AngioDynamics Inc (ANGO) 2019 Q2 法說會逐字稿

Good morning, and welcome to the AngioDynamics Second Quarter Fiscal Year 2019 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

The news release detailing 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 Investors 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 2019. 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 identify 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 insight into the company's financial results is also available on the Investors section of 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 during this morning's conference call.

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

Thank you, Melissa. Good morning, everyone, and thank you for joining us today for AngioDynamics Second Quarter Fiscal 2019 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 our fiscal 2019 financial guidance. After that, we'll open the call to your questions.

We are pleased with our operating and financial accomplishments during the second quarter, which reflect our ongoing commitment to profitable growth, operational excellence and to building a market-leading cohesive product portfolio.

Our net sales for the second quarter of fiscal 2019 increased 5.5% to $91.5 million, driven by a double-digit improvement in Oncology as well as better-than-expected growth across our Vascular Access and Vascular Interventions and Therapies businesses. Additionally, our recent acquisitions of BioSentry and RadiaDyne are contributing to our results, validating our portfolio optimization strategy and enhancing our value proposition within oncology.

At the product level, our AngioVac, NanoKnife, fluid management and core peripheral product lines continued to generate solid growth and momentum, offsetting headwinds in our Venous Insufficiency business in the anticipated slower sales of our radiofrequency ablation product.

Overall, we are pleased to report growth across each of our business units, expanded gross margins and improved profitability during the quarter. And these results are supportive of our financial goals for fiscal 2019.

Now focusing on the performance of each of our businesses. Our Vascular Interventions and Therapies, or VIT business, improved 2.2% year-over-year as strong growth in the fluid management and AngioVac product lines was partially offset by an anticipated decline in the Venous Insufficiency business. However, we were encouraged to see the declines in Venous decelerating. We expect comps to ease in the back half and continue to work diligently to stabilize this business by the end of our fiscal year.

AngioVac procedural volume remain strong, with procedures increasing 10% year-over-year in our second quarter, representing our fifth consecutive quarter of double-digit growth for procedural volume, which we believe validates our unique technology.

As noted previously, we are making targeted R&D investments in our thrombus management portfolio, while also identifying external growth opportunities as we seek to build out a franchise around our AngioVac technology.

Next week, at the JPMorgan Conference, we'll discuss in more detail our growth plans associated with our thrombus management opportunity as we aim to provide a more comprehensive offering in that space.

We saw continued growth in our core peripheral products, which includes angiographic catheters due to the combination of our widely trusted technology and strong execution related to the sales force restructuring we implemented at the beginning of our fiscal year.

Vascular Access revenue was up 5.1% during the second quarter as improved performance and sales of our ports and dialysis products, combined with continued strong sales of midlines was slightly offset by decline in sales of PICCs.

Our Vascular Access growth was driven by the continued market adoption of BioFlo, our market-leading thrombus reduction technology. While we expect the decline in PICCs continue, we anticipate decelerating declines going forward.

We saw growth in all of our geographies in VA, and we're particularly pleased with continued growth of our ports and dialysis products. We attribute much of this consistent growth to the sales and marketing leadership changes that we've implemented over the past 18 months, which have resulted in stronger commercial discipline and execution.

As reported, revenue from our Oncology business, which now includes BioSentry and RadiaDyne, increased 19.8%, driven by strong growth in both capital and disposables, NAMIC sales were up 29.1% year-over-year, and we continue to see momentum and increasing global adoption of our technology.

As previously noted, we are pleased with the early success of our oncology acquisitions as both are progressing in line with our expectations. The addition of these products is consistent with our commitments to build a continuum of care with our -- within our oncology platform business that is built around our core ablative platforms. And we've already seen signs of how these technologies complement our existing portfolio. We will further outline our oncology platform and our growth plans next week at the JPMorgan Conference.

We also wanted to update you on our progress towards obtaining a pancreatic cancer indication for NanoKnife. We are in the process of submitting final responses to what we believe are the final few questions from the FDA. We expect this to be the final step in our process towards IDE approval.

We also received a determination from the FDA that the NanoKnife comprehensive study of Phase III pancreatic cancer will receive a Category B designation. This means that the FDA has determined that the information we provided demonstrates that their initial questions around safety and effectiveness for the NanoKnife system for the treatment of Stage III pancreatic cancer have been resolved.

This is a significant positive as the device and the related treatment during the study will be eligible for reimbursement. We are looking forward to this comprehensive study that will demonstrate the technology's unique capabilities and benefits to pancreatic cancer patients.

