LeMaitre Vascular Inc (LMAT) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to LeMaitre Vascular's Second Quarter 2008 Financial Results Conference Call. My name is Carmen. I'll be your coordinator for today. As a reminder, today's call is being recorded. 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, Carmen. Good afternoon and thank you for joining us for our Q2 2008 conference call. Joining me on today's call 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.

Our forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future indications. 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; 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 [if] products 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, July 29, 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 acquisition efforts and then J.J. will conclude with our financial results. Here are the three headlines from the quarter that I'd like to focus on today. First, we posted 23% sales growth. Second, we cut our operating loss to $869,000, down from $2.6 million in Q1. And, third, cash on hand increased during the quarter by $470,000.

Now I'd like to give you some color on what was an excellent quarter. Sales increased 23%. Sales drivers in the quarter were the class of 2007 acquisitions, the weak dollar and strong performances in our international and vascular surgery categories. Our sales increase was broad-based and cut across almost all of our products and geographies, but our international business clearly lead the way, growing by 40% year-over-year and accounting for 47% of our worldwide sales.

As was true in Q1, the UK, Japan and France posted sizeable gains in Q2. Also contributing to our 23% Q2 growth was the repair of two sales issues which restrained growth in Q1. First of all, our direct sales in Italy increased five-fold from Q1 to Q2 after our ex-distributor sold off the last of his LeMaitre Vascular inventory.

Secondly, our endovascular segment bounced back in Q2 as the launch of the TT and our new TAArget thoracic stent graft picked up steam in Europe. Based on our first half results, we are now raising our 2008 revenue guidance to $48.3 to $48.8 million, up from $47 to $48 million previously.

Our bottom line and our balance sheet also improved in Q2. Our worldwide head count now stands at 209, down 17% from our high water mark of 251 in December. Combining this reduced head count with our record Q2 sales, we were able to post record annualized sales-per-employee of $244,000 in Q2. Furthermore, in April we launched Expense Shave 2008, a significant internal cost-cutting program.

This trio of record sales, head count reductions and the expense shave enabled us to cut our operating loss to $869,000 in Q2, down by two-thirds from our Q1 operating loss. We also began to more tightly manage our balance sheet, decreasing inventory on hand and holding the line on other working capital items. As a result, cash increased by $470,000 during the quarter. This was our first cash-producing quarter since our October 2006 IPO.

As I review our Q2 operations, though, there is one figure which I'd like to address -- our 70% gross margin. This decline was driven largely by the low margin sales we made to our two Biomateriali customers as well as the distributor margins we earn on PowerLink sales in Europe. Also, the continued growth of our international business, which carries lower ASPs, has played a part in this gross margin shift. That said, we have been able to largely offset this decline by keeping operating expenses in check.

At the end of Q2, we had 50 sales reps worldwide, 27 in the U.S. and 27 international. It is work noting that fully 24% of our employees are now bag-carrying sales reps. Of course, of long-term goal is to grow this premium direct sales channel to reach surgeons in uncovered cities from Milwaukee to Milan.

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 as we react to a changed external environment and begin to more specifically pursue profitability. Our 50 sales reps carry approximately $1 million territories, a figure which we believe is more or less the industry sweet spot.

Turning to our clinical trial efforts. Our UNITE clinical trial in the U.S. now has opened its maximum allowable 14 sites. During the quarter, enrollees increased to 15, up from 12 at our last conference call. During Q2, we filed with the FDA to seek the inclusion into our UNITE trial of our newly-launched TT introducer catheter. The TT may speed trial enrollment when it does gain approval.

During Q2, our UNITE trial received a warning letter from the FDA as the expected follow-up to the FDA's 483 observations disclosed in our most recent 10-Q. After responding to this warning letter, we were pleased to receive the FDA's official close out letter on July 10th concluding this episode. Enrollment in the UNITE trial was not interrupted by these events. Of course, we will continue to strive to put in place clinical trial systems which the FDA deems effective.

Separately during Q2, we filed an IDE with the FDA to begin a clinical trial of our TAArget thoracic stent graft. We have named this trial ENTRUST. The goal of this trial is to bring our European thoracic stent graft program to the United States. We expect this clinical trial will be lengthy and we will not be commenting on costs or timing at least until we have received more visibility on our IDE filing from the FDA.

