Joseph DeVivo - CEO Mark Frost - CFO Doug Sherk - IR, EVC Group, Inc..

Tom Gunderson - Piper Jaffray Jayson Bedford - Raymond James Jason Mills - Canaccord Genuity Matt Mishan - Keybanc Capital Markets Keith Hinton - Sidoti & Company Charles Haff - Craig-Hallum.

Ladies and gentlemen, welcome to the AngioDynamics’ First Quarter Fiscal 2016 Conference Call. As a reminder, today’s conference is being recorded. At this time, I’d like to turn the call over to Mr. Doug Sherk. Please go ahead, sir..

Thank you, operator, and welcome everyone. Thank you for joining us for the AngioDynamics’ conference call this afternoon to review the financial results for the fiscal 2016 first quarter results, which ended on August 31, 2015. The news release that crossed the wire this afternoon is available on the company’s Web site at www.angiodynamics.com.

A replay of this call will be archived on the company’s Web site. Before we get started, during the course of this conference call the company will make projections of forward-looking statements regarding future events, including statements about revenue and earnings for the fiscal 2016 second quarter and full year ending May 31, 2016.

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 the forward-looking statements.

Finally, during our question-and-answer period today, we'd like to request each participant to limit themselves to two questions and encourage participants to re-queue to ask additional questions. We appreciate everyone's cooperation with this procedure. With that, I'd like to turn the call over to Joe DeVivo, President and Chief Executive Officer..

Thank you, Doug. Welcome ladies and gentlemen to our first quarter 2016 this fiscal year conference call. Today, we’ve reported the first of two quarters in 2016 during which we expect to report negative growth, due to tough prior year comparisons.

As we’ve guided during our call last quarter, our currency exchange and the impact of withdrawal of the Morpheus PICC line will result in year-over-year revenue declines. At the same time, we expected to generate growth from our four key growth drivers; AngioVac, NanoKnife, BioFlo and microwave.

Having just closed the first quarter, for the most part our results are pretty much consistent with what we expected. Our first quarter revenue was within the guidance we provided in August while our adjusted EPS in consensus illustrating what I believe has improved operational execution.

I would like to start with our international business where we saw revenues down 17% year-over-year. We expected a weak first quarter internationally and our performance was driven by two factors. The first factor was the currency exchange that we talked about previously.

From an overall revenue perspective, fluctuations in currency reduced our international revenues by about 6%. In addition, 60% of all international revenue is from our distribution partners and all of that revenue trades in U.S. dollars. Our business partners have seen currency changes and an inflated dollar.

As a result, some saw some very conservative buying in the first quarter.

While we believe the capital equipment softness is temporary and came on the heels of a really strong fourth quarter, especially in capital equipment sales, we are working closely with our international distribution partners to review pricing on a market-by-market basis in order to enhance the competiveness of our products.

We’re committed to maintaining our market share and are looking at our expense structure and in pricing strategies to accomplish this.

Also, this time last year, a kit packing partner of ours in Asia was changing manufacturing locations and placed $1 million forward inventory buy in order for them to allow time to move operations from one country to another.

That $1 million in revenue, which was realized in the first quarter of fiscal 2015, was not realized again in first quarter of 2016. This was an anomaly that falsely distorts the overall health of the international fluid management business in the first quarter.

If you look at the numbers as we’ve reported them, the top line revenue growth for fluid management OUS is a negative 24%. Normalized for this one stocking order, OUS revenue would have been closer to negative 9% and 3% worldwide.

While that number is still soft, 4Q 2015 saw growth of 5%, which normalizes the six-month period to show just about flat, which we believe is a more accurate reflection of the business. We anticipate seeing the business normalize to expected levels through the balance of the fiscal year.

The international performance was soft during the first quarter but within our expectations. Better results are in store for the second half with the FX headwind. We have a number of new regulatory approvals, which should help growth and our growth drivers continue to succeed. So now let’s turn to the three business segments.

In our peripheral vascular business, AngioVac was strong for the second quarter in a row since the launch of our second-generation product. Worldwide revenues of 2.7 million in the first quarter represent 11% year-over-year growth in the U.S. and 7% worldwide.

That growth is echoed in the excitement surrounding our physician training courses, which are consistently a capacity in translating into excellent outcomes. Our practice enhancement programs are designed to help clinicians increase their local practices and the use of AngioVac.

We’ve also begun enrollment in the registry of the AngioVac procedures in detail, nicknamed RAPID, through our collaboration with Dr. John Moriarty and UCLA to document the clinical success of the AngioVac product we are seeing every day. We expect the strong and steady growth of this product through the balance of the fiscal year.

As AngioVac continues to gain traction, it has provided us with a platform to rejuvenate another product line to expand AngioDynamics presence in the thrombus management. To address the customer need, we filled out our offering for our market-leading Uni-Fuse infusion catheter line.

The Uni-Fuse is now the broadest and most comprehensive catheter directed thrombolysis product in the market and offers our customers increased flexibility for a wide array of clinical applications.

The combination of Uni-Fuse as an everyday thrombolytic product in conjunction with our novel AngioVac product allows AngioDynamics and our sales force to deliver a more comprehensive thrombus management solution to customers.

So now moving to EVLT, venous ablation product, we reversed some negative trends last year during the first quarter of the U.S.

As expected, procedures began to return to our customers through the summer months and as patients overcame their insurance deductibles earlier in the calendar year, we generated worldwide EVLT growth of 4% highlighted by 9% year-over-year growth in the United States.

These results slightly offset the slow start we experienced in the beginning of the calendar year. This growth turnaround in EVLT was led by higher-than-normal growth in new laser sales as well as a return of same-store sales procedural growth to our customers, and we believe that this positive momentum and procedural growth should continue.

Regarding fluid management in the U.S., we successfully launched a NAMIC sales organization with a national business manager and specialist who are focused on reenergizing our domestic fluid management growth.

The number of evaluations occurring with potential customers is tripled that of historic levels, and we expect to see some very positive movement in our top line fluid management revenue in the second half of the year.

