LeMaitre Vascular Inc (LMAT) 2015 Q3 法說會逐字稿

Welcome to the LeMaitre Vascular third-quarter 2015 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, Jasmine. Good afternoon and thank you for joining us on our Q3 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'll 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, October 27, 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.

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

Thanks, J.J.

Q3 2015 was another strong quarter. I'll focus on three headlines. First, we generated record operating profit of $3.3 million, up 79%. Second, sales grew 12% organically to $19 million. And third, our biologic products continue to drive growth, principally XenoSure.

As to our first headline, we generated record operating profit of $3.3 million in Q3, up 79% versus Q3 2014. We also generated record net income of $2.1 million, up 124% versus Q3 of last year. Strong sales and a 71% gross margin drove the bottom line.

As for our second headline, Q3 sales increased 12% organically to $19 million. This was a record summer quarter for LeMaitre. By geography, sales in the Americas grew 7%, while international sales grew 11%. Q3 2014 was our 12th consecutive quarter of double-digit sales growth in Europe. Our goal is to have 89 to 90 sales reps on the payroll by year-end.

As for our third headline, sales of our biologics continue to drive growth. Our XenoSure patch grew 35% in the quarter and this was its 26th consecutive record quarter. In addition, sales of our Omniflow II graft are running at approximately $4 million a year, above preacquisition levels.

In terms of new products, our long AnastoClip is almost finished with its beta trials and should launch in Q4 or Q1. Our Pruitt smart shunt looks set for its first-in-man in Q1 or Q2 of 2016.

At a high level, LeMaitre's financial objectives are simple: 10% sales growth and 20% profit growth. I will now hand the call over to J.J.

Thanks, George.

We recorded a gross margin of 71% in Q3, up from 68.6% in Q3 2014. The 240 basis point increase was driven largely by reduced XenoSure manufacturing costs. Indeed, our cost to manufacture the XenoSure patch has decreased by approximately 30% from one year ago. We expect our Q4 2015 gross margin to be 68.5% and full-year 2015 gross margin to be 68.7%.

Cash in Q3 2015 increased $4.2 million to $23.6 million. The change in cash included cash from operations of approximately $4.1 million, less capital expenditures of approximately $750,000, acquisition outlays of $875,000, and dividends of $715,000. Notably, the Q3 2015 cash increase was also driven by $2.4 million in cash from stock option exercises as our share price continued to improve.

Q3 2015 total operating expenses were flat versus the prior year. Adjusting for the $360,000 gain from the UnBalloon divestiture, operating expenses were up 4% to $10.6 million. This 4% increase was driven by investments in both our sales force and R&D.

Our Q3 2015 effective tax rate was 33%, down markedly from the prior-year period. The decrease was largely driven by our increased 2015 profit forecast, as well as the tax benefit from recent stock option exercises. Separately, our fully diluted share count has increased to 18.5 million shares, as our higher stock price has resulted in more employee option exercises and more in-the-money options.

Turning to guidance, in Q4 2015 we expect sales of $20.1 million, a reported increase of 8% versus Q4 2014. Excluding currency effects and acquisitions, this represents 12% organic sales growth. We also expect Q4 2015 gross margin of 28.5% (Sic-see press release �68.5%�)and Q4 2015 operating income of $2.6 million, a 13% operating margin.

For the full-year 2015, we've increased our sales guidance to $78 million, a reported increase of 10% versus 2014. Excluding currency effects and acquisitions, this represents 13% organic sales growth. We also expect a 2015 gross margin of 68.7% and are increasing our 2015 operating income guidance to $11 million, a 14% operating margin and an increase of 73% over the prior year.

Before opening the call up to Q&A, I want to first welcome our newest covering analyst, Mike Petusky of Barrington Research. I'd also like to note we are holding an analyst day the morning of Thursday, December 3, in New York City. Please RSVP to Beth Kurth or ir@lemaitre.com and we will hold a seat for you.

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

(Operator Instructions). Rick Wise, Stifel.

