AngioDynamics, Inc. (ANGO) Q3 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the AngioDynamics Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, April 5 of 2011. And I would now like to turn the conference over to Mr. Doug Sherk of the EVC Group. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today for the AngioDynamics conference call to review the results of the fiscal third quarter, which ended on February 28, 2011. The news release announcing the third quarter earnings crossed the wire this afternoon after the market closed and is available on the AngioDynamics website. The call is being broadcast live on the web at www.angiodynamics.com. A replay of the call will also be archived on the AngioDynamics website. Before we get started, during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including the statements about revenue and earnings for fiscal 2011. 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 actual results or events to differ materially from those described in forward-looking statements. In addition, today's presentation, includes certain financial measures that -- used to better understand our business, that have not been prepared in accordance with the Generally Accepted Accounting Principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures has been provided in today's news release issued by the company and is available on the website at www.angiodynamics.com. AngioDynamics uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing underlying trends of the company's business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP. On today's call, the company will discuss non-GAAP EBITDA and non-EBITDA per share -- excuse me, non-GAAP EBITDA per share and has used these measures in internal analysis and review of operational performance. [Operator Instructions] And now, I'd like to turn the call over to Johannes Keltjens, President and Chief Executive Officer of AngioDynamics.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us on our third quarter conference call. With me today is, as usual, Joe Gersuk, our Chief Financial Officer. This afternoon, I will start with an overview of our fiscal 2011 third quarter results, and then provide an update on our Oncology/Surgery and Vascular businesses, as well as the progress on our NanoKnife and other strategic programs. Joe will then review financial highlights for the quarter, and we will open the call subsequently for your questions. This afternoon, after the market closed, we reported net sales for the third quarter up 5% and net income up 14% compared to a year ago. Our sales in the third quarter were driven by continued momentum in our Oncology/Surgery business, and NanoKnife posted strong growth with sales of $1.9 million, almost 25% growth over the fiscal second quarter and more than doubling from last year. Also, LC Beads continue to show solid growth. And the third pillar of success for Oncology/Surgery is our International business. The International Oncology/Surgery business is becoming an increasingly large portion of our worldwide business, and all three product lines, RF ablation, Habib resection devices and NanoKnife contributed to growth during the third quarter. I know there's a keen interest from our shareholders in the possible expansion of our LC Bead distribution agreements with Biocompatibles now owned by BTG. We do anticipate a resolution about our ongoing distribution relationship in the next few months. As we've discussed in the past, we are concurrently developing and implementing strategies that are designed to provide ongoing annual top and bottom line growth regardless of the contribution from LC Beads. In the Vascular business, we continue to operate in a challenging U.S. market environment. Sluggish procedure growth, fierce competition and significant price erosion are the key factors contributing to the operating environment. We expect this difficult operating environment to persist for the next couple of quarters. Adding new innovative products will be the key to regaining consistent growth. We generated good volume increases in our Vascular business, which comprises our combined venous access and Peripheral Vascular franchises. However, this volume growth was largely offset by price erosion. We did make further progress towards completing our sales force transition to a combined U.S. Vascular force during the quarter. All training has been completed, and we believe the effects of this transition are largely behind us. Going forward, we will continue to strengthen the customer relationships necessary to achieve and sustain a high level of productivity. Within the Vascular business, we did see some encouraging growth stories. Our VenaCure EVLT franchise continues to grow mid-single digits with strong U.S. growth offsetting the impact of healthcare reform, in particular in the United Kingdom. Our Micro-Introducer kits continue to grow at a healthy pace. And in our venous access franchise both our PICC and Port product family had a particularly strong quarter with solid double-digit growth. Discontinuation of certain diagnostic catheters did impact corporate growth by almost 1% in the quarter. This negative impact will be visible in Q4 before starting to decline as of Q1 fiscal 2012. This particular catheter was discontinued at the beginning of this fiscal year. Our corporate accounts team, who also was able to enjoy some successes in the third quarter while winning contracts with both HPG [HealthTrust Purchasing Group] and Premier. These provide us with great growth opportunities for many of our core products, and our International business continues to show a significant above-average growth. Due to their growth is solid double-digit, with the Asia Pacific oncology business being the big engine as well as a great opportunity. In the quarter, we further strengthened our international operation by acquiring the distribution rights back from a Dutch distributor. We are, at this point in time, revising our full year financial guidance, and this is driven by the current difficult market environment, which is reflected in both pricing and procedural volume pressures. The Q4 over prior-year comparison will be