Executives
Tony Bihl - CEO
Mark Heggestad - CFO
Analysts
Tom Gunderson - Piper Jaffray
Tycho Peterson - JPMorgan Americas
Brooks West - Craig Hallum
Jonathan Block - SunTrust Robinson Humphrey
Jayson Bedford - Raymond James
James Sidoti - Sidoti & Company
Tom Kouchoukos - Stifel Nicolaus
Herb Buchbinder - Wachovia Securities
Ryan Chu - Morgan Stanley
American Medical Systems Holdings Inc. (AMMD) Q1 2009 Earnings Call May 5, 2009 5:00 PM ET
Operator
At this time, I would like to welcome everyone to the AMS quarter one 2009 Earnings Call. (Operator Instructions)
Mr. Bihl, you may begin your conference.
Tony Bihl
Good afternoon. This is Tony Bihl, CEO of American Medical Systems. Thank you for joining us on today's call to discuss American Medical Systems first quarter results. With me this afternoon is Mark Heggestad, our Chief Financial Officer.
So before continuing, I must preface all comments with a Safe Harbor statement. Some of the statements made today will be forward-looking and are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Those risks and uncertainties are referenced in today's press release and described in our most recent Form 10-K and other recent filings we have made with the Securities and Exchange Commission.
During this call we will be discussing certain financial measures which differ from the comparable measures prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can be found in American Medical Systems first quarter 2009 earnings release including the financial tables which are part of the release.
With these statements, we can move forward reviewing the AMS business as covered in our press release issued earlier today. I will begin by summarizing our overall results for the quarter, then review the product line performance within each of our businesses including an update on the progress with our BPH therapy business and conclude with a brief technology update. Mark will follow with a detailed review of our financial results and guidance, and we will conclude today's discussion with question and answer session.
So turning to our quarterly performance, American Medical Systems reported a strong first quarter with revenues achieving the high end of our guidance. Total fourth quarter revenues of $123.6 million increased 2.7% over the first quarter 2008 to reach the top end of our guidance of $117 million to $124 million. On a constant currency basis, that revenue growth is 6.4%.
Non-GAAP adjusted earnings per share were $0.25 for the first quarter and rose 67% over the first quarter 2008 when non-GAAP adjusted EPS were $0.15 and exceeded our guidance for the quarter of $0.15 to $0.19 primarily due to the combination of improvements in our gross and operating margins and a reduced tax rate.
Further, we continued to deliver strong quarterly cash flow through sustained operating expense and working capital discipline. In the first quarter, we generated $28.2 million in cash from operations and we reduced our debt by $35.9 million in this quarter.
In terms of the impact of the economy on the business, the effects have generally been in line with our expectations. Specifically, we have experienced slowing orders in our capital equipment product lines as capital spending remained soft on a global basis, with particularly weak performance in some distributor markets outside the US, whereas our implantable product lines have remained fairly insulated from these economic factors.
To briefly summarize, our first quarter was characterized by generally solid results in men's and women's health and tempered by a decline in our BPH therapy business. In men's health, male continence was up strongly; erectile restoration posted a solid rate of growth. In women's health, female continence and prolapse saw steady growth, partially offset by a decline in Her Option, and in BPH therapy, both laser therapy and TherMatrx were down.
Let me now detail for you our revenue performance by business unit and product line. All of the growth rates I will provide going forward will be stated in terms of constant currency unless otherwise stated.
So, our men's health based business posted revenue of $59.5 million and grew a very strong 16.9% over the comparable first quarter last year. Within men's health, the male continence product line increased in the mid 20% range driven chiefly by ongoing adoption of the AdVance sling system and continued strong demand for the artificial urinary sphincter.
Our erectile restoration product line performed well and grew at a faster rate than in the last few quarters. This positive result was due to favorable pricing and mix from our 700 family of prosthesis.
Our women's health revenues in the first quarter were $38.7 million, a gain of 8.6% versus comparable period last year. So within women's health, the female continence product line generated low double-digit growth. The MiniArc system continues to be the leading growth driver, while prolapse repair approached double-digit growth in the quarter.
Launch of our Elevate posterior system used to treat posterior vaginal prolapse continued in the quarter and is gaining traction. Our Elevate anterior product used to treat anterior vaginal prolapse is on track to commence a formal launch in the second half of the year.
We continue to believe that the FDA public health notice issued in October 2008 regarding mesh materials to treat incontinence and prolapse has not had a measurable revenue impact.
Her Option declined in the first quarter and as we have stated previously, we continue to focus on driving the profit contribution of Her Option by emphasizing probe sales over console sales.
Finally, BPH therapy revenues of $25.5 million declined 14% in the first quarter compared to the same period last year. Within BPH therapy, the laser therapy product line declined 11.1%. 2009 remains a transition year for the laser therapy business.
