AngioDynamics' (ANGO) CEO Joseph DeVivo on Q4 2014 Results - Earnings Call Transcript

Jul.23.14 | About: AngioDynamics, Inc. (ANGO)

AngioDynamics, Inc. (NASDAQ:ANGO)

Q4 2014 Earnings Conference Call

July 23, 2014 4:30 PM ET

Executives

Doug Sherk – IR

Joseph DeVivo – President and CEO

Mark Frost – EVP and CFO

Analysts

Tom Gunderson – Piper Jaffray

Jason Mills – Canaccord Genuity

Jayson Bedford – Raymond James

Charles Haff – Craig Hallum

Operator

Good day and welcome to the AngioDynamics Fiscal 2014 Fourth Quarter and Full Year Financial Results Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Doug Sherk. Please go ahead, Sir.

Doug Sherk

Thank you, Operator. Welcome everyone and thank you for joining us for AngioDynamics’ conference call this afternoon to review the financial results of the fiscal 2014 fourth quarter and full year results, which ended on May 31, 2014. The news release that crossed the wire this afternoon is available on the company’s 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 2015 first quarter ending – excuse me, August 31, 2014 and the full-year ending May 31, 2015. 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.

Today Joe DeVivo, AngioDynamics’ CEO will be using a slide presentation accompanying his open remarks. To access the presentation please go to the AngioDynamics’ website, click on the Investor link, then click on the Events & Presentation link, and then click on the link listen to the webcast. Again that, if you go to the website www.angiodynamics.com click on the Investor link, click on the Events & Presentation link, and then click on the link listen to the webcast. You will access the slides that Joe will be using during his remarks.

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 like to turn the call over to Joe DeVivo, Chief Executive Officer.

Joseph DeVivo

Thank you, Doug. Welcome, ladies and gentlemen, to our fourth quarter and fiscal year-end 2014 conference call. With me is Mark Frost, our Chief Financial Officer, who will review the financials in a moment.

Fiscal year 2014 was an extremely successful year in my view for AngioDynamics. After clearly communicating our vision for our business, laying out how we will grow through the delivery of our growth drivers. For us 2014 needed to be the year that we put it all together to execute to plan, and to make revenue again – revenue growth again, part of the AngioDynamics story. Our goal was to exit the year, a mid-single digit growth company, and I believe we delivered on that key objective.

Looking at our underlying sales growth, our access [ph] supply agreement, we grew 7% ADS worldwide and finished the year at 4% with overall growth. Our team has always believed that restoring our company’s revenue momentum will be the most challenging piece of our plan, and so far we’re making progress. As we can see on the slide, we started to see revenue growth return to the business. What’s even more impressive for the fourth quarter performance is that we followed up a strong third quarter with a strong fourth quarter. It’s an indication that we can deliver quality sales growth quarter-over-quarter.

Each of our three franchises grew. Vascular Access business grew 5% year-over-year, this quarter demonstrating accelerating growth after a negative 5% first quarter, negative 4% second quarter, a 3% third quarter, and a 5% fourth quarter in growth respectively, that’s a 10 point swing from the beginning of the year. Personally, I believe in the next two to three quarters the Vascular Access business maybe the fastest growing business in our company. Today we have BioFlo and PICCs, Ports and dialysis across the entire franchise. And several weeks ago we launched Celerity and the momentum is building.

As you all read on Monday, we delivered on one of our core commitments that we would begin to win key GPO agreement with the novelty and breath of our Vascular Access portfolio. GPO and IDN wins are essential to our Vascular Access strategy. I’ve spoken to you many times about the importance of each of our company to position ourselves in this changing landscape of healthcare. First, for our contracted products it’s essential that there is a complete product offering as customers focus their efforts on few key partners in any segment. Second, the key technology you’re selling must have differentiation that translates into clinical and economic value. You must prove this differentiation, as well as prove that their membership – even all contract wants you as a vendor and we’ll move the business contract.

For us to succeed in a non-contractor GPO the hospital would have to buy by exception of contract. On many occasions a non-contracted win gets reversed out months later when the contracted vendor pressures a GPO or IDN and the hospital lifts compliance. It’s a slippery slope to be off-contract and especially if you don’t have a compelling technology. If you can see – if you can succeed and grow your business despite this, it helps build credibility of a vendor to become more valuable contracting partner. So for example, in this slide, it shows the absolute results of one of the GPO’s we’re working with where our month-to-month growth rate of contract in their membership resulted in a 15% growth in BioFlo sales, month-over-month. This was key evidence in proving our acceptance.

And into my second point regarding differentiation, when you have compelling clinical evidence, as well as great service, both of which that we provide, our overall value as a vendor increases. As we can see now, we can reference multiple experiences that our customers are having, all independently realizing very similar results. We’re very pleased to see these similar experiences with BioFlo independently occurring over and over again at different institutions.

