LeMaitre Vascular Inc (LMAT) 2011 Q4 法說會逐字稿

Welcome to the LeMaitre Vascular Fourth Quarter 2011 Financial Results Conference Call. As a reminder, today's call is being recorded.

At this time I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Almechele. Good afternoon, and thank you for joining us for our Q4 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 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. Q4 has to be seen through the lens of our five 2011 initiatives. Sales in Q4 2011 increased 5% organically, as our European operations began to enjoy direct sales in Spain and Denmark, and as the stent graft exit began to settle down. Profit in Q4 2011 was flat to Q4 2010, as the loss of stent graft sales and associated GP was offset by lower expenses.

The LeMaitre Vascular that is emerging is smaller sales-wise, but we've set the table for quicker growth. In 2012, our top line should grow 9% as a result of a more focused vascular sales bag, 16% more sales reps, and two new products. Also, the bottom line benefit of two factory closures has yet to be realized.

I would now like to provide you with more details on our five 2011 initiatives, and then review 2012 growth opportunities. One of our initiatives was to go direct in Spain and Denmark. Sales began in both countries in July 2011 and we now have a sales manager and four sales reps on the ground. In Q4 2011, we posted $230,000 of sales in Spain and Denmark. This initiative is going according to plan.

The second and third initiatives were to divest our own stent grafts, which we did in June, and to stop distributing Endologix stent grafts, which we did in August. This strategic shift was intended to increase our focus on our core vascular devices and to extricate us from the hypercompetitive stent graft business. As you may recall, the lion's share of our stent graft business was in Europe.

In Q4 2011, our European operation posted its best organic growth quarter since Q1 2010, up 7%. The stent graft exit has also tacked on two gross margin points, as the distributed stent grafts carried lower gross margins. Additionally, the stent graft exist has cut op expenses in other ways. We swapped out several European clinical specialists for less expensive sales reps, and we stopped our American stent graft clinical trials. This initiative is also going according to plan.

The fourth and fifth initiatives were the two 2011 factory closures. After some initial AlboGraft timing and scale-up issues, both manufacturing transfers are now making progress operationally. Financially, though, the projects are slower to reach maturity than I had anticipated. Throughout 2011, these closures cost us gross margin points. I expect the opposite as time goes by.

Our factories in Italy and California have been costing us approximately $4.2 million per year to operate. Our Italy factory was closed in Q1 2011, and our California factory was closed in Q3 2011. I am confident that the savings from these closures will be there, and we need to have the patience to let the transfers settle in. This should provide us with gross margin expansion in 2012 and 2013.

Looking beyond these initiatives and into 2012, I'm excited about our new products and our larger sales force. The over-the-wire LeMaitre Valvulotome and the UnBalloon were launched on both sides of the Atlantic in late Q4, early Q1, and were beginning to see some -- to gain some sales experience.

Combined sales of these devices in January and February ran at about $500,000 a year. The launches are so recent that it's difficult to predict the ultimate size of each product. But I believe these devices will lift our growth rate in 2012 and 2013.

And these new products have an even wider sales channel, as we now have 78 sales reps in the field versus 67 at December 31, 2010. We have 44 reps in North America, 29 in Europe and five in Japan. We are now direct-to-hospital in eight of the 12 largest vascular markets in the world.

In summary, our European rebound in Q4 2011 helped us post 5% worldwide organic sales growth. The profits were flat to Q4, 2010, as the lack of stent graft sales and the associated gross profit was offset by tighter op expenses. Our five 2011 initiatives are beginning to contribute, and in 2012 we should also benefit from a larger sales force and the two product introductions.

With that, I'll turn the call over to J.J.

Thanks, George. Some of the themes running through the financials this quarter included return to sales growth in Europe, the sequential improvement in gross margin, the many benefits from the stent graft exit, continued tight operating expense control, and cleaner quarters with fewer special charges. Due to our exit from stent grafts, reported sales declined 7% from Q4 2010 to $13.4 million in Q4 2011.

