LeMaitre Vascular CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.28.11 | About: LeMaitre Vascular, (LMAT)

LeMaitre Vascular, Inc. (NASDAQ:LMAT)

Q1 2011 Earnings Call

April 28, 2011 5:00 pm ET

Executives

Joseph P. Pellegrino, Jr. – Chief Financial Officer

George W. LeMaitre – Chairman and Chief Executive Officer

David B. Roberts – President and Board Director

Analysts

Ethan Roth – WJB Capital Group Inc.

Joseph Munda – Sidoti & Company

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2011 LeMaitre Vascular, Incorporated Earnings Conference Call. My name is Karris, and I will be your operator for today. At this time all participants are in a listen only mode. And later we will conduct a question and answer session. As a remainder this conference this conference is being recorded for replay purposes.

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

Joseph P. Pellegrino, Jr.

Thank you, Karris. Good afternoon and thank you for joining us for our Q1 2011 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 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 statements regarding forward-looking information and the information under the caption Risk Factors in our 2010 10-K and subsequent SEC filings including disclosure of the factors that could cause the 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 discussion and reconciliation of non-GAAP financial measures.

I will now turn the call over to George LeMaitre.

George W. LeMaitre

Thanks, J.J. I would like to focus my remarks on the three headlines of the quarter. Number one, we posted record sales of $14.6 million up 6%. Number two, we achieved normalized operating income of $1.4 million. And number three, we’re executing on three initiatives to improve profitability in top line growth; A, the Italian factory consolidation, B, the transition to direct sales in Spain and Denmark, and finally C, the de-emphasis of our TAArget and UniFit Stent Graft business.

As to our first headline, we posted record sales of $14.6 million in Q1, 2011, up 6% over Q1, 2010. The Americas was up 12% while international was down 3%. While sales momentum in the Americas carryover nicely from 2010, Q1 European sales continued to be hampered by our move away from TAArget and UniFit Stent Grafts.

Indeed looking at our worldwide business without TAArget and UniFit, sales grew 9% in Q1, 2011. This already is similar when we look at our product categories; Vascular was up 13% worldwide in Q1 2011, while endovascular decreased 12%, almost exclusively due to the TAArget and UniFit.

With respect to individual product lines, our Valvulotomes, Carotid Patch and AnastoClip drove sales growth in Q1 2011. Also in Q1 2011, we made regulatory submissions in the U.S., Europe, Canada and Brazil for the upgraded UnBalloon, which incorporates a re-sheeting fix and several feature upgrades. Geographically in Q1, the U.S., France and Japan will highlight. We ended Q1 2011 with 66 sales reps versus 61 at the end of Q1 2010.

Regarding our second headline, normalized operating income was $1.4 million in Q1 2011 versus reported operating income of $1.3 million in Q1 2010. The increase was due to higher sales and restrained operating expenses. This is also up sequentially from Q4 2010 due to higher sales and lower operating expenses. As you may remember, our operating income high watermark was $2 million in Q3 of 2010. I expect to re-achieve and surpass this level of profitability as we move through 2011.

Regarding our third headline, we continue to make progress on the three initiatives we have previously outlined, and I am excited about the more profitable higher growth entity, which should emerge in H2 2011. Out Italian polyester graft machines have now been transferred to Burlington. First sale of the graft from Burlington should be shipped to hospitals in Q2. We are now through the lion's share of the Italian below the line restructuring charges, but the start-up of our Burlington factory continues to suppress gross margin.

While the manufacturing start-up is a little slower than planned, eventually we expect 12 employees to be on a Burlington payroll to manufacture these grafts in place of the 29 Italian employees previously. This 17 employee reduction should provide a benefit to the gross margin. Indeed headcount eliminate drop from 255 at year-end 2010 to 232 at March 31, 2011, largely as a result of the Italian closure.

In December, we signed agreements with our long-time Spanish and Danish distributors to go direct in July. We have since hired a Danish sales rep and Spanish country manager and we’ve leased the sales office in Madrid. The majority of cash payments to these two distributors will be made in Q2 and you will see associated charges of about $700,000 on the Q2 P&L.

