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LeMaitre Vascular, Inc. (NASDAQ:LMAT)

Q2 2009 Earnings Call Transcript

July 29, 2009 5:00 pm ET

Executives

J.J. Pellegrino – CFO

George LeMaitre – Chairman and CEO

Dave Roberts – President

Analysts

Sara Michelmore – Cowen and Company

Larry Haimovitch – HMTC

Geoff Gloeckler [ph] – Standard & Poor's

Operator

Welcome to the LeMaitre Vascular second quarter 2009 financial results conference call. 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.

J.J. Pellegrino

Thank you. Good afternoon and thank you for joining us for our Q2 2009 conference call. Joining me on today’s call is 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 discuss 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.

Pleased note, these words are not the exclusive means for identifying such statements. Please refer to the cautionary statement regarding forward-looking information and the information under the caption Risk Factors in our 2008 10-K and subsequent SEC filings including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

I will now turn the call over to George LeMaitre.

George LeMaitre

Thanks, J.J. I will start by discussing our Q2 highlights, Dave will then provide a business development update and then J.J. will conclude the call with our financial results.

Here are Q2’s three headlines

Number one, we posted a record $1 million operating profit; number two, sales increased sequentially by $1.3 million to $12.6 million in Q2 2009; and finally number three, we announced a $1 million share buyback program.

With respect to the first headline, Q2 2009’s $993,000 operating profit compares favorably to the $869,000 operating loss we recorded in Q2 2008. This represents a full $1.9 million improvement from the year earlier quarter, and was our fourth consecutive quarter of adjusted operating profit.

At the heart of our record Q2 profitability was our continued ability to control operating expenses and improved gross margin and a sequential sales rebound from Q1. In Q2 2009, we were able to reduce operating expenses by 17% versus the year earlier quarter.

Year-over-year, we also improved our gross margin by 240 basis points as a result of higher average selling prices and the direct-to-hospital Albograft transition. As you would expect, operating profits have a way of improving the balance sheet. In deed, our cash balance increased by a record $2.6 million in the quarter.

As to our second headline, sales increased sequentially by $1.3 million to $12.6 million in Q2 2009. In Q2, we saw American hospitals and some international distributors return to more typical ordering patterns after perhaps achieving reduced inventory targets in Q1. Strong results in our open vascular category accounted for most of our 11% sequential improvement and were driven by (inaudible) such as the Expandable LeMaitre Valvulotome, VascuTape, and the Pruitt-Inahara Carotid Shunt.

Also contributing to the sequential rebound were two products which we recently added to our sales bag. PeriPatch and AlboGraft combined to increase sales by approximately $420,000 from Q1 to Q2. We ended Q2 2009 with 54 sales representatives, up from 50 at the end of the year earlier quarter. We may selectively add to this number over the coming months.

Regarding our third headline, given our recent profitability and current market valuation, we recently elected to execute a stock buyback program. The Board of Directors has authorized a repurchase of up to $1 million of our common stock on the open market through July 31, 2010. We may also make stock repurchases under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so. This share repurchase program may be suspended or discontinued at any time.

I believe LeMaitre represents an attractive investment opportunity and this program reflects our on going commitment to increasing shareholder value. Our $20 million cash balance combined with our recently demonstrated ability to generate cash should leave our sample resources for acquisitions as well as internal investments such as R&D and the build out of our sales force.

I like to conclude my remarks by reiterating the three Q2 headlines. Number one; we posted a record $1 million operating profit; number two, sales increased sequentially by $1.3 million to $12.6 million in Q2 2009; and finally number three, we announced a $1 million share buyback program.

I will now turn the call over to Dave Roberts, our President.

Dave Roberts

Thanks, George. I would like to update you on the two product lines we have recently added to LeMaitre Vascular sales bag, PeriPatch and AlboGraft. In January 2009, we began distributing PeriPatch. Peripatch is a bovine pericardium patch used primarily during carotid endarterectomy surgery. Sales of Peripatch in Q2 2009 were $234,000 meeting our expectations. Much as we had hoped, Peripatch is proving to be a seamless fit in our US sales bag, complementing our Pruitt-Inahara Carotid Shunt.

