Evan Smith - IR Jim Clemmer - CEO Michael Greiner - CFO.

Matthew Mishan - Keybanc Capital Markets Bryan Brokmeier - Cantor Fitzgerald Ian Mahmud- Barclays Cecilia Furlong - Canaccord Genuity Jayson Bedford - Raymond James Lucas Baranowski - Craig-Hallum Capital Dominick Leali - Raymond James.

Good day and welcome to the AngioDynamics 2017 Fiscal Year Third Quarter Earnings Call. Today’s conference is being recorded, and at this time, I would like to turn the conference over to Evan Smith. Please go ahead, sir..

Thank you. Good morning and thank you for joining our conference call as we provide an update on AngioDynamics business, as well as a review of financial results of our fiscal 2017 third quarter, which ended on February 28, 2017.

The news release detailing the third quarter results crossed the wire earlier this morning and is available on the company’s website. A replay of this call will also be archived on the company’s website.

During the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about revenue, earnings and free cash flow for the fiscal year 2017 third quarter.

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.

This morning we’re joined with Jim Clemmer, Chief Executive Officer; and Michael Greiner, Chief Financial Officer of AngioDynamics. With that, I’ll turn the call over to Jim, who will offer insights in to the quarter.

Jim?.

Thanks, Evan. Good morning, everyone and welcome to our second quarter earnings call. Results for the quarter continued to demonstrate the execution on our disciplined approach to strengthen our company. This focus has had a positive impact on both our gross margin and our gross profit, delivering strong EPS growth and cash flow generation.

Our improved operational efficiency and strengthened balance sheet will provide a strong foundation, as we move forward on the initiatives that are setting the company up for growth for fiscal 2018 and beyond. During the third quarter, revenue growth was below our expectations.

Some of the reasons with the result of actions that we took to improve the underlying performance of our business, some of those include continuing our SKU rationalization program that now has eliminated more than 900 SKUs this fiscal year.

We’ve also made changes in our personnel, here in the US and internationally to better support our growing business moving forward. And we’re also doing things differently as a management team, when it comes to our operations internally the portfolio management decisions and our strategic decision making for our long term growth.

We understand that revenue is the biggest driver of long term shareholder value, and we are confident the measures that we’re taking will improve our topline growth as we move into 2018. We will layout these plans for growth when we host our investor day next Thursday in New York.

As part of our effort to simplify and strengthen our supply chain, we are closing our manufacturing facilities in Denmead, UK and in Manchester, Georgia, and will move those operations in to our New York manufacturing facility.

This consolidation is expected to be complete by the end of 2017 calendar year and will result in reduced costs, optimized inventory management and gross margin improvement. We anticipate an 18 month pay-back period for this project.

In line with our focus on high-value products that improve outcomes for both patients and care-givers, we recently announced that we received CE Mark certification or the Solero Microwave Tissue Ablation System.

We are proud to introduce Solero product overseas and with an initial European launch starting April, we’re looking forward to launching the product here in the United States following our FDA approval. Solero story is a key example of why our R&D process needs to be reset.

Solero offers valuable benefits to both patients and physicians, and it competes in a market where we already have a solid position. Our new R&D process has allowed us align our people quickly, identify what needed to be done, and execute against our plan to get Solero to the finish line.

This new R&D process is just one of several initiatives currently being undertaken that are focused on strengthening the foundation to build a great growth company that can consistently deliver the growth and profitability our investors are looking for.

I’ve talked about three goals; grow our revenue, improve our profitability and generate strong amounts of free cash flow. We are currently delivering on the second two and I hope you trust our commitment to be a growth company.

I look forward to providing you with more details of our three year plan to grow our company during our investor day next week. With that, I’ll pass the call to Michael. .

Thanks Jim and good morning everyone. From a topline perspective, as you saw total revenue for the quarter was 85.6 million, down 2% year-over-year. Gross margin for the third quarter was 51.2%, that’s up a 140 basis points year-over-year.