We’re very pleased to have been awarded the new technology award for Novation. Starting August 1, their membership who is currently contracted with Bard and Medcomp [ph] will now have contract access to BioFlo. AngioDynamics as a company has never been on contract with Novation for Ports and PICCs, a buying group that covers almost 50% of the hospitals in United States. When the contract begins, an AngioDynamics sales representative can market an on-contract device, not only on-contract but one which pass a very prestigious new technology process Validating BioFlo is improving value for its members and in patients. We are hoping this is the first of many opportunities to increase on-contract access for BioFlo to other IDNs and GPOs.

So as BioFlo becomes more valuable on the marketplace, it’s adoption and acceleration within the company increases as well. We now have over 46% of our PICC business with BioFlo technology and a early ramp of our Port business has about 10% penetrated with BioFlo. 619 accounts are now actively using BioFlo everyday in the United States and we are in the valuations with an additional 130 private accounts today.

Now for an update on Celerity, we received FDA clearance for Celerity in June which is a great win for the team overcoming some pretty well chronicled earlier setbacks. We’ve completed all the education and launch activities, and few weeks ago we released the product for sale to customers. We believe it will take a quarter or two to measure the impact of the launch, but are pleasantly surprised with the reception thus far. We are learning many hospitals still confirmed the use of tip located PICCs with an X-ray, not relying on tip location alone. So we will be quite busy with this segment of the market in advance of our no chest X-ray claim.

Regarding our progress with the specific no chest X-ray claim for Celerity, we are in active dialogue with the FDA and have modified our view on clearance to now come closer to the end of the calendar year. The bar is certainly higher for this clearance and we will continue the excellent work of our clinical and regulatory team to achieve a successful outcome. I think 2015 will be an even better year for the Vascular Access business. We have the products we need, on top of a great sales, marketing and clinical team. They are positioned to generate a great year for the new business wins. So now I’m going to move to our next growth driver.

We’ve highlighted AngioVac in many quarters prior. AngioVac had a remarkable quarter delivering $3.3 million in worldwide revenues, filing subsequent quarters of $2.22 million and $1.5 million. We continue to drive procedure volume, as well as open new accounts. Of note, the first few procedures were successfully completed in Europe this quarter, most notably in the U.K., Germany, Switzerland, and even Turkey. I’m also pleased to announce that just last week our team won clearance for AngioVac in Canada. In the U.S. we now have 236 customers and $9 million in revenues for fiscal 2014. In 2015, we look forward to launching the second generation AngioVac device in the second half of the year, and also launching an AngioVac registry to capture all the good work that’s being done. We also experienced high double digit teens growth for our EVLT business and product line for the year which powered our Peripheral Vascular franchise to 7% growth year-on-year.

Now moving to our microwave growth driver. Microwave also had a terrific year. We placed 88 new systems worldwide, and procedure volumes grew 82% year-over-year. Now as expected and as communicated in the past, some of that growth came at the expense of RF cannibalization, however, the net impact is very positive. NanoKnife while waited with challenging capital sales for the year did see procedure growth year-on-year of 31%. And lastly, our international business really had a rough year. While our procedures were solid, the capital sales for oncology were a challenge. John Soto, our Chief Commercial Officer, spent a lot of time with the team. I’m encouraged with his view and plans, and we will continue to bolster the team through his strategy and continued emphasis on local acquisitions.

So from a revenue perspective, our growth drivers are not only continuing to deliver, I believe they are just starting. We have a long runway of market share gains, as well as new market development to continue this trajectory. We’ve always maintained that our mission as a management team, it is to attain double digit top line growth, regain a 60% gross margin, and deliver operating leverage to the bottom line in each year over the next five years. Over the next several years we will achieve half of the margin increase from improved mix as our growth drivers are margin accretive, and other half from operational excellence. The key terms of this operational excellence will be the continued implementation of Oracle, gains on our supply chain efficiency and facility consolidation.

We as a management team are completely committed to delivering on our operating leverage opportunities. We have a clear line of sight on cost savings, and with re-establishing our revenue momentum, our team is focused clearly on delivering that improved bottom line performance for our investors. It’s the logical next step and we will make it happen.

That said, while we are on-time with our facility consolidation schedule and having implemented Oracle, we encountered an isolated Oracle issue that affected our gross margins. While we are certainly not the first company to deal with systems conversion issues, we identify the problem, fixed it, and have already moved on. Mark will go in more details.

Now I’d like to turn it over to Mark Frost, our Chief Financial Officer, to review our financial performance. Mark?

Mark Frost

Thank you, Joe and good afternoon, ladies and gentlemen. On the revenue front we continue to drive strong growth with net sales up 4% or a 5% increase without our supply agreement wind down impact, and 7% increase on an average daily sales basis as we had one last day in the fourth quarter. This positive top line performance is similar to our results in the prior quarter and is indicative that our strategy is working.

