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LeMaitre Vascular (NASDAQ:LMAT)

Q1 2010 Earnings Call

April 29, 2010

Executives

J.J. Pellegrino - CFO

George LeMaitre - Chairman and CEO

Operator

Welcome to the LeMaitre Vascular first quarter 2010 financial result conference call. My name is Crystalline and I will be your operator for today. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. At this time, I would like to the turn call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead sir.

J.J. Pellegrino

Thank you, Crystalline. Good afternoon and thank you for joining us for our Q1, 2010 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 is subject to risk and uncertainties, whatever possible we will try to identity those forward-looking statements by using words such as belief, expect, anticipate, forecast and similar expressions. Please 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 of risk factors in our 2009 10-K and subsequent SEC filings including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During this call, we may discuss non-GAAP financial measures. Please refer to our earnings release in our website www.lemaitre.com for a discussion and reconciliation of non-GAAP financial measures. I will now turn the call over to George LeMaitre

George LeMaitre

Thanks J.J. top to bottom I was quite please with Q1. We are growing sales and we are growing profits, as it has become my habit, I'd like to summarize the quarter with three headlines. Number one, we posted record sales of $13.8 million, 22% ahead of Q1, 2009. Number 2, we recorded an operating profit of $1.3 million and number 3, we received six regulatory approvals in the first four months of 2010.

As to our first headline, we posted record sales of $13.8 million in Q1, 2010. Sales increased 22% over Q1, 2009 with all three major geographies contributing. The Americas were up 20%, Europe increased 23% and Japan 34%. By category open vascular increased 28%, endovascular was up 12% and general surgery increased 9%. Q1 marked another impressive quarter for our open vascular category. In fact for the last four quarters, vascular sales growth has been 6%, 16%, 23% and now 28%.

Our continued success in this category is due to our broad pallet of gold standard niche devices and the continued worldwide strength of the LeMaitre vascular brand. In Q1 we received substantial sales growth contributions from our Valvulotome, AlboGraft, and Vascular Graft and XenoSure Biologic Patch. In Q1 our vascular category accounted for 69% of our sales. Also in Q1, 2010 our endovascular category experienced a small rebound.

Our VascuTape Radiopaque Marking Tape, UniFit abdominal stent graft and Powerlink Abdominal Bifurcated Stent Graft all contributed to our 12% endovascular growth. In Q1 our endovascular category accounted for 24% of our sales. The increase size of our 61 rep sales force was a key driver for Q1, particularly in North America where most of the recent salesforce expansion has taken place. Overseas, we continue to benefit from our emerging direct sales outfits in France, the United Kingdom and Japan which reported sales growth rates of 64%, 58% and 34% respectively. With our array of 15 vascular devices, opening up new direct sales territories tends to produce solid sales growth.

The continued buildout of our salesforce is a time-tested expansion avenue for the company. Though we are committed to doing it at measured pace with an eye on profitability. With respect to our second headline, operating profit in Q1, 2010 of $1.3 million was a fourfold increase versus $284,000 of adjusted operating profit in Q1, 2009. We achieved this profit growth through sales increases and a higher gross margin. Over the last four quarters we have posted operating profits of $1 million, $1.3 million, $1.2 million and now $1.3 million. These operating profits and resulting cash flows have allowed us to increase our cash balance to $24.1 million providing us with strategic options such as acquisitions and stock buybacks.

Regarding our third headline, the first four months of 2010 were particularly fruitful on a regulatory front, and this is starting to produce a steady flow of new product launches. indeed we have received the following six regulatory approvals in 2010, AlboGraft, Polyster graft in the US, AnastoClip GC in the US, Target Thoracic Stent Graft in Russia, the Unbaloon in Russia, Albosure polyester patch in Europe and finally five plus over-the-wire catheters in Europe. These regulatory approvals continue to feed new products to our 61 rep worldwide sales force. Notably our expanded US sales force now has two launches in 2010, the AlboGraft and AnastoClip GC, a grip year version of our vascular attachment system.

In summary, Q1 2010 was another excellent quarter in which sales growth and a healthy gross margin combined to produce solid bottomline results. I would like to conclude my remarks by reiterating the three headlines from Q1, 2010. Number one, we posted record sales of $13.8 million, 22% ahead of Q1, 2009. Number two, we posted operating profit of $1.3 million and number three, we received six regulatory approvals in the first four months of 2010.

