Edap Tms SA (EDAP) 2005 Q2 法說會逐字稿

On behalf of EDAP TMS, I would like to welcome you to the company's conference call to discuss the financial results for the second quarter and first 6 months of 2005. [OPERATOR INSTRUCTIONS] On the call today is Philippe Chauveau, Chairman of the Board; Hugues de Bantel, CEO of EDAP TMS; and Thierry Turbant, CFO of the company.

Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements regarding the company's operations, growth and expansion plans. These forward-looking statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described therein. Factors that may cause such differences include, but are not limited to, those described under the risk factors of the company's filings with the Securities and Exchange Commission.

These forward-looking statements speak only as of today's date and the company expressly disclaims any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in the company's expectations or future events.

With that said, I would now like to turn the conference over to Philippe Chauveau.

Thank you and welcome to our second quarter 2005 financial results conference call. On today's call Thierry will review our financial results and then Hugues will comment on the operations of the business over the period and conclude with a discussion of the future course of the business in 2005 and beyond. Following Hugues' comments, we will open the call for a question-and-answer period, during which time Thierry and I will join Hugues in responding to your questions.

Before we begin, I would like to outline the 3 themes you will hear in today's call. First, the company's financial results were essentially steady, even with changes to our product mix and a shift towards the mobile business model that affects several of the numbers at the top line. These changes are a normal part of our markets and we are pleased to report that the company is effectively managing these changes while keeping its eyes to the future.

Much of our internal decision making is driven less by the current quarter and more by the future opportunities. Whenever possible, we will try to point out these opportunities and I hope you will ask questions to better understand our strategies in addressing them within the limits we have for certain pieces of information.

The second theme is EDAP has a solid market position as the leading company in HIFU for localized prostate cancer. We have the most extensive treatment record in the world. Our Ablatherm units are the most technology advanced when compared with other units and we continue to set the bar in this field with steady investments and advances in technology, technique and innovative application of HIFU treatment to further improve the options for men facing localized prostate cancer.

I am pleased to report that men today have more options for treatment with the continuing advance of Ablatherm HIFU with less impact in their lifestyle than at any time in the past. Our primary challenge is in expanding access to more men, primarily through reimbursement approval.

So to our third theme. The company is working hard and beginning to see the early success of its reimbursement strategy. We have seen substantial increases in countries where we have partial reimbursement, primarily in Germany and Italy. These markets clearly demonstrate the growth opportunity we have and we can generate when coupling reimbursement approval with flexible and cooperative strategies to help doctors embrace this procedure easily. These strategies include support from opinion leaders in every country, in-depth training, continuing research and development and forward-thinking financial strategies that help physicians integrate Ablatherm HIFU into the practice with a minimum of effort.

I'll now turn the call over to Thierry Turbant for a result-- a review of the results that we have released yesterday. Thierry?

Good morning, everyone. Please note that all of the figures that I discuss here today are in euros for [inaudible] and comparison purposes. For your convenience, these numbers are converted into U.S. dollars in the table attached to the press release.

I will now review total company numbers as Hugues will review key numbers by division. Total company numbers, in euros, were as follows. Q2 2005 revenues in euros was EUR 5 million, down slightly versus Q2 '04 revenue of EUR 5.2 million. Year-to-date sales are just over EUR 10 million, compared to EUR 11 million in 2004.

Year to date we have sold 16 lithotripsy units. Also, the mix has been more toward the Praktis, our lower price point machine, and we have sold 4 Ablatherm as opposed to 5 in the prior year due to our increasing focus on mobile per procedure programs.

Even with the slight decrease in revenues, our absolute gross margin has remained flat in euro terms at just less than EUR 4.1 million. Margins for the company were up 3 points from 37% in the first half of 2004 and 40% this year.

We continue to carefully control costs, but are investing resources in future growth through the expansion of our sales team, educational programs and outreach programs designed to raise awareness among doctors and patients.

As planned, Q2 operating expenses increased 4% to EUR 2.6 million versus EUR 2.5 million in Q2 '04. Expenses also reflect increases in corporate expenses due to the costs of Sarbanes-Oxley.

Our company net loss for the second quarter was EUR 398,000 as opposed to EUR 507,000 in 2004. The net loss for the first half was essentially flat compared to the prior year at EUR 538,000 compared to EUR 519,000.

At June 30, the company had EUR 8.2 million in cash, flat to the prior quarter ended March 31st even with the company's increased expenditures on sales and marketing.

