AngioDynamics Inc (ANGO) 2017 Q3 法說會逐字稿

Good day, and welcome to the AngioDynamics 2017 Fiscal Year Third Quarter Earnings Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Evan Smith. Please go ahead, sir.

Thank you. Good morning, and thank you for joining our conference call as we provide an update on AngioDynamics' business as well as a review of financial results of our fiscal 2017 third quarter, which ended on February 28, 2017. The news release detailing the third quarter results crossed the wire early this morning and is available on the company's website. A replay of this call will also be archived on the company's website.

During the course of this conference call, the company will be making projections or forward-looking statements regarding future events including statements about revenue, earnings and free cash flow for fiscal year 2017 third quarter. 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.

This morning, we are joined by Jim Clemmer, Chief Executive Officer; and Michael Greiner, Chief Financial Officer of AngioDynamics.

With that, I'll turn the call over to Jim who will offer insights into the quarter. Jim?

Thanks, Evan. Good morning, everyone, and welcome to our call. Results for the quarter continued to demonstrate the execution on our disciplined approach to strengthen our company. This focus has had a positive impact on both our gross margin and our gross profit, delivering strong EPS growth and cash flow generation. Our improved operational efficiency and strengthened balance sheet will provide a strong foundation as we move forward on the initiatives that are setting the company up for growth in fiscal 2018 and beyond.

During the third quarter, revenue growth was below our expectations. Some of the reasons were the result of actions that we took to improve the underlying performance of our business. Some of those include continuing our SKU rationalization program that now has eliminated more than 900 SKUs this fiscal year. We've also made changes in our personnel here in the U.S. and internationally to better support our growing business moving forward. And we're also doing things differently as a management team when it comes to our operations internally, the portfolio management decisions and our strategic decision-making for our long-term growth.

We understand that revenue is the biggest driver of long-term shareholder value, and we are confident the measures that we're taking will improve our top line growth as we move into 2018. We will lay out these plans for growth when we host our Investor Day next Thursday in New York.

As part of our effort to simplify and strengthen our supply chain, we are closing our manufacturing facilities in Denmead, U.K. and in Manchester, Georgia, and we'll move those operations into our New York manufacturing facility. This consolidation is expected to be complete by the end of 2017 calendar year and will result in reduced costs, optimized inventory management and gross margin improvement. We anticipate an 18-month payback period for this project.

In line with our focus on high-value products that can improve outcomes for both patients and caregivers, we recently announced that we received CE Mark certification for the Solero Microwave Tissue Ablation System. We are proud to introduce Solero product overseas. And with an initial European launch starting in April, we're looking forward to launching the product here in the United States following our FDA approval.

Solero's story is a key example of why our R&D process needs to be reset. Solero offers valuable benefits to both patients and physicians, and it competes in a market where we already have a solid position. Our new R&D process has allowed us to align our people quickly, identify what needed to be done and execute against our plan to get Solero to the finish line. This new R&D process is just one of several initiatives currently being undertaken that are focused on strengthening the foundation to build a great growth company that can consistently deliver the growth and profitability our investors are looking for.

I have talked about our 3 goals: grow our revenue, improve our profitability and generate strong amounts of free cash flow. We are currently delivering on the second 2, and I hope you trust our commitment to be a growth company. I look forward to providing you with more details of our 3-year plan to grow our company during our Investor Day next week.

With that, I'll pass the call to Michael.

Thanks, Jim, and good morning, everyone. From a top line perspective, as you saw, total revenue for the quarter was $85.6 million, down 2% year-over-year. Gross margin for the third quarter was 51.2%. That's up 140 basis points year-over-year. This improvement was primarily the result of net productivity, which contributed 265 basis points of expansion, offset by some pricing pressure and product mix. As a result of our gross margin improvements and despite the shortfall in revenue, gross profit did grow year-over-year by almost $260,000.