On the earnings front, while we meet our guidance we came in at the low end of the range, primarily due to two factors. Our gross margin expanded 140 basis points over the last year’s fourth quarter, however, the improvement was less than expected. And second, we again recorded higher U.S. commission expenses as a result of the overachievement on U.S. sales without any offsetting international relief. We discovered an Oracle configuration issue relating to inter-company inventory eliminations which has caused revision to our third quarter fiscal 2014 gross margin. The correction of 80 basis points is immaterial from an accounting perspective, however, provided a false positive on our third quarter gross margin results which led to an inflation of our fourth quarter gross margin expectations. This is the reason for why our results were at the lower end of our Adjusted EPS forecast. This issue has no impact on our operations excellence program which I’ll speak to when I discuss fiscal year 2015 guidance.

I’ll now turn to our revenue discussion. Total revenue was up 4% from the prior fiscal year, however, excluding the impact of the plan whine down of our supply agreement, net sales increased 5% over fiscal year 2013. A loss of a day contributed 2% bringing us to 7% as mentioned earlier. The sales quarterly trend line has demonstrated progressive improvement from negative 1% in quarter four to 1% growth in quarter one, 3% in quarter two, and 7% for the last two quarters on an ADS basis.

Now looking at product performance, our Peripheral Vascular business grew 6% to $50.9 million, reflecting a larger contribution from AngioVac of $3.3 million, as well as 9% EVLT growth. EVLT performance moderated reflecting the anniversary of a significant customer competitive conversion, as well as lower international results. Our Vascular Access business continues to improve with 5% growth to $28.3 million versus the prior quarters 3% increase. All three products, PICCs, Port and Dialysis grew with Ports at 8%. BioFlo technology continues to be the key driver behind both, PICCs and Port sales increases.

Now in the oncology surgery business, sales grow flat into 1% as anticipated reflecting a difficult U.S. comparable on NanoKnife capital equipment sales. Thermal Ablation slowed to 8% growth in the quarter as our international business saw higher RF erosion.

From a geography perspective, U.S. revenue increased 6% while the international markets grew 2%. The U.S. growth continues to be encouraging, and demonstrates the success of our growth drivers. As we commented on the last call, our international business is still a work in progress but offers strong growth potential, and we are in the process of implementing a growth plan and expect to see improved performance in fiscal 2015.

Now continuing down the quarter’s income statement, gross profit totaled $47.5 million or 50.5%, a 140 basis points improvement over the same quarter in the prior year. Our gross margin improvement was lower than expected because of the inter-company error, and we sold less NanoKnife generators. For the fiscal year 2014, our adjusted gross margin ended at 50.8%, essentially flat but a 30 basis point improvement over fiscal year 2013 if we include the additional quality cost. This was a disappointment as we hope to improve by 75 basis point to 100 basis points within the year. The shortfall was caused by a number of factors which we have discussed throughout the year including rebate admin fees which was about 45% of the delta, negative mix contributing 35%, and then higher royalties from EVLT sales which contributed the remaining 20%.

Now we turn to expenses. Our operating expenses totaled $43.8 million including $3.1 million of acquisition, integration, restructuring items, of which $1.3 million is associated with Navilyst acquisition, $1.1 million was related to IP litigation, and $0.5 million was for the operational excellence program. G&A cost increased by $0.6 million versus prior year reflecting the full turn on of our ERP cost including depreciation and maintenance.

Now sales and marketing expenses increased $1.1 million from prior year, primarily from the need to accrue for over achievement on the U.S. sales side. And the important issue in relation to our sales and marketing cost which we discussed last quarter was the impact of our geographic revenue mix where we have over achieved on the U.S. front but under achieved on the international side. The variable compensation component for international is limited but high on the U.S. side. As a result, we do not gain any cost leverage for the international business but we have negative leverage for the U.S. business. Our 2015 plan is now appropriately hedged for this potential imbalance if it does occur this year.

Our GAAP results were a loss $0.03 per share versus a loss of $0.02 per share in the fiscal 2013 fourth quarter. During the fourth quarter, New York State Tax Legislation was enacted which reduced the tax rate for new drug manufacturers to zero percent. As a result our anticipated future tax benefits no longer have value, and we had to write down our tax attributes by $1.2 million or $0.03 per share which was a non-cash charge. Pro forma adjusted EPS, excluding amortization was $0.18 per share, 20% higher than the $0.15 per share from the prior year fiscal 2013 quarter. The GAAP to non-GAAP reconciliation items are detailed in the earnings tables in fourth quarter year-end news release issued this afternoon.

EBITDA was $9.9 million or $0.28 a share versus $7.9 million or $0.22 a share in the prior year’s fourth quarter. Adjusted EBITDA was $14.7 million or $0.41 a share versus $13.7 million or $0.39 a share. Again, a detailed reconciliation is provided in our news release.

