AngioDynamics, Inc.

Good morning and welcome to the NGO Dynamics fiscal year 2022 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 2022 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.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'd 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 actual results 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 and believes 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. A slide package offering insight into the company's financial results is also available on the Investor 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 operational results and financial performances 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, Melissa. And good morning, everyone, and thank you for joining us for AngioDynamics' fiscal 22 third quarter earnings call. Joining me on today's call is Steve Trowbridge, AngioDynamics Executive Vice President and Chief Financial Officer, who will provide a detailed analysis of our third quarter financial performance and our reaffirmed FY22 guidance. Our third quarter saw continued excellent progress in our transformation into a high-growth, innovation-driven MedTech company. We are reporting another quarter of solid revenue growth despite significant headwinds related to the COVID-19 global pandemic and the Omicron variant spike, which were particularly pronounced in December and January during our quarter-ended February 28th. We credit our team's resiliency and focus on driving our transformation to our higher-growth MedTech platforms including Arion, NanoKnife, and Thrombectomy. We ended the quarter with revenue of $74 million, representing growth of about 4% year-over-year. Net sales from our MedTech platforms were $19.6 million, representing growth of about 29% over the previous year. Through Q3, our MedTech business grew about 42% year-over-year, and year-to-date comprised approximately 24% of our overall revenue base, up from 18% in the prior year period. During our Q3, our MedTech revenue was 27% of our total revenue, and as we've highlighted as part of our corporate strategy, we expect that ratio will grow over time. Our Arion Otherectomy business continued its impressive performance, with revenue of $7.3 million for the quarter, up sequentially from $6.3 million in our second quarter. Ariane performed well, particularly in light of the tough environment in January, when hospitals and OBLs were significantly impacted by COVID spikes, both in terms of patient admittance and healthcare worker shortages due to nurses and providers falling ill. Ariane procedures remain fairly evenly divided between above and below the knee, demonstrating the versatility of both our technology and platform, the unique breadth of our addressable market, and opportunities for continued growth. We continue to expect Ariane to generate robust revenue growth during the fourth quarter, and as a result of the strong performance, we are raising our Ariane guidance to a range of $26.5 to $27.5 million for the year from our prior range of $24 to $26 million. Our mechanical thrombectomy business grew 14% year over year, despite the fact that it was one of our businesses that was most impacted by Omicron during the quarter. As other participants of the market have noted, DVT thrombectomy procedure volumes were significantly impacted during the December and January period. But we have seen an improving environment beginning with the back half of February, which has continued through March. We are pleased with the resiliency of this business, along with the feedback we have received from physicians regarding AlphaVac. We will provide more detail on AlphaVac a bit later in the call. Turning to NanoKnife, Disposable sales grew 11% during the quarter. Year-to-date, nanonife disposables have grown 17% year-over-year. Growth during the third quarter was driven by strength in the United States, with U.S. disposable sales growing 56% over the prior year. International markets, most notably in China and Europe, were impacted by the continuing global COVID headwinds. we remain very excited about the opportunities for NanoKnife, particularly in prostate. Our med device business, which includes the remainder of our portfolio, declined approximately 3% year over year in the quarter. Our med device third quarter performance continued to be impacted by our larger than typical backlog. During our second fiscal quarter call, we discussed the tight labor market and the impact on our manufacturing capacity. As we anticipated, the backlog at the end of Q2 did rise through our third quarter, and we continued implementing our response plans, including increasing manufacturing capacity through our Costa Rican partnership and increasing wage rates and retention bonuses at our facilities. I'm pleased to tell you that as we exited Q3, our production hours were up by 20% relative to the December-January timeframe, and we are making great headway on that side of the equation. As was the case last quarter, the demand environment for our med device products remains strong, while our response plans are taking hold. At the end of March, the backlog was approximately $11 million. Clearly, increased demand also impacts the rate at which we are able to work down our backlog. Year-to-date, our med device business declined 1%. When adjusting for