AngioDynamics, Inc. F4Q09 (Qtr End 03/31/09) Earnings Call Transcript

Jul.17.09 | About: AngioDynamics, Inc. (ANGO)

AngioDynamics Inc. (NASDAQ:ANGO)

F4Q09 Earnings Call

July 16, 2009 4:30 pm ET

Executives

Jan Keltjens – President and Chief Executive Officer

D. Joseph Gersuk – Chief Financial Officer

Doug Sherk – Investor Relations

Analysts

Jason Mills - Canaccord Adams

Brooks West - Craig-Hallum Capital

Christopher Warren - Caris & Co.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Unidentified Analyst

Gregory Brash - Sidoti & Company

Operator

Welcome to the AngioDynamics fourth quarter 2009 financial results conference call. (Operator Instructions). I would now like to turn the conference over to Doug Sherk.

Doug Sherk

Thank you for joining us today for the AngioDynamics conference call to review the results for the fiscal 2009 fourth quarter and full year which ended March 31, 2009. The news release announcing the fourth quarter earnings crossed the wire this afternoon shortly after the market closed and is available on the AngioDynamics website. We’ve arranged for a recording of this call which may be accessed by phone. The replay will become available approximately at 6:30 pm Eastern Time this evening and will remain available for seven days. The operator will provide the dial-in information at the conclusion of today's call. In addition, the call is being broadcast live and on the web at www.angiodynamics.com. A replay of the call will also be archived on the AngioDynamics website.

Before we get started, during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about revenue and earnings for fiscal 2010. We encourage 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 actual results or events to differ materially from those described in forward-looking statements.

In addition, today’s presentation includes certain financial measures used to be better understand our business that have not been prepared in accordance with the Generally Accepted Accounted Principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures have been provided in today’s new release issues by AngioDynamics and is available on the company’s website at www.angiodynamics.com.

Management uses non-GAAP measures to establish operational goals and believes that non-GAAP 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. In today’s call, the company has reported non-GAAP EBITDA and EBITDA per share. Management uses these measures in its internal analysis and review of operational performance.

Finally, during the question-and-answer period today, we would like to request each caller to limit themselves to two questions and encourage callers to re-queue to ask additional questions. We appreciate everyone’s cooperation with this procedure.

Now I’d like to turn the call over to Jan Keltjens, President and Chief Executive Officer of AngioDynamics.

Jan Keltjens

Thank you for joining us today for my first conference call with AngioDynamics. With me today is Joe Gersuk, our CFO. Our results released this afternoon include overall topline growth during our fiscal fourth quarter of 13%. While double digit growth during these economic times is an achievement in itself, the fourth quarter also illustrates the work we need to focus on in order to restore solid organic growth.

I’ve been with AngioDynamics for 4 months now, and I’ve had some time to dig in and better understand the company and the opportunities that lie ahead, and during that call today, I’d like to review where we are and some specific steps we are taking to address our challenges. Then Joe will go through the fiscal 2009 fourth quarter and full year highlights as well as our fiscal 2010 guidance, and following that, we’ll take your questions.

As I mentioned, over the past few months, I’ve gotten to know our AngioDynamics team and evaluate the company’s strengths and opportunities. Some of the issues we identified have been evident during the past fiscal year. In several of our product lines, our organic growth rate has been declining and is now trailing market segment growth. Our international business is under-developed relative to our peers, and new product launches have been delayed, and finally the operation of our supply chain is inefficient, which is reflected in our gross profit margins, higher than desirable inventories, and occasional supply constraints.

In our last call, I emphasized our need to focus—focus on market segments with above-average global growth potential, focus on innovation, and focus on operational excellence, in particular supply chain management, and I’d like to take this opportunity to share with you in more details the steps we’ve taken and we’re planning.

One of our key strengths is that we operate a business with tremendous opportunities in growth markets, and to reinvigorate revenue momentum, we will focus our strategic efforts on growth in venous intervention, oncology access, in particular PICCs and ports, and minimal invasive oncology. These focus areas are offering us combinations of growing markets, opportunities for market share growth, favorable demographics driving long-term growth prospects, and opportunities for leveraging our technologies and IP.

Another area of opportunity organic growth for our company is in international markets. We will be accelerating our investments in developing our international business, and to that extent, we are creating a new business unit, International, under the leadership of a general manager responsible for all commercial operations outside the US. We are currently recruiting this individual who will be based in Europe and report directly to me.

