LeMaitre Vascular Inc (LMAT) 2007 Q2 法說會逐字稿

Welcome to the Second Quarter 2007 LeMaitre Vascular Earnings Conference Call. As a reminder, this call is being recorded. At this time I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer. Please go ahead, sir.

Thank you Chantelei. Good afternoon, and thank you for joining us for our Q2 2007 quarterly conference call. Joining me on the call today is our Chairman and CEO George LeMaitre and our President, Dave Roberts. Before we begin I would like to read our Safe Harbor statement.

Certain statements contained in this conference call may be considered forward-looking as defined by the Private Securities Litigation Reform Act of 1995. In particular, any statements we make about our expectations for future financial, clinical and operational performance. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations.

These statements involve various risks and uncertainties that could cause our actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include risks related to product demand and market acceptance of our products, the significant competition we face from other companies, technologies and alternate medical procedures.

Our ability to expand our product offering through internal development or acquisition, our ability to recognize the anticipated benefits of our acquisitions, disruption at our single manufacturing facility or a lack of experience with general uncertainty related to seeking regulatory approvals for our products particularly in the United States.

Potential claims of third parties that our products infringed their intellectual property rights and the risks and uncertainties included under the heading Risk Factors in our most recent Annual Report on Form 10-K as updated by our most recent quarterly report on Form 10-Q, and other periodic filings with the SEC and available on our Investor Relations website at www.lemaitre.com and on the SEC's website at www.sec.gov.

Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matters contained in such statements will be achieved. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today August 1, 2007 only. We do not undertake any obligations to revise or update publicly any forward-looking statements expressed on today's conference call.

I'll now turn the call over to George LeMaitre.

Thanks, J.J. I'd like to welcome all of you to our Q2 2007 conference call. I'll start by reviewing some of the quarter's financial, operational and strategic highlights. Dave will then follow with an acquisitions update after which J.J. will provide some additional financial details. At the end of the call Dave, J.J. and I will happy to take your questions.

I'm pleased to report a solid Q2 both at the top and bottom lines. We posted record quarterly sales of $10.3 million in Q2, 18% over the year-ago quarter. As you may have noticed we have improved our year-over-year sales growth rate from 11% in Q4 2006 to 15% in Q1 2007 and now to 18% in Q2 2007.

This trend is also visible in absolute dollars, $8.8 million, $9.9 million and $10.3 million over the three most recent quarters. At a high level Q2 2007 sales growth was a result of the continuing trend in the marketplace towards endovascular procedures, productivity gains from recently hired sales representatives, direct marketing efforts, and the distribution of the Endologix Powerlink stent graft in Europe.

The Company continues its transition towards endovascular and towards international with 36% of our revenues in the quarter coming from our Endovascular and Dialysis Access category, and 41% of our revenues from outside North America.

With respect to our sales force we ended Q2 2007 with 48 sales reps, down one from 49 at our last conference call. We continue to target 50 to 55 sales reps for Q1 2008. Probably due to the increased W2s and the Company's heightened visibility following the IPO, I remain confident in our ability to hire and retain high quality sales personnel.

At our October IPO we quoted six to nine months as the time it would take a new sales rep to become productive. I'm happy to report that our recent sales reps hires are following this general timeframe and their contributions are becoming evident on our top line. As evidence of this of the top ten North American sales reps in Q2 2007, five were hired after September 15, 2006.

Also notably we began our French direct sales force in Q2 with the hiring of sales reps in Bordeaux and Marseilles. As we previously discussed France is generally considered to be the fourth largest vascular market in the world behind the U.S., Japan and Germany.

Moving down the income statement; we reported a gross margin of 73.8% in Q2 2007, versus 69.6% in Q2 2006. In general, the Company continues to realize operational benefits from its centralized manufacturing. We posted net income in Q2 of $227,000 and an operating loss of $447,000.

We generated this net profit despite significant investments in our sales, marketing and R&D efforts during the quarter. While we were encouraged with these bottom line results, you should not think of a LeMaitre Vascular as a profitable company just yet. We will continue to make the investments necessary to grow the Company, and we will likely generate operating losses through 2007 and into 2008.