AngioDynamics also released to market the NAMIC inflation device during the first quarter, which is designed to be used during angiographic procedures. We will be replacing third-party vendor inflation devices from our fluid management kit and marketing our NAMIC inflation device to all new customers.

Early experience has proven the NAMIC inflation device to be a preferred item among clinicians and another successful launch from our internal research and development team.

As one of the first new fluid management products from us in recent years, the NAMIC inflation device is a key strategy for growth that we believe will breed new life into this category for us. Combined with the NAMIC sales organization, the NAMIC inflation device is building momentum for us fluid management business.

Now I’d like to provide an update on our vascular access business. Our worldwide vascular access business was down 7% year-over-year led by an overall $1.7 million reduction in PICC revenues. Our plan in the first quarter was to begin to recover from the Morpheus recall that occurred last year third quarter.

This has been a challenging time for our sales force as they manage their customers through a major product withdrawal distracting them from reestablishing momentum for growth. As a result, the pace of new accounts has been less than we planned.

Despite that, the team placed another 22 Celerity tip location units in the U.S., 48 units since the launch in Q4 and grew BioFlo PICC sales 20%. We expect a somewhat smaller decline in overall PICC sales in the second quarter before posting from this product line in the third and fourth quarters.

Our research and development team also released to market a BioFlo Midline catheter, which is the first and only anti-thrombogenic midline in the market. This is a strategic entrant for us.

It seems the midline product is drawing not only from current PICC products but also from the peripheral IV market where hospitals are attempting to reduce unnecessary complications by choosing the right line for the right patient.

In addition to the obvious anti-thrombogenic properties, the BioFlo Midline is special because it is in essence a shorter length PICC that is well labeled as the midline. It terminates at the upper arm and does not enter the central venous system.

Therefore, confirmatory chest radiographs are not required allowing for immediate initiation of therapy as well as cost savings. Our early data suggests that the BioFlo Midline provides three main clinical advantages over competitive offerings. One, ease of insertion for the clinicians compared to other competitive devices.

Two, the ability to consistently and affectively draw blood over the duration of the patient’s treatment regimen. And three, device longevity.

The BioFlo Midline will allow clinicians to treat patients for their entire length of therapy and we believe eliminates the need to place additional devices due to malfunction and/or occlusions providing tremendous clinical value for patients and economic value for the healthcare system.

Dialysis catheter saw another strong performance with 9% growth powered by an impressive worldwide uptake of the BioFlo technology. BioFlo Ports and BioFlo Dialysis continue to perform at above market growth rates and are helping increase product line average selling prices.

For PICC, ports, dialysis and now midline, BioFlo is winning across the entire category. While there is clearly churn in the base business for non-BioFlo accounts as it declines naturally, we expect all BioFlo success will return, the vascular access business to worldwide revenue growth beginning in the third quarter.

For example, during the first quarter, overall port revenue was down 2% on slower OUS revenues but BioFlo Port increased 38%. Lastly, for vascular access, I would like to give an update on our tip location efforts. As many of you know, we signed a deal with a third party as a stopgap as we were designing a truly revolutionary system.

We received clearance for the Celerity no chest x-ray EKG in January. We will file for Celerity with Navigation within a month of two with an expected launch by the end of the fiscal year.

Now while we continue to market Celerity units over the next several years, today we are pleased to announce our internal research and development program for an intelligent PICC directional system called FIREFLY.

FIREFLY’s intelligent directional system will give customers simple intelligent and easy-to-use commands based on real time intelligent information and visualization to make it even easier to place PICCs at the patient’s bedside.

FIREFLY’s complete directional and visualization system will sell for a fraction of the current capital cost competitors are charging hospitals, have a low per procedure disposable cost and will deliver the next generation of technology to clinicians around the world.

We expect to launch FIREFLY’s next generation technology in a year or so internationally and six to 12 months thereafter in the U.S. We are committed to the next level of excellence for PICC teams worldwide and the combination of FIREFLY and BioFlo AngioDynamics will provide the best option for PICC patients on the market.

So now I’d like to move to oncology. Overall, oncology business was down 9% in the quarter worldwide following a huge capital fourth quarter selling 12 NanoKnife systems in the fourth quarter of '15.

While capital purchase were down especially as we noted internationally, we believe that we have opportunities on the horizon that will drive revenue growth for this business, which I will outline for you in a few moments. Utilization in the oncology segment in the U.S.

continue to grow with NanoKnife disposables up 29% and microwave procedures up 23%. We are seeing continued positive worldwide interest in NanoKnife following the Annals of Surgery publication of the STAR registry in September that we discussed in detail last quarter. NanoKnife is now chronicled in more than 150 peer-reviewed publications worldwide.

Its acceptance continues to grow and results show meaningful benefits for patients. This quarter we achieved several milestones in the effort to collect data for the use of NanoKnife for prostate patients.

First, the CROES I study has yielded four very important clinical publications from data from this patient cohort including manuscripts on the prostate NanoKnife technique, the correlation of NanoKnife effects in imaging and electro-replacement [ph] and cellular effects and a quality of life paper.

Second, the CROES II multicenter randomized study has begun to enroll patients. The randomized study will involve six centers throughout the world focusing on the efficacy and local regional ablation of the prostate for cancer patients. The goal of this study is to enroll 200 patients and follow each patient for six months on imaging.

Finally, the Clinical Research Office of the Endourological Society has begun its prostate NanoKnife patient registry giving clinicians worldwide a centralized location to share their data when using NanoKnife for focal prostate lesions. The registry is now live and several patients have already been enrolled.

We understand the need for excellent clinical and economic data for the advancement of the technology and we are proud to be working with scientific communities on so many important fronts. We expect this data will continue to bring awareness to the incredible benefits of NanoKnife can offer patients worldwide. So that’s it for the business update.

But before I turn it over to Mark, I’d like to give you some perspective of the first half of the year and comparison to our expectations for the second half. We told you that the recall and foreign currency fluctuations were going to be challenges for us in the first quarter.

