to our adjusted earnings expectations. We are continuing to guide to adjusted EPS, excluding amortization, of $0.62 to $0.66, up 7% to 14% from prior year. We absorbing a $0.04 cost from FX and Morpheus; otherwise, our EPS would be growing 14% to 21%. Again, the halves will be distinct, with the first half contracting 15% to 20%, but 45% to 60% growth in the second half, reflecting primarily the impact of the headwinds on the first half. The critical factor enabling our leverage at the bottom line continues to be our Operational Excellence program, which met its objectives in the first quarter and is expected to generate 100 basis points of improvement within the year. The key driver this year being the shutdown of our Queensbury manufacturing line in January, as well as direct material supply chain savings.

From a balance sheet and cash flow perspective, we expect to generate significant improvement in our cash flow during FY16. Operating cash flow is expected to improve by 30% to 40% versus prior year, and free cash flow by 60% to 70%. Drivers for our improved performance are: one, working capital improvements, primarily from reducing the safety inventory built for the manufacturing consolidation. Secondly, reduction in our restructuring costs. And three, a drop in our fixed asset needs down to a maintenance level of $4 million to $6 million. Adjusted EBITDA is expected to improve based on the earnings improvement range.

Turning to FY16 second-quarter guidance, we are guiding to a revenue range of $87 million to $91 million, 1% down at the top end. Backing out FX and the Morpheus impact, prior-year sales growth would be 2% at the high end of the range. Adjusted EPS, excluding amortization, is expected to range from $0.13 to $0.15, reflecting the revenue range. With that, I'll turn the call back to Joe for his final comments. Joe?

Thank you, Mark. So while we have tough revenue comparables in the first half of the year, we are managing the business and cash well, and are poised for both our strong top line and bottom line for the second half of the year. The key growth drivers continue to pay off, allowing us to deliver about 60% to 70% more cash than we did last year. Our team continues to do the right things, delivering operationally, and developing the growth drivers in the meaningful and valuable businesses for our future.

So with that, operator, I'd like to open the call up for questions.

Thank you.

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Hi, good afternoon, guys.

Hey, Tom.

So I want to try and understand Q1 and Q2 better, so that we can get a better handle on this inflection that we are expecting. The minor question, question one, is, Morpheus -- I think in the press release, it said $2.6 million last year. Should we assume that you recovered or transferred customers to other products of about half of that? Or did you do a little better or a little worse than that?

Yes, I think the actual number, Tom, was about 45% of customers were converted over. So we lost a little bit more than we had planned.

Okay, 45% of customers. Was that about the same for dollars?

Yes.

Okay. And then, along those same lines, on the Celerity with no chest x-ray, you're doing placements, you're selling some, you are doing evaluations. I think in the past, we've talked about evaluations taking a while. And then while you're doing the evaluation, if it looks like you are going to win, the competition may be loading up inventory in that particular hospital and then getting it taking a little bit longer for you to actually get the return that you hope out of winning that evaluation. With that as a too-long preface, is that process something that's going to -- that we're going to see in Q3 and Q4, and get that inflection upwards-moving? Or is it going to take longer than that?

Well, first of all, you're right. It does take time to do evaluations. Now, it's not every situation that a competitor does that. But it does take a while. I mean, we are asking for our customers to pay more for our product. And in order to pay more for a premium product, they would like to feel confident that it's delivering its results. And we are doing that, and that's a big part of our strategy.

So whether -- and that is a cycle, and that does take time. But when we talk inflection, we just have to level-set. So without currency and without the PICC headwinds, just on a like-for-like basis, we'd see obviously a much better net performance of this. So by washing out -- by anniversarying currency and anniversarying having to withdraw a product from the market, obviously the year-over-year comparables are going to be much easier to hit, especially with last year.

But yes, BioFlo is something that is a continued process. I think even when we look into last quarter, I have to absolutely commend our sales force. I mean, for us to be able to maintain 45% of the revenue to convert over from existing accounts when we've had to pull a product from the market, is just a tremendous effort on their part. And we're proud that they've gotten very close to that target.

With that, when you're spending that type of energy to sustain business, the efforts that are placed in doing new evaluations and the efforts that are placed in new placements, et cetera, is really challenging. And again, we have a great organization, who has weathered this storm and has kept a lot of accounts and a lot of hospitals with our Company. So I'm very proud of their activities. But there is no doubt that we've lost momentum because of this activity.

