LeMaitre Vascular Inc (LMAT) 2008 Q4 法說會逐字稿

Welcome to the LeMaitre Vascular Fourth 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, Stacey. Good afternoon and thank you for joining us for our Q4 2008 Conference Call. Joining me on today's call is our Chairman and CEO, George LeMaitre and our President, Dave Roberts. Due to yesterday's snow storm, George's flight was cancelled and he will take this call from the West Coast. We apologize for any technical glitches this might cause.

Also, 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 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, technology as an alternative medical procedures, our ability to expand our product offerings to internal development or acquisition, our ability to recognize the anticipated benefits or 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 may 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, March 3rd, 2009, 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 Q4 highlights. Dave will then provide a business development update and J.J. will conclude with our financial results. From my perspective, here are the four headlines for this call; one, we posted an operating profit of $354,000 in Q4; two, we increased our cash by $2.1 million; three, we reported 11% organic sales growth and lastly, in Q1, we signed a transaction with Edwards Life Sciences to terminate their distribution of our AlboGraft polyester graft.

With respect to the first headline, Q4's $354,000 operating profit was our second consecutive quarterly operating profit. This is in contrast to the $1.3 million operating loss which we posted in Q4 2007. At the heart of our recent profitability is the 2008 Expense Shave. At year end 2008, we had 200 employees, down 20% from year end 2007. As a result, our Q4 2008 operating expenses were 15% less than Q4 2007. We also posted $312,000 in net income in Q4 2008, our first net profit since Q2 2007. The continued deterioration of the broader financial markets has made our recent pursuit of profitability even more timely.

A nice consequence of our improved bottom line is our stronger balance sheet. Cash increased by $2.1 million in Q4 2008. This was our third consecutive cash positive quarter. In addition, we have virtually no debt outstanding and maintain a $10 million untapped revolving credit facility with Brown Brothers Harriman.

As to our third headline, sales increased to $12.1 million in Q4 2008. This is an 11% organic growth rate after stripping out foreign exchange and acquisitions. While our products are predominantly used in non-elective vascular procedures and we sell virtually no capital equipment, we remain vigilant to identify changes in the vascular procedure market due to the economic environment.

During Q4, our stent graft sales powered our European business to a 33% organic growth rate. Our sales growth in Q4 2008 was achieved with just 52 sales reps worldwide versus 57 in Q4 2007, indicating efficiencies and leverage. Indeed, over the last 12 months, we have slowed the expansion of our sales force in order to pursue profitability, product development and more regulatory approvals.

Our 4th headline is that we have just signed an agreement with Edwards Life Sciences to terminate their exclusive distribution of our AlboGraft polyester grafts. Despite the up front Q1 expense, I expect direct-to-hospital sales of AlboGraft will eventually benefit our top line, our gross margin and our bottom line.

I'll now conclude my remarks by reiterating the four headlines. Number one -- we posted an operating profit of $354,000 in Q4. Two -- we increased our cash by $2.1 million. Three -- we recorded 11% organic sales growth. And lastly, in Q1 2009, we signed a transaction with Edwards Life Sciences to terminate their distribution of our AlboGraft polyester graft.

I'll now turn the call over to Dave Roberts, our President.

Thanks, George. I'm pleased to report that last night, LeMaitre Vascular signed an agreement with Edwards Life Sciences to terminate their distribution of AlboGraft. This termination is scheduled to become effective March 27th, 2009 and is subject to customary closing conditions. Since our December 2007 acquisition of Biomateriales, Edwards has held the exclusive distribution rights in Europe and select international markets. These rights were scheduled to continue through December 31st, 2011.

Under terms of this new agreement, LeMaitre Vascular will pay Edwards EUR2.25 million for the termination of this contract and approximately EUR400,000 to repurchase inventory. Edwards will provide detailed customer information as well as transition services with respect to items such as sub distributors, order forwarding and tender transfers.

Preliminarily, we estimate one time charges associated with this transaction of up to EUR2.25 million in Q1 2009. We expect this transition will let incremental revenue of approximately EUR300,000 in 2009 and EUR1 million in 2010, all of which should drop to the gross margin line and most of which should drop to the operating income line.

