LeMaitre Vascular Inc (LMAT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 LeMaitre Vascular, Inc. earnings conference call. My name is Tahisha 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. JJ Pellegrino, Chief Financial Officer of LeMaitre. Please proceed.

Thank you, Tahisha. Good afternoon, and thank you for joining us for our Q2 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 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 caption risk factors in our 2010 10k, 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 the George LeMaitre.

Thanks, JJ. I'd like to use my time this quarter to remark on our five strategic initiatives for 2011. As you may know from our recent announcements, we are undertaking the following changes in order to improve our sales growth rate and profitability.

Firstly, we are terminating Endologix stent graft distribution. Second, we sold our TAArget/UniFit stent craft business. Third, we are closing our California factory. Fourth, we closed our Italian factory, and fifth, we went direct in Spain and Denmark.

Since these five moves obviously present operational challenges, I'm pleased that the Company continued to motor along in Q2, posting record sales of $15.1 million, and $1.9 million of adjusted operating profit. These five strategic initiatives are ultimately intended to improve profitability and speed up top line growth. More specifically, they focus LeMaitre Vascular on our larger, faster growing vascular surgery business, consolidate all manufacturing into our Burlington factory, and expand our direct to hospital sales footprint.

As to the first two initiatives, our decision to terminate our Endologix agreement and divest our TAArget/UniFit platform are intertwined. We exited stent grafts for several reasons. Firstly, we think this will increase our focus on our dominant vascular brands. This will move our focus on selling and resource efforts towards our larger, faster growing, higher margin vascular brands. In these niches we offer leading technology and powerful brands, which provide us with pricing power and enviable gross margins. So we've made a choice to work in markets where we dominate and grow faster.

Secondly, we find there's less competition in open vascular than in stent grafts. Moving away from stent grafts is also a realization that in certain competitive markets we might be wise not to keep up with the Joneses. Gore, Medtronic, and Clark have clearly staked their claims in the stent graft market. Conversely, we have found that product development cycles in open vascular niches are more forgiving and demand fewer investment dollars.

Indeed, so many companies have moved into stent grafts that we now think there is an open field opportunity in the vascular surgery business. We also want to sharpen the focus of our sales force. We've learned over these last six years that there are sales channel problems when you sell $8,000 stent grafts alongside $500 Valvulotomes. The high price stent grafts distracted our European sales reps from selling our bread and butter vascular products.

You may recall that in 2010 we posted 18% organic sales growth in North America versus 3% growth in Europe. One key difference, the North Americans did not have stent grafts to sell, while the Europeans did. Moving forward we will once again have a single unified sales force focused on vascular surgery, not stent grafting.

Lastly, we want to sell our higher margin products. From a profitability perspective our move towards vascular makes good sense. As you may know, to sell stent grafts an additional layer of clinical specialists is necessary. At our high water mark we had eight such clinical specialists, and this is expensive. Also, TAArget/UniFit once occupied two-thirds of our new product development activities and necessitated sizable clinical trial costs. Furthermore, the Endologix stent grafts carried a typical distribution gross margin of 45% to 50%, well below our corporate average.

Turn to the third and fourth of our five strategic initiatives for 2011. Closing our Californian and Italian factories is a time tested LeMaitre Vascular strategy. These are our sixth and seventh closures since 2003. We will now manufacture all of our devices under a single roof in Burlington. On average, the factories we acquired had 20 employees, and typically manufactured just one product line.

In my own opinion, they just were not economically viable. We closed factories principally because we want to produce as efficiently as possible. And as a rule of thumb, it takes about half as many employees to manufacture in Burlington as it did in the acquired factory. We also found that our products evolved more quickly when they were physically adjacent to our development engineers. Finally, with all the products in one building, we are able to instill and maintain uniform quality standards across the portfolio.

Our fifth strategic initiative in 2011, going direct in Spain and Denmark, is also right out of the LeMaitre Vascular playbook. Because we operate in niches, we have frequently found independent distributors cannot penetrate our products as deeply as we can. With the conversion of Spain, we are now direct in eight of the top 12 vascular markets in the world. Just the four BRIC countries remain, Brazil, Russia, India, China. Our desire to be direct allows us to control end user pricing, and enables closer contact with our surgeon customers.

Of course, exiting businesses and closing factories is never easy, and these shifts bring one time expenses, which cloud the income statement. But the LeMaitre Vascular which emerges from all this should have a much cleaner, open vascular focus, which should enable faster sales growth. Also, with just one factory instead of three, I believe we will be able to manufacture all of our products for less, while we further upgrade our quality.

