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American Medical Systems Holdings, Inc. (NASDAQ:AMMD)

Q2 2009 Earnings Call Transcript

August 4, 2009 5:00 pm ET

Executives

Tony Bihl – President and CEO

Mark Heggestad – EVP and CFO

Analysts

David Lewis – Morgan Stanley

Tom Gunderson – Piper Jaffray

Brooks West – Craig Hallum

Jayson Bedford – Raymond James

Jane [ph] – JP Morgan

Jonathan Block – SunTrust Robinson Humphrey

Tom Kouchoukos - Stifel Nicolaus

James Sidoti – Sidoti & Company

Operator

Good afternoon, my name is Shana and I will be your conference operator today. At this time, I would like to welcome everyone to the American Medical Systems Q2 2009 earnings conference call. (Operator instructions)

Mr. Tony Bihl, President and Chief Executive Officer of American Medical Systems, 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 second 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 second quarter 2009 earnings release, including the financial tables which are part of the release.

So 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, and review the product line performance within each of our businesses, and then Mark will follow with a detailed review of our financial results and guidance, and we will conclude today's discussion with a question and answer session.

So turning to our quarterly performance, American Medical Systems reported second quarter revenues $126.4 million in line with our guidance of $124 million to $130 million in sales. Total second quarter revenues decreased 2.6% over the second quarter of 2008 on a reported basis and increased 1.6% on a constant currency basis.

Non-GAAP adjusted earnings per share were $0.29 for the second quarter and rose 21% over the second quarter 2008 and exceeded our guidance for the quarter of $0.22 to $0.26 per share, primarily due to the combination of improvements in our gross and operating margins and reduced interest expense.

Continuing our strong quarterly cash flow trends, we generated $31.6 million in cash from operations and reduced our debt by $20.5 million. Cash flow generation was again the result of strong gross margins and sustained operating expense and working capital discipline.

Let me expand more on our $1.6 million constant currency worldwide sales growth. Notably we delivered very positive sales momentum in our erectile restoration, laser therapy and prolapse product lines. However, growth in our continence product lines slowed significantly from previous trends. While we believe the continence product lines were impacted by a number of market factors such as patient volumes and competition, we ultimately conclude that we must execute more effectively.

Our TherMatrx and Her Option product lines also declined though these results were anticipated. I will provide details of this revenue performance by business unit and product line. Please note that all of the growth rates I will talk about going forward will be stated in terms of constant currency, unless I state otherwise.

So our men’s health business posted revenue of $57 million and grew 5.6% over the comparable second quarter of last year. Erectile restoration product line continued the positive growth trend we saw in the first quarter, yielding sales growth in the high single digits. This strong growth was supported by our patient education and outreach programs in the US and complemented by favorable price mix.

Male continence grew in mid-single digits overall, while AdVance sales approached double-digit growth for a quarter, and finished the quarter with stronger sales through June. Sales growth of over Artificial Urinary Sphincter slowed to mid-single digits. This slower growth occurred in most markets around the world in both AdVance and AUS, and we continue to work to fully understand the drivers. By placing increased sales attention in this area and we are expanding our education and outreach programs and we are confident that our growth rates will move more positively as a result of this.

Turning to women's health, revenue in the second quarter was $41.3 million, a decline of 4.5% over the comparable period last year. On the plus side sales of over prolapse products showed very positive growth throughout the quarter with notable acceleration to double-digit growth in June. This strong performance was led by our new Elevate anterior and posterior products, particularly as we begin the launch of Elevate anterior late in the quarter.

Female continence revenues declined in the low-single digits overall, while we achieved low double-digit growth in our MiniArc Single incision sling. This was offset by a decline in Monarc sling sales. We experienced some competitive pressure in female continence, however positive sales momentum from our Elevate product line carried over to MiniArc as expected late in the quarter as these products have often done concomitantly.

Our focus on female continence will be on effective sales execution, leveraging the strength of the Elevate line and growing the combined market. Her Option declined again in the second 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 $28.1 million rose 3.2% in the second quarter compared to the same period last year. Within BPH therapy, we are encouraged by 8.6% growth in laser therapy product lines. While 2009 remains a transition year for laser therapy, we have seen early signs of stabilization and rising procedure demand within our existing installed base of lasers, specifically fibers were up double digits worldwide, driven by increasing success in communicating the clinical benefits of GreenLight in treating BPH. In fact in the US, laser therapy fiber sales are up double digits year-to-date after 2 strong quarters of demand.

We are continuing to see the effects of soft capital purchasing patterns on our laser console sales due to the impact of the economy on hospital capital spending. However, we did increase our console sales in a few emerging markets in Latin America and Asia as our extended global reach is gaining traction. Regarding the expected implementation of changes to the Stark Law this fall. We are continuing to monitor Stark and its affects on our local providers, and so far we haven't observed anything different from what we discussed last quarter.

The results in laser therapy point to progress we are making on the four key elements of our strategy to improve performance in this product line. These elements were direct general management of the BPH therapy business unit, realignment of the sales force to focus separately on capital equipment sales and selling disposables, implementation of a one AMS to leverage the AMS franchise and the brand and a 10 percentage point improvement in gross margins by 2010.

