LeMaitre Vascular Inc (LMAT) 2015 Q2 法說會逐字稿

Welcome to the LeMaitre Vascular second quarter 2015 financial results conference call. As a reminder, today's call is being recorded. At this time I would now like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Jasmine. Good afternoon and thank you for joining us on our Q2 2015 conference call. Joining me on today's call is our Chairman and CEO, George LeMaitre and our President, Dave Roberts.

Before we begin I will 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. Our forward-looking statements are based on our estimates and assumptions as of today July 28, 2015, 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 most recent 10-K and subsequent SEC filings including disclosure of the factors that could cause results to differ materially from those expressed or implied. Any reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the investor relations section of our website, www.LeMaitre.com. I will now turn the call over to George LeMaitre.

Thanks, J.J. Q2 2015 was another productive quarter. I will focus on three headlines. First, sales momentum continued as we posted record sales of $19.9 million, up 12% organically. Second, we generated record operating profit of $2.8 million, up 41%. Third, Valvulotome sales grew 14% in Q2 due to the Hydro launch.

As for our first deadline, Q2 sales increased 12% organically to $19.9 million. This was our third consecutive quarter of record sales and we beat Q1 by $1 million. There were several growth drivers in Q2. By geography, the Americas and Europe continued to perform well. Organically, the Americas grew 11% while Europe grew 24%. By product, our two largest product lines posted impressive growth. Valvulotomes grew 14% and XenoSure grew 24%. Remarkably, Q2 was XenoSure's 25th consecutive quarterly sales record.

As to our second headline, we generated record operating profits of $2.8 million in Q2, up 41% versus Q2 2014. Strong sales and restrained operating expenses drove the bottom line.

Operating expenses decreased 1%, SG&A expenses were flat and R&D expenses grew 17%. But unlike a year ago, there were no special charges in Q2. Our 14% operating margin in Q2 was our second best ever. Net income increased 39% to $1.8 million, our third best ever. EBITDA increased 31% to a record $3.7 million and finally, EPS increased 25% to $0.10 a share, our second highest ever.

As to our third headline, Valvulotome sales grew 14% in Q2 due to the continued success of the Hydro launch. This product features a hydrophilic coating, a smaller diameter and a higher hospital price. Now nine months into the launch, the Hydro represented 87% of all Valvulotome dollar sales in Q2. We continue to rollout the Hydro globally with 18 of our 20 direct-to-hospital countries on board as of July 1. In Q2, we also received regulatory approval for the Hydro in Brazil.

Beyond these headlines I would like to provide a brief update on our sales force and product line additions. We continued to expand the geographic reach of our sales force in Q2. On June 1, we went direct in New Zealand replacing our distributor with an Auckland-based sales rep and during the quarter we also reached agreement to buy out our finished distributor and plan to go direct there on January 1. Worldwide we are targeting 89 to 90 sales reps by year-end.

We also continue to expand product lines. On May 15, we acquired rights to the true in size Valvulotome for sale outside the US. LTM sales were approximately $300,000. We also completed the first in man of our internally developed Long AnastoClip long and clip two weeks ago and we expect the first in man of our Smart Shunt in Q4.

Stepping back for a moment, LeMaitre's financial objectives are simple, 10% sales growth and 20% profit growth. We achieved both of these objectives in Q1 and in Q2. I will also note we were added to the Russell 2000 Index in June underscoring our growth and contributing to increased visibility for the stock.

I will now hand the call over to J.J.

Thanks, George. We continue to be pleased with our ability to generate operating income. In the last four quarters, we have produced operating income of $9.7 million representing an operating margin of 13%. We recorded a gross margin of 66% in Q2, down from 68.1% in Q2 2014. The decrease was driven by a stronger dollar and increased sales of lower margin products, specifically Omniflow, Angioscope and the Hydro.

