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AngioDynamics, Inc. (NASDAQ:ANGO)

March 12, 2013 1:00 pm ET

Executives

Joseph M. DeVivo - Chief Executive Officer, President and Director

Unknown Analyst

Thanks, everybody, for joining us. This is our first session after lunch here today and I have Joe DeVivo, CEO of AngioDynamics. So we're going to do a fireside chat and talk a little bit about some of the recent trends. Joe, maybe, you made some announcements last week. Do you want to just start wit that and address that first and then we can talk about your growth expectations for the year given that press release?

Joseph M. DeVivo

Sure, sure. Well, we are bi-quarter [ph]. It pretty much would sum it up. We had a pretty good Analyst Day in January where we laid out a plan. We, as a company, have set up 3 businesses with 3 sets of growth drivers and a long-term strategy for success.

We did have some assumptions for the third quarter that haven't panned out for us in the short term. And with all the moves we've made, it's a complicated story with a lot of different things happening in each of the businesses, but we clearly didn't deliver in the third quarter. And so, the team knows it. We're engaged and we're very much in the process of delivering on the long-term plan. But we have our line of sight on our future, but in the third quarter we just didn't deliver.

Question-and-Answer Session

Unknown Analyst

Can you talk a little bit about some of the products that you see as really needle-moving? You've made a number of small acquisitions, and certainly, some of them contributed a lot to growth this year but over the next couple of years, could be big drivers. So maybe talk about what you're most excited about in the pipeline and how we can see that cadence over the next 12 to 18 months?

Joseph M. DeVivo

Sure. Well, we've made some very good investments in some new technology. Not just probably even in the third quarter still a big highlight for us. We have 3 businesses, a Peripheral Vascular business, a Vascular Access business and an Oncology business. In the Peripheral Vascular business, we've acquired a technology called AngioVac, which allows for venous bypass device that allows for large amounts of material to be removed in patients who really have no other option. We, ourselves are, we think, in our own category, there's a lot of devices that take out a small amount of promise and help clear through some clots, but we have a device that really has proven early on that can make a significant impact medically. We've launched it in this third quarter. We guided to doing about $1 million of revenue in fiscal '13. We've already done in our first quarter around $0.5 million and we think that will grow into the fourth quarter of this year and it will get on to the right pace to the guidance that we gave in '14 of $10 million in contribution. So we're very excited about AngioVac, very large market in venous thrombosis that we think we can make, we can really do a great job for. Another exciting product for us is in our Vascular Access business, it's BioFlo. It's the technology that helps reduce the incidences of actually either we believe a thrombus formation in the long-term catheterization. It's been out in the market for only 4 months. It's now 10% of our overall worldwide PICC revenues and we're very excited about putting BioFlo and the rest of our Vascular Access product line. So that's a product that we're very excited about as well. In that segment, there's a little bit of challenge. A lot of competition in that segment for us and I think it's going to take us a few quarters for BioFlo to overcome that type of competitive challenge that we're getting. But I would think that going into 2014, that we should be returning that segment to growth. The last area of growth in the business is both our NanoKnife and our microwave technologies in Oncology business. And we just acquired Microsulis, that brings a very strategic microwave technology in our portfolio. And it gives a -- it's been a pretty much a gap of the company, had seen some pressure in our radio frequency ablation business from microwave companies and it's in its rightful hands now with the best sales force in the world on oncology. So we're excited about our future. I think what we're off is, as a company, simply been predicting the cadence of growth, which is really the original part of your question. It's one thing to have opportunities and technology that you're excited about. It's another thing to give a perspective to the Street as to when you're going to deliver and to see that cadence of growth. We've thrown a long ball in this company, we've taken the opportunity to make some big, bold acquisitions, reorganized ourselves to deliver in the future and we stubbed our toe in the third quarter, and it's difficult to predict exactly when it inflects. But the truth of the matter is, is that we have sales and marketing teams who are very excited about the future of this business, the market that has the ability to grow, technologies that are disruptive and a great new management team that we think can get there. But the third quarter miss was my miss, it was my fault for getting out ahead of the story, which everyone told me not to do. We thought some things would happen and it didn't. So I take that on, myself, and to a certain extent, our prior financial organization. But we have a new CFO that will help us predict better in the future. But strategically, I think we're in a great place. Technology-wise, I think we're in a great place. We just have to get into the cadence that shows a consistent level of performance.

Unknown Analyst

Given that experience, how do you expect some of these key areas that now in inflect, I mean do you have the visibility now to be able to better predict when we're going to start to see some pick-up from BioFlo and from AngioVac, now that you've seen how the initial experience, you've gone in the market, you've gone through this beta testing period?