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

Thanks, Jim, and good morning, everyone. As Jim mentioned, our net sales for the second quarter of fiscal 2019 were $91.5 million, representing year-over-year growth of 5.5%, including our RadiaDyne and BioSentry acquisitions and 2.2% growth on an organic basis.

I'd also like to note that we experienced solid growth in most of our product categories, which are documented on the slides mentioned previously. Our gross margin for the second quarter of fiscal 2019 expanded 440 basis points to 53.7% from 49.3% a year ago. This is reflecting our continued focus on operational and supply chain improvements as well as positive impacts associated with our portfolio optimization strategy.

Our second quarter gross margin was in line with our expectations. However, given continued headwinds related to freight and shipping as well as productivity improvements that will not be realized in the current year, we now anticipate our full year fiscal year 2019 gross margin to be in the range of 54% to 55% with the fourth quarter '18 gross margin exceeding 55%.

Our research and development expenses during the second quarter of fiscal 2019 -- second quarter of fiscal 2019 were $7.4 million compared to $6.1 million a year ago. Consistent with our comments last quarter, we have seen uptick in R&D spend as a percentage of sales. We now anticipate R&D spend to be between $28.5 million and $29.5 million or approximately 8% of net sales for this fiscal year. This contemplates additional spending related to our NanoKnife study and supporting our recent acquisitions during the back half of this fiscal year.

Moving down the income statement. SG&A expense for the second quarter of fiscal 2019 increased to $29.6 million compared to $26.5 million last year. We anticipate SG&A expenses as a percent of revenue to be approximately 33% for the back half of fiscal year, which contemplates an increase of approximately $4 million as a result of the 2 acquisitions.

Our adjusted net income for the second quarter of fiscal 2019 was $8.4 million or $0.22 per share compared to adjusted net income of $6.3 million or $0.17 per share in a comparable second quarter of last year. Last year in the reported second quarter, we had $5.8 million or $0.16 per share based on the then enacted 36% statutory tax rate. The updated report of adjusted net income for the second quarter of last year is now at the post-tax reform blended rate of 30.62%.

Adjusted EBITDAS in the second quarter of fiscal 2019, excluding the items shown in the reconciliation table in our presentation, was $16.3 million compared to $13.3 million in the second quarter of fiscal 2018. This greater than 22% growth is attributable to the previously noted increase in sales and improved gross margins.

In the second quarter of fiscal 2019, we generated $13 million of cash and operating activities from operating activities, and our free cash flow is $12.2 million.

Now turning to the balance sheet. As of November 30, 2018, we had $42.8 million in cash and cash equivalents and $145 million in debt, excluding the impact of deferred financing costs. As a result, our net debt to adjusted EBITDAS ratio is currently 1.67x.

Finally, we are reaffirming our financial guidance for fiscal 2019. We continue to expect 2019 net sales in a range of $354 million to $359 million, including the incremental revenue from both the BioSentry and RadiaDyne acquisitions. We also continue to expect adjusted EPS between $0.82 and $0.86 as well as free cash flow between $26 million and $31 million.

With that, I'll turn the call over to Melissa for questions.

(Operator Instructions) Our first question comes from the line of Brett Fishbin with KeyBanc Capital Markets.

I was wondering if you could provide some additional commentary around the early integration of RadiaDyne and BioSentry into your oncology platform. And then also know that you have a few deals under your belt this year, just generally on the M&A outlook for the rest of the year?

Brett, it's Jim. The RadiaDyne and BioSentry acquisitions have been really well received by our employees that were part of AngioDynamics prior to this, and we're also really, really pleased with the quality of the folks, their capability and the great culture of the 2 companies we acquired. Many times -- I spent my career prior to joining Angio in an acquisitive company and getting cultures aligned and merged can be a challenge, and we're lucky. The quality of the folks in our end and on the 2 companies have been really, really important to the success we've seen out of the gate. Now that being said, the really exciting thing for us is that we haven't even trained our full oncology sales force yet on all these products. In 2 weeks from today, a new oncology sales and marketing team come together for the first time. And everybody will be cross-trained, the RadiaDyne and BioSentry folks will learn how to sell the NanoKnife and the Solero and our other products and vice versa for the former Angio people. So we're really, really excited. So out of the gate, every M&A deal has risk as we all know. We've looked very hard prior to making these deals to lower the risk to our company and make sure we get -- make opportunity matter. We think we've done so out of the gate. We have challenges and hurdles like any company has as we complete our integration process, out of the gate has been great.

