LeMaitre Vascular Inc (LMAT) 2011 Q3 法說會逐字稿

Good day ladies and gentleman and welcome to the third quarter 2011 LeMaitre Vascular Earnings Conference Call. My name Tanya, and I will be your conference moderator 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 hand the presentation over to our host for today, Mr. JJ Pellegrino, Chief Financial Officer. Please proceed.

Thank you, Tanya. Good afternoon, and thank you for joining us for our Q3 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 is 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 in the information under the caption Risk Factors in our 2010 10-K and subsequent FCC 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, JJ. I'd like to break my comments down into three headlines. First, Q3 was a good quarter. Sales were up 7%, operating profit was $2 million, and cash increased by $1.7 million. Second, after three quarters of restructuring, LeMaitre Vascular is positioned to deliver higher growth rates and higher gross margins. And third, The UnBalloon and Over-the-Wire LeMaitre Valvulotome should launch in Q4 or Q1.

As to the first headline, in Q3 we posted 7% sales growth to $14.6 million and $2 million of operating profit. Similar to recent quarters, sales growth was strongest in the Americas and in our vascular category. LifeSpan, Valvulotomes, and carotid patches produced a significant portion of our dollar sales growth.

And tight operating expense control, which is flat to Q3 2010 enabled us to post a healthy 14% operating margin. Cash also increased by $1.7 million in the quarter, despite $1 million of share repurchases and dividends.

As to our second headline, with our five initiatives behind us, we have reoriented our company to be more vascular, more direct-to-hospital, and more efficient. As a reminder, the five initiatives were as follows. We terminated Endologics Stent Graft distribution, we sold our TAArget/Unifit stent graft business, we closed our Italian factory, we closed our California factory, and finally, we went direct in Spain and Denmark.

In time these five initiatives will enable us to focus on our dominant vascular brands, widen our direct sales footprint, move to higher margin products, manufacture more efficiently, and finally, post higher growth rates.

Our third headline is probably the most exciting. We have two upcoming new product launches, The UnBalloon Non-Occlusive Modeling Catheter and Over-the-Wire LeMaitre Valvulotome. We have our regulatory approvals for both devices in the US, as well as Europe. We are about halfway through our post-approval beta trials for both products, and we are anticipating launches in Q4 2011 or Q1 2012 for one or both devices.

The UnBalloon is a catheter-based expandable nitinol cage, which aids in aortic stent graft implantation. Once the stent graft is been implanted The UnBalloon is delivered to the site over a guide wire and inflates like a balloon to tact down the edges of the stent graft.

Modeling, as this is called, prevents blood from leaking back into the weakened artery. Modeling is typically performed using an exclusive latex balloon catheter. The problem is, is that blood pumping out of the heart jack-hammers the top of the balloon with every beat, sometimes causing stent graft migration.

The UnBalloon eliminates jack-hammering because the blood passes straight through nitinol cage. The Non-Occlusive UnBalloon is an intuitive and elegant solution, and we are seeing high physician interest. We have successfully completed 18 of our 30 beta cases.

The Over-the-Wire Valvulotome is the sixth generation our flagship device. As the name implies, our current valvulotome has been redesigned to track over a guide wire allowing for easier access and repeatable device passage.

As you may know, the majority of vascular catheters have a central lumen and are inserted into the vasculature over a guide wire. Guide wires facilitate initial access. The vascular catheter is then easily able to find its way back to its destination. Some people call guide wires the railroad tracks of vascular surgery.

The Over-the-Wire LeMaitre Valvulotome is the first valvulotome to ride over a guide wire. Given our leading share in this niche, we plan to leave our current expandable LeMaitre Valvulotome on the market and give vascular surgeons a choice.

We have successfully completed 15 over-the-wire beta cases. Assuming these two beta trials continue to go well, these launches could prove to be commercially significant. I'll repeat the three headlines from the quarter. Number one, Q3 was a good quarter; sales were up 7%, operating profit was $2 million, and cash increased by $1.7 million.

