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LeMaitre Vascular, Inc. (NASDAQ:LMAT)

Q4 2012 Earnings Call

February 26, 2013 05:00 PM ET

Executives

JJ Pellegrino - CFO

George LeMaitre - CEO

Analysts

Charley Jones - Barrington Research

Jeff Chu - Canaccord Genuity

Joe Munda - Sidoti

Robert Cleary - Stifel Nicolaus

Operator

Welcome to the LeMaitre Vascular Q4 2012 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.

JJ Pellegrino

Thank you, Sue. Good afternoon and thank you for joining us for our Q4 2012 conference call. Joining me on today’s call are our Chairman and CEO, George LeMaitre and our President, Dave Roberts.

Before we begin, I would like to read our Safe Harbor statement. Today, we will make some forward-looking statements, the accuracy of which are 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. These words are not the exclusive means for identifying such statements. Our forward-looking statements are based our estimates and assumptions as of February 26, 2013 and should be not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the cautionary statement regarding forward-looking information under Risk Factors in our 2011 10-K and subsequent SEC filings including a disclosure of factors that could cause actual results to differ materially from those expressed or implied.

During this call, we will discuss non-GAAP financial measures. The most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of GAAP to non-GAAP measures are contained in our Press Release announcing this quarter’s results and are available in the Investor Relations sector of our website www.lemaitre.com.

I’ll now turn the call over to George LeMaitre.

George LeMaitre

Thanks, JJ. Q4, 2012 served as an exclamation mark to great year. In Q4, sales increased 12% organically and unit sales increased 9%. Each of our major geographies posted organic sales growth. International grew 17% and the Americas increased 10%. Q4 op income was up 12% while net income doubled.

For the full year 2012, sales increased 8% organically, units were up 11%, the gross margins improved by 230 basis points and we reported 15% op income growth and 20% net income growth. 2012 was a record year for non-stent graft sales and op profit.

For 2013 we expect sales to growth 8% organically and op income to increase 18%. In addition, the Board of Directors increased the Q1 2013 dividend by 20% to $0.03 a share. Looking back 2012 was a productive year. While our European stent graft exit officially occurred in Q3 2011, our tightened focus on open vascular became fully evident during 2012 and helped drive 15% organic sales growth in Europe.

Additionally, the European sales team fully embraced XenoSure in 2012, increasing sales of our carotid patch six fold to $1.3 million. 2012 was also our first full year of direct-to-hospital sales in Spain and Denmark.

On the business development front we acquired the manufacturing rights to XenoSure in October 2012. In total we will pay $4.6 million to acquire a $5.1 million business, which grew 67% in 2012. We're now in a process of transferring the manufacturing from Vancouver to Burlington and expect to make our first Burlington unit in 2013. Controlling XenoSure manufacturing should enable us to further develop this platform and should eventually improve our gross margin.

Our R&D efforts became more productive in 2012, the new released UnBalloon and the over-the-wire LeMaitre Valvulotome contributed $600,000 of 2012 revenues. We also received several key regulatory approvals which will enable us to sell new devices into new geographies.

Looking ahead into 2013, we will be focusing our R&D efforts on two key launches - the 1.5 millimeter expandable LeMaitre Valvulotome and MultiTASC, a more user friendly remote Endarterectomy device. Both devices logged first in man procedures in Q4 2012 and both beta trials are now running very well. These two product lines should launch on both sides of the Atlantic in mid-2013.

As we closed out 2012, we undertook several new direct-to-hospital initiatives, which should provide sales growth in 2013. In November we opened the Toronto sales office and hired a Canadian General Manager. We expect to begin shipping devices directly to Canadian hospitals from the Toronto office this Friday March 1st and we plan to have five Canadian sales reps on staff by year end.

We also recently began selling directly to Swiss hospitals and have hired two Swiss sales reps. finally in December 2012; we agreed to terminate our distributor for certain Japanese territories and will begin selling direct-to-hospital in those territories through our existing 8 rep Japanese sales force. As always, we are trying to fashion a closer link to our hospital and vascular surgeon customers by eliminating distributors.

In summary 2012 was an exciting year in which we began to benefit from the restructuring efforts we first outlined at our December 2010 Analyst Day. As 2013 begins we look forward to continuing the sales momentum we established in 2012 and we've also undertaken a new set of initiatives to drive future growth and profitability.

At this time I'd like to turn the call over to JJ Pellegrino, our CFO.