I will now turn the call over to J.J. Pellegrino

J.J. Pellegrino

Thanks George. I will now say a few words about our operating results, share buyback program and guidance. As we heard from George Q1 sales growth was strong both domestically and overseas. In addition, our core product lines continue to show significant gains. As we move down the P&L there was more good news, we reported a gross margin of 74.7% in Q1, up from 72.8% in Q1, 2009. This 190 basis point increase was driven by manufacturing efficiencies and higher average selling prices, and was partially offset by a change in product mix. Of note our gross margin in the last two quarters has approached 75%, a level which we believe is sustainable over the coming quarter. Sales and marketing expenses increased to 18% in Q1, 2010 to $4.9 million representing 35% of sales versus 37% in the year earlier quarter.

The spending increase was driven mainly by our larger direct salesforce as well as increased commissions. We ended Q1 2010 with 61 sales reps versus 52 at the end of Q1, 2009. General and administrative expenses increased 4% in Q1, 2010 to $2.6 million representing 19% of sales versus 22% in the year earlier quarter.

R&D expenses increased 17% to $1.5 million in Q1, 2010 representing 11% of sales versus 12% in the year earlier quarter. Also Q1, 2010 operating profit was $1.3 million versus the Q1, 2009 adjusted operating profit of $284,000. Sales growth and the expanded gross margin drove this fourfold improvement, partially offset by increased operating sense. While the total adjusted operating expenses were up 13% year-over-year as a percent of sales, they decreased from 70% of sales in Q1, 2009 to 65% of sales in Q1, 2010.

Operating margin for the period was approximately 9%. Turning to the balance sheet, our cash balance as of March 31, 2010 was $24.1 million with virtually no debt. Cash and marketable securities increased by $98,000 during the quarter. This was the result of $1 million in net income and $562,000 of depreciation, amortization and stock-based compensation and largely offset by $982,000 in annual bonus payments and $315,000 of share repurchases.

Turning to our share repurchase program. In Q1, 2010 we purchased approximately 66,000 shares at a total cost of $315,000. This brings the total shares purchased since inception to 183,000 at a total cost of $837,000 or $4.57 per share. As of March 31, we are about halfway through our $2 million program and continue to purchase shares on the open market.

Now for our Q2 and 2010 guidance. Despite the recent sequential weakness in the euro, we continue to expect 2010 sales of $55 million and are increasing our 2010 operating income guidance from $4.5 million to $5 million. This annual sales guidance implies 10% organic growth versus 2009. In addition, we expect Q2, 2010 sales of $13.7 million and operating income of $1.1 million. This quarterly sales guidance implies 10% organic growth versus Q2, 2009. Guidance amounts exclude the effects of future acquisitions, operational restructurings, foreign exchange re-fluctuations and distributor terminations. With that I will turn the call over to the operator for Q&A.

Question-and-Answer session

(Operator Instructions). We have a question from the line of Tasha (inaudible) with Shaker Investments.

Unidentified Analyst

My question pertains to the leverage that you guys have experienced on your sales and marketing line. It looks like roughly you had the same margin of sales and marketing expects the quarter as you did in the prior quarter, do you expect that you can get further benefits or is this where you are going to plateau out at?

George LeMaitre

I am unclear if you are talking about sequential or year-over-year?

Unidentified Analyst

Sequentially yes

George LeMaitre

You are asking sequentially. On a year-over-year basis I do know that we produce leverage in that category, I believe it was 37% of sales in Q1,'09 and 35% of sales in Q1 '10. On a sequential basis, as you are pointing out it is flat at 35%. As to whether we will get more leverage on that line, I don't know. The place that I look for leverage at this company right now will be the G&A line to start with. Obviously we don't need to hire that many more new in the executive suite as we grow larger.

Unidentified Analyst

Can you talk a little about the product launches, timing the new product launches, the timing of them and potential, what kind of goals are you looking to meet maybe deferred share?

George LeMaitre

First of all I'd start off any kind of conversation about product launches by saying everything we talk about we baked into our 2010 sales guidance, and in general I am a believer that these launches always take longer and they last longer than you think and so I feel in some ways we are talking about 2011 issues when you look at those six regulatory approvals that we talked about. But maybe if we could drill into a couple of them and give you some nuggets on the important one. It feels to me like the important ones of the six regulatory approvals we showed you today, the important ones are probably the AlboGraft in the US and the details on that are, we have received the 510(k) in either January or February?

And we have done about 15 implants so far. The product reception from the doctors seems to be excellent and perhaps more importantly the product reception from our sales channel and we have 35 US sales reps has been excellent and they seemed to be embracing it. that could be a big one overtime, we guesstimate that the market for Dacron Graft in the United States is approximately $80 million and shrinking to the tune about 3% to 5% a year and obviously we start with a 0% market share and we probably have one of the top five or seven peripheral vascular sales channel in the US. So that combined with an excellent device should give us some nice sales overtime. So that's the AlboGraft.