Now the second half of your question as to our M&A strategy. As we've told you from the last year and a half or so, we built a company now with a really strong balance sheet that Michael talked about a minute ago. We have the capability due to the combination of free cash flow and a good debt ratio to do other deals in this space. I think we've highlighted to people the areas that we're probably going to look for opportunities, and we have the financial capability to do so. We're now just trying to match the market opportunity, the available technology with our right to win in these spaces. So we're excited to add more things to our product line. We think the growth going forward for AngioDynamics will be a blend of our internal research and development generating new technologies out of our own house and new things coming in. Thanks for the question.

And then if I could just ask one more on the ongoing discussions with the FDA around the NanoKnife development plan. It definitely sounds like there's been some positive progress on that front. I was just wondering if there has been any impact from the government shutdown. And if that's not the case, if you have just the general sense of the time line around a potential agreement?

So we'll have Steve Trowbridge, our General Counsel, to take your question.

Brett, thanks for the question. We have been monitoring that closely, and we've been working with our contacts in FDA to try to understand what impact if any the shutdown will have on our continued discussions to try to get this approved for our IDE. Our best information as we sit today is that the folks who are reviewing IDEs throughout the agency are working, are taking in questions, comments and are continuing to move forward. We expected that's going to be the case. We hope that remains the case so that we can continue to move forward at a pretty expedited pace. That being said, I think, everybody, both, inside and outside the government are trying to figure out exactly what's going to happen and what this shutdown means as it goes on. So we're monitoring it. We're having conversations. It seems like the folks that we need are in their seats and we hope that continues.

I'll make one final point. We can only control what we can control. So the government shutdown is beyond our control. And we can't worry too much about that. Things will work themselves out. What's important for AngioDynamics, what we can and have control is the quality of our submission that people we've hired in the last 18 months in these phases are really, really good world-class people now that have really, really helped us become a company that now should and can participate in the PMA world doing an IDE like this. So we are very excited for this opportunity. We believe we'll get an approval based upon the quality of our product and the data and the submission that we put forward. So we're looking forward to getting an approval, then allowing patients to gain access to care through the physicians and the care centers that want to be a part of our registry and monitor our progress. So we worked really, really hard to control the things that we can in a really good fashion. So from here, the government will take care of itself, and we look forward to hopefully getting a positive outcome from the FDA here real soon. Thanks for the question.

Our next question comes from the line of Jason Mills with Canaccord Genuity.

Can you hear me, okay?

Yes.

Great. Mike, I guess, starting with you. What are you willing to talk about publicly with respect to your debt ratios and where you might be comfortable taking them if the right deal comes along?

Yes, fair question, Jason. So as Jim just mentioned, we're -- we've got 2 acquisitions under our belt now. We feel really good about the process by which we went and sort those out and then a diligence they are under. So we'll continue to keep that disciplined approach, so -- we don't have anything currently to announce in the near term. That being said, for the right opportunities, our current facility allows us to go up to 3.75x from a net debt-to-EBITDA ratio. I think our comfortable zone and one that makes sense for us from a capital structure standpoint is somewhere in the 2.5x, but will we be willing to go over 3x and then pay that down over a period -- an appropriate period of time. I think we would be for the right opportunity, but as you've seen, we've been talking about M&A for the better part of 18 months. And currently, we've only gotten 2 over the finish line, and that remains to be seen what additional ones we will have. But -- I think going over 3 in a temporary format -- or temporary timing for the right one is something we feel comfortable digesting.

Sounds good. That's helpful. And then just a few product-related questions, Jim. AngioVac addresses a really large market if you look at the various segments of the market on the Venus and Arterial side. Could you talk about the clinical evidence you seek to obtain over time there? And what your strategy might be over time, both from a clinical evidence standpoint as well as how you might look to address the market from a sales force standpoint, whether that will fit in to an existing sales force or that might be big enough ultimately to require its own dedicated sales force or specialists? And also, I guess, a similar question as it relates to NanoKnife and following up on the last question. What sort of longer-term plans you have for selling that product even within the current infrastructure or whether not that opportunity might necessitate its own specialists?

