LeMaitre Vascular Inc (LMAT) 2017 Q4 法說會逐字稿

Welcome to the LeMaitre Vascular Q4 2017 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, Skylar. Good afternoon, and thank you for joining us on our Q4 2017 conference call. With 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, pursue, forecast and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, February 21, 2018, 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. 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. Q4 was another healthy quarter in which we posted sales growth of 15% in the Americas and 22% in Europe, Middle East, Africa. The increase was driven by valvulotomes and XenoSure. Only Asia held us back in Q4 as we are in the midst of transitioning away from our 2 master importers in China. Soon, we will start selling to our own group of distributors from our Shanghai office. Eliminating this layer of middlemen is a typical move from the LeMaitre playbook. This transition left us with no Chinese revenues in Q4 2017 versus a normal rate of about $400,000 a quarter.

So the year of 2017 ended with 13% reported and 7% organic sales growth. The key drivers were our biologic products, including 20% XenoSure growth. We also posted 29% annual op income growth. Over the last 3 years, our op margin was 15% in 2015, 18% in 2016 and 21% in 2017. We are guiding 23% in 2018. These continued op margin improvements are the result of double-digit reported sales growth and high single-digit op expense growth.

This increased profitability, our $41.7 million cash balance and the new lower federal tax rates have all combined to give us a wide array of strategic and cash return alternatives. In this quarter, you're seeing this result in a 27% dividend hike, but this cash will also find its way into future acquisitions and internal investment opportunities.

I'd like to close by reiterating our financial goals. We continue to pursue 10% annual reported sales growth and 20% op income growth. I'll now turn the call over to J.J.

Thanks, George. Our Q4 2017 gross margin was 69.8% versus 69.5% in Q4 2016. The increase was driven largely by favorable mix, as China and distributor sales declined. Op expenses in Q4 2017 were $11.9 million, down 3% versus the prior year period. Lower operating expenses were driven by general cost-cutting measures, fewer sales reps and lower sales management costs.

Combined with increased sales, this cost control allowed us to post record operating income in Q4 2017 of $6.3 million, representing a record 24% operating margin. Our effective tax rate in Q4 2017 was 32%. For the full year, our effective tax rate was 19% as stock option exercises reduced the rate by 17%. We expect our 2018 effective tax rate to be approximately 25%.

We finished 2017 with a record $41.7 million in cash, an increase of $4.1 million from Q3 2017. Cash increases in the quarter were driven by cash from operations of $6.8 million, which were partially offset by capital expenditures of $1.6 million and dividends of $1.1 million. For the full year 2017, our cash increased $17.3 million. Our Board of Directors recently approved a 27% increase in our dividend from $0.055 to $0.07, implying a yield of 0.8%.

Turning to guidance. We expect Q1 2018 sales to be $26.0 million to $26.6 million, a reported increase of 9% at the midpoint and organic increase of 4%. We also expect a gross margin of 71.5% in the quarter and operating income of $5 million to $5.6 million, growth of 25% at the midpoint. We are also guiding EPS of $0.19 to $0.21, growth of 21% at the midpoint.

For the full year 2018, our sales guidance is $110 million to $111.6 million, a reported growth rate of 10% at the midpoint and an organic growth rate of 7%. Our full year gross margin guidance is 71.5% and our operating income guidance is $25.4 million to $26.6 million, growth of 23% at the midpoint. Our annual EPS guidance is $0.96 to $1 per share, growth of 14% at the midpoint.

With that, I'll turn the call back over to Skylar for questions.

(Operator Instructions) Our first question comes from Rick Wise with Stifel.

Congratulations on a excellent quarter despite the China headwind and congratulations on cracking the $100 million barrier. It seems like a noteworthy milestone. Perhaps you could talk a little -- to us a little bit more about the China situation from several vantage points? One, what have you assumed -- what's assumed in your 2018 guidance? And help us -- if you could give us a little more color on what your plans are and actions and what we should expect in terms of getting back to sort of "normal" in China?

Rick, by the way, thank you very much for the question and the $100 million comment. We agree. It is a milestone of sorts. We'd always been told when we got to $100 million, there'd be some kind of big parade for us. So we're real excited about that. It does feel a little bit more substantial. So thank you for recognizing that and appreciate that. In terms of China, this is a fairly standard piece of our playbook. Right now, we're in a 4-layer system. So looking back 6 months, it was LeMaitre sells to a master importer, who brings it into China, who then sells to a layer of distributors, who then sell to hospitals. We are almost through with the transition now. We haven't shipped out first order, but we're about to become LeMaitre Shanghai ships to a subdistributor, who we now call a distributor, who ships to a hospital.

