Robert Jones - Senior Managing Director Joseph M. DeVivo - Chief Executive Officer, President and Director Mark T. Frost - Chief Financial Officer, Executive Vice President and Treasurer.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division Charles Haff - Craig-Hallum Capital Group LLC, Research Division Jeffrey Chu - Canaccord Genuity, Research Division Larry Haimovitch - Haimovitch Medical Technology Consultants.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AngioDynamics Fiscal Second Quarter 2014 Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, January 9, 2014. I would now like to turn the conference over to our host, Mr. Bob Jones, Investor Relations. Please go ahead, sir..

Thank you, Lily. Welcome, everyone, and thank you for joining us for AngioDynamics' conference call this afternoon to review the financial results for the fiscal 2014 second quarter, which ended on November 30, 2013. The news release is available on AngioDynamics' website at www.angiodynamics.com.

A replay of this call will be archived on the company's website.

Before we get started, during the course of this conference call, the company will make projections and forward-looking statements regarding future events, including statements about revenue and earnings for the fiscal year 2014 third quarter ending February 28 and the full year ending May 31.

We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's forms 10-Q and 10-K, which identify specific factors that may cause the actual results or events to differ materially from those described in forward-looking statements.

[Operator Instructions] We appreciate everyone's cooperation with this procedure. And with that, I would now like to turn the call over to Joe DeVivo, Chief Executive Officer..

Thank you, Bob. I'm very pleased to report that the growth story is returning to AngioDynamics. Our revenue of $88.6 million this quarter is ahead of our plan, giving us good momentum as we head into the second half of the fiscal year.

Our worldwide sales growth of 3%, net the supply agreement, is an improvement over the 1% posted last quarter and 2% the quarter prior, during the fourth quarter of last fiscal year. So that's 3 quarters of improvement.

And this top line acceleration is due to an overall higher performance in sales and marketing execution, as well as growing acceptance of key growth drivers in each of our 3 business segments.

Pretty much for the first time since the acquisition of RITA, the Peripheral Vascular business, which is over 55% of our company, grew 7% worldwide, up from 5% last quarter, and became the fastest-growing business in the company. Driven by $2 million in AngioVac sales, the team delivered a strong and balanced performance.

AngioVac was not only the only positive story as the team delivered double-digit growth in EVLT while maintaining a flat Fluid Management business in a declining market and strong maintenance of our core product lines, pretty much proved that the organization and our sales and marketing PV teams can grow new business while preserving the core.

I was very pleased this quarter with the entire team's delivery as we've had more sales territories in the money than we've had in a long time. Oncology, which is our smallest business, grew 5% globally, up from 4% last quarter, with double-digit growth in the U.S. partially offset by sluggish international capital sales.

When you think about it, the 2 combined, both Peripheral Vascular and Oncology, represent 70% of the company which today has collectively grown at above 5%. The balance of our business, Vascular Access, improved to negative 4% from negative 5% quarter-over-quarter.

We all know this has been our area of focus and also quite frankly, in my view, the business with terrific opportunities for growth in what I believe the very near future. The negative 4% growth in the quarter brings the whole company down from a mid single-digit grower, but in my view, that won't be for long.

I've seen recently this business firming up, and even without tip location, the clinical value that BioFlo brings is being appreciated in the marketplace. I believe in the not-so-distant future, we'll see this business level off even without tip location and move to, at least, market growth with it.

If that happens, we should be a mid single-digit grower in the foreseeable future. The pieces in the business are step-by-step falling into place. Regarding tip location, I expected to see clearance before the end of the year, but, of course, it hasn't happened yet.

Our partner did receive a few more questions from the FDA reviewer at the end of November and subsequently answered them before the Christmas holiday. If the FDA is satisfied, approval is imminent. If not, our partner will continue to answer questions until they are satisfied.

They are -- we are, though, fully prepared for an immediate launch in the U.S. following approval. Product is in inventory and in December, the entire sales force for Vascular Access was brought in and trained to support and sell the Celerity tip location system.

Our experience with the Celerity tip location system in Canada thus far has been very satisfied. It may be an even better product than we first believed, and it seems Celerity has some real competitive advantages to the competition.