We believe however that our gross margin will recover in Q3 and Q4 as cost reduction efforts on our XenoSure manufacturing line take hold. We now expect our gross margin to be 69% in Q3 and 68.5% for the full-year 2015.

Of course our entire 2015 P&L is impacted by the strengthening dollar. Approximately 40% of our sales and expenses are transacted in non-dollar currencies. In Q2 2015, we estimated that the strong dollar decreased our revenues by $1.7 million and our operating income was similarly reduced by approximately $800,000.

For the full-year 2015, we estimate that the strong dollar will decreased sales by approximately $5.3 million, gross margin by 170 basis points and reduce operating income by $2.4 million. Our guidance includes these effects.

Cash in Q2 2015 increased $2.4 million to $19.4 million. Cash from operations was $3.9 million while cash outlays included $1.1 million related to the Tru-Incise acquisition, $700,000 of dividends, and $470,000 of capital expenditures.

Looking towards Q3, we recently sold assets related to the UnBalloon product line which we discontinued a year ago. We netted $360,000 of cash from this transaction.

Turning to guidance, in Q3 2015, we expect sales of $18.8 million, a reported increase of 7% versus Q3 2014. Excluding currency effects, this represents 15% sales growth and excluding currency effects on acquisitions, this represents 10% organic growth.

We also expect Q3 2015 gross margin of 69% from Q3 2015 operating income of $2.2 million, a 12% operating margin.

For the full-year 2015, we have increased our sales guidance to $77.3 million, a reported increase of 9% versus 2014. Excluding currency effects, this represents 16% sales growth and excluding currency effects on acquisitions, this represents 11% organic sales growth.

We also expect a 2015 gross margin of 68.5% and are increasing our 2015 operating income guidance to $9.4 million, a 12% operating margin and an increase of 48% from the prior year.

Before opening up the call to Q&A, I would like to welcome Charlie Jones of Dougherty to our list of six covering analysts. In addition, please note we are now holding Analyst Day the morning of Thursday, December 3, in New York City. And finally ,we are pleased to be presenting at a few upcoming conferences including the Investment Conference in Minneapolis on August 5; Canaccord in Boston on August 12; an IDEAS Conference in Chicago on August 26; the Barrington Conference in Chicago on September 1; and at Sidoti in New York City on September 2.

With that I will turn it back over to Jasmine for Q&A.

(Operator Instructions). Chris Lewis, ROTH Capital Partners.

Good afternoon. Congrats on a strong quarter here and continued sales momentum.

First question is just around the guidance. If I back into kind of the fourth-quarter outlook it looks like you are implying a bit of a sequential downtick in terms of operating margin in the fourth quarter versus the third quarter. Can you just walk us through the dynamic there and what potential incremental operating spend assumptions are embedded within that outlook?

So yes, I think you see there the implied sales tick up a little bit and then the operating income sort of flat and around the same area in the low 2s. We have said a few things. One is that we are going to get from our current 81 reps to high 80s, 90 reps by year end and I think there will be some investment spending there that will increase operating expenses. In addition, we will be hiring a VP of sales over the next period of time and that will increase operating expenses as well.

And there are some areas around the firm where we have sort of added investment bodies into the mix. And so I think generally what you are seeing is an uptick in operating expenses to get you from here to there and hopefully that sets us up properly for a good next year in terms of having the folks to do what we need to do.

And on the gross margin line, can you walk us through what gives you confidence that rebounds from here in the second half of this year?

Most of the answer, Chris, is in our XenoSure line. So one of the topics this past quarter Q2 was XenoSure inefficiencies but really the reality is the XenoSure line had started producing XenoSure product at a much lower cost than we have seen historically a little bit ago it just hasn't come through the P&L. And we are pretty sure that that is going to come through the PL in Q3 and Q4 so we are going to see some nice improvement there. It is a substantial number sequentially so I think that gives us confidence of going from the 66% to the 69%.

