LeMaitre Vascular Inc (LMAT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 LeMaitre Vascular, Inc. earnings conference call. My name is Regina, and I will be your operator 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, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. JJ Pellegrino, chief financial officer. And you may proceed, sir.

Thank you, Regina. Good afternoon and thank you for joining us for our Q4 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 in the information under the caption Risk Factors in our 2009 10-K and subsequent SEC filings, including disclosure of 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 on 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, JJ. I'd like to focus my remarks on the three headlines of the quarter. Number one, we posted record sales of $14.4 million, 9% ahead of Q4 2009. Number two, we are initiating a quarterly dividend. Number three, we acquired the LifeSpan product line and we bought our two European -- we bought out two European distributors.

As to our first headline, we posted record sales of $14.4 million in Q4, 2010, up 9% organically over Q4 2009. The Americas was up 14%, while international grew 2%. For the full year, sales increased 12% organically to $56.1 million, led by the Americas, which was up 18%, and our vascular category, which was up 17%.

The increase from 61 to 67 sales reps during 2010 was a key sales driver in both Q4 and the full year. The [Tier A] sales rep model allows us to produce sales growth while keeping sales rep W-2s reasonable. We installed this new rep model in November 2008 and it now comprises over 70% of our North American sales force. Also, our tight focus on vascular niches is working well. We established a beachhead with our differentiated Valvulotomes and shunts, and then we follow up by selling the full line.

At last quarter's call we announced our intention to scale back our TAArget/UniFit stent graft program. This allows us to refocus our sales reps' efforts on our core vascular products where growth has been considerably better. Organically, vascular sales grew 17% in 2010, whereas endovascular was up just 1%. Also, vascular accounted for 71% of 2010 sales versus 67% in 2009.

As we defocus on these TAArget/UniFit stent grafts, our faster growing vascular category will begin to dictate the Company's growth rate. We've also begun to reduce our stent graft clinical trial spending, as we have suspended our two American trials.

Let's now turn to our second headline, dividends. In 2010 our sales increased 10% and our operating profit more than doubled to $4.3 million. Our 2011 guidance is for 11% sales growth and 40% operating profit growth. As a result of the ongoing strength in our business and a healthy balance sheet, we have elected to begin a quarterly cash dividend. I view this dividend program as an extension of the share repurchase initiative which we began in 2009. The central goal of both these programs is to maximize shareholder value.

Our continued product acquisitions and distributor buyouts should indicate that we have plenty of great ways to put cash to work in our business, which we will do in a measured and disciplined manner. The dividend is $0.02 a share to shareholders of record on March 22nd and will be paid out April 5th.

Regarding our third headline, in November 2010 we bought the LifeSpan PTFE business from Angiotech and we set mid 2011 buyouts of our Spanish and Danish distributors. These moves continue our efforts to expand our offerings in our vascular category and enhance our sales channel. Direct-to-hospital sales in Spain and Denmark are expected to begin in Q3 2011. We will leverage our European infrastructure by shipping products directly from our Frankfurt warehouse to Spanish and Danish hospitals. We believe that Spain is the eighth largest market -- vascular market in the world.

I'd like to conclude my remarks by reiterating the three headlines. Number one, we posted record sales of $14.4 million, 9% ahead of Q4 2009. Number two, we are initiating a quarterly dividend. Number three, we acquired the LifeSpan product line and we bought out two European distributors. I'll now turn the call over to Dave Roberts, our President.

Thanks, George. In Q4 2010 we continued to execute on two of our time-tested strategies, bolt-on acquisitions and distributor buyouts. In November we acquired LifeSpan, a vascular graft made of PTFE, the most popular material for small vessel grafts. 80% of peripheral grafts and 95% of dialysis grafts are made from PTFE. We are pleased to add this open vascular product to LeMaitre's sales bag.

LifeSpan is approved in all major markets, the US, Europe, Japan and Canada. The $4 million acquisition was a two-part transaction in which we acquired the Laguna Hills, California factory from Angiotech for $2.8 million, and customer lists and other assets from the former LifeSpan distributor, Edwards Lifesciences, for $1.2 million.

We began selling LifeSpan in the US and Europe in Q4. We'll start selling in Japan next month. We expect LifeSpan sales of $1.7 million in 2011 and growth thereafter. On the bottom line, we expect LifeSpan to dilute operating income by $700,000 in 2011 and be accretive thereafter.