This is Drew Ranieri in for Rick. Congratulations on the record quarter. But just to start, your biologic grafts and patches continue to be great growth products for you. And just kind of thinking about just the large war chest of cash that you have on the balance sheet right now, just absent M&A, can we maybe consider bringing Omniflow to the US? Is that an option? Or is your cash primarily focused still on acquisitions?

Sure, Drew. Thanks a lot. Of course, cash on a balance sheet can be used off the income statement for acquisitions, as you are mentioning, but it can also be used on the income statement for things like clinical trials. That's a decision we haven't made yet on Omniflow and/or any other kind of biological graft. Roughly speaking, that's a four-year, $4 million investment to bring either some kind of bovine carotid artery or the Omniflow II to the US.

Okay. And then, you are at 81 reps -- excuse me, you ended with 82 sales reps in the quarter and you are considering getting up to 89 or 90 by year-end. So are you on track to meeting that goal? Or is that going to be pushed into 2016? Just wondering what your candidate pool is like, both domestically and internationally.

Sure. That's a great question, actually. We have been talking about ramping up all year and we haven't really made too much traction here.

Yes, I do feel like it's doable with 89 to 90. I will say it's been a little bit harder this year than expected, a little bit more turnover we are experiencing at the Company than what we had in years past. It was 6% or 7% for the whole Company in 2014 and it's about 12% or 13% in 2015. And so, a little bit more turnover; that means a little bit more replacement of reps.

But yes, we think we will get there. And we do have some fantastic cities into which these reps will be going, notably -- I know you didn't ask this, but notably in Beijing. We have our first Chinese sales rep starting November 1.

Okay. And then, just lastly, with the TRIVEX contract that occurred in the quarter, can you just give us some details about the contract, how that kind of breaks down over the five-year period? Is there any upside to the contract? And also, for future product approvals in China, is this the same distributor that you would be going with?

Okay. So, great. So that contract, as we talked about a lot, is five years, $7.8 million. It got triggered at the date of the approval -- the re-approval of the TRIVEX box. And that got reapproved, as you saw in a separate press release, about a week and a half ago or so.

It breaks down as such. In year one, after the re-approval, you get about $1.3 million in revenue. Year two, $1.4 million, etc., etc., up to about $1.8 million in the final year, all balancing out to $7.8 million.

I don't know if there's upside to that. I have found over the years these contracts are not exactly what to expect. So maybe we will get a little upside; maybe we will get a little downside. But it feels like a good sort of projection range that we can all sort of rally around.

As far as the approvals go, so we have told people we'd probably have six approvals by the end of 2016. That's our bogey. And so, we are still chasing on that. We've got three of them right now: we have TRIVEX box, TRIVEX disposables, and AnastoClip. And we are looking forward shortly to tape and shunt and single-lumen catheters, and then later on the occlusion catheters. The valvulotomes in XenoSure we are now realizing will require small-ish clinical trials. So I would say those things seem to carry two-year horizons rather than -- we were thinking one year up until six months ago or so, or three months or so ago.

Great. Thanks for the detail. I'll hop back in queue, thanks.

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

Congrats on the strong quarter. I wanted to start on gross margins. You had a really nice, strong quarter here. Was hoping you could provide a bit more color on what drove the upside on the gross margin line. And a follow-up to that, fourth-quarter implies a downtick in gross margin, so how should we think about that as we look at the fourth-quarter guidance?

Yes, thanks, Chris. So in the third quarter, we got some really nice XenoSure efficiencies. I think as you heard me say in the words beforehand, XenoSure year-over-year cost is down about 30%, so we've really gotten some nice -- sort of making nice progress there in terms of reducing the XenoSure cost. And as well in AlboGraft and LifeSpan, we have got some good efficiencies coming through.

Some of these come and go, and a lot of them -- some pieces of the Xeno and a lot of the Albo and LifeSpan sort of just come and go. But some of that Xeno is really here to stay, and so there's a couple sort of currents going on in the gross margin on that score.

But by and large, good news all around with those three product lines in Q3. Year-over-year ASP is probably 1.5% to 1.8% good guide in the margin. And then, there was some headwinds, mix US versus OUS and some other items. But all that sort of rolled up to a 2.5% or so improvement year over year.