As our other recent distributor terminations have shown us, particularly our Italian transition, transferring a business takes time. We'll be finalizing the accounting treatment over the coming weeks and, subsequent to the transaction closing, we'll update our 2009 guidance. Both Edwards and LeMaitre are currently bound by confidentiality and I hope you'll understand if there are questions beyond the scope of what I can answer today.

At a higher level, this transaction enables us to add AlboGraft to our direct-to-hospital sales bag. Polyester grafts continue to be an essential implant in vascular surgery. We believe that the combination of the LeMaitre vascular brand in these high quality implants will enable us to gain share in this $150 million to $200 million market. AlboGraft compliments our suite of devices, particularly our fast-growing Endovascular Aortic Stent Grafts.

Next, I'd like to comment on our Neovasc transaction. On December 30th, LeMaitre Vascular signed an agreement with Neovasc to distribute their biological patches for use in vascular surgery. This agreement, which became effective on January 26th, grants us exclusive distribution rights in the United States and the EU through 2016.

Neovasc received FDA approval in 2004 and subsequently sold this bovine pericardium patch through independent distributors. We expect our revenue from this product to be approximately $400,000 in 2009 and will carry standard distributor gross margins. Starting in 2014, LeMaitre Vascular has an option to acquire this product line. We did not pay any up front consideration for either the distribution contract or the purchase option.

We believe there to be substantial sales synergies between Neovasc Carotid Patch and our Pruitt-Inahara Carotid Shunt. These are the two principal devices that a vascular surgeon needs at the ready when performing a carotid endarterectomy.

With that, I'll turn it over to J.J. Pellegrino, our Chief Financial Officer.

Thanks, Dave. I will now add some detail on our Q4 operating results and will conclude with our 2009 guidance. Q4 revenues were $12.1 million, a 9% increase over Q4 2007. Revenue gains were driven by the inclusion of the AlboGraft acquired in December of 2007, strong results from our target and UniFit stent grafts and remote endarterectomy devices, as well as solid sales gains in Italy, France and the UK.

I will now break down the 9% increase in a couple of different ways. First, by category. Endovascular grew 6%, vascular grew 12% and general surgery decreased 1%. Endovascular was driven by strong target and UniFit stent graft gains, although the weak euro offset much of this growth in Q4. Vascular benefited from the inclusion of the AlboGraft and strong results from our remote endarterectomy devices. International business drove the top line in Q4 2008, accounting for 44% of sales.

On an apples-to-apples basis, organic sales growth was 11%. The Biomateriales acquisition contributed 2% and the weak euro reduced sales by 4%. In other words, 11% organic plus 2% acquired less 4% FX results in 9% reported sales growth for the quarter. In fact, all told, the declining euro negatively impacted sales by approximately $450,000 in the quarter.

Of note, our Q4 organic sales growth of 11% compared favorably to previous 2008 quarterly organic growth rates of 2%, 7% and 7% in Q1, Q2 and Q3, respectively. The Company recorded a gross margin of 69.6% in Q4 2008, up from 67.4% in Q3 2008. The Q4 improvement was due mainly to manufacturing efficiencies as well as reduced inventory write-downs.

The 2008 Expense Shave continues to keep operating expenses in check and allowed us to enjoy SG&A leverage in Q4. Sales and marketing expenses decreased 17% to $4.4 million in Q4 2008 from $5.3 million in Q4 2007. Sales and marketing expenses were 36% of revenue in Q4 2008 compared to 48% of revenue in the year earlier quarter. The Company ended Q4 2008 with 52 sales representatives.

General and administrative expenses decreased 13% to $2.3 million in Q4 2008, the result of general belt-tightening. R&D expenses increased 11% to $1.3 million in Q4 2008 as the Company continued to invest in clinical and regulatory personnel as well as product development.

Q4 2008 operating income was $354,000 versus a loss of $1.3 million in Q4 2007. This improvement was due largely to solid sales as well as the 2008 Expense Shave program. Indeed, total operating expenses fell 15% from $9.5 million in Q4 2007 to $8.1 million in Q4 2008. The $354,000 Q4 operating profit extended the 2008 bottom line turnaround, comparing favorably with Q1 operating loss of $2.6 million, the Q2 operating loss of $869,000 and the Q3 operating profit of $170,000.

