LeMaitre Vascular Inc (LMAT) 2012 Q4 法說會逐字稿

Welcome to the LeMaitre Vascular Q4 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. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Sue. Good afternoon and thank you for joining us for our Q4 2012 conference call. Joining me on today's call are 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 make 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, but these words are not the exclusive means for identifying such statements.

Our forward-looking statements are based on our estimates and assumptions as of February 26, 2013 and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the cautionary statement regarding forward-looking information and the 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 will discuss non-GAAP financial measures, the most directly comparable financial measures calculated in accordance with GAAP. And a reconciliation of GAAP to non-GAAP measures are contained in our press release announcing this quarter's results and are available in the Investor Relations section of our website, www.lemaitre.com.

I'll now turn the call over to George LeMaitre.

Thanks, J.J. Q4 2012 served as an exclamation mark to a great year. In Q4, sales increased 12% organically and unit sales increased 9%. Each of our major geographies posted organic sales growth. International grew 17% and the Americas increased 10%. Q4 op income was up 12% while net income doubled.

For the full year 2012, sales increased 8% organically, units were up 11%, the gross margin improved by 230 basis points, and we reported 15% op income growth and 20% net income growth. 2012 was a record year for non-stent graft sales and op profits.

For 2013, we expect sales to grow 8% organically and op income to increase 18%. In addition, the board of directors increased the Q1 2013 dividend by 20% to $0.03 a share. Looking back, 2012 was a productive year. While our European stent graft exit officially occurred in Q3 2011, our tightened focus on open vascular became fully evident during 2012 and helped drive 15% organic sales growth in Europe. Additionally, the European sales team fully embraced XenoSure in 2012, increasing sales of our carotid patch six-fold to $1.3 million. 2012 was also our first full year of direct-to-hospital sales in Spain and Denmark.

On the business development front, we acquired the manufacturing rights to XenoSure in October 2012. In total, we will pay $4.6 million to acquire a $5.1 million business, which grew 67% in 2012. We are now in the process of transferring the manufacturing from Vancouver to Burlington and expect to make our first Burlington unit in 2013. Controlling XenoSure manufacturing should enable us to further develop this platform and should eventually improve our gross margin.

Our R&D efforts became more productive in 2012. The newly released UnBalloon and the Over-the-Wire LeMaitre Valvulotome contributed $600,000 of 2012 revenues. We also received several key regulatory approvals, which will enable us to sell new devices into new geographies.

Looking ahead into 2013, we will be focusing our R&D efforts on two key launches -- the 1.5 millimeter expandable LeMaitre Valvulotome and MultiTASC, a more user-friendly remote endarterectomy device. Both devices logged first-in-man procedures in Q4 of 2012 and both beta trails are now running very well. These two product lines should launch on both sides of the Atlantic in mid 2013.

As we closed out 2012, we undertook several new direct-to-hospital initiatives, which should provide sales growth in 2013. In November, we opened a Toronto sales office and hired a Canadian general manager. We expect to begin shipping devices directly to Canadian hospitals from the Toronto office this Friday, March 1, and we plan to have five Canadian sales reps on staff by year-end.

We also recently began selling directly to Swiss hospitals and have hired two Swiss sales reps. Finally, in December 2012, we agreed to terminate our distributor for certain Japanese territories and will begin selling direct-to-hospital in those territories through our existing eight-rep Japanese sales force. As always, we are trying to fashion a closer link to our hospital and vascular surgeon customers by eliminating distributors.

In summary, 2012 was an exciting year in which we began to benefit from the restructuring efforts first outlined at our December 2010 Analyst Day. As 2013 begins, we look forward to continuing the sales momentum we established in 2012 and we have also undertaken a new set of initiatives to drive future growth and profitability.

At this point, I'd like to turn the call over to J.J. Pellegrino, our CFO.

Thanks, George. As I look at our Q4 and full year 2012 results, two themes emerge -- the improved focus of our sales platform seems to be bearing fruit and we continue to invest in the business in a balanced way.

With regard to the top-line, Q4 2012 sales were up 12% organically and 10% on a reported basis. While XenoSure contributed significantly, growth was broad-based. In Q4 of 2012, remote endarterectomy devices were up 18%; AnastoClip, 16%; radiopaque tape, 11%; shunts, 9%; and catheters, 8%. This was largely true for the full year 2012 as well.

