LeMaitre Vascular Inc (LMAT) 2009 Q3 法說會逐字稿

Welcome to the LeMaitre Vascular's Third 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, Chris. Good afternoon and thank you for joining us for our Q3 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 statements 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 will now turn the call over to George LeMaitre.

Thanks, J.J. I'll start with a brief recap of our 20-month bottom line turnaround program and then I'll discuss our Q3 highlights. Dave will provide a business development update and J.J. will conclude the call with some thoughts on our financial results.

It seems to me that Q3 2009 underscores the turnaround that we embarked upon in February 2008. This cost-cutting and corporate re-engineering program was executed against the backdrop of the 2008-2009 recession. We first became cash positive in Q2 2008. We then became operating income positive in Q3 and in Q4 we went net income positive. In Q1 2009, we bought out the Edwards European elbow graft distribution rights and more recently we have produced two clean quarters of $1 million in operating profits and $2 million in cash flow.

Our $23 million cash balance is now higher than it was before the turnaround began, despite the $4 Edwards payment. As you have seen, some of this cash is now being used for stock repurchase program and, as always, we will continue to selectively search out acquisitions.

I believe our company is now a more stable, durable and profitable organization, thanks to this turnaround program. Let me now tell you about the third quarter. Top to bottom, I was quite pleased. Here are your three headlines. Number one, we posted record sales of $13.3 million. Number two, we posted a record $1.3 million operating profit, and, finally, number three, we posted record cash flow of $2.9 million.

As to our first headline, sales increased 11% to $13.3 million in Q3 2009. After stripping out currency and XenoSure, our apples-to-apples sales grown rate was 10%. During Q3, we saw our hospital customers bounce back after reducing inventory levels in Q1. Strong Q3 result in our open vascular category appointed for most of the 10% growth, driven by all six of our open vascular products. There were no laggards.

Geographically we saw a broad-based organic sales growth, 8% in North America, 12% in Europe and 21% in Japan. We ended Q3 2009 with 56 sales reps, up from 49 a year ago. We have been selectively adding less-experienced, lower W2 North American sales reps in 2009. This new rep model contains costs while allowing us to add feet on the street in smaller cities like Memphis, Tennessee and Madison, Wisconsin.

With respect to our second headline, Q3 2009's $1.3 million of operating profits compares favorably to the $170,000 operating profit we reported in Q3 2008. This was our fifth consecutive quarter of adjusted operating profits, whereas in previous quarters, we achieved profitability by cutting costs. At the heart of our record Q3 profitability was 10% organic sales growth and a better gross margin. Combined, these two improvements overcame a 7% year-over-year increase in operating expenses.

Regarding our third headline. Record $2.9 operational cash flow increased our cash balance of $23million at September 30, 2009. Given our recent profitability and current market evaluation, we have elected to double the size of our stock buy-back program to repurchase up to $2million of our common stock through December 31, 2010. I believe LMAT represents an attractive investment opportunity and this buy-back program reflects our ongoing commitment to increasing shareholder value. This $23million cash balance, combined with our 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 now like to talk briefly about a new product introduction. In Q3 2009 we initiated a limited European launch of the UnBalloon. The UnBalloon is a catheter-based, expandable nitinol cage which aids aortic stent graft implantation. We have now successfully completed 19 cases and will probably be executing a broader European launch in Q4 or in Q1 2010. The UnBalloon has CE marking and we will soon be filing a 510k in the US. We believe the annual world-wide market for stent graft modeling catheters to be in the $20 million to $30 million range and to carry a 10% to 20% annual growth rate tied to the rapid adoption of stent grafting. My sense is that the UnBalloon will shine in the thorax and will compete in the abdomen.

I'd like to conclude my remarks by reiterating the three headlines. Number one -- we posted record sales of $13.3 million in Q3. Number two -- we posted a record $1.3 million operating profit. And finally, number three -- we posted record cash flow of $2.9 million in the quarter. I will now turn the call over to Dave Roberts, our President.

Thanks, George. I'd like to update you on the two product lines we added to LeMaitre Vascular's sales bag earlier this year, XenoSure and AlboGraft as well as add a little further color on UnBalloon and our Endologix distribution.

In January 2009 we began distributing XenoSure, a bovine pericardium patch used primarily during carotid endarterectomy surgery. For clarification, on October 1, we rebranded PeriPatch to the LeMaitre own trademark XenoSure.

