LeMaitre Vascular Inc (LMAT) 2008 Q3 法說會逐字稿

Welcome to the LeMaitre Vascular Third 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, Erica. Good afternoon and thank you for joining us for our Q3 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 be often 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; 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 in 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 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, October 29, 2008 only. We do not undertake any obligation 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 will start by reviewing some financial and strategic highlights from what was a strong quarter. Dave will then follow with a few words about our business development efforts and then J.J. will conclude with our Q3 financial results.

Here are the three headlines from Q3 that I would like to focus on today. One, we posted an operating profit of $170,000; two, we recorded 19% sales growth; three, our cash and marketable securities increased by $892,000. With respect to the first headline, I am pleased to report LeMaitre Vascular's first quarterly operating profit as a public company.

This is in contrast to the $1.5 million operating loss we posted in Q3 2007. At the heart of this turnaround was the 2008 expense shave. Our worldwide headcount has been cut by 23% to 195 employees at September 30th, and quarterly operating expenses have been cut 13% year over year.

This $3 million cost cutting and headcount reduction program began in February and was successfully concluded in September. In retrospect, the deterioration of the financial markets has made our pursuit of profitability even more timely. Beyond just cost cutting, I am happy to report that sales increased 19% in the quarter to $12 million.

Sales drivers in the quarter were the products acquired in 2007, the weaker dollar, the 32% year over year growth of our international operations, and the impact of our next generation stent graph and introducers. We also launched two new vascular products in Q3, the 9 French Pruitt F3 carotid shunt and the 5+ Over The Wire Embolectomy Catheter. Combined with our reduced headcount, the $12 million of Q3 sales allowed us to post our best post-IPO annualized sales per employee at $248,000.

An obvious benefit of the improved bottom line and solid Q3 sales is the strengthening of our balance sheet. Cash increased by $892,000, our second consecutive cash positive quarter. As we consider our growth plans, it is comforting to know that we have $19.2 million in the bank and virtually no debt outstanding. It is also worth noting that LeMaitre Vascular has a $10 million untapped revolving credit facility with Brown Brothers Harriman.

So in summary, Q3 was an excellent quarter on the income statement, the cash flow statement and the balance sheet. Once again, our Q3 headlines were as follows. Number one, we posted an operating profit of $170,000; number two, we recorded 19% sales growth; and finally, number three, our cash and marketable securities increased by $892,000. I will now turn the call over to Dave Roberts, our President.

Thanks, George. I would like to make just one brief announcement on the business development front. During Q3, LeMaitre Vascular and Endologics signed an extension to our European distribution agreement. This will allow LeMaitre Vascular to continue to distribute in 11 European countries through December 31, 2010.

By way of context, you may recall that since January 2007, we have been the distributor for the Powerling stent graft in most of western Europe. The logic of the distribution agreement is simple. In most instances, the same doctor who implants our Target thoracic and UniFit abdominal stent grafts also implants the Powerling bifurcated stent graft.

As a result, Endologics is able to avoid the expense of a European distribution channel and LeMaitre Vascular is able to sell three stent grafts at each sales call instead of two. With that, I will turn it over to J.J. Pellegrino, our Chief Financial Officer.

Thanks, Dave. I will now add some detail on our sales growth as well as our Q3 operating results. Q3 revenues were $12 million, a 19% increase over Q3 2007. Revenue gains were driven by several 2007 acquisitions, the weaker dollar and the launch of the Company's redesigned Target UniFit stent grafts. I will now break down this 19% growth figure in three different ways. First, by category, endovascular and dialysis access grew 24%, vascular grew 17% and general surgery increased 5%.

Our endovascular and dialysis access category was aided by the weaker dollar and by strength in the Target and UniFit product lines. Second, by geography, international grew 34% and North America grew 9%. Sales outside the US were also aided by the inclusion of BioMateriali and a full quarter of vascular architecture results.

And third, apples to apples organic sales growth was 7%. Foreign exchange accounted for another 5% of sales growth and acquisitions contributed 7% in the quarter. Moving onto the gross margin, we reported a 67.4% gross margin in Q3 2008, versus 74.7% in the year earlier quarter.

This decline versus the year earlier figure was driven by the inclusion of oil margin BioMateriali graft sales, inventory write-offs largely associated with product improvements, and continued strength in the Company's international business. In the last six months, however, this decline has been more than offset by reduced operating expenses and sales growth, hence the bottom line turnaround. We anticipate our gross margin will improve in Q4 2008.