Finally regarding TherMatrx product line, which comprises less than 2% of total revenues, it declined sharply again this quarter as expected as the overall demand for microwave BPH therapies, continues to wane. On the corporate front, earlier this year we discussed our intention is to fill the ranks of our executive team, and I'm pleased to announce the key addition to this team, Max Feorie [ph] joins us in the position of Chief Technology Officer, a role we believe is integral to AMS given our history of innovation and new product development.

Max comes to AMS with over 25 years of research and development experience working with both large diversified healthcare companies like Johnson & Johnson and Abbott, as well as medical technology start-ups. We believe Max’s varied leadership experience will serve to further sharpen AMS focus on new product development.

Before I turn the call over to Mark, let me conclude with a final comment on our outlook for the balance of the year in light of the current quarter results. First, we continue to acknowledge that the uncertain economy has impacted our growth most notably in product lines of capital equipment. With that said, we are particularly optimistic about the growing momentum in our prolapse product line with our new Elevate products, as well as with the positive trends in erectile restoration and laser therapy.

I'm also confident in our ability to grow our male and female continence product lines as we heighten our focus on market developments. Bottom line, I'm confident that we will deliver our financial objectives for the year.

At this time, I will turn the call over to Mark Heggestad.

Mark Heggestad

Thank you, Tony. Tony has provided the revenue details for each of our product lines, so I will limit my comments on revenue to the impact of foreign currency fluctuations, and then provide additional color on the rest of the P&L, the balance sheet, and our second-quarter cash management. The strengthening of the US dollar versus where it was a year ago had an unfavorable impact of $5.5 million when comparing second-quarter results to the prior year. Excluding this unfavorable impact, results in second quarter revenue growth of 1.6% as opposed to reported decline of 2.6%.

Similarly, excluding the unfavorable impact of foreign currency fluctuations results in total international revenue growth of 6.2% versus a reported decline in international revenue of 7.5%. At current rates, we will continue to experience unfavorable comparisons in the third quarter, and then see a slight benefit in the fourth quarter.

Moving on to the rest of the P&L, we again continued the trend we established in 2008 in improving margins in northern areas, i.e. gross margins, operating margins and profitability margins. Our second-quarter gross margin reached 82.9%, up 4.9 percentage points from the 77.5% a year ago. This strong second-quarter gross margin percentage was achieved through a combination of factors, including improved laser therapy margins, cost containment across-the-board, pricing gains and positive product mix impacts.

Benefiting from our efficiency and reliability initiatives to drive a 10 percentage point improvement in the laser therapy gross margins by 2010, the second-quarter laser therapy gross margin percentage achieved 67%, up from 46% a year ago. With that said, as Tony pointed out in his remarks, the reality is laser consoles are down significantly and fiber sales are quite strong. This higher than anticipated ratio of high margin fiber sales versus lower margin console sales has a dramatic favorable impact on our gross margin.

We will eventually see resurgence in our lower margin laser console sales and when that happens the laser therapy gross margin will drop. However, we remain confident that we are well on our way to a sustainable 60% plus gross margin in laser therapy even when capital sales rebound.

In the second quarter, we again drove improved leverage of our operating expenses. This improvement was the result of ongoing initiatives to drive operational efficiencies as well as tight containment of costs during these difficult economic times. This is evidenced by our operating income margin which came in at 26.7%, up 5.1 percentage points versus the 21.6% margin a year ago.

Marketing, selling and G&A spending of $54.5 million in the second quarter declined 4% compared to $56.9 million in the prior year's second quarter. R&D spending of $13.2 million was above slightly our long-term objective of approximately 10% of revenue. In any given quarter R&D ebbs and flows based on development projects in clinical activity. We continue to anticipate that R&D spending will be approximately 10% of revenue for the full year.

Operating margin improvements over the second half of the year are targeted to be more modest and in line with original expectations, and in fact the third-quarter operating margin is expected to return to the lower 20s due to normal seasonal patterns. As a reminder, a definite historical seasonality exists in that our third-quarter revenues declined sequentially from the second-quarter, while at the same time our spending patterns remained fairly level on a quarterly basis, thus pushing down third-quarter margins as well as EPS.

Royalty income in the second quarter of 2009 of $874,000 is generally in line with expectations. Second quarter interest expense of $5.0 million declined $1.9 million from the second quarter of 2008 when our debt levels were much higher. Our substantial debt repayment during 2008, which has continued in the first half of 2009 has reduced our borrowing cost substantially.

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. These charges will continue to be approximately $4 million in each of the third and fourth quarters.

The other income and expense line of $724,000 in income was driven by gains on our foreign currency hedging contracts in the quarter. Given current foreign currency exchange rates, these gains will turn into losses in the second half of 2009.

Our reported second quarter tax rate of 36.1% represents a 3.5 percentage point improvement from the prior year and was slightly favorable to our guidance of 36.5%. The quarter contained a couple of favorable discreet items, and we still expect the full year tax rate to be approximately 36.5%.