In conclusion, Q2 2008 was an excellent quarter. We posted broad-based sales gains and began to put our arms around expenses. As I see it, the three headlines from the quarter are -- first, we posted 23% sales growth; second, we cut our operating loss to $869,000, down from $2.6 million in Q1; and third, cash on hand increased by $470,000. I'll now turn the call over to Dave Roberts, our President.

Thanks, George. Our class of 2000 acquisitions continued to perform in Q2 2008. 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. Year-to-date, sales from the class of 2007 acquisitions totaled $2.3 million, approximately 94% of their pre-acquisition levels.

The LeverEdge and vascular architect acquisitions are now well integrated into the Company's sales organization, both in the U.S. and internationally. As I mentioned on our last earnings call, both of these acquisitions have now turned accretive. The manufacturing integration of LeverEdge is now complete.

The manufacturing integration of Vascular Architects continues and may provide some small gross margin upside, as more steps in the production process are in-sourced. Our Biomateriali acquisition still has the most acquisition work ahead of it. We sell Biomateriali's polyester allograft exclusively through Edwards Life Sciences. Sales softened slightly from Q1 to Q2.

During the quarter, we continued discussing the future of this distribution deal with Edwards. If we would like to terminate this agreement, it will likely trigger cash payments. On our December 21st conference call announcing this acquisition, we projected that Biomateriali would be dilutive in 2008 and we continue to believe that this will be the case.

On a separate note, during the quarter, our regulatory team submitted a 510-K for this device. We have not received a response from the FDA to our application. As you might imagine, the integration of our 2007 acquisitions absorbed much of our bandwidth in the first half of the year.

This, combined with a difficult financing environment, effectively raised our transaction bar. Nonetheless, we continue to stock our pipeline with potential acquisition targets. We have completed ten acquisitions in the past ten years. We are confident 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. I will now add some detail on our sales growth as well as our Q2 operating results. Q2 revenues were $12.7 million, a 23% increase over Q2 2007. Sales gains were driven by acquisitions made in 2007, the weak dollar, as well as strong open vascular surgery and international performance.

I will now break down this 23% growth figure in three different ways. First, by category. Endovascular and dialysis access grew 18%, vascular grew 29% and general surgery increased 4%. Our open vascular category continues to surprise on the upside. Second, by geography. North America grew 12% while international grew 40%. Notably, direct sales in Italy increased five-fold sequentially from Q1 to Q2. The UK grew 85% year-over-year. Japan grew 53% and France grew 41%.

And third, organic sales growth was 7%. Foreign exchange accounted for another 8% and acquisitions contributed 9% in the quarter. Of note, the Q2 2008 organic growth rate improved to 7% in the quarter on the strength of direct sales in Italy as well as the TAArget thoracic stent graft launch.

Moving on to the gross margin, the Company reported a 69.8% gross margin in Q2, a decrease of 4% over the year-earlier quarter, largely due to sales mix. Strong international sales that continued strong results of the PowerLink stent graft and the inclusion of Biomateriali-distributed and OEM sales accounted for roughly three quarters of the gross margin decline. These revenue sources carry lower growth margins than our domestic business. The balance of the gross margin decline was due to higher manufacturing costs, among other factors.

Moving down the P&L, sales and marketing expenses were $5.2 million in Q2, a 9% increase over the year-earlier quarter. This compares favorably to the 23% revenue growth in the quarter. Indeed, sales and marketing gained leverage sequentially as expenses declined from 49% of revenue in Q1 to 40% in Q2. We attribute this leverage to the continued sales momentum as well as a reduction in the number of sales managers since the beginning of the year. Our sales rep count was 50 at the end of Q2 and our sales manager head count had decreased to 11 at the end of Q2.

General and administrative expenses increased 24% to $2.7 million in the second quarter. Increases were driven by the inclusion of the Italian operations as well as increased audit fees. R&D expenses increased 32% to $1.5 million in Q2 2008. Increases were driven by investment in product development, regulatory staffing and the UNITE clinical trial. As the quarter ended, the Company was continuing the launch of its new TAArget thoracic stent graft in Europe. TAArget is the Company's new name for the combination of the TT introducer and the Uniform Top Stent.

