LeMaitre Vascular Inc (LMAT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2010 LeMaitre Vascular earnings conference call. My name is Latasha and I will be your coordinator for today. At this time, all participants are in a listen only mode.

(Operator Instructions)

I would now like to turn the call over to Mr. JJ Pellegrino. Please proceed, sir.

Thank you, Latasha. Good afternoon and thank you for joining us for our Q3 2010 Conference Call. Joining me on today's call is our Chairman and CEO, George LeMaitre and Dave Roberts, our President. 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 in our website, www.lemaitre.com for discussion and reconciliation of non-GAAP financial measures. I will now turn the call over to George LeMaitre.

Thanks, JJ Top to bottom, I was pleased with Q3 for growing sales and posting record profits. I'd like to summarize Q3 with three headlines. Number one -- we posted record operating profit of [$2 million] and cash increased by $2.1 million. Number two -- we posted sales of $13.7 million, up 6% organically from Q3 2009. And finally, number three -- we're working on two initiatives to cut costs and increase focus. We're closing Brindisi and reducing our Target and UniFit stent graft investment.

With respect to our first headline, operating profit in Q3 2010 was $2 million, a 57% increase versus $1.3 million in Q3 2009. This record 15% operating margin was a result of 6% organic sales growth, a post-IPO record 76% gross margin and a 1% reduction in operating expenses. Our profitability is starting to become a good habit.

Over the last four quarters, we posted operating profits of $1.2 million, $1.3 million, $2 million and now, $2 million again. Particularly [with] our large presence in Europe, summer usually means a sequential slow-down in sales, so posting a $2 operating profit in the summer quarter speaks to our growing efficiency. Looked at annually, we entered 2010 projecting a $4.5 million operating profit. Thanks to better than expected domestic sales growth and tight expense control, we are now targeting $6.9 million of 2010 operating profit, up three-fold versus 2009. Our continued quest to become more profitable is also the driving force behind the two initiatives which I will discuss later in this call.

One consequence of increased profits is a healthy balance sheet. Before buy-backs, we produced $2 million of cash in Q3 2010 and we now hold $26.6 million of cash with no debt. This balance sheet liquidity will be deployed over time into our $5 million share buy-back program, acquisitions and international distributor buy-outs.

As to our second headline, we posted sales of $13.7 million in Q3 2010. Sales increased 6% organically over Q3 2009, led by 15% growth in the Americas. By category, vascular increased 15% organically, general surgery was up 8% and endovascular decreased 13%.

Q3 2010 marked another impressive quarter for our vascular business. In fact, over the last four quarters, sales growth in this category has been 25%, 28%, 20% and now 12%. And this category has grown in importance at the company. In Q3 2010 our vascular category accounted for 73% of sales versus 67% in the year earlier period. Our success in this category is due to our broad palette of gold-standard niche devices and our widening sales footprint. Even overseas, where our Target and UniFit stent grafts have struggled, our vascular surgery business was up 9% in Q3 2010 on a constant currency basis.

At quarter's end, we had 64 sales reps on the payroll. The continued build-out of our sales force is a time-tested expansion strategy for our company. With our new streamlined sales rep model, we are now able to grow our footprint even more aggressively. My guess is that we will end 2010 with 70 sales reps worldwide, up from 61 at year end 2009. Going forward, we may also expand our direct sales force footprint through international distributor buy-outs.

Turning to our third headline, we will be closing our 29 employee Brindisi factory and transferring our AlboGraft production to Burlington, Massachusetts. This will be our sixth factory closure since 2002. For the first nine months of 2010, sales of our AlboGraft accounted for 4% of our sales. In transferring production to Burlington, we believe we will produce $1 million per year in savings. The closure is anticipated to take place in December, 2010. The Brindisi employees went on strike October 4, returned to work October 20, and have agreed to work while separation terms are negotiated.

As to our second initiative, given the robust growth rates of our vascular business, we have started to re-deploy assets into this higher growth category. As part of this, we have elected to significantly decrease R&D spend related to our Target and UniFit stent grafts and we have suspended the Unite and Entrust trials in the US We estimate this will eventually free up approximately $1 million per year to either improve operating income or reinvest into the growth of our vascular business.

In Q3 2010, our Target and UniFit product lines accounted for 3% of our sales and declined 53% from the year earlier quarter. I do not expect this initiative will challenge our ability to deliver high, single digit organic sales growth in 2011. Indeed, once this transition is behind us, it may enable improved organic sales growth rates. In summary, Q3 2010 was another excellent quarter in which organic sales growth, a healthy gross margin and reduced operating expenses combined to produce record bottom line results and a strengthening balance sheet.

