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Executives

J.J. Pellegrino – CFO

George LeMaitre – Chairman & CEO

Dave Roberts – President

Analysts

Joshua Zable – Natixis Bleichroeder

Joseph Munda – Sidoti & Company

Mayank Gandhi – Cowen & Company

Sasha Kostadinov – Shaker Investments

Stephen Globus – Globus Ventures

LeMaitre Vascular, Inc. (LMAT) Q2 2010 Earnings Call Transcript July 28, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 LeMaitre Vascular earnings conference call. My name is Sally, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to the turn call over to your host for today, Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. You may proceed, sir.

J.J. Pellegrino

Thank you, Sally. Good afternoon and thank you for joining us for our Q2, 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 risks and uncertainties. Wherever 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 “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 Web site 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 pleased with Q2. We are growing sales and we are growing profits. I'd like to summarize the quarter with three headlines. Number one, we posted sales of $14.2 million, 15% organic growth. Number 2, we posted record operating profit of $2 million, double that of a year earlier. And number 3, we received six regulatory approvals in Q2 2010.

As to our first headline, we posted record sales of $14.2 million in Q2, 2010. Sales increased 15% organically over Q2, 2009 led by 23% organic growth in the Americas. By category, open vascular increased 23% organically, while endovascular was up 2%.

Q2 2010 marked another impressive quarter for open vascular. In fact, over the last four quarters, organic vascular sales growth has been 14%, 14%, 24% and now 23%. Our success in this category is due to our broad pallet of gold standard niche devices and our widening sales footprint. The XenoSure Biologic Patch is a nice case in point. Sales have increased about $100,000 per quarter since the January 2009 US launch.

In Q2 2010, our vascular category accounted for 72% of our sales versus 67% in the year earlier period. Our April 1 North American price hike and the increased size of our sales force were the key drivers of Q2 2010 growth. Indeed at the heart of our recent success lies our lower cost sales model, which keeps a lid on sales rep compensation without sacrificing productivity.

Currently, 58% of our North American sales reps are what we call Tier A, and in Q2 2010, seven of the top 10 North American sales reps were also Tier A. The continued build out of our sales force is a time-tested expansion strategy for the company, and we are now able to do this more efficiently. My guess is that we will end 2010 with 70 sales reps worldwide.

Overseas, a good part of our recent success has come as we have leveraged, entered new large vascular geographies by terminating distributors and going direct. In Q2 2010, our French, Japanese and Italian subsidiaries reported sales growth rates of 54%, 26% and 8% respectively. Going forward, we may continue to repurchase distribution rights from international distributors as a way to enter new vascular geographies.

With respect to our second headline, operating profit in Q2 2010 of $2 million was double the $1 million we reported in Q2 2009. This 14% operating margin was achieved through increased sales, a 75% gross margin and controlled operating expenses. Over the last four quarters, we have posted operating profits of $1.3 million, $1.2 million, $1.3 million and now $2.0 million. Increased operating profits and cash flows have enabled us to ramp up our stock repurchase program to $5 million through December 2011.

Regarding our third headline; Q2 2010 was fruitful on the regulatory front and this is producing a steady flow of new product launches. Indeed we received the following six regulatory approvals in Q2 2010; AnastoClip GC in the US, Pruitt F3 Carotid Shunt in Europe, TAArget and UnBalloon in Russia, remote endarterectomy in Canada, and finally Pruitt F3 Carotid Shunt in Taiwan.

Two products of specific note seemed worth highlighting. In June 2010, we recalled the UnBalloon in Europe after receiving some complaints about re-sheeting the product. As a result of these complaints, I felt that it was prudent to have our engineers rework the product and we should be back on the market in Q4 2010. This new release will not just resolve the re-sheeting issue, but will also include several next-generation product improvements previously on the drawing board; 2010 sales for the company will not be materially impacted by this event.

On the positive side of the ledger, our AnastoClip GC launch has been more exciting than we had anticipated. We received the 510(k) from the US FDA in May and the GC already accounts for about 20% to 25% of our AnastoClip sales. The GC more already grips vessels and it is easier for surgeons to use. The US sales force has rallied around this launch.

In summary, Q2 2010 was another excellent quarter in which sales growth, a healthy gross margin and controlled operating expenses combined to produce solid bottom-line results.

I would like to conclude my remarks by reiterating the three headlines from Q2 2010. Number one, we posted record sales of $14.2 million, a 15% organic growth. Number two, we posted record operating profit of $2 million, double that of the year earlier quarter. And finally number three; we received six regulatory approvals in Q2 2010.

