AngioDynamics' CEO Discusses F3Q2014 Results - Earnings Call Transcript

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 |  About: AngioDynamics, Inc. (ANGO)
by: SA Transcripts

AngioDynamics, Inc. (NASDAQ:ANGO)

F3Q2014 Earnings Conference Call

April 9, 2014 04:30 PM ET

Executives

Joseph M. DeVivo - CEO, President and Director

Mark T. Frost - CFO, EVP and Treasurer

Robert Jones - IR, EVC Group, Inc.

Analysts

Charles Haff - Craig-Hallum Capital Group

Thomas Gunderson - Piper Jaffray

Jayson Bedford - Raymond James & Associates, Inc.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics Third Quarter Fiscal 2014 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday April 9, 2014.

And I’d now like to turn the conference over to Bob Jones, Investor Relations. Please go ahead, sir.

Robert Jones

Thank you, Britney. Welcome everyone and thank you for joining us for AngioDynamics' conference call this afternoon to review the financial results for the fiscal 2014 third quarter, which ended on February 28, 2014. The news release is available on AngioDynamics' website at www.angiodynamics.com. A replay of this call will be archived on the Company's website.

Before we get started, during the course of this conference call, the Company will make projections and forward-looking statements regarding future events, including statements about revenue and earnings for the fiscal 2014 fourth quarter and full-year ending May 31. 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 the actual results or events to differ materially from those described in forward-looking statements.

Finally, during the question-and-answer period today, we’d 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.

And with that, I’d now like to turn the call over to Joe DeVivo, Chief Executive Officer.

Joseph M. DeVivo

Thank you, Bob. Welcome ladies and gentlemen to our third quarter AngioDynamics conference call. I’m very pleased to report a very strong revenue performance for the entire AngioDynamics team this quarter.

Last quarter two of our four businesses, PV and Oncology grew while International was flat and VA made progress, Vascular Access, from the preceding quarter, but was still declining at 4% year-over-year. This quarter, each of our four reporting P&L businesses, Peripheral Vascular, Oncology, Vascular Access, and International grew for an aggregate worldwide top line of 8%. It will be 9% net our OEM supply agreement.

Each quarter, I keep telling you that I look forward to growing our Vascular Access business as when it does, we should be at a real middle-single digit grower. Well that time has arrived. We delivered 3% growth in Vascular Access business, a 7% improvement over last quarter alone.

I believe that growth and better growth in the future is now here to stay. I believe we have a long runway with our key growth drivers in NanoKnife, BioFlo, EVLT, and AngioVac in both the development of new markets as well as driving market share through increased penetration in competition.

While we still have businesses which will float with the overall economy, a greater portion of our growth is in our control, and I believe shines a bright future for AngioDynamics. Each quarter, we enjoy the benefit of the investment that we’ve made to fuel growth.

I like to review several highlights this quarter to provide more detail and color on them for you. So starting off, Vascular Access. BioFlo in my view is winning. Today, BioFlo is now over 40% of our worldwide PICCs, driving our Vascular Access business to the first quarter growth in the last two years. More data keeps coming up, and we’re excited for the upcoming INS Meeting where another new set of data will again show meaningful reductions in Deep Vein Thrombosis rates in upper extremity, Deep Vein Thrombosis as well as more detailed cost savings in the administration of Cathflo tPA, something nurses use to clear clots out of catheters.

Some accounts are seeing up to a 75% reduction in the use of this agent, which is used to reduce those clots, and also which makes hospitals more profitable when it’s used less and that cost is avoided. Our BioFlo ports are also beginning to show similar benefit in reduction of occlusion rates as well as reduction of Cathflo tPA usage as it does in PICCs. We are now seeing a meaningful uptick in port revenues due to BioFlo and believe this is just the beginning.

We also have initiated our clinical market evaluations at seven sites in the U.S and Canada using DuraMax BioFlo Dialysis Catheters and look forward to seeing similar clinical success. Over the next six months, we expect BioFlo Ports and Dialysis Catheters to deliver growth to the Vascular Access category.

BioFlo does translate into market success, and we’re winning new accounts, winning IDN awards, and we will make our best efforts in the near future to make headway in the GPO arena, which is entirely new for AngioDynamics’ Vascular Access. The market share leader enjoys a virtual monopoly of Sole-Source GPO agreements given their considerable market clout and leverage used across multiple categories.

We hope BioFlo PICCs, Ports, and Dialysis Catheters will actually prove so valuable to our direct customers and patients, that putting patients first will be our best shot to overcome these Sole-Source agreements. In the GPO arena, it will be a very interesting year for AngioDynamics.