BioFlo continues to be an important part of our strategy, with now over -- or about 35% of our global PICC revenue being BioFlo. We also started to shift our first BioFlo ports this quarter, which is a really nice add to a very complete and compelling port line.

There's no tip location in our way with ports, and I expect to make headway in that category. Similar to the benefits of BioFlo in PICCs, ports have an even longer dwell time in patients and have higher total occlusion rates than PICCs.

The difference is that complications to total port occlusions in cancer patients can mean a much higher probability of patient death, a far more dire complication than upper extremity DVT for PICCs.

Now it will take us some time to compile data demonstrating and proving that BioFlo can impact this product, and important clinical efforts are being constructed. That said, it's nice to have this product in the market.

Regarding BioFlo dialysis, we expect to hear from the FDA in March of 2014, as everything has been submitted, so hopefully, with a positive outcome. Moving on, this quarter I made a move to promote John Soto to Chief Commercial Officer, following his very successful turnaround of our PV business.

In this role, Peripheral Vascular, Vascular Access, Oncology and international sales and marketing efforts, all now report in to John. I'm excited about this move as my objective is to accelerate our international opportunity through an improved alignment of our business and priorities.

Moving forward, we will continue to increase our direct investments internationally and focus also our business development activities there.

The last several quarters of international performance on the whole, in my view, is suboptimal, and extra attention is now being placed to get it in line with the success we've been able to generate in the U.S.. On the operating front, we continue to make progress.

We announced an operational excellence program, which over the next 3 years will deliver an additional $15 million to $18 million of cost savings designed to make the company more lean and efficient. We also have an important milestone in a few weeks where we'll go live on a single company-wide ERP system.

This should allow the company to consolidate from 3 different systems into one more efficient, one that provides more realtime data for our executives and health expense management more readily. With that, I would like to turn the call over to Mark Frost, our Chief Financial Officer.

Mark?.

Thank you, Joe, and good afternoon, ladies and gentlemen. Building on Joe's commentary, we have continued to drive improvements to our performance, overachieving on the revenue front and meeting adjusted earnings and cash generation targets. I will start with our quarter results and then move to guidance for both the third quarter and the fiscal year.

Starting with revenue, total revenue was up 2% from prior year, but excluding the impact of the planned wind down of supply agreement, we were 3% higher than prior year. This has improvement from the 1% growth in quarter 1 and a better measurement of our sales performance.

Consistent with our strategy to bring faster growth, higher margin products to the market, our growth drivers continue to increase through impacting the overall business. AngioVac delivered $2 million in sales, while BioFlo's market penetration reached 35% of global PICCs now sold with this disruptive technology.

During the quarter, we had also launched BioFlo ports, which Joe mentioned, which helped drive growth in this product line for the first time while contributing to the overall improved performance in Vascular Access. Microwave, again, doubled revenue in the quarter.

Turning to product performance, Peripheral Vascular increased 7% to $48.9 million, reflecting over 20% growth in EVLT and a larger contribution of AngioVac. EVLT's results were driven primarily by exceptional U.S. performance and the conversion of a competitive customer, as well as the benefit of the new NeverTouch, a next-generation product.

Fluid Management, again, was essentially flat, reversing its past negative results as they came in above our expectation. Vascular Access was down to $25.6 million compared to the prior year, but a sequential improvement from this year's first fiscal quarter.

PICCs is expected to continue to be impacted by the lack of tip location, and sales were down 5%. Ports, however, grew 1%, reversing the erosion experienced over the last 2 years driven in large part by new product introductions as well as the previously mentioned launch of BioFlo ports. Oncology surgery growth improved to 5%.

Growth was lower than we expected, reflecting mixed performance within NanoKnife which experienced positive growth in the U.S., but a tough quarter internationally as a number of NanoKnifes did not close despite the strong pipeline. On the thermal ablation front, driven by strong U.S. microwave results, growth came in at 11% for the quarter.

From a geography perspective, U.S. revenue increased 3%, while the international markets demonstrated slight improvement with 1% growth. While we did show positive growth, we are disappointed with our international performance, and we believe we have significant potential to improve revenue and its profit contribution.

Some of our current issues relate to regulatory delays in registering new products, as well as the indirect impact of the warning letter which has prevented our ability to file CFGs in some of our core products, not yet registered in all of the countries around the world.