Turning to distributor buyouts, in Q4 we also signed agreements with our dealers in Spain and Denmark allowing us to go direct-to-hospital in Q3 2011. These buyouts represent the continuation of our successful go direct strategy we've used to expand our international footprint. With the Spanish agreement signed, we will soon be direct in all major European countries.

Before turning the call over to JJ, I'd like to give you a strategic update on our TAArget and UniFit stent grafts. On our October call we announced our decision to reduce our R&D spend on these products in order to deploy assets into our higher growth vascular business. Since then we've decided these product lines may have greater potential in someone else's hands.

Accordingly, we recently initiated a possible divestiture process. If the sale were to happen, our European endovascular specialists would focus their attention on selling Endologix which we have a contract to distribute in most of Western Europe through June 2013. We were pleased to see these products grow 16% organically in 2010. With that, I'll turn it over to JJ

Thanks, Dave. I would like to say a few words about our sales trends, effects of the Dacron graft manufacturing transition, cash balances and 2011 guidance. Versus 2009, full year 2010 sales increased 10% on a reported basis and 12% organically. Drivers included a 17% improvement in our vascular category and an 18% increase in the Americas. Indeed, the Company sales have become more vascular and more North American. As a percent of 2010 total sales, vascular represented 71%, up from 67% in 2009, while the Americas represented 62%, up from 58% in 2009.

Over the coming quarters we expect that our vascular category will continue to outpace endovascular. There are two main reasons for this. First, our European sales force should gain more traction as it focuses less on TAArget and UniFit. And second, our North American team, which does not sell stent grafts, should continue to build on their strong results.

I'd like to focus on one important project that we are currently executing, the relocation of our Brindisi, Italy manufacturing facility. We terminated 29 employees on December 31, 2010 and will likely replace them with 13 employees in our Burlington facility. We will experience charges related to this closure over the next few quarters. However, beginning in the back half of 2011, this consolidation should add more than $1 million per year to our operating profit.

Sales of the Dacron graft product line increased 30% in 2010. In total, the Brindisi move reduced operating income by approximately $2 million in Q4 2010, of which approximately $400,000 was in cost of goods sold, and $1.6 million was a restructuring charge. As delineated in our guidance, we estimate that there will be a $1.2 million charge in Q1 2011 primarily related to Brindisi.

Turning to the balance sheet, the Company's cash and marketable securities decreased by $5.1 million during Q4 2010 to $22.6 million at December 31, 2010. The decrease was due to $3.5 million related to the purchase of LifeSpan, $1.6 million in employee termination costs in Italy, and $1.2 million of share repurchases. Despite the decline in the quarter, we remain confident in the Company's ability to generate cash.

In fact, over the seven quarters from Q1 2009 to Q3 2010, the Company increased its cash balance by more than $10 million. Also of note, 2011 operating income guidance implies full year EBITDA of approximately $8.6 million. While 2011 cash uses will likely include additional share repurchases, buyout payments to distributors, dividend payments, capital expenditures and other needs, we still believe our cash balances will increase in 2011.

Turning to guidance, we expect Q1 2011 sales of $14.5 million and operating income of $150,000. Q1 2010 operating income guidance includes an estimated $1.2 million in largely non-cash charges related to the closure of the Italian manufacturing facility and the distributor buyouts in Spain and Denmark. Additionally, we have revised our full year 2011 sales guidance to $62 million, up 11% versus 2010, and maintained our 2011 operating income guidance of $6.0 million.

This operating income guidance is a -- is an increase of 40% from 2010 and implies a 10% operating margin. Except as otherwise stated, all guidance amounts exclude the effects of future acquisitions, foreign exchange rate changes, distributor terminations and factory consolidations. With that, I'll turn it over to the operator for any questions.

(Operator Instructions)

Gentlemen, your first question today comes from the line of Joshua Zable with WJB Capital.

Hey, good afternoon, guys. And thanks for taking my questions. Congrats on a really nice quarter here.

Hey, Josh. How you doing?

Good. A couple of questions here. Just maybe first I guess for JJ, but everyone, just kind of walk us through the guidance here. You guys changed it to $62 million, but that's sort of now with a defocus on the EndoFit program. You obviously have stuff going on with distributors. I'm just trying to -- maybe you can walk us through, because the [optics], it looks like it's coming down but it sounds like organically things are going really well. So just can you walk us through sort of how we get from $62.7 million to $62 million?

Thanks, Josh. So, we're still up 11% on that guidance, which we think is nice growth. There's a couple of things going on behind the $62.7 million to $62 million. One is the TAArget and UniFit transition that we've been talking about for a while now. Those sales we think will not be as robust as they have been in the past, and that certainly affects our guidance in this year.