Sales of XenoSure in Q3 2009 increased 42% sequentially from Q2 to $333,000. As a reminder, LeMaitre Vascular has an option to acquire XenoSure beginning in January 2014. We were also pleased with AlboGraft sales in Q3 2009, our second direct-to-hospital quarter. With the handoff of customers complete, AlboGraft continued to build sales momentum in Q3, increasing 13% sequentially versus Q2. We continue to work towards an AlboGraft 510k in the United States.

Turning to UnBalloon, in Q3 we initiated a limited launch and had our first commercial sales of the device. For background, the UnBalloon was developed from technology we acquired from Arizona Heart Innovative Technologies in December 2007. As part of that transaction, LeMaitre Vascular paid $400,000 in up-front consideration and we owe the seller approximately two times our first full year's sale. We expect that this earn out will not be expensed, but will impact cash balances starting in Q1 2010.

On a final note, on August 11, 2009, we announced that we extended our exclusive distribution of the Endologix Powerlink stent graft in 12 European countries through June 30, 2013. In Q3, we placed our first stocking order of IntuiTrak. In October, we had our first hospital sales of this new delivery system and we are pleased to report we have proctored a handful of successful cases. With that, I'll turn it over to J.J. Pellegrino, our Chief Financial Officer.

Thanks, Dave. I'll start by highlighting some key elements of the Q3 financial results and conclude with a few remarks about our 2009 guidance. As previously mentioned, organic sales growth rebounded by 10% in Q3 2009, growing over $1.3 million from Q3 2008 levels, with our vascular category increasing 16%, endovascular increasing 1% and general surgery decreasing 2%. Sales growth in our open vascular category was due to the increased size of our North American sales force, higher average selling prices in North America and the transition to direct distribution of AlboGraft in Europe.

Our endovascular results can be attributed largely to our AnastoClip and target devices. In fact, in recent quarters, AnastoClip sales may have been hampered by minor deployment issues, which we have now addressed. With regards to our stent grafts, recent competitor product launches and softness in distributor purchases have applied pressure to sales. We continue to invest R&D and selling resources towards these products with the goal of carving out an appropriate ownership slice of this large and growing market.

We are also hopeful that the UnBalloon will have a halo effect on our stent graft sales. Organic growth increases were broad-based across geographies too. Versus Q3 2008, many of our foreign geographies performed well in the quarter, including France up 46%, Japan up 21%, Italy up 22% and Germany up 13%. These gains were partially offset by sales to European distributors which were flat year-over-year. In the United States, sales increased 8% in the quarter, aided by the addition of 7 new sales reps.

Turning to our Q3 2009 gross margin. We are pleased with our 560 basis point increase from Q3 2008. The increase was mainly a result of the reduction in inventory write-downs versus the year-earlier period, improved manufacturing efficiencies, higher average selling prices in the US and our AlboGraft direct initiative. It is also worth noting that the Q3 2009 gross margin of 73% caps a steady improvement recorded in the quarter since Q3 2009.

Turning to the bottom line, our operating margin in the past two quarters has been solid, increasing from 8% of sales in Q2 2009 to 10% in Q3 2009. In fact, excluding the one-time charge in Q1 2009, we have posted positive operating income in each of our last five quarters. This profitability and our growing cash balance positions us to take advantage of investment opportunities such as acquisitions, additional R&D engineers or sales reps or further share repurchases.

Turning to our guidance, the Company increased its 2009 full year sales guidance to $50.4 million to $50.6 million from $48.25 million to $48.75 million previously. The company also increased its 2009 operating income guidance to $1.4 million from $250,000 previously. Guidance figures exclude future acquisitions, foreign exchange rates, distributor terminations and factory consolidations. With that, I will turn the call back over to the operator for Q&A.

(Operator instructions)

We will pause momentarily to compile a list of questions. Our first question comes from the line of [Mayank Gandhi]. Please proceed.

Hi guys, this is on behalf of Sara. Can you just quantify the 4 things you mentioned for gross margin implement? Would you be able to quantify?

Yes. I can give you sort of directional answers, I think. This is J.J. Thanks for the question. I would say the AlboGraft piece is probably worth 0.7% or so, and the manufacturing efficiencies may be around 1.0% or so and the inventory pieces and the higher ASPs probably a bit more than that.

