AngioDynamics, Inc.

Good morning, and welcome to the NGO Dynamics Fiscal Year 2022 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. In question and answer session, we'll follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference call is being recorded. The news release detailing the fiscal 2022 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 this 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 gross margins for the fiscal year 2022. as well as trends that may continue. Management encourages you to review the company's past and future filings with the SEC, including, without limitation, the company's forms 10Q and 10K, which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. The company will also discuss certain non-GAAP financial measures during this call. Management uses these measures to establish operational goals and review operational performance I believe that these measures may assist investors in analyzing the underlying trends in the company's business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for, or as superior to, financial reporting measures prepared in accordance with GAAP. The 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, Angio Dynamics President and Chief Executive Officer. Mr. Clemmer?

Thank you, Rob. Good morning, everyone, and thank you for joining us for Angio Dynamics Fiscal 2022 Second Quarter Earnings Call. Joining me on today's call is Steve Trowbridge, Angio Dynamics Executive Vice President and Chief Financial Officer, who will provide a detailed analysis of of our second quarter financial performance and our revised FY22 guidance. I am pleased with our second quarter performance as we have continued to progress along our strategic transformation and we have delivered strong revenue growth despite the ongoing challenges related to the COVID-19 global pandemic and other macro-related headwinds. These results are a direct reflection of our team's commitment to and our execution of our long-term strategic plan to transform angiodynamics into a high-growth med-tech company. We ended the quarter with revenue of $78.3 million, representing growth of 7.6% year-over-year. Net sales from our med-tech business, which, as a reminder, includes Arion, NanoKnife, and our thrombectomy platform, were $18.9 million, a 36% increase over the previous year. Our med device business, which includes the remainder of our portfolio, grew approximately 1% year over year, despite a $4 million backlog. The ongoing disruptions from the COVID pandemic and resulting supply chain headwinds led to this backlog and naturally also had an impact on gross margin, and earnings during the second quarter. We ended the quarter with adjusted EPS of negative two cents and gross margin of 51.8%. Before I go into the more specific results across our businesses, I'd like to talk through the current macro environment, the resulting disruptions, and how we are addressing those in a little more detail. As we have discussed during previous quarters, We have been impacted by and we are working through supply chain disruptions stemming from COVID. Specifically, we have discussed the tight labor market, increasing labor costs, raw material inflation, and escalating freight costs. Like many other businesses, we are feeling these supply chain impacts. Two of our main challenges are staffing from our internal manufacturing and operations teams. and increasing levels of production disruption caused by our employees being exposed to COVID. We are also facing similar dynamics with some of our supply partners who are struggling to service our needs due to similar factors within their production environments. These factors contributed to a more difficult environment in our second quarter, which accelerated in November. In order to address this disruption, we are focused on increasing manufacturing capacity, improving efficiencies, and making adjustments to pricing and shipping terms. All of us have been dealing with the ever-changing impacts of COVID for nearly two years, but we have managed through it well and will continue to drive our business with the same disciplined approach while continuing to appropriately prioritize the investments intended to support the long-term growth of our business. Earlier this year, as we saw these macro pressures building, we began to identify and implement solutions to address them. In the second quarter, we initiated a plan to increase manufacturing capacity through our partner in Costa Rica. We are pleased with the pace of this project, and we will keep you updated on progress of this initiative and others during subsequent quarters. To be clear, we are not moving all of our manufacturing offshore and have no plans to close our existing facilities. We are qualifying additional manufacturing capacity to not only address the short-term supply chain disruption, but also to enhance our ability to supply our customers as we grow our business over the medium and long term in accordance with our strategic plan. In addition to increasing capacity in Costa Rica, we have continued to actively pursue programs to improve our supply chain. These initiatives include SKU rationalization and other targeted projects to increase capacity and efficiency in our manufacturing