AngioDynamics Inc (ANGO) 2018 Q1 法說會逐字稿

Good day, and welcome to the AngioDynamics 2018 Fiscal Year First 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.

Good morning, and thank you for joining our conference call as we provide an update on AngioDynamics' business as well as review financial results of the 2018 fiscal first quarter ended on August 31, 2017.

The news release detailing the first quarter crossed the wire earlier 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 make projections or forward-looking statements regarding future events, including statements about expected revenue, earnings and free cash flow for the fiscal year 2018 first 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 identifies specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements.

A slide package offering insights into the company's financial results is available on the company's website under Presentations. This presentation should be read in conjunction with the press release discussing the company's operating results and financial performance released during this morning's conference call.

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, and thank you for joining us today. Our first quarter 2018 results reflect our continued commitment to strengthening our business through disciplined execution, a focus on strategic commercial initiatives and continued operational improvements. This was a solid quarter in which we met our expectations.

Now let's talk about a couple of highlights. First, last quarter, we announced the recall and voluntary withdrawal of our Acculis Microwave Tissue Ablation System. That action led to an acceleration of our planned commercialization efforts for Solero, our microwave ablation device that received FDA clearance in May. We have been pleased with Solero's performance and our ability to execute and drive sales globally.

Our team worked tirelessly to transition Acculis customers over to Solero, and feedback from physicians has been really positive. You can see from the press release we issued this morning that Solero was the primary driver behind an 11% year-over-year sales increase in our Oncology/Surgery business.

As we mentioned last quarter, we took a revenue reserve of $2.6 million. Some of this quarter's year-over-year growth is attributable to that reserve.

Second, during the first quarter of last year, we were in the midst of responding to Cook's recall of their angiographic catheters. At that time, we indicated that about $4 million in sales of our core business was largely attributed to customers stocking their shelves as a result of the Cook recall.

Now that we are a full year beyond that point, we have a better understanding of the market demands and our position, while, by comparison, revenue in our Core/Angiographic Catheter business was down during the first quarter of this year compared to last year, it is on par with quarter-over-quarter revenue, indicating that demand had normalized and we are maintaining a significant amount of the business we earned as a result of the high quality of our products and our steadfast commitment to serving our customers.

We have worked hard to maintain the business we gained and earned the trust of our customers. Revenue for this business is now maintaining a run rate approximately 30% higher than we were prior to the recall.

For the balance of our remaining portfolio, we see execution initiatives taking root. Our Fluid Management business is up. The team had built a strategic business plan that includes a focused sales force, streamlined product offerings and pricing strategies. The team has executed well against this strategy and has driven sales in a slow-growth market. While Vascular Access was down as we expected, the good news is that sales of the BioFlo family of products is up.

We are continuing to focus on the clinical and economic benefits of BioFlo across the vascular access continuum of care. And our NanoKnife utilization is up at the same time that we drove sales of our new ablation technology in the marketplace.

We still have a lot of work to do, and we know where we need to focus. The main thing that I'm concerned about is our Venous business, which is down more than I expected. Venous was light for a few reasons, and we understand them. We are working on putting together the right strategy in place to get this business back on track.

Finally, we have spoken about operational levers, which we are strengthening to help with our long-term growth, including, the R&D process, the consolidation of our operations, continuous improvements to our supply chain and the implementation of a global business unit sales structure and strategy.

All of these initiatives are continuing as planned, and have begun to show positive momentum as we pivot our focus towards growth.

Overall, the first quarter demonstrated our commitment to continuous operational improvement, while investing in long-term sustainable positive outcomes. We remain confident that the strategy we are implementing across our businesses will support both top line growth and improved profitability for the company in the long term.

With that, I'll turn the call over to Michael.

Thanks, Jim. Good morning, everyone. Before I begin, I would like to draw your attention to the slide, which we provided for today's call. We hope this type of information is helpful as we walk through the quarter's results.

From a top line perspective, total revenue for the quarter was $85.4 million, down 3% year-over-year. As Jim alluded to earlier, $1.6 million of the decline was a result of an inventory build by our customers in the first quarter of fiscal 2017 related to Cook's recall of their angiographic catheters.

