LeMaitre Vascular Inc (LMAT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 LeMaitre Vascular Incorporated Earnings Conference Call. My name is Caris and I will be your operator for today. At this time, all participants are in the listen-only mode. Later we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes.

Now I would 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, Caris. Good afternoon, and thank you for joining us for our Q1 2011 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 2010 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 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, J. J. I'd like to focus my remarks on the three headlines of the quarter. Number one, we posted record sales of $14.6 million, up 6%. Number two, we achieved normalized operating income of $1.4 million. And number three, we're executing on three initiatives to improve profitability in top line growth. A, the Italian factory consolidation; B, the transition to direct sales in Spain and Demark; and finally, C, the de-emphasis of our TAArget/UniFit stent graft business.

As to our first headline, we posted record sales of $14.6 million in Q1 2011, up 6% over Q1 2010. The Americas was up 12% while international was down 3%. While sales momentum in the Americas carried over nicely from 2010, Q1 European sales continue to be hampered by our move away from TAArget/UniFit stent grafts. Indeed, looking at our worldwide business without TAArget and UniFit, sales grew 9% in Q1 2011.

The story is similar when we look at our product categories. Vascular was up 13% worldwide in Q1 2011, while Endovascular decreased 12%, almost exclusively due to TAArget and UniFit.

With respect to individual product lines, our Valvulotomes Carotid Patch and AnastoClip drove sales growth in Q1 2011. Also, in Q1 2011, we made regulatory submissions in the US, Europe, Canada, and Brazil for the upgraded UnBalloon, which incorporates a re-sheeting fix and several feature upgrades.

Geographically in Q1, the US, France, and Japan were highlights. We ended Q1 2011 with 66 sales reps versus 61 at the end of Q1 2010.

Regarding our second headline, Normalized Operating Income was $1.4 million in Q1 2011, versus Reported Operating Income of $1.3 million in Q1 2010. The increase was due to higher sales and restrained operating expenses. This is also up sequentially from Q4 2010 due to higher sales and lower operating expenses.

As you may remember, our operating income high water mark was $2 million in Q3 of 2010. I expect to re-achieve and surpass this level of profitability as we move through 2011.

Regarding our third headline, we continue to make progress on the three issues we have previously outlined, and I am excited about the more profitable higher-growth entity which should emerge in H2 2011.

Our Italian polyester graft machines have now been transferred to Burlington. First saleable grafts from Burlington should be shipped to hospitals in Q2. We are now through the lion's share of the Italian below-the-line restructuring charges with the start-up of our Burlington factory continues to suppress gross margin.

While the manufacturing start-up is a little lower than planned, eventually we expect 12 employees to be on our Burlington payroll to manufacture these grafts in place of the 29 Italian employees previously. This 17-employee reduction should provide a benefit to the gross margin. Indeed, headcount at LeMaitre dropped from 255 at year-end 2010 to 232 at March 31, 2011, largely as a result of the Italian closure.

In December, we signed agreements with our long-time Spanish and Danish distributors to go direct in July. We have since hired a Danish sales rep and a Spanish country manager and we have leased a sales office in Madrid.

The majority of cash payments to these two distributors will be made in Q2 and you will see associated charges of about $700,000 on the Q2 P&L. As a result, in Q3, we will be direct in more than 90% of Western Europe, with Switzerland, Norway, and Finland our only distributed markets.

The impetus for direct sales in Europe is obvious -- higher gross margins, more surgeon contact, and better pricing power. These two buy-outs effectively complete our European Go-Direct Project which began in 1998 with direct sales to German hospitals.

I remain optimistic about the long-term medical device market in western Europe, which I see as the cornerstone to LeMaitre Vascular's globalization. Future direct countries may include China and Brazil.

As to the TAArget/UniFit transition, we mentioned on our last call that we have begun exploring divestiture alternatives. While we cannot prognosticate on the potential success of a transaction, we currently have multiple bids in hand and expect the process to conclude in the next few months.

If we do not sell the product line, we may consider other alternatives in order to allow our sales force in Europe to focus on our faster growing vascular business.

So as we push through these three initiatives, my goal is to set us up for clean quarters in the back half of 2011, and to be a more broad-line vascular company rather than a focused stent graft company. I am confident that the company which emerges will be leaner, more vascular, and most importantly, more profitable.

I'd like to conclude my remarks by reiterating the three headlines. Number one, we posted record sales of $14.6 million, up 6%. Number two, we achieved normalized operating income of $1.4 million. And, finally, number three, we're executing on three initiatives to improve profitability and top-line growth.

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

Thanks, George. I'd like to give you a brief update on the November 2010 LifeSpan acquisition. Since the acquisition of this PTFE graft, we have transferred the CE Mark, 5 10-K [Shonin] and Health Canada Regulatory Approvals. A European sales force started selling the product in Q4, shortly after the acquisition, while our North American and Japanese sales forces launched towards the end of Q1. Lifespan sales in Q1 were roughly $302,000, slightly below budget, but generally in line with the year one ramp that we are expecting.