Staying in Vascular Access, you’re all aware we acquired Medcomp’s right to the Celerity tip-location platform following an unfavorable FDA decision on Medcomp’s 510(k). Since that time and under our team’s leadership, we’ve completed all the necessary work and quickly filed an adjunctive 510(k) claim for the Celerity just about two weeks ago. If all goes well, we’d expect a positive decision by the end of June.

We’ve also initiated a human-factor study to yield a specific claim and are accruing candidates now. We should have that study completed in April and filed by the end of May. A successful result will give that claim to us in the end of August. We believe it was the right decision to acquire the rights to gain control of the technology today. It cost us a bit, and we will need to build an inventory before we receive FDA clearance, but it will prove worthy as we will hit the ground running at clearance.

Also, once we complete the trial for Celerity 1.0, we should immediately launch the trial for the next generation Celerity 3.0 system. This is all another piece of good news, which will help us grow this category for the balance of the calendar year.

Moving to Oncology, we’re making great clinical progress in both of our U.S as well as our European safety studies for use of NanoKnife in the prostate. Last month, we accrued our first patient in the U.S IDE prostate safety study and will soon complete enrollment for the European prostate safety study. I’m excited our U.S IDE is underway and also very excited to view the European data as it’s designed as an ablatent resect study, so we will had a cash of histology data to view.

This should prove a valuable foundation in understanding how well IRE works in the prostate giving scientist valuable data. Soon thereafter, a 200-patient pivotal study will begin in Europe. Building on clinical evidence for pancreas, we’re very pleased that data out of the University of Miami and lead investigator, Dr. Raj , affectionately called Dr. Raj was accepted as an abstract at the American Society of Clinical Oncology or ASCO, the world’s largest oncology meeting.

Thousands of abstracts get reviewed and only a few accepted, so this is a great honor. The abstract entitled percutaneous irreversible electroporation, IRE in management of pancreatic cancer reviews the clinical experience of pancreas patients who receive IRE at the University of Miami. This data will be fully searchable on ASCO’s website as of May 14. For the rest of the Oncology business, the category grew 16% overall and we continue our positive momentum with microwaves, of course NanoKnife, and RF sales.

In Peripheral Vascular, it’s not bad when your largest business is now growing 11% worldwide. We had a 20% growth quarter with EVLT, and the whole category performed. Our AngioVac revenue for the quarter was $2.2 million and below our expectations for the quarter. We had a very interesting quarter as it was the first time sales in new accounts leveled off, while procedure volume dramatically increased.

During the quarter, we made efforts to focus on same-store sales and drive utilization. Now that paid off for us in a big way as we grew procedures by 80% quarter-over-quarter. That actually was so impactful that in the final weeks of the quarter, weekly procedures performed were more than double the first few weeks of the quarter. That clinical ramp is continuing into the fourth quarter where we’ve already booked $1 million in AngioVac revenue in March alone.

The third quarter AngioVac revenue will have us come in under our $10 million target by about $1 million, but its still a great result given we only just received our thrombus claim albeit nine months late, and we’re just now booking European revenues also nine months late getting our CE clearance. Frankly I’m thrilled with the performance of AngioVac on the ground with our team and remain terribly excited to the continued revenue and margin expansion it will give the Company.

Today we’re in over 238 accounts for the AngioVac, 12% of the cardiac accounts in the U.S. We still had a long runway in growing our account penetration. So remember, AngioVac is also in the same bag of the same sales people who are growing EVLT 20%, driving fluid management, growing AngioVac, -- angiographic catheters and overall top line PV growth in the U.S of 13% last quarter. This team has a day job while they’re placing a new trial with AngioVac and they’re doing a hell of a job.

Our International team is still in transition as John Soto was dug in and made some changes. I’m pleased that they return to a positive revenue growth of 7% in the third quarter. We have greater expectations in that, out of the international market and it will take us several quarters to allow for our changes to take hold. Like in the U.S., we will fix this and get excellent growth in the future.

Moving to our litigation with biolitec, as you’re aware we’re continuing to pursue our indemnification and damage claims against biolitec’s foreign parent and CEO personally. We’ve now not only successfully won the Massachusetts case; we were awarded treble damages equal to 74.9 million. Our Company has been in the right and we will continue to aggressively pursue all available path and remedies to recoup this damage that they’ve done to our Company. We will update you when we hit our next milestone.

The next, I’d like to highlight two major accomplishments this quarter regarding our operational excellence program. First, at the end of January, we successfully flip the switch on our new Oracle instance. Today the Company and all of its global locations are operating on a singular platform and we’re in the early stage of now getting this system to deliver value.