We saw the first quarter coming and we managed our operating costs to deliver the expected profitability. Our team delivered a sound bottom line and a better cash quarter. We are managing the business today and importantly, we are managing for growth in our future.

Our view is very bullish for the second half of '16 and there are several key milestones, which will drive growth soon. First among those milestones are several reimbursement initiatives. Worldwide, we are making great progress with NanoKnife.

We are implementing aggressive efforts to gain reimbursement this year and believe that we are doing the right things building the evidence, getting the codes in place and working data coverage. Today, there’s a compelling amount of clinical data related to the effectiveness of NanoKnife for locally advanced pancreatic cancer.

We are working to get even more real world evidence through registries with pancreatic cancer UK and the AHPBA. We are also in conversations with the National Institute of Clinical Excellence, NICE, and with CMS to establish coverage of NanoKnife for locally treated advanced pancreatic liver cancer.

And we will be aggressively pursuing reimbursement in Europe, Canada, Australia and all through commercial payors next year. There are also efforts to work with CMS in the U.S. to level the playing field between lasers and RF for use in venous ablation procedures at every site of care.

Last year, CMS normalized reimbursement for in-patient reimbursement between lasers and RF devices. Once again, we believe that strong clinical data will drive reimbursement.

A recent meta-analysis released by NICE suggested that EVLT should be considered as a preferred option for patients with varicose veins due to positive clinical outcomes and cost effectiveness. Strong clinical data such as this offer us confidence that reimbursement will be leveled for all sites of care in the future.

If this occurs, we believe it will be a positive catalyst for the business. Another key catalyst for growth will be the important international registrations we believe we will earn in the second half of this fiscal year.

If you recall, products manufactured out of our Queensbury facility had their certificate of foreign goods suspended due to an ongoing warning letter, which we believe we have remediated. Three months ago, we received those CFGs and subsequently have been filing registrations for new products all over the world.

We are anticipating significant product clearances international, which are expected to lead to between $3 million and $5 million worth of orders within oncology. We’ve already received preliminary approval for NanoKnife generators in China and expect final approval in the fourth quarter of this fiscal year.

Now, I would like to hand it over to Mark Frost who will review the financial performance for the company in the quarter.

Mark?.

Thank you, Joe, and good afternoon, ladies and gentlemen. As we expected and discussed with you on our last two calls, our business in the first quarter was impacted by two headwinds; foreign exchange FX and the strategic decision to discontinue the Morpheus PICC line.

These headwinds impacted our growth by approximately 3% in the first quarter and we anticipate in our planning process that we will have the same impact in the second quarter of fiscal 2016. However, we continue to expect an improvement in the performance in the second half.

Given that Joe has discussed the revenue picture in depth, I’ll limit my comments to a few revenue points and then provide more detail on our P&L, balance sheet and cash flow. Total revenue in the quarter was down 4% from the prior fiscal year.

However, excluding the impact of FX, the Morpheus discontinuance and the planned wind down of our supply agreement, underlying net sales were 1% down from the prior fiscal year. Continuing down the quarter’s income statement, gross profit totaled 43.2 million or 51.6%.

Our operating excellence program contributed a 70 basis point improvement as planned. Our improvement was offset by FX at 60 basis points, the E&L provisions at 50 basis points and negative mix of also 50 basis points. We improved 70 basis points sequentially from fourth quarter but ended down 90 basis points year-over-year.

Turning to expenses, operating expenses totaled 42.1 million, including 2.1 million of acquisition integration and restructuring items, of which 1.3 million was related to litigation and 0.5 million for the operational excellence program. Sales and marketing costs increased 0.5 million reflecting our investment in our U.S.

sales force offset in part by an FX benefit. G&A costs were flat while R&D decreased 0.5 million primarily because of product development time. Our GAAP earnings result was a loss of $0.02 per share versus income of $0.01 in the fiscal 2015 first quarter.

Adjusted earnings per share, EPS, excluding amortization was $0.11 per share versus $0.16 per share from the prior year fiscal 2015 quarter. We lost $0.01 because of FX and the remaining drop was caused by lower revenue volume. EBITDA was 8.2 million or $0.22 a share versus 9.8 million or $0.28 a share in the prior year's first quarter.

Adjusted EBITDA was 11.9 million or $0.33 a share versus 14.3 million or $0.40 a share. Our cash flow was in line with our expectations generating operating cash flow of 4.7 million in the quarter and free cash of 4 million, an improvement over the prior year. As anticipated, our inventory increased based on our manufacturing consolidation time.

We are approaching our final stages and expect to shut down most the lines by the end of the second quarter. Inventory safety stock will then start to be utilized but with a larger run-off in the second half.

Our cash balance increased by 1.9 million to 22 million and we paid down 1.3 million of debt bringing the debt balance to 136.4 million outstanding. I’ll now turn to a discussion of our guidance for the second quarter and fiscal 2016.

Overall, our financial objective for fiscal 2016 remains the same, deliver leverage from the top line at 3x to 4x rate as we demonstrated in the first half of 2015 but with much stronger cash flow.

As we have mentioned in the past and at the start of today’s discussion, our performance will be different for the two halves of the fiscal year, due to the headwinds from FX and the Morpheus discontinuance. We are reiterating our revenue range of 364 million to 370 million, which would represent 2% to 4% growth for the year.

Adjusting for the headwinds, this would have been 4% to 6% as each headwind reduces annual growth by about 1%. Our first half comparison will range from 2% to 4% down as we are absorbing the 3% revenue reduction each quarter from our headwind as well as the slow start for international has further skewed the half.

Our second half is now expected to grow at 7% to 9%. Now supporting our confidence in this revenue ramp for the second half is the final clearance of CFGs relating to NanoKnife from the 2011 warning letter that we discussed was issued this past summer.

As a result, we are expecting significant product clearances in international, which are anticipated to lead to 3 million to 5 million of orders within oncology.

As we discussed in the fourth quarter call, Celerity Navigation and our microwave second-generation product are also expected to launch in the second half of the fiscal year, which will further support revenue growth as well as the launch of our NAMIC inflation device.