Moving down the P&L, we continued to invest in the business for the long term. Gross margin in Q4 2012 was 70.5%, versus 71% in Q4 2011, as higher average selling prices and improved manufacturing efficiencies were offset by XenoSure transfer costs and an unfavorable product mix. In Q4 2012, we incurred $200,000 of incremental expenses related to XenoSure transfer and expect an additional $1.1 million of incremental expenses in 2013. We believe these investments will lead to an improved XenoSure gross margin over time.

Total operating expenses in Q4 2012 were $9.5 million, versus $8.7 million in the year-earlier quarter, a 9% increase. For all of 2012, excluding special charges, operating expenses increased 5%. The increases were largely driven by our additional investments in sales personnel and sales commissions as well as product development and regulatory expenses.

Q4 2012 operating income was $900,000, versus $800,000 in Q4 2011. This 12% increase was due to higher sales, partially offset by higher operating expenses. Changes in foreign currency exchange rates in the quarter reduced operating income by approximately $100,000. Full year 2012 operating income was $4.2 million, versus $3.7 million in 2011. This 15% increase was primarily due to reduced special charges and the 230 basis point improvement in gross margin.

It is notable that the 2012 operating income increased despite the loss of $4 million of 2011 stent graft revenue and approximately $2.5 million of associated gross profit. Cash and marketable securities were $16.4 million at December 31, 2012, a decrease of $4.2 million during the quarter largely due to $4.3 million of XenoSure buyout payments.

Turning to other matters, our board of directors recently increased the quarterly cash dividend to $0.03 per share of common stock. The dividend will be paid on April 3, 2013 to shareholders of record on March 20, 2013. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the determination of the board of directors.

Separately, in Q4 2012, one of our long-time and largest private equity shareholders, Housatonic Partners, distributed is LeMaitre stock to its limited partners. Housatonic's approximately 9% stake in LeMaitre dated back to 1998. We felt fortunate to have Housatonic as an equity partner for so long and look forward to the availability of these shares on the open market. We hope this additional flow will improve our daily trading volume.

With regard to research coverage, we would like to extend a special thanks to Charlie Jones and the folks at Barrington Research who initiated coverage on us shortly after our last earnings call. Turning to guidance, we expect Q1 2013 sales of $15 million, up 8% organically versus Q1 2012, and operating income of $700,000. We also expect 2013 full year sales of $61.5 million, up 8% organically versus 2012, and operating income of $5 million, an 8% operating margin.

Q1 and full year 2013 guidance includes the effects of recently announced initiatives, including XenoSure, Canada, Switzerland, Japan, and France, as well as the medical device tax associated with the Affordable Care Act, which we estimate will be $650,000 in 2013.

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

Thank you. (Operator Instructions). And your first audio question comes from the line of Charlie Jones, Barrington Research.

Good afternoon, guys. Thanks for the thanks and glad to be onboard here. Nice quarter.

Thanks, Charlie.

Thank you, Charlie.

And thank you for all the detail on the revenue items; that will be helpful. I was wondering if maybe you could help us initially by telling us a little bit about how much Japan and LifeSpan contributed to 2012, and what impact going direct will have on your sales line for '13?

Charlie, this is George. Did you say how much Japan and LifeSpan?

Out of France, sorry. LifeSpan out of Japan on its own, and it looks like you're going direct there. Then, LifeSpan in France. What do those two things contribute together or apart and how much does going direct help your sales in '13?

Right. I would say they're not too big. Japan, we're -- you can think that we're generally spending about one times gross profit when we buy out these distributors. And for Japan, we spent JPY10 million, which I think is about $120,000, so maybe in Japan you're picking up $120,000, $150,000 in sales, and obviously that's going to help their gross margin a little bit. And it's a lot smaller in France, maybe it's $30,000 approximately.

Okay, that's helpful. Have you instituted a price increase in the US and internationally, and can you give us just a range maybe?

Sure. Yes, we definitely did in the US, around 4.5%, and in Europe, about 2%, if you ex out the effects of Switzerland going direct to the hospital.

That's helpful. What are you expectations for XenoSure growth in 2012?

Well, that's a good question. One thing we've got to talk about is we generally don't guide on individual product lines, so it is baked into growth. But I agree, it's a big number. We grew about 70% -- I think 67% on a reported basis last year. It's going to come down from there -- these numbers are too big -- but you still do have, in Europe -- it's sort of brand new in a lot of Europe, which is why you've got that six-fold increase in Europe in 2012. So it will be large. We don't -- we're not going to give out an exact number, but obviously it's our number one growth product line.