As in any new implementation, we’re still in the implementation phase. We have some service delays; we have built some inventory and a little bit of a back order. But everyday is getting better; we believe we should be operating quite well by the end of the quarter and begin to see synergies delivered in early 2015.

We also completed the first step of our New York operations consolidation by moving our Glens Falls distribution facility to our Queensberry distribution center of excellence. Today, we’re now operating out of one global distribution center and that has now created the space for building a new clean room in Glens Falls. Once successfully completed, we’ll begin to move production line to Glens Falls over the next year. Each of these activities coupled with the growing higher margin products, will deliver stronger profitability for the Company and the upcoming fiscal year.

Also, our Queensberry facility which is still under an FDA warning letter had a very successful re-inspection by FDA recently, which resulted in no repeat 483 observations. It serves as an incredible example of the tenacity of our entire team to remediate the issues and deliver on the commitments that we made to FDA and of course our investors.

We are hopeful that inspection will lead to our ability to begin again registering products from this facility internationally, which has impaired some of the international growth and also the listing of the overall warning letter. We'll keep you informed when this is accomplished as it will be a great sign of improved international sales growth by the end of the calendar year.

Regarding our overall financial performance, maintaining our focus on revenue growth creates the momentum to accelerate our earnings and cash generation. Today we are temporarily behind on delivering that operating leverage as Mark will show you in a moment we’re dead on our operating expenses and making progress on our operations efficiency initiatives. But it had some negative mix in the quarter regionally and product wise that should run through the balance of the year.

Operationally this negative mix masks some of the great strides our operations team has made in improving our efficiency as responsible. I firmly believe this negative mix is temporary and will resolve itself, especially with the positive momentum on the top line that we’re experiencing.

So with that, I will turn it over to Mark.

Mark T. Frost

Thank you, Joe, and good afternoon, ladies and gentlemen. As Joe indicated, we continued to deliver improved revenue growth driven by a focused sales effort and the increased market acceptance of our new products AngioVac, BioFlo and Microwave. As you also saw, our earnings leverage is taking a little longer to catch up and we did have some ERP implementation impact on the cash front, which we will explain later in the call.

I'll start with our quarter results and then move to guidance for both the fourth quarter and the full fiscal year. Total revenue was up 8% from the prior fiscal year, but excluding the impact of the planned wind down of our supply agreement, we were 9% higher than the prior fiscal year. In the quarter we did benefit from extra sales day, which we estimate contributed about 2% of the growth. The sales quarterly trend line is demonstrating progressive improvement from negative 1% in the quarter for 2013 to 1% growth in quarter one, 3% growth last quarter and 7% in the third quarter without the extra sales day.

Turning to product performance, our Peripheral Vascular business grew 11% to $47.4 million, reflecting continued 20% growth in EVLT and a larger contribution from AngioVac. AngioVac did slow its growth trajectory to $2.2 million, but for understandable reason as Joe articulated.

EVLT strong results were driven once again by exceptional U.S. performance and the conversion of a competitive customer. Our Vascular Access business delivered a strong turnaround, improving by 7% sequentially from the prior quarter and 3% growth compared to the prior fiscal year’s third quarter. All three products PICCs, Ports and Dialysis grew with PICCs and Ports at 5%.BioFlo Technology as Joe commented was the key driver behind both PICCs and Ports improvements.

In the Oncology/Surgery business, growth rebounded to a double-digit level of 15% over the last fiscal year’s third quarter. NanoKnife sales increased 35% primarily because of International and overall thermal ablation fueled by strong U.S microwave results grew 17%.

From a geography perspective, U.S. revenue increased 10%, while the international markets modestly improved to 7% growth. The U.S growth was very encouraging and demonstrate both the success of our growth drivers and the fact that we have overcome our sales integration issues from 2013. With new leadership and a strategic growth plan in place, we are encouraged by performance outside the U.S. However, our international business is a work in progress. We are more likely to see consistent sustained performance when we move into fiscal year 2015.

Now continuing down the quarter’s income statement, adjusted gross profit excluding the inventory step up and QCA -- QCTA costs totaled $45.7 million or 51.8%, which is a 110 basis point improvement over our second quarter and an 80 basis point increase over the same quarter in the prior year. Our gross margin return was slightly lower than expected, primarily because of the product mix as AngioVac and Oncology were lower and supply agreement shipments were greater than anticipated.

We expect this negative mix impact will continue into our fourth quarter as well as the impact of incurring higher rebate admin fees, which I discussed last quarter. These factors are the primary reason that while we are raising our revenue guidance, we’re lowering our adjusted EPS guidance. I'll go into more depth when I discuss our guidance on this point.