Adjusted for the stocking orders in the prior year first quarter, our revenue would have been down 1% from last year compared to our recorded 3% decline. The balance of the decline is primarily related to continued softness of Vascular Access and declines in our Venous business. As Jim mentioned, the decline was partially offset by growth across many of our other product families, including fluid management, thrombus management, the BioFlo family of products and Solero and NanoKnife disposables in our Oncology business.

Gross margin for the first quarter was 48.3%, compared to 51.1% during the prior year first quarter. Gross margin was impacted by the decision we made to support our customers and address the recall voluntary withdrawal of Acculis as well as some changes in mix. Solero's direct impact on gross margins was approximately 90 basis point.

Adjusted net income for the first quarter of fiscal 2018 was $4.6 million or $0.12 per share, compared to an adjusted net income of $6.4 million or $0.17 per share in the first quarter of fiscal 2017. This excludes items shown in the quarterly non-GAAP reconciliation table. Adjusted EBITDAS in the first quarter of fiscal 2018, excluding the items shown in the attached reconciliation table, was $10.6 million, compared to $14.2 million in the first quarter of fiscal 2017.

During the first quarter, we generated $3 million in operating cash flow and $2.5 million in free cash flow. These metrics include payments related to the timing of certain accounts payables as we discussed during our last quarterly earnings call. These metrics are in line with our expectations for the quarter.

Now turning to guidance. As we discussed, there were onetime events that impacted our results when compared to the prior year. That being said, our performance met our expectations, and we are confident in our ability to execute throughout the duration of the year.

As such, we are reaffirming our fiscal 2018 guidance and expect the following: net sales to be in the range of $352 million to $359 million; adjusted EPS to be in the range of $0.64 to $0.68; and free cash flow generation to be in excess of $35 million.

Before I turn the call back over to Jim, I want to offer some insights into our plans for the maintain and invest portfolios, which we introduced during our Investor Day in April.

During the quarter, our focus on commercial execution across our maintain portfolio began to bear some fruit. As a reminder, these are the products that we are focused on maintaining share, while driving operational efficiencies and generating cash for the business.

One example of this was Solero, the market's response to the product gives us confidence that we will be able to hold on to our position within the microwave ablation market, while returning that product line to average or above-average market growth. In addition, we saw growth in Fluid Management and sustained sales in the core business, both achieved through disciplined sales execution.

We're continue to implement aggressive operational efficiencies across the entire maintain portfolio in order to unlock funds or investment in our growth areas. We will continue to rationalize SKUs as appropriate, complete our operational consolidation by the end of the fiscal third quarter, align ourselves sales force and implement strategic pricing and sales initiatives.

Our invest portfolio includes product families where we see significant market opportunity, as we outlined at Investor Day. We see growth in this portfolio accelerating in fiscal 2019 and beyond. First, for NanoKnife, we are continuing discussions with regulatory and reimbursement bodies regarding indications of payment. We feel confident these discussions will yield positive outcomes.

In addition, our R&D initiatives to upgrade NanoKnife's hardware and software is expected to be submitted to the FDA for approval in the coming months. These long-term efforts are in addition to our near-term activities to drive utilization in the space. Our venous insufficiency business continues to be an area facing significant marketplace headwinds, as Jim noted earlier. But we remain committed to becoming a comprehensive provider of venous solutions to our customers.

We saw growth in the first quarter in thrombus management as a result of growth in our thrombolytic products, while maintaining share of revenue in AngioVac. We continue to assess opportunities to provide new options to patients in both of these bases, venous insufficiency and thrombus management, and to round out these portfolios.

Finally, growth for our BioFlo family of products will be driven by generating clinical and economic outcome data. Currently, there are 6 studies underway looking at the benefits of BioFlo, and we are pleased to announce the publication of a study, which concluded that in a nurse-led PICC program, low rates of major PICC-associated complications were partly attributable to BioFlo. Data like this supports our commercial execution efforts in the BioFlo family.

With that, I'll turn the call back over to Jim for some closing remarks.

