AngioDynamics, Inc.

Good morning and welcome to the NGO Dynamics fiscal year 2023 first 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 our fiscal 2023 first 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 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 2023, 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 10-Q and 10-K, 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 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 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 operating results and financial performance during this morning's conference call. I would 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 Angio Dynamics Fiscal 2023 First 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 first quarter financial performance. Before we talk about results, our thoughts are with all of the people who have been impacted by Hurricane Ian, particularly those in Florida, as we know how many people are still struggling as a result of the devastation. We are focused on supporting our employees and customers in the region, and we are closely monitoring the situation. Turning to our results, we ended the quarter with revenue of $81.5 million, representing growth of roughly 6% year-over-year, led by growth of approximately 30% from our MedTech segment over the first quarter of last year. I am pleased with our solid first quarter performance and our ongoing progress towards our long-term goals. At our Investor and Technology Day in July 2021, we outlined our three-year strategic plan and our operating goals. We detailed how we were going to utilize the proprietary technology in our MedTech platforms to enter large, fast-growing, attractive markets and prioritize driving measurable, beneficial patient outcomes. Macro challenges persisted during June, July, and August. Despite these headwinds, we've consistently executed on our strategic goals. We remain committed to making the necessary investments designed to drive sustained growth in our MedTech platforms while maintaining a balanced focus on the bottom line. Inflationary pressures persisted throughout our first quarter as freight and raw material costs continued to rise. While this pressure does have an impact on our results, I am pleased with how our supply chain team has managed through this dynamic environment. Steve will provide some more details a bit later on our call. Hospitals and care locations experienced significant staffing challenges during the summer. resulting in pressure on procedural volumes. While we anticipate that some level of staffing challenges will persist, hospitals are becoming more adept at managing through these issues. In addition to the direct impact on procedural volumes, staffing challenges create some ancillary effects as hospitals and care sites struggle with their reduced revenue streams causing hospitals to lengthen the timing of their payables, which Steve will again discuss later on our call. We continue to partner closely with our customers and have been more flexible with payment terms in light of the current environment. Despite this challenging environment, our MedTech segment continues to exhibit strong growth, driven by year-over-year growth in Arion. The impact of the full market release of our AlphaVac F18 product and the continued growth and utilization of Nanolife by urologists. This performance illustrates both the resilience of our product platforms and our team's ability to execute. Arion continued its impressive performance during the quarter, growing 50% over the prior year. Arion was down slightly sequentially, which we expected, given the typical seasonality and our strong finish in Q4. During the quarter, there were a number of presentations detailing clinical experience with Arion. Specifically, at SIR and LINC, physicians presented 12-month follow-up data from our Pathfinder study. The original IDE for Arion illustrated impressive safety and efficacy results. The patient population in our Pathfinder study included patients in a real-world setting with significantly more complex peripheral disease than those included in the IDE. The results from Pathfinder were similar to or exceeded the efficacy and safety results from the original IDE in this more challenging patient population. In addition, at the AMP meeting, a presentation analyzing outcomes between chronic limb ischemia patients and the less complex patients reported that the long-term outcomes for the CLI patients were similar to those of the less complex patients. This is just a great demonstration of how effective Arion is in treating below-the-knee disease, as CLI patients typically fare much worse than less complex patients. We expect to see Arion continue to grow rapidly as more physicians are introduced to and use this innovative technology. Our mechanical thrombectomy business, comprising AngioVac and AlphaVac, grew 36% during the quarter. When including Unifuse, our thrombus platform grew almost 32% over the prior year. AlphaVac revenue for the quarter was $1.8 million, and we were pleased with this performance, given the particularly challenging procedural headwinds we faced during the summer. Additionally, we entered into a full market release of our AlphaVac F18 product during the quarter. We are on track to meet our AlphaVac revenue expectations for the full year. Our NanoKnife disposable sales grew approximately 12% during the quarter, as we've seen increasing traction within urology practices as prostate procedure volumes continue to grow during the quarter. And our PRESERVE clinical trial drove increased awareness in this space. During Q1, physicians completed 100 prostate cases with NanoKnife, up from 71 prostate cases treated in the fourth quarter and an increase of more than 85 cases over Q1 of last year. Additionally, international markets, particularly the European markets, had a really strong