Joseph M. DeVivo

So the uptick of our new technologies are happening, and are actually happening ahead of our plan. The challenge is, is that our -- as we've shown in our Analyst Day, about 80% of our revenue is revenue growing less than 10%, and 20% of our revenue is represented as growing over 10%. So we have a pretty big weight. And what we need to do is to get the growth drivers going so it pushes the top line of the business. I think some of the areas where we are off, especially in this quarter, were not in predicting the inflection of the growth drivers but predicting the results of the core part of the business. We had our vein ablation business. Procedurally, it was off. It was kind of a surprise. It was a surprise to our sales organization, it was a surprise to our market organization. So we've channel-checked with major customers who used our product and we know for those customers who want to share [ph] it when they said the procedure just didn't show up as they normally did. And we're trying to investigate is that really environmental or is that something that's another fact for us. We found our largest franchise is in Cardiology, in Fluid Management. And we've seen the aftereffects of a lot of pullback in overall cardiac procedures. We predicted that it would be a little stronger than it was. So BioFlo, the initial progress of Microsulis, AngioVac, all of our growth drivers are absolutely doing the things that we had hoped they would do. They're just not, a, big enough to lift the whole company up and, b, some of the fundamentals in some of our mature markets were weaker than we expected.

Unknown Analyst

Let's move on and talk a little about international growth.

Joseph M. DeVivo

Sure.

Unknown Analyst

So you've invested in a number of different geographies. Can you talk about how big of a driver that's going to be over the next couple of years?

Joseph M. DeVivo

It's going to be a very big driver. So far, up until this quarter, it's been a 20% year-over-year business for us. Now unfortunately, it's gone over the last several years from about 10% of our business to 15% of our business. And we'd like it to be a much higher percentage, but one of the things about AngioDynamics is we are heavily weighted U.S. market company. 85% of our revenue being the United States. So we have a very big push to try to grow internationally. We have an excellent team of people who have been able to drive that growth. And the model that's helped us is we've worked very close with our distribution partners and we leverage new technology into new markets. When we get to a certain critical mass, we work with our distribution partners to either help accelerate their growth or acquire their business. And we don't have a hostile business where we will grow and then take the products away and cause turmoil. We've successfully navigated in Germany and in the Netherlands some acquisitions of local businesses that were successful for us and we'll continue to do that. We're looking now to grow and expand in Australia. We're looking to do some novel things in Asia, and there's certain markets that -- but our equation is, help our distribution partners get up to a certain level, work with them to grow. And then once we get to a successful critical mass and allow us to put a direct sales force on the ground, work with acquiring that business so we can make sure that we maintain the contacts and the people to then take it over and go direct. So that's pretty much been a part of our strategy. We're also now looking at what are ways where we can maybe put a larger set of operations over in Asia and we need to build a little bit more critical mass. So the success that we've had has been very strong with our team. And aside from the hiccup they had this quarter, I would expect that to continue.

Unknown Analyst

And as you're thinking in terms of moving operations to Asia for cost base or that in order to drive sales or both?

Joseph M. DeVivo

I think that just like in politics where all politics are local, as Tip O'Neil said, I think so are all sales and you have to be embedded in an environment, in a market to really understand it. We are very hedged to U.S. business and I think as we grow, we'd like to create some domicile in those markets where we like to grow. And we're studying, specifically for our businesses, which one of the businesses has that greater propensity and which market would benefit from it. But as we look out in the future, I would see us diversifying more as an international company. We're a little bit too centric in the U.S.

Unknown Analyst

You mentioned Asia. Is there 1 geography that you're really focused on now? Or are you just kind of dipping your toe in the water to figure out which one's maybe the most accretive or have the highest return?

Joseph M. DeVivo

Well, the areas that we mentioned in our investor meeting are Japan, China and then looking at the Latin America strategy, Brazil, very similar to others. We actually have a nice Oncology business in Japan and we think there's some things we can do with it. And especially now, with acquiring Navilyst and the cardiology presence is there, we think there are some things we can do in Japan with. We're studying China. We have a legacy oncology business in China but the other parts of our business don't have any presence. So we're trying to find ways to work with our local partners to extend their presence. And then of course at some point in time, we'd like to get over the mercurial [ph] wall and see if we can have some type of domicile in Latin America. We currently have a strategic partner for all Latin America and we're trying to identify ways to grow that market more.

Unknown Analyst

Let's move down from the top line and talk a little bit about margins.

Joseph M. DeVivo

Sure.

Unknown Analyst

You've done some work to restructure. Can you give us an update on how that's going and then how we can see margins improve over time?

