LeMaitre Vascular Inc (LMAT) 2012 Q2 法說會逐字稿

Welcome to the LeMaitre Vascular Second Quarter 2012 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. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead sir.

Thank you, Fab. Good afternoon, and thank you for joining us for our Q2 2012 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 and the information under the caption Risk Factors in our 2011 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 in 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. Q2 2012 featured some solid numbers; 8% organic growth, five more gross margin points and a 10% operating margin. The quarter was better than we'd expected so I'll leave the income statement details to JJ. I'd like to spend some time relating our Q2 2012 results to the recently completed 2011 initiatives and then I will make a few comments about our strategy and 2013 direction.

In 2011 we undertook the following initiatives, refocused our European sales force on our proprietary vascular devices, expand our geographic reach, and third, consolidate our manufacturing into Burlington. We are now benefiting from these initiatives.

Our European operations were front and center in this transition, looking back to 2010, 33% of Europe sales were stent grafts, and many reps were stent graft only clinical specialists. Fast forward to Q2 2012 and we now have a 32 rep European sales force focused on vascular surgery.

We've also tacked on direct to hospital channels in Spain and |Denmark, while increasing the number of French and Italian sales reps by 50%. As a result of our refocusing in sales force expansion Q2 2012 organic growth in Europe was 17%. Perhaps the key headline of today's call is the 480 basis point pick up in gross margin. While the exit from lower margin distributed stent grafts has certainly helped, so too have the Italy and California factory closures, as we've now fully consolidated into our Burlington factory.

And we're starting to see our new AlboGraft production lines begin to manufacture more efficiently. Product quality questions have been answered as well. The UK and France rescinded their AlboGraft provisions in July, following the successful UK audit in Burlington. So, it is safe to say that the Italy and California transfers are now complete.

From increased European sales growth to a 5 point gross margin pick up to a pair of successful manufacturing transfers, it's nice to see the 2011 initiatives producing tangible results on our income statement.

So, what's next? Our three strategic directions should come as no surprise. Number one, we will continue to build out our vascular sales force in new countries. Number two, we will develop new vascular devices and line extensions via R&D, and finally, number three, we will look to acquire vascular devices to leverage our distribution platform.

Over the last decade, we've opened direct sales operations in the UK, Holland, Japan, France, Italy and Spain. We just keep finding that our suite of niche vascular products sells best when paired with a direct sales force. We project we will finish 2012 with about 85 reps. We will continue expanding geographically in 2013, setting up a direct presence in Brazil, Canada and Switzerland. These countries ranked number 6, number 11 and number 19 in terms of GDP.

In Brazil and Switzerland, we will likely replace current distributors with LeMaitre reps. In Canada, which has quickly become our fourth largest entity, we plan to open a Toronto sales office and double our existing sales force to 6 reps. An estimate of rep head -- rep head count at the end of 2013 might be 90 to 95.

And this growing sales force acts like a new product catch basin; the larger it becomes the more product development opportunities it attracts and uncovers. The Q2 2012 books show R&D grew 9%. Much of this increase was spent doubling our staff to 13 product engineers. These folks speed mark -- speed to market new platforms, next generation devices and product fixes.

The UnBalloon and the Over-the-Wire LeMaitre Valvulotome were both launched in Q4 2011 and sold at an annualized rate of $600,000 in Q2 2012. On the drawing board for late 2012 launches are the silicone UnBalloon, the 1.5 millimeter expandable LeMaitre Valvulotome and the second generation Moll MultiTASC [plaque] debulker.

The silicone UnBalloon reduces sheath-on-sheath friction. The 1.5 millimeter Valvulotome is a further downsizing of our 1.8 millimeter flagship. The Moll MultiTASC, will combine two of our current devices simplifying our Remote Endarterectomy procedure. This increased pace of development will help us extend our dominance in niches like Valvulotome and Carotid shunting, but it will also get us into new spaces like stent graft modeling.