Excluding the amortization of certain non-cash items I will provide details on in a moment, non-GAAP adjusted net income was $21.6 million and fully diluted earnings per share was $0.29. This represents a 24% and 21% increase over similarly adjusted net income and EPS of a year ago. With the second-quarter revenue achieving the midpoint of our guidance combined with diligent cost containment and gross margin performance, we surpassed the top end of our EPS guidance by $0.03.

On a GAAP basis, net income of $16.9 million and earnings per share of $0.23 compares favorably to $11.8 million and $0.16 per share a year ago. As mentioned in previous quarters, we exclude certain amortization related expenses from our non-GAAP adjusted results due to their non-cash nature and the fact that they limit comparability to other companies, specifically the non-GAAP adjustments on a pre-tax basis or intangible asset amortization of $3.4 million or $0.03 per share and financing amortization of $4 million, also approximately $0.03 a share. A full reconciliation of GAAP to non-GAAP adjusted earnings and earnings per share is included in our earnings press release.

I would now like to focus our attention on our balance sheet and cash management where we again continued very favorable trend established throughout 2008. We ended the second quarter with a cash and short-term investment balance of $49.2 million. Cash generated from operating activities in the second quarter of 2009 was $31.6 million driven by the improved operating margins that I just mentioned combined with continued aggressive working capital management.

This cash flow generation enabled us to reduce our debt by $20.5 million, while at the same time increase our cash and short-term investment balance to nearly $50 million. We are on track with the guidance provided in the first quarter call to reduce debt by approximately $95 million this fiscal year.

All the $20.5 million of debt we paid in the second quarter was applied to our senior secured credit facility, bringing the balance of that debt down to $200 million at quarter end. The balance on our convertible note remains at $312 million.

The net result of our increased earnings combined with continued debt reduction has allowed for further improvement in our total leverage to EBITDA ratio to 3.1 times, down from 3.3 times at the end of the first quarter, and down substantially from 4.5 times a year ago.

As we turn to the outlook for the remainder of the year, there are a number of considerations including current foreign exchange rates and the second-quarter revenue performance. With that said, we have narrowed for 2009 revenue guidance range to $495 million to $510 million versus the previous guidance of $495 million to $515 million. However, given the continued strong cost management success and other factors impacting our bottom line, we are confident in narrowing and raising the range of our 2009 non-GAAP adjusted earnings per share to $1 to $1.10 versus the previous guidance of $0.96 to $1.07.

As it relates to the third quarter, it is important to understand the historical seasonality of our business. The third-quarter revenue has historically declined sequentially from the second-quarter followed by a significant sequential increase in the fourth quarter. This is combined with the spending profile that in terms of absolute dollars remains relatively constant among quarters.

All this results in third-quarter operating margins that are below the annual average and fourth-quarter operating margins that are above the annual average. Keeping that in mind our third-quarter revenue guidance is in the range of $113 million to $119 million and third-quarter non-GAAP adjusted earnings per share guidance is in the range of $0.17 to $0.21. All revenue guidance assumed at foreign currency exchange rates to stay fairly consistent with current levels.

Also as previously noted all non-GAAP adjusted EPS guidance excludes the impact of intangible amortization expense and amortization of financing costs. Intangible asset amortization is expected to be approximately $13.5 million or $0.11 per share in 2009, and approximately $3.5 million or $0.03 per share in the third quarter. Amortization of financing costs is expected to be approximately $16 million or $0.135 per share in 2009 or approximately $4 million or $0.035 per share in the third quarter.

All EPS guidance also excludes the impact of large one-time non-operating type items, such as the first-quarter gain on early extinguishment of debt.

The first half of 2009 has started of with a combination of puts and takes, which is not entirely unexpected given the ongoing challenges of an economy struggling to emerge from a global recession. On a positive note, our men’s health business posted growth while BPH therapy outperformed our expectation and is showing encouraging signs of stabilization.

Although women's health was down, we are confident that we have the new product in focus necessary to regain our position in this business. Our earnings exceeded guidance and expectations and as a result of continued discipline expense management and our balance sheet management has continued to produce robust cash flow generation.

Finally one administrative note, our shelf registration on file with the SEC recently passed its three year effective life, and so as a procedural matter we plan to renew that registration next week. As part of that process we filed today a Form 8-K to update those sections of over 2008 10-K, which were impacted by the change in accounting for convertible notes.

Recall this change in accounting was effective for us at the beginning of 2009 and required retrospective application to prior periods. The information in the Form 8-K is not new information and is not an amendment to or restatement of our 2008 Form 10-K, but simply updates those sections impacted by the change in accounting under the new convert rules.

Thank you for your time and now I will turn the call back to Tony.

Tony Bihl

Thanks, Mark. In summary, we hit the mid-point of our revenue guidance range and we exceeded bottom-line guidance, and by again managing our P&L and balance sheet we have demonstrated strong execution on expense management and cash flow generation. So before opening up the call to question and answers, in order to allow as many analysts as possible to ask questions, 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 a lot for your consideration. So Shana, would you please open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of David Lewis.

David Lewis – Morgan Stanley

Good afternoon guys.