All right, thank you. I've got a few more questions. I'll jump offline; maybe I'll be back.

Thanks, Charlie.

Thanks.

Thank you. And your next question comes from Jason Mills, Canaccord Genuity.

Hi, guys. This is Jeff Chu filling in for Jason. Thanks for taking the questions.

Hi, Jeff.

Hi. I have several questions relating to your guidance for 2013. First, I was hoping you could describe the components of growth as it relates to 2013. When we look at your business, we think about unit growth, price increases, geographic expansion, and new products. Is there anything that we're missing from that?

No. You've got new products, you've got geographic expansion. I don't think there's anything you're missing. One -- it's not answering exactly your question, but as long as you bring it up, so in Q4 2012, just to give you maybe a springboard to go into 2013 as you think about it, the 12% growth was comprised of about 70% unit growth and 30% pricing increase.

Great. That's very helpful. And in terms of -- what is your growth margin expectation for 2013?

So, Jeff, as you know, we don't guide on gross margin and the gross margin is baked into the guidance. I will tell you that we've said that the XenoSure transfer is going to cost about $1.1 million, sort of, in 2013, and that's largely in the first three quarters. So you can think of us as trying to get XenoSure inventory onto the shelves in Q4 of 2013, so we'll probably see some improvement in Q4. So maybe depressed a little bit through the first three quarters because of that transfer, and then a nice jump in Q4.

And, Jeff, we've also said, I think at the last meeting or in the press release, around the XenoSure transaction, that we believe that out in 2014-ish, 2015, that the transformation of actually making it rather than buying it will add about 15 gross margin points on the XenoSure product line for us.

Great. Fantastic. And the last one for me, what should we be modeling for the tax rate in 2013?

So, you saw a low effective tax rate in Q4. I would say that's obviously not normal, and in 2013 you should probably be in the high 30s -- 37%, 38%. We will get the benefit of R&D tax credits, again, in 2013; did not get them in 2012. But I would say up in the high 30s is probably where you should be.

Great. Thanks for taking the questions, guys.

Thanks, Jeff.

Thank you. And your next question comes from Joe Munda, Sidoti.

Good afternoon, guys.

Hey, Joe.

Hi, Joe.

Real quick, George, thank you for the insight on the additional sales people. I'm just curious, what is the international sales force number right now?

We've got 8 in Japan and I think 33 in Europe. Should add up to 81. So I think it's 42, US; eight in Japan; and the balance Europe, maybe 31, Europe. Sorry, let me just -- I have it right here. Let me do it -- let me start over again here, Joe, sorry.

Yes.

Americas, 43; Europe, 30; 8, Japan; worldwide total, 81.

Okay. And then, can you just talk about -- I'm sorry, let me -- I'm skipping ahead here. J.J., what was CapEx in 2012?

CapEx for all of 2012 -- let me get that for you, I don't have it off the tip of my tongue -- I want to say around $2 million, but let's take a look. Yes, so about $1 million, Joe.

$1 million.

Yes.

And, George, I was wondering if you could give us some color on the decision to up the dividend and why now?

Sure. So, the pattern that we've established -- and I can't say whether we'll keep this up -- is every year at the beginning of the year the board of directors evaluates the dividend. And we went from $0.02 when we first initiated it, to $0.025 last Q1, to $0.03 this Q1. So it feels like it's something like a half a penny raise, something like a 25% or 20% raise each quarter. And now the yield, which we look at a little bit, is at 1.9%. So getting up closer towards a higher yield.

And when we started it we didn't know -- exactly know how it would feel; we're now two-and-a-half years into it or so and we feel good about it and we keep inching it up a little bit.

Okay. Is there a particular number you guys are shooting for as far as yield is concerned, or as you just going to --?

No, not really. And I feel like that's something that -- it feels to me like it's something the board's got to look at every year. And I think it will be weighed against growth rates, free cash flow available, things like that, so it feels like it is a yearly decision. And the only think I can give to you is we felt a little bullish based on what we've been seeing, and we felt like moving it up this year.

Okay. And then I've got one more and then I'll hop back in the queue. George, can you give us some color on your father's decision to take a step back from the board? I know it has to do with Housatonic, but I was just wondering how that transition is going within the board.

Sure. It actually has been excellent and quite smooth. Joe, to start with, I think we had always felt like nine directors was too many at this Company for the size of our Company. It felt a little large, a little bureaucratic.

