LeMaitre Vascular Inc (LMAT) 2009 Q1 法說會逐字稿

Welcome to the LeMaitre Vascular First Quarter 2009 Financial Results Conference Call. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Shameka. Good afternoon, and thank you for joining us for our Q1 2009 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. Today we will discuss some forward-looking statements, the accuracy of which are subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as belief, expect, anticipate, forecast, and similar expressions.

Please note these words are not the exclusive means for identifying such statements. Please refer to the cautionary statement regarding forward-looking information in the information under the caption Risk Factors in our 2008 10-K, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During the call, references will be made to certain non-GAAP measures, which management believes provide additional and meaningful assessment of the core operating performance of the Company. Reconciliations of non-GAAP measures to the most comparable GAAP measures are provided in our earnings release and on the Company's website at www.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks. I'll start by reviewing some Q1 highlights. Dave will then provide a business development update. And then JJ will conclude the call with our Q1 financial results. Here are the three Q1 headlines for this call. Number one, we posted adjusted operating profit of $211,000, our third consecutive profitable quarter. Number two, our gross margin rebounded by 300 basis points to 73%. And number three, sales grew 4%, excluding FX, acquisitions, and AlboGraft.

With respect to the first headline, Q1's $211,000 adjusted operating profit was our third consecutive operating profit. This $211,000 operating profit contrasts with the $1.5 million adjusted operating loss, which we posted in Q1 2008, and is more or less in line with our operating profits in Q3 and Q4 of 2008. At the heart of our recent profitability is the 2008 expense shave, which reduced Q1 2009 adjusted operating expenses by 20% versus Q1 2008. Our transformation into a profitable Company is now three quarters old. In the next three quarters, we should see additional operating leverage as sales increase and as AlboGraft-direct plays out.

Moving on to our second headline, in Q1 2009 our gross margin rebounded by over 300 basis points from Q4 2008 to reach 73%. This increase was driven by a larger direct-to-hospital presence in Europe, as well as improved manufacturing efficiencies. As in our previous acquisitions, our gross margin frequently dips post transaction, and then repairs as we execute the integration. As a result of our improved gross margin, today we are revising our 2009 bottom-line guidance upwards by $300,000. This implies $1.6 million of operating profit over the balance of 2009.

As to our third headline, sales increased 4% versus Q1 2008, excluding foreign exchange, acquisitions, and Biomateriali. Sales in North America increased 3%, while international direct-to-hospital sales increased 6%. There were several European standouts in Q1, including Italy, where sales grew more than fourfold, and France, where sales grew 37%, both in Euros. Our international direct-to-hospital initiative of the last several years continues to serve us well. Company-wide direct-to-hospital sales accounted for 93% of total revenues in Q1, our high water mark.

On the other hand, sales to international distributors in Q1 decreased 53% year-over-year, reflecting the decrease in AlboGraft purchases by Edwards, as well as decreases in Spain and Greece, our two largest distributor markets. We believe sales to our international distributors will recover as they complete the inventory reduction activities they initiated in response to economic conditions. Likewise in Q1, we observed US hospitals becoming more reluctant to purchase our five packs, ten packs, and 20 packs, preferring instead to order devices one by one as the surgeries took place.

While I hesitate to outguess the economy, we expect that these inventory workdowns will not continue indefinitely, as the vast majority of our revenue is tied to major arterial reconstructions. As a roadmap for what to expect from the AlboGraft transition, perhaps I could focus on our recently completed transition to direct sales in Italy. We bought out our Italian distributor in Q3 2007. This transition took us five quarters to integrate. And Italy has now become our third largest subsidiary, behind only the US and Germany.