I will now turn the call over to J.J. Pellegrino, our CFO.

J.J. Pellegrino

Thanks, George. Before I start, I would like to welcome the folks from Natixis Bleichroeder and Sidoti & Co. to the LeMaitre story. Both firms have recently picked up research coverage of LeMaitre Vascular and we look forward to working with them.

I will now say a few words about our operating results, share buyback program and guidance. As we heard from George, Q2 2010 sales growth was strong in our North American and newer direct markets. In addition, our core vascular products continue to show significant gains with our XenoSure, remote endarterectomy and AlboGraft product lines up 136%, 82% and 25%, respectively.

Our endovascular category meanwhile was constrained by the Q4 2009 loss of an important stent graft customer in Germany as well as a broader competition in that segment, and was up 2% organically in Q2.

As for the gross margin, we reported a 75.3% margin in Q2 2010, up from 72.2% in Q2 2009. This 300 basis point increase was driven by higher average selling prices, manufacturing efficiencies, and a favorable geographic mix. In fact, 63% of our sales in the quarter were generated in the Americas where ASPs are higher. Of note, our gross margin in the last two quarters has approximated 75%, and we believe that this may improve 50 basis points to 100 basis points over the coming quarters.

Moving down to P&L, operating expenses were 61% of sales in Q2, down significantly from 66% in the previous two quarters demonstrating nice operating leverage. Sales and marketing costs increased 12% in Q2 2010 to $4.7 million. The spending increase was driven by our larger sales force and increased sales commissions. The company ended Q2 2010 with 61 sales reps versus 54 at the end of Q2 2009.

General and administrative expenses increased 3% in Q2 2010 to $2.5 million, while research and development expenses decreased 7% to $1.3 million, representing 9% of sales. The decline in R&D was primarily driven by regulatory and clinical spending as we conducted less animal testing and purchased fewer outside services than in prior-year quarter. Going forward, however, we expect R&D to return to 11% to 12% of sales.

Q2 2010 operating income was $2 million versus $1 million in Q2 2009. Net income in Q2 was $1.5 million or $0.09 per diluted share versus $925,000 or $0.06 per diluted share in Q2 2009.

Turning to the balance sheet, our cash balance as of June 30, 2010 was $26 million and we have virtually no debt. Excluding share repurchases, our cash increased by $2.2 million during the quarter. The increase was primarily the result of $1.5 million in net income and $573,000 of depreciation, amortization and stock-based compensation.

As for our share repurchase program, in Q2 2010, we repurchased $383,000 or 76,000 shares of our stock at an average price of $5.02 per share. And our Board of Directors recently increased the size of our share repurchase program by $3 million, authorizing up to $5 million of stock to be purchased from time to time in the open market or in privately negotiated transactions.

Finally, we are increasing our 2010 sales and operating income guidance to $55.8 million and $6.2 million respectively. Our sales guidance implies full-year 2010 organic sales growth of 12%. We also expect third quarter 2010 sales of $13.8 million and operating income of $1.4 million implying Q3 2010 sales growth of 8%. Guidance amounts exclude the effects of acquisitions, restructuring, foreign exchange fluctuations and distributor terminations.

With that I will turn it over to the Operator for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Joshua Zable with Natixis. Please proceed.

Joshua Zable – Natixis Bleichroeder

Hi, guys. Congrats on a really impressive quarter here. Thanks for taking my question and for welcoming us to the call.

George LeMaitre

Thanks, Josh. Good to have you on board.

Joshua Zable – Natixis Bleichroeder

I have a bunch of questions here. So I’ll get right to them. Obviously impressively organic growth, George, I know you talked about a price increase, April 1. Can you kind of quantify that in any way, shape or form?

George LeMaitre

Sure. On a very high level, blended US price hike of 5% April 1.

Joshua Zable – Natixis Bleichroeder

Okay, great. Then I guess, just kind of big picture here. Obviously, vascular was very strong, endovascular not quite as strong. I know there is some correlation between the US and international in endovascular and vascular. Maybe just help us understand specifically, I know J.J. alluded to stent graft customer in Germany. Just trying to understand sort of what’s going on specifically out there that you are seeing. Any more color will be helpful. Thanks.