At a high level, expenses were down across the board, with the exception of research and development, sales and marketing expenses decreased 5% to $4.4 million in Q3 2008, from $4.6 million in Q3 2007. Sales and marketing expenses were 36% of revenue in Q3 2008, compared to 45% of revenue in the year earlier quarter. We ended Q3 2008 with 49 sales representatives.

General and administrative expenses decreased 8% to $2.2 million in Q3 2008, from $2.3 million in Q3 2007, the result of general belt tightening. R&D expenses increased 5% to $1.2 million in Q3 2008, from $1.1 million in Q3 2007, as we continue to invest in product development as well as regulatory and clinical personnel.

During the third quarter, we launched our 9 French F3 Pruitt carotid shunt and our 5+ Over the Wire Embolectomy Catheter. Q3 2008 operating income was $170,000 versus an operating loss of $1.5 million in the year earlier quarter. This improvement was due in large part to the $3 million 2008 expense shave and associated headcount reductions.

Operating expenses fell 13% from $9.1 million in Q3 2007 to $7.9 million in Q3 2008. After taxes and foreign exchange losses, we reported a net loss of $136,000 in Q3 2008 or $0.01 per diluted share, versus a net loss of $1.4 million or $0.09 per diluted share in Q3 2007.

Our cash and marketable securities increased by $892,000 during Q3 2008 to $19.2 million. This increase was driven by the reduced net loss and working capital improvements. As of September 30th, approximately 83% of our cash and marketable securities was held in cash, Treasuries, federal agency obligations, repurchase agreements and commercial paper, while approximately 17% was held in corporate debentures and honor-related securities.

We feel comfortable with the integrity of this portfolio, but continue to monitor it closely. In Q3, we recorded a $105,000 write down of a single GMAC security, but did not sell the underlying asset as it continues to perform and its value has been recovering. As to our guidance, we are raising the lower end of our 2008 sales guidance of $48.6 million to $48.8 million from $48.3 million to $48.8 million.

We are also improving 2008 operating loss guidance to $3.1 million from $4.3 million previously. We plan to provide 2009 top and bottom line guidance as foreign exchange visibility improves. Our guidance does not include the impact of any future acquisitions, significant distributor terminations or material currency fluctuations. With that, I will turn it back over to the Operator for Q&A.

(Operator Instructions)

And your first question comes from the line of Philip Legendy, Thomas Weisel Partners. You may proceed.

Hi, good afternoon, gentlemen.

Hi, Phil.

Congratulations, nice quarter. Wondered if you would comment in endovascular and dialysis, that product line really outperformed what we were looking for. Is there a single product that's driving growth there?

Yes, I mean, I think the answer is what you want it to be, which is the Target as well as the UniFit, which sometimes we think of as one platform, it is our own native stent graft platform, had a fantastic quarter on a year over year basis. A little bit driven by the launch, obviously, but we are thrilled, as remember that was giving us a little bit of a problem in Q1. It seems to have repaired dramatically.

And is that -- do you attribute that recovery to the launch of the new -- the TT catheters -- the relaunched there?

Yes, I would say generally we have got a much better delivery system and a much better-looking top stent. And I think it is attracting doctor interest in Europe.

All right. Then SG&A, obviously the reductions that you have made there were a big contributor to the bottom line performance. I wonder if you would comment, maybe where you have made those cuts and how confident you are that you've cut only fat and no muscle here?

Right. One thing I think about as I answer that question in my head is that the lion's share of the headcount reductions took place on February 15th and so you do now have seven and a half full months of operations to judge whether we have cut into muscle or not.

And I would say I feel like in Q2, with that 23% growth quarter, and in Q3, with the 19% growth quarter, which of course was penalized by FX, so you could even say it could have been even better. But I would say those two quarters are hinting that we have been able to cut without getting into the muscle or the bone, depending on your analogy.

And kind of going forward, do you -- is this kind of the run rate we should be looking at on SG&A, or do you think you are going to drift down even a bit further as we run through the quarters here?

I would be happy if you thought of this as the new run rate. When a person takes off a few pounds on a diet, it is very hard -- the hardest next move is to keep those pounds off, right? So I would say yes, it is a challenge. It will be a challenge to keep it off. I don't think it is going to go down from here. We will try as hard as we can to keep that weight off.