In specific reference -- so we're just taking a layer out. And in this change out, we haven't started booking revenues to distributors. If you ask the question, I think you did, how much of Chinese revenue is in guidance, we really haven't gotten -- in the past, we haven't broken out by countries, but at a high level, since we brought up the Chinese topic, maybe we can say, at a high level, at the high watermark, we were selling about $1.6 million in revenues to the Chinese distributors, the 2 master importers, and I feel like something between $300,000 and $800,000 is reasonable to expect this year. It's just a question when it really does turn on. And historically, since it's been such a small piece of our business, we haven't really worried about it. When we got down to looking at guidance and how it affected Q4, it really did make a big difference because you lost $400,000 of revenue in a quarter.

And obviously, still turned in solid performance. Gross margin was a shade less than your 70.3% guidance. Obviously, more than making up for it on the OpEx -- slower OpEx growth. Maybe talk through some of the puts and takes on both -- gross margin, was that -- I don't know, currency or mix or China and the drivers of the lower OpEx? And again, how that sets us up perhaps, J.J., for 2018?

Yes. The -- thanks for the question. The gross margin was maybe 0.5% or so below what we were talking about previously on the previous call. The lower China sales actually helps the margin a little bit. Those sales are typically at a little bit lower margin than our sort of U.S. and European sales. But we had some year-end cleanup topics and we had some manufacturing inefficiencies. I'll call it accounting stuff as sort of what we capitalize through the balance sheet stayed up on the balance sheet for a little bit longer than I thought it would last quarter. And those are good guys coming off. So you're going to get some of that in Q1. You didn't get it in Q4 and you thought you would. So it's really -- a lot of it caught up in accounting, sort of, balance sheet, P&L interplay there and maybe some year-end cleanup as well.

Going forward, I think you're going to get a little bit of that good guy in Q1 and you can see our guidance of 71.5% for the year. In the year and in the Q1, you're definitely getting FX help, but in Q4 versus our previous guidance, FX really wasn't a topic. But going forward, FX is certainly a topic if rates stay, sort of, where they are in that $1.23 range or so, euro to dollar. So you'll get some nice tailwinds from the FX going forward from Q1 through the rest of the year, if those rates stay.

Okay. And 2 last ones for me. Just again, maybe it's a high-level question. To start with, obviously, there are a lot of topics here, but when I think about your organic growth guidance of 7%, you grew -- or if I'm remembering correctly, 12% organically in '16. You're just -- you're growing 7% in '17. Here you're guiding to 7% in '18. But that's with -- '17 was with the China headwind with valvulotome not performing optimally, without significant sales, forced expansion, which is a whole other topic. But why wouldn't I -- sorry to push on it, but why wouldn't I view the 7% organic outlook for '18 as maybe thoughtfully and prudently conservative, but -- as potentially conservative, given all the other good things that are happening?

Yes, I would say the guidance is what it is, Rick, and this is what we think. We put our pencil to paper. And so I wouldn't want to say it's optimistic or negative guidance. It's just what we say. So that is where we are at. I will say, as you look at it, LeMaitre has historically and consistently sold you guys a 10% reported sales growth rate; that's in play this year. This year is 7%, maybe a little bit smaller than, sort of, historically. As we've talked about it with hundreds of investors, we've broken it down to 10% and 8% -- 8.3% is this odd number we keep coming back to, but 8% is a better number. And I would say that if you pull out China in '17 and '18, we keep coming back to the 8% number. And so it seems like a pretty standard guess by LeMaitre Vascular, but I wouldn't characterize it as particularly bearish or bullish.

Okay. That's great. And just last for me. Obviously, your cash continues to build. It's been about a year since your last deal. I forget who's running business development at LeMaitre, but -- perhaps, that person could talk about M&A capacity and what's happening? And again, how we think about opportunities in '18.

George, do you want me to take this?

Yes, Dave.