We anticipate that the continuation of the Ablatherm HIFU investment strategy by using our cash through the end of Q3.

I will now turn the call over to Hugues to give more specifics on results and to discuss the company's business foresight for the rest of the year and beyond. Hugues?

Thank you, Thierry. Good morning, everyone. As Philippe mentioned, we will be discussing our results which Thierry has just provided more detail in the underlying elements, as well as our outlook for those. I will add some more detail regarding our divisional operations, especially as they relate to the second and third themes Philippe outlined, our leadership position within the field of HIFU treatment for localized prostate cancer and our future growth program to capitalize on this opportunity.

Let's start with the UDS division for lithotripsy and manufacturing as it relatively easy to report. The UDS division continued to deliver relatively steady performance with 16 lithotripters sold this year and a backlog of 5 machines. UDS revenue is down from the prior year, primarily due to continuation of the trend we saw in Q1 of this year, more sales weighted toward our mid-range products, as well as the replacement of aging machines, which generated higher services tickets.

We are continuing to adjust to the swings and changes in this market where competition is high and there is less in new technology to differentiate products. Our service is a key to ensure our users always receive the very best we can offer.

The UDS division gross margin remains steady at 30% as we control manufacturing costs and overhead.

Lithotripsy, while a competitive market, remains a good entry to a larger base of urologists, the same physicians who can become our partners in Ablatherm HIFU.

Now I would like to turn my attention to the growth engine of our business, the company's HIFU division. For the second quarter, the HIFU division posted good results with 2 Ablatherms sold and a continuing increase in our per procedure mobile business.

Year to date, we have sold 4 Ablatherms as compared to 5 in 2004 due to a strong first quarter last year. Even with the differential of one machine less in sales, the EDAP division posted a 2% increase in net sales. This seems small unless we consider that the unit represents about EUR 0.5 million in sales.

The growth in mobile operations, as well as a strong 44% increase in services and spares accounts for the strengthening of our base operations in this division. Accordingly, our cost of goods sold is down and cost efficiencies throughout the division have contributed to a strengthening of our gross margin to 48% year to date as compared to 43% for the first half of 2004.

We have chosen to increase our spending in a number of categories in advance of expected growth drivers, notably R&D related to our improved 3D imaging head and marketing and selling expenses, including the education programs, which increased our operational expenses in this division, swinging it to a small net loss for the first time in 5 quarters. But let me be clear, the net loss in this division is the result of our decision to invest in future growth today.

While every HIFU unit we sell contributes to our installed base and broadens the potential population we can treat in partnership with our urology doctors, our biggest growth can and likely will be in the mobile per procedure business. This business option gives the clinic access to HIFU without the initial up-front cost of a unit purchase, especially as the unit purchase may not be available under the clinic's budget cycle for some time.

Additionally, it offers the urologist time to train on the Ablatherm unit and begin building a practice base without the financial obligation other than what he actually consumes in treatment. This is a win/win scenario for our urology partners as it provides a soft entry into a very beneficial treatment they very much want to offer to their patients.

We are already seeing very strong evidence of success in this model, as we had indicated in the last conference call. By way of example, we today have 12 sites in Germany where we have partial reimbursement approval. 9 of the sites are served on the mobile model by one Ablatherm unit and we are seeing almost complete utilization of that machine. We placed a second unit in Germany in June to fulfill demand from new clinics and urologists asking for access after learning about the Ablatherm HIFU procedure from our opinion leader in Germany, seeing Ablatherm and its benefits at conferences and having the opportunity to train with one of our champion practitioners with very deep experience.

Together with a program clearly designed to assist the urologist in offering this treatment option, we are penetrating the market at a faster pace and see a very substantial opportunity.

This is very much the case in Italy, where we see much the same scenario and significant opportunity in regionally located mobile Ablatherm units. In each of these markets, respected urologists are turning to Ablatherm and assisting us in growing awareness and desire for this treatment option.

Perhaps the most convincing point, though, is the effectiveness of treatment with little impact on the patient's lifestyle. This is a distinguishing and desirability characteristics of Ablatherm treatment and the source of our credibility within the urology communities of each country we serve.

As we noted in the press release, today we service 75 sites with Ablatherm compared to 67 a quarter ago and 53 this time last year. This kind of growth is driven by mobile opportunities and each mobile site represents a possible future permanent installation. In the interim, our results this year demonstrate that the mobile unit may start at the lower level of utilization but it can become a significant revenue generator, to the point of replacing a sell unit or more annually as it matures in its geographic market.