JJ Pellegrino

Thanks George. As I look at our Q4 and full year 2012 results two themes emerge. Improved focus of our sales platform seems to be bearing fruit and we continue to invest in the business in a balanced way. With regard to the top line, Q4 2012 sales were up 12% organically and 10% on a reported basis. While XenoSure contributed significantly, growth was broad based. In Q4 2012, remote endarterectomy devices were up 18%, AnastoClip 16%, radio opaque tape 11%, shunts 9%, and catheters 8%. This was largely true for the full year 2012 as well.

Moving down the P&L, we continue to invest in the business for the long term. Gross margin in Q4 2012 was 70.5% versus 71% in Q4 2011, as higher average selling prices and improved manufacturing efficiencies were offset by the XenoSure transfer cost in an unfavorable product mix.

In Q4 2012, we incurred $200,000 of incremental expenses related to XenoSure transfer and expected additional $1.1 million of incremental expenses in 2013. We believe these investments will lead to an improved XenoSure gross margin over the time.

Total operating expenses in Q4 2012 were $9.5 million versus $8.7 million the year earlier quarter, a 9% increase. For all of 2012, excluding special charges, operating expenses increased 5%. The increases were largely driven by additional investments in sales personnel and sales commissions as well as product development and regulatory expenses.

Q4 2012 operating income was $900,000 versus $800,000 in Q4 2011. This 12% increase was due to higher sales, partially offset by higher operating expenses. Changes in foreign currency, exchange ranges in the quarter, reduced operating income by approximately $100,000.

Full year 2012 operating income was $4.2 million versus $3.7 million in 2011. This 15% increase was primarily due to reduced special charges and a 230 basis point improvement in gross margin. It is notable that the 2012 operating income increased despite the loss of $4 million of 2011 stent-graft revenue and approximately $2.5 million of associated gross profit. Cash and marketable securities were $16.4million at December 31, 2012 a decrease of $4.2 million during the quarter, largely due to $4.3 million of XenoSure buyout payments.

Turning to other matters, our Board of Directors recently increased the quarterly cash dividend to $0.03 per share of common stock. The dividend will be paid on April 3, 2013 to shareholders of record on March 20, 2013.

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the determination of the Board of Directors. Separately, in Q4 2012, one of our long time and largest private equity shareholders, Housatonic Partners distributed its LeMaitre stock to its limited partners. Housatonic’s approximate 9% stake in LeMaitre dated back to 1998.

We felt fortunate to have Housatonic as an equity partner for so long and look forward to the availability of these shares on the open market. We hope this additional flow will improve our daily trading volume. With regard to research coverage, we would like to extend special thanks to Charley Jones and the folks of Barrington Research, who initiated coverage on us shortly after our last earning's call.

Turning to guidance, we expect Q1 2013 sales of $15 million, up 8% organically versus Q1 2012 and operating income of $700,000. We also expect 2013 full year sales of $61.5 million, up 8% organically versus 2012 and operating income of $5 million, an 8% operating margin.

Q1 and full year guidance includes the effects that we have recently announced initiatives including XenoSure, Canada, Switzerland, Japan and France as well as the medical device tax associated with the Affordable Care Act which we estimate will be $650,000 in 2013.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first audio question comes from the line of Charley Jones, Barrington Research.

Charley Jones - Barrington Research

I was wondering if maybe you would help us initially by telling us a little bit about how much Japan and lifespan contributed in 2012 and what impact going direct will have on your sales line for ‘13?

George LeMaitre

Charley this is George. Did you say how much Japan and lifespan?

Charley Jones - Barrington Research

Out of France, sorry. Japan on its own and it looks like you're going to direct there and then lifespan in France, what do those two things contribute together apart and how much does going direct help your sales in ‘13?

George LeMaitre

Right I would say they are not too big. Japan, you can think they were generally spending about one times gross profit when we buy out these distributors. And for Japan we spent 10 million yen, which I think is about a $120,000. So maybe in Japan you are picking up a $120,000 – $150,000 in sales. And obviously that’s going to help their gross margin a little bit. And it’s a lot smaller in France, maybe its $30,000 approximately.

Charley Jones - Barrington Research

Have you instituted a price increase in the U.S. internationally, and can you give us just a range maybe?

George LeMaitre

Sure, yes, we definitely did in the U.S., around 4.5% and in Europe about 2%; if you ex out the effects of Switzerland going direct to the hospital.