As a reminder, there are four key elements of our strategy to improve performance in laser therapy product line. They are number one, to provide direct general management of the BPH therapy business unit; two, to realign our sales force to focus separately on capital equipment and trailing disposables; three to implement the one AMS concept to leverage the AMS franchise and brand, and four, to drive a 10 percentage point improvement in gross margins by 2010.
So consistent with this strategy, in the first quarter, we realigned our sales forces to focus on capital equipment with trailing disposables. We continued to fill open sales territories during the period.
The flagging capital equipment environment, however, did hamper laser therapy revenues and as I alluded to earlier, this was compounded by softening in some distributor markets outside the U.S. due to unfavorable foreign currency exchange rates.
We've also seen more conservative capital purchasing patterns from some of our mobile providers, partially impacted by the upcoming implementation of the Stark Law in October 1st of this year.
As you may be aware, the Stark Law is intended to regulate physician self-referral of Medicare patients for designated health services, where the physician has a direct ownership stake and is paid on a per procedure basis.
Conversations with many of our mobile providers find that they are working to address the changes expressed by Stark regulation and they expect no interruption in access to GreenLight therapy for the physicians they service.
Again, the Stark Law affects only the mobile providers who have some direct physician ownership. To calibrate this, in 2008, less than 15% of worldwide laser sails were to mobile providers with some degree of physician ownership, the group that may be affected by the Stark Law.
I want to repeat a point I've made consistently for the past year that the mobile providers for GreenLight Laser remain an important market channel for AMS and for physicians who choose GreenLight for their patients. We continue to work closely with them and we fully support them.
On the positive side, the trailing disposables component of laser therapy, the fiber sales, demonstrated promising trends in the quarter with U.S. fiber sales surpassing our expectations. We believe this is an early positive indicator of our increased focus on fiber sales.
In the quarter, we made progress on the first element of the strategy by naming Joe Martin to the position of Senior Vice President, General Manager of BPH Therapy business. Joe comes to AMS with over 25 years of experience in medical capital equipment with trailing disposables business model, including time at Bayer and Abbott Labs.
Finally, we have made significant progress in the fourth part of the strategy, that is improving the laser therapy gross margins, the details of which Mark will discuss shortly. So while these accomplishments are not fully reflected in today's numbers, we're solidly on track with our plan and believe that the improving performance will become increasingly apparent in our results.
Regarding our TherMatrx product line which by the way comprises less than 2% of our total revenue, it declined again this quarter as expected as the overall demand for microwave BPH therapies continue to wane.
Turning to new technologies and research and development, I'd like to briefly update on the status of two programs. While product revenues on these programs are still several years away, recent milestone achievements are examples of progress we're making in the technology development area.
First our Topaz sling device to treat fecal incontinence continues to progress through development with promising data resulting from our six-month follow-up on 22 patients in a pilot clinical study. We will now begin discussion with the FDA on the design of a clinical study to support the fecal incontinence indication for Topaz.
Secondly, we received FDA IDE approval to proceed with a second phase clinical evaluation of continuum, our anastomosis device employed in prostate cancer surgery and we will begin enrolling patients in the coming months. We continue our follow-up on patients implanted with this device in Europe with promising results.
So before I turn the call over to Mark, let me conclude with a final comment on our outlook over the balance of the year in light of the current economic environment. Our visibility remains inexact given the potential impact of many macroeconomic crosscurrents.
However, we are increasingly confident that we will weather this economic downturn as evidenced by the increased earnings guidance Mark will provide. We expect to accomplish this based on strong underlying trends in men's and women's health, the prospects of seeing tangible improvement in laser therapy and our continued discipline on cost and cash flow generation.
At this time, I'll turn the call over to Mark Heggestad.
Mark Heggestad
Thank you, Tony. Tony has discussed our revenue performance for each of our product lines, so I will touch on revenue by geography only before detailing the remainder of the P&L.
First quarter U.S. revenue grows 6.3% over the prior year to $89.7 million. International revenue declined 5.6% to $34 million due to the strengthening of the U.S. dollar, which reduced reported sales by $4.5 million compared to the prior year. Excluding the unfavorable impact of foreign currency fluctuations, results in first quarter international revenue growth of 6.9%.
Moving on to the rest of the P&L. We continued the trend we established in 2008 of improving margins, as evidenced by first quarter gross margin percentage of 81.1%, up significantly from the 75.9% of a year ago and the 79.1% of the most recent fourth quarter.
The strong first quarter gross margin percentage was achieved through a combination of factors, including cost containment, improved reliability in the laser therapy product line, pricing gains and very positive product mix impact.
I would caution you not to extrapolate the first quarter margin percentage over the remainder of the year, as there will be pressure on the margin when we begin to see recovery in the capital equipment sales thereby contributing an increased proportion of lower margin product to revenue.