Net income for the third quarter was $2.9 million or $0.08 per share compared to net income of $600,000 or $0.02 per share in the same quarter last your. Adjusted net income was $6.9 million compared to adjusted net income of $5.4 million from last year. Adjusted EPS was $0.19 during the third quarter, up approximately 27% from $0.15 in the same quarter last year. And adjusted EBITDA was also up 12% year-over-year to $15.5 million.

Once again, we had strong cash flow performance during the quarter. We generated $14.4 million in operating cash flow and $14 million in free cash flow as a result of our strong working capital management efforts, specifically a focus on cash collections as well as lower CapEx during the quarter. Additionally, we ended the quarter with $36.8 million in cash and investments and currently have outstanding debt of $98.8 million.

We also retired all of our treasury shares outstanding during the quarter. As we discussed during our second quarter call, we execute against our plan to pay off the outstanding balance on our revolver during the third quarter and currently have no revolver debt outstanding. That leaves our net debt-to-EBITDA ratio, when calculated utilizing our full cash balance, at 1.11 as of the end of the third quarter. Our continued commitment to prudent financial management supports and strengthens our balance sheet, which will provide greater flexibility for our long-term growth potential.

I'll now provide an overview of the third quarter results for each franchise. Our Peripheral Vascular franchise delivered $48.5 million in revenue, down 3% compared to last year. Year-over-year declines in fluid management and venous were slightly offset by volume in the core business. We had approximately $1.5 million in revenue related to Cook during the quarter as the business starts to normalize. We will continue to focus on further strengthening these customer relationships in order to maintain as much of this revenue as possible.

In Vascular Access, revenue was $23.7 million, down 5% year-over-year. VA experienced declines across the portfolio, partially offset by strong BioFlo sales, particularly in midlines. While non-BioFlo products were down 16% during the quarter, BioFlo sales increased 12% compared to the prior year.

The Oncology/Surgery business generated $13 million in revenue. That's up 8% year-over-year primarily due to higher utilization across each of the product lines.

And internationally, revenue was $17.8 million, up 3% year-over-year.

Now turning to guidance. Given some of the revenue challenges Jim described earlier, we believe that it is prudent to lower our revenue guidance for the year to be in the range of $352 million to $355 million. However, as a result of our continued focus on operational improvements, we are increasing our adjusted EPS guidance to be in the range of $0.68 to $0.70. Although our current free cash flow year-to-date is just below $35 million, we are not increasing our free cash flow guidance at this time. This is because we anticipate an inventory build of approximately $5 million to $6 million in the fourth quarter to support the closure of our Denmead, U.K. and Manchester, Georgia facilities.

With that, I will turn the call back over to Jim for closing remarks.

Thanks, Michael. To summarize, we are focusing on improving the performance of our company through research and development, managerial discipline, commercial execution and operational excellence. When fully functioning, we will grow our company over time.

Part of that effort has included adding senior-level management to lead our organization. I'm pleased to share with you that Bob Simpson joins our leadership team as our Senior Vice President and General Manager of our Peripheral Vascular business. Bob is a well-respected, results-driven medical device executive who joins us from Medtronic. Based upon my experience working with Bob for several years, he's known for leading teams with a disciplined strategic intent and focusing on accountability and execution, key factors to AngioDynamics' overall long-term growth.

We look forward to sharing our long-term growth plans with you during our Investor Day next week. We plan on outlining details on how we will achieve top-line revenue growth in the coming years. Additionally, we plan to break down strategies by each franchise, highlighting the unique growth drivers and the plans we have to capture greater market opportunities.

Thanks for joining us this morning. And now we'll open the floor for questions.

(Operator Instructions) And we'll take our first question from Matthew Mishan with KeyBanc.

First on the guidance. If I'm doing the math right, I think it implies a material step-down in profitability, I guess, sequentially from 3Q to 4Q. And I'm just trying to understand the drivers of that. Or are you simply being conservative?

So I think --- well, there's a couple of things that, as we look into the fourth quarter, that we're looking to do. We've been behind a little bit on spend in R&D through the year because we've been a little more thoughtful with some of our projects, as we mentioned the new program that's in place. We've also been a little bit behind on spend in some other areas, in selling and marketing with headcount. So we anticipate that we'll have a small increase in expenses as we enter the fourth quarter. But revenue will sequentially be up quarter-over-quarter going from the third quarter to the fourth quarter.