As you're aware, we have operated under a warning letter for the past 2 years at our Queensbury site and are awaiting the FDA to perform their final audit, which we believe should result in the letter being lifted. We recently announced a leadership change which we expect will be a catalyst to improve our performance.

In addition, as previously discussed in our prior earnings calls, we are assessing further M&A options to accelerate our growth in the international front. Now continuing down the quarter's income statement, gross profit totaled $44.9 million or 50.7% of sales, flat with prior year's second quarter results.

Our gross margin return was lower than expected, reflecting a product mix impact in Oncology which is our highest-margin business, as well as an increase in royalties because of the stronger performance of EVLT.

Now while our broader product portfolio and national account efforts have led to new GPO/IDN wins and contributed to our sales growth, our admin fee rebates have increased, reducing the margin return. All these points are expected to flow through to our full year results, which I will touch upon when I discuss our guidance. Now turning to expenses.

Operating expenses totaled $43.4 million, including $2.7 million of acquisition, integration and restructuring items, of which $1.6 million is associated with the Navilyst acquisition, including some start-up costs related to our recently announced operational excellence program which is designed to generate significant savings over the next 3 fiscal years.

In addition, we had costs related to our refinanced prior litigation with Bard and the Clinical Devices acquisition.

Now sales and marketing expenses did increase $2.4 million from the last year as a result of the planned increase in sales territories leading into 2014, as well as our investment in AngioVac clinical specialist team, which we have previously discussed on past calls.

An important point to also remember is that we experienced significant sales attrition during the first half of fiscal year 2013, which artificially reduced the run rate, particularly for quarters 2 and 3. Now lower G&A offset some of the sales and marketing increase.

We also incurred $1 million of medical device tax and $0.9 million of contingent costs, which are basically new costs in the first half of fiscal 2014. Now as announced in December, we have become the next phase of integration on the operations side of our business.

Our operations excellence initiative is expected to generate savings of $15 million to $18 million within the manufacturing supply chain areas and improve our gross margin return by 400 to 500 basis points, with the improvement starting in fiscal year '15.

These activities are envisioned to take 3 years to fully implement, and will involve a $5.4 million CapEx investment, most of which will occur in fiscal year '15 and '16. We also anticipate $4.7 million in restructuring charges, with $1.5 million being cash and $3.2 million, noncash, reflecting cease-use accounting for the Queensbury facility.

We expect $1.6 million of these charges to occur in fiscal year '14, with $0.9 million being cash and $0.7 million noncash. GAAP results were breakeven, were $0.06 in the fiscal 2013 second quarter. Pro forma adjusted EPS, excluding amortization was $0.14 per share or $0.17 in fiscal 2013's comparable quarter.

Adjusted EPS, excluding amortization, was reduced by $0.02 of medical device tax as well as the higher sales and marketing costs which offset our gross margin improvement. We also started to see the benefit of a refinance transaction. We expect to realize the full impact starting in the third quarter.

The GAAP to non-GAAP reconciliation items are detailed in the earnings tables in the quarter's news release. EBITDA was $7.8 million or $0.22 a share versus $11.4 million or $0.32 a share in the prior year's second quarter. Adjusted EBITDA was $12.7 million or $0.36 a share versus $15 million or $0.43 a share in the prior year.

A detailed reconciliation again is provided in our news release.

We generated $8.2 million of operating cash and $4.2 million of free cash flow in the second quarter, and year-to-date, we have generated $15.8 million of operating cash and $8.6 million of free cash flow versus operating cash of $5.5 million and free cash flow of $0.7 million in the prior year's first half.

We did invest slightly more than planned in CapEx because of the timing of the ERP project, which is expected to go live, as Joe mentioned, in the next quarter. Our cash balance was reduced to $17 million, reflecting the first Vortex earn-out payment of $8.4 million, and we ended the quarter with $140.2 million of debt outstanding.

I'll now turn to a discussion of our guidance for fiscal year 2014. For fiscal year 2014, we are raising the lower end of our revenue guidance from $347 million to a range from $349 million to $353 million, representing 3% growth at the top end of the range.

Our change is driven by the stronger results we have seen in the first half of our fiscal year 2014.

