LeMaitre Vascular Inc (LMAT) 2008 Q1 法說會逐字稿

Welcome to the LeMaitre Vascular First Quarter 2008 Financial Results Conference Call.

At this time, I would like to turn the call over to Mr. J.J. Pellegrino, chief financial officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, [Grace Ann]. Good afternoon and thank you for joining us for our Q1 2008 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 or 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 can 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 alternative medical procedures, our ability to expand our product offerings through internal development or acquisition, our ability to recognize the anticipated benefits of our acquisitions, disruption at any of our manufacturing facilities, general uncertainty related to seeking regulatory approvals for our products, particularly in the United States, potential claims of third parties that our products will infringe 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 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, April 30th, 2008, only. We do not undertake any obligation to revise or update publicly any forward-looking statements expressed in today's conference call.

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

Thanks, J.J. I'll start by reviewing some financial and strategic highlights, Dave will then follow with a few words regarding our recent acquisitions, and J.J. will conclude with our financial results.

Here are the headlines I hope you'll take away from today's call. We had another 20% sales growth quarter. The Class of 2007 acquisitions did well in the quarter, beating our own internal expectations. And number three, we are reaffirming our top and bottom line guidance for 2008.

Let me now give you some color on these headlines. Our 20% sales growth in Q1 follows 20% sales growth for all of 2007. Inside this 20% Q1 sales figure, we began to see the emergence of our Class of 2007 acquisitions. LeverEdge, Vascular Architects and Biomateriali produced $1.2 million of revenue in the quarter, slightly ahead of expectations.

In Q1, we also posted a record 46% of our revenues outside of the United States. As you can imagine, this provided us with a sizeable currency lift due to the weak dollar. We also saw strong results in our open vascular category. Our valvulotomes and balloon catheters posted record quarters.

While I'm always pleased to report 20% dales growth, we could have done better. Q1 endovascular sales were hampered by some product usability issues in our TT Introducer launch and our direct in Italy effort had a slow start.

In terms of the TT, during Q1, we found product issues involving the side port and the guidewire lumen, both of which have now been corrected. While our surgeons can easily identify and work around both issues in the OR, we saw fit to send a field safety notification to the nine affected European customers as we roll out our corrective actions.

Products with the side port fix began shipping in April, while products incorporating the guidewire lumen fix are now being manufactured and will be available by Memorial Day. These issues have caused a slower than expected TT launch. As a reminder, the TT is our first ever self-manufactured stent graft introducer, a replacement for the model we previously private labeled from another manufacturer. The TT should improve the deployment accuracy of our stent grafts.

Our direct in Italy effort began January 28th and we've now hired three employees and opened a sales office in Rome. During Q1, we allowed our ex-distributor to almost completely sell down its LeMaitre vascular inventory in order to keep the distribution channel clean. As such, we booked only EUR28,000 of Italian revenue in Q1 '08, substantially down from the EUR264,000 we sold to our Italian distributor in Q1 2007. Indeed, ex-Italy, our sales growth rate in Q1 '08 would have been 23% rather than the 20% we reported.

To contextualize the Italian transition, let me give you an update on other recent direct to hospital conversions. Sales growth rates for France, Japan and the UK were 43%, 40% and 24% respectively in Q1 2008. Our direct in Ireland transition is also showing early signs of success. While this Irish distributor buyout took place just six months ago, annualized sales there have already more than doubled. As we execute the French and Italian conversions in 2008, we've elected to focus on the 12 countries where we already have a direct presence rather than convert additional markets.

We currently have 50 sales reps worldwide, 27 in the U.S. and 23 outside of the U.S. Our mid- and long-term goals are to grow our worldwide distribution channel. However, having reached our original IPO target of 50 to 55 sales reps, we expect rep growth over the next several quarters to be slower than our post IPO ramp. With 50 sales reps and projected 2008 sales of $47 million to $48 million, on average, our sales reps carry approximately $1 million territories, a figure which we believe is more or less the industry sweet spot.

Turning to clinical and R&D, our UNITE clinical trial in the U.S. gathered momentum since our last conference call. Our sites implanted four UniFit stent grafts in the last eight weeks, bringing our total to 12 enrollees. And we now have 13 investigational sites, up from 10 at the last conference call. Also during the quarter, the EndoFit Thoracic Uniform TopStent launch in Europe progressed smoothly. Coupled with the recently launched TT, this uniform TopStent is designed to substantially improve deployment accuracy.