Within the overall gross margin percentage, the laser therapy gross margin percentage was 60.7% in the first quarter, up from 48.4% a year ago. While changing product mix will put negative pressure on the laser therapy gross margin in future quarters as capital equipment sales improve, we are well on our way to achieving our objective of a 10 percentage point improvement by 2010 from our 2008 baseline of 49.9%.
In the first quarter, we again drove improved leverage of our operating expenses. Some of this dramatic improvement was the result of ongoing initiatives to drive efficiencies and some resulted from a very cautious stance we took to delay hiring in selected projects at the beginning of the year until we are comfortable with how the economy and foreign currency environment play out. This is evidenced by our operating income margin which came in at 24.3%, up 7.3 percentage points versus the 17% margin a year ago.
Marketing, selling and G&A spending of $54.1 million in the first quarter declined slightly compared to $55.2 million in the prior year's first quarter. R&D spending of $12.8 million remains within the range of our long-term objective of approximately 10% of revenue.
Now that we are more comfortable with the stability of the economic environment and its impact on our results, we will selectively fund some of the postponed initiatives and make the necessary hires as we move through 2009. Thus, operating margin improvements over the remainder of the year are targeted to be more modest and in line with original expectations.
Royalty income in the first quarter 2009 of $933,000 is generally in line with expectations. First quarter interest expense of $5.4 million declined 32.9% from the first quarter of 2008 when our debt levels were much higher. Our substantial debt repayment during 2008 which continued in the first quarter, as I will detail shortly, has meaningfully reduced our borrowing costs.
Amortization of financing cost of $4 million primarily represents the non-cash charge pertaining to the new accounting on convertible debt adopted in the first quarter. All prior periods are retroactively restated to reflect the accounting change. The charges is less than we originally guided in our February earnings call due to the favorable impact of a higher than anticipated pay down on our convertible notes in the first quarter.
We recorded a $4.6 million gain on extinguishment of debt in the first quarter resulting from the retirement of $27.3 million in convertible notes at a 22% discount to par value. I will provide more details on this transaction in a minute. The other income expense line of $552,000 in income was driven by gains on our foreign currency hedging contract in the quarter.
Our reported first quarter tax rate of 36.4% compared favorably to our guidance of a 39% rate for fiscal 2009. The tax rate was favorably impacted by a better than expected tax deduction for domestic manufacturing, a higher R&D tax credit, and savings realized on items settled in a recent audit of prior years. These items are expected to continue throughout 2009 and as a result we now expect a full year tax rate of approximately 36.5%.
Excluding the positive impact of a gain on extinguishment of debt and amortization of certain non-cash items that I will provide details on in a moment, non-GAAP adjusted net income was $18.8 million and earnings per share was $0.25. This represents a 69% and 68% increase respectively over similarly adjusted net income and EPS of a year ago.
On a GAAP basis, net income of $17.1 million and EPS of $0.23 compares favorably to $6.1 million and $0.08 per share a year ago respectively. Specifically, the non-GAAP adjustments on a pre-tax basis include intangible asset amortization of $3.3 million or $0.03 per share and financing amortization of $4 million, also approximately $0.03 per share.
Also excluded from non-GAAP adjusted earnings is a $4.6 million or $0.04 per share gain on early extinguishment of debt. A full reconciliation of GAAP to non-GAAP adjusted earnings and earnings per share is presented in our earnings press release.
I would now like to focus our attention on balance sheet and cash management where we [won] again continued very favorable trends established throughout 2008. We ended the first quarter with a cash and short-term investment balance of $42.5 million. Cash generated from operating activities in the first quarter of 2009 was $28.2 million compared to $7.4 million in the same period last year.
The first-quarter a year ago contained a large payment on litigation settlement of $15 million. However, even after adjusting for this onetime item, we continue to experience increased cash generation resulting from the improved operating margins that I just mentioned combined with additional cash from working capital reductions.
Adding to the significant declines in inventories and receivables we drove throughout 2008, we once again decreased both these balances in the first quarter. As a result of these successes in generating cash flow, we were able to reduce our debt by $35.9 million in the quarter and we expect to exceed our original guidance for fiscal 2009 debt reduction of $85 million by an additional $10 million, thus bringing our new expectation for debt reduction to approximately $95 million this fiscal year.
Of the $35.9 million of debt we paid in the first quarter, $8.6 million was applied to our senior secured credit facility, bringing the balance of that debt down to $220 million at quarter end and $21.1 million went towards repurchasing $27.3 million in face value of our convertible notes, bringing the balance on our convertible notes down to $312 million.