And in addition, the Spain and Denmark agreements allow for some repurchase of inventory, which will give us some revenue recognition issues in the quarter. And so those two things combined I think -- and into Q2 as well, and will sort of lead us to bring down the full year guidance. Again, it's still 11% reported. And underneath that I think it's important to note that open vascular is still very strong. It was up 18% in 2010 and we still think it's going to post some pretty strong results in 2011.

So just to be clear, is that from these sort of onetime things? The underlying sort of sales growth expectations are still -- nothing's changing there? You're not seeing any fundamental changes to the business?

And in fact, you're replacing what we think is slower growing sales with faster growing sales. So to the extent that we get our sales folks focused out of TAArget and UniFit and into our open vascular products, we think we'll increase the growth rate over time.

Okay. And then just sticking with here the guidance, you left operating income the same. Obviously we're taking revenues down slightly. Just kind of wondering is this -- should I read into that things are kind of progressing more profitable than you thought? Is that a function of, hey, with the distributors we lose some sales, but we gain some profitability. Just help me understand because obviously the operating margin is the same on lower sales, so something must be going right.

Yes, I think underneath that sales number you can expect our gross margin to improve over the course of the year. We've certainly got these [Biomat] transition issues that we're going through just recently in Q4 and then in Q1 that we've been talking about and we've guided for. If we get improvements there over the course of the year you'll certainly behoove the bottom line.

And then in addition, I think we've shown -- we've had a history of keeping operating expenses pretty tight and I think we'll continue to do that into the year. And between those two things, I think despite the sales climbed down a little bit, we've kept operating income the same.

Great. And then just on the overall market, you guys said obviously effectively maintaining the growth guidance ex those items. Can you just kind of tell us what you're seeing out there in the market, maybe George and Dave, in terms of sort of growth-wise or things getting better, things getting worse, things staying the same? I mean you guys are obviously growing pretty nicely, especially relative to a lot of other companies. I'm just wondering is it share gains? Are we seeing procedures pick up? Just any color around sort of general market would be helpful.

Right. Josh, this is George. I don't see -- I do know some other companies are talking about this, but we didn't see anything last year. I would say our issues seem to be internal issues around the TAArget and UniFit stent graft.

But if you -- we have a nice experiment, which is in the United States we are a strictly open vascular company without stent grafts, and we grew 18% last year in the US And if you take out 4% or 5% of pricing in the US, the balance of that 18% for the year wound up being unit growth and/or share gains. So, we're not really seeing too much from our perspective, particularly in the markets where we're not having to work through this TAArget/UniFit transition.

Great. And then one housekeeping item. Just on the share repurchase, how much is left? Do you guys have that handy?

About $2 million, Josh.

$2 million, great.

Through the end of the year.

Great, guys. Thanks very much. Congrats and we'll get back in queue here.

Thanks, Josh.

Your next question comes from the line of Joe Munda with Sidoti & Co.

Good afternoon, guys.

Hey, Joe.

Just real quick on the restructuring charges with the Brindisi facility. JJ, I know you had mentioned $1.2 million in Q1 2011 expected. Is that going to be total for the year? Can you give us some outlook as to what we can expect as far as restructuring charges go?

Yes, I think that's about half of what maybe we get during the year. We're thinking that about $1.2 million is non-cash related to the takedown of the balance sheet at the Italian subsidiary, basically as we shut that thing down from an entity standpoint. And then as we're getting out of EndoFit and UniFit -- TAArget and UniFit, over time we think maybe we'll experience some restructuring or impairment items there as the year goes on.

And, Joe, this is George. Just for clarification, that $6 million in guidance of op income, that's the op income after all the charges. That's what we're saying the reported op income will be for 2011.

Okay. Also, just one other question. As far as the dividend is concerned, how did that come about? I mean you guys have never paid a dividend in the past. Is it because you guys are kind of slowing on the acquisition front that you feel that you need to repay investors? I mean where's that coming from?

Right. It's always a question that comes up. No, we feel real good about our acquisition pipeline. We just feel like we have a lot of cash. We have $22 million, $23 million of cash in the bank. We think it's going to go up by about [7 or 8] this year and we figured why not pay out $1 million worth of that in dividends.

And it's all -- it feels to me like just another flavor of the repurchase program. If you remember, we started that thing in August of '09 when the stock was at $3. And the point of that was to sort of enhance shareholder value. This seems to me like just another flavor of trying to enhance shareholder value.

