Edap Tms S.a. (EDAP) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the EDAP TMS Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Glenn Garmont, Investor Relations. Thank you. You may begin.

Thank you, Michelle. Good morning and thank you for joining us for the EDAP TMS second quarter 2019 financial and operating results conference call. On today's call, we will hear from Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and François Dietsch, Chief Financial Officer. Before we begin, I'd like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. I'd now like to turn the call over to EDAP's Chairman, Philippe Chauveau. Philippe?

Thank you, Glenn. And thank you everyone for joining us today. During the quarter, we recorded yet another record in terms of revenue, our strongest second quarter to date and drove meaningful gross margin expansion that allowed us to achieve our third consecutive quarter of profitability. As Marc will discuss in more detail shortly, we achieved these strong results despite being in the very early stages of our Focal One marketing activities. All our leading indicators are strong and we entered the back half of 2019 with a high degree of confidence in our ability to continue to execute on our growth plan. We remain excited about the potential of Focal One, to disrupt the current prostate cancer treatment paradigm, and believe we are well-positioned to deliver long-term value to our shareholders while offering superior outcomes to prostate cancer patients. With that, I would like to turn over the call to EDAP's Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, Philippe. Good morning and thank you for joining our call. As Philippe highlighted, we have had a strong first half of the year. It was indeed very strong and positive not only by the numbers we produced, but also with the quality of the progress in major projects on which we continue to focus our time and efforts. We have high expectations thanks to this great and solid momentum in our overall performance and we look forward to continuing this trend. Since the beginning of the year, we have sold six HIFU devices in the US, including three in the second quarter. Let me provide you with a couple of specific examples in the quarter that demonstrate how our differentiated sales model can help us serve a larger portion of the addressable market in many different contexts. Rochester Regional Health in Upstate New York is an existing EDAP customer and user of our Ablatherm HIFU device which they utilized by a relationship with American HIFU, a mobile medical equipment provider. Rochester Urology Group then decided to purchase a Focal One machine outright from EDAP and use it in their prostate cancer treatment protocol. Being one of the pioneers in using HIFU in the US, Dr. John Valvo wanted to continue in his innovative vision of treating prostate cancer by upgrading his practice to requiring the latest innovation of HIFU device and continuing to lead the trend of non-invasive and focal ablation of prostate tissue. The University of Chicago medicine surgical team, on the other hand, did not have a lot of experience with HIFU technology. The team performed its first HIFU test using the Ablatherm device in 2017 and has since acquired a Focal One device for their prostate cancer program. Dr. Shalhav, chief of urology surgery, explained that Focal HIFU is bridging a significant void between i-sys surveillance, or a watch and wait approach, which can be stressful, and radical treatments like code 9 removal or radiation. It's indeed bridging the gaps and allows patients to maintain their quality of life. Focal one and its ability to deliver highly targeted treatment to the prostate was the perfect solution. The level of accuracy and safety of Focal One as the latest generation of HIFU device made a clear difference in the decision process. Finally, Houston Methodist Hospital was one of the first hospitals in the US to offer Ablatherm robotic HIFU in early 2016. They wanted to upgrade to a Focal One and upgrading [ph] the Ablatherm. However, the hospital later decided that they wanted to offer a broader HIFU program using both Focal One and an Ablatherm. Houston Methodist wound up buying back the Ablatherm for another of their hospitals and are now one of our biggest customers, and they use both our Ablatherm and Focal One on a very regular basis. They not only upgraded to Focal One technology in their HIFU practice, but they clearly extended their HIFU operations by having two HIFU devices in their group of hospitals in Houston, Texas. We are very excited and pleased to report continued strong growth in HIFU revenues during the second quarter of 2019 compared to the same quarter of last year. This growth is mostly driven from US HIFU revenues, which reflects the continued enthusiasm and momentum that our latest generation, state-of-the-art HIFU technology is receiving in the US since clearance from the FDA in June of last year. Based on this positive feedback, we are optimistic that this could be the beginning of an inflection point in terms of greater Focal One adoption and market penetration. Going forward, our communication strategy is not to continue to announce each and every US sale of Focal One, but we will definitely keep the market updated on our sales and placement advances regularly during the quarterly calls. As a reminder, our HIFU business generates a higher gross margin which has led to significant expansion of our overall gross margin. The gross margin leverage has dropped to our bottom