LeMaitre Vascular Inc (LMAT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 LeMaitre Vascular, Inc. Earnings Conference Call. My name is Kianna and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre. You may proceed.

Thank you, Kianna. Good afternoon and thank you for joining us for our Q4 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 believe, 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 will now turn the call over to George LeMaitre.

Thanks, J.J. I see Q4 as continued validation of our performance in Q2 and Q3. We have now transformed LeMaitre Vascular. We're growing sales, making profits and accumulating cash. I'd like to summarize Q4 with three headlines.

Number one, we posted record sales of $13.6 million, up 12%. Number two, we tripled our operating profit to $1.2 million, and number three, excluding share repurchases, cash increased by $1.7 million in the quarter. As to our first headline, we posted record sales of $13.6 million in Q4 2009. Sales increased 12% over Q4 2008 and our major geographies all contributed; the Americas were up 11%, Europe increased by 13% and Japan grew 27%.

By category, open vascular increased 25% and endovascular decreased 10%. Q4 2009 was another impressive quarter for open vascular, extending our success in this category. In fact, for the last three quarters, vascular sales increases have been 8%, 19% and now 25%. Vascular now accounts for 64% of our business. Our continued success in open vascular is due to our broad palette of gold standard devices, the introduction of the XenoSure biologic patch and the increased size of our direct sales force.

Indeed, we've been pleased with the continued rollout of our lower cost rep model in North America, putting more feet on the street and fortuitously, the reason recession enabled us not to sacrifice on personnel quality in this transition. We had 61 sales reps at year-end 2009, up from 52 at year-end 2008. And although we added 11 reps, sales and marketing expenses as a percent of sales decreased from 36% in Q4 '08 to 35% in Q4 '09.

Despite these solid results in vascular, our endovascular category has not met expectations as of late. Our largest stent graft customer retired in 2009. We felt this impact most strongly in Q4 2009. We have also seen some of our larger stent graft competitors launch new products over the last year. We hope to see our endovascular category strengthen over the coming months and quarters as we broaden our customer base and continue to improve our technology. Endovascular now accounts for 27% of our business.

As you may recall, our business plan is built for the ups and downs of both vascular and endovascular and over 12 public quarters, we have seen our sales growth come first from endovascular and now, more recently, from open vascular. The guidance which J.J. will detail at the end of this call implies 17% sales growth for Q1 and 8% sales growth for the full year 2010.

With respect to our second headline, operating profit in Q4 2009 of $1.2 million was powered by 12% sales growth and a significant expansion in the gross margin. During the last three quarters, we posted operating profits of $1 million, $1.3 million and now $1.2 million. On an annual basis, this transformation into a profitable company is stark.

In 2008, we posted an operating loss of $2.9 million, while in 2009, we posted operating profit of $1.9 million. This is a $4.8 million swing in just one year. This bottom line improvement was achieved in three phases, SG&A cost cutting in 2008, gross margin improvement in 2009 and now, sales growth in the back half of 2009. Our $4.5 million operating profit guidance for 2010 reflects our belief that operating profits are here to stay.

Regarding our third headline, cash increased by $1.7 million to $24 million in Q4 2009. Indeed, our cash balance increased by $6.7 million in the last nine months, despite $520,000 of stock repurchases. Our 2010 guidance suggests we will continue to generate cash on an operational basis.

A quick note on R&D. Expenses increased 32% in Q4 2009 over the year earlier period. In fact, R&D expenditures represented 13% of sales in Q4 2009 versus 11% in the year earlier quarter. This investment is starting to bear fruit in the form of a host of product launches, including AlboGraft in United States, the UnBalloon in Europe, AnastoClip GC in Europe, and InvisiGrip in Japan. Also of note, we have enrolled patient number 52 in our 90-patient UNITE Study, which we hope will bring our UniFit stent graft to the United States.

In summary, Q4 2009 was an excellent quarter, which validated LeMaitre Vascular's transformation into a profitable company. I'd like to conclude my remarks by reiterating the three headlines from Q4 2009. Number one, we posted record sales of $13.6 million, up 12%. Number two, we tripled our operating profit to $1.2 million and number three, excluding share repurchases, cash increased by $1.7 million in the quarter.

