LeMaitre Vascular Inc (LMAT) 2016 Q2 法說會逐字稿

Welcome to the LeMaitre Vascular Q2 2016 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, Michelle. Good afternoon and thank you for joining us on our Q2 2016 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, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today, July 27, 2016 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.

During this call we will discuss non-GAAP Financial measures which include organic sales and growth numbers as well as EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available on the Investor Relations section of our website, www.lemaitre.com. I will now turn the call over to George LeMaitre.

Thanks, J.J. Q2 2016 was a very productive quarter. I will focus on three headlines. First we posted several records in Q2 2016. Second, XenoSure grew 36% in Q2 and will likely benefit from a competitor backorder in Q3. And third, international sales continue to drive our growth.

As to our first headline, in Q2 2016 we posted several financial records. Record sales of $22.4 million, up 13%; record EBITDA of $4.8 million, up 30%; record EBITDA margin of 21%; record operating income of $3.8 million, up 35%; record net income of $2.6 million, up 47%; and record EPS of $0.14 per diluted share, up 40%.

As to our second headline, the XenoSure biologic patch continues to drive growth, up 36% in Q2 to a record $4.3 million. XenoSure growth was strong in all geographies with the Americas coming in at 36% and international operations up 35%.

XenoSure growth in Q2 occurred largely independent of the Baxter backorder discussed in the press release as only four selling days at the end of June were affected. Growth of XenoSure in Q2 without the Baxter backorder was 26%.

LeMaitre continues to increase its market share in the $70 million patch market because of XenoSure's nice match with our growing sales channel and surgeons' increasing desire to use Biologics.

More broadly, LeMaitre's entire biologic portfolio, including the Omniflow graft and the recently acquired ProCol graft accounted for over 25% of our total sales in Q2. This is a high watermark up from 21% a year ago.

As you may know, on June 24 a safety alert was issued by Baxter Healthcare Corporation requesting that US hospitals discontinue the use of certain lots of its Vascu-Guard peripheral biologic patches. This safety alert has since spread to the UK, Germany, Italy, Korea and other international markets and we have continued to experience higher than normal XenoSure patch sales in July.

For the purposes of guidance we assume that the competitor's safety alert will be resolved on September 30 and that we will benefit from incremental XenoSure sales of $1.25 million in Q3 and $500,000 in Q4.

Of course I would be remiss not to mention the Valvulotome's continued robust sales growth. Q2 2016 was the record Valvulotome quarter with sales growth of 14%. Valvulotome growth over the last two years was largely a result of the introduction of the HYDRO. This transition is nearly complete.

As to our third headline, our growth continues to be driven by our international operations which were up 22% in Q2 and 16% a year over the past five years. Over this period we have added products via acquisition and development and we have opened sales offices in Madrid, Toronto, Melbourne and Shanghai.

Over the same timeframe we increased international sales rep headcount by 65% from 28 to 46. In H2 of 2016 we expect to enroll our first patient in the XenoSure China clinical trial and to make our application to the Australian health authorities for the approval of XenoSure.

International sales accounted for 41% of our sales in Q2 2016 as compared to 38% in the year-earlier quarter. I will now turn the call over to J.J. Pellegrino.

Thanks, George. I will focus on four topics: our gross margin; cash balances; share buyback program; and guidance.

Q2 2016 gross margin was 68.6%, up 260 basis points from the prior year. The improvement was driven in large part by reduced manufacturing costs of XenoSure and Hydro as well as increased average selling prices. We expect the gross margin to rebound to 72% in Q3 2016 and 70.5% for the full year 2016 as cost reductions in XenoSure and the HYDRO continue to take hold.

Our cash balance was $29.3 million at June 30, 2016, an increase of $3.4 million in the quarter. The increase was a result of strong operating results and proceeds from employee stock option exercises. Of note, cash increased significantly despite dividend payments of $1.7 million and cash taxes of $1.2 million in the quarter.

Given our strong balance sheet and cash generating ability it is worth touching briefly on our capital allocation strategy and then saying a few words about our recently approved share repurchase program.

As many of you know, we strive to increase profits 20% per year which have been used to buy companies and pay dividends. And on July 25 our Board approved a $5 million share repurchase program, in part to reduce the dilutive effects of our stock-based compensation program.

Share repurchases are not entirely new at LeMaitre and you may recall that from 2009 to 2013 we repurchased $6.5 million of stock at an average price of $5.85 per share. We do not expect the current program to affect our ability to execute acquisitions. Indeed with $15.9 million of guided 2016 operating income we are well-positioned to use cash as well as debt for any future acquisitions.