Now our operating cash flow improved from a negative $0.6 million last quarter to a healthier $10.1 million, and free cash flow at $7.3 million. Accounts receivable was higher because of the ERP implementation impact as discussed last quarter, as well as from our revenue growth in the quarter. Inventory rose as we build safety inventory associated with our manufacturing consolidations. Our cash balance increased to $17.9 million, and we ended the quarter over $142.7 million of debt outstanding. I’m now going to turn to a discussion of our guidance for fiscal year 2015.

Now building our progressive improved quarterly sales performance during fiscal year 2014 we are guiding to a full fiscal year range of $362 million to $368 million in revenue reflecting 3% to 5% excluding the impact of the plain whine down of our supply agreement. We expect our supply agreement revenue to decline by 65% or $4 million during fiscal year 2015. Overall revenue growth has been driven from our main growth driver as Joe has already discussed.

Now upsides to our revenue plan includes strong performance from existing GPO IDN contracts, success in pending new contracts, as well as clearance of a no chest X-ray claim and navigation application for the Celerity tip location product.

On the earnings side, we anticipate delivering stronger operating leverage in fiscal year 2015 and our guiding to adjusted earnings per share, EPS, excluding amortization of $0.64 to $0.70, representing a 10% to 21% increase over fiscal year 2014. We are providing a wider range because of the product mix variability and the timing of our cost initiatives. Now the critical factor enabling our leverage is the operational excellent program. We expect to deliver a hundred basis points of gross margin improvement in fiscal year 2015.

Key components of the improvement are supply chain savings both, direct and indirect, best practice implementation including Kiazen and engineering activities. And then some small manufacturing consolidation efficiencies in the second half but most of this will be in 2016 when we finish transitioning the product lines. Operational excellence activity is comprised two-thirds of the gross margin improvement. While the remaining coming positive sales mix. Our goal remains to deliver 400 to 500 basis points of gross margin improvement from operational excellence by fiscal year 2018 with 15% coming in fiscal year 2015.

Benefits from favorable changes to our product portfolio will bring us to the 60% gross margin goal as Joe mentioned earlier. Now on the expense side we are anticipating a 60 basis points to 80 basis points increase in G&A cost. R&D is expected to remain consistent with fiscal year 2014 at 78% of revenue. We are building modest leverage into our sales and marketing cost structure which we anticipate will generate a 20 basis point to 40 basis point improvement from fiscal year 2014.

One-off costs are estimated decline significantly by close to 50% with major items remaining related to operational excellence and IT litigation. Now from a balance sheet and cash flow perspective, we are not providing a specific cash range. We do expect to return accounts receivable DSO to more normal levels. As well as we have targeted actions to reduce income. But this will be offset to a degree by inventory we need to buy through our Medcomp deal, as well as the timing of the facility consolidation and implementation which could swing between the end of fiscal year 2015, and early fiscal year 2016.

Adjusted EBITDA is expected to improve based on earnings improvement range. I’m turning to fiscal year 2015 first quarter guidance. We are guiding to a revenue range of $83 million to $86 million, representing a 4% increase at the top end of the range when excluding the whine down impact. We believe we are being cautious in our guidance, however, in the past we have experience some sequential softness in the first fiscal quarter due to the traditional sales round towards the end of the fourth quarter. Adjusted EPS excluding amortization is expected to be in a range of $8 to $12.

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

Joseph DeVivo

Thank you, Mark. So as I said earlier, I’m very pleased with the performance of the team. I expect each of our businesses to grow throughout 2014. And international too again be a strong contributor.

Now as we continue to improve our top line in the phase of tougher comparables, we will delivery on improving our earnings, faster than our top line growth into the quarter this year. I’m confident in our team and I believe the company is on the right part to creating increased value for investors. Thank you for your support and we look forward to an exciting fiscal 2015 with you.

Operator, lets now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Tom Gunderson with Piper Jaffray.

Tom Gunderson – Piper Jaffray

Hi, good afternoon everybody. The – I’m sorry Mark, I missed this, the annual – the 2015 guidance does or does not assume FDA clearance of Navilyst and Celerity with no chest X-ray?

Mark Frost

It does not include us obtaining a no chest X-ray claim, so that would be an upside based on the time at when we get it.

Tom Gunderson – Piper Jaffray

Okay. And that would be the same, it does not assume that you get an automated fluid management system?

Mark Frost

No, we have pulled any API revenue out of our numbers, that would be another upside in 2015.

Tom Gunderson – Piper Jaffray

Okay. And part three of my first question is, what’s your assumption on OUS growth for 2015?

Mark Frost

We are assuming a return to mid single digit type of growth in the international.

Tom Gunderson – Piper Jaffray

Thanks. And then Joe, could you talk a little bit about – I know it’s just one product but it’s one of those one’s that’s intriguing and that would be the – I think you call it the DuraMax, the dialysis catheter with BioFlo.