This improvement was primarily the result of net productivity which contributed 265 basis points of expansion offset by some pricing pressure and product mix. As a result of our gross margin improvement and despite the shortfall in revenue, gross profit did grow year-over-year by almost $260,000.

Net income for the third quarter was 2.9 million or $0.08 per share compared to net income of 600,000 or $0.02 per share in the same quarter last year. Adjusted net income was 6.9 million compared to adjusted net income of 5.4 million from last year.

Adjusted EPS was $0.19 during the third quarter, up approximately 27% from $0.15 in the same quarter last year, and adjusted EBITDA was also up 12% year-over-year to 15.5 million. Once again we had strong cash flow performance during the quarter.

We generated 14.4 million in operating cash flow and 14 million in free cash flow as a result of our strong working capital management effort, specifically to focus on cash collections, as well as lower CapEx during the quarter.

Additionally, we ended the quarter with 36.8 million in cash and investments and currently have outstanding debt of $98.8 million. We also retired all of our treasury shares outstanding during the quarter.

As we discussed during our second quarter call, we executed against our plan to pay off the outstanding balance on our revolver during the third quarter and currently have no revolver debt outstanding. That leaves our net debt-to-EBITDA ratio when calculated utilizing our full cash balance at 1.11 as of the end of the third quarter.

Our continued commitment to prudent financial management supports and strengthens our balance sheet, which will provide greater flexibility for our long term growth potential. I’ll now provide an over view of the third quarter results for each franchise.

Our peripheral vascular franchise delivered 48.5 million in revenue, down 3% compared to last year. Year-over-year declines in fluid management and venous were slightly offset by volume in the core business. We had approximately 1.5 million in revenue related to Cook during the quarter, as the business starts to normalize.

We will continue to focus on further strengthening these customer relationships in order to maintain as much of this revenue as possible. In vascular access, revenue was 23.7 million down 5% year-over-year.

VA experienced decline across the portfolio partially offset by strong BioFlo sales, particularly in Midlines, while non-BioFlow products were down 16% during the quarter, BioFlo sales increased 12% compared to the prior year.

The oncology surgery business generated 13 million in revenue, that’s up 8% year-over-year primarily due to higher utilization across each of the product lines. And internationally, revenue was 17.8 million, up 3% year-over-year.

Now turning to guidance, given some of the revenue challenges Jim described earlier, we believe that it is prudent to lower our revenue guidance for the year to be in the range of 352 million to 355 million.

However, as a result of our continued focus on operational improvements, we are increasing our adjusted EPS guidance to be in the range of $0.68 to $0.70. Although our current free cash flow year-to-date is just below 35 million, we are not increasing our free cash flow guidance at this time.

This is because we anticipate and inventory build of approximately 5 million to 6 million in the fourth quarter to support the closure of our Denmead, UK and Manchester, Georgia facilities. With that, I will turn the call back over to Jim for closing remarks. .

Thanks Michael. To summarize, we are focusing on improving the performance of our company through research and development, managerial discipline, commercial execution and operational excellence. When fully functioning we will grow our company overtime. Part of that effort has included adding senior level management to lead our organization.

I’m pleased to share with you that Bob Simpson joins our leadership team as our Senior Vice President and General Manager of our Peripheral Vascular business. Bob is well-respected, results driven, medical device executive who joins us from Medtronic.

Based upon my experience working with Bob for several years, he’s known for leading teams with a disciplined strategic intent and focusing on accountability and execution, key factors to AngioDynamics’ over all long term growth. We look forward to sharing our long term growth plans with you during our investor day next week.

We plan on outlining details on how we will achieve topline revenue growth in the coming years. Additionally, we plan to break down strategies by each franchise, highlighting the unique growth drivers and the plans we have to capture greater market opportunities. Thanks for joining us this morning, and now we will open the floor for questions. .

[Operator Instructions] And we’ll take our first question from Matthew Mishan with Keybanc..

First on the guidance, if I’m doing the math right, I think it implies a material step down in profitability, sequentially from 3Q to 4Q.

And I’m just trying to understand the driver does that or are you simply being conservative?.