That said, our fundamentals are good. We have GPO agreements. We are placing a lot of Celerity units out there. We have a significant amount of evaluations. That's why we're bullish for the second half of the year. But we knew when we came into the fourth quarter that this was going to be rough.

We talked about it on our fourth-quarter call. We said, wow, we have to look at the first half of the year without this much revenue in our plan, and we have to look at our sales, especially with some pressure internationally. So we're not sitting here with a surprise. We're sitting here with something that we had planned. And our team is committed to continue to get past this and to deliver a better performance in the second half of the year, especially with this past us.

Got it. Thanks. Those are my two. Thank you, guys.

Thanks, Tom.

Jayson Bedford, Raymond James.

Good afternoon. Thanks for taking the questions, guys.

Hey, Jayson.

Just on the access business, I realize BioFlo grew 30%, but access was down 7%. I'm just trying to reconcile the math there. How big is BioFlo right now?

Do you have that in front of you?

Yes.

BioFlo for the entire -- across all three product lines?

Yes. How you guys define (multiple speakers).

Yes, I'll answer it, Jayson. It's about 40% of our VA portfolio now. I think the last quarter it was like 30%, 35%. Now it's 40% of the whole portfolio. It's like 70% of PICCs.

Right.

And 15% of ports and about 15%, 20% of dialysis. So the issue is that the PICC legacy business dropped more, which is what caused the VA issue.

Right.

Right, okay. And to be clear on Celerity, you'll still be selling this, replacing it, while you're working through the R&D efforts on Firefly?

Absolutely. Will be placing it for years.

Are you placing it or selling it?

Both. It all depends on the situation. But both. But if we're placing it, it's under a committed agreement. We don't give them away. So if we have a committed agreement, then we will place it, or if an account would like to purchase it, then they purchase it. But it's both.

Okay.

What we're doing is -- we're going to be working with Celerity for several years. But now we're going to start getting into the marketplace internationally with a bunch of R&D and a lot of work, and we felt we wanted to bring illumination to the program. Because it's what we've been working on. We acquired a technology a couple years ago that, we knew we were behind in tip location, and so we entered into a partnership to quickly close the gap. And I think Celerity has done that wonderfully, and we're very excited about launching the navigation component of Celerity. But we know that in order to win in this market, you have to leapfrog. And Firefly is our entrant that will leapfrog the current systems on the marketplace in leaps and bounds. We're very, very excited about it. And because we'll be out in the marketplace more with it, we felt that need to unveil it today.

Okay. And then just as my second question here, on AngioVac, I thought the growth would be a little bit higher, given gen 2, let's call if, of AngioVac. Do you expect it to grow to pick up there?

Yes, I would think so. I think this particular quarter, I think, I was a little underwhelmed with the international effort. But the US effort was fine. But yes, I think we're going to see a really good year for the product. We've been getting back to the basics on developing very strong education programs which are completely filled. Our usage is strong, and I do expect a higher-than-11% growth rate.

And Uni-Fuse -- I was a little unclear as to your comment there. You've been selling that product, or did you reintroduce it? Can you just remind us -- I realize -- I know the product, but I wasn't sure what was new about Uni-Fuse.

Well, what we've done is, in the process of communicating to clinicians about our thrombus strategy with AngioVac, we realized that we have a market-leading catheter-directed thrombolysis product that's been in our portfolio for 20 years. And we are in conversations where we're not just talking about AngioVac, we're talking -- these conversations talk about other different ways of taking care of the patient. And clinicians are like, well, guys, wow, you have this great Uni-Fuse, this is very synergistic. So in order to even continue our value, we've resuscitated a legacy product.

We've launched 22 new SKUs of varying lengths that are consistent with current practices and anatomies, which make it the most broad catheter-directed thrombolysis line in the market. And so we're pretty proud of our R&D team. They been very busy. They launched three launches just in the past quarter. And by adding all of these codes to the portfolio, we are training our sales force to be talking disease state, to be solving problems and identifying ways of helping patients with AngioVac. But also, if there is a case that's not applicable to AngioVac, we don't lose it, we go right to Uni-Fuse. And it's building a very wise, broad-based strategy. So because we just launched 22 new codes into inventory, we figured we'd talk about it.