We posted an operating loss in Q2 2008 of $869,000, compared to an operating loss of $447,000 in the year-earlier period. The Q2 2008 operating loss included $395,000 in special charges, including the previously-disclosed payments to our former Italian distributor, which ceased earlier this month. Non-GAAP operating loss was $474,000. The net loss for the quarter was $925,000 compared to the year-ago net income of $227,000. Income in the year-ago period included a tax provision credit of $302,000.

Turning to the balance sheet, we held cash and cash equivalents of $18.3 million at quarter's end compared to $17.8 million at March 31, 2008. This $470,000 increase was driven by strong sales, the Q1 reduction in force, the ongoing 2008 Expense Shave program and a decrease in inventory.

As to our business outlook, the Company is increasing its 2008 sales guidance, $48.3 million, to $48.8 million and reaffirming operating losses of $4.3 million for 2008. The Company's guidance does not include the impact of any future acquisitions or significant distributor terminations. I'd like to reiterate the three key messages that we take away from the quarter -- One, we posted 23% sales growth; two, we cut our operating loss to $869,000, down from $2.6 million in Q1; and three, cash on hand increased $470,000. With that, I'll turn it back over to the operator for Q and A.

(OPERATOR INSTRUCTIONS)

And the first question comes from the line of Amit Hazan from Oppenheimer. Please proceed.

Hi, this is [Michael Chu] calling in for Amit Hazan. Congratulations on another good quarter.

Thanks, Michael.

My first question is regarding how we should be looking at the P&L going forward for 2008, given the fact that your gross margin is in the 70% to 72% range in the first half and then also for SG&A going forward for 2008.

I'll take that, Michael. This is J.J. Thanks for the question. On the gross margin side, as you know, we're not guiding on gross margin. However, I wouldn't expect to see any systemic changes in the near-term from where we're at now, but I would say that sort of the decrease in gross margin that you've seen over the last few quarters, because of the reasons that we stated, has been made up for by reductions in operating expenses, still getting us to a nice op income [loss] number improvement over Q1, so $11.1 million or so of op expenses and $9.8 million op expenses or so in Q2, a nice reduction there.

Okay. And then, for my next question, just wanted to get a little bit more detail about your Italian sales. You mentioned that your sales in Italy have increased five-fold, but how should we be looking at it on an apples to apples basis prior to going direct?

Sure. I think we were mentioning -- Michael, this is George. I think we were mentioning before we went direct, that the dealer, and I think we mentioned this in a couple of press releases. As we went to purchase the distributorship. The dealer was selling, was purchasing roughly, pick a number, EUR800,000 from us, and we're not giving exact breakdowns here but we're getting very close to being at that level right now. So you had a very light sales level for us in Q1 which rebounded -- he was still selling off his inventory in Q1 and into Q2. Finally, at the end of Q2, we were fully in charge of selling this stuff.

So I would say you can think of it, we're basically about even right now in terms of sales and the opportunity is to become larger and actually sell what he was selling at the hospital level. So we still have some room to go to capture it all but it was a tremendous quarter in terms of getting back to -- as far as we're concerned, you're probably seeing a higher gross margin right now with the same amount of revenue as you sold to the Italian dealer last year.

Okay. All right, thank you very much.

On a run rate basis.

Okay, and I didn't quite catch it on the call. Regarding your '07 -- class of '07 acquisitions, the sales run rate was, you mentioned $2.3 million?

Yes. So the acquisitions for the class of 2007 totaled $2.3 million year-to-date, that's right.

So last quarter you provided that it was on an annual run rate, I think, of $1.2 million, unless my notes are incorrect.

Maybe. I think if you're trying to look apples to apples against Q1, we were reporting last quarter that they were performing at about 99% of the pre-acquisition levels and now year to date they are at about 94%. So down slightly, but nothing too material.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS)

The next question comes from the line of Larry Keusch of Goldman Sachs. Please proceed.

Hi. Good afternoon, guys.

Hi, Larry.

So I guess, George, just coming to the guidance. You obviously did better in the 2Q than I think people are looking for. You've got this cost-reduction program going on. You raised your top line, yet you didn't change your expected operating loss for the year. So I'm just trying to make sure I understand what's going on there.

