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LeMaitre Vascular, Inc. (NASDAQ:LMAT)

Q4 2011 Earnings Call

February 27, 2012 5:00 PM ET

Executives

Joseph Pellegrino – CFO

George LeMaitre – Chairman and CEO

David Roberts – President

Analysts

Jamar Ismail – Canaccord Genuity

Joe Munda – Sidoti & Company

Operator

Welcome to the LeMaitre Vascular, Fourth Quarter 2011 Financial Results Conference Call.

As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead sir.

Joseph Pellegrino

Thank you, Michelle. Good afternoon. And thank you for joining us for our Q4 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 and our website www.lemaitre.com for discussion and reconciliation of non-GAAP financial measures.

I’ll now turn the call over to George LeMaitre.

George LeMaitre

Thanks, JJ. Q4 has to be seen through the wins of our Five 2011 Initiatives. Sales in Q4 2011 increased 5% organically as our European operations began to enjoy direct sales in Spain and Denmark and as the stent graft exit began to settle down. Profit in Q4 2011 was flat to Q4 2010 as the loss of stent graft sales and associated GP was offset by lower expenses.

The LeMaitre Vascular is emerging as smaller sales wise, but we’ve set the table for quicker growth. In 2012 our top-line should grow 9% as a result of more focused vascular sales bag, 16% more sales reps and two new products. Also the bottom-line benefit of two factory closures has yet to be realized.

I would now like to provide you with more details on our Five 2011 Initiatives and then review 2012 growth opportunities. One of our initiatives was to go direct in Spain and Denmark. Sales began in both countries in July 2011 and we now have a sales manager and four sales reps on the ground.

In Q4 2011 we posted $230,000 of sales in Spain and Denmark. This initiative is going according to plan. The second and third initiatives were to divest our own stent graft, which we did in June and to start distributing Endologix stent grafts, which we did in August. This strategic shift was intended to increase our focus on our core vascular devices and to extricate from the hyper competitive stent graft business. As you may recall the lion share of our stent graft business was in Europe.

In Q4 2011 our European operation posted its best organic growth quarter since Q1 2010 up 7%. The stent graft exit has also attacked on two gross margin points as the distributed stent grafts carried lower gross margins. Additionally the stent graft exit has cut op expenses in other ways. We swapped out several European clinical specialists for less expensive sales reps and we stopped our American stent graft clinical trials. This initiative is also going according to plan.

The fourth and fifth initiatives were the two 2011 factory closures. After some initial AlboGraft timing and scale up issues both manufacturing transfers are now making progress operationally. Financially though the projects are slow in reach maturity than I had anticipated. Throughout 2011 these closures cost us gross margin points. I expect the opposite as time goes by.

Our factories in Italy and California have been costing us approximately 4.2 million per year to operate. Our Italy factory was closed in Q1 2011 and our California factory was closed in Q3 2011. I am confident that the savings from these closures will be there and we need to have the patience to let the transfers settle in. this should provide us with gross margin expansion in 2012 and 2013.

Looking beyond these initiatives and into 2012, I am excited about our new products and our larger sales force. The Over-the-Wire LeMaitre Valvulotome and the UnBalloon were launched on both sides of the Atlantic in late Q4, early Q1 and we’re beginning to gain some sales experience. Combined sales of these devices in January and February ran at $1000 a year. The launches are so recent that it’s difficult to predict the ultimate size of each product, but I believe these devices will lift our growth rate in 2011 and 2013.

And these new products have an even wider sales channel, as we now have 78 sales reps in the field versus 67 at December 31, 2010. We have 44 reps in North America, 29 in Europe and five in Japan. We are now direct to hospital in eight of the 12 largest vascular markets in the world.

In summary our European rebound in Q4 2011 helped us post 5% worldwide organic sales growth. Profits were flat to Q4 2010 as the lack of stent graft sales and the associated gross profit was offset by tighter op expenses. Our Five 2011 Initiatives are beginning to contribute and in 2012 we should also benefit from a larger sales force and the two product introductions.

With that I will turn the call over to JJ.

Joseph Pellegrino

Thanks George. Some of themes running through the financial this quarter included return to sales growth in Europe, the sequential improvement in gross margin, the many benefits from the stent graft exit, continued tight operating expense control, and cleaner quarters with fewer special charges.