Okay, thanks. I'll get back in queue.

Thanks, Jason.

Jason Mills, Canaccord.

Hi, guys, thanks for taking my questions. Can you hear me okay?

Yes, Jason. How are you?

Good, thank you. Mark, good gross margins this quarter. Could you talk about the trends going into the second quarter and through the remainder of the year? And then could you just give us a minute on updating us with your thoughts on the next two or three years, based on what's going on inside the house? What you're seeing both from a cost control, reimbursed cost expense control standpoint, as well as pricing, over the next couple of years? Gross margins has been, in my mind, one of the more important levers here for bottom-line growth, and therefore the stock. So I'm just interested to get an update both on the trends this year, and updated thinking on the next couple of years.

Sure, okay. I'll try to -- there's a couple different questions there. But I'll try to hit the COGS point first. Pricing is a whole different matter, and it's -- we get into that. It's different by each product area. From a COGS standpoint, Operational Excellence delivered as we expected. We've moved 40% of the lines now. We expect to finish that process by January. So you're going to get an increasing benefit of that in the second half.

So you'll see gross margin improvement rise each quarter as we go through the year. It's a little muted; the benefit was muted and will be muted a little bit in the second quarter because of FX. Now, the FX goes away as we get into the second half, so you'll see a more pronounced benefit in the gross margin line in the third and fourth quarter, because the 50, 60 basis point hit from FX goes away. Assuming, of course, there's not another massive drop in the euro, but we haven't been seeing that. The euro has actually strengthened in the last couple quarters. So that's what we expect in the year.

From continuing onward, the plant -- we continue to expect and we have a pretty well-drawn out plan that we will generate 100 to 125 basis points in the next two fiscal years as well, based on the big benefit coming in FY17 from a consolidation of the plants. But we also expect direct material savings to start kicking in, in both 2017 and 2018, which will drive that 100 to 125 basis points. So that's the COGS picture of what's going to drive performance.

From a price standpoint, it is quite a mixed situation. I mean, you are, on the international side, seeing some prize degradation -- Joe touched on this a little bit -- because of, in the distributor markets, you had a US dollar appreciation. Now, we're going to have to see how that plays out. But we have seen some lower price internationally, and the US is quite a mixed bag. Oncology, we continue to get price because of the uniqueness of our offering.

Fluid management has been up and down. ELT, there's been some price, but not anything material. I'd say when you look at the net price impact on the business, it's still running about 1%. So it hasn't been a big material impact of the business so far. But Joe sort of -- and Joe can build on this, is, the international side is a little bit of a concern as we go forward. We're going to have to do something there in our US dollar market. I don't know if you want to add to that, Joe.

The only other comment I'd make for gross margins is that, as you have mentioned in the past, that each of the products that are growing in excess of 10%, 20% are all margin-accretive products. And so we're going to see mix be a pretty positive contributor to gross margin. So it's our internal cost reductions and it's our mix improvement. So those are the ways that we get to accelerate it and to the gross margin targets that we've mentioned.

But yes, I mean, we have 60% of our international business, which is not a huge part of the Company but it's still a meaningful part of our business, has seen virtually a 20% or 30% price increase because of the dollar going up, and their inbound price has been higher. So their orders this quarter -- and if it doesn't change, would be challenged. And so we are working with them to ensure that we manage their pricing and cost in order to make sure that they're competitive.

But while we have a pretty good plan, as far as improving gross margin, I'm very proud of our operation team. We've been talking to you about Operational Excellence for, I don't know, four or five quarters, and they haven't missed a beat. Every single milestone, product line, time conversion and change, they've hit.

We've always said that we'd be done by January, and that team is right on it. And by January, we'll see that improvement and those costs come out. So I'm very proud of their execution, and across the board, I think the Company is going to see improving gross margins over the next several years.

Okay. That's a lot of detail and I want to make sure just to be clear on a couple points. Mark, you mentioned 125 basis points next year, and then you turned to pricing and we talked a little bit about a mixed bag. I just want to be clear. The COGS discussion obviously is a discussion broadly about pricing. So is that 125 basis points before we consider pricing, and therefore the expansion would be less than 125 basis points? And also, did you give -- and I'm sorry if I missed it -- a gross margin target for the full year this year, 2016?

