American Medical Systems Holdings, Inc. Q1 2008 Earnings Call Transcript

 |  About: American Medical Systems Holdings, Inc. (AMMD)
by: SA Transcripts

Welcome everyone to the AMS quarter one 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Ross Longhini, interim CEO.

Ross Longhini

I thank you for joining AMS today, for our conference call to discuss the 2008 first quarter results. With me this afternoon is our new CEO Tony Bihl, we are pleased to welcome to AMS and Mark Heggestad our Chief Financial Officer.

Before continuing I must preface all comments with the Safe Harbor Statement. Some of the statements made today will be forward-looking and are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Those risks and uncertainties are referenced in today’s press release and described in our most recent Form 10-K and other recent filings we have made with the Securities and Exchange Commission.

With that statement we can move forward with reviewing the AMS business as covered in our press release issued earlier today. American Medical Systems posted a solid first quarter, continuing the stabilizing trends we saw in the fourth quarter. Total first quarter revenues were $120.4 million, an increase of 11% over the comparable period of 2007 and in line with our guidance of $116 to $122 million. Earnings per share for the first quarter were $0.11 an increase of 87% over the first quarter of 2007 and slightly above our guidance of $0.08 to $0.10. Mark will elaborate on these figures in a few minutes.

First let me provide some highlights on the quarter. Our total Men’s Health business grew 13.5% compared to the first quarter of last year. Within Men’s Health, the Erectile Restoration posted solid growth, while men’s continence showed exceptionally strong growth. Our prostate business turned in modes growth as we continue to increase our understanding of the market dynamics affecting this business.

Women’s Health revenues increased 5.9% versus last year, with the women’s continence segment turning in the strongest performance.

Our objective for today’s call includes the following: first, Tony is going to spend a few minutes introducing himself; next Mark will provide details on our key financial results from the quarter; I will return to speak to you about our operational performance for the quarter, after which Mark will provide information on our guidance for the second quarter. Our regular Q&A session will follow to allow you time for further review of our quarter.

Before asking Tony to say a few words, I would like to comment on the CEO selection process. The board and I have worked diligently during the past four months to find the best leader for AMS at this stage of our growth. Several candidates were thoroughly evaluated to assess their capabilities to lead AMS’s growth and to further unlock value in the markets we serve. Tony has the experience, leadership capability, passion, and discipline to lead AMS at this time and in the coming years. I am excited to begin working with Tony and to guide his integration into the AMS team.

With that said, I’d like to turn the call over to you Tony.

Tony Bihl

First of all, let me tell you how excited I am to have this opportunity to lead American Medical Systems. As I’ve gotten to know the business over the past few months I’ve been incredibly impressed by our exceptional market position, dominant sales force, track innovation capabilities, entrepreneur culture, and strong management team here at AMS.

It goes without saying that we always have areas we can improve, and I’m looking forward to digging into the business and working with Ross, Mark and the rest of the executive team as we refine our strategy to take advantage of our significant competitive advantages and address these areas of improvement.

I’d like to give you a few words about my background. First I’ve spent the last 25 years of my career in the health care market place working in companies that develop, manufacture, and sell medical products typically involving precision medical instruments or instrument platforms, often referred to as capital equipment, the consumable products that are used on these instrument platforms and then often a service component.

I’ve held senior leadership roles in large divisions of very large companies with broad international presence like Siemens AG, Bear AG and DuPont, and I’ve also operated in midsize private companies with three years at Sterling Diagnostic Imaging, a company with about $500 million in annual sales, where I was an officer and VP of the Instrument Manufacturing and Service business.

In my career I’ve had the opportunity to lead in a wide variety of functions in these businesses, including all aspects of operations, ultimately becoming a plant manager at DuPont, as well as in the areas of finance, strategic planning, controlling, and business development.

If you’re around long enough you see businesses in good times and bad. I’ve had the opportunity to lead major business operations through times of turn around, focusing on profitability improvement, product and process rationalization etc…, as well as to lead organizations through times of significant growth, such as my last three years at Bear and Siemens, where operational and sales execution are the key to success.

This experience has built a foundation of leadership experience which allowed me to take on increasing responsibilities over the past years, so that during the past three years I’ve been CEO and president of the Worldwide Business divisions with fully charged aspects of all business operations, research and development, manufacturing, distributions, strategic planning, sales, marketing, and service, truly a complete business operation.

At Bear I was president of a $1.8 billion annual sales diagnostic business with 5,500 employees and sales operations in 100 countries. We consistently operated a market in sales and were the fastest growing of our top four competitors two years running, while steadily improving our profitability.

At Siemens I was CEO of the new diagnostic business with $2.5 billion in annual sales and 8,000 worldwide employees, charged with integrating two acquisitions into Siemens, and building a new combined leadership team while maintaining sales momentum of the former companies. We finished the fiscal year with sales above market growth rates and exceeded the profit targets that were established for the unit.

Leading these companies gave me the opportunity to interact with customers around the world, as more than half of the revenues were generated outside the US. Our customers were PHD lab directors, hospital administrators, and business leaders of major reference labs like Quest and LabCorp.

In summary, I look forward to combining my experience in leading organizations with that of the AMS staff to build on the core strength of this very successful company and unlock the full value by focusing and delivering.

Now with that background, I’d like to take a minute to let you and the investment community know what you should expect from me in the near term.

I intend to spend the first few months gaining a deeper perspective on AMS, our markets, customers, our products as well as our strategic opportunities and challenges. I’ll do this by sticking with our leadership teams, key customers, physician partners and with you in the investment community. I hope I have the opportunity during this time to meet or speak with many of you and I look forward to hearing your perspective on our business.