quarter. While disposable demand remains strong, some supply chain bottlenecks encountered during the quarter impacted our top line growth and resulted in a small backlog of nanomife orders. For example, one of our subcomponent suppliers couldn't meet our demand, which in turn led to a production shortfall. While we expect to clear this shortfall in Q2, continuing supply chain challenges drove our decision to add raw material and work in process inventory, which increased our inventory levels. On the operations front, we continued to work down our backlog in a deliberate and strategic manner with total backlog of $7.1 million at the end of the first quarter, down $1.3 million from the end of May. We continued to invest in our business during the quarter, and our focus remains on supporting our existing platforms while also continuing to drive the development of new products to expand into larger, faster-growing addressable markets. As a reminder, these investment initiatives include geographic expansion internationally, clinical research, product development, selling and marketing, and regulatory pathway expansion. our strategic investments continue to advance our growth platforms, in particular with the recent regulatory pathway expansion for our Arion product in arterial thrombectomy when removing thrombus accumulation adjacent to our threctomy, as well as FDA clearance of a hydrophilic coating on our Arion catheters and an initiation of our APEX clinical study for the treatment of pulmonary embolism with our AlphaVac F18 product. Our teams continue to execute on our clinical trials, including our three IDE studies, our PRESERVE study for the treatment of prostate cancer with NanoKnife, our APEX study for the treatment of pulmonary embolism with our AlphaVac F18, as well as our DIRECT study for the treatment of pancreatic cancer with NanoKnife. As a reminder, We believe that Preserve will demonstrate that NanoKnife can be an effective focal treatment option for men with intermediate risk disease and provide favorable quality of life outcomes when compared to other focal treatment options or surgery. We estimate that the total potential market for focal treatment of prostate cancer that can be addressed by NanoKnife may exceed $700 million in the U.S. alone. We believe that our APEC study will prove that our unique AlphaVac products can be an effective treatment for PE, providing ease of use and another treatment option, while also unlocking an opportunity in a large addressable market that we estimate to be in excess of $1.5 billion in the United States. I'd also like to provide you with an update on our antitrust suit. against Beck and Dickinson's CRBAR business as it relates to our vascular access business. The trial concluded this week and is now being deliberated by the jury, and we are awaiting a verdict. Before turning the call over to Steve, I'd like to thank our team here at AngioDynamics for their continued hard work and dedication to achieving our goals. Their unwavering effort is essential to the transformation of AngioDynamics. 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 first quarter of FY23 increased 5.9% year-over-year to $81.5 million driven by continued strength in our MedTech platforms, including Arion, NanoKnife, and Thrombus Management. MedTech revenue was $22.8 million, a 29.6 year-over-year increase, while MedDevice revenue was $58.7 million, declining 1.1% compared to the first quarter of FY22. For the quarter, our MedTech segment composed 28% of our total revenue, compared to 23% of total revenue a year ago. Our Ariane platform contributed $8.8 million in revenue during the first quarter, a 50% increase compared to last year. As Jim mentioned, Ariane was down slightly sequentially from Q4, in line with our expectations. This represented solid performance when considering typical seasonality and the strong finish to Q4. We're very pleased with the continued growth of the Ariane platform. August was a strong month for Arion, and we saw an improving growth trend throughout our Q1. As of today, our installed base is approximately 350 lasers, with about 40 lasers placed during the first quarter. Total lasers placed since launch have utilized approximately $22 million of cash, adding quarterly depreciation expense to our gross margins. During the quarter, we launched Arion catheter line extensions, providing enhanced usability And in September, we also received regulatory clearance for a hydrophilic-coated catheter. Our forecast for Arion for the year remains unchanged, as we expect to see continued year-over-year growth throughout the course of FY23 and generate full-year revenue in the range of $40 to $45 million. Mechanical thrombectomy revenue, which includes angiovac and alphavac sales, grew 36.1% over the first quarter of FY22. When including Unifuse, thrombus management revenue grew 31.8% year-over-year. AlphaVac revenue for the first quarter was $1.8 million. We're very pleased with this performance after generating revenue of $2.2 million during FY22 and are excited to have begun the full market release of our F18 product during the quarter. Position feedback on the F18 remains very positive, and we're excited that four sites have completed all initiation requirements and are currently recruiting patients for our Apex PE study. AngioVac revenue was $6.9 million in the quarter, representing growth of 8.5% over the prior year's quarter. Procedure volume for AngioVac during the quarter remains solid, particularly given the challenging macro environment. We believe that staffing challenges at hospitals have continued to impact AngioVac procedure volume due to the complexity of these procedures, which require perfusionists and typically an ICU bed. We continue to expect our mechanical thrombectomy platform to grow 30% to 35% and be a significant contributor to our overall growth, and we plan to continue to invest in this platform as a key driver of our transformation. NanoKnife disposable revenue increased 12.3%, driven by 21.8% growth in international markets. NanoKnife procedure growth continues to be driven by increased awareness from our clinical studies, ongoing expanded adoption within practices by urologists, and a growing install base. Capital sales were down 500,000 versus the prior year, but our install base increased by 16 units as we implemented alternative placement models in the urology market. Turning to our med device segment, in the quarter, our core dialysis and microwave products each achieved modest growth, offset by modest declines in the balance of the portfolio, resulting in the overall segment decline of 1.1%. As a reminder, Almost all of the $7.1 million backorder relates to our MedDevice segment. 