negatively impacted by the strong sales of LC Beads in the fourth fiscal quarter of 2010 due to the unavailability of the competing product, plus the impact of the now discontinued diagnostic catheter line earlier this fiscal year. Now let's turn to NanoKnife and let's first address the warning letter. In January, we received a warning letter from the FDA in connection with certain aspects over marketing of the NanoKnife System. In the warning letter, the FDA states that certain statements we make, including those on our company website, promote the use of NanoKnife System beyond its currently cleared indication. The warning letter does not restrict or prohibit the sale or marketing of our products. The warning letter does not require us to recall any products. We take these matters seriously and are committed to complying with all applicable laws, rules and regulations in connection with the marketing and sales of any of our products. While we believe we have been fully responsive to the matters raised by the FDA in the warning letter, there can be no assurance that the FDA will be satisfied with our response. Meanwhile, NanoKnife continues to gain momentum in both the U.S. and abroad. During the third quarter, 6 new hospitals became clinically active with the NanoKnife System, and this brings the total number of active users to 29 worldwide. In total, these institutions treated an incremental 126 patients since January 1, 2011, bringing the total number of patients treated with NanoKnife to 538. A cornerstone of our NanoKnife program is the commitment to evidence-based medicine, and clinical outcome data will be the foundation for regulatory approvals, more specific label indications, reimbursement and general market adaption. In the International HCC, hepatocellular carcinoma, or primary liver cancer multicenter study, we did see good progress with an additional six patients that had been treated in the last 90 days. This brings the total now to 11 patients, which is close to the halfway point of this study. Six centers in four countries are currently enrolling. We do expect prospective single-center studies focusing on pancreas and kidney tumors to start in European sites in the near future. In line with earlier statements, we have submitted our responses to the questions from the FDA on our NanoKnife IDE submission for our prostate study, and are currently awaiting their reply. And we continue to be on track to submit the pancreas IDE in this fiscal quarter. As scientists and clinicians around the world continue to study and evaluate the safety and efficacy of the NanoKnife System, those results are being reported in significant publications and at important scientific meters -- meetings. The clinical feedback continues to be strong and there’s a broad and deepened trust from the clinician side to participate in the program. Our goal for the company is to grow significantly faster than the market and to grow in a profitable way. We remain more focused than ever on executing our programs to create sustainable long-term growth. Being focused on Oncology/Surgery, peripheral arterial disease and venous intervention creates solid growth opportunities in a large market regardless of the macroeconomic market trends. The key to generating growth is delivering innovation to our customers. And looking at the areas where we're enjoying growth, there's a strong correlation with us having launched meaningful new products in the last 12 months or so. Our R&D investments currently are the highest in the history both in terms of absolute dollars as well as the percentage of sales. And in the third quarter, we launched four new products. Yesterday, we announced the U.S. launch of the next-generation DuraMax stepped-tip chronic dialysis catheter and the new DuraMax VP [VascPak] kit. Additionally, we launched SafeSheath valve peelaway introducer to support our Port franchise. The SMART PICC bedside insertion kit, and we did upsell -- obtain CE Mark for the NanoKnife 220 system, which comprises a significant hardware and software upgrade. With this, year-to-date we have launched 10 new products from our internal R&D organization meeting our stated goal for this fiscal year. Our R&D and engineering teams continue to work on new products that will be launched later this fiscal year as well as in fiscal 2012 and '13. Gross margin in Q3 came in below our expectations. We believe we have a number of programs in place that will improve gross margin over the longer term. Two significant vertical integration programs were implemented at the end of Q3. These are the launch of our SMART PICC bedside insertion kit and the new DuraMax dialysis catheter. Both products present gross margin improvement opportunities. Also, mix is expected to become favorable over time going forward, with products like NanoKnife now being among our fastest-growing product lines. Our strong cash flow and resulting balance sheet allow us to look at acquisitions as a core element of our growth strategy. And we remain focused on strategic fit and potential to drive our top line. In addition, as we have previously stated, we want any deal to be accretive in a reasonably short time frame, which we define as four to six quarters. In closing, we remain confident in the long-term potential for AngioDynamics. Our strategic objective remains unchanged, which is to deliver profitable growth at a rate that is significantly faster than the broader market. We are executing our long-term growth strategy and profitability strategies, and we continue to make necessary investments in R&D and our innovation pipeline to drive long-term sustainable growth. Our commitment to strategic acquisition remains a top priority, and our financial strengths give us the flexibility to make disciplined investments to pursue additional growth opportunities. I'd like to thank, once again, our global AngioDynamics team for their continued hard work and for their dedication and commitment to building our future. And I would also like to thank our shareholders and our board of directors for their ongoing support and confidence. At this point, Joe will take you to a more detailed look at our quarterly results. Joe?