In addition, the strength of the BioFlo Midline launch and improved customer penetration from our GPL contract wins should drive stronger VA growth in the second half. Reimbursement progress, which Joe discussed earlier, will be an upside depending on their timing. The revenue timing will flow through to our adjusted earnings expectation.

We are continuing to guide to adjusted EPS, excluding amortization, of $0.62 to $0.66, up 7% to 14% from prior year. We are absorbing a $0.04 cost from FX and Morpheus, otherwise our EPS will be growing 14% to 21%.

Again, the halves will be distinct with the first half contrasting 15% to 20% but 45% to 60% growth in the second half reflecting primarily the impact of the headwinds on the first half.

The critical factor enabling our leverage to the bottom line continues to be our operational excellence program, which met its objectives in the first quarter and is expected to generate 100 basis points of improvement within the year.

The key driver this year being the shutdown of our Queensbury manufacturing line in January as well as direct material supply chain sales. From a balance sheet and cash flow perspective, we expect to generate significant improvement in our cash flow during fiscal 2016.

Operating cash flow is expected to improved by 30% to 40% versus the prior year and free cash flow by 60% to 70%.

Drivers for our improved performance are one, working capital improvements primarily from reducing the safety inventory built for the manufacturing consolidation; secondly, reduction in our restructuring costs and three, a drop in our fixed asset needs down to a maintenance level of 4 million to 6 million.

Adjusted EBITDA is expected to improve based on the earnings improvement range. Now turning to fiscal year 2016 second quarter guidance, we are guiding to a revenue range of 87 million to 91 million, 1% down at the top end. Backing out FX and the Morpheus impact, prior year sales growth would be 2% at the high end of the range.

Adjusted EPS, excluding amortization, is expected to range from $0.13 to $0.15 reflecting the revenue mix. With that, I’ll turn the call back to Joe for his final comments.

Joe?.

Thank you, Mark. So while we have tough revenue comparables in the first half of the year, we’re managing the business and cash well and are poised for both our strong top line and bottom line for the second half of the year. The key growth drivers continue to pay off allowing us to deliver about 60% to 70% more cash than we did last year.

Our team continues to do the right things delivering operationally and developing the growth drivers in a meaningful and valuable businesses for our future. So with that, operator, I’d like to open the call for questions..

Thank you. [Operator Instructions]. We’ll take our first question from Tom Gunderson with Piper Jaffray..

Hi. Good afternoon, guys..

Hi, Tom..

So I want to try and understand Q1 and Q2 better so that we can get a better handle on this inflection that we’re expecting. The minor question, question one, is Morpheus. I think in the press release, it said 2.6 million last year.

Should we assume that you recovered or transferred customers to other products of about half of that or did you do a little better or little worse than that?.

Yes, I think the actual number, Tom, is about 45% of customers were converted over, so we lost a little bit more than we had planned..

Okay.

45% of customers, was that about the same for dollars?.

Yes..

Okay. And then along those same lines, I’m sorry – on the Celerity with no chest x-ray, you’re doing placements, you’re selling some, you’re doing evaluations.

I think in the past we’ve talked about evaluations taking a while and then while you’re doing the evaluation, it looks like you’re going to win the competition maybe loading up inventory in that particular hospital and then getting – taking a little bit longer for you to actually get the return that you hope out of winning that evaluation.

With that as a too long preface, does that help – is that process something that we’re going to see in Q3 and Q4 and get that inflection upwards moving or is it going to take longer than that?.

First of all, you’re right. It does take time to do evaluations. Now it’s not every situation that a competitor does that but it does take a while.

We are asking for our customers to pay more for our products and in order to pay more for our premium products, they would like to feel confident that as delivering its results, and we doing that and that’s a big part of our strategy. So whether – that is a cycle and that does take time. But when we talk inflection, we just have to level set.

So without currency and without the PICC headwinds, just on a like-for-like basis we see obviously a much better net performance of this.

So by washing out – by anniversarying currency and anniversarying – having to withdrawal product from the market, obviously the year-over-year comparables are going to be much easier to hit, especially with last year. But yes, BioFlo is something that is a continued process.

I think even when we look into last year, I have to absolutely commend our sales force. For us to be able to maintain 45% of the revenue to convert over from existing accounts when we’ve had to pull a product from the market is just a tremendous effort on their part. And we’re proud that they’ve gotten very close to that target.

With that, when you’re spending that type of energy to sustain business, the efforts that are placed in doing new evaluations and the efforts that are placed in new placements, et cetera, is really challenging. And again, we have a great organization who has weathered this storm and has kept a lot of accounts and a lot of hospitals with our company.

So I’m very proud of their activities, but there’s no doubt that we’ve lost some momentum because of this activity. That said, our fundamentals are good. We have our GPL agreements. We are placing a lot of Celerity units out there. We have a significant amount of evaluations.

That’s why we’re bullish for the second half of the year, but we knew when we came into the fourth quarter that this was going to be rough. We talked about it on our fourth quarter call.

We said, wow, we have to look at the first half of the year without this much revenue in our plan and we have to look at ourselves especially with some pressure internationally. So, we’re not sitting here with a surprise. We’re sitting here with something that we had planned.

And our team is committed to continue to get past this and to deliver a better performance in the second half of the year, especially with this asset..

Got it, thanks. Those are two. Thank you, guys..

Thanks, Tom..

We’ll go next to Jayson Bedford with Raymond James..

Good afternoon. Thanks for taking the questions, guys..

Hi, Jayson..

Just on the access business, I realized BioFlo grew 30% but access was down 7. I’m just trying to reconcile the math there.

How big is BioFlo right now?.

You have that in front of you --.

For the entire – across all three product lines..

Yes, I’ll answer it, Jayson. It’s about 40% of our VA portfolio now. I think last quarter it was like 30, 35. Now it’s 40% of the whole portfolio. It’s like 70% of PICC and 15 of ports and about 15, 20 dialysis..

Okay..

So the issue is that the PICC legacy business dropped more, which is what caused to be an issue..

Right, okay.