Thanks, Michael. To summarize, we had a solid first quarter, and we remained confident in our annual plan, and we're very bullish on our future. We know that there is still much work to be done, and we are confident in the ability of our business and our businesses to grow in their overall markets. Our efforts and focus in execution will create value for our stakeholders.

Overall, we continue to focus on improving our company, aiming to launch new products at a much faster pace than our historical average. We want to expand our growth internationally through our new aligned global business unit strategies and by utilizing our financial strength to opportunistically acquire external assets of strategic and financial value.

We are very confident in the strength of our business going forward. Thank you for joining us this morning. We'll now open up to some questions.

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

I'm not quite sure I fully understand the decline in the gross margin. Could you walk from where you were in 3Q and 4Q, which is the mid-50s, to where you came in this quarter? I don't believe there was a significant change in sales between the quarters.

Yes -- No. Thanks, Matt. I'm not sure we're in the mid-50s in those quarters. I think we were more in the 51%, 52% range. But I could just walk you from the 51%, 52%. So we had about 0.5% headwind on ASP, we had 0.9% and 90 basis points related to the Solero generators that we've got out of the market at no charge. And then mix was unfavorable by 1.2%. So when you look at the solid quarter Fluid Management had, we had some mix in there because of Fluid Management's lower margins.

And just following up on that, it doesn't seem like a lot of that is onetime or nonrecurring. How confident are you that you're going to be able to hit that 52% plus, I think, that's underlying your guidance for this year?

Yes. So very confident. So Solero was a onetime as we get into the back half of this year. ASP, we had a couple of things happen that we have built into our expectations, around 0.2% for the full year. So that was a little bit higher in the first quarter, but we don't expect to see that trend continue. And then mix, we expect to see be much more favorable in the back half of the year. So we feel very good about the 52% plus. We also will start to see some of the positive outcomes from the consolidation of the plants in the back half of the year as we get done with those in the December-to-January timeframe.

And Matt, it's Jim. Some of the activity we did, Matt, in the Solero -- Acculis to Solero program, some of those are one-timers. Some of our customers have different programs they're on that lead to us putting heavily discounted or no-charge hardware in place in the field. So once we get those things behind us, that will help. Also, the Fluid Management team did a really great job. We've got a great selling and marketing team there supported by our operations team. But that still is a dilutive business on a margin basis, overall, to us. Now the work they've done with tremendous SKU reductions, more focused pricing initiatives and better field execution had lead that to go up in margin. But still, that is dilutive overall to our gross margins.

Okay, great. And then just one last one on the Angiographic Catheters and Cook. Could you give us an update on where Cook is? Are they back in the market? Or is this inventory situation stabilized with -- and your run rate stabilized with them still out?

Yes. So, Matt, we have people in the field every day. We hear different pieces, but no, to our knowledge, they have not yet come back in the market. We were very close to the market, as you know, being a major player. So we expect them to probably return, but we don't know. The point is, now, we're taking real charge of this business. We've done a really great job supporting our base customers that we had prior to this Cook issue and now supporting a lot of the new customers that have come over. We've also responded with some new products that some of these new customers have access for to better fit their needs. So we're doing a really good job there, Matt. We'll be clear and transparent. I think if you go back to a year ago, we were very clear in calling out the revenue that we gained last year and how we responded. It took time for our supply chain to respond. Our selling and marketing team did a great job responding. But today, we feel really strong about the position we're in, but we can't predict what they'll do.

We'll take our next question from Matt Taylor with Barclays.

This is actually Ian Mahmud on for Matt. One of the bright spots this quarter was Solero, obviously. Can you size the market and maybe get some commentary on the ramp for that product based on your latest thinking?

So we've been a major player in the microwave business for a long time with our Acculis products, but we also knew the Acculis product needed to be upgraded. So here at Angio, we had an R&D project to come up with the Solero product. So we have identified this market for a while, been a major player for a while. And today, with Solero, we feel better about our ability to compete against other market players like J&J and Medtronic in this space. So today, we're not ready to put out market sizing or potential growth rates in the space. But we've talked about our ability to service this customer. And you take a step back, I've been in this industry for a long time. And when you see what we had to do this past quarter, when we voluntarily pulled a product from the market that's trusted by physicians to give care, replaced it with another one, that can be very, very disruptive to care. And when we've got good competitors that we compete against, the fact that Solero is being widely accepted is a good bullish sign for us going forward. But we've got a lot of work to do to maintain or grow our market share in that place, but we like that space and we'll compete hard.