So that may be one piece also in Q3, maybe there is a little less China sales and/or export sales to geographies where there are lower gross margins but we will see how that goes.

Thirdly, we had some purchased accounting related to the Omniflow acquisition that has gone away and so that should help the gross margin as well.

Appreciate the color there. Just one more for me. Can you give us an update on potentially where you are with any pending or relatively close M&A opportunities given your continually strong cash balance? Thanks, guys.

Chris, it is Dave. Thanks for the question. Yes, so we just finished a small tuck-in acquisition in Q2 which J.J. mentioned and of course as usual, we have a pipeline. There are numerous opportunities. I usually sort of say a lot of words but don't say very much at this point. We have done five acquisitions in the last two to three years, all drop ins, sort of niche but we are out there continuing to look with the same set of criteria. And I hope that at some point I will be able to announce another acquisition and it will do well for the Company. But I don't have any specific news at this time.

Just to follow up real quick, can you just elaborate on the acquisition that was made during the quarter? Thanks.

Sure. So we acquired a very small product line with less than $300,000 in sales. It was called the truant size device. It is a lower-priced Valvulotome and we acquired the rights in Europe to this device. It basically gives another product line for vascular surgeons to use. Some surgeons just prefer one device over another in this gives us sort of a lower price offering for our bag over there.

A big part of this frankly was there was a big base of business of this particular device in Finland and that really allowed us to go direct there and so that was an important consideration for us. But even beyond Finland, what is important about acquiring this device is we picked up a list of customers and were able to cross sell our other 14 or 15 product lines to those customers. So sort of out of LeMaitre's play book although this one arguably smaller than others.

Thank you.

(Operator Instructions). Jason Wittes, Brean Capital.

Thanks for taking the questions. I wanted to ask about China. I don't know if you mentioned it in the script but was there any impact from China this quarter? And if not, when should we expect a greater impact from that region?

So in fact, Jason, this is George. Good to talk to you. There was an impact and it was a negative impact. We sold up out $600,000 in Q2 2014 and we have only sold $163,000 in Q2 2015. So you had China kind of pulling down this whole number. We are always saying this is very lumpy in China and we still are awaiting the approvals sort of two notable approvals around this TRIVEX system. You know that we have a five year $7.8 million distribution agreement that gets triggered the second we get these approvals and we have kind of been sitting here waiting. I think our old guidance was we will get them in Q2. It feels like they are getting close and I would say it would be odd if we didn't get them in Q3 and or Q4. So that is a big piece of the China play.

We also just hired a new general manager in China. I think everyone on the call knows we sort of stubbed our toe. We hired a general manager and she quit five months later in this January. We have now got a new general manager in her care in Shanghai. Her name is [Ying] and she just started in June so we are sort of restarting the engine over there.

Concurrently we also hired a marketing fellow who sits in that office and a regulatory woman who is up in Beijing. So we now have three Chinese employees. The revenue is incredibly lumpy over there but that is sort of where we are at in China. Still very excited.

Helpful. Thank you. I wanted to ask about some of the drivers right now and kind of how much further you think they have to go? Valvulotome, Hydro and XenoSure, XenoSure just continues to plug away. It seems like for the Valvulotome product there is an ASP bump but and I am just curious as to just how long we should model for growth from both of those products?

I think in your question you have kind of gotten the answer right already. But I will just repeat what we feel which is that the Hydro is a finite type of thing. I think in the old days if you will, pre-Hydro, we were doing price hikes in the order of around 6% or 7% or 8% annually. You could expect that to continue on starting in December of this year but this switch to the Hydro we do feel like we have done a pretty good job taking advantage of a major advancement in the device but effectively it has been to our shareholders, it looks like just an enormous price hike.

We did have 24% organic growth for the Hydro in H1 and also in both Q1 and Q2. So if you strip out the euro collapsing over these two quarters, it was an extraordinary price hike but to continue on to your question, it feels like since it has been a rolling hard switch, Jason, and not just done one time discreetly, it feels like you still have two or three more quarters of enjoyment there.