Number two, after three quarters of restructuring, LeMaitre Vascular is positioned to deliver higher growth rates and higher gross margin. And finally, number three, The UnBalloon and Over-the-Wire LeMaitre Valvulotome should launch in Q4 or Q1. And, with that, I'll turn the call over to JJ.

Thanks, George. I'd like to start by giving some color on our Q3 financial results, review our special charges, and conclude with some remarks about repurchases, dividends, and guidance. Q3 2011 sales were in line with our expectations at $14.6 million, a 7% increase over the prior year. Geographically, the Americas increased 8%, Japan was up 25%, and Europe increased 2%.

Sales in the Americas and Japan were solid, while in Europe our transition away from stent grafts and the microeconomic environment hampered results. Worldwide organic sales growth was 4% in the quarter. Moving down to P&L, we reported a growth margin of 69.9% in Q3 2011 versus 76.1% in Q3 2010. The decrease was largely due to continued AlboGraft transition costs in Burlington, as well as a shift in sales mix.

With regard to AlboGraft, we believe that the transition from Italy to Burlington is rounding third and we should see improvement soon. With respect to product mix, increased sales of carotid patches, the inclusion of LifeSpan, and a large stent graft all negatively affected the Q3 gross margin. We expect that our gross margin should improve 1% to 2% in the coming quarters.

Further down the line, the California factory closure should give us some gross margin upside as well. Q3 2011 operating income was $2 million, matching our Q3 2010 operating income. Excluding a $735,000 gain from the Endologix termination and restructuring charges of $394,000, adjusted operating income was $1.7 million in Q3 2011.

This compares favorably to adjusted operating income of $1.1 million in Q1 and $1.5 million in Q2. 2011 operating expenses continue to be restrained. I'd like to make a quick point about special charges. Over the last several quarters OpEx special charges related to our five initiatives have declined from $2.2 million in Q4 2010 to $1.1 million in Q1 2011 to $650,000 in Q2 2011.

In Q3 2011 we had a net gain of $340,000. These declining charges roughly reflect the operational progress we have been making. Going forward, we expect a cleaner P&L. Turning to the balance sheet, cash and marketable securities as of September 30, 2011 were $23.1 million, an increase of $1.7 million during the quarter. This increase included the receipt of the $1.3 million distribution termination payments from Endologix, dividend payments of $310,000, and share repurchases of $734,000.

We have grown cash steadily throughout 2011, in fact, from a net year of $18.8 million in February, cash balances have risen by over $4.3 million. Further, if we add back share repurchases and dividends, cash balances would have increased $6.1 million since February.

With regard to our share repurchase program, since we began in August 2009, we have repurchased approximately $4.2 million of our stock at an average price of $5.96 per share. Our Board has authorized us to purchase up to a total of $5 million through the end of 2011. Our fully diluted share account has remained essentially flat since the inception of the program. The stock repurchases have been partially offset by employee stock grants.

Turning to guidance, we expect Q4 2011 sales of $14.2 million, up 9% organically versus Q4 2010, and reported operating income of $1.2 million. We also expect 2012 full year sales of $59 million, up 8% organically versus 2011, and reported operating income of $6 million, up 50% versus 2011.

Our Q4 2011 and full-year 2012 guidance includes the effects of our exit from stent grafts. These devices carried a roughly 55% gross margin and accounted for $6.8 million of sales in 2010 and $4 million of sales in the first nine months of 2011.

As a result, the exit from stent grafts will decrease sales by approximately $1.3 million per quarter and gross profit by approximately $700,000 per quarter going forward. We do not expect to record stent graft sales in Q4 2011 and full-year 2012.

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 would like turn the call back over to the Operator for Q&A.

So, Tania, I don't know if you there, we see Joshua Zable in the queue.

(Operator Instructions)

Our first question will come from the line of Joshua Zable with WJB Capital. Please proceed.

Hey, guys. Congrats on a nice quarter. Thanks for taking my questions here. Can you hear me, okay?