The Company reported net income of $312,000 in Q4 2008 or $0.02 per diluted share versus a net loss of $1.2 million, or negative $0.08 per diluted share in Q4 2007. The Company's cash and marketable securities increased by $2.1 million during Q4 2008 to $21.3 million. This increase was driven principally by net income of $312,000, depreciation, amortization and stock-based compensation of $566,000, as well as a $1.1 million inventory reduction. The substantial cash addition in the quarter compared nicely with Q3 and Q2 with cash increased by $892,000 and $469,000, respectively.

Before getting to our full-year guidance, let me first make a comment about Q1. Due to the weak euro, the near-term top line implications of the Edwards transaction and the effects of any possible AlboGraft inventory returns, it is likely that Q1 2009 sales will be down sequentially from Q4 2008.

As to our guidance for 2009, the Company expects sales of $50.0 million to $50.5 million and operating income of $1.5 million. Excluding foreign exchange and acquisitions, this sales guidance implies year-over-year growth of 8% to 9% in 2009. This top and bottom line guidance also excludes the impact of the Edwards distribution termination. The Company will update its 2009 guidance to reflect the impact of this transaction after the closing.

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

Thank you. (Operator Instructions).

Your first question comes from the line of Larry Haimovitch with HMTC. Please proceed.

Good afternoon, gentlemen.

Hi, Larry.

Congrats on the quarter. I'm sure you feel pretty good about it, particularly given the environment we're in right now. I had a couple of questions. One was on the income statement. I don't know whether Dave or J.J. or you, George, want to take it. It doesn't matter.

What struck me about Q4, obviously, besides the fact you made a nice operating profit, which is lovely, the sales and marketing expenses were down significantly, although sales were up a little bit, and I'm wondering -- and you said your head count in salesmen was up, so did you cut marketing expenses? Or what happened in the quarter that sales and marketing expenses were down, particularly in the light of higher sales?

Larry, you may have heard it wrong. We had 57 sales reps in the wake of the Vascular Architects acquisition in Q4 '07 and we had 52 sales reps in Q4 '08.

Oh, I did. I mis-heard that. Okay, thanks for clarifying that. But would that still account -- I guess it sounds like George is answering. George, does that still account for about a $900,000 drop in sales and marketing?

I mean, I'm glad you're noticing that. I think this is just -- I hope you're seeing the impact of what we did. We really took a lot of costs out. You can hear -- there's five sales reps that you're hearing about. You're not seeing the -- there's a couple of regional managers that aren't there any more from '07 to '08, and then, yes, there's just some good -- marketing took its share of the cuts. So, it was a pretty full-rounded -- 20% of the employees are gone from '07 to '08.

When we see marketing expenses cut, you always worry about whether there's a long-term impact on the brand image and stuff like that. The sales obviously are more directed to the sales line but marketing is more of a long term thing. Are you comfortable that you haven't taken cuts so deeply into the fat that maybe you've cut into some bone or muscle?

Well, one of the facts -- and it's a good thought and it's certainly something people come up with often. One of the thoughts -- one of the ways I'd answer that was in Q1, Q2, Q3 and Q4, our stripped organic growth rate was, I think, if I'm quoting correctly, was 2% in Q1, 7% in Q2, 7% in Q3 and then 11% in Q4. So, there's some indication that maybe we're cutting correctly and maybe we're avoiding cutting into bone.

Yes, yes, that's a fair answer. Thanks, George. And then, there was a comment made -- I don't know if I caught it exactly, but that Europe was particularly strong, and I think Dave, or George, you may have commented that the stent practice was particularly strong and I wanted to just get a little color on that, if I could.

Sure, I mean, I'll take a shot at this and one of the guys back in Boston can also comment on it. We -- Larry, the big move I think that we've made over there is a, the sales force in Europe versus the sales force in the United States is a little bit beefed up, so we've had sort of real muted growth if not a little bit of down on the US side. But on the European side we do have a full complement of reps. I think we have 24 reps outside of the United States or something like this and 26 in the United States or -- it should balance to 52. That's up, so that's up a little bit in Europe.