process. As we discussed last quarter, we have recently implemented targeted revisions to our pricing and shipping terms in response to the increased costs of doing business. While the increases in operating costs have affected our business and we have taken actions to address these, excuse me, actions to address these challenges to minimize any potential long-term effects. The majority of the supply chain challenges and cost increases affect our med device portfolio and have a lesser impact on our med tech portfolio as the investment and design processes for our med tech products integrated robust supply chain planning. We are continuing to pursue our strategic plan, including funding our core transformational investments, as we know they are vital to driving our growth and the value of our company over the long term. Now, turning back to our detailed results for the second quarter. Our Arion business saw continued sequential growth during the second quarter, with revenue of $6.3 million. up from 5.9 million in the first quarter of FY22, despite increased pressure on procedure volumes stemming from COVID and hospital staffing challenges. The continued highly positive feedback from the market confirms our belief that our Arion platform offers differentiated technology through a broad suite of treatment options that drive positive patient outcomes. At the end of the second quarter, Arion had been used in over 13,000 procedures, and we estimate that Arion now represents about 5% share of this market. As we've mentioned on previous calls, Arion procedures have been fairly divided between above and below the knee. We think this demonstrates both the versatility of our technology and the unique breadth of our addressable market and opportunities for continued growth. We continue to expect Arion to generate robust revenue growth for the balance of FY22, and we believe we've appropriately considered the current headwinds as part of our revenue guidance. As a result, we are reiterating our revenue range of $24 to $26 million for Arion for fiscal 2022. We continued to see strong year-over-year growth within our thrombectomy portfolio which generated approximately 21 percent revenue growth over the second quarter of FY21, despite the challenging environment. This included 29 percent year-over-year growth from our mechanical thrombectomy portfolio, comprising AngioVac and AlphaVac. We are also pleased that we recently completed the limited market release of our AlphaVac mechanical thrombectomy system. This highly effective LMR process generated valuable insights, including the highly positive responses from physicians regarding their clinical outcomes, which led us to commence our full market launch of AlphaVac in early December. While it has only been a few weeks, we've received excellent feedback from physicians and are very pleased with the pace of the launch. As a reminder, AlphaVac expands our thrombectomy opportunity by addressing a much larger segment of the DBT venous thromboembolism market. As we've discussed, the DBT segment of this market represents an approximately $1.5 billion market opportunity. While the initial AlphaVac product, a 22 French cannula device, increases our addressable market, it still only unlocks a portion of this $1.5 billion opportunity. We plan to unlock full access to the DVT VTE market through the upcoming launches of our 18 French device and subsequent smaller French AlphaVac devices as we've described in our Investor and Technology Day presentation. In addition, we plan to use the 18 French device for a pulmonary embolism IDE study that upon clearance would provide us access to an additional $1.5 billion market. We have filed the application for this IDE study and are in discussions with the FDA to support approval. Nano knife probe sales for the second quarter increased 9% year over year. Year to date, nano knife probe sales have increased by 20%. were pleased with our sales of nanodive probes, despite the increased COVID-related challenges we faced during the second quarter. One dynamic we've seen as a result of these challenges is an increase in case cancellations for pancreatic procedures due to disease progression. In certain instances, we've noticed that treatment delays throughout the pandemic have led to disease progression in many patients. Some physicians have reported that when they finally try to perform a nanolife procedure, following a staffing or COVID-related delay, they often discover metastases in the operating room and cancel the ablation, which is a very difficult situation for patients, their families, and the physicians. Despite the challenges of the current market environment, we believe probe volume growth benefited from the tailwind of a larger capital base and increased data-driven awareness from our direct study. NanoKnife capital sales were down year over year against a difficult comp in the second quarter of FY21, following the trend of general quarter-to-quarter variability in capital placements. We remain excited and committed to investing in our NanoKnife platform as we continue to make progress with our clinical studies which will support our planned expansion into new indications, such as prostate. And we also look forward to exploring new geographic