Joseph M. DeVivo

Sure. Well, we're currently about a 50% gross margin company. All of our growth drivers that we've just talked about are all margin accretive. So the more we get our -- and create our additional growth, the more we can get our overall gross margins up. From an operating margin, we're a company that's been almost a 5% operating margin company for a little too long, given the heavy investment in NanoKnife and for other reasons. With the acquisition we've gotten, we've done a lot on our cost base. I think we've gotten ourselves close to a 10% operating margin company. We want to get ourselves over the next 5 years, as we've shown in our Analyst Day, into the 15%, 16% operating margin basis over the next 3 to 5 years. So we're working aggressively now to drive leverage in the organization. We first have to demonstrate that we can grow the top line. I think we've done a good job this year and we've shown investors quarter-over-quarter our ability to manage our cost, manage our infrastructure, our G&A, and also manage our cash. So we've proven that. What we need to do is accelerate our top line. With that acceleration, we do believe there's leverage in the business and we do believe that will drop right to our operating income line. So between our growth drivers driving gross margin and our cost effectiveness driving operating margin, we think we're going to become a more profitable business in the future. I know we keep talking about growth and we haven't delivered it yet, but our goal is to be a 10% top line growth company and 15% bottom line every single year. And I think we have the components in place. We just need the time to settle, the organization to settle and just execute. And we're also in a relatively difficult economy and a competitive environment. So we just have to prove it to get it there. But our goals are to drive leverage, not to -- just to continue investing as investors, to be patient. We'd like to start paying those bills now.

Unknown Analyst

And I guess, in addition to the top line drivers and the mix drivers that help to drive margin, what opportunities do you see from a sourcing perspective or a consolidation perspective and other ways that you can take out some costs at the same time that you look to these growth drivers to help you?

Joseph M. DeVivo

Sure. Well, with the acquisition of Navilyst, we acquired an operation which is only 4 miles away from the core operations of AngioDynamics. And so, 80%, 90% of our operations are now concentrated into 1 corridor in upstate New York. And over the last year into the integration, we spent more time on G&A cost than we've really gone in and been hard on operations to drive out cost. As of late, we've been doing some of that. We've been looking at our supply chain. If you look at whether it's PICCs, catheters, whether it's in ports, there's a lot of leverage we can drive because we've virtually doubled the business in those segments. So we have not yet taken out all the opportunity of cost savings on operations. I think as we look over the next 5 years, we should be seeing gross margin enhancement not only from mix with better products, but we think we can match that with operational savings as we continue to integrate these 2 facilities.

Unknown Analyst

And of course, this should lead to a lot of improvement in cash flow. Can you talk about use of capital today and what are the first calls on cash and then how that could evolve over the next couple of years as you grow the company?

Joseph M. DeVivo

Sure. It is a dissonance. For any of those who are new to the story, if you look at the P&L in order to understand what the absolute value creation is, you really have to take -- you have to look at our amortization. Our amortization is currently in our adjusted EPS. And you'll see that if you pull out amortization and also look at the operating losses that are carrying forward that allow us to avoid some tax, we generate a lot of cash for a size revenue business. And one of the things we're doing obviously is as we're coming out of this -- all this change in deployment, in acquisitions, in integrations and all the onetime costs are filtering out, we're going to be consistently generating -- I don't want to throw a number out there right now -- but I mean last quarter, we generated $11 million worth of cash and we think that, that is on the beginning end of where it should be. We think it will be a little bit more than that going forward, depending upon revenues. And with that type of cash, we currently have some debt on our books and we're trying to figure out whether -- the current plan was to pay that debt down over 5 years. If interest rates stay the way they are, we may consider to keep that debt on the books and do either more strategic things with cash or potentially buy back stock. But it's not a formulated plan right now because we're waiting to see if the business gets to consistency and revenue at consistency and the cash at consistency, and then we're going to do what's best with that cash. Some people would like us to be less leveraged, some people would like us to buy back stock. I think today, we have those options at our disposal. Our primary objective is just to create some consistency in the cash flow where we feel comfortable that making those deployments are the right thing.

Unknown Analyst

And maybe it's worth spending a minute on each of those big drivers that we talked about in the beginning and what you feel are some of the gaining factors for each one. At the VEITHsymposium, we saw AngioVac and it seemed like a really interesting product for an unmet need. You've done kind of a beta launch so far and you're looking for new indications there. But maybe talk about, for each one you've got kind of indications, reimbursement, education, different gaining factors that are going to help you to move the needle.