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

Thanks, George. I'd like to provide a brief update on the three product lines we added to the sales bag in 2009 -- XenoSure, AlboGraft and the UnBalloon.

In January 2009, we began distributing the XenoSure bovine carotid patch and it was a real home run for us. Sales of XenoSure grew sequentially over the four quarters of 2009 from roughly $100,000 to $200,000 to $300,000 to $400,000. As a reminder, LeMaitre Vascular has an option to acquire XenoSure beginning in January 2014. AlboGraft continued to show momentum in Q4 with sales increasing 12% sequentially over Q3. Also on January 14th, we received 510(k) clearance to market AlboGraft in the United States and are launching this product in Q2.

Turning to the UnBalloon, following Q3's CE approval, in Q4, we completed 30 pre-launch cases and have since initiated a market release of this device in Europe. We're pleased with the device's technical performance and look forward to a broader European rollout. In the US, we continue to work towards 510(k) approval.

With that, I'll turn the call over to J.J. Pellegrino, our CFO.

Thanks, Dave. As previously noted, Vascular's sales were up markedly in Q4 2009, benefiting from strong results across all product lines, the inclusion of XenoSure and the stronger euro. Of note, AlboGraft was up 61%, Valvulotome was up 24% and catheters up 9% and Remote Endarterectomy up 15%.

AlboGraft sales continue to benefit from the March 2009 direct-to-hospital transition. All other Vascular growth was driven by higher ASPs, a stronger euro and more feet on the street. As George touched on, Q4 2009 endovascular decline was largely the result of decreased target stent graft sales.

Geographically, Q4 sales in the Americas increased 11%, while sales in Europe and Japan grew 13% and 27% respectively. North American sales were driven by higher ASPs, the inclusion of XenoSure and more sales reps. European sales benefited from strong results from our newly direct Italian and French subsidiaries.

Our gross margin was a standout in Q4, up from 69.6% in 2008 to 74.9%. This 530 basis point improvement was driven by manufacturing efficiencies, higher ASPs and the stronger euro. Q4 2009 operating profit was $1.2 million versus $354,000 in Q4 2008. Sales growth and the expanded gross margin were the drivers. For the full year, operating profit was $1.9 million versus an operating loss of $2.9 million in 2008. Of note, full year 2009 operating expenses were 4% less than in 2008.

Q4 2009 net income was $1.3 million or $0.08 per diluted share, versus $312,000 in Q4 2008 or $0.02 per diluted share. Excluding $427,000 of share repurchases, cash and marketable securities increased by $1.7 million to $24 million at December 31, 2009. The increase was largely the result of $1.3 million in net income and $635,000 of depreciation, amortization and stock-based compensation. Sales and marketing expenses increased 9% in Q4 2009 to $4.8 million, representing 35% of sales in Q4 2009 versus 36% in the year-earlier quarter. Operating leverage was due to reduced rep commissions, our lower cost rep model and lower marketing expenses.

G&A expenses increased 6% in Q4 2009 to $2.4 million, due principally to additional spending in Europe and the stronger euro. G&A expenditures represented 18% of sales in Q4 2009 versus 19% in the year earlier quarter. R&D expenses increased 32% to $1.7 million in Q4 2009, a result of higher product development, regulatory and clinical affairs spending. R&D expenditures represented 13% of sales in Q4 2009, versus 11% in the year earlier quarter.

At a high level, we are pleased with our expense control in 2009. In fact, as a percent of sales, adjusted 2009 operating expenses were 66% versus 72% in 2008. We did this while increasing our R&D spend. SG&A operating leverage was a critical part of the bottom line turnaround.

In Q4 2009, we purchased $427,000 of our own shares. Repurchases since the program began in August 2009 through December 31, 2009 totaled $521,000 at an average price of $4.44. Our Board of Directors has authorized the repurchase of up to $2 million of shares through December 31, 2010.

Turning to our guidance, the company expects 2010 sales of $55 million and operating income of $4.5 million. The company also expects Q1 2010 sales of $13.3 million and operating income of $750,000. Our sales guidance implies reported growth of 8% for 2010 and 17% in Q1 2010. On an organic basis, implied growth rates are 9% for 2010 and 14% for Q1 2010. Guidance amounts exclude the effects of future acquisitions, foreign exchange rate changes, distributor terminations and factory consolidations.