Moving down the income statement, you may have noticed we have heightened our focus on the bottom line. The February RIF reduced headcount from 257 at year-end to 218 at March 31st, a level last seen here in Q1 2005. We have also recently undertaken a cost cutting program dubbed the 2008 Expense Shave.

In summary, Q1 2008 was a solid quarter. We continued our 20% sales growth rate, largely driven by the Class of 2007 acquisitions, the currency lift and above plan performance from some of our core open vascular devices. During the quarter, we also put in place programs designed to significantly improve our bottom line. Many of these initiatives will take hold even as early as Q2.

Based on our continued sales momentum coupled with these cost cutting initiatives, I'm confident we will achieve our 2008 top and bottom line guidance.

Thanks, George. Let me take it from here.

Our Class of 2007 acquisitions got off to a good start in 2008. Some have turned accretive a little ahead of schedule. For clarity, let me review the 2007 deals.

In April, we acquired CII, which manufactured the LeverEdge contrast injector. In September, we acquired Vascular Architects and in December, we acquired Biomateriali. Sales from the LeverEdge and Vascular Architects deals rebounded nicely from Q4 and along with Biomateriali contributed meaningfully to LeMaitre Vascular's first quarter performance.

Q1 2008 sales from these three acquisitions were $1.2 million, 99% of their pre-acquisition levels. This compares sequentially with Q4 2007 when the Class of 2000 sales were running at 57% of their pre-acquisition levels. This rebound is consistent with what we have seen historically.

Let me now provide you with a brief update on each of the 2007 acquisitions. It has been 12 months since we purchased LeverEdge. During Q1 2008, we received CE Mark approval for LeverEdge and brought the packaging in-house. With no remaining CII employees, this acquisition, while small, is now accretive.

With regard to Vascular Architects, the front end integration of this acquisition is on plan. In Q1, we obtained CE Mark approval and we now have no product backorders. On the expense side, the VA acquisition appears to be ahead of plan. Partially overlapping with the RIF, we reduced the VA headcount at LeMaitre Vascular from seven at the acquisition down to two employees today. On our September 21st conference call announcing the transaction, we projected VA would be dilutive for 12 months. Based on these cuts and the Q1 sales rebound, the VA acquisition has now turned accretive.

Our most recent acquisition was Biomateriali and among the Class of 2007, it still has the most integration work ahead of it. We continue to sell Biomateriali's Albograft vascular grafts at distributor level margins through Edwards Lifesciences. In January, we began discussing the future of this distribution deal with Edwards. If we elect to terminate this agreement, it will likely trigger cash payments.

On a separate note, our team is continuing to examine the U.S. regulatory pathway for this device. We are not yet prepared to provide guidance on if or when Albograft might receive FDA approval, but we are enthusiastic about the prospects of dropping this time-tested implant into our domestic sales bag. On our December 21st conference call announcing this acquisition, we projected that Biomateriali would be dilutive in 2008. We continue to believe that this will be the case.

So, what's LeMaitre Vascular's next acquisition? Well, it's been eight weeks since our last call and during this period, we've made some progress restocking the pipeline with targets. We are conscious of the substantial integration work still in front of us for the Class of 2007 deals. However, acquisitions are an integral part of LeMaitre Vascular's growth strategy and we'll continue to search for the next transaction which fit our criteria. We have completed 10 acquisitions in the past 10 years. We are confident that we will be able to continue executing transactions in the quarters and years ahead.

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

Thanks, Dave.

George reviewed our number one headline, 20% sales growth. Dave just reviewed our number two headline, acquisitions working in Q1. After I add a bit more color on our sales growth, I'll focus the balance of my remarks on our number three headline, our ability to hit top and bottom line guidance in 2008.

Q1 revenues were $11.8 million, a 20% increase over Q1 2007. By category, endovascular and dialysis access grew 5%, vascular grew 31% and general surgery decreased 4%. By geography, North America grew 9% while our international grew 36%. Strong performance from the newly acquired products, Endologix and core open vascular devices, drove revenue in the quarter, as did the weak dollar.

As some of you may have seen, we have recently begun reporting the effects of currency and acquisitions by quarter. You can see these amounts outlined on page 55 of the 2007 10-K and in the press release issued this afternoon. Based on these figures, implied historical apples-to-apples growth rates have fluctuated between the mid-single digits and the mid-teens.