George LeMaitre

Sure. At a high level, trying to break this thing down, we are doing great in the United Sates. I think in the United Sates we are more penetrated with this Tier A program. So we are getting more feet on the street in the United Sates, and we are also benefitting from better pricing environment, obviously as indicated by the April 1 price hike. Over in Europe, it’s true. In our specific, what I will call, a home market in Germany we are having a tough time and a lot of that can be ascribed to that one customer, he left us and I think October he retired, he left us in October of 2009. So we still have a couple more bad comp months to go; but in November that pain from that customer should go away.

If you want to get a little bit broader in Europe, a lot of good things are actually going on over there. Italy is going great. They were up 16% organically year-over-year. France is going fantastic; I think they were up 66% organically. The UK was up in the neighborhood of – I don’t have this exact piece of data – between 10% and 15%.

So really the problem is Germany right now and I can focus the problem down on at that customer. In addition to all that, getting through all that for a second, I would say we’ve been a little bit less competitive with our stent graft program in Europe than some of the people that we’re working against. That all being said, being two tracks, Endologix launch is going quite nicely actually.

Joshua Zable – Natixis Bleichroeder

Great. Then I know you guys launched a surgical graft. Can you just comment maybe how that’s going in general?

George LeMaitre

Sure. So there are two separate launches Josh. There is one in Europe. We bought that product in December of ’07. It’s called the AlboGraft, Dacron Graft. And we finally got control of the end customer distribution in April 1, I think of 2009. We had our first apples to apples direct comparison of selling it direct ourselves in Q2 ’09 versus Q2 ’10, and we were up 33% organically in what I will call that first apples-and-apples quarter from ’09 to ’10.

You have a separate launch going on in United States. We received the 510(k) for that product line in I believe January – or February of this year, and we really launched that thing April 1. I would say that launch is going okay. There are other competing products out there. The accounts that we are winning, we are winning on a basis of the fact that LeMaitre, they know us, they use other products.

The other hindrance, if I could say to that launch is right next door to that launch you have a fantastic launch which the US sales force has very quickly co-left [ph] around to AnastoClip GC and that launch is going great guns and adding significant growth maybe $800,000 to $1 million worth of sales growth in our US pie on an annualized basis if you look at June and July. So that launch is steeling the thunder from the AlboGraft launch, but the US sales force is doing great on the AnastoClip launch.

Joshua Zable – Natixis Bleichroeder

Awesome. Then, just I guess carry over to J.J. here, just on the – really impressive quarter on the P&L here. It looks like you guys hit on all cylinders. Obviously mix is what it is. I know you addressed R&D as probably a timing issue, if you will, and that picks up. But on the G&A and the selling and marketing still much better leverage than I think anyone was expecting.

Can you just walk us through how to think about it? Was there some timing issues? I know you guys are reinvesting in the sales force. I assume that’s going to move around based on timing. But just generally about the leverage, it seems like spending on an absolute basis is down, which is pretty impressive. So just help us understand how spending is down maybe what’s going on, is it timing, is it cost cutting, what kind of is going on there?

J.J. Pellegrino

I guess, I would say, the starting point is we were at 14% or so for an operating income margin, which compares nicely with 9% and 10% in the previous couple quarters. So really nice improvement there, nice to see clearly the increase in sales, allows you to do a lot of this stuff. But in addition, we had a nice gross margin improvement as you saw we had increased efficiencies in the margin. We had geographic mix helping with the US being 63% of sales and we had the ASP increases that George talked about earlier, and so that’s a nice help as well. So that’s two for two.

Then coming down to operating expenses, I think we had about 33%, 34% of sales for selling and marketing. That compares pretty favorably to the last couple quarters of about 35%. Maybe a tick higher than some of our nicely performing peers, and so maybe there is a little bit of room there going forward as sales increase and as you roll out the Tier A model. So I would say, yes, you might be able to get something there going forward. We will see.

It is a little chunky quarter to quarter. So you might see it right away in Q3 and Q4, but over time going out of the G&A line, I would say, yes, lot of those costs we think are fairly fixed. So as sales ramp, you should get leverage there, pretty immediately. So we are at the 17.5% range or so down from 18% or 19% the last couple of quarters. We are pretty pleased with that as well and we might be able to get a little bit more leverage there over time as sales increase.

Then as you mentioned on the R&D line, I would say, yes, we were abnormally low at 9.5% for this quarter. It sort of waxes and veins a little bit. It’s going to be a little but lumpy from quarter to quarter. I would say over time we are going to shoot for 11% to 12% of our sales going towards R&D as product development is clearly an important part of what we do.