As a remainder, LeMaitre Vascular has an option to acquire Peripatch beginning in January 2014. We were also pleased with AlboGraft, first direct-to-hospital quarter. As a remainder, we acquired AlboGraft in December 2007 and negotiated the termination of Edwards’ worldwide distribution rights in March 2009. AlboGraft sales in Q2 increased by $288,000 from Q1, a reflection of the increased detention our sales channel can get this product.

The handoff of customers from Edwards’ LeMaitre Vascular has smooth and its now nearly complete. We continue to work towards AlboGraft 510(k) in the United States. Like Peripatch, AlboGraft fits well in our peripheral vascular sales bag and the synergies are substantial.

With that, I will turn it over to J.J. Pellegrino, our Chief Financial Officer.

J.J. Pellegrino

Thanks, Dave. I will start by reviewing the Q2 financials and conclude with a few remarks about our 2009 guidance. Q2 2009 sales of $12.6 million were 1% below Q2 2008 sales of $12.7 million. The balance of my sales remarks will be made in comparable constant currency terms, which excludes the effect of foreign exchange and Peripatch distribution. A reconciliation of these amounts to GAAP measures can be found on our website at ir.lemaitre.com.

For the quarter, sales increased by 3% year-over-year. Sales in the Americas increased 2% and international sales increased 3%. Year-over-year, sales increases in the Americas were driven largely by strong results in core vascular product lines including Valvulotomes and Shunts. Internationally, strong sales gains in Italy of 82% and France of 36% were partially offset by continuing weakness in our distributor business.

By product category in Q2 2009, open vascular sales increased 10%, endovascular decreased 9%, and general surgery declined 3%. Higher open vascular sales were driven by strong Valvulotome and Shunt sales as well as increases in remote endarterectomy and Albograft.

Sales growth in the endovascular category was negatively impacted by three products, the Powerlink stent graft which we distribute for Endologix, our UniFit stent graft and our AnastoClip. We believe our Powerlink and UniFit issues were in part related to the European launch of the Medtronic Endurant Abdominal Stent Graf.

In deed, sales of our TAArget Thoracic Stent Graft increased during Q2. In July, we also begin the roll out of our smaller TT sheets [ph] in Europe. We expect the sheet diameter reductions should have a positive impact on sales going forward. We also expect to launch the Endologix IntuiTrak in the back half of 2009 in Europe.

The company reported a gross margin of 72.2% in Q2 2009, up from 69.8% in Q2 2008. The increase was driven by higher average selling prices, the recent direct-to-hospital Albograft transition in Europe and improved manufacturing efficiencies. Gross margin improvements were partially offset by the change in foreign currency.

Operating expenses continued to remain under control. Q2 2009 total operating expenses were 17% below Q2 2008 levels with lower spending across nearly all departments. We plan to continue to manage expenses closely and are pleased that the operating leverage, our income statement has begun to reflect.

In Q2 2009, operating expenses totaled 64% of sales versus 77% of sales in the year earlier quarter. In general, our cost cutting efforts have brought our expense ratios more in line with our peripheral vascular peer group.

Sales and marketing expenses decreased 18% in Q2 2009 to $4.2 million. We have recently implemented a two tier sales rep compensation model, which allows us to hire into the smaller American markets by on boarding less costly sales reps. As a result, we have been able to increase our RevPAR count while decreasing total selling costs.

We ended Q2 2009 with 54 sales representatives versus 50 at the end of Q2 2008. General and administrative expenses decreased 12% to $2.4 million in Q2 2009, the result of general belt-tightening. R&D expenses decreased 3% to $1.4 million in Q2 2009 as reduced product development costs more than offset increased regulatory and clinical spending.

Q2 2009 operating profit was $993,000 versus an operating loss of $869,000 in Q2 2008. Continued expense discipline and the higher gross margin drove this $1.9 million improvement. Net income in Q2 2009 was $925,000, or $0.06 per share, versus a net loss of $926,000 in Q2 2008, or loss of $0.06 per share.

On the balance sheet, our cash and marketable securities increased by $2.6 million during the quarter to $19.8 million. The increase was largely the result of changes in working capital items, $925,000 in net income, and $602,000 of depreciation, amortization and stock-based compensation.