Recall from last quarter's earnings call that our senior secured debt agreement limits the amount of subordinate convertible debt that can be purchased. With the first quarter convertible notes repurchase, we are now capped out for the remainder of 2009. The net result of this debt reduction was a further improvement in our total leverage to EBITDA ratio to 3.3 times, down from 3.7 times at the end of 2008 and down substantially from 5.0 times a year ago.
I will now turn to our second quarter and fiscal quarter 2009 outlook. Though the global economy is not yet firmly on stable ground, we remain confident in forecasting continued strength in our implantable product lines while we continue to expect moderating declines in the capital equipment product line.
Also, as we mentioned in our February earnings call, the rapid strengthening of the US dollar over the last couple of quarters will have a dramatic effect on revenue comparisons to the prior year. As previously noted, the impact on the first quarter reduced our international revenue growth by approximately 12 percentage points.
At current exchange rates, second quarter comparisons to the prior year will experience the most severe unfavorable impact of any quarter in 2009, reducing international revenue comparisons to the prior year by as much as 18 percentage points. Based on these factors, we are maintaining our revenue guidance for full year 2009 at $495 million to $515 million.
Given the impact of fluctuations in foreign currency exchange rates and the normal seasonality of our business by quarter, we expect second quarter revenue in the range of $124 million to $130 million. This guidance assumes that foreign currency exchange rates stay fairly consistent with current levels.
Before providing EPS guidance, please be reminded of the required change in accounting that impacts our GAAP net income and earnings per share for 2009 and prior years, which we discussed in our February conference call.
The accounting change impacts how we account for convertible notes is effective at the beginning of 2009 and requires retroactive restatement of our financial statements back to the year we obtained the convertible notes, which was mid-2006.
As a result, restated GAAP earnings per share were reduced for each of years 2008 and 2007 by $0.16 and $0.12, respectively. Further, this requirement will reduce our 2009 reported GAAP EPS by approximately $0.11 per share.
In our February conference call, we indicated that the new accounting treatment would reduce 2009 reported GAAP earnings per share by approximately $0.12, but this estimate has been reduced due to the favorable impact of paying off a portion of the convertible notes in the first quarter ahead of our original assumptions. It is important to note that this accounting change has absolutely no impact on cash flow.
Given the impact of the amortization of financing costs resulting from this new accounting for convertible notes, combined with the amortization of intangible assets, the company now has two significant charges in GAAP earnings that inhibit consistent comparisons to many other companies.
Accordingly, we now guide to non-GAAP adjusted earnings per share, which we define as GAAP earnings per share excluding the impact of amortization of intangible assets and excluding the impact of amortization of financing costs. All guidance also excludes the impact of any unusual non-recurring type charges, such as IPRD and the first quarter gain on extinguishment of debt.
Given our favorable margin trends and expected improvements in our 2009 tax rate and interest expense, we are increasing 2009 non-GAAP adjusted earnings per share to a range of $0.96 to $1.07 per share, up from the original guidance of $0.86 to $0.99 per share provided on our February earnings call.
This guidance excludes the impact of intangible asset amortization expense of approximately $13.5 million, or $0.11 per share, and the impact of amortization of financing costs of approximately $16 million or $0.135 per share.
Recall that the $0.135 per share impact related to the amortization of financing costs is made up of two components, the $0.11 per share I previously referred to in the discussion on the new accounting for convertible notes and approximately $0.025 cents relating to the amortization of financing costs previously recognized under prior accounting.
For the second quarter of 2009, we expect non-GAAP adjusted earnings per share in the range of $0.22 to $0.26 per share, which excludes the impact of amortization of intangible assets of approximately $0.03 and amortization of financing costs of approximately $0.03.
As a reminder, some of the key assumptions that go into the fiscal 2009 guidance include an improvement in gross margins by approximately two percentage points in 2009 versus 2008 driven by cost reductions; reliability improvements, and pricing and product mix gains; continuing operating margin improvement through a combination of gross margin improvement; a modest leveraging in our SG&A and maintaining R&D spending at approximately 10% of sales; a reduction in interest expense to approximately $20 million in 2009, down from the $22 million we previously guided due to faster than originally anticipated repayment of our debt; and finally, a tax rate of approximately 36.5% in 2009 versus our original guidance of 39%.
Despite obvious concerns with current economic conditions, we have started the year off on a very positive note and we look forward to continued successes in the remainder of 2009.
With that said, I will now turn the call back to Tony.
Tony Bihl
Thanks, Mark. In summary, we're pleased with the first quarter results. We've done a good job of managing our P&L and balance sheet. We've reached the high end of our topline guidance range and exceeded bottomline guidance, and we continue to demonstrate strong execution on expense management and cash flow generation.
Before opening up our call to the question and answer session, in order to allow as many analysts as possible to ask question, please observe our request that you ask no more than two questions; one leading question and one follow-up and then return to the queue.