Finally, our reach into Europe should be just that much deeper as we gain direct sales in two more countries. Executing this set of five initiatives is challenging, but the resulting entity should make it well worth the effort. With that, I'll turn the call over the Dave.

Thanks, George. I'd like to take a moment to briefly describe the two transactions we've executed in the last month which will allow us to make a clean break from stent grafts. First, on June 30 we signed an agreement to divest our TAArget and UniFit stent grafts to Duke Vascular. Duke paid us $100,000 on June 30, will pay us another $500,000 on June 30, 2012, and has assumed the stent graft clinical trials. Through September 30 we will manufacture TAArget and UniFit for Duke on an [OAM] basis. We will also fill the back order we had as of the June 30 closing date.

Following the divesture of TAArget and UniFit we concluded it no longer made sense to distribute Endologix stent graft in Europe, as the sales and marketing leverage was gone. As such, on July 6 we entered into an agreement with Endologix to terminate this relationship early. Endologix will pay us $1.3 million in Q3 2011 in exchange for terminating our distribution rights August 31, 2011, providing a smooth transition, and returning inventory. With that, I'll turn it over to JJ.

Thanks, Dave. I'd like to start by giving some color on our Q2 financial results, talk briefly about our share repurchase and dividend programs, and conclude with some remarks about guidance. In Q2 2011 we posted record sales of $15.1 million, an increase of 7% over Q2 2010. Our open vascular category continued to post solid results growing 12% over the prior period. Gains in this category were led by Valvulotomes up 18%, and [Anastoclips] up 36%, and carotid patches up 28%. Separately, our Endovascular category was down 7% versus Q2 2010.

This was mainly due to a 59% decline in TAArget and UniFit. Our exit from stent grafts has required a significant adjustment for those European sales reps accustomed to selling higher priced devices. We believe that this has hurt rep productivity in Europe across all product lines. As we set up for our final break from stent grafts, we look forward to reaping the rewards of a more focused, simple, and streamlined sales team in Europe. Organic sales growth, excluding stent grafts sales, was 3% in Q2 2011.

Moving down the P&L, our Q2 2011 gross margin was 68.6%, down from 75.3% in the prior year period. The decline was due to start up costs related to the transfer of the Italian factory to Burlington, other manufacturing inefficiencies, and the $361,000 stent graft inventory write down. Excluding the write down, our gross margin was 71%.

Turning to operating expenses, we continued to hold the line on spending. Excluding $650,000 in restructuring charges, Q2 2011 operating expenses were $8.8 million, a 3% increase from the year earlier period. Excluding the effects of the weaker US dollar, Q2 operating expenses were below those of the prior year period. Operating income in Q2 2011 was $879,000, compared to $2 million in the year earlier quarter. Excluding restructuring charges of $650,000, and stent graft inventory write downs of $361,000, adjusted operating income was $1.9 million. This amount compares favorably to recent Q1 2011 and Q4 2010 results, and approaches amounts last seen in the middle quarters of 2010.

Cash and marketable securities as of June 30, 2011 were $21.4 million, an increase of $2.3 million from $19.1 million in March 31, 2011. This increase included the effects of dividends of $310,000, and share repurchases of $130,000.

With regards to our share repurchase program, since the August 2009 program inception, we have repurchased in excess of $3.2 million of stock at an average price of approximately $5.75. The Board has authorized us to purchase up to a total of $5 million through the end of 2011.

Turning to guidance, we expect Q3 2011 sales of $14.6 million, up 7% versus 2010, and reported operating income of $1.5 million. We also expect 2011 sales of $58.7 million, up 5% versus 2010, and reported operating income of $4 million. We have reduced our full year 2011 sales guidance by $2.3 million largely due to our exit from stent grafts. Full year operating income guidance is after approximately $2 million of charges and special items associated with the five strategic initiatives George detailed above. With that, I would like to turn the call back over to the operator for Q and A.

Thank you. (Operator Instructions)

Your first question comes from the line of Joshua Zable from WJB Capital. Please proceed.

Hi. Actually, Ethan Roth on for Josh Zable. Congrats on a really great quarter here. I just first wanted to touch on the vascular side of the business. You guys obviously put up another really strong quarter. Several companies have reported a bit of a slow down in procedures, and so I was wondering if you could just provide your thoughts on volumes, and then also to what extent volumes drove growth in that business relative to pricing?