But this masks a number of positive trends. Organic revenues in Q4 2011 were up 5% over the prior year period, our best quarterly growth rate of the year. Sales at our European subsidiaries increased 7% on an organic basis, as our more focused, non-stent graft sales force, as well as our newly direct efforts in Spain and Denmark gained traction. In addition, a number of our core products continued to perform well. In Q4 2011, XenoSure increased 46%, Valvulotomes increased 11%, VascuTape 9%, and catheters 8%.

The Q4 gross margin was 71%, down from 71.7% in Q4 2010. Manufacturing inefficiencies, the AlboGraft transition and a limited AlboGraft recall reduced the gross margin. But these were largely offset by the mid-2011 stent graft exit. Without this two-lot recall, the Q4 2011 gross margin would have been 72.3%, a 3.7% improvement from Q2 2011.

We continue to expect gross margin improvements as the AlboGraft and Lifespan product lines in Burlington mature. Currently, all AlboGrafts are being manufactured in Burlington, while full-scale Lifespan production in Burlington is three to six months away.

Moving down the P&L, LeMaitre continues to exhibit expense discipline. Q4 2011 operating expenses were $8.7 million, a 25% decrease from Q4, 2010. Excluding special items in both periods, operating expenses in Q4 2011 were $8.6 million, a 9% decrease from Q4 2010.

The improvement was driven by reduced selling costs in the absence of stent graft clinical trials. Excluding special items, 2011 operating expenses remained in check, with Q1 at $9.1 million, Q2 at $8.8 million, Q3 at $8.5 million and Q4 at $8.6 million.

From 2008 to 2011, in fact, operating expenses, excluding special charges, totaled $35.1 million, $33.5 million, $35.4 million and $35 million respectively. Cash and marketable securities were $20.1 million at December 31, 2011, a decrease of $3 million during the quarter.

The decrease was driven by $1.1 million of share repurchases and dividends, $600,000 of Italian facilities closing costs, $0.5 million for the Spanish and Danish transitions and the Lifespan acquisition, and $500,000 of factory build-out costs. Of these, only the share repurchases and dividends are recurring items.

With regard to dividends, our Board of Directors recently approved the payment of a quarterly cash dividend, in a 25% increase in the dividend rate to $0.025 per share of common stock. The dividend is payable on April 3, 2012 to shareholders of record on March 20, 2012. The increase in the dividend rate reaffirms our commitment to return value to shareholders, as well as our belief in the Company's ability to generate profits and cash.

Turning to our guidance, we expect Q1, 2012 sales of $13.8 million, up 8% organically versus Q1 2011, and reported operating income of $800,000. We also expect 2012 full year sales of $57.5 million, up 9% organically versus 2011, and reported operating income of $5 million. Changes in foreign currency exchange rates since our previous guidance in October lowered full year 2012 sales guidance by approximately $725,000.

Our Q1 2012 and full year 2012 guidance includes the effects of our exit from stent grafts, which accounted for $4 million of sales and $2.1 million of gross profit in 2011.

With that, I'll turn it back over to the operator for Q&A.

(Operator Instructions)

And the first question comes from the line of Jason Mills with Canaccord. Please proceed.

Hey, guys, this is Jamar Ismail calling in for Jason.

Hi, Jamar.

Good afternoon. Hey, the first question is, can you go into more details in your trends on what you're seeing in the vascular business, both US and OUS?

Sure. The best trend I can give you is we were up organically 5% and we saw a little bit better activity over in Europe. I would hesitate in making that too big of a point regarding other companies. I find we tend to trade in our own little space, in our own little world. So it was -- we see thing going fine in the US and in Europe, maybe a little bit better for us in Europe, but that could change.

Okay. So the growth in US and OUS are both around 5%, with OUS a little bit better.

OUS a little bitter. We're saying Japan was 9%, Jamar, Europe was 7%, and the US was 4% in Q4.

Okay. And then just on 2012 guidance, it's lower by about $1.5 million and if $725,000 of that is FX, what is -- what are you seeing differently with the rest?