Now turning to expenses. Operating expenses totaled $38.1 million, including $3 million of acquisition, integration and restructuring items, of which $1.3 million is associated with the Navilyst acquisition, and a $1 million relates to our operational excellence program. Included in our expenses was a non-operational $5 million gain from reducing the AngioVac contingent liability. The liability is reported at fair value each quarter based on expected AngioVac sales over the earn-out period, which is 10 years from the date of acquisition.

We continue to have significant comments in the future of AngioVac. However, any delays in our revenue expectations over that finite 10-year period, will reduce the fair value valuation of the liability. However, incorporating contingency mechanisms was a key part of our M&A strategy to design risk projection for us, while also enabling upside opportunity performance for our counterparties.

Sales and marketing expenses increased $2.2 million primarily from the need to accrue for the over achievement in the U.S sales side as well as our continued investment in the AngioVac clinical specialist team, and the cost of same new sales territories we added in the first half.

Another point which I communicate last call is we experience significant sales attrition during the first half of fiscal year 2013, which artificially reduced the run rate, particularly for quarters two and three. An important issue though in relation to our sales marketing costs is the impact of our geographic revenue mix where we’ve over achieved on the U.S front, but under achieved on the International side versus our original operating plan.

The variable compensation component for International is limited, but high on the U.S side. So as a result, we do not gain any cost leverage for the International business, but have negative leverage for the U.S business. This is a secondary reason for reducing our adjusted EPS guidance.

Now as announced in December, we began the next phase of integration on the operations side of our business. We achieved two key milestones as Joe communicated, since that announcement. We went live on ERP system in January and consolidated our warehouse operations into one Center of excellence in March. Both activities were challenging, particularly the ERP implementation and have led to some operational volatility as Joe indicated, especially in product shipment.

However, we’re systemically working out the issues and are making good progress. A positive outcome of the ERP implementation is the improvement in transparency thus provides into our business, which we expect will add significant value as we are able to accelerate and improve decision-making from the expanded information. These actions have already led to some savings, but as I indicated in the last call, most of the $15 million to $18 million cost savings or 400 to 500 basis points gross margin improvement will take place over fiscal year 15 to 17.

We will have more color on the expected impact for 2015 on our next call in July. Now GAAP income per share results improved the $0.14 versus negative $0.03 in the fiscal 2013 third quarter. Pro Forma adjusted EPS excluding amortization with $0.16 for share even with the prior year’s fiscal 2013 comparable quarter.

The GAAP to non-GAAP reconciliation items are detailed in the earnings tables in the quarter’s news release. Now EBITDA more than doubled to $14 million or $0.39 a share for a $6.5 million or $0.18 a share in the prior year third quarter. Adjusted EBITDA was $14.6 million or $0.41 a share versus $13.7 million or $0. 39 per share. Again a detailed reconciliation is provided in our news release.

Now looking at cash, a consequence of the ERP implementation was a temporary build of working capital, specifically receivables. We experienced some earning curve issues and therefore our billing was delayed which led to a $9 million increase in receivables. Our operating cash as a result declined $0.06 million. We expect to catch up our collections for the most part within the fourth quarter and anticipate a return to strong cash generation.

Our cash balance was reduced to $9.2 million, reflecting the working capital build and a micro sue list $5 million earn-out payment. We ended the quarter with $138.9 million of debt outstanding.

I will now turn to the discussion of our guidance for fiscal year 2014. For fiscal year 2014, we’re raising a revenue guidance from $349 to $353 million to $351 million to $355 million, which is 4% growth at the top end. Our upward revision is driven primarily by stronger sales results in the U.S., reflecting the positive impact of our growth drivers.

On the earnings side, we’re slightly reducing our full-year guidance from $0.63 to $0.67 and expect adjusted EPS excluding amortization to range from $0.60 to $0.63. There are three reasons for the reduction in our range. The first is the impact of negative product mix where our Oncology and AngioVac product lines, our highest gross margin products will come in below our original operating plan, while sales from our supply agreement which is our lowest margin product are expected to be higher than our original plan. This mix will lower our gross margin expectation to about a 40 to 50 basis point adjusted gross margin improvement or 170 to 180 basis point GAAP gross margin improvement as compared to fiscal 2013.

The second reason is the geographic cost mix issue. We’re expected to attain operating cost leverage as communicated in the last call to cover the gross margins short fall. We actually have seen negative cost leverage on the U.S. sales side because of the higher variable commission cost component as I explained earlier. The third reason is the recently announced Medcomp Agreement which will create extra R&D and clinical cost reducing our EPS by about a $0.01.

