LeMaitre Vascular Inc (LMAT) 2019 Q2 法說會逐字稿

Welcome to the LeMaitre Vascular Q2 2019 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. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Carmen. Good afternoon, and thank you for joining us on our Q2 2019 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 within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, 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 24, 2019, 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 in 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 growth numbers as well as operating income and operating income growth expectations, excluding certain onetime gains and charges. 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, JJ. In Q2, we reported record sales of $29.5 million, up 9%. Embolectomy catheters, allografts and polyester grafts drove dollar growth in the quarter. Both the Americas and Europe had record quarters growing 9% and 10%, respectively. We're increasing our full year 2019 sales guidance to 10% growth, up from 8% at the last call. We're also guiding 17% sales growth for Q3 2019. The 2018 acquisitions as well as the 2018 sales rep surge are largely responsible for the 9%, 10% and 9% sales growth rates we've reported over the last 3 quarters.

The Syntel and Cardial acquisitions of 2018 are running at $8 million in annual sales, significantly ahead of pre-acquisition results. The 2 acquisitions also seem to be causing organic growth in our existing polyester grafts and embolectomy catheters. Separately, as you may recall, we bought the international rights to the Tru-Incise valve cutter in 2015. As a follow-up, in July, we bought the U.S. rights, which we believe could add $600,000 to H2 sale.

Worldwide, we ended Q2 at 110 sales reps, a high water mark. We're also opening more sales offices as we aim to enhance our presence in the larger countries.

In Q1, we opened our new Asia-Pac headquarters in Singapore. In Q2, we opened a sales office in Chandler, Arizona to serve western U.S. surgeons and hospitals. And in Q3, we hope to get ahead of Brexit by opening a sales office and warehouse in Hereford, England. Following the Hereford opening, we will have 13 sales offices: 5 in Europe, 4 in North America and 4 in Asia-Pac.

On R&D side, in Q2, we launched XenoSure Plus. XenoSure Plus is a thicker version of our current patch aimed directly at our main patch competitor. And in H2 2019, we expect to launch DuraSure, which is identical to XenoSure but carries U.S. indications for neuro and spinal.

As you may know, we also continue to pursue XenoSure approval in the 3 large Asian markets of China, Japan and Korea. In China, our clinical trial is now 93% enrolled, and we currently expect approval in 2022. We expect to make another Japanese XenoSure filing in September, and we have received approval in Korea, though we await reimbursement specifics. And finally, our 2018 Australian XenoSure approval has begun to accelerate sales growth in that country.

With that, I'll turn it over to JJ.

Thanks, George. Our Q2 2019 gross margin was 68.9%, down 1.4% versus the prior year period. The decline was driven by the recently acquired lower-margin embolectomy catheter and Cardial product lines, the stronger dollar and lower margins in our export sales. Our gross margin may be range bound for several more quarters, while we execute integration and cost-cutting measures typical after our acquisitions. Two of those projects are underway. We have now begun to transfer Omniflow manufacturing from Australia to Burlington, and we are also transferring the applied medical embolectomy catheters to Burlington. We anticipate both transfers to be completed in H1 2020.

In Q2 2019, operating income was $5.9 million, up 6% from Q2 2018, excluding special items. The operating margin in the quarter was 20%.

In addition, we are guiding operating income increases of 16% in Q3 and 6% for the full year 2019, excluding special items. These increases compare favorably to past quarters and mark a return to our bottom line growth. The increased leverage should be driven by solid sales growth and operating expense control.

For Q3 2019 and the full year, we expect operating margins of 19%. We ended Q2 with $48.2 million in cash, an increase of $786,000 during the quarter. The increase was driven by net income of $4.6 million in stock option exercises, which were partially offset by working capital uses and dividends of $3.3 million.

Separately, our Board of Directors approved an $0.085 dividend implying a yield of 1%.