Well there’s a couple of things there as we look in to the fourth quarter that we’re looking to do. We’ve been behind a little bit on spend and in R&D through the year, because we’ve been a little more thoughtful of some of our projects.

As we mentioned that the new program that’s in place, we’ve also been a little bit behind on spend and some others areas in selling and marketing with headcount. So we anticipate that we’ll have small increase in expenses as we enter the fourth quarter.

But revenue will sequentially be up quarter-over-quarter going from the third quarter to the fourth quarter..

And then on the consolidation of the facilities, could you give us a sense of what the cash restructuring costs are and then the expected annualized savings from the consolidation of those facilities?.

So as Jim mentioned the payback period will be about 18 months. We anticipate that we’ll get savings in the range of $5 million initially that’s primarily related to the overhead that will be avoided going forward.

And as we bring that manufacturing all in to one location in Upstate New York, we think there’s additional savings down the road, we haven’t built those in to the calculation yet though, and the cost will range somewhere between 6.5 million and 7 million to shuttle those two facilities. .

And let me squeeze me one more in. The free cash flow has been a really great story for you guys this year.

How should we be thinking about that moving forward? Maybe but how are you looking at it like a free cash flow conversion metric maybe to adjust the net income and then what’s the reasonable rate of CapEx for this business?.

So next week we’ll layout good detail on those two questions, but at a high level here we’ve done a lot of work around payables, receivables, inventory management this year, although as in the fourth quarter we’ll have inventory building but that’s obviously a temporary build in order to supply inventory for these plant closures.

But as we go in to next year we still anticipate having free cash flow growth opportunity. But as we exit next year, we’ll be more maintenance mode from a working capital standpoint and then it’s a matter of driving more profit to get more free cash flow.

And just from a CapEx standpoint, this has been a slightly lighter year than we are building in to our models for the next couple of years, but the increase in CapEx is not significant to have a material impact on free cash flow. .

And we go next to Bryan Brokmeier with Cantor Fitzgerald..

So you made some personnel changes, you commented about in the prepared remarks and also in prior quarters, as well as changes I believe a couple of quarters ago to better incentivize the sales force for the long term pipeline growth.

Have you begun to see improvements in the pipeline and can you provide a little bit of color around where you’re seeing the biggest improvement so far?.

Sure Bryan. So our pipeline specifically talking about the new product pipeline that we are developing. .

I’m talking about the sales pipeline..

So two things, so sales pipeline at this point we have changed a couple of spots in our senior leadership team as you know, there’s two new general managers here. Bob has just joined us less than two months ago. So we haven’t seen a big difference there in the sales pipeline in those businesses.

We are making, we are aligned properly and we have the right resources where our customers expect us to be. So there’s now a big change in our sales pipeline.

There’s bigger change in the R&D pipeline, the sales pipeline is similar to what it has been and we are preparing now with our sales strategies to be where we need to be to support our new product launches that we’ve identified in the coming years..

Have you met with the FDA to discuss the data that’s currently available on the neomycin and what more they may require for submission?.

Bryan good question. At this point we talk to the folks that are on the call about our intent to work with the FDA to try to expand the indication that we currently have. So next week we’ll give a bit more detail around there.

But to answer the question, yes, we’ve been working on the background here at ANGO and having conversations to prepare ourselves to have a good argument why we think we deserve an expanded indication in this space. .

And then lastly, are you seeing much in terms of, you commented on the Cook revenues in the quarter, but are you seeing much in terms of cross-selling as a result of those new sales of the angiographic catheters?.

I would like to see a bit more.

I think, if you look back at the 10 month history of the Cook recall, the first few months and a couple of other companies, I think we are doing all we could from a backward looking supply chain standpoint and forward-looking commercial standpoint just to help the customers have product in the shelves to treat patients.

So it was very, very much scrambled when we talked to you about that setting up our supply chain, and now we are in the phase where people are staying with us. We don’t know yet, Cook is not said a lot about if and when they’ll return.

