LeMaitre Vascular Inc (LMAT) 2009 Q2 法說會逐字稿

Welcome to the LeMaitre Vascular Second Quarter 2009 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, Janita. Good afternoon, and thank you for joining us for our Q2 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 and the information under the caption Risk Factors in our 2008 10-K and subsequent SEC filings, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

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

Thanks, J.J. I'll start by discussing our Q2 highlights. Dave will then provide a business development update, and then J.J. will conclude the call with our financial results. Here are Q2's three headlines. Number one, we posted a record $1 million operating profit. Number two, sales increased sequentially by $1.3 million to $12.6 million in Q2 of 2009. And finally, number three, we announced a $1 million share buyback program.

With respect to our first headline, Q2 2009's $993,000 operating profit compares favorably to the $869,000 operating loss we recorded in Q2 2008. This represents a full $1.9 million improvement from the year earlier quarter and was our fourth consecutive quarter of adjusted operating profit. At the heart of our record Q2 profitability was our continued ability to control operating expenses and improved gross margin and a sequential sales rebound from Q1.

In Q2 2009 we were able to reduce operating expenses by 17% versus the year earlier quarter. Year-over-year, we also improved our gross margin by 240 basis points, as a result of higher average selling prices and the direct to hospital AlboGraft transition. As you would expect, operating profits have a way of improving the balance sheet. Indeed, our cash balance increased by a record $2.6 million in the quarter.

As to our second headline, sales increased sequentially by $1.3 million to $12.6 million in Q2 2009. In Q2 we saw American hospitals and some international distributors return to more typical ordering patterns, after perhaps achieving reduced inventory targets in Q1. Strong results in our open vascular category accounted for most of our 11% sequential improvement and were driven by stalwarts such as the expandable LeMaitre Valvulotome, VascuTape and the Pruitt-Inahara Carotid Shunt.

Also contributing to the sequential rebound were two products which we recently added to our sales bag. PeriPatch and AlboGraft combined to increase sales by approximately $420,000 from Q1 to Q2. We ended Q2 2009 with 54 sales representatives, up from 50 at the end of the year earlier quarter. We may selectively add to this number over the coming months.

Regarding our third headline, given our recent profitability and current market valuation, we recently elected to execute a stock buyback program. The Board of Directors has authorized the repurchase of up to $1 million of our common stock on the open market through July 31st, 2010. We may also make stock repurchases under our Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so. This share repurchase program may be suspended or discontinued at any time.

I believe LMAT represents an attractive investment opportunity and this program reflects our ongoing commitment to increasing shareholder value. Our $20 million cash balance combined with our recently demonstrated ability to generate cash, should leave us ample resources for acquisitions, as well as internal investments such as R&D and the build-out of our sales force.

I'd like to conclude my remarks by reiterating the three Q2 headlines. Number one, we posted a record $1 million operating profit. Number two, sales increased sequentially by $1.3 million to $12.6 million in Q2 2009. And finally, number three, we announced a $1 million share buyback program.

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

Thanks, George. I'd like to update you on the two product lines we have recently added to the LeMaitre Vascular sales bag, PeriPatch and AlboGraft. In January 2009, we began distributing PeriPatch. PeriPatch is a bovine pericardium patch used primarily during carotid endarterectomy surgeries.

Sales of PeriPatch in Q2 2009 were $234,000, beating our expectations. Much as we had hoped, PeriPatch is proving to be a seamless fit in our US sales bag, complementing our Pruitt-Inahara Carotid Shunts. As a reminder, LeMaitre Vascular has an option to acquire PeriPatch beginning in January 2014.

We were also pleased with AlboGraft's first direct-to-hospital quarter. As a reminder, we acquired AlboGraft in December 2007 and negotiated the termination of Edwards worldwide distribution rights in March 2009. AlboGraft sales in Q2 increased by $288,000 from Q1, a reflection of the increased attention our sales channel can give this product.