Tony Bihl

Hi, Dave.

David Lewis – Morgan Stanley

Hi, Tony. This is an obviously interesting quarter in that laser scope did better than some of the other core businesses, which we haven't seen in a while. I wonder, do you think this is simply just a quarter, would you think this is more indicative of something we may see in 2010 where the core businesses are very significant products decelerate just on obviously difficult comps, but the core laser scope business does dramatically better. So is this just a quarter, or could this start indicating things we could see more broadly in 2010?

Tony Bihl

No, I think the first half of the year is giving us some indications that we have got the laser business moving in the right direction. So as I said, this is the second quarter in a row, for example in the US where we saw double-digit fiber growth. And that is what we have been focusing on, making sure that physicians know that this is a great procedure for their patients and driving utilization installed base of lasers. So I think we have seen the level of growth that we expected, and again I'm cautious to say we are early in the turnaround process, but that is very encouraging. I would not say that we would expect to see other parts of the business in any kind of a softening or downturn mode, again the way we have driven growth in other parts of the business would be the same formal, bringing new products to the market place and to expand the patient base.

And a good example of that is what Elevate is doing. We are seeing very strong double-digit growth in a product area that hasn't had that kind of growth in the past, and it is being driven now by new products. So I don't think there is any flip-flop of anything here. I think we are very happy to see some positive performance in the laser business, and I'm starting to feel some confidence about that turn.

David Lewis – Morgan Stanley

Okay, and just maybe a follow-up question on competitive dynamics, Tony you mentioned in the quarter, are we seeing share loss or is this simply merely a little bit of trailing [ph], and if there is competition share loss, is it coming without price competition or we're seeing some evidence of price competition in continence?

Tony Bihl

I think it is too different areas. One is the men's health business. I think there are some trailing going on. There is another product out there for male continence. We don't see a lot of it, but I don't think we're naïve. We know that it is out there in the market place. We believe there is also some softening in patient volumes, perhaps early in the quarter, and in men's continence we're just going to focus on the proven formula, that is keep working with physicians, keep helping them to educate their patients, bring forward patients to understand they have alternatives for their continence and that is the formula that has worked for us, and what I say execute that is when we need to turn our attention, and clearly our sales team is very busy in that area.

On the female side, yes, there is a bit more competition, and you know I think we have mentioned in the previous quarter that there are other many slings out there in the market place, and certainly they have gotten some attention from the market. Again the reason that we feel positive about our position is we know that the combination of our Elevate product combined with our slings, we think that that is going to help us to have a very strong position going forward.

So, yes, there are people out there, but we know in this women's health business that we have always had competition, and again the formula which has worked for us is bringing new products and continued to drive focus on that. So again we are positive about the direction we're going at.

David Lewis – Morgan Stanley

Just real quickly as a follow-up to Tony’s comments Mark, in terms of gross margins as it relates to mix, it occurs to me looking over to the third and fourth quarter, if men's and women's comes back a little bit sequentially, the mix should be working for the company. Is there any reason to believe gross margins can’t be sustainable at these levels sequentially across the third and the fourth?

Mark Heggestad

Yes, I would caution that. I think between all of our capital businesses, we would expect to see a little bit more of a mix even within the businesses. We would expect to see capital [ph] with a little higher mix within the laser business. We probably expect to see consoles with the higher mix with TherMatrx and Her Option, and we're focusing on that. We need to drive those console placements to drive sustained growth long-term. So there will be some downward pressure on the gross margin in the second half of the year. I would expect to see that.

David Lewis – Morgan Stanley

Okay, thank you very much.

Tony Bihl

Okay, David.

Operator

Your next question comes from the line of Tom Gunderson.

Tom Gunderson – Piper Jaffray

Hi, good afternoon. Tom Gunderson from Piper Jaffray. Question again a little bit more granularity if you can Tony on women's health particularly in the US, you said both in answer to David and in the prepared remarks that now with the prolapse both anterior, and the new prolapse product both anterior and posterior that you expect things to pick up. When -- did you launch that in early June, was it a blended launch? How -- is there bundling going on, do you think there was a backlog, what do you mean that you think things will pick up now that you have the anterior?

Tony Bihl

You know we launched posterior late last year, and we knew at the time that that was the smaller of the volume of procedures done. We knew that anterior was the higher volume. It was something like two-thirds and one-third, anterior being higher volume. We launched very slowly through the second quarter, but I think that we saw the ramp up in June where we had more physicians on the ground, having been trained and started to do the procedures, and the response has been really fantastic to the product.

So we watched our sales growth through the quarter and clearly as June came on, we could watch what happened to the growth rates. And so it gives us a lot of confidence that the word we are hearing in the market is translating into sales growth for us. And we feel very comfortable that is continuing for us.

Tom Gunderson – Piper Jaffray

But how does that translate into continence specifically?

Tony Bihl

We know that there is a significant amount of time when a physician is dealing with pelvic floor repair or prolapse problem that they also would address continence at the same time. And so there are varying numbers out there, but order of magnitude 30% of the time, there is the potential that they are going to do a continence procedure at the same time they do pelvic floor repair.