Once I finish gaining this baseline understanding of the state of the current business, the executive team and the board will agree on any refinements to the business plan. After we’ve completed this process and shared these plans with you, I promise I’ll be much more visible in the investment community than I will be over the next six months while we complete the process. I want to thank you in advance for your patience and understanding while I am operationally focused.

With that, let me turn the call over to Mark to review the financial performance from the first quarter.

Mark Heggestad

As we reported earlier today, our first quarter 2008 revenue was $12.4 million, representing an 11.1% increase over $108.4 million in the comparable quarter of 2007. Our first quarter revenue profile was very similar to what we experienced in the previous quarter: we experienced strong growth in our erectile restoration, male continence, and female continence products, partially offset by declines in Uterine Health and US laser therapy revenues.

First quarter Men’s Health revenue of $83.6 million grew 13.5% over the comparable period last year driven by strong revenue performance from the too MS product line for erectile restoration and the Artificial Urinary Sphincter and Advanced Sling system used to treat male incontinence.

Partially offsetting this strong performance from these product lines was relatively flat growth in the Laser Therapy product line finishing the quarter with a 3.2% growth rate over the same quarter last year. As we mentioned in the previous quarter, and Ross will elaborate on later, we have identified and are executing initiatives to accelerate the growth rate in the rate in the US Laser Therapy business and anticipate seeing accelerated US growth in the later half of 2008.

Women’s Health first quarter revenue of $36.8 million grew 5.9% over the comparable period last year driven by continuing momentum from the MiniArc sling system used to treat female incontinence. This was partially offset by a decline in Uterine Health revenue during the quarter.

From a geographic perspective, total US first quarter revenue grew 6.9% over the prior year to $84.4 million; total international first quarter revenue grew 22.2% to $36.0 million. Favorable foreign exchange rate comparisons between years added $2.6 million to the international growth.

International revenues have now grown to 30% of our total worldwide revenue.

The company reported net income for the first quarter 2008 of $8.2 million or $0.11 per share. This compares to net income from continuing operations for the same period last year of $4.4 million or $0.06 per share. This represents an 83% increase in earnings growth over the prior year.

As we noted in our fourth quarter conference call, we are emphasizing a cash earnings per share metric in 2008 due to the significant impact of certain items reflected in net income that do not impact cash. Q1 cash earnings per share were $0.17 compared to $0l.13 generated in the same quarter last year and represent significant progress towards the 2008 guided cash EPS of $0.84 to $0.99.

The first quarter 2008 gross margin percentage was 75.9% a slight improvement over the 75.7% gross margin percentage reported in the comparable period of 2007. The 2008 first quarter gross margin represents the continued high margins we have historically experienced with the base business, combined with the relatively lower laser therapy margin.

Although we continue to experience improvements in Laser Therapy margins, driven by several initiatives to improve the reliability of the Laser Therapy product line, as well as manufacturing efficiency’s, a portion of the margin improvement realized thus far has been offset by decreased production volumes as a result of the sale of the Aesthetics business and the recent expiration of the related product supply agreement, as well as a carefully planned reduction in inventory levels, which I will highlight again later.

The first quarter gross margin is in line with our expectation and in line with the 78% gross margin anticipated for full year 2008. We are also on track to realize the full year console and five year cost reduction initiatives we had described previously.

2008 first quarter operating income margin came in at 17.0% versus the comparable margin a year ago of 13.6%. Throughout 2008 we will leverage the investments we made in selling, marketing and G&A in 2007.

As we move through 2008 we anticipate increased operating income margins and will continue to emphasize efficiencies in selling, marketing, and G&A spending. As it pertains to R&D we continue to target R&D spending to be approximately 9% to 10% of revenue.

2008 first quarter interest expense and amortization of financing costs of $8.8 million compared favorably to $10.4 million incurred in the first quarter of 2007. This decreased interest expense was driven by a combination of reduced debt: we have paid off nearly $56 million of our debt since the beginning of 2007, as well as a reduction in the floating interest rate on our senior secured debt.

The 2008 first quarter tax rate was 39.7% which increased from the full year 2007 non-GAAP adjusted rate of 38.2% due to the loss of the Federal R&D tax credit in 2008. We continue to project our 2008 full year tax rate will be very close to 40%.

We ended the first quarter with a cash and short-term investments balance of $38.2 million. Cash generated from operating activities in the first quarter of 2008 was $7.4 million, compared to $8.4 million in the same period last year; however, the first quarter contained $15 million of payments for litigation settlement occurred at the end of 2007, primarily the CyroGen shareholder matter.

Excluding these one time payments, cash generated from operations in the first quarter would have been approximately $14 million higher versus the prior year. Contributing to this increase in cash provided by operations was a $5.5 million reduction in inventory during the quarter.

The company has put in place several initiatives to optimize our inventory levels. We saw noticeable improvements in all manufacturing locations and our first quarter inventory turns are now back up to 2.0.

Also contributing to cash provided by operations was continued leveraging of the 2007 investments in the sales, marketing, and G&A infrastructure. As we continue to drive initiatives to optimize our investments in these areas, we anticipate increased momentum in our cash generation and debt pay down.

Our first quarter GSOs were flat compared to the prior year first quarter. We saw noticeable improvement in our US and Europe DSOs; however these improvements were offset by higher DSOs in the non-European international markets. Our DSOs are also negatively impacted as a result of an increased proportion of our revenue coming from international markets, which has significantly longer payment terms than in the US.

Despite the increased DSOs in non-European international markets, we are confident we will achieve our stated DSO goal of 70 days or less by the end of the year.