Our Q3 2019 sales guidance of $27.8 million to $28.6 million represents a year-over-year increase at the midpoint of 17% on a reported basis and 11% organically. We also expect Q3 2019 operating income of $5.1 million to $5.6 million, an increase of 16% at the midpoint. We have increased our full year sales guidance to $115.5 million to $116.7 million, representing a year-over-year increase at the midpoint of 10% on a reported basis and 7% organically. We also expect full year operating income to be $21.5 million to $22.4 million, an increase of 6% excluding onetime items.

With that, I'll turn it back over to the operator for questions.

(Operator Instructions) And our first question is from Rick Wise from Stifel.

It's Drew Ranieri on for Rick tonight. Just wanted to start on one thing. George, you mentioned that the recent acquisitions, they are going above your expectations and they are actually causing some organic growth in some of your other product categories. Can you maybe touch on that a little bit more? Are you seeing the organic growth as more surgeons coming on board to LeMaitre? Or is this maybe just increasing procedure wallet share with LeMaitre customers?

I think it's more the former than the latter, Drew. And in general, you remember the French acquisition was largely about the Dacron in France, and we sell our own brand of Dacron called AlboGraft. And so we're seeing a really nice -- something good happening with AlboGraft, and we're ascribing it to what we are calling leakage, which is a new word, from the acquisition into our -- I don't know, our house brand, our house type of Dacron. The same thing is happening with the Syntel, Python acquisition, the applied medical devices. We bought those embolectomy catheters, and they're leaking into our brand of embolectomy catheters as well. So you're getting reported good guy growth from the acquired devices. And then you're getting also organic good guy growth in the devices that you already had.

Got it. And just to touch on RestoreFlow. I think last quarter, you were discussing the product was a bit challenged, but it did improve in April. And it looks like it continued to improve throughout the second quarter. Could you just maybe touch on some of the dynamics there of what you saw unfold through the second quarter? How that recovery is progressing with RestoreFlow? And have you worked through all the issues at this point?

Okay. To cut to the end of your question, I sort of think, yes. We've got to the end of our issue, and our issue at the beginning for us, which started very early on after the acquisition, was we weren't able to source enough of the long, 70- and 80-centimeter cadaver veins. Now we've got that behind us, I feel like our sourcing of these products is now beyond our gifting or granting or whatever you call it, you're not allowed to sell them to people, but I think it's beyond that now. So we have a nice, what they call, a tissue bank of tissues out in Chicago now at our factory. And the thing played out a lot like we thought it would. The sales force said, "Gosh, we don't have enough product." This is the one place we're in backorder, and so we galvanized a giant effort inside of LeMaitre Vascular. And I think it was late January or early February, where we said, "Oh my God, ta-da, we got it done." We have enough products, and now sales are going up as a result of that. Let's see what happens next. But for the first 4.5 months of this new situation, it's been fantastic.

And Drew, this is JJ. That's on the sourcing side. And then you recall, a year ago, Q3, we talked about a weak RestoreFlow quarter, and we lost a bunch of the original very large customers. And I think our organic growth rate of new customers has increased a lot. I think it's around 150 or so active customers now, up dramatically from where we were when we acquired the product line. So there's a nice healthy topic going on in terms of new customer growth as well that's helping to get us over that hump, which was on the purchasing side.

Q2 organic growth was 26% in the allografts category.

Great. And just one last housekeeping question. I think I heard you mention your sales offices, but did I miss you provide an updated sales force headcount by geography?

I hope I did. I didn't give the geography. I'm happy to. We've 110 on board right now. It's a high watermark. 51 in the Americas, 43 in Europe and 16 in Asia-Pac. A lot of the growth -- it comes and goes, but a lot of the growth has been about Europe and Asia-Pac.

Our next question is from Jason Mills with Canaccord Genuity.

George, it's Dave Rescott on for Jason. Can you hear me all right?

Yes.

So I wanted to start first (inaudible) on guidance and the acquisitions. So I know kind of in the past, you've mentioned that the 2 recently acquired products were expected to be lumpy going forward. And I was wondering if you would, first, be able to talk about the contribution within the quarter from those products as well as kind of parsing out the differences going forward at least as far as how you are thinking about the different contributions in growth in the new guidance for the year, whether it be legacy or the acquired or the new products. And where if any of those areas you think you can see acceleration coming from?