Turning to guidance, the Company expects Q3 2016 sales of $22.2 million, an increase over the prior year of 17% on a reported basis and 17% organically. The Company also expects Q3 2016 gross margins of 72% and operating income of $4.3 million, an increase of 29%.

For the full year 2016 the Company expects sales of $88.3 million, an increase over the prior year of 13% on a reported basis and 12% organically. The Company also expects a full year 2016 gross margin of 70.5% and operating income of $15.9 million, an increase of 38%.

Before opening the call up to Q&A I would like to remind listeners that LeMaitre Vascular will be presenting at a number of upcoming conferences including Canaccord in August, three-part Midwest in August, Barrington in September and Dougherty in September. With that I will turn the call back over to the operator for Q&A.

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

Just wanted to start on the Baxter safety alert. Was hoping you could just spend a minute elaborating on kind of what you have seen since that alert came out. I guess how many new customers have you added?

And I guess your assumption that it ends on September 30, I guess what does that mean exactly? And are you assuming those customers to convert back or do you think it is reasonable that you could retain some of those potentially new customers?

Hi, Chris, it is George. Thanks for the question. Of course we knew this issue would attract some interest. So I'm going to start backwards. You asked a bunch of questions in terms of what we'll retain.

So we just made an educated guess that this thing would end at September 30. Of course there is a lot of things going on inside some Baxter building somewhere that you know that not of us are privy to. And so, we are trying to put all the hints and corridor conversations that our reps are having in hallways and hospitals together to get you a guess.

And our guess is, hey, it is probably going to last until September 30. Furthermore, we are going to guess that for Q4 maybe we retain 40% of that business. So, this is something that is really hard to put a number on and we are doing our best to do it.

And that is the best that we can do for you guys is $1.25 million in Q3 of additional Baxter-related XenoSure sales. And then the tail of that being 40% of those customers stick around for $500,000 of revenue in Q4. I hope I got to a bunch of your questions.

Yes, appreciate it. And you talked about the incremental kind of impact to revenues. I guess two-part question. First, is that kind of mixed between the US and OUS and can you potentially break that out? And then second, what type of impact will that have in terms of profitability?

Right. So until now there has been almost no impact overseas. Any impact that has happened has been in the US. But because we have seen these safety alerts go up at the various health authorities we are guessing that there will be some impact overseas. So I wouldn't break that [1.5] out.

Again, this is a funny thing to have to guide on if you don't know. We don't have any information of what is going on inside their building. So, I wouldn't try to break that out US international; I would just say it seems like 1.5 worldwide. And what was your second question?

Bottom line effect.

Bottom-line effect. Maybe I would have J.J. do that. We have been thinking and talking about that.

J.J. Pellegrino)

Yes, so, Chris, as George was saying, we are thinking maybe $1.75 million in total in revenue. I think the bottom line is we get to about a 50% contribution on it at the end of the day. Maybe it is a mid 70%s, 80% margin and then you have got to pay commissions.

And then on top of that we are gearing up here for extra units in a bunch of different places, customer service and in warehouse and shipping and in the manufacturing room as well and other areas. So, I am going to say about half of that probably goes to the bottom line.

Great, appreciate it. And switching over to just international, that continues to be just a nice -- significant growth driver for you. Understood you have obviously added some resources in terms of new sales reps over there.

Are there any other kind of growth drivers that we should think about for that business? You continue to outperform and I am just hoping to get a little bit more color on where that is coming from. Thanks.

Right. And so at its root that question is why do we continue to do well internationally, is that right?

Exactly.

Okay. So, I think one thing to keep in mind is that the two big pieces of business that are growing really well for us right now are XenoSure and the Valvulotome. They happen to be over represented in the international what is called Europe portfolio.

And Europe is not bogged down to a certain extent by some of the lower slower growing product lines that the US has to handle, cholangiograms specifically and carotid shunts and also VascuTape. The business in Europe for those three items is fairly small versus the US. And therefore when XenoSure and the Valvulotome move ahead they are not bogged down by the other items which I just talked about. There is a big piece of this.

Another piece of it is we really did get started with XenoSure about two years later in Europe. And so, accepting out this current quarter, in general XenoSure is growing faster over in Europe than it is in the United States because we started a little bit later there.

And then third I would point to the reps which is if you look at reps in the US and Canada we went from 41 last Q2 to 45, that's a growth of four reps with a denominator of 40. In Europe we had a growth of five reps with a denominator of 31. And so, on the margin we are growing percentage wise faster in Europe with all of offices. And also some of them are just virgin territory that we are going into.