Thank you, Johannes, and good afternoon, ladies and gentlemen. Despite the continuing challenges of the operating environment, our third quarter was highlighted by a resumption of sales growth, major progress in our NanoKnife program, good operating expense management, excellent cash flow and growth in net income and earnings per share. Reported sales of $54.6 million grew 5% from a year ago and featured another solid growth quarter for our Oncology/Surgery business as well as improved performance in our Vascular division. Vascular product sales were essentially flat compared to the prior year, which is a significant improvement from the 4% and 6% year-over-year declines that we reported in the first and second quarters. The disruption associated with the sales force transition was much less of a factor this quarter than it was in the first half of the year, which is consistent with the expectation we set in our last earnings call. However, the broader slowdown in hospital admissions and procedure volumes that have been widely reported persisted again this quarter. And as a result, we saw softness in sales across most Vascular product categories. A bright spot was the strength of our vein ablation business in the U.S. where we saw strong double-digit unit sales growth in disposables and lasers. This was somewhat offset, however, by weakness in the international vein ablation market due to budget-driven reimbursement changes in the U.K. We also saw more intense pricing pressure in the Vascular business in the third quarter as ASPs declined 6% year-over-year in the Vascular division as a whole. This compares to the 4% year-over-year ASP declines that we saw in the first and second quarters. The price erosion in the third quarter was fairly broad-based across most of the Vascular product categories and reflects the competitive intensity of the marketplace. Turning to the Oncology/Surgery business, we achieved 19% sales growth in this quarter led by strong sales of LC Beads and NanoKnife products. NanoKnife sales of $1.9 million marked our fourth consecutive quarter with more than $1 million in sales of this exciting new technology, as seven additional sites entered the commercial program in the quarter. This included a site in the U.K., while the others are in the U.S. ASPs were firm in the Oncology/Surgery business in the quarter, rising by 3%. This partially offset the impact of price erosion in the Vascular division. However, the net price decline to the company in the aggregate was 4%, which in turn affected our gross margins in the quarter. From a geographic perspective, 88% of third quarter sales were in the U.S., and 12% or $6.3 million came from international markets. International sales grew 8% from the prior year on a reported basis and 9% on a constant-currency basis. Consistent with our international growth strategy, in early February, we entered into an agreement with our distributor in the Netherlands to end their distribution agreement, to purchase the relevant business assets and to secure their assistance in transferring customer relationships to AngioDynamics. As a result, we have established a direct sales operation and a business office in the Netherlands. With this transaction, we are now well positioned to sell more of our products in this small but attractive market in Europe, and it marks the fourth country in Europe where we sell directly to hospitals. Continuing down the income statement, gross profit totaled $31.7 million or 58% of sales in the quarter. This is the same gross margin we reported a year ago. And it is also 1.1 percentage points lower than reported in the second quarter, and is not the sequential margin improvement that we expected. This is attributable to the pricing pressure in the Vascular division mentioned earlier, which offset the positive impact of the material and manufacturing cost reduction programs that continue to reduce our product cost. Operating expenses totaled $26.5 million in the quarter, which is modestly higher than the $26.1 million reported in the second quarter as we continue to control SG&A costs to minimize the impact of lower sales growth and pressure on gross margin. The increase in operating expenses from a year ago was primarily due to a 24% increase in R&D spending to support Vascular and Oncology product development and regulatory activities. Operating expenses for the NanoKnife program amounted to $2.7 million in the quarter. The net effect of the program was a loss of $0.04 per share in the quarter compared with a $0.05 loss per share a year ago. And as NanoKnife revenues are rising faster than the associated cost to the program. Operating income was $5.2 million in the quarter, and the operating margin was 9.6%. EBITDA was $8.4 million or $0.33 per share in the quarter. The income tax provision was recorded at a 25% rate compared with a 38% rate a year ago, with this quarter's low rate primarily attributable to the renewal of the R&D tax credit, which expired in December 2009, as well as manufacturing tax credit. This lower-than-normal tax rate added $0.02 to earnings per share in the quarter. Turning to the other financial statements, cash generation continues to be excellent as operating cash flow was $10.3 million in the quarter and $22 million year-to-date. As a result, we ended the quarter with cash and liquid investments of more than $120 million. This is an increase of nearly $10 million in the quarter and more than $20 million since the beginning of the fiscal year. As challenging as the operating environment may be, it's worth noting that our business model continues to generate substantial amounts of free cash flow. Our revised guidance for the fiscal year is as follows: Net sales in the range of $217 million to $220 million, this is a 1% to 2% increase over fiscal 2010, with the revision due to the expectation of continued pricing pressure on our Vascular business and generally soft procedure volumes; gross margin in the range of 58% to 59%, GAAP operating income in the range of $20 million to $21 million, a $500,000 reduction at the low end due to the lower sales expectation; EBITDA in the range of $32 million to $33 million, a $1 million reduction from previous guidance; and GAAP EPS of $0.48 to $0.50, an increase of $0.01 at the low end, mainly reflecting the lower tax rate. As the impact of the NanoKnife program has been $0.12 per share through the third quarter, we would expect the full year impact to be in the range of $0.16 to $0.18 per share, of which $0.04 is the non-cash intangible amortization cost. This reflects the strong sales performance and lower spending on clinical activities for the program. Additionally, we expect a tax rate of 35% in the fourth quarter and 33% for the fiscal year and cash tax savings of $3.1 million from the use of NOL. Finally, we plan to report Q4 financial results on Thursday, July 14, after the market closes. And now, Michaela, we're ready for questions.