As I will discuss in a minute, when speaking to third quarter guidance, we continue to anticipate revenue growth to gradually increase over the fiscal year, as our growth drivers become more significant contributors and, therefore, have a larger impact in the back half of the year. However, it will be uneven by quarter and not linear.

On the earnings side, we are reiterating our full year guidance and expect adjusted EPS, excluding amortization, to range from $0.63 to $0.67. However, we are going to achieve this outcome in a different fashion than previously communicated.

As a result of the gross margin headwinds mentioned earlier, we are expecting the pro forma gross margin to improve by 50 to 75 basis points versus 75 to 100 basis points indicated at the beginning of the year. We expect leverage in G&A, R&D and our refinance benefit to offset the lower gross margin rate.

For cash guidance, we have slightly reduced our expectations for operating cash improvements, and expect operating cash to improve by 40% to 45% from $27 million in the prior year. The lower expectation incorporates an interim inventory build as we begin to undertake our facility rationalization at the start of the summer calendar 2014.

The free cash flow range is accordingly being reduced to $25 million to $28 million from the previous $28 million to $30 million, based on the inventory build, and CapEx at the higher end of our range of $8 million to $10 million. On the adjusted EBITDA front, we continue to expect we will be in the $56 million to $59 million range.

Now turning to fiscal year third quarter guidance, we are guiding to a revenue range of $85 million to $88 million, 4% to 8% at the top end of the range and 5% to 9%, excluding the wind down of the supply grid. The growth is higher in quarter 3 as we have an extra day, and last year's fiscal year's soft third quarter represents an easier comparison.

In the fourth quarter, we will have 1 less day, so doing the math, you will see that our growth rate is anticipated to be 2% to 3% and 3% to 4% without the supply agreement.

I will reinforce a point we have made in the past few calls, we do not expect to see a dramatic increase in our revenue growth rate, but a more gradual improvement as we continue to build our growth drivers and improve the execution on our core products.

Adjusted EPS, excluding amortization, is expected to improve from quarter 2 and be in the range of $0.15 to $0.18. So with that, I'll turn the call back to Joe for his final comments.

Joe?.

Thank you, Mark. So the team's delivering to our plan, and I believe we'll continue our progress throughout the balance of the year. I'm very excited about the progress of our key growth drivers as well as the overall performance of our team.

We should continue to make progress on our top line, and I believe improvements to the earnings will show favorably as Mark has identified. So with that, I'd like to open it up for questions..

[Operator Instructions] We have a question from the line of Jayson Bedford with Raymond James..

A couple of quick ones here and then I'll get back in queue.

In terms of BioFlo, can you just remind us of the premium over a non-coated PICC, as well as is this premium holding? And then in terms of penetration, kind of 30% to 35% here, where does that settle out and kind of what's the pushback for those folks who have not adopted BioFlo?.

Good questions. So first of all, the premium that we have been asking to get and are getting is 15%. We are seeing a premium in all the accounts that have converted over to us. We're probably over 200 accounts now, which is great.

And I think the -- what will happen is I do think as a company in, I don't know, in the next 3 years, I don't see why we'd be selling any PICC or dialysis catheter without BioFlo. The results are so good that I think it's going to be unethical to sell a product without a thromboresistant material.

What's holding us back is purely our -- and we have a lot of accounts today that are telling us, "Hey, evaluations were great." We've had terrific clinical success, but when you get tip location, we will go ahead and do the conversion. So I think we're building up some pent-up demand and we are waiting for that to occur.

On the current product side, most of our sales force has been focusing on competitive accounts with BioFlo but we are converting current business, and it's just a matter of time and energy in place. But the tip location part of it continues to be a barrier, and I'm very excited to -- I'm hoping that any day now we receive that clearance.

And our sales force is trained, products and inventory accounts are literally waiting for the day that we receive it, and I think we'll see an immediate boost when it does come..

So the impact of tip location is not so much from tip location, it's the pull-through? So basically, tip location will pull through and convert folks from -- to BioFlo?.

Well, I mean, if you look at the market, the tip -- for a -- if a hospital has made a decision that they wish the nursing team to place the PICCs, then it's basically an enabling technology. If they are actively -- if nurses are actively placing PICCs bedside, for them to switch to another vendor they need to use that vendor's tip location device.

