AngioDynamics, Inc.

Good morning and welcome to the NGO Dynamics third quarter fiscal year 2019 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero from your telephone keypad. As a reminder, this conference call is being recorded. The news release detailing the third 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 one 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. Thank you for joining us. discussing the company's operating results and financial performance during this morning's conference call. I'd now like to turn the call over to Jim Clemmer, AngioDynamics President and Chief Executive Officer. Mr. Clemmer?

Thanks, Rob. Good morning, everyone, and thanks for joining us today for AngioDynamics' third quarter fiscal 2019 earnings call. Joining me today on the call will be Michael Greiner, AngioDynamics Executive Vice President and Chief Financial Officer, and Stephen Trowbridge, Senior Vice President and General Counsel, who is also the leader of our clinical team. Michael is under the weather today and will not be doing the financial portion of the call, but is with us to answer any questions that you may have during the Q&A portion of our call. Today, I will provide a brief overview of our operating highlights and financial performance for the quarter. Before I close our prepared remarks, will have a discussion of the NanoKnife Pancreatic Cancer Direct Study. Stephen has joined us to answer specific questions that you may have related to the approval of this study that we announced yesterday morning. Overall, we are really pleased with our results for the third quarter. Despite some pockets of softness, we were encouraged by our solid results in a number of areas, and we continue to generate profitable growth with a focus on operational excellence and building a market leading cohesive product portfolio. As I will discuss later, our third quarter performance positions us to achieve our annual guidance for revenue, adjusted EPS, and free cash flow. Our net sales for the third quarter of fiscal 2019 increased 3% to $86.3 million. driven by growth in our oncology and vascular interventions and therapies businesses, including contributions from our recent acquisitions of BioSentry and Radiodyne, which are in line with our expectations for the third quarter. At the product level, our angioVac, dialysis catheters, fluid management, and Solera products exhibited solid growth During the quarter, offsetting lower nanonife capital sales, which were primarily a result of timing and continued expected slowing of our radiofrequency ablation products as market adoption focuses on our microwave ablation technology. With regard to the performance of each of our businesses, our VIT business grew 3.3% year-over-year as strong growth and the AngioVac and Fluid Management product lines, along with continued strength in our core business, were partially offset by an anticipated decline in the venous insufficiency business. The pace of this decline continues to decelerate and we continue working diligently to stabilize this business and anticipate better comps in fiscal year 20. AngioVac procedural volume remained strong, with procedures increasing 19% year-over-year, representing our sixth consecutive quarter of double-digit volume growth and further validating this unique technology. As we mentioned in detail at the J.P. Morgan Conference in early January, we are continuing to make targeted R&D investments in our thrombus management portfolio while also identifying external growth opportunities. We believe there is a significant opportunity available to us in the moderately complex segment of the thrombus management market based upon the success of our Unifuse and AngioVac platforms which serve the simple and complex ends of this space respectively. The middle of this market is a significantly larger addressable market than we currently serve, with meaningful opportunities for growth and share gains. Our vascular access revenue declined 4% during the third quarter, as continued strong performance in sales of our dialysis products was offset by declines in sales of PICs, midlines, and ports. We experienced very strong growth in port sales during the second quarter, which we believe impacted our ability to drive growth in the third quarter. We do anticipate returning to low single-digit growth in the fourth quarter in both our ports and our midlines businesses. Revenue from our oncology business increased 15.1%. Strong sales of our Solero microwave product and revenue contributed by our BioSensory and Radiodyne acquisitions helped to offset a decline in NanoKnife capital sales during the quarter. We remain pleased with the early success of our oncology acquisitions, which are both progressing in line with our expectations as we continue to build out our oncology business around a continuum of care portfolio. We also recently received 510K approval for electron and cancer treatment related to our OR-TRAC real-time dosimetry device. This approval both defines and supports the future growth profile of our OR-TRAC while positioning us to obtain additional indications in the future. Despite the softness in nanoknife capital sales, we continue to see momentum and increasing global adoption of this groundbreaking technology. And we are thrilled to have received IDE approval from the FDA, which we announced yesterday morning, for the use of our nano knife technology in the treatment of stage three pancreatic cancer, which I will discuss in more detail after we're going through the financials. In addition, another positive development in the quarter included are previously announced successful outcome in the Delaware intellectual property litigation with Bard. We were pleased with the court's decision to dismiss this case. After reviewing the financials, I want to remind