With respect to acquisitions the LeMaitre channel is a valuable asset which can substantially increase the sales of certain vascular devices. This has been demonstrated exactly as we ramped up distribution of XenoSure from $500,000 in 2008 to $3 million in 2011. And, of course, we own an exclusive option to acquire XenoSure beginning in January 2014. This is a nice model, but we also like to acquire devices outright without such a long trial period.

We will stay tightly focused on vascular surgery whether we elect to use acquisition or internal development. Our tight call point is our business plan. We're confirming guidance today which implies 9% organic growth for 2012 and a 9% operating margin, while just south of double-digits, this pair of nines is continued confirmation that we're on the right track to grow sales and profits.

With that, I'll turn the call over to JJ so he can fill in the details about this fine quarter.

Thanks, George. Last quarter I noted that as we move away from the 2011 initiatives we would set ourselves up for cleaner quarters and an improved P&L. This seemed to play out in Q2. With this in mind, I would now like to review our Q2 sales, gross margin and operating expenses. I will conclude with a few words about our share repurchase program, dividends and guidance.

Q2 2012 sales are $14.4 million, an organic increase of 8% over Q2 2011, sales increased 3% organically in the Americas and international sales were up 17% led by Spain, Japan, Germany and Italy.

Our strategic decision to refocus our European sales channel by exiting stent grafts and increasing rep headcount by 40% both contributed to the gains. In fact, Q2 2012 European sales were strong across nearly all product lines. The recently added XenoSure biologic patch performed well, while Inahara's carotid shunts were up 13% and Valvulotomes 10%.

As George outlined above our gross margin also benefited from the 2011 initiatives. Gross margin in Q2 2012 was 73.4% versus 68.6% in the prior year quarter, a 480 basis point increase. This improvement was due to our exit from stent grafts, higher average selling prices and improved manufacturing efficiencies. More specifically, much of the training and start up cost associated with our 2011 factory transfers has abated.

Regarding operating expenses, Q2 2012 total expenses excluding special charges were up 2% to $9 million. The higher spend came from sales and marketing as well as R&D. Sales and marketing increased 5% due to additional sales reps and direct marketing, R&D increased 9% due to higher headcount. These increases were partially offset by a 5% decline in general and administrative expenses to the Italian factory closure and reduced compensation. The comparatively weaker euro also reduced expenses on a year-over-year basis.

Q2 2012 operating income increased 62% to $1.5 million, versus $900,000 in Q2 2011. The increase was driven principally by an improved gross margin and a reduction in special charges. The Company's operating margin in the quarter was 10%. Q2 2011 net income was $824,000 or $0.05 per diluted share, versus $519,000 or $0.03 per diluted share in Q2 2011.

Cash and marketable securities were $20.2 million at June 30, 2012, an increase of $500,000 during the quarter. Cash from operations was partially offset by share repurchases of $486,000, an increase in net inventories of $830,000 and two dividend payments of $760,000.

This month our Board of Directors approved the payment of a quarterly cash dividend of $0.025 per share, the dividend will be paid on September 4, 2012 to shareholders of record on August 17, 2012. Also, since August 2009 we have repurchased $5.8 million of our authorized $10 million buyback program. The program ends December 31, 2013.

Turning to guidance, we expect Q3 2012 sales of $13.9 million up 8% organically versus Q3 2011 and reported operating income of $1 million. We also continue to expect 2012 full year sales of $57 million and reported operating income of $5 million. These figures represent 9% organic sales growth and a 9% operating margin. Given the 7% evaluation of the euro since our last call, confirming 2012 guidance of $57 million has effectively increased our full-year organic growth rate from 8% to 9%.

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

Thank you.

(Operator Instructions)

And your first question will come from the line of Joe Munda with Sidoti.

Good afternoon, guys.

Hi, Joe.

Hi, Joe.