Yes, perfect, Josh, thanks.

Yes we can.

Great. It's nice to have a lot of this stuff behind us and starting to look at some clean numbers here so very, very helpful. We appreciate it. I have a number of questions. I'll run through them quickly. Just, JJ, for some housekeeping, on the gross margin, just pro forma basis, what was that at? I'm just trying to run through the math. I have 70%. Is that right, or am I too light on that?

And by pro forma, what do you mean? Next couple quarters?

No, I mean for Q3; ex-impairment or anything like that. Is that the right number? I have 69.9%. I just want to make sure I'm not missing anything there.

Yes, 69.9% was the reported number, Josh, and about 3.5% of the Delta from last year was because of the AlboGraft start up, and another 2.5% or so was from mix.

Okay. So again, I know that's not really far off from the 71% where you've been, but the lighter versus this year, if you will, was really more a function of mix than anything else?

I think this year really AlboGraft was the big drag on the gross margin and you've been at the high 60s for the last three quarters, and I think what we're saying is we think we're rounding third on that project and hopefully we'll see some improvement in the gross margin line as excessive costs from that project abate.

Great. Great. And then, as we think about next year, both the Unballoon and the Valvulotome, or the new Valvulotome, I know have a lot of potential. I know you guys are excited. We're excited about it.

It just sort of -- its even unclear what the potential is, but when you think about your guidance next year, to what extent have you accounted for these guys launching? Can you give us any sense; are these guys upside to the numbers? Are these guys part of it? What are you thinking around them? Thanks.

Sure, Josh. This is George. The number that we've got baked in our head is about $1 million to $1.5 million. Obviously, if things go fantastic, they could represent upside. Although, we have found over the years, the first year of a launch is a little bit slow and you're still getting your feet underneath you, but I'd say $1 million to $1.5 million is inside those numbers next year already.

And that's for each product or for the combination of the two?

Combination.

Oh, nice. Okay, great. And then, just looking to international numbers, the international growth is a little bit lighter than it has been. I know that can get kind of lumpy, but you are direct in Spain and Denmark now, you talked about that.

I know there's a lot of macro headlines going on. So there's some macro stuff going on, and then I know you guys are transitioning to try and go more direct. Can you just talk about that and as you think about that 8% for next year and next quarter what not, sort of, trajectory US versus international, just how to think about it. Thanks.

Okay, great. One key stat to think about is this transition, I think, has been -- it explains a lot about Europe for us. The transition from stent graft company to non-stent graft company has been significant. And we just did some quick numbers before we got on the call for this question.

Approximately 50% of our European sales force and clinical specialist group has either been terminated because we didn't need clinical specialists going forward or have quit voluntarily since we announced at the last October 28th call a year ago that we were about to get out of stent grafts. So you've had a full 50% flip of the sales force over there, Josh, and I would say, I think fundamentally, that accounts for the slowness in Europe.

As to your second part of that question, the macro-economic environment, it's true that we're having issues over in Europe. I think all the companies are noticing that. One very poignant anecdote for us, just to show you how it does matter to us, I think about three years ago we had a EUR500,000 a year business in Greece. We have EUR0 a year business in Greece effectively right now.

So the strikes that you see happening in Greece on the television have clearly come home to roost for medical device companies, and a lot of our bigger peers are just pulling out of Greece all together. So we've got our own issues, which is the swirl around exiting stent grafts, but we've also seen the macro-economic environment affect us.

That being said, to get fully back to the beginning of your question, we're pretty optimistic about next year. I actually forget right now in my budget what the spread of the growth rates is between Europe and the US next year, but I think it's pretty equal. I don't think there's a material difference between what I'm expecting out of my American crew and what I'm expecting out of Europe.

And then just a final question here, George. Just as far as thinking about next year's ramp so to speak, should it be a ramp where you start to gain momentum? Again, I know you guys. JJ, I know you talked about the margin assuming, so are we going to see a ramp there on the sales line, kind of pretty consistent across the board or should we start to see a ramp as new products? I know you haven't baked in too much. I'm just trying to think about it properly so we model it properly. Thanks, guys. Congrats again.