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 first quarter of FY23 was 51.9%, a decrease of 20 basis points compared to a year ago. Gross margin for our MedTech segment was 63.2%, a decrease of 220 basis points compared to the year-ago period. This decrease was primarily driven by increased depreciation costs associated with the increasing Arion installed base and some pricing of Arion catheters. Gross margin for our med device segment was 47.5%, a 70 basis point decline compared to the first quarter of 22, due largely to continued inflationary pressures. In accordance with our strategy, we expect our consolidated gross margin to expand throughout FY23 As sales in our higher margin MedTech segment grow and represent a larger portion of our total sales mix. As Jim said, while we're pleased with our progress on manufacturing, we expect to continue to see some variability in FY23 as a result of supply chain and other macroeconomic headwinds, including continued inflationary pressure. As we did with our fourth quarter, we've included a gross margin bridge in the materials published today. Our consolidated corporate gross margin in the quarter was positively impacted by product sales mix, as well as increased efficiency in our manufacturing operations. These tailwinds were offset by headwinds from raw material inflation, costs associated with the continued tight labor market, and increasing freight costs. In the first quarter, on a year-over-year basis, the impact on gross margins from product mix was the benefit of approximately 80 basis points. The increase in production capacity from our initiatives and increased efficiencies provided a benefit of approximately 240 basis points. These benefits were offset by approximately 100 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, and higher freight costs had an approximately 60 basis point negative impact. Some of the heightened impact from freight is the result of higher levels of raw material purchases, that we accelerated to address continuing component supplier disruptions. I'll cover this in a bit more detail shortly when discussing our cash position. Hardware depreciation costs from our increasing Ariane installed base negatively impacted gross margins by about 80 basis points. Our research and development expense during the first quarter of FY23 was $8.3 million, or 10.2% of sales, compared to $7.4 million, or 9.6% of sales, a year ago. We continue our disciplined investment in R&D, focused on driving our key technology platforms, including the clinical and product development spend for our MedTech portfolio. For FY23, we still anticipate R&D spend to target 10% to 12% of sales. SG&A expense for the first quarter of FY23 was $36.6 million, representing 44.9% of sales, compared to $33.4 million, or 43.4% of sales, a year ago. The year-over-year increase in SG&A spending is primarily driven by the annualization of investments in our sales teams, particularly Arion. For FY23, we continue to anticipate SG&A spend to target 40% to 45% of revenue. Our adjusted net loss for the first quarter of FY23 was $2.5 million, or adjusted loss per share of $0.06, compared to an adjusted net loss of $900,000, or adjusted loss per share of $0.02 in the first quarter of last year. Adjusted EBITDA in the first quarter of FY23 was $3 million, compared to $3.6 million in the first quarter of FY22. In the first quarter of FY23, we used $24.7 million in operating cash, had capital expenditures of $800,000, and additions to ARION placement and evaluation units of $2.2 million. As of August 31, 2022, we had $24.6 million in cash and cash equivalents, compared to $28.8 million in cash and cash equivalents on May 31, 2022. The cash balance at quarter end includes a refinancing of our credit facility that we closed at the end of Q1. Details of our cash position are included in the presentation on our Investor Relations website published in connection with this call. We've also included a cash bridge in today's materials. As we discussed on our fourth quarter call, we expected to have higher levels of cash utilization in the first quarter than in subsequent quarters for our FY23. Higher cash utilization was driven by annual incentive compensation in connection with our FY22 results, typical beginning-of-year payments for insurance and other prepaids, high levels of inventory purchases to proactively address supply chain disruptions, Arian laser placements, and some other one-time payments. Inventory levels increased 6.2 million in the first quarter of FY23 from our inventory balance as of May 31. This increase is in large part driven by raw material purchases we accelerated to address continuing supply chain disruptions. Supplier disruptions accelerated through the first quarter of FY23. Quoted lead times from various suppliers have expanded significantly, and suppliers that used to quote lead times of three or six months are now quoting lead times of nine months to more than a year. In order to mitigate significant disruption from these