everyone that each quarter we post a presentation on our investor relations website summarizing the key items associated with our quarterly results as well as our financial guidance. Those slides are intended to complement our prepared remarks. Our net sales for the third quarter of fiscal 2019 were $86.3 million, representing a year-over-year growth of 3% when including our Radiodyne and BioSentry acquisitions, and declining 0.8% on an organic basis. Our gross margin for the third quarter of fiscal 2019 contracted by 10 basis points to 54.1% from 54.2% a year ago. We continue to see gains in gross margin related to operational and supply chain improvements as well as positive impacts associated with our portfolio optimization strategy, specifically the radiodyne and biosensory acquisitions. These gains were offset during the third quarter by headwinds related to FX, which were approximately 20 basis points compared to the prior year, as well as a one-time benefit that we received in the prior year quarter related to our plant closures worth approximately 50 basis points. We continue to anticipate our full-year 2019 gross margin will finish in the range of 54% to 55% with a fourth quarter exit gross margin exceeding 55%. Our research and development expenses during the third quarter of fiscal 2019 were $7.2 million or 8.4% of sales compared to $6.5 million or 7.7% of sales a year ago. Consistent with our comments over the past several quarters, we are spending more in R&D and clinical around some of our core technologies. And we continue to anticipate R&D spend to be approximately 8% of net sales for this fiscal year. This already contemplates additional spending related to the rollout of our NanoKnife study and also to support our recent acquisitions. Moving down the income statement, SG&A expense for the third quarter of fiscal 2019 increased to $28.2 million or 32.7% of sales compared to $25.7 million or 30.7% of sales a year ago. We anticipate SG&A expense as a percent of revenue to be approximately 32.5% for the full year inclusive of approximately $4 million in SG&A expenses as a result of the two acquisitions earlier in the year. Our adjusted net income for the third quarter of fiscal 2019 was $7.4 million, or 19 cents per share, compared to an adjusted net income of $8.7 million, or 23 cents per share in the third quarter of last year. The 2018 Tax Reform Act went into effect for us during our third quarter last year. Adjusted net income for the third quarter of fiscal year 2018 was based upon a tax rate of 23%. We have updated our full year, prior year, post-tax reform rate to 30.62%, resulting in a two-cent impact on last year's adjusted net income. Our current statutory tax rate is 23% in fiscal year 2019. Adjusted EBITDAs in the third quarter of fiscal 2019, excluding the items shown in the reconciliation table in our presentation, was $14.9 million compared to $16.8 million in the third quarter of fiscal 2018. This 11.3% decline is attributed to the previously noted increase in R&D and SG&A spending, partially offset by our increase in revenue. In the third quarter of fiscal 2019, we generated $8.3 million of cash from operating activities, and our free cash flow was $7.5 million. Now, turning to our balance sheet. As of February 28, 2019, we had $41.7 million in cash and cash equivalents and $133.8 million in debt. This excludes the impact of deferred financing costs recorded on the balance sheet. As a result, our net debt adjusted EBITDA ratio is currently 1.55, providing us with sufficient to execute against our investment and capital deployment strategies. 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. We also continue to expect adjusted EPS between 82 cents and 86th Sense, as well as free cash flow between $26 million and $31 million. Now I'd like to take a moment to continue our earlier discussion on the recently announced NanoKnife IDE approval and to provide more details on the direct study. As noted in our press release yesterday, we are very excited to begin enrolling patients into our direct study and improving the standard of care for pancreatic cancer. This disease afflicts approximately 57,000 new patients every year in the United States alone, and approximately 25% of those patients present as stage three, making them good candidates for our direct study with NanoKnife. In terms of the details of the direct study, it will include a real-world evidence next-generation registry at up to 30 sites, as well as a randomized controlled trial at up to 15 sites, each with a nanonife treatment and control arm. Our design anticipates each nanonife arm to consist of approximately 250 patients with an equal number of control patients. The primary endpoint of the study is overall survival. As a reminder, we also received a determination from the FDA that the direct study 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 3 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, significantly mitigating the overall costs of the study. We are not updating our guidance at this point, but we intend to have a further readout on our three-year strategic and financial plan to share with you by our fiscal year-end call. We are looking forward to this comprehensive study that will demonstrate our technology's unique capabilities and benefit pancreatic cancer patients. We are thrilled to be able to start enrollment soon. And in fact, we've launched angiodirect.com as a website All of us at AngioDynamics are dedicated to the idea that the standard of care for this deadly disease can and should improve. With that, I'll turn the call over to the operator for your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, Please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is from the line of Matt Hewitt with Craig Hallam. Please proceed with your question.