the one-time $5 million order from NHS during the prior year period, our med device business grew 2% year-to-date. As we stated during our Investor in Technology Day last summer, we expect our med device business to grow 1% to 3% over our three-year strategic plan period. we are very pleased with this performance, particularly in light of the challenging supply chain environment. As was the case last quarter, while the demand environment remains strong, macro-related factors weighed on margins, which Steve will discuss in more detail. Over the last few quarters, we have noted several macro-related headwinds, including interruptions to the supply chain due to COVID, a tight labor market, and inflationary pressures on wages, raw materials, and freight. We saw COVID, and particularly the Omicron variant, contribute to delays of elective procedures during the third quarter. However, we continue to manage through it well and saw a meaningful improvement beginning in late February, and we are pleased that our procedural volumes continue to increase in March. As has been the case throughout the past two years, we are working through these challenges while simultaneously making the necessary investments in our MedTech businesses to drive growth and facilitate our strategic transformation. Turning to earnings, we generated an adjusted EPS of $0.03 in the quarter. This result was positively impacted by a benefit from the employee retention credit under the CARES Act, which resulted in a fractional reimbursement of expenses that we actually incurred during the first two calendar quarters of 2021. This reimbursement related to maintaining employment for sales, R&D, and support functions materially impacted by restrictive state and federal COVID rules and regulations. We made the decision to maintain our employment and investment levels before we knew this benefit was available to us, and we are appreciative of the assistance in maintaining our hardworking, talented workforce and our investment imperatives. The CARES Act had an approximately $0.08 positive impact on adjusted EPS in the quarter. While we didn't contemplate this relief in our original earnings guidance, it has allowed us to maintain and even accelerate certain investments across a number of areas in our business. As a result, we do not expect this to be additive to our full year adjusted EPS guidance, and we continue to expect full year adjusted earnings per share to be in the range of a loss of two cents to a gain of two cents. Turning to internal R&D during the quarter, we continue to invest in our key strategic priorities, which are, first, to support our existing platforms to facilitate physician adoption and improve 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. One great example is how we recently have received FDA clearance of our AlphaVac F18 mechanical thrombectomy system for use in the venous vasculature. The F18 is a unique design that was purpose-built to allow physicians to treat VTE without lytics with the control and the power they seek when utilizing mechanical thrombectomy. as a first-line treatment tool for patients. The F18 device is also the subject device for our PE IDE. We currently plan to initiate a limited market release later this quarter with a full market release anticipated in the first fiscal quarter of 2023. We are excited about our progress in the mechanical thrombectomy market, and we look forward to continuing to open up a larger, faster growing segments of this market through new product clearances and subsequent launches. Regarding our clinical programs, we remain in investment mode to drive our MedTech platforms and we are excited by our continued progress with respect to our clinical initiatives associated with our thrombectomy and nano knife platforms. We are pleased to announce that the FDA has approved our IDE study for the use of our AlphaVac F18 system to treat acute pulmonary embolism. The study is named APEX-AV and we expect to start enrollment in the second half of this calendar year. We are proud to announce a partnership with the Pulmonary Embolism Response Team, PERT Consortium, in this important study. APEX is a single-arm, multi-center investigational study of 122 subjects. We expect to initiate approximately 20 sites. The primary efficacy endpoint is the reduction in RV-LV ratio between baseline and 48 hours post-procedure as assessed by CT and geography. Subjects will be followed for 30 days post-procedure. We are also excited to announce that we have enrolled our first patients in our Preserve study for NanoKnife treatment of prostate cancer. We have more than 20 sites in the initiation process for Preserve, and we are excited about our progress. NanoKnife's unique mechanism of action enables it to be used as a focal option for physicians and patients seeking alternatives to radical prostatectomy. We think the NanoLife system can grow the focal treatment market due to its ease of use and unique mechanism of action and can potentially serve as a more favorable treatment option for patients and physicians alike. This could open up a potential addressable market for NanoLife, which we believe is more than $600 million in the U.S. alone. We currently have 22 active sites in our direct study. and we remain excited by the awareness generated by this study. We also note that the U.S. direct study has pawned interest in initiating similar research in other countries. For example, the multicenter direct INSPIRE study in Australia recently enrolled its first patient. Finally, I would like to congratulate our international team for the very successful International Life Symposium held March 10 through 12 in Barcelona, Spain. This international symposium brought together leading experts in the surgery, oncology, urology, and vascular fields to discuss the latest clinical learning and explore new and exciting directions for future patient care. Physician and partner feedback has been exceedingly positive, and this is a testament to the investments that we've made and building out our talented international team. 