You know we went into New Zealand recently, notably Finland, these are places where we effectively had zero sales and there are no Finland's and New Zealand's left in the United States where there are effectively zero sales.

So, I would say a combination of all those things means if I were to look ahead in this business I would put my money on international operations growing faster than American operations.

Great. And just one more for me if I could. In terms of operating margins, if you look at the business over the past two to three years you have done a great job of really expanding the operating margins from kind of the single-digit now here into 19% implied in the back half of this year.

I understand there is some Baxter tailwind in those quarters for the remainder of this year. But longer-term where do you think operating margins can expand to? Thanks.

Thanks for the question, Chris. So, I mean we don't guide on this obviously, but I think directionally we sort of frame it with our larger peers sort of in the mid-20%s or so, and our more direct peers generally losing money or lower margins, not all but many. And so, yes, I think you have accurately portrayed us sort of moving into the mid to high teens, high teens more recently.

I would say you could probably expect to get some more directionally leverage and a selling and marketing line as we build out local geographies with a little bit more sales, maybe layer in some acquisitions on top of those smaller local geographies and leverage the fixed cost there over more sales.

G&A certainly you want to get a little bit of leverage there. You don't need another CEO, CFO or President as you grow. But R&D you might get negative leverage, Chris, as we try and invest a little bit more in R&D going forward. I think we have been down around 7% or so recently. And that feels a little bit light to us probably going forward. We would like to be able to invest more there.

So I would say there is room for more leverage. I can't quantify that for you now. But I do feel like the guiding principle of 10/20, 10% top-line growth and 20% bottom-line growth, can help you sort of divine that answer going forward.

Okay, congrats on the quarter.

Rick Wise, Stifel.

Hi, guys, it is Drew Ranieri in for Rick. And congratulations on another record quarter. And just to start, you have talked about Biologics being the future growth engine for LeMaitre and becoming a greater portion of your overall revenue surpassing Valvulotome.

And just as you look over the next three years, I mean where do you see your Biologics exposure going to? And is XenoSure, ProCol, Omniflow -- are these products going to get you there or do need to expand their labels or acquire additional patches or graphs?

Drew, it is Dave Roberts, thanks for the question. We certainly believe there are more opportunities for further penetration with XenoSure. We are living through that right now of course. And the other two biologic products we have in our bag currently, one we acquired just two years ago and one we acquired four months ago. And so, I'd say it is still early days with those products.

So, certainly I think we have three horses that we can ride and generate more sales to expand Biologics within LaMaitre over time. But clearly there are other biologic products that the Company does not currently have that we would like to.

For example, there are large diameter biologic graphs that we don't offer. Our US force does not have a peripheral graft because ProCol is only indicated for dialysis access. On the patch side we don't have a decellularized patch.

So there are plenty of examples of other Biologics that we would like to go out and hunt for from an acquisition standpoint and you can rest assured we are doing that. And then with respect to our R&D operation, filling in SKUs and expanding SKUs is something that they are busy doing. So I think there is plenty of opportunity still for us in this space.

Great, thanks. And just on guidance, you raised overall guidance by about $2.6 million. So, part of that I am guessing is the incremental XenoSure sales and [two cubes beat]. But just the business seems to be humming along very nicely. I mean is there anything that you are cautious about going into the back half of the year?

Yes, so, just to quantify that first part and generally agree with you. The [2.6 B] you can think of as a raise. We beat Q1 by about $800,000 and then the Baxter piece, as George said, was about $1.7 million. The hidden piece of this is foreign exchange.

When we gave guidance I think the Euro was about 1.14 or so. So there was about a $400,000 plus [bad guy] from when we gave guidance. And so that sort of goes the other way. So we feel like the raise was $500,000 plus or so.

In terms of the back half of the year I think the big question mark is the Baxter back order piece. And really we did our best to guesstimate what we think Q3 and Q4 would be about in terms of that. But, who knows.

You don't know what is going to come out of that in terms of an answer over the coming weeks. Otherwise I think by and large I think the business generally along pretty much all product lines we are feeling pretty good about.

And, Drew, just to pile on here a little bit, I look forward to the back half of the year because this rep surge that we keep talking about, the 2016 rep surge, those reps started coming on in Q4 of 2015, Q1 of 2016. We are now getting a critical mass of this rep surge. And it does take them some time to gear up.

And I think by Q4 -- now this is all baked into our guidance as far as we know right now. But I think by Q4 we should be seeing some nice results coming out of those new reps. So I do think the wind is at our back from the rep surge perspective.

And to date we have just been sitting through all the additional expenses without exactly gaining revenues. And I think going forward you will have that with you.