As a result in Q3, we’ll be directing more than 90% of Western Europe with Switzerland, Norway and Finland, our only distributed market. The effort is for direct sales in Europe is obvious, higher gross margins, more surging contacts and better pricing power. These to buy outs effectively complete our European go-direct project, which began in 1998 with, direct sales to German hospitals.

I remained optimistic about the long-term medical device market in Western Europe, which I see as the cornerstone to LeMaitre Vascular’s globalization. Future direct countries may include China and Brazil.

As to the TAArget UniFit transition, we mentioned on our last call that we’ve began exploring divestitures alternatives, while we cannot prognosticate on the potential success of the transaction, we currently have multiple bids in hand and expect the process to conclude in the next few months. If we do not sell this product line, we may consider other alternatives in order to allow our sales force in Europe to focus on our faster growing vascular business.

So as we push through these three initiatives, my goal is to set us up for clean quarters in the back half of 2011 and to be a more broad-line vascular company rather than a focused Stent Graft company. I am confident that the company, which emerges, will be meaner, more vascular and most importantly more profitable.

I would like to conclude my remarks by reiterating the three headlines. Number one, we posted record sales of $14.6 million, up 6%. Number two, we achieved normalized operating income of $1.4 million. And finally number three, we are executing on three initiatives to improve profitability and top line growth.

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

David B. Roberts

Thanks, George. I’d like to give you a brief update on the November 2010 LifeSpan acquisition. Since the acquisition of this ePTFE Graft, we have transferred the CE mark 510(k) shown in Health Canada regulatory approvals. Our European sales force started on the product in Q4 shortly after the acquisition, while our North American and Japanese sales force is launched towards the end of Q1. LifeSpan sales in Q1 were roughly $302,000, slightly below budget, but generally in line with the year one ramp that we’re expecting.

With respect to operations, shortly after the acquisition we placed an Integrations Manager into the Laguna Hills factory. We are learning the production process while at the same time installing LeMaitre’s cost cutting discipline at the factory. In just a few months we have identified and executed cost reductions in the areas of personal and sterilization. As a result, LifeSpan’s operating profit contribution is performing ahead of our projections.

With that, I’ll turn it over to J.J.

Joseph P. Pellegrino, Jr.

Thanks, Dave. I’d like to say a few words about our gross margin, operating expenses, special charges, cash balances, and 2011 guidance. Our Q1 2011 gross margin was 69.5%, down 5.2% from 74.7% in Q1 2010. This economy was mainly due to additional cost related to the relocation of the company's graft manufacturing facility from Italy to Burlington, including first start-up cost in Burlington as we hired and trained both in advance of production. And second, inefficiencies in Italy as the factory there assemble its final products.

After the first item, Burlington setup cost will continue to Q2, but should abate in the second half of 2011 as we begin to achieve full-scale up. As for the second item, the Italian facility was efficiently closed on March 31st, so moving forward, we expect minimal expenses from Italy, a clear benefit to the gross margin.

Separately, it is important to note that the recently acquired life span facility may offer expense reduction opportunities as we further integrated into our organization. We will update you on developments there as appropriate. Given all of this activity, Q2 company wide gross margin should improve minimally and then the back half of this year we expect further gross margin recovery perhaps back to the low to mid 70% levels.

Moving down the P&L operating expenses in Q1 2011 were $9.1 million excluding special charges. This was nearly flat with the prior year period, in fact since 2007 annual operating expenses have remained approximately $35 million and have declined from 82% of sales to 63% of sales. This year, we are continuing our cost conscious ways and have introduced an internal program to trim $2 million of operating expenses.

We are also reducing headcount were appropriate, as implied in our guidance, we believe these programs, in conjunction with the initiatives George outlined above, to TSP for solid bottom line leverage in the later half of the year.

I recognized that our three initiatives have caused several changes in recent quarters. Perhaps it would be helpful if I could summarize these for you. First, the Italian factory relocation generated a total of $2.8 million of special charges in Q4 and in Q1 of 2011. I believe the lion share of these charges are behind us.