Despite the use of $15 million of cash to pay the litigation settlement, the company still made progress on its debt reduction goals with nearly $6 million of pre-payment on our senior secured debt in the first quarter, bringing the quarter end down to $308 million. Shortly following the close of first quarter, the company paid another $10 million on the senior secured debt, bringing the current balance to $299 million. These repayments will provide for improvement against future financial covenants and reduce cash interest expense.

Capital expenditures during the first quarter were $1.1 million, compared to $6.5 million in the same quarter last year, when we were completing the expansion of our corporate headquarters and upgrading our ERP system.

We continue to expect 2008 full year capital expenditures to be less than $15 million.

I will now turn the call back to Ross.

Ross Longhini

I would like to go behind the numbers presented in a bit more detail. I will first discuss the first quarter’s operating trends by business line and then share our perspectives on the upcoming American Urology Association and Association of Obstetrics and Gynecology meeting.

As Mark mentioned, we experienced strong Men’s Health revenues in the first quarter. Our rectal restoration sales increased 9.6% from last year’s first quarter with the AMS 700 MS prosthesis seeing growth in the period.

Our patient outreach activities also continue to grow very well in this segment. The 700 MS continues to gain access to more and more markets around the world. We remain on tract to launch our new malleable prosthesis late this year.

In our Men’s Continence segment revenues grew a robust 39.9% versus last year. We attribute this strength to both the artificial sphincter with InhibiZone antimicrobial treatment and to a robust uptake of AdVance, which launched in late 2006 and which continues to gain traction in the worldwide market place. We continue to introduce AdVance to more new markets around the world.

Additionally three abstracts submitted for presentation at the upcoming AUA meeting in May have been accepted for AdVance. Overall our strong performance in this segment is largely a function of our product grasp and our market leadership.

Our Prostate Treatment business was up 2% with a decline in the base prostate business offset by a 3% increase in the Laser Therapy business. While for Matric sales were slightly down year-over-year, the business has stabilized over the last several quarters.

During the first quarter we did increase our GreenLight sales focus on fiber utilization resulting in fiber unit growth of 8% during the quarter primarily driven by OUS result.

The Laser Therapy market remains challenging and as such we remain committed to understanding the factors affecting new adoption and continued usage of the GreenLight system.

As we discussed on our last call, we have initiated market research to better understand the factors driving this market. We have completed a site of care survey that looked at both the Matric and GreenLight. We also completed a survey of the GreenLight distribution channel, focusing on the mobile providers. Finally we complete the qualitative market research that was conducted to properly set up a larger GreenLight market assessment study.

All of these surveys have been recently completed and we are currently in the process of analyzing the information and developing solutions to improve growth: Having said that, I am pleased to report that our initial analysis of the data confirms that GreenLight is perceived very favorably by both physicians and mobile providers.

One of the facts that we have learned from the market research is that some physicians are trialing competitive systems, primarily due to a perceived cost benefit. We have some data that suggest this trialing may be short lived as the clinical results and ease of use appeared to be inferior to GreenLight.

In fact, in one paper we saw presented at the EAU, it was shown that the retreatment rate with a 980-nanometer laser, similar to BioLitec’s laser, was significantly higher than with GreenLight, which you recall is a 532-nanometer laser.

As mentioned, we are committed to thoroughly understanding the BPH market so that we can optimize our growth initiatives. Meanwhile we are moving forward with a number of activities.

Let me update you on our physician and patient outreach programs that were recently initiated.

Although we don’t have quantitative data yet, we do have several examples that show that patient outreach program as well as referral physician education and outreach leads easily to market growth. I’ll share with you one example from Milwaukee.

In this market, the response to a patient mailer was so overwhelming that the office had to set up a separate line to take calls and two additional physicians in the practice were trained on GreenLight in order to handle the patient load.

We are also continuing to strengthen our ties with out mobile providers. In fact, we are working together with our mobile providers on patient and physician outreach. Our two largest mobile provider partners are physician owned and combined have over 1,600 physician owners. Many of these physicians are not GreenLight users and we are working with these mobile providers to reach more of their members.

We are also reaching out to more of our non-physician owned mobile providers and working with them to reach more physicians and patient through outreach programs.

Finally, our efforts to increase reliability and reduce costs on the HPS system and Laser Fibers are progressing. We are very pleased with the efforts of our engineering and service teams as they continue to improve the durability of the HPS system. The cost reduction engineered into the HPS counsel and fibers are also on track, although as Mark has mentioned, the overhead absorption associated with the reduced volume is offsetting much of the gain in this first quarter.

On a clinical front: At the European Urology Association meeting held in March, a study reporting on five-year data on the GreenLight system was presented. The study concluded that GreenLight does continue to provide excellent outcomes through out the five-year period. Additionally eight other papers were presented on GreenLight that also continue to build our body of strong clinical effectiveness.

At the EAU we hosted a GreenLight symposium attended by more than 400 physicians and also had over 200 physicians’ trial GreenLight at the wet lab in our booth.

Clinical studies continue on plan for the continuum cross detecting an anastomosis device and two papers were presented at EAU. As a reminder, we are not anticipating revenues from this product continuum in the current year.

Turning to Women’s Health: Revenues rose 5.9% to $36.8 million from last year with the Women’s Continence business driving growth.

As noted earlier the relatively new MiniArc product has really taken off nicely with record revenues in the first quarter and nice sequential uptick from the fourth quarter. To some extent this growth is aided by our recent roll out to international markets, albeit we are still early in our launch outside the US. We expect that additional reimbursement coverage in markets around the world will further bolster the uptake of MiniArc.

Visibility studies for Accessa, our neuromuscular stimulation technology for urge incontinence and interstitial cystitis are continuing. The information from these studies has helped us continue to refine the device, surgical technique, and patient selection. We plan to expand our clinical studies later this year. We anticipate that the IB clinical trial will begin next year.