In the US, increasing our focus on GPOs also creates further growth opportunities. We plan on expanding through this path responsible for this and provide more support to this strategic effort. We’re happy to report that in the past quarter, we did win an important GPO contract with the Broadlane Group.

Our focus on innovation is reflected in a number of organizational changes. We are focusing all new product development efforts in our three respective business units. We have decided to transfer our Manchester Georgia access development activities to upstate New York. We’ve also realigned responsibilities in our global leadership team with a goal to increase agility and accountability in decision making, and finally we have decided to concentrate the leadership of our oncology surgery business in Fremont, California.

In the past 7 weeks or so, we have launched four new products. The Starbust XLie enhanced semi-flex electrode is the first RFA device specifically designed to deliver a 7-cm ablation of a tumor in a single placement during CT-aided procedures. The Starbust XL is an RFA device with a convenient re-attached main cable designed to provide reproducible spherical ablations upto 5 cm. The DuraMax hemodialysis catheter is our latest innovation and a market leading step tip design that improves ease of use, dialysis efficiency, and patient outcomes. And finally, the NeverTouch FRS provides compatibility between our great NeverTouch fiber technology with a large installed base of delta laser systems.

We anticipate the introduction of an additional seven products in fiscal 2010 including the Centros catheter in the second half of the fiscal year, a triple lumen multi-stick, and new versions of port and drainage catheters, as well as several EVLT VenaCure family line extensions. Each one of the new products will bring to market unique value-added benefits that benefit our customers as well as their patients. We plan to continue to drive product innovation by investing 10% of our fiscal 2010 revenue in R&D. In addition to that, we have initiated clinical studies for recently acquired Benephit product line as well as the EVLT VenaCure product line.

Finally, we are focused on improving our operational excellence, and in particular our supply chain and manufacturing efficiency. We have established a center of excellence for process engineering and technology at our Queensbury location, and we plan to transfer the manufacturing of Flowmedica Benephit products there from California by the end of the fiscal year.

In the quarter, we also closed the former Diomed office in Andover, Massachusetts. As a result of all these activities, we have decided to establish a corporate office near Albany, New York. This new office location will house the peripheral vascular and access business units as well as some of the executive staff and many corporate functions including R&D. As a result, we will be able to create the required supply chain focus and free up much needed manufacturing capacity in Queensbury, and in addition the new office space will provide an attractive and more easily accessible location and should enhance our ability to recruit key talent to drive our growth.

A significant portion of our R&D investment is allocated to our existing IRE technology and NanoKnife programs. In fact, we anticipate we will invest approximately $0.24 per share from our fiscal 2010 earnings in the IRE NanoKnife program. An investment of this magnitude illustrates our belief in the potential of this technology. Since early April, we have achieved several milestones in our NanoKnife program. For instance, version 2.07 software for NanoKnife was released, and this new software release offers a variety of features including a cardiac synchronization algorithm that prevents cardiac arrhythmia during IRE procedures near the heart, an occurrence that we discussed during the last call, and since then we have not seen anymore arrhythmias being reported.

We have also made several important decisions regarding clinical development program associated with NanoKnife and are accelerated investments in evidence-based medicine for the NanoKnife. Since our last call in April, we determined that we will focus on clinical studies designed to gain specific labeling for the treatment of prostate and pancreatic cancer in the US and generate strong clinical outcome data for HCC/liver cancer internationally.

The IDE preclinical work is progressing nicely, and the patient enrolment in some of these trials are expected well before the end of calendar year 2009. We believe full completion of the three programs could take up to several years, and we plan to provide you with increasingly more detailed updates once key milestones are achieved. In addition to the three clinical trials, we have also supported the submission of two physician sponsored IDEs for IRE.

While we have a clear strategic direction on the clinical development programs for NanoKnife, we continue to commercialize the system. We have tightened up our commercial offerings, provided training to our sales, and just completed our first professional education program. Another recent milestone achieved by the program was the first commercial patient treatment using the NanoKnife system in the US. The procedure was performed at Banner Good Samaritan Hospital in Phoenix, and as of today in total an estimated 66 clinical procedures have been performed using NanoKnife in the US and overseas in a grand total of seven centers.

As we look ahead into 2010, we remain focused on delivering profitable growth. Our short-term target is to achieve organic revenue growth consistent with the market’s overall growth of at least 7-9%. Needless to say, longer term our goal is to exceed the market growth rate, and this will be created by improved organic growth through a steady stream of new products generated by better R&D processes, a stable supply chain, and the commercialization of significant R&D programs like IRE, and possible synergistic acquisitions in business areas we focus on. We are committed to improving our operational performance as we drive this revenue growth.