So, when Housatonic distributed their shares, of course, the two seats that they had on the board, they really didn't have a right to have those two seats and so those two seats went away. But, of course, we always have to know that there needs to be a preponderance of independent directors versus inside directors.

So clearly, we had a choice, which is we used to have four inside directors -- myself, Dave, my mother, and my father -- and we just felt like we had to drop one of them. One nice thing is that as the two seats have disappeared, Dr. LeMaitre has been asked to be a permanent observer to the board. So, in effect, you have a seven-person board right now with Dr. LeMaitre as a permanent observer, just not voting.

And to some extent, I think my mom and my dad figure out their votes beforehand at the kitchen table and she comes armed ready to vote. So I don't think we've lost too much from Dr. LeMaitre's opinions.

Okay, great. Thanks, guys.

Thank you.

Thank you. (Operator Instructions). And your next question comes from the line of Robert Cleary, Stifel Nicolaus.

Good afternoon, gentlemen.

Hi, Robert.

Hi, Robert.

Hi, how are you? It's Stifel Nicolaus, as you know. My question was answered, with respect to the XenoSure growth rate. But along those lines, are there any other products that you distribute that you have options to acquire?

Hey, Robert, it's Dave Roberts.

Hello, there.

Currently, no, although that was a nice deal structure for LeMaitre. It allowed us to fully evaluate the product before making the decision to acquire it. So we're not at all adverse to that type of deal structure, but at the current time, no, we're not distributing any other product lines and we're out there, obviously, hunting for the next acquisition.

Great. Thank you and congratulations on the sales momentum.

Thanks a lot.

Thank you very much.

Thank you. And your next question comes from the line of Charlie Jones, Barrington Research.

Thanks again, just a couple more here. Is the $1.1 million from XenoSure transfer, is that the extent of your one-time-ish items?

Yes. In terms of XenoSure related, yes, it should be.

And obviously you're coming out with some strong Q1 numbers here. Can you point to anything there that's driving that out in the market and talk a little bit about the US and the European markets? From some of the bigger companies, some weakness obviously in Europe, and then others really haven't been seeing it as much. So, some fairly wide dispersion there. Just wondering if you could help us out a little bit about Europe and the US trends here, the way you see it.

Sure. Charlie, it's George. I think the difference for LeMaitre, at least in the last three or four quarters and we think continuing on into 2013 right now, is that we just did do a large restructuring, and the restructuring at our Company was focused mostly on Europe. We got rid of the stent grafts. We really did hire up a lot of European sales reps sort of going back five or six quarters ago, and I feel like they're finally getting their sea legs at our Company. So the sort of things about combining the renewed focus on open vascular and also the enlarged European sales force seems to be driving some of our numbers.

And then also, as you know, we do have a lot of these direct conversions in our market. In 2011, we converted Spain and Denmark. And in 2013, you're seeing us in the middle of converting Switzerland and Canada. And those things do tend to add to our international growth rates. So maybe that's a little bit where we derive some of our bullishness on sales.

And are there any quarters over the next 12 months that we should be paying a little bit more attention to as far as difficult comps or, I don't know --.

Sure. Yes, that's a great question. I feel like Q2, we had $14.4 million in sales, that will be a comparatively tougher comp. And then, on the flip side, in Q3, I think we have a relatively easy number to go after. I think, if my memory serves me, it was $13.4 million in Q3. Was that right?

$13.6 million.

$13.6 million in Q3. That should be a favorable comp. And then, of course, the quarter we just finished, that we're reporting on right now, $14.8 million seems like a pretty nice number. Hopefully, we'll be able to get past it at some point. But if you wrap it altogether -- it is kind of lumpy by quarter. If you wrap it altogether, we're looking at 8% organic growth rate for the whole year.

Can you talk a little bit about -- that's helpful, thank you. Can you talk a little bit about when those shares were distributed and just remind us about how much?

Sure. The press release, I believe, went out December 15 for the Housatonic distribution. Of course, once the Housatonic officially distributed its shares to its limited partners -- and this was -- this was a large transaction. This was 9% of our shares, approximately. So when they did go out, at that point we lose visibility on what the limited partners are doing with the shares, although, of course, we felt like it was largely sort of a doubling of volume from before they distributed the shares --.

Yes, it was notable.

-- to after. Dave reminded me, approximately 1.4, 1.3 million shares was the Housatonic position.