We remarked in the last call that our Prolapse Repair business is slowing as the market for mesh augment and repairs is becoming saturated. The 4% growth in this segment is in line with these trends.

We continue to expect that new products are key to spurring growth in this market. To that end we commenced a clinical study recently for Elevate our new product in this category. We have CE mark and 510-K approval for the first product in the Elevate family. This product is scheduled for a May 3 quarter release.

We also continue to study both Apogee and Perigee. Clinical data on these prolapse products will be presented at the AUA.

The Uterine Health business fell short of our expectations and actually declined on a year-over-year basis. We did realign the Her Options sales force during the quarter and had recently changed the focus from counsel placement to probe utilization. We believe this downturn is temporary, however we announced that growth in this segment may come slowly. As we have discussed before, Her Options requires market development to educate both patients and physicians to the benefits of in-office endometrial ablation procedures over traditional hospital based treatment and we continue to work toward this end.

Our Topaz devices to treat fecal incontinence continue to progress through feasibility clinical trials. We plan to conduct an IDE study in order to get specific indication approval in the US. The IDE is planned to begin in Q4.As you may recall, we have talked about bringing full rectal surgeons into the fold of our sales and marketing focus as Topaz progresses to market.

Outside the US sales grew strongly, up 22% including the favorable impact of currency. Excluding currency sales rose 11%. This growth was distributed across many product lines, in particular the growth meters were electro restoration, male and female continence, and prostate health.

In last quarters call we advised you of some changes to our international management structure. We continue our search for the general manager of our international business. In the meanwhile, the leaders of these businesses will continue to report directly to me.

In May, we will attend two important medical meetings. ACOG, or the American Causes of Obstetrics and Gynecology in the women’s from May 3 to 7 and the AUA, American Urology Association meeting in Orlando from May 17 to the 22. The AUA is expected to attract 9,000 physicians and ACOG is expecting 4,000.

At the AUA, 21 GreenLight abstracts have been accepted along with four abstracts for AdVance and one podium presentation for each of Apogee and Perigee.

At ACOG, our Women’s Health products are in the spotlight and we expect to see data presented on MiniArc.

At this point I will turn the call over to Mark and he will provide guidance for the rest of the year and the second quarter.

Mark Heggestad

Although we experienced mixed result in some of our product lines in the first quarter, we are encouraged by the strong performances in erectile restoration, male continence, and female continence. We are also pleased with the progress toward identifying and driving the initiatives necessary to accelerate the US laser therapy market.

Accordingly we remain confident in the 2008 revenue and EPS guidance we provided on our February 14 conference call, with revenue in the range of $500 to $520 million and earnings per share in the range of $0.57 to $0.72.

As previously stated, we are also reconfirming our projected cash earnings per share for 2008 in the range of $0.84 to $0.99. We define cash earnings per share as adjusted net income from continuing operations, excluding the impact of significant non-cash items, which we have identified as amortization on intangible assets, amortization of financing costs, and stock-based compensation.

This guidance excludes the impact of an unusual non-recurring type charges such as IP R&D on milestone payments related to prior acquisitions.

As it relates to the second quarter of 2008, we are guiding revenue in the range of $123 to $129 million and earnings per share in the range of $0.13 to $0.15.

I will now turn the call back over to Ross.

Ross Longhini

Thanks, Mark. I’d like to close by thanking you for your continued interest in American Medical Systems. Our markets remain robust and our market leadership, coupled with a very capable organization, enables us to realize tremendous opportunities. In the current year we expect to achieve a four-fold increase in the number of patients treated with our product versus just five years ago, a meaningful accomplishment in terms of improving the lives of patients.

We are very pleased to be bringing Tony Bihl on board with this favorable backdrop.

Tony Bihl

Well thanks again, Ross. I’d like to take this opportunity to acknowledge and thank Ross and Mark for their leadership during this first quarter, which yielded the positive results you’ve heard here today. Ross demonstrated the leader here is by staying focused and moving the business forward in a very positive way and creating real momentum among the team at AMS during his time as interim CEO.

Again, I very much look forward to working together with Ross and Mark. We all look forward to talking with you again at the end of the next quarter, and I’ll now turn the call back over to Ross and Mark to answer your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Tom Gunderson – Piper Jaffray.

Thomas Gunderson - Piper Jaffray

We’ve got a lot of CEOs in this sector that are commuting. I’m wondering if you’re going to relocate to the Twin Cities and then second, is there a particular area in the early stages of your analysis and understanding of American Medical Systems is there a particular area that you want to focus on first as far as continuous improvement.

Tony Bihl

First of all yes, my wife and I are relocating to the area; in fact we’ve already had our first house hunting trip and I’m pleased to say she’s excited by the opportunities and the possibilities, so I will get that process moving very quickly.

In terms of where I want to bring first focus, I think the opportunity; I’ll call it, in this laser business is probably one of the most exciting that I see ahead and so it’s an area where I most want to gain some knowledge about our full comprehensive plans to capitalize on that opportunity.

I think there are some parallels in my background with businesses that consist of a capital equipment that uses a consumable as the real revenue generator in the business, so I’m anxious to get in and see if I can add value in that area.

Thomas Gunderson - Piper Jaffray

Mark, Q107, I think it was Q107, it was hindered by low inventories that caused back orders on three different product lines; you worked inventories back up and now you mentioned that you had inventory reduction plans that were underway. Give us some comfort that you’re not going to go too low again. What did you learn from that and why is reducing inventory a good thing when you turn silicone into gold?