opportunities as the OUS environment improves. Our med device business grew approximately 1% in the second quarter, which was in line with the long-term trajectory of the business that we laid out for you at our Investor and Technology Day. Our medical device performance was impacted, by the challenging supply chain environment in Q2 that resulted in the backlog that I discussed earlier. Turning to internal R&D during the quarter, we continued to invest in our key strategic priorities, which are, first, to support our existing platforms to facilitate physician adoption and approve patient outcomes, and second, to continue the development of new products in order to expand into larger, faster-growing addressable markets. These investment initiatives include clinical research, product development, and selling and marketing, as we prepare to introduce these new products into the market. We also continue to look for opportunities externally, and strategic tuck-in M&A remains a component of our long-term growth strategy. We regularly monitor the landscape for the right opportunities while also maintaining a disciplined approach to capital allocation and cost management as we do so. Turning to our clinical programs, we currently have 22 active sites in our direct study and are encouraged by the overall execution of the study. We also note that the US direct study spawned interest in initiating similar research in other countries. For example, the multicenter direct INSPIRE study in Australia recently enrolled its first patient. I'd like to take a moment to discuss the progress regarding our prostate initiative for the NanoKnife system. The NanoKnife's unique mechanism of action enables it to be used as a focal option for physicians and patients seeking alternatives to radical prostatectomy. Current focal treatment options have been limited in their ability to grow to no more than 5% of the addressable market. We believe the NanoLife system has the potential to grow the focal treatment market due to its ease of use and unique mechanism of action to serve as a more favorable treatment for patients and physicians alike. In order to prove this belief, We have partnered with the Society of Urologic Oncology to launch the PRESERVE study. The PRESERVE study is designed to assess local cancer control in patients with intermediate risk disease with a secondary endpoint measuring quality of life outcomes. This study will be led by our principal investigators, Dr. Jonathan Coleman from Memorial Sloan Kettering and Dr. Arvin George from the University of Michigan. We will keep you up to date on this important study, and we expect to begin patient enrollment in Q3. We believe that the PRESERVE study can provide valuable evidence proving the nanolife system as a focal treatment option and expand the potential target market to greater than $500 million. With that, I'd like to turn the call over to Steve Trowbridge, our Executive Vice President and Chief Financial Officer to review the quarter in more detail.

Thanks, Jim. Good morning, everyone. Before I begin, I'd like to direct everyone to the presentation on our Investor Relations website, summarizing the key items from our quarterly results. Our revenue for the second quarter of fiscal year 22 increased 7.6% year-over-year to $78.3 million, driven by continued strength in our medtech businesses, including Arion, NanoKnife, and AngioVac. MedTech revenue was $18.9 million, a 36.4% year-over-year increase, while MedDevice revenue was $59.4 million, growing approximately 1% over the second quarter of fiscal year 21. For the first six months of the year, MedTech grew 50%. MedDevice was flat compared to the prior year period, but grew roughly 5% year-over-year when excluding last year's NHS order. Year-to-date through the end of the second quarter, our MedTech platform comprised 24% of our total revenue, compared to 17% at this time last year. Revenue in our endovascular therapies business increased 17% year-over-year to $39.7 million, benefiting from the continued adoption of Arion in our thrombectomy portfolio. Arion contributed $6.3 million in revenue during the second quarter, continuing the momentum that we've been building since last year's launch. And we did see some impact from the ongoing COVID pandemic on Arion hospital procedure volume during the quarter. And despite this challenging market environment, we continued to place new lasers during the quarter, and as of today, our installed base is 242 lasers, with 35 lasers placed during the second quarter. We view Arion as a key growth driver going forward, and we continue to invest in the platform, building out our commercial infrastructure and generating clinical evidence to drive further adoption. As Jim stated earlier, we continue to expect Arion to generate revenue in the range of $24 to $26 million for the year. Mechanical thrombectomy revenue, which includes angiovac and alphavac LMR sales, grew 29% over the second quarter of FY21, as related procedure volumes improved sequentially with robust demand for the platform. When including unifuse, thrombectomy revenue grew 21% year over year. While in the current environment, we have seen some softening in procedure volumes in the month of December, we're very excited