line and driven our third consecutive quarter of profitability for EDAP. Our goal is to continue to improve these metrics and further enhance our profitability as the mix of HIFU to overall revenues continues to grow. We had a very productive presence at the AUA meeting in May, which helped to fill our pipeline of potential customers. We look forward to updating you on this momentum going forward. We also reported a major development that occurred during the second quarter of 2019, which was the very positive update on the reimbursement front. The American Medical Association's CPT editorial panel, at its May 2019 meeting, accepted our request to establish a new Category 1 CPT code that will facilitate the reimbursement of the ablation of malignant prostate tissue with HIFU technology. The CPT-specific code description selected by the panel is ablation of malignant prostate tissue, transrectal, with high-intensity focused ultrasound. The establishment of the CPT code is significant because it allows for reimbursement of for both the technical fee as well as additional reimbursements to the surgeon. In contrast, the C-code only provides for reimbursement of the technical fee [indiscernible]. We believe the additional reimbursement afforded by the new CPT code will serve to further accelerate adoption of this technology within the urology domain. This is a significant milestone for EDAP as it now gives us a line of sight to definitive reimbursement and provides confidence and visibility to the marketplace about the clinical effectiveness and financial viability of the use of HIFU technology. As part of the process of developing specific reimbursement guidelines, the American Urology Association and the American Medical Association has commenced a survey of the market in order to determine the value level of this procedure code. The survey is ongoing and should be completed shortly and presented at a panel before the end of the year. We look forward to specific reimbursement details in mid-2020. To the extent that we are able, we will communicate these to our analysts and investors as they evolve. The code will be included in the next CPT code group in 2020 and will be effective on January 1, 2021. Beyond the US market, we continued to experience strong momentum with Focal One, in particular we're continuing to focus on expanding our presence in large markets such as Brazil where we completed one Focal One sale in the second quarter and now have an installed base of six machines in the country. Mirroring what we're seeing in the US, our sales pipeline continues to grow in key ex-US territories and we look forward to announcing future deals and placements. HIFU is the most advanced ablation technology available and we remain focused on developing this technology. With HIFU continuing to get recognition among surgeons and with the enhanced awareness of the Focal One system since gaining FDA approval for prostate tissue ablation, we are focused on developing a HIFU platform [indiscernible] ablation indication. In terms of our ongoing development activities, we continue to refine plans for both the multicenter Phase II study of Focal One for the treatment of rectal endometriosis and a Phase II study using [indiscernible] HIFU prototype to treat liver metastasis. These are both high need indications. And if we're successful, these activities will further expand our position as the global leader in minimally invasive therapeutic Ablatherm. In summary, we're very pleased with every aspect of our second quarter results. The reported revenue growth and the gross margin expansion speak to the significant unmet medical need that we are able to address with Focal One. We are excited with our current growth trajectory. And with further clarity on reimbursement, we anticipate good things to come. And now, our CFO, François Dietsch, will provide a review of our financial results. François? François Dietsch: Thank you, Marc. And good morning, everyone. Please note that all figures, except for percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was $1.1241 for the second quarter of 2019 and $1.1297 for the first half of 2019. Total revenue for the second quarter was €12.5 million, an increase of 45.1% versus €8.6 million in Q2 2018, reaching a new record level for second quarter. Our HIFU division generated sales of €12.6 million, representing an increase of 98.3% versus Q2 2018 HIFU sales of €2.3 million. During the quarter, EDAP sold five HIFU devices, including three in the US versus one Focal One during the same period of 2018, and we recorded a 60.9% increase in HIFU treatment revenue. Our UDS business bounced back nicely from the first quarter, with €7.9 million of revenue, which is a 25.9% year-over-year increase. We sold 8 lithotripsy devices in the quarter versus 10 in the same period last year. The growth was driven by a 43.7% increase in sales of distribution product. Gross profit for the second quarter of 2019 was up 78.3% to €6.3 million from €3.6 million for Q2 2018. Gross profit margin on net sales was 60.7% in Q2 2019 compared to 41.3% in the year-on-year period. The increase of 9.4 percentage points was driven mainly by the increase of HIFU activity which has better margin. The strong increase in the gross profit drove the third consecutive quarter of global profitability. The operating profit for the second quarter of 2019 was then €1.7 million compared to an operating loss of €1.1 million in the year-ago period. Net income for the quarter was €1.4 million or €0.05 per diluted share.