Mark Heggestad

That’s a very, very fair question, Tom and you’re right. It was about this time last year, actually it started even before this time if you remember; when we bought Laserscope Scope and the day we bought them, we were having a hard time keeping up with the requirements in terms console availability and then by the time we hit the first quarter we added to that; we had introduced the MS 700, which we used loaner chips to sell the female prosthesis and building enough loaner chips was difficult with the significant demand that we saw in the first quarter last year on the MS 700 system.

We did indeed struggle as we went through the first quarter and then to exasperate all that, if you remember we were going through the implementation of a brand new ERP system and that exasperated the whole process even more.

The good news is, as we look at what we’re doing today, so the knee jerk reaction to that, we did build a lot of excess inventory as we went through 2007. The general feeling as you said, I don’t know that I’d say “turn silicone into gold”, but when you have margins at the level we have them at, we certainly understand that you do not want to lose one single sale because you’re not properly stocked from an inventory perspective.

What we’ve added during the process is a number of initiatives to assure that our forecasting is done more accurately. We did get the new ERP system in around May of last year was when we finalized that, but we’ve been improving on the benefits of that system ever since.

We’ve made some changes in both management and process as it relates to supply chain management and at the same time everybody knows that the number one rule is we will not stock out of inventory as we move forward and it’s managed very, very closely.

Thomas Gunderson - Piper Jaffray

Last question is a broad question on the hospital economy and that is, selling capital equipment in there either. Tony maybe you can give us your experience at Siemens or Ross or Mark what’s going on now at American Medical Systems with lasers.

As some of the hospitals are hit with increased, unbudgeted interest expense from auction rate securities and other issues, did you see any push back from any subset of the hospitals to buying capital equipment just now and maybe saying, “come back to me in the summer, because right now we’re dealing with a fire that we have to put out”?

Mark Heggestad

Tom let me take a first stab at that and then I’ll ask Ross and/or Tony to input anything.

We’ve been asked a lot about has the general economy been having an impact on the business in general. On the non-capital equipment side, certainly when it comes to the implantables’ we have very good reimbursement, Medicare on a number of our products and commercial insurance on the rest of the products. The capital side I think does get a little more difficult with the economy turndowns.

I wouldn’t say with any certainty that we’ve been negatively impacted as a result of the economy, but at the same time, when you take a look at where we’ve had our difficulties, and that’s despite some very significant initiatives, it certainly is on the capital equipment side.

With out going so far as to pointing to the economy in terms of it’s been dragging on our capital equipment, it certainly has made the sales process more difficult.


Your next question comes from David Lewis – Morgan Stanley.

David Lewis - Morgan Stanley

Ross I want to dive into Laserscope, a little more granularity here. I’ve seen stuff on diligence that in this quarter you had some programs in place to push more disposables, or fibers versus boxes, a program not entirely dissimilar to the one you described in Her Options.

In the box fiber business in the quarter, you said 8% year-over-year growth for fibers?

Ross Longhini

Yes, that is correct.

David Lewis - Morgan Stanley

That implies, obviously boxes were down, they’re always down seasonally. Can you walk us through how much of that box decline do you think is simply seasonal, box purchasing decline, and how much of that was the initiative or the change in the sales force as it relates to pushing procedures or fibers over boxes.

Ross Longhini

Certainly it’s a little bit typical to tell or to quantify exactly how much of that was the change in the incentives for the sales force versus the number of counsels that were down. If you look at the number counsels that were down, it was not down very much, frankly, at all from what’s been our historical run rate. So, I’m not certain that I would be able to really part out or have any way actually at all, to tell how much of that decline was due to the incentive versus due to seasonality.

David Lewis - Morgan Stanley

Where do you think we are on HPS console penetration in the US market?

Ross Longhini

Again, I don’t want to be evasive, David, to the question. It’s a little bit hard to tell exactly how many hospitals are being serviced by mobile providers.

If we look at, we know that the number of laser therapies that are done as opposed to TURPs, we’re still probably penetrating with lasers roughly 30% or something in the US market, if that high; but a significant portion, maybe 2/3 of our business goes through the mobile provider, not quite 2/3 but 60 some percent goes through mobile providers.

So, I don’t have a good feel right now, I don’t have a map in front of me right now to tell me exactly how many hospitals they’re calling on, but I would have to say that it certainly has got to be in order for us to get to nearly 30% of the penetration, it’s got to be more than that in terms of the number of hospitals that are serviced.

David Lewis - Morgan Stanley

That’s helpful. Are you at least able to say, I know it’s only been a month here in the second quarter, but are you confident your sales force can execute on driving more procedures or greater procedure growth, why not see immaterial decline and box placements versus expectations?

Ross Longhini

As I mentioned, we’re very bullish on some of the things that we’re learning from our market research initiatives; however, a lot of that information that we’ve gathered so far has not been transitioned from simply knowledge into market solution. Despite that, it appears that some of the initiatives that we, if you were on the com during the first quarter, some of these outreach initiatives indeed do appear to be some of the right levers.

We only have handfuls of examples; therefore I’m reluctant at this point, next call we’ll get into it in more detail, but I’m reluctant at this point to say that these few anecdotal signs are really going to pay off, and a couple of those that I’ll talk about.

I mentioned on the call one patient mailer that went out and he have literally thousands and thousands of letters going out this first quarter, that’s one initiative that we undertook; we think that one probably will pay off.

The other one that we’ve done is we’ve had a few outreach meetings were a urologist in a community brings in his referring physicians and tells those referring physicians how we can handle their patients with DPH. Again, on an anecdotal basis those outreach programs have been productive. We’ve seen many patients come through those channels as well, but it’s only a couple of handfuls here and there.