Joshua Zable – Natixis Bleichroeder

Great, guys. Congrats on a great quarter. Thanks for taking all my questions.

George LeMaitre

Thanks a million, Josh.

Operator

(Operator instructions) Your next question comes from the line of Joseph Munda with Sidoti. Please proceed.

Joseph Munda – Sidoti & Company

Hi, guys. How are you doing? Good to finally talk to you George.

George LeMaitre

Joseph thanks.

Joseph Munda – Sidoti & Company

How are you?

George LeMaitre

Very good. How about yourself?

Joseph Munda – Sidoti & Company

Good. Good. J.J., how are doing?

J.J. Pellegrino

Good, excellent.

Joseph Munda – Sidoti & Company

Listen, you mentioned in the call, sales rep compensation. Can you touch a little bit on that? I kind of knew this story, so I understand that you are trying to keep cost down. But can you go into a little bit of that?

George LeMaitre

Sure. In November of 2008, we started a program called the Tier A program and basically that was a recognition of the fact that we’re in a recession as well as maybe LeMaitre doesn’t have to hire $200,000 a year sales reps. So what we put in was a program that has a significantly lower yearly compensation. Roughly speaking, the new Tier A reps are making something like, $85,000, $90,000 a year. And our old program had them targeted towards about $145 million or $150 million; and as a result it has given us a place for them to go career wise, we can give them raises as they go.

So it’s sort of lengthened out their tenure so far at the company and it’s also – it kind of works better with our sales volume and the size of our territories. It seems to be a homerun so far. So we are real excited about it and about 58% of the reps right now in the US are Tier A and we grandfathered all the other reps to more highly paid reps into their positions. We are not really trying and get rid of them. We are happy with the work they are doing for us, but we felt like going forward we need to sort of reduce the starting point of the pay package.

Joseph Munda – Sidoti & Company

Okay. I just had also a quick question; you talked about cutting out some distributors. Are we still looking at 93% of sales direct to hospitals and 7% to distributors? Or is that number going to come down a little bit?

George LeMaitre

I think it was either 93% or 94% this quarter. I forgot which, but yes, we are always in the business of trying to go direct in these various countries. The material country is that you still have remaining would be places like Spain, Switzerland, Denmark, South Korea, Australia and even China although we don’t have much of a footprint there even with sales through a distributor. So, yes, we are always trying to go more direct. We like the link to the customer.

Joseph Munda – Sidoti & Company

Okay. Just one last question. I saw you talk about Germany and the loss that one customer that really drove down sales there. And you are talking about new vascular geographies and markets. What you’re guy looking for going forward as far as making up the lost sales in Germany?

George LeMaitre

Right. Well, we hope in November when the bad comparable periods had gone away. We hope most of this will resolve itself. In Germany, we’re also beating up the sales force. We got an open territory in Hanover that we are about to fill, just reinvigoration around a lot of product launches over there, we actually have a real full bag of medical devices that we are launching over there. There is four or five of them right now; the Pruitt F3 Shunt, Flexcel Shunts in single pack, the XenoSure Patch when it gets an approval, and also the AlboSure Patch.

So we got a bunch of launches lined up over there and we got a pretty healthy sales force. So we are confidence they will come back. In the meantime, it’s being buttressed by right around Germany. You have fantastic results going on in France, Italy, in the UK, which are sort of helping buttress our European results.

Joseph Munda – Sidoti & Company

I am sorry. I had just one more question. This one is for J.J. you had mentioned 50 basis points to 100 basis points improvement in gross margins in quarters going forward. Is that due to volume or is that due to better cost cutting? What is that improvement coming from?

J.J. Pellegrino

Yes, I think we are doing pretty good on the operation side and we might expect some nice efficiencies going forward. Or if you maintain your current levels then you get the price increases that we talked about periodically you are going to get improvement there. So I would say both of those would be driving an improvement hopefully over time. I wouldn’t say anything dramatically right away. I wouldn’t think in those terms, but I am saying over time, over a number of quarters.

Joseph Munda – Sidoti & Company

Okay. All right, thanks guys. I appreciate for taking my call.

George LeMaitre

Thanks, Joe.

Operator

Your next question comes from the line of Mayank Gandhi with Cowen & Company. Please proceed.

Mayank Gandhi – Cowen & Company

Hi, guys. How are doing?

George LeMaitre

Mayank, how are you?