It is not going to necessarily stop one day because these other items are rolling over. I think Tokyo won't be fully converted until January 1. France won't be until January 1. So you still have a couple of things going on even into 2016. But you are right that is a discreet thing and maybe it is six quarters and maybe we are three quarters of the way through it.

As it relates to XenoSure, some nice things have gone on this quarter. It sort of bounced up a little bit. If you strip out the currency effects, XenoSure grew 34% organically in Q2 and why is that? Simply in Europe it continues to just set the world on fire. I think organic growth was 48% in Europe and I'm getting a nod here.

So I'm going to say 48% and we will come back, it is either that in 38% in Europe and also in the US, we have had a nice thing happen which is the main competitor which is Baxter Biosurgery, it used to be Cenovus, they have sort of stumbled on a packaging change which then led them into some back orders. So we have gotten a little bit of a bump for Xenosure in the Americas that we weren't exactly expecting. So the short answer to that is it continues to just move along here and it is all good right now.

Okay, great. Thank you very much. I will jump back in queue.

Jan Wald, Benchmark Company.

Good morning or good afternoon everyone. A great quarter. I guess just some clarification on the sales reps and distribution of the sales reps and how you see them coming on board and starting to be productive as they come. How do you see the rest of this year and going into next year in terms of that ramp?

Jan, this is George. Thanks for your question. It feels to me like we are right on plan with the European group and it feels like there is about seven folks coming in, six or seven folks coming in in all these big cities we have talked about before.

The summer obviously slows down so you won't see as much hiring activity in August over there as you would in the US. So I feel like you are going to see a little bit of this in the Q3 expenses and then you are going to see the full brunt of it in the Q4 expenses as J.J. was referring to previously.

In the US it feels like you're going to see bunch of hires, maybe one a month for the next five months so we are saying 89 to 90 but you could conceivably see us going up even a little bit higher than that by the end of the year. We are real excited about getting them on board so that they can hopefully impact 2016. We always have these annual sales meetings in January and we bring all the reps to these sales meetings and it is nice to have a larger team at those sales meetings. They seem to get a lot out of them.

So there is a little bit of as you run up to those sales meetings, there is a little bit of a crunch to get the reps onto the payroll right before the sales meeting and the sales meeting is January 3 this year.

Just in terms of the surgery market versus the intravascular market, do you see any changes out there that would affect your business?

The constant question about LeMaitre is always endovascular, right. But we see the same endovascular things going on. It does seem as though -- we have seen some charts recently that indicate that the excessive growth of endovascular is slowing down and it is a little bit more asymptotic towards what is sort of a flat of the open surgery businesses. So it seems like those things, the switch is slowing down a little bit but there is plenty of endovascular business here.

I'm going to pass it over to Dave here who has a couple of cents to add to this, Jan.

Yes, Jan, good question. I would just add that on let's say five or 10 years ago, vascular surgeons didn't all necessarily know how to perform endovascular procedures and so there was a big training component for endovascular. And today I would say all vascular surgeons know how to perform endovascular procedures and all vascular surgeons virtually are performing endovascular procedures.

So in a funny way the distinction is broken down a little bit because endovascular is just another type of procedure that vascular surgeons are performing. There is no big training barrier that is incumbent upon a medical device company to show surgeons how to use a stent graft for a stent atherectomy device or something like that. So I think that makes the endovascular segment of our market more accessible to a company like LeMaitre.

So that kind of goes to my next question about this. I see what you do as really knowing the vascular surgeons very well and finding out what they want to do and supporting them in terms of their product needs. Are you seeing different product needs that will put you in a different place in terms of what you are looking for in terms of acquisitions?