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

(Operator Instructions).

Our first question comes from the line of Sara Michelmore of Cowen and Company. You may proceed.

Yes. Thanks for taking the question, guys. J.J., just quick on the Q1 guidance, I suspect, just based on the mathematics there, that maybe the gross margin is a tick down from Q4. And I'm just wondering if you can kind of just talk through the gross margins in Q1 and what is sustained from Q4 and what was sort of the stars aligning in the quarter?

Yes, thanks for the question, Sara. We're obviously pretty pleased with the gross margin increase quarter-over-quarter to 530 basis points or so and I think it was 370 basis points in the year. And so, that was some pretty nice increases. And at the 75% level or so, I guess I would say, I would expect to generally remain in that general area, maybe some incremental improvement along the way, but nothing truly structural unless we had some kind of operational changes or factory relocations or things of that nature.

Okay. And I know you guys have been in kind of cost savings or improving efficiency mode for a while. Are there things in 2010 which you're hoping to increase your investment in? Should we be thinking about increased investment capacity for certain areas of the business?

Yes. Well, I can -- you can look at Q4 and start to see some of the expense structure creeping back a little bit, certainly more investment spending in R&D up to about 13% of sales from 11% and 12% in that range. And so, I think you can expect to see more of that. That's probably part of the answer to your previous question as well in Q1 vis--vis the bottom line. I think there is a balance here between dropping profits to the bottom line and keeping expenses tight and putting money, investing towards growth and that's sort of the balance we tried to walk with the guidance that we've given you.

Okay.

And Sara, this is George. I'd also jump in on that, thinking about investments for this coming year, we definitely walk in with a full complement of sales reps. I think last year, we came in with 52 reps. We walked into the year with 52 reps and this year, we'll walk into the year with 61 reps and we might even boost that up, to sort of say, 63 or 67 reps as the year goes by. So, maybe if I could summarize, maybe R&D and sales reps get some additional allocation next year.

Okay. And just a follow-up for you, George, on the endovascular business. I understand that you've had some new product launches from competitors and I'm not sure that there's much that will change that competitive dynamic, but if you could just kind of address what you think the outlook is for that business generally? Thanks.

Sure. We're actually pretty optimistic, Sara, there. We -- one thing that might change the outlook there is that we do have some things in place. We do think we'll be able to improve our technology as the year goes by. You know we've been trying as hard as we can not to sort of preannounce launches. But there are things inside of us, inside of our company that we're working on.

I'd also say that as the years have gone by and we've noticed this customer sort of graying, if you will, we have put in place sort of the broadening of the customer approach over there and so, I think you'll start seeing some of that kick in. So, I'm relatively optimistic about that.

Okay. Thanks for the color.

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

Thank you, Operator. Oh, how they mangle my name. Hi, gentlemen. Good quarter. J.J., looking at the press release, Q4 sales reported at 12% but organic is 4%. Was that all currency exchange or was there some new products that got put into the mix that affected that disparity?

Yes. So, FX was really a big driver in the difference between reported and organic Q4 results. I think there were sort of about a 5% plus swing in FX period-to-period and so, clearly that was a big impact. The second impact, Larry, was the addition of XenoSure, the biologic patch, to the product line and stripping that out of the period also had an impact. So really, that was your two big deltas between reported and organic.

So, foreign exchange more important than the additional product, but both were contributors?

Yes, yes. Very significant impact on FX. And it is worth pointing out, Larry, that in Q1, that will unwind against us. So sequentially from Q4 to Q1, you're going to see the euro change and turn around on us.

Yes. You anticipated my next question because I would imagine your guidance for Q1 has to take that into effect and the euro has come off pretty significantly in Q1 versus Q4, so that will certainly impact your first quarter, won't it?

Yes. In Q4, I think the effect was 148 or so. And in Q1, if you take a blend and then understanding where you are now, you're probably at 138 or so. So again, a pretty big swing now in the other direction.

And Larry, I'd even jump in on a sequential basis. If you didn't have that change in the euro, we would be sitting here projecting a record quarter for you for sales. And it is that material, because as you know, for a small company, we take about 40% of our sales in euro-denominated currencies, or euro currency.

So good news, it helped Q4. Bad news, it's going to bite you somewhat in Q1?