That's very helpful. Just a couple more here. Sorry to ask another product-related question, but you made some comments at the Analyst Day about your shunt business. And you had nice growth, it looked like, I think you mentioned 8% in the quarter.

Can you talk a little bit about what's going on there as far as share and, I guess more importantly and maybe as importantly, price? It sounded like that was an area that maybe you could see a little bit of price degradation. Just curious, have you raised prices or have you kept prices flat there? A little bit about the shunt business, if you could.

Okay, great. So, the shunt had a relatively weak year for the first three quarters. And in the fourth quarter, it seemed to spring back to life to a certain extent, so we were pleased to see that. I would say, it's not our fastest growing product these days. It seems a little bit stagnant. I think I don't remember the sales growth rate in Q4; roughly 6% organically.

10%.

10% organically in Q4 was the shunt growth rate. And we get asked this question a lot, "Are you being bothered by carotid stents?" And our answer is still no, they're not bothering us. We do feel like different modalities of neurological monitoring are interrupting to a certain extent with the growth of the shunt business for us.

All right, that's very helpful. Just two quick ones. How many reps do you plan to add in FY13? And can you talk a little bit about maybe a couple of new product developments, when you expect -- which ones they are that you expect to come out and when?

Sure. We feel as though the rep count at year-end will be something like 85 to 88. And in terms of -- and a lot of those are going to be Canadian reps. We're going from two reps effectively to five reps. So three of them are Canadian, and we'll sprinkle a couple into Europe and the US.

This is if we don't announce future initiatives to go direct in countries like Australia, the BRIC countries, Poland, Czech Republic, Norway. Those will be some of the places we might announce, but we haven't announced any of that yet. So ex any announcements, that's what you can expect, is 85 to 88.

And your second part of the question was about new products. We're real excited about our R&D department, particularly with the enlarged sales force these days. We're able to run through these, what we call limited market (inaudible) or beta trials much faster than we used to be able to. And so right now we are steaming through our beta trials for the 1.5 millimeter Expandable LeMaitre Valvulotome. That's the newest generation -- I'll call that generation seven of the Valvulotome product line.

And we're also even further ahead in the MultiTASC remote endarterectomy trial, where we're about two-thirds of the way done through the trial. My sense is both of those product lines will be finished with their trials in Q2. We've already gotten regulatory approval in all the major markets, minus Japan, and we should be launching in Canada, the US, and Europe sort of mid 2013 on both of those product lines.

I guess as a follow-up to that, can you -- have you been hearing really good things or good things about the Valvulotome, and what is it that they're saying that's different that they like?

Okay. So, specifically around the Valvulotome, the great thing is in medical catheters sometimes you can go with a simple statement as smaller is always better. And so we're taking it down from a 1.8 OD to a 1.5 OD, And so they love that. Not only that, but the shaft of the device is going down from something like 1.6 to 1.0, and so along the full length of the device the surgeons love the fact that it's banging against the inside of the vein a lot less and there's a lot less bulk to this instrument in a very, very delicate procedure where you don't want to damage the endothelium. So we think that's what they like.

We also feel like they can have a better tactile sensation when they're cutting the valves in the vein, which is, of course, what the entire valvulotomy procedure is about, is about a good cut of the valve. So, so far, yes, it's excellent, we're really pleased with it.

I'd even transition from that to the MultiTASC, Charlie. We're getting extremely positive results from that product line. We increased the size offering, so we got smaller devices and we have larger devices, so we should be able to treat a wider range of anatomy with the MultiTASC. And also, the whole reason we invented the MultiTASC was it does two things now. It dissects and it also transects the plaque in one motion. And previously, in the first generation of remove endarterectomy devices, you needed one device to dissect, you would then pull out that device, and with the second device you'd need to regain access all the way to the end of the site. And that motion and that changing of devices was a bit arduous for the surgeon, and so they love the one-pass aspect of the MultiTASC.

Thanks for all the detail. I really appreciate it.

Thank you.

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

Thanks, Sue. First, I'd like to thank all the participants on this call. I'd also like to remind you that we'll be presenting at several upcoming investor conferences. We'll be at the Lazard Capital Markets Snowbird Conference on March 1 in Utah. J.J. gets that skiing vacation. We'll also be at the Three Part Advisor's Conference on May 15 in Boston as well as the Sidoti & Company microcap conference on June 7 in New York City.

And with that, I'll turn the call back over to Sue. 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.