Ladies and gentlemen, please standby. Our conference will resume momentarily. Once again, ladies and gentlemen, thank you for standing by. Our conference will resume momentarily.

Hello, everyone. We are back. Sorry, we just had a connection problem. So, François will continue to detail the numbers. François? François Dietsch: Thank you. So, turning now to the first half of 2019 results. Total revenue of €22.6 million was up 27.3% versus the year-ago period, which was driven by 77.4% HIFU growth and a 9% increase in the UDS revenue. Thanks to the strong growth of the HIFU activity, gross margin for the first six months of 2019 was 49.5%, an increase of 6.9 percentage points year-over-year. The company recorded an operating income for the first half of 2019 of €1.9 million compared to an operating loss of €1.5 million during the same period last year. And net income for the first half of 2019 was €1.7 million versus a net loss of €0.7 million in the year-ago period. Lastly, we finished the second quarter of 2019 with a strong cash balance of €16.3 million or $18.5 million. The cash position at the end of June reflected a high level of working capital as we prepare the second half of the year. Let me now turn the call back to Marc.

Thank you, François. Sorry again for the disconnection during François' speech. Again, we're very excited and encouraged by the following, one, the steady growth of our HIFU installed base; second, the second growth rate of our HIFU revenue; third, the third consecutive quarter of profitability for EDAP; fourth, the positive outcome from the CPT panel for HIFU reimbursement in the US; and finally, a full pipeline of potential sales activity in the US and world. We remain in the early stages of commercializing Focal One, but the positive feedback we continue to receive from urologists for this novel technology continues to be very encouraging as we focus on growing this franchise in the US and in key markets around the world. I will now turn the call to question and answer. Operator?

Thank you. [Operator Instructions]. Our first question comes from the line of Brooks O'Neil with Lake Street Capital Market. Please proceed with your question.

Good morning, Marc, François. Congratulations on the terrific results.

Good morning, Brooks.

I might have asked you this on the last call. And if I did, I apologize. But, obviously, getting the CPT code progress is tremendous, but can you just give us a quick basic overview of what the economics of the system are from the perspective of a hospital and a doctor in today's world, given the current environment? Thank you.

So, the current environment is the C-code that was given and granted by the CMS two years ago now, which is covering the technical fee, which is basically the machine cost to the hospital, and then the surgeon and the physiologist could be paid privately or could use an unlisted code to get reimbursed from there on their work, on the job. And also, which is still the majority of the cases, patients are privately paying for the procedure. So, these are the comics. Tomorrow, with the CPT code, that will continue and strengthen the technical fee and that will add an official code, a number, for the surgeons and physician fee.

Yeah. So, that's very helpful. So, just again, thinking about like a return on investment for a hospital in today's world, obviously, the success you're having suggest that the hospitals see at least a favorable opportunity, both clinically and financially, but can you help us get a sense for how a hospital might view the economic proposition in today's world of buying a HIFU machine?