Okay. So good set of questions, Jason. So a couple of things. Let me start to with the sales question you asked. I'll start first on the AngioVac side. So back in January 1 -- I'm sorry, June 1, our fiscal year for 2019, we -- I think, we communicated that we split our sales force into VIT group. So we now have people -- a set of people that carry just the AngioVac and the catheter from both those products as well as our core angiographic catheters. So we split away the Venous Insufficiency products from them, gave them more room to specialize, meet with their clinical physicians, so that we did. Over time, as I mentioned, we'll probably add more products and technologies to this offering. Within Uni-Fuse on the lower end of acuity and AngioVac on the high end, we'll add new technologies. And Jason, you're probably getting to where decisions will make, at some point we just have a thrombus or clot-only sales force, we'll cross that bridge when we get there when we have the right technology. Now to continue your other part of the AngioVac question, I think we've communicated that we have ongoing R&D work being done. We expect to launch a new version of AngioVac this summer, which will help physicians use the product in a more easier format, get it to areas they like to get it to within the venous structure. And then from there, we have another iteration that will come out in about 12 to 18 months after that, which will change the size of the device, that we believe and we're still doing work here, may allow us to then do the necessary work to follow for a PE indication. So we still -- these are things we're working on internally. We're not ready to do that yet, but we believe AngioVac can be expanded through our R&D efforts to make it more physician-friendly and then again going after a new market for clot care. It's very, very important to us. And then as we expand our technology offerings with what we believe we will bring in from M&A, we'll have a really, really important clot and thrombus portfolio. And we'll make sure that any sales force changes that need to be made we'll make along the way, it's a really important area. We're really fortunate to have really good selling and marketing teams now that are really effective at communicating what our products can do. Now switch over to the NanoKnife question you asked a minute ago. We're doing the same thing there as well as I mentioned on our call. In 2 weeks, we have our sales forces coming together, and we're training people on the RadiaDyne, the BioSentry and our core ablation products. We also have specialists in oncology, a medical sales team ready to work with our clinician partners and our physician partners that want to use NanoKnife we hope for our new registry-based approach. Over time, we'll talk to you more completely, even next week, and over time, we think the spring lay out to you more of a time line of how we think we will expand NanoKnife and other opportunities to graft to other organ care and treatment, but we really want to get the FDA pancreatic cancer indication done first, get that ball over the goal line, it communicates you what that means for us, and then we'll talk to you about other organs that we can take a similar approach with and it's all underway, Jason. We think we will also match our selling and marketing efforts to make sure we have the global approach necessary to communicate the effectiveness of our products.

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

Few question for you. I guess, just starting with NanoKnife, does the Category B designation change the time line or the structure of the trial in anyway?

Jayson, let's Steve chime in.

No, the Category B designation doesn't change our projected time line or structure. In fact, we were putting together a strategy aimed at getting this Category B designation and all the benefits that come along with that. So just to take a step back, you remember our primary focus for creating this study was to provide a comprehensive data generation plan that's going to provide meaningful data to our customers, the physicians as well as patients, provide us a pathway to get the proper regulatory coverage and then move us into reimbursement. The Category B designation really ties a bow around that last piece, the reimbursement. So you remember we talked previously about receiving specific ICD-10 codes for NanoKnife. We then talked about where those codes mapped into from a DRG perspective into what we think are the right DRGs, the highest-paying DRGs and then this Category B provides that third leg of the stool, which is the coverage. So patients who are treated within our comprehensive study will now have the opportunity to get reimbursement -- excuse me, the customers will get reimbursement for using our product within their study. So it really does lend itself very well to our overall strategy of using a broad-based registry platform to create and collect this meaningful data.

Okay. So basically, what you're saying was, there was a risk that you'd get approval for the study, but participants wouldn't get reimbursed and now, you have effectively reimbursement with this Category B designation?

That's correct.

Okay. Is the trial still expected to be 200 patients in each arm?

Give or take, right. So this is some of the final little crossing of the t's and dotting of the i's that we're doing with the FDA right now to get to the final details on that. I think that's probably correct, we're really looking at a pretty large comprehensive trial to compare what it's like for patients who are treated without NanoKnife to those patients that get the opportunity to be treated with NanoKnife. And then measuring what that outcome survival benefit is going to be. So that's probably right around the size that you should think of.

Okay. And then last one on this topic, just for clarity, the ultimate approval for the pancreatic label will be based on data from the direct trial or will it be based on data from the registry data that you'll collect?

Those are 2 -- and those are one and the same. So there is the direct trial that we're doing, it's a comprehensive study that has the registry-based platform to it, with some embedded RCT, again, to provide that comprehensive data. So you shouldn't think as 2 separate things. So the ultimate approval as we see it will be based upon the full body of evidence that we're able to provide for the regulators.

Okay. Just a couple more product line questions. The 7% growth in fluid management seems high and congrats on that, but it seems high for a market that is effectively kind of flattish to maybe up 1. Can you maybe talk about the contribution of either price or portfolio mix and just the sustainability of this type of growth in fluid management?