Okay. And, George, just on the sales reps, are you still targeting 96 by year end 2016 and adding maybe five or six annually after that?

Yes. I guess I am not guiding for this second into 2017, but you have seen on our presentation we have given sort of a long-term, yes, we will add five-ish. But yes specifically 96 for year end.

Okay. And then just lastly, you've touched on this, but on the share repurchase side you said that it is not going to impact your focus on M&A. And Dave, you may just want to talk about this. But can you just give us your updated thoughts on M&A broadly and kind of what your pipeline looks like and valuations that you are seeing?

Sure. It is a pretty consistent story. The pipeline looks good. I think as you know we are starting to look for a little bit larger target. But we remain focused on the vascular surgeon niche market. We like Biologics, as you know. We also like endovascular -- I would say endovascular niches. So, and that has I think been pretty consistent over time.

Obviously with the cash generation inside the Company, even with the buy back, I think at this point we have a good $20 million of dry powder. The last 12 months EBITDA is around $17 million. So -- and we have no debt. So from a debt standpoint we could probably add -- you might know the number better than me -- $40 million or $50 million of debt.

Valuations, of course there has been a nice sort of run up in peripheral vascular device companies, some of our peers, 16%, 18% 20% in the first six months that LMAT has sort of sat on the sidelines of, so --. And then we have seen larger deals, the Abbott Saint Jude deal and Medtronic HeartWare. We're seeing takeouts of around five times sales.

But when we get into the targets that I am looking at, I would say valuations are a little bit more situation dependent. So, I don't necessarily take those market indicators as an exact correlation to the type of multiples that I would pay.

Great, thanks, guys. I will hop back in queue.

(Operator Instructions). Jason Mills, Canaccord Genuity.

Good afternoon. This is actually Jeff Chu filling in for Jason. George, congrats on another solid print. Just a couple of quick questions from me.

Number one on gross margin, you maintained your guidance at 70.5% with, if I recall, the improvement driven by HYDRO and cost reductions. I'm wondering if you could comment on your progress with ProCol. I understood you were initially in the 30% to 35% range and I was curious on the progress there.

Yes, so, ProCol, the issue there is not necessarily the actual current cost of manufacturing, it is more about the purchase accounting that brought it down to 30% I think for the first eight months or so. So we are going to experience that for a while.

I think it was like a 0.5 or 0.6 hit to the margin in the quarter. And we will feel that for a little while longer. And I think we'll probably wind up in the 60% range to start and then hopefully we can improve that from there. But that is a temporary phenomenon that piece.

Okay, great. And just to follow on on the last question about M&A. You certainly talked about M&A accounting for I think about 2% of your 10% growth plan. But I am more curious on your internally developed products. And I was hoping you could remind us on some of the projects or products that you have in the pipeline that will make up that 8% of that growth?

Sure, Jeff, I would be happy to, it is George again. So, we hope to do a first in man by the end of the year for the famous Pruitt shunt with monitor that we have been talking about for a little bit on these calls now.

Technically we are getting our arms around and over all the issues that we had talked about perhaps six months ago. So we are feeling good technically. And we hope to have first in man potentially in Canada by the end of this year. So we are feeling good about that project again.

In terms of the XenoSure product line, we are starting to build out some new SKUs. I think this is the first time we have talked about it on these calls. We will be making what are little tiny blocks called pledgets, they are just XenoSure cut up into a million Little pieces for cardiac surgery.

And we are also coming out with a couple new shapes and sizes of the patch, some slightly bigger than what we are selling right now and we will see where those go. Those do not come with regulatory hurdles in the United States. And so, these will be relatively fast to market, maybe even in Q4.

We also have some fixes going on, some nice quality fixes going on with the TRIVEX machine. There is three or four ones that we've been trying to get after since we bought that device in 2013. You will see those in H2 that is coming out.

And then there is one more -- we came out with a long clip about six months ago, the long AnastoClip device. And that thing is going quite well. AnastoClip grew I believe 20% in Q1 and 29% in Q2.

And a lot of the growth that's happening in that category is based on that new product, the long device, which is a little bit more geared towards neuro and spine surgeons than the vascular surgeons, nonetheless the category is growing robustly again.

Great, thanks for the color. That is it for me. I will get back in the queue.

Larry Haimovitch, HMTC.

Good afternoon, gentlemen. I hope you can hear me okay, I am driving and I am on speakerphone. Can you hear me?

Yes, we can hear you. It does sound like you are on a cruise ship, Larry, but we will take your word for it.