Okay, got it. And then on the consolidation of the facilities, could you give us a sense of what the cash restructuring costs are and then the expected annualized savings from the consolidation of those facilities?

Yes. So as Jim mentioned, the payback period will be about 18 months. We anticipate that we'll get savings in the range of $5 million initially. That's primarily related to the overhead that will be avoided going forward. And as we bring that manufacturing all into one location in Upstate New York, we think there's additional savings down the road. We haven't built those into the calculation yet, though, and the costs will range somewhere between $6.5 million and $7 million to shutter those 2 facilities.

Okay, great. And then if I can just squeeze one more in, the free cash flow has been a really great story for you guys this year. How should we be thinking about that moving forward? And maybe how are you looking at, like, a free cash flow conversion metric maybe to adjust as net income? And what's a reasonable rate of CapEx for this business?

So next week, we'll lay out a good detail on those 2 questions. But at a high level here, we've done a lot of work around payables, receivables, inventory management this year, although as in the fourth quarter, we'll have inventory building, but that's obviously a temporary build in order to supply inventory for these plant closures. But as we go into next year, we still anticipate having free cash flow growth opportunity. But as we exit next year, we'll be more in maintenance mode from a working capital standpoint. And then it's a matter of driving more profit to get more free cash flow. And just from a CapEx standpoint, this has been a slightly lighter year than we are building into our models for the next couple of years, but the increase in CapEx is not significant to have a material impact on free cash flow.

And we'll go next to Bryan Brokmeier with Cantor Fitzgerald.

So you made some personnel changes that you commented about on the prepared remarks and also in prior quarters as well as changes, I believe, a couple of quarters ago to better incentivize the sales force for the long-term pipeline growth. Have you begun to see improvements in the pipeline? And could you provide a little bit of color around where you're seeing the biggest improvements so far?

Sure, Bryan. So our pipeline, specifically, talking about the new product pipeline that we're developing.

I'm talking about the sales pipeline.

Okay, so 2 things. So sales pipeline, at this point, we have changed a couple of spots in our senior leadership team, as you know. There's 2 new General Managers here. Bob has just joined us less than 2 months ago. So we haven't seen a big difference there in the sales pipeline in those businesses. We're making sure we're aligned properly and we have the right resources where our customers expect us to be. So there's not a big change in our sales pipeline. There's bigger change in the R&D pipeline. The sales pipeline is similar to what it has been, and we're preparing now with our sales strategies to be where we need to be with our -- to support our new product launches that we've identified in the coming years.

Okay. And have you met with the FDA to discuss the data that's currently available on the NanoKnife and what more they may require for a submission?

So Bryan, good question. At this point, we've talked to the folks on the call about our intent to work with the FDA to try to expand the indication that we currently have. So next week, we'll give a bit more detail around there. But to answer the question, yes, we've been working on the background here at Angio and having conversations to prepare ourselves to have a good argument why we think we deserve an expanded indication in this space.

Okay. And then lastly, are you seeing much in terms of -- you commented on the Cook revenues in the quarter. But are you seeing much in terms of cross-selling as a result of those new sales of the angiographic catheters?

Bryan, I guess I would like to see a bit more. I think if you look back at this -- at the kind of 10-month history of the Cook recall, the first few months, we and a couple of other companies, I think were doing all we could from a backward-looking supply chain standpoint and a forward-looking commercial standpoint just to help the customers have products in the shelves to treat patients. So it was very, very much a scramble, we talked to you about that, setting up our supply chain. And now we're in the phase where people are staying with us, we don't know yet. Cook has not said a lot about if and when they'll return. So we're now in a maintenance mode where we're trying to do all we can to support these customers long term and to maintain them with our products. So ultimately, we think there'll be more opportunities for cross-selling. But the truth is a lot of these folks already were our customers at some point, whether it was a couple of the products in that category or in sister categories. So we have a --- we had a pretty broad touch into the areas that use these products. So we will continue. Now our space is a bit bigger, and we're a larger supplier partner to some of these hospitals, we think that will open up parallel selling opportunities. But to this point, it's been a lot of maintenance and working with these customers to make sure they're satisfied.

