AngioDynamics Inc (ANGO) 2018 Q2 法說會逐字稿

Good morning, and welcome to the AngioDynamics Second Quarter Fiscal Year 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

The news release detailing the second quarter results crossed the wire earlier this morning and is available on the company's website. This conference call is also being broadcast live over the Internet at the Investor section of the company's website at www.angiodynamics.com, and the webcast replay of the call will be available at the same site approximately 1 hour after the end of today's call.

Before we begin, I would like to caution listeners that during the course of this conference call, the company will make projections or forward-looking statements regarding future events including statements about expected revenue, adjusted earnings and free cash flow for fiscal year 2018. Management encourages 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 being described in the forward-looking statement.

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

And now let's turn the call over to Jim Clemmer, AngioDynamics' President and Chief Executive Officer. Mr. Clemmer?

Thank you, Rob. Good morning, everyone, and thank you for joining us for AngioDynamics Second Quarter 2018 Earnings Call. With me on the call is Michael Greiner, AngioDynamics Executive Vice President and Chief Financial Officer.

Today, I will provide a brief overview of the operating highlights for the quarter. Michael will then provide a detailed analysis of our financial performance and an update to our fiscal 2018 financial guidance. After that, we'll open the call to your questions.

The second quarter was both rewarding and challenging for AngioDynamics. While we continue to drive operating efficiencies and position our company for long-term success, our top line performance did not meet our expectations. This led us to reduce our full year 2018 net sales and free cash flow guidance.

Our net sales for the second quarter of fiscal 2018 were down 2.6% year-over-year to $86.7 million. This decrease was primarily attributable to declines in our Venous Insufficiency and Core businesses as well as year-over-year declines in our non-BioFlo product lines. These were partially offset by growth in our Solero, AngioVac and BioFlo businesses.

Now I'd like to briefly discuss the performance of each of our businesses during the quarter and outline the strategies we're implementing to improve performance and drive long-term growth in each of those businesses.

Our Peripheral Vascular business was negatively impacted by year-over-year declines in the previously mentioned Venous Insufficiency and Core businesses. These declines were partially offset by growth in the fluid and thrombus management product lines. As a reminder, in the year ago quarter, we saw the benefit of roughly $1 million of stocking orders in our angiographic catheters business, which was related to a competitor's product recall, which, as expected, negatively impacted our growth rate in the second quarter of fiscal 2018.

As we discussed last quarter, we are not satisfied with the performance of our Venous business, which continues to face reimbursement headwinds related to a key competitor's radiofrequency products. We have a clear understanding of these challenges. We remain committed to providing patients with the best treatment options and determining how we can best position ourselves for success in this treatment category.

On an encouraging note, we saw a record number of AngioVac procedures performed during the month of November and in the second quarter. In addition to these positive trends, we continued to invest internally in the development of complementary thrombus management products and to identify inorganic growth opportunities as well.

Vascular Access, primarily non-BioFlo, continued to soften during the second quarter as growth in Midlines was more than offset by declines across the remainder of the portfolio. However, we continue to accumulate clinical evidence that supports the value proposition for our BioFlo-related products and we are encouraged by what the future holds for this product line.

Additionally, our lawsuit against C.R. Bard is moving forward as planned, and we continue to believe that if our PICCs are able to compete on a level playing field, we can gain share in this market particularly given the gains we have seen from our BioFlo Midline, ports and dialysis product families.

Now moving on to Oncology. Our Oncology/Surgery business continued to perform well, growing 8.4% year-over-year primarily driven by incremental sales of our recently launched Solero Microwave Tissue Ablation System. Additionally, Oncology/Surgery experienced robust sales across several key international markets. Our team continues to work hard on transitioning Acculis customers to Solero and feedback from physicians remains positive. We also anticipate that we will complete all Acculis transitions during this current quarter.

While we have meaningful work ahead of us to position the company for long-term growth, we have had -- we have made great strides operationally. We remain disciplined in seeking out potential M&A, we continue to generate free cash, and importantly, we are driving an improved R&D process, which is the first step in developing a strong pipeline of innovative, high-quality products.

