LeMaitre Vascular Inc (LMAT) 2010 Q1 法說會逐字稿

Welcome to the LeMaitre Vascular First Quarter 2010 Financial Results Conference Call. My name is Crystal Lynn and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

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, Crystal and good afternoon and thank you for joining us for our Q1 2010 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 2009 10-K and subsequent SEC filings including disclosure of the factors that could cause actual results to differ materially from those expressed or implied. During this call, we may discuss non-GAAP financial measures. Please refer to our earnings release and our website, www.lemaitre.com for a discussion and reconciliation of non-GAAP financial measures.

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

Thanks, J.J. Top to bottom, I was quite pleased with Q1. We're growing sales and we're growing profits. As has become my habit, I'd like to summarize the quarter with three headlines. Number one, we posted record sales of $13.8 million, 22% ahead of Q1 2009. Number two, we recorded an operating profit of $1.3 million; and number three, we received six regulatory approvals in the first four months of 2010.

As to our first headline, we posted record sales of $13.8 million in Q1 2010. Sales increased 22% over Q1 2009 with all three major geographies contributing. The Americas were up 20%, Europe increased 23% and Japan 34%. By category, open vascular increased 28%, endovascular was up 12% and general surgery increased 9%.

Q1 marked another impressive quarter for our open vascular category. In fact, for the last four quarters, vascular sales growth has been 6%, 16%, 23% and now 28%. Our continued success in this category is due to our broad pallet of gold-standard niche devices and the continued worldwide strength of the LeMaitre Vascular brand. In Q1, we received substantial sales growth contributions from our Valvulotome AlboGraft vascular graft and XenoSure biologic patch. In Q1, our vascular category accounted for 69% of our sales.

Also in Q1 2010, our endovascular category experienced a small rebound. Our VascuTape Radiopaque Marking Tape, UniFit Abdominal Stent Graft and Powerlink Abdominal Bifurcate Stent Graft all contributed to our 12% endovascular growth. In Q1, our endovascular category accounted for 24% of our sales.

The increased size of our 61 rep sales force was a key driver for Q1, particularly in North America where most of the recent sales force expansion has taken place. Overseas, we continue to benefit from our emerging direct sales outfits in France, the United Kingdom and Japan which reported sales growth rates of 64%, 58% and 34% respectively. With our array of 15 vascular devices, opening up new direct sales territories tends to produce solid sales growth. The continued build-out of our sales force is a time-tested expansion avenue for the company, though we are committed to doing it at a measured pace with an eye on profitability.

With respect to our second headline, operating profit in Q1 2010 of $1.3 million was a four-fold increase versus $284,000 of adjusted operating profit in Q1 2009. We achieved this profit growth through sales increases and a higher gross margin. Over the last four quarters, we have posted operating profits of $1 million, $1.3 million and $1.2 million and now $1.3 million. These operating profits and resulting cash flows have allowed us to increase our cash balance to $24.1 million, providing us with strategic options such as acquisitions and stock buy-backs.

Regarding our third headline, the first four months of 2010 were particularly fruitful on a regulatory front and this is starting to produce a steady flow of new product launches. Indeed, we have received the following six regulatory approvals in 2010 -- AlboGraft Polyester Graft in the US, Anastoclip GC in the US, TAArget Thoracic Stent Graft in Russia, the UnBalloon in Russia, AlboSure Polyester Patch in Europe and finally, 5 Plus Over-the-Wire Catheters in Europe.

These regulatory approvals continue to feed new products to our 61-rep worldwide sales force. Notably, our expanded US sales force now has two launches in 2010 -- the AlboGraft and Anastoclip GC, a grippier version of our vessel attachment system.

In summary, Q1 2010 was another excellent quarter in which sales growth and a healthy gross margin combined to produce solid bottom line results. I'd like to conclude my remarks by reiterating the three headlines from Q1 2010. Number one, we posted record sales of $13.8 million, 22% ahead of Q1 2009. Number two, we posted operating profit of $1.3 million, and number three, we received six regulatory approvals in the first four months of 2010.

I will now turn the call over to J.J. Pellegrino, our CFO.

Thanks, George. I will now say a few words about our operating results, share buy-back program and guidance. As we heard from George, Q1 sales growth was strong, both domestically and overseas. In addition, our core product line continued to show significant gains.

As we move down the P&L, there was more good news. We reported a gross margin of 74.7% in Q1, up from 72.8% in Q1 2009. This 190 basis point increase was driven by manufacturing efficiencies and higher average selling prices and was partially offset by a change in product mix. Of note, our gross margin in the last two quarters has approached 75%, a level which we believe is sustainable over the coming quarters.