Now comes our AlboGraft transition. Given the orderly inventory transfer and the customer information and transition services we purchased, we expect that the AlboGraft transition should be faster and smoother. Indeed, AlboGraft sales turned on as expected on March 27. And we have now begun to ship this implant to European hospitals and distributors from our Frankfurt distribution facility. Selling AlboGraft directly to hospitals should allow us to enjoy an increase in sales, gross margin, and operating income. Further upside to AlboGraft-direct could be realized upon receipt of US regulatory approval. This is not baked into our 2009 guidance.

Another item which gives me cause for top-line optimism is the productivity of our R&D and clinical regulatory departments. In Q1 2009, we received six regulatory approvals, the most significant of which was Chinese approval of our EndoFit Thoracic Stent Graft. It is likely that these six approvals will begin to contribute to revenues in the quarters ahead. We are also happy to report that our UNITE trial has 34 enrollees, an increase of 12 since December 31, 2008. We are now more than one-third enrolled in this 90 patient, 21 center pivotal trial for our UniFit Abdominal Stent Graft.

The updated sales guidance we are providing today implies a solid sales rebound versus Q1 for the remainder of 2009. I'd like to conclude my remarks by reiterating the three Q1 headlines. Number one, we posted adjusted operating profit of $211,000, our third consecutive profitable quarter. Number two, our gross margin rebounded by 300 basis points to 73%. And number three, sales grew 4%, excluding FX, acquisitions, and AlboGraft. I will now turn the call over to Dave Roberts, our President.

Thanks, George. In Q1, our business development efforts dropped two more product lines into the LeMaitre sales bag. Both are bread and butter implants used by our core customer, the vascular surgeon. On March 27th, we completed the termination of our contract with Edwards for their distribution of AlboGraft. We paid Edwards EUR2.25 million and repurchased EUR375,000 of inventory. In US dollars, this was a $3.5 million cash payment. In exchange, Edwards relinquished global distribution rights and provided detailed sales history and customer transition services.

Immediately following the transaction, we began shipping orders direct to European hospitals. In the near term, we'll focus on establishing relationships between our LeMaitre sales reps and the 150 plus active hospital customers and some outlying distributors. As the year progresses, however, we expect to shift our focus towards cross-selling other LeMaitre products to these customers, as well as to marketing AlboGraft both to dormant and new users.

It has been a longstanding goal to add a polyester vascular graft to our sales bag, due to the substantial cross-selling opportunities we believe exist. Needless to say, we are pleased to be able to complete what we call the back half of the Biomateriali acquisition and finally be in a position to begin to access these sales synergies.

Closer to home, we submitted a 510k application to the FDA for AlboGraft in 2008. We have early indications that this will not require a perspective clinical trial. The second implant we dropped into our sales bag in Q1 was PeriPatch, a biological patch manufactured by Neovasc. On January 26, LeMaitre became the exclusive distributor in the US and Europe for the patches sized for vascular procedures. These distribution rights run through January 2016.

And as a part of this transaction, LeMaitre also obtained an acquisition option starting in 2014. In its first three months, PeriPatch sales have been encouraging and reinforce our belief in the synergies between this patch, primarily used in carotid endarterctomy and our gold-standard Pruitt Inahara Carotid Shunt. With that, I'll turn it over to JJ Pellegrino, our Chief Financial Officer.

Thanks, Dave. I will now add some detail on our Q1 operating results, and will conclude with an update of our 2009 guidance. Q1 2009 sales were $11.3 million, a 4% decrease versus Q1 2008. By category, sales decreased 1% in endovascular, 6% in vascular, and 3% in general surgery. Sales decreases within the endovascular category were driven by weaker than expected AnastoClip results. Sales decreases in the vascular category were driven by reduced AlboGraft purchases prior to the Edwards termination.

It is worth noting that these effects did mask positive Q1 sales results. Indeed, excluding foreign exchange, acquisitions, and Biomateriali, Q1 2009 sales growth was 4% over the year earlier quarter. We posted 3% and 6% growth in our two largest direct markets, North America and Europe. The Company reported a gross margin of 72.8% in Q1 2009, up from 71.7% in Q1 2008, and 69.6% in Q4 2008.