One important point though is we are seeing now overall leverage as our adjusted operating returns have improved each quarter and now stand at 12.2% up from 9.9% in the first quarter. While it is taking a little longer to accelerate the leverage from higher revenue we do believe we will realize further operating leverage in the future.

Now for cash guidance we are reducing our expectations for operating cash improvement because of the adjusted EPS provision the ERP impact is well at the Medcomp deal an inventory requirement associated with it, and expect the operating cash to improve by 15% to 20% versus the prior fiscal year and free cash flow is accordingly expected to improve by about 30% to 40% above the prior fiscal year. On the adjusted EBITDA front we revised our range because of the EPS reduction to $54 million to $57 million.

Now turning to fiscal year fourth quarter guidance, we are guiding to a revenue range of $91 million to $95 million, 6% at the top end of the range but an 8% on an average daily sales basis as we’re loosing a day in our fiscal fourth quarter. Adjusted EPS excluding amortization is expected to improve from quarter three and be in the range of $0.18 to $0.21.

So with that, I’ll turn the call back to Joe for his final comments. Joe.

Joseph M. DeVivo

Thank you, Mark. I just realized, I didn’t write down your full last name and title. So, Mark Frost our Chief Financial Officer, so I apologize for that. It's so casual here, a pleasure to work with you.

So our plans are to rebuild our -- our plan to rebuild our top-line are working. Our growth drivers continue to deliver and our entire team continues to hit their mark. The plan we laid out for growth in each of our businesses is progressing as we’re focusing on execution on both the top and bottom lines. But I believe that we will exit this year at that 5% growth that we’ve been targeting and I believe we should have every opportunity to not look back from there. As we drive our top-line, we will leverage the bottom-line and make AngioDynamics a wonderful valuable company for investors and we very much appreciate your support going forward.

So with that operator, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Charles Haff with Craig-Hallum. Please go ahead.

Charles Haff - Craig-Hallum Capital Group

Hi, thanks for taking my question. I had a question for you about your revenue guidance which appears to be going up a little bit, a little more than the beat that you had this quarter. I am getting calls from investors with concerns about bad weather. Some of the hospitals are saying they have mixed surgical volumes versus their prior expectations. I am just wondering, how much kind of conservatism or how much are you concerned about some of these bad weather issues that happened in March and so forth in terms of your revenue guidance?

Joseph M. DeVivo

Yes. So weather in -- so third quarter is December, January, and February, and weather was an issue. We don’t see it as much of an issue in March, but it was most certainly an issue in January and February. There were times, I think our sales teams had reported up that East-Coast and Mid-West we lost anywhere between three and six days of elective procedures. But we all -- we think we’ll catch it up in the fourth quarter. We don’t believe weather will impact, anything that has been done from March is a function of our current revenue guidance, but I will tell you that I believe we would have add an even better third quarter if it wasn’t for weather. So, I wouldn’t be surprised if other companies especially those reporting January, February, March are going to be lamenting a really tough winter.

Charles Haff - Craig-Hallum Capital Group

Okay, great. And then, Joe you mentioned you were winning some IDN contracts and expect some good GPO news in the future. Obviously, you probably don’t want to mention names, but can you kind of characterize what type of wins those would be. Would those be BioFlo wins or will those be your whole product set or how should we kind of think about the magnitude and the potential impacts for those wins in the future?

Joseph M. DeVivo

Well, right now the main crux of our focus is in the Vascular Access category, and so there are PICC contracts, port contracts coming up. We have been sitting in the last couple of years talking about the fact that we’re loosing customers in Vascular Access tip-location. Tip-location of course is an issue for growing some new business, but BioFlo is proving out hospital-after-hospitals who’re doing their evaluations are seeing the same type of clinical benefit that the original hospitals have had, and that is creating a stickiness. ‘A’ we’re not loosing accounts anymore and ‘B’, we are converting accounts, we have a line of sight on a whole laundry list of them. And yet, there are times now where AngioDynamics historically has not been in for Vascular Access, the GPO conversation today, buttressed by not only having BioFlo and seeing the benefits and it being a proprietary technology that no one else has, but coupled with the fact that the acquisition of Navilyst is paying off in States which not only delivered us BioFlo, but also a very complete product line offering. So when we now go into GPO conversations and IDN conversations, we’re not trying to carve out this product or that product because we don’t have it. We can convert out any competitor lock, stock, and barrel and that makes us formidable now. So, we don’t guide to -- in our guidance, it doesn’t represent expected wins. In our guidance, it's purely what's in hand and what we think we can accomplish with what we have. Some of these arrangements could be very meaningful, but I also want to be cautious because the incumbent competitors are incredibly powerful. They use a lot of their market cloud, especially even in other businesses to make sure that small companies don’t, at times can compete head-to-head. So, we’ll see how that all plays out. But I’ll tell you, this is our time. Right now, we're -- there’s no reason why we can’t make an impact. We have brought on and promoted some of our best sales executives into the corporate accounts part of our business, and I am terribly pleased with each one of their efforts as they’re representing our company very well, and it’s an upside. As I look at a growth driver from a product standpoint, there’s a growth driver from our corporate strategy of coming up with the complete product line and bringing in great technology, so the ability to satisfy competitively this category which has virtually been a monopoly for a competitor I think is now fair game.