The handoff of customers from Edwards to LeMaitre Vascular has been smooth and is now nearly complete. We continue to work towards an AlboGraft 510k in the United States. Like PeriPatch, AlboGraft fits well in our peripheral vascular sales bag and the synergies are substantial.

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

Thanks, Dave. I'll start by reviewing the Q2 financials and conclude with a few remarks about our 2009 guidance. Q2 2009 sales of $12.6 million were 1% below Q2 2008 sales of $12.7 million. The balance of my sales remarks will be made in comparable constant currency terms, which excludes the effects of foreign exchange and PeriPatch distribution. A reconciliation of these amounts to GAAP measures can be found on our website at ir.lemaitre.com.

For the quarter, sales increased by 3% year-over-year. Sales in the Americas increased 2% and international sales increased 3%. Year-over-year sales increases in the Americas were driven largely by strong results in our core vascular product line, including Valvulotomes and shunts. Internationally, strong sales gains in Italy of 82% and France of 36% were partially offset by continuing weakness in our distributor business.

By product category, in Q2 2009 open vascular sales increased 10%, endovascular decreased 9%, and general surgery declined 3%. Higher open vascular sales were driven by strong Valvulotome and shunt sales as well as an increased -- increases in remote endarterectomy and AlboGraft.

Sales growth in the endovascular category was negatively impacted by three products, the Powerlink stent graft, which we distribute for Endologix, our UniFit stent graft and our AnastoClip. We believe our Powerlink and UniFit issues were in part related to the European launch of the Medtronic Endurant abdominal stent graft. Indeed, sales of our target thoracic stent graft increased during Q2.

In July, we also began the rollout of our smaller TT sheath in Europe. We expect the sheath diameter reductions should have a positive impact on sales going forward. We also expect to launch the Endologix IntuiTrak in the back half of 2009 in Europe.

The Company reported a gross margin of 72.2% in Q2 2009, up from 69.8% in Q2 2008. The increase was driven by higher average selling prices, the recent direct-to-hospital AlboGraft transition in Europe, and improved manufacturing efficiencies. Gross margin improvements were partially offset by the change in foreign currency.

Operating expenses continued to remain under control. Q2 2009 total operating expenses were 17% below Q2 2008 levels, with lower spending across nearly all departments. We plan to continue to manage expenses closely and are pleased at the operating leverage that our income statement has begun to reflect.

In Q2 2009, operating expenses totaled 64% of sales versus 77% of sales in the year earlier quarter. In general, our cost cutting efforts have brought our expense ratios more in line with our peripheral vascular peer group.

Sales and marketing expenses decreased 18% in Q2 2009 to $4.2 million. We have recently implemented a two-tier sales rep compensation model, which allows us to hire into the smaller American markets by on-boarding less costly sales reps. As a result, we have been able to increase our rep headcount while decreasing total selling costs. We ended Q2 2009 with 54 sales representatives versus 50 at the end of Q2 2008.

General and administrative expenses decreased 12% to $2.4 million in Q2 2009, a result of general belt tightening. R&D expenses decreased 3% to $1.4 million in Q2 2009, as reduced product development costs more than offset increased regulatory and clinical spending. Q2 2009 operating profit was $993,000 versus an operating loss of $869,000 in Q2 2008. Continued expense discipline and the higher gross margin drove this $1.9 million improvement.

Net income in Q2 2009 was $925,000, or $0.06 per share, versus a net loss of $926,000 in Q2 2008, or a loss of $0.06 per share. On the balance sheet, our cash and marketable securities increased by $2.6 million during the quarter to $19.8 million. The increase was largely the result of changes in working capital items, $925,000 in net income, and $602,000 of depreciation, amortization and stock-based compensation.

Turning to guidance, we are increasing our 2009 sales guidance to $48.25 million to $48.75 million, from $48.0 million to $48.5 million. We are also increasing our 2009 operating income guidance to $250,000 from breakeven. This top and bottom line guidance excludes future acquisitions and changes in foreign exchange rates.