Yeah, absolutely. The business case is very simple and very easy. If you have a mix of Medicare patients and private patients, you basically need around three patients a month, like two Medicare, one private, to breakeven on the operation, which is very easy for a big academic institution. And, actually, there is an article that was written by the purchasing manager of Houston Methodist Hospital when they bought the Ablatherm, explaining how they recovered their investment in cash after less than two years of operation.

Wow, that's great. Okay, thanks a lot. Congratulations [indiscernible].

Thank you.

Thank you. Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright & Co. Please proceed with your question.

Thank you. This is R.K. from H.C. Wainwright. Congratulations, folks. Obviously, great financial results. When I look at what we have achieved in the first six months versus the last year, so in all of 2018, you recorded €39 million. But in the first half, you have recorded €23 million. So, obviously, the momentum is there. So, how are you – how should we think about the next six months and also up until we get the reimbursement code in place? Just trying to understand how we should think about the trajectory from here till January 1, 2021 when you'll have the CPT code in place.

Yeah, I think, like we said today during the call, we have very strong expectation. Again, we had a very nice momentum and we continue to seed our pipeline of projects with new leads and new potential customers. So, again, we are very optimistic, very positive in the future and we really believe a good number of things should happen in the next month and years. Now, if your question is more specifically between now and the CPT code in execution, I think the fact that AMA accepted our request of a definitive CPT Category 1 is giving a very high level of confidence to any and every hospital that is interested in purchasing the machine because that really gives, again, a warranty of that technology being reimbursed on a definitive basis for prostate malignant tissue ablation actually on the code. And that's very important when you make an investment for the next 5 or 10 years. So, I think we will start to benefit from that not only when it will start in 2020 to be in execution, but from now because you know that the sales process in big hospitals, when they're buying these type of equipment at this type of price, they have to go through budget, they have to go through a number of approvals, and it usually takes – like we said many times, it usually takes between 12 to 18 months for a purchasing process. So if you want to be ready with your device when the CPT code is in action, you better get started now. And that's what we're currently explaining and also telling to most of our prospects and to also get new prospects, so that they're not late when it's an action. So, the action is started right now even if the CPT code will be in execution just in 2021.

Yeah, that's great. And also, in general, you were talking about how the different hospitals, some of them had prior experience with the device whereas folks like in Chicago, they did not have a prior experience. So, as they get ready for this January 1, 2021, what sort of experience do you think generally surgeons would like to have before they start filling up their calendar with surgeries of this kind?

And as we discussed a few times, the potential with HIFU – actually, prospect of HIFU as a [indiscernible] technique is that the potential for treatment is very big. You can do from very localized focal treatment to organ ablation. You can do primary care patients to a radiation-failure patient. So, the options are, I wouldn't say unlimited, but there are a lot of options and a lot of potential strategies of treatment with HIFU and, more specifically, with Focal One HIFU. But, again, the more confidence, the more trained you get, the more, I would say, risk you can take in treating more fragile patients, more difficult cases. So, I think even though there's a learning curve and the training phase is pretty short as you may be very comfortable in using the machine after the first 10 patients, which is basically what we have in our usual training program that was approved by the FDA, you want to get started slowly and then, slowly, but surely, increasing the different type of treatments and strategies of treatments that you want to do with HIFU and increase the potential of patients that you want to treat with it. So, that's also an important point.

Perfect. The other question I have is, we saw that, this quarter, the UDS division of the company is doing, obviously, better than what we had expected, at least in our financial model. So, what is new there? What should we expect from that division going forward?

Again, we had a very nice and strong quarter in Q2. As you remember, Q1 was not that nice on that specific division. So, that's why, again, the quarterly evaluation of the business is difficult. But I think we should be able to continue the growth rate that we've experienced in the last years in that division, maybe increase it a little bit by adding new products or new innovation. But, basically, again, it shows that from one quarter to the other, it could be different without giving a real trend.

Okay. Thank you very much.

Thanks, R.K.