Well, let me see if I can help Mark for a moment. Well, first of all, when we run our gross margin targets based upon our cost reductions for the year, we are obviously planning on a certain revenue line, we're planning on a certain level of pricing. So if pricing changes significantly or if revenue is way off plan, then we're going to over-absorb and our gross margins aren't going to be as high.

But the net cost, the physical one-to-one cost of pulling out of the business is what's happening as far as the headcount, overhead consolidation and whatnot. But of course, in that calculation, there are variables, and if there is changes to the variables, then there's changes to the calculation. But as you know, gross margin is at the bottom line. But as far as we're concerned, based upon the cost reductions that we are targeting, we expect a 100 basis points to 125 basis point improvement in gross margin over the next two years.

Right. And 100 basis points for this year, Jason.

Okay, got it. And then just a second line of thinking here on the cash flow side, and that's -- obviously, expansion feeds cash flow. What are your targets, Mark, for free cash flow this year and next year, if you can give us a range or directionally some -- (multiple speakers).

Yes, we've guided free cash flow to improve pretty significantly this year. I think I mentioned it earlier, that it would be -- hold on a second, just make sure I don't misquote -- 60% to 70% improvement this year on free cash flow. And that's generated by operating improvements, working capital improvements, and then lower maintenance CapEx in the year.

So we have a pretty significant expectation of nice improvement as we get through the manufacturing consolidation. We haven't really talked to next year numbers. We'll probably start talking in the next quarter or two on that. But that's our focus on 2016, is trying to deliver that improvement.

Jason, the good part is that for the last couple of years, we've been using cash. We've been using cash for Oracle, we've been using cash for plant consolidation. We been using cash in order to increase inventory for all of that. And those projects are now being successfully completed.

So our corporate CapEx requirement is not as high as it was for the last several years. Inventory won't be as high as it was for those obvious reasons. And once it normalizes, that cash is going to flow through for a while. So we'll see pretty significant increase in cash over the next six to nine months, and then it should be steady-state as the revenue and the business grows accordingly.

Right.

That's helpful. Just a follow-up on that point and I'll get back in queue. If you're successful and we see cash up to your guidance this year, I presume that the gross margin expansion next year, coupled with not-such-a-bad FX environment -- and you're hoping, I'm guessing, for revenue growth next year -- drives some leverage next year as well to the cash line, that grows. If you're successful with the next couple of years generating the type of cash that people have in their models, what do you do with that cash, Joe? And thank you for the answers.

And thanks for the questions and the involvement, Jason. Right now our plan is purely to strengthen our balance sheet and pay down our debt. But what we'd like to be able to get back to doing is, if we're going to put some of that capital to work for smaller acquisitions, that makes sense to bolster our product portfolios, we'll do it.

But I think we've signaled quite a while ago that we're really intent on making what we've done work, and operationalizing the business, getting our top line growing and getting our bottom line growing faster, and then bringing cash out. So we want to return that to shareholders and return it to the Company and put it in our balance sheet. But I think ultimately, as we shore up our balance sheet, it wouldn't be inconceivable that, as we are done with all these projects and we're ready for more, that we not do anything too big.

But I do think our portfolios can always use new technology. And also continue, as we had said -- we're still looking for good international targets to acquire to build out our international business. So those are probably the two best uses of cash for us.

Matt Mishan, KeyBanc.

Great, thank you for taking my questions.

Thanks, Matt.

On the revenue guidance, I mean, you were able to keep that intact for the full year. But if I'm looking at it right, I think the cadence changed a little bit, where maybe lowered the first half by about 100 or 200 BPs and raised the second half guidance. So I was just curious, where are you falling short in the first half? Why that doesn't bleed into the second half? And what gives you more confidence in an improving second-half environment?

Sure. I'll hit it, and Joe will probably build on my comments. So in the first half, we came in at slightly below midpoint of our numbers. And we had a little bigger -- less growth in PICCs than we were expecting, and international was a little slower start then we would have hoped at the higher end. So that just flows into the second half. That's why the first half is so -- you're right -- it's about 100 basis points lower.