The other side sort of significant launch which we are excited about is the AnastoClip GC and GC is short for grip clip and what the issue is there is that the clips they were putting out now are grippier here and hold on to the vessels better than the clips that we are currently selling under the brand name AnastoClip.

We received the 510(k) I believe literally Monday of this week. So the launch really isn't for another three to five weeks. My guess is we are going after the number one product line possible improvement on that AnastoClip device and its good size device, it's $2 million to $3 million in sales. So you could have a good impact on that. But again it just starting, we have done the beta trials if you will -- we've done the 30 or 40 cases that we feel like we need to after we receive the 510(k) and so far the product works great, with the surgeons. They are real excited about the fact that the clips hang on even tighter than the old clips. Those are the US launches and maybe one other launch is UnBalloon which was launched in Q1 of 2010. I think we got the European approval in Q4 of 2009 and we still await the American approval. I would say we don't have enough information on that launch yet. It's just beginning just somewhat like AlboGraft and AnastoClip launches in the US.

Unidentified Analyst

Okay, with respect to the AnastoClip GC, are you replacing your old product with that product and if that's the case is there a revenue benefit because you charge more for the product?

George LeMaitre

Yes, we are call that a soft (inaudible) we leave the old catalogue number out there for the doctors to take because a lot of them are going to tell me I would like to use the old product because it doesn't penetrate. This new one is a penetrating device. We think it's a lot better, but our general approach is well let the doctors vote with their feet overtime and the catalogue numbers are not wide enough or you wouldn't want to just keep all the catalogue numbers open, so no hard switch on that, we'll go over the soft switch.

Operator

(Operator Instructions). Your next question comes from the line of Sara Michelmore with Cowen and Company.

Sara Michelmore - Cowen and Company

Just one question on your guidance. You assume the sales guidance organic growth of 10% and you have Q1 organic growth of 18% so can you help just reconcile that?

George LeMaitre

FX has a pretty significant effect on our topline, we have about 42% of sales outside of the US and so FX while it helped in Q1, is actually going to reverse or has been reversing in and if it stays where is at now about 133 it will continue in that same direction over the rest of the year. so you had the combination of things, you had a weaker prior year last year and then you had a nice recovery throughout the year in '09 and Q3 and Q4, so you had pretty Q3 and Q4 comparably.

On the whole we think a 10% sort of year-over-year growth rate is pretty nice for us. We are pretty pleased with that and if it blends that it is higher at the beginning of the year and sort of muted from that during and throughout year because of FX and because of varied comps quarter-to-quarter, then I think that's pretty good.

Sara Michelmore - Cowen and Company

Okay, and on gross margin, you highlighted this couple of quarters of strong gross margin performance. How much upside can we expect going forward, if you look at 70% plus gross margin, is that achievable in the near term?

George LeMaitre

We have rotated upto the sort of 75% range. We are pretty happy with that, I think it compares pretty favorably to our peers as you know. I would expect us to stay in this range for a while unless we do something structural. You may keep creep up a little bit with price increases overtime and creep up a little bit with kaizens and cost efficiencies as you get in the back room overtime and those would be great but I would say step function improvements come with larger pieces.

Sara Michelmore - Cowen and Company

I think the utilization of NOLs and tax rate was little bit higher than what I thought it would be in this quarter, can you just tell us just how much NOLs have been utilized and how should we think about the tax rate for this year?

George LeMaitre

Yes, so our effective tax rate was around 21% in the quarter. I think in the high level you can think of us rotating up to 38% to 40% statutory rates overtime, what's going on as we become profitable and so we have used significant amount of NOLs maybe $3 million to 3.5 million over the last three quartersish and we are also using R&D tax credits that we have been accumulating and so as we work through those, we will start rotating up to those higher statutory tax rates. We got about million dollars of NOLs left or so maybe a little less and R&D tax credits maybe in the $500,000 range something like that. So you can expect that to happen over the next quarters.

Sara Michelmore - Cowen and Company

The 21% for this quarter, they should go up from these levels?

George LeMaitre

I think so, you probably make your way up to the high 30%, 40% overtime over quarters.

Operator

(Operator Instructions). And there are no further questions. I would like to hand the call back to George LeMaitre for closing comments.

George LeMaitre

Thank you, Crystalline and I like to thank you everyone for participating and we will look forward to our next call.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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