Thanks for your consideration. So Maggie, would you please provide those instructions for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from the line of Tom Gunderson
Tom Gunderson - Piper Jaffray
My first question would be, Tony or Mark, could you comment on the expectation that some of us had that maybe Q1 would have experienced a little bit harder seasonality? Did you see anything as far as deductibles resetting from their low or zero levels in Q4 and going into Q1 as the economy continues to push back on some of the procedures? Obviously, it did well. I'm just wondering if you saw any of that early in the quarter versus late in the quarter or have any commentary.
Mark Heggestad
No, Tom, we didn't see that. Nothing marked or nothing different than any other first quarter. So, we did not see an impact of anything there.
Tony Bihl
Tom, I'll just add to that a little bit. I mean keep in mind especially as you think about our second quarter guidance, our first quarter a year ago was probably a little bit easier comps than normal and as we go into our second quarter, it's probably a little bit more difficult. So we also have that going on as we look at results year-over-year.
Tom Gunderson - Piper Jaffray
But Q1 versus Q4 seems like any other time.
Tony Bihl
Yeah.
Tom Gunderson - Piper Jaffray
Actually just a second subset question would be, can you comment a little bit on what you were talking about particularly on ER as far as price? Did you have price increases or is it all just mix?
Tony Bihl
No, it's a combination of both and it's probably about an equal combination of both. We did have some price increase and then we continue to get some very nice success out of movement from both malleable and two pieces to our three-piece AMS 700 series.
Operator
Our next question comes from the line of Tycho Peterson.
Tycho Peterson - JPMorgan Americas
Just maybe looking for a little bit of color on some of the pipeline here. I guess for Topaz, you talked about the initial feasibility study and some of the follow-up data. Can you talk about kind of next steps as we think about pathway for regulatory review?
Tony Bihl
I think, as I mentioned before, the key next step now is to talk with the FDA about the appropriate clinical study that we need to go forward and get the indications for fecal incontinence. We did complete some pilot studies and I did mention the feedback on 22 people.
I don't want to speculate about what the outcome will be of that discussion with the FDA. We want to work closely with them and just make sure that we follow the appropriate regulatory path, but we don't have at this moment an answer to exactly what that path will be.
Tycho Peterson - JPMorgan Americas
Okay and then on continuum, how about sense of the size of the trial that you might need to take on here?
Tony Bihl
Well, we have probably got implanted about 30 people so far in the work that we have done. The study that we will do now will be likely about 40 patients at more than five sites in the US and so that's what we will commence in the next few months.
Tycho Peterson - JPMorgan Americas
Okay. Then just one last one on BPH; you talked in the past about infrastructure investments and I think you called out Europe and Canada and Asia as areas where you are going to be investing and the sales force for BPH is. Is that still part of the plan given the environment a little more cautious on infrastructure around BPH going forward?
Tony Bihl
As you know, we have invested in additional sales force in the US when we reorganized to have about seven people selling capital equipment and somewhere in the range of 40 people who are surgical reps. Outside the US, we haven't made as much investment in new sales force, but that's something that we are looking at as we go forward.
We have combined the sales forces in, for example, Germany and France and now the sales reps sell the full product line; men's health, women's health, and laser and have divided themselves around the country that way. I think we are watching closely the appropriate investment, but I suspect in the latter part of this year, we will be making some investment in the sales force in those areas.
Operator
Thank you. The next question comes from the line of Brooks West.
Brooks West - Craig Hallum
Tony, on the Laserscope business, are you still confident that you feel like you can turn this business around to a flat or even a modestly growing business or do you see it as something that you manage the decline and up the gross margins and benefit that way?
Tony Bihl
We are making a lot of very targeted investments, a lot of investment in the appropriate leadership time. So, I am still very confident. The confidence comes from the success I think we found. It is early success, but it is moving in a positive direction around the increase in utilization in the first quarter in the US. So, we put particular amount of effort in that area and we have seen as I mentioned in the call, better than we expected growth in that area.
Considering that we had a significant disruption in our sales force changing their roles in the first quarter, we had some open territories that we have now gotten closed; all of that considered, I would report that I am pleased with the progress we have made in driving utilization of procedure.
We were out there to make sure that physicians knew about GreenLight and that they had access to it and that we were bringing the technology to them, and I think we've made good progress there.
The capital side of the business is difficult with the many factors that are out there and we want to stop short of making excuses, but certainly there are factors that are affecting us there. We mentioned some of them and we see that those are going to be factors that are here for some period of time through 2009, but we don't think they are long-term fundamental factors. So, we look to the day when we can sell both consoles and fibers at an increased rate. I am still positive about it.
Brooks West - Craig Hallum
So, just to follow-up to that thought on the fiber sale, you said they were surpassing internal expectations, but you also just said you were seeing some growth there. Did fiber sales or procedure volumes, however, you want to think about it grow year-over-year or was that also in a slight decline?