This 320 basis point sequential increase was driven by increased direct-to-hospital presence in Europe, as well as improved manufacturing efficiencies. We are pleased to see our margins move back towards the low to mid 70s after the 67% we posted in Q3 2008. Furthermore, we see some perspective gross margin improvement as we begin to sell AlboGraft directly to hospitals.

Moving down to P&L, operating expenses remained in check. In fact, Q1 2009 operating expenses, excluding restructuring and impairment charges, were $8 million, 20% less than in the prior year. The continuing benefits of the 2008 expense shave program was the main driver. To give you some understanding of just how lean we have become, we ended the quarter with 205 employees, a level we first reached at the beginning of 2005. As a result of this lean approach, sales per employee reached $221,000 in the quarter, up from $120,000 in Q1 2005.

The Q1 2009 operating loss was $1.6 million versus $2.6 million in Q1 2008. Excluding the $1.8 million AlboGraft termination charge, non-GAAP operating income was $211,000, more or less in line with the prior two quarters' results and significantly improved versus Q1 2008 non-GAAP operating loss of $1.5 million.

The Company's continued ability to control costs were evident throughout the income statement. Sales and marketing expenses decreased 29% to $4.1 million in Q1 2009. Sales and marketing expenses were 37% of revenue in Q1 2009 compared to 49% in the year earlier quarter, as the Company continued to gain operating leverage and strategically focus its marketing resources.

The Company started and ended Q1 2009 with 52 sales representatives. General and administrative expenses decreased 11% to $2.5 million in Q1 2009, a result of general belt-tightening. R&D expenses decreased 3% to $1.3 million in Q1 2009. Increased product development and regulatory spending was more than offset by reduced process engineering and royalty costs.

The Company's cash and marketable securities decreased by $4 million during the quarter to $17.3 million, a direct result of $4.1 million in one-time payments. This $4.1 million cash outlay was comprised of a $3.5 million payment to Edwards, and a $575,000 deferred acquisition payment to the sellers of Biomateriali. Only EUR 128,000 of cash payments remain to these sellers, due in September 2009. The Company continues to maintain a $10 million untapped revolving credit facility.

Turning to our guidance, as a result of continuing currency fluctuations and general economic uncertainty, we reduced our 2009 sales guidance to $48 million to $48.5 million. Excluding foreign exchange and acquisitions, this implies year-over-year sales growth of 2% to 3%. We also updated our 2009 operating income guidance to break even from $1.5 million previously, which reflects the Q1 $1.8 million AlboGraft distribution termination charge and our improved gross margin. This is a net increase to our operating income guidance of $300,000, and implies an operating profit of $1.6 million over the balance of 2009. As usual, our top and bottom-line guidance excludes future acquisitions and changes in foreign exchange rates. With that, I'll turn it back over to the operator for Q&A.

Thank you.

(Operator instructions)

You have a question from the line of Larry Haimovitch of HMTC. Please proceed.

Good afternoon, gentlemen.

Hello Larry.

Congrats on the nice solid quarter. Going forward on your guidance -- I guess probably JJ or Dave would be the best to answer this. What assumptions are you making on the Euro? Obviously you've hit -- you've got some tough comparisons the next couple of quarters because the Euro was so much stronger last year than this year. Are you looking for the Euro to be about flat with last -- with the current level?

Yes. Thanks for the question, Larry. Clearly last year the Euro made a couple of moves, one up during the first couple of quarters and then down later on in the year. We're assuming basically a flat Euro from here on out. And that's what's included and incorporated into our guidance. We're not in the business of prognosticating what the Euro will do going forward. So we've assumed that it will be flat.

So if that happens, for the rest of the year relative to your $48 million or approximate guidance for the year how much of a hair cut would you have taken because of the Euro decline? $2 million, I'm assuming, something like that?

Yes. I would say blended overall year-over-year probably maybe a little more than $2 million is probably a fair gauge of the impact of the Euro year-over-year.