With respect to operations, shortly after the acquisition we placed an integrations manager into the Laguna Hills factory. We are learning the production process while at the same time instilling LeMaitre's cost-cutting discipline at the factory. In just a few months we have identified and executed cost reductions in the areas of personnel and sterilization. As a result, Lifespan's Operating Profit Contribution is performing ahead of our projections.

With that, I'll turn it over to J. J.

Thanks, Dave. I would like to say a few words about our gross margin, operating expenses, special charges, cash Balances, and 2011 guidance.

Our Q1 2011 Gross Margin was 69.5%, down 5.2% from 74.7% in Q1 2010. The decline was mainly due to additional costs related to the relocation of the Company's graft manufacturing facility from Italy to Burlington, including first, start-up costs in Burlington as we hire and train folks in advance of production; and second, inefficiencies in Italy as the factory there assembles its final products.

As to the first item, Burlington start-up costs will continue into Q2 but should abate in the second half of 2011 as we begin to achieve full scale-up. As to the second item, the Italian facility was officially closed on March 31, so moving forward we expect minimal expenses from Italy, a clear benefit to the gross margin.

Separately, it is important to note that the recently acquired Lifespan facility may offer expense-reduction opportunities as we further integrate it into our organization. We will update you on developments there as appropriate.

Given all of this activity, Q2 company-wide gross margin should improve minimally. And in the back half of this year we expect further gross margin recovery, perhaps back to the low to mid-70% levels.

Moving down the P&L, operating expenses in Q1 2011 were $9.1 million, excluding special charges. This was nearly flat with the prior year period. In fact, since 2007 annual operating expenses have remained approximately $35 million and have declined from 82% of sales to 63% of sales.

This year we are continuing our cost-conscious ways and have introduced an internal program to trim $2 million of operating expenses. We are also reducing head count where appropriate. As implied in our guidance, we believe these programs, in conjunction with the initiatives George outlined above, should tee us up for solid bottom-line leverage in the latter half of the year.

I recognize that our three initiatives have caused several changes in recent quarters. Perhaps it would be helpful if I could summarize these for you. First, the Italian factory location-relocation generated a total of $2.8 million of special charges in Q4 and in Q1 of 2011. I believe the lion's share of these charges are behind us.

Second, as it relates to Spain and Denmark, we have not yet recorded any special charges. As you saw in today's press release, however, we expect to record about $700,000 of special charges in Q2. We expect no additional special charges related to this initiative thereafter.

And, finally, with regard to TAArget and UniFit, in Q4 we recorded impairment charges of $420,000. By quarter, the summary of the special charges is as follows -- Q4 2010, $2.2 million; Q1 2011, $1.1 million; in Q2 2011, $700,000.

Moving on to the balance sheet, cash and marketable securities as of March 31, 2011 was $19.1 million, down from $22.6 at December 31, 2010. The decline was mainly due to the annual bonus and commission cycles of $2 million, the build-out of our new manufacturing facility of $800,000, severance-related payments in Italy of about $600,000, and share repurchases of about $300,000.

Turning to our guidance, we expect Q2 2011 Sales of $15.5 million, up 9% versus 2010, and reported operating Income of $1.1 million. This guidance implies a 7% Reported operating margin for Q2 2011 and includes an estimated $700,000 in charges related to the distributor buyouts in Spain and Denmark.

We also reiterate our full year 2011 Sales guidance of $62 million, up 11% versus 2010, and reported operating income guidance of $6 million. This guidance implies a 10% reported operating margin for 2011 that includes charges associated with the various restructuring initiatives.

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)

And you have a question from the line of Joshua Zable with WJB Capital. Please proceed.

Hi, guys. This is actually Ethan Roth here on the line for Josh Zable.

Ethan, how are you doing?

I'm great, thanks. I just wanted to focus here for a moment on the markets and what you guys are seeing out there, specifically in the vascular market. A really great quarter here, continued high growth.

You guys kind of called out the main products. What exactly is driving that growth? Is it procedures, is it price? And then maybe if you could just talk about the difference on a geographic basis? Thanks.

Maybe I'll take the latter half of the question first and then I'll focus on the US side of the first part of the question. So we're definitely doing well in the US growth is 13%. Over in Europe we had a tough quarter, down 3%.

In the US that growth -- the split is probably half and half in terms of price and procedure or units. We had a price hike January first and that keeps - we keep on getting that price hike. We feel good about that.

In terms of Europe, what I would say is that we are going through a major transition. The stent graft business, the TAArget and UniFit business was down 51%. And, actually, if you look at the business without those two stent graft products, you can add about 3% growth to the Company. So, whereas we reported 6% growth for the Company as a whole, it actually goes up to 9% if you allow us to ignore TAArget and UniFit.

