J.J. Pellegrino - CFO
George LeMaitre - Chairman & CEO
Dave Roberts - President
Larry Hemowich - HMPC
LeMaitre Vascular, Inc. (LMAT) Q3 2010 Earnings Call October 28, 2010 5:00 PM ET
Good day, ladies and gentlemen, and welcome to the third quarter 2010 LeMaitre Vascular earnings conference call. My name is Latasha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions).
I would now like to the turn call over to your host for today, Mr. J.J. Pellegrino. Please proceed, sir.
Thank you, Latasha. Good afternoon and thank you for joining us for our Q3, 2010 conference call. Joining me on today's call is our Chairman and CEO, George LeMaitre and Dave Roberts, our President.
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 on 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.
Thanks, J.J. Top to bottom, I was pleased with Q3. We are growing sales and posting record profits. I'd like to summarize Q3 with three headlines. Number one, we posted record operating profit of $2 million and cash increased by $2.1 million. Number two, we posted sales of $13.7 million, up 6% organically from Q3 2009 and finally number three, we are working on two initiatives to cut cost and increase focus. We are closing Brindisi and reducing our target in units to extend graft investment.
With respect to our first headline operating profit in Q3 2010 was $2 million, a 57% increase versus 1.3 million in Q3 2009. This record 15% operating margin was a result of 6% organic sales growth post-IPO record 76% growth margin and a 1% reduction in operating expenses. Our profitability is starting to become a good habit. Over the last fourth quarters, we've posted operating profits of 1.2 million, 1.3 million, 2 million and now 2 million again. Particularly the large presence in Europe summer usually means a sequential slowdown in sales. So posting a 2 million operating profit in the summer quarter speaks to our growing efficiency. Looked at annually we entered 2010 projecting a $4.5 million operating profit. Thanks to better than expected domestic sales growth and tight expense control we are now targeting $6.9 million of 2010 operating profit, up three fold versus 2009.
Our continued quest to become more profitable is also the driving force behind the two initiatives which I will discuss later in this call. One consequence of increased profits is a healthy balance sheet. Before buybacks we produced $2 million of cash in Q3 2010 and we now hold $26.6 million with no debt. This balance sheet liquidity will be deployed over time into our $5 million share buyback program, acquisitions and international distributor buyouts.
As to our second headline we posted sales of $13.7 million in Q3 2010. Sales increased 6% organically over Q3 2009 led by 15% growth in the Americas. By category Vascular increased 15% organically, General Surgery was up 8% and Endovascular decreased 13%. Q3 2010 marks another impressive quarter for our Vascular business. In fact over the last fourth quarters sales growth in this category has been 25%, 28%, 20% and now 12%. And this category has grown in importance of the company.
In Q3 2010 our Vascular category accounted for 73% of sales versus 67% in the year earlier periods. Our success in this category is due to our broad pallet of gold standard niche devices and our widening sales footprint. Even overseas where our targets in UniFit Stent Graft have struggled our Vascular Surgery business was up 9% in Q3 2010 on a constant currency basis.
At quarter’s end we had 64 sales reps on the payroll. The continued build out of our sales force is a time tested expansion strategy for our company. With our new streamline sales rep model we are now able to grow our footprint even more aggressively. My guess is that we will end 2010 with 70 sales reps worldwide, up from 61 at year end 2009. Going forward we may also expand our direct sales force foot print through international distributor buyouts. Turning to our third headline, we will be closing our 29 employee Brindisi factory and transferring our AlboGraft production to Burlington, Massachusetts. This will be our 6th factory closure since 2002.
For the first nine months of 2010 sales of our AlboGraft accounted for 4% of our sales. In transferring production to Burlington, we believe we will produce $1 million per year in savings. The closure is anticipated to take place in December 2010. Brindisi employees went on strike on October 4 and returned to work October 20 and have agreed to work while separation terms are negotiated.
As to our second initiative given the robust growth rates of our vascular business, we have started to redeploy assets into this higher growth category. As part of this we have elected to significantly decrease R&D spends related to our target in UniFit Stent Graft and we have suspended the (inaudible) in the US. We estimate this will eventually free up approximately $1 million per year to either improve operating income or reinvest into the growth of our Vascular business.
In Q3 2010 our target in UniFit product lines accounted for 3% of our sale and declined 53% from a year earlier quarter. I do not expect this initiative will challenge our ability to deliver high single digit organic sales growth in 2011. Indeed, once this transition is behind us it may enable improved organic sales growth rates.