And was the reduction, albeit quite relatively small on the guidance on sales, was that mainly because of the Euro or just a caution of the economy that we don't know how the economy's performing, and we may be seeing a little bit of impact on procedures?

Yes. I would say it's a couple things. Number one is clearly we're coming out of maybe a softer Q1. And between the AlboGraft transition issues that we described and the export issues that we described being down by about 50% or so in the quarter, there's probably 40% or more of your guidance revision. And so coming out of that weakness, I think you expect those things to repair over time. But they do repair over time. It does take a few quarters maybe. And given the broader economic difficulties, I think it made sense to wind up where we wound up in terms of guidance.

I do have a couple more questions, but let me not -- let me jump back in queue and let anyone else jump in, and then we can come back.

(Operator Instructions)

You have a question from the line of Robert Faulkner of Redmile Group. Please proceed.

Hi. Good evening, gentlemen.

Hello, Rob.

I joined a few minutes late, so forgive me if you covered this. But you talked about filing a 510k for the graft in the US. Do you have anything in guidance for that?

No. We've kept it out of guidance just to -- in case we don't get it in '09, I don't want to have to come back to you and say, we didn't get it, so we're pulling down guidance. So that's not baked into guidance for '09.

And when did you file it?

I think we made our first filing, God, Q2 '08. And we sent back a set of questions within the last three months, Rob. And the good news out of it is we don't think there's a clinical trial involved. So that's real good news.

Okay. And do -- I guess you don't. Do you want to be in the business of saying when you think you'll get it?

Well, you've been good enough to ask this question for the last three conference calls. And I'm still no closer to giving you a good answer. I would say it feels like it's within 12 months. But I always get burned when I try to predict when the FDA is going to say yes.

Okay. Okay. And perhaps you ran over how transition to your own sales force from, let's say, Edwards is going in Europe, but I may have missed it.

Yes. Rob, I'll take that. This is Dave. Actually, I think it's going real nicely. We've had a real nice professional level of cooperation from Edwards. And remember this transaction is just a month and a day old now.

Yes.

So it's still very new to us. But we have been very busily filling orders over there selling to European hospitals. And I'd say the early indications are good, with respect to the type of business that we got. But I'll also caution us that it is just a month, and it's probably too soon to tell. But I'd say logistically things are going just fine.

Okay. So does that mean you keep most of the business that they had or -- ?

So when we were on this call eight weeks ago, we gave guidance that in '09 we would see a positive impact of sales, gross margin, and almost entirely dropping down the operating line, in '09 again, of EUR300,000.

Yes.

And so I would say that number right now is wrapped up in our '09 guidance.

Yes.

And I guess I'll stop there.

So you're sticking with that, and it's going as planned so far, even if we're just a month in?

That's right, Rob. And I'd throw in one more thing, which is we opened our mouth the last time and said we're going to do EUR1 million extra in sales in 2010.

Right.

So that's additional guidance where we actually dipped into 2010 to let you know about our bullishness about that product.

Yes, okay. And if and when it gets to the US, what kind of impact do you think it can have on your business? I guess one way of thinking about it is what your typical customer already uses for grafts that you could take away from somebody else.

Right. And we think it's about $180 million worldwide, Rob, and maybe $90 million of that sits in the US.

Yes.

You're going after a significant market. And one of our issues in the US has always historically been we've got these great sales reps, but they're going after $20 million and $40 million and $50 million niches. And so we're quite optimistic about finally sticking them on a much larger revenue base than we've been able to historically. So we're real -- that is a big part of this story is getting that thing from Europe to the United States.

Okay. So of $90 million, your customers use how much of that? Or is it all $90 million?

Yes. I mean, we're in touch with -- I've got to say I always think that we're 40% to 50% geographically penetrated worldwide. Let's just call it that in the US. And so we're going after 50% of that with the customers that we talk to.