And to be clear on Celerity, you’ll still be selling this or placing it while you’re working through the R&D efforts on FIREFLY?.

Absolutely. We’ll be placing it for years..

And are you placing it or selling it?.

Both. It all depends on the situation but both. But if we’re placing it, it’s under a committed agreement. We don’t give them away. So if we have a committed agreement, then we will place it or if an account would like to purchase it, then they purchase it. But it’s both..

Okay..

So what we’re doing is we’re going to be working with Celerity for several years, but now we’re going to start getting into the marketplace internationally with a bunch of R&D and a lot of work and we felt we wanted to bring illumination to the program, because it’s what we’ve been working on.

We acquired a technology a couple of years ago that we knew we were behind in tip location and so we entered into a partnership to kind of quickly close the gap and I think Celerity has done that wonderfully and we’re very excited about launching the Navigation component of Celerity.

But we know that in order to win in this market you have to leapfrog and FIREFLY is our entrance that will leapfrog the current systems on the marketplace in leaps and bounds. We’re very, very excited about it. And because we’ll be out in the marketplace more with it, we thought we need to unveil it today..

Okay. And then just as my second question here on AngioVac, I thought the growth would be a little bit higher given kind of gen two, let’s call it, of AngioVac.

Do you expect the growth to pick up there?.

Yes, I would think so. This particular quarter I think I was a little underwhelmed with the international effort but the U.S. effort was fine. But yes, I think we’re going to see a really good year for the product.

We’ve been getting back to the basics on developing very strong education programs, which are completely filled, our usage is strong and I do expect a higher than 11% growth rate..

And Uni-Fuse, I was a little unclear to your comments there.

You’ve been selling that product or did you reintroduce it? Just remind us – I realize I know the product but I wasn’t sure what was new about Uni-Fuse?.

What we’ve done is in the process of communicating to clinicians about our thrombus strategy with AngioVac, we’ve realized that we have a market-leading catheter directed thrombolysis product that’s been in our portfolio for 20 years.

And we are in conversations where we’re not just talking about AngioVac, we’re talking – these conversations talk about other different ways of taking care of the patient and clinicians are likely, well, guys, you have this great Uni-Fuse. This is very synergistic. So in order to even continue our value, we’ve kind of resuscitated a legacy product.

We’ve launched 22 new SKUs of varying lengths that are consistent with current practices and anatomies, which make it the most broad catheter directed thrombolysis line in the market. And so we’re pretty proud of our R&D team. They’ve been very busy. They’ve launched – three launches just in the past quarter.

And by adding all of these codes to the portfolio, we’re training our sales force to be talking disease state, to be solving problems and identifying ways of helping patients with AngioVac. But also if there’s a case that’s not applicable for AngioVac, we don’t lose it. We go right to Uni-Fuse. And it’s building a very wide broad-based strategy.

So because we just launched 22 new codes into inventory, we figured we’d talk about it..

Okay, thanks. I’ll get back in queue..

Thanks, Jayson..

We’ll go next to Jason Mills with Canaccord..

Hi, guys. Thanks for taking my questions.

Can you hear me okay?.

Yes, Jason.

How are you?.

Good. Thank you. Mark, good gross margins this quarter.

Could you talk about the trends going into the second quarter and through the remainder of the year? And then could you just give us a minute on updating us with your thoughts on the next two or three years based on what’s going on sort of inside the house, what you’re seeing in both from a cost control – reimbursement cost expense control standpoint as well as pricing over the next couple of years? Gross margins has been in my mind one of the more important levers here for bottom line growth and therefore the stocks.

So I’m just interested to get an update both on the trends this year and updated thinking in the next couple of years..

Sure. Okay, I’ll try to – there’s a couple of different questions there but I’ll try to hit the COGS point first. Pricing is a whole different matter and as we get into that, it’s different by each product area. From a COGS standpoint, operational excellence delivered as we expected. We’ve moved 40% of our lines now.

We expect to finish that process by January. So you’re going to get an increasing benefit of that in the second half, so you’ll see gross margin improvement rise each quarter as we go through the year. It’s a little muted – the benefit was muted and will be muted a little bit in the second quarter because of FX.

Now the FX goes away as we get into the second half. So you’ll see a more pronounced benefit in the gross margin line in third and fourth quarter because the 50, 60 basis point hit from FX goes away, assuming of course there’s not another massive drop in the euro, but we haven’t been seeing that.

The euro has actually strengthened in the last couple of quarters. So that’s what we expect in the year.

From continuing onward, the plan we continue to expect and we have a pretty well run out plan that we will generate a 100 to 125 basis points in the next two fiscal years as well based on the big benefit coming in fiscal year '17 from consolidation of the plan, but we also expect direct material savings to start kicking in, in both '17 and '18, which will drive that 100 to 125 basis points.

So that’s sort of the COGS picture of what’s going to drive performance. From a price standpoint, it is quite a mixed situation. You are on the international side seeing some price degradation, Joe touched on this a little bit, because of in the distributor markets you had a U.S. dollar appreciation. Now we’re going to have to see how that plays out.

But we have seen some lower price internationally. In the U.S., it’s quite a mixed bag. Oncology, we continue to get price because of uniqueness of our offerings. Fluid management, it’s been up and down. ELT, there’s been some price but not anything material. I’ll say when you look at the net price impact on the business, it’s still running around 1%.

So it hasn’t been a big material impact to the business so forth, and Joe can build on this. On the international side, there’s a little bit of a concern as we go forward. Are we going to have to do something there in our U.S. dollar markets? I don’t know if you want to answer that, Joe..

The only other comment I’d make for gross margins is as you have mentioned in the past that each of the products that are growing in excess of 10%, 20% are all margin accretive products. And so we’re going to see mix be a pretty positive contributor to gross margins. So it’s our internal cost reduction and it’s our mix improvement.

So those are the ways that we get to accelerated and to the gross margin targets that we’ve mentioned.