And now I'll turn the call over to Michael Greiner, our Executive Vice President and Chief Financial Officer.

Thanks, Jim, and good morning, everyone. Before I begin, I would like to remind you that we have posted a presentation on our IR website summarizing the key items associated with our second quarter results. This information is intended to complement our prepared remarks as we now walk through the quarter's results.

As Jim mentioned, our net sales for the second quarter of fiscal 2018 totaled $86.7 million, which represents a 2.6% year-over-year decrease. For the 6 months ended November 30, 2017, net sales were $172.1 million, a decrease of 2.8% compared to $177.1 million for the same period a year ago.

When adjusting for the stocking orders associated with the angiographic catheter recall a year ago, our year-to-date revenue decreased 1.1%.

Our gross margin for the second quarter of fiscal 2018 declined 130 basis points to 49.3% from 50.6% a year ago, primarily driven by an inventory write-off related to VOLTA, our radiofrequency ablation product previously sold in Japan. Excluding this inventory write-off, gross margin would have been 51.2%, an increase of 60 basis points year-over-year. We remain committed to executing on achieving our full year gross margin target of 52%.

We expect to close our second manufacturing plant by the end of January. In addition, we had an annual royalty of approximately $6 million included in cost of goods sold in prior years that will be less than $2 million this year. In addition to these 2 significant items positively impacting our gross margin, we continue to focus on smart and efficient spending across our entire manufacturing platform providing us confidence in our ability to end the year with a gross margin of 52%.

Our research and development expenses during the second quarter of fiscal 2018 were $6.1 million or 7% of total sales compared to $5.9 million or 6.6% of total sales a year ago. Although this is an increase in our R&D spend versus prior years, it is currently behind our spend expectations.

As noted on previous calls, we have enhanced our research and development process and I've included various milestones and stage-gate requirements before allowing a project to move forward. As a result, we are very focused on when R&D dollars are to be expended to ensure that we are building an R&D pipeline that will translate into a high-quality, high-margin product portfolio. Because we are only spending when we achieve predetermined milestones or exit certain stages of this process, we are currently below our projected year-to-date spend for our R&D activities. However, we anticipate that our spending will increase during the second half of the fiscal year and that we will likely close most, if not all, of the current gap to our R&D expenditures for the year.

Selling, general and administrative expenses for the second quarter of fiscal 2018 decreased slightly to $26.5 million or 30.6% of total sales compared to $27.3 million or 30.7% of total sales a year ago. The decrease in SG&A on a dollar basis was attributable to our continued focus on cost reduction of activities with a low ROI associated with them including lower spending on consultants and other outside services as well as leveraging our internal capabilities.

Our adjusted net income for the second quarter of fiscal 2018 was $5.8 million or $0.16 per share compared to adjusted net income of $6.9 million or $0.19 per share in the second quarter of fiscal 2017.

For the 6 months ended November 30, 2017, our adjusted net income was $10.4 million or $0.28 per share compared to adjusted net income of $13.3 million or $0.36 per share a year ago. Both the 3 and 6 months lower adjusted net income is attributable to the sales declines already discussed.

Adjusted EBITDAS in the second quarter of fiscal 2018 excluding the items shown in the reconciliation table on our presentation, was $13.3 million compared to $15.2 million in the second quarter of fiscal 2017.

For the 6 months ended November 30, 2017, our adjusted EBITDAS was $24.6 million compared to $29.5 million for the same period a year ago.

Now moving to the cash flow and balance sheet. In the second quarter of fiscal 2018, we generated $10.2 million in operating cash flow and $9.4 million in free cash flow, the difference being CapEx. As of November 30, 2017, we had $51.1 million in cash and cash equivalents and investments as well as $95 million in outstanding debt, which excludes the netting impact of deferred financing fees on our balance sheet.

As we have previously discussed, we are actively pursuing inorganic growth opportunities. For a variety of reasons including valuation, we did not complete any M&A during the second quarter, but we will continue to look for value-creating opportunities throughout the duration of fiscal year 2018 and beyond.