HIFU is becoming a widely accepted treatment alternative to traditional but more difficult options such as surgery and radiation, largely as a result of our ongoing education effort directed to both patients and urologists.

As patients and their doctors become more aware of the treatment options available and the benefits of HIFU, they are increasingly seeking to utilize this option. Our treatments, now totaling more than 7800, also continue to offer an alternative treatment for those not able to use a traditional treatment method due to their health history or for those who failed in an attempt to be treated with external beam radiation.

We continue to work on securing a satisfactory level of reimbursement in every key country in Europe. Patients and, very importantly, their doctors are clearly wishing to pursue HIFU and reimbursement is a key element in making sure this treatment is available to a much broader population. Part of our expense increase is dedicated to this important task.

Wrapping up a few items, I'm sure are on your minds. Canada continues to progress nicely through the Toronto clinic. The clinic has begun an additional marketing effort aimed at bringing urologists to the clinic through a referral program that [inaudible] to increase their reach within North America.

We continue to progress in our marketing efforts in the UK. We believe that reimbursement will significantly open this market to Ablatherm and already have an excellent distribution partner at work, building a very healthy pipeline in anticipation of success.

We'll now open the call for your questions.

[OPERATOR INSTRUCTIONS] Fred Perrine (ph), private investor.

I actually have 2 questions. Can you discuss your plans for penetration into the U.S. market and Asian markets and could you also discuss what is happening in Japan? I notice that you have a request in since 2000?

Yes. With regards to the U.S. market, as you know, we partnered with HealthTronics in the U.S. HealthTronics is the company in charge of the relation with the FDA and starting the study in the U.S. to obtain approval on the product. We are now at the stage when HealthTronics is answering questions from the FDA and we expect the FDA to come up with a clear process before the end of the year.

Now for Asia, we already have 2 equipments in Asia. We've got one in Korea in a very large hospital in Seoul, a hospital called [inaudible], and then we've got a second unit in the Philippines and we are looking different opportunities in the future.

As far as Japan is concerned, we are currently reviewing the file. It's a long process. We hired a new consultant to work on the file with us. Now that being said, you've got to realize that the Japanese market is maybe not the most crucial for us because the incidence of prostate cancer there is quite limited compared to Europe or the U.S.

Do you have an estimate on when the approval process in the U.S. would be complete?

Well, HealthTronics mentioned somewhere around 1 year from now that it will be a process of 3 to 5 years, so I would say now, with some-- I mean, 2 to 4 years.

2 to 4 years. OK. Second question, can you discuss the percent of successful outcomes using your Ablatherm HIFU?

I didn't catch the question. Could you repeat, please?

Sure. Can you discuss the percentage of successful outcomes using your procedure, your Ablatherm HIFU units?

Yes, sure. We've got-- we recently got a publication in a major urology journal presenting results at more than 5 years with a 93% success rate based on negative biopsies.

Great. And one further question. Could you discuss your mobile units a little further? Is this units that are operated by the company or are they sold to another party who operates them?

We are actually the one running the business. We are the one dealing with the hospital, charging the hospital, but we subcontract the transportation of the equipment to a third party.

But essentially a company-run operation?

Yes. What the company does is really moving the equipment from one hospital to another.

Right. But the company owns the-- EDAP owns the equipment, right?

Absolutely. We own the equipment. We are the one training the-- training the urologist. We are the one supporting the urologist and we are the one charging the hospital.

Do you have a rough idea or can give me a rough idea of what a procedure would cost?

Well, depending on the country, the procedure will cost anywhere between EUR 3000 to EUR 3500 a case.

Ken White (ph), private investor.

I applaud your efforts and your strategy as it appears that you are on track for something really tremendous here. My first question is, do you see the demographics in the United States to have a potential to make a major impact on the company's numbers? And if not, which area of the world would you predict would have the largest impact?

Well, the 2 major markets for prostate cancer will certainly be Europe and the U.S. I mean, in the U.S. we are talking about 230,000 new cases a year. We are talking about 250,000 new cases a year in Europe. So there is a great potential, no question about that. And these demographic numbers are growing due to the aging population plus a very nice campaign and systematic PSA screening that we've seen in these 2 major regions.

So these 2 markets are the ones we want to tackle. We are, at the moment, approved in Europe. What we need to achieve in Europe is really now securing reimbursement, educating the market. That's what we are doing and we need to be in the U.S. and to be in the U.S. we need to secure the FDA approval.

Great. That sounds really awesome. My second question, I just want to confirm that with the-- the loss people share is mainly due to the company's efforts to reinvest current revenues into the business?