Joseph DeVivo

We received our clearance at the end of last fiscal year. We had our national sales meeting with the product in June and wanted the sales force and we are in full commercial release. We prioritized our commercial release with the first set of clinical experience at hospitals and have been doing cases at those hospitals. And we expect that to be a very positive contributor. When we look at dialysis and ports and PICCs, the three products have different dwell times in the body, have different times when complications present themselves. PICCs, it can – depending upon how long they are in the body, will typically have certain acute reaction and then it will have some type of response later. Dialysis is something that we will not see the type of results like-for-like, like we saw in PICCs until probably 90 days after implantation in the body. And so because of the larger diameter and the longer time to present with the type of complications that we believe BioFlo can offset, we think that probably by the end of this calendar year is the time that we’re going to start seeing percolating in the marketplace, the same type of enthusiasm that we saw almost much quicker on the PICC side. That said, some of the early indicators of clinical success of a dialysis catheter is of course, how well that – it enters into the patient. And then in an acute perspective, how good are the flow rates, and flow rates has always been a key attribute of the DuraMax catheter and it’s designed specifically. But the ability of BioFlo coupled with DuraMax upfront to show the type of flow rates that we are seeing or seem to telling us that’s a very positive early indicator of long-term clinical success. So I would expect that in the clinical sites where we are having the early clinical experience, that the type of excitement and enthusiasm, the type of positive response will clinically start to percolate by the end of this calendar year.

Tom Gunderson – Piper Jaffray

Great, exactly what I wanted. Thanks for the color.

Joseph DeVivo

No problem.

Operator

Thank you. And we’ll take our next question from Jason Mills with Canaccord Genuity.

Jason Mills – Canaccord Genuity

Hi Joe, can you hear me okay?

Joseph DeVivo

I can hear you great Jason, how you’re doing?

Jason Mills – Canaccord Genuity

Great, good, thank you. Also wanted to touch on just a few individual product lines but as it relates to 2015 what your expectations are. AngioVac is a product that you took a lot of heat and what you paid for it, it’s ramping quite well. I know you’ve talked in the past about the opportunity, the targeted addressable opportunity. What sort of penetration level under that opportunity do you think you can achieve it here in the second full year launch? And sort of – can you put actual numbers to serve where you see that business going in 2015?

Joseph DeVivo

Thanks for that Jason, we can agonize [ph] over that given a specific number. We have put out there originally that we would do $50 million in five years, I’m at the fifth year and I think that’s something that we’ll attain. We went from virtually zero to $9 million in 12 months. I think if there is a portion of that that goes towards opening of new accounts and then a portion of that obviously towards consumption, do I think it’s going to double year-on-year, no, but I think we’re going to have a successful year with the product, it’s certainly not going to be flat. And I know you want a number, and I’m unfortunately not prepared to give you one. I believe that we’re probably not going to replicate $3.3 million in the first – kind of a slow quarter that we have in the summer months, but I do think we are going to see after that first quarter some very nice and strong growth. But – is it 18, no; is it 9, no; it’s somewhere between – on a lower basis maybe, probably. But I really – the business is still very new and I just – I’m trying to not take it to a specific number. So I apologize if that does not satisfy.

Jason Mills – Canaccord Genuity

Okay, that’s helpful, at least a little bit. On the Vascular Access side, I guess it’s just the revenue question, then a follow-up just on the P&L for Mark. Vascular Access business, you said that you thought it could be your fastest growth business division for fiscal 2015. We obviously have your total guidance, so how do you see that divisions breaking out from the standpoint of growth by division next year?

Joseph DeVivo

We kept the expectation on the international low, I’m hoping – and there is a little bit of a dichotomy between our guidance and what I’m hoping is going to happen. Our guidance is representative of a very appropriate way to guide investors but when I look at the business, we’re obviously tasking ourselves to bigger and greater things and have bigger and more exciting areas that we’re trying to get to. I think our international business – I’m hoping to see that do a little bit better. I think – we haven’t broken it out to our guidance in numbers per division but obviously I’d like to see the trajectory on Vascular Access continue. Peripheral Vascular, we had – especially in the U.S. a hell of a year, and I think you know it’s going to be topped at – as we anniversary those comps to see that accelerate past those numbers. So I’m trying to be a little conservative with our U.S. PV.

And oncology is an interesting thing because if you look at the slides and if you listen to Mark’s numbers, the underlying growth in oncology on a disposable side is very strong. What makes it really lumpy is, you sell one NanoKnife for $0.25 million and that’s – and then you don’t do it the next year or you don’t keep that trajectory on the capital side, it makes the business look less vibrant but the truth is that the business at a consumable basis is doing very well, and I know we haven’t talked a lot about NanoKnife recently because I just wanted to take the heat off the product line and let the product line flourish on its own. We are seeing major centers develop programs around pancreas ablation, we’re seeing a continued drumbeat of new major centers around the world doing pancreas procedures and that’s a good part of our business and an accelerating part as the data continues to show strength. And these patients who don’t have clinical options, or many of them, many good ones are really discovering the technology. In U.S. it’s only 45,000 procedures a year – looking out [ph] I wish it was zero. But it is something that is real and we’re going to start seeing NanoKnife start to mature and start stretching it’s legs a bit.