But yes, we have 60% of our international business which is not a huge part of the company but it’s still a meaningful part of our business has seen virtually a 20% or 30% price increase, because of the dollar going up and their inbound price has been higher. And so their orders like this quarter and if it doesn’t change would be challenged.

And so we are working with them to ensure that we manage their pricing and cost in order to make sure that they’re competitive. But we have a pretty good plan as far as improving gross margin. I’m very proud of our operations team. We’ve been talking to you about operational excellence for I don’t know four or five quarters.

They haven’t missed a beat; every single milestone, product line, time conversion and change they’ve hit. We’ve always said that we’d be done by January and that team is right on it. And by January we’ll see that improvement and those cost come out.

So I’m very proud of their execution and across the board, I think the company is going to see improving gross margins over the next several years..

Okay, that’s a lot of detail. I want to make sure just to be clear on a couple of points. Mark, you mentioned 125 basis points next year and then you turned to pricing and we talked a little bit about mix bag. I just want to be clear. The COGS discussion obviously is a discussion broadly about pricing.

So is there 125 basis points before we consider pricing and therefore expansion will be less than 125 basis points? And also did you give – I’m sorry if I missed it, a gross margin target for the full year this year, '16?.

Well, let me see if I can help Mark for a moment. Well, first of all, when we run our gross margin targets based upon our cost reduction for the year, we are obviously planning on a certain revenue line which we’re planning on a certain level of pricing.

So if pricing changes significantly or if revenue is where our plan, then we’re going to over absorb and our gross margins aren’t going to be as high. But the net cost, the physical one-to-one cost of pulling out of business is what’s happening as far as the headcount, overhead consolidation and whatnot.

But of course in that calculation there was changes to the variables and there’s changes to the calculation. But as you know, gross margin is at the bottom line. But as far as we’re concerned based upon the cost reductions that we’re targeting, we expect 100 to 125 basis point improvement gross margin over the next two years..

Right, and 100 basis points for this year, Jason..

Okay, got it. And then just second line of thinking here on the cash flow side and that’s obviously expansion impedes cash flow.

What are your targets, Mark, for free cash flow this year and next year if you can maybe give us a range or directionally?.

Yes, we’ve guided free cash flow to improve pretty significantly this year. I think I mentioned it earlier that it would be – hold on a second just to make sure I don’t misquote – 60% to 70% improvement this year in free cash flow.

And that’s generated by operating improvements, working capital improvements and then lower maintenance CapEx in the year. So we have a pretty significant expectation of nice improvement as we get through the manufacturing consolidation. We haven’t really talked to next year numbers.

We’ll probably start talking in the next quarter or two on that, but that’s our focus on '16 is trying to deliver that improvement..

Jason, the good part is for the last couple of years we’ve been using cash. We’ve been using cash for Oracle, we’ve been using cash for planned consolidation, we’ve been using cash in order to increase inventory for all of that and those projects are now being successfully completed.

And so our corporate CapEx requirement is not as high as it was for the last several years. Inventory won’t be as high as it was for those obvious reasons. And once it normalizes, that cash is going to flow through for a while.

And so we’ll see a pretty significant increase in cash over the next six to nine months and then it should be steady state as the revenue and the business grows accordingly..

That’s helpful. Just a follow-up on that point and I’ll get back in queue. If you’re successful and we see cash up to your guidance this year.

I presume that the gross margin expansion next year coupled with not such a bad CapEx environment and you’re hoping I’m guessing for revenue growth next year drives maybe some leverage next year as well to the cash line and that grows.

What do you start doing – if you’re successful over the next couple of years generating the type of cash that people have in their models, what do you do with that cash, Joe? And thank you for the answers..

And thanks for the questions and your involvement, Jason. Right now, our plan is purely to strengthen our balance sheet and pay down our debt. But what we’d like to be able to get back to doing is if we’re going to put some of that capital to work for smaller acquisitions, that makes sense to bolster our product portfolios, we’ll do it.

But I think we’ve signaled quite a while ago that we’re really intend on making what we’ve done work and operationalizing the business and getting our top line growing and getting our bottom line growing faster, and then bringing cash out. So we want to return that to shareholders and return it to the company and put it in our balance sheet.

But I think ultimately as we sure up our balance sheet, it wouldn’t be inconceivable of that as we’re done with all these projects and we’re ready for more that we not do anything too big but I do think our portfolio is going to always use new technology.

And also continue, as we had said, we’re still looking for good international targets to acquire, to build out our international business. So those are probably the two best uses of cash for us..

We’ll go next to Matt Mishan with Keybanc..

Great. Thank you for taking my questions..

Thanks, Matt..

On the revenue guidance, you were able to keep that intact for the full year but if I’m looking at it right, I think the cadence changed a little bit where maybe you lowered the first half by about 100 or 200 bps and raised the second half guidance.

So I was just curious where are you falling short in the first half, why that doesn’t bleed into the second half and what gives you more confidence in an improving second half environment?.

Sure. I’ll hit it and Joe will probably build on my comments. So in the first half we saw – we came in at slightly below midpoint of our numbers and we had a little bigger – less growth in PICC that we were expecting and international was a little slower start than we would have hoped at the higher end. So that just flows into the second half.

That’s why the first half is so – you’re right, it’s about 100 basis points lower. The second half we feel stronger. Joe talked about a number of things.

I think particularly the regulatory clearances we have a pretty good line of sight on our number of critical orders, which gives us a lot of confidence that we can recover that 100 basis points of growth in the second half and have a pretty good strong second half.

And then clearly as we’ve talked throughout the call and on earlier questions, we don’t have the two headwinds in the first half. So the comps are much easier in the second half, which also gives us confidence. I don’t know if you want to add anything else, Joe..

Yes, I’ll just add a couple of things. I do not underestimate how not being able to register products for three years impacted our international business. Not having those CFGs and dealing with that, our international team really had their focus on what it had and drive its markets and do a lot of heavy lifting.

We have all of our clearances now, we have all of our CFGs now and we’ve been filing for new clearances. There’s markets where we don’t have our 1470 laser register, which is crazy. There’s markets where we don’t have NanoKnife. There’s markets where we don’t have our PICC registered.