Okay. We can handle the second part of that a little quicker and more cleanly. We -- our ASP's were up around 4%. And so if you look -- and most of that's over in the US -- if you look at the US number, I think we were up 6%, so that did take up a bunch of our growth, if you will, say 4% out of 6%.

In terms of volumes, I would say there's a chance we're seeing procedure volumes a little weaker over in Europe. Just our particular set of procedures, but it's hard for me to unwind that from what's going on with the stent graft exit, so I don't want to make any too broad of sweeping generalizations about Europe, but our European business has been weak. And I think our organic growth in the European vascular business, forgetting about stent grafting, was flat.

Okay, thanks. And then just a follow up question here. On UnBalloon you mentioned that that was an approved CE Mark approval this quarter. Just trying to think about the ramp for that, especially now that you've exited the stent graft business, and I know that kind of plays in that area a little bit. So how to think about the ramp for UnBalloon in Europe?

Sure. Well, of course, we're just beginning the beta trial. We've done three cases, all of them in Brazil. They've all gone great. We're excited to go through that beta trial. We did find on the last UnBalloon launch that it did take a while to get through the beta trials over in Europe. So, it's all [baked] into guidance for 2011, the sales for the UnBalloon are, so we're not going to try to pull it apart. We agree that there's a chance we'll see less thoracic stent grafts, because our sales force will start working less on thoracic stent grafting.

But I will say, historically LeMaitre has been the right place for a vascular surgeon, whether they're working the thorax, the abdomen, or the peripheries, to find a catheter. That's what we're known for. So, I think even though we're exiting stent grafts, I think we'll have a very good entree to sell this device to vascular surgeons for both thoracic and then abdominal stent grafting.

Okay, great. Thanks for taking my questions.

Thanks a lot.

Your next question comes from the line of Joe Munda from Sidoti. Please proceed.

Good afternoon, guys.

Good afternoon, Joe.

Good afternoon, Joe.

Real quick, can you -- just a couple things. Can you give me what the sales mix of stent grafts was in Europe? Just the percentage break down?

Sure. We were down on a reported basis 60% in TAArget and UniFit in Q2, and on a reported basis we were up 1% for Endologix, although because of the strong Euro, if you did the Endologix number organically, that was down 11%.

Okay.

So it was a very tough quarter. I think minus 22% overall was the number quarter to quarter, and is that an organic number or a reported number? Organic number.

Okay. And now that you guys have divested that business, and you had mentioned on the call that it took up the majority of your product development, as you turn, are we to expect R&D to kick down, because it is coming out of that business you have divested?

Sure. Well, one thing that's clear you're going to see tick down, I'd like to distinguish product development R&D from the R&D related to clinical trials, because they're all lumped for US accounting purposes in the same category. Definitely. And we're already seeing a tick down in the clinical trials. There's been a real slow down in the cost there, and we expect, since we were able to sell off to Duke Vascular that product line, we expect those clinical trial costs to come down rapidly now, so we're excited about that.

From a product development perspective, my guess is that when it all shakes out and the dust settles, it's going to give us a lot more money to put at things like the Over-The-Wire remains Valvulotome, for which we received a 510k approval today, and also, the UnBalloon, the abdominal UnBalloon, which might come at some point, as well as the work we're going around our [mall] ring cutter product.

Okay. The same goes as well for SG&A. Are we to assume that to come down as well, in regards to a percentage of revenue? Because you guys aren't selling that higher priced products, so is that safe to assume?

For all SG&A, we're guiding here, I would say, on Q2, if you look at Q2, the SG&A number was really low. I think we said [9.6] is the reported number, but if you pull out about $800,000 in that Spain and Denmark restructuring charge, and then you pull out another $400,000 of growth in the op expenses simply due to the strengthening of the Euro against the dollar, you can kind of make your way to an $8.4 million op expense number. And so I think you're already starting to see that, Joe.

Okay.

We [are] very tight op expense quarter. We're really excited about it.

And just real quick, can you go into a little bit more of the OEM that you're going to do for Duke? I mean, how is that going to work? Just give me a little bit more color?

Sure, Joe. This is Dave. Good question. Yes. So when we signed the transaction with Duke, obviously, they needed a little bit of time to get up and running, so we agreed that through September 30 we would continue to manufacture for them on an OEM basis, at a cost plus a certain percent. And during this three month window, they are going to be here learning the production, and we'll be moving the equipment and all that out to California for them, and we'll get them up and running. So, it's pretty straight forward. It ends on September 30, and they will take the wheel on October 1.

And, I mean, are you guys going to receive royalty income from them once they are doing it themselves?