And for us from a pure revenue perspective, the more that we depend upon the consumables and the less on the big pops and the live-in catheter I think the posting of strength of business will continue but right now we are – we do get whiplashed with those large capital deals as we did this year, it’s not a business that’s a single digit business, I’m we’re a 20%, 30% growth consumable business and procedures. If we didn’t have the capital we’d be jumping up and down with that, but we love those orders when they come in because it really does make a difference for all the anniversary and it doesn’t happen, that’s a challenge, now you’ve seen that Jason in other businesses. So, I think I’ve kind of given you a perspective of each of the franchises. I think we have very good commercial leaders in place, very good sales leader, very good marketing teams, clinical teams, I they have a handle on – each of our franchises have a handle on the business, we’re going through some change in international but my confidence is growing.

And I think from a revenue perspective, there is going to be a pretty good drumbeat, so where we guide is where we want to point investors. We’re driving ourselves to bigger and better things.

Jason Mills – Canaccord Genuity

Thanks for all that detail Joe, that’s much more satisfying answer, the detail is fantastic. Just lastly, quickly for you Mark. What is the expectation for amortization of intangibles next year, so what’s embedded or what’s backed out of the guidance that you’ve given? We’re just happening to look at it with that embedded in there.

Mark Frost

It will be probably $1 million above our 2014 run rate.

Jason Mills – Canaccord Genuity

$1 million about the 2014 run rate, perfect. Thanks guys.

Joseph DeVivo

Hey Jason, thank you.

Operator

Thank you. We’ll take our next question from Jayson Bedford with Raymond James.

Jayson Bedford – Raymond James

Good evening, and thanks for taking my questions.

Joseph DeVivo

Hey Jayson, how are you today?

Jayson Bedford – Raymond James

Doing well, thanks. Just a couple – maybe Mark, on gross margin I think you mentioned a 100 basis point improvement in 2015. There is a lot of noise in your 2014 number, so just – so we are on the same page. What’s the baseline you’re using for fiscal 2014?

Mark Frost

From 50% on adjusted basis, an improvement from 50.8%.

Jayson Bedford – Raymond James

Okay. And then, I guess a bit of a critical question. Joe you mentioned earlier a clear line of sight on expenses but earnings estimates kind of turn it down in fiscal 2014. You had higher revenue over the last couple of quarters but the earnings have come in a little weaker, and I realized there is always some unforeseen cost. But can you maybe just walk us through why you have better visibility into earnings today than you did say a year ago? Is it just a function of you being more confident in your forecasting or have you simply just left over a more cushion?

Joseph DeVivo

No Jayson, it’s actually a little bit more complicated than that. We don’t have a spending issue at the company. If you look at our OpEx, aside from us being whipsawed a little bit with the U.S. sales commissions and the U.S. over performance that was not effectively offset with gains in international. We had a mix issue on commissions and we talked about the last quarter and Mark just brought it up now a bit. But aside from that you look at our R&D spend, and our core sales and marketing spend and G&A, we don’t have a spending issue here at the company and we have been taking cost out and I think in general, our OpEx is doing a pretty good job.

The greatest area of opportunity is becoming more efficient on our gross margin line and our cost of goods, and our ability to take out supplier cost, and our ability to consolidate our operations, and our ability to lean out our manufacturing facilities, and our ability to benefit from having system wide visibility from a single ERP system the allows us to target and see things that we’ve never seen before. The core truth Jayson in 2014 fiscal is, aside from really – focusing like a laser with our commercial team on driving our top line revenue. The balance of our team was consumed with this ERP implementation. Our core finance team, our core operations team, we went from an Oracle platform with Navilyst and old SAP platform from Angio, and the entire organization went to a brand new system. And pushing that over the edge, getting that implemented, getting the processes in place, and then turning it on – I mean, we probably couldn’t have turned it on at a worst time Jayson because – in retrospect I wish we turned it on June 1 so we would have at least been consistent through the year and then not have the amount of energy it took to literally berth this system.

So what’s different now is, that’s over. And if I go back a year earlier, you know Jayson, all throughout 2013 we were dealing with quality remediation, spending all kinds of money to make sure that everything was in place and we succeeded. And we spend now in 2014 besides from getting our revenue we spend the time getting our back office systems because when you have the power of a single ERP system, you have the visibility where all your costs are worldwide, we have that today. And all that pain that was dedicated to that is now freed up. So we exhale on that side, we have momentum now in revenue and our team is going to go attack gross margins. So we haven’t had the bandwidth and we haven’t had the ability through 2014 with us – much freedom to go out and get it, but now we feel like we did. So we’ve always known where the costs are, and our operational excellence program on consolidating facilities and taking those costs out are as well in play. But I will tell you we see whether it’s more cost and we’re just going to go get.