With that, I will turn the call back over to the operator for Q&A.

(Operator Instructions)

Your first question comes from the line of Sara Michelmore with Cowen & Company. Please proceed.

Great. Thank you for taking the question. George, could you just talk a little bit about the vascular growth in the quarter? Obviously quite a bit stronger than we had expected and I understand that some of that is from new products. But how much of the growth that you saw in sort of the core Valvulotome and other products here? Do you think is sustainable, or was this just an exceptionally good quarter in some of those product lines? Thanks.

Okay, thanks, Sara, and thanks for the question. Good question. So, if I could answer that sequentially first, of the, I think, $1.3 million of sequential increase -- 420 we can take out as coming from the increase in PeriPatch, as well as the increase in the AlboGraft device. And then a big part of what was left is those core vascular devices.

I will say one of the stories that keeps coming back at us is the open vascular category just keeps being strong. I think call after call, as I remember, I remember saying, wow, it's stronger than expected. So, I do think you can keep on relying on this as a very healthy category.

And to that point, we did just press across a pretty good price hike in the United States in Q3, starting July 1st. So, we are confident that growth will continue. And a lot of the -- the United States business is a little bit more open vascular and the European business is a little bit more endovascular.

Okay. And fairly good quarter in terms of gross margins, a bit ahead of our model, certainly. I know you did raise the operating income guidance. You beat our number by, I think, $0.5 million this quarter and you're raising the full year by 250. It suggests that the total operating income the next two quarters would be substantially lower than it was this quarter.

So I'm just wondering in terms of expense gating or things like that if there's -- if you expect to spend a little bit more in operating expenses or produce a little bit less gross margin, if there's an explanation just in terms of the expenses going forward. Thanks.

Yes, this is J.J. Thanks for the question, Sara. I think we're implying about $825,000 or so of op income given our guidance in the second half. As you know, there's some seasonality to this business. I think you can expect Q3 to be a downtick generally from a seasonal standpoint from Q2 and then a recovery in Q4. So I think you've got that issue to deal with.

In addition, I think you need to consider FX. And I believe FX is probably likely to continue to hurt you throughout Q3 or so and then maybe be a benefit in Q4. That remains to be seen. So between those two things, I think it's wiser to sort of temper expectations from a top and bottom line standpoint.

In addition, with specific reference to the bottom line, I would say our manufacturing facility in Italy takes the month of August off, as is customary in Italy, and that may have somewhat of an impact on the bottom line.

Okay. Sounds like a good deal to me. So in terms of SG&A and R&D, though, we're not -- there's nothing in the model there that suggests you guys are ticking back up to spending in either of those lines?

I would say, generally speaking, no. Although I think you've seen us be pretty frugal and cost conscious over the last number of quarters across all lines. I wouldn't be surprised if R&D ticked up a little bit from here and maybe that's the place where you see a little bit of movement. Otherwise, I would say generally fairly consistent numbers, I'd bet.

Okay. And just one last one for me on M&A. I know the activity's been fairly slow there. Are things starting to heat up there at all in terms of you guys finding targets that fit your criteria and willing sellers who are, I think, still a little bit fluid in terms of M&A activity? Thanks.

Okay, thanks, Sara. This is Dave. Yes, it's a good question. Obviously, if I step back and look at the big picture over the last decade, you know we've done roughly a deal a year. And we did the small PeriPatch deal at the beginning of this year and we also did the Edwards buyout at the end of March. So that absorbed a little bit of our focus, but certainly we're always keeping an eye out for what the next acquisition will be.

We're quite pleased with the status of the pipeline. Obviously, I get asked this question frequently on these calls and I'm never very specific about what's in the pipeline. But we're pleased with it. We do see, and I'm sure you've seen also, some transactions that have been announced by the Covidiens and Medtronics and eV3s. So we do see M&A activity out there taking place still at a somewhat comparatively high valuation. So that's a factor for us.