Second as it relates to Spain and Denmark, we have not yet recorded any special charges, as you saw in today’s press release; however, we expect to record about $700,000 of special charges in Q2. We expect no additional special charges related to this initiative thereafter.

And finally with regard to TAArget and UniFit in Q4 we recorded impairment charges of $420,000. By quarter, the summary of the special charges is as follows, Q4 2010, $2.2 million, Q1, 2011 $1.1 million and Q2, 2011 $700,000.

Moving onto the balance sheet, cash and marketable securities as of March 31, 2011 was $19.1 million down from $22.6 million at December 31 of 2010. The decline was mainly due to the annual bonus and commission cycles of $2 million. The build out of our new manufacturing facility of $800,000, severance related payments in Italy of about $600,000, and share repurchases of about $300,000.

Turning to our guidance, we expect Q2 2011 sales of $15.5 million up 9% versus 2010 and reported operating income of $1.1 million. This guidance implies a 7% reported operating margin for Q2 2011 that includes an estimated $700,000 in charges related to the distributor buyouts in Spain and Denmark. We also reiterate our full year 2011 sales guidance of $62 million up 11% versus 2010 and reported operating income guidance of $6 million. This guidance implies a 10% reported operating margin for 2011 and includes charges associated with the various restructuring initiatives. Except as otherwise stated, our guidance amounts its truly effects future acquisitions, foreign exchange rate changes, distributed terminations and factory consolidations.

With that I’ll turn it over to the operator for any questions.

Question-and-Answer Session

Operator

(Operator Instruction) And you have a question from the line of Joshua Zable with WJB Capital. Please proceed.

Ethan Roth – WJB Capital Group Inc.

Hi, guys this is actually Ethan Roth here in line for Jos Zable.

Unidentified Company Representative

Ethan, how you are doing?

Ethan Roth – WJB Capital Group Inc.

Great, thanks. I just want to focus here for a moment on the markets and what you guys are seeing out there specifically in the vascular market, a really great quarter here, continued high growth you guys kind of called out some of the main products. What exactly is driving that growth, is it procedures, is it price and then maybe if you just talk about the difference on a geographic basis? Thanks.

Unidentified Company Representative

Sure, maybe I can take the latter half of the question first and then I’ll focus on the U.S. side of the first part of the question. So we are definitely doing well in the US, growth is 13% over in Europe we had a tough quarter down 3%. In the U.S. that growth the split is probably half-and-half in terms of price and procedures or units, we had a price hike January 1 and we keep on getting that price, we feel good about that. In terms of Europe what I would say is that we're going to a major transition the Stent Graft business, the target and UniFit business was down 51% and actually if you look at the business without those two Stent Graft products you can add about 3% growth to the company. So as we reported 6% growth for that the company has a whole it actually goes up to 9% and if you allow us to ignore target and UniFit. .

Ethan Roth – WJB Capital Group Inc.

Okay, thanks. And just a follow question here – I actually you guys have resubmitted the application with the updated, with the update I just any sense of timing I know that can be the tricky and then also once approved that you just talk about the commercial strategy? Thanks.

Unidentified Company Representative

Sure, the timing of course as you know is whenever they get around wouldn't say yes, my sense we will get, we’ll get one or two of these approvals, we have put it into four countries, we’ll get one or two of them over the H2 2011 if you will. The revenues if any are already based on the guidance for 2011, it may add materially to revenues in 2012 but I guess we’ll take away these approach because those regulatory agencies have a way of acting on their own.

Ethan Roth – WJB Capital Group Inc.

Okay, thanks guys. And congrats on a great quarter.

Unidentified Company Representative

Thanks.

Operator

(Operator Instructions) And you have question from the line of Joe Munda with Sidoti. Please proceed.

Joseph Munda – Sidoti & Company

Good afternoon guys.

David B. Roberts

Hi, Joe.