Additionally, our free cash flow generation continues to strengthen our balance sheet and underlines our focus on financial discipline. This access to internal and external capital will allow us to pursue assets that align with our long-term growth initiatives while enabling us to continue to make the necessary investments internally to develop an innovative product portfolio.

Now let me provide you with an update on our financial guidance for the remainder of fiscal 2018 that Jim alluded to earlier. We are reducing our net sales guidance and we now expect fiscal year 2018 net sales in the range of $345 million to $350 million compared to the previous range of $352 million to $359 million. We are also adjusting our free cash flow guidance and now expect free cash flow in the range of $30 million to $35 million excluding any payments we may make related to the DOJ subpoenas previously disclosed.

Although we are lowering our revenue guidance, our improved operating efficiencies and ongoing focus on cost control still position us to meet our previously communicated adjusted EPS guidance. As a result, we are reaffirming our adjusted earnings per share guidance range of $0.64 to $0.68. This excludes any positive impact associated with the 2017 tax reform act.

Speaking of taxes. With regards to the newly signed tax reform, we will see a positive impact to our adjusted EPS primarily due to the decline of our statutory tax rate from 35% to 21%, which is what we use to calculate our adjusted EPS, and as I mentioned, this is not included in our formal guidance of $0.64 to $0.68. That being said, we do not anticipate any near-term impact on our U.S. GAAP earnings per share until we fully utilize our net operating losses that we have discussed on prior earnings calls and/or disclosed in our past SEC filings.

Finally, items such as minimization of interest expense deductibility, repatriation of overseas cash or the deemed dividend concept or even stock-based compensation related to executives should not have any meaningful impact to our cash tax rate, which will remain comfortably below 15% for the foreseeable future.

With that, I'd like to turn the call back to Jim.

Thanks, Michael. In closing, as we look forward to the second half of the fiscal year, we remain committed to pursuing both organic and inorganic growth. We will continue to make disciplined investments across all 3 of our businesses and to seek out potential strategic acquisitions in order to drive long-term revenue growth and build long-term value for our shareholders.

And now, I'd like to turn the call back to Rob for Q&A.

(Operator Instructions) Our first question today comes from the line of Jason Mills with Canaccord Genuity.

Jim, can you hear me okay?

Jason, yes.

I have several questions, I'll try to limit to a couple. Just firstly, could you talk a little bit about -- a little bit more about your R&D progress and I guess, somewhat related, any specifics or generalities for that matter with respect to your M&A process and what you're seeing out there in general and what areas you might be looking? And then, secondly, curious how the guidance reduction impacts your relatively recently stated long-term plan. And then I had one more follow-up.

Sure. Okay, Jason, I'll try to tackle those and Michael will chime in the second half. So a couple of things. The R&D process today is up and running, fully functional in the way we expected when I communicated last year we're going to build a process. So it works now. We have projects in the queue and we have expected launch dates associated with those projects. What we'll find, Jason, here is at Angio I've talked about before, we're going to need really 3 paths to get the innovation level where we want it to be: one is internal R&D; secondarily, it is licensing or partnership or distributor opportunities with other partners; and third is through M&A. We are strategizing to use all 3 of those opportunities as we grow revenue. So today, you will see during the course of this calendar year, you'll see launches come out from the R&D process we put in place last year. Second, I think you asked a little more about specificity regarding M&A. So we've also targeted, as we mentioned at our Investor Day last year, 4 of our 10 business product categories that we're interested in investing in. So we currently have activity in each of those 4 segments and looking at opportunities in those 4 areas. There's nothing here to announce today. As you know, we're being responsible and cautious based upon valuations that we see in the market yet we believe there's good opportunities for technology we can bring in, add to our commercial ability to get them to the market. And then, finally, I'll let Michael tackle the other piece, Jason.