AngioDynamics enjoys important strengths that differentiate us and give us confidence that we will achieve our longer term goals. We address a large and growing market that is well positioned to benefit from general population trends. The diseases our products are indicated to treat are largely non-elective and our business is primarily based on disposables, providing some predictability and sustainability to our revenue streams. We have a strong product pipeline across all of our business areas, and our financial foundation is solid as characterized by our profitability, strong free cash flow, and a sound balance sheet.

As we move forward, we plan to capitalize on these strengths and focus our energy and resources. We’ll focus on global growth opportunities in core business areas including interventional oncology, minimal invasive oncology, vein intervention, as well as ports and PICCs as I mentioned before, and we’ll focus on product innovation, and we are focused on operational excellence. We’ve got work to do, and 2011 in many ways will be a transitional year, but I believe we will be making substantial progress towards these goals as the year progresses.

Those are my formal remarks, and before I turn the call over to Joe, I’d like to thank once again our board members and the AngioDynamics associates for their support and continued execution during the leadership transition as well as the hard work in delivering the fourth quarter results. I’d also like to extend my sincere appreciation to shareholders for their support and confidence. Now I’d like to turn the call over to Joe to review our fiscal fourth quarter financial highlights.

Joseph Gersuk

Fiscal 2009 was a year of transition for AngioDynamics. The company reorganized into three business units and invested in the expansion of the sales forces in the peripheral vascular and access business units. In addition, the transition included the initial commercialization and markets of irreversible electroperation technology, the completion and successful integration of two acquisitions, and the recruitment and transition to a new chief executive officer.

We completed the fiscal year with fourth quarter sales of $52.8 million which was 13% growth over the prior year. Growth this quarter was led by sales of vein ablation and oncology products, particularly our embolization product, LCB. This brought full year sales to $195.1 million, which was 17% growth over the prior fiscal year, with full year growth again led by sales of vein ablation products and the embolization product.

We estimate that company’s organic growth rate in sales at 2% in the fourth quarter and 6% for the fiscal year, which we calculate by excluding in both periods the sales of all laser ablation products as a result of the acquisition of the Diomed business and the subsequent restructuring of the product line as well as the Benephit renal infusion system that was acquired in the third quarter.

Peripheral vascular sales grew to $22.5 million in the fourth quarter which is a 26% increase from a year ago and reflects the impact of the two acquisitions. Total laser ablation sales which include the entire Venacure EVLT product category amounted to $8.5 million in the fourth quarter, a 126% increase from the $3.8 million in VenaCure sales a year ago. This was our first full quarter selling the Benephit renal infusion system, and we think this product has good potential in the emerging field of targeted renal therapy.

For the full year, peripheral vascular sales were $83.5 million and grew 31% over the prior year. Access sales of $17.9 million were slightly below the prior year’s results. This reflects the fact that the Centros dialysis catheter was on the market in last year’s fourth quarter and has not been available since them. While SmartPort sales were very strong this quarter, we experienced component supply issues with the Morpheus PICC line again this quarter, and solving this problem is the #1 priority for this business unit. For the full year, access sales were $66.8 million and grew 4% over the prior year.

Oncology surgery sales of $12.4 million increased 15% over the prior year fourth quarter and were led by strong LCB sales as mentioned earlier. For the full year, oncology surgery sales were $44.8 million, an increase of 17% over prior year. NanoKnife sales totaled $42,000 in the quarter, bringing fiscal year IRE sales to $194,000.

From a geographic perspective, 89% of fiscal 2009 sales were in the US, and 11% or $21.7 million came from international markets. Of the $21.7 million in international sales, $8.4 million was denominated in sterling or euros and the balance was dollar denominated. The decline in the sterling and euro rates against the dollar caused fiscal 2009 sales to be approximately $1.6 million lower than they would have been had exchange rates been constant throughout the year. However, we also incurred significant costs in those currencies, including our laser manufacturing operations in England, and therefore the impact of the currency movement on operating income was neutral in the fiscal year.

Continuing down the income statement, the gross profit margin was 61.9% in the quarter. For the year, it was 61.6% and matched the prior year margin. The lower gross margin in this year’s fourth quarter reflects the change in product mix as well as royalty payments, partially offset by price increases and manufacturing efficiencies.