[Operator Instructions] And our first question comes from the line of Brooks West with Craig-Hallum Capital.

I wanted to just dig into the Vascular commentary a little bit. And I'm a little confused. Johannes, you said in your prepared remarks that you had good volume growth within your business, but then you're contrasting that with sluggish procedure growth and price. And I'm wondering, you get positive comments on PICCs and Ports, there seem to be positive comments on the laser ablation. Can you give a little bit more detail on just what you're seeing coming into Q4 that's making you cautious? I mean, is it more price? Is it more competitive launches? Or do you feel like you're losing some share and you need to get some new products out? I know it's a broad question, but just a little bit more detail there would be helpful.

Yes, and Brooks, it's difficult to summarize it, I can see that. So I think the big overarching issue is price. I mean, I think price erosion as Joe was indicating stepped up by two points in the Vascular division compared to previous quarter, and that's a meaningful number on the overarching revenue number. The R&D, some broad pockets, the exports have been singled out like introducer kits, VenaCure franchise. And we have consistently been able to grow it out over the last couple of quarters actually. And, certainly, looking at volume, we'd like to believe that we're at least holding share in the U.S., maybe even inching forward a little bit. But we've got some headwind in some of the other product lines. I did think a lot diagnostic catheters, although that was heavily distorted by this one product line that we discontinued, which starts having a significant impact in Q3 and also in Q4. Frankly, Benephit is not generating the traction that we hoped for when we entered into the whole franchise. Our PTA [percutaneous transluminal angioplasty] products, having a tough time, so that offsets it to a certain point. But again, the price erosion is the big overarching comment. And in my comments, if you go through them, I said the single biggest driver for getting out of that is frankly innovation. Because by having more unique products, products that perform strongly, can stand up against competition, make it a little easier to manage price. I think the days of gaining price are far away in this segment not just for us but I think for many companies. But by upgrading technology, being able to upsell, have products that distinguish themselves from competition, price management becomes a little easier.

Okay. And I guess, two more, if you'll indulge me. Joe, will gross margin -- you kept your gross margin guidance for the year consistent. Will gross margins be above 58% in Q4? And then, I just -- I had a question on the cash. I mean, you've had a lot of cash on the balance sheet for some time now. Are you not seeing deals out there? Are things still too pricey? I'm just a bit surprised you haven't pulled the trigger on something.

With regard to gross margins, we would certainly expect them to be no less than what we just reported in Q3 at 58%. And PICCs effects are helping us as well as the reduction programs, so it shouldn't be any lower than that, and certainly possibly, better than the 58% even that we just reported. With respect to the M&A activity, certainly, we continue to look at numerous opportunities and haven't found exactly what meets the strategic criterion yet, and is available at the right price, but the program remains active, and we continue to look at the opportunities and there's certainly no shortage of them.

And our next question comes from the line of Jayson Bedford with Raymond James. Jayson Bedford - Raymond James & Associates, Inc.: Just a couple of quickies. The Access business was strong, I think it's the first time it's grown in a while. Can you just -- and maybe you mentioned it, but what were the drivers there, if you just kind of think of the three buckets, PICCs, Ports and dialysis catheters?

Yes, Jayson, it's -- I think the danger of doing this, now almost for two years, that some of the programs that I'm going to use are being recycled, but -- so we're a little cautious. But yes, we had a very strong quarter in PICCs and a very strong quarter in Ports, but ongoing struggle in dialysis. And that certainly took -- took the overall number down. I made, in my prepared remarks, a comment about the correlation between those areas where we do see success on the top line and innovation. I think in the PICC line, we have been launching two products, frankly, three products during the last 12 months, a Triple Lumen SMART PICC, a Dual Lumen 5 French SMART PICC, and then more recently, a bedside kit, which is frankly, a big volume product. So we had meaningful innovation. And these are all the new SMART PICC family. So those are meaningful pieces of innovation that really help us show off the business. I think even the Port franchises are maybe even stronger, I think those Smart Port technology with the Vortex technology has a great reputation in the marketplace. We have been launching a mini Port, a low-profile Port, really running either a titanium power injectable Smart Ports, and they have just been performing well. The second thing that also plays in favor of the business, like a Port line and maybe also a PICC line, is corporate accounts. We have, certainly, over the last couple of quarters made some steady progress in that. It's become an increasing part of our revenue stream in Vascular, maybe also contributing a little bit to the price pressure, to be honest, but we get volume in return for that. But getting more -- becoming more effective and more successful in corporate accounts tends to help some of the core products and the excess products more so than some -- for instance, Oncology products. Is that helpful, Jayson? Jayson Bedford - Raymond James & Associates, Inc.: That is, that is. It’s a fair answer. And then as the second question here, just on the fourth quarter operating dynamics, and the EPS looks a little lower than I would have thought, especially given gross margin you expect to be up sequentially. It seems like you've left yourself a little cushion. Is there somewhere specific where you're ramping spending?