Moreover, if you look closely at the last 13 quarters, it becomes apparent that apples-to-apples growth tends to be lower during the quarters following robust acquisition activity and tends to be higher during quarters following less acquisition activity. This stands to reason. When you drop a new product into a salesperson's bag, it naturally attracts attention. While we would have liked to have seen a higher Q1 apples-to-apples growth rate, this may be the logical result of the three acquisitions that occurred in the back half of 2007.

Excluding the effects of the Italy transition, our apples-to-apples growth rate in Q1 2008 was 5%. In this same quarter, our growth rate attributable to recent acquisitions and foreign currency changes were 11% and 7% respectively. The Company reported a 71.1% gross margin in Q1, a decrease of 2.9% over the year earlier quarter.

This was the Company's first quarter selling its lower margin Biomateriali vascular graft through its distributor. The margin decline was also a result of strong international sales growth where average selling prices are generally lower than in the U.S.

Otherwise, gross margin in our main product groups remained strong and the Company continued to drive manufacturing improvements. In fact, during the quarter, the number of direct labor employees at the Company's Burlington facility decreased by approximately 15.

Sales and marketing expenses were $5.8 million in Q1, an $800,000 increase over the year earlier quarter. The average number of reps on our income statement in Q1 2008 was 53 versus 48 in Q1 2007. The change in the relative strength of the dollar added an additional $300,000 of expenses.

In Q1 2008, G&A expenses were $2.8 million, up 19% over Q1 2007. This increase was primarily the result of Biomateriali's G&A expenses as well as the weak dollar. On the R&D side, expenses increased $200,000 to $1.4 million. We spent 12% of our revenues on R&D.

We posted an operating loss in Q1 2008 of $2.6 million compared to an operating loss of $1 million in the year earlier period. The Q1 2008 operating loss included previously disclosed $1.1 million of restructuring and impairment charges. Non-GAAP operating loss was $1.5 million. The net loss for the quarter was $2.6 million compared to the year ago net loss of $629,000.

I would like to point out some of the measures that we have put in place or are putting in place in order to reduce our non-GAAP $1.5 million quarterly operating loss. As George previously mentioned, we executed a 32-person RIF in February and recently launched the 2008 Expense Shave.

In April, we are implementing something called a [Casa Integracione], which is more or less Italian for a one-year furlough program. This equates to roughly a seven-person layoff. We are confident that these programs taking place under the umbrella of continuing sales growth will help us to achieve our bottom line goals this year.

Turning to the balance sheet, we held cash and cash equivalents of $17.8 million at March 31, 2008 compared to $22.9 million at December 31, 2007. This $5.1 million decrease included $4 million of special items, $1.2 million to our Italian distributor, [$1 million] in annual employee bonuses paid in the quarter, acquisition related payments of $600,000, and $200,000 for the RIF. In addition, our inventories and accounts receivable increased $800,000.

As to our 2008 guidance, the Company reaffirms its expectation of full year net sales between $47 million and $48 million. In addition, the Company expects its 2008 operating loss to be $4.3 million. The Company's expectations for future financial performance do not include the impact of any potential acquisitions or significant distributor terminations.

Before turning it over to the operator, I'd like to reiterate our headlines for the quarter. Number one, we had another 20% growth quarter. Number two, Q1 sales from our Class of 2000 acquisitions rebounded to exceed expectations. And number three, we are reaffirming our top and bottom line guidance for the year.

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

I think, is the operator out there? Grace Ann, we got you out there?

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Lawrence Keusch of Goldman Sachs.

Good afternoon, gentlemen. This is Sebastian Paquette in for Larry.

Hi, Sebastian. How are you doing?

Doing well, thanks. Just wondering, we've seen a nice trend in gross margins and then a bit of a dip here in the first quarter, so I was just hoping you could size up the negative impact from the Biomateriali acquisition and the high proportion of OUS sales.

Well, I'll take the first one first. Biomateriali we have not broken out actual gross margins for that, Sebastian, as you know. It is a distributor relationship mainly through Edwards and so, you can think of it on the low end of distributor relationship margins. I think we told you the pre-acquisition sales and so with those two pieces, you can probably figure in what kind of margin that is contributing to the Company as a whole.

In terms of the OUS sales in the quarter, 46% of sales were OUS and that is up from the prior quarter year-over-year I think at 40%. So, significant increase there. And generally speaking, lower ASPs in Europe than in the U.S., which is really the driver there.