Operating expenses were $27.9 million in the fourth quarter which included $700,000 in nonrecurring costs, primarily the writeoff of the cost of a project to expand office space in Queensbury. For the full year, operating expenses excluding the restructuring item and the cost of the CEO transition totaled $100.2 million or 51.4% of sales.

We continue to invest heavily in the IRE program, the cost of which was $2.4 million in the quarter and $9.7 million in the fiscal year. On an after-tax basis the investment in IRE amounted to $0.06 per share in the fourth quarter and $0.25 per share for the year.

We reported operating income of $4.8 million in the quarter which would have been $5.5 million excluding the nonrecurring costs. A year ago, we reported $7.1 million in operating income excluding a litigation provision. The reduced operating income reflects the substantial investment in IRE and sales and marketing costs associated with acquisitions and the transition of the business units.

EBITDA was $7.8 million or $0.32 per share in the quarter compared with $2.8 million or $0.12 a year ago. For the fiscal year, we reported $16.1 million in operating income compared with $16.2 million in the prior year, while EBITDA was $27.9 million or $1.14 per share compared with $25.4 million or $1.04 per share in the prior fiscal year.

After income taxes are taken into account, the result is $2.9 million in net income or $0.12 in diluted earnings per share compared with $0.12 in earnings per share a year ago. The nonrecurring costs reduced fourth quarter earnings by $0.02 per share. For the fiscal year, net income was $0.41 per share in 2009 compared with $0.45 per share a year ago. Excluding the special items in both years, fiscal 2009 net income was $0.51 per share and 2008 net income was $0.54 per share, reflecting the substantial IRE and sales and marketing investments.

The tax rate was 35% in the fourth quarter and 34% for the fiscal year. While we recorded a tax provision in the income statement, we paid minimal federal income taxes in fiscal ’09 and saved $6.7 million in tax payments through the use of NOLs available as a result of the acquisition of RITA Medical.

Turning to the balance sheet and cash flow statement, we ended the cash and liquid investments of $68.2 million compared with $62.2 million at the end of the third quarter and $78.2 million at the beginning of the year. We generated $6.9 million in cash flow from operations in the quarter and $19.9 million in the fiscal year. 2009 cash flow from operations would have been $26.7 million excluding the first quarter payment to Venous Medical in settlement of litigation.

Our accounts receivable remains in very good shape. DSOs were 46 days sales outstanding in the fourth quarter, a 3-day improvement from one year ago. Our balance sheet and liquidity positions remain extremely strong, and we expect to continue to generate significant free cash flow.

Finally, as indicated in the release, we are providing guidance for fiscal 2010. We expect 7-10% organic growth in net sales which is a range of $209-$215 million. Gross margin in the range of 61-62%, GAAP operating income to increase 12-24% to a range of $18 to $20 million, EBITDA to increase by 8-15% to a range of $30 to $32 million, and GAAP EPS of $0.43 to $0.47 per share inclusive of a $0.24 EPS impact from the investment in IRE. We expect a tax rate of 37.5% and to achieve cash tax savings of $7.5 million from the use RITA NOLs in fiscal 2010.

I’ll now turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Jason Mills - Canaccord Adams.

Jason Mills - Canaccord Adams

First question is more of a macro question with respect to your markets. Perhaps it would be helpful if you could give your assessment of the growth profile within your three target markets today, the organic growth you’re showing within those target markets, and how long do you expect it to take to get to or surpass market growth in each of those target markets.

Jan Keltjens

Let me give you some high level information. There is a little bit of black signs in reading the market size, but the way we peg the markets and these are global numbers, if you look at our peripheral vascular division, that overall market is growing at about 7%. Within that of course the varicose vein ablation market is growing faster than the average, but the average we think is about 8%. On vascular access, we think it’s about 7%, and interventional oncology or minimal invasive oncology we think it’s about 9-10%, something along those lines. There is a bandwidth nature to those numbers. So actually what you see is if you take our guidance we think that we have a good shot at growing at market rate. I mean it averages out I think I said in my comments about 7-9% or 7-10% if you want to say. That’s actually in line with our guidance. So I don’t think we’re going to incur all that much damage in terms of losing market share, but our ambitions are more far reaching than that.

Jason Mills - Canaccord Adams

Within what timeframe? Should we see the first half of fiscal 2010 lower than those market growth rates and then with new products, you have the Centros in the second half; the second part of my question asked about vascular access, perhaps resolving some of the issues there and filling a product line towards the end of the year and helping the second half. Am I thinking about that right?