Thank you. Our next question comes from the line of Walter Ramsley with R^2. Please proceed with your question.

Oh, thank you. Congratulations, Marc, François. Excellent quarter. I have a couple of follow-up questions. First of all, the gross margin was very good this quarter. Was that a non-recurring thing? Or is that a number that you think the company can continue to produce?

No. Like François explained a little bit in the call, that's mainly due to the fact that HIFU generates higher margin or contributes with a higher rate of gross margin than the lithotripsy and UDS division. So, again, the mix product between HIFU and UDS being in favor of HIFU is increasing the overall gross margin. So, basically, we expect – as, again, the expectation is to continue growing significantly the HIFU revenues. We expect that trend to be continuous as well.

Okay, great. And as far as some of the other expense categories are concerned, R&D has gone up somewhat. Does the company plan to spend significantly more than what the outlays were in the second quarter? Or is that pretty much the run rate, do you think, for the time being?

No. They are in the normal range of what they are and what they should be. Again, they should remain about the same level, maybe increasing a little bit. But between the different divisions and different technologies we are working on, we're in continuous research and development for innovation, improvement and new things, so we usually – we will usually maintain and continue with the level of R&D expenses.

Okay. And on the sales and marketing line, does the company plan to increase that, now that the customers are showing like a higher adoption rate and more willingness to buy the product?

Yeah. Certainly, we'll continue as we did in the last few months and years in increasing the marketing and sales effort to support the market penetration and the adoption of the technology. So, yes, we will continue increasing that.

So, in the quarter, the net interest expense was down, again, quite a bit year-over-year. Is that due to paying off debt or are you just earning more money on your own bank balances? François Dietsch: On the interest expenses line, we had the adjustment of fair value of the outstanding warrants. So, [indiscernible] as maturity was near at the end. So, we had a big profit in the interest line [indiscernible] a non-cash effect [indiscernible]. So, now, we have just normal interest level.

Okay. And just one last thing, the Brexit situation in Europe, does that pose any threat or benefit to the company?

Well, we don't see any effect yet as it's not yet done. And, actually, we've been doing pretty well in the UK lately, in the last few months and years, and we need to push and continue to have a number of projects. So, we don't see any change so far.

Okay. Well, anyway, congratulations on a great quarter and thanks for taking the questions. I appreciate it.

Yeah. You're welcome. Thank you.

Thank you. Our next question comes from the line of John Mack who is a private investor. Please proceed with your question.

Thank you. Very good afternoon, gentlemen. What was the backlog of HIFU machines for future delivery at the end of the quarter? And then, we are two thirds of the way, for all practical purposes, probably at the end of the third quarter, how many contracts have been signed to date?

Contract of machines or what…?

Yes.

As we said, we have increased tremendously our pipeline of projects and leads and we won't disclose yet the number of signed contracts. We have a number of machines that have been sold and delivered during the quarter yet, but we'll give more details about that when we do the quarter three conference call.

Okay. Another question. What is the maximum number of HIFU machines the company can deliver in a quarter? And are there plans to ramp up production and spend capital here in the next six months?

So, as we explained a few times, we're very flexible in our manufacturing processes. There is no maximum number of devices that we know we could deliver or not in a quarter. But what is sure is that we can definitely accompany the growth of our business without major significant capital investments, again, as the company is organized to be flexible and increase significantly, if needed, the number of deliveries. So, we have no issue and limitation yet on that.

Okay. Good start, gentlemen. And om shant [ph] for the future.

Thank you so much.

Thank you. Our next question comes from the line of Paul Nouri with Noble Equity. Please proceed with your question.

Hi. Good morning. Just wondering what the service and disposable sales were in the HIFU segment last year versus this year?

As François, I think, detailed in the call, we recorded a 50% increase in our system-driven revenues. So, that includes the consumables and services on the HIFU business compared to last year.

Okay, great. That's my only question. Thanks.

Yeah. You're welcome.