Okay. Thanks. And then just a follow-up question here on UnBalloon. I see that you guys have resubmitted the application with the updates. Just any sense of timing? I know that can be a bit tricky. And then also once approved, if you could just talk about the commercial strategy? Thanks.

Sure. The timing, of course as you know, is whenever they get around to it and say yes. My sense is we'll get one or two of these approvals. We put it into four countries. We'll get one or two of them over H2 2011, if you will. The revenues, if any, are baked in the guidance for 2010 -- excuse me, for 2011. It may add materially to revenues in 2012. But I guess we'll take a wait-and-see approach because those regulatory agencies have a way of acting on their own.

Okay. Thanks, guys. And congrats on the great quarter.

Thanks a million, Ethan.

(Operator Instructions)

And you have a question from the line of Joe Munda with Sidoti. Please proceed.

Good afternoon, guys.

Hi, Joe.

My question really is more for Dave Roberts. As far as with the divestitures going on and the restructuring, is the acquisition strategy that you guys normally have, is that kind of put on hold for right now?

Thanks for the question, Joe. No, not at all. I mean, we're definitely out there looking. The criteria hasn't changed at all. We obviously closed on the Lifespan acquisition in November and we've restocked the pipeline.

Frankly, what we do is we're always rationalizing the bag, so we're looking for great acquisitions and then when we realize the product isn't working, we proceed with divestiture. And that's what we're doing right now. So, the acquisition process is fully underway and we have a nice pipeline and it's business as usual.

Okay. Great. Thanks, guys.

Thanks, Joe.

And your next question comes from the line of James Terwilliger with Duncan- Williams. Please proceed.

Hey, guys. I'm new to this story, so I apologize if these questions are kind of old or if you've covered them previously. But what are the characteristics of the market in Spain that makes that so attractive to you to move from a distributor to go direct?

Sure, James. There's a lot of attractive markets out there. What we were thinking when we bought out Spain was we've already developed an entire European infrastructure and so when we're finally direct in Spain in July, the products that we warehouse at our Frankfurt warehouse and they will be shipped to Spanish hospitals every night from our Frankfurt warehouse.

What we were trying to do is really finish the puzzle for ourselves in Europe. And, clearly, we're interested in getting into the brick countries going forward. You do sense we need exposure to those higher growth markets. But that's the rationale for Spain.

And it is a 45 million person country, so it is one of the top eight vascular markets in the world. And we feel like with our bag, the breadth of our bag, we kind of got to be in hospitals in Barcelona and Madrid.

These are big cities where we just feel like we can't miss. Historically, we've been with the same dealer there. He's a great guy. But we've been with him for 15 years and his penetration is quite low versus what we see with our direct penetration in France, Italy and Germany.

And, again, this is something we've been doing since 1998 over in Europe and it's a pretty proven strategy. We go direct in a country and you'll hear us talk about it on the earnings calls. You'll get some nice above-company growth rates in terms of sales for the years - the two or three or four years that follow the acquisition of the distributor.

All right. Thanks. Great. One more quick question. Again, I apologize because I am late to the story. When you moved the manufacturing facility from Italy to Burlington, was that a brand new facility that you built from scratch or did you acquire someone else's facility? And where else do you have manufacturing facilities at?

Sure. I'll answer the back of the question. We have a seven-person facility out in Laguna Hills, California, that we bought in the November 2010 acquisition of Lifespan. That's the easier part of the question. The second part of the question is we just rented a building next to our building in Burlington, Massachusetts.

We occupy a 27,000 square foot building in Burlington and we just rented, as of January 1, 2011, the 27,000 square foot building right next to ours. And there's a covered walkway that now connects the two. All of the build-out in that building that we just leased for seven years is all brand new build-out done by us. And you can feel a little bit of that in the cash drain over the last quarter or so.

Okay. Thanks, guys, for taking my questions. Thank you very much.

Thank you, James.

As a reminder, ladies and gentlemen, that is star one to ask a question. And at this time there are no further questions in queue. And I will now turn the call back over to Mr. George LeMaitre for closing remarks.

Thanks, Caris. First of all, I'd like to thank all of the participants on this call. I'd also like to mention that we will be speaking at the following investor conferences over the next couple of months. We have May 10, JMP Securities in San Francisco; June 20 or 21, with Lazard at Foxwoods.

I'll make a point of being at that one. June 22 and June 23, Wells Fargo in Boston. August 9, Canaccord Genuity in Boston as well. So those are four of the next conferences coming up. We're doing about ten or twelve of those a year, so they come up pretty frequently.

With that, I'll turn the call back over to Caris. Thank you very much for taking care of our call, Caris.

You're very welcome. And 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.