And we have been hampered as tip location, over the last several years, has become more and more standard of care in the accounts that are using the device. It's very difficult for us to convert them over. So I think a lot of places have just simply said, "We like the PICC.

When we get a tip location device, we'll make the move." And I think with just a lot of great activity that our sales team has put in place, when we see that clearance, I think there's a lot of places we'll move pretty quickly and then it will open up opportunities for the places who haven't been willing to look at anything unless we come with a tip location system.

But as I have mentioned on prior calls, it's more of a neutralizer to eliminate a barrier, and I think when we do come out with a tip location system, it will provide the account preference a vendor will switch to, who has the best PICC and who has the -- and whose PICC is performing the best, not just a quid pro quo to whether you have a system or not..

Okay.

And then just secondly, switching gears to AngioVac, up sequentially, are you still looking for $10 million in AngioVac contribution for the full year? And then what can you do to really accelerate sales? Is it just more bodies? Is it an expanded label? What do you do to get to those goals?.

Well over a 5-year period, to get to our $50 million goal, we do need to get an expanded claim. We've already filed for that expanded claim, and that would allow our marketing and market development efforts to be more pointed.

Right now, we market specifically to the label that we have, and when the label expands, it will free ourselves up to a much more aggressive market development activity.

But we've known the timeline for that and we've planned for that, and throughout this fiscal year, our objectives have been a function of our own ability to educate our salespeople, develop a 15-person clinical specialist organization which I think we're at 12 or 13 in the field today, who are just -- we're bringing on just the best people, that we've seen just wonderful people who are very clinically astute and working with a lot of great sellers.

So a lot of this has been -- if you -- the more you understand AngioVac, it is a very disruptive technology. It's a technology that is -- it requires a lot of different skill sets to be successful, and it takes time to onboard procedures into a new account, a lot of training.

It requires a perfusionist to get involved with an interventionalist, which is a new relationship. So there's a lot of work to be done. And after those first cases, those accounts do, it's probably one of the most gratifying things to take very sick patients with no other option and all of a sudden, give them one.

So we're very excited about our adoption. We've gone from 80 to 500 to $1.1 million to $1.5 million to $2 million. And we think $10 million is still within eyesight, and we're very pleased with our progress as we're accelerating at an accelerating pace each quarter. So we're pretty -- we're still very, very excited about AngioVac..

Yes, just building on that a little bit, Jayson. As you probably noticed, we got cleared in Europe, so that gives us some confidence that we're going to start getting some revenue over there.

But obviously also, we have a range in our revenue, so clearly, that we build a little bit, but I think we're very confident we're going to get close to that number again, close to our goal with this year..

Our next question comes from the line of Charles Haff with Craig-Hallum Capital Group..

Question for you on tip location. You said you were hoping for approval by year end in the U.S.

Was that fiscal year end or calendar?.

No. That was calendar. No, we were open before -- when we had the last submission in and we saw the questions and the answers in the October timeframe, we felt very confident that the magnitude of the questions were not something that would be anywhere near showstopper.

So it gave us a confidence to even say publicly that we thought, given the question-and-answer is in the magnitude of and that the FDA would give us clearance before the end of this calendar year. So with not having it today, well, in the end of November, a couple or another question did come in.

It was quickly answered before the holiday a couple of weeks later, and we're just waiting now. We can either get a fax saying there's approval, or we can get another question. That's just the -- it's just the way things are today. But we're very bullish on the technology and we're committed to get this clearance..

And do you have anything in your guidance for U.S.

tip location approval right now?.

I think we've been pretty conservative on what we think the -- from a guidance perspective for tip location, we've been -- if you go back and look at the last 4 conference calls, I've been talking about, I can't wait to get this clearance, so I don't talk about this anymore. But we've been expecting clearance.

We signed this deal October last year and thought we'd get a clearance January of last year. So because we've been burnt, we're not ahead of ourselves on guidance. I think if we get the clearance, it's not inconceivable there will be a little upside. It would be an upside to our guidance if we could get Celerity..

Okay. Great. And my last question is regarding international. So you made a new executive shift there. You mentioned maybe some acquisitions internationally.

Would that be maybe distributors or product acquisitions? And how do you kind of see international growth playing out over the next couple of years?.