Let me discuss our clinical trial efforts in Q2. On May 9th, we were happy to announce approval from the FDA to commence Phase II of our UNITE abdominal stent graft trial. On June 7th, we implanted our first UNITE implant at Emory University Hospital. As discussed on our last call, we have received approval to implant stent grafts using ethylene oxide sterilization. While we have not yet received approval for hydrogen peroxide sterilization, we do not expect that this will slow enrollment.

Going forward, we will seek to provide the FDA with the testing data that we hope will enable them to approve our hydrogen peroxide sterilization process. As a reminder the principal advantage of hydrogen peroxide sterilization is it allows us to sterilize custom built stent grafts in days not weeks. We believe that we are the only company with European approval to sterilize stent grafts with hydrogen peroxide.

Indeed the length between our speed to patient advantage and our actual sales results is becoming evident. In the first half of 2007, approximately 40% of our European stent grafts were custom made for individual patients. We believe this customization program has been an integral part of our ability to grow market share in the European thoracic stent graft market from approximately 4% in 2005, to approximately 6% in 2006.

Lastly, I'd like to comment briefly on a couple of promotions that I made recently within our Executive suite. At my request the board promoted Dave Roberts to President and J.J. Pellegrino to CFO. Of course Dave's many accomplishments at the Company over the last ten years are reason enough for this transition. But it also seemed to me that further delineation of Dave and J.J.'s roles will allow Dave to focus more of his time on acquisitions, while J.J. tackles the day-to-day financial issues.

In terms of our relations with Wall Street, I expect that the three of us will share these duties with J.J. being your principal day-to-day contact. Minus the title, my role at LeMaitre Vascular remains unchanged.

I will now turn the call over to Dave, for more color on our business development activities.

Thank you, George. Late in 2006 we announced our agreement to distribute the Powerlink stent graft from 2007 through 2009 in Europe. In May we announced our acquisition of Cardiovascular Innovations, Inc. a handheld contrast injection device which we have rebranded as LeverEdge. Before I talk about acquisitions prospectively, I'd like to provide you with a brief update on both of these business development transactions.

On the Endologix distribution agreement we have been pleased with the results of this partnership to date. The product synergies we had expected between the bifurcated Powerlink abdominal stent growth and our tubular EndoFit thoracic and UniFit abdominal stent grafts are indeed playing out.

While the lower margin sales of Powerlink weighed down our gross margin, the sales call efficiencies and enhanced product offering to our Europe customer base are compelling. With respect to the LeverEdge acquisition we closed on in April initial sales out of the gate were running at our expectations. However, late in Q2 prior to our initial market launch we discovered pin sized holes in some of the products' packaging, and as a result we felt it prudent to initiate a voluntary recall.

These devices were manufactured prior to the acquisition. We have subsequently implemented a simple packaging fix, and expect to resume shipping to hospitals in August. This sales hiatus is not material. We continue to believe that LeverEdge will be a nice complement to the LeMaitre sales bag.

While we are pleased with both of these business development initiatives, it is clear that neither transaction satisfies our internal definition of a significant acquisition. As you all know acquisitions are a key component of our growth strategy. Beginning at our IPO Road Show we've been providing guidance that we expect to announce a significant acquisition in 2007.

It continues to be our policy not to announce acquisitions until they have closed. While I have no specific announcement today our pipeline continues to be full with a range of Endovascular and Vascular product lines and companies. Moreover we are in various stages of discussions with multiple sellers both in the U.S. and overseas.

I remain optimistic that we will complete a significant acquisition in 2007. Of course everyone on this call can agree that no acquisition is better than the wrong acquisition. On the Investor Relations front, LeMaitre Vascular will be holding its first Analyst Day on November 19th, the Monday of Thanksgiving week. We'll be hosting this event in Midtown Manhattan. Please mark your calendars. We'll be sending out 'save the date' postcards shortly.

With that, I'll turn it over to J.J.

Thanks, Dave. I'm now going to talk about Q2 financial results, make a few remarks about our June 30th balance sheet then finish with our 2007 guidance. Q2 sales were $10.3 million, an 18% increase over Q2 2006. In terms of our three product categories, Endovascular and Dialysis Access continue to grow the fastest increasing 46% while Vascular grew 8% and General Surgery declined 3%.

In Q2 our Endovascular and Dialysis Access category accounted for 36% of sales. Vascular accounted for 55% and General Surgery accounted for 9%. For reference in Q2 2006 our Endovascular category accounted for 29% of our revenues. For Q2 2007, the Company reported a gross margin of 73.8% versus 69.6% in Q2 2006, an increase of 420 basis points.