But then looking into Q4, Chris, there's a few things going on. One is we are doing the transfer of the angioscope line to Burlington, which we acquired a few quarters ago, if you recall. And then George was just talking about sales to China that will be coming through in Q4. Those generally have lower gross margins, and so the gross margin will be negatively impacted by that, while the sales line positively impacted. And there are some other export sales we might get as well in Q4, we think, that will hurt the margin.

And then, some of those temporary good guides that we got in Q3 from AlboGraft and LifeSpan we won't get in Q4. So that's why I'm thinking, you know, it was a nice 71% in Q3, but in Q4 I expect it to come down a little bit, more in line with where we've been. And if you looked at the overall trend over the last number of quarters and couple of years, we've been improving the margin fairly steadily. When you look at it more granularly quarter to quarter, it gets a little choppy. But I think the overall trend is in the right direction.

I understand. I appreciate the color there. And then moving to the operating margin line, guidance implies 14% this year. You have done a really nice job of demonstrating leverage. I know it's early to provide guidance for next year, but just when we look at our models and kind of the assumptions in there, what type of leverage opportunities should we think about and expect as we look in 2016 for continued operating margin expansion?

Chris, this is George. And I think you already got on this, but we're really hesitate to go too much further with guidance beyond what we're giving you here. I will say, though, recently the three of us -- Dave, J.J., and I -- started giving this sort of intermediate-term guidance of 10% sales growth and 20% op income growth. And I would say in there is the kernel of the leverage that we are trying to get for us and for you guys.

Perfect. And does that 10% sales growth imply any acquisitions?

You know, people ask, how do you break that down? Roughly speaking, it's 8% organic growth and 2% added acquisition growth. That's sort of more looking at what it's been the last 10 years or so.

But roughly, it does -- it's not the organic number we are quoting; it's what we think we'll show up with at the end of the year. I mean, we did a 10% reported growth. If you believe our guidance for Q4, in 2015 we'll show up with a 10% reported growth. Although this year was a little better than normal, it was a 13% organic sales growth.

Understood. And just one more from me, any details on kind of what we can expect for the analyst day next month? Thanks a lot.

Chris, Dave Roberts. Thanks for the question. So it is the morning of December 3, and you will, of course, have the key members of the management team from the US and Europe.

But in particular, we have two vascular surgeons who have agreed to present for us. One of them is going to talk about the future of open versus endovascular surgery, and the other one is going to talk about the future of biologics because obviously biologics are becoming a more important part of the story. So, half-day event ending with lunch, you know, so we'll get everybody out of there right after lunchtime. Should be a good morning.

Great. I look forward to it. Thanks.

Jason Wittes, Brean Capital.

This is Evan Wang in for Jason. Thanks for taking the question. I just want to ask, for 2016 what are some new products to look for? And what do you think will drive growth in 2016 and beyond?

Okay, great. So if I heard you correctly, what are the new products in 2016? And the stuff that we're talking about on this call would be the long AnastoClip, which is used for dura closure in the spine; and then also the smart shunt, which is the shunt that has a blood flow monitor on it. And that's what we have been talking about.

In terms of, generally speaking, what will drive future growth, that's a good question, too, that I heard. This rep surge, if you will, going from 80 to 90, is a big piece of our 2016 growth expectations.

I will say that XenoSure product just continues to gallop right along. While the reported growth was 35% in Q3 and it was our 26th consecutive record quarter, the news is actually better than that because organically, if you strip out the currency impact, the product line grew 45% in Q3. So, that's a big piece of what we are doing around here.

And of course, Omniflow is new in our bag and we are seeing how that works. In general, the biologics are doing great around here and so I would say more of the same next year.

Jason Mills, Canaccord Genuity.

This is actually Jeff Chu in for Jason. George, just a quick follow-up to the last question. Regarding a rep surge, how long does it take for a rep to get up to speed, typically?

Right. So we have been saying six to nine months, although, of course, that's highly variable based on geography and based on rep experience, but say six to nine months for your models.