Well, I don't think so. It's a bit of a funky comparison, and of course, when we give guidance, Joe, is typically full year guidance rather than specific for the quarter. But we do realize changing it at the end of Q3 as an implied guidance for Q4, the only thing, I think, is the R&D expenses have gone up in this quarter and roughly committed to fund our future, and that probably stays relatively high. We had a little bit of one-time windfall in certain areas, that we wouldn't have, like a tax benefit I guess, Joe.

Yes, and there is a fairly wide range, I think, is what your question implies there, that there -- a $3 million range in just for a quarter's performance, so it is a range. And certainly, we want to make sure that we get in the range. But I think the only specific area of spending that we would see necessarily is in R&D, which is ramping up some as we just saw it did in Q3. And then apart from that, the sales expenses typically will rise with the higher sales expectation that is implied in this forecast relative to Q3, that is.

And our next question comes from the line of Jason Mills of Canaccord.

This is a Jamar Ismail for Jason. My first question is in R&D, you talked about how it's increasing. Can you give us a little bit more color on what type of products do you have in the pipeline? Is it in new product areas or just product line extensions or improvements?

Well, it's all of the above. We launched, I believe, 11 new products last fiscal year. This year, three quarters in, we're up to 10 new products. We could make a few more this year. So it's actually a steady stream of new products, running out at about one a month, and it's really across the board. We had new line extensions, if you like, in our NeverTouch platform or laser fiber for varicose vein ablation. I already highlighted two or three launches in our SMART PICC family, two launched in our Smart Port family. We just had a major addition to our dialysis product lineup. We did launch a new Micro-Introducer kit, and I'm rattling these out from the top of my head here. A couple of support products like this valve introducer sheet. We had a non-coring needle earlier in the year. In Oncology, well the 220 upgrade is only international right now, we're trying to obtain the CE -- sorry, 510(k) approval in the U.S. as well. But that of course from an R&D point of view, was a significant effort. So it's fairly broad-based, Jamar, and I think that's going to look like that going forward there. In the hopper are more ports, more dialysis products, further innovation on varicose vein -- on the VenaCure franchise, and frankly, a few other ones as well. Good probes both in -- a number of new probes, ablation probes in Oncology are in the near-term hopper as well. So, I think this is looking increasingly good.

All right. Next -- my second question is on the sales force. Where are you in terms of trying to -- think you'd -- that they'll be driving efficiency gains? I know you mentioned in your remarks that the training is over.

Yes. So two things there. I think the -- I mean, first of all, just to kind of break it out a bit. Training is never over. We launch new products on an ongoing basis, and we train people all the time and there’s always room for improvement. I think the comment we're saying, we're making is that the transitional impact of combining two sales forces is largely behind us. I think we had -- I think from a leveraging point of view, from a sales and marketing point of view, I don't think, and I'm looking at Joe while I speak here, I don't think you should expect much there in the near future. I think we want to continue to invest in our sales force. And that's really about top line growth, and with that, the sales and marketing expenses go up a little bit. So I don't think it's as much -- it's a bit of a productivity issue, but with that the commissions will go up and some of the variable expenses go up as well. So I wouldn't want to guide toward too much leverage on the sales and marketing line in the next couple of quarters. But frankly, we made some pretty remarkable strides there in the last 18 months or so. Is that answering your question, Jamar?

And our next question comes from the line of Thomas Kouchoukos with Stifel, Nicolaus. Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.: I just wanted to -- I think you mentioned on the FDA IDE studies that you are expecting pancreas by the end of Q -- your fiscal Q4. Is there an update on prostate? I mean, should we not expect that by year end at this point?

Yes, maybe I slipped in there a little bit too much, but we did submit all the required paperwork for the prostrate IDE a couple of weeks ago. So that -- and that IDE was an over IDE. The IDE came back with questions, top of my head, over a year ago. We did some work to answer those questions and we submitted that package a few weeks ago, and so we met that goal of submitting that in this fiscal year. And now it's in the hands of the FDA. We, hopefully, get a reply from them at least in the next -- hopefully, a couple of weeks or so, but you never know. Our next set upon indeed is the pancreas IDE, which is a brand spanking new IDE, which should go in and will go in before the end of this fiscal year, so in the next six, seven, eight weeks, what is that? Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.: Okay. And based on the different indications, is there one that you would expect to get cleared sooner than the other or is it anybody's guess at this point?

I limit my gambling to Vegas, and even I don't do it there actually. So I don't want to roll the dice. It's hard to say. Obviously, we believe that both are strong submissions, and we'd love to get them to a real prospective clinical trials, well regulated and gain the learning from that. And hopefully with good outcome, which we expect, of course, get a benefit in terms of getting spend the label indications and reimbursement, et cetera et cetera. So we gave it our best shot, and we look forward to a discussion with the FDA. And hopefully, it's going to be okay in one fell swoop. And if not, and we come back with some more questions, we'll deal with that.

And our next question comes from the line of Robert Goldman with CL King. Robert Goldman - CL King & Associates, Inc: A couple of additional things on the NanoKnife, Johannes, and then a financial question. With NanoKnife, the seven new commercial accounts, could you just break those down as to how many were U.S. and how many were outside the U.S.?