Mayank Gandhi – Cowen & Company

Okay, thank you. Can you speak of the sales in the quarter, if you can? What’s coming from new products, if you can just help us think that? Then maybe highlight some of those newer price, I know the last quarter you had bunch of new launches. So if you can quantify a little bit, that will be helpful.

George LeMaitre

Okay. Let me get to what the bulk of the sales growth is coming from, and we will talk about the launches because I don't think they are adding in some giant way just yet, they will, but not right now. The product lines, the big four were the in terms of dollar growth from Q2 ’09 to Q2 ’10 will be the (inaudible), the shunt, the remote endarterectomy products as well as the recently launched XenoSure Patch. So that’s where the bulk of the dollar volume growth is coming from.

In terms of the launches, I feel like the AlboSure is clearly the – the XenoSure Patch is clearly the one that’s adding material financial results. Just recently and you don’t see this showing up in the Q2 yet Mayank, but just recently the AnastoClip GC is starting to add materially to the monthly results, but not the quarter because it was only out there for the beginning of June onwards. You only have one month in that number. Those two launches – I don't think you are seeing much from the AlboGraft in terms of quarterly add to the US side of the street. But if you still allowing that the AlboGraft is launching in Europe since we are five quarters into the launch, I would say that is adding materially. It’s helping markets like France, some of the extraordinary numbers that you are seeing in France are that their – the sales force is gravitating towards that AlboGraft launch. J.J., I am talking quickly here, am I missing some particular ones? I think I mentioned remote endarterectomy tools as well. Am I getting the biggies?

J.J. Pellegrino

Yes, I would say in the US, all open vascular products really have been contributing nicely as of late, particularly in the most recent quarter. (inaudible) some more feet on the street, ASP and price increases as well, but unit growth there too. So it has been nice to see in the US; and then in France more particular, AlboGraft and Endologix contributing and then other products throughout Europe. So I would say it’s fairly broad based contribution on the open vascular side.

Mayank Gandhi – Cowen & Company

Okay. Then to follow on the questions on margin, your guidance implies about 11% operating margin for the year and this quarter and last quarter you had very impressive leverage across the P&L. How should we think about what’s run rate like? What’s the influence going to be over the next few years? How much of it is sustainable?

J.J. Pellegrino

Well, I would say in the short and medium term our guidance is around 10% or 11% or 12% or so. Op margins, down from the 14% or so we just did. I think Q3 is seasonally a little light. Everybody in Europe goes on holiday. So doctor on holiday and purchasing less, so that’s probably not a surprise.

Then looking out over a year or so or two, as you asked, I guess I would say, well, if you think about our peers – you got two types of peers, one is your medium and smaller cap peers and they are in the 0% to 10% op margin range generally with some notable stand-ups, but by and large in that range, and I think we feel like in the 10% to 13% or 14% range. That’s a pretty decent place to be where you can balance growth and profitability which is really what we are doing here because if we said we wanted to be a lot more profitable tomorrow I think we could do that for you or for us. But really what we are trying to do is balance that growth and profitability and we’ve talked about that before.

If you look at our larger cap peers, maybe they are in the 20% to 25% op margin range. That’s certainly out there somewhere in the future, but I guess generally at a high level to try and answer your question is impacted towards $80 million to $100 million in revenues, you increase that margin, you hope naturally – through natural leverage to the mid-to-high teens, 20% in that range.

George LeMaitre

Mayank, this is George. I might add to that. We had been – stuck is a wrong word, but we have been trending in 8% or 9% op margin for the last four or five quarters. So we are real excited and we do want to highlight that this is a high-water mark for us, this 14%. Maybe I think Josh in part of his mentioned all things came together. I guess we are not always planning that all things are going to come together. So we are excited about the 14% high-water mark. Maybe we go down a little bit to 10% and 11%, the next couple of quarter if things just go normally. But maybe there is a little upside in that too. You know us we’ve been trying to be reasonable on the guidance side. We try not to get too far ahead of ourselves. So we are excited about that 14% number.

Mayank Gandhi – Cowen & Company

Okay, understood. Then final question on just your cash utilization strategy in the context of the enhanced share repurchase program, what do you see in terms of the M&A landscape, any updates there?

Dave Roberts

Mayank, I’ll try. This is Dave.

Mayank Gandhi – Cowen & Company

Hi, Dave.

Dave Roberts

Thanks for the question. I would say obviously we have different uses of our cash. As we think about the $26 million of net cash that we have in the business certainly we are always out there looking for the next acquisition. While the pipeline is good, we’ve seen some disconnect in the market ever since the great recession where M&A is taking place at three to five times sales out there. Here at LeMaitre, we have a thought for good or for bad that we can purchase ourselves one-time sales.