Charley Jones - Barrington Research

What are your expectations for XenoSure growth in 2012?

George LeMaitre

That’s a good question. One think we got to talk about, we generally don’t guide on individual product lines. So it is baked into growth, but I agree it’s a big number. We grew about 70%; I think 67% on a reported basis last year. It has got to come down from there as these numbers are too big, but you still do have in Europe, it’s sort of brand new in a lot Europe, which is why you got that six fold increase in Europe in 2012. So it will be large. We are not going to give out an exact number but, obviously it’s our number one growth product line.

Operator

And your next question comes from Jason Mills, Canaccord Genuity.

Jeff Chu - Canaccord Genuity

This is Jeff Chu filling in for Jason. I have several questions relating to your guidance for 2013. First I was hoping you could describe the components of growth as it relates to 2013, when we look at your business as we think about unit growth, price increases, geographic expansion and your products; is there anything that we’re missing from that?

George LeMaitre

No, you got new products, you got geographic expansion. I don’t think there is anything you are missing. One, it’s not answering exactly your question, but as long as you bring it up, so in Q4 2012, just to give you, maybe a springboard to go into 2013 as you think about it, the 12% growth was comprised of about 70% unit growth and 30% pricing increase.

Jeff Chu - Canaccord Genuity

And what is your gross margin expectation for 2013?

JJ Pellegrino

So Jeff, as you know, we don’t guide on gross margin and the gross margin is baked into the guidance. I will tell you that we have said that the XenoSure transfer is going to cost about $1.1 million sort of in 2013 and that’s largely in the first three quarters and you can think of us as trying to get XenoSure inventory onto the shelves in Q4 of 2013. So we’ll probably see some improvement in Q4. So maybe depressed a little bit due to the first three quarters because of that transfer and then a nice jump in Q4.

George LeMaitre

And Jeff, we’ve also said I think at the last meeting or in the Press Release around the XenoSure transaction that we believe that out in 2014 or 2015, that the transformation of actually making it rather than buying it will add about 15 gross margin points on the XenoSure product line for us.

Jeff Chu - Canaccord Genuity

And the last one for me, what you would be modeling for the tax rate in 2013?

JJ Pellegrino

So we saw low effective tax rate in Q4. I would say that’s obviously not normal and in 2013 you should be probably in the high 30s, 37%, 38%. We will get the benefit our R&D tax credit again in 2013, did not get them in 2012 but I would say up in the high 30s is probably where you should be.

Operator

Thank you and the next question comes from Joe Munda, Sidoti.

Joe Munda - Sidoti

Real quick George, thank you for the insight on the additional sales people. I’m just curious; what is the international sales force number right now?

George LeMaitre

You’ve got eight in Japan and I think 33 in Europe, should add up to 81, so I think its 42 U.S., eight in Japan and balance Europe, maybe 31 Europe. Sorry, I have right here; let me start over again here Joe, sorry. Americas 43; Europe 30; 8 Japan, worldwide total 81.

Joe Munda - Sidoti

And JJ what was CapEx in 2012?

JJ Pellegrino

CapEx for all 2012 let me get that for you, I don’t have it off the tip of my tongue. I want to say around $2 million but let’s take look, yes, so about $1 million, Joe.

Joe Munda - Sidoti

And George, I was wondering if you could give us some color on the decision to up the dividend and why now?

George LeMaitre

Sure. So the pattern that we've established and I can't say whether we'll keep this up is every year at the beginning of the year, the Board of Directors evaluates the dividend and we went from $0.02 when we first initiated it to $0.025 last Q1 to $0.03 this Q1. So it feels like it's something like a half a penny raise, something like a 25% or 20 % raise each quarter and now the yield which we look at a little bit, is at 1.9%; so getting up closer towards a higher yield, and when we started it we didn't exactly know how we would feel. We're now two and a half years into it or so and we feel good about it and we keep inching it up a little bit.

Joe Munda - Sidoti

Is there a particular number you guys are shooting for as far as yields are concerned, or you’re just going to…?

George LeMaitre

No, not really and it feels to me like it’s something the Board's got to look at every year and I think it’ll be weighed against growth rates, free cash flow available, things like that. So it feels like it's an yearly decision and the only thing I can give to you is that we felt a little bullish based on what we’ve been seeing and we felt like moving it up this year.

Joe Munda - Sidoti

I've got one more and then I'll hop back into the queue. George, can you give us some color on your father's decision to take a step back from the board. I know it has to do with Housatonic but I was just wondering how that transition is going within the Board?