I'd like to conclude my remarks by reiterating the three Q3 headlines -- number one, we posted record operating profit of $2 million and cash increased by $2.1 million. Number two -- we posted sales of $13.7 million, up 6% organically from Q3 2009. And finally, number three -- we're working on two initiatives to cut costs and increase focus. We're closing Brindisi and we're reducing our Target and UniFit stent graft investment. I'll now turn the call over to JJ Pellegrino, our CFO.

Thanks, George. I'd like to talk about our four bottom line records in Q3 2010 and tell you about a possible Q4 2010 tax credit and then close with our updated Q4 and 2010 guidance. This was an exciting quarter from a bottom line perspective. We posted four quarterly records. Post-IPO record gross margin, record operating income, record operating margin and record net income. So what made Q3 such a profitable quarter at LeMaitre?

First, gross margin was exceptionally strong. We reported a gross margin of 76.1% in Q3 2010, up from 73 % in Q3 2009. The increase was driven by improved manufacturing efficiencies, higher average selling prices and favorable geographic mix. Of note, production expenses actually decreased year-over-year in the third quarter.

Another impressive result was the operating expenses level, down 1% year-over-year. Some of this decline can be attributed to the weaker Euro, which naturally lowers Euro-denominated expenses. Some of the decline can also be ascribed to the success of our lower cost sales rep model and some of it can be attributed to reduced operating, reduced spending on our Entrust trial, which had significant start-up costs in 2009. Combined with our gross margin, his 1% year-over-year spending decline produced a record operating profit and operating margin.

Moving to the bottom line, in Q3, our NOLs and other tax credits helped to keep our effective tax rate down. This allowed us to post record net income of $1.5 million and $0.09 per fully diluted share and earnings. I would now like to give you some information on a potential Q4 2010 tax item which would create a one-time increase in net income. At a high level, we are transitioning from a cumulative loss position into profitability which may allow us to use certain tax assets and create a one-time tax credit. If this occurs, it would increase net income by approximately $2 million to $2.5 million in Q4 2010. This would be an non-cash item.

Turning to guidance. We have increased our full year 2010 sales guidance to [$59 million], $55.9 million, which implies 12% organic growth versus 2009. We have also increased our Q4 2010 sales guidance to $14.3 million which implies 9% organic growth versus 2009. We increased our full year 2010 operating income guidance to $6.9 million and our Q4 2010 operating income guidance to $1.6 million.

Operating income guidance amounts exclude any charges related to the Brindisi production transfer. Guidance amounts also exclude the effects of additional restructurings, acquisitions, foreign exchange fluctuations and distributor termination. We will be giving full year 2011 guidance at our Analyst Day on December 2. With that, I'll turn it over to the operator for Q&A.

Thank you.

(Operator Instructions)

Latasha, there do appear to be five questioners, or four questioners there.

Yes. And your first question comes from the line of Mayank Gandhi. Please proceed.

Hi, guys. Thanks for taking my question. Just a -- start off with -- can you just comment a high level, what you're seeing in med tech, just macro trends, (inaudible) capitalization trends and how it affects you all and can you just touch up on how should we think about the sustainable organic revenue growth profile for the company going forward?

Okay. Thanks for the question Mayank. This is George. Those are both good questions. First of all, we thought a lot about -- a lot of people have been talking about procedures and deductibles and insurance. To be honest, we didn't see that at all. We had about a 5% price hike go through April 1 and we felt like it has not affected our business at all.

We're able to -- because we have European operations and US operations, we're able to pull them apart. In the US you see we had, I think, 15% organic growth in Q3, maybe 3% or 4% of that's price, 5% of that's price, but the rest is unit growth, so in the US, where I think the question is more aimed at, everything seems fine to us. We don't seem impacted. Over in Europe, too, we posted 9% organic growth in the open vascular category and that would be a hint that, at least in that category, it really hasn't changed anything.

So I would say we don't have too much information for you on the global question of how is health care changing in the US based on the external circumstances of the recession as well as Obamacare. Can you give me your second question again, Mayank?

Yes, just the -- kind of just the long term and going forward, how should we think about the sustainable organic growth through -- you have like -- you're projecting 12% for 2010. That's obviously higher than the past few years and then, just going forward, how should we think about that?

Sure. And, of course, underneath all this, you always know we're not going to -- we're not going to give guidance for 2011.

Yes.

We know that's more of a generalized question.

Yes.

So our guidance implies 9% organic Q4 growth and it implies 12% organic growth for the year. Also in the script you notice that I talked about next year being high single digit organic growth. I think you can think about that as a general place where LeMaitre Vascular feels comfortable. I am excited, as we sort of move away from this tough Target and UniFit stent graft business -- I am excited that this will release us to better organic growth rates than that, but we haven't seen it yet so I don't want to get too far over our skis on that.

Okay. And then to that point of Target and UniFit, is the -- you redefine those resources from R&D so is that kind of a new normal for R&D in terms of percent of sales or that's -- should -- that's not the case?