I do see in the pipeline more early stage sort of money-losing opportunities. And of course we're more focused on deals with revenue that are accretive. So it's -- I like the status of the pipeline. We're out there looking. And I would just lean back on the fact that we've done roughly a deal a year and at some point, people can expect another transaction out of LeMaitre. And we're just simply waiting for the right transaction at the right price.

Great. Thank you.

And your next question comes from the line of Larry Haimovitch with HMTC. Please proceed.

Good afternoon, gentlemen. Congrats on a good quarter. Dave or George, could you talk a little bit about the impact of the IntuiTrak in the -- in the European market? I know they're doing very, very well domestically. I'd love to hear your thoughts on what you expect overseas as you roll that product out.

Thanks, Larry. It's Dave. I'll take that and George can add in if he likes. Yes, so, obviously we've seen Endologix, a great company, reporting nice numbers in the US. And certainly I think there's a lot of enthusiasm about IntuiTrak in Europe. Obviously we don't distribute in all of Europe but we distribute in most of Europe.

We don't have the IntuiTrak system in our hands yet over there. We are expecting to get that, as we mentioned, in the back half of the year at some point. And so we're quite excited about it because we think that there are improvements to the system over the current Visiflex system. So we are excited and encouraged by that.

I'll also say, on the other hand, there's more competition in Europe, as you're well aware. The regulatory path there is a little bit different. We referenced in the discussion earlier the Medtronic Endurant launch, which, frankly, we hear back from folks in the field.

Medtronic's a sizeable company. That's a nice product line. So, there'll be comparatively more competition for us in that bifurcated endograft space with IntuiTrak in Europe than they're facing here in the US. I think Medtronic doesn't launch Endurant in the US for a little while.

So I want to temper expectations vis--vis IntuiTrak in Europe based on the heightened competition. But I will say we are excited about getting that product into our bag at some point in the back half of this year. And we hope to deliver good things for our company and our shareholders when we do.

Thanks, Dave.

Your next question comes from the line of Jeff Englander with Standard & Poor's. Please proceed.

Good afternoon. I wonder if you could just give us a little more color on the two-tiered sales reps, and also on maybe what the gating factors would be there in terms of you hiring additional reps.

Sure. This is George, Jeff. I'll answer that question. So, one of the things we found, our sort of previous model was trying to go more or less towards aiming towards a W2 of around 140. And we found it didn't allow us to go into some of the small regions, for instance like in Milwaukee or Portland. The sales volume just wouldn't support that kind of W2.

And so we wound up saying as we go higher, more of these territories, maybe we can try a different model, maybe we can get a little bit less experience in the medical device field. And so far, I tell you, we're very pleased with the model. And one nice thing happened as we got there into the new model, which is we realized that you have sort of more upwards W2 space for that sales rep. So if they turn out to be good, you can go from sort of 85,000 to 105 to 125. When you start up at 140 or 150, you don't have that far to go and then it starts becoming an uneconomic proposition.

So we've been quite pleased with the model so far. And, ironically, we think maybe that it'll improve our turnover and not make it worse in the sales force.

Gating items -- we're always constrained by our P&L, Jeff. We have a lot of people watching the P&L. And I would say we just have to add selectively. I mentioned in my comments that we'd be probably taking on more -- a few more reps as the next couple of months go by. So maybe you see us going up sort of the 57 to 59 range over the next couple of months or so.

The gating items we don't want to get ahead of ourselves. I think we caught ourselves in February of '08 having gotten a little bit ahead of ourselves and we had to pull back. And we'd hate to put ourselves in that spot again. But I will say the new W2 model makes it a lot easier to bring people onboard and it makes it easier to grow the gross number of reps without really blowing out the income statement.

Right. Thanks very much.

Thank you, Jeff.

(Operator Instructions)

And at this time there are no further questions. I would now like to turn the call back over to George LeMaitre for any closing remarks.

Thank you, Janita. And thanks to everyone for joining us today. We'll look forward to our next call.

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