In summary, Q3 2010 was another excellent quarter in which organic sales growth, a healthy gross margin and reduced operating expenses combined to produce record bottom line results and a strengthening balance sheet. I would like to conclude my remarks by reiterating the Q3 headlines. Number one, we posted record operating profit of $2 million and cash increased by $2.1 million. Number two, we posted sales of $13.7 million, up 6% organically from Q3 2009 and finally number three, we are working on two initiatives to cut costs and increase focus. We are closing Brindisi and we are reducing our target in UniFit Stent Graft investment.
I will now turn the call over to J.J. Pellegrino, our CFO.
Thanks George. I would like to talk about our four bottom line records in Q3 2010, tell you about the profitable Q4 2010 tax credit and then close with an updated Q4 and 2010 guidance. This was an exciting quarter from a bottom line perspective. We posted four quarterly records, post-IPO record gross margins, record operating income, record operating margin and record net income.
So what made Q3 such a profitable quarter at LeMaitre. First gross margin was exceptionally strong. We reported a gross margin of 76.1% in Q3 2010, up from 73% in Q3 2009. The increase was driven by improved manufacturing efficiencies, higher average selling prices and favorable geographic mix. Of note, production expenses actually decreased year-over-year in the third quarter. Another impressive result was the operating expense level, down 1% year-over-year.
Some of this decline can be attributed to the weaker euro which actually lowers a euro denominated expenses. Some of the decline can also be ascribed to the success of our lower cost sales rep model and some of it can be attributed to reduced spending and trust trial which had significant set up cost in 2009. Combined with our gross margins, this 1% year-over-year spending decline produced a record operating profit and operating margin.
Moving to the bottom line, in Q3 our NOLs and other tax credits helped to keep our effective tax rate down. This allowed us to post record net income of $1.5 million and $0.09 per fully diluted share in earnings. I would now like to give you some information on our potential Q4 2010 tax items which would create a one-item increase in net income.
At a high level we are transitioning from a cumulative loss position into profitability which may allow us to use certain tax assets and create a one-time tax credit. If this occurs it would increase net income by approximately $2 million to $2.5 million in Q4 2010. This would be a non cash item.
Turning to guidance we have increased our full year 2010 sales guidance to 55.9 million which implies 12% organic growth versus 2009. It also increased our Q4 2010 sales guidance to $14.3 million which implies 9% organic growth versus 2009. We increased our full year 2010 operating income guidance to $6.9 million and our Q4 2010 operating income guidance to $1.6 million.
Operating income guidance amounts exclude any charges related to the Brindisi production transfer. Guidance amounts also exclude the effects of additional restructurings, acquisitions, foreign exchange fluctuations and distributor terminations. We will be giving full year 2011 guidance at our Analyst Day on December 2.
With that I will turn it over to the operator for Q&A.
Thank you. (Operator Instructions). And your first question comes from the line of Mayank Gandhi. Please proceed.
Hi guys, thanks for taking my question. Just to start off with, can you just comment just higher level what you are seeing in just macro trends, health care utilization trends and how it affects you all and then can we just touch upon how should we think about these sustainable organic revenue growth profile for the company going forward.
First of all we thought a lot about, a lot of people have been talking about procedures and deductibles and insurance. To be honest we didn't see that at all. We had about 5% price hike go through April 1 and we felt like it has not affected our business at all. We are able to, because we have European and US operations a little bit we are able to pull them apart. In the US you see we had I think a 15% organic growth in Q3 maybe 3% or 4% of that's price, 5% of that's price but the rest is unit growth. So when the US, well I think the question is more aimed at everything seems fine to us. We don't see them impacting. Over in Europe too we posted 9% organic growth in the open vascular category and that would be hinted at least in that category. It really hasn't changed anything. So I would say we don't have too much information for you on the global question of how is health care changing in the US based on the X amount of circumstances, the recession as well as Obamacare. Can you give me your second question again Mayank.
Yeah. It's just the kind of just the long term kind of going forward, how should we think about the sustainable organic growth so you are projecting 12% for 2010 and that's obviously higher than the last few years and then just going forward how should we think about that.