The other ones that we’ve done are we’ve really bolstered our emphasis in teaching institutions and teaching institutions are often connected with the VA.

We’ve had some outreach recently to be consultants to people that were put in the VA to better understand how we can reach deeper into that large number of patients that are treated with DPH. The information we got, I believe, was invaluable and that changing our methods to get into these teaching institutions to make sure that they have access to our boxes.

At some point, you’re going to have to do it in teaching institutions at a slight reduction in cost possibly, so those are the kinds of things we’re looking at: to really get the footprint out for GreenLight.

Many of these are too early to comment. This is how much investment will take and therefore we’ll get this return and we’re not there yet. Again, I’m very confident that we will find the right leverage to grow this market.

Mark Heggestad

David sorry to interrupt you and maybe one more question after this, but from an administrative standpoint we did get a lot of feedback last time after our last conference call, that we allowed our conference call to go way too long. Therefore, I decided I’d ask that, as we move forward each caller try and limit their number of questions to one or at least no more than two, to assure we can get through all the callers, thanks.

David Lewis - Morgan Stanley

Ross you gave us the laser scope market number, or for Mark, of 53% I believe, last quarter. Where is that margin in the first quarter and where do you think that can be by year-end?

Ross Longhini

The Laserscope gross margin, it was lower than in the first quarter as we expected, the revenue being a little lower, a lot of fixed costs still in place. As we mentioned at the end of the fourth quarter at least during the first half of the year, we’re dealing with some of the fixed costs related to lower volumes as we wound down the aesthetics production that we had.

We’re anticipating that we should be able to bring the Laserscope margins up by as much as 6% points or so, which can have a couple percentage point impact on the total company.


Your next question comes from Jonathan Block – SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey

I believe when you gave annual guidance at the end of the last call, the granularity was maybe low-teen revenue growth for Laserscope, and then whatever the implicit guidance was for the base business. Obviously 1Q we had very strong revenue growth from the base, a little bit weaker in laser. Do the parts shift here and should we maybe bring down the Laserscope expectations for fiscal year ’08?

Mark Heggestad

As Ross had talked about we have a number of initiatives in place and we feel during the first half of the year that we didn’t want to guide towards growth rate really much different than how we ended the fourth quarter.

In the first quarter, with the growth rate of a little over 3% was very similar to the laser growth rate we had in the fourth quarter of around 3%. Until we prove that a lot of these initiatives are taking off, we’re assuming probably something relatively similar to that in the second quarter.

For the full year our guidance on the laser, if you just looked at our total year guidance of $500 to $520 million, our implied assumption from a Laserscope standpoint was probably somewhere in the 5% to 14% growth rate. Again, that’s a difficult number to predict, albeit for a full year, until we start to see how some of these initiatives will really pay off in the US market.

Jonathan Block - SunTrust Robinson Humphrey

Gross margin is largely flat year-over-year, yet base business seems to account for a higher percentage of revenue. My first question is can you break out, like you normally do, base versus Laserscope gross margins? The second part would be it seems like base may have come in a little bit. Is that just mix shift with incontinence accounting for a bigger piece, or is there something else going on there?

Mark Heggestad

The base business, we usually don’t build it into our numbers or our plan, because when you’re running margins of around 83, 84, 85%, it’s hard to predict that you’re going to do even better.

Obviously there are always initiatives in place to do even better and our base business has done well in the first quarter. Our base business, again, had a margin of right around 84%, but as we looked at the Laserscope margin it was just over 48% for the first quarter.

Again, we’re dealing with a number of things: We did take some incremental warranty cost during the quarter. We did write off some inventory items as we were looking to really clean that business up. We were dealing with the lower volume; so again, despite where that margin came in in the first quarter, we feel very confident about the ability to improve on that going forward.


Your next question comes from Bruce Jackson - RBC Capital Markets.

Bruce Jackson - RBC Capital Markets

With the operating expenses there was really good control, are these levels of operating expense sustainable, especially the G&A?

Mark Heggestad

Yes, absolutely. As we look at our numbers going forward into the year, we feel real confident that we’re going to leverage the current spending rates. Other than on the R&D side, we really don’t anticipate any growth from a quarter-to-quarter basis on the marketing and selling side, or on the G&A side. In fact we intend to probably leverage that G&A down even a little bit more as we continue to go through the year.

Bruce Jackson - RBC Capital Markets

My other question is about the 700 and AdVance: they’ve both been hanging in there very well. Is this level of growth sustainable and what do you think is driving that growth?

Mark Heggestad

700 has been hanging in there, as you mentioned, very well: we’re very happy with the progress of that. Below that, both a mixed shift as more and more physicians believe that the 700 series is a solution for their patients as opposed to either the two-piece Ambacor or the valuable prostheses that we have: that mixed shift is helping us increase the revenue potential.

The other thing that’s helping us, as we continue to talk about it, is these patient outreach programs. We have become quite proficient at going around the country and now in a few cases, around the world, in doing community health talks, as we call them. We go out and we do educational seminars for patients that are delivered by, typically, patient advocates and physicians and these are patients of a particular physicians practice, and those have continued to pay off as well.

We think that that growth, going forward, is going to continue to remain robust.

On the male continence side, as I’d indicated Bruce, we had a 39.9% growth rate during the first quarter. I want to caution listeners a little bit, who think that that’s a sustainable growth rate in this quarter and coming quarters, because that was 39.9% over a very soft Q1 of ‘07.

If you remember what happened last year, we had just introduced AdVance and we were all scratching our heads collectively saying, “What the heck happened to the male continence business here at AMS”? And, we had hypothesized at that time that doctors and their patients were trying to understand how AdVance fit into their repertoire of treatment, that there was a little bit of a delay going on. And indeed, as the year progressed we determined that was a proper hypothesis.