It's a fair way to say it.

R&D up significantly. Q4 looked, if I do a big, quick calculation, it's 12.5%, 13% of sales. That's high historically. Are you going to be there for all of 2010 or is that going to come down -- was that just a consequence of someone usual spending in Q4 that won't continue for the full year?

Right. That will come down little bit, Larry, probably into the 11% to 12% range. We do feel like, as a small company, we sort of owe a little bit extra to that R&D bucket. But we are really excited about what's happening here which is we are almost starting to overwhelm our sales force with these new launches. I mentioned the AlboGraft in the US, UnBalloon in Europe, AnastoClip GC in Europe and InvisiGrip in Japan. So, yes, it's starting to bear fruit but is an expensive process, as you know.

Yes, and speaking about the UnBalloon, would you care to give us an update all about US status -- US progress?

Sure. Well, I would start by saying we were thrilled to get that AlboGraft 510(k). We haven't made too much of a big deal on it, but we got the AlboGraft 510(k). I know it's unrelated in Q1. So, we're really happy about that, that came maybe a little bit earlier than we were expecting.

I would say the opposite's true on the UnBalloon which is -- it's been a bit of a slog. The FDA has come back to us with a couple rounds of questions; I think we probably talked about this on our last conference call. Their questions are related to how does the nitinol basket on our device impact the stent grafts, the various stent grafts that are available in the US? We have great animal testing and great clinical testing showing we're fine. It's just a -- it's a matter of communicating that to the FDA. It should be fine. They definitely are not indicating to us that they want to get into human clinical trials. So, maybe if I could put a bracket around this, late 2010.

Okay. So, you think it's going to be pushed back toward the back end of the year now with the FDA moving slower?

I would say so, yes, just to be conservative there, Larry.

Okay. Great. Okay, guys. Thanks very much.

Thanks a million, Larry.

(Operator Instructions).

Kianna, we are seeing three folks in the queue there. I don't know if you're --

Our next question comes from the line of [Tom McGuire]. You may proceed.

Okay. Thanks for taking my call, gentlemen. I have a big picture question. In last quarter's conference call, mention was made that if you look at your peers that are doing well, that they sport operating margins of 15% to 25%. And I inferred from your comments that over time, that there's no reason why you shouldn't be able to get there also.

So, my question is how long of a process will it take for you to get to, say, the mid-teens operating margin? And I do understand you're working with new product launches and increasing the sales force and R&D is high as a percent of sales, all that. But what kind of time frame before you get to the mid teens and secondly, is that high end of the range, that 25% operating margin, is that really doable over time?

Okay. I -- get to that 25% margin. That does sound a little high, although I guess we start out by saying when we walk into this discussion with a 75% gross margin, it probably makes us more likely to do a 15% to 20% margin than the average bear, because most of our peers are carrying around sort of high 60s gross margins. So, we sort of get out of the starting blocks with 6 or 7 points on the other folks.

Your question about timing though, the bigger picture is when does this come? I would say it's not about timing as it relates to days on the calendar. I would say it's about timing as it relates to how big do we get? And I feel like when you enter the $75 million to $100 million revenue range, you're probably much more ready to get a 15% or 20% gross margin than we are right now. And then, how do you get there?

So, if we do a -- what I'll call a transformational acquisition, you probably get there relatively quickly, one year, two years, four years, but if we continue to grow at 10%, 5% a year, it probably takes you longer to get there. So in short, I would say, when we get to $75 million to $100 million company, I do firmly believe we can deliver operating margins of the type you're talking about.

And Tom, this is Dave. I would just add on there that those 20% operating margins, those are something you'd typically see in much larger companies. Even if you look at peers that are still many times larger than us, like Integra or Merit, they're only at a 14% and 13% operating margin. So to George's point, we walk in at a pretty reasonable level. But I agree that if we did a larger acquisition, you might be able to see movement in that direction.

Okay. Thanks very much. That clarifies it. Great.

Thank you.

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

Good afternoon, guys.

Hi, Jeff.

How are you doing? Quick question, on the SG&A line, you guys came in below my expectations and you were able to add the additional reps. You talked a little bit about maybe adding a few more for this year, but not quite as many. Can you give us some sense of is there additional leverage there, it didn't sound like it and also any sense between the lower cost rep model and a more traditional rep, what you're looking quota-wise?