Oh, come on now. I wish I was. So, I have two questions. We have seen some interesting changes in the reimbursement lines [again] this year, some different proposals. Have you seen anything yet that could have any impact, positive or negative, on any of the key procedures that use your products, George?

No.

Okay, next question. China, can you give us a bit of an update? I joined the call late; you make have talked a bit about China. Can you give us an update on your progress getting some of the products approved through the Chinese authorities?

Okay, great. And, Larry, we did not talk about China yet. So, China -- we now have five devices approved over there which account for approximately 37% of our worldwide annual revenues. So you can think of us as being one-third approved in China.

And we have started to file for XenoSure, we hope to get that approved in 2020. And we also hope to get the PTFE product approved in let's say two years.

So I would say we just finished the bolus of approval and then more approvals will come, but they are going to come somewhat down the road. So you have what you have. And now we are building out the sales force to sell those.

And I would say -- buried in all of this I would say China operationally is going very well in terms of us kicking off the milestones, hiring the sales reps, working on contracts with master distributors.

But I would say buried in all of these numbers, even though we had a good Q2 for China, China is not our leading country right now, it is longer and harder than I think we expected. It doesn't bother us at the corporate level, you can see we are posting nice results.

But I would say we continue to find that it is a long complex project, we are 100% committed to it because it is the second largest device market in the world already and it is just growing gangbusters. But we are definitely new over there and I would say the sales results are middling at best.

George, how large is China? I don't know whether you want to give a specific number. But it is it a seven figure, over $1 million market for you at this point?

I think I have quoted this before, I am more than happy to -- it is about $1 million, maybe a little bit less, Larry, and maybe a year and a half ago it was like $1.2 million for us, something like that. So it is flattish around $1 million.

And the issue there is lack of new product approvals, is that what is keeping you from really growing it, George?

No. I would say fundamentally, Larry, we bought that TRIVEX device and it had a nice distribution channel over there. And the personnel, they have had a lot of upheaval at the Chinese distributor, the master distributor. And we are trying to put the pieces together from that turnover of personnel at the master distributor. Because a big chunk of our Chinese revenue is TRIVEX.

Everywhere else TRIVEX is a bit player in our world, it is not more than 4% of our Company. But in China it is a big piece of what we do. And we've struggled with personnel at the distributor.

So one more question on China, I won't beat this horse dead. But over time it sounds like given the size of this margin that this could become a very nice growth market for you as you work through these problems, get the distribution and [management] and new products approved this could become a major market for you.

Yes. Our success in Japan and Germany as two other very large markets would point us towards someday we are going to get great success in China. It is not coming yet but we are very confident it will and we continue to grow out the operation as though it will succeed.

Okay, great, George. Congrats on the progress and I will jump back in the queue.

Mike Petoskey, Barrington Research.

I just -- really most of my questions were asked and answered, but I never actually heard what is the current sales rep number?

The current at June 30 was 91.

Okay, and then just a couple of housekeeping. Do you guys have the D&A figure for the quarter as well as the CapEx figure for the quarter?

G&A in the quarter --.

D&A.

Say that again, Mike. Sorry I don't know if you said G&A or D&A.

Depreciation and amortization.

Yes, in the quarter about $850,000.

And CapEx?

About $500,000 -- $525,000.

Let me ask one last one, stock comp for the quarter?

Yes, sure. Stock comp about $350,000.

All right, great. Like I said, most of my questions were asked and answered. Thanks, guys. Really great results. Thanks.

Jan Wald, Benchmark Company.

Congratulations on the quarter, it was a really good quarter. I guess most of my questions have been answered. But one thing I just wanted to get your feeling for was what we have right now is a nice additional income stream for the third quarter that is sort of waning in the fourth quarter.

Do we go back to sort of business as usual in the first quarter of 2017? Or is there going to be some leverage you get out of the Baxter enterprise or something like that? So is this a blip on the screen or is it a bit of a change in trajectory from your perspective?

So I can't imagine that -- looking out into 2017 I can't imagine all of the business will go away, Jan. So I think this is going to leave some permanent good item at our level on the sales level.

I also feel through this process of getting closer to understanding Baxter, I think we are now discovering why we are making such nice inroads against this company and their sales compensation strategy and the attention levels that they pay to this product.

So, we are -- forgetting about exactly this, quote, blip right now, we are doing fantastic on a real true unit and market share basis against Baxter, but as well as against all the other synthetic and some small other biological competitors.

So, I think this affirms and continues to let us know we are in a good place here in this product line and we should continue to steal share from all the competitors and maybe we will get something residual from this Baxter thing as well.

Okay, thank you very much.

There are no further questions. 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.