Turning to guidance, we are increasing our 2009 sales guidance to $48.25 million to $48.75 million from $48.0 million to $48.5 million. We are also increasing our 2009 operating income guidance to $250,000 from break-even. This top and bottom line guidance excludes future acquisitions and changes in the foreign exchange rates.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Sara Michelmore with Cowen and Company. Please proceed.

Sara Michelmore – Cowen and Company

Great. Thank you for taking the question. George, could you talk a little bit about the vascular growth in the quarter, obviously quite a bit stronger than we had expected and I understand that some of that is from new products, but how much of the growth that you saw in fact the core Valvulotome and other products do you think is sustainable or this was just an exceptionally good quarter in some of those product lines? Thanks.

George LeMaitre

Thanks, Sara and thanks for the question, good question. So if I have answered that sequentially first, I think $1.3 million of sequential increase, 420 we can take out as coming from the increase in PeriPatch as well as the increase in the Albograft device. And then a big part of what was left is those core vascular devices. I will say one of the story that keeps coming back at us is the open vascular category, just keeps being strong. I think call after call, as I remember – I remember saying, while it’s strong than expected. So I do think you can keep on relying on this. This is a very healthy category and to that point, we did just press across a pretty good price hike in the United States in Q3 starting July 1st, so we are confident that growth will continue and a lot of the United States business is a little bit more open vascular and the European business is a little bit more endovascular.

Sara Michelmore – Cowen and Company

Okay. And fairly good quarter in terms of gross margins ahead of our model certainly. I know you did raise the operating income guidance. You beat our number by I think $0.5 million this quarter and you are rising the full year by 250. It suggests that the total operating income in the next two quarters would be substantially lower than it was this quarter. So I am just wondering in terms of expense skating or things like that if there is, do you expect to send a little bit more on operating expenses or pleased [ph] little bit less gross margin if there is an explanation just in terms of the expenses going forward. Thanks.

J.J. Pellegrino

Yes. This is J.J., thanks for the question Sara. I think we are implying about hearing $25,000 or so about income given our guidance in the second half. As you know, there is some seasonality to this business. I think you can expect Q3 to be a downtick generally from a seasonal standpoint from Q2 and then a recovery in Q4. So I think you have got that issue to deal with. In addition, I think you need to consider FX and I believe FX is probably likely to continue to hurt you throughout Q3 or so and then may be be a benefit in Q4, and that remains to be seen. So between those two things, I think its lies to [ph] sort of temper expectations from a top and bottom line standpoint. In addition, with specific reference to the bottom line, I would say our manufacturing facility in Italy takes the month of August off as is customary in Italy and that may have somewhat of an impact on the bottom line.

Sara Michelmore – Cowen and Company

Okay. Sounds like a good deal for me. So in terms of SG&A and R&D though, we are not – there is nothing in the model there that suggest you guys that are ticking back up for spending in either of the one.

George LeMaitre

I would say, generally speaking, no, although I think you have seen us pretty turbulent and cost cautious over the last number of quarters across all lines. I wouldn’t be surprised if R&D checked up a little bit from here and may be that’s the place where you see a little bit of movement otherwise I would say generally, fairly consistent numbers I bet.

Sara Michelmore – Cowen and Company

Okay. And just one last one for me on M&A. I know the activity has been fairly slow there. Are things starting to heat up there at all in terms of you guys finding targets at your criteria and willing sellers or install a little bit fluid in terms of M&A activity. Thanks.

Dave Roberts

Okay. Thanks, Sara. This is Dave. It’s a good question, obviously if I step back and look at the big picture, over the last decades you know we have gone monthly a deal a year and we did the PeriPatch deal at the beginning of this year and we also did the Edwards’ buyout at the end of March. So that absorbed a little bit of our focus, but certainly we are always keeping an eye out for what the next acquisition will be. We are quite pleased with status of the pipeline. Obviously, I could have asked this question frequently on these calls and I am never very specific about what’s in the pipeline.

We do see and I am sure you have seen also some transactions that have been announced by the Covidien [ph] and Medtronic, and GP3 [ph]. So we do see M&A activity out there taking place still somewhat comparatively higher valuation. That’s a factor for us. I do see in the pipeline more early stage sort of money losing opportunities and of course we are more focused on deals with revenue, that are accretive. So I like the status of the pipeline, we are out there looking and I would just lean back on the fact that we have done a deal a year and at some point, people can expect another transaction out of LeMaitre and we are just simply weighting for the right transaction at the right price.