But what we did really specifically regarding those stent grafts is we launched a brand new introducer in November of 2007. I think you might remember a couple of phone calls in Q1 and Q2 of 2008. We sort of brought the thing back into the shop, did a couple of tweaks and I would say the real launch took place in kind of the back half of 2008 and you can see them getting fantastic momentum in Q4 2008. Despite the weak euro, we had a record dollar month, quarter, rather, in Q4 with the stent grafts.

Yes.

So, it's definitely coming on with the stent grafts. It feels that way.

And also, if I recall -- and I'll jump back in queue, I shouldn't hog this too much. But just one more quick question and that is on the stent graft side, I think you distribute the Endologix stent graft overseas, don't you?

That's correct.

Yes. And any comments on that? Was that part of the strong growth as well or was it more of the direct products that you have under your own brand name?

Two -- let me take two shots at that. One is on a year basis, I think the number is -- and I'm happy to be corrected by the folks in Burlington, I don't have the numbers in front of me. I think on a yearly basis, the answer was it was really strong for UniFit and TAArget and that outshined the growth that was going on in the Endologix line. But in terms of in Q4, I think the Endologix line did participate in that growth.

Okay, great. Thanks.

(Operator Instructions).

Your next question comes from the line of Jeremy Green with Redmile Group. Please proceed.

Hi, guys. Congrats on the quarter. Better be careful with that cash generation. You might have a negative equity values, yes.

Thanks for the back-handed compliment, Jeremy.

The -- no, no, seriously though, nice job, especially in these times. Just a quick question on the Edwards deal which -- that looks like a particularly good step forward. Can you just run through those numbers again? I didn't quite hear them.

Sure, I'll run through it, Jeremy. This is Dave. Again, we're paying Edwards EUR2.25 million.

Right.

Right, and for the termination and then, there's also an inventory repurchase which we're estimating at approximately EUR400,000, all right? And then, what we just described was in 2009, we think that that transaction will generate incremental sales of EUR300,000 but that also will all drop to the gross profit line and almost entirely drop to the operating profit line and in 2010, this transaction ought to generate an incremental EUR1 million of sales and that also will all drop to the gross profit line and almost entirely drop to the operating profit line as well.

So, I mean, this is basically an almost accretive in year one and highly accretive in year two?

Yes.

Okay.

I mean, I would caution, Jeremy, just -- there is the charge coming for the EUR2.25 million payment, so if you're saying X that charge, year 1 does look good, but that is something worth -- you're going to see that and we're going to feel that on the income statement.

No, no, I applaud the conservative comments about the reported number, but just from a pure cash point of view, it obviously is a pretty good deal for you guys and it gives you control of your destiny there as well.

Most importantly.

The -- X that one particular transaction, can you just shed some light on what you think cash generation will be this year and then that $1.5 million of operating profit guidance you're guiding to, how -- can you just give some sense of how that'll change with Edwards? I mean, I realize it hasn't closed yet, but you're guiding that the 1 Q will be sequentially down. It wouldn't seem in your normal conservative nature for that number to change hugely on a big 1Q surprise.

Jeremy, I'll take the first part anyway on the cash generation. If you -- if we're guiding $1.5 million op income or so, and you assume a little over $2 million or $2.2 million of non-cash add-backs per year, you can kind of put those together, maybe a conservative number on capital expenditures, given the environment, half of those sort of non-cash add-backs and get to a cash flow number for the year or something along those lines.

That excludes any working capital changes, of course. You've seen us decrease inventory pretty significantly over the last nine, 12 months down to the high $6 million, $7 million range. Further decreases from here, incrementally, I think would be tough, although achievable, so you might assume that working capital gains from here on probably are minimal.

Right, okay. That makes sense, thank you.

(Operator Instructions).

With no further questions in the queue, I'd like to return the call back to Mr. George LeMaitre for closing remarks.

Okay, thank you very much, Stacey and I'd like to thank everyone for joining us. I'm going to sign off. We'll look forward to our next call together and I think that's in April. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.