Jayson, this is Jim. I think about a year and half ago I talked to you and the investor community about how we are treating our fluid management platform a bit differently. It's a challenging business to run, it's got many SKUs and customers love us because we do a great job. They love the NAMIC brand because we do a really good job giving them what they want. So I talked to you a couple, a year and half ago that we made some changes, we reduced some SKUs to raise our operational efficiency. We raised some prices in areas and we're working to do business in many more. And I think what we still found is the value of NAMIC, what we do is unique. We got 1 or 2 good competitors out there, but NAMIC is a well-trusted brand. We have great products, going back to the (inaudible) medical that people really love and trust. So I think, what you see right now is a combination of the quality of our products, the quality of our service, and then we have really good selling and marketing infrastructure supported by a great operational team that can pull efficiencies up and make a tough business like this run really well. So we think it's one of the crown jewels of AngioDynamics, well managed, well run. Over time, we need to decide what businesses we should be and how we manage them, but this has been a great example, and when we put our efforts towards something what our results can be.

And the sustainability?

Long term, I don't know if I'd hang on a 7 number. I think, we are outperforming the market in a really strong way. We know the strength of the business. We're always outperforming the market. I don't know if we'll keep a 7 handle on that, Jayson. You're probably asking a fair question. We've not guided you guys to that range. We're just starting to performing really well, but it will always outperform, we believe, the market.

Okay. And then last line from me, similar questioning on Vascular Access, ports, dialysis, high single-digit growth is clearly faster, I think, than the market. And I realize some of it was may be comp-related, but is the strength all due to share gains, was there a new geography there? What really drove that type of growth in ports and dialysis?

It's a good question. So 2 things. Externally, we've done a really good job OUS in some of the VA business, our team here has done a really good job OUS, so there is some geographic growth we've had. And in the U.S. as well. Again, we keep striving on the core benefits of our BioFlo technology. We know we make the best catheters. We have a challenge with PICCs to get them into people's hands. We know about that. You look at ports and dialysis, we have our great products, and then we have a really good selling and marketing team that can communicate the effectiveness of our technology to our customers in a manner that maybe we weren't as good at a couple of years ago. We've had new people join us that have sold products like this for other companies and are really well experienced. And the combination of those good experienced people now with our technology I think is really getting us back to this consistent growth we'll see in these categories.

And Jayson, just a little more detail there. Both non-BioFlo and BioFlo ports and dialysis are both growing with BioFlo in both categories at least for this quarter growing double digits.

(Operator Instructions) Our final question comes from the line of Matthew Hewitt with Craig-Hallum Group.

Just one for me. I think you mentioned in your prepared remarks that RadiaDyne and BioSentry teams would be cross-trained here coming up soon. What kind of growth do you anticipate that adding once they're up to speed?

So Matt, it's Jim. We'll do -- Michael reiterated our outlook for FY '19 earlier. So we're going to continue the range we gave you for revenue. And I think over time when we get our sales force fully aligned and trained, you'll probably see more of an effect when we give our 2020 guidance to you. And we'll give you more clarity around 2020 guidance, but like anything, when you look at the training aspect of what happens, we've done a lot of pretraining too prior to the event we're holding in a week and half. But it will take a little bit of time for these people. We have new managers, new people, new geographies. So we are fortunate to have really, really good teams coming together. But we don't think we'll really see an effect right of the gate in this current fiscal year, we already gave you that guidance. But we wouldn't be doing this if we didn't think we'll have a much stronger long-term effect to communicate the effectiveness of each of these technologies. And it's kind of funny even in the first few months. We've already seen some of our sales reps say, oh, wait a minute, now you can talk to me about that dosage monitoring system in radiation therapy. I hear that's really interesting, let's talk about that. So I think we're going to have a crossover effect of our sales and going even from base AngioDynamics we had about 20 people in the U.S., now we're going to have 30 in 2 weeks by bringing in the BioSentry and RadiaDyne people and those people are really, really good and they're going to now have the AngioDynamics portfolio of ablation products that sell as well. So we're really excited, but we're not going to move any other guidance beyond what Michael gave you this morning.

And that concludes our question-and-answer session. I'll turn the floor back to Mr. Clemmer for any final comments.

Thank you for joining us today. I think we are proud to put these results out today. They're indicative of how our company expects to perform, which is a good, consistent growth company, and also has a high level of efficiency and effectiveness that can drop our growth through to profitable manner and generate free cash flow and strong returns. We are able to do this by the combination of the quality of our products, our technology, and the quality of our people. The last year and half or so we've added a lot of people and new capabilities to AngioDynamics, and we're a stronger and better company for those people joining us. What's also really important to us, we're building a culture which goes below a lot of the things that we can share with you on these calls, but the culture of AngioDynamics is changing. People with a high level of capability and accountability and the willingness to roll up their sleeves and work hard for the patients who can get care delivered to them by the quality of our products. So we're really proud to work hard. We'll talk to you in a few months, and thank you for joining us today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.