Yes, so we're 6 months in to our 3-year plan at this point, Jason. Although we are pulling back a little bit on revenue guidance, obviously today that does not impact our ability to believe in what we're doing over the next 24 and 36 months. So we have no comments on the 24 and 36 months, but we are still marching towards what we stated back in April. The other thing I would just add of R&D and M&A, as you noted in our prepared remarks, we're a little behind in R&D spend. We did not get to the finish line in M&A for various reasons so far this year, but it was wrapped around us being very focused on the areas that we want to invest in. We want to make sure that when we put dollars in play, that they have a high probability of good ROI. So we're just being focused on where it is that we want to participate in those types of activities and so we're a little behind, as I said, in R&D, but we do expect in the second half of the year we'll do some catch-up spend as some of our stage A processes accelerate.

Okay, that's helpful, Jim and Mike. And just as a follow-up, Jim, to your commentary on M&A, perhaps remind us what your discipline is? Are you looking predominantly at assets that would contribute immediately from a revenue and then relatively short-term contribute to the bottom line? Or are you looking at larger target addressable market opportunities that could be dilutive initially and take a little bit while to develop, it could be larger long term maybe? Just remind us of our -- of your discipline or what we might expect to see as outsiders here over the course of the next year or so. And then just more specifically with your current programs, maybe give us an update on your NanoKnife indication progress, if you've had any, or anything to report there? And then, lastly, maybe what length of time you expect the Bard litigation to take?

Sure. I'll try to capture those, Jason. [Back], I guess you're looking for a kind of a ranking in our -- how we're looking at M&A. So obviously, we're looking right now in the -- again, the 4 areas we identified as the growth pockets that we like, that's our first hurdle, and we have ideas and activity in those 4 areas. From there, we're looking at things whether they're complementary, adjacencies or white space, we're interested in all 3. But they have to be accretive from a growth perspective initially. We also obviously would look towards accretion on a full -- on a profit basis, but we're not afraid of dilution if we find something that's extremely compelling. So we're looking at and ranking things in order, but obviously something if it's dilutive to long term, that's going to be a little more -- take a little more to swallow. The piece, Jason, I would talk about as far as a long term, I'll call it, "a science project", I don't think that's where we're looking right now. We have -- we'd rather have things that are either closer to revenue or current revenue. When I look at things like -- and you touched upon Nano, what we believe with our Nano platform, when we get our regulatory and clinical approvals correct, we think the science behind NanoKnife, driven by the compelling data produced by surgeons who have used it, physicians who have used it, gives us enough bullishness that this is really the bet we're making today as well and rather make sure that we invest properly in NanoKnife to get it -- the right hurdles cleared so we can go to market in the proper channel. To me, that's a better bet than betting on someone else's "science project" right now externally, which comes with risks. And then, Michael, I'll pass the other one to you.

Bard -- we had Bard and...

I'm sorry.

So Steve, did you want to comment on that one?

Bard litigation? So Steve Trowbridge is here, Jason. Steve will comment quickly on your Bard question.

Sure. I think you had 2 questions, one was on NanoKnife and one was on Bard. With the Bard litigation first, your question was around timing. Timing on any litigation is very hard to predict. I mean, what we can say is, as we've disclosed, we're in the very early stages of some of the motion practice. Bard has filed a motion to dismiss. We think it's a very weak motion. We do expect that motion to be denied. From there, we would then move into the discovery phase of the trial. As we've said before, we think it's a very clear, well-defined case and the discovery should not be protracted, but we do expect the defendant in that case to argue for a more protracted discovery period. We're going to try to limit that as much as possible. So as much as you can predict any litigation, that's how we're approaching it. With respect to the question on NanoKnife, no new news to report today other than, as Jim had mentioned, we remain very bullish on the technology. We are actively engaged in those discussions that we talked about with the FDA to try to secure expanded indications and to secure expanded availability of the technology. We're encouraged with the way those conversations are going. We do hope to have something to announce in the relatively near future, and once we do have something concrete to announce, we'll announce that properly.

The next question comes from the line of Matthew Mishan with KeyBanc.

Michael, I think I heard you say that you're still confident you're going to end the year at 52% gross margin. I just want to make sure I fully understand. Is that a 52% run rate at the end of the year? Are you still thinking the full year can be 52% and that you'll exit somewhere in that 54% kind of range?