Okay. That was very helpful. And just going forward. So, how sustainable do you think this gross margin implement is? And this is in the context of your sort of intermediate to long term goal of increasing the gross margin to the mid 70s. Do you feel that is achievable in the near term?

Yes. I guess I would say first you think of those manufacturing efficiency improvements that we talked about as not recurring. That said, the ASP piece and the manufacturing efficiencies piece I think you're still going to see improvements over time. And you might get 100 basis points sort of in the next couple of quarters or something like that. I wouldn't say a lot more than that, but maybe in that range over the next couple of quarters might be reasonable.

Okay. And then on just the share repurchase strategy. You've increased, doubled the repurchase plan, yet you've only bought a limited number of shares. So do you reconcile that? Do you have a target in mind or how are you approaching this whole share repurchase activity?

Yes, thanks. That's a good question. I don't think we're necessarily -- and clearly, we're not committed to buying $2million as an absolute target. I think this plan is in place to absorb excess supply and we don't necessarily need to get to a predetermined figure. If the market dictates that we buy 5,000 shares a week or 10,000 shares a week, then we'll evaluate as we go along and do what's reasonable at reasonable prices. We're still convinced that the stock is a bargain for shareholders and a good idea for the company, a good investment for the company.

And so, given our bullish outlook, I think it makes sense to continue with the buy-back, and in addition, maybe there's a piece of you that says maybe it's a good thing that there hasn't been a lot more shares bought back by the company because the market maybe doesn't have an interest in selling at these reduced prices and that's probably a positive signal to us as well.

Actually that was my question. Do you have sort of a price point in mind when you talk about share repurchase?

Go ahead, George.

Mayank, this is George again. You know, obviously we're not going to do anything stupid like buying stuff way up there, but we still feel you look good on multiple revenues to entity values so you still feel it's a dramatic value. And so while we still think it's a dramatic value, we're going to keep buying. But I think we have a general sense of what medical device companies are worth and I don't think you'll see us bypass that general period or that place.

Okay. That's helpful. And any update on the clinical trials for UniFit and the thoracic stent?

Sure. I can give you both of those, Mayank. The UNITE trial has gained some momentum. We are now at 44 implants as of today with ten in the queue for this quarter-ish over the next 90 days or so. So effectively, you're halfway implanted in the UNITE trial and these next ten cases are going to get you dramatically past halfway. That trial has been sped up by a number of factors recently. We've expanded the site number from around I think 16 to 21, and we also, I think we talked about this on one of the calls, we brought in the TT introducer. We brought that over from Europe. It's our own in-house introducer.

And we replaced the old Cook introducer which was sort of an old device with that. And it's really made the cases go better and sped up the trial a little bit. We also, and you can see this from the income statement, we've also been spending more money in R&D and, of course, as you know, part of that R&D bucket is the clinical trial department. We now have -- I think we have four or five folks in clinical right now and we used to have two or three people when we first started doing these calls. So we put more resources at it and it's gotten some momentum. That's the UNITE side.

On the Intrust side, which is the thoracic side, we've had several back-and-forths with the FDA over the last roughly year and a half and we are getting there. I think we started out with something like 100, 120 questions. We are down to our last two questions and we are sending the answers in presently. We never really can predict when we get a yes out of the FDA and I think everyone on this call knows the FDA has gotten a little cautious with passing out those yeses to people lately. But I feel like we're getting close and we're still committed to getting into this Intrust thoracic trial.

Okay. Thank you very much.

(Operator instructions)

Our next question comes from [Larry Haimovitch] of HMTC. Please proceed.

Good afternoon, gentlemen.

Hi, Larry.

Very, very good quarter. I have three questions. One, Japan was notably strong. I wonder if you could provide any color on that at all, specifically, was there any distributor stocking or anything unusual because I don't remember Japan ever being that strong.

Okay, well, first I want to just -- last year, apples-to-apples, I believe, and I'm going from memory here, Larry, I think in calendar '08, Japan was up like 23%, 25%, apples-to-apples, so it was a good geography for us last year. It continues to be decent this year. In Q3, specifically to your question, we got approvals of the InvisiGrip Vein Stripper in Q2 and we got approval of the single lumen embolectomy catheters in Q2 as well. You're seeing some of that take place over there right now.