Q2 2006 results, however, included a one-time inventory charge of $277,000 as a result of the shutdown of our Expedial dialysis graft product line. The Company continues to drive manufacturing improvements across all product lines, realizing operational benefits from its single manufacturing location. Over the past year the number of direct labor employees at the Company has decreased by 24% while sales have increased 18%.

You can see these personnel efficiencies reflected in the gross margin. We're also starting to see similar economies play out on a company-wide level. Worldwide headcount is down year-over-year from 227 at June 30, 2006 to 220 at June 30, 2007. In Q2 we posted annualized sales per employee of $188,000. This is the highest sales per employee quarter that we have posted in a decade.

Q2 sales and marketing expenses were $4.7 million, an increase of 23% over $3.9 million in Q2 2006. Higher spending was driven primarily by the continued ramp of our sales force, as well as increased sales rep W2s. The number of LeMaitre Vascular bag carrying sales representatives grew from 37 at the end of Q2 2006, to 48 at the end of Q2 2007, a 30% increase.

Total Q2 2007 selling and marketing expenses were 46% of sales. Q2 2007 G&A expenses were $2.2 million, up 29% over Q2 2006. Much of this increase was a result of public company expenses such as increased audit fees, insurance costs and Sarbanes-Oxley compliance. Total Q2 2007 G&A expenses were 21% of sales.

On the R&D side expenses grew at a more measured pace increasing 13% year-over-year to $1.1 million. But this 13% R&D increase deserves explanation. In 2006 much of our R&D spend was incurred as process development, a byproduct of our factory consolidation program. In 2007 process development was greatly reduced with product development largely taking its place.

Indeed, year-over-year product development expenses nearly doubled primarily driven by the hiring of additional R&D engineers. Total Q2 2007 R&D expenses were 11% of sales. We posted an operating loss in Q2 2007 of $447,000 compared to an operating loss of $1,050,000 in the same period in 2006. The Q2 2007 operating loss was primarily due to increased sales force expenditures, as well as the cost associated with being a public company.

Q2 2006 results included an impairment charge of $406,000 associated with the write down of the Expedial product line assets, as well as a restructuring charge of $147,000 from the consolidation of the Company's Phoenix facility. Net income for Q2 2007 was $227,000, compared to a net loss of $1,089,000 for Q2 2006. Q2 2007 net income included $344,000 of interest income, as well as a net income tax benefit of $302,000 primarily related to the Company's Japanese subsidiary.

Turning to the balance sheet we had cash and cash equivalents of $27.9 million at June 30, 2007 compared to $28.6 million at March 31, 2007. The decrease from Q1 was driven primarily by the acquisition of the LeverEdge Contrast injection system, as well as an investment in working capital principally to fund the sales-driven growth of accounts receivable and inventory.

Non-cash share-based compensation related to FAS 123R in Q2 2007 was $122,000. As to our guidance, the Company is reaffirming its prior 2007 sales expectations of $39.5 million to $41.0 million. We continue to expect a net loss for 2007 based on our ongoing investment in selling, marketing and R&D.

The Company's goal remains to achieve profitability by the end of 2008. We previously had given guidance that we would achieve EndoFit thoracic approval in China in 2007. As you may know the head of the Chinese SFDA was executed for corruption in May. Given this political uncertainty, we are suspending our guidance on the approval process in China. Our expectations for future financial performance do not include the impact of any future acquisitions.

With that, I'll turn back over to the Operator for Q&A.

Thank you.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Miss [Angela Woodall] of CIBC World Markets. Please proceed, ma'am.

Hi, congratulations on the quarter.

Hi.

I was wondering if you could give a little bit more information about the U.S. study. Have all of the IRBs been approved?

Sure we are trying to get to 14 sites. Right now we have two sites that are fully up and running, Emory and UCLA and both of them have gotten through their IRB and I would say there's a queue of about five to seven other sites that are going through their IRBs, as well as the western IRB common application right now.

Okay, that's good. How many patients have been implanted so far?

One.

Okay. Also on gross margins it has gone up over last year but last quarter you reported 74.6% for gross margin. Could you explain a little bit of why it's gone down sequentially since December?

