AngioDynamics, Inc.

Good morning and welcome to the NGO Dynamics Fiscal Year 2020 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. The news release detailing the fiscal 2020 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 investor section of the company's website at www.andgeordynamics.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 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 gross margins for fiscal year 2020. Management encourages you to review the company's past and future filings with the SEC, including without limitation to the company's most recent annual report on Form 10-K, as well as its most recent Form 10-Q for the quarter ending February 29, 2020. 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 Events and 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. I'd now like to turn the call over to Jim Clemmer, Andrew Dynamics President and Chief Executive Officer. Mr. Clemmer?

Thank you, Melissa, and good morning, everyone, and thank you for joining us for Andrew Dynamics Fiscal 2020 Third Quarter Earnings Call. Joining me on today's call is Steve Trowbridge, Andrew Dynamics Executive Vice President and Chief Financial Officer, who will provide a detailed analysis of our third quarter financial performance. Given the impact that the COVID-19 pandemic is having on our company and our customers, during this call, Steve and I will take a tailored approach to assessing our third quarter results and discussing our perspectives on the business moving forward. With respect to the third quarter, we will discuss our results through the lens of the facts as they existed at that time. With respect to our business moving forward, We will discuss our perspectives looking through the lens of the facts as they exist today, while acknowledging that the facts, circumstances, and situations for everyone remain highly fluid and dynamic and are likely to change significantly in the short and medium term. With that said, I'd now like to provide an overview of our operating and execution highlights for the quarter, as well as some commentary on the impact. We had a strong third quarter. We reported solid top-line performance during the quarter. Our revenue increased 6.5% year-over-year and increased 9.3% when excluding Esclera, and it was driven by growth in all three of our businesses. In addition, we are pleased to report that that we delivered adjusted EPS of a penny per share. We believe this clearly demonstrates our ability to simultaneously invest in those businesses that will fuel our transformation into a growth company while being thoughtful and disciplined about our overall spending. We believe these results provide continued evidence of our successful ongoing transformation into a more focused medical technology company delivering unique and innovative healthcare solutions into larger and faster growth markets. During the quarter, we remained focused on three drivers to continue this transformation, internal research and development, M&A, and clinical and regulatory pathway expansion. Let me update you on our accomplishments in each of these areas. On the R&D front, we continue to focus investment on our three key technologies, AngioVac, Arion, and NanoKnife, while seeking out ways to increase the profitability profile of our other products. Earlier this year, we announced that we had launched NanoKnife 3.0 and AngioVac 3.0, and we spoke with you about expanding our AngioVac platform through the continued commitment to focused internal research and development. I'm happy to say that we remain on track to deliver two new AngioVac products in the next 12 to 18 months, and we look forward to sharing these developments with you in the future. In terms of our recent M&A activities, we continue to advance the Arion technology and progress towards commercial launch through investment in three primary areas. ensuring a strong and robust supply chain, building position and sales training programs, and building a dedicated selling and marketing channel to take this product to the market in the proper way. Additionally, the integration of our recently acquired C3 Wave PIC tip location system is progressing nicely, and customers have already begun to express interest in this new product. M&A will continue over the medium and long term to play an important role in our transformation. However, we are clearly in uncharted territory due to the COVID-19 global pandemic. While we will maintain our disciplined approach of identifying appropriate M&A targets and will continue to assess opportunities, we will also prioritize the strength of our balance sheet amid this rapidly evolving macroeconomic climate. Steve will provide more details and perspectives on our liquidity position later in the call. Given that backdrop, I am comfortable saying that we will be more conservative with respect to M&A opportunities in the current environment of heightened uncertainty. The third driver of our transformation is clinical and regulatory expansion in data generation. which are foundational pillars to our strategic transformation. I'd like to update you on our two most important efforts underway, Pathfinder and Direct. While we continue to focus on these areas, the current environment obviously requires flexibility. With CMS and hospitals throughout the country seeking to prioritize critical care procedures and seeking to preserve treatment capacity, Additional site initiation activities and patient enrollment efforts in both Pathfinder and Direct have been paused. We are working internally to be in a position to ramp up these efforts as quickly