Tony Bihl
In the US, they grew year-over-year. Outside and in the broader market, they did not, but in the US, they grew year-over-year. The broader market was affected by the comments I made about significantly about our distributor businesses outside the US. Remember with this business that 40% of the laser business is outside the US, different than the rest of our mix. So, it is 60 US, 40 outside the US.
Brooks West - Craig Hallum
So, are those typically stocking distributors now or we were seeing financing problems with inventory across other medical device. Are those the types of problems or is it a slowdown in the end market?
Tony Bihl
Well, it is a bit of an impact of currency, frankly that you are dealing with, but we are working very closely with them. Our focus is to make sure they have the product they need for a physician to be able to provide GreenLight. We think that they have probably done some inventory reduction.
They certainly haven't been very aggressive in purchasing capital. We are working closely with them and it is going to take a little more time to get that solved, but I think we will see a little bit of progress on that as we move through the next few quarters.
Mark Heggestad
Hey Brooks, just maybe a little detail on that. As we looked at some of our distributors, we invoice them in US dollars which sounds great, but then what happens is when their currencies devalue significantly and a lot of these distributors are in more underdeveloped countries where there was even more significant devaluation of their currencies than others, it gets that much harder for them to pay up their receivables.
As you know from looking at our balance sheet, we are very disciplined about managing those receivables and so as a result, we have been a little bit more careful actually in making sure those receivables don't increase and in fact working with those distributors to work them down before we sell them more inventory.
Operator
Thank you. Our next question comes from the line of Jonathan Block.
Jonathan Block - SunTrust Robinson Humphrey
First question just on the female side; may be if you can give us your thoughts on the competitive landscape. I think you were the first with the single incision about a year ago. I believe Boston introduced theirs back in September or October and we know Barr has been trying, but I think they suffered a little bit of a setback.
Can you give us a feel on how this shakes out? Has Boston had any sort of an impact there, and do any of the products differ from MiniArc in your opinion?
Tony Bihl
Well, I think Boston has had the good opportunity to bring new products to market and attract some physicians to try the product and I think what we found in our market is new products do get physicians attention. It's an opportunity to see if there is something better out there.
We feel really good about where we are with MiniArc. Boston's product Solyx came in the market in a similar way and we think from a competitive perspective, we are very happy with our position technically with the product, data wise with the product and otherwise.
Frankly, we look forward to when we launch Elevate anterior, the combination of probably [prolapse] repair and continence repair is a significant combination procedure and we believe Elevate anterior and MiniArc are going to be pretty strong impact out there in the marketplace. So, yes, I think Boston has made some noise and had some impact in this quarter. I like our chances as we move through early part of quarter three and launch the Elevate anterior.
Jonathan Block - SunTrust Robinson Humphrey
Okay great. Then second question, just moving over to GreenLight, it seems like the leadership is in place and the progress has certainly been there and gross margins. Tony, can you tell us where you are with the one AMS initiative? Is that in place yet? Is the referral process working? Then, Mark, maybe just if can point us directionally, is consoles still in that 15% to 20% of revenues of GreenLight?
Tony Bihl
So to start with where we're going directionally here; yes, I think directionally we still feel good about where we are going. I would reinforce it's very early in some of the changes we have made. We did do move to the one AMS concept in Q1 as you asked and that concept really was to have all of our reps be able to promote GreenLight.
As I may have mentioned in previous calls, about 40 of our men's health reps in the U.S. actually have as part of their quota selling GreenLight fibers. The early indications that are in from the first quarter, I believe that they have been very successful for a group that has taken this on about mid-January to how much they have accomplished so far. So we're still pressing that forward. I think they are still learning in the market but the indications are very, very positive.
We are still collecting data on how much opportunity we had for referrals of physicians to go to training et cetera. That data I don't have yet on all of the Q1 output. There's a lot of talk. I receive a lot of emails from our reps on a regular basis about an opportunity that they found by working together as reps in the field and leveraging relationships and that's been positive. So, I think we are off to a very, very good start on that.
Mark Heggestad
Then to your question on consoles, it's around 20% plus or minus a percentage point or two in any given quarter. As Tony mentioned, given the economy and given the issues with distributors, we were definitely at the low end of that range this quarter as it relates to total percent of consoles as a percent of total laser therapy revenue.
Operator
Our next question comes from the line of Jayson Bedford.
Jayson Bedford - Raymond James
Just looking at the double-digit growth in female incontinence, is the growth you are seeing true volume growth or is it more of a positive mix shift to MiniArc?
Tony Bihl
The majority of it continues to be volume growth. We had a little bit of price increase, but again, the majority of it continues to be volume growth.
Jayson Bedford - Raymond James
Then secondly, I think you mentioned open territories. I was just wondering how many open territories do you have and how many are you looking to fill right now?