Sure and of course underneath all this you always know we are not going to give guidance for 2011, though I know that's more of a generalized question. So our guidance implies 9% organic Q4 growth and it implies 12% organic growth for the year. Also in the script you noticed that I talked about next year being high single digit organic growth. I think you can think about that as a general place where we will make Vascular fields comfortable. I am excited as we sort of move away from this tough target and UniFit Stent Graft business. I am excited that this will release us to better organic growth rates than that but we haven't seen it yet so I don't want to get too far over our skis on that.
Okay and to that point of target in UniFit is the, you are redeploying those resource from R&D so is that kind of a new normal for R&D in terms of percent of sales or that's not the case.
Right that's a great question Mayank. No it’s not the case. We do want to advertise it. LeMaitre Vascular as a smaller company knows that it needs to be putting something like 11% to 12% of its sales back in R&D. You are looking at sort of an anomalous quarter on spend. This is not exactly who we are on the R&D line. So the money that we are going to be saving from reducing the investment in target UniFit will indeed be redeployed into the current product lines, Valvulotome, Shunt, remote endarterectomy, etc. and wanted to redeploy into newer product lines like the UnBalloon and new platforms which we don't even have exposed to you guys yet.
(Operator Instructions). And your next question comes from the line of Larry Hemowich with HMPC.
Larry Hemowich - HMPC
J.J a question on the last comment you made about the tax situation, I was trying to get a better understanding about it, could you review it again and discuss the implications on cash flow. It sounded like it was going to be a very beneficial thing for cash flow but I wasn't quite sure so would you just mind reviewing it.
Yeah, thanks that's a big number I sort of blurted out there, good question. It’s actually a non-cash item. It’s likely that we will get a credit in our tax provision for $2 million to $2.5 million in Q4. And this is basically a result of looking back in 12 quarters or so and coming out of accumulative loss positions so as the company becomes more profitable we are able to release credits to use towards the provision that we hadn't previously. So this is a one-time non-cash good guide to the P&L if you will to the $2.5 million.
Larry Hemowich - HMPC
Okay. George the end of Vascular clearly has been disappointing. I wanted to understand a little bit more about what you talked about. Did I understand that you guys would just say look this business is just not for us and we just want to gradually pull ourselves away from it and then concentrate where we are stronger is that kind of really the strategic message you are giving us.
More or less Larry I would like to make a big distinction here between endovascular and Stent Graft. So we have our own two native Stent Graft platforms that are targeting UniFit. We've just found we had a tough time with those over in our European markets and we felt like it defocused our emphasis on Vascular Surgery. So before we let all of this get into our American sales bag we just decided it was better off retreating from those two categories largely based on a competition in those segments with the Cooks, Medtronics and the Gores. We just felt like in Vascular Surgery we would bring something very differentiated and very exciting to the surgeon and in the Stent Graft business it was a little bit, there was eight or nine guys out there selling tubes and we are not so sure what we bring to the party. So yes except that (inaudible) on Stent Graft with endovascular things like the UnBalloon and things like VascuTape a number of items we are more than happy to go into endovascular and it remains a very exciting field to be in.
Larry Hemowich - HMPC
And George just you mentioned the UnBalloon, I don't know if you made any specific comments, is there anything you can update us on with regard to your progress on the regulatory front with UnBalloon.
Sure the submissions on both sides of this ocean for Europe as well as the US will be going in probably late Q4 and this is for the revised UnBalloon product and we can expect to be out there whenever we get approvals from the two regulatory bodies.
Larry Hemowich - HMPC
And the US would be a 510(k) I am assuming.
Larry Hemowich - HMPC
So you've revised the product and you are submitting the revised protocols and revised information and then wait for the FDA to give you the signal ahead.
(Operator Instructions). Your next question comes from the line of Alex with Granite Point Capital. Please proceed.
Just on the closing the factory in Brindisi you said you had a strike and that you are in the negotiations you mean there's no estimate for how much you might add, I don't, I mean in Europe I understand its difficult for things like that but do you have any idea about how much (inaudible) will end up costing you.
We are thinking non-severance related charges for the P&L of high 1 to 1.8, 1.9 million, something like that and maybe cash all in of sort of mid 2, to 2.5 in that range on severance related.
Okay and these will be cash, they will be off the book value for you.
Well, not all the P&L charges are cash. So you have the sort of part, there's a part but basically from a P&L perspective if you think of non-severance charges being about $1.7 million to $1.8 million maybe a little in Q4 and then some of it right through in 2011, that's sort of the right way…
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