Joseph Munda – Sidoti & Company

My question really is more for Dave Roberts. As far as with the divestiture, the divestiture is going on and the restructuring and is the acquisition strategy that you guys normally have is that kind of put on hold for right now?

David B. Roberts

Thanks for the question, Joe. No, not at all I mean we’re definitely out there looking, the criteria. It hasn’t changed at all. We obviously closed on the Lifespan acquisition in November and we restarted the pipeline, frankly what we do is we’re always rationalizing the bag. So we’re looking for great acquisitions and then when we realized the product isn’t working. We proceed with divesture and that’s what we’re doing right now. So, the acquisition process is fully underway and we have a nice pipeline and we’re its business is usual.

Joseph Munda – Sidoti & Company

Okay great. Thanks guys.

David B. Roberts

Thanks Joe.

Operator

And your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

Yes. Hi guys. I missed a few story so I apologize if these questions are kind of already you have covered them previously. But what are the characteristic of the market expand that makes that so attractive to you to move from the distributor together?

David B. Roberts

Sure. James, there is a lot of attractive markets out there, what we bought Spain was we’ve already developed and entire European infrastructure. And so when we’re finally directing Spain in July the products that we warehoused at our Frankfurt warehouse and they will be shifted to Spanish hospitals every night from our Frankfurt warehouse.

So, what we were trying to do is really finish the puzzle for our sales in Europe. And clearly we’re interested in getting into the brick countries going forward, you do sense we need exposure to those higher growth markets. But that’s the rationale for Spain, it is a 45 million person country so it is the top, one of the top eight vascular markets in the world. And we feel like with our bag, the breadth of our bag, we are kind got to be in hospitals in Barcelona and Madrid.

These are big cities where we just feel like we can’t miss. Historically we’ve been with the same dealer there. He is a great guy. But we’ve been with him for 15 years and his penetration is quite low versus what we see with our direct penetration in France, Italy and Germany. And again this is something we’re doing since 1998 over in Europe and it’s pretty proven strategy. We go direct in a country and you will hear us talk about on the earnings call as you’ll get some nice above company growth rates in terms of sales for the years, the two or three or four years that follow the acquisition of the distributor.

Unidentified Analyst

All right, great. Thanks. One more quick question. Again I apologize because I am new to the story. When you move the manufacturing facility from Italy to Burlington, was that a brand new facility that you bought from scratch, or did you acquire someone else’s facility and where else do you have manufacturing facilities now?

George W. LeMaitre

Sure. I’ll answer the backhaul question. We have a 7% facility out in Laguna Hills, California that we bought in the November 2010 acquisition of Lifespan. That’s the easier part of the question. Second part of the question is, we just rented a building next to our building in Burlington. We occupy Massachusetts. We occupied a 27,000 square foot building in Burlington and we just rented as of January 1, 2011, the 27,000 square foot building right next to ours and is a covered walkway that now connects the two. All of the build out in that building that we just leased for seven years is all brand new build out done by us. And you can feel a little bit of that in the cash drain over the last quarter or so.

Unidentified Analyst

Great. Thanks a lot guys for taking my question. Thank you very much.

George W. LeMaitre

Thank you, James.

Operator

(Operator Instructions) And at this time there are no further questions in queue and I would now like to turn call back over to Mr. George LeMaitre for closing remarks.

George W. LeMaitre

Thanks Karis. First I’d like to thank all the participants on this call. I would also like to mention that we’ll speaking at the following investor conferences over the next couple of months. We have May 10th, JMP Securities in San Francisco, June 20 or June 21 with Lazard at Foxwoods. I’ll make a point of being at that one, June 22nd and June 23rd Wells Fargo in Boston, August 9th Canaccord Genuity in Boston as well. So there is a floor of the next conferences coming up. We are doing about 10 or 12 each year. So they come up pretty frequently.

With that, I’ll turn the call back over to Karris. Thank you very much. Take care. Bye Karris.

Operator

You are welcome. And ladies and gentlemen, that concludes today’s conference. I would like to thank you for your participation. And you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!