We'll move to Matt Taylor with Barclays.

This is Ian Mahmud in for Matt. Can you hear me okay?

Sure.

Great. So just stepping back a little bit, it sounds like currently, there's almost a trade-off between new operational efforts and driving revenue growth. Can you just comment generally on how far along you think you are in terms of ultimately delivering on revenue growth? And specifically, on the SKU rationalization, can you remind us how many you've eliminated so far and how many you're targeting?

Sure. So to be clear, we're not trying to say we're going to do one and not the other. So early on in my tenure here at Angio, I think I identified to folks that I thought there was a lot of room we needed to do and I was going to spend the time looking internally at improving our operations and strengthening the foundation of our company for growth. Some of those things I talked about included changing the compensation plan to ensure it's aligned with our corporate goals, changing how we do our operations, where we do our operations. The announcement this morning of closure of 2 of our 4 facilities was important for us to streamline our supply chain. And then I talked about the SKU reduction program. We have too many SKUs that we offer today for a company our size, yet we care deeply about the customers that use our products. So it's a very purposeful process to change SKUs out. Year-to-date, we have -- I believe our number's 930, year-to-date, SKUs we've reduced. When you do that, and we did allude to this, you put revenue at risk. Some customers may not be pleased that we're changing an SKU of a product they used to buy. They may choose a different product from a different company. We are fully prepared for that risk. So those are some things we've done, and we've been purposeful about them. And I think we've communicated those properly over the course of the year. But just to be clear, we're not trying to say we can only do those and not grow revenue. We expect to grow our revenue in line with continued operational excellence and internal management changes to make our company operate streamlined. In the future, we'll give you more details next week about how we'll grow revenue going forward. That'll include both product and commercial activities.

And just to answer your second question, we don't specifically have a SKU target. We're looking across our entire portfolio, what's profitable, what can we make in large volume. And so it's an ongoing project that we'll continue to look at. So there's no target that we currently have in mind.

Got you. Okay, helpful. As a follow-up, can you discuss your philosophy for balancing some of your internal growth goals versus external revenue opportunities?

So we monitor the markets we're in. We know the spaces we're in. We know them pretty well. And we know how they're growing or the challenges they face to grow. Then we match up our internal capabilities, where we stand in line with those places. So what we're doing now is making the choices. We either realign or add resources to the areas that interest us the most as far as growth opportunities. So what we do is a constant analysis, partly a portfolio management process, challenging our own portfolio, and then it's also a resource allocation process to make sure we have the necessary tools to compete in the spaces that we want to win in. So next week, we'll give you folks more detail around the spaces that we've chosen, and we'll share with you some of the resources that we're going to add in those areas and then what our expected growth will be in the coming years.

And if I may go to Jason Mills with Canaccord Genuity.

This is actually Cecilia Furlong on for Jason. And I just wanted to ask first on R&D. It was a little lighter than we had modeled for the quarter, and just if you could give any color about where you see this going over the next few quarters.

So that's correct. And it's probably been a tad lighter in the second and third quarter. The big reason for that is we've taken a step back in our R&D process. And we've analyzed where do we expect to win, where can we win in the places we want to participate strategically. And so we've put on pause some spending until we identify those places we can win. So for instance, we took a fair amount of resources, and we redirected them towards Solero to make sure we can get the Solero CE Mark over the finish line, which we have. We're doing that in other pockets as well. As I talked about earlier with Matt, we do anticipate that spend in R&D will increase in the fourth quarter. But we've talked about this in the past, the overall R&D dollars that we've been spending as a company, 8% to 9% of revenue, we anticipate will stay in that range. We don't think that we need to spend more than that. We just believe that we needed to identify better areas of how to spend that and be more focused on how to spend that in a way that aligns with our strategy. So the total dollars should remain fairly consistent over our future, which we'll show next year -- next week, in that 8% to 9% range. But we believe that these are better dollars spent that are more focused in places where we can win.