Charles Haff - Craig-Hallum Capital Group

Okay, great. And then one more question, I’ll jump back in queue I have other questions, but I’ll re-queue for those. In terms of NanoKnife congratulations on the IDE. One; we haven't heard about NanoKnife in a big way for a while from your company. One of the concerns that I hear from investors is how much money are you willing to put into this product at this juncture given the fact that you’ve put a lot in already. How should we think about the work that you’re doing from a capital allocation standpoint over the next couple of years; it might be helpful to just kind of put that in context. Thank you.

Joseph M. DeVivo

Thank you very much Charles for the question. I think I mentioned in the past that we have -- historically in the past there was I guess there was a substantial investment -- almost an over investment in NanoKnife to the Dutchmen of other businesses. Within our operating businesses we have now created a balance between the revenue opportunity and the expenses associated to it, and we're growing our businesses in as very well hedged portfolio. We’re not betting to farm in any one area, whether it be AngioVac, BioFlo or NanoKnife. But we are continuing to invest in NanoKnife’s clinicals proportionately. Of course if there is a time when we feel we can create a significant value in doing a massive U.S. pivotal trial that may tip the scales and we may have to talk about that but, we would have to believe that was incredibly meaningful in order to do it and I don’t see that in our near term plans. I think the ability to clinically validate the technology can be done within our means at the moment.

Charles Haff - Craig-Hallum Capital Group

Okay, great. Thanks a lot. Nice quarter.

Joseph M. DeVivo

Thank you.

Operator

Thank you. Our next question comes from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Thomas Gunderson - Piper Jaffray

Hi, good afternoon. So on BioFlo, that’s going well on PICCs and Ports. You got the FDA approval for the dialysis catheter. Joe, how should we think of adoption of BioFlo within the new category of dialysis catheters, is that something that people are waiting for? Is it going to take a couple of quarters to get people familiar with it? Give me a little color on how you think the product rolls out?

Joseph M. DeVivo

Thank you Tom for the question. Just like in PICCs and Ports there is a long dwell time for the catheter, and so I think it's going to take us three to four months of clinical time for the investigators to start to see the reduction or the reduction or elimination of Thrombus formation and then see the benefit. So I don’t see that it's something that would fly off the shelves day one. And we’re very committed to getting that evidence. Because boy, when you have it, it does alive itself. One of the good things in this area is there’s no tip-location that holds us. We have a great product already and typically those who see the complications are the ones who are placing the product. With PICCs you have to walk in the hospital and convince them they have a problem, because a lot other people who put it in aren’t the ones who were dealing with the patients who are (indiscernible) Thrombus. So you got to go through this study and then you build this awareness and they go what? We’re spending that much money in Cathflo, what we have these complications. And then after years of hard work -- after a year of hard work it's now starting to catch on and hospital after hospital are seeing the benefits. On the dialysis side, I think it's going to happen quicker. So, we’re going to have to wait a few months to get the clinical data. But once that data happens I think the adoption might happen quickly than PICCs because we don’t have to convince a radiologist that or a nephrologist for that matter that a dialysis patient has a Thrombus issue. They all have Thrombus issues. So if we make -- if we are successful clinically, I think we’ll see a quicker adoption in the dialysis segment than in PICCs.

Thomas Gunderson - Piper Jaffray

Got it. Thanks. That’s exactly what I wanted. And then a quick question on the lawsuits, the ongoing litigation with Biolitec, is that -- $75 million would help the balance sheet considerably even if there was tax that would help the balance sheet considerably. But we all know that the court system is moving slowly. Is there any prediction that you have gotten from your lawyers or internally that on the timing of when you might receive money?