[Operator Instructions]. Our next question comes from the line of Emmanuel de Figueiredo with LBV Asset Management. Please proceed with your question.

Good afternoon. Thanks for taking my questions. I just have three please. The first one is, on your strategy in Europe for HIFU, can you describe a little bit how many machines you have on your balance sheet which is actually being sent around different hospitals? So, how many machines do you have and what are the plans to grow that kind of leasing business you have? And what partnerships you have there? That's the first question. And the second question is on the UDS or your traditional business, which has improved as well in Q2, how much of that is actually third-party distribution? It seems like the good performance is mainly from that. So, if you can just give a little bit of color on what you're selling? And then, my final question is on the working capital, which is quite high at the end of June, as per your CFO's comment. Should we expect an improvement in the cash position until year-end or the working capital will remain quite elevated throughout this year because of the very high growth? Thank you.

You're welcome. These are very detailed questions. So, the number of machines that we have on the balance sheet in Europe are maybe machines that we use in countries where we are directly operating mobile services, so which is mainly Germany, France, Italy, Spain and Benelux. And on the balance sheet, we have approximately – not being completely precise on the HIFU side, approximately, I think, 15 machines – around 15 machines that are, again, being used mainly for mobile services that EDAP does directly in Europe. For your second question, on the distribution in the UDS division between third-party and our own manufacturing devices, in this quarter, and again, that could vary from one quarter to the other, but this specific quarter was about half and half. And finally, the working capital, that's something that should decrease by the end of the year. Usually, we have a high level of cash consumption at midyear and also during the third quarter, because, like François explained, we are preparing the end of the year which is usually the high season in selling equipment as hospitals and centers will spend their – will tend to make their budgets on spending capital equipment. So, usually, we have a strong increase in working capital at that time which will reduce at the end of the year which will usually allow an improvement of our cash position.

Thank you.

You're welcome.

Thank you. Our next question comes from the line of Matthew Pilkington [ph] with Roundtop Capital [ph]. Please proceed with your question.

Hi, Marc. I have a couple of questions. Just following up on that last one, from what I understand, the mobile units do not use Focal One. So, if your mobile units in Europe are probably going to slowly be phased out as you bring in the new technology. That's the first question. The second question is a market question. We see you put out an early announcement of your results. I presume, this question, that was because you're fed up with your stock price not being where you thought it should be with your excellent results [indiscernible] the markets agreed with you. But in the long run, you've had this amazing successes [Technical Difficulty]. And if you were a US-based company, you could then go into this modern world [Technical Difficulty] markets to do with ETFs and you don't have to do these sort of jump functions yet into ETFs. And you're not a US-based company. So, you're not probably – you're not going to get into the Russell 2000. You're not going to get into Europe ETFs because you're in between. So, can you comment on what – in the end, we all want to see your stock do well and you do well. How do you sort of reconcile [Technical Difficulty] that modern trading world we are in in 2019 where ETFs are running the show and you're not going to get [Technical Difficulty]?

I'm not sure I understood the first question. And as far as the second question is concerned, I'm not sure I have the answer.

Well, the first question is, I didn't think you had mobile units, but not Focal One. I thought mobile units were the old – so, the first question is, if there's a mobile unit, aren't they going to be phased out and you're going to sell – people are going to have to upgrade to new machines?

Yes. Well, taking into account that we have in Europe some mobile Focal Ones, but not in the US.

Oh, you do? You do. Okay. On the second, I think you have to make a decision at some point. You can stay where you are, so you will not – I don't think we'll get the appropriate value that you should have if you stay one foot in France, one foot in US. You don't have to answer it.

Yeah. All right. I don't. All right. Well, thanks, Matt.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Oczachowski for closing remarks.

Well, again, thank you very much for joining the call today. Again, we're very happy with what we've achieved in Q2 and we're continuing our effort and focus to maintain this trend and continue the success of the market penetration of our HIFU technology. Thanks again. And talk to you again very soon. Bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.