No, there's no royalty after that. We just -- the only income we get aside from the cash from the transaction is the payment we get for providing OEM services between now and September 30.

Okay. Thanks, guys. I'll hop back in the queue.

Thanks, Joe.

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

Good afternoon, gentlemen.

Larry, how are you doing?

Very well, George. You?

Very good, very good. Thank you.

So, lots of moving parts here. I guess this question probably best goes to JJ. The gross margin was down, was one of the lowest margins that I can -- I don't know if you've had a margin that low in quite some time. I know there was a lot of convoluted factors in there. Is there any way to give us a pure apples-to-apples number on this, because I'm a little confused relative to what it was a year ago? What it would be if you hadn't had all this stuff going on?

Yes, thanks, Larry. We had a number of pieces in there. One is the AlboGraft manufacturing transition, the introduction of LifeSpan into the mix with a little bit reduced margin from our corporate margin. And then we had the TAArget/UniFit write off of about $360,000 as we exited that business. So at a high level if you added back the AlboGraft transition and the TAArget/UniFit write off, and sort of said those were special items, that's about a 6% or 7% delta. So you can take that 68.6 and add 7% or 6% or so, and get up to the low- to mid-70s.

So you'd be very close, if not right on the money, with last year's second quarter if you adjust for all those unusual items?

Yes. It feels like a little bit below, but about that, yes.

Given that you've had such good price increases, and seems that those prices, from everything George has said both publicly and when he and I have talked, and Dave and I have talked, too, that they seem to be sticking very, very well. Is there gross margin pressure somewhere else in the business that we're not aware of? Because obviously, you should be getting better gross margins as you're raising your prices?

Yes. I think there is a lot of swirl with these two items alone, and I would say that over time you should probably improve your gross margin at a high end level, and we look at it on an annual basis over the sweep of the years. But quarter to quarter I think it's being masked by a lot of the items we talked about, but certainly ASP increases should help the margin over time. And then I would say that, no, generally speaking, that's not being masked by something else.

And Larry, just an addendum to that. This is George.

Yes.

Remember we bought the LifeSpan Company --

Yes.

In November of 2010, and that carries a much, for now, that carries a much lower gross margin than the rest of our Company. For obvious reasons, you have a seven person factory out in Laguna Hills exclusively making a $1 million, $1.5 million, $2 million product line.

And then secondly, one of the growth items that we do keep calling out is this XenoSure Patch, and for now, we have an option, a hard option, to buy that in January 2014, or '16 --

'14.

2014, and so we have that hard option to exercise whenever we want, but for now it is a distributed item, and it's done particularly well in our hands, and so over time, maybe those two items have a negative implication mix wise --

Yes.

though they're still bounded by -- I can't believe those two businesses are more than $3.5 million, $4 million a year in annual revenue at this point right now.

Okay. So, gross margins, if you take away all the noise that we had this quarter, and the last couple of quarters, prices going up, which is helping gross margins, some mix, which is hurting the gross margin?

That's right. And of course, all this noise that we keep talking about, at some point there was a reason that we did this, so closing these two factories should have a terrific effect at some point on the numbers that we want to get to as a group, the higher gross margins.

Okay, good. Second question. George, you talked earlier -- I think someone asked a question on UnBalloon. What about the US status of UnBalloon?

Sure. So, we've had a back and forth already with the FDA. They seem quite happy with the filing. They are now more or less waiting to see what happens in our international beta trial, and the international beta trial is targeted for around 20 to 30 procedures. And I think the FDA is in a very -- they're very cooperative with us, and they're sitting back, and they're going to watch what happens in that trial, and hopefully, that trial will go well, and they'll feel good about it.

And so what would be a range -- I know, obviously, it's not fair to try to pin you to anything specific -- but what would be your range of guess for possible US approval? Are we looking at 2012 at this point, George?

And Larry, I thought you'd be so happy that I got a 510k today, just for you, for the Over-The-Wire we made Valvulotome.

Oh, I'm thrilled.

You're never satisfied. So, I actually, I can't prognosticate on that; I always get burned on when we're going to get a yes out of the FDA. Although we've had a very good back and forth on all the details of the file, with the exception of they want to see the trial played out.

Do you know how many they've asked for in terms of wanting to see how the trial goes? Is it 10, is it 100, is it 1,000?

You know, they'll never, ever give you a number like that, but our sense is from some of the back and forth that five was not sufficient, and when they looked at our last trial, they said they would have been more or less on board with that. So, not five, it's too small, but some number more. But they will never let you pin them down on a number like that.