And no, it's not really about distributor stocking orders. As you know, we are quasi-direct over there. We have three sales reps on the ground. Italy, like Japan, you're never really direct -- you're always going through a multi-layer distribution channel. But we are sort of direct over there and distributor business takes up less of a percentage of our business than you'd think over there.

Can you give us some sense of order magnitude about how big Japan is -- relative -- you may not want to get into details, but--

Sure. I will, just because you're asking about Japan, I want to focus us. It's really -- unfortunately, it's not a material piece of LeMaitre. We had thought about putting it underneath the OUS category and we just pulled it out this time. I'm going to say, roughly speaking, it's 3% to 5% of LeMaitre Vascular.

Okay, so it's still very small but obviously contributing nicely?

Correct, and in fact, to springboard off that, Larry, the three geographies that we're real excited about, sort of what I'll call the virgin territory geographies are France, Italy and Japan. These are 60 million, 60 million and 128 million geographies where, in each place, we have two to three sales reps and you can hear that you need a lot more sales reps in those places. There's a lot of 6 million person cities in those countries that we need to fill in so it should be relatively good growth for a relatively long time in those three countries.

Okay. George or anyone, my second question: you've talked about the sales reps, you've added more. Probably a little early to think that they're at their best production or maturity. Should we expect the sales reps to continue to grow in terms of their contribution, the newer sales reps, of course I'm talking about?

I'd say yes, definitely, Larry. I think we started with this new model about 12 months ago and it really got steam in terms of hiring only 6 or 7 months ago. Approximately a third of the US 33-person sales force is this new model and we're very optimistic about how the new model's working out. And as I said, the key here is that it lets us cover places like Portland and Denver where we couldn't put a full W2 $150,000 body into those territories. So it should -- it's way better with 14 product lines to have someone knocking on hospital doors in Portland than not, and that's the hypothesis behind this change.

Okay. And then, third question. I'm impressed by what I call operating leverage this quarter that on a good sales growth, you really saw some very nice margin improvement. Is the business at that bit of an inflection point where we can continue to see that kind of operating leverage, sales growth at 10%, 12%, whatever it turns out to be, where you can see a significantly higher margin and leading obviously to better operating profits.

Yes, Larry. This is J.J. Thanks. I would say, if you look back historically over the last three to five quarters, you will in fact see nice leverage already coming on to the P&L and I think if you look at selling and marketing, you see it coming down from the 40s somewhere, down to 33%, 34% which is nice to see G&A ticking down a little bit, maybe from 22% or so down to 19% or something like that. And R&D, we're, by design, keeping flat or so as a percent of sales as we try to invest more in R&D and product development. And so you've seen an 8% op income number and a 10% op income number in each of the last two quarters, respectively.

Where it goes from here is a good question and I guess I would frame it initially by saying if you look at our peers that are doing well, they're sort of in the 15% to 25% op income range. With LeMaitre having sort of a mid 70s gross margin, I don't see why we couldn't get there over time and that certainly seems doable to me. We'll probably comment more on this so you'll learn a little bit more about this when we give our guidance for next year.

So if we look at what could be possible, you could be a 75% gross margin company with roughly 55% or 60% operating expenses leading to a 15% or 20% operating margin as business matures and continues to benefit from crossing the line, so to speak?

Yes, that doesn't seem unreasonable hearing you say that.

Okay. Great. Thanks guys. Congrats again.

Thanks, Larry.

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

I was wondering if you could give us a little more color on the sales force model in terms of how do you compare the ramp up period to productivity or (inaudible - microphone inaccessible) and what level do you (inaudible - microphone inaccessible) put them in a whole bunch of different places that you don't have the full W2 guys out now.

Jeff, I'm real sorry. This is George. I don't know if other people had a hard time hearing you, but I'm having a very difficult time hearing you. I wonder if you could rearrange something at your desk right now and try asking that question again.

Sure, hold on. Hold on one second. Is this better?

Much.

Okay, sorry about that. Can you just talk about the new sales force model and where -- how long it takes to get them to peak efficiency and at what level or what number do you think you'll get to with that type of sales person?

Okay, great. And, in fact, Larry asked at the beginning of that question and I didn't mean to dodge it. How long does it take these guys to get up to speed? I think in the old days when you hired an experienced medical device rep, you're probably thinking six months until they get really going and I would say maybe you can add 2 to 3 months onto that where we do have to do a little bit more intensive training with them, a little bit more OR type training and clinical training and teach them the ins and outs of the veins and arteries. So maybe 9 months you can think of like that. Another part of your question was what percent of our sales force ultimately becomes this lower W2 rep. Is that your question?