Yes, exactly. As a matter of fact, when I was reading my prepared remarks, I'm like Matt's going to ask me a question on this because I wasn't clear. But exactly what you just said, which is we will exit at a much higher rate than the 52%. So therefore, the full year rate will be in that 52%.

Okay. Great. And then just going back to the M&A pipeline, it's probably the most I've heard you guys talk about this. First, just talk a little bit, if you can, talk a little bit about the pipeline. It sounds like you were close to a deal and had to pull back. And then, second, maybe the amount of leverage you'd be comfortable going up to?

Yes, so I think even starting this fiscal year, we had commented that last year we were very focused on internally understanding our capabilities, getting some additional resources available from a personnel standpoint and then when we were ready to look at M&A in a way that we could effectively identify opportunities, execute and then obviously, most importantly, post-closing, ensure that we could get the value creation that would be laid out in any sort of M&A whether it be any of those 3 sorts of programs that Jim was talking about earlier, we would be ready to do that. And I think when you look at our first and second quarter of this fiscal year, we felt confident that we could actively participate in the M&A market. As it turns out, there were opportunities that we saw that for valuation or other reasons just didn't come to fruition, but we will continue to remain actively looking there for the duration of this year and obviously beyond given our level of confidence that we could do this well and that we have the right internal capabilities and platform to do that now. With respect to how much we would do and therefore what our leverage could look like, our existing credit facility provides us with $150 million of revolver capability plus our $50 million in cash, so we have a fair amount of dry powder that also allows, with our current facility, allows us to go up to 3.5x leverage net debt-to-EBITDA and up to actually 3.75 temporarily for M&A. I can't foresee a situation where we would do that right out of the gate. For the right scenario with the -- to Jim's point earlier, with the right level of accretion and revenue opportunity, I can definitely see us pursuing something that would put us over 3.0 in leverage. But I think our comfortable target would be in that 2.5x range longer term. So I'd say we're probably a little under leveraged right now when you think about where we'd like to be from a capital structure standpoint, but we are remaining patient until we find the right asset opportunities.

Okay, great. And then just, lastly, on this -- the change in the sales guidance. I don't think your second quarter number was too far off from where The Street was at. What's driving the change, especially around 3Q and 4Q expectations?

Matt, as we look into the coming forecasting process, really the Venous Insufficiency business that we called out, some of the competitive headwinds that we've faced recently aren't going to go away immediately so it's really a product choice in the marketplace. So what we've done now is we can limit that going forward. We have good plans to limit that impact, but we're watching a little carryover effect. So we're being, we think, realistic and giving you guys the best range of what we feel is a realistic set of guidance going forward. But you're correct, this Q2 miss was not dynamic, but we're being responsible and we've done a good job forecasting forward.

Our next question is from the line of Jayson Bedford with Raymond James.

A couple of questions. I guess just getting back to NanoKnife and the status there, are you running any new formal trials associated with getting a label expansion or a more specific label?

Jayson, this is Stephen. At this time, no, we're not running today any new formal trials. And whether formal trials will be required is part of the conversation that we're currently having with FDA.

Okay. And you expect some sort of -- I don't want to call it resolution, but I think, Steve, your comment was expect some sort of announcement in the near term. Is that the way I interpret your comment?

We do expect to be able to give some additional information, some news regarding our progress in the not-too-distant future.

Okay. In terms of one of the growth drivers, fluid management, can you just comment maybe at the level of how quickly that business grew and where is the growth coming from? Is it more mix? Is it share gains? Or is it step up in volume?

It -- so Jayson, it's Jim. So a couple of things are happening. First, we have a really good sales force in that business that's done a really good job focusing on what we do well, which is our -- going back to our core NAMIC business. It's well managed and well represented. Really, Jayson, it's share gains. And if you go back to comments we made 3 or 4 quarters ago when we talked about this business, how we took SKUs out, about 900 SKUs we removed, to really clarify the business, give our customers clarity of choice and give us a little more operational streamline in our process, we also -- and I talked about some price increases because some of this business was at margins we didn't like. But we brought in attention and a focus to it here. Again, that's one of the reasons why we remain bullish in some of the other categories that are similar because now we're showing what AngioDynamics can do when you focus on a category, and in this case, one with a very good competitor, yes, we're able to grow the market -- grow the business in a market that's essentially flat. So it's essentially good execution in this case. Now we expect that good execution to carry into other categories going forward as well.