Right. That's a great question, Mayank. No, it's not the case. We do want to advertise that LeMaitre Vascular as a smaller company knows that it needs to be putting something like 11%, 12% of its sales back into R&D. You're looking at sort of an anomalous quarter on spend. This is not exactly who we are on the R&D line. So the money that we're going to be saving from reducing the investment in Target and UniFit will indeed be redeployed into the current product lines, Valvulotome, shunts, remote endarterectomy, et cetera. and will also be redeployed into newer product lines like the Unballoon and new platforms which we don't even have exposed to you guys yet.

Great. I'll let others ask questions. Thank you.

Thanks, Mayank.

(Operator Instructions)

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

Thank you, Operator. Hey, George, hey JJ.

Hey there.

A question on the last comment you made about the tax situation. I was trying to get a better understanding of it. Could you review it again and discuss the implications on cash flow? It sounded like it was going to be a very beneficial thing for cash flow, but I wasn't quite sure. So you would just mind reviewing it?

Yes, thanks. It's a big number -- I sort of blurted out there. It's a good question. It's actually a non-cash item.

Okay.

It's likely that we'll get a credit in our tax provision for $2 million to $2.5 million in Q4.

Okay.

This is basically a result of looking back 12 quarters or so and coming out of a cumulative loss position so as the company becomes more profitable, we're able to release credits to use towards the provision that we had previously. So this is a one-time, non-cash good guy to the P&L, if you will, of $2 million to $2.5 million.

Okay. George, the endovascular clearly has been disappointing. I want to understand a little bit more about what you talked about. Did I understand that you guys are just saying, look, this business is just not for us and we just want to pull ourselves away from it and concentrate where we're stronger -- is that kind of really the strategic message you're giving us?

More or less, Larry. I'd like to make a big distinction here between endovascular and stent grafts.

Okay.

So we have our own two native stent graft platforms -- the Target and UniFit. We're just -- we just found -- we've had a tough time with those over in our European markets and we felt like it defocused our emphasis on vascular surgery so before we let those get into our American sales bag, we just decided it was better off retreating from those two categories, largely based on the competition in those segments with the [Cooks, the MedTronics and the Gores]. We just felt like in vascular surgery, we bring something very differentiated and very exciting to the surgeon and in the stent graft business it was a little bit -- there was eight or nine guys out there selling tubes and we're not so sure what we bring to the party. So, yes, except I'd focus you on stent grafts. With endovascular, there's things like the Unballoon, things like VascuTape -- a number of items. We're more than happy to go into endovascular and it remains a very exciting field to be in.

George, you mentioned the Unballoon. I don't know if you made any specific comments. Is there anything you can update us on with regard to your progress on the regulatory fund with Unballoon?

Sure. The submissions on both sides of this ocean for Europe as well as the US will be going in probably late Q4 and this is for the revised Unballoon product, and we can expect to be out there whenever we get approvals from the two regulatory bodies.

And the US would be a 510K, I'm assuming.

That's correct.

Yes. So you've revised the product and you're submitting the revised protocols or revised information and then wait for the FDA to give you the go-ahead.

That's correct.

Okay. Great. Thanks guys.

Thanks a lot, Larry.

(Operator Instructions)

Your next question comes from the line of Alec with Granite Point Capital. Please proceed.

Hi. Good to talk to you. Just on the closing on the factory in Brindisi. You said you had a strike and that you're in negotiations. There's no estimate for how much you might have -- I don't -- Europe, I understand, is difficult for things like that. Do you have any idea about how much it might wind up costing you?

So -- this is JJ Thanks for the question. We're thinking non-cash, non-severance-related charges to the P&L of the high ones, $1.8 million, $1.9 million, something like that, and maybe cash all in of sort of mid twos, $2.5 million -- in that range, non-severance-related.

Okay. And these will all be cash -- cash off the books, obviously, right?

Well, not all the P&L charges are cash. So you'd have to sort of parse those apart. But basically from a P&L perspective, if you think of non-severance charges being about $1.7 million, $1.8 million, maybe a little in Q4 and then some in -- the rest of it in 2011 -- that's sort of the right way to think about it, I think.

All right, well, thanks. Good job this quarter. Thank you.

Thanks, Alec.

Thanks, Alec.

(Operator Instructions)

I show no further questions. I would now like to turn the call over to George LeMaitre. Please proceed.

Thank you, Latasha. Before I sign off, I would like to let everyone know that we will be presenting at several conferences this quarter. The Lazard Conference on November 16 in New York, the Stephens Conference on November 17 in New York, the Canaccord Genuity Conference on December 7 in San Francisco, and, finally, the [Schmid] West Conference on December 8 in Chicago. We also look forward to seeing many of you at our Analyst Day on December 2 in New York City. Thank you very much.

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