as possible once the situation allows us to do so. In mid-January, we launched the Pathfinder 1 registry, a pilot study to evaluate the safety and efficacy We believe this study will provide valuable, scientifically-backed data to further differentiate the Ariane system from competitive products in this space and build upon the excellent long-term results that patients experienced during the IDE. The NanoKnife Direct IDE saw solid progress through the third quarter, As of today, 19 study sites have secured IRB approval. We remain very pleased with the pace at which leading institutions have committed to our comprehensive clinical study and securing IRB approval. Before I turn the call over to Steve, I'd like to provide an update on how the COVID-19 pandemic is currently impacting our business. Our office-based employees are working remotely and doing so efficiently and effectively. From a manufacturing standpoint, we have employees on the manufacturing floor to ensure that our products are available to help save lives. Given the nature of this pandemic, while we've effectively implemented the business continuity and contingency plans that we've had in place, we've also had to create some new ones. to help to protect our employees while they protect our supply chain and ensure that production of our critical care products continues uninterrupted. In the interest of their safety and at the request of our customers, we have grounded all of our field-based sales reps in order to help reduce transmission of the virus and free up hospital resources to focus on caring for patients with COVID-19. Despite these challenges, I'm very proud of our team. They've done a terrific job in adjusting and providing remote support to our global customers. We have been very proactive around CRM activities and business development planning so that we are prepared to spring into action once our customers are ready and elective procedures resume. We have had great momentum heading into this. and we want to be sure we're ready to continue to build upon that momentum as we exit whenever that may be. From a procedural impact perspective, our business includes products that fall on both sides of the critical care and necessary line. AngioVac cases saw strong growth during the third quarter and into the early days of the fourth quarter driven by AngioVac 3.0. But over the past few weeks, we have seen procedures slow as hospitals have rightfully shifted their focus to preparing for COVID-19 patients. We have seen some slowing of EVLT procedures and even some labs closing their doors in the past couple weeks. We anticipate that this business will be softer in the fourth quarter. Oncology procedures are straddling the line between acute and elective-like and we expect this trend to continue with some cases proceeding as planned and others seeing delays. We do believe that these are delays, not cancellations, as these are treatments that the majority of patients will proceed with. Laser athlectomy procedures with our Arion laser have been continuing in patches, consistent with other procedures that are still in the very early ramp-up stage. and lastly, sales of our VA products including picks, midlines and ports remain strong even over the past few weeks, driven by our new agreement with Premier and a couple of new line extensions for our picks. While the current environment is certainly unprecedented, we are taking the necessary steps to prioritize the health and safety of our employees while also ensuring that we are positioning ourselves for continued innovation and growth as the environment returns to normal over time. With that, I'd like to turn the call over to Steve Trowbridge, our Executive Vice President and Chief Financial Officer.

Thanks, Jim, and good morning, everyone. Before I begin, I'd like to point you to the presentation on our investor relations website summarizing the key items associated with our quarterly and year-to-date results. I'd like to reiterate something that Jim mentioned earlier, which is that with respect to the third quarter, we will discuss our results looking through the lens of the facts as they existed at that time. With respect to our business moving forward, we will discuss our perspectives looking through the lens of the facts as they exist today. Additionally, unless otherwise noted, all prior year results and comparisons exclude the contribution of our NAMIC fluid management business, which we divested at the end of our fiscal year ended May 31, 2019. Our net sales for the third quarter of fiscal 2020 increased 6.5% year-over-year to $69.8 million. Excluding the fiscal 2019 revenue contribution from the Esclara Sclerotherapy product, which we stopped distributing during the fourth quarter of fiscal year 2019, revenue for the third quarter was 9.3%. As Jim mentioned earlier, all three of our businesses posted solid growth during the quarter, led by strong performances by AngioVac and NanoKnife. as well as our core, PICS, and ports products. Our total DIT business grew 4.3% year-over-year, and when excluding Esclera, grew 10.5%, driven by higher sales of AngioVac, which were up 44% year-over-year, and a second straight quarter of growth of our core products. AngioVac procedural volume remains strong, with procedures increasing 33% year-over-year, representing our 10th consecutive quarter of double-digit volume and revenue growth. Vascular access revenue increased 10.3% during the quarter, driven by double-digit growth in sales of PICs, ports, and midlines. We continue to integrate our recently acquired C3 Wave tip location system and