Sales and marketing expenses increased 18% in Q1 2010 to $4.9 million, representing 35% of sales, versus 37% in the year-earlier quarter. The spending increase was driven mainly by our larger direct sales force as well as increased commissions. We ended Q1 2010 with 61 sales reps versus 52 at the end of Q1 2009.

General and administrative expenses increased 4% in Q1 2010 to $2.6 million, representing 19% of sales versus 22% in the year earlier quarter. R&D expenses increased 17% to $1.5 million in Q1 2010, representing 11% of sales versus 12% in the year earlier quarter. All told, Q1 2010 operating profit was $1.3 million versus a Q1 2009 adjusted operating profit of $284,000.

Sales growth and the expanded gross margin drove this four-fold improvement, partially offset by increased operating expense. While the total adjusted operating expenses were up 13% year-over-year as a percent of sales, they decreased from 70% of sales in Q1 2009 to 65% of sales in Q1 2010. Operating margin for the period was approximately 9%.

Turning to the balance sheet, our cash balance as of March 31, 2010 was $24.1 million with virtually no debt. Cash and marketable securities increased by $98,000 during the quarter. This was the result of $1 million in net income and $562,000 of depreciation, amortization and stock-based compensation and largely offset by $982,000 in annual bonus payments and $315,000 of share repurchases.

Turning to our share repurchase program, in Q1 2010, we purchased approximately 66,000 shares at a total cost of $315,000. This brings the total shares purchased since inception to 183,000 at a total cost of $837,000 or $4.57 per share. As of March 31, we are about halfway through our $2 million program and continue to purchase shares on the open market.

Now, for our Q2 and 2010 guidance -- despite the recent potential weakness in the euro, we continue to expect 2010 sales of $55 million and are increasing our 2010 operating income guidance from $4.5 million to $5 million. This annual sales guidance implies 10% organic growth versus 2009. In addition, we expect Q2 2010 sales of $13.7 million and operating income of $1.1 million. This quarterly sales guidance implies 10% organic growth versus Q2 2009. Guidance amounts exclude the effects of future acquisitions, operational restructurings, foreign exchange rate fluctuations and distributor terminations.

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

(Operator Instructions)

Your first question comes from the line of Sara Michelmore of Cowen & Company. Please proceed. And she just took herself out. We have no other questions at this time.

We do have one from the line of Sasha Kostadinov of Shaker Investments. Please proceed.

Yes, hi, guys, congratulations on the good quarter. My question pertains to the leverage that you guys experience on your sales and marketing line. It looks like roughly you had the same margin of sales and marketing expense in the quarter as you did the prior quarter. Do you expect that you can get further benefits or is this where you're going to plateau out at?

I'll take a shot at that and this is George. I'll have J.J. come in and help me out if I don't do it right here. I'm unclear if you're talking about sequential or year-over-year?

Sequential, I guess.

You're asking sequentially. I'm ready -- on a year-over-year basis, I do know that we did produce leverage in that category. I believe it was 37% of sales in Q1 '09 and 35% of sales in Q1 '010. On a sequential basis, as you're pointing out, it is flat at 35%. As to whether we'll get more leverage on that line, I don't know. The place that I'd look for leverage at this company right now would be the G&A line, to start with. Obviously, we don't need to hire that many more in the executive suite as we grow larger.

Okay. And can you talk a little bit about the product launches, timing -- the new product launches. The timing of them and potential -- what kind of goals are you looking to meet, maybe, in the first year or so?

Sure, sure. I mean, first of all, I'd start off any kind of conversation about product launches by saying everything we talk about we've baked into our 2010 sales guidance.

Okay.

And in general, I'm a believer that these launches always take longer and they last longer than you think, and so, I feel in some ways, we're talking about 2011 issues when you look at those six regulatory approvals that we talked about, but maybe if we could drill into a couple of them and give you some nuggets on the important ones.

It feels to me like the important ones of the six regulatory approvals we showed you today -- the important ones are probably the AlboGraft in the US and the details on that are we received the 510(k) in either January or February. My memory escapes me right now. And we've done about 15 implants so far. The product reception from the doctors seems to be excellent, and perhaps, more importantly, the product reception from our sales channel -- and we have 35 US sales reps -- has been excellent and they seem to be embracing it. That could be a big one over time.

We guesstimate that the market for Dacron grafts in the United States is approximately $80 million and shrinking to the tune of about 3% to 5% a year, and obviously, we start with 0% market share and we probably have one of the top five or seven peripheral vascular sales channels in the US. So that, combined with an excellent device, should give us some nice sales over time. So, that's the AlboGraft.