Thanks a lot, Josh; appreciate that. I would say I would look to the last three years and look at what our breakdown is per quarter. I know the summer's always a little weak. I know that Q4 is always a little better in the summer.

And then I would say layer into that, I think you're going to see our sales force right this second is at 71 sales reps. We'll probably end the year more in the 75, 78 range and we'll probably roll through the year with 80 reps. So you're going to have a good rep increase. When they really become operational maybe is six months after they get hired. So maybe a little bit more ramp next year, although I don't know dramatically so.

Great, and one last thing. Do you guys know off hand the sale rep last quarter, I'm just trying to figure out sequentially where you're at if you added this quarter.

I can tell you (inaudible) form. Okay, 64 here.

Okay. Great, guys. Thanks very much.

Thanks a lot, Josh.

Thanks, Josh.

Our next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed.

Hey, guys. This is Jamar calling in for Jason.

Jamar, how are you doing?

Doing pretty good. Thanks for taking my questions. The first one; what was your vascular growth rate in Europe this quarter?

Negative 4%.

And then, just in terms of procedure growth in vascular, what are you seeing in the different geographies?

I guess I'd answer that by saying the organic growth rate was 7% in the US, negative 4% in Europe, and 4% in Japan. And I think that's as close as I come to understanding the underlying procedures.

Okay. And then in terms of being ready to launch the Valvulotome, you said you have 15 beta procedures. How many total in that product are you guys going to have?

I think on both sides, the Unballoon as well as the Over-the-Wire Valvulotome, we're searching for 30 cases so we're roughly half way through each trial.

Okay, great. And then the last one, just (inaudible) for modeling, what are you thinking about in terms of restructuring charges for Q4 and then is Q4 said to be done?

Yes, I think part of what we're telling folks here today is you've seen a nice trend in restructuring through this quarter and going forward; we should have fairly clean quarters on the restructuring line. So probably nothing like the numbers that you've seen over the last three quarters. Pretty muted.

Okay, great. Actually, I do have one last one. Have any of you guys, I know you're probably not going to give a direct answer, but in terms of what you're seeing out there for tuck-in acquisitions, are you moving forward, still looking at that or anything near term?

Hi, Jamar, it's Dave. Yes, we're definitely out there looking like we always do. I don't comment specifically on the pipeline, but obviously, we're continuing to generate cash and we're continuing to look and when we see a target that meets our criteria and is reasonably priced, we'll execute on it.

Okay, great. And just to be clear, there's none of that in guidance?

Right.

Okay, great.

You know, Jamar, it is worth pointing out that there's an option to buy that XenoSure product line which we currently distribute on January 2014. So that's a potential use of cash out there. And the terms are all set between the two companies. It's just do we exercise the option.

Okay, great. Thanks a lot.

Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed.

Good afternoon, guys.

Hi, Joe.

Real quick. Just following up with what George said on XenoSure, how much -- what is the revenue run rate for XenoSure, ball park?

I'll give you a range. We don't love to get into the exact details of other products, but something like $2 million to $4 million.

$2 million to $4 million. And the -- what is -- the factory right now in Burlington, what's the capacity? What is it running at right now?

I would say you've got a lot of capacity that you could utilize. We have 28 people in the factory right now, and I would say unit wise on some of these devises, we only need 5,000, 7,000 units a year and we can probably make, with the team on hand, about 12,000 to 15,000 units a year.

So roughly in the 45% to 50% range you guys are running at?

That's fair.

And that's just the [AlphaVerif] side. And generally speaking, Joe, we're just running one shift by and large so you could run another shift.

Okay. So then I guess with what Dave had just said -- with an acquisition, are you looking to fill that excess capacity? Is that another way to leverage growth there?