I think we are a little conscious, Larry, about the gross margin, and while we're making great strides at the expense shave, the gross margin, obviously, is picking away a little bit at us. So while you do have great sales gains, that's going to take away from it a little bit.

I'd also like to say this is our first guidance hike, a pure apples to apples guidance hike, so we feel really good about having made the top line guidance hike. Maybe as time goes by, there's room for both top and bottom, but we don't feel comfortable at this point making that stretch.

Okay. And then, on the UNITE trial. So again, you obviously indicated that you're in all your centers now and but the reality is you only have three enrollees in a three-month period, and so you maybe you can refresh my memory on what is the targeted enrollment for this trial and what are your expectations for this new introducer? Can it really start to accelerate this because this has gone pretty slowly at this point.

Yes, I'd agree with you, Larry. We're actually internally quite disappointed with the speed of the trial. So start off by saying I'm not making any excuses about it. As far the TT goes, I don't want to oversell it. I think it can get us -- the TT is a much better introducer than what we were using previously, which was a private label device from another manufacturer.

It should help -- once the surgeon's doing implantations, it should help them understand that we have a much better system, but I don't expect it to double or triple enrollments overnight. We do throw that out there that it will increase a little bit. We've got plenty to do here. We've got plenty of work to do. We probably need to do a little bit more outreach than we're doing.

One of the reasons why you might have seen a little slowdown here in Q2 was that some of the bandwidth in our clinical department had been deployed to get that ENTRUST filing in. I think it's a very notable filing that we're making here that we're deciding to go forward with the thoracic clinical trial and this ENTRUST trial probably should be a faster enroller than the UNITE trial. One of the reasons is the UNITE is a bit of a -- we are finding is a bit of a niche procedure.

They're not using it all the time. We certainly experienced over in Europe that our EndoFit or now-renamed TAArget product line does tend to attract a little bit more interest than our UniFit product line. So I would say, while I agree with your frustrations of the speed of the UNITE trial, as I think about the ENTRUST trial, I believe that we will be on a platform that will encourage enrollment to go a lot faster when we get to that.

Okay. And --

90 patients was your other answer.

90 patients. Okay, great. Okay. And then, just lastly, with the Edwards relationship, does the -- this is the second conference call in a row that you guys have obviously mentioned that there could be cash payments if you can come to some sort of an agreement with Edwards.

Again, I'm just trying to understand if there have been any formal conversations? Are you making any headway? I'm sort of giving you the opportunity, if you will, to sort of set expectations, whether we should anticipate that there could be some cash payments or is this really just still in the phase where you just don't know.

Larry, good question. This is Dave. I'll take this. We have had discussions with Edwards, but to answer your question, I would say there hasn't been substantive progress. So I'm not sure if I'd be building anything into your model just yet or at this point.

It is just the second full quarter that we've finished with them and, even though the sales are a little bit soft vis-a-vis Edwards, perhaps there could be some quarter to quarter fluctuation in their business like there sometime is in ours. So we're monitoring their sales and the relationship. We'll see where it goes. To contextualize it, it is just 4% of our revenues but it's an important 4% and there could be some upside there eventually. But nothing substantive to report at this point.

Okay, terrific. All right, thanks, guys.

Thank you, Larry.

And the next question comes from the line of Andrew Weinstein from Cowen and Company. Please proceed.

Good afternoon, guys.

Hi, Andrew.

Most of my questions have been asked but I do have a couple of follow ups. First on Italy. Can you just discuss Italy in terms of the other recent direct conversions and how does this trajectory compare to, say, UK, France and Japan.

Well that's a big, good question. You know, one thing I can say that at a high level, this is a big one for us and it jumped out of the gate -- in the old way that we used to look at Italy, there was something like 5% or 10% of our worldwide sales. The material one, which is why you're seeing all of our sort of press releases around this and all the information around it -- it was a little different in that we walked into this thing with a distributor that had a little bit more inventory on hand than the other places that we'd go. So it's been a little bit different.