The other sort of significant launch which we're excited about is the Anastoclip GC. And GC is short for grip clip. And what the issue is there is that the clips that we're putting out now are grippier and hold onto the vessels better than the clips we are currently selling under the brand name Anastoclip. We received that 510(k), I believe, literally Monday of this week. So, the launch really isn't for another three to five weeks.

My guess is we're going after the number one product line possible improvement on that Anastoclip device and it's a good sized device -- it's $2 or $3 million in sales, so you could have a good impact on that. But again, it's just starting. We've done the beta trials, if you will. We've done the 30 or 40 cases that we feel like we need to do after we receive the 510(k), and so far, the product works great with the surgeons. They're really excited about the fact that the clips hang on even tighter than the old clips.

Those are the US launches and maybe one other launch is the UnBalloon, which was launched in Q1 of 2010. I think we got the European approval in Q4 of 2009 and we still await the American approval. I would say we don't have enough information on that launch yet. It's just beginning just somewhat like the AlboGraft and the Anastoclip launches in the US.

Okay. With respect to the Anastoclip GC, so that's -- are you replacing that -- the old product with that product and is there -- and if that's the case -- is there a revenue benefit because you charge more for the product?

Yes, in fact, we're not going to -- we're going to -- we call that a soft switch -- when we leave the old catalog number out there for the doctors to take because a lot of them are going to tell me "I would like to use the old product because it doesn't penetrate." This new one is a penetrating device, so we think that it's a lot better, but our general approach is we'll let the doctors vote with their feet over time, and the catalog numbers are not wide enough where you wouldn't just want to keep all the catalog numbers open. So, no hard switch on that one, we'll go with a soft switch.

Okay, thank you.

(Operator Instructions).

And your next question comes from the line of Sara Michelmore with Cowen & Company. Your line is open.

Hey, guys, can you hear me?

Hey. How's it going?

Good, good, thanks. Just one question. On your guidance, you assume the sales guidance organic growth of 10% and you had in Q1 organic growth of 18%, so can you help us just reconcile that?

Yes, sure, as you know, Myank, FX has a pretty significant effect on our top line. We have about 42% of sales outside of the US and so, FX, while it helped in Q1, is actually going to reverse, or has been reversing and if it stays where it's at now at about 133, we'll continue in that same direction over the rest of the year.

And so, you had a combination of things. You had a weaker prior year last year and then you had a nice recovery throughout the year in '09 in Q3 and Q4, so you had pretty strong Q3 and Q4s comparably. And so, on the whole, we think a 10% sort of year-over-year growth rate is pretty nice for us. We're pretty pleased with that and if it blends that it's higher at the beginning of the year and sort of muted during and throughout the year because of FX and because of varied comps quarter to quarter, then I think that's pretty good.

Okay. And on gross margin, you highlighted just a couple of quarters of strong gross margin performance. What's the -- I guess, how much upside can we expect going forward? Is there -- how do you achieve -- if you look at 7.5% plus gross margin, is that achievable in the near term?

We've rotated up to this sort of 75% range. We're pretty happy with that. I think it compares pretty favorably to our peers, as you know, and I would expect us to stay in this range for a while unless we do something structural. So, you may creep up a little bit with price increases over time and you may creep up a little bit with [cases in] and cost efficiencies that you get in the back room over time and those would be great, but I would say step function improvements come with a little bit larger pieces.

Okay, and just finally -- can you clarify -- I think the utilization of NOLs, I thought the tax saved was a little bit higher than I thought it would be in this quarter. Can you just tell me -- tell us just how much NOLs have utilized and how should we think about a tax rate for this year?

Yes, so, our effective tax rate was around 21% in the quarter. I think at a high level, you can think of us rotating up to the 38% to 40% statutory rates over time. What's going on is we've become profitable and so we have used a significant amount of NOLs, maybe $3 million, $3.5 million or so over the last three quarters-ish, and we're also using up R&D tax credits that we've been accumulating.

And so, as we work through those, we'll start rotating up to those higher statutory tax rates. We've got about $1 million of NOLs left or so, maybe a little less, and R&D tax credits may be in the $500,000 range, something like that. So, you can expect that to happen over the next quarters.

So, the -- so for the 21% for this quarter, should it -- rate should go up from these levels, is that --?

Yes, I think so. You'll probably make your way up to the high 30s, 40% over time, over quarters.

Okay, that's all. That's all for me. Thank you.

(Operator Instructions). And there are no further questions. I would like to hand the call back to George LeMaitre for closing comments.

Okay, thank you Crystal Lyn, and I'd like to thank everyone for participating and we will look forward to our next call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.