Okay, and then just lastly here, one kind of bigger picture question. I wonder if you have or what your perspective is on procedure volumes in hospitals. There are scattered reports and some people say they are declining, some people see no change. Just wonder what you are seeing?

Right. We have been polling our regional managers and our sales reps on this topic. And despite every opportunity I give them to give me an excuse as to why sales aren't going to go up, they keep choosing not to say that there is an impact yet, Phil. So as far as our procedures, which are sort of life-or-death vascular procedures, we are not seeing a change and I can give you that as of September 30th. So that information is pretty fresh.

Okay, thanks a lot.

Thank you, Phil.

(Operator Instructions)

Your next question comes from the line of Sarah Michelmore from Cowen and Company. You may proceed.

Thank you. Good afternoon.

Hi, Sarah.

I guess just a few things. Do you have an estimate of what the FX organic growth was for revenue in the quarter? Just trying to get a sense of what the underlying growth was.

So in the quarter, if you sort of look at the 18.6% in terms of FX acquisitions and organic, FX around 5%, acquisitions around 7% and organic around 7%, a little over 7%.

Okay. And obviously the foreign exchange dynamics have changed here and continue to change real time. So could you just walk us through the P&L quickly and just kind of give us a sense of where the expense lines fall out in terms of foreign exchange exposure? And I know -- if you could spend a little time on the manufacturing side too? I know there is some unique situations that you guys may have. Thanks.

Yes, so for every change on the top line, I think, Sarah, probably about 50% to 60% or 65%, somewhere in that range, is sort of naturally hedged with expenses coming back, expenses denominated in euros. And on the gross profit side, on the cost side, cost of goods sold, we have BioMateriali operating over in Italy obviously in euros.

There is also a piece of sort of our shipping and warehouse that operates in euros over in Germany, and those pieces get translated back. And so those sort of help offset the changes on the top line, I would say to the tune of 10% or 15% or something like that.

And then the rest, getting up to that 50% or 60% natural hedge, happens in the operating expenses lines and most of that is -- you have got a number of folks over in Germany sort of making up the bulk of the expenses and the selling and some on the admin side.

Okay, that's helpful. And in terms of the translation loss that was on the other expense line, is that balance sheet translation [cost]?

Yes, so we sell products to our subs and when the payable for them is [set up], receivable for us, they then owe us that money. If after a certain period of time, they haven't paid it, that's turned into a note at which point the FX is locked.

But up until that time, when it is sort of trade receivables to us, payables for them, it varies and that is what you see impacting that line. So they actually, if the euro weakens, they owe us in dollars. We sell to them in dollar denominations, they actually have to go out and get more euros to hypothetically pay us back and that is what you see hitting the P&L.

Okay. And you talked a little bit about gross margin improvement going into Q4. What exactly are the drivers there sequentially and in general? Should we think about this quarter being a low for that gross margin metric?

Right. Yes, good question, thank you. So as I said, the drivers this period were the inclusion of BioMateriali, inventory write-offs associated with new product introductions, namely the TT and the Target, as George had mentioned, and strong OUS sales. So to the extent that we've largely been through some of those changeovers in product lines, I would say you will see repair on that line and maybe 100 to 250 basis points or something in that range.

You might expect hopefully going forward, we will see how that plays out. And then to the extent that OUS sales change in their proportion to mix and, of course, FX, then you have got another issue there. But excluding that issue, I would say just from the sort of changeover teething issues, you will see a repair.

Okay. So 100 and 250 basis point kind of range, Q3 into Q4?

Yes, something like that. Yes, maybe. I mean, of course, I don't know what is going to happen, but that would be my guess.

Okay, that's helpful. Thank you.

Your next question comes from the line of Larry Haimovitch from HMTC. You may proceed.

Good afternoon, gentlemen.

Hi, Larry.

Congratulations and greetings from California.

Thank you very much, Larry.

On the, George -- sorry, Dave, for you, acquisitions, I know you maintain a very full pipeline. Obviously you will announce the deals when they are announceable. But can you just give us an update, at least subjectively, on what you are seeing out there? Are you seeing acquisition prices come down with the decline, steep decline in public equity valuations? So I would like to hear a little bit about that, if I could.

Thanks, Larry, good question. Yes, obviously we haven't done an acquisition in almost a year and while it is not like a 17 car pileup in the pipeline, the pipeline is certainly filling back up or filled back up, I could say.