Okay. Good. Great. Okay. That's it. We have -- that's it. And we'll come back if we have anything more.

Thanks, Rob.

Your next question comes from the line of [Myank Danny] of Cowen and Company. Please proceed.

Hi, guys. I just had one question on guidance again. How conservative is your guidance right now, do you think? Because I know you had to redo your old guidance just about a month ago. So how should we think about that?

Yes. Thanks for the question, Myank. This is JJ.

Hi.

Yes. I think we feel good about this revised guidance. Clearly it's not -- a position we would particularly want to be in to be revising from the previous guidance that we've given you. But given the events of Q1, the effects of the general economy on distributors internationally, which was really pretty dramatic, I think we felt that they were reducing their inventories fairly dramatically given their environment over there and given the large one-time event of the AlboGraft-direct transition, which was not in place at that time.

So clearly it wasn't something that we were going to bake into guidance at that time. Those are two pretty large factors in the revision. So I would say, all things considered, moving forward, if we understand those and we think they're going to unwind over time, which we do, then we're dealing with the broader economic difficulties on the business. And I think we feel pretty comfortable that that the numbers that we've given you are reasonable.

And I'd take another shot at that, as well, to supplement JJ's answer in that we've been public -- this is our 10th quarter or 9th quarter, I think. And we've always hit our own guidance with the exception -- this is our first downward revision of our sales guidance. So we've been relatively conservative with these numbers historically. And this is just a first-time event on that.

Your next question comes from the line of [David Gold] of [Merrilyn Nexus]. Please proceed.

Yes. Hello, everyone. This is actually [Dominic Simone].

Hello Dominic.

Hi, guys. I know David's on the line as well. So anyway, quick question. Could you please -- I don't know who, maybe JJ or David speak generically about the financial condition of the Company in terms of liquidity and access to capital? I'm asking this because I think we welcome these strategic moves that we've seen taking place in Europe.

For example, the acquisition of AlboGraft and Biomateriali and so on are long term positive, though -- you need to finance inventory and so on, and you need access to capital to do those, and also potentially acquisitions. Should we expect financing or to see the Company some time in '09 raise capital in a way or another or not?

No. I would characterize -- to answer the first part of your question, I would characterize the financial condition of the Company as extremely strong. We have a $17.3 million cash balance. We have virtually no debt. We have a $10 million untapped revolver. If our guidance implies about $1.6 million Op income for the balance of the year and you add back non-cash items, you can get to nice cash generation through the balance of the year.

So you've got a Company with a very strong balance sheet generating cash, and puts itself in a good position to do these types of strategic things. So the termination of the distribution agreement is a great case in point. It was very easy for us to make that decision and buy that piece out, given that we had a $21.3 million cash balance at 12/31, 2008. So I would say we've got nice flexibility from a financial strength standpoint. And that's a nice position to be in.

And Dominic, this is Dave. I would just add in, you know, you asked about, well, is there dry powder for deals? And I'd certainly say that in addition to what JJ said, even if you took a snapshot right now with $17 million plus in the bank, no debt, plus that $10 million untapped revolver, so that gives us let's call it $27 million. You subtract out maybe $5 million of cash that you want to leave as a buffer. You're still talking about $20 million or so of liquidity with which to execute these strategic transactions.

What kind of multiple do you pay? Do you pay a one-time sale and buy a $20 million revenue business, or two-time sales and buy a $10 million? That, of course, depends on the attributes of the business. But that probably bounds the upper end of the discussion. And so you still have a fairly wide range of strategic options with respect to acquisitions and other types of transactions. And that's not even counting in the future cash generation ability of the business, which JJ described.

Okay. Okay. Good. Good. So -- and lastly, are there any remaining transactions like Biomateriali or AlboGraft that you could engineer in the next few quarters in your existing portfolio?

Can I ask you to ask that question again one more time? I missed the third word. Is it contractions?