Okay, great. And then just turning to gross margins, just your expectations around the impact of the consolidated manufacturing facilities and overall where you see gross margins trending over the next year or 2.

Great. So specific to the manufacturing impact, as we said, it will be about an 18-month payoff. So the first 18 months, it's kind of a breakeven analysis obviously, but we anticipate there to be around $5 million plus in annual savings subsequent to that. So that impact will be 40 or 50 basis points. Subsequent to that, though, we are also anticipating other things that we're doing in our operations, and those will contribute significantly more than that. So next week, when we talk about our ranges for a variety of margin metrics, including gross margins, you'll see, and we've talked about this in prior calls, that we believe we can get to 55% plus in gross margins over time through this action as well as additional actions down the road.

And we'll go next to Jayson Bedford with Raymond James.

Hearing no response, we'll move to Lucas Baranowski with Craig-Hallum Capital.

Yes. This is Lucas Baranowski on for Charles Haff. Taking a look at your revenue for the quarter, Oncology revenue came in about $2 million better than we expected, and you mentioned that it was driven by higher utilization. Can you tell us whether that higher utilization was more weighted toward NanoKnife or maybe more weighted toward the ablation products?

It was across -- as we noted in our prepared remarks, it was across all of our oncology products.

Okay, fair enough. And then on your income statement, the acquisition, restructuring and other items, I think, was a bit smaller than it has been for quite a while. Do you expect that to tick back up in the coming quarters? Or is it going to be -- kind of remain around current levels?

So that's tough to answer right now because that is a bucket that captures often onetime unusual items that we're not anticipating. Specific to the fourth quarter, legal expenses, which we include in there specific to unusual litigation, was down versus budget and versus our prior year. So that was a component of it. We also had -- we didn't have amounts in there related to M&A costs. That was also down. So that's a tough one to monitor going forward as to exactly how that plays out. Again, those -- that tends to be a line item that we try to capture unusual items or things that are not consistent with our normal day-to-day operations. And you'll see next week as we lay out some of the metrics that we believe are good indicators of our execution against our 3-year plan. This is an item that we want to see shrink over time because obviously, we want to not have those types of one-time and unusual items. But those are obviously hard to forecast.

And we'll go next to Dominick Leali with Raymond James.

This is Dominick in for Jayson. Can you hear me?

Sure.

I just had a few questions here. I wanted to make sure, in Japan this quarter, did you guys receive the stocking order for around $1.7 million?

We did, yes. And that was part of the 3% international growth that we saw.

Okay, great. And on SKUs -- on the SKUs, was there a revenue impact in this quarter? And is that by itself sort of a source of revenue growth going forward?

So all right, just second half first. No, when we reduce SKUs, normally, you're not going to grow revenue from there. We'll try to minimize the impact of reducing those SKUs. So in this quarter primarily, there's probably a little bit of revenue loss. I don't think it's large enough that we can identify. But it's a disruptive event when you're talking to customers about a product that they had chosen to use and telling them that you're not going to supply it any longer. We're going to offer them alternatives, and they also know alternatives may exist from other companies out there. So we fully understand, and it's a disruptive event. Yes, we think the benefits outweigh the risks for our company going forward.

Okay. And there's a couple more. BioFlo as a percent of access, is there a percentage you can help us with?

BioFlo as a percent of access? Let me check.

It's a little under 50%.

Okay. And within access, can you help us understand the growth of the segments? Did any of those segments grow?

Well, midline continues to show significant growth opportunities, and that's all BioFlo in the midline. And then the other -- PICCs continues to see some headwinds there without our tip location, although BioFlo PICCs continues to hold in okay. And then ports and dialysis was down a little bit on the quarter, so we anticipate a fourth quarter where we have a little more even performance across ports and dialysis. We'll probably continue to see PICCs --- see some headwinds, at least the non-BioFlo PICCs, and then midline should continue to show some strong growth.