Yes. So it has been about 14 or 15 months. The good news is we've been integrating RestoreFlow. And I think, as everybody knows, that's been going quite well for us. I think the revenues are 62% above the preacquisition level. And so of course, we're always focused on doing the right deal rather than doing deals quickly. But that being said, aside from focusing on integrations in the first half of the year, we've been back -- we, me and my colleague, Luke, and other folks who help out here, pounding the pavement, trying to identify the next acquisition. So all I can really tell you is the pipeline, there's a good number of targets in it. We continue to focus on the open vascular surgery, peripheral vascular, dialysis access. We like biologics but we like non-biologics too. And certainly, with the bigger war chest cash of $41.7 million as you point out, I think that gives us -- starts to give us greater optionality. So we've done 19 deals in 20 years and we're out hunting for the next one and at some point you will hear about it.

Our next question comes from Jason Mills with Canaccord Genuity.

This is actually Cecilia Furlong on for Jason. And we were just wondering, could you provide an update on your sales force leadership both in the U.S. and O-U. S., as well as sales force retention and hiring trends?

Great. Okay. Cecilia, thanks a lot for the great questions. George, you're actually talking to the worldwide VP of Sales right now as well as CEO. And the great news here is, we've found a wonderful guy to run our Frankfurt office and he starts on March 1. So we're about, I don't know, 10 days away or so from me not being in charge over in Frankfurt. I spent the last 7 months running over there 1 week a month, to sort of just feel the organization and understand what they needed. On the U.S. side, we've been a little bit slower. It's a little bit easier for me to manage the U.S. side since I have 7 folks that I've been working with for a long time in and out of VPs of Sales and we continue to search for that -- for the right man or woman on that side.

In terms of turnover, we had an interesting thing in 2017. You asked about turnover. In Europe, we had a little bit more turnover, largely Central Europe, which we're going to call Germany, Switzerland, Austria. We had 3 or 4 turns there; that's a little greater than normal. And in the U.S., we had a bit of a better run than we usually have. And in 2017, 4 reps left us voluntarily. I would say, the normal number in the American -- North American sales force, excuse me, is about 6 or 9, and this year we only had 4. Something about the rising stock price, the better comp plans and maybe the better portfolio devices with that RestoreFlow acquisition kept the folks around a little bit longer in the U.S. than they normally stay.

Okay. Great. Thanks very much for the color. And then just for a follow up, could you provide some color around the growth trends you're seeing just across your biologics portfolio versus the rest of your product bag? And how you see this mix playing out in 2018 versus 2017 as well as impact on margins?

Sure. And you remember, of course, we don't guide based on individual products. So maybe I'd go back into '17 and try to draw some trends, then you'll have to figure out what you want to do with those growth rates. XenoSure grew 20% on a reported basis. I think Omniflow grew 18% on a reported basis, if I'm getting that right. RestoreFlow had a high growth rate, but it didn't have anything to comp against but it -- we don't have a comp number for you. So that was -- it was a very exciting year for RestoreFlow. And then ProCol also had a 15% growth rate in the quarter -- excuse me, in the year. Dave's got a better number.

51%.

51%, sorry. Transposed that, Cecilia. But in general, you can think that LeMaitre's biologic portfolio continues to plow ahead at a faster rate than its nonbiologic portfolio.

(Operator Instructions) Our next question comes from Raymond Myers with Benchmark.

And usually you report the biologics as a percent of total sales. Are you prepared to do that this quarter?

Yes. Dave can take care of that, Ray.

Ray, so the biologics in Q4 were 35% of total sales.

Great. Let's talk a bit about your plans for hiring reps. Now that you are about to hire a European sales leader, and George, you're going to be able to focus all your attention in the U.S., will you be hiring more sales reps in 2018?

Yes, Ray. In fact, I'm glad you asked that question. So on the official sheets here, it looks like we have 90 sales reps. Interestingly enough, we have 102 requisitions out there right this second. Most of them will kind of fill over 3 to 8 months. And so I feel as though the general trend is upwards here. I'm sort of able to recirculate a little bit of the money that I saved off of the VPs of Sales in the 2 geographies as well as, you remember, I didn't take my salary for, sort of, last half of last year. So we've been able to sort of start going, let's get a little bit more generous with the rep portfolio and that growth is taking place on both sides of the Atlantic, not necessarily in Asia.

Okay. So that's 102. Does that suggest that you'll get to 102 reps by the end of this year? Is that what you meant by that?