Jan Keltjens

Well, I’d be a little cautious. We don’t give quarterly guidance, and there’s a reason for that, so I want to stay away from that a little bit here as well. As I mentioned we have launched four, frankly if you pull in the software release 2.07, we launched 5 products in the past two months or 7-8 weeks. They will help drive some growth. Some of the products will continue to grow of course, and then there’s some other stuff that comes on stream later in the year, but I wouldn’t want to give too much color on whether growth is going to be front loaded or back loaded. I think we should see a fairly stable performance throughout the year, I’d say.

Jason Mills - Canaccord Adams

On the VA side, it was a little bit lower than our expectations. I’m wondering what holes you may have in that line in terms of where you are now relative to where you want to be, and how do you best address, it sounds like you’ve got some projects in place to increase production capacity, etc., so what are doing to address a product line that used to be a very fast grower for the company and has fallen on some hard times recently, and within what timeframe should we expect the VA line to bounce back?

Jan Keltjens

I think Joe gave a good chunk of the answer there. There were three effects if you like that hurt in the quarter, certainly quarter over quarter or prior year comparison. One is a year ago we actually had Centros out there with tremendous performance, certainly on a relative scale, in the quarter, so very unfavorable comparison. The PICC supply issues, we had the Molpheus PICC supply issues that continue to haunt us, and I think it’s one of the these things that we have to just arm wrestle into shape a little bit while we’re working on more structural solutions. It’s going to be hand to mouth for a while, and we’ll continue to push that trying to avoid that becoming a constraint in growing it, but it was a bit of a constraint in Q4, and then I think the third dimension is a bit of a mix. I mentioned the Broadlane agreement we were able to gain. That’s a big help for the access business. We have to run another product line. In particular, a triple lumen PICC is very important for us, so I’d say once those things start materializing, that should help growing that unit better. So actually I’m quite optimistic on the prospects of the access units, but they have their work cut out alright, but I think it’s a fabulous business with tremendous opportunities for us.

Jason Mills - Canaccord Adams

I’ll slip one in here for Joe. Why are you calling out the IRE invesetment from GAAP EPS. The $0.24 compared to the $0.25 investment this year for IRE suggests about $6-$7 million, but your GAAP earnings guidance is I guess a little bit lower in line, etc. I’m trying to figure out why we call that out specifically given that it’s roughly the same year over year?

Joseph Gersuk

Just to clarify that in both years there is substantial investments and to make clear what the numbers are. Correct that they are about the same year over year, but just to be clear, and certainly that’s a discretionary investment we’re making. We believe in it in the long run, but obviously it’s penalizing our earnings in the short run.

Jason Mills - Canaccord Adams

It doesn’t seem to be uncharacteristic in terms of the costs associated with run trials commensurate with the ones you’re planning to run though, right? Am I right about that? Six to seven million seems to be a lot of money and seems to be characteristic of IDE trials commensurate with the ones you’re running.

Jan Keltjens

I think you correctly said the number, but it’s a very significant number—something we have not done in the past. A long range program like that with that many upfront investments, I think that’s why chose to give a little more color on the impact of that long range program without significant revenue for the time being. So it’s not guidance element as such. It was just to enhance your understanding of the business model.

Operator

Your next question comes from the line of Brooks West - Craig-Hallum Capital.

Brooks West - Craig-Hallum Capital

Jan, I wanted to focus in the first question on the base business. On the divisional and sales and marketing structures, what do you feel like you’ve been able to accomplish so far and what remains to be done, and then I guess as a second part of that question, if you were to point to upside in your guidance in any of the product franchises, where do you think we might see something?

Jan Keltjens

I’m not sure where you’re going with the first part of the question, but let me maybe say this. The last conference call also had a lot of questions about the salesforce and business units and all that kind of stuff and productivity of our salesforce. If you ask me really and I guess you do what’s our key issue, I don’t think it’s the salesforce or the business units and stuff like that. It is what I would say feed the animal, so I want to be very clear. We’re committed to business units. We think it’s the right structure to deal with complexity. It gives the right focus in certain product families which can be quite averse, and we’re committed to that, and the second thing is I think salesforce productivity will start looking a lot better if we get some tractions with those new product launches, and they will pull us forward, and a final comment is I don’t think the new year is still damp behind the ears if you like. I don’t think this is the time to start talking about upsides. We gave guidance, which is a balanced guidance in many ways, and I’m quite pleased with the business model we have, and I think there are genuine opportunities to start accelerating growth in each of our business units. I think oncology surgery is the most obvious one, but I think those business areas that we singled out for focus frankly grow above the average of the market, and I think that will be one way of doing it. Again, the nice thing here is we have a number of options to accelerate.