Sure. So, we gave you guidance of $59 million in October, and now we're giving you guidance of $57.5 million. It's actually very explainable. As you know, our quarter was $800,000 short of our guidance, and so our starting point for next year is $800,000 short. And as you're picking up, there's FX difference of about $700,000. So combining those two is exactly the $1.5 million miss -- the $1.5 million change, I should say, from $59 million to $57.5 million.

It is worth pointing out that we still feel real good about the business because we were giving you an 8% organic growth number before for full year 2012, and now we're giving you a 9% organic growth for the business for full year 2012.

Okay. Do you see any material increases in your sales reps for 2012, or are you fine with the level you have now?

I think you'll see within six months us go from -- we're at 78 right now at this reporting period. I feel like you're going to see us drift up another four or five.

Okay. And then just as far as the Lifespan goes, can you just give a little bit more details about what the issues are there?

Sure. Lifespan actually -- the transition between California and Boston seems quite good. We have plenty of inventory. I think we left there last summer with 7,000 pieces of inventory, and we're fine in terms of going through those units. So, the transition's going almost exactly according to plan. Maybe it's a month late. But I think everything's fine with the Lifespan transition.

Okay. And then the last question, just M&A. Are you guys still looking at deals and where are you in terms of that?

Yes, Jamar, hi. This is Dave. Yes, we're definitely out there looking at deals. I'm not commenting specifically on the pipeline, but the criteria still hasn't changed. We're looking for disposable, implantable devices that are used by vascular surgeons. We have plenty of dry powder. Obviously, we have no debt. So, we're ready when we see the right opportunity at the right price.

Okay. Thanks a lot, guys.

Thank you.

(Operator Instructions)

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

Good afternoon, guys. Thanks for taking my call and my question.

Hey, Joe.

So, J.J., you alluded to -- oh, I'm sorry, George, you had stated the two factory closures are taking a little bit longer than you had anticipated and it's costing you roughly $4.1 million a year. Correct?

Let me try this again. The facts that I put out there was that the buildings when they were in California and in Italy cost us about $4.2 million a year to run.

Oh, to run. Okay.

And then just to follow up on the next point, the Lifespan transition seems to be going almost exactly according to plan. Maybe we're a month late, but I would say in the scheme of things it's almost exactly according to plan. The AlboGraft thing was definitely late. We caused back orders for our customers over in Europe, though we think we've put that in the rearview mirror. It seems to be fixed now.

Okay. My concern is -- I mean, the restructuring charges that you guys have taken on the P&L, are we going to see that coming in 2012 as well?

Yes. I mean, you've seen a lot of charges come through the last three or four quarters. And as you know, we pre-announced a lot of that last -- a year ago November, given the five initiatives that we were going to take on, or at the time four. And so, those have happened and come through the P&L. We think they're pretty much largely behind us at this point.

You've seen the charges get progressively smaller over the last couple of quarters. And really, we only had about $100,000 of special charges in this last most recent quarter. So we think those charges are pretty far behind us. We think we're going to have fairly clean quarters going forward. So, I don't think you should worry too much about charges from these things -- these initiatives coming forward.

Now, if we do something new, that's a different story. But given what we've done and the initiatives that we've undertaken, we think that operationally they're pretty well behind us.

J.J., what was CapEx for the year?

CapEx was in the high -- about $1.7 million, $1.9 million, in that range. Maybe $2 million even, as we were building out our AlboGraft and Lifespan clean rooms.

And operating cash flow?

Depending on how you want to define it -- so, if you're looking at EBITDA it was around $6.5 million. If you're looking at sort of free cash flow, net income minus CapEx plus depreciation, amortization, stock-based comp and working capital items, maybe $2.5 million or something like that. Not sure which number you want to peg to.

No, I was looking for that $2.5 million number. And, George, I mean, you guys have been pretty aggressive on the price increases. The growth that you guys are seeing, is that -- I mean, is that more volume driven, or is it due to the price increases? Can you give us --

Sure.

-- a little bit of color there?