Understood. Helpful. Okay. You also alluded to in the script the regulatory and reimbursement discussions around NanoKnife. And you mentioned that you felt confident about the outcomes of those discussions. Can you comment on what gives you that confidence?

So Ian, good question, what I'll do is we have Stephen Trowbridge here today, who is our General Counsel and also runs our clinical affairs group, I'll have Stephen comment for you.

Thanks, Jim. Thanks Ian for the question. So as we've said in past calls, we do feel very confident on the outcome of these discussions. As we said in the last call, when you look at the proliferation of clinical data that we've had coming out recently, but really over the last several years, it all tells a very consistent story. We're going to be leveraging that data in these ongoing conversations that we're having with both the FDA as well as payers, private payers and public payers. As you know, this is a long iterative process. So you have conversations with the FDA, you'll get feedback, you'll go back, work on it, resubmit, have to wait some time before you can get back in front of them. And it's the same way with the payers as well. So we're continuing these discussions, we're moving forward. We do feel that they are progressing appropriately, and we're as bullish as we ever have been that we will get to the right outcome, it just takes some time.

And we'll take our next question from Jason Mills with Canaccord Genuity.

This is actually Cecilia Furlong on for Jason, and I wanted to just touch on the Solero transition again and really what you see is left at this point in terms of transitioning customers and how we should think about it through the balance of the year.

It's Jim. And I'm sorry, just to get your question right. Did you ask what we see is loss? I couldn't hear what you ask for.

I'm sorry. Just what's left in terms of transitioning additional customers over.

Okay, sure. Thank you. So 2 ways we look at that, Cecilia. As you recall, we took a reserve, which we noted in our prepared remarks the end of the fourth quarter. That was for Acculis products that will be coming back to us. Part of how that reserve gets relieved is default turnover to Solero products. We anticipate that, that reserve will be completed as far being cleaned up off the balance sheet by the end of the calendar year. So that's one way to answer that. The other way to answer that is that we also anticipate in the back half of the year, the expectations we have with our Acculis products, initially, for the back half of the year before we launch Solero, we will have probes at the same levels of volumes or, hopefully, based on some of the upside we see in this first quarter. Maybe even greater than what we anticipated. So by the end of the year, as we exit our fiscal year, we expect all of that Solero transition to be completed.

Okay, great. And then, also, you just highlighted your Venous business and weakness below what you were expecting in the quarter. What's your strategy going forward to kind of turn this business around?

So going back to our Investor Day, we highlighted the Venous business. As most folks know, we're the market leader in laser ablation space, and we like our laser position, but we also identified other areas, and there's some movement in new levels of care and how care is delivered. So today, we have our laser and we have a drug product that we distribute. But there are other spots that we are interested in, in delivering care and supporting our customers that they deliver care in this space. So 2 things, we think the product portfolio growth is an enabler. And we also mentioned at that time that there's still such a small percentage of people seeking or receiving treatment in the space. So we're going to work hard again on the portfolio enhancements and work hard on education to find access, people that need care to come to our partners.

And we'll go next to Charles Haff with Craig-Hallum.

So a couple here. In terms of NanoKnife placements, what were your NanoKnife placements this quarter? And do you think that presented any gross margin headwind when you look at the year-over-year comparison?

We're not -- so Charles, it's Michael. Thanks for the question. We're not giving out NanoKnife placements. What I can -- what I will provide is that placements were -- (inaudible) were up year-over-year, and we had units that were a little down year-over-year. So we don't expect that mix to remain the same throughout the duration of the year, and we don't expect to see any headwinds on our year-over-year comparison from a margin standpoint specific to NanoKnife.

Okay. And just to remind me, the NanoKnife capital equipment has much higher than corporate average gross margin, right?

That's correct, as do the probes.