All right. Thanks, guys.

Thanks a lot, Joe.

(Operator Instructions)

Your next question comes from the line of Larry Haimovitch with HMTC.

Good afternoon, gentlemen.

Hey, Larry.

Hi, Larry.

JJ, on the cash side, of course you've had a terrific run of generating positive cash flow. This quarter was an exception. I'm assuming with the operating income at $10 million that we would certainly expect positive cash flow for '11. Have you -- I don't think I heard in the prepared remarks you quantifying cash flow. Would you care to comment on that at all?

Yes, sure. So, we've actually got $6 million of operating income and that contemplates all the charges that we just talked about earlier. And we've got non-cash items of about $2.5 million, depreciation, amortization and stock-based comp. And then if you take out some CapEx, maybe about $8 million, $8.5 million of sort of normalized free cash flow for 2011 based on the guidance. And we're going to invest in a bunch of stuff along the way as well. But that's sort of your normalized theoretical number. And looking back at 2010, if you did the same thing, you're sort of in the $7 million range. So a nice progression there, despite the investments going on.

And then of course you have the buyback, which could potentially reduce the cash flow --

There's $2 million right there. And then $1.3 million for dividends. So there's a bug chunk right there.

George, on the regulatory front, I don't think there was any comments on the call, I may have missed it, on the UnBalloon. Not to bring up a sore subject because I know it's been a little sluggish getting through this the FDA. Any update on that product and anything else where you have stuff in the FDA pipeline, regulatory pipeline you want to update us on?

Sure. You know what? It's interesting, Larry. Things have been going so well for us from a regulatory and clinical perspective. We've been getting so many approvals that we literally forgot to brag to you guys about them this time.

So we got five or seven regulatory approvals in Q4 and into the first month of Q1. And I forget which ones they are exactly, but we had a great run there. The switch we've made internally has really broadened out what we're getting in terms of regulatory approval.

And I would say on the UnBalloon, to follow up on that, it [isn't a source, Bob], because we remain very excited about this thing when we get it out there. The filings will be taking place sort of Q1, Q2, and our current guesstimate is we'll have that thing on the market in 2011. But so it should be exciting when we get it out there. And obviously we'll be pushing towards that as quickly as possible.

Now, George, it's still a 510k. I don't think they were requiring any specific clinicals were they?

That's correct.

Yes. So the -- basically it was your decision to reengineer the product and then send it back for FDA approval? Is that essentially what happened?

That's right, Larry. So we pulled it off the market in June of last year for safety reasons. It wasn't re-sheathing well and we were nervous about that. Nothing bad happened, but we were nervous about it. We pulled it off the market for that.

In tandem, we had always had UnBalloon 2.0 coming along down the track with four or five very nice convenience items, in addition to safety changes that we made in the rework. And so when it comes out, it will be UnBalloon 2.0 for all of us internal people, although the world will know it as UnBalloon, period.

Okay, thanks.

Thank you.

Your next question comes from the line of Bill Wolfenden with Cottonwood Investments.

Afternoon, guys.

Bill.

Quick question. We've been always talking since the IPO, you guys have mid 70s gross margins and you've it to operating margins of 10% for '11. Can you just give us some sort of framework of what the revenue run rate level would be for us to get up close to the 20% operating margin level?

I can say if you take out the charges next year, Bill -- sorry, 2011, you can think of this as a 13% op margin company. And then I would say beyond that you'd be asking me to give guidance into the years that follow, and I just don't feel comfortable doing that.

But is it realistic that we see 20% operating margins at some point with this business?

Yes.

Great. And then the share count with the buyback in 2011, do you anticipate that that stays roughly flattish again?

Yes, 16.1 fully diluted.

Great. Thank you.

Thanks, Bill.

Gentlemen, this concludes the question and answer portion of today's call. I'd like to turn the call back over to George LeMaitre, chief executive officer, for closing remarks.

Okay, thank you very much, Regina.

I just wanted to remind everyone we have a couple of conferences coming up before we let you guys go. We'll be at Cowen in Boston in March. We'll be at Roth in Southern California in March. And we'll also be speaking at JMP in San Francisco in May. And there's a couple more after that, but I'll just leave it at that. Special thanks to everyone who listened in today. Thank you very much. And I'll pass it back over to Regina again.

Ladies and gentlemen, this concludes our conference for today. Thank you so much for your participation. You may now disconnect. Have a wonderful day.