Due to our exit from stent grafts reported sales declined 7% from Q4 2010 to $13.4 million in Q4 2011. But this masks a number of positive trends. Organic revenues in Q4 2011 were up 5% over the prior year period, our best quarterly growth rate of the year. Sales at our European subsidiaries increased 7% on an organic basis as our more focused non- stent graft sales force as well as our newly direct efforts in Spain and Denmark gained traction.

In addition a number of core products continued to perform well. In Q4 2011 XenoSure increased 46%, Valvulotomes increased 11%, VascuTape 9% and Catheters 8%. The Q4 gross margin was 71%, down from 71.7% in Q4 2010. Manufacturing inefficiencies, the AlboGraft transition, the limited AlboGraft recall reduced the gross margin. But these were largely offset by the mid 2011 stent graft exit.

Without this two lot recall the Q4 2011 gross margin would have been 72.3% a 3.7% improvement from Q2 2011. We continue to expect gross margin improvements as the AlboGraft and LifeSpan production lines in Burlington mature. Currently all AlboGrafts are being manufactured in Burlington while full scale LifeSpan production in Burlington is three to six months away.

Moving down the P&L we may continue to exhibit expense discipline. Q4 2011 operating expenses were $8.7 million, a 25% decrease from Q4 2010. Excluding special items in both periods operating expenses in Q4 2011 were $8.6 million, a 9% decrease from Q4 2010. The improvement was driven by reduced selling cost and the absence of stent graft clinical trials.

Excluding special items 2011 operating expenses remained in check with Q1 at $9.1 million, Q2 at $8.8 million, Q3 at $8.5 million and Q4 at $8.6 million. From 2008 to 2011 in fact operating expenses excluding special charges totaled $35.1 million, $33.5 million, $33.4 million, and $35 million respectively.

Cash and marketable securities were $20.1 million at December 31, 2011 a decrease of $3 million during the quarter. The decrease was driven by $1.1 million of share repurchases and dividends, $600,000 of Italian facilities closed cost, $0.5 million for the Spanish and Danish transitions and the LifeSpan acquisition and $500,000 of factory build cost. Of these only the share repurchases and dividends are recurring items.

With regards to dividends our Board of Directors recently approved the payment of a quarterly cash dividend and a 25% increase in the dividend rate to $0.025 per share of common stock. The dividend is payable on April 3, 2012 to shareholders of record on March 20, 2012. The increase in the dividend rate reaffirms our commitment to return value to shareholders as well as our belief in the company’s ability to generate profits and cash.

Turning to our guidance, we expect Q1 2012 sales of $13.8 million up 8% organically versus Q1 2011 and reported operating income of $800,000. We also expect 2012 full year sales of $57.5 million up 9% organically versus 2011 and reported operating income of $5 million.

Changes in foreign currency exchange rate since our previous guidance in October lowered full year 2012 sales guidance by approximately $725,000. Our Q1 2012 and full year 2012 guidance includes the effects of exit from stent grafts, which accounted for $4 million of sales and $2.1 million of gross profit in 2011.

With that I’ll turn it back over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question comes from the line of Jason Mills with Canaccord. Please proceed.

Jamar Ismail – Canaccord Genuity

Hey guys this is Jamar Ismail calling in for Jason.

George LeMaitre

Good afternoon Jamar.

Jamar Ismail – Canaccord Genuity

Good afternoon. Hey the first question is can go into more detail on your trends and what you’re seeing in the vascular business both US and OUS?

George LeMaitre

Sure. You know the best trend I can give you is we were up organically 5% and we saw a little bit better activity over in Europe, I would hesitate in making that too big of a point regarding recording other companies, I finally tend to trade in our own little space and own little space and our own little world, so it was – we see things going fine in the US, and in Europe, may be a little bit better for us in Europe, but that could change.

Jamar Ismail – Canaccord Genuity

Okay, so the growth in the US and OUS are both around 5% with OUS a little bit better?

Joseph Pellegrino

OUS a little better, we are saying Japan was 9%, Europe was 7% and the US was 4% in Q4.

Jamar Ismail – Canaccord Genuity

Okay. And then just on 2012 guidance, I mean it’s lower by about 1.5 million of seven 25K that is FX, what are you seeing different with the rest?

Joseph Pellegrino

Sure. So we gave the guidance of 59 in October and now we are giving a guidance of 57.5, it’s actually very explainable. As you know our quarter was $800,000 short of our guidance and so our starting point for next year is $800,000 short and as you are picking out this FX difference of about $700,000, so combining those two is exactly the 1.5 change I should say from 59 to 57.5, it is worth pointing out that we still feel real good about the business because we were giving you an 8% organic growth number before the full year 2012 and now we are giving you a 9% organic growth for the business for full year 2012.