Well, that's a good question, Charles. We -- as you're -- for those who have been following us for a while, following the integrations and all of the work that we've done, we've really focused getting our U.S. channel humming and getting it in line. And it really is working well.

I have to give a lot of credit to Rick Stark, who runs our Oncology business; Chuck Greiner, who runs Vascular Access; and John, who runs Peripheral Vascular. I think they have done a very good job getting the sales and marketing teams working well. We have a good comp plan.

We have more people on all 3 businesses in the money than we've had in the past that -- so things are going well, and we really kind of didn't put the type of attention in international. It's 20% of the business.

We've got a good team functioning there, and I think, given the fact that a lot of our products come out of our Queensbury facility, we haven't been able to get the type of new registrations, or we haven't probably given that team in the near-term as much investment as we should have.

And we felt that by elevating John, having 1 global commercial leader, wouldn't be this team versus that team.

We wanted to create harmonization between the businesses, the ability to move resources where we thought the greatest opportunities were, and now to focus our corporate attention by having a person here in the office who is focusing on the global footprint so we can now become a more global organization.

We had been relying on some pretty high level of growth from the international teams in the years past. I think with the U.S. focus, we kind of allowed that to get deemphasized a bit and we're trying to rectify that now..

Okay.

And on the acquisition part of my question, would that be products or distributors?.

Yes, I think we, as a company, needs to increase our international footprint. We are not situated commensurate to our peer group with the amount of revenue and infrastructure internationally. I think, just trying to grow internationally using your operating expenses is hard.

I think, to the extent that there is acquiring of distributors, that is most -- we don't do anything hostile with distributors. We don't go direct and then get into fights. When people do well, we become partners with them, and that's our philosophy.

If there are businesses that are like ours, that are international, that have their own products and their own registrations in certain markets, that will definitely be of interest, if it's at the right magnitude. I don't think we are -- we have an appetite to do things that were in the magnitude that we've done over the last 24 months.

I think we're looking for measured ways of increasing our global footprint. But today, after we've gotten our 3 U.S.

businesses running well, it's time to make sure that our team at international is getting the attention and the resources, and to the extent that whether it's new registrations, whether it's the addition of sellers and/or the acquisition of more infrastructure, that's top of mind for our management team today..

Our next question comes from the line of Jason Mills with Canaccord..

This is actually Jeff Chu filling in for Jason. I had a couple of quick questions, the first one on gross margin.

I was wondering what your expectations are, I guess near-term and longer-term for gross margins?.

Sure. As I indicated in the call, our improvement, pro forma-wise, through -- primarily through the benefit of mix and some operational things we undertook last year which are on top of what we discussed in the operational excellence. Our hope is to improve pro forma 50 to 75 basis for the year.

So we would expect sequential improvement both quarter 3 and quarter 4 in our gross margin. Now it's a little lower than we anticipated walking into the year, but we're talking about 20 basis points. So it's not a significant challenge for the business.

I think longer-term, the whole operational excellence program was something that we've been working hard on the last 6 months to look at how we implement, and it will be very significant. Now it's going to take 3 years because we're in the FDA world, to fully implement all the changes.

But the expectation is by the end of 3 years, we will have a 400 to 500 basis-point improvement in our overall gross margin. And that will come from a number of things, the ERP catalyst, supply chain improvements both direct and indirect, the facility reorganization, product rationalization moves we've begun to make.

So there's 5 or 6 categories of activities we're working on now and have set plans in motion to make it happen. So it will -- our expectation is this will have a very significant impact and then prove us to be much more cost competitive on a number of our product lines. So that's the plan right now.

And as we enter into next year, we'll talk more about the impact of how it splits over the year. It's a build each year. You layer on a piece each year, and we'll have more color on that as we enter into '15, how much is going to come in '15, how much will come in '16, and how much will come in '17.

But the expectation is by the end of '17, as we get into the year, is we'll have a 400, 500 basis-point improvement in overall gross margin. Does that -- I hope that helps to answer the question..

Yes. Very helpful. On my last question, I just wanted to ask a quick one on free cash flow in 2015.

Perhaps you can provide us with some direction on where we could expect that to go in the next fiscal year?.