George LeMaitre

Sure, it's actually been excellent and quite smooth. Joe, to start with I think we'd always felt like nine directors was too many at this company for the size of our company, felt a little large, a little bureaucratic. So when Housatonic distributed their shares, of course the two seats that they had on the board, they really didn't have a right to have those two seats and so those two seats went away, but of course we always have to know that there needs to be a preponderance of independent directors versus inside directors. So clearly we had a choice, which is, we used to have four inside directors, myself, Dave, my mother and my father, and we just felt like we had to drop one of them. One nice thing is as the two seats have disappeared, Dr. LeMaitre been asked to be a permanent observer to the board. So in effect you have a 7 person board right now with Dr. LeMaitre as a permanent observer, just not voting, and to some extent I think my mom and my dad figure out their votes beforehand at the kitchen table and she comes armed ready to vote. So I don't think we've lost too much from Dr. LeMaitre's opinions.

Operator

(Operator Instructions) And your next question comes from the line of Robert Cleary, Stifel Nicolaus.

Robert Cleary - Stifel Nicolaus

My question was answered with respect to the XenoSure growth rate but along those lines, are there any other products that you distribute that you have options to acquire?

George LeMaitre

Currently no, although that was a nice deal structure for LeMaitre. It allowed us to fully evaluate the product before making the decision to acquire it. So, we’re not at all averse to that type of that deal structure, but at the current time no, we’re not distributing any other product lines and we’re out there obviously hunting for the next acquisition.

Operator

Your next question comes from the line of Charley Jones, Barrington Research.

Charley Jones - Barrington Research

Is the $1.1 million from XenoSure transfer; is that extent of your one timish items?

George LeMaitre

Yes, in terms of XenoSure related yes, it should be.

Charley Jones - Barrington Research

And obviously you’re coming out of some strong Q1 numbers here. Can you point anything there that’s driving that out in the market and talk a little bit about the U.S. and the European markets, I guess from some of the bigger companies, some weakness obviously in Europe and then others really haven’t been seen this much. So some fairly wide dispersion there. I wondering if you could help us out a little bit about Europe and the U.S. trends here.

George LeMaitre

Charley, its George. I think the difference for LeMaitre at least in the last three or four quarters and we think continuing on into 2013 right now is that we just did do a large restructuring and the restructuring at our company was focused mostly on Europe. We got rid of the stent-grafts. We really did a hire up a lot, European sales reps, sort of going back five or six quarters ago and I feel like they’re finally getting their sea legs at our company.

So those sort of things about combining the renewed focus on open vascular and also the enlarged European sales forces seems to driving some of our numbers and then also, as you know we do have a lot of these direct conversion in our market. In 2011, we converted Spain and Denmark and in 2013 you are seeing us in the middle of converting Switzerland and Canada and those things do tend to add to our international growth rates. So may that’s a little bit where we derive some of our bullishness on sales.

Charley Jones - Barrington Research

And are there any quarters over the next 12 months that we should be paying a little bit more attention to as far as difficult comps or I don’t know?

George LeMaitre

Sure. I feel like Q2, we had 14.4 in sales. That will be a comparably tougher comp and on the flipside in Q3, I think we have a relatively easy number to go after. I think if my memory serves me, it was thirteen four in Q3. Was that right?

JJ Pellegrino

13.6.

George LeMaitre

13.6 in Q3. That should be a favorable comp and then of course the quarter we just finished that we are reporting on right now, 14.8, seems like a pretty nice number. Hopefully we’ll be able to get passed it at some point. But if you wrap it all together it is kind of lumpy by quarter. If you wrap it all together, we are looking at 8% organic growth rate for the whole year.

Charley Jones-Barrington Research

Can you talk a little bit about when those shares were distributed and just remind us about how much?

George LeMaitre

Sure, the Press Release I believe went out December 15th for the Housatonic distribution. Of course once Housatonic officially distributed its shares to its limited partners and this was a large transaction, this was 9% of our shares approximately. So when they did go out at that point, we lose visibility on what the limited partners are doing with the shares, although of course we felt like there was largely a sort of a doubling of volume before they distributed shares to after. Dave is reminding me, approximately 1.4 million - 1.3 million shares was the Housatonic position.