So we’re now in a maintenance mode where we’re trying to do all we can to support these customers long term and to maintain that with our products. So ultimately we think there will be more opportunities for cross-selling.

But the truth is a lot of these folks already were our customers at a certain point, whether it was a couple of the products in that category or in sister categories. So we have a pretty broad touch in to the area that use these products.

So we will continue, now our space is a bit bigger and we’re a larger supply of partner to some of these hospitals. We think that will open up parallel selling opportunities, but to this point it’s been a lot of maintenance and working with these customers to make sure they’re satisfied. .

Now we’ll move to Matt Taylor with Barclays..

This is Ian Mahmud in for Matt, can you hear me okay. Just stepping back a little bit, it sounds like currently there’s a trade-off between new operational efforts and driving revenue growth.

Can you just comment generally on how far long you think you are in terms of ultimately delivering on revenue growth and specifically on the SKU rationalization can you remind us how many you’ve eliminated so far and how many you are targeting. .

So to be clear, we’re not trying to say we’re going to do one and not the other. So early on in my tenure here at ANGO, I think I identified the folks that I thought there was a lot of room we needed to do when I was going to spend time looking internally and improving our operations and strengthening the foundation of our company for growth.

Some of those things I talked about included changing the compensation plan to ensure it’s aligned with our corporate goals, changing how we do our operations, where we do our operations. The announcement this morning of closure of two of our four facilities was important for us to streamline our supply chain.

And then I talked about the SKU reduction program. We have too many SKUs that we offer today for a company our size. Yet we care deeply about the customers that use our products. So it’s a very purposeful profit to change SKUs out. Year-to-date we’ve had, I believe our number is 930 year-to-date SKUs we’ve reduced.

When you do that, we did allude to this, we put revenue at risk. Some customers may not be pleased that we’re changing an SKU of a product they used buy. They may choose a different product from a different company. We’re fully prepared for that risk.

So those are some things we’ve done and we’ve been purposeful about them, and I think we’ve communicated those properly over the course of the year. But just to be clear, we’re not trying to say we can only do those and not for revenue.

We expect to grow our revenue in line with continued operational excellence and internal management changes to make our company operate [streamlined]. In the future we’ll give you more details next week of how we’ll grow revenue going forward. That will include both product and commercial activities. .

And just to answer your second question, we don’t specifically have a SKU target. We’re looking across our entire portfolio that’s profitable, what can we make in large volume and so it’s an ongoing project that we’ll continue to look at. So there’s no target that we currently have in mind. .

As a follow-up, can you discuss your philosophy for balancing some of your internal growth goals versus external revenue opportunities?.

We monitor the markets we’re in. We know the spaces we’re in, we know them pretty well, and we know how they’re growing or the challenges they face to grow, and we match up our internal capabilities, where we stand in line with those places.

So what we’re doing now is making the choices to either realign or add resources to the areas that interest us the most, as far as growth opportunities.

So what we do is a constant analysis (inaudible) portfolio management process, challenging our own portfolio and then it’s also resource allocation process to make sure we have the necessary tools to compete in the space that we want to win it.

So next week we’ll give you folks more detail around the spaces that we’ve chosen and will share with your some of the resources that we’re going to add in those areas and then what our expected growth will be in the coming years. .

And we’ll go to Jason Mills with Canaccord Genuity. .

Hi, this is actually Cecilia Furlong on for Jason. And I just wanted to ask first on R&D, it was a little lighter than we had modeled for the quarter and just if you could give any color about where you see this going over the next few quarters. .

That’s correct. It’s probably been a tad lighter in the second and third quarter. The big reason for that is we’ve taken a step back in our R&D process and we’ve analyzed where do we expect to win, where can we win and the places we want to participate strategically. And so we’ve put on pause some spending until we identify those places we can win.

So for instance we took a fair amount of resources and we redirected them towards Solero to make sure we can this Solero CE Mark over the finish line which we have. We’re doing that in other pockets as well. As talked about earlier with (inaudible) we do anticipate that spend in R&D will increase in the fourth quarter.