Okay. And for midlines overall, are we still thinking about $8 million for this year?

Yes.

For...

Midlines for the year.

Midlines for the year, yes, sorry.

Okay, got you. And just last, is there any later thoughts on tip location? So if going forward, if you'll explore options?

So yes, as we mentioned to the folks last summer, we discontinued the Celerity program that was in our pipeline for research and development. And going forward, we've also mentioned that we're interested in having a tip locator in that space if we could. I can tell you it's not our biggest level of interest right now. So we'll speak more about it next week. You'll get to talk to Chad one-on-one next week. He'll give you more detail. But it's not something we're concerned with at this moment.

And we'll go to a follow-up question from Matthew Mishan with KeyBanc.

Great. I just wanted to follow up on the decline in revenue guidance. As you came into the year, I think you were conservative in your expectations around the Cook recall. So you would have had some level of cushion on the revenue guidance there. What specifically is coming in worse than you thought coming from the beginning of the year?

So Matt, a couple of things. So it was a tricky balance to get the Cook revenue add with the base business. And our people in the field, the selling and marketing team in the PV group has done a really good job servicing those customers through this traumatic time and taking care of them and actually bringing this new Cook business in and maintaining it. They've done a great job. On the other side, we've been softer than we thought in our venous business, and our fluid management business has been a bit softer than we thought. It's offset some of that. We knew coming into the year, the Vascular Access business would be challenged, as we just mentioned, with some of the items there on PICCs. And so -- and third, internationally, we thought our international growth would be ahead of where it's at today. We've looked at some of the reasons why. And Matt, some of that may be -- as you know, when I joined the company last spring and Michael joined in the end of the summer, we know a lot more now than we knew then, able to understand our company better and our trading partners better and our business processes better. So we just feel right now we're giving you guys a really good indication of what we truly believe to be the most accurate reflection of where we sit today. Next week, we'll give you a lot more detail and reasons behind actions next week to give you why we believe we can be a growth company in the very short near future.

The other thing that I'm very focused on, and Jim was alluding to this just now, Matt, but we're very focused on trying to determine what's the right demand pull for our product portfolio. And so that takes some time to work through for certain product lines that might have been a little bit more of a push approach versus related to demand. So we're working through some of those things. And hopefully, exiting '17, where we're going to have a much better sense of normalization quarter-to-quarter for revenue.

Okay, great. That's really helpful. And on the venous side or the EVLT side, why do you think that's been a little bit weaker than you thought?

Well, 2 things. You've got to remember there's a comparable issue as well. Last year, we changed to Asclera, so I think the company went through a lot of energy last spring, last winter and last spring to prepare for that. And second, we've just been a little lighter than expected there. Some of that we've internally looked at, trying to figure out if it's execution on our side. And we also know that our customers, some of the demand from our customers has been maybe slightly more unstable than the past. We have a great history of understanding our customers' demand, and we know it well and we're major players in that space. But we've seen a bit of instability there, not enough that we were going to highlight it to you earlier. But it's an area, as you know, we're highly focused on. And again, next week, we'll give you more details on our future. But again, these are small choppy pieces. These are normal choppy things that happen in an annual cycle of any company. So we're not really here to highlight any of these in particular.

It does appear we have no further questions at this time. I'd like to now turn it back to our speakers for any additional or closing remarks.

Thank you again, operator. On behalf of AngioDynamics, thank you again for calling this morning. We hope you have a good level of input to our company. And we think we've also shown that we can do what we said we're going to do. We told you we'd drive more profitability from our revenue and we extract more free cash from our profitability. We're showing the foundation of a very strong operating company. The largest challenge that we face going forward is to show we can grow revenue consistently at compelling revenue growth rates. We know that's our challenge. We accept that challenge. And we look forward with the opportunity to share our plans with each of you next week in New York City. Thank you again for calling today.

And that does conclude our call today. Thank you for your participation. You may disconnect at this time.