No. It means we have 102 spots that are being offered and -- with reps, as we talked about with Cecilia, you're getting them coming and going based on voluntary quits. Once in a while, there's a forced termination. And so even though you aspire to 102, it feels a little bit more like it's going to be lower than that. I don't really have a great grip on what lower means. But for fun, we could say 96 to 99 would be sort of the -- where we might go, although we might open up some more reps. One of the things about the FX rate that you're seeing happening is that we are having a nice uplift this year from FX. We already called out that we had a 7% organic number but a 10% reported number. That entire delta, if I'm not mistaken, is FX. And inside of that, there might be an opportunity to take a little bit of that away as well as a little bit of the Trump tax cut and use that to build the sales forces a little bit more on both sides of the Atlantic.

Great. What is stock comp in the fourth quarter?

Stock comp in the quarter, about $500,000.

$500,000. Very good. You were building out a clean room in Burlington, how is that progressing?

Yes. So we built out 2 clean rooms in Burlington, actually, Ray. So our main clean room, we expanded last year and added a decent number of square footage to that space just to give us more room. Obviously, as we expand volume, but we also built a biologic clean room. So a clean room dedicated solely to our biologic products; XenoSure, obviously, the first product line to go in there. More room for the XenoSure folks, but also a larger footprint gives them a chance to build a better process around what they are doing with XenoSure. And as the units ramp and, combined with a better process, hopefully we can get better costing on those XenoSure units as they come out of the new clean room over time. We're also selling ProCol. As you know, we had previously been purchasing that product from the seller of the device to us and now we're manufacturing it ourselves, although not approved and not validated to do that yet, but we're in the process of striving for that. So we'll get that over the next -- I don't know, maybe 6 months or so. So we'll see how that goes. But -- so 2 biologic products going into that clean room and 2 separate clean rooms, 1 expanded and 1 new.

Great. And kind of lastly, general question, maybe for George. You've shown really good operating expense control recently. Is that part of a program of cost cutting? What should we expect for expense control in the future? Should we get used to this type of expense control or is this a temporary?

Last year, you had these 3 things, these discrete items, the 2 VPs and myself. We've talked about that once already. But we also had in the background this thing, the cost-cutting effort that sort of started in May or June. And I think that helped out a little bit as well as, as you talk about, the gross number of reps being 90 in Q4 versus 96 the year before. So all those things kind of came together. I would say that's a special quarter. I don't feel like we can be that tight for all of next year. And I think our budget -- you can figure out what our op expenses are supposed to be based on all these numbers we've given you. But I feel like it's not going to be as tight next year. But in general, I perceive LeMaitre to be a really tight company and that's why we're able to guide 23% op margin next year without -- sort of, over the last 4 years, we haven't really had a big updrift in our gross margin. And so we've been able to get this op leverage from about 15% op margin in 2015, I think I'm doing this right, to 23% in 2018. And that's been about low single-digit sales growth and high single-digit op expense growth. A little bit of operating leverage there is what I'd say.

Yes. It was nice to see. Last question, I'm not sure that you gave us a sense of how soon we should start to expect revenues again in China?

Right. So I think what I was trying to say is we're not exactly about countries. But I did call out China, so it makes sense you guys would want to know that. And it feels to me, like we should expect the first shipment to sub-dealers in March or April of this year. And then it should build to something this year. And I think I gave a range on this call of about $300,000 to $800,000-ish and it's really hard to tell how this thing is going to take off. On a $110 million business, I wouldn't worry too much about whether I land at $300,000 or $800,000, but something like that.

Our next question comes from Mike Petusky with Barrington Research.

So I guess, one question I have and it's related to the dividend increase, which obviously is great for shareholders. But I do wonder if it sort of also says something about the valuations you guys are seeing out there in terms of M&A. I don't know, if George or Dave would want to talk about that a little bit?

Maybe I take a shot at it from a sort of strategic perspective and then Dave takes a shot at it from acquisitions. We try as hard as we can always to flash to everyone we talk to, we love dividends. We love doing M&A. We've done 19 deals in 20 years, as Dave mentioned before. As the principal owner here, I feel strongly that a great company exhibits strong dividend growth. So I'm not letting go of that at all and I'm pressing even harder. The more we get leverage -- you see the tax reform, we sort of got tax reform a year early in some funny way here because of this stock option exercises. All these things that were going on in 2017 gave us an effective tax rate of 19% and we only have an effective tax rate of 25% next year due to the Trump tax changes. So those 2 things enable one to be a little bit more aggressive with the dividend strategy. But I always want to say, I got plenty of internal CapEx type investments and Dave can tell you again about all the wonderful acquisition opportunities we have.