Okay. And then on the Venous business. You mentioned that you saw some marketplace headwinds on the Venous business, do you think you're losing market share in the Venous business to Boston Scientific or some other players this quarter?

So Charles, it's Jim. A couple of things. So there is still kind of a wild west going on right now between laser RF kind of the folks that we play in the thermal space that's been trusted for years as that best care delivery mechanism. And as we all know, too, there's some new products coming out in the NTNT, or non-thermal, non-tumescent space. So I think customers are looking right now to decide, hey, do I want to use a laser, and people trust Angio as the laser choice. Another company has on RF, and then there's a couple of folks out there with this new device. So we think there's a lot of things happening in the marketplace. Did we grow our share? No. Did we have a soft quarter? Yes. But again, as I said earlier, we remain confident in our ability to grow this business overall, probably with additions to our laser platform, as we talked about. So today -- and again, one quarter is hard to read trends in it. We watch it very closely. I think you know, too, Charles, we brought a new leader for this division in, in February who now has his arms around it, has good knowledge of the space and has provided us a good strategy that we support going forward.

Okay. And then last question on inventories. I saw your inventories ticked up a little bit quarter-over-quarter. Was there any stocking that you were doing in Puerto Rico or anything to get in front of the anticipation of the hurricanes coming?

No. No. Two things. We don't have any manufacturing in Puerto Rico. But secondarily, most of that was just due to preparing for the closure of the 2 plants, one in Manchester, Georgia, and one in Denmead, U.K. So we obviously have to get stock available in upstate New York that we'll be selling as we move the registration up to our upstate New York plant.

Okay. And just to clarify, the Puerto Rico, I thought you were doing some operations for Boston Scientific down there. Is that not the case?

No.

No.

No. As you know, we have a small business that we do. We have a small OEM business to Boston Scientific, but Puerto Rico isn't affected.

We'll go next to Jayson Bedford with Raymond James.

So just a few. Bigger picture, I realize that the first quarter comp was a tough one. But outside of easing comps, what would you identify here guys as the drivers of the implied growth in your revenue for the year?

So Jayson, a couple of things. We talked about Solero out of the gate. And again, that will normalize, we'll all get to see that over the course of this year. But we're very pleased with how Solero came out. Second, NanoKnife, our probes, our utilization of our products are up, which is great. Third, our International sales as a percent of our sales is moving in the direction that we told you it needs to move, which is up. And I credit a few things there, some really good people that we brought on globally, who are really close to their market opportunities, is half of it. The other half is by moving to the GBU structure that we announced last spring, and getting our decision makers closer to the global market is definitely helping. So these are still things in process. And then, finally, areas like Fluid Management, which is our largest overall business. We compete with a really good competitor there, but we have a really strong team and they executed very well there. So those are some of the neighbors we see now. When we get the Venous Business straightened out and BioFlo becomes a larger percentage of our Vascular Access business, we think those businesses will stabilize and help the growth show in other areas.

Okay, that's helpful. A few follow-ups on that. Just in Access, BioFlo as a percent of the overall Access mix, what -- where is it?

So it's up to nearly 50 right now, almost 50% this quarter.

Okay. And then in Oncology, on a net basis, what percent of Acculis customers have converted over to Solero?

We don't know the exact number, but a very high percentage. We were very pleased with the execution in the field. And very pleased to hear that customers like the Acculis products and were thrilled to have the Solero opportunity.

Jayson, the hard part is, globally, we know where all of our Acculis hardware systems are placed, and we're working to get people now the new Soleros. But our initial supply chain projections had us, as we talked to you about, a launch that was on more of a stable basis. This when we updated the launch to replace Acculis out of the gate, it did not allow us to have a supply chain ready to support every customer globally. So we still know there's some more transitions to occur this next quarter.

So you still have Acculis owners that aren't using the device that, hopefully, will be converted to Solero over the next few quarters?

Exactly.

Right.

When we finish the transition we'll have Soleros in their hands now. So we have some utilization, as we said, that can't occur that maybe some of our competitors are getting access to those procedures.