Tony Bihl
The open territories exist, as we increased the number of salespeople we had selling GreenLight in the first quarter and so we were on the ramp-up through the quarter. Probably going into the last month of the quarter, there were as many as 20% of those open at that time.
I'm pleased to say today there are two open territories for GreenLight in the U.S. So team has done a great job to fill those openings, done a terrific finding surgical reps, former pharmaceutical reps. There's a very, very good talent base out there. I've met many of these folks; very excited by where we are at. We filled a number of positions, many of them though later part of March.
So we expect to see the impact of them. We will give them a couple of days to get on the job, but I think maybe 90 days out you're going to see significant impact, but these are good top quality people.
Mark Heggestad
Jason, I want to follow-up. I alluded that there might be a little bit of pricing. Quite honestly, almost all of our growth on the female incontinence side came from volume.
Operator
The next question comes from the line of James Sidoti.
James Sidoti - Sidoti & Company
Just want to make sure I had the numbers straight. The one-time gain from the prepayment on the convert, that was about $0.04 to EPS, is that right?
Mark Heggestad
It was $4.5 million. So under $0.04.
James Sidoti - Sidoti & Company
Then you said that you got a break a little bit on the tax rate this year. Do we assume next year the tax rate goes back to about a 39%, 38%, 39%?
Mark Heggestad
No. There are real savings given our current manufacturing, given our current R&D activities. As long as the IRS doesn't change anything on us, we feel pretty comfortable that our tax rate will be closer to 36.5% than it will be to 39 as we go into 2010.
James Sidoti - Sidoti & Company
Then just one last kind of a macro question. You've done a real good job tightening up on the expenses this year. What is it going to take for you to start to open up again and start to hire people? What do you have to see for that to happen?
Tony Bihl
Well, let me comment on it, Jim. We are hiring people today. I mean we are continuing to in selective ways grow our workforce. I think what we've tried to do is look for some operating efficiencies and we found some of those and we continue to drive at those. We have grown our R&D staff though and you can see that we're spending a little bit more money on R&D right now, and we are selectively increasing our sales force because we think there are opportunities out there in the market.
So I think we're cautiously optimistic about where the year could go and we're not going to run out and hire a lot of people now. We have made it clear to our staff internally that we want to make sure that we aren't so cautious that we miss opportunities for growth. So for example, as we bring the Elevate anterior out to the market, we are ramping up our training efforts pretty substantially, bringing more docs in, going through the training et cetera, because we think the opportunity is great.
So don't get the read from what we're doing that we're sitting here doing cost cutting. I think we are selectively leveraging our cost structure, but we're also making appropriate investments.
Operator
The next question comes from the line of Tom Kouchoukos.
Tom Kouchoukos - Stifel Nicolaus
Just a couple, one on the Laserscope gross margin side. I think you talked about mix being a big part of that gross margin bumping up. Assuming that that kind of the capital environment stays where it is, how should we think about margin trending? I think you said don't expect what we saw this quarter to go through the year, but is there any detail you could put on that to help us think about how to model it?
Tony Bihl
Again, Tom, we set a very specific goal and stated it a couple of quarters ago that our baseline in 2008 was a 49.9% gross margin for the laser therapy business. We're very confident that we will achieve the 10% percentage point improvement off that 49.9 as we go through 2009.
I think what we have seen happen here in the first quarter as a result of the favorable mix just gives us significantly more confidence that we'll achieve that. I wanted to caution that I wouldn't assume that it's just going to continue to have significantly more than a 10 percentage point improvement over the prior year given that we will fall back to a more reasonable mix as time goes on.
Tom Kouchoukos - Stifel Nicolaus
Then on the second question I had was being at AUA and looking at, it looks like from your numbers and then at the conference that the physician appetite for mesh hasn't really been impacted much by the FDA letter at all.
I think there was a New York Times piece on the ObTape today and we're seeing kind of a growing number of attorneys try to capitalize on the warning letter opportunity. Are you seeing any impact maybe from the patient side or are women getting a little more concerned about going into this procedure or how should we think about that?
Tony Bihl
I think, we feel the same as we did when this first started and that we went out and talked to physicians. We believed in many of the aspects of what the letter said from the FDA. It said, "Make sure you give your patients the appropriate guidance about what to expect, make sure you are properly trained, make sure you consider what the alternatives are."
We kind of built our foundation on clinical data and what we heard from doctors then seems to be consistent. They said, "Those who were doing mesh will continue and those who are not would likely continue not using mesh." We find and we are finding with Elevate as we bring it out that physicians see these products as very solid therapies, very strong alternatives to other therapies they can provide and they continue to go forward.
So, we are hearing the same noise that you hear in the marketplace and occasionally there is a little bit of a louder noise from this, but we don't see it changing the business significantly.