Okay. Lots of questions in there. Could you mind dissecting those questions down? What's the first question that you want?

Yes. So first one, I guess, would just be on the acquisitions in the quarter. I know we can break out kind of what the contribution was there. Was there anything kind of onetimers in there? Second would be how you're thinking about growth going forward? And where the majority of that growth is going to come from, whether it be the acquired products, the legacy products or new product launches? And then third one, and that one being just which of those 3 kind of areas will show any kind of acceleration?

Okay. So I'm going to answer the first 2. So the acquisition will add $200,000 in Q3 and $400,000 in Q4.

And if you wanted just the gross number. In Q2, the applied acquisition was about $1.1 million, and the Cardial was about 850 -- $850,000. If that was what you were asking.

And then to continue on, I think also you were asking: What is the acquisition? Is it going to be about organic growth or acquired growth going forward? I sort of heard that in there. And I would say the guidance is 10% reported growth for the year and 7% organic. So you could say the company is growing 7% for the year, and then there is some acquisition there. Remember, in Q4, since we bought those 2 companies in late Q3, very early Q4, there really isn't that much contribution from acquisitions anymore. It's kind of petered out by then, and it's mostly an organic story in Q4, according to what we see from here.

Okay. And then I think you mentioned that in the past you've been able to kind of derive growth via ASP increases while (inaudible) volume growth. Is that kind of how you're thinking about it going forward as well? And I had another thought as well.

Right. So I wouldn't be able to guide on that, but I would say, looking at Q2, the business comes exactly 50% from pricing and 50% from units. We did look at that. The growth -- positive growth of our business was 50% unit, 50% pricing.

Okay. And then maybe one more specific within the CEA. So I know we kind of still had data come out about CI -- around kind of TCAR procedures. I wonder if you could provide some of your thoughts around how you are thinking about that competition coming in? And really where it could affect any of your product lines?

Yes. I think there is no question in the U.S.A. We're doing great with the shunts product line, but there's no question that is in the area of shunts, and we'll see how adopted that technology gets and how it affects our carotid endarterectomy business. So we shunt, and some people stent. This is a better way of stenting, they say. And there's a lot of data coming out, and the stock on that company is doing quite well. So hasn't affected us yet. We'll see what happens next. We don't -- it's hard to outguess what the surgeons are going to do.

(Operator Instructions) And our next question is from Joseph Munda with First Analysis.

Tracy Marshbanks pitching in for Joe here, but he left me some questions for you. So the first one was on could you quantify biologics as a percent of the revenue in the quarter.

Yes. So biologics were about 35% of sales in the quarter, and that's up from about 33% in the prior quarter.

Okay. And then the other question was really on gross margin in your outlook. I mean, you touched on it a bit, but could you sort of help quantify where the improved outlook on gross margin is coming from between the integrations and various other operational activities that are going on?

Yes. So we're guiding 68.7% for the year, and that's up 0.2% from our last guide. And most of that increase really, Tracy, is from the beat in Q2. We beat the gross margin a little bit. And I would say Q3 is typically seasonally, oddly, a little bit better quarter. And we might get some good guides from RestoreFlow, which has cranked up production, as you know, over the last year. And some of that makes its way on to the balance sheet and then comes back on to the P&L and will still come on to the P&L, but it's declining. But we'll still get some of that, and maybe there is a mixed topic there that helps as well.

Right. Okay. Noted the -- that you launched Xeno Plus. Could you talk a little bit about -- do you have any feedback from the market? And how that's going? And when you might have feedback, if you don't?

Yes, sure. We have a very little, but we have some. We've done about 10 or 15 cases. Everything seems to be going swimmingly. It seems to be the -- I would say, we're trying to replicate our competitor's product. We have our own product. It's kind of we love it, and it's the market leader right now. But we have a big competitor who also has a big chunk of the market. And so the surgeons seem very happy with it. Everything's fine, and we will see as it rolls out.