Jim, how much of the growth is price/mix?

At this point, Jayson, it's almost all just -- it's market growth. The price that we got was over the last 3 quarters or so. A little bit of price may remain, but it's really share gains, volume.

In Access, how much of that portfolio is converted to BioFlo?

It's about 50-50 at this point, Jayson. It's about half and half.

And then maybe for Michael. The impact of corporate tax reform, I realize it's not in the guide, but I'm guessing next quarter when you report, you're going to report a lower tax rate to reflect this on an adjusted basis. Is that fair?

Yes, that's exactly what we'll do, Jayson, and then we'll also give you the number as if we had the old statutory rate because that's what we're going internally look at, our $0.64 to $0.68. So we will, as soon as we execute on all the other things as we reaffirm the $0.64 to $0.68, we'll finish above that this year due to what you just described, but -- because that's the benefit of math and not really our cash tax rate, we wanted to look at the $0.64 to $0.68 with the old statutory rate in place. But you will see the 21% come through to your question on adjusted EPS for 3Q and 4Q.

So will it go from -- you report now on an adjusted basis 36%, is it going to go to 21%?

Exactly.

And so -- sorry for -- I realize this isn't a huge issue, but are you going to report 3 EPS numbers?

Well, there'll be a GAAP EPS and there'll be adjusted EPS, and then for purposes of you guys to guide to the $0.64 to $0.68, we'll let you know what that would have looked like using the old tax rate.

Okay. And you're still assuming the -- that you pay the med device tax here in the back half of your fiscal year?

That's right. We assume that from the beginning of the fiscal year and we had that in our planning for the full -- for the back half of the year, that's correct.

(Operator Instructions) The next question is from the line of Matthew Hewitt with Craig-Hallum.

Just a couple of questions from me. First, on NanoKnife, so you commented a little bit on the regulatory side of things. Maybe an update on the reimbursement or the -- how that's progressing?

Update is the same. We're continuing our conversations with CMS. We're looking to coordinate the conversations that we're having with FDA and CMS, and as we have more concrete updates, we'll provide those.

Okay. And then just a follow-up on the tax rate. Is it -- because it's so new and you and your accountants are still kind of working through, that you would be reporting all 3 of those EPS numbers? Or why not just make the switch and kind of provide a little bit of clarity?

Yes, I mean we were -- the attempt was not to be disingenuous, that we were reporting an adjusted EPS increase because of a math calculation. In other words, our U.S. GAAP EPS is not going to be impacted by the 21% because of our NOLs. So we were trying to say, look, at the beginning of the year, guys, we told you $0.64 to $0.68. Today, we're indicating we're reaffirming $0.64 to $0.68 and that's not because we got a lower tax rate, that's because we're going to continue to execute well. And yes, when we report out going in the third and fourth quarter because of this new lower rate, we will get above mathematically by using 21% versus 36%.

At this time, I will turn the floor back to management for closing remarks.

So again, thank you for commenting today. Thank you for your questions. We remain committed towards growth at AngioDynamics. We talked about pathways to get to growth, our internal R&D process, combined with the balance sheet as a strength point, to enable M&A activity in the future. What we also didn't talk about today in the call, but again our commitment to operational excellence, the quality of our products and improving our efficiency levels. I'll remind folks again, nearly a year ago we announced the closure of 2 of our 4 manufacturing facilities due to high overhead costs and low efficiencies. Now I'm happy to tell you today those projects are on schedule. One of the 2 plants is closed and one will be closed at the end of January. So a really good job was done by our operations team, responding in an urgent fashion, maintaining high levels of quality and efficiency for our customers during this process. So using some of these core foundational building blocks, we look forward to growing AngioDynamics in the future. Thanks for paying attention today.

Thank you, everyone. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.