Yes, one was in the U.K. and all the others were in the U.S. Robert Goldman - CL King & Associates, Inc: And then also on NanoKnife, could you tell us what the R&D spend was in the third quarter and year-to-date?

We don't quantify it exactly, but we've said in the past that we spend roughly 40% of our R&D on NanoKnife, and it hasn't changed significantly over the course of the year.

And that would include the clinical expense in support of NanoKnife.

Correct.

But in Oncology, of course, there's also work going on, on RF electrodes and some other work to support those product lines, Habib knife. So we never break out the actual hard R&D dollars for NanoKnife only the total program expenses. Robert Goldman - CL King & Associates, Inc: Okay. And then the final financial question. I can't remember if you guys give a free cash flow guidance for the year. If I missed it, could you tell me what that guidance was? Or could you add that to your guidance?

Yes, we do EBITDA, but we don't actually do cash flow from operations or free cash flow for that matter. The cash flow from operations tends to certainly be in the vicinity of the EBITDA, and the capital expenditures tend to be fairly modest. They run in the $5 million or so a year range would be the normal level of capital expenditures in the business.

And our next question comes from the line of Charles Croson with Sidoti & Company.

Just one quick item here. I want to thank you guys again for breaking out those segments via Access and the Peripheral Vascular. It's a -- that's helpful. Switching gears here, question for Johannes. It seems to be a theme among several of your competitors that increased innovation to deliver better clinically-backed products is pretty necessary in the environment. So two-part question. Does this potentially mean you have to increase R&D, maybe north of sales about 10%? And what do you have to do to outpace the competition in this area since they're somewhat doing the same thing?

Well, it's a great question. The -- I mean, first of all, the start of the -- beginning of your question, I wouldn't guide the group to us spending structurally more than 10% of revenue on R&D. There could be the odd quarter that we kind of break through that a bit, and then they would drop back, but I think that's kind of the right level. And certainly, what occurred in gross margins, I don't think we could support much more anyhow. And I think when I say, and I really obviously mean this, that innovation is the key to the future. And you're -- I mean, it really means that what I would call portfolio management, portfolio strategy is an important element. And even an organization, we're relatively small but not that small, but we can be all things to all people. Even large corporations can be all things to all people. It's really about picking your battles, and you've seen as one example we're really committed -- I mean, more spaces like that absolutely committed to the Varicose Vein business, and that's where we have a healthy pipeline and a steady stream of new launches, and it makes a difference. And I do believe that the growth we've been enjoying there over the last -- well coming up to two years now, a year and a half, two years is not a coincidence. It's a result of that commitment, and it's frankly an organization-wide commitment. It's not only R&D. It is frankly also the marketing team that has done a tremendous job in creating market development programs. It is the sales team across the world that has done a great job in bringing this to customers and working with customers and putting this to good use. And then, of course, all the support sets around it, coming all together. So I'm a big believer in as a corporation, pick your areas of opportunity. Oncology is one for us. Ports, we're doing great. And again, the danger of starting to rattle out a few is that I get -- ignore other ones, I don't want to do that. It's really about less, fewer projects and really committing to them and driving it hard. Because yes, I think all my colleagues would say innovation is very important, but I also believe all my colleagues would say the cost of innovation, the cost of bringing in new products to the market have gone up over the last couple of years both in terms of dollars and in terms of resources as well as in time. Regulatory environment, the burden of proof on the clinical side, safety side has increased over time, and there's nothing wrong with that. We just have to commit to that, and again, be very, very smart about picking the R&D projects we take on.

Okay. That's very helpful. It's just -- then again, one more quick question. On the Vein sales, you said disposables is what's really driving those. Can you touch up on that? And then, just one question similar to that is what are the console sales account for the total Vein sales, if you can give a rough number of that.

Yes, I'll leave the second part of your question to Joe, but the overall, I can -- comment I want to make to the beginning of your comment is we look at this as very much a razor-razor-blade business. And we are a disposable product company. And the lasers an enabling technology. We own the technology. We develop our own lasers. We make our own lasers. We think we got an advantage from that point of view. We have seen a shift, and I think some of our colleagues have been saying similar things over the last couple of quarters, where the transaction on laser equipment moves away from the hard cold cash transaction to a leased or amortized kind of a structure. Joe, then I'll let you, to what I understand, we have details available here in numbers but...

Yes, but -- don't particularly break them down, but I mean the -- in terms of the capital component, I think, if you're asking what portion of the total vein sales it represented, it's only about 10%. So 90% of the vein ablation revenues would be the sales of the disposable products, and 10% would be the capital component. What we saw in the third quarter was good, strong, double-digit growth in the U.S. market in disposable sales. However, much of that was offset by the effect of price erosion. And then we saw some weakness in our international vein business as a result of the reimbursement issues in the U.K. in particular. But at the end of the day, we continue to see the vein ablation as a strong market for us, an attractive one where we believe we have a very strong market position and can ultimately increase market share.