It's been a little bit more black and white. It was very bad in Q1 and it was very good in Q2. So it jumped more quickly than I've seen, but I will say that the most recent ones that we've done, the transition has been Austria, Sweden, Ireland. Believe it or not, France isn't really a direct transition -- we've been direct there for a long time. And then the UK and Italy seems to be going just fine.

Maybe I could say that I'm a little bit more excited about Italy than the other places that I've just mentioned because of the potential there. Italy really is a, sort of top four worldwide vascular market, and specifically, we're most interested in Europe in the EndoGraft market and Italy is the largest stent graft market in Europe, larger than even Germany. So we're real excited about what we see there. I think there's going to be tremendous blue sky in Italy.

As you dig into what a distributor has been doing for you for the last -- I think Sergio was our distributor for approximately 15 years, ever since I got here. And when you dig into what they were doing, we do find that, of course, they focused more on certain product lines. So I'm going to guess, of the 14 product lines that we sell in Europe, maybe six or seven of them never really saw the light of day underneath the [serum] umbrella and what I think I can bring to the party here is a more full exposure of all 14 product lines.

So we really have -- we're real excited about Italy and I think it's going great versus what I've seen in other transitions. But it is a biggie and so it's one we treat very carefully. One last thing I would add is we actually do have a dedicated sales office in Rome. We're renting space. We have a couple of administrative assistants as well as the manager there and that's something -- and we don't do that in most of these other countries I've mentioned.

Basically we have sales reps resident in the country and then we pipe all the information back to Frankfurt. So just more color on this, that this is a biggie. I think it's going very well, although we'll see. We've only got two quarters underneath our belt and one of them was real bad and one of them seems to have been real good.

That's great. Thanks very much for that, George. And last question. Not to put a dark cloud on the silver lining from vascular, but do you think there's any hesitancy in the market to be moving more towards endovascular. This is two quarters in a row that we're seeing vascular kind of trump endovascular a little bit more than expected.

I might take that a different way, which is I think is part of our business plan has always been to construct a company that works when endovascular waxes or wanes. So we built this company thinking it's going to go back and forth. It's going to go back and forth. I don't think there's any major thing out there.

I think you're seeing some very specific markets that we participate in coming and going, you're seeing us make some specific moves in these markets. I wouldn't ascribe too much to it. I think it does (slot] with my -- one of my operating hypothesis with these businesses which is surgeons switch less quickly than we would think they would from technology A to B, and you have to sort of spread your risks in technology A and technology B.

I think we're doing a good job of that. And for two quarters in a row, you happened to see it but there's no telling if other markets won't explode, I might point you to go look at the [Endologic] is showing big numbers still on their sales growth rate in terms of their stent graft business. So there are good examples out there of the endovascular business still having very robust procedure volumes.

Fair enough. Thanks very much, guys.

And a final question comes from the line of Philip Legendy from Thomas Weisel Partners. Please proceed.

Hi, this is [Erica Levy] in for Phil.

Hi, how are you doing, Erica?

Doing well. How about you?

Very good, very good.

Just -- most of my questions have been answered so I have kind of higher level trend questions. I'm curious if you've seen any changes in the overall pricing for each of the businesses?

Nothing specific to report back, maybe with the carve out of Japan continues as a company -- the reimbursement as a country, excuse me, the reimbursement system continues to roll back. You can plug into your spreadsheet something like a 4% cutback on reimbursements over in Japan and that's been going on for the last couple of years and we anticipate that to keep going, though Japan previously did have almost off the chart pricing versus the rest of the world. But no, I haven't seen anything and in our markets to indicate anything is afoot elsewhere.

Okay, thanks. And my other question is, have you seen any impact to manufacturing costs from rising commodity prices?

Thanks for the question. This is J.J. I would say that the majority of our manufacturing costs are in labor and so any rises in commodity prices are muted and you don't really see the effects come through as much as you might otherwise. That said, yes, we probably have seen some increases in commodity prices, but again, not to the extent that we really want to call them out as a driver on the gross margin line.

Okay, all right. Thank you very much.

Thank you.

That concludes the Q and A portion of today's call. I would now like to turn the call back over to Mr. George LeMaitre. Please proceed.

Thanks, Carmen, and I'd like to thank you all for joining us for our Q2 call and we'll look forward to our next call.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful week.