Great. And last one. Maybe your thoughts on both as a company your ability and readiness for additional acquisitions and if you will, the landscape out there that you are facing?

Yes. Tracy, it's Dave Roberts. The ability, I think, is just as good as it's always been. We ended the quarter with $48 million of cash. We just did another smallish acquisition a couple weeks ago. But at a very high level, the pipeline looks full, the strategy remains the same. We normally do about an acquisition a year or so. We're out hunting. Valuations are maybe a little bit higher than normal, but they're very situation dependent. So -- and we'll always wait until we see the right valuation before we close the deal.

Our next question comes from Mike Petusky with Barrington Research.

I may have missed this, but did you guys give growth numbers for XenoSure, valvulotome and RestoreFlow?

I think the only one we've given so far is RestoreFlow, 26%. Happy to give you Q2 numbers if -- I think valvulotome's 3% organic or 2% organic.

3% reported. And what was the other one? Xeno was low-single digits to flat reported, Mike.

But 2% organic for Xeno.

Yes.

To the extent you can speak to sort of the competitive issues and pricing in XenoSure, I mean, is there any color you can give around the current state of things there?

Sure. And I'm lucky I just saw a bunch of market share charts last week, so I'm as educated on this as I could be. It feels to me like in the U.S. specifically, we continue to do a good job market share-wise and that the market's down a little bit in the last 1.5 years. And so that might explain some of the issues we've had there. In Europe, where we don't enjoy as much market share, that's going much better for us. And in some ways, we look at Europe and the U.S. right now on XenoSure as a tale of 2 cities for us. It's going great in Europe. The organic growth rate number in Europe is -- I think it's 8% or 9% for the quarter, someone will help me while we're talking. And in the U.S., it's more like 1-ish, I think. I mean it's 5% or 6% in Europe and then 1% here. So it's very different, and we have a much lower market share over in Europe, in a good way, like we have more to go. In the U.S., you sense, "Oh, we're getting to the 40s or so, and it's harder to make progress." Pricing, you asked about. We definitely feel pricing pressure by the various competitors in the U.S. more so than we do in Europe. So we're out there doing a lot of price competition.

Okay. All right. Okay, very good. And then, I guess, George, in terms of the fairly weak and higher sales reps, I know it takes 2, 3, 4 quarters for you guys to really sort of get traction. I mean, it feels like probably we're still a quarter or 2 away from sort of full maturity on that latest surge. I mean, is that a fair way to think about it? Or anything you can speak to there.

Yes. We are saying in this call that now we've seen 9%, 10% and 9% sales growth in the last 3 quarters. So I'm starting to think like we're feeling it a little bit, but I always feel like it takes -- this is going to sound crazy but feels like 2 years once you fill a territory until you're really, really going. And so it takes a long time. We all got to be patient. But I feel like we're starting to feel good about it. It just feels good around here, the sale does. And you can start to feel it in some of the guidance that we're giving you as well. So yes, I think we've started to feel it. I think there's still more coming on.

Okay. All right. Great. And then...

Mike, one other piece about that is, in the Americas, the sales rep ramp really hasn't been dramatic. It's kind of been flattish. It's really been more in Europe. And you can kind of feel that in our numbers, too. Europe feels pretty strong, and Europe feels a little bit lighter and maybe there is some correlation there.

U.S. feels lighter, you meant to say.

Yes, U.S. feels.

Yes. I tracked on that. Okay, great. Just one more, and this is really housekeeping for JJ. Do you, by any chance, have the stock-based comp and CapEx for the quarter handy?

I do. I wrote it down just for you somewhere. So hold on. Stock-based comp, $700,000. What did you want? CapEx? Or G&A?

CapEx.

CapEx, $850,000. And G&A, $1.35 million.

And our next question comes from Frank Takkinen with Lake Street Capital.