Got you. Okay. And then last one for me within Oncology. NanoKnife, so probes were up, placements were up, but my impression was that NanoKnife revenue was not up year-over-year, is that correct?

Right. Probes were up, placements were down, and so that has the impact on the outcome.

And we'll take a follow-up question from Matthew Mishan, KeyBanc.

On the non-BioFlo portfolio in Vascular Access, that's still 50% of that. What's the strategy for maintaining that portfolio where it is? So it's not necessarily a headwind, as it's been over the like the last couple of quarters.

So, Matt, going back to our April Investor Day when Chad Campbell laid out some of his thoughts about the transition. And I think, at that point, at that time, Chad showed where our business was today, BioFlo versus non, and where we'll be in the 3-year plan. So really, what we'll do is we're going to support a healthy transition of some of our customers today that don't use our BioFlo products over. And we also think we'll probably lose in the PICC area, especially. We've lost market share in the PICC area for a while. So we'll continue to probably lose it in the non-BioFlo. But we maintained it at a much higher rate in the BioFlo area. So it's just a tricky process. I think we laid out to you, very transparently back in April, we stick to that, that we'll shift people over. But it's hard to see when you jump quarter-to-quarter as well, Matt, it's a tricky one. But it's going according to the plan that Chad and his team laid out.

Okay. And then the EPS guidance, you laid out some moving pieces of that back at the Investor Day as well, like -- and we're able to quantify and walk the guidance with gross margin expansion, the device tax, investments in R&D, stock-based compensation. Have any of the moving pieces underlying that EPS guidance changed materially?

No, not at all Matt. Some timing from the quarter R&D, as you see in the results, are a little behind where we thought we'd be spending in the first quarter. That was just because we weren't ready to put certain dollars into play. So we anticipate throughout the income statement what we laid out in the Investor Day and for this year will remain intact.

And for NanoKnife in the U.K., now that you have the NICE recommendation behind you, have you seen an uptick in demand in the U.K. or an uptick in conversations with physicians? What's been the general activity following that recommendation?

So it's a good question, Matt, maybe we can give you more detail in the future. A couple of things. As we went through our GBU structure in the spring and the summer, so we have a new leadership team in place in Europe to sell our Nano and our Oncology business and actually put up a leader in the U.K. now become our European leader. So a lot of activities occurring. I don't think I could report to you today, Matt, there's been significant uptick yet due to NICE. We'll keep an eye on that. We can look at that in the future if that's of interest.

Okay, excellent. And I promise that this is going to be my last question. Now that we have somewhat of a tax reform package on the table, can you just comment how your first takes on it and what you think would be the impact to Angio on your tax rate if the corporate rate goes down into the low-20s in the U.S.?

Yes. Great question. Thanks, Matt. For us, in the near term, near term being 3 to 5 years, it will have very little impact because of our NOL situation. So from a cash tax situation, we have international taxes, we have some state and local taxes. But from a federal, domestic standpoint, I would say very little. That being said, after we work through the NOLs, having the lower tax rate available is going to be beneficial because, right now, with our mix of, call it, 80-20, domestic/international, and not having any international manufacturing operations where you would get some of that price arbitrage, that will have a very positive impact on us in the out-years. But we haven't scheduled that at this point because, again, that's 3 to 5 years out where we start to have to consider the direct impact of the new cash structure.

It appears we have no further questions at this time. I will now hand it back to our speakers for any additional or closing remarks.

Thank you folks for joining us today. I think what saw at our first quarter is even with some choppiness in the revenue comparable to last year, with the Cook situation and now the Acculis to Solero transition, I think what you see is the underlying strength of our company. Things that we talked about in April at our Investor Day, we are working on actively. We talk to you about our plan this year to take $5 million that last year was in our profit line and invest it back into our business. Most of that in our research and development process, to make sure we can hit or exceed expectations that we have to grow our company in the future. We also talked to you about the ability that we have due to the strength of our balance sheet and our strong debt-to-cash position and how we can use our strength financially as an enabler to bring external assets in to play here over time.

So again, those plans that we identified, we're working on in the background. We look forward to sharing more of those details with you in the future. Thank you for joining us today.

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