No. It was not well asked. So let me try again. In your current existing product portfolio, are there opportunities to reacquire or control assets like you did with AlboGraft or with Biomateriali left that you could work on in '09 and 2010? Or you think the next addition to products would have to come from outside?

You know, Dominic -- this is Dave. I would say there is nothing. From a product control standpoint, there's nothing that stands out as quite as immediately available. We do have an option to acquire that carotid patch. But that's not for another four or five years. And so in terms of anything that's imminent in terms of a buying out of a distribution right or something like that for a product line, nothing immediately comes to mind.

Okay.

I would say from a product line perspective, that's true. But as you know, we've been voracious acquirers of our distributors over the years. And so if you took the same concept of what we did to Italy three years ago or two years ago, and what we did to AlboGraft just now with Edwards, we're basically buying out the front end of the company. We have that -- we have access to doing that in a variety of distribution markets. We're direct in probably two-thirds of Europe. And then we're only direct in Japan and elsewhere. So you look at places like Australia, South Korea, places like that, you can always do that.

Okay.

And, Dominic, this is JJ, and I guess I would finally add that that excludes anything coming out of R&D and regulatory. So we got six approvals this quarter. To the extent that we get more approvals, you've got opportunity there. And to the extent that our investments in R&D produce new products that we may tell you about in the future, then there will upside there as well.

Yes. Okay. Good. Thanks a lot.

(Operator Instructions)

You have a follow-up question from the line of Larry Haimovitch of HMTC. Please proceed.

I'm glad to see there's lots of questions. This is good. So two questions from me. One, in terms of your reduced guidance, are you seeing any impact from the economy on the business? I would think modest or little, but just curious if you're seeing a little bit or just being cautious on the guidance.

Larry, I'll take that. This is George. I do feel like in Q1 we did see a little bit of it in terms of, and I think we've talked about this a little bit in the call, but the hospitals and the distributors getting a little bit skittish about having a financial investment of inventory on their shelves. We believe and we hope this is a one-time adjustment that we've been through.

But again, I don't really know anything about this economy more than you guys know from reading The Wall Street Journal than I know. So we'll see what happens in the future. It's my general sense since we work in the carotid arteries, the thoracic and abdominal aorta, and the femorals, it's my general sense that if any of us needed these bypasses or these interventions that we wouldn't let them slip for too long.

I think the procedures are still taking place. All the information that I have in front of me right now is that the procedures are still taking place around the world. But who knows? We did see something in Q1. And you're seeing us get a little bit -- pulling in our horns a little bit on guidance. So let's see what happens next. But we don't think the procedures are stopping. We think it's a one-time stocking issue.

Thanks, George. Dave, a question for you. Is your acquisition pipeline as full as it has been in the past? I know you're very active in that area. And are you seeing changes in valuations? Obviously public valuations have dropped substantially. Are you beginning to see or have you seen the private market valuations come into a range where you're feeling more hopeful about getting some deals done that you'd like to get done?

So the pipeline, I would say it's not materially different from what I've seen before, Larry. I do think that I see more companies that are early-stage that are in need of capital or even companies that are further developed but that are losing money and also that are in need of capital. I see more of those opportunities these days. Obviously I completely agree with you that to the extent any of our targets are publicly traded, they've dropped down with the tide. But in terms of the privately held companies, I would say not necessarily.

I still think that if you're a privately held vascular device entrepreneur, let's say, and your little company is generating cash, you might be hard-pressed to be convinced that your company is worth 50% of what it was worth a year ago. And so these people can be fairly tenacious about value. So I would say not all these privately held entrepreneurs have received the email about valuation yet. But I don't know. We'll see. We'll see how it all plays out.

Okay. Good. Thanks, Dave. Appreciate it.

Thank you.

There are no further questions in the queue at this time. I would like to turn the call back over to Mr. George LeMaitre. Please proceed.

Thank you very much. And thank you, everyone, for joining us. And we look forward to our next call.

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