We know that that is the strength of Monarc and MiniArc will be supported there as Elevate picks up and has more impact. We know that on a competitive front that you know, specifically one of our competitors has gone to the market with a mini sling and has a pelvic floor repair product and has gotten some traction. So now we are out in that same market and we believe that from a competitive perspective we will improve our share also.

Mark Heggestad

And Tom may be one more piece of color around our confidence as we look to the ramp up in the second half of the year on pelvic floor repair. By the end of the second quarter, we had trained about 400 physicians on the anterior approach. As we go through the third quarter, we will train at least another 500 physicians, and as we go through the fourth quarter and we will train yet another 500 physicians. So certainly that gives us a lot of upside as we look to the second half of the year.

Tom Gunderson – Piper Jaffray

Sorry, I don't want to burn my second question on this, but just to clarify that would mean that you have got at the beginning of August you pretty much got the training booked up for Q3? Is that what you're saying for 500?

Tony Bihl

Exactly. We have got a plan. We are looking for ways to free up new slots for training, because there is a very high demand for our training.

Tom Gunderson – Piper Jaffray

And then the second question would be, can you give us a quick update on the Topaz and on the anastomosis products for BPH or for prostate cancer?

Tony Bihl

Yes, not a lot of new information on Topaz. I think the last time we reported, we indicated that we had completed six-month follow-up on our initial pilot study. The results were favorable, and so we were proceeding with preparing for IDE meeting with the FDA. I think in the next month we're going to see an IDE submission and hoping to get IDE approval in the latter part of this year and begin submitting our IRB. So we are on track with the pace in Topaz. Again, the early data is very positive, and we are continuing to drive that forward. Again, Topaz is the (inaudible) post-anal sling at the fecal incontinence sling. And then continuum, I think you asked about continuum is also moving along. We received back in March FDA approval for Phase II feasibility trial and we are in the process of enrolling patients now.

So that is moving along here in the US as well as we continue to do selective number of surgeries outside the US. Again we are very much moving through the process of collecting data and supporting our submissions to the FDA.

Tom Gunderson – Piper Jaffray

Got it. Thank you.

Tony Bihl

Okay.

Operator

Your next question comes from the line of Brooks West.

Brooks West - Craig Hallum

Good afternoon guys.

Tony Bihl

Brooks, how would you doing?

Brooks West - Craig Hallum

Good. Mark, are you anticipating greater than normal summer seasonality as you look into Q3?

Mark Heggestad

No, we are looking at -- we would assume summer seasonality very similar to what we have seen in the past. And in fact if you take a look at the past few years and look at what happens from second quarter to third quarter, we would assume something very similar will happen this year.

Brooks West - Craig Hallum

Okay, but with the continued questions around the economy, you are not anticipating any greater than normal run?

Mark Heggestad

No, it means we don't see the -- we don't anticipate the economy getting significantly better or significantly worse in the second quarter or third quarter. I don't assume that will be any different than what we have seen in the past.

Brooks West - Craig Hallum

Okay, and then on the men’s health side, I know you are talking about doing some bundling as well in the ED and continence products, has that started and might you see a similar impact in that business as you anticipate on the female side?

Mark Heggestad

Well, just be careful about what we are saying there. I think what we know is that there are times when patients have both procedures done, a penile implant and artificial urinary sphincter work in AdVance. What we have been doing to co-market the product is to have community health talks that discuss both products. In fact they discuss all three, laser therapy or BPH, incontinence as well as erectile dysfunction. And you know, I think we continue to learn in those community health talks about what the patients who come to the sessions really have interest in, and you know I think what you have probably heard in the subtlety of my comments was we want to ramp up the focus of continence as part of that dialogue. So we still had very, very strong dialogue about erectile dysfunction in those meetings and we want to ramp up the focus on incontinence. We know that there is -- the rates of radical prostatectomy continues to grow, and we know that there are patients out there who had this challenge and we need to do a better job of just bringing them forward and educating them about alternatives.

Brooks West - Craig Hallum

Sorry. I know bundling is a bad word. Am I correct in thinking it is about a third of the time in both of the female and male side where you have the opportunity to co-market the products?

Tony Bihl

Not so much in the male side. It is more that way in the female side, not so much in the male side.

Brooks West - Craig Hallum

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Jayson Bedford.

Jayson Bedford - Raymond James

Hi, good evening guys.

Tony Bihl

Hi, Jayson.

Mark Heggestad

Hi, Jayson.

Jayson Bedford - Raymond James

Hi, just a couple of quick questions. First on the male continence business, just trying to figure out the difference between April, May and June. And I'm wondering do you think there was at all a kind of a catch-up from a very strong first quarter, did you see a greater competitive impact in April or May and I'm just trying to figure out what happened kind of intra-quarter and what led to the strength as you say in June?