Right. I mean, it's one of those nice problems to have, where we have so much cash coming in that we're increasing the dividend and yet, the war chest continues to build. And so, Mike, to address your question about valuations. Of course, I would say as a rule, we generally don't participate in auctions. Valuations I find are very situation dependent. But I think there is no question that as we see the public market valuations high with our peer group and then a lot of deals like Philips/Spectranetics and Becton/Bard at 6x and 7x sales or CryoLife/JOTEC, Weigao/Argon in the 4x sales range. Sometimes that translates over to certain sellers. And then with other sellers it doesn't. So maybe at the margin we see valuations up a little bit. But again, it's very situational and some deals I look at, the public market seems to not be affecting at all. So sort of hard to exactly connect the dot.

Okay. What's your confidence level you guys do a deal in '18?

I mean, I generally don't talk about whether we'll do a deal in a specific period of time or not. I'd say -- if you look at the history, and I know you it well, we've done about a deal a year but sometimes I have gone a year or 2 or 3 without a deal, and then I think 1 year we did 4. And so -- and part of the reason it's difficult to predict is often we don't know if a deal is going to get done until the last minute. And so I would say not much has changed. It's the same team. Maybe the team has even broadened, the bank balance is higher, so those are good things. But we have to find willing sellers of strategically appropriate assets, and so we're just out looking as usual.

Maybe a little -- Mike, maybe an additional color on this is, so you're pointing out, hey, you haven't done a deal in 16 months, when is the next one. And we're not saying when it is. But I will say, we took a breather last year. I think you remember, we had some recalls in the beginning of 2017, end of 2016, that we weren't too proud of. And so we took a little bit of a breather and got our house in order. We worked real hard on quality. We've got a fantastic complaint rate starting up in 2018, particularly in Q1, obviously. And so we feel like we've largely -- you never really do at a medical device company finally, but largely put our quality issues behind us. And I think Dave is forced to wait a little bit when stuff like that is going on in our business because he knows it's so important to get great quality. I feel like we're there now and that's sort of further releasing him to go off and do what he needs to do.

Okay. Great. So speaking of capital allocation, have you guys been active at all in the -- there is a -- I think there is a share repurchase. Have you guys done anything with that yet or not to this point?

We have not. We have share repurchase authorized for, I think, $7.5 million and we have not repurchased any shares yet.

Okay. All right. And then just one other quick one. I didn't quite catch it. I was reading something real quick and then you guys started giving numbers. The XenoSure number for the -- was it 20% for the year or was it 20% for the quarter, the comp? I didn't catch that?

20% for the year.

Was XenoSure up -- I know we're hitting some difficult comps, but was XenoSure up in the fourth quarter or was it down?

Yes. It was up, I think, 16%. Yes, 16%.

Our next question comes from Jim Sidoti with Sidoti & Company.

Can you hear me?

Yes, Jim, you sound great.

Just a quick question on the sales and marketing, and general and administration expense in the quarter. Even though sales were up relative to the third quarter, those 2 numbers are down. Is that strictly due to the fact you didn't have a sales manager and that George wasn't taking a salary? Or were there any other one times in there?

So sequentially, Q3 to Q4 OpEx, is that what you're asking?

Right. Right.

Yes. So we had about a $500,000 charge in Q3, noncash, onetime special item for stock-based comp for a departing employee that we didn't have in Q4. And that's really, Jim, your big delta between the 2 quarters. There were some other puts and takes as well. Sales rep count at 90, so a little bit on the low sides, so commissions and related expenses down. But really, if you want to flux from Q3 to Q4, that's kind of your answer.

Okay. And I'm sorry, if you addressed this already, but you said you have 90 reps now and -- I'm sorry, 90 reps now and what is your target for 2018?

I feel like we talked about 96 to 99, but I feel very comfortable doing a little more or a little bit less based on comings and goings of reps.

Okay. All right. And then Dave, you better do a deal soon. People don't even remember your name.

All right. Point taken.

A pretty good one for this call.

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