Charley Jones-Barrington Research

That's very helpful, couple more here. Sorry to ask another product related question but you made some comments at the Analyst Day about your shunt business and you had a nice growth it looked like; I think you mentioned 8% in the quarter. Can you talk a little bit about what's going on there as far as share and I guess more importantly and maybe as importantly priced, it sounded like that was an area that maybe you could see a little bit of price segregation. Just curious, have you raised prices or have you kept prices flat there, little bit about the shunt business if you could.

George LeMaitre

Okay so the shunt had a relatively weak year for the first three quarters and in the fourth quarter it seemed to spring to life to a certain extent. So we were pleased to see that. I would say it’s not our fastest growing products these days. It seems a little bit stagnant. I think I don’t remember the 6% organically.

JJ Pellegrino

10%

George LeMaitre

10% organically in Q4 was the shunt growth rate. And we get asked this question a lot, are you being bothered by carotid stents? And our answer is still no, they are not bothering us. We do feel like different modalities of neurological monitoring are interrupting to a certain extent with the growth of the shunt business for us.

Charley Jones - Barrington Research

All right that’s very helpful, just two quick ones. How many reps do you plan to add in FY’13 and can you talk a little bit about maybe a couple of new product developments when you expect, which ones they are that you expect to come out and when?

George LeMaitre

Sure, we feel as though the rep count at year end will be something like 85 to 88 and then a lot of those are going to be Canadian reps. We are going from two reps effectively to five reps. So three of them are Canadian and we’ll sprinkle a couple into Europe and the U.S. This is if we don’t announce future initiatives to go direct in countries like Australia, the BRIC countries, Poland, Czech Republic, Norway, those would be some of the places we might announce. But we haven’t announced any of that yet. So ex any announcements, that which you can expect is 85 to 88.

And your second part of the question was about new products. We are really excited about our R&D department. Particularly with the enlarged sales force these days, we are able to run through these, what we call limited market meetings or beta trials, much faster than we used to be able to. And so right now we are steaming through our beta trials for the 1.5 millimeter expandable LeMaitre Valvulotome. That’s the newest generation, I will call it generation 7 of the Valvulotome product line and we are also even further ahead in the MultiTASC Remote Endarterectomy trial, where we’re about two thirds away done through the trial. My sense is both of those product lines will be finished with their trials in Q2. We have already gotten regulatory approval in all the major markets minus Japan and we should be launching in Canada, U.S., and Europe, sort of mid-2013 on both those product lines.

Charley Jones - Barrington Research

I guess, this is a follow-up to that, have you been hearing really good things or good things about the Valvulotome and what is it that they were saying that’s different that they like?

George LeMaitre

Okay, specifically around the Valvulotome, the great thing is in medical catheters, sometimes you can go with a simple statement as smaller is always better and so we are taking it down from a 1.8 OD to 1.5 OD and so if they love that, not only that but the shaft of the device is going down from something like 1.6 to 1.0 and so along the full length of the device the surgeons love the fact that it is banging against the inside of the vein a lot less, and there is a lot less bulk to this instrument in a very, very delicate procedure where you don’t want to damage the endothelium.

So we think that’s what they like. We also feel like they can have a better tactile sensation when they are cutting the valves in the vein which is of course what the entire Valvulotomy procedure is about. It’s about a good cut of the valve.

So far, yes, it’s excellent. We are really pleased with it. I’d even transition from that to the MultiTASC Charlie. We are getting extremely positive results from that product line. We increased the size offering. So we got smaller devices and we have larger devices.

So we should be able to treat a wider range of anatomy with the MultiTASC and also the whole reason we invented the MultiTASC was it does two things now, it dissects and it also transects the plaque in one motion and previously in the first generation of remote endarterectomy devices, you needed one device to dissect, you then pullout that device and with a second device you need to regain access all the way to the end of the site and that motion and that changing of devices was a bit arduous for the surgeon and so they love the one pass aspect of the MultiTASC.

Operator

Thank you. At this time there are no further questions in the queue and I would now like to turn the call back over to Mr. George LeMaitre for closing remarks.

George LeMaitre

Thanks Sue. First I would like to thank all the participants on this call. I’d also like to remind you that we’ll be presenting it several upcoming Investor Conferences. We’ll be at the Lazard Capital Market Snowbird Conference on March 1st in Utah. JJ gets that skiing vacation. We’ll also be at the Three Part Advisors Conference on May 15th in Boston as well as the Sidoti & Co Microcap Conference on June 7th New York City.

And with that I’ll turn the call back over to Sue. Thank you very much.

Operator

You’re welcome. 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.

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