Okay. Great. And if I heard you correctly, you said you had just hired a salesperson in China. What else needs to be done in that market now? You have the TRIVEX approval; you have the contract in place. Are they just going out to sell at this time?

Yes. There is a lot -- I mean, China is such an exciting story, but there's a lot that needs to get done. We currently have -- without the rep on board, we have four employees. When the rep comes on, it will be five employees. We are very much at the beginning of this story.

I would say really what needs to happen is regulatory approvals. You've heard us talk about trying to get to six of them. We now have three of them. And you're going to get a bunch more as this next year rolls out.

But I would say first things first: regulatory approvals, and then sorting out the distribution channel, and then hiring a sales force. So, a lot of work to be done.

What's driving LeMaitre Vascular right now is Europe. The organic growth rate was 25% in Q3, and Asia is coming along. It's a much smaller piece of what we do, but in five years it should be a big play for us.

Great. Thanks for the color.

Just wanted to ask you about 2016. I appreciate you don't want to provide too much color just yet; unfortunately, we do still have to try to model 2016 estimates. Just trying to get an early read on gross margin. You talked about the growth in Europe and the Asia-Pac region. I'm assuming those are -- or some areas are slightly lower margin. How do you balance that growth in those areas relative to maintaining your current gross margins -- or I should say more normalized gross margin in 2014 -- or, I'm sorry, in Q4?

Yes, I mean, I guess one way to look at it is what are some of the headwinds and what are some of the tailwinds? I would say from a headwinds standpoint, to the extent that Europe and other OUS geographies continue to outpace the US in terms of growth, that's a headwind for you. The margins are generally lower outside the US than in the US.

And to the extent that we sell more to China and export geographies, that's a headwind as well, as those margins tend to be lower. And then, of course, we initially said we have rising manufacturing costs and that would be a headwind as well.

But I would say a lot of that is offset by the fact that we have done some nice work on XenoSure in terms of getting costs down. And that really hasn't played out for a full year, and it will next year. And with the introduction of the Hydro, I think you could expect to have sort of elevated costs initially and then get those costs out over time. And that project is in process, and I expect that that will sort of play out through next year as well and be a good guide to the gross margin next year. And, of course, to the extent we raise prices, that helps margin as well.

So those are some of the -- that's some of the pros and cons of the margin moving forward. And yes, we're not giving guidance on next year. So, unfortunately, I can't help you out much more than that.

Hey, Jeff, I'd also like to jump in a little bit because the FX swings this year have been -- and, of course, we are 40% international here, so we are very international. This plays out in our gross margin in a big way. It's a story that we don't talk much about, but if you look at 2014, our gross margin was 68.1% for the whole year. And if you believe our guidance for 2015, stripped of the FX effect, it's 70.3%.

And so, while we're not giving guidance on 2016, you do have a legitimate 220 basis-point increase from full-year 2014 to full-year 2015. So things seem to be going in the right direction.

Great. I appreciate the color. Congratulations and I will get back in the queue.

Mike Petusky, Barrington Research.

I didn't hear -- I may have missed it, but I didn't hear you guys call out valvulotome sales growth. Do you guys have that figure handy, by any chance?

Yes. Q3 organic growth was 11% worldwide.

All right, great. And then, just a couple more income statement questions. I guess, J.J., is a 38% tax rate going forward, is that still a decent way to think about the effective tax rate?

Yes, it is. I think the Q3 was a little bit of an anomaly. We had some catch-up going on as we changed our forecast, and the ISO option exercises helped as well. And so, yes, I think you stay the course with that 38% or so.

Okay. And then, just, I guess, a quick question related to share count: 18.5 million, 18.6 million, something like that for the fourth quarter. Is that a decent place to be?

Yes, it is.

All right, great.

Fully diluted.

Right, right. Okay, great. Nice quarter, guys. Thanks.

Jan Wald, Benchmark Company.

Congratulations on the quarter. It looks really good. I guess a couple of questions. One is you mentioned that you had a higher sales force turnover this quarter than previous -- than you previously had. What was the reason for that, do you think?

Right. Jan, the numbers I was quoting was Company-wide; it's my closest fact on that. So that's Company-wide. I'm sure it does drill down to the sales force as well.