Mark Heggestad
The other thing to keep in mind, Tom, and the same thing we [threw] when that public health notification came out, the FDA talked about the concerns and complaints that have resolved around mesh products, but the alternative meaning not use mesh is usually results in worse situations. So, with everything Tony said, mesh is still a very widely supported product line.
Operator
Thank you. Our next question comes from the line of Herb Buchbinder.
Herb Buchbinder - Wachovia Securities
Can you comment on the competitive landscape in BPH? I think there is a new evolve laser that was introduced at the show. Is there any impact from that?
Tony Bihl
A number of new lasers are coming into the market. We see those on a fairly regular basis at this point in time and I think we're evaluating what they bring. Most of the ones you are talking about are 980-nanometer lasers, and we will still stand on the fact that our clinical data around our GreenLight laser provides favorable outcomes, and I think that the physicians who use it still feel the same and feel strongly about that.
There are some other market entrants with GreenLight offering. One of those is based in Europe and doesn't have much of a distribution network in the US. So, we don't know exactly what to expect from that. We are watching it like everyone else is, but the fact that we have a strong channel, we have probably the biggest sales force, the deepest clinical data and you know you talk about GreenLight. It is the brand that is recognized. We continue to drive forward.
So, I don't think we saw anything there that gave us dramatic cause for concern, but as I always say, they were all formidable competitors and we will continue to deal with them in the marketplace.
Operator
Thank you. Next question from the line of David Lewis.
Ryan Chu - Morgan Stanley
It is Ryan Chu for David Lewis. Thanks for taking the questions. First is on AdVance. It has obviously been a very strong driver for the last several quarters and you guys have a virtual monopoly in this space.
I was wondering how we should think maybe AdVance in the broader male incontinence market in that context and are we even close to material penetration and how long in your view can 20% plus growth continue?
Tony Bihl
One of the things we are finding I think about AdVance in the marketplace is first of all it is making treatment for continence for mild to moderate so much more available and the tremendous number of radical prostatectomies; there are still many people out there who don't know that there is a solution. I think we are finding as we run community health talks and provide education that more and more people are coming forward.
So, I don't know when we are going to reach the bottom of this or the top of this, but we still see good opportunities for growth in that way.
The good news for us is the dialogue is creating interest in the artificial urinary sphincter at the same time. So I think that's why we're seeing both lines go up. We're having more men have a conversation with their physicians about incontinence and that's been very positive for us.
So I don't know that we see where the end is. We're obviously cautious about that because we're not sure when it's going to happen, but we're going to continue to drive community health talks. We're going to continue to drive the dialogue and continue to improve on the products and I feel very good about where we are going with it.
Ryan Chu - Morgan Stanley
Then my follow-up would be on gross margins. Mark, on the overall corporate gross margins, I think last quarter or maybe two quarters ago, you had said that the goal for this year would be a 100 to 200 basis point improvement over '08's gross margins so that would place corporate margins about 79 to 80. Should we think that those numbers as kind as the goalpost for this year despite the strong first quarter?
Mark Heggestad
Yes, they should be. I will say that I have much more confidence that we'll be closer to the 200 basis point improvement in 2009.
Ryan Chu - Morgan Stanley
You said these stronger gross margins were a large result of the higher mix of disposables. So I would assume that you are baking in some kind of improvement in capital equipment sales throughout the year?
Mark Heggestad
Quite honestly, I actually stated it was a combination of a number of items.
Ryan Chu - Morgan Stanley
Can you go through those components?
Mark Heggestad
I would say in order of priority, its cost savings, cost improvements as we continue to drive efficiencies through our plants. Its continued savings as we continue to increase reliability of our laser therapy product line. There is some favorableness coming from pricing in some of our products, increased pricing and then we are indeed getting some favorable impact as a result of mix, primarily less capital than we originally assumed.
So, again, we expect to be a little more pressure on the margins going forward because we do anticipate that capital equipment will pick up, but we also have some confidence around those other factors that we will be able to continue to keep those in play.
Ryan Chu - Morgan Stanley
So the capital equipment pickup is fair to say a small component?
Mark Heggestad
No, they're relatively equal in impact.
Operator
There are no further questions at this time.
Tony Bihl
Well, then, thank you. Let me wrap up first of all by thanking you for joining us on the call today and for continued interest in American Medical Systems. We believe our diverse portfolio of products will maintain our strong leadership position and growth opportunities regardless of the state of the broader economy.
Naturally, we'll continue to take the actions necessary to maintain our leadership including an ongoing focus on leveraging our cost structure, generating cash flow and paying down our debt. So thank you again and we look forward to talking to you at the end of next quarter. Bye-bye now.
Operator
This does conclude today's conference call. You may now disconnect.
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