Okay, good. And then finally, a question for Dave, primarily. Dave, I know you've been a busy quarter; lot of things going on. I know you're busy looking at a lot of things. But you guys have been relatively quiet in terms of the acquisitions. I know you want to do acquisitions. I know you're looking hard at them. Can you just give us some color on what you see going on for you or the marketplace in terms of acquisitions lately?

Sure, Larry. So, yes. Obviously, after we did LifeSpan in November there was a little bit of integration work, and then, frankly, between Endologix and the TAArget/UniFit divesture, that absorbed a little bit of band width for us.

Yes.

And frankly, I'd say Corporate wide we're sort of -- we've been interested in integrating and letting the dust settle a little bit with respect to a number of these initiatives. As you pointed out at the beginning of your question, there are a lot of moving parts --

Oh, yes.

of the business right now. And so, to lop an acquisition on top of the Company in the middle of all that, though we came close in Q1 of this year, but the seller got cold feet. We're definitely out there looking. You know, at any one time I've got, as you know, probably two to four real deals that are kicking around. I don't like to get real specific about it, but we're out there looking for the standard drop in acquisition, and we are looking, you know, we'll look at larger deals also, if they're appropriate. So, we're out looking around, and when we find something that we like at a valuation that we like, because we're value buyers, then we'll execute.

Great. Thank you, guys.

Thanks, Larry.

(Operator Instructions)

Your next question comes from the line of Jason Mills from Canaccord. Please proceed.

This is Jamar for Jason.

Afternoon, Jamar.

I've got a couple. First one is just to make sure that the change in your operating income guidance is all due to the charges from your initiatives, and not related to any of the underlying business?

Yes. I feel like -- this is JJ, Jamar. Thanks for the question. I feel like that in large part the answer is yes, although I would say with 3% organic growth, excluding stent grafts, that's not necessarily where we want to be, so there's a piece of it which relates to more than stent grafts. But I would say by and large, the vast majority of the guidance change relates to the stent grafts. The Endologix piece, in the $4 million to $5 million sales ranges is a very big chunk, and when that goes away, obviously, that's going to ripple through the P&L from the sales line down to the op income line. And the TAArget piece going away as well, being one of our sort of native products had a pretty decent gross margin, and that would ripple through the P&L as well.

Okay. And then, following up on the loss though of Endologix in Europe, has that had an effect on sales force attrition out there? What do you expect? And then in terms of your total number of reps, where are you this quarter? And do you still plan to have around 70 at the end of the year?

Right, okay. So the back half of that question's easier and more concrete. Yes, we're at 65 or 66, I forget what we put in the press release, 65. And we do still anticipate being in low 70s by the end of the year. A lot of the growth has come in the United States where our sales force right this moment, not as of the end of the quarter, but right at this moment, that like 40-ish or 41, and we've been really making a big effort to get these tier one guys and tier A guys in. The good news is that the Japanese and American sales forces are 100% insulated from the stent graft issues, and the stent graft transactions. And so we've had nice lack of turnover in those sales forces, and we feel really good about what's going on there.

But to your point, in Europe we've definitely seen more sales force turnover recently, because some of the folks came, to give them their fair due, they came here to sell stent grafts, and now Dave and JJ and George are telling them, oh, we don't sell stent grafts any more as of September 1. And so some of them, their careers have changed, and they decided, hey, I'd like to chase the stent graft thing rather than the open vascular thing. So, we are seeing a little more turnover. And one would expect also, Jamar, to see that turnover continue for another two, five months until things settle down and everything gets clear. But just to clarify for everyone on the call, the last stent grafts really get sold at this Company in Europe on August 31 of 2011, and that's when we like things will start really settling down in that sales channel.

And, Jamar, I would add that that turnover is actually something that we want. We want to get the folks that want to see open vascular products to stay with us and focus on that, and the folks that didn't, I think it's best that we replace them with folks going forward that do. So I think that turnover's a healthy part of the change in the strategic direction.

All right. Thanks a lot.

Thanks a lot, Jamar.

Gentlemen, we have no more questions in the queue, so now I would like to turn the call back over to Mr. George W. LeMaitre for closing remarks.

Thanks, Tahisha. First I'd like to thank all the participants on this call. I'd also like to mention that we'll be speaking at the following investor conferences over the next couple of months. We have the Canaccord Genuity growth conference in Boston on August 10, and the Midwest Healthcare Investor forum the same day in Chicago. After that we'll be at the Stifel Nicolaus Healthcare conference in Boston on September 9. With that, I'll turn the call back over to Tahisha. Thank you very much.

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