This is Brooks on for Frank. I'm just curious I might have missed some of the commentary, George. But I recall back a few quarters ago, you kind of stepped away from the 10% and 20% growth guidance that you had, I think, put up for the company for some time. Would you say you are ready to declare that LeMaitre is back? Or would you say we're still in a period where you are working aggressively to find the formula to get back to that historic growth number?

Brooks, I remember pointedly this was a big topic I think 3 or 4 phone calls ago with you. So I appreciate you staying on the topic. I think what we've learned with the broad intermediate-term guidance of what was then 10%, 20%, we learned that it interfered with a lot of conversations in one-on-one room and things like that. So I don't know if I'm ever going to go back to this intermediate term, whatever it could be, whether it's 10%, 20% or 10%, 30% or 10%, 10%. I don't know if we're ever going to go back to that longer guidance. I think we sort of learned the lesson we should stay within ourselves. We should stay within the year. And so this year, it's a 10%, 7%, and it feels a lot better than last year felt. And I forget -- I think last year was a 5%, negative -2%, if you adjust out for all the items. But we feel like we're crafting a nice comeback story, and it is a 10%, 7%. But I think we feel a little bit gun shy about going beyond the end of 2019 as we just keep figuring out that the future is a lot harder to divine than you think it is. So I doubt we're going to go back to that type of thing, but maybe. Who knows? The future is uncertain.

Okay. But you are feeling -- you said and I'm just regurgitating what you said. You're feeling a lot better about how the company is positioned, the elements you put together to run the company and the opportunities you see in the marketplace going forward.

Things feel great to me right now. And you're seeing in the guidance with a 10% at the top line, we haven't seen double-digit guidance out of LeMaitre for a while. And you're seeing in the 7% of income growth. So it feels good. You're going to know what I feel based on how we guide because JJ and I spend 2 days locked in a conference room trying to make sure we guide correctly. We've been doing that forever. We're not better or worse than we used to be, but we take the guidance really seriously.

No, no. It's good. It's important, and I'm glad things are going a lot better and you're feeling better. And that's a really positive thing. So keep it up. Congratulations.

And our next question is from Scott Henry with Roth Capital.

Looks like great results. Just had a couple questions, most of mine have been asked. But I guess, first, for RestoreFlow, very strong quarter. Looks -- it's always a guesstimate, but it looks like a record quarter for the product line. The question is sometimes that can be a little lumpy in that product line. Should I think about the 2Q number going forward on an absolute basis as a new trajectory? Or will there still be some lumpiness based on quarter-to-quarter?

Right. So to confirm for you, there is a question there: Is it a record quarter? The answer is yes. It was a record quarter in RestoreFlow. I agree, this one, with the fewer number of customers, is a little bit harder for us to understand. It's definitely not like the LeMaitre valvulotome business, where we have hundreds and hundreds of small customers. On this one we have more large customers, although our model is less reliant on large, what we call, whales than the model of the company that we bought it from, the actual RestoreFlow company. So I think we've sorted out some of it. But I agree with you. It's a little bit lumpy. I don't know what to say about the future for RestoreFlow except you just had a record quarter. It was up 26%, and we've solved the supply issues that were nagging at us for the last 2 years. So I would say all systems are go around RestoreFlow. Let's see what happens next. We don't break down our guidance by product line. We love the fact that we're a mutual fund of vascular devices. So we don't try to break down exactly which product is going to do well or not do well for you guys. Of course, we're looking at that internally a bit.

Okay, great. And then just one other question on XenoSure. It's kind of an inching -- right around flat, slightly up, but you have new products coming on board. Do you think we're at a point where it should start to accelerate and we should start to think about sustainable growth even if there are small numbers going forward? Or I'm just trying to get a sense of when we come out from that kind of plus or minus category as far as growth goes.

Right. It is hard to read. We agree with you, and we feel it. Again, I don't feel comfortable putting any expectations on specific product lines. But I am coming out with a 10% reported and a 7% organic guidance here. And so somewhere in there, something is going well. But I'd rather not put that kind of -- let's wait and see and see what happens in Q3, I would say. Sorry, that's not a very satisfying answer, Scott, but that's what we got.

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