Mark T. Frost

Well we still have several steps to go. We are certain that the defended will appeal, that will take six to nine months. We feel confident as we’ve been successful at almost every turn because we’re in the right, that we’ll win that appeal. And then at that point in time Tom we’re going to now then have to take action on the entity who is domiciled in Austria. Now they have assets around the world that we may be able to go after, but I think it's a long process. I don’t expect a check for $75 million anytime soon. But we have a major, if this is upheld a major set of leverage and we will continue until we get as much value as they have.

Thomas Gunderson - Piper Jaffray

Got it. Thanks. Those are my two. Thank you guys.

Joseph M. DeVivo

Thank you, Tom.

Operator

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

Jayson Bedford - Raymond James & Associates, Inc.

Hi, good afternoon guys, I apologize for the background noise here, but just a couple of questions. Just following on Tom’s question on dialysis, it seems like it's little more of a price sensitive market. What's the pricing strategy on BioFlo for dialysis?

Mark T. Frost

Well it's a consistent strategy that we have across the board. But well the dialysis category does have another product that has similar benefits but it's priced very, very high and it's been neighed for that purpose. We continue to hold a 15%, 20% premium on BioFlo, we’ll do that in dialysis. And because Thrombus is such an immediate acute issue that drives dialysis cost, we don’t think that the additional up-charge we’ll require to cover our cost will be a problem. What's going to happen for us is over the next three to four months we’re going to get our clinical evidence. And if the clinical evidence shows a similar Thrombus reduction, an improvement in other areas, we think we’re priced well to not only grow the business but to make a very good argument to dialysis centers to convert to BioFlo lock, stock, and barrel.

Jayson Bedford - Raymond James & Associates, Inc.

That’s helpful. Your growth in EVLT business was strong. Have you seen any benefit from the in-house for reimbursement shift at all?

Mark T. Frost

I don’t know that I have any -- we have anecdotal information. There are definitely accounts where on the inpatient and hospitals where we now have some lasers going in. I can’t say that, that’s the reason why we’re growing as much, it's definitely a tailwind which is great. And I think it's something that will help us deliver the growth in the future. But I can’t tell you that of the growth rate I can attribute a portion to it yet. But I think, if you spoke to my sales force they definitely have a line of sight, and we most certainly have seen several accounts convert since that January timeframe.

Jayson Bedford - Raymond James & Associates, Inc.

Okay. And then just last one if I could sneak it in on the cost side. I missed the gross margin comment. Is the assumption that gross margin is above 52% in the fourth quarter and then what's the increased cost in a dollar value related to the Medcomp deal? Thanks.

Mark T. Frost

Okay, I’ll do my best to answer it. Yes, the guidance is in the fourth quarter we will get to that, but as I said for the overall year adjusted gross margin would improve by about 50 basis points. That does put us in for a 52% range. On Medcomp it's about 110% is what the extra R&D clinical cost have been baked into our guidance.

Jayson Bedford - Raymond James & Associates, Inc.

Okay. So sorry Mark, the 50 basis points was a year-over-year number?

Mark T. Frost

That’s a year-over-year improvement. So you can back into what the fourth quarter is going to be, which is close to what you said.

Jayson Bedford - Raymond James & Associates, Inc.

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And we do have a follow up question from the line of Charles Haff with Craig-Hallum. Please go ahead.

Charles Haff - Craig-Hallum Capital Group

Hi, thanks for taking my follow up question. So on sales and marketing you guys came in a little bit higher than I was expecting and I think Mark you mentioned the U.S. sales force doing a little better and that was the, kind of the additional bonuses that were paid. But is there anything else that I should be thinking about when I model sales and marketing expenses?

Mark T. Frost

No, it is primarily because of that reason that we're -- as I said in my talk earlier, we’re over teaming on the U.S. which then triggers we have to hire -- pay higher achievement to our U.S. sales force. The problem is when we missed on the international side we have a very low rate of commissions, so it's almost fixed cost, so we get no benefit when we miss on the international. So we’re getting no leverage the other way. So the U.S. achievement is a pure additional cost for us at this point in time, and that’s what we expect for the fourth quarter as well. Now this will go away as we reset our 2015 plan, but it's an issue with our operating plan in 2014 the way the revenue is played out.