But when you talk about this in the past, the overall R&D dollars that we’ve been spending as a company 8% to 9% of revenue, we anticipate we’ll stay in that range. We don’t think that we need to spend more than that.

We just believe that we needed to identify better areas of how to spend that and be more focused on how to spend that in a way that aligns with our strategy. So the total dollars should remain fairly consistent over our future which will show next week in that 8% to 9%.

But we believe that these are better dollar spend that are more focused in places where we can win. .

And then just turning to gross margins, what’s your expectations around the impact of the consolidated manufacturing facilities and overall where you see gross margin trending over the next year or two?.

So specific to the manufacturing impacts, as we said it will be about an 18 month pay-off. So the first 18 month is a kind of a breakeven analysis obviously. But we anticipate there to be around $5 million plus in annual savings subsequent to that. So that impact will be over to your 50 basis points.

Subsequent to that we are also anticipating other things that we’re doing in our operations and those will contribute significantly more than that.

So next week when we talk about our ranges for a variety of margin metrics including gross margins, you will see and we’ve talked about this in prior calls that we believe we can get to 55% plus in gross margins over time through this action as well as additional actions down the road. .

And we’ll go next to Jayson Bedford with Raymond James. Hearing no response we’ll move to Lucas Baranowski with Craig-Hallum Capital. .

This is Lucas Baranowski on for Charles Haff. Taking a look at your revenue for the quarter, oncology revenue came in about $2 million better than we expected. And you mentioned that it was driven by higher utilization.

Can you tell us whether that higher utilization was more weighted towards NanoKnife or maybe more weighted towards the ablation products?.

It was across as we noted in our prepared remarks. It was across all of our oncology products. .

And then on your income statement the acquisition restructuring and other items, I think was a bit smaller than it has been for quite a while.

Do you expect that to tick back up in the coming quarters or is it going to be - kind of remain around current levels?.

That’s tough to answer right now, because that is a bucket that captures often one-time unusual items that we’re not anticipating. Specific to the fourth quarter, legal expenses which we include in there, specific to unusual litigation was down versus budget and versus our prior year. So that was a component of it.

We didn’t have amounts in there related to M&A costs that was also down. So that’s a (inaudible) monitor going forward as exactly how that plays out again, that tends to be a line item that we try to capture unusual items of things that are not consistent with our normal day-to-day operations.

And you’ll see next week as we lay out some of the metrics that we believe are good indicators of our execution against our three-year plan. This is an item that we want to see shrink over time because obviously we want to not have those types of one-time on unusual items. So those are obviously hard to forecast. .

And we’ll go next to Dominick Leali with Raymond James. .

This is Dominick in for Jason.

I just had a few questions here, and I wanted to make sure in Japan this quarter did you guys receive the stocking order for around 1.7 million?.

We did, yes. That was a part of the 3% international growth that we saw. .

And on SKUs was there revenue impact in this quarter and is that by itself sort of source of revenue growth going forward?.

I’ll take your second half first. When we do SKUs normally you’re not going to grow revenue from there. So try to minimize the impact of reducing those SKUs. So in this quarter primarily, there’s probably a little bit of revenue loss. I don’t think it’s large enough so we can identify.

But it’s a disruptive event when you’re talking to customers about a product that they had chosen to use, and telling them that you’re not going supply any longer. We can offer them alternatives, and they also know alternative may exist from other companies out there.

So we fully understand it’s a disruptive event, yet we think the benefits outweigh the risks for our company going forward. .

And there’s a couple more, BioFlo as a percent of access is there a percentage you can help us with?.

BioFlo a percentage of Access. Let me check, it’s a little under 50%. .

And within Access, can you help us understand the growth of the segment; do any of those segments go?.

Well Midline continues to show a significant growth opportunity and that’s all BioFlo in Midline, and then the other PICCs continues to see some headwinds there without our chip location, although BioFlo PICCs continues to hold in okay, and then ports and dialysis was down a little bit on the quarter.