Okay, but would it be safe to say that gross margins might tick upwards sequentially from here through 2008?

I would say there's a third piece I didn't mention, Sebastian, and thanks for that follow-up. Endologix sales have been strong as well and that's a distributor product as well. And so, margins are depressed there. So to the extent that Endologix continues to do well and that we have OUS sales performing well and strong, you won't see an increase there. I would say generally speaking, you probably wouldn't expect to see a big downtick either. But we'll have to watch to see how the results come in.

Okay. And maybe just to finish up that topic, what's currently kind of baked into your guidance assumptions for gross margins? Would you mind just kind of explaining that or maybe directionally how it should trend?

We really aren't breaking that out, Sebastian. I think if you start with this quarter and model what you think things will do based on what I've said, that's probably your best bet. We're not, unfortunately, breaking that out.

Okay. In terms of procedural trends during the quarter, were they -- were they constant through the quarter? Did you see any acceleration towards the end of the period? Would you mind kind of discussing that in terms of U.S. and then OUS?

Okay. So, Sebastian, this is George. Great question. You know, I would say month to month, no, I'm not -- I have to admit, I'm not able to see procedural differences out there in the country and in the world. As it relates to my business, I will say you might be seeing something procedure-wise with the valvulotomes and as FoxHollow gets immersed inside ev3, it's probably pressing that product less hard than it used to be with FoxHollow.

In terms of the balloon catheters as well, I don't know that you're seeing procedure growth. I do know what we think we're seeing is I think Edwards is reducing its focus on the peripheral vascular segment and I think the folks, and I'll put ourselves in that, that have been kind of hanging around in the balloon catheter world are benefiting dramatically from that. So, that might explain some of these uplifts in the valvulotome as well as the balloon catheter segments.

Okay. And then yes, so we saw obviously kind of the growth of the vascular segment that you just described and then the endovascular seemed to be a bit switched this quarter as typical quarters go. Could you maybe just describe what was -- or explain what led to the 5% growth in the endovascular category?

Sure. Let me take those as both questions, endovascular category as well as vascular category. I think the vascular category is more easy to quickly explain so I'll do that, and we'll talk about endovascular.

So in the vascular category, of course we have Biomateriali's open vascular graft getting added to that segment. That explains some amount of it, although it doesn't explain the whole thing. And again, I go back to you had very strong quarters in what I'll call the -- quarter, rather, in what I'll call the traditional open vascular products.

I don't know if you guys are able to see this happening in other companies, but the market does tend to wax and wane between endovascular and vascular. It's almost like you -- it's almost inevitable that in the long, long run it becomes endovascular. And we're talking about stent grafts and we're talking about percutaneous interventions. But on the way towards that, it comes and goes. And we saw in Q1, it was a little bit less active on the endovascular side.

I will say something that's specific to us, though, which is that TT product. That TT product set of issues that we talked about, that was real for us. That took away one of our growth engines for the quarter versus Q1 2007. I hope and I believe we'll be able to repair that for Q2. I think our engineering crew has very quickly put in great fixes to the issues we had. But I will say some of that endovascular is not just waxing and waning, it's the -- it's the TT issues.

Maybe a third issue I could point at for you on the endovascular segment is, and I tried to -- I was trying to sort of coach people on this as Q3 and Q4 kept going, but in Q1, we did have finally the Endologix product line is worked into what I'll call our organic bag. And whereas in Q1, Q2, Q3 and Q4 of 2007, you were able to comp that against nothing in the endovascular bag, now that product is comping against itself.

And so, while we were reporting what I'll call gaudy growth numbers of 44 and 34 and 50, I forget the details, last year, I do feel like you're going to see a little bit more normal growth numbers being reported in this segment as 2008 plays out, although I will say 5% felt very low to us. I think we can do better than that.

Great. All right, thanks very much.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Philip Legendy of Thomas Weisel Partners.

Hi, guys. How are you?

Hi, Phil. How you doing?

Good. Wondered if you could actually just talk a little bit more about how you are doing in Powerlink? I know it's folded into organic growth, but that's been kind of a star for a while, so be interested in any comments you have on that business.

All right. Okay, so, good question, Phil. Always tracking the Powerlink device. One easy place I can point you to is the Endologix press release that just came out two days ago. They get at some of their numbers internationally as well as domestic. So, there's numbers out there.