And our next question comes from the line of Larry Haimovitch with HMTC [Haimovitch Medical Technology Consultants]

On the NanoKnife, a couple of still checks I've made suggests that there's some very, very good results with non-resectable pancreatic cancers. And I know pancreatic cancer is a great opportunity. I'm just wondering if it makes sense for you to pursue a Humanitarian Device Exemption, limiting -- perhaps limiting the commercial potential but perhaps speeding your way to the market by going to the FDA and looking at that as a possibility. I wonder if you'd looked at that as a strategy and how you think about that?

Well, we looked at that as a strategy. We don't think it works, as the executive summary, if you like. Going into detailed discussion gets a little complicated. But first of all, HDE [Humanitarian Device] is a viable pathway, I'm familiar with it from my prior license, stroke and all that. There's a couple of limitations and a number of procedures that, I think, even in pancreas would be exceeded or easily exceeded. The second thing is I'm actually not aware of -- and that might be my limitation, but we're not aware of a device getting HDE approval when it's already has a generic 510(k) approval. I mean, obviously, we can only promote the device within its indicated use, which is surgical ablation of soft tissue. It has no specific indication for treating a specific disease beyond that. That's part of a strategic goal towards the future to try and obtain that. And again -- but at the same time, I think as few are reporting, apparently, physicians are using it in certain cases for that kind of a procedure. So I don't think an HDE would be feasible in this scenario, Larry.

Okay. I don't know if there is or isn't any history of going for an HDE. But, obviously, it would be great if you could promote it directly rather than just as for soft tissue. I don't know whether it would speed the commercial acceptance but...

Well, listen, Larry. The device is what it is today. It has this generic label, as I've said, again, we are absolutely disciplined in promoting it within those boundaries and commercializing it within those boundaries. And I want to set that apart from our strategic intent, and you see it also international -- we're really trying to get in different countries into prospective trials of that -- most of all, research, clinical research from that point of view. And that will lead us to the path going forward. So I want to clearly separate between what we're doing commercially today as opposed to what this platform technology could potentially do somewhere in the future, but which is not reality today, and which is not a commercial foundation, certainly not in the U.S.

[Operator Instructions] And we have a follow-up question from the line of Brooks West with Craig-Hallum Capital.

I have just a couple of quick ones. Johannes, any update on the STAR registry that Rob Martin is running? And then, since the warning letter, have you seen an impact in either control unit sales or utilization as maybe some people back off from the technology, any impact there?

Well, the STAR registry, again, is an independent registry run by Rob Martin. I don't think he established, but I do know from conversations with him that, apparently more and more centers are getting IRB approval and more patients are being enrolled in the study. And at some point, I assume there's going to be some publications coming out of that. Impact from the warning letter, hard to measure, Brooks. I mean, this letter, of course, gets the attention of our customers. Obviously, we have an intense training program following this kind of episodes internally as well. The only thing I can say is look at the results in Q3, which we believe that we can hold our head out there. But as I've said earlier on, forward-looking statements, I try to stay away from those but it will be a lasting impact here or not, hard to say.

And then just one on LC Beads. You didn't call out the growth rate there this quarter. Have you seen any kind of an impact in that growth rate as your customers realize that Biocompatibles has been acquired and maybe you’re going to lose that product line? Has that slowed down at all?

No, I don't think. No, I mean there's other factors driving a pickup or slowdown like I reiterated a year ago -- well today, a year ago, a competitive product was taken out of the market, and that's why I think you will start seeing a reported growth coming down because we had a big spike up, starting in Q4 last year. It frankly lasted well into this year, so I think because of that effect, that kind of effect, you will see it coming down. But I think, who happens to be the legal entity owning a certain product, I don't think, in itself, drives sales up or down.

Business as usual.

As much as we pound ourselves on the chest, it’s a love affair, it really isn't.

And we have a question from the line of John Granahan with Granahan Investment.

Does your statement about being selective in terms of picking competitor battles or R&D support for product line, does that suggest future pruning of the product line to any significant degree?

No, I wouldn't jump to that conclusion, John. The fact that we strategically focus on something doesn't mean we don't value the rest. At the end of the day, certainly, if you want to build a sizable franchise and you want to sustain this kind of a free cash flow, I think you need to know, these products, whether you want to refer to them as core products or base products or whatever you want to call them, that don't necessarily get that entire strategic focus and that -- their fair share of R&D dollars, still constitute a very important part of a corporation, in terms of absorption of cost, in terms of filling out the back, in terms of being able to pull through, in terms of being able to have larger contracts with buying organizations, so they can still construe a very, very important and integral part of the franchise. So our focus is on growth. On profitable growth. For that, we need to increase growth margin, we need to increase top line, of course. I think the basic infrastructure works well. We're not looking right now at lobbing off significant product lines or revenue streams.

And we have a follow-up question from the line of Larry Haimovitch with HMTC.