So, Q, the comparable was quite weak last year; nonetheless, we do believe that our male continence business will continue to grow ahead of our expectations or ahead of what we thought just a few months ago, so we’re really pleased with that business.


Your next question comes from Tycho Peterson – JPMorgan.

Tycho Peterson - JPMorgan Americas

As we think about, the key priorities in the trend through out the year and some of these initiatives between GreenLight, Her Option and you just mentioned 700 MS patient education: what are the top two or three priorities here in the next two quarters or so?

Then are you still looking at driving referrals? You’ve talked in the past about working with cardiologists to drive ED referrals. If you could just comment on maybe those initiatives as well it would be helpful.

Ross Longhini

As far as the top initiatives in my mind, and I would echo the question that was given or the answer that Tony gave to a question earlier about what’s one of his areas of focus coming on here, that’s no different than what we’ve said before; is that we’ve got to figure out ways to drive more value and basically get more patients treated with GreenLight. In doing that really we’re finding that we need patients to know, we need doctors to know.

A lot of these patients that are, frankly, watching TV these days and seeing the commercials for Flomax and Advadart, they’re out there running to their general practitioner and they’re given a drug prescription.

What we’d like to do is make sure that those general practitioners know that there are alternatives for these patients as opposed to staying on long-term drug use and that’s part of the physician outreach that we’re doing and we’re doing that through different educational seminars with physicians, combined with urologists in local communities.

That is one area of focus for us going forward. Along with that, I think, in fact maybe the number one thing we’re doing is really making sure that patients are aware.

So, whether improvements to the way that patients get information on the web or improvements in the way that we reach out to patients through neighbors, from their urologist, these are the areas that we’re really focusing on, primarily through the urologist, I’d have to say. That’s absolutely key, I think, for us going forward. That’s not just a US phenomenon; we’re going to start that push in the US.

Outside the United States, we’ve continued to see very strong GreenLight growth particularly as we get the product approved in more and more markets. Just the fact we’ve got the products in Argentina for instance and we’re very excited about starting to explore new opportunities in Latin America.

We can gain footprint outside the United States shift simply by increasing our geographic availability, but also by starting to figure out what drives patients to the GreenLight treatment around the world.

I said about GreenLight, values are very high priority for us. The other ones, that I’ll just tee up for maybe the first time here is that I believe that there is significant opportunity and we’re going to start piling different trials here to figure out what’s the best way to do it, but on the female continence side.

If you take a look at the MiniArc product and you understand how minimally invasive that procedure is, you’d really scratch your head as to why any woman would live with incontinence and we think that’s mainly a matter of women knowing that they have that solution; so, that’s an area that we’re beginning to do some piloting in as well.

Tycho Peterson - JPMorgan Americas

You had called out MiniArc as doing well outside the US, in your comments. Where in particular, is it mainly in Europe, is that doing well?

Ross Longhini

Yes, actually MiniArc is doing well in every market that we’ve introduced it. Sometimes we were having a little bit of push back. MiniArc is doing very well in the US as well, but sometimes we’re having a little push back with is reimbursement. As we mentioned before, we’re trying to reset a price point with MiniArc and it’s still commanding a pretty significant price premium due to the other slings in the marketplace. So in a few countries, France being one of them, we don’t sell MiniArc and we’re working on getting the reimbursement approvals in place.

Tycho Peterson - JPMorgan Americas

On the overhead absorption, can you give us a sense as to how much of that carries through into the next quarter?

Mark Heggestad

Quite honestly, it will be very similar in the second quarter to what we saw in the first quarter and then we’ll start to see upticks in the third and fourth quarter.

Tycho Peterson - JPMorgan Americas

Then on the pipeline, no update to go on at this point: you talked, I think last quarter, about some improvements in the three-month occlusion rate; any change in the thinking there?

Ross Longhini

No change to update with at this time. Yes we were pleased with the three-month occlusion rates that we got; however, they weren’t sufficient for us to go to the next step in our, it didn’t pass our internal hurdle; so consequently we are continuing to do refinements to the design of the product itself and that is planned to take most of 2008 to get those refinements completed.


Your next question comes from Jayson Bedford – Raymond James.

Jayson Bedford - Raymond James

First on Women’s Health, just 6% growth, is this a fair growth rate going forward and if not, what besides continued traction of MiniArc, what really re-accelerates this segment of the business?

Ross Longhini

That growth rate is not a growth rate that we were expecting, certainly not a growth rate that we expect going forward. That growth rate was a combination of a number of things as I had indicated: one is very strong growth on the female continence business. We were pleased with that business. The prolapsed and to be honest with you, female continence, if we continue to get the growth rates that we got in Q1 we would be pleased going forward.

On the prolapsed business we believe the key there is clinical data, some of which will be talked about at AUA as I had indicated, but really the key driver to that is going to be Elevate. We think that Elevate is really a unique new product that will drive a lot of folks to us in the prolapsed business.

The growth rate of roughly 6% on the Women’s Health business was really because on a percentage basis we had a rather steep decline in uterine health during the quarter and when averaging that it really did pull down the overall growth rate significantly. That, as I mentioned, was a couple of things.

I do believe that realignment of the sales force during the quarter did hurt us and I shouldn’t say hurt us in the long term, but it hurt us in the quarter. In addition to the fact that when we changed from very much of a box focus on Her Option to a fiber focus, I think that what we didn’t do is we didn’t plan appropriately, because when you do that you miss out on the initial stocking orders you get with probes that go along with the box placement; so it takes you a quarter or two to work through that until you start getting really drive into our utilization.