Operator

Your next question comes from the line of Christopher Warren - Caris & Co.

Christopher Warren - Caris & Co.

Tax rate on the nonrecurring expenses in the quarter?

Joseph Gersuk

That would be 35%. That’s the crude rate.

Christopher Warren - Caris & Co.

If you’re spending $0.25 a year on IRE, how can investors get their hands around the justification for the expense? When should investors begin to see some pay off in terms of at least revenue from it?

Jan Keltjens

Chris, that’s an absolute valid question, and I do and we do realize that we’re probably not providing the level of insight and detail you all would be hoping for, but we made a choice there. What we are committed to doing is two things. If significant events happen in the IRE program, let’s say we submit an IDE or get one approved, we will share that will all of you, and I think you will get increasingly more insight into timelines associated with that, for instance number of patients we want to enroll, the endpoints, the followup period, number of centers, actual enrolment dates, so I think quite rapidly you will get a better feeling for when those programs start converging and lead to better indications. The second thing is that we’ve started sharing with you in a bit more detail I think than we did historically the actual number of cumulative procedures and the number of sites around the world that actively perform procedures, and I think they are the most fundamental measure of traction in this area—how many cases are being done commercially in particular and how many centers are using it and are repeat users, and I think and I know we are asking for a lot of trust here. It’s a significant investment. No qualms about that. The fact that we’re doing it and continue to do it, and we’ve reviewed the whole program means that we’re comfortable and see the long-term potential, but I also acknowledge it’s going to take a little bit of time before you can really see that materializing and start projecting it out a little bit.

Operator

Your next question comes from the line of Thomas Kouchoukos - Stifel Nicolaus & Co.

Thomas Kouchoukos - Stifel Nicolaus & Co.

On the PICC side, I understand you had production issues on the Morpheus front. Cook when they came with their antimicrobial PICC had a lot of press on that and made some noise, and I am just wondering are you seeing that out in the market and how important do you think that is to the PICC space to have something like that for the hospitals?

Jan Keltjens

Let’s put it this way. It was not a factor in our performance. We see the product out there as being trialed in certain areas, but it has not been a factor in our performance, and we don’t expect it to become a material factor in the foreseeable future. That’s the short answer. The longer answer is as I said before I have an R&D background. Any technology innovation is interesting. There has been a lot of talk about infection prevention in particular and CVC lines and dialysis may be a little bit so in PICC lines. We’re not convinced that the Cook answer is the right answer, but it’s certainly an area we continue to keep a finger on the pulse. We’ve got some programs, and we’re trying to understand and make sure that we’re ready once the right technology breaks through.

Thomas Kouchoukos - Stifel Nicolaus & Co.

I know it’s only been a month or so since venous was acquired, but I am wondering if you see anything different from out in the field yet, and then to follow up on that I think at FVS there was some, I can’t remember it was a news story or some data that was presented that talked about recovery trial versus laser, and maybe it was a little slanted towards recovery or towards RF because it’s comparing the closure versus the old version of the laser, not the new NeverTouch type 5, and I’m wondering when you talk about the clinical work that you’re looking to do on EVLT, is that something that you’re looking to maybe an apples to apples study and take that out to market?

Jan Keltjens

Yes. The recovery trial, you’re absolutely correct. It was comparing the fast closure RF technology with our old fibers. Some emerging articles are out there already that do a little bit of a comparison of our NeverTouch system against RF, and we feel very confident that our NeverTouch technology that we can have a minimal level playing field when it comes to pain and bruising, and feel that it is at least as good if not a hair better and more versatile when it comes to the actual clinical efficacy, and we’re going to get more and more active when it comes to evidence based medicine, and I guess there are some articles behind that that we can use.

Operator

Your next question comes from the line of Gregory Brash - Sidoti & Company.

Gregory Brash - Sidoti & Company

Maybe you could help me a little bit on the expenses that you’re looking for in 2010. The way I look at it, in fiscal 2009, if you exclude some of the recurring, we’re doing operating income around $19.6 million in 2009; yet, you’re guiding towards $18-$20 million in 2010 with similar spend on IRE, 7-10% revenue growth and similar gross margins, so where are all these extra costs coming from? Why aren’t we seeing any leverage this year?

Joseph Gersuk

Part of the answer is on the marketing side some of the clinical trial are actually marketing expenses, so that’s another area of investment for us next year as well.