Joe, this is Dave. That depends on the product line you acquire. Typically, the manufacturing activities associated with an acquisition are a little unique and you have to take a little more space, but you do gain operating leverage by eliminating a lot of the duplicative overhead. So there is some leverage but it doesn't mean it necessarily fits in exactly to the footprint we have here. It just depends on what you acquire.

Yes, would the model be then similar in the past by the facility and hope to move it to Burlington?

Yes, absolutely. And the timing of that just depends up on the nature of the product you acquired and the complexities or lack thereof of the manufacturing.

Okay. And my last question. To your comment George, about Greece, you guys said you had a [EUR500,000] business there now you have zero. I'm not a doomsdayer, but with what's going on there, it seems that the Europeans are still a ways away and there could be more problems there. What happens to your other business in other countries, for instance Spain or Italy, what are your plans for that?

Sure. So interestingly enough last month, I flew directly from Athens to Milan to Madrid to do a trade show and then to visit the two offices. And I would say for my own eyes, and again I am just one person here, but I do draw a big line between the Greeks and the Italians and the Spaniards, in terms of how close they are to budget control and things.

So I am not quite as worried, although, you can read the Wall Street Journal as well as I can, there's some risk and some fear. I would say that is balanced out by -- you can look at our income statement right now and figure out that we're turning into an American company ironically from having been a European company for a long time.

So as we drop the stent graft business, that was $6 million in 2010 of European revenues. That's all gone now. And so percentage wise, this company's now something like 65% US and also of the European revenues, most of it is coming from the Northern countries we started in Germany.

And so we've got Holland, Belgium, France, Austria and the Northern countries producing a lot of our income, and I have dramatically less fear about what's going to happen in the German economy than Spain and Italy.

Okay. And plans for a push into Asia by any chance?

Well, it's an interesting comment about where else do we do next, because we've basically gotten Europe finished and we're in Japan and the US. We see ourselves as being in eight of the top 12 vascular markets in the world and the only ones, the big one's that remain I should say, are the brick countries. And I think we're sort of looking at ourselves and trying to figure out, if we want to go to Brazil or China next and then when that make sense to go.

Okay. And what would -- what is that eye-opening moment that pushes you guys to go, what do you need to see?

Right. One of the things we think about here is that we're a publicly trading company and we have an income statement to present to you guys every quarter. And so we feel like we've just gone through a lot of this transitions and particularly we've gone direct in Spain and Denmark in the last year, but if you look back over the last ten years, we probably picked up one of these countries every year and half.

And so for now, I think we're good although, as we start to normalize here and we just start to get further away from these charges that we're talking about, I consider myself to be very adventurous geographically for a small company, so you can probably expect to see some of that in the future.

Okay. So what does it cost to add a distributor, per say, let's say you were going to add one to Brazil, what would it cost on average? What has it been in the past?

I am sorry, I misunderstood the question, I thought you meant, when do we go direct in the next markets. We already have distributors in all these countries.

I am sorry -- no, no -- I am sorry. I meant direct. I am saying what would it cost to be direct in those countries per say?

Yes. It varies on how aggressively you go after -- you could put one or two people down there and just kind of be managing distributors or you can go whole hog, like I'll say we just did in Spain.

We have five employees in Spain roughly EUR40,000 in employees. So it's a pretty expensive endeavor in all of these countries, and you don't want to go direct in all the countries because they would initially produce losses at the beginning.

Okay. All right. Thank you.

Thanks a lot.

Our next question will come from the line of Larry Hemowich with HMPC. Please proceed.

Good afternoon, gentlemen.

Larry.

George, a subjective question or more qualitative question, we talked a little bit -- we talked quite bit about Europe, what are you seeing in the way of pricing pressure in the US. And I know that part of your business model over the last several years is that you have been able to implement price increases in a regular way and seemingly without a lot of push back, has that changed it all for you in the last few months?

Sure. So we had our price increase on January 1st in the US and we plan to do another price increase this January 1. I have to admit reading all the headlines, I do get a little skittish about all the price increases going forward.