Yes. I would expect -- I'm not going to give you an exact number, but our expectation in '15 is we will accelerate the leverage because of the operational excellence, because of higher, even higher mix benefits that we would have an amplified leverage.

I think the other issue for this year is, or like on sales and marketing I mentioned earlier, we were artificially down probably in our run rate. We won't have that problem next year. So we should have even better leverage and as you've seen, we're doubling basically our free cash flow in 2014.

So it's going to be, I would expect, another significant improvement, but it's too early to give you exact numbers, Jeff..

We have a follow-up question from the line of Jayson Bedford with Raymond James..

On the gross margin, Mark, you gave a few items there. Did price factor in to the lower gross margin at all, or what was -- I realize there was a mix....

Yes, in a way, the fees, rebates is a form of price management. So that was probably 20%, 25% of the gross margin story. So it's a trade-off we make on doing deals where we consciously look at. As you do more contract deals and more national account deals, you trade off getting volume versus price.

So it's something that we looked at, we measured it, and you can see, we're starting to get the real acceleration in our revenue. But, yes, you got to give a little up on the margin return line, but in the end, we think we're much better off..

Okay.

And then what's the revenue mix between -- in Oncology between -- on the thermal side RF and microwave?.

Yes, I don't think we....

We don't give the 2 pieces, Jason. We only give a thermal ablation number.

So I'm not sure, what is your question?.

How much is RF? How much is the microwave?.

No....

We're -- RF is going down and microwave is going up..

Going up..

Net-net, the whole category is going up..

Right, double digits..

Okay.

And then where are you, the timeline on the API?.

Right now, we're on the original schedule. We're going to file our regulatory for U.S. later in the third quarter and then Europe beginning in the fourth quarter.

And then we have baked in a little bit longer than normal time for maybe a couple review cycles in case that's there, so that would have U.S., summer, end of summer, and Europe, fall, the same type of window that we've been looking at. Our big goal is just to get those filings in and right now, we're on plan to get there..

Our next question comes from the line of Larry Haimovitch with HMTC..

I don't know whether I missed it on the call, but I didn't hear much or anything about IRE.

And I wondered if you can provide an update, specifically the progress of the urology trial, and then any update at all on your progress with FDA and getting a pancreatic trial going?.

Yes, it's the same answer every quarter. We continue to go back and forth on pancreas. It's almost why I just stopped talking about it until I have positive news and we make progress. It's really the same story. And -- but that said, there are a lot of good clinical activities going on in the U.S., with sites that's used to do it for pancreas.

And we still think it's a very good application. But we have not made the kind of progress, and we'll just continue to work at it. And when finally when we break through, maybe I'll pick up the phone and call you, Larry. You'll be the first one to know.

But we do have a lot of good clinical activities happening, and we are preparing our site for the U.S. safety study for prostate. We are accruing patients. I'm not sure how many we're up to, but it's in -- I think we're double digits with our CROES study in our -- yes, 12 patients with our CROES study, which is excellent.

The activities, and I'll tell you, I have a tough time with IRE because it is probably one of the technologies I'm most excited about but I purposely don't talk about because I don't want to create expectations, that -- until I see the market activity.

But clinically, Larry, seeing what's occurring with investigators who were using it for early intervention of local ablation's internationally, the response of the investigators, and I was saying, it's very, very exciting. But -- and just to be cautious and not overhype and overfocus.

My attention is to focus on what are the things are going to deliver revenue today and when we achieve key clinical or technical milestones that I think represent near-term commercial activity, then I'll get more and more excited about it. But we are still investing in Nano.

We are -- and the CROES study is actually happening, and when that safety study is over, we will go into a pivotal study. The Endourological Society over in Europe is very excited about it. And we have several investigators who are doing a bunch of procedures, and that could -- especially if the data continues, it could be a wonderful opportunity.

So we are continued to be excited about it, and we'll see -- when we come up with important clinical milestones, Larry, we will be very vocal when we get there..

Will you -- did you have any commercial shipments of capital equipment in the quarter, Mark?.

Yes, we did. We only had a couple, I think, 4 in total for the world. So we've definitely seen a slowdown. I think capital is more difficult, and the whole process to approve NanoKnife because of -- it's our theory, because of some of our challenges with the FDA, it had slowed down that decision process.