component suppliers, we have increased our raw material purchases, resulting in increased use of cash. We believe that it's prudent use of this cash as partial insurance against increased disruption in the future, especially as our capacity initiatives in Costa Rica take hold. In addition to the increased uses of cash I just mentioned, our account receivable balances remain high and our DSOs have increased. As Jim mentioned in his remarks, we've seen hospitals and caregivers begin to push out payment timing. This has negatively impacted our cash conversion cycles. We've been very deliberate about providing appropriate flexibility to our customers while remaining pragmatic with our approach to order fulfillment and have placed certain customers on credit hold or withheld delivery when appropriate. We're taking a balanced approach to extending credit, working closely with our customers, and believe that we have adequately addressed any increasing credit risk. From a balance sheet ratio perspective, we're comfortable with our working capital, liquidity, and current ratio. Our current ratio in Q1 was 2.28, which is consistent with how we've managed the business historically. With respect to our capital structure, we've refinanced our credit facility to accomplish a few specific goals. First, the previous facility was set to mature in June 2024, and given the dynamic financing environment, we wanted to extend maturity to 2027 and replace LIBOR with SOFR as the reference rate. Second, the previous facility was a $125 million revolving facility. Our current strategy does not support or require a borrowing base of $125 million. So there was a significant amount of unused credit which carried a commitment fee. Lastly, we wanted to modify our capital structure to more closely align the cash used in Arian laser placements with the expensing and revenue generation profile of those lasers. The new credit facility accomplishes each of these goals. The new facility has a term through August of 2027, and the revolver was resized to $75 million from $125 million, reducing our commitment fee. We believe that the $75 million of revolving credit is appropriately sized for our cash and liquidity needs to support our current long-term strategy. Finally, we added a $30 million delayed draw term loan to better align the cash used for Ariane lasers with their expense and revenue profiles. As we discussed last quarter, since the launch of Arion, we have utilized roughly $22 million of cash in the manufacturing of the Arion laser install base. These lasers are placed at customer facilities and generate revenue over their useful life. In addition, the cost of the laser is reflected on our balance sheet and amortized over a five-year period. As a result, cash for each laser is spent immediately, with each laser then generating monthly revenue with the purchase of catheters while also having an associated monthly expense. The cash utilization is front-loaded compared to the revenue and expense profile. The delayed draw term loan effectively refinances the lasers already in the field while providing some financing for future lasers we expect to place through FY24. We'll pay down the delayed draw term loan in a manner consistent with the expense and revenue profile I just mentioned, and we believe that this is a more efficient capital structure for our business. At the closing of the revised facility, we drew $25 million on the delayed draw term loan in connection with the REN lasers currently in the field, as well as lasers we expect to place during the first half of FY23. Finally, we also made a payment of $4.5 million to the Israeli Innovation Authority to prepay a 4% royalty obligation that was negotiated prior to our acquisition of Eximo. Paying the IAA will provide a gross margin benefit for us going forward as this royalty, which extended through at least FY24, had increased the cost of goods of Ariane. The end result of this financing is that we reduced our total available debt facility from $125 million to $105 million, reducing fees paid on unused portions that were unlikely to utilize, and adding a delayed draw term loan to match the cash use of Ariane lasers with their revenue and expense profile. The spread and pricing grid for the refinance facility remained exactly the same as the previous facility, but now links to SOFR. We're very pleased with these terms, specifically in light of the current environment. We continue to expect our net cash position, that is cash net of debt, by the end of our FY23 to be flat to slightly up from where we exited FY22. As a reminder, during the back half of our FY23, we expect to achieve the aggregate revenue milestone target for Ariane, which would trigger a contingent consideration payment of $10 million. This contingent consideration payment is currently excluded from our operating cash expectations. Turning now to guidance. Our guidance remains unchanged from Q4. We continue to anticipate FY23 revenue in the range of $342 million to $348 million, and we expect full-year adjusted earnings per share to be in the range of $0.01 to $0.06 as we continue to invest in driving sustainable growth in our key MedTech platforms, while also managing continued headwinds. While the macroeconomic environment has improved in certain areas, it remains uncertain due to inflation, supply chain disruptions, the tight labor market, and pressures facing our customers. We continue to expect FY23 consolidated gross margins to be in the range of 52.5 to 54.5. We expect this range to be comprised of MedTech gross margins in the range of 65 to 68, and then device gross margins in the range of 45% to 48%. I'm proud of the tremendous efforts of our angiodynamics team, and it's their drive and commitment that allows us to continue making progress towards delivering on our long-term goals. With that, I'll turn it back to Jim.