Johannes, there were some earlier questions about acquisitions. And I don't want to beat this horse dead, but I feel like you could be more open with us in terms of the kinds of things you're looking at, the kinds of pipeline you have, what size of acquisitions. And we know you're looking at acquisitions. We know you brought someone on board to help you, but I'm just wondering if you would be willing to give us a little more color so we can get a little more confidence that in fact some deals are going to get done.

Well, first of all, the confidence deals get done it’s -- deals get done. That's straightforward. We have a strong balance sheet. We accumulated a lot of cash. We did it somewhat on purpose, and part of that is also that we can muster somewhat larger deals. If you want to -- in this day, in this environment, you want to buy products that have some revenue, ideally has some revenue, has tremendous growth potential, you got to pay up. And I think we have an ability to do that. As we said before, we're not looking for science projects. As an example, as much as we like NanoKnife strategically, we do not want a second NanoKnife-like program. I think that would kind of exceed our abilities a little bit. So we're looking for things that we can sell through existing sales forces or at least make our sales distribution organization stronger both in the U.S. as well as international. We're looking for things that can increase gross margins, accelerate our compound top line growth rate. We want to be accretive in four to six quarters, which is a big statement and a big commitment from that point of view as well. And within those constraints, we're looking at things. And they can be bigger and they can be smaller. Not that we are going to destroy the benefit to the company here, but we're looking for robust solid deals, and I think they’re out there. I know they’re out there, and we're pursuing those opportunities.

Okay.

And Larry, while we’re at it, the areas where we’re interested, I think we've reiterated those before, we have a big appetite to build a strong leading Oncology/Surgery franchise on a global basis. We're looking for international footprint, very intrigued by venous intervention, thrombus management and, of course, peripheral arterial disease is virtually a boundaryless opportunity, so we’ve got a fairly broad-based interest there as well.

Okay. Well, that's helpful, Johannes.

And we have a follow-up question from the line of Charles Croson with Sidoti & Company.

Yes, just one quick question here. On the Access segment, showing growth, but I was curious if there's any effect on the -- that you might see from the CMS reimbursement on the end-stage renal disease, any effect there at all or is that minimal?

I think that particular impact is minimal on our product lineup. I mean our Dialysis business is not doing great, but I don't think this is a key driver there.

Okay. And then, sorry, I just have one more follow-up. On the distribution purchase in the Netherlands, is this something we should continue to expect as far as the broader strategy to boost international presence, again, boosting up the sales force, the direct side?

I wouldn't probably take it that far. I think that Netherlands is a bit of a unique situation and not because of my accent and my first name, but frankly, our distributor in the Netherlands has done a tremendous job in building a very, very strong franchise for us, in particular, in Varicose Veins. And it was very attractive to start owning that directly for a number of tactical and strategic reasons. I think there's not too many that kind of opportunities out there, and I think distributors, going forward, will always be an integral part of our distribution strategy. Not to be settling, we couldn't take more products direct in certain products, some more product lines direct in certain countries. But never say never, but I don't see too many opportunities of this kind of a magnitude out there, Joe, right now.

Yes. I was going to say that in time, though, we're likely to be direct in more countries than four across the globe. Where this is -- the Netherlands is our fourth that we are direct in the -- we will be direct in others in time. And certainly, to buy a distributor's business is a good way to get a significant foothold in a new country that we want to go into. So, it could be more in time, though.

I see. That direct, though, is that a -- what kind of time line. Is that just a slow process or would that be something that you'd be doing more quickly?

When the opportunity is there, we will do it. And it's like that acquisition strategy. We'll do it when we’ve got things that meet the strategic objectives and fit the economic requirements and the accretion requirements as well. So easy to buy things, but you want to make sure you're buying the right things.

Okay. That's fair enough.

Maybe -- I'd put a bit of color around it. I think our Dutch distributor, actually, before we acquired them was probably our single largest distributor in the world, so it was a very sizable entity. There's not too many opportunities out there of that magnitude. So -- but I think Joe's overarching comment is important. We think having a direct interface with key opinion leaders in key positions is very important. And I think in some key markets, I think, we will have some kind of a presence. And that could also be a hybrid presence, which is more strategic rather than actually distribution. I know it's a little incremental but I think we said last quarter or the quarter before, that one strategic or tactical move we made is we opened up an office in Hong Kong. And whatever person based there right now, we're supporting distributors in the region just better in terms of training, in terms of working with customers and trials, et cetera, et cetera. And it just enhances the performance of distributors, it's really a win-win scenario.

Thank you. And at this time, I am showing no further questions in my queue. I would like to turn the conference back over to management. Please continue.

Well, thank you, Michaela, and thank you everybody here in the conference call, and thank you for participating today. We look forward to keeping you abreast of our progress, and we'll talk with you again reporting our Q4 numbers, which will be somewhere in July, early July this year in a couple of months. Thank you very much. Have a great evening.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation. And at this time, you may now disconnect.