Jamar Ismail – Canaccord Genuity

Okay. Do you see any material increases in your sales for 2012 or you are fine with the level you have now?

George LeMaitre

I think you will see within six months us go from we are at 78 right now at this reporting period, I feel like you are going to see us drift up another 4 or 5.

Jamar Ismail – Canaccord Genuity

Okay. And then just as far as the LifeSpan goes, can you just give a little bit more details about what the issues are there?

George LeMaitre

Sure. LifeSpan actually the transition between California and Boston seems to quite good. We have plenty of inventory I think we left there last summer with 7000 piece of inventory and we are fine in terms of going through those units. So the transition is going almost exactly according to plan, maybe it’s a month late, but I think everything is fine with the LifeSpan transition.

Jamar Ismail – Canaccord Genuity

Okay and then the last question just M&A, you’re guys looking at deals and where are you in terms of that?

David Roberts

Yeah Jamar hi this is Dave. Yeah we are definitely out there looking at deals, I am not commenting specifically on the pipeline, but the criteria still hasn’t changed, we are looking for disposable and plantable devices that are used by Vascular surgeons, we have plenty of dry powder, obviously we have no debt, so we are ready when we see the right opportunity at the right price.

Jamar Ismail – Canaccord Genuity

Okay thanks a lot guys.

George LeMaitre

Thank you.

Operator

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

Joe Munda – Sidoti & Company

Good afternoon guys. Thanks for taking my call.

George LeMaitre

Hey Joe.

Joe Munda – Sidoti & Company

So JJ, you’ve alluded to – I am sorry George you had stated the two factory closures are taking a little bit longer than you had anticipated, and it’s costing you roughly $4.1 million correct?

George LeMaitre

Let me try this again. The facts that I put out there was that the building when they were in California and in Italy cost us about $4.2 million a year to run.

Joe Munda – Sidoti & Company

To run okay.

George LeMaitre

And then just to follow-up on the next point the LifeSpan transition seems to be going almost exactly according to plan may be we are month late, but I would say in the scheme of things it’s almost exactly according to plan. The AlboGraft thing was definitely late, we cause back orders for our customers over in Europe, although we think we put that in the rear view mirror, it seems to be fixed now.

Joe Munda – Sidoti & Company

Okay. My concern is I mean the restructuring charges that you guys have taken on the P&L, are we going to see that coming in for 2012 as well?

Joseph Pellegrino

Yeah, I mean you’ve seen a lot of charges come through the last three or four quarters and as you know we pre-announced a lot of that last year ago November, given the five initiatives that we were going to take on or at the time for and so those have happened and come through the P&L, we think that pretty much largely behind us at this point. You’ve seen the charges get progressively smaller over the last couple of quarters and really we only had only about $100,000 of special charges in this last most recent quarter.

So, we think those charges are pretty far behind us. We think we’re going to have fairly clean quarters going forward. So, I don’t think you should worry too much about charges from these things, these initiatives coming for now. If we do something new that’s the different story, but given what we’ve done in the initiatives that we’ve undertaken we think that operational they are pretty well behind us.

Joe Munda – Sidoti & Company

JJ what was the CapEx for the year?

Joseph Pellegrino

CapEx was in the high $1 million – about a $1.7 million, $1.9 million in that range, maybe $2 million even as we were building out our AlboGraft and LifeSpan clean rooms.

Joe Munda – Sidoti & Company

And operating cash flow?

Joseph Pellegrino

Depending on how you want to define it, so if you’re looking at EBITDA it was around $6.5 million, if you’re looking at sort of cash flow net income minus CapEx plus depreciation, amortization, stock-based comp and working capital items maybe 2.5 million or something like that, not sure, which number you want to take in to.

Joe Munda – Sidoti & Company

No, I was looking for that 2.5 million number.

Joseph Pellegrino

Yeah.

Joe Munda – Sidoti & Company

And George I mean you guys have been pretty aggressive on the price increases, the growth that you guys are seeing is that – I mean is that more volume driven or is it due to the price increases, can you give us...

George LeMaitre

Sure, sure.

Joe Munda – Sidoti & Company

Little bit of color there?

George LeMaitre

I can give you high level simple answer and then I’ll dig down a little bit in to it.

Joe Munda – Sidoti & Company

Okay.