So I think that sort of driven a little bit of the enthusiasm for more than doubling the size of that program. It also has led us to focus a little bit on the opportunity of going direct in more markets because making investments in sales people has proven to be a very reliable way of driving organic growth in the business. So, certainly as George mentioned, there are markets where we can do that like Spain, Switzerland, Denmark, Korea, China, etcetera. So buying out distributors that are half or one-time sales or something is also a good use of funds.

But clearly we want to leave dry powder and I think despite the fact that we will be doing share repurchases and (inaudible), we feel very good based on the underlying cash generation properties of the business that will have cash flow that’s either where it is now or growing to execute on transactions. We have like I said a nice pipeline. We are value buyers like many of our investors are. So we are also looking for what that next acquisition is and we’ve done 11 of these in the last 13 years. We feel highly confident. We will be able to do more of these in the months and quarters and years ahead. But we are out there looking and trying to deploy cash wisely.

George LeMaitre

The feathers are just pulling on longer or waiting for the recovery to take place essentially.

Dave Roberts

I am sure that you guys in your investment banking division, we see this all over Wall Street. The number of deals is down and what happens is obviously there is a big disconnect between prices of publicly traded companies and then the underlying value that companies believe that there was. So you get this disconnect and of course when the capital market goes few, the companies that need cash sometimes get desperate and you can get better pricing on those types of transactions.

But those tend to be dilutive and I am not going to say we won’t do a dilutive transaction, but our sweet spot is really to target companies with positive revenue, positive earnings, all of that, and those typically have positive cash flow. So their back isn’t against the loan, they’re going to be demanding three or four or five times sales. Then that where a little bit of the valuation disconnect comes in.

Now that all being said, we believe there are opportunities out there and so we are looking. We’ve taken a swing at a few things here in the last 6 months to 12 months, basically just missed some valuation but we are also actively pursuing a small handful of deals right now.

Mayank Gandhi – Cowen & Company

Okay, great. Thank you.

George LeMaitre

Thanks, Mayank.

Operator

Your next question comes from the line of Sasha Kostadinov with Shaker Investments. Please proceed.

Sasha Kostadinov – Shaker Investments

Thank you. Congratulations guys, very nice quarter. I think I heard earlier but I don’t recall what the number was, your hiring plans for sales reps for the year. Could you repeat what that number was?

J.J. Pellegrino

Sure. We would like to get to about 70 reps and we are currently at 61.

Sasha Kostadinov – Shaker Investments

Okay. That seems like a pretty aggressive goal. Do you already have candidates in the pipeline or where would you say you are in achieving that goal?

J.J. Pellegrino

You mean aggressive in terms of how fast that could happen over six months?

Sasha Kostadinov – Shaker Investments

Yes, yes.

J.J. Pellegrino

Okay, got it. In the US probably from start to finish on a search you can probably bring someone in the door in, I am going to say, two months at the inside, four months at the outside, so in the US that’s easy to do. There is a recession out there, you got 9% unemployment. It’s not that hard to find candidates for these jobs. I would agree with you over in Europe and in Japan we have struggled at time with speed on our recruitment processes; so as we go – and the blend is half US and half European. So as we go to do that it will be a little bit more of a struggle. But I am almost certain we can get it done by the end of the year.

Sasha Kostadinov – Shaker Investments

Okay. My next question is given that you just instituted a blended 5% price increase across your product line and given that even if you didn’t hire any sales reps, you got a nice year-over-year delta. Your second half sales guidance, I hate – it sounds conservative, but it does.

George LeMaitre

For the company, I think our sales growth was 8% in ’07, 7% in ’08 and 4% in ’09. So our guidance right now, implying 12% organic growth. We are thrilled with that actually. So you can have your opinion on it, but we are real excited about that. Also remembering back to the great recession, if you will, what we saw happen and this is – I am brining the story out because it’s going to impact what we are talking about in H2 2010. What we saw happen was in Q1 ’09 the hospitals and the distributors un-stocked their shelves. We sold very few medical devices in Q1 ’09, maybe it was a little bit less extreme in Q2 ’09. But in general you had a lot of pent-up volume buyers come in in Q3 ’09 and to a certain extent Q4 ’09. So you had more buying of medical devices happening in the back half of ’09 than in front half of ’09, and so this is a long way of saying they are tougher comps in the back half of ’10 because you had so much pent-up buying demand that was satisfied in Q3 ’09 and to a lesser extent Q4 ’09.