The second half we feel stronger. Joe talked about a number of things. I think, particularly the regulatory clearances, we have a pretty good line of sight on a number of critical orders, which gives us a lot of confidence that we can recover that 100 basis points of growth in the second half and have a pretty strong second half. And then clearly, as we talked throughout the call and on earlier questions, we don't have the two headwinds in the first half. So the comps are much easier in the second half, which also gives us confidence. And I don't know if you want to add anything else, Joe.

Yes, I'll just add a couple things. Do not underestimate how not being able to register products for three years impacted our international business. Not having those CFGs and dealing with that -- our international team really had to focus on what it had and drive its markets and do a lot of heavy lifting. We have all of our clearances now. We have all of our CFGs now. And we've been filing for new clearances.

There's markets where we don't have our 1470 laser registered, which is crazy. There's markets where we don't have NanoKnife. There's markets where we don't have our PICCs registered. So we're now starting in the second half of the year to start seeing some of these key markets get registrations that our distribution partners have just absolutely been waiting for.

And probably the biggest second-half component is going to be in our oncology business. If we receive our -- and we believe that we will receive NanoKnife clearance in China -- China is huge inflation market. And there will be, we believe within this year, a significant capital equipment buy when we receive that clearance. And we have a big launch plan in place. And that's something that we have a very clear line of sight for. We have another couple of initiatives with other oncology products that we have very high confidence with that, if we receive those registrations, we're going to see significant new orders.

So we're now on the beginning tail of benefiting as other companies have, as a part of the strategy. A lot of the growth you see is not just organic growth, it's growth due to new product registrations and markets. And you keep rolling these new registrations and building these markets, you're increasing your footprint and increasing your business. Well, we were starved for that for a couple of years, and now that's happening for us. So we have, again, a clear line of sight as to what products, what markets, and we know, for example, and we mentioned in our comments, of between $3 million and $5 million in new orders we're going to see between the third and fourth quarter, purely based upon those registrations.

Okay. And just to follow up -- and that was really helpful. Just to follow up on the NanoKnife conversation, I think you also said last quarter that potentially some upside to your guidance would be from some changes in reimbursement towards the end of the calendar year and you'd have probably some increased visibility into that as the year progressed. Could you give us a little bit of color on potential changes in reimbursement in the US or in overseas, for NanoKnife?

Yes, that's a great question. So first of all, last year in the January timeframe, for the first time, we received new codes for NanoKnife in Germany. And if you look at our fourth-quarter revenue, I mean, we sold 12 NanoKnife systems in the fourth quarter. We had a huge fourth quarter. And our utilization, I think, going into the end of last year, was up about 30% in NanoKnife worldwide.

And that's a function of maturing data, it's a function of -- in Denmark and some Scandinavian countries we've started to receive NanoKnife reimbursement. In Germany, we have NanoKnife reimbursement. And now we are actively talking to the National Institute of Clinical Excellence in the UK regarding specific approval and specific guidance on the recommendation of NanoKnife for certain patients.

And interestingly, if we receive a positive NICE indication -- it's not an indication, but if we -- I guess they give us a positive view on NanoKnife, where today, NICE has NanoKnife as experimental. So a lot of private payers or other government agencies around the world look at that guidance and say, well, why would we reimburse this when NICE sees us as investigational? We believe that by January, we're going to shed that investigational label. And when we shed that investigational label, every market around the world whose held off on reimbursement, we think is going to start coming in line.

And we're very excited. We've hired a tremendous executive on healthcare policy and reimbursement here at the Company, and she has really breathed an incredible amount of momentum on our reimbursement strategy. So whether it's the NICE indication -- we've also had one-on-one conversation with CMS. There's 150 clinical publications today on the Internet, and there's certain patients who really have a significant medical need and should have the technology.

So I think we've held back from talking about NanoKnife for a while, but today the data is too advanced. And the societies -- now having the AHBPA, the American Hepato-Biliary Society, manage a worldwide registry for NanoKnife, is an incredible acknowledgment. The fact that we're going to do a patient registry for pancreatic cancer patients in the UK with NICE is an incredible accomplishment. And these are all early indications now that the technology is on the cusp of its acceptance in reimbursement. So it's really -- the time for NanoKnife is occurring, and to see worldwide growth last year, and seeing 30% growth in the US for consumables, is a great validation.

That's great. I'm just going to squeeze one more in real quick on EVLT. Just given the volatility in that business over the last couple quarters, has the momentum continued so far in this quarter that you saw last?