Gregory Brash - Sidoti & Company

But wouldn’t that be included in your $0.24 estimate for IRE.

Joseph Gersuk

No. There are some trials being done on EVLT for example as well as the Benephit product as well that would be considered marketing expenses. These are products that are already on the market, so it’s additional marketing expenses there.

Gregory Brash - Sidoti & Company

This is the fourth straight year where adjusted EPS is either flat or has gone down. When can we start to see leverage in the business and start to see earnings growth again?

Jan Keltjens

As I said in my comments, it’s a transitional year, and as very often in medical devices, so many investments go ahead of the returns, and I would look at it that way, so there’s a lot of conflicting forces if you like in our 2010 P&L and to a certain point also in Q4, so for us gross profit stays in terms of guidance virtually flat. There’s a lot of underlying improvement but continued headwind when it comes to mix as well as investments, and I mentioned the process technology and engineering team, consolidating some of the production efforts, there are some expenses associate with that, but there’s a lot of underlying improvement. The same in sales and marketing whereas there is a trend towards leveraging the salesforce, our ongoing investments when it comes to marketing and in particular also in marketing and evidence-based medicine, and those will start getting some traction and generating some traction in hopefully not too distant future, and we’re disappointed as well, and we are committed to shareholder value from that point of view. That uptake we don’t think is visible in the fiscal 2010.

Operator

The next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford – Raymond James

My first question is on the revenue growth assumed in 2010. You did 2% organic growth here in the fourth quarter. Your fiscal 2010 guidance is 7-10%. Could you maybe just highlight the one or two key assumptions that get you to that type of growth, and then my second question is typically AngioDynamics introduces a price increase in the first quarter, and is that something you still plan to do this year?

Jan Keltjens

I’ll try to take a stab at this. Joe, chime in with some details if you have them. I think the 2% in Q4 is probably a little bit deflated because of a very strong Q4 ’08. There is some effects in Q4 ’08, so I think the underlying strength of the organic growth is a little better. Also if you pay careful attention to the way Joe explained pro forma growth, it’s a little conservative because the nature of the Diomed business when we acquired it, so it was very hard to do a real pro forma analysis, so we assume that we did not have the laser business at all in both years and that’s growing business for us, so I think the 2% is a little deflated, a little conservative, and the second one as I mentioned we did launch 4-5 new products in the last couple of years. They’ll start getting some traction. We started getting a little bit more confident when it comes to marketing of EVLT VenaCure. We think we got a little bit more traction there, a few other things and it all adds up to a decent number. In terms of price increases, I don’t think we should be talking on conference calls about price increases too much. There are all kinds of people listening in, and I think it could be construed in the wrong way, but let me put it this way. There is a lot of price pressure obviously. I think we have been handling it very well, and whenever we see an opportunity to increase prices, either pound for pound or true innovation, we’ll certainly capture that kind of an opportunity.

Joseph Gersuk

Jayson, I also mentioned the EVLT business in particular this year was a year of integration of that business, and it was a really enormous undertaking when you consider the fact that the business had been through bankruptcy prior to our acquisition of the business, so it was a major undertaking that is now completely behind us, and we’re expecting substantially better performance out of that part of our business in 2010 than the integration year that we had in 2009. As you know, that market is among our faster growing markets, so that’s one area where we would expect to grow, and secondly the PICC business, we’re highly confident that over the course of this fiscal year that we’re going to solve all of those problems. We now know them well, and we firmly believe that we will solve them and have better performance in the access business and the PICC part of it in particular, and then of course if and when we get the Centros back on the market, that too should fuel growth as well, so I would say we’re quite confident of that range that we’ve given on the top line performance for next year, all things considered.

Operator

The next question comes from the line of Christopher Warren with Caris & Company. Please go ahead.

Christopher Warren – Caris & Company

Wanted to know what the component PICC issue de jure was and also what went wrong with the first fix attempt at addressing the problem?

Jan Keltjens

The component issue de jure is the same as it was yesterday. In the public setting of this kind of a conference call, I don’t want to go into too much technical detail, but it really revolves around the interaction between a compound and a complex extrusion with one of our suppliers. We’re not blaming the suppliers. It’s a complex product with a complex design. The skinny answer is we are revising that part of the design. We had some intense reviews of this over the last couple of months, and we’re taking a slightly different direction in the fundamental design of that part of the PICC. It won’t affect performance, might actually enhance performance and certainly will drive manufacturability quite a bit, and frankly it will drive gross profit a bit as well, so it’s a win-win scenario. We have to chip through it. It’s a regulated industry and all that kind of stuff, and hopefully we are going to get this on the market sooner rather than later.