Okay. Let me take the back of that question first and then we'll go back to the front. No, there is no difference at all between what we're asking the various sales reps to do and just because you mentioned it, approximately 50% of our domestic sales force is now part of this, what we call Tier A sales force. So, we're half transitioned.

When you talked about more leverage, I didn't exactly understand leverage of what kind, but if you're talking about will we continue to realize savings as this program rolls out, the answer is yes because we're halfway through the transition although it is worth pointing out we've got a lot of great reps out there from the old model and we're not out there chasing them of this out of this company. They're fantastic reps are doing a great job. So, it just -- as we go and as they drop off, you replace with the lower price model.

Can you give us any sense of terms of the older model versus the Tier A, what they're carrying in either commission or quota?

Sure. They're carrying the exact same sales bag. I know that wasn't exactly your question. The exact same sales bag --

But a nice nudge.

No, I'll answer it. Exact same sales bag, exact same quota and roughly speaking, the W2s are somewhat -- the old W2, the old model I should say, is sort of around a median of 145 and the new W2 is a median of about 85.

Great. Thanks very much.

Thank you.

Your next question comes from the line of Bill Wolfenden of Cottonwood Investments. You may proceed.

Good afternoon, gentlemen.

Hey, Bill. It's nice to hear your voice.

Good to hear you guys, too. A couple questions. Kind of to the two callers ago, I guess on the operating margins, for the 2010 guidance, it looks like -- I like to look at the world from incremental margins. So, your incremental revenue growth that you're guiding is a little over $4 million and you're guiding to incremental profit, operating profit growth of about $2.5 million. So, that's like a 60% plus incremental margin, flow-through margin, if you will. Is that the kind of margin that we should think about going forward on the flow through?

Yes. Bill, this is J.J. Thanks for the question. I think in 2010, at least, I'll mention a few points. One is you've got the euro going against you versus recent quarters and versus the prior year and that's having a little bit of wind in your face. You're still, I guess, point number two, is you're still 1 and 1.2, 1.5 times where you had been previously and at about 8% of sales for a margin, so generally in the range of where you've been in previous quarters for the full year.

And again, I think this is a balance. I think with the 75% margin and with the leverage, we can probably get on the selling and marketing line, you can craft this thing anyway you want, but part of this balance is to keep growth going while maintaining a reasonable bottom line. So, it's not always going to be linear. We had really nice progress last year on the bottom line. I'm really aggressive on cost cutting and cost constraints throughout the year. You saw them leaking back a little bit in Q3 and more in Q4. But I think what we're saying now is we're holding the line on that through 2010.

Okay. And then, George, it sounded like from answering that same similar questions that you guys were thinking of sort of long-term sales growth before acquisition of maybe in that 8% to 10% range, is that fair?

Yes and our guidance here does indicate that that's what we see happening. And Bill, the organic growth I think was 8% three years ago, 7% two years ago, 4% last year and our guidance here is 9% for this coming year and those are your four pieces of data around that topic.

Okay. And then, the endovascular customer, I -- you guys kind of cut out. I think you said that a customer, a large customer retired. Was that just like a high volume doctor or something?

That's correct. It was a high volume German doctor.

Got it. And then lastly, the buyback level, it looks like you were buying stock in the low to mid $4.00 range. Is there a stock price where you won't be buying stock or what sort of drives the buyback?

Well, I think at $4.50 or $4.40 in that range. We clearly feel like we're buying low and we're buying at a reasonable price. Certainly anything at or around or south of 1 times entity value to sales, we view as a good investment from our perspective. When you start to get substantially north of that and if our peers are, say, at 2 times, that's probably the bounds of the upper end of your range in terms of buyback valuations.

Great. Thanks a lot.

Thanks, Bill.

With no further questions in the queue, I would now like to turn the conference over to Mr. George LeMaitre for closing remarks.

Thank you, Kianna, and I'd like to thank everyone for participating today. Just a reminder that we will be speaking at the Cowen Conference in Boston, next Tuesday the 9th and at the Roth Conference on March 15th in Laguna Niguel out in California. We also look forward to speaking with you on our next earnings call.

Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation and you may now disconnect. Have a great day.