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 third quarter of FY22 increased 3.9% year-over-year to $74 million, driven by continued strength in our MedTech business, including Arion, NanoKnife, and Thrombectomy. MedTech revenue was $19.6 million, a 28.6% year-over-year increase, while MedDevice revenue was $54.4 million, declining approximately 2.8% compared to the third quarter of FY21. For the first nine months of the year, MedTech grew 41.8 percent. MedDevice was down 0.8 percent compared to the prior year period and grew roughly 2 percent year-over-year when excluding last year's NHS order. For our third fiscal quarter, our MedTech platform comprised 27 percent of our total revenue. Year-to-date, our MedTech platform comprised 24 percent of our total revenue compared to 18 percent at this time last year. Overall demand during the quarter was impacted by both macro-level and company-specific dynamics. Macro-level demand was clearly challenged in December and January, but did improve during the second half of February as Omicron cases declined and hospital access improved. Staffing remains a headwind and likely will remain so through the rest of this calendar year. Customer demand for angiodynamics products has been resilient as evidenced by our results for the quarter and the status of the backlog that Jim mentioned. Revenue in our endovascular therapies business increased 14.5% year-over-year to $38.1 million, benefiting from the continued adoption of Arion in our FromBeckamy portfolio. Arion contributed $7.3 million in revenue during the third quarter, continuing the momentum we've been building since last year's launch. As of today, our installed base is 285 lasers, with 43 lasers placed during the third quarter. As planned, we continued to build out our commercial infrastructure during the third quarter in order to drive ongoing, consistent growth. As Jim stated earlier, we now expect Arion to generate revenue in the range of $26.5 to $27.5 million for the year. Mechanical thrombectomy revenue, which includes angiovac and alphavac sales, grew 14% over the third quarter of FY21. When including unifuse, thrombectomy revenue grew 7% year over year. As Jim noted, DVT thrombectomy procedures were negatively impacted during the quarter, particularly in December and January. We did see improvement beginning in the second half of February, which continued through March. For our fiscal year to date, mechanical thrombectomy grew 18%, and when including unifuse, grew 12%. Given the acute demand disruption due to lower procedure volumes, particularly during that December and January timeframe, we now expect mechanical thrombectomy to grow approximately 20% for the full year, as opposed to the 30% growth we expected before the Omicron disruption. We remain confident that it will be a significant contributor to our overall growth, and we plan to continue to invest in the platform as a key driver of our transformation, as evidenced by the recent clearance of our AlphaVac F18 system and the approval of our PE IDE. The launch of our AlphaVac F18 system provides an initial entry into expanded portions of the DVT market, and the IDE for PE, as we've indicated in the past, gives us the opportunity to more than double our overall available peripheral market. Vascular access revenue decreased 5.6% during the prior year period. Vascular access is one of the three businesses, along with our core angiographic catheter business, and our EVLT business that felt the most impact of the supply chain headwinds and tight labor market that resulted in our backlog. Demand has remained strong for our VA products, and we expect this business to return to growth as we implement our supply chain improvement plans and work through the backlog. For our fiscal year to date, our VA business is down 4.4%, and when accounting for the one-time $5 million NHS order last year, our VA business is up 2.5%. Revenue from our oncology business declined 5% during the quarter as compared to prior year, as oncology-related procedures were acutely impacted by COVID and hospital staffing disruptions. NanoKnife disposable revenue increased 11%, driven by 56% growth in the United States. NanoKnife growth was driven by increased awareness from our clinical studies and a growing installed base. Year-to-date, NanoKnife probe sales were up 17%. The capital environment remained challenged, with capital sales during the quarter of $1 million. Sales of our microwave product declined 6%. And moving down the income statement, as illustrated in the gross margin bridge included in the earnings