about thrombectomy as a key growth platform. Vascular access revenue increased 4.8% versus the prior year period, continuing the solid performance of this business, even in the face of hospital staffing shortages and manufacturing delays, which have resulted in a portion of the backlog that Jim discussed previously. Revenue from our oncology business declined 9.3% during the quarter as compared to prior year, primarily driven by fewer capital sales in the quarter, as well as general procedural pressures related to COVID and hospital staffing disruptions. In addition, sales of microwave remained challenged, declining 3%. NanoKnife disposable revenue increased 9%, driven by increased awareness from our direct study and a growing installed base. Year-to-date, nanonite disposable sales are up 20%. Moving down to the income statement, our gross margin for the second quarter of fiscal year 22 was 51.8%, a decrease of 340 basis points compared to a year ago. Accelerating increases in labor and manufacturing costs continue to negatively impact our gross margin, resulting in an approximately 170 basis point headwind versus the prior year. Inflationary pressures on raw material prices, resulted in an approximately 60 basis point negative impact to gross margin, and higher freight costs had an approximately 10 basis point impact versus the prior year. As we anticipated at the beginning of the year, Ariane and Alphavac startup costs accounted for approximately 100 basis points impact versus the prior year. We expect these dynamics to continue to pressure our margins near term. Given these ongoing headwinds, we now expect fiscal year 22 gross margin be in the range of 52% to 54%, a decrease from our prior guidance of approximately 55%. Over the long term, we expect our gross margin to expand as growth in our higher margin MedTech platforms accelerates and the manufacturing initiatives Jim mentioned earlier have an increasing impact. Our operations team remains focused on driving labor and service efficiencies and seeking material pricing opportunities. We've also implemented modifications to our pricing and shipping terms in an effort to offset some of these ongoing headwinds. We'll continue to monitor the dynamic environment closely and provide updates. Our research and development expense during the second quarter of fiscal year 22 was $8.2 million, or 10% of sales, compared to $9.7 million, or 13% of sales, a year ago. We continue our disciplined investment in R&D, focused on driving our key technology platforms, including the clinical spend for AlphaVac PE and NanoKnife Prostate. For fiscal year 22, we continue to anticipate R&D spend to target 10% to 13% of sales. SG&A expense for the second quarter of fiscal 22 was $33.3 million, representing 43% of sales, compared to $29.4 million, representing 40% of sales, a year ago. The increase in SG&A year-over-year reflects the strategic investments we discussed during our Investor and Technology Day, including headcount investments in areas such as Ariane. we continue to anticipate fiscal year 22 SG&A spending to approximate 40% to 45% of revenue. Our adjusted net loss for the second quarter of fiscal 22 was $0.9 million, or a loss of $0.02 per share, compared to adjusted net income of $0.6 million, or earnings per share of $0.01 in the second quarter of last year. The COVID-related headwinds with respect to gross margin that I previously discussed equated to approximately a $0.03 impact on second quarter results. Adjusted EBITDA in the second quarter of fiscal year 22 was $4.4 million compared to $5.2 million in the second quarter of fiscal 21. In the second quarter of fiscal 22, we generated $1.9 million in operating cash, had capital expenditures of $1.1 million, and additions to Arianne placement and evaluation units of $2.7 million. As of November 30th, 2021, we had $34.3 million in cash and cash equivalents compared to $35.5 million in cash and cash equivalents on August 31st, 2021. Our debt outstanding remained consistent at $25 million. Now, we do expect to see a higher-than-normal cash utilization during the third quarter as a result of both the backlog and funding the initiatives that Jim and I have discussed today. Turning now to guidance. We continue to anticipate that fiscal year 22 net sales will be in the range of $310 to $315 million. We now expect that full-year adjusted earnings per share will be in the range of a loss of $0.02 to a gain of $0.02 compared to our prior guidance of $0 to $0.05 as we continue to invest in driving sustainable growth in our key MedTech platforms while also managing the continued headwinds that we discussed today. In the current and evolving environment, we expect potential headwinds to persist during the third quarter, with a subsequent recovery as our internal initiatives take hold and the external environments improve. We plan to manage through these headwinds in a consistent fashion. Through two quarters of our fiscal 22, we're pleased with our progression along our strategic transformation. We continue to balance prioritizing top-line growth with managing profitability, delivering 8.6% growth year-to-date, and continuing to make investments that support our future growth initiatives. With that, I'll turn it back to Jim.