So we’re now starting in the second half of the year to start seeing some of these key markets get registrations that our distribution partners have just absolutely been waiting for. Probably the biggest second half component is going to be in our oncology business.

If we receive and we believe that we will receive NanoKnife clearance in China, China’s a huge ablation market. And there will be we believe within this year a significant capital equipment buy when we receive that clearance and that we have a big launch plan in place. And that’s something that we have a very clear line of sight for.

We have a couple of initiatives with other oncology products that we have very high confidence with if we receive those registrations, we’re going to see significant new orders. So we’re now on the beginning tail of benefitting as other companies have as part of their strategy.

A lot of the growth you see is not just organic growth, it’s growth due to new product registrations in markets and you keep rolling these new registrations and building these markets, you’re increasing your footprint and increasing your business. We’re starved for that for a couple of years and now that’s happening for us.

And so we have again a clear line of sight as to what products, what markets and we know for example and we had mentioned in our comments between $3 million and $5 million of new orders we’re going to see between the third and fourth quarter purely based upon those registrations..

Okay. And just to follow up – and that was really helpful, just to follow up on the NanoKnife conversation, I think you also said last quarter that potentially some upside to your guidance would be from changes in reimbursement towards the end of the calendar year and you’d have probably some increased visibility into that as the year progressed.

Could you give us a little bit of color on potential changes in reimbursement maybe in the U.S.

or in overseas for NanoKnife?.

Yes, it’s a great question. So first of all, last year in the January timeframe for the first time we received new codes for NanoKnife in Germany. And if you look at our fourth quarter revenue, we sold 12 NanoKnife systems in the fourth quarter. We had a huge fourth quarter.

And our utilization I think going into the end of the last year was up about 30% in NanoKnife worldwide. And that’s a function of a maturing data, that’s a function of – in Denmark and some Scandinavian countries, we’ve started to receive NanoKnife reimbursement. In Germany, we have NanoKnife reimbursement.

And now we are actively talking to the National Institute of Clinical Excellence in the UK regarding specific approval and specific guidance on the recommendation of NanoKnife for certain patients.

And interestingly if we receive a positive NICE indication – it’s not indication but if we – I guess they give us a positive view on NanoKnife where today NICE has experimental.

So all private payors or other government agencies around the world look at that guidance and say, well, we can’t – why would we reimburse this when NICE see this as investigational. We believe that by January we’re going to shed that investigational label.

And when we shed that investigational label every market around the world who’s held off on reimbursement we think is going to start coming in line, and we’re very excited.

We’ve hired a tremendous executive on healthcare policy reimbursement here at the company and she has really breathed an incredible amount of momentum on our reimbursement strategy.

So whether it’s the NICE indication, we’ve also had one-on-one conversations with CMS, there’s 150 clinical publications today on the Internet and there are certain patients who really have a significant medical need and should have this technology.

So, I think we’ve held back from talking about NanoKnife for a while but today the data is too advanced and the societies now having AHPBA, the American Hepato Biliary society manage a worldwide registry for NanoKnife is an incredible acknowledgment.

The fact that we’re going to do a patient registry for pancreatic cancer patients in the UK with NICE is an incredible accomplishment and these are all early indications now that the technology is on the cusp of its acceptance in reimbursement.

So, it’s really – the time for NanoKnife is occurring and to see worldwide growth last year and seeing 38% growth in the U.S. for consumables is a great validation..

That’s great. I’m just going to squeeze one more in real quick on EVLT just given the volatility in that business over the last couple of quarters.

Has the momentum continued so far in this quarter that you saw less?.

Yes, it did. So I think I had mentioned on the last quarter’s call that we saw May, our procedures start returning to our customers. And to refresh everyone’s memory, in the first four months of the calendar year, boy, our same-store sales in patients were just not there and we reported on it as thus we saw it.

And yes, they came back in May and they came back throughout the summer. Our U.S. business was up roughly 9%. Now we’re expecting that growth to continue here in the second quarter.

And it will be interesting to see if – we’ve asked ourselves openly and publicly whether or not whatever the shortfall was in the first half of the year is made up in the second half of the year, that I don’t know. But my concern for EVLT today is far, far less.

And on top of that, if CMS decides to level the playing field for outpatient reimbursement for lasers and RF, it’d probably be game on..

Got it. Thank you very much..

Thank you for your questions, Matt, and thanks for joining the team..

[Operator Instructions]. We’ll go next to Keith Hinton with Sidoti & Company..

Hi.

How are you?.

How are you, Keith?.

Hi, Keith..

Doing well. Okay, my first question is regarding the rapid database for AngioVac.

I’m curious as to what the sort of timing on that data is going to be? Is that going to be you receive efficacy data regularly on that or is that going to be all at once more like a clinical trial? Can you give a little color on that?.

I don’t know that I have a specific date interval, but I think when there is a meaningful number and a meaningful age and Dr. Moriarty feels like it’s time to – that there is medically necessary or important data that he’ll put it out. I think we funded the STAR registry with Dr.

Martin and he chose that certain intervals to do meta-analysis on the data when he felt it was medically necessary. So we don’t control the registry. It is not our registry. We have an unsolicited grant for UCLA and Dr. Moriarty to run the registry as they see fit. And so whenever Dr.

Moriarty thinks there’s something of clinical relevance, it will be completely his decision. But one of the things as a company we’ve seen – we’ve funded and gave Dr. Martin an unsolicited grant for the STAR registry five, six years ago. And today we have a publication and he handles the surgery, 200 patients.

So that’s why we’re funding the AHPBA registry for NanoKnife. They run it, they do it exactly how they – we don’t determine their protocols, we don’t determine who they include, how they include and when they report. Now we’re funding a registry with CROES for prostate NanoKnife ablation, the same thing.

They are completely in control as the same thing as Dr. Moriarty is. So I would expect that whenever they feel it’s medically necessary, it will be out in the public domain and when they present things in the public domain, then we’ll of course draw your attention to it..