are already seeing positive impact of this product on our PIC business, together with a value PIC distribution relationship we entered to in the third quarter. Thank you for joining us. as well as softness in the performance of our biosensory and balloon businesses. Moving down the income statement, our gross margin for the third quarter of fiscal 2020 was 57.8%, a decrease of 40 basis points compared to a year ago, driven primarily by product mix. As we discussed during our call last quarter, this decrease was in line with our expectations. Our research and development expenses during the third quarter of fiscal 2020 were $8.4 million, or 12% of sales, 6.9 million or 10.6% of sales a year ago. We are continuing to invest strategically in R&D and clinical with a focus on further developing our NanoKnife, AngioVac, and Aurion products while focusing on driving profitability of our other businesses. Prior to the current environment, we continued to expect R&D spend to be between $32 and $34 million in fiscal year 2020, including investments related to our acquisition of Eximo Medical, now Aurion. In the current environment, we're looking to maintain investment in our three key technologies while being more measured in our investments in other areas. SG&A expense for the third quarter of fiscal 2020 increased to $31.1 million, representing 44.6% of sales, compared to $27.1 million, representing 41.4% of sales a year ago. Prior to the current environment, we continue to anticipate SG&A spend between $126 and $130 million for fiscal year 2020. We will support our upcoming product launches as well as the needed investments for a commercial release of Orion heading into fiscal 21. Given the current environment, we are continually assessing controllable discretionary spend with an eye towards spend and cash management while maintaining investment in our key technologies. Our adjusted net income for the third quarter of fiscal 2020 was $0.4 million, or one cent per share, compared to adjusted net income of $1.9 million, or five cents per share, in the third quarter of last year. Adjusted EBITDA in the third quarter of fiscal 2020 was $3.8 million, compared to $7.7 million in the third quarter of fiscal 2019. Turning to our balance sheet, in the third quarter of fiscal 2020, we began with roughly $41.2 million in cash. and we used $17.8 million of cash in operating activities. During the third quarter, we used $10 million of cash to fund the acquisition of the C3 Wave Tick Tip Location System. As of February 29, 2020, we had $27.2 million in cash and cash equivalents and $15 million in debt outstanding. We entered this current environment with a strong foundational position, having a net cash position and a revolver with meaningful available capacity. In addition, Inventory levels were elevated in anticipation of completing our move out of the Glens Falls facility that we sold to Medline at the end of fiscal 19. In the current environment, we have continued to increase inventory levels as an aspect of our evolving business continuity plans. We've been in contact with our strong and longstanding banking group and are keeping a close eye on the environment. We're taking a thoughtful and disciplined approach to our balance sheet. We're focusing on our collections, and while we will continue to keep a close eye on them, we are pleased to say that commerce continues to be moving. We are also paying close attention to our payables. We're not taking a cynical approach, and we have positioned ourselves to be a good customer while also being proactive. Overall, we believe we're in a solid position and will remain focused on maintaining dry powder and being proactive in the current environment. Consistent with this approach, we have initiated a modest draw of $25 million on our revolver. We believe that this is a prudent move, illustrating both our focus on cash and liquidity and our strong foundational position. Turning now to guidance, as Jim and I discussed on this call, we're pleased with our third quarter results. In addition, we were encouraged by our sales in the month of March, both on their own merits and in light of the current environment. However, we have seen a slowdown and a shift in procedures during the last couple weeks. Thank you for joining us. and recommends changing on a daily basis on both a national and state-by-state level with no firm end in sight. The primary unknowns at this point are twofold. The first is the duration of the COVID-19 pandemic and the impact it will have on elective procedures. The second is that we are unsure when our reps will be allowed to get back on the road and gain access to our hospitals and physicians' offices. The potential range of outcomes given these unknowns is so broad and far reaching that we are unable to provide an accurate guidance range at this time. As we mentioned earlier, we had a strong third quarter and saw that strength continue through the majority of the month of March. We're encouraged by this, but we saw declining procedural volumes in late March and into the first week of April, which we anticipate will continue throughout the fourth quarter. While this is incrementally more granularity on the current quarter than we would normally provide, We felt it was important to share this given the context. As Jim mentioned earlier, we established exciting momentum through the end of Q3, and we're working hard to ensure that we will be well positioned to sustain and build on that momentum once the situation allows. With that, I'd like to turn the call back to the operator to open the call for questions.