Mark Heggestad

Yes, I think Jason, we suspect that maybe the first quarter was a little stronger, and the second quarter was a little weaker than the two might have been. You know, we are continuing to look at that because you remember we had very, very strong first quarter. April started off a bit softer, and we were wondering what was happening there from an outpatient volume perspective. We did see a bit of a pickup as the quarter went on, but again I think our focus is continuing to do the community health talks and continue to drive the patient education, because you know, we know that proven formula. We have got to bring that patients out. We had to get them educated and I think what we -- I think as we look back on it, we think perhaps we need a bit more attention in that area around continence. We had had a lot of success in erectile dysfunction and as I mentioned the growth rates there have proven that. You know by putting a lot of focus in that area, we have been able to really see a lot more patients coming forward and being able to see solidity in the growth rates in that area and even some improvements in growth rates in that area. So we're going to apply that same formula more diligently in the continence area.

Jayson Bedford - Raymond James

And you mentioned you have not seen much from the competitor out there, did you see trailing at all in April or May and did you not see it in June. Is that fair?

Mark Heggestad

No, I guess I would say we have seen the trailing. I'm not sure I can tell you exactly which month in the quarter we saw it, but clearly there is some trailing going on. You know our insights about how many doctors are doing the trailing probably tell us the numbers are not huge, but again you know the last thing we do is underestimate a competitor in the marketplace. So we're keeping our eyes wide open here. We're touching base with our physicians. We're making sure that they understand and remember why it is that they are using the AdVance product, and why it is that AMS is the leader in continence in men’s health, and that is very simple. We have the history; we have the clinical data et cetera. So we got to do the good old blocking and tackling to make sure we hold on to our market. And we will do that at a time when a competitor is coming to the market. That is just normal business and it is something we will do. But again we haven't seen a lot of trailing, but there were some level of activity.

Jayson Bedford - Raymond James

Okay, that is fair and just my last question was on the GreenLight business, you know obviously it was strong in the quarter and that it actually grew, I'm just wondering can you pinpoint as to what you attribute the growth to, was this more a function of the new initiatives such as one AMS, or are you able to track referrals there or is it more of a weakened competitor dynamic that is helping you?

Tony Bihl

I think it is -- I think the formula we described having an increased number of salespeople focused on talking to physicians about the procedure is clearly got to be the answer there. I think certainly the one AMS, I get fairly regular e-mails from our sales force, who talk about one of our reps who introduces another of our reps to a long-standing physician who has been supportive of AMS and has the opportunity to help them understand the procedure. I think that is having some impact and I think the number of people on the ground are having an impact, but the good news is what we believed about the business, which was we had the strongest procedure. It is proven out of the marketplace. If we get in front of the physicians, we are clearly increasing utilization of the existing consoles, and getting more patients treated with GreenLight.

Jayson Bedford - Raymond James

Thank you.

Tony Bihl

I don't think there's any one element of it. I think it is a multiple, but I think really clearly was an increase in focus sales effort and an increase in number of salespeople driving procedure growth.

Operator

Your next question comes from the line of Tycho Peterson.

Jane - JP Morgan

Hi, this is Jane [ph] for Tycho. Thanks for taking the questions. Just going back to BPH again, in terms of would you be able to provide more color kind of on the sales infrastructure internationally, whether -- is there any updates there?

Tony Bihl

No, I think our focus internationally has been again in countries, let us say in the four countries of Europe it has been to get all of our sales reps talking about all of our product lines, and very simply because it is a small number of sales reps, it is difficult to have so terribly much specialization in some countries around Europe. And we are continuing to drive that. We are continuing to drive the education process, and I think we're having some positive effect of that. I mentioned today that we saw some growth in Latin America and Asia. Part of that is -- again we have gotten some approvals in various parts of Latin America, but we have also seen through some good success in educating in the marketplace where there is an up-tick in Latin America. And then in China we are seeing some increased interest in the HPS system. So in all those markets we are seeing some positive growth.

Jane - JP Morgan

Okay, and in terms of you talked about 10% of the R&D, invest 10% of R&D, 10% of your sales in R&D. Would you mind giving us some highlights as to, either talk about some of the products in the pipeline, but you know what your priorities are as far as timelines are concerned, investment dollar et cetera?

Tony Bihl

Yes, what we talked about earlier in terms of Topaz, continuum, Excessa [ph], those are products that we know a little bit longer term in terms of when they will deliver revenues. In terms of the approval processes, the clinical trials required et cetera. So those have a longer term view. In the shorter term, in each of our business areas, there is a product cadence of new products. I want go into any great details for competitive reasons on those, but if you look at the history at AMS. We take the technology and we edge it out a little bit further with each passing year and that we continue to do.

The Elevate product launch is a good example of that and I think you should expect in each of our product areas that we continue with cadence of improvements in the existing products aimed at addressing things that physicians tells us they need the product to do. I don't want to go into details in any of the individual product areas though for competitive reasons.

Jane - JP Morgan

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Jonathan Block.

Jonathan Block - SunTrust Robinson Humphrey

Hi guys, good afternoon.

Tony Bihl

Hi, Jonathan.

Jonathan Block - SunTrust Robinson Humphrey

It may be just the first question on the male side in terms of competition. Maybe you can share with us your thoughts on the product, what do you hearing, does it differ from your sling in any way? How is it being priced, and then if you can remind us out of your male incontinence, I believe advances may be 50% of volume, but is it much less than that in terms of revenue dollars?