Real quick, George, with the reinstatement of AlboGraft in Europe, are we going to see similar sales numbers that we've seen there before the stoppage?

Right, that's a good question. So we're free to sell now -- my sense is in a market as competitive is Dacron. And, again, this is not a big piece of our business, this is a $2 million business usually in total. But my sense is, if we have projected that this is a $1 million piece of business, this France and the UK maybe we lopped off, annualized 400 or 200 something like that, Joe.

Okay. And what -- I mean, what were the results? I'm just curious. What were the results of their findings?

They came here, they audited for 3 days I believe; we had our whole staff here. They went home, they gave us a list of 20 questions and then they came back and said -- this is the UK -- and they said you're back on the market and then the French followed that.

The French never came, they just piggybacked off --

That's correct. And it had been known all the time -- the French piggyback to leave -- to put on prohibition, and they also piggyback to get off prohibition.

And were other countries in Europe waiting to see the findings that the UK had, if there were any to possibly take action, or was that just --?

No, no. They had all generally decided that everything was fine regardless of what the UK decided.

Okay.

And, again, the genesis of that problem, Joe, is that, I think, unfortunately we got 4 of our issues of our 10 worldwide issues happen to be in the UK where only 10% of our sales were, and so we looked anomalous to the UK agency.

Okay. And then on number of reps, you're at 83, I think you said anywhere between 90 and 95 in 2013?

That's right.

Is that without having an acquisition in place or is --

Yes, that's without acquiring a company that has a sales force. So, assuming we don't acquire a sales force based company, yes.

Okay. And then I guess this question is for Dave, as far as acquisitions are concerned -- I'll let this be my last question and then I'll hop back in the queue. Is there anything out there that really interests you at the moment? And, what's the ballpark -- is it still onetime sales, is that what you're looking at or is it -- has the multiple increased?

Yes, thanks, Joe. The -- I can't really comment specifically about the pipeline, although, I would say generally speaking it looks good in terms of the number of opportunities and sort of the attributes of those opportunities.

With respect to valuation -- LeMaitre still looks -- and generally the sweet spot is one to two time sales. We just saw CryoLife acquire Hemisphere for 4.1 time sales and, of course, before that we saw Baxter acquire Synovis for three times sales. So, there's -- evaluations are still healthy in this space. All day long we see companies getting acquired for 3 to 4 time sales but, of course, it just depends on what's exactly in the pipeline and how proprietary the pipeline is. And so, we feel good about it right now generally speaking.

Yes, I actually covered both of those names. And then, JJ, one final question, what was the CapEx [do] for the first-half of the year?

Through the first-half of the year, I'm going to say about $800,000, somewhere in that range -- $750,000.

Okay, all right. Thanks, guys.

Thanks Joe.

(Operator Instructions)

Your next question will come from the line of Jason Mills with Canaccord Genuity.

Hi, this is Christine (inaudible) for Jason. Thanks for taking the call. JJ, I have a question for you, Jason wanted me to ask you where you see gross margins trending over the next several quarters?

Yes, so you've seen our gross margin come up nicely over the last three or four quarters from the high 60s, I think we're around 69% in Q2 and Q3 of last year and now sort of in that 73% range, that has been reflective in part at least of our getting the manufacturing transition settled down which is happening.

I would say that we'll continue to work on that process over the next couple of quarters, so maybe we're in that same 73% range over the next couple of quarters, and then after that who knows. And I would say we peaked at some 76.1 or something in Q2 of 2010. I don't know about that any time soon but that would be a nice thing to shoot for at some point.

Great. All right, great. And can you talk to me about some of the things that -- the most exciting things that you like in your pipeline?

Sure. This is George, I would say right now we're real excited about the UnBalloon and the Over-the-Wire LeMaitre Valvulotome, those launches have been ongoing for about 6 months and we're getting great feedback about the concept of the UnBalloon and we're also getting great feedback about the Over-the-Wire Valvulotome. Those are exiting ongoing launches.