Christopher Warren – Caris & Company

Are you guys saying that the market itself that Angio serves hasn’t really slowed down? It’s just a share loss issue that led to the 2% organic growth this quarter?

Jan Keltjens

I don’t think you can look at the 2% in the quarter in isolation. I think the number was 6% for the year. I think that’s probably a better reflection of a true performance, something along those lines. Quarters go up and down quite a bit as I mentioned. Simple example Q4 ’08, Centros was in there for a significant amount relatively. We actually like the market in which we operate. As we said, largely consumables, very few elected cases, and we have not seen a slowdown or material slowdown in the underlying business. We’re not going to sit here and take that as an excuse. The markets are good. We have to work hard, and I’m sure the salesforce is listening in partially here. The salesforce had to increasingly hard and has to see more people than they used to have to see to make the sale, but the business is there. We are competitive, and we are focused, focused on execution.

Joe Gersuk

Chris, on your earlier question about the tax rate applicable to the restructuring item, the nonrecurring cost there, it’s actually 36%. Our controller, Wayne McDugall is here and informs me that was the exact rate.

Operator

The next question comes from the line of Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West – Craig-Hallum Capital

Joe, just a couple of followup questions on the cost side for 2010. Can you give us any guidance in terms of the increased marketing spend for the two marketing studies there and then also on the Albany facility, the cost and timing for that?

Joe Gersuk

We aren’t going to provide specific cost information on those marketing studies that we’re going to do obviously for competitive reasons, so I can’t be specific about that. In Albany, the likely occupancy there is the February timeframe of next year. It will be leased premises, and so we won’t have capital tied up in it, and we’re likely to sign something like a 10-year lease for that property.

Operator

(Operator Instructions). The next question comes from the line of [inaudible]. Please go ahead.

Unidentified Analyst

I just had a real quick one and that’s inventories came in at about $36 million. I know because of acquisitions it’s up a little bit, but overall, can you just discuss the level of inventory and how you feel about it?

Joe Gersuk

Yes. $37 million dollars is what it is end of the fiscal year, and frankly it’s higher than we want it to be. Part of the answer of course the acquisition of Diomed, and we are now in the business of manufacturing lasers, so that was an expected and understandable increase in inventory, but beyond that, there are some increases in safety stock associated with the supply chain issues that some of them that Jan mentioned, so we actually have a program to reduce inventory levels and have set a specific goal for ourselves as to what we want to get them down to, so they are a bit high now, higher than we would like them to be, but for understandable reasons. The reserves against them are certainly adequate, but we would expect them to be going down next year in response to some specific programs that we have to get them better under control.

Operator

The next question comes from the line of Greg Brash with Sidoti & Company. Please go ahead.

Greg Brash – Sidoti & Company

Would you guys be willing to quantify how much the supply issue in the PICCs hurt you in the quarter?

Joe Gersuk

No. Not really, and Greg also on top of that even if we could quantify it from a back order position or extrapolation of revenue, these things sometimes have a more far fetching effect in terms of creating uncertainty with the salesforce, some uncertainty with customers, you’d lose an account for it, so we don’t take it lightly. We think the PICC market is a very healthy market. It didn’t perform well for us in Q4. That’s enough call to action for us to give it our all and get this fixed as soon as possible.

Greg Brash – Sidoti & Company

I know you’re trying to build your presence overseas. How much a part of that is getting into or expanding your business in the vein side? I know one of your competitors has been doing quite well in Europe.

Joe Gersuk

Well, as I said in the beginning of my remarks that we are very much focusing on three segments if you like. It’s obviously vein intervention, but within that very much vein ablation. It’s all on the oncology side, but we’ve got some exciting products there, and then ports and PICCs, and I think those three elements will be our spearheads also when it comes to international expansion. In different gradations, when you talk about Asia, I think oncology is relatively maybe more important. I think the vein ablation business is a bit more accessible for us in Europe, but I think along those vectors, you’ll see us getting increasingly ambitious.

Operator

There are no further questions in the queue. I’ll turn it back over to management for any closing comments.

Joe Gersuk

Thank you all for your questions and your interest in AngioDynamics. We will continue to provide you updates on our progress as developments merit, and I do look forward, and we all look forward to talking with you again during our first quarter fiscal 2010 conference call in about 2 months or so. Thank you all.

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