Yes, I guess, in theory you could put a tremendous number of these people out there. How many people are you envisioning in this particular model?

Okay, so broadly speaking, and I'm only thinking out now 6 months here. It feels like if we're at 56 sales reps worldwide right now, it feels like we're on the path to go, in the immediate future, towards 60, 62 of these things. I wouldn't be surprised if we showed up for the conference call in Q1 with 61 sales reps.

Right now, as I mentioned, a third of our US sales reps are this model. We're hoping to hang on to a lot of those sort of grandfathered larger W2 reps. They're doing great. We're perfectly happy with those guys. So it's really about turnover and how fast they turnover. And, as you know, this recession, right now when you hire someone, they stay at your company for an awfully long time. Historically, that has not been the case. At LeMaitre Vascular, we have had some turnover in our sales force but right now we're not losing anyone. So the transition to this lower W2 model is a little slower than we anticipated except that we're hiring a little bit faster than we anticipated.

I think one of the things that you all saw in Q3 was when LeMaitre started thinking hey, things are going pretty well in Q2 and Q3, I think we've been turning up the speed of the hiring of the new reps a little faster than we even expected because we felt like things went a little better than we anticipated and so if that continues, you could see us twist the dial faster. But for now, maybe if we agree we're trying to go to 61, 62 over the next 3 to 5 months, that makes some sense and I don't really want to give guidance beyond that because we don't know where it goes.

Buried inside your question is a point I like, which is, it does feel like this gives the model the correct proportion of W2 costs versus sales growth that I can get out of these sales reps and that's the whole reason we did this thing was before we felt like we were having a hard time bringing it together in the US with $150,000 W2, they weren't quite making ends meet for us and now at 80, 85, it's a lot easier.

Great, thanks very much.

Thanks a lot Jeff.

Our next question comes from the line of Mayank Gandhi of Cowen & Company. Please proceed.

Hi guys, just a couple of questions. On FX, given just the currency volatility, do you guys have any plans on -- I guess how should we think about that? Obviously it's going to have a favorable impact on the top line but how does it flow through the P&L? If you can walk us through that, it would be great. And then the second question on -- any color on the kind of activity you're seeing on the business development side? That would be great. Thank you.

Okay. I'll take the FX question. Thanks. This is J.J. Yes, obviously we've seen a lot of volatility in FX over the last number of quarters and sort of up in the 150 Euro and dollar over the beginning of '08 and then just sort of a big decline and then now we're climbing back up again, so on balance in '09 it hasn't helped. I would say, going forward, that may change. The effect throughout the P&L I guess you could think of it as sort of 50 to 60% getting its weight out of the bottom line, that is to say we think we're 50 to 60% naturally hedged as expenses in Euros come back through the P&L and get translated into dollars.

Okay, thanks.

And, Mayank, it's Dave. Thanks for the question about the biz dev. I think it's been a good year for business development from the standpoint we did that PeriPatch deal early on. We did the Edwards buyout at the end of Q1 and then we had that Endologix renewal for just about 4 years and that was in August.

So from sort of a biz dev standpoint it's been a nice year for us. Obviously the PeriPatch and Edwards termination and direct AlboGraft sales -- those both seem to be working out nicely for the Company. We're optimistic about the Endologix distribution as well. It's still early days with the IntuiTrak but it seems to be a good match for us so we're excited about that as well.

And then, if your question is a little bit deeper vis--vis acquisitions, obviously we do acquisitions as a company. We've done ten in 12 years and so we're always out there mining the pipeline trying to figure out what's out there and what's reasonable and what fits with us strategically.

All I can tell you is we're very diligent at looking at opportunities right now and as soon as we find one that we feel like fits our standards, we'll bring it to you guys and we'll announce it. So, at some point you'll hear about something but for the time being we like the three business development transactions we did earlier this year.

(Operator Instructions)

There are no further questions at this time. Mr. LeMaitre?

Thank you, Chris. And I'd like to thank everyone on the phone call for participating and we will look forward to our next phone call with you all.

Thank you for your participation in today's conference. This concludes the presentation. Have a good day.