Okay, terrific. And I just have one more. Sales and marketing crept up a little bit as a percentage of sales. I’m thinking that’s probably geographic related as to the weakness in the international.

Am I thinking about that correct?.

No. Actually we made a strategic decision that we talked about in the fourth quarter. Our peripheral vascular business in the U.S. has a lot of opportunities and between AngioVac and EVLT, some of our other products haven’t had the appropriate attention.

So we made a strategic decision to promote one of our best people to a national business manager role and then some of our best sales people to specialist and sales roles, and we created up a new NAMIC sales force.

And that NAMIC organization works through our peripheral vascular organization to basically grow and give new life and energy to our largest product line in the company, our fluid management NAMIC business. So it was an investment. It shows a little bit more cost as a percentage of sales in the quarter and I bless every dollar that we put into it.

Our new general manager made a great decision and we’re seeing the activities. If activities are precursors to results, then I expect some good results in the second half of the year..

Okay, terrific. That’s it from me. Thanks..

Thank you, Keith..

We’ll go next to Charles Haff with Craig-Hallum..

Hi, guys.

Can you hear me okay?.

Yes, we can.

Charles, how are you?.

Good. A couple of questions here, most have been answered, but on the warning letters I understand the CFGs getting lifted here, it helps, but on the warning letters getting lifted, I understand you can pass the re-inspections.

Any update that you’ve heard from the FDA? Is there any further steps that are still outstanding before potentially these three warning letters can be lifted?.

I don’t think in our hands. I think right now we’ve asked FDA to review and we’ve asked them to lift it. Obviously, to get into the warning letter we’ve had to have repeat 43s and since that, we remediated and we’re very pleased in the fact that we had repeat inspections of each of the sites.

And on those repeat inspections there were no 43s that were repeated, which is a pre-indicator towards lifting of the warning. And hence the real transactional part of it is receiving your certificate to foreign government. That’s where the rubber really hits the road.

From a PR standpoint, it’s nice to get rid of the warning letters but from a pure transactional standpoint the fact that we now can register all of our products in foreign markets, that’s where from an operational standpoint we’re there. So to any extent there’s any additional questions, we’ll answer but the ball’s not in our court anymore.

We feel we’ve done everything..

Okay. Yes, that’s very helpful. I was kind of thinking more on the PR side getting this news out there is always very helpful.

When was the last re-inspection or when was the last communication?.

The last re-inspection was maybe a month ago, maybe – I don’t know, four, five, six weeks. Within four to six weeks, so it hasn’t been --.

Okay..

If I could maybe – don’t really want to assume too much, but I think there is typically a holistic view. I think for us to get a clean bill of health, I think they want to see everything before they would give it piecemeal. So we’ve worked with it, we are very proud of our accomplishments.

The amount of cost and the amount of work and the amount of attention of our R&D teams and our quality teams behind the scenes, it’s unheralded. You don’t get credit for that. You don’t get credit for the hours of responses and remediation in CapEx. No one sees that. They see new product launches. But the people at AngioDynamics have worked so hard.

They put the customer, they put the patient first and we have been doing such a great job and I am so proud of our quality organization. I’m proud of our R&D team. There’s times when we’re developing, we’re focusing our whole R&D teams and making sure the remediation are there, and again you don’t get credit for that.

But so much of that behind us, you’ve seen now just in this last quarter three product launches coming out and we’re going to start – we’ve told everyone that we have a great pipeline and more is going to come. And we’re bullish on our business.

Charles, we’re not happy with the fact that we have to live through a couple quarters of down revenue given a product withdrawal and a currency size, but if you look under the hood and our team is executing and delivering and I can’t wait for the PR of the warning letters finally being lifted, because we’ve earned it..

Yes, that’s great. And then on the CFG and being able to get the approval in China for NanoKnife.

So you’ve been approved on the NanoKnife generator in China already, right?.

Yes..

Okay. So this would be the needles..

Yes, from the best of my understanding it’s a two step process. The generator gets approved and the distributor then is allowed to bring the generators in to the top hospitals who do a limited amount of clinical evaluation. And so as a part of the approval process – there are generators that are now in China and no revenue.

We are giving them needles and then they’re doing these cases. And as a two step process, so once they approve the needles then we have our complete freedom to market. And we expect that before the end of the fiscal year. We have plans. We know and our partner knows where – who’s in line and where this is going to go.

The Asian marketplace is a very big ablation marketplace, especially given the prevalence of ACC and others and 150 papers and clinical publication, this is not an experimental technology anymore. It’s very well established in the scientific community. So we expect that the China launch is going to be material and that’s why it’s in our guidance..

Okay. And then just on the ASP question without getting into specifics, but the U.S. ASP is quite a bit higher than the China ASP on the generators.

Would you expect that same ratio for the needles in China or is that still to be determined?.

Yes, I think from our oncology business standpoint, typically our international ASPs are half the U.S. ASPs that goes for generators and needles. That’s a rule of thumb. I’m sure market-by-market might be different but that’s pretty much where it is..

Okay, sounds great. Thanks a lot, guys..

That does conclude the Q&A portion of today’s call. I’d like to turn it back over to Joe DeVivo for any closing remarks..

Thank you everyone for staying with us tonight and thank you for doing your work on the company. We remain very proud of what we are accomplishing here at AngioDynamics. We believe we’re doing the right things in investing for our future. We were hit with a hard blow at the end of last year.

We started off the year with great growth and great momentum and we were building this enthusiasm, and we had a rough third and fourth quarter. It’s just excruciating to pull a product off the market. It’s one thing to go through a recall, it’s another thing to just take if off the market.

And to try to forecast the effects on your business when your customers have been using that for so long is just tough. We persevere and our team is still out there and we’re driving and we have the absolute best vascular access portfolio in the world bar none, and our competitors are scared of it and they are coming after us hard.

We have a fantastic oncology portfolio and we’re building a very, very strong peripheral vascular portfolio. So we’re still as bullish on this business as we’ve ever been and we appreciate your attention and support, so thanks..

This does conclude the conference today everyone. We thank you for your participation. You may now disconnect..