Joseph M. DeVivo

Right. Well, in AngioVac, we think in the near-term, the opportunity is so large that in near-term, we're just at an early phase of introducing the technology. What we think ultimately will accelerate revenues is when we see a specific regulatory plenaries that allows us to talk more about outcomes. Right now, the technology is kind of a tool and we sell it as a tool. We don't specifically talk about patient outcomes because we don't have the type of studies yet that focus on that. We just talk about the device used as a venous drainage cannula to remove intravascular material. And even within that context, the level of uptick has been significant. We've seen -- and in the magnitude of the procedures and the effects have been fantastic. So we think in the near-term, the ability to get to the $10 million is pretty much line-of-sight. In order to make this $100 million, $200 million business, I think we need to have more specific regulatory claims. We also need to have studies that show the types of specific outcomes we can have. The device has been used to clear pulmonary embolisms, have been -- had to clear fully occluded IVCs, which nothing in the world can do that. And also to clear some deep vein thromboses. And to the extent that we then have that in clinical publication and then have a more general thrombus claim, we think that that can take it from the $10 million to the $100 million level. And we are actively working specifically on both of those items. For BioFlo, it's the same thing. We're seeing today there's a long sales cycle in the PICC business. And in order to get into the hospital, you have to do an evaluation and then go through the value analysis committee. And what we're finding is the evaluations have actually been our best friend, because within their own hand, they've been seeing a reduction in t-PA deployment for the management of thrombus, a reduction in deep vein thrombosis rates. Almost to the level, and the e-mails that we're getting it's incredulous. Where we've had even 1 institution, over 300 cases over a 2-month period who normally has 6% to 8% deep vein thrombosis rates. To this day, has not had 1. And treating a deep vein thrombosis costs the hospital $10,000 per procedure. It's painful and cumbersome for a patient. And to be able to provide a technology that's so avoidable of a complication is really incredibly material. Now in order to make this a phenomenon globally, we have to put it into kind of a clinical trial that could replicate these individual experiences in a controlled setting. We announced in our analyst meeting that we are funding a trial called the PROOF trial. It will be 5 centers global and we should be accruing patients late spring, early summer. We'll be accruing, I believe, 200 to 300 patients and we will be looking for symptomatic and asymptomatic thrombosis. And we believe that if in a controlled randomized trial, we'd be able to replicate the same type of results that we're seeing anecdotally on single sites that it would be a significant uptake for the technology. And on top of that, by bringing BioFlo into our port business and into dialysis, and most who see it in the PICC business say, when you have that for a dialysis catheter, bring it our way because it's even a greater set of complications being in thrombosis with dialysis catheter. So the way to really inflect it, instead of nibbling at the fringes and converting just a bit of business is to put it into that type of protocol. And I think as we look at the overall healthcare environment, the commodity products will get even greater challenges on price and the fickleness of a customer to switch. But I think any technology that validates itself and to show that improves, truly improves outcomes and over a healthcare cost, I think the sky is the limit for them. And we have that in BioFlo.

Unknown Analyst

Great. I guess, just back on the basis, I'm curious. when you feel like you're going to know whether it was Angio-specific or more market driven, you need to see some other competitors' report or are you going through the numbers more?

Joseph M. DeVivo

Well, it's interesting, we're on a fiscal calendar that our year ends in May and begins in June. And so this third quarter is December, January, February which is kind of an awkward time because other companies are closing their year in December, so it looks robust, where we close our quarter in November. So our December is seriously weak and then January, February. Usually February is a pretty strong month for us, but not in comparison to other companies' fiscal calendars. So we're pretty much -- Medtronic is actually in the same calendar and ourselves and Medtronic are one of the few companies who have this odd fiscal calendar. So it kind of puts us out there to talk about the beginning of the year before the rest of our competitors do. We'll see. I think ultimately we'd like to be in the same calendar. We are actually contemplating modifying our fiscal calendar to a calendar year so we can be like-for-like with our competitors. For EVLT, which was one of the biggest fallouts for us or disappointments, normally in the fourth quarter, it's historically strong. It's when the springtime comes, people will have vein ablations they don't mind wearing the stockings for a couple of weeks, the compression stockings that they need to wear post-procedure. And we'll see. I mean, if it comes roaring back in the second quarter, then maybe it was more environmental or more seasonal. If it doesn't, then it's either market share environmental and we'll see. But I think for the EVLT business, the fourth quarter will be tell-tale it will give us a good indication whether it's the marketplace or whether it was us.

Unknown Analyst

Did you see really that weakness in Europe because that was something that Medtronic had really called out and then backed off later?

Joseph M. DeVivo

Yes, we did. I mean we did have a miss internationally, we did have a miss in Europe. We had 10% growth, which is good, although we were forecasting 20%. So yes, we did see a bit of weakness there.

Unknown Analyst

Okay. Well, maybe we'll stop there. If you want to join us at the breakout, we're going to be across the hall.

Joseph M. DeVivo

Thanks a lot, appreciate it.

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