presentation posted this morning, our gross margin for the third quarter of fiscal year 22 was 52.2%, a decrease of 190 basis points compared to a year ago, but up 40 basis points sequentially including the impact of the CARES Act reimbursement Jim mentioned earlier. In accordance with our strategy, we expect our gross margin to expand as growth in our higher margin MedTech platforms accelerates and our manufacturing initiatives have an increasing impact. In our third quarter, we did see approximately 100 basis points of a benefit from product mix. This benefit was offset by a continuation of the headwinds we discussed during our second quarter call, including the ongoing COVID impact increases in labor and manufacturing costs, inflationary pressures, and freight costs. For our third quarter, gross margin was negatively impacted by approximately 110 basis points versus the prior year period due to increased labor and manufacturing costs. Inflationary pressures on raw material prices resulted in another approximately 100 basis point negative impact. Higher freight costs had an approximately 10 basis point negative impact, and production volume had an approximately 40 basis point negative impact. Arion and Alphavec startup costs accounted for an approximately 50 basis point negative impact. These headwinds were partially offset by an approximately 20 basis point incremental tailwind provided by the CARES Act benefit. We began to see the positive impacts from our capacity improvement initiatives during the second half of the quarter. As an example, excluding the CARES Act benefit, gross margin in the month of February was 53.7%. We expect these dynamics to continue to pressure margins near term and still expect FY22 gross margin to be in the range of 52% to 54%. Our research and development expenses during the third quarter of fiscal year 22 was $7.3 million, or 9.8% of sales, compared to $8.6 million, or 12% of sales, a year ago. We continued our disciplined investment in R&D, focused on driving our key technology platforms, including the clinical spend for our medtech businesses. For FY22, we continue to anticipate R&D spend to target 10% to 13% of sales. SG&A expense for the third quarter of FY22 was $29.1 million, representing 39.4% of sales, compared to $28.6 million, representing 40.2% of sales a year ago. We continue to anticipate FY22 SG&A spending to approximate 40% to 45% of revenues. Our adjusted net income for the third quarter of fiscal year 22 was $1.3 million or adjusted earnings per share of $0.03 compared to adjusted net income of $0.7 million or adjusted earnings per share of $0.02 in the third quarter of last year. COVID relief expense reimbursement under the CARES Act in the third quarter of FY22 and FY21 were $4.2 million and $1.9 million respectively. Adjusted EBITDA in the third quarter of fiscal year 22 was $6.7 million, compared to $5.4 million in the third quarter of fiscal year 21. In the third quarter of fiscal year 22, we used $8.8 million in operating cash, had capital expenditures of $1.1 million, and additions to ARION placement and evaluation units of $1.5 million. As of February 28, 2022, we had $23.9 million in cash and cash equivalents, compared to $34.3 million in cash and cash equivalents on November 30th, 2021. As we discussed in Q2, cash utilization was higher in Q3, primarily as a result of our manufacturing enhancement initiatives. In addition, in line with our expectations, VSOs have increased largely due to customary market terms associated with our Arion customers and the growing revenue contribution of that business. Our debt outstanding remained consistent at $25 million. Turning now to guidance, we continue to anticipate that fiscal year 22 revenue will be in the range of $310 million to $315 million. This does imply a significant step up in revenue from our Q3. Our fourth quarter has four additional selling days relative to our third quarter. And in addition to the improving procedural environment, we continue to add manufacturing capacity and work through the backlog. We also continue to expect full-year adjusted earnings per share to be in the range of a loss of two cents to a gain of two cents as we continue to invest in driving sustainable growth in our key MedTech platforms while also managing the continued headwinds we discussed. As Jim mentioned, while we saw an eight-cent tailwind from the impact of the CARES Act during the third quarter, we used this as an opportunity to continue and accelerate investment in R&D and SG&A across certain areas of the business, and this is contemplated in our full year guidance range. Accordingly, our guidance range remains a loss of two cents to a gain of two cents, despite the CARES Act impact. Overall, we've seen steady improvement in procedural volumes during February and March, and even here in the first week of April, and are confident in our ability to continue to grow the business. We're pleased with the progress we've made towards our strategic transformation, We continue to balance our priorities of achieving top-line growth in the near term with investments that will create sustainable, profitable growth over the long term. I'm proud of our team's ability to continue working towards these goals despite a very challenging operating environment. With that, I'll turn it back to Jim.