And now that a lot of those major projects are off our plate and revenues running, I’m telling you as CEO of this company, I’m dedicating our team to generate in the operating leverage that our investors deserve and we’re going to get at it. So that’s what give me the confidence is that we’ve earned our way past – pretty some challenges that I don’t think we get that type of cost without getting in pieces, they do go hand in glove and we’re going to get it in 2015.

Mark Frost

Just to build on Joe’s point, I mean if you look at our P&L, G&A and R&D are pretty much consistent with prior year. We saw we would invest in AngioVac, we said we’ll put more wraps. And only surprise really on the OpEx side was what we talked about was the U.S. over achievement. So when you backed that out we were pretty much flown out on our expenses. So I agree with Joe that all of our thinkers now is how we get further leverage in the gross margin line and that’s where we’re spending all our time now.

Joseph DeVivo

The one other thing Jayson that I just want you to make clear and understand. Mark identified the fact that at the end of the year we realized that there was an inter-company transfer set up in SAP from one of our – from an international sub that didn’t transfer stuff over and what it did properly, and what it did is it inflated gross margin. So we went into the second half of the year thinking our gross margins will be higher. And for all sense of purposes, at the time after the close, we felt we meet all the objectives that we told you and everybody else, and it was on the close that we realized that this one set up in Oracle was inaccurate. And so there was a big disappointment for us because we thought we have lived our commitments and we’ve had to reverse that out. So that’s angered us and that made us more viral [ph] on going out and grabbing cost and getting our gross margins. But I feel today that the project mind drain that has occurred over the last – literally 24 months, this company has been elevated, we’re feeling good and the commercial team is delivering, and my internal team is intently focused on improving that situation and we will. Like we got revenue, we’re going to go get gross margin.

Jayson Bedford – Raymond James

Okay. Maybe just as a bit of a follow-up. ERP sounds like it’s behind you, Mark is the expectation that AR trend is down here because it’s – there has been two quarters now with pretty steep step up here?

Mark Frost

Yes, part of it going up in the fourth quarter is because we grew revenue. Probably half of the issue is still residuals from the AR, from ARP and as Joe said from a timing standpoint wasn’t that great. But yes, we already saw big improvements in June where we had very significant collections and receivables have started to go down significantly. So I feel pretty good and I said that in my comments that by the end of the year we should get back to our normal DSO levels around 50, 52 days, and we’re above 60 right now.

Jayson Bedford – Raymond James

Okay, thanks. I’ll get back in queue.

Operator

Thank you. And we’ll take our next question from Charles Haff with Craig Hallum.

Charles Haff – Craig Hallum

Alright, thanks for taking my questions. Can you hear me okay?

Joseph DeVivo

Yes, Charles. How are you?

Charles Haff – Craig Hallum

Good. Sorry about that. So question for you on NanoKnife placements, I apologize if I missed this, but did you give that number or would you be willing to give it?

Joseph DeVivo

We did, it was on one of our slides where we placed 22 Nano’s during the year.

Charles Haff – Craig Hallum

Okay, great, thanks. And you mentioned Joe, the NexGen AngioVac in the second half, were you talking about fiscal year or calendar year?

Joseph DeVivo

Fiscal.

Charles Haff – Craig Hallum

Fiscal, okay. Thank you. Let’s see here – since the Novation win close last Friday I assume that you haven’t put that in your fiscal 2015 guidance, is that correct?

Joseph DeVivo

I guess we had hoped for a little but there are – we believe there is definitely upside throughout the year. We did not contemplate the impact in our numbers [ph].

Charles Haff – Craig Hallum

Okay. And if you think about Novation, since you really didn’t do much business because of the counter detailing from Bard was pretty heavy. When you think about the opportunity there, what’s the right way you would frame that for investor expectations? How should we be thinking about how material that maybe going forward?

Joseph DeVivo

I think our goal right now in this call is to set expectations based on our guidance. And we would be very happy to provide sentiment and enthusiasm but I don’t want our investors to get ahead because – especially on, even a GPO contract, as we’ve learned with PICCs that the timeline for revenue ramp takes a while, there is a valuation and all different types of things. Now the barriers that we’ve had in the past and the value analysis committee and what not are going to be easier to be contract especially of the new technology, so these cycles will be quicker. But personally, I think we’re going to see this be a growing business, well above what we’ve seen in the fourth quarter, but I’m just unwilling to set the number yet because the timing is so sensitive. And if it happens in the second quarter or the third or the fourth, I don’t want to mislead you because I don’t have a clear line of sight on the exact inflexion point. But everything is going, we’re finally firing on all cylinders, and we have what we need. And I’d like to give you a number Charles but I think it’s our intention to guide investors to the guidance we’ve provided.

Charles Haff – Craig Hallum

Okay, great. Thanks a lot guys.

Operator

(Operator Instructions) And we’ll take our next question from Larry Hemowich with HMPC [ph].

Unidentified Analyst

Good afternoon, gentlemen.