Yes, it did. So I think I mentioned on the last quarter's call that we saw May, procedures start returning to our customers. To refresh everyone's memory, in the first four months of our calendar year, boy, our same-store sales and patients were just not there. And we reported on it as best we saw it. And yes, they came back in May, and they came back throughout the summer. Our US business was up roughly 9%.

Now, we are expecting that growth to continue here in the second quarter. And it'll be interesting to see if -- we've asked ourselves openly and publicly whether or not, whatever the shortfall was in the first half of the year, is made up in the second half of the year. That I don't know. But my concern for EVLT today is far, far less. And on top of that, if CMS decides to level the playing field for outpatient reimbursement for lasers and RF, it's probably be game on.

All right. Thank you very much.

Thank you for your questions, Matt, and thanks for joining the team.

(Operator Instructions)

Keith Hinton, Sidoti & Company.

Hi, how are you?

How are you, Keith?

Doing well. Okay, my first question is regarding the RAPID database for AngioVac. I'm curious as to what the timing on that data is going to be. Is that going to be you receive efficacy data regularly on that, or is that going to be all at once, more like a clinical trial? Can you give a little color on that?

I don't know that I have specific date intervals. I think when there is a meaningful number and a meaningful age and Dr. Moriarty feels like it's time to -- if there is medically necessary or important data, that he'll put it out. I think we funded the STAR registry with Dr. Martin, and he chose at certain intervals to do meta-analysis on the data when he felt it was medically necessary.

So we don't control the registry. It is not our registry. We have an unsolicited grant for UCLA and Dr. Moriarty to run the registry as they see fit. And so whenever Dr. Moriarty thinks there's something of clinical relevance, it'll be completely his decision.

But one of the things as a Company, we funded and gave Dr. Martin that unsolicited grant for the STAR registry five, six years ago. And today, we have a publication, the Annals of Surgery, 200 patients. So that's why we're funding the AHPBA registry for NanoKnife. They run it; they do it exactly how they -- we don't determine their protocols, we don't determine who they include, how they include and when they report.

Now we're funding a registry with CROES for prostate NanoKnife ablation -- same thing. They are completely in control, same thing as Dr. Moriarty is. So I'd expect that whenever they feel it's medically necessary, it will be out in the public domain. And when they present things in the public domain, then we'll, of course, draw your attention to it.

Okay, perfect. And I just have one more. Sales and marketing crept up a little bit as a percentage of sales. I'm thinking that's probably geographic-related, as to the weakness in the international. Am I thinking about that correct?

No, actually we made a strategic decision that we talked about in the fourth quarter. Our Peripheral Vascular business in the US has a lot of opportunities. And between AngioVac and EVLT, some of our other products haven't had the appropriate attention. So we made a strategic decision to promote one of our best people to a national business manager role, and then some of the best salespeople to specialists and sales roles, and we created a new NAMIC sales force.

And that NAMIC organization works through our Peripheral Vascular organization to basically grow and give new life and energy to our largest product line in the Company, our fluid management NAMIC business. And so it was investment, it shows a little bit more of cost as a percentage of sales in the quarter. And I bless every dollar that we put into it. Our new general manager made a great decision, and we're seeing the activities -- if activities are a precursor to results, then I expect some good results in the second half of the year.

Okay, terrific. That's it for me. Thanks.

Thank you, Keith.

Charles Haff, Craig-Hallum.

Hi, guys. Can you hear me okay?

Yes, we can Charles. How are you?

Good. A couple questions here. Most have been answered. But on the warning letters, I understand the CFGs getting lifted here, it helps. But on the warning letters getting lifted, I understand you've passed the re-inspections. Any update that you've heard from the FDA? Is there any further steps that are still outstanding before potentially these three warning letters can be lifted?

I don't think in our hands. I think it right now we've asked FDA to review and we've asked them to lift them. Obviously to get into the warning letter, we've had to have 43s and repeat 43s, and since that, we remediated. And we're very pleased in the fact that we had repeat inspections of each of the sites, and on those repeat inspections, there were no 43s that were a repeat, which is a pre-indicator towards lifting of the warning letter.