To your point I would say the bulk of the products in LeMaitre Vascular's bag currently are used in open vascular surgery but because all vascular surgeons know how to do endovascular procedures, I would say we are open for business looking at products in endovascular surgery as well. Some products that are more interventional in nature may be used more by an interventional cardiologist or perhaps an interventional radiologist. So we would be maybe at the margin more interested in one that would be used by a vascular surgeon. But we are looking at both open and endovascular procedures. I think the key for us is markets where there is a little bit less rivalry where we feel like we could have a winning hand.

To add onto this a little bit for some color, it does feel like what is going on over in Europe for us does show me -- and there has been a renaissance in the US as well, the 24% organic growth in Europe, those are numbers that any endovascular company would die to have right now. So the business plan of LeMaitre has been hey, there's a lot of fun left in open vascular surgery and I think what keeps happening over in Europe -- I don't know what the fact running around was the last 15 quarters, we have done double digits over in Europe or something like that -- but I think that does show you that there is still a lot of excitement and market growth available for a company like LeMaitre in open vascular surgery.

And you know as Dave is mentioning, our portfolio is largely open vascular but it is growing 24% organically in Q2 and I think in Q1 if I have a numbers right, it was something like 18% or so in Europe as well. And then of course in the US, we have had this balance where we got 11% for Q1 and 12% for Q2.

So there is something going on that is really good with these open vascular products but we agree endovascular is exciting as well.

Okay. Thank you very much.

Larry Haimovitch, HMTC.

Congrats on another great quarter, guys. There has been so many good questions asked, I have enjoyed all of them and you have given good answers so I'm just going to say congrats and sign off. Thank you.

Thanks Larry. A man of few words. I appreciate it.

Rick Wise, Stifel Nicolaus.

This is Drew in for Rick. Just a couple of quick questions. The first is really we always ask you about acquisitions and you mentioned doing the UniBalloon divestiture. Are there other opportunities to prune your portfolio and maybe what are your criteria for divestitures?

Sure. This is Dave. Thank you for the question. Sure. Our product bag has about 15 or 16 product lines in it and there are several that you hear us talk about regularly that are always driving revenue at the company like the Valvulotome, like XenoSure. And then other products, catheters or AnastoClip, they are sort of at different times powering the growth of the company. There are some product lines that we don't talk about very much and in a funny way I would say the divestiture criteria is sort of the opposite of the acquisition criteria.

So if a product line is small, if it is growing, if it is off call point, if it absorbs a lot of rep time but doesn't provide a lot of return for that, those are all factors that get weighed in if there is not a lot of cross-selling between that device and others in the bag.

So there are criteria. We have a process we've set up where we are managing our portfolio proactively and I would say we will look at other divestitures over time and you may see that here and there. Of course if a product is just sitting in the bag and it's generating cash flow and profit then we may leave it there but we certainly are well and are considering other divestitures. But we have to be prudent about it of course.

Right, thank you. Sorry if I missed this earlier in the call but your sales force numbers, you are still expecting to get to 89 or 90 by year-end, maybe a little bit higher. But you mentioned before maybe a couple of calls ago worldwide capacity could be 125 to 150 reps, somewhere in that range. But maybe how should we think about salesforce adds over the next two to three years? Would it be similar to 2015 or should we see an acceleration and maybe what geographic areas you would be expanding into? Thanks.

Good question. Thanks a lot. I feel as though we have been adding five or six for a long time every year and maybe we could think of it that way although we don't like to guide into 2016 on anything. And so I would say I hesitate to guide into 2016 but that has been our past activity.

In terms of other countries, it feels to me as though we have a lot of filling in to do in China so we just got into Finland and New Zealand this past quarter. And I would say China is probably going to absorb a lot of our energy over the next year or two. So maybe not so many new countries but again I don't want to guide into 2016. I always find when I try to guide too far ahead I get myself wrong so we don't know but I would say China is a good place to put bodies going forward.

Thanks. Just wanted to try.

There are no remaining questions at this time. Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect. You all have a great day.