I do think that this external market maybe does have an effect on pricing. I would say maybe the most -- the deals that are most vulnerable to the pricing are the smaller companies where maybe they need capital in the credit crunch or valuations are affecting them. So I think those deals certainly are coming out of the woodwork maybe a little bit more.

Perhaps also the private equity-backed deals, if they don't see sort of a liquidity event vis-a-vis the public markets, they may decide to monetize their investments sooner rather than later. And then maybe third in that order would be carve-outs from larger companies who maybe are a little bit more able to withstand the storm. But I think it is sort of -- I do think it is having an effect on valuation out there, and hopefully at some point, that will accrue to our benefit.

Okay. Maybe a question for George. You have shaved your beard, you achieved some real progress with the cost cutting. You made an operating profit in Q3. Should we think going forward that this will be the new standard for the Company, that, in fact operating profit every quarter barring unforeseen very catastrophic types of events, should continue?

Yes.

Okay, thank you. And maybe for J.J., on the guidance, I missed the guidance for the year and so you probably can back into Q4. What does your guidance for the year imply for Q4, because I missed the number that you threw out when you were talking?

Yes, good question, thanks. So on the low end, the $48.6 million implies about a $12 million Q4, and then on the high end, about a $12.2 million Q4. And on the op loss side, about $200,000 or so of income, operating income.

Okay. So to George's point, he is going to do everything he can, even if he has to grow a beard again, so that he can keep you guys on the positive side, correct?

Right. I would say at this level, $170,000, $200,000 op income, we are not talking about $1 million or $2 million. And sometimes things can bounce around pretty easily in those ranges, but I think the answer is yes.

And then one more question for George -- for any of you, actually. On the foreign exchange side, as Sarah pointed out, the dollar has come up very strongly vis-a-vis the euro. You derive 43% of your sales from Europe.

Is there any way for us to kind of quantify how heavy the effect will be in Q4 or even looking into '09? I imagine you are working hard on your '09 budgets. Wondering what you are thinking about in terms of budgeting for the euro or the dollar?

Yes, I would say, you could probably -- we have seen it help to the tune of 7%, 7.5%, 5%, something like that, over the last three quarters. And I bet you could expect it to hurt to the extent of 5% or so in the coming quarter. It could be a $600,000, $700,000 impact.

Oh, really? Okay.

Obviously no crystal balls here, but just sort of looking at where we are now. And I am talking sort of sequentially.

Yes. So your sequential revenue growth, then, for Q4 should significantly be below Q3, if in fact it turns into a mild tailwind to a strong, strong headwind as it is.

You know, Larry, I want to just make sure you got it straight. We are -- the implied guidance I think J. was talking about is $12 million in sales -

Right.

- which wouldn't be a decrease from Q3. It would be flat to Q3. If we didn't have this FX headwind going into Q4, you are probably looking at a guidance a little bit higher. I think J. is talking about $500,000, stuff like that.

Okay, got it. Thanks for clarifying that. Thanks, guys.

Thanks for the good questions, Larry.

You are very welcome.

Your next question comes from the line of [Chris Lynch], a private investor. You may proceed.

George, Dave, J.J., nice job on the quarter.

Thank you very much, Chris. Good to hear from you.

Quick question. Marketable securities, $6 million, could you just talk about what that is invested in and how you account for gains and losses?

Yes, so we wrote down about $100,000 of a single GMAC security during the period. We basically have to decide whether something is other than temporarily impaired, which is the accounting language and the standard we have to apply. And that is not always completely black and white, but essentially, it's, is this thing permanently impaired or not?

And to date, that is the sort of security that has -- we have deemed "permanently repaired". That, despite the fact that it's really actually been recovering from a market value standpoint over the last number of months.

Okay, thanks.

Thanks for the question, Chris.

Your next question is a follow-up question from the line of Philip Legendy from Thomas Weisel Partners. You may proceed.

Hi, guys. A quick follow-up here. Wondering if you would quantify for us the inventory write-off that you had in gross margin so that we can back that out?

Yes, I would say, Phil, it probably impacted the margin by 2%, 2.5%, something in that range.

And was that a one-time expense that we should not expect to see recur?

I would think so, largely. It may not be completely done, but I would say largely, yes.

Okay, thank you.

Thanks, Phil.

This concludes the question and answer portion of the call and the presentation. You may now disconnect and have a wonderful day.