We do expect the uterine health business to begin to plateau or not plateau, but rebound a little bit and then grow steadily, albeit, we don’t expect really high growth rates in that business.

What does that all sum up to? Certainly a higher growth rate than 6% and we think that Women’s Health business should not be lowering our overall business growth rate.

Jayson Bedford - Raymond James

On HPS what percentage of the time is a new box, a new HPS box replacing a PV box, or going to, versus a new user? I’m just trying to figure out if indeed the installed base is growing.

Mark Heggestad

I don’t know that I can answer that specifically. When it comes to trade-ins, the amount of trade-ins we get are very, very minimal; so from my understanding I think we have a number of users who have PV boxes versus HPS boxes as a way of increasing their volume or their capacity and I think very few are actually replacing PV boxes.

Jayson Bedford - Raymond James

So Mark, the bulk of the HPS sales are tentative to the business it sounds like?

Mark Heggestad

Yes, I believe that.


Your next question comes from Thomas [Hochokus].

Thomas [Hochokus]

Most of my questions have been asked already. I did want to follow-up on Jason’s question with the Women’s Health growth rate. Are you suggesting that we get back to the double digits as early as Q2 or do we need to see the Elevate product help that out towards the back of the year?

Ross Longhini

It should get close back to the double-digit growth rate, but I think that in, and that’s yet committed to say that it’s going to bounce back there in Q2 right away. The female continence business is growing well into the double-digits and very strong there, we like that. But, I have to admit we were thrown a little bit of a curve ball with our uterine health business and our options back in Q1 and for us to understand that and then be able to say “what is that going to do in Q2”, we’re not quite ready to go out on that limb yet.

Mark Heggestad

I would just add to that, as we looked at our guidance for Q2, again similar to what we did in the previous quarter, we looked at the most recent quarter in helping us set that guidance. Quite honestly, as much as we believe in what Ross said, we did not build into our Q2 guidance an assumption that we’re going to see that rebound.

Again, we’re going to be very cautious when we’re giving guidance to assure that the assumptions we have and the initiatives we put in place will really bear fruit before we literally build them into guidance numbers.

Thomas [Hochokus]

To tag onto that, it seems like, just looking at the competitive landscape in the Mini Sling segment of the market, that maybe competitors are pretty quick this time around to duplicate your efforts. Can you just give a quick over view of whose out there with like products?

Ross Longhini

The products that I’m aware of that are out there is J&J is still out there, of course, with their TVT Secure. I was surprised recently to see some market data that suggests that despite some of the challenges with that product that there’s still a fairly high amount of usage of the TVT Secures. That’s the biggest other play in the market.

There are a number of smaller players out there and a number of other players that we expect to come out there, but haven’t necessarily really shown up in any significant way. One of the things that ‘s going to happen at the end of the day, we anticipate, is that we’ll continue to obviously fight it on the marketplace, but we also, at some point these product patents will issue and we’ll have to make sure that we’re projecting our patents offering.

Thomas [Hochokus]

Could you talk about what drove the $1.3 million in other income on the income statement?

Mark Heggestad

I realized as I was walking through the P&L that I had not touched on that one. $1.3 million in 2008 relates to a couple things, but by far the biggest item is just the way the foreign exchange rates play out on intercompany receivables, intercompany payables, intercompany notes. The foreign exchange rate increased dramatically during the quarter.

In most of the P&I, you look at it year-over-year though, when it comes to the intercompanies we looked at it during the quarter, so that’s by far the biggest piece of that $1.3 million. There are a couple of other items: there was one related to the almost final sales of our aesthetics product. We talked about how we’ve blown that contract down and we’ve talked about how we’ve literally stopped manufacturing that product, but we do have inventory of that product that we’ve been selling to Uridex as we wind down that agreement and we basically sold the majority of the remainder of that and that had a favorable impact too. It’s considered discontinued ops where we run that through operating income.

The point I’d like to leave, and then as you’re comparing it to last year, there was about $1.2 million in the last years number that related to a paid up license fee on [Seltion]. The key I’d like to leave you with on that on is as you look at other income going forward during the year, I would not count on, unless the FX rates move significantly one way or the other, right now I wouldn’t count on any major income or expense or loss in the remainder of the year on that line item.

Thomas [Hochokus]

With GreenLight, I think last quarter you gave what the US versus OUS growth rates were. Could you tell us what that split was?

Mark Heggestad

On the US side, as we looked at GreenLight from a worldwide perspective, on the US side the growth rate, the decline is about 8%, so as that level of declines improved from where it was in the fourth quarter; then on the OUS side we were up about 22% during the quarter.

Thomas [Hochokus]

Then did, you mentioned 8% unit growth, did ASP or fibers stay pretty steady from last quarter?

Mark Heggestad

Yes it was quite flat from last quarter.


Your last question comes from Gary [Laugh]

Gary [Laugh]

Can you tell me what the foreign exchange impact on revenue was in the quarter?

Mark Heggestad

$2.6 million.

Gary [Laugh]

What was total debt at the end of the quarter and where were you with respect to the covenant levels?

John R. Brewster

At the end of the first quarter we had the same convert able, the $374 million outstanding and then the senior secured debt was at $308 million. In regards to covenant compliance, we’re well within compliance on all the financial covenants for Q1.

Ross Longhini

I’d like to close by again just thanking everybody who joined us on the call today and those who will listen in later. I really do believe that a lot of the changes that we’ve seen in AMS in the recent months and as demonstrated in our performance in the last quarter are really building on the momentum that we see growing in the business.

I’d like to, finally, just thank Tony for joining the AMS team and look forward to his contributions as we go forward. Thank you.

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