I hate to do this, but you know that we don't report on specific product lines. And we did -- I think we did finally break that out for you at the end of last year. I think the number's in the K. J.J., if I'm not mistaken, the four numbers in the K include largely Endologix numbers?

Yes.

For the four quarters?

Yes.

So you could probably get a very good glimpse of that if you look at the K or the press release that we sent out today. That'll give you your base number for 2007. And what is that -- what are the four numbers put together? Something like $2.6 million? I just don't have the exact details in front of me, Phil, but it's right there in the --

$2.8 million, $2.7 million.

Around $2.7 million is your base number coming into the year, Phil.

Got it.

So, you have a definitive number coming out of last year, or more or less because you have a quarter worth of Vascular Architects in there. But more or less you have that number, a pure number last year to look at as it goes forward this year and you have a press release from Endologix. So, it's going well. We don't want to break out these individual product lines because every quarter, one of them is going to go up and one of them is going to go down and we're going to have to explain all of them.

All right, fair enough. Just a housekeeping. Did I hear you say that the guidance for an operating loss of $4.3 million is excluding the special charges?

It's only excluding what I'll call one special charge -- or a bucket of special charges, which is if we do do this Edwards transaction that might happen at some point, if we do go direct in a very significant market where we get rid of a distributor, you'll see and read about those. Other than that, and this is a topic we covered on the February 29th call, other than that, these do include special charges and impairments, et cetera.

So, we do expect you to come -- we do expect to come to you guys at the end of the year with a $4.3 million operating loss or better except for those sort of Edwards and large distribution type transactions.

So I guess it looks, then, like you're expecting some pretty significant improvement in the operating -- either operating expenses or cost of goods. I think you eliminated cost of goods as kind of a driver of the -- maybe you can give us an idea of -- given that we're already at a loss of $2.6 million maybe, where's the catch-up coming from?

So, Phil, this is J.J. Thanks. Yes, if we're at $2.6 million already and we're going to $4.3 million, we've got about $1.7 million left or so. You can kind of spread that as you see fit, but I think conceptually if it's not coming so much from the gross margin, then you can probably assume that expenses are remaining in check and you're getting top line revenue growth and that's where the leverage is coming from.

And I'd even say, Phil, if you compared Q1 against what you think is going to happen in Q2 though Q4, we can address them as a bucket here, the RIF, the 32-person RIF took place roughly two-thirds of the way through February. J.J. mentioned in April that we have a similar situation going on over in Italy called the Casa Integracione and we also have pretty aggressive costs cutting program here. So, this is our first year sort of on the clock, if you will, with the bottom line. We're very cognizant of how much we've gone through and what we have left to go through. And we're also very confident we'll make that number.

Okay. Maybe kind of on a similar subject, you mentioned that your distributor in Italy is now essentially finished selling down the inventory that he was holding. Maybe talk about how that's going to affect -- where is that going to show up in the quarters going forward?

Okay, good question because it should provide some kind of lift. And I hate to box myself in here, but it should provide some kind of sequential lift against Q1 because you saw very, very little revenue, as you're pointing out, EUR28,000 in Italian revenue. As you remember, that was our largest distributor market. When we chose to go direct in September, we put out a press release indicating that our sales in that country at the hospital level should be something like EUR1.5 million to EUR2 million and you see us come out of Q1 with effectively zero euros. So, the lift should be substantial.

I hope -- I hope the folks on Wall Street will be a little patient with the transition as we get going. We've seen transition issues all over the place with all these transactions. But I am quite confident this will happen and I am confident that the inventory is gone in Italy now. And so, the hospitals need to drag that product from someone and we're the folks that have the inventory. So, it should be -- should be a nice sequential lift.

And is the -- does he have any -- sorry. Did that distributor have any -- did he have sales concentrated in any particular business segment or was he fairly evenly spread across -- ?

Another good question and it gets at the -- it gets a little bit at the endovascular issue that we talked about before, the 5% growth. Yes, he tended to be a little bit more endovascular than vascular, than open vascular. And that is as a result of Italy is the largest endovascular market in Europe, which is a driver to why we wanted to be direct there to start with. But so, you can expect while Italy repairs, you might see a little side repair of the endovascular number coincident with that.

All right, thanks. I'll jump back in queue.

Thanks a lot, Phil.

And you have no questions at this time. I will now turn the call back over to George LeMaitre for closing remarks.

Okay, I'd like to thank everyone for joining us today. We will look forward to our next call. Thanks a lot.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.