Joseph DeVivo

Hey Larry.

Mark Frost

Hey Larry.

Unidentified Analyst

Congrats on a strong end to the year. Joe, going back to AngioVac, AngioVac had a tremendous fourth quarter, I’m sure you’re just delighted with how well it did. It was way, way above previous quarters. Is there anything extraordinary in the quarter or is it just the progression of the acceptance in the marketplace?

Joseph DeVivo

I don’t know about extraordinary but one of the things that we expected when we did the deal was – a CE marketing, literally a year ago. I think CE marketing we expected in plan permitted [ph], I think it’s in December of last year. So we thought that we would have sometime through the end of 2013 and into 2014, building our international business and that kind of contributed to how we view that initial $10 million number. In the fourth quarter where the first set of revenues that we started to experience from international. So aside from the fact that we had very strong procedure growth, and the procedures are continuing, and what’s wonderful is every week that goes by we have procedures and it’s higher than the prior week, and so we’re very pleased with that. But probably the one thing that’s unique in the third quarter is the contribution of European revenues.

Unidentified Analyst

And the year breakdown Joe then of the $9 million that you garnered in AngioVac between U.S. and O.U.S. which sounds like mostly or almost all U.S. I guess.

Joseph DeVivo

O.U.S is negligible, it just started to contribute in the fourth quarter so it probably propped up the fourth quarter a little bit more than if we pulled it out but not to a huge magnitude. I mean we’re talking hundreds of thousands of dollars, it’s not millions. So – the success that the trajectory in the U.S. is – the third quarter as we mentioned was little bit of a blip, the trajectory is pretty healthy. Again, this will be our first anniversary of our first quarter, and first quarter’s are usually pretty slow for us, so I really don’t know how to predict where we’ll land but I don’t think it’s going to be above $3.3 million, I think we’ll kind of pull back and then accelerate through the year. So – the biggest thing in the third quarter I had to deal with – our fourth quarter had to deal with – it’s a fourth quarter, and international revenue started. And now, last week we were very pleased to receive our Canadian approval and so the team is now going to develop its strategy to get out, maybe by the end of this quarter, beginning of the second, and that will start impacting and we have a strategy that gets us in all the markets around the world. And that should start building – as you know Larry, as every medical device company goes through.

Unidentified Analyst

Whether these are kind of parallel of the procedure growth Joe, in other words, if you grew from – whatever you grew from to is very small I guess in the last fiscal year of anything. Is that all related to the very strong procedure growth?

Joseph DeVivo

Yes, I think it’s proportionate, I think it’s proportionate. But whenever you’ll have a new product launch, a new product, especially a high [ph] product, you’re going to – every time you open up account they’re going to put two of them at minimum on the shelf. And that’s a $26,000 order, and if they put three on, it’s almost a $40,000 order. So you get that right upfront when you create the new accounts you want to start their programs because you’re not going to just put one on. So you do benefit from – there is a proportion of opening accounts and – you go through these, have inflows for the new product launch and at some point you’re focusing more on your procedure ramp than your new account ramp. And the top line might look like it’s slowing a bit but – and that kind of adds inflows that will go through and that’s why it’s so hard to predict and why I don’t want to give a specific number for this next year. But yes, I don’t think for example, that the progress in revenue is – all this is just going to hit some wall because it’s all stocking orders, that’s not the case.

Unidentified Analyst

And Joe, one final question, I know I’ve got several on AngioVac. I’m assuming given the price point you’re selling in that – this will definitely carry above corporate gross margins?

Joseph DeVivo

It’s extremely accretive to gross margins.

Unidentified Analyst

That’s what I thought. Okay, thanks very much.

Joseph DeVivo

Thank you, Larry.

Operator

And it appears there are no further questions at this time. I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Joseph DeVivo

Thank you. I would just like to close with the fact that I’m very proud of the team for delivering the top line. Getting at our operating efficiencies, they are all there, and they are all going to be had the projects that we’ve embarked on, have been a big challenge and as you’ve seen us over the last three years now, this management team has not been afraid of taking on big challenges but it doesn’t always go perfectly. And it’s just more of a function of cadence. But we will execute, we are getting our revenue going, we feel like – as I’ve said in my comments, there is so much more upside growth in driving market share and our Vascular Access business. And continuing to grow AngioVac we haven’t even scratched the surface as far as a percentage of the overall procedures that are applicable, the ability to penetrate our worldwide markets. And then that continues as a great progress on NanoKnife and on Microwave. I think the guys have made a lot of the right moves and we’re moving in the right direction. With these projects off of our plate we’re going to be intently focused on delivering leverage, our investors deserve that. And I believe when we deliver that to you I think the stock will be handsomely rewarded and that’s where our focus is now. So, thank you so much for your interest and have a wonderful evening.

Operator

Thank you. And again, this does conclude today’s AngioDynamics fiscal 2014 fourth quarter and full year financial results conference call. We thank you again for your participation.

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