Mark Heggestad

Well, you know in terms of the competitive product, we haven't seen a lot of the competitive products out in the marketplace, and I would rather -- rather than rattle through what the differences might be between our two products, we focus on the fact that we have been on the market at that time we have, we have the clinical data and we can walk through features and benefits with our customers around that, with physicians around that.

I think that what we're finding and what we will find is a competitor that has one product will try to apply that product across the whole series of incontinence both severe to mild and moderate incontinence, you know our focus is to continue to reinforce the point that AMS has the AUS for those severe incontinence and for mild to moderate have AdVance. We have got clinical data. We have got a procedure that has been fine tuned in the marketplace. It has been fine tuned with many, many patients, and you know that is a foundation that doctors will rely on, because it has been out there for a time.

In terms of the size of the AdVance business versus the dance business versus the artificial urinary sprinter.

Tony Bihl

I can handle that one Jonathan. About a quarter of our male continence revenue is coming from the sling right now. Obviously the majority of the rest of it comes from our artificial urinary sprinter, but we do have a couple of other product lines that effort to take up a small piece, (inaudible).

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. And then just on the follow up. And Tony, it seems like you have done a great job in a short period of time on the fiber, and I guess this builds on an earlier question, the numbers were very impressive. How much of that is current accounts? How much of that is do you think market share gains. Is there anyone out there specifically that you think is struggling or you are able to pick up a decent amount of share from?

Tony Bihl

Yes, great question. I think a considerable amount of it is our current physicians that we are help them to understand that they can use this procedure more broadly. That said our focus has been to be able to take to convert TURP accounts to GreenLight. So yes we're picking up some competitors perhaps in the case where some folks who have done the procedure in the physician's office have discovered that's really not the place they wanted to do the procedure. You find that they come back to GreenLight and that's been positive for us, but again we think there is a big broad market of TURP users out there, who really want to focus on converting and that's been external concentration. So we want to go deeper penetration with existing docs and we want to move broader and get those physicians who are doing TURPS to convert the GreenLight and that's been I think the biggest part of our growth rather.

Jonathan Block - SunTrust Robinson Humphrey

Great, thanks guys.

Operator

Your next question comes from the line of Tom Kouchoukos.

Tom Kouchoukos - Stifel Nicolaus

Hi, Tony. Hi, Mark.

Tony Bihl

Hi, Tom.

Tom Kouchoukos - Stifel Nicolaus

Hi, thanks for taking my question. Just two kind of on the international front, one I noticed just in your press release it looks like the international sales on a constant currency basis outpaced the US pretty substantially and I'm just wondering, is there anything you are doing differently or these your kind of US initiatives you talked about that in the last year to started to take hold a little more in the marketplace?

Tony Bihl

I think, generally speaking if you look over time the growth outside the US has been a bit fascinating -- US for probably a couple of years anyway and that's just really a condition where we have a smaller business outside the US. 30% of our revenue coming from outside the US and we been able to have -- to see factor growth as we are move into new markets there. But clearly, I think we also want to, you know, our organization will take credit for, you know, getting a bit more traction in markets, and, you know, I think our focus I think our focus in Europe, Middle East, and Africa, and our focus in Latin America and Asia Pacific are having -- is having something of a positive effect, you know, also that we're preparing ourselves to go to Japan and, you know, we are hoping that in the not so distant future, we start to hear back from the Japanese authorities about product approvals. So, you know, we are optimistic about what's happening outside the US. It's a big open market opportunity, helps us balance risk and we will continue to drive it.

Tom Kouchoukos - Stifel Nicolaus

Okay. And actually, you kind of touched on my follow up here. I know there's been some, I don't know if it is cooperation between US and Japan recently about, maybe speeding up their approval process and I'm wondering, you know, how that could affect you guys going forward or they kind of set the stone from your timeline as you see here today.

Tony Bihl

No. Clearly, we have seen signs of that. We have seen responses coming back from our submissions, from the authorities in Japan, the PMDA and others to be really moving in a much faster rate than many of our experiences were in the past. And so that's been very pleasant for us and caused us to have to be ready faster and to be giving our replies to the agencies more quickly. So definitely positive signs in terms of response from the Japanese authorities, and we are not cast in stone if we get approvals faster we be in the market faster. I think that's -- you know, we're clearly interested in that market. We're highly motivated by early signs of interest in our products in that market and you know, as we get in an orderly way, we are beginning to prepare ourselves to have staff on the ground to lead our country operations in Japan. We'll be doing that over the next couple of quarters here and, you know, as we get better more feedback about when we will have product approvals, we will prepare ourselves for some commercial ramp ups.

Tom Kouchoukos - Stifel Nicolaus

Okay, Tony, one last one. I don't want to hold it to a timeline in terms of approval date or things like that. But can you maybe talk about what products you could see first come out in that market.