So what you get is a funny blend of – our organic growth rates this were 18% in Q1, 15% in Q2, 8% in Q3, and 9% in Q4 [ph]. I would ask you, if you would, look at it as yearly basis and say these guys did 12% organically. That’s pretty good.

Sasha Kostadinov – Shaker Investments

Your sales growth has been very good. I don’t wanted getting at to criticize it. I just trying to understand what the reason for; then make sense if you have an inventory re-stocking came over. But okay. The other question is on the G&A line, is this kind of a good run rate for you? Your sales were actually up and your G&A went down sequentially. What was it played there?

J.J. Pellegrino

Hi, Sasha, it’s J.J. Yes, I would say, you got a little bit of FX coming into play in these Op expense lines as well as you got to think about I think the Euro in Q1 was 1.38 blended or so and then to 1.27 in Q2. So that’s about an 8% delta. We’ve got 45% or so of our sales in the US. So you can think about expenses being over there in Euros as well. So that’s a piece of it. I would say otherwise generally in G&A we try to be pretty tight and I think we’ve been doing that. We haven’t hired many folks. I think it was plus two year-over-year, and I think generally, we’ve just tried to stay lean.

Sasha Kostadinov – Shaker Investments

Okay. All right. Thank you very much. Keep up the good work, guys.

J.J. Pellegrino

Thank you.

George LeMaitre

Thanks.

Operator

Your next question comes from the line of Stephen Globus of Globus Ventures. Please proceed.

Stephen Globus – Globus Ventures

Good afternoon, guys, and thank you for taking my call. Great quarter. Just couple of quick calls, questions most have been answered. J.J., can you tell me a little bit about our tax rate, how we are paying? I see we have a large NOL that will turn for it.

J.J. Pellegrino

Yes. Thanks for asking about the tax line. Q1, our effective rate was about 20%, 21%, and up at 30% 32% or so for Q2, so about 26% blended for year to date.

Stephen Globus – Globus Ventures

That’s state and federal?

J.J. Pellegrino

Yes. That’s all in and US and non-US as well. So we had a large NOL, I guess, we technically still have. We will be basically using all of our US NOLs this year. We will still have some R&D tax credits. But basically that will translate into effective rates going up to statutory rates. So 36% to 39% over time and probably not in the next couple quarters, but then certainly next year I think you will see rates start to go up.

Stephen Globus – Globus Ventures

Okay, understood. Also, we talked about this briefly, but could you give us maybe Dave or George can give us a little color on the new climate of regulations that are coming down the pipe from Washington? How does that affect us?

George LeMaitre

Sure. You are talking about Obamacare or –?

Stephen Globus – Globus Ventures

Yes. Obamacare.

George LeMaitre

Part D Regulation. Sure, okay. As far as Obamacare, I shouldn’t say this. It’s not good for us, I don't think. Effectively what we see happening in 2013 is we are going to get a 2.9% excise tax, which I think we’ve quickly calculated out to be worth about $1 million of a stick pretax on our company. In addition at a very high level, we obviously deal in Europe and we’ve been dealing with eight or nine very socialized healthcare systems for a decade or so. We have learned how to make money in those markets, but we do find that when you effectively a single state payer system that your gross margin gets challenged, actually by the State of France and by Germany. They go in and they look at things.

So we do experience lower margins over in Europe than we experienced in the US. I think generally speaking that due to the singer payer system my guess over the sweep of 10 years, Obamacare starts meeting that towards us. Another sort of thing I think people are starting to get to which is in order to ensure the 35 million people coming into the insurance pool, you probably going to have to take some money away from the senior citizens in the Medicare program. We generally sell our devices to doctors that are working on people that are 65 years and older. It’s not exactly true all the time, but it’s generally who we sell to. So our senior citizen customers are going to have money taken from them by Obama and given to the newly insured population.

So probably not a great thing over the long run, although I will say we have learned how to make it work over in Europe and Japan where they really do have top-down state run system. So I am going to guess, life will go on, but we prefer to the old system.

Stephen Globus – Globus Ventures

You don’t see more members, more participants or more demanders, these things gets socialized down or –

George LeMaitre

No, because Medicare has already covering everyone 65 and over. And those are the folks getting vascular procedures. So unfortunately the expansion of procedures that will take place for stuff like gallbladder surgery, mid-40s, mid-30s stuff like, that’s going to be someone else’s. It’s actually good for some other medical device company, not us.