So to the Joe's point, that's why we're being much more careful on this front now..

And so I think reimbursement also remains a challenge, doesn't it?.

Yes. I mean, and to the extent where surgeons are using the device and adjunct to a current procedure, reimbursement is not an issue. But we, right now, have built our plan to not live and die on Nano. If it contributes, that's great. Actually, the procedures and the procedure contributions are going well.

It's really the capital sales and the new account placements that is slowing a bit on the Nano side, and we're -- again, we're fine with it because it's not about -- we're not going to make or break the company based upon selling a Nano here and there. That's not our focus.

Our focus for Nano is to help the clinical support that's going to create a multiple several hundred-million-dollar business when we accomplish that goal. But we have great investigators who are creating great data and multiple applications in U.S. and international.

We had the first NanoKnife being performed in Hong Kong just last week, and a nice little press release went up by the institution. And just so many wonderful things are happening, but when it comes up to the size of the company, we are now in the magnitude to investors on a quarter-by-quarter basis.

It's still a program that is receiving clinical investment, and it's -- one day, we're going to come out with, wow, look at what we did, and it's going to be very large. But it's not something that I'm willing to telegraph in the very near future.

And you know, Larry, the moment I get something that I see is a quarter or 2 away, I'll start winding it into the story and I'll start giving people guidance. But it's a technology that has tremendous promise. We are investing. We are thrilled. We have great people out. We have investigators who are doing unbelievable work.

And as material milestones to investors come up, we'll communicate them..

Did procedures at all grow during the quarter year-over-year or sequentially?.

Larry, they are slightly up -- well, it was sort of a mixed bag. In the U.S., we did a little bit better than we did internationally, but overall, slight growth..

Okay. So the basic business is more or less flat right now until you start getting some of these milestones that Joe talked about..

All of our efforts, I think, clinical development. We are not pushing the sales force. We are not doing things that are artificial.

We are letting the business go to where it goes, and there's a lot of activity on microwave today, a lot of activity on -- and we're growing some nice market share in overall thermal ablation given our microwave and now, one-two punch with RF and microwave. And we're very happy with, in general, where the Oncology teams are going.

And, yes, we're not selling as many Nanos as we were in the past, but the overall health of the business and the margin of the business is still strong. We like to do better.

I mean, we are typically a double-digit grower in that category which is usually fueled by continued capital placements, and we're probably in a little bit of lull with Nanoknife at the moment..

Joe, one other question and I'll jump back in queue, and that relates to the RF microwave effort.

Does it make strategic sense to ever combine those into 1 box and try to sell them as a combined product?.

Yes, we have a competitor internationally who does do that. We find that they are still -- I thought that for a while, but our teams convinced us that having 2 different systems to do one thing, which could be in multiple locations, would be more inefficient than anything instead of just having 1 RF box here and 1 microwave box there.

We actually, at our investor meeting, showed that we had an RF microwave and Nano all on 1 box, all in 1 type of cart type-of-thing. But the more we brought it to our customers, the customers threw out more logistics issues than the novelty of having it.

And typically, given the CT scans and the amount of prep work for a patient, the customers are pretty sophisticated today with the imaging of knowing which energy source would be best for which patient's anatomy at a particular time. So they'll know before the procedure.

So we found out through customers that while we can technically do it, it's probably more of a novelty than a necessity..

[Operator Instructions] And Mr. DeVivo, there are no further questions in this time..

Great. Well, I'd like to thank everyone for being on the call. We are very excited about where we are as a company. We are executing to our plan. If there's deviations, we fix them. We have an unbelievable management team today who is starting to get this business focused on its top line revenue growth.

We've made progress 3 quarters in a row, and I think that will continue into the foreseeable future. And as with PV growing now from 5% to 7% and Oncology in the 5%, making progress in Vascular Access, we're 1 business away from having all of them growing and then as seeing where the acceleration will take us. So we think the future is bright.

We've gone through the tough times and are now executing to our plan. And we very much appreciate the support. So thank you, everybody..

Ladies and gentlemen, this concludes the AngioDynamics Fiscal Second Quarter 2014 Conference Call. If you'd like to listen to a replay of today's conference, please dial (800) 406-7325 and enter access code 4655652. AT&T would like to thank you for your participation. You may now disconnect..