I feel as though around the Company we are seeing that we are coming -- finally coming out of this great recession. So I feel that. One thing we did do in July is we put in a higher entry-rep compensation package in the USA specifically. So we made a material bump to their W-2s as a sort of way to get at the potential burgeoning issue of rep turnover. So I guess that's what we are seeing, and we are not particularly alarmed by it. It happens. Our turnover is usually worse in the US sales force than it is in the international sales force.

But you don't think this is an ongoing problem that's going to keep you from getting to that 89 or 90 sales reps (multiple speakers)

No, I don't. I think you'll see us get there. It's been a little bit harder this year than we expected, but I am not particularly worried about it. And I think you'll see us get there.

Okay. And I guess the last question I had is on the valvulotome. But on the Hydro specifically, you were getting some nice bumps from conversion. Where are you in that conversion?

I don't have that exact number around, but the last time we talked to you, I think it was like at 80% in the last call. It feels like, sales dollars, it's probably around 85% or 90% is Hydro right now.

The performance of the device is outstanding. We are having no problems at all with it. We are having some, you know, pricing issues in Europe where we are trying to rejig our pricing, but up 11% organically for Q3. Q2 was up 22% and Q1 was up 22%.

We are starting, Jan, to get to the point where we are lapping the beginning of the Hydro hard switch. So we always talked about this being four or six quarters' worth of exciting growth, and we are getting there on that topic because when we come around to November we will have lapped the USA price hike.

Okay. Thank you very much, and again, congratulations on the quarter.

Thanks, Jan.

Larry Haimovitch, HMTC.

Congrats on all the progress. It's been a really good year. So my question is sort of a macro question. You are the CEO; I know the CEO of any company worries about everything. But what -- when you look at the year, you have to be feeling very good, of course, but you can't feel too good because you always worry about what could be coming down the pike. So are there any big issues or even smaller issues within LeMaitre itself that gave you concern that the very impressive momentum you've been building over the last several quarters could slow down?

Right. The what-keeps-you-up-at-night question?

Yes. Yes, exactly.

You know, one thing that does keep you up at night is when you post a year with 13% organic growth and, what, 79% op income growth. It does start to ratchet up expectations. So our fears of the shareholders getting ahead of themselves is sometimes a fear of ours.

But we have just kept to the policy of just keep doing it and go quarter by quarter, and whatever happens with the shareholders' mindset, you can't really control that. So I think that's a topic, obviously, and I am addressing those folks right now.

You know, we have the same issues. How do we keep the sales force growing? How do we attract great talent? It's harder these days. I think Jan was getting at this in his question. It's harder to keep talent right now because the US has 5% unemployment. And go back four or five years ago, and it was, what, 9%, 10%, something like that, in the depths of the great recession. That's a different operating environment and we (multiple speakers), so maybe that's a topic -- I guess those are things that I think about.

Yes. Well, maybe there will be a few sales reps available from the Endologix/TriVascular fallout.

We figured that would come up on our phone call today and we figured that we have nothing to do with that.

No, not exactly, but it is a sales force that does call on vascular surgeons, so to that extent, I guess. But, you know, just curious, do you have any thoughts on that deal? Anything you want to comment on publicly?

I mean, it's an interesting story to the extent you are seeing -- regardless of how much you like or don't like the acquisition, the public stock markets are really responding negatively. And I think we all have seen this in The Wall Street Journal. But the stock markets are responding exceptionally negatively to transactions.

And then, obviously, maybe we are coming into a time where earnings are valued more than sales growth -- maybe. I don't know that. But maybe the stock markets are getting nervous about companies that aren't producing cash.

Larry, it's Dave. I might pile in that the hypothesis -- one of the hypotheses behind LeMaitre is that the endovascular growth rates would eventually slow down as the endovascular revolution ran its course and open vascular surgery growth rates might recover, and there might be a convergence over time. And maybe we are seeing a little bit of that these days. So, perhaps there is some support to that hypothesis. But this is a long life, and so we shall see.

Yes. Great, guys. Keep up the good work. Very nice quarter.

Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect. Have a great day.