This is Philippe Chauveau, the Chairman. Let me respond by saying that we have 2 divisions in the company, one which handles Ablatherm, which we call the HIFU division, and the other one, which is called TMS, which handles the lithotripsy division. Both of these divisions, in fact, are close to operating income positive in every quarter and also self-sustained cash flow wise, with the exception of the EDAP division where Hugues and his team have decided to keep investing for growth and, therefore, while the operating income-- while that extra spending on marketing is neutral to operating income positive, it's slightly negative.

But the answer to your real question is something else. We are quoted on NASDAQ. We have substantial Sarbanes-Oxley costs, as well as other costs related to the NASDAQ and being on the market and that costs us roughly $1 million a year and that is not part of the 2 operations, but obviously something that has to be borne by the 2 operations.

So when you see the loss year to date of about-- group loss of about EUR 500,000, that's essentially due to what I've just described. Does that help you?

Yes, actually, it does tremendously. It sounds like the biggest driving factor for you right now is growth and to achieve that growth could actually benefit the stock in a very large way. And I applaud your efforts once again. I thank you.

[OPERATOR INSTRUCTIONS] At this time there appear to be no more questions. Mr. Chauveau, I'll turn the call back over to you for closing remarks.

Thank you very much for--

I apologize for the interruption. Actually, Mr. Chauveau, we do have a question that just queued up now. Dale Vincent (ph), Wells Capital Management (ph).

I'm sorry, I called in a little late and I just wanted to get some additional-- and I missed what was said earlier about the decline in margins and revenues. Could you kind of just reiterate for me, please, that?

With regards to the decline in revenue we experienced a slight decline in revenue in our lithotripsy division, mainly due to-- we sold the same number of lithotripters but we had a change in the mix of our sales in lithotripsy, so we sold more of the low-cost equipment than higher-cost equipment. That's first.

Then second, we had a slight decline in our service revenue in the lithotripsy division due to the fact that some of our older lithotripters came out of the market and they were bringing a larger amount of service and maintenance revenue to the company.

Now on the Ablatherm side--

Where was that? Was that Japan, then, or exactly-- where were those that came out of service, what area geographically?

Well, mainly Japan and France.

OK. Thank you.

And then we had a slight increase in our revenue in the EDAP HIFU division and this was due mainly to the increase in our mobile services and the fact that we started a service contract on some of our equipment in Europe.

And how is the Canadian operation unfolding? You were going to be able to place some units in Canada, I thought.

Yes. We did that. We placed a unit in Canada by end of March. They started treated patients by end of April and they are now regularly treating patients and their plan is now to keep on marketing their center and try to get additional referrals from doctors throughout North America.

OK. Well, I was a little disappointed in the revenue line, but other than that I think-- hopefully everything's going along just fine and that we'll see a better quarter here the next one.

OK. Let me just respond to another question. We're tracking the number of treatments and without any, at this stage, reimbursement improvements, our number of treatments is continuing to go up. The 2 countries where we have partial reimbursement, which are Italy and Germany, we have dramatic increase in number of treatments because of that reimbursement.

We are working very hard on reimbursement in, obviously, many countries outside these 2. We're close to some success, an early success, in the UK with the insurance providers called BUPA, B-U-P-A. We should be able to announce something on-- as soon as we can.

But we also believe this is a long-term commitment and investment whereby the reimbursement process is taking as long as it takes, but we're not giving up and, in the meantime, we're maintaining our cash and building up our break-even divisions to slightly better than planned, if we can, but Q2 was also a disappointment to us.

OK. Well, I'm sorry I got in late, but thank you for the input.

Thank you. At this time there appear to be no more questions. Mr. Chauveau, I'll turn the call back to you.

OK. Let's have another question as soon as I say that, right? Thank you very much for joining us today. We look forward to reporting continued success in our financial position, the building of our company through continual demonstrations of results in the clinic, as well as overcoming some hurdles that will allow us to value our enterprise.

In the meantime, we're happy to provide information and answer questions as we are able. Please contact Halliburton Investor Relations, listed on the press release. They will be happy to arrange to meet your requests and, obviously, orchestrate, as they have done so far and continue to do, individual conference calls that Hugues normally handles and responds to questions in depth that you may have.

Once again, thank you very much. We look forward to speaking to you again next quarter update. 'Bye.

Thank you. This concludes today's EDAP TMS conference call. Thank you for your participation. At this time I will disconnect all lines from the conference call. Have a pleasant day.