George LeMaitre

So of the organic growth of 5% in Q4 one fourth of it was unit growth and three fourth of it was price. And interestingly the unit growth for the whole company is actually 8% year-over-year and what’s happening is the lower price products like the catheters, like the XenoSure and like the InvisiGrip, those lower price products are growing fast whereas the higher more expensive products are growing less quickly unit wise.

Joe Munda – Sidoti & Company

Okay. And can you give us an update on the launch of UnBalloon and Valvulotome?

George LeMaitre

Sure I am really excited about...

Joe Munda – Sidoti & Company

I am sorry.

George LeMaitre

Yeah.

Joe Munda – Sidoti & Company

I am sorry I might have missed it if you had in the open remarks.

George LeMaitre

No, no problem. So we launched those give or take on December 31 on both sides of the Atlantic, we have all of our approvals in the US and Europe for the Over-the-Wire Valvulotome as well as The UnBalloon and with that launch the sales meeting in the US was the first week of January, the sales meeting in Europe was the second week of January and by the end of February we’ve gotten to a run rate of $500,000 a year for the two products combined, I am very positive or optimistic that we have upside from that, but there is what they are looking like two months in to the year 2012.

Joe Munda – Sidoti & Company

All right. Yes it’s in – but often my press release yet. And I guess my last question is your plans to expand distribution channels in to China, any updates on that, I know you had probably mentioned that you don’t anticipate government approvals till late 2012 may be even early ‘13?

George LeMaitre

Right. Yeah so we talk that we are in eight of the countries and four – the only four that we are not – 8 of the 12 biggest markets and the only four that we are not in are Brazil, Russia, India, China. We are currently looking closely probably at Brazil and China and we don’t know exactly where we are going to go, it feels like Brazil might proceed China, but even if it does it’s just a sequencing issue and then we’d come right along and do China after that.

However given how far flung we are geographically I don’t want to get too far over our skews in sort of giving guidance on what year we will get direct in those markets. I think it’s very clear that the executive ranks inside our company that we might go to China and Brazil and it’s just a question of time, but we don’t have firm plans to open an office as of yet. And the second we do just like with Spain and Demark last year we will get on a horn and we will taking about it a lot.

Joe Munda – Sidoti & Company

Okay, I mean China is it the joint venture thing that’s the biggest provoke or is it government what in your mind is preventing you guys from being there?

Joseph Pellegrino

Quite honestly it’s my income statement and it’s not about the form of venture takes, it’s about we need to show the public market that we can make some money on the bottom line and so if I were to go and spend $2 million over in China a year right now, it would probably get some comments on these phone calls. So that’s what’s slowing me down.

But I do feel like on the flip side of that I think we’ve been very aggressive in getting into a lot of these markets and it really has done a lot – had a bit of tough level on the income statement and so yeah we will get there, but I feel like maybe we need to leave – allow the income statement a little room to breathe here and then get going on the international direct operations after that.

Joe Munda – Sidoti & Company

Okay. Then how – okay, but then Dave stepped in and you guys are looking at an acquisition, how is that playing to it as well?

Joseph Pellegrino

But the thing I like about acquisitions is they usually happen off the income statement, so you’re just buying companies. So, we have plenty of cash here. We have $20 million of cash, so I consider that something very different and we’re definitely looking to buy companies. When you do setup an operation in Spain, Denmark, Brazil or China as you know that – when you hire employee that stuff happens on the income statement.

And so to a certain extent I didn’t want to extend myself just yet for Brazil and China although as we’re a small company with 285 people and 80 of our employees are overseas and so I think we’re definitely geographically adventurous. I do feel like after Spain and Denmark we’re going to take a little bit of a breather, but we’ll get back on it very shortly.

George LeMaitre

And Joe just to add on at even higher level often the revenue streams that we acquire are sometimes in some of these distant countries. So, the acquisition strategy can fit really nicely with the geographic expansion strategy.

Joe Munda – Sidoti & Company

Okay. Thanks guys. I’ll hop back in the queue.

Joseph Pellegrino

Thanks Joe.

Operator

(Operator Instructions). And at this time there are no further questions in queue and I would not like to turn the call back over to Mr. George LeMaitre for closing remarks.

George LeMaitre

Thanks Michelle. First I’d like to thank all the participants on this call. I’d also like to mention that we will be speaking at the following investor conferences over the next couple of months. We’ll be at the Bank of America Merrill Lynch Conference in May and the Sidoti and Wells Fargo Conferences in June.

With that I’ll turn the call back over to Michelle. Thank you very much.

Operator

You’re 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.

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