Sara Michelmore – Cowen and Company

Okay. Great. Thank you.

Operator

(Operator instructions) And your next question comes from the line of Larry Haimovitch with HMTC. Please proceed.

Larry Haimovitch – HMTC

Good afternoon gentlemen. Congrats on a good quarter.

J.J. Pellegrino

Thank you.

Larry Haimovitch – HMTC

First, vascular, David did you talk a little bit about the impact of the two track in the European market. I know they are doing very well, which dramatiscally. I love to hear your thoughts on what you expect overseas if you roll that product.

Dave Roberts

Thanks, Larry. Its Dave, I will take that in George and if he likes. Yes so obviously we have seen Endologix great company reporting nice numbers in the US. And certainly, I think a lot of enthusiasm about IntuiTrak. In Europe, obviously, we don’t distribute in all of Europe, but we distribute in most of Europe, we don’t have the IntuiTrak system in our hands yet. Over there, we are expecting to get that as we mentioned in the back half of the year at some point and so we are quite excited about it because we think that there are improvements for the system over the current business like systems. So we are excited and encouraged by that. I will also say on the other hand, there is more competition in Europe as you are well aware like inventory pass, there it’s a little bit. We referenced in the decision earlier than Medtronic indurate [ph] which frankly we know we hear back from folks in the yield. You know Medtronics is a sizable company, that’s the next product line. So they will be comparatively more competition for us in the bifurcated endo graft space with IntuiTrak in Europe and they are facing here in the US.

I think Medtroncis doesn’t launch in the US for a little while. So I wanted to temper expectations vis-à-vis IntuiTrak in Europe based on the heightened competition, but I will say we are excited about getting that product into our bag at some point in the back half of this year and we hope to deliver good things for our company and our shareholders when we do it [ph].

Larry Haimovitch – HMTC

Thanks, guys.

George LeMaitre

Thanks, Larry.

Operator

Your next question comes from the line of Geoff Gloeckler [ph] with Standard & Poor's. Please proceed.

Geoff Gloeckler – Standard & Poor's

Good afternoon. I want you to just give us a little more color on the two tier sales reps and also on may be what the dating factors would be there in terms of hiring additional reps.

George LeMaitre

Sure. This is George, Geoff. I will answer that question. So one of the things we found are sort of previous model was trying to go more or less towards – aiming towards W2 of around 140. And we found that, it didn’t allow to us to go into some of the smaller regions, for instance like in the Rocky or Portland the sales volumes just wouldn’t support that kind of W2, and so we wanted up saying as we go higher more of these territories, may be we can try different model, may be we can get a little bit less experience in the medical device field. And so far I would say we are very pleased with the model and one nice thing happened as we got there into the new model which is we realize that you have sort of more upwards, W2 space for that sales reps or if they turn out to be good, you can go from sort of 85,000 till 1.05 to 1.25. When you start up at 1.40 or 1.50, you don’t have that far to go and that it’s just becoming an uneconomic proposition. So we have been quite pleased with the model so far and ironically, we think may be that it will improve our turn over and not make it worse in the sales force. Gating items, we are always constrained by our P&L Geoff, we had lot of people watching the P&L and I would say we just have to add selectively I mentioned in my comments that we would be probably taken on board a few more reps as the next couple of months go by. May be you see us going up sort of 57 to 59 range over the next couple of months or so. The gating items, we don’t want to get ahead of our sales. I think we caught ourselves in the February of ’08 having gotten a little bit ahead of our sales and we had to pull back and we need to put ourselves in that spot again. But I will say the new W2 model makes it a lot easier to bring people on board and it makes it easier to grow the gross number of reps without really blowing out the income statement.

Geoff Gloeckler – Standard & Poor's

Okay. Thanks very much.

George LeMaitre

Thank you, Geoff.

Operator

(Operator instructions) And at this time, there are no further questions. I would now like to turn the call back over to George LeMaitre for any closing remarks.

George LeMaitre

Thank you. And thanks to everyone for joining us today. We look forward to our next call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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