So we anticipate a fourth quarter where you have a little more even performance across ports and dialysis. We’ll probably continuously see some headwind at least in our BioFlo PICCs and that should continue to show us some strong growth..

And for Midline to overall, are we still thinking about 8 million for this year?.

Yes. Midline’s for the year, yes. Sorry. .

And just last, are there any related thoughts on duplication going forward as you explore options?.

So as we mentioned to the folks last summer we can discontinue the Celerity program that was in our pipeline for research and development. And going forward we’ve also mentioned that we are interested in having a chip locater in that space if we could. I can tell you it’s not our biggest level of interest right now.

So we’ll speak more about it next week, you’ll get to talk to Chad one-on-one next week, he’ll will give you more detail. But it’s not something we’re concerned with at this moment. .

And we’ve got a follow-up question from Matthew Mishan with Keybanc..

I just wanted to follow-up on the decline in revenue guidance. As you came in to the year, I think you were conservative in your expectations around the Cook recall, so you would have had some level of cushion on the revenue guidance there.

What specifically is coming in worse than you thought coming from the beginning of the year?.

Matt a couple of things, it was a tricky balance to get the Cook revenue add with the base business.

And our people in the field, they are selling their marketing team in their PV Group has done a really good job servicing those customers through this dramatic time and taking care of them, and actually bringing this new Cook business in and maintaining it, they’ve done a great job.

On the other sides, we’ve been softer than we thought in our venous business and our fluid management business has been a bit softer than we thought, that’s offset some of that. We knew coming in to the year the Vascular Access business would be challenged as we just mentioned with some of the items there on PICCs.

And then third internationally we thought our international growth would be ahead of where it’s at today. We’ve looked at some of the reasons why. And Matt some of that maybe as you know when I joined the company last spring and Michael joined in the end of the summer.

We know a lot more now than we knew then, able to understand our company better and our trading partners better and our business processes better. So we just feel right now, we’re giving you guys a really good indication of what we truly believe to be on the most after reflection of where we sit today.

Next week we’ll give you a lot more detail and reasons behind the actions, next week to give you why we believe we can be a growth company in a very short near future. .

The other thing we’ll be very focused on and Jim was alluding to this just now Matt. But we’re going to be focused on trying to determine what’s the right demand pull for our product portfolio, and so that takes some time to work through for certain product lines that might have been a little more of a push approach versus related to demand.

So we’re working through some of those things and hopefully exiting ’17 where we’re going to have a much better sense of normalization quarter-to-quarter for revenue. .

And on the venous or the EVLT side, why do you think that’s been a little bit weaker than you thought?.

Well two things you got to remember, there’s a comparable issue as well. Last year we changed towards (inaudible). So I think the company went through a lot of energy last spring, last winter and last spring to prepare for that, and second we’ve just been a little lighter than expected there.

Some of that we’ve internally looked at trying to figure out if its execution on our side, and we also know that our customers, some of the demand for account source has been maybe slightly more unstable than the past. We have a great history of understanding our customers’ demand. And we know we’re all a major players in that space.

But we’ve seen a bit of instability there, not enough that we’re going to highlight it with you earlier. But it’s an area as you know we’re highly focused on and again next week we’ll give you more details on our future. So I think again these are small choppy pieces, these are normal choppy things that happen in an annual cycle of any company.

So we’re not really here to highlight any of these in particular. .

It does appear we have no further questions at this time. I’d like to now turn it back to our speakers for any additional or closing remarks. .

Thank you again operator. On behalf of AngioDynamics thank you again for calling this morning. We hope you have a good level of input to our company and we think we’ve also shown that we can do what we said we’re going to do. We told you we’d drive more profitability from our revenue and we extract more free cash from our profitability.

We’ve shown the foundation of a very strong operating company. The largest challenge that we face going forward is to show we can grow revenue consistently at compelling revenue growth rates. We know that’s our challenge, we accept that challenge, and we look forward with the opportunity to share our plans with each of you next week in New York City.

Thank you again for calling today. .

And that does conclude today. Thank you for your participation, you may disconnect at this time..