So I think to go against that I think we've widened out our sales force Larry, and now we're going to be carrying a sales force next year just dramatically larger then this year. So hopefully they can get some more unit growth going to go with the price hiked, but yes, Europe's always more challenging and in April Japan puts through -- this April, they put through a 5%, essentially a 5%, deflator and then two years from now, they will do that again.

So there's challenges in Europe. I think we got a 1% price hike this year and I think that did stick in Europe generally speaking, but in Japan we were down roughly 3% in price and in US, I think we are up 4% or 5% in price. We generally get our price hike, but I agree, it's going to be more challenging going forward. Everything you read means it's going to be more challenging.

And specifically the US, I was talking to a friend of mine who has been calling on Cath Labs and in the hospital and so the pricing pressure he's noticed over the last several months is really accelerated. Have you guys seen that in push back on your US pricing?

I don't specially if we have, but I'd pile on a little bit and I would say we're also seeing the level of democracy of getting into hospitals and getting new products approved has sky rocketed in the last five years. You have to be badged, et cetera, to go into hospitals nowadays. So yeah, we see it coming. It's worse in the future than it was in the past.

Yes. He was saying that too and he said even where companies got a really good proprietary product, the problem there is that the doctors want it, the purchasing agent will maybe stock just a few ways, but they can't get good stock because the purchasing agent doesn't want to put too much new stock in new product, et cetera. So yes.

So George, second question, could you provide a little more color on two of my favorite products, the Valvulotome and you've discussed your own sense of what these new improvements will bring. And then second of all, a little more update on UnBalloon. What specifically is going on in the US with the regulatory side on UnBalloon.

Okay. Great. Well, let me give you a simple answer which -- I go with UnBalloon first. We're all set with our regulatory approvals on both sides of Atlantic for both of these products. So all the remains is for us to complete our internal self-appointed post - approval beta trials and we're half way through both of those trials. So all that waits is for us to say we feel great about the performance of the device that we'd be willing to risk the LeMaitre brand name watching over the device. So you don't have to wait for the FDA or a CE mark on either device --

Okay. I didn't real- -- so you actually 510-K approval now for UnBalloon?

Yes, that happened in Q3 as did the Over-the-Wire LeMaitre Valvulotome as well.

Okay. I may have missed that in call itself, but that must be encouraging because you are little worried, as we talked in the past about the timing of FDA approval. So that must feel encouraging to have gotten those approvals.

We are and a lot of thanks to our regulatory department whose done a great job with this filling lately, so yes, we're excited about that. As for the LeMaitre Valvulotome you know you watch all our reports.

The thing has been a work horse. It continues to grow for us. It's been great. I am excited about this Over-the-Wire Valvulotome because it's our first real serious change to the platform in quite a while. And when you work on a big slug of revenue, like the LeMaitre Valvulotome is right now, if you can make a tweak that's just 15% or 30% better, you can impact the big revenue stream.

So that's why I am excited to go after the Valvulotome with this new tweak and with the UnBalloon it's obviously all terra nova, and so it's an exciting device. The doctors are thrilled about it, but we'll see how that translates into action as we start selling this things.

Yeah. And just a quick question to JJ, then I jump back, so JJ on the share buyback I want to make sure I heard, did you say you'd spend $4.2 million of $5 million authorized?

We have. We spent about $725,000 in the most recent quarter; $4.2 million total; so about a $800,000 left.

And how many shares approximately have you bought back, last since the buyback began, just a rough ballpark number?

Yes, about 700,000 shares.

700,000, and those were all accounted for by new options, et cetera?

Almost a wash, almost.

Okay, great. Thank you very much.

Thank you, Larry.

At this time there are no further question in the queue. I would now like to hand the conference back over to George LeMaitre for closing remarks.

Thank you very much, Tanya. 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'll be at the Lazard Conference on November 16, the Canaccord Conference on December 6th, the MidWest Conference on December 8th, and the Sidoti Conference on January 9th. With that I'll turn the call back over to Tanya. Thank you very much.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.