And hence, the real transactional part of it is receiving your certificate of foreign governments. That's where the rubber hits the road. From a PR standpoint, it's nice to get rid of the warning letters, but from a pure transactional standpoint, the fact that we now can register all of our products in foreign markets, that's where -- from an operational standpoint, we're there. So we're working -- to any extent that there is any additional questions, we'll answer. But the ball is not in our court anymore. We feel we've done everything.

Okay. Yes, that's very helpful. I was just thinking more on the PR side, getting this news out there is always very helpful. When was the last re-inspection, or when was the last communication?

The last re-inspection was maybe a month ago, maybe -- I don't know -- four, five, six weeks -- within four to six weeks. So it hasn't been --

Okay.

And I think there is -- if I could maybe -- don't want to assume too much, but I think there is typically a holistic view. You know? I mean, I think for us to get a clean bill of health, I think they would want to see everything before they would give it piecemeal. So we've worked with it. We are very proud of our accomplishments.

The amount of cost and the amount of work and the amount of attention of our R&D teams and our quality teams behind the scenes, it's unheralded. You don't get credit for that. You don't get credit for the hours of responses and remediations and [capas]. No one sees that; they see new product launches.

But the people at AngioDynamics have worked so hard work, they put the customer -- they put the patient first. And we have been doing such a great job, and I am so proud of our quality organization. I'm proud of our R&D teams. There's times when we are developing -- we're focusing our whole R&D teams on making sure the remediations are there. And again, you don't get credit for that. But so much of that is behind us.

You've seen now just in this last quarter three product launches coming out. And we're going to start -- we've told everyone that we have a great pipeline, and more is going to come. And we're bullish on our business. Obviously, Charles, we're not happy with the fact that we have to live through a couple quarters of a down revenue, given a product withdrawal and the currency size. But you look under the hood and our team is executing and delivering. And I can't wait for the PR of the warning letters finally being lifted, because we've earned it.

Yes, that's great. And then on the CFG and being able to get the approval in China for NanoKnife, so you've been approved on the NanoKnife generator in China already, right?

Yes. And from --

Okay, so this would be the needles.

Yes, from the best of my understanding, it's a two-step process. Because the generator gets approved, and the distributor then is allowed to bring the generators into the top hospitals, who do a limited amount of clinical evaluations. And so it's a part of the approval process. There are generators that are now in China and at no revenue -- we're giving them the needles, and then they are doing these cases. And as a two-step process.

So once they approve the needles, then we have our complete freedom to market. And we expect that's before the end of the fiscal year. We have plans. We know and our partner knows where -- who is in line and where this is going to go. The Asian marketplace is a very big ablation marketplace, especially given the prevalence of [HCC] and others. And 150 papers in a clinical publication -- this is not an experimental technology anymore. It's very well-established in the scientific community. So we expect that the China launch is going to be material, and that's why it's in our guidance.

Okay. And then just on the ASP question, without getting into specifics. The US ASP is quite a bit higher than the China ASP on the generators. Would you expect that same ratio for the needles in China, or is that still to be determined?

Yes. I think from an oncology business standpoint, typically our international ASPs are half the US ASPs. And that goes for generators and needles, and that's a rule of thumb. I'm sure market by market might be different, but that's pretty much where it is.

Okay, sounds great. Thanks a lot, guys.

That does conclude the Q&A portion of today's call. I'd like to turn it back over to Joe DeVivo for any closing remarks.

Thank you, everyone, for staying with us tonight. And thank you for doing your work on the Company.

We remain very proud of what we are accomplishing here at AngioDynamics. We believe we are doing the right things and investing for our future. We were hit with a hard blow at the end of last year. We started off the year with great growth and great momentum and we were building this enthusiasm, and we had a rough third and fourth quarter. It's just excruciating to pull a product off the market. It's one thing to go through a recall; it's another thing to just take it off the market. And to try to forecast the effects on your business when your customers have been using them for so long is just tough.

But we persevered, and our team is still out there, and we are driving. And we have the absolute best vascular access portfolio in the world, bar none. And our competitors are scared of it, and they are coming after us hard. We have a fantastic oncology portfolio, and we're building a very strong peripheral vascular portfolio. So we're still as bullish on this business as we've ever been, and we appreciate your attention and support. So thanks.

And this does conclude the conference today, everyone. We thank you for your participation. You may now disconnect.