Tony Bihl

Yes, our intention is artificial urinary sphincter would be first. That's the product that's likely to have approval first and is on that path right now. Behind that we have GreenLight and Monarc and we are diligently in the process on both of those, although somewhat early in the process. There are multiple realms of questions that you go through in these approvals and we have gone through, you know, for example in GreenLight the first round anyway, and there could be up to seven more rounds of questions come to us. So, you know, we're -- our focus is get our responses back as quickly as possible and be ready for the authorities in Japan to bring their questions to us and to keep moving through the approval process. So the AUS first and we hope it is not too many months out that we have that approval.

Tom Kouchoukos - Stifel Nicolaus

Okay. Thanks a lot.

Tony Bihl

Very good.

Operator

Your next question comes from the line of James Sidoti.

James Sidoti - Sidoti & Company

Good morning, Mark -- I'm sorry good afternoon. Can you here me?

Tony Bihl

We can here you, John.

James Sidoti - Sidoti & Company

Just -- I just want to be clear, overall (inaudible) fails including consults. Were they flat? Were they down a little, up a little on a reported basis?

Tony Bihl

On a reported basis, laser therapy only is that what you're asking?

James Sidoti - Sidoti & Company

Right.

Tony Bihl

Laser therapy only was up a little, yes.

James Sidoti - Sidoti & Company

Okay, it was up single digits and fibers were up mid-single digits?

Tony Bihl

Right. Fibers were up double digits.

James Sidoti - Sidoti & Company

The fibers were up double digits.

Tony Bihl

Right, and so the message with laser therapy is the capital market is affecting console sales, we did see some console sales improvement in the quarter outside the US as we moved into some markets internationally. We mentioned Latin America and Asia-Pacific. But from a fiber perspective, you know, that's the focus of utilization of procedures. We saw double-digit growth in that area, and in terms of the fiber sales in the US it is the second quarter -- second consecutive quarter where we are seeing double-digit growth in fibers.

James Sidoti - Sidoti & Company

So, just the big picture for the quarter was laser scopes seemed okay. Now erectile dysfunction seemed okay. It was really female continence and or would have been of the male continence products that were really the surprises that occurred?

Tony Bihl

I think I'd characterize it as strength in the first three, strength in the laser business, strength in the pelvic floor repair prolapse business, and strength in the erectile restoration. Those were all areas that we are pleased with the outcomes and the results, and then certainly in the continence areas those are areas that we have some opportunities to make some improvements.

James Sidoti - Sidoti & Company

Okay, and more so on the female than in the male or --

Tony Bihl

Well, I wouldn't single them out. I think it's probably both areas. I think as we mentioned in the female continence area, we think that probably we are to see some improvements simply because of bringing Elevate and those two procedures are often done concomitantly and we hope that we see some pickup in female continents simply for that reason. That's positive. On the male continent side, you know we got to continue to go out and increase patient flow by increasing the awareness of the alternatives. So I don't think Jim I'd pick either one out as a lesser challenge.

James Sidoti - Sidoti & Company

Okay, and then just on the cash flow Mark, you are on pace to spend about $5 million to $6 million this year in CapEx, down a little bit from last year. Is that going to be the normal run rate going forward?

Tony Bihl

Yes, I mean I would probably assume it's around $10 million on a go forward basis and then obviously as time goes on there are always a few specific items. You know, if we either have to increase from a facility standpoint, if we have to put in a new ERP system. You know if you look at opportunities offshore et cetera. But on an ongoing basis, you know it's probably around $10 million, not much more than that.

James Sidoti - Sidoti & Company

Okay, did you give free cash flow guidance for the quarter, I mean for the year?

Mark Heggestad

No, I didn’t -- of the top of my head, our operating cash flow was $31 million and again we spent very little on CapEx.

James Sidoti - Sidoti & Company

And for the year, have you given guidance for free cash flow?

Mark Heggestad

Not for free cash flow. We've indicated that we intend to pay down about $95 million on debt for the year.

James Sidoti - Sidoti & Company

Okay, so free cash flow will be at least that high or close to that.

Mark Heggestad

Correct.

James Sidoti - Sidoti & Company

Okay, thank you.

Operator

Your next question comes from the line of Brooks West.

Brooks West – Craig Hallum

Mark, you kind of answered this with the last statement but on the last call you had said debt paid down of 85 to 95, now you are saying 90 to 95, so kind of tightening that up. Any kind of upside to that based on current trends, or that's where you're sticking right at 95.

Mark Heggestad

Yes, I mean we're sticking at 95, I will say at the current -- I currently have a lot of confidence in paying of $95 million debt this year.

Brooks West – Craig Hallum

Okay, great. Thanks guys.

Operator

There are no further questions at this time. Do you have any closing remarks?

Tony Bihl

Yes, I do Shana. Thank you. So first of all again thank you all for joining us on the call today and for your continued interest in American Medical Systems. You know, we believe our diverse portfolio products will maintain strong leadership positions, and we'll continue to take the actions necessary to maintain our leadership, including our focus on sales execution, leveraging our cost structure, generating cash flow and paying down our debts. So thank you again. We look forward to talking to you again at the end of next quarter. Bye now.

Operator

This concludes today's conference call. You may now disconnect.

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Source: American Medical Systems Holdings, Inc. Q2 2009 Earnings Call Transcript
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