Yes this is J.J. We feel this is part and parcel of an upward trend. There is going to ebb and flow between quarters. You're not going to see a smooth linear transition year-over-year, although over full years you've seen that over time, and certainly over Q2 '06, you've seen an improvement.

But in the last quarter, we did have an increase in OUS sales as a percent of total sales, and OUS sales are driven somewhat by distributor sales, which tend to have lower margins so we saw a little down tick in that area.

Angela I'd also jump in here -- this George, and say that I think that it is apples and apples to compare Q1 '07 to Q2 '07 because both contain the Endologix distribution agreement. But I don't think it's quite apples and apples to go from Q4 over the cusp of the year into Q1/Q2, because in Q4 you didn't have the Endologix distribution agreement.

So I think the question is fair about the first two quarters of '07, but I think organically we definitely have improved over that number, over the Q4 number in the first two quarters of the year.

Okay, that's good. Also you could talk a little bit more about your thoughts for an acquisition. Are you still focusing on the Endovascular sector in terms of what companies you're looking at?

Sure this is Dave Roberts. We are looking both at the Endovascular and Dialysis Access sector but we're also looking at the Vascular sector. We do see the growth characteristics a little bit higher in the Endovascular and Dialysis Access space. There's probably a little bit more innovation in that space as well.

So we are looking in both, and if you've seen our presentation you know we have sort of an agnostic Ying Yang symbol saying we will look at product lines or companies in either one of those two categories. And it just gets down to the specifics of the product itself and the nature of the deal.

So we're really looking at both of those categories. And I would also generally speaking tell you that we're not looking at the General Surgery category. We really view ourselves as a company-centered and focused on developing and acquiring devices for vascular surgeons whether they be traditional open vascular surgery or endovascular devices.

Okay great. Thank you so much.

Thank you.

And your next question comes from the line of Mr. Larry Keusch of Goldman Sachs. Please proceed, sir.

Hi, good afternoon, guys.

Hi, Larry.

Hey, Larry.

A couple of questions first just to clarify and I think J.J. may have said this, the SFDA approval for the stent graft which has now suspended your timing guidance on are you saying that that's just the result of uncertainty with just the upheaval in that organization, or are you saying it's not coming in 2007?

Larry I think we're saying -- this is George. This is sort of my bailiwick a little bit more. I think we're saying yes to both of those. There's a lot of uncertainty in the organization. And I also feel like we're broadening our guidance as to when we're going to get through that pipeline. If I were to allocate blame here in this process I'd have to take half of it, and I'd have to hand half of it back to the SFDA.

Their half is obvious. Not only did that guy get executed, but his lieutenant got 15 years in jail and on and on there's just a big corruption scandal over there so it's really rocking the boat. From our side I think what I've said in some of these calls I've gotten a bit optimistic. Unfortunately for us in China we're working with a distribution partner to get through to the SFDA on this.

And I think from our side we still have issues to sort out with our distribution partner before fully ready to go ahead with the filing. So it may be more fair to carve the blame that way then just on the SFDA.

Okay, terrific. I appreciate that color. Just a couple of other things. I don't know if there's any way or maybe I should say it -- I don't know if you guys slice your data this way, but I think one of the questions that people will ask is the growth in sales, is that merely coming from the addition of the incremental sales reps and the fact that those guys are starting to bring in additional revenues in territories that you didn't have before?

Or are you really seeing, if you will, some sort of same-stores sales growth? And maybe you can just help us think a little bit about that.

Sure there's two ways to get at that Larry. One is the sort of sequential basis. I think if you look at Q1 going to Q2 you have what I'll call apples and apples in there. So you go from 9.9 to 10.3 and I don't know how many extra sales reps. I think there are no extra sales reps. In fact, negative one since the sales call. That's sort of the short-term look at that.

The other way to look at it I guess is the market share data that we're starting to focus on with the stent grafts. If you want to drill down on one particular product of this company probably the thoracic stent graft is the most important device. And what I'm trying to flash to you guys is that we are seeing real growth there.

Not only are we in a market that seems to be growing at about 25% a year, but we're picking up share from '05 to '06 from something like 4% to 6% share in that market. That's one detailed example. We are trying not to slice the data too much by these product lines but I hope that gives you some insight behind the curtain.

Okay, but you would say if you just -- I mean obviously you look for sales territories and the performance of your individual reps. If I were just to take away the new hires would you say that your organic business ex- those new reps is growing?