Stephen Globus – Globus Ventures

Just a quick question. It’s already been an hour already. You guys are probably missing it. Dave, are you – we are getting into specifics, are you looking acquisitions overseas which are fairly tricky? Have you been looking at China at all?

Dave Roberts

Yes. Thanks, Steve for the question. So we’ve done 11 acquisitions historically and I want to say maybe half of them had been overseas, but of those all have been done in Europe. We are looking at China? Typically no, we have looked a little bit in Japan historically. But I would say really materially the bulk of the targets that we are focused on are either based in the US or based in Europe.

Stephen Globus – Globus Ventures

An Asian deal, would that deal flow comes from your own sources or would you expect to see those through investment bankers or merchant bankers in those scenarios?

Dave Roberts

Occasionally, we see deals from the bankers, investment bankers and merchant bankers. Usually, if we see them from those sources, and they are showing them to a million other people as well. I think every deal except one that we transacted has not been in a competitive situation. So I would say the proprietary deal flow for us comes from either directly from physicians’ owned companies, or executives and smaller venture-backed companies that aren’t going to go public because basically nobody is going public these days, or also some larger companies that are doing carve out.

We hear about them through the professional industry network that we have and we’ve been doing this for 13 years. So that’s a pretty deep network. Also we hear some ones through physicians and our distributors; so lot of sort of catch basins if you will. But I would say it’s unlikely; but never say never. We’re just going to get the deals some way.

Stephen Globus – Globus Ventures

One last question, and the other source which could be fruitful but who know the educational institutions, I know that one of your deals came from Arizona. But is that something that you are picking and choosing from time to time?

Dave Roberts

Yes. Certainly we believe that lot of that innovative technologies come from key opinion leaders who are physicians or institutions. So we have an ongoing effort in the company among the senior management team to know these individuals and their institutions. So all means, those typically tend to be more early stage interesting technologies. They may be less bulky revenue acquisitions –

Stephen Globus – Globus Ventures

Quite right. Yes, they can some time, yes.

Dave Roberts

By all means, we are interested.

Stephen Globus – Globus Ventures

Okay. Thank you for taking my questions and congratulations.

Dave Roberts

Thanks again.

Operator

Your final question is a follow-up question from Joshua Zable with Natixis. Please proceed.

Joshua Zable – Natixis Bleichroeder

Hi, guys. Thanks for taking my follow up here. Just kind of a general question. Just there were some calls obviously early today in the vascular space about procedure growth, just kind of be in the mid-low-single digits. I guess, I am wondering what you guys are seeing maybe faster on the – with respect – obviously you are kind of serving more vascular surgeons than some of the other guys. Or if you are seeing that kind of in line?

Then the second thing again I know there is a lot of moving parts here, but US versus international procedures if procedures are holding up out there. I know and the numbers obviously there is lot of moving parts. I am just trying to point out general market growth if you will. Thanks.

George LeMaitre

I don’t have the benefit of those phone calls from today. So I don’t know what you are hearing. I would tell our opinion is maybe the open vascular procedures grow 1%, 2%, 3% a year, and maybe the endovascular procedures are growing sort of 7%, 8%, 9%, 10% a year. Maybe a blend of the whole market we always say that we are growing, the market itself is growing 8% financially a year.

But if you want to break it down across two sides of the Atlantic, our results recently we had a tougher time in parts of Europe, although it’s delayed by the fact we are doing so well in Italy and France. But, it does seem like it’s tougher slating over in Europe right now. And then in the United States, it’s kind of going okay. And maybe that has something to do with all the European financial crisis or maybe that’s just over thinking it. It was also a German doctors’ strike which lasted I think half way through May through the end of June. That may have impacted procedures as well.

Joshua Zable – Natixis Bleichroeder

Great, guys. Thanks. Congrats.

George LeMaitre

Thank you, Josh.

Operator

If there are no further questions I will hand the call back over to Mr. George LeMaitre.

George LeMaitre

Okay. Thank you, Sally, and thanks to everyone listening in today. Before I sign off, I’d like to let everyone know that we will be presenting in the Canaccord Genuity Growth Conference in Boston on August 12 and also the Rodman & Renshaw Global Investment Conference in New York in mid-September. Obviously we also look forward to our next earnings call in October. So thanks a lot for listening and have a nice afternoon.

Operator

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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Source: LeMaitre Vascular, Inc. Q2 2010 Earnings Call Transcript
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