Sure. I can give you high level simple answer, and then I'm going to dig down a little bit into it. So, of the organic growth of 5% in Q4, one-fourth of it was unit growth and three-fourths of it was price.

And interestingly, the unit growth for the whole company is actually 8% year-over-year. And what's happening is the lower priced products like the catheters, like the XenoSure and like the InvisiGrip, those lower priced products are growing fast, whereas the higher, more expensive products are growing less quickly unit-wise.

Okay. And can you give us an update on the launch of UnBalloon and Valvulotome?

Sure. I'm real excited --

Yes, I'm sorry. I must have missed it if you had it in the opening remarks.

No problem. So, we launched those, give or take, on December 31st on both sides of the Atlantic. We have all of our approvals in the US and Europe for those -- for the over-the-wire Valvulotome as well as the UnBalloon. And with that launch, the sales meeting in the US was the first week of January, the sales meeting in Europe was the second week in January.

And by the end of February we'd gotten to a run rate of $500,000 a year for the two products combined. I'm very positive or optimistic that we have upside from that. But there's what they're looking like two months into the year 2012.

All right. Oh, yes, I see it. It's cut off in my press release -- yes, I see it. And I guess my last question is your plans to expand distribution channels into China, any updates on that? I know you had probably mentioned that you don't anticipate government approval until late 2012, maybe even early '13.

Right. Yes, so, we talked that we're in eight of the countries, and four -- the only four that we're not -- eight of the 12 biggest markets. And the only four that we're not in are Brazil, Russia, India, China. We are currently looking closely probably at Brazil and China. And we don't know exactly where we're going to go. It feels like Brazil might precede China, but even if it does, it's just a sequencing issue, and then we'd come right along and do China after that.

However, given how far flung we are geographically, I don't want to get too far over our skis in sort of giving guidance on what year we'll get direct in those markets. I think it's very clear at the executive ranks inside our company that we must go to China and Brazil, and it's just a question of time. But we don't have firm plans to open an office as of yet. And the second we do, just like with Spain and Denmark last year, we'll get on the horn and we'll be talking about it a lot.

Okay. I mean, China, is it the joint venture thing that's the biggest roadblock, or is it government? What, in your mind, is preventing you guys from being there?

Quite honestly, it's my income statement. And it's not about the form the venture takes, it's about we need to show the public market that we can make some money on the bottom line. And so, if I were to go spend $2 million over in China a year right now, it would probably get some comments on these phone calls. So, that's what's slowing me down.

But I do feel like the flip side of that, I think we've been very aggressive in getting into a lot of these markets, and it really has done a lot of -- has had a lot of tough love on the income statement. And so, yes, we'll get there, but I feel like maybe we need to leave -- allow the income statement a little room to breathe here, and then get going on the international direct operations after that.

Okay. Then how -- then -- okay. But then Dave stepped in and then you guys are looking at acquisitions. How does that play into it as well?

Well, the thing I like about acquisitions is they usually happen off the income statement, so you're just buying companies. So, we have plenty of cash here. We have $20 million of cash, so I consider that something very different. And we're definitely looking to buy companies.

When you do set up an operation in Spain, Denmark, Brazil, China, as you know, that -- when you hire an employee, that stuff happens on the income statement. And so, to a certain extent, I didn't want to extend myself just yet for Brazil and China. Although as we're a small company with 280 people and 80 of our employees are overseas, and so I think we're definitely geographically adventurous.

I do feel like after Spain and Denmark we're going to take a little bit of a breather, but we'll get back on it very shortly.

And, Joe, just to add on, at an even higher level, often the revenue streams that we acquire are sometimes in some of these distant countries. So the acquisition strategy can fit really nicely with the geographic expansion strategy.

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

Thanks, Joe.

(Operator Instructions)

And at this time there are no further questions in queue. And I would now like to turn the call back over to Mr. George LeMaitre for closing remarks.

Thanks, Almechele. 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 Bank of America Merrill Lynch conference in May, and the Sidoti and Wells Fargo conferences in June.

With that, I'll turn the call back over to Almechele. Thank you very much.

You are 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.