And we also talked today about a couple of more launches which is we think we'll be launching a 1.5 millimeter Valvulotome, we're going to have a second generation version of our MollRing MultiTASC and we also have an upgrade to our UnBalloon coming with the silicone inside the sheath for better -- less friction movement on the sheaths.

Great. I mean, I apologize I have not been following LeMaitre closely and I'm just back to following it more closely. Can you remind me of the market potential for each of those products?

Sure. I would say in general we're quoting Valvulotome. The market size is being sort of $15 million-ish. The UnBalloon, I think we've been quoting about $10 million market depending on whether you include thoracic or thoracic and abdominal.

And on the MollRing MultiTASC it's caught up in this whole Atherectomy and debulking space but isn't exactly Atherectomy. So, maybe that market potential was $10 million to $20 million. All of them are very typical LeMaitre niches or we don't -- we try not to get into markets that are too, too big for us, so our sale force can handle the competition.

Great. Thank you so much, I'll get back in queue.

Thanks, Christine.

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

Good afternoon, gentlemen.

Larry, how you're doing?

Larry.

Very well, and yourself?

Very good, very good.

Good. Couple of questions. I apologize, I joined a bit late. Did you give the number of shares you bought back during the buyback program during the prepared remarks?

We did not, we said that we have got -- we've bought about 5.8 [life] to date, we've got about $4.2 million remaining. Did you want to know another piece of that, that's basically the high level.

Okay, so you -- so the authorization was for a total of 10 and it's roughly 58% done?

Yes, exactly. Exactly.

Okay. Second, your reps are up to a high mark -- a high watermark of 83. I'm assuming that some of the newer reps haven't kind of hit their full stride yet and as they do, presumably, this would give a nice boost to the sales as they build their territory?

I mean, it's -- it is all baked into guidance as far as what we see but, yes, you're correct that these are newer reps and they're getting up to speed.

Okay. And for any of you, one of the companies that I follow -- in fact, Jason Mills also follows it is the Vascular Solutions. On their call -- Q2 call they talked about the impact of the medical device tax, which we all of course just absolutely love to death.

Have you quantified what that's going to be for next year, in a ballpark way, obviously you'd have to give guidance to that, but just in a ballpark way? And, secondly, Vascular Solutions actually said, we're going to raise our prices to offset the medical device tax. And I know you have that price increases in the past, I wonder if you have any comments about that particular issue.

Yes, Larry, very good question. We started to prepare for that, it's not all that surprisingly, it's not all that straight forward how you calculate the med device tax, but I am going to guess it's going to be somewhere in the $600,000 to $800,000 range for us annually, and that will probably hit up in the cost of good sales line and that will be paid for probably in part through price increases and part through less hiring or lower expenses and hopefully not on the bottom line.

Okay. And is that your thinking now, JJ, to put it actually in cost of goods as opposed to separate line items perhaps?

I think, so right now -- yes. I think so. We got to examine the actual rules a little bit closer which we'll do over the next few months, so we'll have a better handle on that but I'm thinking that's where it goes.

Okay, that's all I've got for now.

Thanks, Larry.

(Operator Instructions)

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

Thanks, Phoebe. First, I'd like to thank all the participants on this call. I'd also like to remind you that we will be hosting an Analyst Day in New York City the morning of September 25th, at Ruth's Chris Steak House followed by QA and of course lunch. Several of our executives will be on hand for a 2 or 3 hour presentation entitled, All the Pieces for Profitable Growth. Please see our website for RSVP details.

Separately we'll be presenting at several investor conferences in New York City over the next several months. Stifel Nicolaus on September 5 and 6; Rodman & Renshaw on September 9 and 10, and Lazard Capital Markets on November 13 and 14 and finally, we will be presenting at Barrington Research Associates on September 6th in Chicago.

And with that, I'll turn the call back over to Fab. Thank you very much.

You're 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.