Joseph M. DeVivo

Yes, Charles we had expected at the beginning of the year a lot more from international and frankly less from the U.S. We have, when you do your U.S. plans you factor in how many people you think will get to over achievement and then you create an accrual for that. And the truth is; we’re going to have a lot of U.S. sales people. We’re going to make a lot of money this year, and you know what, they deserve it. I am happy for them. If I could take an accrual in the third and fourth quarters to help pay for the success of that, that the team has delivered, so be it. It will be nice if we had the confidence to actually bake that in at the beginning of the year, but we just didn’t expect them to deliver as much as they had done so quickly. So, normally with the lower revenue in international if we had a variable comp plan, that team would have made a lot less and we would have been able to offset the wins and the gains for this level of revenue, but it's just the way it is. So when we look at as Mark mentioned; we look at our operating income. Our operating income adjustment is improving. Our operation excellence programs are in place. Our ability to -- our overall gross margin if you net out this mix issue actually it is doing what we wanted to do and it matched some of the great work our operations team is doing, but it's just an artifact of the year. So, we’re very pleased with the top-line growth. We know top-line growth gives us the ability to adjust our plans and the ability to create leverage. We’re focused and intent on continuing to drive that top-line growth, continuing to build out markets, continuing to grow market share and winning agreements. We’re also incredibly committed to building out our international group. We’re very pleased with some of the work that John’s already done sort of with the international team and believe that it's not going to be too long when those guys get back to the type of revenue performance they had before but also in a very sustainable profitable manner. So, I think it is what it is. I think if we came in at very low revenue growth put another penny in earnings, I wouldn’t be as excited about that as I am excited about what this team has delivered and what we can do for our future which is completely consistent with how we communicated to the investment community and how we communicate internally and externally. So, I wish that artifact wasn’t there and we could have predicted the mix differently. But you know what, our team is doing great. I appreciate all the work they’re doing and it's just -- momentum is hard to create guys. But when you got it, you really start hitting the gas pedal and you knew a lot of good things fall in the place and we’re starting to get there.

Charles Haff - Craig-Hallum Capital Group

Okay, great. And then my last question is regarding the Queensbury facility. You mentioned inspection recently with no 483’s, congratulations for that. And you hope the warning letter to be cleared soon. What kind of impacts could that have to your business, I am not quite clear on that because I know in terms of the operating excellence plan you kind of move some stuff around, but what type of impacts would the lifting of the warning letter have?

Joseph M. DeVivo

The most material impact lifting a warning letter would have is on our international revenue. Products that are made out of that facility we can’t reregister until we lift that warning letter in international markets. In our Latin America EVLT business for example, we don’t even have our 1470 laser registered in all of Latin America, and it's a large EVLT market, but because of this warning letter we have an old system down there that really hasn’t made much traction. And I can go line-by-line of all the stuff that come out of a plant, there is issues where we’re registering products in China that is affecting us, there’s issues in South-East Asia where we’re registering products that we can’t get these registration. So, it's actually a core contributor to the international performance but not the entire contributor. So, we think we’re very close to lifting those restrictions. We think that will then allow us over a 6 to 9 month period to go through the re-registration process. And I think this time next year, on a one-to-one basis the international business is going to start seeing some really nice growth based simply registering and selling products we currently have in those markets.

Mark T. Frost

Yes. Let me just build on Joe’s answer. Charles, there is actually a potential interim step that we’re pursuing were you can file for what's called a CFG, Certificate of Foreign Goods, which allows you to register earlier before you even get the warning letter lifted. So we’re doing both plays. We may be able to get some of the economic benefit even earlier before waiting to get the warning letter lifted. So we’re pursuing both avenues at the same time.

Charles Haff - Craig-Hallum Capital Group

And how long does that Certificate of Foreign Goods usually take to process?

Joseph M. DeVivo

It’s usually pretty immediate. I mean we’re I think it’s a -- we’ve applied for it and it’s about 30 day wait and so we should know in a few weeks whether that clears. And if it doesn’t, it will -- we will be getting it to clear in the near future, because there is no basis for it to not and we will just have to sit with FDA and understand why. And then just one other clarifying comment, there were a couple 483s out of the Queensberry facility, but they were not related to any of the prior issues and there is stuff that we will resolve, but if we had a repeat 483 for the issues that we were remediating then that would be a serious issue, but so when I say no 483s, I meant no repeat 483s.

Charles Haff - Craig-Hallum Capital Group

I got you. Yes, that makes sense. Okay, great. Thanks for taking my additional questions.

Operator

Thank you. And I’m showing no additional questions in the queue. At this time, I’d like to like the turn conference back to Mr. DeVivo for any closing remarks.

Joseph M. DeVivo

All right everyone. Well, thank you so much for your interest in our Company and watching our progress. For the employees of AngioDynamics we’re very proud of the work that they’ve done operationally, sales and marketing globally. This is a journey and while everything doesn’t move in concert always in the same direction, everything is getting better and the team is delivering. So I appreciate your attention and thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the AngioDynamics third quarter fiscal 2014 financial results conference call. We thank you for your participation. You may now disconnect.

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