I would say so and I think inside the Endovascular category in particular you have a market that's growing fast --.

Right.

That there is organic growth inside there.

Okay and then two last ones, and I'll jump off. On the gross margin I recognize the depressing effect that the Endologix agreement has on that. I also recognize the mix shift with the overseas sales and the lower margin that that brings in. Again just trying to normalize things is anything changed in that gross profit ability of the products that you're selling?

No, I think traditionally to flash on this we have done our domestic price hikes on October 1st, not December 31st.

Right.

So you're three months away from that as well.

Okay, so no pricing changes in the quarter per se.

In terms of pricing pressure overall, no, not at all.

Yes okay. And then lastly could you just -- I may have missed this on the call if you did talk to it. But could you just run us through the tax benefit that occurred in Japan? Just trying to understand what happened there.

Yes Larry this is J.J. We have had about 2.6 million of losses in Japan. We opened the Japan office in 2004, and we knew we'd be incurring losses as it ramped and we decided to employ a tax strategy to recoup those losses. We converted the legal entity of that group in the quarter and that triggered a tax event and we expect to get a cash benefit from that over time. We've gotten some tax carry back benefits from that as well.

Okay terrific. Thanks guys.

Thank you, Larry.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Mr. Philip Legendy of Thomas Weisel Partners. Please proceed, sir.

Hi, guys.

Hi, Phil.

I'm wondering if you guys could -- can you provide any quantification of how the Endologix product is doing in Europe? And then can you update us also on kind of how the competitive dynamics are shaving up for endovascular stents generally?

And you want to talk about stent grafts, not stents?

Well that's stent grafts.

Stent grafts, okay. Okay you know we grappled with this Endologix question a lot and the best we keep coming up for you since we're trying as hard as we can not to break these categories into individual product lines is to give you Edward's purchases from Endologix' the last three years. And I'm sure you've heard us talk about that but I don't know what else to say, you know.

Okay. Fair enough. Next SG&A actually looked like it took a solid step down sequentially despite the fact that you added a lot of reps. What's driving that, and is that sustainable for the year?

Is that true that we took a sequential step down?

As a percent of sales?

As a percent of sales selling and marketing did take a step down.

Because we had so much more sales.

Yes largely -- correct.

So it looks flat nominally Phil from what, 4.8 to 4.73. Is that the numbers you're looking at?

Yes, yes, yes.

Yes, so it's flat. You know we didn't increase our reps over the quarter while we are maintaining our guidance to go to 50 to 55. We didn't add any reps this quarter. So it partly stands to reason that it would have stayed more or less static. And then your denominator there is going to be 10.3 rather than 9.9.

Okay so sort of on a quarterly basis I guess are these guys on a fixed salary? Or I mean should we expect that kind of leverage to continue? It's a question about leverage, so.

Right, and of course not the product line but the actual operating leverage, right?

Yes.

Okay, the salary structure for those folks is approximately half straight salary and half commission based on their ability to achieve gross margin.

Okay. And then on acquisitions I guess this is for Dave or for all of you. I was just wondering we've all -- there's been a lot of noise about the credit markets tightening. I wonder how that affects you? Does it affect you at all, or are the acquisitions you're looking at kind of below the waves on that?

You know Phil, I would say generally speaking that hasn't really affected us. We have a terrific relationship with our bank, Brown Brothers Harriman and we also have obviously the bulk of the net proceeds from the IPO still sitting in the bank account. And so, I would say generally speaking that really hasn't impacted the acquisition strategy.

Okay. I guess I was thinking more -- does it make it more difficult for some of these smaller companies to sell? Does it make it more difficult for buyers that might be competing with you guys for deals to complete deals, or again is it too small to really matter?

I guess it's so new maybe we really don't know what's going on. I think, when the DOW hit a high three weeks ago, and then two weeks ago everyone was running for the hills. So it's so new, I don't know if we really know. My general guess is we're looking at companies that are small enough that they wouldn't be bought by private equity companies using junk bonds to finance them. So I'm going to guess not, but potentially.

Okay, all right. Thanks, I'll hop back in the queue.

Thanks, Phil.

At this time there are no further questions in the queue, and I would like to turn the call back over to Mr. George LeMaitre. Please proceed, sir.

Okay, thank you very much. To everyone out there thank you very much for joining us. We will look forward to our next call in a quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.